Localization Economies in the Bulgarian Production Sector: Empirical Evidence from the Pharmaceutical and Oil Production Industries

The purpose of this paper is to study the effect of localization economies on firms’ performance in an attempt to answer the following research question: RQ: To what extent is there localization economies in the pharmaceutical (and oil) production industry in Bulgaria and how this affects the within-industry firm’s (financial) performance in the period 2010-2016? In the way of answering the above-imposed question, this paper examines the effectiveness of within- industry clustering on firms’ financial performance by focusing on the pharma and oil production industries in Bulgaria. Importantly, the dataset contains 7 years of key financial performance indicators and a localization employment quotient variable which serves as a proxy of within-industry clustering. Leaning on these variables, it is possible to investigate to what extent is there a localization phenomenon in the production industries in Bulgaria and how this grouping affects the financial performance of the firms. The findings of this research suggest a somewhat dubious effect of a within-industry constellation for the tested production companies. Initially, considering the oil production data sample, no significant effect from industry grouping on firm’s performance is to be observed (i.e. both sales and profit indicators are explained by other factors). On the other hand, once the dataset is filtered to pharmaceutical companies, a positive and significant association of firm’s localization with profit figures is to be distinguished. Yet, referring to the same industry, no statistically significant relation between localization and sales performance is to be identified. Similarly, no particular difference between localized and less localized (i.e. more isolated) industry-leavers and/or entrants is to be revealed either. These discoveries remain robust throughout all additional panel data investigations. Overall, the research encloses that for some production industries in Bulgaria, a greater level of within industry grouping is positively related to annual profit records, however, such grouping does not necessarily lead to healthier sales figures. A solid explanation for this is the fact that clustered pharma production companies experience a more efficient utilization of inputs - a process which is argued to partially stem from the positive externalities, gained by the companies in the more localized geographical regions. Notably, due to insufficient sources of information, similar cluster investigations are absent for the Bulgarian market. Although this paper sets the ground for the need of similar research, a more in-depth analysis of the cluster economies in Bulgaria is required. Similar testing should be carried out for other industries in order to expropriate the true benefits of agglomeration economies in this geographical region.