Bulgaria: Investment Climate Assessment Vol. 3

BULGAR I A
Investment Climate Assessment
(In Three Volumes)
Volume III
Technical Appendices
Finance and Private Sector Development Department
Europe and Central Asia Region
October, 2008
Document of the World Bank
Report No. 45819-BG
Washington, DC

Copyright © 2008
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ii
Currency and Equivalent Units
(Exchange rate effective October 28, 2008)
Currency Unit=Bulgarian Leva (BGN)
EUR 1=1.95583 US $ 1= 1.57 BGN
Fiscal Year: 1 January - 31 December
Weights and Measures: Metric system
Abbreviations and Acronyms
2SLS Two-Stage Least Squares

BEEPS European Bank for Reconstruction and Development-World Bank
Business Environment and Enterprise Performance Survey
BNB Bulgarian National Bank
CoM Council of Ministers
EP Employment Promotion
ESF European Social Fund
EU European Union
FDI Foreign Direct Investment
FSAP Financial Sector Assessment Program
FSC Financial Supervision Commission
GDP Gross Domestic Product
IC Investment Climate
IFI International Financial Institution
IMF International Monetary Fund
ISO International Organization for Standardization
IT Information Technology
LAD Least Absolute Deviations
LEP Law for Employment Promotion
LLL Life-Long Learning
MLSP Ministry of Labor and Social Policy
NAVET National Agency for Vocational Education and Training
OLS Ordinary Least Squares
SG State Gazette
TE Technical Efficiency
TFP Total Factor Productivity
Vice President: Shigeo Katsu, ECAVP

Country Director: Orsalia Kalantzopoulos, ECCU5
Sector Director: Fernando Montes-Negret, ECSPF
Sector Manager: Lalit Raina, ECSPF
Task Team Leader: George R. Clarke, ECSPF
iii
Table of Contents
Appendix 2.1: Technical Efficiency 1
Appendix 5.1: Econometric Analysis of Firm-Level Perception
Data 13
Appendix 7.1: Econometric analysis of perceptions about
skills and labor regulation 21
Appendix 7.2: Econometric Analysis of Training 24
Appendix 7.3: Summary of the Doing Business indicator for
employing workers 27
Appendix 7.4: Life-Long Learning (LLL) in Bulgaria 33
Appendix 8.1: Banking and Non-banking sector in Bulgaria37
Appendix 8.2: Econometric analysis of perceptions about
Access to Finance 41
Appendix 8.3: Econometric analysis of objective indicators
44
Appendix 8.4: Econometric analysis of investment behavior
47
References 54
Endnotes 57
iv
Appendix 2.1: Technical Efficiency
Although measures of firm productivity such as labor productivity provide useful information on
firm performance, they can be misleading when considered in isolation. To get an overall assessment
of productivity, it is necessary to take both capital and labor use into account simultaneously by
calculating technical efficiency. This measure is analogous to the macroeconomic concept of total
factor productivity. Differences in technical efficiency (TE) or total factor productivity (TFP) are
those differences in output that cannot be explained by differences in the use of labor, capital and
other inputs. Differences in TE across firms can be due to things such as differences in the quality of
workers, the quality of management, the technology used (as long as it isn’t embodied in capital), or
firm organization. Firms for which TE is higher are more efficient—they produce more with fewer
inputs.
In addition to taking into account both capital and labor use, TE has several additional advantages
over labor productivity:
1. Because TE is calculated in a regression framework, it is possible to control for multiple

things when calculating it. For example, when comparing average TE across countries it is
possible to control for differences in sector composition.
2. The regression framework also makes it possible to estimate an augmented production

function to look at differences between different types of firms while controlling for capital
and labor use and other firm characteristics. Controlling for other firm characteristics is
important. For example, exporters tend to be more productive than other firms. However, if
they are more likely to work in some sectors than others—and there are sectoral differences
in productivity—then it is difficult to know whether this is due to sectoral differences or
other differences such as differences in technology. Within a regression framework it is
possible to control for multiple factors (e.g., sector, ownership, or export status) including
investment climate-related factors simultaneously.
Methodology
Mechanically, TE is calculated as a residual from a regression of the log of output (either value-
added or revenue) on labor, capital, and other intermediate inputs.a Using a formulation based upon
value-added, the estimation assumes a Cobb-Douglas Production functionb:
Where Y is value-added for firm i, K is a measure of capital (e.g., the book value or replacement
value of capital), L is the number of workers and A is total factor productivity. Constant returns to
scale are not imposed allowing the model to essentially control for differences in productivity by
firm size. The higher that A is, the more output the firm produces with the same amount of capital
and labor. Taking natural logs of both sides implies that:
where
That is, the firm’s productivity is equal to a constant, μ, and an additional firm-specific measure
of productivity, εi.c It is easy to generalize this into a more general ‘augmented’ production function

BULGARIA: Investment Climate Assessment
where the error term is:
Where ICi is characteristics of the firm or the investment climate for that firm. This implies
that:
Under some assumptions, equation (4) can be estimated by OLS. In particular, when firm
characteristics are omitted (i.e., when equation (2) is estimated), the coefficients can be estimated
with OLS if capital and labor are uncorrelated with the error term. That is any shock or firm specific
factors that affect productivity must be uncorrelated with the firms’ decisions regarding capital and
labor choices. This would be violated if, for example, managers were aware of something that affected
productivity and allowed this to affect their hiring, firing or investment decisions. For example, if a
firm received some technical advice from one of their suppliers or buyers that improved the firm’s
productivity and then the manager decided to hire more workers to take advantage of this improved
know-how, this would violate this assumption.
Characteristics of the firm or the investment climate for the firm can also be directly included
in the OLS regression as long as these characteristics are exogenous. For example, if becoming an
exporter makes a firm more productive (e.g., through exposure to foreign markets) then a dummy
variable indicating that the firm was an exporter could be included in the regression so long as
the causation does not run in the opposite direction. Reverse causation could be a problem if a
firm became more productive and decided that this productivity boost meant that it could start
exporting.
Rather than including firm or investment climate characteristics directly in the model, it is
possible to first estimate equation (2) through OLS or another more robust estimation method,
obtain estimates of TE by calculating ε for each firm from equation (2) and then regress the residuals
on the firm and investment climate characteristics (e.g., estimating equation (3)). An advantage of
this approach is that it might be possible to estimate equation (2) using a robust technique such as
the method suggested by Levinsohn and Petrin (2003) and then use something such as 2SLS in the
second stage if one of the firm or investment climate characteristics were thought to be endogenous.
d
The drawback of this second approach is that if the firm level or investment climate characteristics
are correlated with the labor and capital variables then the estimates of the coefficients in equation
(2) will be biased.e As a result, the ε’s will be estimated incorrectly and the coefficients from the
second stage will be biased. It seems likely that this will often be the case.
Escribano and Guasch (2005), argue that “this is almost always the case since the inputs are
correlated with the IC variables and least squares estimators of [equation 2] are inconsistent and
biased.” For this reason, estimation is done in a single step in this report.
One concern about OLS is that outliers can have a significant effect on OLS estimates. In addition
to using OLS, equations (2) and (4) are also estimated using a Least Absolute Deviations (LAD)
estimator. This is used rather than Ordinary Least Squares (OLS), because it is more robust to
outliers. Due to concerns about outliers, LAD estimators are often used when estimating production
functions.f
In addition to concerns about outliers, a second set of concerns have been discussed in the
literature on (i) the functional form of the error term, ε, and (ii) whether the error term is correlated
with capital and labor. Several methods have been proposed regarding the functional form of the
error term. In particular, stochastic frontier analysis allows for two error terms, a one sided term
assumed to have a half normal distribution, ν, representing technical efficiency and a two-sided, ε,
a two-sided normally-distributed error term representing temporary shocks to productivity and
measurement error. The model is estimated using maximum likelihood estimation.
A broader problem is that things that affect productivity might affect firm managers’ choices
regarding capital and labor. If this is the case, OLS, stochastic frontier estimation and LAD
estimation will all produce biased estimates of the coefficients. Although several methods have been
proposed to deal with this, they tend to be more data intensive and to require panel data. Although
a short two-year panel can be constructed for the data from the Enterprise Survey for Bulgaria,
this does not provide much across-time variation. With this proviso, the analysis also includes
estimates based upon a method proposed by Levinsohn and Petrin (2003) as a robustness check.
Under assumptions about how productivity shocks evolve over time, this can produce unbiased
estimates of the coefficients even when the shocks affect decisions regarding inputs.
A final concern is that for analysis with firms from multiple sub-sectors of manufacturing, the
analysis essentially assumes that firms use the same production technologies. Since the analysis
includes firms from more than one sub-sector of manufacturing, a more flexible estimation
technique would allow firms in different sector to use different production technologies. This can
be done mechanically by including a full set of sector dummies and interacting these dummies with
the measures of labor and capital to allow different technologies in different sectors—that is, this
allows labor and capital intensities to different in different sectors.
The augmented production function then becomes:
The coefficients on labor and capital, β and γ, are assumed to vary between sectors. Sector
dummies, α,, are also included to allow for systematic differences in productivity across sectors.
These models are referred to as the ‘unrestricted models’ while the models that assume identical
production technologies are referred to as ‘restricted models’
Methodological issues
There are some problems, however, with this methodology.
1. For cross-country comparisons, value-added and capital have to be denominated in a

common currency (e.g., US dollars or Euros). Because these two variables are denominated
in local currency in the survey, cross-country comparisons of TE are vulnerable to exchange
rate fluctuations. If the exchange rate is overvalued relative to its long-run equilibrium
then TE might look artificially low. This is not a problem for within country comparisons.
2. Capital is more difficult to measure than labor for both theoretical and practical reasons.
Since TE uses measured capital in its construction, it will generally be mismeasured when
capital is mismeasured.
3. Because estimates are calculated in a regression framework, it is less straightforward to

calculate than labor productivity. One issue is that estimates of TE for groups of firms
do not have natural units. For cross country comparisons, TE is shown as percent of TE
in Bulgaria. For other group (e.g., exporters) differences are presented in terms of a base
category (e.g., non-exporters).
4. As noted by Escribano and Guasch (2005), there is no single accepted approach to

estimating TE. For this reason, we estimate the model in several different ways to check
the robustness of results. First, we estimate both restricted models (e.g., all input-output
elasticities are assumed identical across industries) and unrestricted models. Second, we
estimate the model that make different assumptions about the error term such as stochastic
frontier estimation, Ordinary Least Squares (OLS), Least Absolute Deviations (LAD), and
the Levinson-Petrin estimator (Levinsohn and Petrin, 2003)
5. Recent studies have noted that inputs in the production function (labor and capita) are
endogenous (Levinsohn and Petrin, 2003; Olley and Pakes, 1996) and this can affect the
estimation of TE. With panel data, it is possible to control for this using sophisticated
econometric techniques instrumenting for inputs with intermediate inputs or investment.
In this case, with only a short panel, these methodologies can not be implemented as easily.
Therefore, we use the Levinsohn-Petrin methodology as a robustness check.
There are some additional problems associated with including measures of the investment climate
in TE regressions.
1. The impact that different aspects of the investment climate have on firm productivity are
likely to vary across countries—and results across countries have often varied in previous
Investment Climate Assessments.. For example, improvements in access to financing are
likely to depend upon how developed financial markets are, how difficult it is to get access,
how the financial sector is regulated, what informal institutions have evolved to make up
for problems with formal credit markets, and many other factors. Because we are primarily
interested in the effect that investment climate variables have on productivity in Bulgaria,
we do not pool data for multiple countries in the regressions looking at the effect of firm
characteristics and the investment climate on productivity. This gives us greater confidence
that the results apply to Bulgaria specifically rather than to middle-income countries more
generally. This will however make it harder to find statistically significant variables. In this
case, it also makes sense because the data for the comparator countries comes mostly from
the BEEPS survey, which does not have the detailed information on productivity that is
available in the 2007 Enterprise Survey.
2. Most of the investment climate variables are potentially endogenous. As in previous

studies (Dollar and others, 2005a; Escribano and Guasch, 2005) using firm-level data from
Enterprise Surveys—and many investment climate assessments—we control for this by
replacing the potentially endogenous investment climate variables with region-industry
averages as a robustness check.g This is obviously not an ideal solution, but it is very difficult
to find purely exogenous variables (i.e., that affect productivity but are not affected by it) in
this case. Exogeneity tests are used to see whether the variables appear exogenous or not.
3. There is a potential omitted variables problem due to large number of investment climate
variable that might affect productivity (Escribano and Guasch, 2005). To deal with this
problem, a general to specific modeling approach is used. This allows us to identify those
areas of the investment climate that are most strongly and robustly correlated with firm
productivity. In addition, we also look at whether the coefficients on the variables (both
insignificant and significant in the final model) are statistically significant when the variable
included alone (i.e., using a specific to general approach). This gives greater confidence in
the final results. Differences in results between the two approaches are discussed in the
text.
Several papers have discussed these issues in more depth including Escribano and Guasch (2005)
and Dollar and others (2005a).h Data is pooled for the six sub-sectors of manufacturing for which
enough data were collected to estimate productivity: food, garments, chemical, fabricated metal
products, machinery, and electronics.i
Cross-Country Analysis
As a first exercise, average technical efficiency levels are estimated for all countries in the sample.
Because TE does not have any natural units, results are presented as average TE for that country
relative to average technical efficiency for Bulgaria. The estimation is done using unrestricted
models based upon three of the four techniques (LAD, OLS, and stochastic frontier analysis)
described above. The final technique (Levinsohn-Petrin) is not used because this technique cannot
be used due to a lack of lagged productivity variables in the BEEPS data. The regression is essentially
the augmented production function (equation 5 above) without any additional investment climate
controls except country dummies.
Although the estimation should not be as sensitive to the minor differences in sampling between
the BEEPS surveys and the Enterprise Survey as the simple averages reported elsewhere in the report
(i.e., the regression analysis controls for difference in size and sector in the unrestricted models), it is
important to keep in mind that the samples from the BEEPS survey are not very large and the quality
of the productivity data is not as high. As for all of the productivity analysis, these estimates only
include manufacturing firms (i.e., non-manufacturing firms are omitted).
Results from the three models are similar, although not identical. The correlation between the
three estimates is 0.99 or higher. All three models present similar conclusions for Bulgaria—technical
efficiency is consistently lower in Bulgaria than in the any of the other comparator countries. In
most cases, the differences are statistically significant at conventional significance levels in almost
all cases.
Table 1: Average technical efficiency in Bulgarian relative to comparator firms for other
countries
LAD OLS Frontier
Bulgaria 100% 100% 100%
Romania 116%** 133%*** 127%***

Latvia 121% 122% 116%
Lithuania 133%** 168%*** 159%***
Czech Republic 196%*** 195%*** 186%***
Poland 201%*** 222%*** 209%***
Slovakia 202%*** 199%*** 189%***
Estonia 214%*** 240%*** 227%***
Hungary 233%*** 256%*** 242%***
Slovenia 507%*** 514%*** 494%***
Correlation with OLS estimates 0.99 1.00 1.00
Source: Author’s calculation based upon World Bank Enterprise Surveys.
Notes: All percentages are averages relative to averages for Bulgarian Firms in 2007. All estimates come from
unrestricted model estimates for each of the methods. *** means average TE is different in that country from
average TE in Bulgaria at a 1% level. ** 5 percent level and * 10 percent level.
Firm Characteristics
Before adding additional investment climate-related variables, it is interesting to first analyze

