4. Investment policy and promotion (Dimension 1)
Providing investors with a sound regulatory environment, clear non-discriminatory policies, strong implementing institutions and more opportunities for public procurement projects can have a beneficial impact on the volume and quality of foreign investment, in turn creating more employment opportunities, boosting growth, and encouraging technology transfers. This chapter, divided into three sub-dimensions, analyses the extent to which Western Balkan governments have established favourable investment climates that support steady economic growth and sustainable development. The first sub-dimension, the investment policy framework, assesses the breadth and depth of investment policies, notably the regulatory environment of host economies and the protection that it provides to investors – including intellectual property protection – as well as its consistent treatment of both domestic and foreign investors. The second sub-dimension, investment promotion and facilitation, examines the strategies, services, and institutions in place to promote and facilitate investment before, during and after establishment. The third, new, sub-dimension, investment for green growth, reviews strategies to promote investment in renewable energy and energy efficiency projects, and their facilitation through public and private partnerships.
The markets in all WB6 economies are open to FDI and regulatory environments for investment are sound. While there are few sectors closed to foreign investors, most frameworks remain complex and problematic for investors to navigate due to overlapping laws and institutional mandates.
Foreign investors in all WB6 economies have the same rights and remedies before national court systems as domestic investors. All the economies, except Albania, Kosovo and North Macedonia, have dedicated commercial courts that have first instance jurisdiction over commercial matters. However, commercial disputes are costly and lengthy in most economies and enforcing contracts is problematic, except in Montenegro and North Macedonia.
Alternative dispute mechanisms are offered in all economies and some have updated their mediation legislation. However, public awareness, familiarity with and use of dispute resolution tools remain low in all economies except Montenegro.
All economies have sound intellectual property (IP) rights laws and regulations. Albania, Montenegro, North Macedonia and Serbia have made progress in reinforcing the capacities and resources of their authorities in charge of IP rights. However, the relevant authorities in Bosnia and Herzegovina and Kosovo continue to lack resources and inter-institutional co-operation.
Each of the six economies has a well-established investment promotion agency (IPA), a clearly defined institutional framework and a strategy in place for investment promotion and facilitation, though Bosnia and Herzegovina lack the latter two elements. However, the resources and capacities of all IPAs, with the exception of Albania and Serbia, remain insufficient, making it challenging to fulfil their mandates efficiently.
Albania, Montenegro, North Macedonia and Serbia have put in place complex and multi-layered investment incentive schemes. Those in Bosnia and Herzegovina are implemented at the entity level with little state oversight. The mandates of all IPAs include aftercare services with dedicated aftercare units or strategies, including Montenegro’s IPA which is currently being established.
Almost all economies (except Kosovo) have adopted various policies and mechanisms to encourage green investment and private sector participation in green infrastructure. Some economies, like Albania and Montenegro, have developed concrete programmes to encourage and facilitate green investment initiatives.
Since the last assessment, almost all economies have increased their scores in both the investment policy and investment promotion and facilitation sub-dimensions. However, the WB6 average remains almost unchanged due to differences in the assessment framework: the scores of the new sub-dimension on green investment lower the average by 0.3 points compared to the scores for the first and second sub-dimensions.
Note: Scores for 2021 are not directly comparable to the 2018 scores due to the addition/removal of relevant qualitative indicators. Therefore, changes in the scores may reflect the change in methodology more than actual changes to policy. The reader should focus on the narrative parts of the report to compare performance over time. See the Methodology chapter for information on the assessment methodology.
Foreign direct investment (FDI) is a crucial component for promoting international economic integration. It can provide economies with financial stability, encourage economic development and enhance the well-being of societies. With the right policy framework, FDI can not only help increase economic competitiveness and create jobs, but also bring further benefits, such as technology and skills transfers, increased innovation and exports, and support the transition towards green growth. Non-discriminatory principles, limited barriers to investment, property rights protection and strong mechanisms for settling investment disputes underpin a quality investment environment. Meanwhile, continuous efforts to promote and facilitate investment can enable investors to establish or expand their activities with ease and thus contribute to a hospitable investment environment. While the WB6 economies have seen a surge in FDI over the last decade, the COVID-19 pandemic has limited the region’s steady progress towards becoming a strong investment destination. The pandemic has had detrimental consequences for the region, including deep contractions in economic activity, steep increases in unemployment, and severe repercussions for small and medium-sized enterprises (SMEs). Although public investment has increased in some economies due to policy support packages to stimulate the economy, private investment has plummeted, putting an end to the region’s upturn. In the months following the pandemic, the six Western Balkan economies will need to turn their attention to policies to mobilise support for existing foreign investors, promote strategic sectors catering to economic and technological development, and leverage investor networks and investment promotion agencies to protect global value chains (OECD, 2020[1]).
