Foreign Direct Investments

The global expansion of market economies in recent decades, facilitated by the gradual removal of trade barriers and the free flow of goods, services, capital, and people, has resulted in a significant rise in foreign investments. The increased economic interconnectedness among nations, a direct consequence of globalization and the rapid growth in international trade and financial transactions, has sparked an active and continuous discussion on strategies to uphold and protect fundamental social rights within the supranational framework, particularly about safeguarding the rights of foreign investors. Foreign direct investment (FDI) is widely recognized as a primary approach to internationalizing businesses, although the ongoing process of globalization underscores the growing importance of domestic products and entrepreneurship. Research has increasingly supported innovation in enterprises due to its role in fostering economic growth, influencing international trade and market competition, bolstering infrastructure and production capacity, advancing human capital competencies, improving labor quality and employment conditions, and promoting green economy initiatives.

Countries worldwide engage in intense competition to attract investments from foreign nations and global corporations. Policymakers posit that FDI has the potential to bolster economic growth at a rapid pace through the infusion of fresh capital, the creation of new jobs, the introduction of new technologies, and the transfer of productive knowledge.[1] [2] The essence of FDI lies in its distinctive character compared to other types of capital investment, as shown in the nature and duration of the commitment it entails. FDI serves as a mechanism that empowers developing countries to bridge their objective and organizational deficiencies by ushering in novel managerial and technological practices. The FDI index holds a particular significance not only for developing nations but also for their developed counterparts. The merit of FDI lies in enabling developed nations to embark on enhancing opportunities in emerging markets, reaping augmented profits, nurturing partnerships, and elevating market influence while offering developing countries (including the Western Balkans) prospects for prosperity and advancement.[3] 

FDI Flows to the Balkans: Geographical and Sectoral Analysis

Over the past decade, the Western Balkans have attracted increasing FDI, but trends have varied by country and sector.[4]

Geographical Analysis:

• Montenegro leads in FDI inflows relative to GDP, reaching 14% in 2022, particularly driven by tourism, real estate, and financial services.
• Serbia follows closely, maintaining strong FDI inflows (7.25% of GDP in 2022) due to manufacturing and technology investment, supported by special economic zones (SEZs) and tax incentives.
• Kosovo and Albania have seen fluctuating FDI patterns, with Albania’s FDI inflows declining by 1% in 2022 despite strong interest in energy and infrastructure projects.
• North Macedonia and Bosnia and Herzegovina lag behind in attracting FDI due to political instability and weaker institutional frameworks.

Sectoral Analysis:

• Manufacturing and Automotive: Serbia has successfully attracted investment in automobile and industrial production, benefiting from foreign automotive giants like Fiat.
• Real Estate and Construction: Montenegro and Albania have received high FDI in real estate and tourism, with foreign investors purchasing coastal properties.
• Energy and Infrastructure: Renewable energy projects, including hydropower and solar energy investments, have gained momentum in Albania, North Macedonia, and Serbia.
• ICT and Financial Services: While the ICT sector has grown across the region, tech-related FDI remains low, highlighting a gap in digital investment and innovation.

Innovation

Since the very first studies on technological innovation, the central role played by the location and degree of spatial concentration of production activities has been unanimously recognized. In the classical Marshallian theory, the significance of spatial agglomeration of production endeavors in technological advancement is highlighted.[5] Western Balkans exhibit remarkable innovation capabilities within the global innovation.[6] The concept of National Innovation Systems (SIN) came to the forefront during the 1990s, presenting alternative interpretations to neoliberal perspectives on the processes of innovation. According to the key findings of the European Innovation Scoreboard (EIS) in 2023, the Western Balkans have been identified as Emerging Innovation nations exhibiting an overall performance lower than the average of the EU countries. The general results indicate that all the countries in the region, except for Serbia, lag behind the EU nations in terms of their innovation, connectivity, top R&D spenders, and the role of government procurement in driving innovation and research. Unfortunately, there is a lack of data available for Kosovo, and none of the Western Balkan countries provide detailed information on their Innovation profiles and innovation related to climate change.