what types of firms are most productive. Because of endogeneity concerns about many investment
climate variables, including these variables in the analysis in addition to firm characteristics could
make it difficult to look at the relationship between firm characteristics and productivity in these
large regressions. In practice, however, the results from this section appear robust to the inclusion
of the investment climate variables. This is discussed in the next subsection.
As in the next subsection, the variables are selected using a general to specific approach due to
concerns about omitted variables (Escribano and Guasch, 2005). In practice, however, the results
are fairly similar when the variables are included one at a time. That is, most of the coefficients on
the firm characteristics that are statistically insignificant in the larger models are also statistically
insignificant when included one at a time.
The largest model included 12 variables indicating that: (i) the firm is ISO certified; (ii) the firm
licenses a foreign technology; (iii) the firm has introduced a new product within the past three years;
(iv) the firm has introduced a new production process within the past three years; (v) the firm is an
exporter; (vi) the firm is a limited liability product, (vii) the firm has its own website; (viii) the firm
uses e-mail to communicate with suppliers and customers; (ix) the firm is foreign-owned; (x) the
firm is state-owned; (xi) capacity utilization; and (xii) age of the firm.
Insignificant variables are omitted until coefficient on remaining variables are statistically
significant. The final model includes four variables:
ISO Certification. After controlling for other firm characteristics that might affect firm
productivity, firms that are ISO certified are between about 30 percent more productive than firms
that are not (see Table 2 and Table 3). This result is statistically significant across statistical models
and is robust to the inclusion of the investment climate-related variables in the next section. The
point estimates of the coefficients suggest that technical efficiency is between about 19 and 34
percent higher in firms that are ISO certified.
As with other variables, it is difficult to fully assess the direction of causality. One plausible
explanation is that the process of quality improvement requires that firms carefully assess their
processes and organizational performance and that this in turn improves their efficiency. Another
possibility is that this improves either quality or acts as a signal of quality, allowing the firm’s product
to command higher prices on international markets.
However, it is also possible that causation might partly run in the opposite direction. That is,
firms that are already producing quality goods and are already well organized might find it easier
to become internationally certified than other firms. This interpretation is consistent with other
evidence that suggests that although international certification provides a useful market signal that a
firm is adhering to a recognized management system there is mixed evidence that it actually improves
quality and organizational performance in the firm (Guasch and others, 2007). As discussed in
Chapter 4, it is therefore important to emphasize that certification is a first step to further quality
upgrading and not an end in itself.
Licenses Foreign Technology. Firms that license foreign technologies are considerably more
productive than other firms. The coefficient estimates in Table 2 and Table 3 suggest that firms
that license foreign technologies are between about 40 and 60 percent more efficient than other
firms are. This emphasizes the importance of foreign flows of technology in promoting productivity
improvements.
Introduces New Product. Firms that have introduced new products within the past three
years are between about 20 and 30 percent more technically efficient than firms that have not after
controlling for other firm characteristics that might affect productivity. The result is statistically
significant in most model specifications, although the coefficient does become smaller, suggesting
that these firms are only about 5 percent more productive, and statistically insignificant when the
Levinsohn-Petrin estimator is used.
It is not surprising that more innovative firms are more productive. Firms that continually update
the products and services that they provide will be able to command higher prices than firms that do
not. That is, firms that update their product lines will probably find it easier to compete on things
other than price (e.g., quality). Because of the way that productivity is measured (i.e., in monetary
terms) this would make the firm more efficient (i.e., allowing it to produce more revenue with the
same inputs). It is possible, however, that other omitted firm-level characteristics might also play a
role. Firms that are better managed will probably find it easier to introduce new products and are
also likely to be more efficient in other ways.
Age. Firms that are older appear to be more efficient in Bulgaria after controlling for other firm
characteristics that might affect productivity. Based upon the estimates shown in Table 2 and Table
3. This suggests, for example, that firms that are 10 years old will be about 13 percent more efficient
than firms that are only 5 years old.
Table 2: Differences in TE by firm type (unrestricted estimates)
Estimation Method OLS LAD Frontier
Dependent Variable Log of Value Added
Observations 319 319 345
Sector Dummies Yes Yes Yes
Sector-specific technologies Yes Yes Yes
Age 0.227*** 0.191** 0.242***
(natural log, years) (2.83) (2.40) (3.42)
Firm licenses foreign technology 0.462*** 0.431*** 0.355**
(dummy) (2.81) (2.80) (2.49)
Firm has ISO certification 0.260** 0.225** 0.200**
(dummy) (2.38) (2.23) (2.06)
Firm has introduced new product 0.204** 0.186* 0.230**
(dummy) (1.99) (1.95) (2.45)
R-squared 0.75
Source: Author calculations based on World Bank Enterprise Surveys data.
*** Significant at 1% level; ** 5% level; *10 percent level
Other Variables. The coefficients on the other variables (e.g., Internet use, exporting, foreign-
and state-owned firms) were statistically insignificant in the extended model containing all variables
and were mostly statistically insignificant when included one at a time without any other variables.
For example, the coefficient on the dummy variable indicating that the firm is foreign-owned was
statistically insignificant in the largest specifications—and remained statistically insignificant as the
least significant variables were dropped from extended model—but is also statistically insignificant
when included alone.
The one exception to this is the coefficient on the dummy variable indicating that the firm was an
exporter. The coefficient was statistically significant and positive before any additional variables are
included in the analysis. The results suggested that exporters were about 22 percent more efficient
than similar non-exporters. Once the additional variables were included, the coefficient becomes
statistically insignificant. One plausible reason for this is that exporting is correlated with the other
technology-variables, which are mostly statistically significant. In particular, they are more likely to
license foreign technologies (12 percent of exporters compared to 8 percent of non-exporters), more
likely to be ISO certified (44 percent compared to 26 percent) and more likely to have introduced
new products (64 percent compared to 59 percent). Including these additional variables decreases
the size and statistical significance of the coefficient on the exporting dummy.
Table 3: Differences in TE by firm type (restricted estimates)
Levinsohn-
Petrin
Observations 319 319 345 578
Sector Dummies Yes Yes Yes Yes
Sector-specific technologies No No No No
Age 0.230*** 0.191** 0.202*** 0.131
(natural log, years) (2.86) (2.35) (2.67) (1.63)
Firm licenses foreign technology 0.488*** 0.472*** 0.426*** 0.335***
(dummy) (2.98) (3.06) (2.87) (2.91)
Firm has ISO certification 0.284*** 0.222** 0.202** 0.170*
(dummy) (2.66) (2.23) (2.03) (1.68)
Firm has introduced new product 0.219** 0.194** 0.256*** 0.051
(dummy) (2.14) (2.03) (2.67) (0.51)
R-squared 0.74
*** Significant at 1% level; ** 5% level; *10 percent level.
Investment Climate Variables
In addition to the enterprise characteristics, it is also interesting to see how various aspects of
the investment climate affect firm productivity. Many areas of the investment climate can affect
firm productivity. Since productivity data are only collected for a relatively modest number of
firms (about 300 firms in six sub-sectors of manufacturing in Bulgaria), it is difficult to reach strong
conclusions on what aspects of the investment climate have the most significant impact on firm
performance in Bulgaria.
Keeping these limitations in mind, in this section the econometric analysis described above is
conducted adding additional investment climate variables to the regressions. Up to 30 variables are
included in the largest models and statistically insignificant variables are dropped to reach a final
model (i.e., the approach is a general to specific modeling approach). Following previous analyses,
variables in five broad areas of the investment climate are included in the most general analysis.j The
included variables are:
Infrastructure: Days of power outages; Days of water outages; Losses due to power outages (% of
sales); Losses due to transportation failures (% of sales); Firm has generator; % of water from public
sources; Firm uses own transportation; Days for exports to clear customs.
Red tape: Time senior management spends dealing with government regulations; Security costs
as % of sales; Losses due to crime (% of sales); Bribes as % of sales; Revenues reported to tax reform
(% of sales); Workers reported to authorities (% of workers); Number of tax inspections; Level of
competition (index).
Finance: % of working capital financed with bank financing; firm has bank loan; firm has overdraft
facility;
Labor and Skills: Unskilled workers as % of workers; Part-time workers as % of workers; % of

workers trained.
Other control variables: Age of firm; Firm licenses foreign technology; Firm has ISO certification;
Firm has introduced new technology in past three years; firm exports; firm is limited liability
company; firm is foreign-owned; firm is government owned; Capacity utilization.
Although the general to specific approach is used, the results are similar when the variables
are included one at a time. That is, most of the coefficients on the investment climate variables
(and firm characteristics) that are statistically insignificant in the larger models are also statistically
insignificant when included one at a time. Other than exports, which was discussed in the previous
section, the only other variable that was significant when included by itself that wasn’t significant
when added to the final model was the share of workers that were trained. Results from restricted
and unrestricted models are presented in Table 4 and Table 5. Although given the difficulty of
precisely measuring the impact of the investment climate on firm performance, these estimates
suggest that productivity is associated with worker skills and education, the burden of regulation
and crime, and access to finance.
% of workers that are unskilled. One of the most robust results is that firms that have a greater
share of unskilled workers are less productive than other firms. The coefficient on this variable is
statistically significant and negative in all model specifications (see Table 4 and Table 5). A one
percentage point decrease in the number of workers that are unskilled would increase productivity
by about one percent. Because Bulgarian firms perform relatively poorly on this measure—in
the sample of firms in this study, unskilled workers make up about 18 percent of workers for the
average manufacturing firm in Bulgaria, a relatively large share. This suggests that relatively large
improvements in productivity would be possible if the percent of workers that are unskilled was
reduced to the same levels as in the best performing of the other recent EU entrants. For example,
if the percent of unskilled workers were reduced to 8 percent, the level observed in Slovakia (the
country with the second lowest share of unskilled workers among the new EU entrants), the point
estimates suggest that productivity could increase by about 10 percent.
% of time managers spend dealing with government regulations. Firms whose managers have
to spend significant amounts of time dealing with government regulations are less efficient than
firms whose management have to devote less time to these tasks. The coefficient is negative and
statistically significant in most model specifications. A one-percentage point increase in the percent
of time that managers spend dealing with government regulations and requirements would increase
productivity by about 1.1 percent. Because Bulgaria compares relatively unfavorable on this measure
(see Chapter 6), large improvements in productivity would be possible if the burden of regulation
could be reduced to level observed in the best performing economies. Although comparable data
are not available for the other recent EU entrants, if the burden could be reduce to about 11 percent
of management time, the level observed in Croatia, productivity could increase by 7 percent.k
Security costs as % of sales. Crime also appears to impose a fairly significant burden on firms
in Bulgaria (see Chapter 6). The coefficient on the cost of security as a percent of sales is negative
and statistically significant in all model specifications. The point estimate of the coefficient suggest
that if security costs could be reduced from about 1.2 percent of sales to about 1.1 percent of sales,
then productivity would increase by about 2 percent. If security costs were reduced to about 0.26
percent, the level in the country with the second lowest average security costs among the new EU
entrants (Poland), productivity would increase by about 16 percent. Although these numbers should
be treated cautiously, especially given that the decrease in costs is large in absolute terms in this case,
it does suggest the possibility for gains.
% of working capital financed with bank financing. The final variable that is statistically
significant in most cases is the percent of working capital that firms finance with bank financing.
The coefficient on this variable is statistically significant and positive in nearly all models. The point
estimate of the coefficient suggests that increasing the percent of working capital financed with
bank financing by 1 percentage point would increase productivity by about 0.2 percent. Overall,
the benefits from increasing bank financing are likely to be relatively modest. On average, firms in
Bulgaria already finance about 18 percent of their investment in this way—higher than in the other
recent entrants to the EU (see Chapter 7). Increasing this to the level observed in Croatia, where
firms finance about 24 percent of their investment in this way, would increase productivity by about
4 percent.
Table 4: Differences in TE by firm type (restricted estimates)
Estimation Method OLS LAD Frontier Levinsohn-
Petrin
Sector-specific technologies No No No No
Observations 296 296 320 538
Age 0.215*** 0.211*** 0.228*** 0.125
(natural log, years) (2.68) (2.70) (3.40) (1.51)
Firm licenses foreign technology 0.440*** 0.446*** 0.261* 0.313*
(dummy) (2.73) (2.86) (1.95) (1.89)
Firm has ISO certification 0.186* 0.171* 0.135 0.099
(dummy) (1.74) (1.68) (1.48) (0.98)
Firm has introduced new product 0.277*** 0.259*** 0.257*** 0.162*
(dummy) (2.70) (2.67) (2.98) (1.94)
Time senior management spends dealing -0.011*** -0.009*** -0.003 -0.004
with regulations
(% of time) (-3.33) (-2.66) (-1.26) (-1.08)
Security costs -0.178*** -0.196*** -0.163*** -0.196***
(% of sales) (-3.44) (-3.98) (-3.75) (-4.10)
Unskilled workers -1.032** -1.102** -1.253*** -0.594***
(% of workers) (-2.18) (-2.38) (-3.26) (-3.04)
Working capital financed with bank 0.007*** 0.008*** 0.004** 0.004
financing
(% of financing) (3.61) (3.92) (2.57) (1.50)
R-squared 0.77 --- --- ---
Table 5: Differences in TE by firm type (unrestricted estimates)

Age 0.208** 0.202*** 0.222***
(dummy) (2.68) (2.77) (2.19)
Firm has ISO certification 0.159 0.157 0.129
(dummy) (1.45) (1.53) (1.28)
Firm has introduced new product 0.277*** 0.254*** 0.213**
(dummy) (2.65) (2.59) (2.21)
Time senior management spends dealing with -0.011*** -0.009*** -0.002
regulations
(% of time) (-3.30) (-2.59) (-0.81)
Security costs -0.151*** -0.167*** -0.132***
(% of sales) (-2.86) (-3.33) (-2.72)
Unskilled workers -0.899* -0.953* -1.455***
(% of workers) (-1.73) (-1.92) (-3.12)
Working capital financed with bank financing 0.007*** 0.008*** 0.004**
(% of financing) (3.51) (3.85) (2.31)
R-squared 0.782 . .
The results for the firm-level variables are similar to the results from the more limited model
discussed above. Firms that license foreign technologies, that have ISO certification and that have
introduced new products are more productive than other firms. The coefficients on these variables
remain statistically significant in at least some of the regressions for the extended model with
10 BULGARIA: Investment Climate Assessment
additional variables. Similarly, the coefficients on the other firm-level variables were not statistically
significant in the larger model.
For the most part the coefficients on the other variables are not statistically significant whether
included in the large model or included one at a time added to the basic model (e.g., without other
Investment Climate variable or firm level characteristics). One exception, other than exports which
are discussed above, is percent of workers that are trained.
% of workers that are trained. Before including any other variables in the regression, coefficients
on both a dummy variable indicating that the firm provides training and the percent of workers
trained are statistically significant and negative. However, when added to the extended model, the
coefficient on this variable is only significant at about a 15 to 20 percent significance level—lower
than the conventional 10 percent level (see Table 6). A one percentage point increase in the percent
of workers that are trained would increase productivity by about 0.2 percent. Even a large increase
in training would therefore only have a modest affect on productivity.
For example, increasing the share of workers trained by 26 percentage points, from the average
for Bulgaria (about 27 percent) to the average for the Czech Republic (about 53 percent), would
increase productivity by only about 5 percentage points.
Table 6: Differences in TE by firm type with training included (unrestricted estimates)
% of workers trained 0.002 0.001 0.001
(percent) (1.41) (1.36) (1.12)
Age 0.200** 0.195** 0.229***
(dummy) (2.70) (2.79) (2.36)
Firm has ISO certification 0.154 0.153 0.130*
(dummy) (1.40) (1.48) (1.75)
Firm has introduced new product 0.246** 0.229** 0.200***
(dummy) (2.32) (2.31) (2.77)
Time senior management spends dealing
-0.012*** -0.009*** -0.003
with regulations
(% of time) (-3.42) (-2.69) (-1.32)
Security costs -0.142*** -0.157*** -0.114***
(% of sales) (-2.68) (-3.12) (-3.22)
Unskilled workers -0.959* -1.027** -1.476***
(% of workers) (-1.84) (-2.06) (-4.25)
Working capital financed with bank
0.007*** 0.007*** 0.004***
financing
(% of financing) (3.42) (3.77) (3.23)
Constant 7.338*** 7.815*** 7.203***
Other Variables. The other variables were statistically insignificant whether added to the basic
regression (i.e., only with labor and capital) or in the large model described above. Multicollinearity
might play a role in this in the largest model and so the absence of additional variables related to
red-tape or workers might not be surprising.
Other Finance Variables. The coefficients on the other finance variables, whether the firm has
a loan and whether it has an overdraft, are statistically insignificant whether included in the large
model or alone. This is interesting given that the coefficient on the share of working capital financed
with bank financing is significant in both case. One possible reason for this might be that access
to loans has increased significantly in recent years and, as discussed in Chapter 7, many, although
not all, firms without loans do not appear to want them. Thus, one explanation for this might be
that although firms can generally get some type of loan if they want one, there are still concerns
associated with getting a loan on favorable enough terms (e.g., in terms of the size of an available
Technical Appendices 11
loan). In this respect, although firms are not credit constrained in that they can get loans, they
might remain credit constrained in terms of not being able to get enough credit. Hence the size of
the loan rather than whether the firm can get a loan at all might be driving some of these results.
Other Infrastructure Variables. Another interesting point is that none of the variables related
to infrastructure are statistically significant when included either one at a time or in the large model
described above. This, of course, does not mean that infrastructure does not affect productivity.
l
Rather, although as discussed in Chapter 5, firm managers are becoming more concerned about
infrastructure and the objective data also suggests some deterioration in quality, overall quality of
infrastructure remains relatively good. Thus, it might not be surprising that it is not proving to be a
large constraint on firm performance at the moment in Bulgaria.
Endogeneity. One serious concern about the investment climate variables is the direction
of causation. For some variables, such as security costs, reverse causation seems less likely than
others—it seems more likely that high security costs or red-tape would lead to low productivity
rather than low productivity leading to high security costs or a high regulatory burden—but there is
some concern for others of these variables. For example, it seems plausible that banks will favor high
productivity firms or that unproductive firms will tend to hire less skilled workers. As a robustness
check, we run some additional regressions either instrumenting for the investment climate variables
(2SLS) or replacing the investment climate variables with proxies when instrumental variable
techniques are not possible (LAD and stochastic frontier) (see Table 7).
It is difficult to find appropriate instruments in this kind of econometric set-up. Most firm-level
investment climate variables from the survey could at least potentially affect productivity, making
them inappropriate instruments. The instruments/proxies that are used are sector-region averages
for the investment climate variables. Although there are not ideal, they have been used by many
analyses in both investment climate assessments and in academic papers.m
The coefficients on percent of workers that are unskilled and percent of working capital financed
with bank financing remain statistically significant and with the same signs as in the previous
analysis. Wu-Hausman tests confirm that these variables are endogenous.
The coefficient on security costs remains negative in all model specifications, but its significance
level falls. Finally, the coefficient on percent of time spent dealing with government regulations
becomes small and statistically insignificant.
Table 7: Differences in TE by firm type (endogenous estimates)
Estimation Method 2SLS LAD Frontier
Age 0.009 0.151** 0.119
Firm licenses foreign technology 0.501** 0.446*** 0.410*
(dummy) (2.56) (2.99) (1.93)
Firm has ISO certification 0.288* 0.237** 0.160
(dummy) (1.95) (2.40) (1.09)
Firm has introduced new product 0.260** 0.146 0.119
(dummy) (2.04) (1.54) (0.84)
Time senior management spends dealing 0.001 0.003 -0.003
with regulations a
(% of time) (0.081) (0.37) (-0.20)
Security costs a -0.029 -0.012 -0.133
(% of sales) (-0.19) (-0.095) (-0.77)
Unskilled workers a -1.632** -1.595*** -2.123***
(% of workers) (-2.28) (-3.27) (-3.13)
Working capital financed with bank 0.023*** 0.023*** 0.021***
financing a
(% of financing) (3.48) (4.66) (3.10)
R-squared 9.554*** 8.298*** 9.131***
*** Significant at 1% level; ** 5% level; *10 percent level. a Treated as endogenous.
In general, concerns about endogeneity are not as strong for the percent of time that managers
spend dealing with regulation and security costs than for the other two variables (i.e., it does not
seem likely that the negative signs can be caused by low productivity resulting in a high regulatory
burden or high security costs). Wu-Hausman tests confirm this intuition. The null hypothesis
that these two variables are exogenous cannot be rejected at conventional significance levels either
jointly (p-value=0.46) or singly (p-value==0.36 and 0.35 respectively). This suggests favoring the
results in Table 5 for these two variables and suggests that these variables might affect productivity.
In summary, although methodological problems suggest caution, the results suggest that some of
the investment climate variables affect productivity. In particular, firms with skilled workers, with
bank loans, with lower security costs, and lower regulation burden are more efficient than other
firms. These results appear fairly robust.
Appendix 5.1: Econometric Analysis

of Firm-Level Perception Data
Managers’ views about the investment climate often differ in systematic ways. These differences
can be due to differences in expectations (e.g., managers of foreign-owned firms might have
expectations based upon their experience in their home countries) or differences in experiences
(e.g., managers of large firms might find it easier to get loans due to having better connections or
better access to collateral). This appendix looks at differences in perceptions across different types
of firm in more detail. Later chapters address whether the differences in objective indicators are
consistent with the differences in perceptions.
One way of assessing whether there were differences in perceptions across different types of firms
would be simply to compare average responses across firms of different types. For example, it would
be possible to look at how many firms of different types rated a particular investment climate issue
as their biggest constraint or how many firms rated it as a major or very severe constraint.
Although this approach is quite intuitive, there are at least two problems associated with it. First,
the sub-samples of different types of firms are often relatively small. This makes it difficult to assess
whether differences are due to random variation in responses or due to actual systematic differences
in perceptions. For example, there are only 53 foreign-owned manufacturing firms in the sample.
Second, there are also systematic differences in other firm characteristics across types of firms. For
example, foreign-owned firms in the manufacturing sector tend to be both larger than domestic
firms (an average of 159 workers compared to an average of 46 workers) and are far more likely
to export (70 percent compared to 12 percent). Differences in perceptions between managers of
foreign and domestic firms might therefore reflect differences in size or export behavior rather than
being foreign-owned.
To deal with this, this section presents econometric results that deal with both these issues. First,
by using a multivariate regression approach, it is possible to look at differences in perceptions after
controlling for other systematic differences between firms. Second, it is possible to look at the
statistical significance of the results (i.e., to see whether the probability that differences are due to
random variation in responses is low).
Methodology
The methodology is similar to the methodology used in a recent paper by Gelb, Ramachandran,
Shah and Turner (2006).n Because of concerns about pooling the data from the SMLE and
microenterprise surveys, the results focus on differences among the SMLEs in the sample. The
microenterprise sample, with only about 120 firms, is too small to do a similar analysis.
The question of how different factors, including ownership, affect access to credit for
microenterprises is examined by estimating different versions of the equation below:
The dependent variables are dummy variables indicating whether the manager of firm i rates that
area of the investment climate as a major or very severe obstacle. The independent variables are a
set of dummy variables indicating firm age, firm ownership (whether the firm has a female owner,
and whether the firm is foreign owned), firm size (number of workers), a dummy variable indicating
whether the firm exports, and a series of dummies indicating sector of operations. The error term is
assumed to be normally distributed. Because the dependent variable is a dummy variable, the model
is estimated using standard maximum likelihood estimation.
Results
Results from the regression for each of the obstacles are shown in Table 8. The main statistically
significant results are discussed below.
a) Firm Size
Previous cross-country work suggests that large firms are more likely to complain about most
aspects of the investment climate, with the exception of access to finance and access to land, than
smaller firms.o This does not appear to be the case in Bulgaria. In most cases (10 out of 16 cases),
there is no correlation between firm size and the probability that the firm manager says that that area
of the investment climate is a serious constraint to firm operations and growth. For the other six
areas—including access to finance and access to land—the correlation is negative (i.e., larger firms
were less likely to say that it was a serious constraint).
Figure 1: Managers of small firms were more likely to be concerned about several areas of the
investment climate than managers of larger firms
50% Small
Large
% of firms saying area
40%
is a serious problem
30%
20%
10%
0%
Competitors
Corruption
Access to
Access to
Regulation
and Trade
Crime
Customs
Finance
Informal
Land
Source: World Bank Enterprise Survey (2007).