Creating sound legislation and strategies to promote the attractiveness of the WB6 economies as investment destinations can stimulate the region’s overall economic growth and development, encourage further market integration efforts, and support a sustainable and resilient recovery from the COVID-19 crisis. To this end, WB6 governments need to establish a fair, transparent, and predictable regulatory framework for investment. The Competitiveness Outlook’s investment policy and promotion dimension assesses the quality and predictability of the WB6 investment climates, including their legal frameworks, judicial systems, investor rights and protection, as well as activities to make them more conducive for strategic and targeted investment projects.
Building a favourable climate for investment requires a whole-of-government approach. Although almost all policy areas analysed in the Competitiveness Outlook play a role in contributing to a hospitable investment landscape for foreign investors, the following dimensions are particularly important to the investment policy and promotion dimension:
Chapter 5. Trade and investment relationships are at the core of globalisation and are vital for facilitating the cross-border transfer of goods, services and capital. Enterprises combine trade with investment to ensure global value chain (GVC) performance and to organise the supply of inputs, expand to new markets, access knowledge, and provide services to consumers.
Chapter 6. Access to finance in the long term is crucial for infrastructure investments; public-private partnerships play an important role in facilitating foreign investment projects where public investment cannot meet the needs of the economy.
Chapter 7. Tax policy is often used as an incentivising tool for investors through which host governments can create a competitive advantage for their economies. However, tax policies must balance the need for foreign investment with collecting appropriate tax revenue from multinational enterprises (MNEs).
Chapter 8. Competition policy can improve the fairness and efficiency of markets, thus contributing to a more attractive environment for investors. It also plays a role in minimising exceptions to national treatment and in ensuring equal treatment between domestic and foreign investors.
Chapter 9. State-owned enterprises and their corporate governance play a large part in investor confidence, as does treatment of private investors in relation to public enterprises, where fair dispute settlement and upheld legal frameworks can encourage investment.
Chapter 10. Education policy helps provide investors with access to a highly qualified workforce and adequate skills and abilities, especially for MNEs operating in science, finance or R&D, as well as for staff training in the production and manufacturing sectors.
Chapter 12. Science, technology and innovation relies on a dependable intellectual property legal framework which can protect individuals and businesses and enable technology transfers for investors interested in innovative SMEs and entrepreneurs.
Chapter 15 and 16. Energy and environment policies play a key role in creating a hospitable environment for green investment. Strong environmentally conscious legislation and strategies to cut carbon emissions and focus on renewable energy and energy efficiency solutions can create profitable green project opportunities for investors.
Chapter 19. Anti-corruption policy plays a key role in investor confidence by ensuring a sound, reliable and fair justice system that investors can depend on when it comes to commercial matters and enforcing contractual rights.
Structure
This chapter assesses policies to improve the investment policy and promotion in the WB6 through the three main sub-dimensions and one cross-cutting sub-dimension:
1. Sub-dimension 1.1: Investment policy framework. To what extent have the economies designed and implemented sound legal frameworks for investors; are the economies open to FDI; and how does the legal framework for investment protect investors, including their intellectual property rights regime?
2. Sub-dimension 1.2: Investment promotion and facilitation. What is the institutional framework to attract and facilitate inward investment, including strategies and investment promotion activities, measures to facilitate investments and expansions, and the promotion of business linkages?
3. Sub-dimension 1.3: Investment for green growth. Are the WB6 developing favourable and specific frameworks that encourage green investment, and are they encouraging private procurement partnerships for green investment projects, including in infrastructure?
