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Investing in FDI: How and Why do the Western Balkans Differ?

February 11, 2021

Investing in FDI: How and Why do the Western Balkans Differ?

February 11, 2021
Albana Shehaj in Tirana Observatory

What drives recent changes in the landscape of foreign direct investments (FDI) in Western Balkan states and what are the socioeconomic implications of such changes? The emerging economies of the Western Balkan countries (WB6) of Albania, Bosnia and Herzegovina (BiH), Montenegro, North Macedonia (NM), Kosovo, and Serbia have much to benefit from foreign direct investment (FDI). International flows serve as a catalyst for macro- and micro-economic growth: FDI generates capital inflow and allows host countries to expand their economies by opening their markets to higher volumes of international trade; it also stimulates domestic business competition, resulting in higher employment opportunities and growth in GDP per capita; FDI also precipitates technological shifts that call for employee training and transferable skills, ultimately contributing to the advancement of host-countries’ human capital.

Attracting greater investments from multinational enterprises (MNEs) can help the developing economies of the WB6 to instigate macroeconomic growth and ameliorate socioeconomic welfare—measures that offset the negative implications of declining GDP per capita and rising unemployment and poverty rates that currently mark the economic terrain of several WB countries. Currently, unemployment rates in the WB6 are higher than in other Balkan states and among the highest in Europe. Compared to Bulgaria and Croatia with respective unemployment rates of 3.85% and 7%, unemployment rates in year 2020 reached 12.8% in Albania and Serbia, 15% in Montenegro, 17% in NM, 18% in BiH, and approximately 25% in Kosovo[1]. This downturn has had a negative impact on poverty rates across the region, as the percentage of population living on less than $1.90 a day escalated in several WB countries in recent years[2]. Higher unemployment rates have also triggered higher emigration outflows, as WB citizens seek economic refuge in Western Europe – a phenomenon that exacerbates the region’s demographic problem and depletes the workforce needed to boost the WB6 economies[3].

Inducing greater FDI further enables the lagging WB economies to catch up with the better-performing ones, allowing them to revive their economic pulse in ways that recapture and surpass their own post-socialist economic peaks. Current GDP per capita growth rates vary across the region: Albania, BiH, and Montenegro note a decline since 2018; Serbia and Kosovo have reached a plateau; and NM’s economy has grown relative to previous years (Figure 3). These statistics are less optimistic when assessed from a comparative perspective: even in periods of economic growth, current GDP per capita rates in several WB countries are lower than those from a decade ago. To illustrate, over the last 12 years, the annual percentage of growth rate in GDP per capita in Albania has dropped to approximately a third of the country’s 2008 growth rate of 8.3%. While the country’s economy was able to grow from 1.2% in 2013 to 4.3% in 2018, its current 2.7 percentile growth rate is only a third of the 8.3% growth rate in 2008 and is approximately 37% lower than the 4.2% growth rate that Albania reached in 2010 despite the 2008 economic crisis.

The region’s current socioeconomic conditions provide an impetus for WB governments to induce greater foreign investment as a mechanism for fostering economic development. However, regardless of common incentives to attract greater inward FDI, the WB6 governments vary in their capacity to effectively do so. This variation is driven by individual country factors owing to policy reforms to incentivize FDI, economic growth potential, and institutional measures that ensure accountability and the protection of investor rights.

Investing in FDI: Policy Measures

Recognizing the potential economic advantages of FDI, the WB6 governments have undertaken a series of policy measures, spanning the scope of business, fiscal, and legislative reforms, to establish investor rights that incentivize greater capital inflows. To this end, the Serbian government has boosted the country’s business climate by implementing legislative measures to reform the country’s labor law, privatization, and public procurement practices—efforts that helped Serbia improve its Greenfield FDI Performance Index to 11.92 in 2019, ranking it first in the list of countries most accommodating to foreign investment. Similarly, Montenegro has enacted several legislative reforms to liberalize the country’s FDI structure. Most notably, the Foreign Investment Law, implemented in 2011, annihilated investment constraints, waved customs duties, and granted foreign investors the right to repatriate profits and dividends as well as equal treatment to domestic firms. The establishment of the Montenegrin Investment Agency (MIA) and the Law on Public Private Partnerships further institutionalized these efforts, allowing Montenegro to increase its net FDI inflows to 700 million USD by year 2015[4]. Montenegro ranked second to Serbia with an 11.49 FDI Performance Index in 2019.

Similar measures undertaken elsewhere in the region yield more nuanced results, as the WB6 show within- and cross-country variation in the magnitude and frequency of FDI inflows. Several WB countries, including Albania, BiH, and Kosovo show incremental growth in yearly FDI net flows, yet these resources constitute a relatively small percentage of their GDP—especially when compared to the region’s other economies. For instance, the Albanian government has proactively sought to integrate its economy into the larger international structure by entering conventions for investment protection with a growing number of countries across the EU, China, and the US. Other initiatives to accommodate greater inward FDI include the ratification of the Investment Charter, policies that safeguard the equal protection of foreign investors, and tax measures, such as the VAT exemption for international exports. These measures have helped increase Albania’s net FDI inflows to 1.2 billion USD by year 2019. However, Albania’s current FDI inflow is lower than the country’s 1.3 billion inward FDI in year 2013 and compares to approximately 29% of the 4.2 billion in net FDI inflows that Serbia was able to attract in year 2019. Therefore, the temporal trend that emerges is that while Serbia’s net FDI as a percentage of GDP has steadily increased since 2012, Albania’s has been more volatile and declining since 2013. Albania’s current FDI inflows comprise 7.9% of the country’s GDP relative to the 11.1% in 2009. Figure 1 depicts the diverging trends in FDI inflows as a percentage of GDP in Albania and Serbia from 2006 to 2019.

About the Author

Albana Shehaj

Albana Shehaj

Program Manager

Albana Shehaj is the program manager at the Minda de Gunzburg Center for European Studies (CES). A political scientist by training, Shehaj specializes in international political economy, artificial intelligence, and democratic developments ...