Note: Small firms have between 10 and 49 employees and Large firms have 250 or more employees.
The differences in perceptions for several of these areas are quite large (see Figure 1). For example,
about 44 percent of managers of small enterprises said that competition from informal firms was a
problem and 46 percent of managers said that corruption was a serious problem. In comparison,
only 18 percent of managers of large firms said the same about competition from the informal sector
and only 29 percent said the same about corruption.
Despite this, it is important to note that, in general, this does not affect the ordering of constraints
significantly. For example, although managers of small firms were far more likely to say that
corruption was a problem, it still ranked as the third most common concern for managers of large
firms (compared to the most common concern for managers of small firms). Similarly, crime, access
to land, access to finance, and trade regulations did not rank among the most common concerns for
managers of either small or large firms (6th, 9th, 12th, and 16th most common concerns for managers
of small firms and 6th, 10th, 11th, and 16th for managers of large firms).
The one exception to this general pattern is competition from the informal sector. Whereas
managers of small firms were more likely to report that corruption was a serious concern, it did
not rank among the top concerns of managers of large firms (7th most common concern). In this
respect not only is the difference in the share of firms reporting that it is a serious constraint large
(44 percent of managers of small firms compared to only 18 percent of managers of large firms—the
largest difference in absolute terms), but the difference in relative rankings is also large.
b) Ownership
Managers of foreign-owned and domestically owned firms generally have very similar concerns
about the investment climate. The coefficients on a dummy variable indicating that the firm is
foreign-owned are statistically insignificant in most regressions. In two cases, the coefficient on the
dummy indicating the firm is foreign-owned is negative and statistically significant. This suggests
that managers of foreign-owned firms were less likely to say that power and business registration
were significant problems than managers of other firms. Although the coefficients are statistically
significant—and relatively large suggesting that managers of foreign-owned firms were about 10
percentage points more likely to say that each area was a serious obstacle—qualitatively it does
not have a large impact on results. Neither power nor business registration ranks among the top
constraints for managers of either foreign-owned or domestically owned firms.
Firms are also asked if any of their main owners are female. The coefficient on this variable is
consistently small and statistically insignificant at a five percent significance level. This suggests that
managers of
c) Exporters
Exporters often have different concerns from non-exporters. For example, exporters can be more
vulnerable to macroeconomic instability (exchange rate fluctuations) than non-exporters and can be
more sensitive to problems with trade and customs regulations.p
Given the fixed exchange rate—and that very few firms of any type had any concerns about trade
regulation because of the accession to the EU in January 2007 which lifted trade barriers (above 70
% of Bulgaria’s foreign trade is with the EU)—it might not be surprising that there is little evidence
than exporters have different concerns than non-exporters in Bulgaria. The one exception to
this is that exporters were far less likely to say that they were concerned about competition from
informal firms than non-exporters. Whereas about 41 percent of non-exporters said that they saw
competition from informal firms as a serious problem, about 26 percent of exporters said the same.
Intuitively this makes sense. It seems unlikely that exporters will find themselves competing with
small informal firms for export markets—especially for firms that export to other members of the
European Union. Moreover informal competition is likely to take place at the domestic market since
inspections for foreign markets are far more stringent than inspections for products that are sold on
the domestic market.
d) Age of Firm
Firm age might also affect perceptions about the investment climate. For example, managers of
older firms that have established relationships with banks, suppliers and customers might be less
concerned about access to finance. That is, given their existing long-term relationships they might
find it easier to get both commercial and bank credit. In addition, if older firms are no longer in an
expansionary phase, they might not need to invest as much in their operations and so have less need
for bank credit.
Although older firms were less likely to say access to credit was a concern, the difference was small
and statistically insignificant. In fact, the coefficients on firm age were statistically insignificant in
all regressions, suggesting that managers of young and old firms have similar concerns regarding the
investment climate.
e) Sector
Firms in different sectors of the economy are also likely to have different views about the constraints
that they face. For example, transportation is likely to be less important to firms whose products
or services are mostly delivered locally or who can deliver their product or services electronically.
Similarly, the availability of educated workers is likely to be more important to firms that are more
skills intensive whereas skill shortages might be less important for more labor-intensive industries,
like the garment sector.
The econometric results suggest that managers of firms in the four broad sectors of the
economy—retail trade, manufacturing, information technology and other services—do have
different perceptions about how great an obstacle in several areas of the investment climate are to
their firms’ operations. In particular, the null hypothesis that firm managers are equally as likely to
see an area of the investment climate as a serious obstacle to their firms’ operations can be rejected
for eight of the sixteen obstacles: corruption; competition from informal firms; worker education;
access to finance; crime; transportation; business licensing; access to land; and transportation (see
test of null hypothesis that sector dummies are equal in Table 8). These obstacles are discussed in
turn below.
Corruption. After controlling for other factors that might affect perceptions about corruption,
managers of firms in the manufacturing sector were less likely to say that corruption was a serious
constraint than managers in the retail trade and service sectors. The null hypothesis that the coefficient
on the manufacturing dummy is zero (i.e., the null hypothesis that managers in the manufacturing
sector are no less likely to say that corruption is a serious constraint than managers in the other
services sector) can be rejected at a 5 percent significance level, while the null hypothesis that the
coefficient on the manufacturing and retail trade dummies are equal (i.e., the null hypothesis that
managers in the manufacturing sector are no less likely to say that corruption is a serious constraint
than managers in the retail trade sector) can be rejected at a 1 percent significance level. In contrast,
the null hypothesis that the coefficient on the IT and manufacturing dummies are equal cannot be
rejected at conventional significance levels (p-value=0.15).
Fewer managers of IT firms said that corruption was a serious concern than other managers—only
37 percent of managers in the IT sector compared to between 44 and 52 percent of other managers
(see Figure 2). The coefficient on the dummy indicating that the firm is in the IT sector, however,
is not statistically different from the coefficients on the other sector dummies. This suggests that
the difference might be the result of random variation rather than due to a difference in perceptions
between managers of IT firms and other managers.
Figure 2: Managers of firms in different sectors have very different views of the economy
Source: World Bank Enterprise Surveys.
70%
Manufacturing
% of firms saying area is a
60% I.T.
serious problem
50% Retail
40% Other Services
30%
20%
10%
0%
Inadequately
Access to
Access to
Transportation
Corruption
Licensing
Competitors
Crime
Business
Workforce
Finance
Educated
Informal
Land
Note: Small firms have between 10 and 49 employees and Large firms have 250 or more employees.
Although managers of manufacturing firms were less likely to say that corruption was a serious
constraint than managers of retail trade and other service firms after controlling for other factors,
corruption remains a serious concern for managers in this sector. About 44 percent of managers
said that it was a serious concern—more than any other investment climate related constraint. Thus,
although managers of manufacturing firms were less likely to say it was a problem than managers
of retail trade and other service firms, it remains a serious concern for managers of manufacturing
firms.
Competition from informal firms. Managers of firms in the IT sector were far less concerned
about competition from informal firms than managers in other sectors. Based upon the point
estimates, managers of IT firms were between 16 and 26 percentage points less likely to say that
competition from informal firms was a serious constraint than firms in the other three sectors. The
null hypotheses that managers of IT firms were no more likely to rate competition from informal
firms as a serious problem than managers of other three sectors can all be rejected at a one percent
level or lower.q
Managers in other sectors were also more concerned about it in relative terms. They were close
to twice as likely to say that competition with the informal sector was the biggest problem that they
faced (12 percent of firms outside of IT compared with 6 percent for firms in the IT sector). It also
ranked among the very top constraints for managers in other sectors. Based upon the percent of
managers that said it was a serious problem, it ranked as the second greatest constraint for managers
in manufacturing and other services and the third greatest constraint for managers in the retail trade
sector. In comparison, it only ranked as the 9th largest constraint for managers in the IT sector.
Worker Education. Worker education ranked among the top concerns of firms in all sectors.
Managers of manufacturing and other service firms were more likely to say that it was a serious
constraint than all but four areas of the investment climate, while managers of retail trade firms were
more likely to rate it as a serious obstacle than all but three areas of the investment climate. But
managers of information technology firms were far more likely to say that it was a serious constraint
than other managers—close to two-thirds of managers of IT firms, compared to between 30 and 41
percent of managers in the other sectors (see Figure 2).
As well as the concerns of managers in the information technology sector, some managers in the
manufacturing sector were also concerned about workers education. On average, managers in the
manufacturing sector were no more likely to say that skills were a problem than in the retail trade
and services sectors. A test of the null hypothesis that the coefficients on the manufacturing sector
dummy is zero (i.e., equal to the coefficient for the missing sector, other services) cannot be rejected
at conventional significance levels (p-value=0.29). Moreover, the null hypothesis that the coefficient
on the dummy for manufacturing is equal to the coefficient on the dummy for retail trade can also
not be rejected at conventional significance levels (p-value=0.51).
Although this is true on average for firms in the manufacturing sector, managers in some sub-
sectors of manufacturing are more concerned. When sub-sector dummies for electronics and for
machinery and equipment are added to the base regression, the coefficients on the two dummies
are positive and statistically significant—although the coefficient on the electronics sub-sector
dummy just fails to be significant at a 5 percent significance level (see Table 9). This indicates
that manufacturing firms in these subsectors are more likely to say that skills are a problem than
manufacturing firms in other areas of manufacturing.
This might not be surprising since firms in these subsectors tend to be more skills intensive than
in other sub-sectors. In particular, about 2 percent of firms in electronics and 11 percent of firms in
machinery and equipment said that their average employees had no vocational or university training.
In comparison, about 30 percent of firms in the chemicals and food and beverage subsectors, about 24
percent of firms in the garments sub-sector and 12 percent of firms in the fabricated metal products
sub-sector (mostly structural metal products for construction) said the same. This suggests that
managers in those sub-sectors that hire less well-educated production workers (garments, food,
and fabricated metal products) were less likely to say that skills is a problem than managers in sub-
sectors that demand better educated workers (e.g., electronics and machinery and equipment).
Access to Finance. Managers of firms in the manufacturing and other services sectors were
more likely to say that access to finance was a serious obstacle than managers in the retail trade and
IT sectors. The coefficients on the dummies indicating that the firm is in the IT or the retail trade
sectors are statistically significant and positive. The null hypotheses that they are the same as the
coefficient on the dummy variable indicating that the firm is in the manufacturing sector can also be
rejected at conventional significance levels (p-value of 0.00 for both sectors).
Managers of manufacturing firms were more likely to say that access to finance was a serious
problem than managers of firms in other sectors—27 percent for manufacturing compared to
between 13 and 25 percent for the other three sectors. It also ranked higher among the constraints
for firms in the manufacturing sector than for firms in other sectors (7th compared to 14th for firms
in the retail trade and other service sectors). But it did not rank among the very top constraints for
manufacturing firms either.
Interestingly, although the coefficient on the dummy is negative and statistically significant,
indicating that managers in the IT sector were less likely to see access to finance as a constraint
than managers in other service sectors, about 25 percent of managers of firms in the IT sector said
that access to finance was a serious constraint—more than in the other services sector (about 18
percent of managers). This makes it the fifth most common constraint mentioned by managers in
this sector.
The discrepancy appears to be due to the inclusion of the variable indicating firm size. The average
size of the IT firms in the sample is far smaller than in other sectors (about 33 in IT firms, compared
to 83 in manufacturing and over 100 in the other two sectors). In this respect, the high level of
concern appears to reflect that IT firms are small—and small firms are typically more concerned
about access to finance than other firms.
Crime. In most countries where retail firms have been surveyed as part of an investment climate
survey, retail firms tend to be particularly concerned about crime.r Because their stock is often
attractive and can be easily used by both consumers and workers, this makes it vulnerable to being
stolen. In addition, by the nature of their business, retailers have to provide consumers, including
potential thieves, access to their stock. In contrast, goods held by manufacturers are in some cases
of little use to end consumers (e.g., intermediate inputs, parts, capital machinery and equipment)
and consumers are generally not provided access to factories and facilities in the same way that that
they are provided access to retail shops.
This is also the case in Bulgaria—managers of firms in the retail trade and other services
sectors appear more likely to say crime was a problem than managers of other firms. Managers
of manufacturing firms were less likely to say that crime was a serious obstacle than firms in both
these sectors. The null hypothesis that the coefficient on the manufacturing dummy is the same
as the (omitted) dummy for service firms and for retail trade firms can be rejected at conventional
significance levels (p-values of 0.03 and 0.02, respectively). Although the difference between IT
firms and other firms was not statistically significant, the coefficient was large—the point estimate
suggests that IT firms were about 9 percentage points less likely to say crime was a problem than
firms in retail trade and other services.
For managers of retail trade firms, in particular, concern about crime appears higher than for
other sectors (see Figure 2). About 42 percent of managers said crime was a serious problem—more
than any other areas of the investment climate except corruption (52 percent of managers) and
competition with informal firms (43 percent of managers).
Business Licensing. Firms in the ‘other services’ sectors were more likely to say that business
registration and licensing were serious problems than firms in other sectors. After controlling for
other factors, managers of other service firms were about 10 percentages points more likely to say
that business licensing was a problem than managers in other sectors. Even among other service
firms, business licensing did not rank among the greatest concerns. Based upon the percent of firms
that said each area was a significant problem, it only ranked 8th of 15 areas for these firms.
Because the ‘other services’ sector only contains about 100 firms, it is difficult to make comparisons
within the sector. With this proviso in mind, there do appear to be some differences in perceptions
across sub-sectors with managers of transportation firms (about 31 percent of managers), wholesale
trade firms (about 26 percent), and construction firms (about 24 percent) being the most concern.
Managers of hotels and restaurants were also concerned, but less than in other areas.s
The manufacturing sample tends to have more firms within each sub-sector, making it easier
to make comparisons across sub-sectors. Managers of firms in the food processing industry were
more likely to say that business licensing was a serious problem than managers of most other
manufacturing firms. About 23 percent of managers of food processing firms said that business
registration was a concern compared to about 20 percent of other managers. A recent report noted
that the registration process for food business operators is particularly cumbersome, with processing
firms having to register with municipalities, the Ministry of Health and the Ministry of Agriculture.
t
Access to Land. Managers of firms in the retail trade sector were more likely to say that access to
land was a serious obstacle to their firms’ operations than managers in other sectors. The coefficient
on the dummy indicating that the firm was in the retail trade sector was larger than the coefficients
on the other dummies and the null hypothesis that managers of retail trade firms were no more
likely to say access to land was a serious problem than managers of IT and manufacturing firms can
be rejected at conventional significance levels (p-values of 0.01 and 0.00).
The coefficient on the dummy is also larger than the omitted coefficient on the dummy for other
service firms (i.e., it is implicitly zero), but the difference is not statistically significant at conventional
significance levels.
Although it did not rank among the very top concerns for managers in any sector, access to
land also tends to figure more prominently among the concerns of managers of retail firms than
among the concerns of managers of firms in other sectors. It ranked as the 6th largest constraint for
Table 8: Differences in manager perception, by firm characteristics
(1) (2) (3) (4) (5) (6) (7) (8)
Access to Tax Trade
Telecom Power Transportation Tax Rates Courts
Land Administration regulation
Observations 289 989 944 947 988 989 918 946
Age -0.079 -0.041 0.001 0.004 -0.019 0.012 0.024 0.033
(in years, natural log) (-1.75) (-1.84) (0.073) (0.25) (-0.82) (0.58) (1.93) (1.51)
Workers 0.001 0.020 0.016 -0.033** 0.005 -0.009 -0.014* -0.005
(natural log) (0.041) (1.56) (1.51) (-3.22) (0.34) (-0.79) (-2.05) (-0.40)
Female Owners 0.045 0.041 0.012 0.041 0.015 0.025 0.004 0.003
(dummy) (0.84) (1.39) (0.51) (1.84) (0.51) (0.98) (0.28) (0.12)
Exporter -0.021 -0.040 -0.028 -0.006 -0.048 0.007 0.012 0.001
(dummy) (-0.31) (-1.21) (-1.03) (-0.23) (-1.42) (0.24) (0.77) (0.028)
Foreign-Owned -0.105 -0.106* -0.064 -0.046 -0.086 0.013 0.008 -0.077
(dummy) (-1.41) (-2.17) (-1.56) (-1.14) (-1.66) (0.29) (0.31) (-1.61)
Sector - Information Technology 0.066 0.097 -0.128** -0.096* -0.028 -0.112* 0.086 -0.062
(dummy) (1.06) (1.40) (-2.93) (-2.51) (-0.41) (-2.39) (1.39) (-1.05)
Sector - Retail Trade 0.036 -0.023 0.011 -0.037 -0.081 0.076 -0.040
(dummy) (0.53) (-0.51) (0.24) (-0.56) (-1.71) (1.19) (-0.69)
Manufacturing 0.049 -0.037 -0.068 0.041 -0.103* 0.051 -0.073
(dummy) (0.86) (-0.87) (-1.64) (0.73) (-2.20) (1.32) (-1.37)
Test that sector dummies equal (p-value) 0.29 0.53 0.02 0.01 0.20 0.10 0.58 0.56
Pseudo R-squared 0.02 0.01 0.03 0.04 0.01 0.01 0.03 0.01
(9) (10) (11) (12) (13) (14) (15) (16)