Figure 4.2 shows how the sub-dimensions and their constituent indicators make up the investment policy and promotion assessment framework. Each sub-dimension is assessed through quantitative and/or qualitative information which the OECD collected with the support of the WB6 governments and their statistical offices. Qualitative indicators are based on the OECD’s Policy Framework for Investment (OECD, 2015[2]). They have been scored in ascending order on a scale of 0 to 5. The statutory restrictions assessed for the foreign direct investment indicator are based on the OECD FDI Regulatory Restrictiveness Index (Box 4.1).
The OECD FDI Regulatory Restrictiveness Index seeks to gauge the restrictiveness of an economy’s FDI rules. The FDI Index is currently available for more than 60 economies, including all OECD and G20 members, allowing FDI policies to be compared and potential areas for reform identified. It is commonly used on a stand-alone basis to assess the restrictiveness of FDI policies when reviewing candidates for OECD accession and in OECD Investment Policy Reviews, including reviews of new adherent economies to the OECD Declaration on International Investment and Multinational Enterprises. The index does not provide a full measure of an economy’s investment climate as it does not score the actual implementation of formal restrictions and does not take into account other aspects of the investment regulatory framework, such as the extent of state ownership, and other institutional and informal restrictions which may also impinge on the FDI climate. Nonetheless, FDI rules are a critical determinant of an economy’s attractiveness to foreign investors; and the index, used in combination with other indicators measuring the various aspects of the FDI climate, may help to explain variations among economies in attracting FDI.
The FDI Index covers 22 sectors, including agriculture, mining, electricity, manufacturing, and the main services (transport, construction, distribution, communications, real estate, financial and professional services). For each sector, the scoring is based on the following elements:
the screening and approval procedures applied to inward foreign direct investment
other restrictions such as on land ownership, corporate organisation (e.g. branching).
Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is the average of the 22 individual sectoral scores. The discriminatory nature of measures, i.e. when they only apply to foreign investors, is the central criterion for scoring a measure. State ownership and state monopolies, to the extent they are not discriminatory towards foreigners, are not scored. For OECD and non-OECD member adherents to the OECD Declaration on International Investment and Multinational Enterprises, the measures taken into account by the index are limited to statutory regulatory restrictions on FDI, as reflected in their list of exceptions to national treatment and measures notified for transparency under OECD instruments, without assessing their actual enforcement. For non-OECD economies, information is collected through Investment Policy Reviews or, when not in the review process, through a dedicated questionnaire. Regulatory information is updated on a yearly basis following the monitoring of investment measures carried in the context of OECD Freedom of Investment Forum for participating economies, and on the basis of ad-hoc monitoring for the remaining ones.
Source: (Kalinova, 2010[3]), OECD's FDI Restrictiveness Index: 2010 Update, www.oecd.org/daf/inv/investment-policy/WP-2010_3.pdf. For the latest scores, see: www.oecd.org/investment/index.
The assessment was carried out by collecting qualitative data with the help of questionnaires filled out by governments, as well as face-to-face interviews undertaken with relevant non-government stakeholders. Alongside these qualitative inputs, quantitative data on certain indicators – provided by the economies’ statistical offices, relevant ministries and agencies, and other databases – formed an integral part of this assessment. For more details on the methodology underpinning this assessment please refer to the Methodology and assessment process chapter.
The leaders of the WB6 endorsed the Common Regional Market (CRM) 2021-2024 Action Plan (AP) at the Berlin Process Summit held on 10 November 2020 in Sofia. The action plan is made up of targeted actions in four key areas: 1) regional trade; 2) regional investment; 3) regional digital; and 4) regional industrial and innovation (Regional Cooperation Council, 2021[4]).
In the regional investment area, the WB6 economies commit to greater regional alignment of investment policies and better co-ordinated investment promotion by removing existing barriers to regional investment, conducting regional investment promotion campaigns, developing regional guidance criteria for screening mechanisms, attracting investment in sustainable regional value chains, and concluding economy-specific international investment agreements (IIAs) with the EU.
The regional investment area section of the CRM 2021-24 AP includes the following three components: 1) regional investment promotion; 2) regional investment policy reforms; and 3) regional investment retention and expansion. The findings of the investment promotion and facilitation sub-dimension can inform the implementation of actions under this component (Box 4.4).
