Foreign direct investment in the Balkans: recent trends and prospects

Abstract

A strong upward trend in foreign direct investment inflows is among the most remarkable recent developments in the Balkans—a process that is being led by the private sector in the face of ostensibly insurmountable barriers. External official inputs have contributed little to the trend of improvement, beyond the provision, arguably, of the most basic conditions. Private business does not operate in a political and social vacuum. But it is striking that the upsurge in foreign private sector involvement has been based on only a few minimal conditions—the restoration of peace and basic security, the beginnings of economic recovery and modest improvement in business environments. Medium‐term forecasts suggest that the buoyant FDI trend is likely to be sustained.

Notes

Much of the data and specific research results cited in this article are from the Economist Intelligence Unit. All the opinions expressed and interpretations in this article are, unless otherwise indicated, exclusively those of the author.

Much of the continuing pessimism about the region tends to be spread by high‐profile and politically well‐connected international NGOs. To a certain extent, organisations active in the region such as the Berlin‐based European Stability Initiative and especially the ultra‐interventionists of the International Crisis Group, have an institutional self‐interest, reinforced by strong ideological proclivities, in cultivating a climate of crisis and negativity to promote the view that that there is a need for continued external official intervention and tutelage.

Albania is an exception as its officially recorded GDP in 2004 was more than one third above the 1989 level. This implies a growth rate over the past 15 years that was even stronger than the leading reformist countries of Central Europe. Although Albania also has by far the weakest official statistics in the region, there is little reason to doubt that output has now surpassed its low 1989 transition starting level. Romania, after very strong growth in 2004, is estimated to have just reached its 1989 output level.

After some delay, the recent success of the Balkans in attracting FDI is appearing on official radar screens. For example, the Austrian Chancellor Wolfgang Schuessel told the EU‐US summit held in Brussels on 22 February 2005 that recent successes in the region, which he largely attributed to Euroatlantic cooperation, were illustrated by the fact that foreign direct investment had grown to ‘over $30 billion’. Speaking to the press afterwards, Schuessel noted that President George W. Bush and British Prime Minister Tony Blair were especially interested in the investment figures (‘Europeans hail EU‐US record in the Balkans’, RFE/RL Newsline 9(37), Part II, 25 February 2005).

See Bastian (2004), whose article, published recently in this journal, represents the most comprehensive and detailed survey and analysis to date of the fascinating story of the penetration of the Balkans by Greek capital. Bastian’s estimate of the stock of Greek capital in the region, which is also consistent with some other estimates, appears plausible, although it is far larger than is attributed to Greek investors by national statistics on the origin of FDI in the various Balkan countries. One important reason for this is that much of Greek capital is registered in other countries (and appears as such in official Balkan countries’ statistics).

Most FDI, even in Romania—the leading recipient country in the Balkans—is still privatisation‐related, although there has been a gradual pick‐up in greenfield investments. This is especially the case in Transylvania, which has been attracting considerable greenfield projects. Much of this is in low‐skill industries such as textiles, but there has also been investment in the electronics, automotive and software industries. The Romanian car parts industry, in particular, has experienced rapid growth in recent years; foreign companies have invested more than US$600 million in production plants in the country. The prospects for the further expansion of the industry are good and Romania has the potential to emulate the success of Central European countries such as Hungary, Slovakia and the Czech Republic, which have established successful car parts sectors supplying large manufacturers that have assembly plants in the region or in Western Europe. Indeed, some Western car parts producers have re‐located to Romania from other locations in Eastern Europe as labour costs in those countries that have already joined the EU have risen.

This also followed the acquisition by the Greek Piraeus bank of the smaller Atlas Banka. With the privatisation of Yubanka and Delta Banka, the share of banking assets still in state hands has declined from some 44 per cent at the end of 2004 to about 30 per cent. Among the eight new foreign banks currently operating in Serbia, four are from Greece (NBG, Alpha Bank, EFG Eurobank and Piraeus Bank). Three of these banks have made outright acquisitions in Serbia during the past seven months (see ‘Alpha Bank’, Southeastern Europe Economic Update, 28 February 2005).

A recent study by Brada et al. (2004) attributes high significance to the impact of past political instability on FDI in the region, and also points to considerable FDI catch‐up potential as the situation stabilises.

Indeed, the increasingly widespread view that Kosovo cannot experience economic improvement in any way, and that it is destined to hover on the edge of a precipice unless the political status issue is resolved—invariably now used as code for the solution of outright independence—gives the province’s independence‐minded ethnic Albanian political elite an in‐built incentive to do little or nothing to try to improve economic conditions.

Contrary to frequent assertions, Serbia’s unresolved political status issues need not inevitably hold back the country’s economic development. There are countries with longstanding disputes and unresolved status issues, such as South Korea, Taiwan, southern Cyprus and Israel, that have been among the most successful economies in the world in recent decades and developed superior business environments.