Labor Worker Business Access to Political Competition from
Corruption Crime
Regulation Education registration Finance Instability Informal Sector
Observations 990 987 908 977 968 978 989 942
Age 0.020 0.012 0.008 -0.010 0.030 0.035 0.011 0.018
(in years, natural log) (1.13) (0.49) (0.46) (-0.51) (1.21) (1.43) (0.49) (0.73)
Workers -0.012 0.017 0.001 -0.040** 0.006 -0.034* -0.035** -0.037*
(natural log) (-1.14) (1.18) (0.058) (-3.38) (0.42) (-2.37) (-2.76) (-2.52)
Female Owners 0.017 -0.045 -0.000 0.024 0.041 -0.045 0.014 0.034
(dummy) (0.77) (-1.37) (-0.018) (0.95) (1.26) (-1.43) (0.49) (1.05)
Exporter 0.010 0.009 -0.009 -0.040 -0.010 -0.042 -0.042 -0.147**
(dummy) (0.37) (0.23) (-0.32) (-1.41) (-0.27) (-1.16) (-1.30) (-4.00)
Foreign-Owned 0.038 0.004 -0.090* -0.006 -0.047 -0.032 -0.026 0.066
(dummy) (0.95) (0.066) (-2.27) (-0.13) (-0.85) (-0.58) (-0.53) (1.12)
Sector - Information Technology -0.048 0.394** -0.136** -0.145** -0.039 -0.057 -0.086 -0.164*
(dummy) (-1.04) (5.44) (-3.67) (-3.35) (-0.55) (-0.84) (-1.55) (-2.37)
Sector - Retail Trade 0.026 0.101 -0.080* -0.131** 0.008 0.024 -0.006 -0.000
(dummy) (0.53) (1.38) (-2.07) (-3.03) (0.11) (0.35) (-0.100) (-0.0020)
Manufacturing -0.028 0.066 -0.107* -0.040 -0.042 -0.124* -0.110* 0.100
(dummy) (-0.65) (1.05) (-2.57) (-0.89) (-0.69) (-2.09) (-2.12) (1.67)
Test that sector dummies equal (p-value) 0.30 0.00 0.00 0.00 0.73 0.01 0.04 0.00
Pseudo R-squared 0.01 0.05 0.03 0.04 0.00 0.02 0.02 0.05
Source: Authors calculations based on Enterprise Survey data.
19
**, * Significant at 1 and 5 percent significance levels.

managers of retail firms, compared to the 7th for managers of IT firms, 11th for managers of other
service firms, and the 12th for managers of manufacturing firms.
Transportation. After controlling for other firm characteristics, managers of IT firms were less
likely to say that transportation was a serious constraint on their operations than firms in other
sectors. The coefficient on the dummy indicating that the firm is in the IT sector was negative
and statistically significant at a 1 percent significance level indicating that the null hypothesis that
managers of IT firms no more likely to say transportation is a serious constraint than managers of
firms in other service sectors. Moreover, the null hypothesis that the coefficient on the IT dummy is
equal to the dummy indicating the firm is in the manufacturing sector or the dummy indicating the
firm is in the retail trade sector can also be rejected. This suggests that managers of IT firms are also
less likely to say transportation is a serious concern than managers of firms in these sectors as well.
The difference is also fairly large in absolute terms. Only 4 percent of managers of firms in the
IT sector said that transportation was a serious concern, compared to between 12 and 24 percent of
firms in the other three sectors. In fact, managers of IT firms were less likely to say that transportation
was a serious problem than they were about any of the other 15 areas that they were asked about.
But it is also important to point out concern about transportation was only modest among managers
of firms in other sectors. Transportation ranked as the 10th, 12th and 14th biggest constraint in other
services, retail trade, and manufacturing. In this respect, although the difference is statistically
significant—and relatively large—transportation is not a serious constraint on most firms in any
sector.
It is probably not surprising that this is the case. Unlike most manufactured goods, many IT
services can be delivered electronically. Further, IT firms are probably less reliant on deliveries of
supplies than firms in the retail trade sector and than firms in the residual service sector, which
includes hotels and restaurants, wholesalers, and construction firms.
Table 9: Additional regressions on perceptions about worker skills
Worker Education Worker Education
Observations 984 984
Age 0.012 0.005
(in years, natural log) (0.49) (0.21)
Workers 0.017 0.025*
(natural log) (1.18) (1.70)
Female Owners -0.045 -0.032
(dummy) (-1.37) (-0.95)
Exporter 0.009 -0.004
(dummy) (0.23) (-0.096)
Foreign-Owned 0.004 0.008
(dummy) (0.066) (0.15)
Sector - Information Technology 0.394*** 0.404***
(dummy) (5.44) (5.57)
Sector - Retail Trade 0.101 0.103
(dummy) (1.38) (1.41)
Manufacturing 0.066 0.029
(dummy) (1.05) (0.46)
Machinery and Equipment 0.207***
(dummy) (3.54)
Electronics 0.129*
(dummy) (1.94)
Pseudo R-squared 0.05 0.06
***, **, * Significant at 1 and 5 percent significance levels.
Appendix 7.1: Econometric analysis of

perceptions about skills and labor regulation
Firms were more likely to say that inadequately educated workers were a serious problem than
any other of the investment climate except corruption, political instability and competition from
informal firms. But, as discussed in Chapter 5, some firms are more concerned than others. In
particular, even after controlling for other things that might affect perceptions about skills, managers
of firms in information technology and some areas of skills-intensive manufacturing tend to be more
concerned about inadequately educated workers than other managers of other types of firm.
In contrast, few firms said that labor regulation was a serious problem—only about 20 percent.
This was fewer than any other area of the investment climate other than customs and trade
regulation, transportation, and access to finance. There were also few difference related to size,
sector, ownership or export status. Relatively few firms of any type saw labor regulation as a serious
obstacle to doing business.
Using the methodology described in the Appendix in Chapter 5, this section extends the analysis
to look at additional factors that might affect perceptions about worker skills and education and
labor regulation. In particular, the analysis looks at several factors that might be specifically related
to concern about labor markets—the extent to which the firms use unskilled and part-time or
temporary workers, the extent to which the firm needs new workers (due to innovation and firm
growth). Firms that need to hire new workers and firms that need a flexible workforce might be
especially vulnerable to problems related to worker education and labor regulation.
Perceptions about labor regulation
Results from Chapter 5 suggest that labor regulations were not a serious problem for most
firms. Moreover, most firm characteristics were not significantly related to concern about labor
regulation—large firms were no more or less concerned than small firms, exporters were no more or
less concerned than non-exporters, and foreign-owned firms were no more or less concerned than
domestically owned firms. There were also no significant differences between firms in different
sectors.
Although there were few differences with respect to these types of firm characteristics, it is
possible that some firms are more affected by labor regulation than other firms are. In particular,
it is plausible that firms that have the most flexible demand for labor are more affected by labor
regulations than other firms. Firms that rely heavily on part-time or temporary workers might be
more concerned than other firms.
Firms that rely mostly on unskilled labor might also be more concerned about labor regulation
than firms that rely mostly on skilled labor. Firms that rely upon highly skilled workers—especially
when worker have firm-specific skills—are probably less likely to require a flexible workforce than
firms that rely upon unskilled labor. Firms often need workers with specific human capital and
therefore can invest heavily in training their workers (Becker, 1964; Mincer, 1962) either through
formal or on-the-job training. Managers of firms that require workers with high human capital—
and have invested in their training—are unlikely to want to adjust their workforces as quickly as
firms that use only unskilled workers. Similarly, high demand for skilled workers (see next section),
is also likely to discourage firm managers from laying off skilled workers too quickly since it is more
difficult to replace them if demand bounces back.u
Finally, firms that are expanding or contracting might be more likely to be concerned than firms
that are staying about the same. That is, firms that need to hire new workers or fire existing workers
are likely to be more worried about labor regulation.
Table 10: Effect of firm-level variables on perceptions about labor regulation

Labor Regulations are a serious obstacle (dummy)
Observations 823 903 990 524 431 523
Sales Growth 0.040* 0.007
(log growth rate) (1.90) (0.25)
Employment Growth 0.051* 0.069*
(log Growth Rate) (1.86) (1.72)
Temporary and Part-time Workers 0.224** -0.189
(% of total workers) (2.22) (-1.00)
Unskilled Production Workers 0.097* 0.139**
(% of production workers) (1.87) (2.32)
Introduced new product in past 3 0.036
years
(dummy) (1.01)
Introduced new production
-0.016
process in past 3 years
(dummy) (-0.46)
Age 0.012 0.022 0.021 0.042* 0.036 0.036
(in years, natural log) (0.52) (0.96) (1.22) (1.86) (1.01) (1.58)
Workers -0.016 -0.014 -0.012 -0.023* -0.038** -0.025*
(natural log) (-1.58) (-1.36) (-1.29) (-1.77) (-2.45) (-1.86)
Female Owners 0.012 0.018 0.018 0.059** 0.075** 0.061**
(dummy) (0.47) (0.75) (0.81) (1.98) (2.25) (2.06)
Exporter -0.003 0.007 0.013 -0.010 -0.011 -0.012
(-
(dummy) (0.26) (0.52) (-0.33) (-0.31) (-0.37)
0.096)
Foreign-Owned 0.046 0.034 0.030 0.026 0.089 0.047
(dummy) (1.01) (0.78) (0.77) (0.43) (1.23) (0.75)
Sector - Information Technology -0.017 -0.038 -0.035
(dummy) (-0.31) (-0.74) (-0.74)
Sector - Retail Trade 0.084 0.053 0.047
(dummy) (1.37) (0.95) (0.90)
Manufacturing 0.016 -0.007 -0.013
(dummy) (0.34) (-0.16) (-0.30)
Pseudo R-squared 0.01 0.01 0.01 0.03 0.06 0.03
Note: All regressions are probit regressions with marginal effects reported rather than coefficients.
***,**, * Significant at 1 and 5 percent significance levels.
Perceptions about education and skills

In contrast to labor regulation, worker education was a serious concern for many firms. About
one-third of firms in the Enterprise Survey said that it was a serious problem. Based upon the
percent of firms that said this, worker education ranks as the fourth most common concern among
firms. Although there was broad concern about education and skills, firms in skills intensive areas
of manufacturing and in the information technology sector were more likely to say that skills were a
problem than other firms were.
This section looks at additional variables that might affect perceptions about worker education
and skills. There does not appear to be a strong association between firm growth and concern about
worker education and skills (see Table 11). Managers of faster growing firms appear more likely to
say that worker education and skills are serious obstacles than managers of other firms. However,
the coefficients on these variables are not statistically significant at conventional significant levels.
Similarly, there is no evidence that firms with high numbers of unskilled workers or temporary and
part-time workers are more or less concerned about worker skills and education.
Firms that are more innovative in terms of introducing new products and new production
processes, however, are significantly more likely to say that worker education and skills are a
problem than other firms. Firms that introduced new products were about 21 percentage points
more likely to say that worker skills and education were a problem than firms that did not, while
firms that introduced new production processes were about 15 percentage points more likely to say
the same. Both coefficients are statistically significant. The other two variables related to innovation
and quality management, being ISO certified, and licensing foreign technologies were no more likely
to say that worker skills were a problem than other firms, however. Given the strong link between
innovation and productivity (see Chapter 2), this further suggests that worker skills and education
are likely to have a negative impact on productivity in Bulgaria.
Table 11: Effect of firm-level variables on perceptions about worker skills and education
Inadequately educated workers are a serious obstacle
(dummy)
Observations 822 429 519 423 322
Sales Growth 0.044 0.076 0.078
(log growth rate) (1.35) (1.46) (1.48)
Employment Growth 0.003
(log Growth Rate) (0.038)
Temporary and Part-time Workers 0.099
(% of total workers) (0.34)
Unskilled Production Workers 0.050
(% of production workers) (0.53)
Firm is ISO certified 0.069
(dummy) (1.31)
Firm licenses foreign technology -0.057
(dummy) (-0.67)
Firm introduced new product in
0.211*** 0.220***
past 3 years
(dummy) (4.20) (4.01)
Firm introduced new production
0.149*** 0.150***
process in past 3 years
(dummy) (2.98) (2.73)
Total Factor Productivity 0.011
(residual) (0.32)
Age 0.021 0.047 0.005 0.024 0.073
(in years, natural log) (0.60) (0.96) (0.16) (0.49) (1.59)
Workers 0.016 0.000 -0.024 -0.040* 0.020
(natural log) (1.06) (0.023) (-1.17) (-1.75) (0.80)
Female Owners -0.061* -0.121*** -0.110** -0.136*** -0.143***
(dummy) (-1.71) (-2.60) (-2.55) (-2.85) (-2.62)
Exporter 0.008 0.005 -0.027 -0.013 -0.021
(dummy) (0.20) (0.10) (-0.58) (-0.25) (-0.36)
Foreign-Owned 0.079 0.054 0.063 0.101 0.014
(dummy) (1.26) (0.56) (0.69) (0.97) (0.12)
Sector - Information Technology 0.414***
(dummy) (5.22)
Sector - Retail Trade 0.134*
(dummy) (1.66)
Manufacturing 0.083
(dummy) (1.20)
Pseudo R-squared 0.0559 0.0224 0.0873 0.111 0.0272
Appendix 7.2: Econometric Analysis of Training
Worker productivity is determined by the quantity and quality of human capital embodied in
workers, capital intensity and the level of remuneration. Human capital formation takes three
forms: first workers invest in formal education before employment; second, they learn on the job
and finally, firms or workers can invest in general-skills or firm-specific skills training (Becker, 1964;
Mincer, 1962). For workers that have completed formal schooling, the scope for skills growth in
short and medium-term depends on firm-based and -financed training. This appendix discusses
what type of firms provides training to their workers, making it possible to explore opportunities for
policy interventions to encourage more widespread firm-based skills development in Bulgaria.
This section outlines the empirical strategy for answering the two questions set out in section
above. At the firm level, firms decide whether they should invest in their workers. They also decide
who the recipients of this training will be and the content (firm-specific or general skills). The
firm decision to provide training can be investigated by looking at correlates of firm-based training.
This is done using a probit model that estimates the likelihood that the firm provides training as a
function of firm characteristics. The estimated model is:
Tij = η+α Xij + µj + εij
Where Tij takes on the value of 1 if firm i in sector j provides training and 0 otherwise. Xij represents
observable firm characteristics thought to affect the provision of training and µj represents fixed
sector characteristics that determine the desirability to provide training. εij represents unobserved
firm characteristics that potentially affect training.v Because information on firm-level training is
only available for manufacturing firms, the analysis is limited to these firms.
Size of Firm. An important variable includes indicators for firm size to capture the impact of scale
on the likelihood of training provision. The coefficient on this variable is positive and statistically
significant at conventional significance levels. The coefficient is large indicating at a significant
difference between large and small firms. After controlling for other factors, a medium-sized firm
with 50 employees would be more likely to have a training program than a small-firm with 10
employees by about 20 percentage points.
It is not surprising that large firms are more likely to provide training than small firms. If there
are large fixed costs associated with firm-based training, the per-worker cost of training will be
lower for large firms. Fixed costs might be associated with the cost of bringing outside trainers in
(i.e., if they can train groups of workers at a time) or to space requirements. Another possibility is
that large firms might become large as a result of training or a common factor such as ‘high quality
management’ or access to liquidity which affects both employment growth and the propensity to
train.
Exporters. The regressions also include controls for export status, foreign ownership and firm age.
All of these measures might serve as proxies for firm quality (Roberts and Tybout, 1996). Although
it might seem that exporters would be more likely to train because the discipline of competing on
international markets would require them to remain productive, this does not appear to be the
case in Bulgaria. The coefficient on this is statistically insignificant in all model specifications. If
exporters are mostly competing on price in low-skill sub-sectors of manufacturing, then they might
not have any greater need for training than other firms.
Foreign-Owned. Similarly, firms with foreign ownership might be more likely to provide training
either because they are more likely to use imported technologies or if they have greater liquidity or
‘peer’ effects in their home country encourage training. In this case, however, this does not see to
be the case—the coefficient on this variable is consistently statistically insignificant. This is broadly
consistent with earlier results that suggested that foreign-owned firms are no more efficient than
other firms and is consistent with the idea that these firms are mostly competing in low-skills areas,
possibly competing on price rather than quality.
Firm Age. Firm age is a often seen as a proxy for quality and or competitive pressure (Hopenhayn,
1992). This might suggest that older firms will be more likely to provide training. Although in some
model specifications, there appears to be a positive correlation between firms’ age and training, this
result is not highly robust.
Table 12: Effect of firm-level variables on firm training
Firms provides formal (i.e., beyond on-the-job) training
(dummy)
Sector Dummies Yes Yes Yes Yes Yes Yes
Observations 523 519 479 520 508 467
Skills are serious problem 0.135***
(dummy) (2.86)
Positive Employment
0.128* 0.104
Growth
(0 if negative) (1.72) (1.25)
Negative Employment
0.019 -0.017
Growth
(absolute value, 0 if
(0.16) (-0.14)
positive)
Introduced new product
0.106** 0.126** 0.143**
in past 3 years
(dummy) (1.99) (2.27) (2.46)
Introduced new
production process in past 0.173*** 0.165*** 0.123**
3 years
(dummy) (3.36) (3.09) (2.18)
Firm is ISO certified 0.150*** 0.170***
(dummy) (2.80) (3.06)
Firm licenses foreign
0.055 0.088
technology
(dummy) (0.72) (1.07)
Age 0.051 0.050 0.132*** 0.044 0.052 0.132**
(in years, natural log) (1.45) (1.39) (2.72) (1.20) (1.37) (2.56)
Workers 0.111*** 0.113*** 0.112*** 0.098*** 0.080*** 0.081***
(natural log) (5.09) (5.14) (4.79) (4.34) (3.33) (3.16)
Female Owners 0.062 0.070 0.061 0.064 0.068 0.070
(dummy) (1.35) (1.50) (1.26) (1.36) (1.41) (1.38)
Exporter -0.023 -0.013 -0.036 -0.022 -0.049 -0.067
(dummy) (-0.46) (-0.25) (-0.68) (-0.45) (-0.96) (-1.22)
Foreign-Owned 0.086 0.080 0.150 0.103 0.102 0.153
(dummy) (0.92) (0.86) (1.50) (1.07) (1.05) (1.48)
Pseudo R-squared 0.10 0.11 0.12 0.14 0.17 0.18
Firms concerned about skills. Given the high level of concern about worker education, a natural
question is whether firms that see skills as a problem are more or less likely to provide training than
firms that do not. It seems plausible that the correlation could be either positive or negative. If firms
that are concerned about worker education believe that their worker’s do not have the basic skills
and education to benefit from training, they might less likely to provide training than firms that do
not see worker education as a serious concern. On the other hand, these firms might have a greater
demand for educated and skilled workers and so be more likely to provide training.
The coefficient on the training dummy is positive and statistically significant. Firms that were
concerned about training were about 13 percentage points more likely to have a training program
than firms that are not. This suggests that the concern about education is concentrated among firms
that provide training. This further emphasizes the complementarity between basic education (i.e.,
primary, secondary and tertiary education) and training. When this variable is included at the same
time as the variables associated with innovation and quality certification, its coefficient becomes
statistically insignificant.
Firm Growth. There is only a weak correlation between firm growth and training. In general,
firms that are growing appear to be slightly more likely to provide training that firms that are either
not growing or actually shrinking. Firms that are growing might have to provide formal training if
they have to hire new workers and train them in firm or industry specific skills.
Technology and Quality Certification. Firms that adopt new production technologies and that
have introduced new products are more likely to provide formal training to their workers. In both
cases, the effect appears large. Firms that introduce new production processes are about 12 to 17
percent more likely to train their workers and firms that introduce new products are about 10 to 15
percent more likely to do the same. Finally, firms that are ISO certified are between about 15 and 17
percent more likely to provide training.
This emphasizes the link between training and innovation. Firms that are more innovative or
that receive quality certification will have to train their workers to adapt to the new products and
processes. Further Firms that are upgrading product lines or production processes probably have
greater need for adaptable skilled workers than firms that do not. In this respect, government
programs to encourage firms to provide training will probably also encourage firms to upgrade
production processes and quality.
Worker skills. Returns to training are likely related to the level of formal education of the worker.
In some specifications, controls for the percent of workers that are unskilled and the share of workers
that are temporary and part-time have been introduced. The coefficients on these variables are
both statistically insignificant and small. Similarly, the average education level for workers is not
correlated with the probability that the firm provides training.
Appendix 7.3: Summary of the Doing