Key methodological changes to the assessment framework
Since the 2018 edition of the Competitiveness Outlook, Investment for green growth (Sub-dimension 1.3) has been added. In addition, the court system analysis under Investment policy (Sub-dimension 1.1) has been broken down into investor protection against expropriation and alternative dispute resolution. Under Investment promotion and facilitation (Sub-dimension 1.2), the strategy and institutional framework for investment promotion and facilitation has been split into investment promotion agency structure and strategy as well as investment facilitation services and strategy, to better map the investment promotion agencies in the WB6 region and benchmark them against OECD economies. Furthermore, the starting a business and FDI-SME linkages indicators have been absorbed into existing indicators under Investment promotion and facilitation (Sub-dimension 1.2).
After a steady decrease in global FDI flows over the last decade, COVID-19 shrunk investment circulation to 1% of world GDP in 2020, the lowest levels since 1999 (OECD, 2021[5]). The pandemic hit the WB6 in the midst of an economic upturn after several years of sizable investments that provided economic growth, lowered unemployment, and boosted innovation and technological development. COVID-19 caused a deceleration of both public and private investment as the region’s high concentration and composition of FDI created vulnerability.
FDI fell globally by 38% in 2020, from USD 1.37 trillion in 2019 to an estimated USD 846 billion, according to the OECD FDI in Figures Report (OECD, 2021[5]). While the global economic outlook is positive, with the OECD expecting an estimated 5.8% growth, according to UNCTAD, as of January 2021, FDI flows are expected to fall further, by 5-10%, in 2021 (UNCTAD, 2020[6]). The Western Balkans have seen a less severe drop of FDI inflows during the first half of 2020 than at the global level. FDI relative to GDP remained stable in Albania and Bosnia and Herzegovina, and increased in Montenegro (European Commission, 2020[7]).
Prior to the COVID-19 pandemic, WB6 economies attracted USD 6 billion of foreign investment annually over 2015-19. This was up from the USD 5.1 billion attracted over 2010-14, with FDI in the region increasing by 4.6% a year over 2010-19 (Figure 4.3). Serbia continues to account for more than half of the region’s FDI each year, given its relatively large economy, reaching 59% of the region’s FDI inflows in 2019. In relative terms, Albania and Montenegro have been the leading economies for FDI inflows measured as a percentage of GDP, whereas the lowest ratios in 2019 (and in 2017) remain in Bosnia and Herzegovina (2.7%) and North Macedonia (2.9%) (Figure 4.4).
Source: (UNCTAD, 2020[6]). UNCTAD, World Investment Report 2020: International Production Beyond the Pandemic, https://unctad.org/system/files/official-document/wir2020_en.pdf.
Note: CEEC 11 – Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia
Source: (UNCTAD, 2020[6]), World Investment Report 2020 International Production Beyond the Pandemic, https://unctad.org/system/files/official-document/wir2020_en.pdf.
FDI stocks represented over 45% of GDP in the six economies in 2019, reflecting the important role FDI plays in the WB6 (Figure 4.5). Compared to the EU and to the peer economies of Croatia and Slovenia, FDI as a proportion of GDP is higher in Montenegro (104%) and Serbia (82%) and slightly below the EU (but higher than Croatia and Slovenia) in Albania (57%), Kosovo (53%) and North Macedonia (51%). Bosnia and Herzegovina has the lowest FDI stock-to-GDP ratio among the WB6 economies (45%), but is still higher than Slovenia. In comparison to the last assessment, FDI as a percentage of GDP remains largely the same in the WB6 economies, with the exception of Albania, where the FDI stock-to-GDP ratio increased by 16%.
Note: Data for Kosovo are from 2018. CEEC 11 – Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia.
Source: (UNCTAD, 2020[6]), World Investment Report 2020 International Production Beyond the Pandemic, https://unctad.org/system/files/official-document/wir2020_en.pdf; IMF statistics for Kosovo; (OECD, 2019[8]) OECD International Direct Investment Statistics 2019, https://doi.org/10.1787/g2g9fb42-en.
