The aspiring EU members of Southeast Europe are struggling to attract foreign direct investment (FDI), with only Albania and Serbia reporting a significant increase above 2010 levels as of 2016, finds a new report from the United Nations Conference on Trade and Development (UNCTAD).
The study looks at progress in the Western Balkans 6 countries plus Moldova towards the goals set in the SEE Strategy 2020, which envisaged a 103% increase in FDI to the region above the 2010 level by the end of the decade.
Slightly over halfway towards this date, however, “progress has been limited”, the report says, with an average increase of just 27% recorded as of 2016, a year that saw a slight y/y decline in FDI inflows.
Overall, “inflows to the region have partially recovered from the postcrisis low of $3.8bn in 2012, but they remain far from the peak of $8.7bn in 2008,” according to UNCTAD.
It also reveals significant differences between countries, with only Albania surpassing pre-crisis annual volumes of investment in 2016. Both Albania and Serbia have seen investment rally above the 2010 level recently, while in Bosnia & Herzegovina, Montenegro, Moldova and Kosovo, FDI inflows in 2016 were below the Strategy 2020 base year of 2010.
The report also points out that the region has performed poorly compared to its regional peers. “The decline in FDI inflows experienced by the SEE region between the periods 2007–2011 and 2012–2016 has been markedly stronger than the decrease seen in transition economies (excluding SEE), and in the EU, in both absolute and relative terms,” it says.
In 2016, global flows of FDI declined by 2%, while the decline in the seven SEE countries was considerably higher at 5%.
FDI into the region also remains concentrated in the financial services sector despite what UNCTAD says is “significant potential” in manufacturing. “With its competitive labour costs and proximity to European and emerging markets in Asia and North Africa, the region is strategically placed to attract efficiency-seeking FDI in the manufacturing export sectors and their value chains,” says the report. “This includes the automotive sector, in which cars have been produced since the 1950s.”
Despite drawbacks such as its small and fragmented markets, the region has other advantages such as a combined market size of 21mn people, a young workforce and economies that are either EU candidate countries or potential countries.
In terms of policy, UNCTAD also points to “significant progress in investment policy reform across the region and the end of a harmful fiscal race”.
Still, further progress is needed if the 2020 Strategy goals are to be met, for example in easing restrictions on trade and improving regional cooperation.
“Enhanced regional cooperation is of crucial importance to enhance FDI in Southeast Europe as we aim to guide the region to meet the strategic needs of investors and avoid the race to the bottom,” commented Goran Svilanović, secretary general of the Regional Cooperation Council (RCC).
Another proposal from UNCTAD is the creation of a regional investment promotion platform. “Taking a regional approach to investment attraction makes sense,” said James Zhan, senior director of investment and enterprise at UNCTAD. “Multinational firms and investors operate and invest regionally, based on strategic decisions about market size, regional production networks and infrastructure links.”
Rather than see FDI attraction as a zero-sum game, economies can benefit by pooling resources and offering a joint value proposition to investors, Zhan added.