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The Effects of Foreign Direct investment Flows in Developing Process of Countries of Western Balkan

TitleThe Effects of Foreign Direct investment Flows in Developing Process of Countries of Western Balkan
Publication TypeConference Paper
Year of Publication2013
AuthorsGanić, M
Conference NameThe 5th International Summit of Istanbul Economists - New Turkey’s Economic Vision In The Process of Global and Regional Change
Date PublishedNovember, 2013
Place PublishedIstanbul, Turkey

Following a period of isolation up to 1990-s, in an era of transition, WB countries faced tough challenge of achieving a market framework and integration their economies with the rest of the world. The early years of transition were characterized by decentralizing their economies and intensified efforts to attract Foreign Direct Investment (FDI). This issue is particularly important in terms of the global economic crisis, when FDI was recognized as one of the key generators of recovery of the economy of many countries. The paper examines the trends in FDI flows and its economic, social and environmental impacts in host countries.

Establishment of the legal, macroeconomic and institutional framework provide the necessary impetus towards FDI inflows also it is a necessary condition of development of industry and reintegration into global economic flows. Unfortunately, unlike the countries of Central and Eastern Europe, in terms of destination of FDI, WB is less targeted region. FDI inflows in the region of WB, neither in scope nor the structure was not sufficient for the restructuring of economic activities and increase export competitiveness. The entry of FDI in transition economies was caused primarily by the privatization process.

The purpose of this paper is to present a comparative analysis of the effects of FDI on economic development selected economies of WB region. Also it analyzes the ongoing trends in attracting FDI also it draws attention to their importance for the accelerated economic development in the future. In our analysis we use annually data series which are sourced from the following IMF databases: UNCTAD, World Bank, from the national central banks, their annual reports. The data covers the period between 2006-2011 and included 6 countries of Western Balkan (WB): Albania, Bosnia and Herzegovina, Croatia, Macedonia FYR, Montenegro, and Serbia.

The paper is divided into five sections. Section 2 analyzes the impact of capital account liberalization on the economy of WB countries, then following analyze position and characteristics of business environment and competitive position of selected economies. Section 4 gives an overview of the FDI inflows and and issues related to FDI attraction.
The findings and discussion presented in previous sections of this article ends with conclusions that greater inflow of FDI could affect the change in the structure of production and exports of WB countries, and thus to increase the competitiveness of domestic companies in foreign markets.

Full Text

Trends in international financial flows enable private companies access to international financial markets in order to collect additional resources need to operate internationally.
Growing freedom in trade in goods and services is closely linked to developments in the financial and capital markets. Such trends include one by one the countries that had a different form of economic organization. The transformation of the global economy is
accompanied with fundamental changes in the nature of economic policy in most countries.
This particularly applies to the WB countries. In recent decades, WB countries have begun the process of transition from one economic system to a market-oriented and are still in the midst of earlier stages of the model. However, the model of transition in those countries is different, with varying degrees of success and the many difficulties they face. These problems are the
lack of adequate economic structure, technological backwardness, high indebtedness, unemployment, lack of own financial resources, etc. Opening up to trade is important issue in small countries with closed economy.
Enhancing the integration and interdependence in a globalized economic environment with all the tough competition, it set new rules of positioning companies in the world market.
Instead of the traditional approach through various modalities of export business, investing in foreign countries has never been easier and it has proven to be the better option. Through FDI abroad enterprises disposition of its manufacturing systems and other business functions. Speaking of the main engine of world economy it can be mentioned that FDI function with trade function represents some sort of starting point for economic development. and as the main mechanism for the globalization of the world economy. Special interest in attracting FDI shows less developed countries, due to fact that inflow of FDI serves them as asource of as a source of investment funds and innovation.