FDI in the region is largely dominated by EU companies, accounting for 65.5% of total WB6 FDI stock in 2018 (European Commission, 2020[9]). For the past two decades, foreign investment in the WB6 economies has primarily originated from Western Europe (Austria, France, Germany, Italy, the Netherlands, and Switzerland) and the Russian Federation (Table 4.2). Investment in the region also comes from neighbouring economies such as Croatia, Cyprus, Greece, Slovenia, and Turkey, as well as the United Arab Emirates and Canada. It is also worth noting that Serbia is an important investor in the region, accounting for 14% of the FDI stock in Bosnia and Herzegovina and 5% of FDI stock in Montenegro in 2018. China is increasingly investing in the region, initially focusing on Serbia, as part of its Belt and Road Initiative (BRI).
The sectoral distribution of FDI varies across the WB6 economies. In Albania, FDIs are concentrated in the energy sector, extractive industries, financial and insurance activities, utilities and real estate. In Bosnia and Herzegovina, manufacturing (34% of total FDI stock), and banking (25%) are the largest beneficiaries of FDI, followed by telecommunications and trade (12% each) and by the tourism sector. In Kosovo, real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy, while food, information and technology, infrastructure, and energy are growing sectors. FDI in Montenegro is mostly concentrated in the tourism, energy and agriculture sectors. In North Macedonia, manufacturing remains the sector that attracts most FDI, ahead of financial and insurance activities. Finally, in Serbia, FDI is concentrated primarily in manufacturing, trade, real estate, logistics and financial mediation.
The composition of FDI stock in the Western Balkans underlines the region’s vulnerability to the impact of the COVID-19 pandemic. The manufacturing sector accounts for the greatest share of FDI stocks in North Macedonia (36%), Serbia (32%), Bosnia and Herzegovina (28%), and Kosovo (12%). As EU investors have located export-oriented activities in the region to serve their home markets (Novik and de Crombrugghe, 2018[11]), a potential demand contraction might result in a fall in earnings affecting sectors such as automotive, machinery parts and textiles (OECD, 2019[8]).
Developing an enabling investment climate that attracts investors and promotes sustainable growth requires a sound legal framework including laws, regulations and policies that ease the admission of investors and protect their property. In addition, governments should ensure that policies and legislation are transparent, predictable and easy to implement.
These elements are covered in four sections: 1) the quality of the legal and regulatory framework for investment; 2) market access and exceptions to national treatment (assessed through the measurement of statutory restrictions to FDI); 3) investor protection (assessed through the guarantees against expropriation and alternative dispute resolution indicators); and 4) intellectual property rights (assessed through the intellectual property rights laws, enforcement and awareness-raising indicators).
Frameworks for investment are sound; legislation could be more transparent and predictable
All WB6 economies have established sound legal frameworks for investment. Investment laws are the main instrument regulating investment in the majority of the WB6 economies. While North Macedonia and Serbia have unified investment laws covering both foreign and domestic investors, Albania, Bosnia and Herzegovina, Kosovo and Montenegro have dedicated foreign investment laws. In addition, legislation governing investment is complemented with strategic investment laws in Albania, Kosovo, and North Macedonia, as well as with free economic zones laws in some economies, such as the Law on Technological Industrial Development Zones, which plays an important role in attracting investment in North Macedonia.
In recent years, governments have made some efforts to modernise their legislation. For instance, Kosovo adopted a law on strategic investment in 2017 and a law on business organisations in 2018, while Montenegro adopted a public private partnership law and public procurement law in 2019 that modernise the investment promotion institutional setting. Albania prepared a new draft investment law in 2017 that simplifies and unifies the legal framework for investment by replacing the former laws on foreign investments and strategic investments. While consultations have been initiated, the new investment law has yet to be adopted. In addition, governments have begun to improve and simplify their legislation. For instance, North Macedonia and the Republic of Srpska are implementing regulatory impact analysis (RIA) programmes to improve their regulatory environment and enhance consultations with stakeholders.