Business indicator for employing workers
As discussed in Chapter 7 of the ICA, few of the firms in the 2007 Enterprise Survey said that labor
regulations were a serious concern. Moreover, Bulgaria compares favorably with other countries in
the region and even in the EU with respect to objective indicators of labor regulation.
To give context to the discussion in the chapter, this appendix provides background information
on labor regulation in Bulgaria. It discusses the recent evolution of labor regulation, provides a more
detailed description of the Doing Business indicator for employing workers and the sub-components
that make up the Doing Business Indicator, noting where Bulgaria compares most favorably with the
other new EU entrants and areas where it compares less favorably. It also discusses some additional
areas of labor regulation that are not covered in the Doing Business Report (World Bank, 2007).
The evolution of labor regulation since 2000
Since 2000, existing legislation on labor and industrial relations has been amended and some
new regulations have been introduced to ensure that Bulgaria’s labor legislation is consistent with
key European Directives. This has been a relatively smooth process. Of particular importance are
amendments in the Labor Code that have made work arrangements more flexible and some changes
in social insurance and tax collection that have reduced the burden of formality. The amendments
to promote flexibility have made it easier to hire workers under non-typical labor contracts while
ensuring that they are treated on an equal basis with employees under regular contracts. The
Government has introduced obligatory registration of all concluded labor contracts at the National
Insurance Institute and corporate and social insurance taxes have been slowly reduced. The Law for
Employment Promotion (LEP) has been successfully amended several times.
The Rigidity of Employment Regulations
To put Bulgaria’s labor regulations in context it is useful to compare labor regulation in Bulgaria
with labor regulation in other economies, including the other recent entrants to the EU. The Doing
Business Report (World Bank, 2007), which collects detailed cross-country information on how rigid
labor regulations are throughout the World, is useful in this respect.
This section looks at the Doing Business data to see how Bulgaria compares with other countries
with respect to labor regulation. Consistent with the Enterprise Survey data (see Chapter 7), which
suggests that most firms do not see labor regulation as a serious problem, Bulgaria compares
favorably with other countries in the region with respect to the Doing Business indicators. Out of
the 175 countries for which data are collected, Bulgaria ranked as having the 57th most flexible labor
regulation. This was two places behind the Czech Republic, the best performing of the new EU
entrants, but was above the new EU entrants (see Table 13). Overall, Bulgaria ranks as having the
most flexible labor regulations of the new EU entrants with respect to the rigidity of employment, the
third-lowest non-wage labor costs and the second lowest firing costs.
The rigidity of employment index is disaggregated into three sub-indices, the difficulty of hiring,
the difficulty of firing and the rigidity of hours. Bulgaria’s legislation is very flexible with respect
to hiring and firing workers (tie third and tie first among the new EU entrants). It is, however,
less flexible with respect to the third sub-index, the rigidity of hours. Although only two countries
among the new EU entrants have more flexible regulation in this respect (the Czech Republic and
Latvia), in contrast to the other indices, Bulgaria’s score is no better than most of the other new EU
entrants. Moreover, all of the new entrants perform relatively poorly on this measure. In fact, of the
175 countries in the 2008 Doing Business report, only about 11 countries score lower than Bulgaria
(4 of them from among the new EU entrants) with respect to rigidity of hours. The individual
components and other areas of regulation related to them, but not specifically included in the Doing
Business indicators, are discussed in detail below.
Table 13: Rigidity of Employment Indexes in 2007

Nonwage Firing
Difficulty Rigidity Difficulty Rigidity of
labor cost costs
Rank of Hiring of Hours of Firing Employment
(% of (weeks of
Index Index Index Index
salary) wages)
Bulgaria 57 17 60 10 29 23 9
Czech
55 33 40 20 31 35 22
Republic
Slovakia 75 17 60 30 36 35 13
Poland 78 11 60 40 37 21 13
Hungary 81 0 80 10 30 34 35
Latvia 96 50 40 40 43 24 17
Lithuania 124 33 80 30 48 31 30
Romania 145 78 80 40 66 31 8
Estonia 156 33 80 60 58 33 35
Slovenia 166 78 60 50 63 19 40
Source: World Bank (2007).
The Difficult of Hiring
The sub-index for the difficulty of hiring measures the flexibility of contracts and the ratio of the
minimum wage to the value added per worker. Specifically, it looks at whether fixed-term contracts
are prohibited for permanent tasks; the cumulative maximum duration of fixed-term contracts;
and the ratio of the minimum wage for a trainee or first-time employee to average value-added per
worker. Bulgaria compares favorably with other countries in the region on this measure, ranking
tie third among the new EU members (see Table 13). The only change that Bulgaria could make to
improve on this sub-index would be to lengthen the maximum term for a fixed term contract—from
its current level of 36 months to five or more years.
There are some others features related to other aspects of hiring and to fixed-term contract that
are not explicitly measured by the Doing Business indicators that affect fixed term labor contracts.
One important feature is that fixed-term contracts can be easily changed into non-defined contract.
The worker has to work for an additional 5 or more days without the objections of the employer,
when the position is not already occupied. According to the Labor code, fixed term contracts have
to be concluded for seasonal work and other work of a temporal nature.
Some anti-discrimination provisions for persons employed under a fixed-term labor contracts
have also been made. These amendments introduced equal rights and obligations of employees
hired under fixed-term employment contracts to those under indefinite-term (permanent) contracts.
Those with fixed-term employment contracts receive the right to: not be placed under less favorable
conditions because of their employment relationship; receive information provided by the employer
in writing on all vacancies and open positions that are available in the company under an indefinite-
term employment arrangement; and to get access to professional training that will provide
opportunities for career development and permanent job placement.w
The Difficult of Firing
The second component of the rigidity of employment index is a sub-index that looks at the
difficulty of firing. This covers workers’ legal protections against dismissal and include (i) whether
redundancy is a basis for termination; (ii) whether the employer needs to notify a third party such
as a government agency when terminating either a single workers or a group of 25 workers; (iii)
whether the employer needs the consent of a third party when terminating single worker or a group
of 25 workers; (iv) whether the law needs to consider reassignment or retraining before redundancy
terminiation; and (v) whether priority rules apply for either redundancies or re-hiring.
There are few of these restrictions in Bulgaria. The main remaining restriction is that trade
unions need to be consulted before collective redundancies can be given. Currently, the period
of negotiations with trade unions can last between 3 and 4 months, even when issues were known
before the announcement the mass redundancy. In addition, the local labor office has to be informed.
The procedures require that a set of documents on the recent financial status of the company are
issued. This encourages managers to avoid mass redundancies and use other ways to get rid of
redundant workers.
Related to this, provisions on employers to inform and consult employees have been widened
along a variety of dimensions. Provisions include requirements to provide information to the
employees or their representatives on any amendments or changes of the employment relationship,
no later than 1 month after the enforcement of the respective amendments.x An important aspect
of the amendments is that employers should proactively inform the employees on all collective labor
agreements that have been concluded.y
Another amendment to the Labor Codez related to terminating employment concerns

requirements for written references and recommendation upon termination of employment. The
Code requires that employers should draft and present to the employee, if and when approached to
that effect, a fair and unbiased reference on the employee’s professional qualities, the results of his/
her work experience or a fair recommendation that have to be used by the employee when applying
for other jobs. The employer also has to notify the National Revenue Agency about concluding the
contract.
Rigidity of Hours
As noted above, Bulgaria compares favorably with the other new EU entrants and with other
countries throughout the world with respect to the sub-indices for hiring workers and firing workers.
In contrast, although Bulgaria compares somewhat favorably with respect to the other new EU
entrants with respect to the rigidity of hours, it compares less favorably with other countries
throughout the world on this sub-index.
The rigidity of hours sub-index covers: (i) whether weekend and night work are restricted; (ii)
whether the workweek can consist of 5.5 days; (iii) whether the workweek can extend over 50
hours (including overtime); and (iv) whether annual leave with pay is mandated for 21 or more. It
scores poorly on the sub-indices related to restrictions on days of work in a workweek (5 days only),
restrictions on night work, and restrictions on weekend work (see Table 14).
Table 14: Components of Rigidity of Hours (early 2007)
Score
Can the workweek extend to 50 hours (including overtime) for 2 months
Yes 0
per year?
What is the maximum number of working days per week? 5 20
Are there restrictions on night work? Yes 20
Are there restrictions on “weekly holiday” work? Yes 20
Paid annual days of vacation for an employee with 20 years of service. 20 0
TOTAL --- 60
Source: World Bank (2007).
Some recent amendments—not all of which are reflected in the Doing Business Indicators—
have increased flexibility with respect to restriction on hours worked. Since 2006, employees have
been allowed to have employment contracts with employers for doing work outside their primary
employment relationship. This is allowed except in cases where their individual employment
contracts under their primary employment relationship do not allow it. The maximum duration of
the working hours under an employment contract for additional work, together with the duration
of the working hours under the primary employment relationship under daily calculating shall not
to be more than 48 hours (40 hours for those less than 18 years old). The working time duration also
cannot violate the minimum uninterrupted rest between days and weeks established by the Labor
Code. Since 2006, however, employees can work longer than 48 hours with either their primary
employer or with secondary employers if they agree to do so in writing.
Another requirement is that employers have to keep records of the work history of each employee.
They have to provide this information to representative of the “General Labor Inspection” when
requested. Although this increases the bureaucratic burden on employers, its has been broadly
supported by the representatives of the trade unions.
Changes in the Social Insurance Code have also affected the flexibility of hours. Since January
20005, period of service can be calculated in hours. days, months, or years. Income received for
overtime work is subject to insurance contributions. Legislation allows for the inclusion of overtime
in the payroll files for the respective month.
Part-time Employment
The Doing Business sub-index for rigidity of hours does not contain any measures that specifically
look at the ease of hiring of part-time workers. Although the enterprise survey does not contain any
specific information on this, few firms in the enterprise survey had any part-time employees. This is
consistent with other information that suggests that part-time employment is particularly difficult
in Bulgaria.
An important question is why is this the case? Low levels of part-time employment could reflect
either that firms do not want to hire part-time workers (i.e., that the supply of part-time jobs is low)
or that most workers might not want to work part-time (i.e., that the demand for part-time jobs is
low). If low demand is the primary issue, then making part-time employment more attractive to
workers might increase part-time employment. In contrast if supply is the primary issue, part-time
employment could be more easily increased by reducing the burden of hiring part-time workers.
Recent amendments to the Labor code have tired to address the demand-side issue by making
part-time employment more attractive to workers. As of July 1, 2006, anti-discrimination provisions
were introduced in the Labor Code to make part-time contracts more attractive and to improve
public attitudes towards part-time work. The amendments included:
Equal rights and obligations of employees under part-time contracts. Based on the new
statutory provisions, employees hired under part-time contracts may not be placed under less
favorable conditions (as compared to that of their colleagues) solely on the grounds of the type
of their employment relationship. This is according to the Labor Code, Art.138 (3), SG25/2001,
amend. SG48/2006. The workers and the employees as per art.138, par.1, cannot be placed in more
unfavorable position because of their part-time status compared with workers and employees with
full-time labor contracts who have the same or similar jobs in the enterprise. They have the same
rights and responsibilities that full-time workers have, unless the law stipulates the use of some
rights in respect to the durability of working time, working experience, acquired qualification or
others.
Part-time workers have the right to receive information. Based on the new changes in the Labor
Code, employees under part-time contracts have the right to receive information (provided by the
employer in writing) on all vacancies and open positions, which are available in the company under
an indefinite-term employment arrangement (Labor Code, Art.138a, par.3, item 3 (SG48/2006,
in force since July 1, 2006). The objective of this change is to give part-time employees an equal
opportunity to be hired on a permanent basis.
Provision of part-time jobs at all enterprise levels and access to training for part-time workers.
According to the Labor Code, art. 138a, par.3, item 4, employers have to undertake various measures
to facilitate access to part-time job in all levels at the enterprise, including for positions that require
qualification and for management positions. Employers also have to facilitate part-time workers
access to professional training to increase the possibility for career growth and professional
mobility.
These measures should make part-time employment more attractive for workers. On the other
hand, however, the measures are less likely to make part-time workers more attractive to employers
(i.e., they do not necessarily reduce the cost of hiring part-time workers).
Non-wage Labor Costs
The Doing Business report also contains some additional information on the regulatory cost of
hiring workers. One is the nonwage labor costs of hiring (as a percent of wages). This covers all
social security payments and payroll taxes associated with hiring an employee. Bulgaria (23 percent)
compares favorably with the other new EU entrants on this measure, with only Slovenia (19 percent)
and Poland (21 percent) having lower costs. It is, however, important to note that the cost is relatively
high compared to the best performing countries in the EU. For example, costs are only 1 percent in
Denmark and 8 percent in the United Kingdom.
Social security payments seem to be the main reason for Bulgaria’s position according to this
measure. In 2008, the insurance burden is 33.5% and includes 20.5% that have to be paid by the
employer and 13.0% by the employee for the common third category of labor. The share paid by
the employer has been falling.aa The current distribution of payments is about 60 percent by the
employer and about 40 percent by the worker. The employee’s share is planned to increase to 45
percent in 2009 and to 50 percent by 2010. This should improve Bulgaria’s position on this index.
Cost of Firing Workers
The final measure is the cost of firing workers as a percent of wages. This measures the cost of
advance notice requirements, severance payments and penalties due when terminating a redundant
worker, expressed in weeks of salary. There have not been any significant changes in the labor
legislation on these issues recently. Costs are relatively low, with Bulgaria ranking second in Eastern
Europe by this measure.
Regulations for improving the quality of labor conditions
In addition to the aspects of labor regulation monitored by the Doing Business indicators, other
aspects of regulation are also important. The Government approved Convention № 187 regarding
establishment of encouraging framework on occupational health and safety at work.ab It stipulates that
countries encourage improvements in occupational safety and health at work, aiming to preventing
occupational diseases, accidents at work, and fatalities. After consultations with representative
organizations of employers and employees, countries develop their national policy, national system
and national program on safe and healthy working environment.
At the end of 2006, the Government announced changes in the Law on Occupational Safety and
Health. The Law will be applied not only for people on labor contracts but to “all aspects relevant to
work” and all “working persons”. The establishment of Working Conditions Committees with up to
10 members is envisaged in trade companies or other organizations with more than 50 employees.
The regular monitoring of the representatives of the executive agency—the General Labor
Inspectorate and its regional structures show the need for investment in better labor conditions. In
2008, work will be finalized regarding risk assessment at work and the development of programs
with concrete actions for its elimination, limitation and minimization; and for supporting SMEs so
that they can introduce and applying requirements on ensuring occupational safety and health at
work.
Large scale of the employment in the grey economy means that the main work of the controlling
bodies is related to problems with concluded employment contracts and cases of work without
such contracts. The highest number of infringements is reported in construction. Another problem
concerns firms hiring under 16 year-olds, where this is banned.
Recent policy changes related to improving employment in Bulgaria
In addition to the regulatory changes outlined above, the Government of Bulgaria has also taken
several steps to increase employment during the pre-accession stage and the after Bulgaria had
become an EU member.
The Employment Strategy 2004-2010, elaborated by the Ministry of Labor and Social Policy,
which incorporates the principles and objectives of the European Employment Strategy 2010, stands
as an important element of the process of labor market policies cohesion (Roukova, 2008). Increases
in employment, improvement of the labor force quality, and the promotion of entrepreneurship are
among priorities of the Strategy. The policy in Bulgaria has developed in line with EU directives and
with the Lisbon Strategy. Moreover, labor market issues are paid due attention in the Operational
Program Human Resource Development 2007-2013. The strategic objectives include increasing
employment, increasing economic activity of the population, improving labor force competitiveness,
reducing unemployment, and improving vulnerable social groups’ access to the labor market.
It is important to underscore some recent legislation measures that are intended to generate
increase labor market activity and improve the formulation of labor policy. The Employment
Promotion (EP) Act, adopted in 2001 (SG 112) has been amended substantially in recent years
(last amend. SG26/7 March 2008). The law regulates the public relationship in encouragement
and employment protection; professional orientation and adults learning and intermediation in
terms of information and job hiring. The National Council for Employment Promotion, attached
to the Minister of Labor and Social Policy, was created by an amendment of the Law. The laws
major functions include: (i) discussing the development and conduct of Employment Policy of the
National Action Plan for Employment; (ii) proposing the development of projects of normative acts,
measures and programs for employment promotion to the Ministry of Labor and Social Policy; and
(iii) discussing projects on common activities of the Ministry of Labor and Social Policy and other
line ministries on employment issues.
Furthermore, according to Art.14 (1) of the EP Act, programs for active Employment Policy,
adopted by the Council of Ministers, are financed through the state budget. The Ministry of Labor
and Social Policy (EP Act, Art.14, par.2) has to approve the request for financing of measures and
programs. According to the Bulgarian Regulation of the EP Act, the Executive Director of the
Employment Agency prepares an annual draft for budget to the Minister of Labor and Social Policy
(Regulation, EP Law, Art.11) and the Minister distributes the budget for the implementation of active
policy in line with the priorities, defined in the National Action Plan for Employment (Regulation,
EP Act, Art.12, par.1).
Among the amendments to the legislation introduced in March 2008 (SG26/2008, EP Law) one
provides financing by the government after 2008 for issues related to adult learning. These include:
(i) programs and measures for adult learning and for professional orientation (art.16, item 1); (ii) the
development of national, branch and regional programs for employment and adult learning (art.16,
item 5); (iii) implementation of projects for social integration of groups in unequal standing on
the labor market (art.16, item 6); (iv) advertisement-information and printing activities, related to
employment, unemployment and adult learning (art.16, item 7); and (v) financing of the activities of
Centers for Vocational Training, created through CoM decision (art.16, item 9).
In addition, legislative provisions have been included to support programs and measures for
promotion of employment and labor mobility. For instance, employers are exempted from dues
for the Pension Fund, the Labor Accident and Professional Illness Fund, Common Illness and
motherhood Fund, on the paid gross labor remuneration (amend. And suppl. SG38/2005, amend.
SG26/2008, art.30a, item 4), and also of employers’ payments for the Unemployment Fund on the
paid gross labor remuneration (item 5). In addition, employers are exempted from the same dues
if they encourage territorial mobility of their employees (item 18), if they encourage professional
orientation (item) among others.
The government is stimulating youth employment by offering additional remuneration as per

minimum scale, stipulated in the Labor Code and its normative acts for each new opened working
place in case when unemployed person by the age of 29 was hired, registered at the Employment
Agency, but this subsidy is paid for not more than 12 months since work inception (EP Law, Art.36,
last amend. SG17/2006). In addition, youth employment was encouraged through the introduction
of new provision, which stimulates opening of internship place for a hired unemployed person
by the age of 29, registered at the Employment Agency (EP Law, art.41, last amend. SG26/2008).
Furthermore, professional qualification of hired workers and employees (in general) can be supported
by the same measure (Art.44 – last. amend. SG26/2008).
Appendix 7.4: Life-Long Learning (LLL) in Bulgaria
Chapter 7 presents evidence from the Enterprise Survey that suggests that few firms in Bulgaria
provide training to their workers. This is consistent with other evidence from other sources also
suggests that training rates are very low in Bulgaria. The EU labor force survey collects information
on persons aged 25 to 64 who stated that they received education or training in the four weeks
preceding the survey (i.e., participation in life-long learning). Although this data must be treated
with caution, since this data does not provide any information on the length or intensity of training
or the type of training that is being provided, it does provide separate information that appears
broadly consistent with the information from the Enterprise Survey.
Only about 1.3 percent of Bulgarians in this age group were involved in life-long learning (LLL)
in the four weeks before the survey in 2007 (see Figure 3). This rate has remained almost unchanged
since the beginning of the decade. This is also lower than in most of the other new EU entrants and
is lower than the average for either the EU15 or the EU27.
Women participate on equal basis in LLL compared with men in Bulgaria. This might not be
surprising given that women are overrepresented in professions that require continuous training.
ac
Another factor that might also play a role is that some women need to retrain after maternity
leave.
Figure 3: Very few workers in Bulgaria had received training or education

