Market Newsletter : Doing Business in These Balkans: Rock Bottom Cost . . .and Quality : Yugoslavia, Romania and Bulgaria are offering tax holidays and fewer limits on foreign partners. They also offer ethnic strife and a questionable work ethic.

In the Balkan nations of Yugoslavia, Romania and Bulgaria, the work force is plentiful, the markets are wide open and the cost of doing business is rock-bottom. But in a region whose name has become synonymous with slovenly work and ethnic strife, Western investors are best advised to be careful they don’t get what they’ve paid for.

Business people flocking to Eastern Europe in search of the perfect deal have mostly focused on the rapidly democratizing states to the north, like Hungary and Czechoslovakia.

Fear of being overlooked in the regionwide gold rush has encouraged Balkan states to offer comparatively attractive conditions, like tax holidays and fewer limits on what foreign partners can own.

The mountainous states flanked by the Adriatic and Black seas have in common a desire for reform and Western integration. But the similarities end there, as each has distinctive pluses and considerable minuses.

--Yugoslavia, a Communist renegade of long standing, has the most experience with Western business. It began tinkering with its planned economy in 1967. It has also shown remarkable progress in recent months, taming four-digit hyperinflation and introducing Eastern Europe’s first convertible currency. Its biggest detraction is recurring ethnic unrest that has led to strikes, boycotts and a threat of civil war.

--Romania’s chief asset is the virtual absence of a foreign debt, which the late dictator Nicolae Ceausescu erased with a Draconian austerity program that virtually starved the nation. While new leaders say they are eager for Western partnership, the country’s political instability should be an overriding consideration for those contemplating investment. The brutal clash between pro- and anti-government forces in Bucharest in mid-June was likely a harbinger of worse times to come.

--Bulgaria, the last of the true believers in communism’s capacity for self-correction, has oddly emerged from the season of free elections with the greatest degree of political and ethnic stability in the Balkans. Reform Communists steering the government have also created favorable conditions for foreigners, including free-trade zones with no taxes or limits on the amount of hard-currency earnings that can be taken out of the country. On the down side, Bulgaria’s industrial output has been slipping, it has a colossal foreign debt of $10 billion, and the traditional market for its goods--the Soviet Union--has dried up due to that nation’s own economic traumas. . . .

Poverty and economic crisis are among the few factors that bind the Balkan states in these days of emerging individualism. Industrial output has been falling in all three states--in Yugoslavia by design, as the cost of bringing down inflation--and per capita income is a fraction of West Europeans’.

Deutsche Bank, West Germany’s largest financial institution, estimates that Bulgarians and Yugoslavs have 45% of the purchasing power of their Western neighbors, and Romanians only 35%.

Because investment opportunities are gauged by purchasing power instead of market size, the attraction for Balkan projects is limited despite a population of 56 million consumers and deficits of every product from bread to baling wire.

Holding out more promise are joint ventures that produce goods for export or services that can be sold for hard-currency consumption on the spot.

The Sheraton Sofia Hotel Balkan trades the Boston-based chain’s reputation, training and management skills for a share of the steadily improving income.

“Sheraton hasn’t had to put any money into the country. We are giving them our expertise,” said Flemming Jensen, general manager of the 200-room showcase of Western efficiency in a region renowned for bad service.

Jensen said Western bankers and business people have been flocking to Bulgaria to search out new opportunities. Most are optimistic about the long run, he said, but have been discouraged by the government’s March suspension of payment on foreign debts.

“Foreign companies are concerned now because they can’t buy property,” observed Rumen Gechev, a professor of macroeconomics at Sofia’s Institute of Economics. “But the laws are changing and investors should be attracted by the more favorable opportunities to lease land and facilities, which in many ways reduces their risks.”

Gechev said that Bulgaria, which will likely retain at least 50% state ownership as it pursues a moderate economic reform course, recently leased 500,000 acres of farmland to Israel for a cotton-growing project. . . .

Romanian officials likewise have been pushing leasing deals to avoid selling out the nation’s best assets, like white-sand beaches along the Black Sea. But internal conflict is costing them foreign trust, most notably in tourism, which has seen an 80% drop in bookings this year.

“It is a normal human reaction that one doesn’t come here under the circumstances. The whole world was watching what happened in Romania,” Ion Nichita, spokesman for the Litoral travel network, said even before the most recent wave of violence. . . .

Yugoslavia’s well-developed tourist industry has benefited from new foreign investments spurred by reforms introduced last December by Prime Minister Ante Markovic.

Desimir Guzina, director of the federal Institute for Social Planning, boasts that 10,200 new firms opened in the first five months of this year, many with the aid of foreign partners. Encouraged by more lenient conditions for doing business, Western companies have concluded more contracts with Yugoslav firms in the last 18 months than over the previous 20 years.

“Faith is there with the foreign partners, although some reservations due to political conflicts are apparent in the amounts being invested,” Guzina said of the primarily small projects.

One has only to look at the relations among Yugoslavia’s six republics and two provinces to get nervous about the federation’s future. Differences between Slovenia, the richest republic, and Serbia, the largest, led to an economic boycott earlier this year that inflicted considerable damage on both sides. And smoldering ethnic hostilities in Kosovo, a predominantly ethnic Albanian province under Serbian rule, has Yugoslavs as well as foreigners watching warily for the next explosion of violence in the south.