Foreign Direct Investment in the Western Balkans: What Role Has it Played During Transition?

Abstract

The paper explores the impact of foreign direct investment (FDI) on the economies of the Western Balkans during their transition to a market system. The paper recalls the political and historical circumstances that have delayed transition in the Western Balkans economies, and draws attention to the specific features of FDI that have influenced their economic development. The main hypotheses are formulated and basic tests performed on data from the manufacturing sector. However, data limitations mean that we can only test for horizontal, rather than vertical, spillovers and in practice we are not able to identify many significant horizontal spillover effects. This finding can probably be explained by various factors -institutional, economic, and political -that have constrained FDI effects in the Western Balkan economies in comparison to the Central East European countries. Our work has important policy implications; in order to accelerate economic development, Western Balkan policy makers may need to implement more effective economic policies. JEL codes: F23, F63, L53, P33

Firm productivity in the western Balkans: The impact of European Union membership and access to finance

“…Since Slovenia and a further eight Eastern European transitional economies acceded to the EU in 2004, followed by Bulgaria and Romania in 2007 and Croatia in 2013, the question has arisen whether the countries of the Western Balkans could be integrated more promptly. Barriers to membership remain within the Balkan five (Albania, Bosnia Herzegovina, Kosovo, Montenegro, and Serbia) and whilst this paper does not focus on foreign direct investment (FDI), there is empirical evidence that a negative attitude towards investing in the Balkans can be alleviated, to some degree, by EU membership (Estrin and Uvalic 2016). Other factors include the size of the economies and distance from investment hubs, but principally the paucity of institutional processes.…”

“…Furthermore, they had lower loan loss provisions and less reliance on equity, indicating a level of greater efficiency and strength in depth within the banking sector. Literature suggests that the predominance of foreign banks with enhanced credit scoring criteria, allied to the necessity to improve capital ratios at home, may be contributory factors, together with the underdevelopment of capital markets (Caviglia et al 2002;Thimann 2002;Volz 2010;Estrin and Uvalic 2016). There is little evidence of exploration of the relationship between the level of productivity, accession to EU membership, and access to finance, although work done suggests a reduction in productivity due to misallocation and credit constraint.…”

“…There is some evidence that the NMS are beginning to achieve convergence with the original EU 15, albeit that due to economic stagnation within the Eurozone this is proceeding at a comparatively slow pace (Havlik 2015). Equally, the EBRD 2016 believes that progress in the Balkans is being retarded as a result of financial imbalances, credit constraint, and a lack of FDI (see also Estrin and Uvalic 2016). The misallocation of capital may be an additional constraint (Gopinath et al 2015).…”

The effects of intercompany lending on the current account balances of selected economies in the Western Balkans

“…Since the potential for those is decreasing, it would be beneficial to promote greenfield investments. Furthermore, as noted by Estrin and Uvalic (2016), FDI in the region was mostly focused on the financial sector, and not enough in the manufacturing, which may be a reason why these countries still are not able to integrate better into the global market and benefit from the higher export potential. In addition to that, for the majority of these economies, full integration into the European Union would bring significant benefits.…”

Foreign Direct Investment in the Function of Economic Development - Example of Selected Countries in the Western Balkans

“…Investment opportunities, their tracking, and facilitating the exchange of goods and services will reduce transaction costs, which inevitably lead to economic growth [30], [31]. The requirement to attract foreign direct investment is becoming one of the key prerequisites for future economic growth, especially for the countries of South East Europe, which aim to become EU members [32], [33] and consequently we can say that FDI are considered as the driver of economic growth [34].…”