15
% of workers that
received training
10
0
Bulgaria (women)
EU (15 countries)
Czech Republic
Hungary
Slovakia
Slovenia
Latvia
Bulgaria (total)
Lithuania
Bulgaria (men)
Romania
Poland
Estonia
Source: Eurostat.
Note: Life-long learning (adult participation in education and training) - Percentage of the population aged 25
to 64 participating in education and training over the four weeks prior to the survey. Data are for 2007.
One common form of adult learning is vocational training offered by the Employment Agency. This
provides (i) training to the unemployed based upon their personal preferences and a list of demanded
professions, which is decided upon each year; (ii) training that predetermines further subsidized
employment; and (iii) on-the-job training during apprenticeship. The share of unemployed persons
that are enrolled in vocational training has increased since 2000 (see Table 15).
Table 15: Unemployed in vocational training

2000 2001 2002 2003 2004 2005 2006 2007
Registered 693,481 669,610 655,998 528,041 469,223 424,381 356,054 286,980
unemployed
Unemployed
in vocational 15,825 10,304 19,102 38,216 31,426 27,859 31,153 35,120
training
Relative share to
the total number 2.3 1.5 2.9 7.2 6.7 6.6 8.7 12.0
of the Registered
(in %)
Source: Employment Agency.
The National Agency for Vocational Education and Training (NAVET) is a specialized body
of the CoM.ad It was established in 2000, but did not start its work until 2004. There are long-
term agreements for partnerships between NAVET and all nationally representative employer and
employee organizations, state institutions and organizations from various economic and vocational
sectors. These partnerships are related to their participation in NAVET activities and form
coordinated positions on key issues concerning human resource development. NAVET performs
operational and strategic coordination and cooperation with all public and private institutions in the
field of vocational training.
Institutions involved in life-long learning
The Ministry of Labor and Social Policy (MLSP), the Ministry of Economy and Energy and the
Ministry of the Education and Science, together with the Employment Agency (EA) are currently the
main governmental institutions that take part in the LLL implementation. They work in cooperation
with other institutions in developing common standards for professions and vocational training.
Only training organizations that have been licensed by the National Agency for Vocational
Education and Training (NAVET) can conduct vocational training of the unemployed. The
Employment Agency adopted transparent procedures for selection of training service providers
for the labor administration, which is another guarantee of the quality of the vocational training
offered.
Traditionally, employers and labor unions take part in councils and bodies whose task is to develop
national, regional, and branch-level human resource development policies. An essential task is
their participation in the National Economic and Social Council, National Employment Promotion
Council, NAVET’s managing board, regional employment committees and in cooperation councils
at the Labor Offices. Some of the social partners have their own training centers, such as the centre
at the Confederation of the Independent Trade Unions in Bulgaria and the Bulgarian Industrial
Association.
Recent changes in legislation related to life-long learning
During the accession years, legislation regulating vocational training and adopted national
strategies have been substantially revised. An important change was the adoption of the Strategy
for Development and Improvement of Continuous Vocational Training 2005–2010. Its objective is to
establish and improve conditions for acquiring, expanding and developing professional qualifications.
Action plans to realize these strategies have been prepared.
Another recent reform was the European e-Learning Action Plan. It was enacted with the
implementation of the Strategy for Introducing Information and Telecommunication Technologies
in Training 2005-2010. The Employment Strategy of Bulgaria was updated in 2008. One of its main
focuses is on the professional qualifications of the labor force. The draft of the Strategy on LLL will
be object of further discussion.
The acquis communautaire in the area of free movement of people, and, more specifically, in
relation to the mutual recognition of diplomas and qualifications for regulated professions has been
broadly implemented. Bulgarian legislation has been made consistent with the key EU directives
through the amendment of the Law on Vocational Education and Training. This law outlines the
procedures for issuing and approving competences for practicing regulated professions.
Work on the National Qualifications’ Framework for high education has started. A comparative
table to the same framework for the united Europe was developed. Some steps towards harmonizing
the common national framework with the European Qualifications’ Framework for Life Long
Learning have been done, but the main part of this task remains to be completed by the end of
2009.
Other Policy Changes
There have been several important changes related to life-learning and vocational education in
recent years. One important change is that requirements for vocational training and procedures for
recognizing acquired professional qualifications of students and adults were introduced in 2005. The
requirements include common training framework programs, a common list of the professions, and
procedures for issuing certificates and diplomas. The unification of the specialized terminology for
grouping professions was made on the basis of the updated National Classification of Professions.
Other expected changes could be supported by projects under the European Social Fund (ESF).
The Operational Program “Human Resource Development” started in July 2007. Funding for job-
related trainings is secured through a separate scheme. It is expected that 38,000 employees will be
trained in obtaining or improving their qualifications. More than 30 percent of them will participate
in programs to acquire key competences.
Innovative changes in the training of employed people are foreseen, all directed at improving
competitiveness and facilitating flexible forms of employment. For example, the ESF could contribute
in validating of prior learning and could develop monitoring systems for training activities and their
regular external quality and impact assessments.
Some steps towards learning initiatives for the marginal groups in the labor market were made
in 2006 – 2007. These groups were offered to participate in a National Program for Literacy and
Vocational Training organized by the MLSP and EA. In addition, 10 specialized labor offices for the
Roma minority were established. Their effectiveness is yet to be explored.
A useful practice developed in Bulgaria is the regular national representative surveys on the
professions and labor force qualifications in demand. The information obtained through these surveys
is used to update lists of professions where vocational training is offered. The annual amendment
takes into consideration job openings announced at the Labor Offices. This should help to achieve a
better match between the offered vocational training and the nature of the registered labor demand.
A pilot model of Integrated information system “NAVET – EA” for demand and supply of vocational
training was introduced in 2007. It will be extended further at national, regional and local level. In
this way NAVET will be included in the e-government project in Bulgaria.
Barriers to increasing access to life-long learning
At the current time, there are no clear public-private partnerships and, as a result, the optimal
combination of public and private training funding is lacking. Although the European Social Fund
could potentially reduce financial constraints, resources currently coming from ESF are modest
and mobilization of internal sources could be improved. In addition, because of the recent steps
in Bulgaria towards fiscal decentralization, local municipalities should receive incentives to invest
more actively in the development of knowledge and skills—something that could be taken into
account in the near future.
It is also difficult for individuals to self-finance LLL and this might partly explain why there is
only limited interest in LLL on the side of workers. Despite the nominal increase in household
incomes, real income growth has been small and the proportion of expenses for “spare time, culture
and education” remains almost constant (about 3.5 percent between 2002 and 2007). As a result,
demand for the paid forms of LLL has remained low. At the same time, there are no opportunities
to deduct personal expenditure of the employee for training or skills development from taxable
personal income, even it was done in favor of the enterprise..
The lack of financial resources is connected with technical prerequisites for LLL at the work
place and at home. The computers’ role in LLL, especially for distance learning, is well-recognized.
In Bulgaria, although the share of households with computers has increased, it remains low by
international standards. In the first quarter of 2007 the number of the individuals aged between
16 and 74, who used a computer reached 34.5 percent (4.4 percent higher than in 2006). At the
same time, however, two thirds of the population did not use a computer within the year preceding
the survey (60 percent of the survey respondents in 2007).ae The results of similar enterprise level
survey shows that the share of enterprises using computers did not increase between 2005 and 2007,
remaining at about 85 percent.af The share of workers using computers did increase somewhat
(from 14 percent to 20 percent). Large enterprises are leaders in IT equipment, but the number of
computers in small enterprises slightly decreased. It is obvious that the recent technical equipment
of the households and enterprises is not adequate prerequisite for large scale continuous adults’
learning.
Another factor that might reduce demand for vocational training is the organization of labor
compensation. For some formal reasons and because of the low level of the payments in some
sectors “seniority payments” have been preserved for some positions. Although this allows easy
recognition of professional experience on the basis of the length of service when remuneration is
calculated, it reduces the importance of the training to the individual.
Regularly conducted research and external evaluations on the quality of the skills acquired after
vocational training would also be useful. There are many reasons for dissatisfaction with vocational
training. They include, although are not limited to, concerns such as an insufficient connection
between training and practical aspects of jobs; an underestimation of the importance of learning-by-
doing; insufficient training materials developed for adults and for distance learning; low involvement
of employers in curricula development and unsatisfactory quality of technical equipment used for
vocational training.
Another issue is the provision of opportunities for graduation for adults who have not finished
secondary education, but want to. This is an important problem, because the link “secondary
education” - “high qualification levels” is one of the main characteristics of the contemporary system
for vocational training and qualification in Bulgaria. As it is fixed in the legislation–secondary
education is necessary for people wanting to acquire higher qualifications. Thus, it would be
useful to provide adults with ways to complete secondary education in the framework of the LLL.ag
Another opportunity for low educated but experienced workers is the validation of experience as an
opportunity to possess high levels of qualification for some professions.
Similar to the requirements of gender mainstreaming of social policies, “age mainstreaming” of

learning could also set up. This is important for improving the quality of the aging working force, and
especially important given the low levels of labor force participation among older people, and for
applying the life cycle approach and allowing for flexible work arrangements in Bulgaria. Specially
designed training for people over 50 years old might be useful.
An important issue that has to be debate publicly is the design of the training system for the adults
within the system of LLL. Now, it includes only four degrees of professional qualifications.ah At the
current time, it takes a long time for adults to finally achieve this and so reduces incentives to do so.
In addition, there are some modules within qualification levels that are not appropriate or accessible
for people with very low educational levels, something that might affect some marginal groups, if
their average level of educational attainment is low.
In general, all of the social partners agree about the central importance of vocational training.
Still, few collective agreements include clauses related to provision of vocational training. This can
be explained with the low level of protection of the investments which were made by the employer
in vocational training in case the worker leaves the company. It could be also due to the stable
protection of the employment-labor contract relationship.
Appendix 8.1: Banking and Non-

banking sector in Bulgaria
The initial transformation of the banking sector at the beginning of the decade came along with
the transition from socially-based to market economy. Two laws, the Bulgarian National Bank Act
that was enacted in June 1991 and the Law on Banks and Credit Activity, enacted in 1992, laid the
foundation for this transformation. Although the second law introduced a regulatory framework for
the banking sector, regulatory control was limited and supervision was not effective. This in turn led
to soft budget constraints which led to the growth of credits to the non-financial sector, primarily to
large borrowers, and to a surge in bad loans.
The banking system of Bulgaria has changed tremendously since the introduction of the Currency
Board Arrangement in 1997. It has changed in terms of the dynamics and structure of bank lending,
but also in terms of ownership structure and competition (Frömmel and Karagyozova, 2008). Along
with the changes in the supply factors, there were also many structural changes of the economy,
affecting corporate credit in particular. Taking into consideration both supply and demand variables,
one may easily distinguish three distinct subperiods in the years 1997–2006 – a credit crunch period
until 2001, credit expansion in the years 2002–2005, and a period of more moderate growth after
BNB has introduced administrative measures to curb the lending boom (Frömmel and Karagyozova,
2008).
The total assets of the banking sector have tripled from about 40 percent of GDP to about 110
percent since 2002. The banks have been expanding credit in the past few years, but the main
contributors have been the top 5 banks (see Figure 4), which are all subsidiaries of foreign banks.
Their loan portfolio represents over three quarters of total bank assets, of which 55 percent are loans
to the corporate sector, 30 percent to households (equally divided between mortgages and consumer
loans) and 17 % to financial institutions. See the assets’ distribution in the banking and non-banking
sector between 2003 and 2007.
Table 16: Assets (in millions of LEV)
Dec 03 Dec 04 Dec 05 Dec 06 Dec 07
Commercial banks 17,324 24,917 32,851 42,195 59,089
Nonbank financial institutions 1,652.4 2,610.4 5,134.9 9,122.1 7,624.9
Insurance Companies 800.9 946.9 1,225.6 1,755.3 …
Non-life 567.4 674.9 873.1 1,122.2 …
Life 233.5 272 352.5 633.1 …
Investment funds 18.0 56.1 95.2 316.1 890.0
Pension funds 510.5 787.4 1,112.1 1,517.4 2,321.6
Leasing companies … … 1,378.6 2,504.1 3,613.3
Securities firms 323.0 820.0 1,323.3 3,029.2 …
Total financial system 18,976.4 25,527.4 37,985.9 51,317.1 66,713.9
Source: BNB and FSC.
Since the crisis, private and foreign banks have come to dominate the banking sector. The first
foreign banks entered the Bulgarian market in 1994, when the Greek Xios Bank and the Dutch ING
set up branches in Sofia. By 1998, foreign banks accounted for about one-third of banking sector
assets (see Table 17) and private banks accounted for about 40 percent. Privatization and entry by
private banks led to a massive increase in private and foreign participation in the sector. Since 2003,
private banks have held over 95 percent of sector assets and foreign-owned banks have held over 75
percent of assets.
Table 17: The Banking Sector in Bulgaria

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
No. of banks 34 34 34 35 35 34 35 35 34 32 29
Private banks
33 39 53 80 80 84 98 98 98 98 98
(% of assets)
Foreign banks
18 32 45 73 75 72 86 82 75 80 83
(% of assets)
Source: BNB (1997-2008).
Although no single bank dominates the sector, it is relatively concentrated. The five largest banks
account for a combined market share of close to 60 percent.
Figure 4: At the end of 2007, the Banking sector in Bulgaria is relatively concentrated
Market shares in the Banking Sector (31 Dec.2007)
Unicredit Bulbank,
15.34%
Remaining banks
and branches, DSK Bank,
43.48% 13.28%
Reiffeisenbank,
Eurobank EFG, Bulgaria, 10.12%
Bulgaria, 7.41%
United Bulgarian
Bank, 10.37%
Source: BNB (2008).
Figure 5 Dynamic Growth of corporate and household credit market
Source: BNB.
The Bulgarian financial system and the corporate sector witnessed a lot of restructuring in the
first few years after the monetary regime change. In addition to that, a new legal framework was
introduced for the banking sector, imposing quite conservative requirements on capital adequacy
and liquidity. Despite the considerable improvement achieved in respect to commercial law, its
implementation and enforcement was unsatisfactory and the associated credit risks remained high
(Nenovsky and others, 2002). Thus, the low demand, since the confidence in the banking system
was low, and the low supply, because of bank’s reduced capacity to lend, limited credit growth in
the first years after the crisis. Nenovsky and others (2002) confirm that it was not the availability of
resources but rather the institutional environment that affected bank decisions. Indeed, banks were
overcapitalized, with capital adequacy and liquidity ratios far above the minimum requirements, but
nevertheless preferred to allocate their resources abroad.
Lending to households was rather underdeveloped at that time and accounted for less than 22 per
cent of all loans to the non-financial sector (Frömmel and Karagyozova, 2008). The authors report
that the banks were facing much higher monitoring and agency costs in respect to households due
to the relatively small size of the consumer loans and the lack of credit history records. Moreover,
there was no centralized information on consumer loans before 2004, when the BNB Central Credit
Register was amended to cover all loans.
The stock of corporate and household credit, however, has grown substantially between 2001 and
2007 and this is likely due to the growth of the construction business and the high demand for real
estate, including interest from the corporate sector from abroad through Foreign Direct Investment
(FDI), see Chapter 6.
The credit boom in Bulgaria, especially in 2006 and 2007 was spectacular. The BNB recently
reported that the capital of the banking system remained strong, and sufficient to cover risks.
However, while Financial System Indicators remain good in appearance (see Figure 5), these
indicators are backward looking and the high credit growth, especially in 2007, which apparently
continues in 2008, is raising increasing concerns by International Financial Institutions (IFIs) in
particular.
Figure 6 The capital adequacy remains strong compared to previous years
Source: BNB (2007).
The BNB reported in December 2007 that the quality of assets of the banking system and most
leading banks is good. The report did note, however, that small and medium-sized credit institutions
are more vulnerable than large banks (Bulgarian National Bank, 2007). The annual increase in
classified assets in the banking sector was 25 per cent in 2007, compared to an overall asset growth
of 40 percent. Non-performing loans grew by 55 percent, while provisions went up by 40 per cent
compared to 2006. The forthcoming joint World Bank-IMF’s Financial Sector Assessment Program
(FSAP) for Bulgaria, which will be completed in 2008, is well-timed to assess the long-term impact
of the system’s rapid growth on sector stability.
Non-banking Financial Intermediaries
Market capitalization of the Bulgarian Stock Exchange has increased spectacularly, reaching 55.5
percent of GDP in 2007, as seen from Table 18.
Table 18: Non-banking sector financial sector intermediaries
(in % of GDP) 2005 2006 2007
Assets of the banking system 768% 85.9% 113.1%
Balance-sheet assets of pension insurance companies 2.6% 3.1% 4.5%
Gross premium income of insurance companies 2.5% 2.6% 2.4 %
Assets of Collective Investment Schemes 0.2% 0.6 % 1.7 %
Market Capitalization of BSE-Sofia 19.7% 31.2% 55.5%
Source: BSE-Sofia (2008).
Despite the high market capitalization, which came from a low base, the Bulgarian stock market
is small and it is yet to be explored what role it will play in corporate financing in the near future.
According to FSC data, the direct participation in the capital of investment intermediaries as
of September 2007 is equal to 3.38 % of total. In the insurance sector, however, 41 % of the capital
structure is in the hands of foreign investors (mostly coming from EU countries). As seen from
Table 3 (above), the gross premium revenue for insurance companies has grown steadily during
the years. Foreign investors take up 63 % of the capital of the life insurance companies alone. The
gross premium revenue (as % of GDP) in this sector is meagre, but it is growing. The number of
Joint-Stock companies with target for securitizing real estate has grown from none in 2002 to 34 in
2006 and potentially even more in 2007 and 2008. The reason for that is the high interest in the real
estate market.
Table 19 Non-banking Financial sector is growing, but from a low base
2001 2002 2003 2004 2005 2006
Investment intermediaries 97 97 108 93 88 85
Brokerage houses 69 67 77 62 59 56
Banks 28 30 31 31 29 29
Collective investment schemes* 3 4 5 9 25 45
Joint Stock Companies with special - - 3 5 13 40
investment target
Securitizing real estate - - 2 4 12 34
Securitizing receivables - - 1 1 1 6
Insurance Companies 32 32 31 31 31 37
Pension-insurance companies 8 8 8 8 8 9
Gross premium revenue (% of GDP) for 1.6% 1.9% 1.9% 2.2% 2.5% 2.5%
insurance
Gross premium revenue (% of GDP) for 0.01% 0.02% 0.03% 0.04% 0.05%
life insurance
Pension funds (net assets as % of GDP) 0.6% 1.0% 1.49 % 2.1% 2.6% 3.1%
Number of people with social security (in 597 642 2295 2717 2972 3201
000)
Universal pension funds 2 1614 2005 2240 2443
Professional pension funds 145 155 165 176 182 193
Voluntary pension funds 452 485 516 535 550 566
Source: FSC.
* Collective Investment Schemes, according to the Bulgarian legislation, are the investment companies with
open and closed type and the mutual funds.
Appendix 8.2: Econometric analysis of