Following is a summary of the most significant findings for the 6 Western Balkan countries in a vis-à-vis view with the EU:

• Albania, an Emerging Innovator country, demonstrates a performance level reaching 41.1% of the EU average. The country’s performance falls below that of other Emerging Innovators, with a growth rate lower than the EU’s at 8.5 percentage points. The widening performance gap between this country and the EU is notable. After a more moderate increase in 2019, a strong rise in 2020, a decrease in 2021, a slight rise in 2022, and a modest decline in 2023, culminating in a 17% performance boost. Key performance improvements were observed in Human resources, Research systems, and Environmental sustainability, while setbacks were noted in Innovators, Linkages, and Employment impacts. In comparison to the EU, Albania exhibits lower per capita income but boasts a rapidly expanding economy, with a larger proportion of turnover attributed to SMEs. FDI inflows contribute positively to the innovation ecosystem, while factors such as Entrepreneurial Activity, Top R&D spenders, and Buyer sophistication have a negative impact. Unfortunately, detailed information on Innovation profiles remains unavailable, and government procurement in this country lags behind the EU average as a driver of research and innovation.
• Bosnia and Herzegovina. Bosnia and Herzegovina exhibits a performance level equivalent to 36.2% of the EU average. The performance of this country falls below that of other Emerging Innovators, showing a declining trend that surpasses the rate of growth observed in the EU by 8.5%-points. As time progresses, the performance gap between Bosnia and Herzegovina and the EU continues to widen. In the analysis of the country’s Innovation performance, it was revealed that a decrease from 2016 to 2019, followed by significant advancements from 2020 to 2022 and marginal changes in 2023, resulted in an overall decline of 1% between 2016 and 2023. In terms of innovation dimensions, notable improvements were observed in Research systems, Digitalization, and Linkages, while a decline was noted in Finance and support as well as Intellectual assets. When compared to the EU, Bosnia and Herzegovina shows a lower per capita income but boasts a rapidly expanding economy. The manufacturing sector constitutes a larger portion of the economy, with Small and Medium Enterprises (SMEs) contributing significantly to the overall turnover. Foreign Direct Investment inflows have a positive impact on the innovation ecosystem, whereas factors such as Entrepreneurial Activity, Top R&D spenders, and Buyer sophistication have a negative influence. Unfortunately, detailed information on Innovation profiles for this country is currently unavailable, and the government’s procurement practices fall below the EU average in terms of driving research and innovation initiatives.
• Montenegro reports a performance level of 47.0% of the average seen in the European Union. The country’s performance falls below that of the Emerging Innovators. The rate of performance growth is slightly lower than that of the EU, standing at 8.5 percentage points. The disparity in performance between the country and the EU is on the rise. Initially, there was an upward trend in innovation performance, which was followed by a decline in 2018 and 2019. Subsequently, there was an increase from 2020 to 2022, but a decrease again in 2023, resulting in a significant 20% rise for that year. When examining the innovation dimensions in comparison to the country’s performance in 2016, there was a notable increase in performance for Human resources, Digitalization, Finance and support, Intellectual assets, Sales impacts, and Environmental sustainability. However, there was a decline in performance for Research systems and Linkages. In terms of innovation performance compared to the EU, Montenegro exhibits lower per capita income and a slower-growing economy. Business services represent a larger portion of the economy, with SMEs and large enterprises contributing a significant share of turnover. The lack of significant R&D investors has a detrimental impact on the innovation environment. Both top R&D investors and Buyer sophistication hurt the innovation climate. Montenegro has a higher percentage of non-innovators with the potential to innovate, as well as non-innovators lacking the inclination to innovate.
• North Macedonia. North Macedonia shows a performance level equivalent to 46.3% of the European Union’s average. This performance of the country falls below that of the Emerging Innovators cohort. The rate at which performance is increasing surpasses that of the EU by 8.5 percentage points. The disparity in performance between the country and the EU is gradually diminishing. The trajectory of innovation performance commenced an upward trend in 2017, gaining momentum in 2022 and 2023, resulting in an overall enhancement of 40% between 2016 and 2023. The country experienced the most significant performance improvement in dimensions such as Research systems, Linkages, Intellectual assets, and Environmental sustainability. However, there was a decline in performance in Finance and support, as well as Information technologies. In contrast to the EU, North Macedonia exhibits lower per capita income. The manufacturing sector holds a larger portion of the economy, with SMEs contributing a higher share of turnover. FDI inflows have a positive impact on the innovation environment, while factors like Entrepreneurial Activity, Top R&D spenders, and Buyer sophistication have a negative influence. Unfortunately, there is a lack of information available on Innovation profiles. Entrepreneurial training exceeds the EU average, whereas government procurement lags in driving research and innovation efforts.
• Serbia’s innovation performance stands at 63.2% of the EU average, surpassing the Emerging Innovators’ average. The country’s performance growth rate exceeds that of the EU by 8.5 percentage points. The performance gap between Serbia and the EU is narrowing. Innovation performance witnessed a significant increase from 2016 to 2022, followed by a decline in 2023, resulting in an overall improvement of 28% during the period from 2016 to 2023. Notably, the performance saw the most substantial growth in Research systems, Digitalization, Finance and support, Innovators, Linkages, and Employment impacts. Conversely, performance decreased in Information Technologies, Intellectual assets, and Environmental sustainability. In comparison to the EU, Serbia has a lower per capita income but a faster-growing economy. Manufacturing plays a more significant role in the economy, with SMEs contributing a larger share of turnover. Enterprise births and FDI net inflows positively impact the innovation environment, while top R&D spenders and Buyer sophistication have a negative effect. Serbia has a higher proportion of innovators who do not create innovations themselves and non-innovators lacking the inclination to innovate. Government procurement as a driver of research and innovation falls below the EU average.