Overall, the quality of the investment frameworks is improving as governments progressively align their legislation with EU standards. According to the Worldwide Governance Indicators, Albania, Montenegro, North Macedonia and Serbia have solid frameworks (though they still rank below CEEC, EU and OECD benchmarks), whereas Kosovo and Bosnia and Herzegovina’s legislation is lagging behind other economies in the region, as investors have to navigate differences in legislation across several levels of government, including the cantonal level (Figure 4.6). Nevertheless, in some economies, investment legislation remains unclear (US Department of State, 2020[12]). For example, in North Macedonia, frequent changes and inconsistent interpretation of the rules tend to create an unpredictable business environment.
Note: This dimension of the Worldwide Governance Indicators reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Percentile rank among all economies, ranging from 0 (lowest) to 100 (highest) rank. EU includes all EU Member States in 2015-2019 period. CEEC-11= Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia. OECD high income definition: The World Bank defines a high-income country as one with a gross national income per capita exceeding USD 12 056.
Source: (World Bank, 2020[13]) World Bank, The Worldwide Governance Indicators (WGI) project, http://info.worldbank.org/governance/wgi/.
Governments in the region are making efforts to increase transparency, the accessibility of legislation as well as public involvement in policy making. For instance, all WB6 economies publish and regularly update their investment legislation online. However, some economies do not have a single website or portal for investors and the legislative texts are not always available in English. In addition, public involvement in policy making is not sufficiently systematic and remains below EU standards overall (European Commission, 2020[14]). While all WB6 economies have established mechanisms for public consultation using online platforms, they often suffer from insufficient time allocated for comments, late inclusion of stakeholders in policy making, frequent use of urgent procedures for adopting legislation, and limited inclusion of shareholders’ contributions in final texts.
Exceptions to national treatment remain low in the WB6
WB6 economies are among the most open to FDI, as measured by the OECD FDI Regulatory Restrictiveness Index (which only covers statutory measures discriminating against foreign investors) (Figure 4.7). Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia maintain only a handful of restrictions, making their FDI regimes less restrictive than those of the average OECD economy. They also compare favourably with the average of the 22 EU Member States covered by the Index.
Note: Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The OECD FDI Regulatory Restrictiveness Index only covers statutory measures discriminating against foreign investors (e.g., foreign equity limits, screening and approval procedures, restriction on key foreign personnel, and other operational measures). Other important aspects of an investment climate (e.g., the implementation of regulations and state monopolies, preferential treatment for export-oriented investors and special economic zone regimes) are not considered. Data reflect regulatory restrictions in December each year.
Source: (OECD, 2020[15]), FDI Regulatory Restrictiveness Index (database); OECD (2021), FDI Regulatory Restrictiveness Index (database), www.oecd.org/investment/fdiindex.htm.
None of the six economies has established a foreign investment negative list to clearly delimit the sectors where foreign investment is prohibited or conditioned and outlining which discriminatory conditions apply. Negative lists can improve the accessibility of the legal framework for foreign investors as it relieves them of the burden of reviewing multiple laws to understand the market access and treatment conditions applicable to them.
There are no pre-establishment screenings requiring foreign investors to obtain approval from the host economy prior to making an investment in the WB6 economies. National treatment of foreign investors in the post-establishment phase is guaranteed. All foreign investors, when incorporated and headquartered in WB6 economies, are considered to be domestic legal entities, with all the rights and obligations applied to domestic investors. The WB6 economies maintain a few de jure restrictions, primarily in service sectors, which is common practice in OECD economies as well. Foreign equity restrictions are also used less in WB6 economies than in the other economies covered in the FDI index. They are generally limited to a few service sectors, while FDI in manufacturing is allowed in all sectors with the exception of arms and ammunition. Local legislation allows full foreign ownership of service companies, with restrictions limited to service sectors which regularly face restrictions in OECD and non-OECD economies such as defence, media and transport (Table 4.4). Sectors where foreign ownership restriction exists in the WB6 are also common in EU and OECD economies and the WB6 remain very open in comparison. It is also worth noting that some of these restrictions are lifted for nationals from EU economies, the United States and other economies that have signed bilateral agreements with the WB6.
Yet despite the openness of the WB6 economies, there are still exceptions to national treatment for foreign investors in key sectors where historical monopolies dominated by state-owned enterprises (SOEs) persist. However, it should be noted that Kosovo, Montenegro and Serbia are undergoing a process of structural reforms and privatisations which should reduce these barriers.