perceptions about Access to Finance
Chapter 3 looks at whether there are systematic differences in firm perceptions across different
types of firms in Bulgaria. The results suggested that managers of manufacturing and other service
firms tended to be more concerned about access to finance than managers of firms in the IT and
retail trade sectors. Also, as in many countries, managers of small firms tended to be more concerned
about access to finance than managers of small firms. Even for small firms, however, access to
finance did not generally rank among the top concerns of firms.
Using the methodology described in Chapter 3, this section extends the analysis in Chapter 3 to
look at additional factors that might affect perceptions about access to finance. First, the analysis
looks at several factors that might affect access to finance—whether the firm owns land, whether
the firm has audited accounts, and whether the firm is a limited liability company. Since firms with
land have better access to collateral and the presence of audited accounts or limited liability might
increase information on the firm for bank offices, these could affect access to finance. Second, the
analysis looks at whether the firm has a loan or overdraft, whether the firm has been rejected for a
loan, and whether the firm does not think it needs a loan affects affect perceptions. This could give
an idea about what aspect of financing is the greatest concern. For example, if most complaints are
from firms with credit, this could indicate concern about the terms of the credit (e.g., about interest
rates or loan duration) rather than simply whether the firm can get a loan or overdraft or not.
Ownership of Land. Firms that own their own land might have better access to credit than other
firms because it is generally easier to use land and buildings as collateral than other movable objects
(see Table 20). In general, firms that own their own land complain less about access to finance than
firms that do not own land. After controlling for other factors (e.g., size, sector, ownership), firms
that own land are between about 4 and 5 percentage points less likely to say that access to credit is
a serious problem than firms that do not. The coefficient is statistically significant in most, but not
all, model specifications. This suggests that access to collateral is potentially one of the factors that
leads firms to be concerned about access to finance.
Audited Accounts. Firms with audited accounts will, in general, be more attractive to lenders.
Having audited accounts will make it easier for banks to assess the firm’s viability. Moreover, its
seems likely that firms that keep more detailed and more accurate accounts are also likely to be more
likely to be able to provide other information (e.g., to provide detailed business plans). Consistent
with the idea that these firms will be more attractive to lenders, firms without audited account were
about 5 to 6 percentage points more likely to say access to finance is a serious problem that firms
without audited accounts.
Limited Liability Companies. Limited liability companies might be less likely to have problems
getting credit than other firms. For example, limited liability companies are likely to be more formal—
making them lower credit risks. Moreover, they are likely to have more detailed information on firm
performance. For example, they are more likely to keep audited accounts even after controlling
for size and sector. Despite, this they were no less likely to say that access to credit was a serious
problem than other firms.
Loans. To see whether perceptions line up well with objective indicators, several objective
measures of access to credit are also included in some model specifications. In general, firms that
reported that they had either a loan or overdraft facility were more—not less—likely to say that
access to credit was a serious problem. After controlling for other things, they were about six
percentage points more likely to say that access to credit was a problem than firms without loans.
The coefficient on the dummy indicating that the firm had bank credit was statistically significant at
a 5 percent significance level (see column 3 in Table 20). Further breaking this down, it appears that
firms with loans are more likely to say that access to credit is a problem than other firms, while firms
with overdrafts are no more likely to do so (see column 4).
One possible reason for this might be that some firms that have loans got the loans a long time
ago. If these firms feel that they are unable to get new loans, they might say that access to credit is
a problem, even though they have a loan. To see if this is the case, an additional dummy indicating
that the firm applied for a loan in 2006 (see column 5). Once this new dummy is included, the
coefficient on having a loan or overdraft becomes statistically insignificant. But the coefficient on
the new dummy is positive and statistically significant—firms that applied for a loan in 2006 were
almost 12 percentage points more likely to say that access to credit was a problem than other firms
were.
Table 20: Differences in firm perceptions about access to finance
Finance is a serious obstacle to growth
(dummy)
Observations 977 903 901 898 892 892
Firm has bank credit 0.060**
(dummy) (2.21)
Firm has loan 0.055* 0.023 0.034
(dummy) (1.80) (0.71) (1.08)
Firm has overdraft 0.002 -0.008 0.008
(dummy) (0.068) (-0.27) (0.28)
Firm applied for a new 0.122*** -0.094***
loan
(dummy) (3.21) (-2.77)
Firm did not need a -0.261***
loan
(dummy) (-8.06)
Firm was rejected for 0.414***
a loan
(dummy) (4.07)
Age -0.010 -0.003 -0.004 -0.005 0.001 -0.000
(in years, natural log) (-0.51) (-0.15) (-0.19) (-0.26) (0.065) (-0.024)
Workers -0.040*** -0.029** -0.031** -0.031** -0.030** -0.015
(natural log) (-3.38) (-2.13) (-2.20) (-2.19) (-2.10) (-1.10)
Female Owners 0.024 0.019 0.021 0.024 0.022 0.019
(dummy) (0.95) (0.72) (0.78) (0.88) (0.84) (0.72)
Exporter -0.040 -0.043 -0.044 -0.043 -0.046 -0.024
(dummy) (-1.41) (-1.45) (-1.51) (-1.47) (-1.57) (-0.83)
Foreign-Owned -0.006 0.011 0.009 0.010 0.009 0.025
(dummy) (-0.13) (0.21) (0.18) (0.18) (0.17) (0.46)
Sector - Information
Technology -0.145*** -0.135*** -0.125*** -0.127*** -0.123*** -0.084*
(dummy) (-3.35) (-2.94) (-2.67) (-2.74) (-2.64) (-1.72)
Sector - Retail Trade -0.131*** -0.146*** -0.149*** -0.149*** -0.143*** -0.123***
(dummy) (-3.03) (-3.32) (-3.43) (-3.43) (-3.27) (-2.84)
Manufacturing -0.040 -0.036 -0.035 -0.034 -0.028 -0.023
(dummy) (-0.89) (-0.79) (-0.76) (-0.75) (-0.61) (-0.53)
Firm owns land -0.037 -0.046 -0.050* -0.055* -0.040
(dummy) (-1.32) (-1.63) (-1.74) (-1.91) (-1.43)
Firm has audited
accounts -0.050* -0.051* -0.051* -0.062** -0.063**
(dummy) (-1.67) (-1.70) (-1.68) (-2.03) (-2.10)
Firm is Limited Liability -0.008 -0.013 -0.011 -0.007 0.021
Company
(dummy) (-0.22) (-0.37) (-0.31) (-0.19) (0.64)
Pseudo R-squared 0.04 0.05 0.05 0.05 0.07 0.16
Two additional dummies were included in the regressions shown in column 6. The first indicates,
for firms that did not apply for a loan, that the firm manager said that they did not do so because
they did not need a loan. The second indicates that the firm applied for a loan, but was rejected.
Once these additional dummies are included, the coefficient on the dummy indicating that the firm
applied for a new loan in 2006 becomes negative. Firms that applied for new loans were about 10
percentage points less likely to say access to credit than firms that did not apply for new loans but
did not do so for some reason other than that they did not need one (e.g., they did not apply for loans
because interest rates were too high or they did not have collateral). Firms that did not apply for a
loan, but said that they did not do so because they didn’t need were less likely to say access to credit
was a serious problem than other firms—including firms that had applied for loans and had not been
rejected. Finally, firms that were rejected for loans were far more likely (44 percentage points more
likely after controlling for other factors) than other firms.
Overall, this analysis suggests that access to financing per se is not the major reason why firms say
credit is a problem. On average, firms without loans and firms that did not apply for a loan in 2006
were less likely to say access to credit was a serious problem than firms with loans and that applied
for them. This appears to be because most firms without loans do not want to get loans. Although
firms that had loan applications rejected were most concerned about access to credit, this represents
only a small number of firms (only about 25 or 2.5 percent of the sample). Concern about access
to credit from firms with loans suggests that this might be either because they cannot get enough
credit or that credit is not being extended on terms that are as favorable as managers would like (e.g.,
with respect to the type of collateral that is needed, the size of loans, or interest rates).
Appendix 8.3: Econometric analysis

of objective indicators
The previous section looked at differences in perceptions about access to finance across different
types of firms. This section expands this analysis to look at objective measures of access to finance—
whether firms have loans and overdrafts, how much investment they finance through bank financing,
and whether they have been rejected for a loan. This analysis is broadly complementary to the
previous analysis. For example, although it is interesting to see whether firms have bank financing,
this does not provide information on why they do not or whether the manager feels that not having
financing is an obstacle for firm.
As in the previous section, the approach is to use a multivariate regression analysis of access
indicators of firms in Bulgaria. While descriptive univariate analysis provides useful information
about the relationships between firm’s characteristics and access, it does not take into account the
correlations between different firm characteristics. For example, foreign-owned firms tend to be
larger than other firms. Thus differences in access to finance between foreign- and domestic firms
could be either due to foreign firms being larger and large firms have better access than small firms
or because being foreign makes it easier to get credit. Regression analysis can distinguish between
these hypotheses by controlling for other factors such as size or age when comparing foreign and
domestic firms.
In addition, regression analysis determines whether the differences between various firm
categories are statistically significant or not. That is, in small samples such as the sample in this study,
differences in means across groups could be due to random variation. By providing information on
statistical significance, it is possible to assess whether differences and correlations are likely to be the
result of sampling variation.
Methodology
The analysis is a simple multivariate regression:
Where Finance i is an objective indicator of access to finance for firm i, ICi is a vector of firm-level
characteristics for firm i (e.g., size, sector and ownership) and εi is a normally distributed error term.
Since the dependent variables are mostly either dummy variables or are truncated below at zero,
the models are generally estimated as standard probit or tobit models using maximum likelihood
estimation. The objective indicators include variables indicating that the firm has a loan or an
overdraft, whether it applied for a new loan in 2006, whether this loan application was rejected for
firms that did apply, whether they did not apply because they did not need one for firms that did not
apply, and how much of their investment and working capital was financed with bank financing. The
firm characteristics include age, size, sector and ownership.
In the regression analysis, it is assumed that firm characteristics are exogenous. However, it is
plausible that the access to credit may affect firm characteristics. For example, small size could
be a determinant of access (i.e. small firms are more likely to be denied loans), but also access to
credit could increase the chances that firms stay small and cannot grow. In this case access may
be endogenous determinant of size. Without proper instruments (i.e., variable correlated with the
firm-level characteristics but uncorrelated with the objective indicators related to access to finance),
however, it is not possible to determine the direction of causation.
Empirical results
Results from the regression analysis are shown in Table 21. For the dummy variables (i.e., whether
the firm has a bank loan), the coefficients are marginal effects (i.e., slopes for continuous variables
and the effect of switching dummies from one to zero) evaluated at means. For the Tobit models,
the coefficients are the simple coefficients.
Several of the variables are statistically insignificant in most model specifications. In particular,
the coefficients on the variables representing firm age, whether the firm is limited liability company
Table 21: Characteristics of firms and access to finance
Probit Probit Probit Probit Probit Probit Tobit Tobit

Firm was Bank finance
Firm has Firm has Firm applied Firm does Bank finance
Firm has loan rejected for a for working
Credit Overdraft for loan not need loan for investment
loan capital
914 914 913 910 175 712 607 913
Age -0.020 -0.009 0.004 -0.049** 0.016 0.002 -8.970 1.713
(in years, natural log) (-0.71) (-0.34) (0.14) (-2.26) (0.39) (0.062) (-1.18) (0.56)
Workers 0.072*** 0.081*** 0.076*** 0.024* -0.042* 0.078*** 13.385*** 9.746***
(natural log) (4.08) (4.59) (4.61) (1.87) (-1.80) (4.19) (2.90) (5.23)
Female Owners 0.020 0.019 0.040 0.006 -0.084* -0.022 -3.309 5.474
(dummy) (0.56) (0.55) (1.19) (0.22) (-1.69) (-0.64) (-0.36) (1.47)
Exporter -0.001 -0.011 -0.001 -0.002 0.147** 0.101*** -13.322 -8.522**
(dummy) (-0.023) (-0.27) (-0.022) (-0.069) (2.28) (2.66) (-1.30) (-2.00)
Foreign-Owned -0.269*** -0.206*** -0.207*** -0.065 0.264** 0.084 -12.301 -17.291**
(dummy) (-4.28) (-3.35) (-3.67) (-1.46) (2.10) (1.25) (-0.76) (-2.40)
Sector - Information Technology -0.219*** -0.169** -0.224*** -0.102* 0.126 0.196*** -43.835** -35.620***
(dummy) (-2.79) (-2.20) (-3.32) (-1.93) (0.76) (3.27) (-2.07) (-4.06)
Sector - Retail Trade 0.076 0.101 0.002 -0.048 0.036 0.171*** -1.078 -6.464
(dummy) (1.00) (1.35) (0.033) (-0.94) (0.28) (2.86) (-0.058) (-0.86)
Sector - Manufacturing -0.072 -0.062 -0.094 -0.074 0.063 0.045 -11.998 -14.590**
(dummy) (-1.13) (-0.97) (-1.57) (-1.53) (0.65) (0.74) (-0.76) (-2.26)
Firm owns land 0.124*** 0.149*** 0.044 0.070** -0.033 0.035 24.895** 12.143***
(dummy) (3.31) (4.00) (1.22) (2.41) (-0.56) (0.98) (2.42) (2.99)
Firm has audited accounts -0.021 -0.040 -0.068* 0.063** -0.028 0.015 -21.017* -7.052*
(dummy) (-0.51) (-1.00) (-1.78) (2.01) (-0.48) (0.37) (-1.96) (-1.65)
Firm is Limited Liability 0.043 0.053 0.065 -0.022 0.002 0.121*** -18.817 -0.581
Company
(dummy) (0.91) (1.12) (1.45) (-0.57) (0.035) (2.64) (-1.47) (-0.11)
Pseudo R-Squared 0.07 0.07 0.06 0.04 0.12 0.11 0.01 0.02

45

and whether the firm has a female owners are statistically insignificant in most model specifications.
Furthermore, the coefficients on the sector dummies for manufacturing and retail trade are
statistically insignificant in most model specifications indicating that firms in these sectors do not
appear very different from firms in the other services sector with respect to access to finance.
There are, however, several interesting and robust patterns.
Firm Size. The coefficients on firm size suggest that large firm have better access to finance
than small firms and are statistically significant at a ten percent level or higher in most model
specifications. Firms with 100 employees are between about 7 and 8 percentage points more likely
to have loans and overdrafts than firms with 10 employees, are about 2 percentage points more likely
to have applied for a loan in 2006, are about four percentage points less likely to have been rejected
if they did not apply for a loan, and are about 8 percentage points more likely to say that they did not
need a loan if they did not apply for one in 2006. They also financed more investment and working
capital with financing obtained from banks than smaller firms were.
Exporters. Exporters were neither more nor less likely to have loans than other firms. They were
about 10 percentage points more likely to say that they did not need a loan and used bank financing
less to finance their working capital—about 3 percentage points less on average than non-exporters.
This mostly seems to be because they finance their working capital out of retained earnings.
Foreign-Owned Firms. Foreign-owned firms were far les likely to have loans or overdrafts
than domestic firms—about twenty percentage points less likely—and used bank financing less to
finance both working capital and investment (although the coefficient on the dummy is statistically
insignificant for investment). Although this pattern is common and is due to their lower demand
for financing in most countries, it is less clear that this is the case in Bulgaria. Foreign-owned firms
were no less likely to say access to finance was a serious problem (see Chapter 3) and were no less
likely to say that they did not need a loan if they did not apply. Moreover, they were more likely to
say that they had been rejected for a loan—although the sample size is small for this regression.
Owning Land. Firms that owned land were more likely to have loans—although not overdrafts,
financed more investment and working capital with bank financing, and were more likely to have
applied for a loan in 2006. Although it is difficult to draw strong conclusions from this with respect
to the direction of causality (e.g., firms that own their own land might find it easier to purchase land
than other firms), it is consistent with the idea that land is an important source of collateral.
Appendix 8.4: Econometric analysis

