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FOREIGN DIRECT INVESTMENT IN THE FRAMEWORK OF CROSS-BORDER CO-OPERATION IN SELECTED BALKAN COUNTRIES TRAJKO SLAVESKI AND PECE NEDANOVSKI Faculty of Economics, St. Kyril and Methodius University F.Y.R. of Macedonia Introduction Due to certain historical and institutional factors in the past, there were significant obstacles to movement of capital to and from the Balkan economies. Balkan countries in transition faced shortage of capital at the early stages of transformation of their economic systems. Their enterprise sectors needed restructuring: financial, ownership, technological, etc., in order to be viable and ready to face the new challenges of market economy. Differences in attitudes towards FDI among countries in the region remain and are determined by various factors (cultural, ethnic, social, etc.). However, the more dynamic inflow of capital in the future is expected to reduce these differences. The goals of the paper are: · To elaborate the current and future tendencies in the capital movements in the selected Balkan countries. It is natural to believe that Albania, Bulgaria and FYR of Macedonia will be net recipients of capital inflows in the short and medium term. However, one should not neglect the increasing importance of joint ventures between firms from these countries, although this kind of crossborder investment is still insufficient to represent a more significant contribution to the overall economic activity in the respected countries. · On the other hand, Greece is the leading net capital exporter in the region. For instance, the share of Greek capital in the overall FDI in FYR of Macedonia is the highest at the moment, with prospects for further increase in the near future. As a member of the European Union, and the most developed country among those encompassed in the framework of the project, Greece seems to be the natural leader in strengthening the economic co-operation among the countries in the region. In this sense, it is interesting to estimate the potential role of Greece in the future process of crossborder cooperation, and with a help of this, the possible accession to the EU for FYR of Macedonia, Albania, and Bulgaria. Main Characteristics of the FDI in the Selected Balkan Countries (Albania, Bulgaria, FYR of Macedonia) FDI in the region of Southeast Europe Fundamental changes have taken place in virtually every country in Southeast Europe as reforms go forward. Despite this fact, the inflows of FDI are still comparatively low, even in the countries that have moved quickest on reforming their economies. Till the end of 1999 cumulative value of FDI inflows in the Southeast Europe 11 countries has reached nearly USD 45 billion (about USD 4 billion for 1999 alone). About 60% of this FDI account to Greece and Turkey. In comparison, the countries from Central Europe (Poland, Czech Republic and Hungary) have attracted more than USD 60 billion since the political and economic changes in the beginning of the 1990s. However, the governments in the SEE countries recognize the fact that the FDI are very important, and have created a favorable legal framework for attracting FDI. Table 1 below lists the main sectors with FDI potential among the Balkan countries. It shows that provided the two major things (among others) still missing at large in the region – political stability and lower corruption levels – the Balkan countries in transition have a right to be optimistic about their growth prospects in the future. Table 1. Sectors with substantial FDI for the analyzed Balkan countries FDI attractive sectors Sectors that have attracted substantial FDI for the past few years Black metallurgy FYR of Macedonia Machinery and equipment Bulgaria Power, gas and water supply Bulgaria Electronics Bulgaria Construction Albania Transport Albania, FYR of Macedonia Cement FYR of Macedonia, Bulgaria Furniture FYR of Macedonia Textiles and clothing FYR of Macedonia Food drinks and tobacco products FYR of Macedonia Trade Albania, FYR of Macedonia Tourism Albania, Bulgaria Services Albania IT & Telecommunications FYR of Macedonia Source: Investment Guide for Southeast Europe, Bulgaria Economic Forum, Sofia, September, 2000, p. 11. Table A1 in the Annex provides quantitative data on the cumulative total and per capita FDI inflows, as well as the share of FDI in the countries’ GDP in 1998 and 1999 in Albania, Bulgaria, and FYR of Macedonia. It can be seen that Bulgaria has been much more successful in attracting FDI compared to both FYR of Macedonia and Albania. This applies particularly to the period after 1996, when Bulgaria achieved macroeconomic stability by introducing a currency board, among other measures. Albania suffered form the instability created by the 1997 insurgency, and FYR of Macedonia has been cursed to suffer all the possible shocks in the region, including the notorious 1999 Kosovo crisis and its spillover on its own territory two years later. According to the EBRD, “Bulgaria, Croatia, the Czech Republic and the Slovak Republic registered their largest FDI inflows ever in 1999. Much of this increase has been attracted by progress in cash privatization, in particular in the banking and telecommunications sectors, by relatively favorable investment climates and by prospects of accession to the EU.” (EBRD 2000, p. 83). “The key issue of the post-privatization era will be how to attract FDI into greenfield ventures and into privately owned assets. While the attractiveness of existing industrial and commercial assets will depend on their valuation in secondary markets, foreign investors who consider greenfield investments need to take into account the cost of new plant and equipment, the business environment and market potential. Of particular importance is the security provided to investors by the existence of enforceable contracts, standardized product classification and business practices, and customs and other regulations designed to regulate commercial transactions. Moreover, the experience of the transition economies and other emerging markets shows that FDI tends to be closely linked to rising bilateral trade flows. In this respect, the prospect of stability resulting from the removal of barriers to market entry and integration into the European Union also helps to attract FDI.” (EBRD 2000, p. 74). A general conclusion could be drawn that so far there has not been a significant inflow of foreign capital in the selected Balkan countries, compared to the Central European countries (Hungary, Poland, and the Czech Republic), for example. Having in mind the population and territory, the global amount of the FDI are much less than in the other countries in transition. Some of the reasons for this situation are: · Stability (Or more precisely – instability in the region as a whole). The instability has got a very strong negative impact on the FDI. · Market size. The interest of the foreign investors during the last decade shifted from the search of lower costs (especially lower labor costs), towards the search of new (bigger) markets. No one can dispute the fact that size does matter. · Potential candidates for Mergers and acquisitions. During the last decade, the FDI came in the form of M&A, unlike before, when FDI were mostly in the form of green field investment. It seems that the potential of good enough companies for M&A in the selected Balkan countries is quite limited. · Internal factors: reforms. The reforms in these countries are lagging behind the same processes in the other countries in transition (for instance: Slovenia, the Czech Republic, Poland, Baltic Countries, etc.).
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