Table 1 below shows the current stance of the FDI features in the Western Balkans.

Table 1: FDI stance in the Western Balkans

Note: * The most recent data refer to the 2022.

Source: The World Bank data, 2024.

Referring to Table 1, Montenegro leads the table, boasting a GDP growth rate of 6.4% and FDI net inflows of 14% in 2022, marking a 7% growth from 2019. The country shows a growth of 3% in foreign investment power from 2021 to 2022. Yet its investment power remains low at 0.82%. Serbia registers the second-highest score and advancement in terms of annual GDP growth (2.54%) and FDI inflows (7.25%), although the nation itself maintains a minimal foreign investment strategy, evidenced by FDI net outflows of 0.17%. Kosovo asserts the third position with an annual GDP growth of 5.21% and an FDI inflow of 8.12%, experiencing a growth of 3% from 2019 to 2022. Despite this, the country’s investment rate remains low, with FDI net outflows of 1.25%. Next to them stands Albania, which records an annual GDP growth of 4.8% and an FDI inflow of 7.619%. The country observes a 4% decline in annual GDP growth from 2021, the lowest in the region, along with a 1% decrease in FDI inflows compared to 2021. It is noteworthy that Albania demonstrates a higher level of foreign investment compared to other regional countries, with FDI net outflows at 1.01%. North Macedonia, on the other hand, highlights an annual GDP growth of 2.14%, marking a 3% decrease from 2019. The country sees a 2% increase in FDI inflows (6.25%), while maintaining a consistent proper investment power level compared to 2019, standing at 1.25%. Lastly, Bosnia and Herzegovina features a GDP annual growth rate of 4.1%, representing a 3% decrease from 2021. The nation has experienced a 1% growth in FDI inflows (3.25%) from 2019, yet exhibits a low investment rate, with FDI net outflows at 0.28%.

Table 2 below gives a view of the Enterprises Innovation Index as reported by the latest Eurostat data for 2019-2023.

Table 2: Innovation Index, ICT domestic enterprises and FDI data in the Western Balkans 2019-2023

Note: *No data available.

Source: Author’s elaboration on Eurostat data, 2024.

The data presented in the table indicate a marginal uptick in GDP growth in 2022 compared to 2019. However, the influence of Foreign Direct Investments on domestic ICT investments within the region does not appear to be significant. These outcomes align with the conclusions drawn by the European Commission (2023), which highlighted a substantial disparity in evidence supporting local ICT enterprises and investments when compared with the EU market.

The Relation between Places and FDIs

Referring to the Western Balkans region’s capacity to stimulate trade and attract FDI to a vast open regional market Krasniqi et al.[7] suggest that “agglomeration” supports trade and FDI through scale benefits, knowledge sharing, proximity effects, labor pooling, and linkages influencing business locations. These insights may offer valuable guidance for advancing the performance and productivity of domestic enterprises. The policies implemented by Serbia and North Macedonia have resulted in the creation of SEZs, providing companies with a host of benefits, including 0% value-added tax (VAT), 0% customs duties, 0% profit taxes, and various subsidies. The limited backward spillover in the form of knowledge transfers is observed among better-performing suppliers in high-technology industries, with a few isolated instances of successful cooperation and technology transfer between MNCs based in SEZs and local suppliers in the region.[8] To foster sustainable growth and revive the economies of regions post the COVID-19 recession, the authors suggest that policies aimed at attracting FDI must progress towards supporting linkages with domestic SMEs on a regional scale.

