Bulgaria's pathway to regional revival: A smart specialisation strategy for Severoiztochen

The demographic crisis reshaping Bulgaria's economic landscape

Over the past decade, Bulgaria's population has declined by more than 20%, falling from 7.3 million in 2001 to 6.5 million in 2021 (World Bank Group, 2024a). Since peaking in the 1980s, emigration has contributed to Bulgaria's staggering population loss of approximately one-quarter. This demographic decline is equivalent to the disappearance of a city the size of Amsterdam or even San Francisco within just a decade, making Bulgaria the fastest-shrinking country in Europe.

This population loss has been accompanied by growing regional economic disparities between core and non-core areas, particularly as global and neoliberal market pressures have emerged to transform the landscape of the country. Since the late 1970s, the decline of the post-war Keynesian model of economic governance alongside the rise of globalisation and neoliberal policies has driven a significant economic shift, moving economies away from industrial practices and labour-intensive production toward the concentration of knowledge-intensive services and a 'new geography of jobs' (Iammarino, Rodriguez-Pose and Storper, 2018, p. 274).

Sofia's dominance and the widening regional gap

This transformation has had profound social and spatial implications for regions outside the capital, Sofia. Although broad regional policies have been introduced — most notably through the National Concept for Spatial Development (NCSD) 2013–2025 — Sofia has remained the primary beneficiary of these approaches (OECD, 2021). Over the past forty years, the employment-to-working-age population ratio in Sofia and its surrounding areas has steadily increased, resulting in a 20-percentage-point gap compared to other parts of Bulgaria (European Commission, 2023a).

Although the theory of innovative enterprise reminds us that innovation is a collective process, it makes an organised choice of workforce and skills within the operational divisions of labour that often means the so-called 'left-behind' regions face the greatest challenges in adapting (Martin et al., 2021). This historic divergence from one growth and development trajectory to another serves as a stark reminder that country-led innovation can lead to value destruction as well as value creation (Glaeser, 2012).

A place-based approach for Severoiztochen

In light of these challenges, the Ministry for Territorial Cohesion and Place-based Policy is committed to increasing recognition of place-based approaches to address the cumulative issues faced by 'left-behind' places, specifically targeting Severoiztochen, a low-income region in the northeast of Bulgaria. The identification of this region follows the criteria set out in the European Commission's 2017 report, which defines low-income regions as those with GDP per capita levels below 50% relative to the EU average under the national productivity average (European Commission, 2017).

This report acknowledges that only 4% of the total funds allocated by the European budget since 2021 have been exhausted at a national level, let alone at a regional level. Hence, the Ministry of Territorial Cohesion and Place-based Policy has set smart specialisation and multi-scalar governance place-based policy at the forefront of its agenda (Gocheva and Lecheva, 2024). This report argues that levels of upskilling labour and R&D spending constitute a circular process where knowledge and innovation diffuse across markets, technology, institutions, and policy (Mazzucato, 2018).

Why timing matters for smart specialisation

Timing is key. As John Kingdon’s concept of the “window of opportunity” reminds us, the recent establishment of Bulgaria’s Ministry of Innovation and Growth (MIG) in 2021, together with the launch of the ‘2021–2027 Research, Innovation and Digitalisation for Smart Transformation Programme’ by the State Administration, has laid the groundwork for greater involvement of public sector and educational institutions in driving innovation (Hoefer, 2022; OECD, 2024). This also means that having the state do the early heavy lifting makes the case for a ‘smoother’ transition into a place-based policy approach in the Severoiztochen region, where labour productivity remains low, emigration is high, and no viable smart specialisation strategy has yet been proposed.

To support the strategic framing of the policy response, Figure 1 presents an ex-ante SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats), intended to identify the foundational conditions necessary for local economic transformation in Severoiztochen. To ensure a comprehensive examination of all relevant factors, the report integrates themes from a PESTEL analysis, Political, Environmental, Socio-Cultural, Technological, Economic, and Legal, and incorporates other indicators from Bulgaria’a 2030 National Development Plan, specifically Goal 10 (Institutional Framework), into the evaluation (SACHEVA, 2024).

Severoiztochen SWOT analysis: Key factors for smart specialisation policy

Figure 1: (McCann, 2013; Minority Rights Group, 2018; Hermansen, 2021; Martin et al., 2021; Tcherneva, 2023; OECD, 2024)

The diagnosis of the Severoiztochen region challenges traditional agglomeration and urban consumption theories, particularly the notion that the productivity-amenity growth loop leads to uniformly positive regional outcomes. Instead, it reveals how this loop exacerbates disparities in employment and wages between high-income earners and the working class at an intra-regional level (Glaeser 2012; McCann, 2013). For example, Figure 1’s ‘weaknesses; economic’ serve as an indicator of the significant 46-percentage-point difference in employment levels that exists between the more economically dynamic districts of Varna and Dobrich in comparison to the rest of the region, namely Shumen, Targovishte, Razgrad, and Silistra (Metaxas, 2008). 