Enhanced integration of world economic activity in a number of areas and interdependence of countries, the more severe criteria of competitiveness sought by companies to find efficient channels, which will allow them easier access to markets. Regional economic integration and FDI have positive mutually supportive effect, because foreign direct investment and endogenous growth correspond to fundamental changes in the world economy - economic integration (Gao, Ting, 2005: 158). The largest and most advanced integration in the world by the European Union (European Union) - the EU, and is one of the most important
destinations for FDI inflow, but also one of the largest investors abroad. For countries in transition, especially for those who are in the process of joining the European Union, particularly important issue is how to policy makers can initiate changes in order to
increase the country' s attraction for inward FDI.
Increasing the level of FDI flows is a a complex task where there are many factors should take into account. In recent years, there have been attempts to debate about this a dillema.
One of the main questions most of the economist have been dealing with the dilemma of the need for FDI inflow.
Creating of favorable investment climate for foreign investment is primarily focusing on political stability, impartial and efficient judiciary system, efficient public administration, ease of doing busines, the size of the tax burden, the level of education of the population and other factors. FDI is not just a transfer of financial capital, as it usually involves the transferring skills, knowledge, technologies but also management skills.
This affects the growth of employment, productivity and international competitiveness in“host” countries (which receive the FDI). Today, a significant portion of investment in world comes in many forms from multinational companies covering global markets, FDI results in an increase of trade and improving the balance of payments of host countries (OECD, 2002: 9-19).
On the other hand, there are worries in host countries that the presence of multinational companies can negatively affect domestic production in terms of monopolization of the domestic market, which is often technologically lagging and this gives multinational
companies an edge over host economies. Also, in some cases multinational companies do not use domestic resources for the procurement of raw materials, because it can provide the global market under favorable conditions. However, such a policy investors can positively affect the local economy, because it encourages rationalization of production and use of natural resources. Critics are also concerned about the possible negative effects of FDI in the host economy that are tied to the growth of the deficit in the payment balance, increase in unemployment rate due to layoffs, crowding out domestic investment, the creation of local monopolies, tax evasion etc.
II. The impact of capital account liberalization on the economy of Western Balkan countries
As the side effects of the process of globalization, liberalization of national financial systems, freedom of international capital flows and the internationalization of banks and companies have had to contribute to greater efficiency of the world economy and financial markets.
The topic of the capital account liberalization is considered often in connection with process of globalization. There are some basic facts that characterize the direction of economic trends in the WB and that they have a lot in common. Accordingly, it is important to understand that from the moment of independence these countries have chosen to become democratic societies followed by other advanced transition countries. All countries of the WB have accepted the market economy as the basic orientation and long-term perspective of their social and economic development. This fact-constant of the new economic reality in the WB countries represent as the most important link in the whole process of their further economic development. The second element that must be borne in mind are internal and external circumstances under which the successor states of former Yugoslavia begin with its own political independent life and a breaking with socialism looking for new alternatives in a market economy.

Impact of capital account liberalization on economic growth attracted the attention of many economists. First, because of the potential benefits in terms of improving the efficiency of developing countries and emerging markets, and secondly because of the mobility of capital flows from rich to poor countries.
Advantages of greater mobility of capital flows for the growth and modernisation of the WB region are clear. These are more efficient allocation of resources, including access to new sources of financing projects in poor countries with a low level of savings, opportunities for diversification of risks, and promote financial development. International trade has had little involvement in the system of centralized planning as opposed to market-oriented economies and developing countries. Therefore, these countries have been isolated from the international financial system.
One of the key aspect transition former Yugoslavia countries including Albania was to achieve macroeconomic stability in order to create environment in which their business operates and meet the challenges of environment and economic development.
Moreover, difficulties such as non convertible currency have imposed many limitations on local companies to deal with international transactions. After the collapse of the centralized planning system most transition economies has begun the process of removing restrictions on current account transactions. Furthemore, the majority of these countries have taken measures to liberalize financial flows as part of the development strategy. Over the transition period, a number of complex economic policy measures are conducted such as the liberalization of prices and trade, financial stabilization, establishment of currency convertibility, restructuring, and the development of an institutional and legal framework of a market economy.
Many of these activities are accompanied by the order of liberalization of the current and capital accounts of the balance of payments that easing restrictions on capital flows across a country’s borders enabled countries of WB gradual integration into the international trade and financial flows.
One of the main positive effects of liberalization comes from increased inflow of private (foreign) capital and foreign exchange reserves. By the same token, process of liberalization also had some negative consequences. The early years of transitions were characterized by public debt increases, trade deficit and increases of inflation rate. Table 1 gives a short overview of range of economic data over the period 2002-2012. Data in the table 1 represent a weighted average of the selected countries. According to these data, it is observed that among the countries of WB Montenegro recorded its highest-ever current account deficit in 2008 (49% of GDP) while Croatia recorded a lowest Current Account deficit of 0.14 percent of GDP. Therefore, fiscal consolidation is necessary in order to increase domestic saving and reduced the current account deficit.
Also it is supposed that fiscal efforts should be oriented by develop a sustainable fiscal situation. All WB economies experienced increased goverment debt in transition period that had relatively high ratios of debt to GDP. General government gross debt tradinionally had been high and remained in doble digits during transition period.
On cumulative basis, most noteworthy the pickup in investment rate as well as average rates of gross national savings was recorded in Croatia and Albania.