Researchers have observed that Serbia, Albania, and Montenegro emerge as the primary attractors of FDI in the Western Balkans, with North Macedonia occupying the least favorable position. The sectors that have garnered the highest FDI inflows encompass Financial and Insurance Activities, Real Estate Activities, Construction, Wholesale and Retail Trade, Repair of Motor Vehicles and Motorcycles, and Manufacturing. Given the critical importance of FDI for Western Balkans countries and the imperative to enhance economic performance, diminish the unemployment rate, alleviate poverty, address the escalating mass immigration, and bolster social well-being at large, it is imperative that the governments of these nations actively pursue policies, strategies, plans, and concrete measures aimed at fostering and safeguarding FDI.

Challenges in Attracting FDI: The Role of Regional Competition

Despite progress, several challenges hinder the Balkans from fully leveraging FDI potential:

1. Political and Regulatory Uncertainty – Frequent policy shifts, political instability, and inconsistent enforcement of regulations reduce investor confidence.
2. Limited Market Size and Workforce Constraints – Smaller economies and skilled labor shortages make the region less attractive compared to larger Central European markets.
3. Intra-Regional Competition – Countries like Serbia and North Macedonia compete aggressively for FDI using tax breaks, creating a “race to the bottom” effect.
4. Infrastructure Gaps – Outdated transport and energy infrastructure hinder efficient business operations.
5. Corruption and Bureaucracy – Slow administrative processes and corruption perceptions discourage long-term investment.

Future Directions for Investment in the Balkans

To enhance FDI inflows and economic growth, the Balkans should focus on:

• Enhancing Regional Cooperation: A unified market approach, similar to the EU’s single market model, can attract multinational investors.
• Diversifying Investment Targets: Moving beyond real estate and tourism to attract tech, green energy, and advanced manufacturing investments.
• Strengthening SEZ Effectiveness: Ensuring that tax incentives translate into long-term job creation and local business linkages rather than short-term capital inflows.
• Improving Governance and Institutional Reforms: Reducing bureaucratic hurdles and increasing transparency in investment policies.
• Investing in Human Capital: Developing STEM education and vocational training to attract high-value technology investments.

By focusing on regional integration, technology-driven investments, and policy stability, the Balkans can position themselves as an emerging European investment hub.

[1] Ezo Emako, Seid Nuru, and Mesfin Menza, “The effect of foreign direct investment on economic growth in developing countries,” Transnational Corporations Review 14, no. 4 (2022): 382–401. https://doi.org/10.1080/19186444.2022.2146967.

[2] Getoar LUBENIQI, “Foreign Direct Investments in Western Balkans: Are the Western Balkans Countries different?,” Quality – Access to Success 24, no. 195 (2023), https://doi.org/10.47750/qas/24.195.44.

[3] European Central Bank, “Foreign Direct Investment and its Drivers: A Global and EU Perspective,” June 26, 2018, http://www.ecb.europa.eu/press/economic-bulletin/articles/2018/html/ecb.ebart201804_01.en.html.

[4] The World Bank Data on FDI in the Western Balkans (2024).

[5] Alfred Marshall, Principles of Economics. Vol. 1. (Düsseldorf: Verlag Wirtschaft Und Finanzen, 1890).

[6] Riccardo Crescenzi, Fabrizio De Filippis, Mara Giua, Luca Salvatici, and Cristina Vaquero‐Piñeiro, “From local to global, and return: Geographical indications and FDI in Europe,” Papers in Regional Science 102, no. 5 (2023): 985–1006, https://doi.org/10.1111/pirs.12758.

[7] Besnik Krasniqi, Jasmina Ahmetbasić, and Will Bartlett, “Foreign Direct Investment and Backward Spillovers in the Western Balkans,” Southeastern Europe 46, no. 1 (2022): 1–22. https://doi.org/10.30965/18763332-46010001.

[8] Will Bartlett, Basnik Krasniqi, and Jasmina Ahmetbašić, “Attracting FDI to the Western Balkans: Special Economic Zones and Smart Specialisation Strategies,” Croatian Economic Survey 21, no. 2 (2019): 5–35. https://doi.org/10.15179/ces.21.2.1.