of investment behavior
The previous appendix looks at factors that are associated with access to credit. This appendix
looks at firm characteristics associated investment and whether after controlling for these
characteristics whether access to credit is associated with higher investment. Since one of goals of
improving access to credit is to boost investment, this provides on information on the strength of
the link in Bulgaria.
Methodology
The models used to study investment behavior is:
Investmenti is one of the three investment measures for firm i: (i) an indicator variable for whether
or not the firm has made invested anything in property, plant and equipment in the previous year;
(ii) investment divided by existing assets, and c) investment divided by sales. The regressions with
Purchased Assets as dependent variable is estimated using Probit model and regressions with
Investment amount as dependent variable is estimated by Tobit model with a lower bound of zero,
to account for those firms which made no investments.
In general, the ratio of investment to assets would be preferred over the ratio of investment to sales,
since the first ratio measures the quantity of new investment relative to an existing stock of assets
and therefore shows something close to the rate of expansion. However, this measure suffers from
several problems. The first is that current value of existing assets is only available for manufacturing
enterprises in a few sectors (food, garments, chemicals, metal products, machinery and equipment,
and electronics). This reduces sample size considerably. Second, assets are particularly difficult
to measure (see Chapter 2 for a more complete discussion). Therefore, the ratio of investment to
sales is also calculated. While sales can be used as a rough guide of the size of the firm, the ratio
of investment to sales would be affected by differences in capital intensity. In practice, results are
similar for the two measures.
The independent variables include variables related to firm characteristics (ICi). But in addition,
the regressions also include several measures of access to finance (financei). This is to see whether
access to finance is associated with either a higher incidence of investment or a larger amount of
investment.
Although this investment model allows a rough analysis of the impact of access on investment,
data availability prevent a full analysis, which would required a structural model of investment that
predicts investment as a function of the marginal product of capital (i.e. the investment opportunity)
and the cost of capital. Since the data do not provide information on these things, they are imperfectly
proxied for by other firm characteristics. If there are some omitted variables that are correlated with
access and with investment opportunities, the results might overestimate the effect of access to
finance on investment.
Empirical Results
Firm Characteristics. The regressions include several variables representing firm size, firm age,
ownership, land ownership status, and other firm characteristics. For the most part, the coefficients
on these variables are statistically insignificant in most model specifications (i.e., the coefficients are
not statistically different from zero), indicating that the null hypotheses that firms of that type (e.g.,
foreign owned firms, limited liability companies, and firms with audited accounts) are neither more
nor less likely to invest and that they invest about the same amount as other firms cannot be rejected
at conventional significance levels.
Some coefficients are however consistently statistically significant. The strongest results is that
large firms are more likely to invest than smaller firms and that when they do they tend to invest
more than smaller firms (see Table 22, Table 23, and Table 24). The difference is quite large. Firms
with 100 workers are between about 12 and 13 percent more likely to invest than firms with 10
workers and invest between about 23 and 26 percent more as a percent of assets.ai This is large given
that the average firm invests only about 8 percent of sales and the median firm invests only about 22
percent of assets.
Older firms do not appear to be either more or less likely to invest than younger firms. But those
that do invest, tend to invest less. Based upon the point estimates of the coefficients, firm that are
about 3 years old (one standard deviation less than the mean) invest about 2 percent less as a percent
of sales than firms that are about 21 years old (one standard deviation more than the mean). Finally
firms that own land are between about 6 and 10 percentage points more likely to invest and invest
between about 6 and 8 percent more than firms without land
Access to Credit. Although it is interesting to see what kind of firms invest in Bulgaria, it
is also interesting to look at whether access to credit appears to affect investment. To do this,
several indicators of access to credit are added to the base regression to see whether they affect
investment.
The first measure is a measure of perceptions about access to finance. The broad question here
is whether firm managers that say access to finance is a serious constraint are more or less likely to
invest. When this variable is included in the base regression, its coefficient is positive in all three
regressions and is statistically significant in two of them. This suggests that firms that see access
to finance as a major constraint are more likely to invest and invest more than firms that do not.
The difference is large in economic terms—firms that see access to finance as a major problem are
about 10 percent points more likely to invest than firms that see it as a minor problem. Given that
problems with access to finance are likely to deter investment, the most reasonable explanation for
the correlation is that firms that want to invest are more concerned about access to finance than
those that do not.
The second measure is a measure of whether the firm has any kind of credit (i.e., a loan, line of
credit or overdraft). Firms with at least one of these products are about 22 percentage points more
likely to invest and, on average, invest about 11 percentage points more than other firms as a percent
of sales. When this variable is split in two—with separate dummies for firms with loans and firms
with overdraft facilities—the results are generally stronger for loans. The coefficient on the dummy
indicating that the firm has a loan is statistically significant at a 5 percent level or higher in all three
regressions, whereas the coefficient on the dummy indicating that the firm has an overdraft facility
is statistically significant in only one (invest over assets as the dependent variable).
These previous results suggest that access to loans—if not overdrafts—might encourage
investment. As discussed previously, however, it is difficult to draw this conclusion. For instance, if
firms with better or more dynamic managers are both more likely to invest and more likely to apply
for bank credit, then there could be a spurious correlation between investment and having a loan.
There is at least one reason to think that this might be the correlation might be spurious. The
question about investment asks whether the firm invested in 2006, while the loan question asks
whether the firm had a bank loan at the time of the interview. If the firm had a loan, the firm was
then asked when it got its most recent loan. It is therefore possible to divide the sample into two
groups—firms that got there most recent loan in 2007 and firms that got there most recent loan in
2006 and earlier. If access to credit was an important determinant of investment, it seems plausible
that firms that got their most recent loan after 2006 would be less likely to invest in 2006 than firms
that got there most recent loan in 2006 or earlier. Of course, this evidence is not entirely conclusive
because many firms that got their most recent loan in 2007 might have already had a loan in 2006.
But it seems reasonable to assume that at least some of the firms that got there most recent loan in
2006—especially given the expansion of credit over this period—did not have a loan before that.
In general, firms that got there most recent loan after 2006 (i.e., after the investment occurred)
were no less likely to invest and did not invest any less than firms that received their loan in 2006
or earlier. Although, as discussed above, this does not conclusively show that causation runs in the
opposite direction, it suggests reason for caution.
Table 22: Effect of access to finance on whether the firm invests

(1) (2) (3) (4)
Investment over sales
892 881 890 887
Regional Dummies Yes Yes Yes Yes
Access to finance is problem 0.053***
(higher values indicate greater
(3.80)
obstacle)
Firm has bank credit 0.221***
(dummy) (6.32)
Firm has loan 0.186***
(dummy) (4.80)
Firm has overdraft 0.066
(dummy) (1.60)
Number of Workers 0.124*** 0.133*** 0.113*** 0.109***
(natural log) (7.16) (7.62) (6.43) (6.23)
Age of firm -0.026 -0.023 -0.023 -0.026
(natural log) (-0.90) (-0.78) (-0.77) (-0.88)
Firm is Limited Liability
-0.068 -0.072 -0.082* -0.086*
Company
(dummy) (-1.50) (-1.58) (-1.81) (-1.89)
Firm is foreign-owned -0.060 -0.051 -0.025 -0.032
(dummy) (-1.04) (-0.85) (-0.40) (-0.53)
Firm is state-owned -0.406* -0.413* -0.361 -0.363
(dummy) (-1.76) (-1.76) (-1.49) (-1.51)
Firm has female owner 0.014 0.019 0.003 0.002
(dummy) (0.40) (0.54) (0.095) (0.062)
Firm owns land 0.092** 0.104*** 0.066* 0.063*
(dummy) (2.48) (2.78) (1.75) (1.69)
Firm has audited accounts 0.025 0.021 0.026 0.036
(dummy) (0.62) (0.51) (0.65) (0.88)
Pseudo R-squared 0.09 0.10 0.12 0.12
Table 23: Effect of access to finance on how much the firm invests relative to sales
(1) (2) (3) (4)
Investment over assets
868 858 866 863
Access to finance is problem 0.016**
(higher values indicate greater
(2.05)
obstacle)
(dummy) (5.50)
Firm has loan 0.113***
(dummy) (5.13)
Firm has overdraft 0.013
(dummy) (0.58)
Number of Workers 0.020** 0.023*** 0.012 0.010
(natural log) (2.34) (2.69) (1.38) (1.20)
Age of firm -0.040** -0.040** -0.037* -0.039**
(natural log) (-2.08) (-2.01) (-1.91) (-2.03)
Firm is Limited Liability Company -0.045 -0.047 -0.049* -0.051*
(dummy) (-1.52) (-1.57) (-1.68) (-1.71)
Firm is foreign-owned -0.052* -0.052* -0.030 -0.033
(dummy) (-1.93) (-1.81) (-1.09) (-1.18)
Firm is state-owned -0.173 -0.168 -0.135 -0.138
(dummy) (-1.54) (-1.44) (-1.22) (-1.26)
Firm has female owner 0.007 0.012 0.004 0.004
(dummy) (0.36) (0.56) (0.22) (0.21)
Firm owns land 0.075*** 0.079*** 0.060** 0.059**
(dummy) (2.79) (2.95) (2.27) (2.23)
Firm has audited accounts 0.037 0.036 0.043 0.044
(dummy) (1.27) (1.22) (1.44) (1.51)
Pseudo R-squared 0.07 0.08 0.12 0.13
Note: All regressions are tobit regressions (since investment is truncated below at zero).
Table 24: Effect of access to finance on how much the firm invests relative to assets
(1) (2) (3) (4)
Firm invested
(dummy)
364 363 363 363
Access to finance is
0.201
problem
(higher values indicate
(1.11)
greater obstacle)
(dummy) (2.81)
Firm has loan 0.996**
(dummy) (2.12)
Firm has overdraft 0.922*
(dummy) (1.85)
Number of Workers 0.398* 0.457* 0.316 0.263
(natural log) (1.75) (1.91) (1.43) (1.23)
Age of firm -0.901* -0.870* -0.867* -0.908*
(natural log) (-1.87) (-1.80) (-1.78) (-1.88)
Firm is Limited Liability
-0.163 -0.162 -0.113 -0.148
Company
(dummy) (-0.32) (-0.31) (-0.22) (-0.29)
Firm is foreign-owned 1.007 1.024 1.295 1.231
(dummy) (0.94) (0.96) (1.22) (1.15)
Firm is state-owned -1.679 -1.675 -0.515 -0.270
(dummy) (-0.81) (-0.77) (-0.25) (-0.13)
Firm has female owner 0.869* 0.906* 0.812* 0.747
(dummy) (1.80) (1.87) (1.71) (1.59)
Firm owns land 1.400** 1.413** 1.139* 1.141*
(dummy) (2.36) (2.38) (1.91) (1.95)
Firm has audited accounts -0.818 -0.896* -0.796 -0.748
(dummy) (-1.54) (-1.69) (-1.51) (-1.45)
Pseudo R-squared 0.03 0.03 0.03 0.03
Table 25: Effect of old and new loans on how much the firm invests
Probit Tobit Tobit
Firm invested Investment Investment
(dummy) (over assets) (over sales)
Regional Dummies Yes Yes Yes
Firm has loan in 2006 or earlier 0.457*** 1.223* 0.116***
(dummy) (3.76) (1.93) (4.30)
Firm has loan after 2006 0.578*** 0.720 0.109***
(dummy) (4.22) (1.48) (4.51)
Firm has overdraft 0.177 0.968* 0.014
(dummy) (1.58) (1.89) (0.63)
Number of Workers 0.293*** 0.259 0.010
(natural log) (6.22) (1.21) (1.23)
Age of firm -0.067 -0.875* -0.038**
(natural log) (-0.85) (-1.80) (-2.01)
Firm is Limited Liability Company -0.232* -0.143 -0.050*
(dummy) (-1.85) (-0.28) (-1.70)
Firm is foreign-owned -0.086 1.266 -0.033
(dummy) (-0.53) (1.18) (-1.19)
Firm is state-owned -0.931 -0.405 -0.139
(dummy) (-1.48) (-0.20) (-1.26)
Firm has female owner -0.002 0.746 0.004
(dummy) (-0.019) (1.59) (0.18)
Firm owns land 0.175* 1.101* 0.059**
(dummy) (1.74) (1.88) (2.23)
Firm has audited accounts 0.086 -0.727 0.044
(dummy) (0.79) (-1.42) (1.49)
H0: Firms with old and new loans equally
0.41 0.44 0.81
likely to invest (p-value)
Pseudo R-squared 0.12 0.03 0.13
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REFEREnces & ENDnotes 55
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REFEREnces & ENDnotes 57
Endnotes
a Following Caves (1990), the analysis in this chapter uses value-added rather than sales is used
as the dependent variable. Caves (1990) found that measures of TE (technical efficiency) based upon
revenues (gross output) were far more sensitive to small changes in functional assumptions with respect
to calculating efficiency.
b It is possible to make other assumptions about the functional form of the production function
(e.g., to assume a trans-log production function), although this does not appear to have a significant
impact on results in most cases (see for example the analysis from the Investment Climate Assessment
for Turkey).
c Breaking the firm specific measure of productivity is mostly for convenience—that is it means
that it is possible to assume that vi has a mean of zero. In practice the two terms could be merged into a
single term where vi has a non-zero mean.
d Gatti and Love (forthcoming) do this allowing access to credit to be endogenous in the second
step.
e This is due to omitted variable bias. It is discussed in more detail in Chapter 7 in Kumbhakar
and Lovell (2000) and Escribano and Guasch (2005).
f See, for example, Greene (2000, pp. 449-450).
g Other published studies have used this approach to look at other questions. See, for example,
Svensson (2003) on corruption or Clarke (forthcoming) on exporting.
h Previous investment climate assessments have used multiple firm-level observations in a
single regression. In most cases, the data for the investment climate variables and many of the firm
characteristics is cross-sectional. That is, it was only asked for a single year. In contrast, productivity
data was collected for three years. By replicating the investment climate variables, which were only
collected as a cross-section, for each year for which there was productivity data, it was possible to run
random effects panel regressions. Fixed effects could not be included because these would collinear
with the investment climate variables. For Bulgaria, productivity data was only collected for two years.
Because of this, and because the investment climate variables are collected only for a single year, the
gains from estimating a panel are relatively small and therefore the estimation is purely cross-sectional.
The one exception is the Levinsohn-Petrin estimator described above, which requires a panel approach
because it uses lagged variables as instruments.
i The econometric approach that is used to estimate TE is similar to the econometric approach
used in other Investment Climate Assessments in several ways (see, for example, the Investment Climate
Assessment for South Africa or Investment Climate Assessment for Turkey). See Clarke and others
(2007) and Finance and Private Sector Development Department, Europe and Central Asia Department,
World Bank (World Bank, 2007b).
j See, for example, the Turkey: Investment Climate Assessment (World Bank, 2007b).
k As discussed in Chapter 6, although there is a question on the BEEPS survey that asks about the
burden of regulation, it only deals with the time directly spent dealing with public officials rather than
regulatory requirements. The percentages on this question are far lower than the percentage (typically
about 2-3 percent of time in the recent EU entrants in the 2005 BEEPS survey) that the percentage for
the question on the Enterprise Survey (typically about 9-10 percent) in other middle income countries.
l For example, many studies have found that poor infrastructure explains the poor performance
of firms in Africa (Biggs and others, 1996; Eifert and others, forthcoming).
m See, for example, the Turkey: Investment Climate Assessment (World Bank, 2007b); Escribano
and others (2005); Escribano and Guasch (2005) ; Dollar and others (2005b; 2005a).
n Similar approaches have been used in other published studies included Beck and others
(2004) and Clarke and others (2006; forthcoming). It has also been used in many investment climate
assessments. See, for example, Regional Program on Enterprise Development (2007a; 2007b; 2007c).
o See Gelb and others (2006).
p Clarke and others (forthcoming) show that this is the case in South Africa.
q The null hypothesis that the dummies on manufacturing and retail trade are equal can also be
rejected at a 5 percent significance level.
r See, for example, Clarke and others (2007) for a discussion of South Africa.
s See World Bank (2007a) for a discussion of regulatory procedures in the food, tourism and
transportation sectors.
t See World Bank (2007a).
u This is related to efficiency wage stories (Shapiro and Stiglitz, 1984). Firms are more likely to
pay above market wages to workers when the level of unemployment for that type of worker is low—
that is, unemployment is a less effective deterrent from shirking when the worker will be reemployed
quickly.
v In this analysis, it is not possible to control for unobserved firm-fixed effects. As a result, it
will be difficult to rule out the potential for omitted variable bias of our estimates.
w The employer has the capacity to secure such opportunities for development.
x Also the employer has to provide information about any changes in the company’s type and
scope of business, activities, financial status and organization of labor; recent and forthcoming changes
in the company’s business activities and the economic status of the organization; status, structure
and the prognosticated development of employment in the company; planned contingency measures,
especially in those cases that could lead to redundancies and lay-offs; possible substantial changes in the
organization of labor.
y Until that change it was considered sufficient for the employer to keep at the employees’
disposal the full text of the collective labor agreements concluded by the company.
z State Gazette # 48, 2006. The changes are in force effective since 1 July 2006.
aa In 2007, this distribution was 22.125 to 11.375 percentage points between employer and the
employee.
ab Related to this Convention, Bulgaria adopted also Recommendation №197 on Establishing
Encouraging Framework on Occupational Safety and Health at Work and Recommendation №198 on
Employment Relations. The documents were approved at the 95th session of the International Labor
Conference in Geneva on 15th June 2006.
ac These are the occupational groups of “professionals”, “technicians and associated
professionals”, “clerks” and “service workers” and “shop and market sales workers”.
ad http://www.navet.government.bg/en/nappo.
ae Information is from The Survey on Information and Communication Technologies
Usage in Households 2006 - a joint survey of the National Statistical Institute and the European
Community, carried out according to Eurostat requirements. The survey methodology and tool are
in full compliance with the European Community Directives and Regulation No 808/2004 of the
European Parliament. Source: NSI. http://www.nsi.bg/IKT_e/IKT.htm.
af The survey on ICT usage and e-commerce in enterprises is part of European Community
statistical surveys and NSI of Bulgaria was involved by Multinational PHARE Program in 2004,
2006 and 2007. The methodology and the statistical tools are completely harmonized to Eurostat
requirements and Regulation №808/2004. The survey is based on proportionally stratified random
sample, calculated in accordance with the share of each stratum in general population. The sample
size was 4495 enterprises, selected by NACE classes and number of employees. http://www.nsi.
bg/IKT_e/IKT.htm.
ag Up to the present-practically there are no appropriates.
te preconditions for adults obtaining general secondary education in terms of lecturers, text books,
curricula, forms of organizing the learning out of the class room, etc.
ah The number is higher in other EU members. The European qualification framework suggests
8 reference levels. For details see: The European qualifications framework, ec.europa.eu/education/
policies/educ/eqf/index_en.html.
ai Marginal effects are obtained using the mfx command in Stata.

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BULGAR I A

Investment Climate Assessment

(In Three Volumes)

Report No. 45819-BG

1818 H Street, N.W.

Copyright Clearance Center, Inc.

2SLS Two-Stage Least Squares

Vice President: Shigeo Katsu, ECAVP

1. Because TE is calculated in a regression framework, it is possible to control for multiple

2. The regression framework also makes it possible to estimate an augmented production

where the error term is:

The augmented production function then becomes:

There are some problems, however, with this methodology.

1. For cross-country comparisons, value-added and capital have to be denominated in a

3. Because estimates are calculated in a regression framework, it is less straightforward to

4. As noted by Escribano and Guasch (2005), there is no single accepted approach to

2. Most of the investment climate variables are potentially endogenous. As in previous

Romania 116%** 133%*** 127%***

Before adding additional investment climate-related variables, it is interesting to first analyze

Investment Climate Variables

Labor and Skills: Unskilled workers as % of workers; Part-time workers as % of workers; % of

Table 5: Differences in TE by firm type (unrestricted estimates)

Appendix 5.1: Econometric Analysis

Source: World Bank Enterprise Survey (2007).

constraints for managers of either foreign-owned or domestically owned firms.

(9) (10) (11) (12) (13) (14) (15) (16)

**, * Significant at 1 and 5 percent significance levels.

Appendix 7.1: Econometric analysis of

Table 10: Effect of firm-level variables on perceptions about labor regulation

Perceptions about education and skills

Appendix 7.2: Econometric Analysis of Training

Tij = η+α Xij + µj + εij

Appendix 7.3: Summary of the Doing

The evolution of labor regulation since 2000

The Rigidity of Employment Regulations

Table 13: Rigidity of Employment Indexes in 2007

Another amendment to the Labor Codez related to terminating employment concerns

The government is stimulating youth employment by offering additional remuneration as per

Appendix 7.4: Life-Long Learning (LLL) in Bulgaria

Figure 3: Very few workers in Bulgaria had received training or education

Table 15: Unemployed in vocational training

Institutions involved in life-long learning

Recent changes in legislation related to life-long learning

Other Policy Changes

Barriers to increasing access to life-long learning

Similar to the requirements of gender mainstreaming of social policies, “age mainstreaming” of

Appendix 8.1: Banking and Non-

Table 17: The Banking Sector in Bulgaria

Figure 5 Dynamic Growth of corporate and household credit market

Source: BNB (2007).

Appendix 8.2: Econometric analysis of

Appendix 8.3: Econometric analysis

The analysis is a simple multivariate regression:

Probit Probit Probit Probit Probit Probit Tobit Tobit

Source: Authors calculations based on Enterprise Survey data.

***,**, * Significant at 1 and 5 percent significance levels.

There are, however, several interesting and robust patterns.

Appendix 8.4: Econometric analysis

Table 22: Effect of access to finance on whether the firm invests

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Romania 116% 133%* 127%***

,, Significant at 1 and 5 percent significance levels.