At the macro level, we can also distinguish factor mobility, institutional challenges, and governance issues, as outlined in Figure 1 (Institutional and Economic Indicators), to provide a more holistic diagnosis for place-based policy. This includes examining the divergence of knowledge-intensive business services (KIBS) between core regions like Sofia and non-core regions such as Severoiztochen. A key example of this is labour market polarisation (Figure 1), which became especially evident after 2007, when Sofia was the main recipient of EU funds, over €3.1 billion, which aimed at boosting their SME productivity and gross value added in technological sector (IME, 2025). In this case, the institutional incapability and weak rule of law to redistribute and diversify funds across regions in Bulgaria have pinpointed different speed economies between core (Sofia) and non-core regions (Severoiztochen) and the urgency of this regional diagnosis and the smart and innovative place-based solution that follows (OECD, 2024).  

Opportunities through upskilling and innovation

Opportunities abound through upskilling the labour force in higher-value sectors, which could significantly boost productivity and regional income. Growing the Varna-Dobrich district cluster can establish a regional innovation hub and activate higher local job multipliers. Leveraging EU funding streams, such as ERDF 2021–2027, can strengthen regional resilience and competitiveness. Enhanced multi-scalar governance can improve coordination between national, regional, and local authorities. Technological advancements, particularly digital infrastructure, could reduce connectivity gaps and attract skilled workers. Finally, increased environmental efforts, particularly in renewable energy, align with EU green transition goals and could create new employment sectors.

Threats include corruption and governance deficiencies, which undermine public trust and institutional efficiency. Geopolitical instability, particularly Bulgaria's proximity to Russia, poses risks to political stability and EU integration. Climate change impacts, including droughts and resource scarcity, threaten agricultural productivity and regional sustainability. Continued brain drain to Sofia and Western Europe risks further depleting the regional talent pool. Global economic volatility and rising energy costs add uncertainty to investment and development prospects.

Multi-level governance and stakeholder collaboration

This policy emphasises strengthening collaboration and coordination across multiple levels of governance, as well as diversifying budgetary provisions. The report adopts Lasswell's (1956) conceptualisation of the policy cycle to structure the discussion into three phases: agenda-setting, implementation, and evaluation (Jann and Wegrich, 2006).

In the agenda-setting phase, the report outlines the delivery of smart specialisation targets, identifies the shared responsibility amongst key stakeholders, and builds upon the budgetary framework of the European Regional Development Fund (ERDF) 2021–2027. The implementation phase focuses on how R&D subsidies, educational training, and competence clusters can contribute to achieving access to finance, knowledge spillovers, and higher regional profitability in job market creation.

Implementation: R&D subsidies and educational infrastructure

The implementation strategy centres on three interconnected pillars. First, R&D subsidies will support local enterprises in developing innovation capacity, encouraging partnerships between businesses and research institutions. Second, educational training programmes will focus on upskilling the existing workforce and attracting young talent through vocational training aligned with regional economic needs. Third, competence clusters will bring together universities, businesses, and local government to create innovation ecosystems that facilitate knowledge transfer and collaborative problem-solving.

These interventions recognise that innovation is a circular process requiring sustained investment in both human capital and institutional capacity. By targeting Severoiztochen's specific assets — its proximity to emerging economic centres like Varna, its untapped labour pool, and its potential for cluster development — the policy aims to reverse decades of economic decline whilst respecting the region's unique characteristics and capabilities.

Evaluation framework and future considerations

The policy's success will be measured against clearly defined indicators, including labour productivity growth, reduction in emigration rates, increased R&D spending as a percentage of regional GDP, and improvements in educational attainment. Regular evaluation cycles will ensure adaptive management, allowing for course corrections based on empirical evidence and stakeholder feedback.

Whilst this report positions collaboration between multiple stakeholders and the personalisation of solutions as the definitive pinnacle of smart specialisation place-based policy, it also opens new avenues for further research. A future iteration of this analysis could extend beyond the policy cycle framework by incorporating the Advocacy Coalition Framework to explore further Severoiztochen's political dynamics, belief systems, and power dynamics of the actors involved in regional economic development (Cairney, 2015).

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