Nicholas Watson in Belgrade -

It was a good week for the Serbian economy: a day after the prime minister attended a July 31 ceremony to break ground on a new $35m Cooper-Standard auto component plant, the deputy PM was shaking hands with the head of United Arab Emirates airline Etihad over a €40m deal that will save JAT Airways from the same fate as some of the region's now-defunct airlines.

The JAT deal is a particular coup for the coalition government and its largest member, the Serbian Progressive Party; the previous Democratic government made two unsuccessful attempts to sell the loss-making airline in 2008 and 2011, and with several other airlines in the region either bankrupt, most notably Hungary's Malev, or in danger of going that way, finding a saviour was a top priority.

The deal is essentially the same as that which saved another regional airline, Czech Airlines. To get around EU rules on ownership by foreign entities, Etihad will have only a 49% stake in the newly-christened Air Serbia, but have management control. James Hogan, head of Etihad, told reporters that Etihad will invest some €40m.

Deputy PM Aleksandar Vucic, the powerful head of the Progressives, boasted to bne in an exclusive interview that it was his strong personal relationship with UAE's prime minister, Sheikh Mohammed bin Rashid Al Maktoum, that finally secured the deal. "He is my friend, I met him in Scotland to seal the deal."

However, the fact Etihad chose JAT over other flag carriers in the region, notably that of new EU member Croatia, probably speaks more about how Serbia has regained its position as the top destination for foreign direct investment (FDI) after years in the wilderness following the wars that accompanied the breakup of the former Yugoslavia and the independence of Kosovo.

According to the United Nations Conference on Trade and Development's (UNCTAD) "World Investment Report 2013" released June 26, FDI into Serbia in the years 2007-2012 was $12.7bn, which is 25% of the total that flowed into the Western Balkans during those years. With $2.7bn in 2011, Serbia managed to outstrip any other Southeast European country in 2011 (except Turkey), including EU members Bulgaria and Romania.

That year saw the bulk of the €1.3bn investment from Italian carmaker Fiat in the rebuilding of the old Zastava plant in Kragujevac - a sector which accounts for the largest share, about 12%, of the nearly $25bn incoming investment since 2000. Fiat directly provides about 3,000 jobs in the ultra-modern plant that has the capacity to churn out 600 Fiat 500Ls a day. Though with the Serbia Investment and Export Promotion Agency (SIEPA) aiming to have 85% of components made locally, the number of associated jobs could dwarf that at around 10,000.

Fiat's gamble to move a big part of its production to Serbia was a combination of several factors: the wage differential, a workforce with a long history in the auto industry (at its peak in 1989, Zastava produced 181,000 of the Yugo cars), generous tax incentives (an investment of €9m that creates more than 100 jobs will mean 0% corporation tax for 10 years), and free trade agreements with both the EU and Russia. In April, PM Dacic said Russian President Vladimir Putin had promised to allow customs-free sale of 10,000 of cars made in Serbia, at a time when the Kremlin is putting pressure on car imports from other countries in a bid to protect and develop its domestic industry.

"Serbia has the unique position that not only is it now an EU accession country, but it also has free trade agreement with Russia - so the best of both worlds," says Bozidar Laganin, director of SIEPA.

Bumper harvests

The second largest recipient of FDI at 11.5% of the total is the food, beverage and agriculture sector. Serbia is still very much a farming country, where the 6m hectares of agricultural land produces around 25% of the country's exports worth €4.5bn and accounts for one-third of the labour force. Some estimates put the potential of the sector at nearer €12bn a year.

Qatar, UAE, Saudi Arabia and China have been big buyers of land directly, though the value-added food processing industry has attracted a number of big name investors, such as Agrokor, Rauch and Nestle, as well as the international brewers Heineken, InBev and Carlsberg.

Electrical and electronics is a growing source of employment. Panasonic, which has a plant 110 kilometres outside Belgrade that makes components for the lighting industry, set up there because of the experience the company had with workers from the former Yugoslavia in its German plants, who it found worked hard and spoke excellent English - a trait many investors cited as a reason for setting up there, as well as the recent political stability and relatively cheap workforce.

"Language is very important. I am ashamed when I compare the English ability of my German compatriots with those here in Serbia, and I put this down to the fact that Serbian TV is never dubbed, as it is in Germany," says Dirk Bantel, director of the plant, who is a German national.

This language ability has also given rise to a growing service industry of call and service centres. NCR, a US computer hardware and electronics company that provides products and services around the world, has established one its largest centres in Belgrade, where 700 people provide services over the phone in seven different European languages.

Ironically, the rise of this business has been put down partly to Serbia's relatively late arrival to the process of transition that had taken hold in the rest of Emerging Europe since the end of communism; the last remaining economic sanctions on Serbia were only lifted in 2008. "We were late to transition, which has created an opportunity as we will be a pocket of near-shoring for the next five to seven years," says Borsi Vujicic, chairman of the Belgrade-based outsourcing service company Trizma.

Bandel says the average net salary at his Panasonic plant is €280 per month, which even though it's far about the monthly €188 minimum wage in Serbia (even less than China's €200), it still offers a huge cost advantage to Germany, to where 100% of the components are shipped. This big wage differential goes a long way to explain why Serbian projects are among the most labour intensive in Europe, creating 132 jobs each on average, according to Ernst & Young in its "2013 European Attractiveness Survey" that was released in July.

Nevertheless, the Balkan wars cast a long shadow and Serbia is still, despite the recent advances, handicapped by a negative image around the world, which will take many more years to finally shake off. Just 1% of the investors in E&Y's survey picked Serbia as the most attractive FDI destination in Central and Eastern Europe, worse even than Turkey's 2%, yet in reality the country scooped up 13% of CEE's FDI projects in 2012.

"This glaring mismatch suggests these countries face perception problems among foreign investors," the report concludes. "The governments of Turkey and Serbia may need to do more to educate business leaders about the opportunities their countries offer."