You’ve probably heard about the Research and Development (R&D) or Research and Innovation sector (R&I/R&D&I). R&D refers to the activities that corporations and governments undertake in order to create new products and services, as well as improve the existing ones. Research and development include the engineers’ work on developing specific new products and the research of industrial scientists, which may result in future unspecified products.
The design and development of a new product is often a crucial factor in the survival of a company. The global industrial landscape is changing fast due to the fierce competition and the evolving preferences of consumers. In this environment firms must continually revise their design and range of products/services in order to be more competitive and become as well as remain their customers’ first choice.
The activities around R&D are quite expensive regarding spends on materials, equipment and salaries without the guarantee of more profitability, creativity and bigger market share for the businesses. However, R&D is a necessary step that various institutions take in order to move forward in the long term. Before we explore the development of R&D in Bulgaria, let’s have a look at the sector’s highlights on global level.
R&D status worldwide
According to statista.com the total global R&D expenditures amounted to almost 2.5 trillion U.S. dollars in 2022 (once local currencies are adjusted for purchasing power parity). Last year the two largest spenders in R&D worldwide were The United States (USD 680 billion) and China (USD 550 billion). However, when R&D expenditure is considered as a share of overall GDP (gross domestic product), smaller countries with tech-heavy economies like Israel and South Korea also stand out.
Leading R&D industries worldwide
As per statista.com the two industries accounting for the highest share of R&D spending worldwide are ICT hardware producers and health industries. ICT accounts for about 23% of the global R&D expenditure where the Health industry has a 21% share. The ICT software companies are also heavy investors. Despite the global presence of all these sectors, different regions outspend each other in different areas. The United States, for example, is the largest R&D spender within software and health care. Europe on the other hand is a large spender within automobiles & transport. China is dominating R&D spending in construction. R&D-intensive industries also have differing levels of importance among the different economies, with high-intensity R&D exports being more central to European and Asian economies.
Leading R&D companies worldwide
In 2020 Amazon was the biggest corporate R&D spender, investing over 40 billion U.S. dollars in R&D. The other major spenders were producers of information and communication technology (ICT). This is not surprising since many of these companies are major players in developing future, high-growth technologies like artificial intelligence. As per statista.com’ s report the corporate investment in healthcare R&D is also expected to remain high into the near future, despite the decrease in return on investment of this industry over the recent years.
Outsourcing and R&D activities in Bulgaria
Bulgaria is a well-known and popular outsourcing destination. Country evolves from a cost-effective nearshoring location, to a well-recognizable European digital hub. That is due to the more complex activities performed in Bulgaria. Operations of Bulgarian tech companies have moved higher up the value chain from support and services to product creation, innovation, research and development.
Aside from the domineering BPO and ITO sectors in the country, there’s a growing presence of the R&D activities and centers in Bulgaria. All companies in the R&D segment have foreign ownership. It is largely due to the nature of the companies’ core activities as part of multinational groups. The increasing share of R&D in Bulgaria is a good indication for the development of the technological sector in the country. It further increases the complexity and quality of Bulgaria’s industry services. With this said let’s explore the status of the Bulgarian Research and Development sector.
R&D segment turnover in Bulgaria
In terms of market size the R&D segment is the smallest in the sourcing field with aggregate operating revenue of EUR 584.6 million. in 2021. Then R&D grew at an annual rate of 18.2% (data from AIBEST Report 2022). Although this was the slowest year-on-year rate in the sector, in CAGR terms R&D centers performed better in the period 2017-2021 with a rate of 18.7%. As the report of AIBEST notes the R&D segment includes three of the 10 sourcing companies with the largest turnover in 2021.
The leader is VMWare Bulgaria EOOD with operating revenue of EUR 132.2 million, followed by Enterprise Services Bulgaria EOOD with EUR 128.8 million. The software development center of SAP Labs Bulgaria EOOD ranked third with annual turnover of EUR 79 million. The 10 largest R&D centers in terms of operating revenue generated almost 90% of the segment’s aggregate. That is due to the small number of companies in the segment.
R&D segment employment in Bulgaria
In 2021 R&D segment employs 9,690 FTEs, representing 11% of the aggregate sourcing headcount. The annual growth rate of the segment’s workforce doubled to 12.8% in 2021 from 6.0% in 2020. Aggregate employment in R&D centers has expanded at a CAGR of 7.9% in the five-year period 2017-2021. This is 0.2 pp faster than the sourcing sector as a whole (data source: AIBEST 2022). The Top 3 employers in the R&D segment according to AIBEST in 2021 are the companies Enterprise Services Bulgaria EOOD, VMWare Bulgaria EOOD and SAP Labs Bulgaria EOOD. Together these companies employ more than half of the workforce in the R&D segment.
Employment expenses in the R&D segment
As per the AIBEST report 2022, among the three sourcing segments, R&D vendors register the highest increase in salary costs of 23.2% y/y. It marked a significant acceleration from the previous year, when the annual increase stood at 16%. The combined salary expenses of the R&D centers exceeded EUR 320 million and represented 15.1% of the sector’s aggregate, up from 14.9% in 2020. In terms of salary costs per FTE, R&D companies are the unrivalled leader in the sector with EUR 33,060 in 2021, up by 9.3% on the year.
Profitability in R&D in Bulgaria
The profitability of Bulgarian R&D centers is expected to continue its positive development and bring the segment’s annual net financial result close to EUR 60 million by 2025. The net profit margin in R&D in 2021 amounted to 6.4%, up from 5.6% a year ago, but still equaling only half of the sectoral average of 12.9%.
Long-term investments
In 2021 the aggregate investment in long-term assets of the companies in Bulgaria’s sourcing sector amounted to EUR 138.7 million. They expanded at a very strong rate for the second year in a row: 35.6% year-on-year, reaching their highest value for the 2017-2021 period. This rapid increase brought the five-year CAGR to 12.8%.
Nearly half of the total investments in long-term assets made by sourcing vendors in 2021 were concentrated in the R&D segment. Its investments are both the largest in absolute terms and the fastest growing, at a rate of 54.3% in 2021 to EUR 65.3 million. This extraordinary increase was caused almost entirely by the activity of SAP Labs Bulgaria EOOD, which acquired the Park Lane Office Center building in Sofia for EUR 50 million. Such investment shows the long-term interest of the company in expanding their research and development activities on Bulgarian soil in the upcoming years.
Last thoughts
The future growth and competitiveness of the business sits in a large part with the R&D activities. While the research and development is typically not performed to gain immediate profit, it is expected to contribute to the long-term profitability. With their R&D centers companies work hard to create products/services that are difficult for their rivals to replicate. R&D also allows them to stay ahead of their competition by catering to new wants or needs in the market. As a sub-segment in the “Knowledge industry”, R&D’s expansion in Bulgaria comes very much in favor to the development of the technological sector in the country. The growth of R&D in Bulgaria further increases the complexity and quality of country’s industry services long term.
Are you considering outsourcing to Bulgaria? Or you’d like to open R&D center here?
Then let’s have a talk. As we’ve already established, Bulgaria is one of the popular outsourcing destinations in Eastern Europe for many international companies seeking quality, reasonable costs and professionalism. Being your outsourcing partner, we ACS Bulgaria can establish and manage various outsourcing operations, as per the needs of your business. Models we offer are Agency contracting (staff augmentation), Managed service, and Transition & transformation of processes. Our team has the required knowledge and experience you can rely on.