Foreign ownership of non-agricultural land is generally permitted in the WB6 economies; however, some economies maintain some restrictions on the acquisition of land by foreign investors for business purposes. Restrictions primarily concern ownership by legal entities established abroad and can be circumvented by establishing a legal entity in the territory. For instance, Bosnia and Herzegovina, North Macedonia and Serbia maintain discriminatory restrictions on real estate ownership by legal entities established abroad. These are subject to reciprocity, with exceptions for the EU and the OECD member states’ residents, who have the same rights as local residents. Ownership of commercial property in Albania is only permitted if the proposed investment is worth three times the price of the land. In Montenegro and Kosovo there are no restrictions on foreign ownership of real estate assets. All WB6 economies, with the exception of Kosovo, also impose restrictions on ownership of agricultural land by foreign investors (OECD, 2018[16]).
Investor protection against expropriation has been bolstered
Investor protection is included in a wide range of policies, laws and regulations that provide investors with the legal guarantee that their rights will be respected, and their property protected. By enhancing investor confidence, sound investment protection is likely to increase not just the level, but also the quality of investment, its durability, and its contribution to economic development (OECD, 2015[2]). Key elements of investor protection include guarantees against unlawful expropriation and securing property protection; effective contract-enforcement mechanisms; an independent court system; and alternative dispute resolution mechanisms, including commercial and investment arbitration.
All WB6 economies provide investors with solid protection against expropriation without fair compensation. Policy makers have incorporated in their respective legislation guarantees that investors’ rights will be respected and that their property will be protected against unlawful expropriation. They have also included transparent and predictable procedures in the event of expropriation and for determining financial compensation. Core protection standards are enshrined in the constitutions of Albania, Montenegro, North Macedonia and Serbia; in Bosnia and Herzegovina’s Law on the Policy of Foreign Direct Investment;2 and in the Law on Foreign Investment of Kosovo. The laws regulating investment across WB6 economies stipulate that expropriation can only occur when it is in the public interest without discrimination, against compensation and under due process of law. In all the WB6 economies, the modalities and procedures governing expropriations are regulated by the laws on expropriation. These laws also provide for calculating the amount of compensation, as well as judicial and administrative appeal mechanisms for reviewing or contesting decisions on expropriation. In practice, this assessment found that the business community does not perceive unlawful expropriation to be a major concern in WB6 economies; disagreements tend to be limited to the amounts of compensation.
The concept of indirect expropriation is ultimately covered by the respective legislation in the region. Indirect expropriation occurs when a state interferes indirectly with business operations, affecting the benefits, investments or use of an investor’s property, but without actually taking the property. However, only Kosovo provides a clear definition of indirect expropriation.3 Providing clearer definitions of expropriation that also include indirect expropriation can provide additional protection to investors from the uncertainty of compensation linked to indirect expropriations.
All six economies have also signed a large network of investment agreements, constituting an additional layer of protection for foreign investors. Several governments in the region, notably Albania and Montenegro, are also currently reforming their existing network of bilateral investment treaties (BITs) and defining a new BIT model that will balance investor protection provisions with national strategic interests, whilst also fully complying with EU standards and good international practices. This means ensuring that protection provisions are transposed into their respective national laws and are consistent with international standards of protection.
Enforcing contracts and settling disputes remain challenging
Contract enforcement and dispute settlement mechanisms are fundamental if markets are to function properly. Good enforcement procedures enhance predictability in commercial relationships by assuring investors that their contractual rights will be upheld promptly by local courts. When procedures for enforcing contracts are overly bureaucratic and cumbersome or when contract disputes cannot be resolved in a timely and cost-effective manner, companies may restrict their activities (OECD, 2015[2]).
Overall, the quality of the justice system and its responsiveness to the needs of businesses and people alike remain a challenge for the majority of the WB6 economies. Economies' low ability to enforce contracts (Figure 4.8) is challenging for investors. The efficiency of the legal framework in settling disputes is underperforming compared to EU-28 and OECD averages (Figure 4.9). Confidence in the judiciary system and the courts is remarkably low in the Western Balkan region (OECD, 2015[17]). In 2019, on average, the level of confidence stood at 33% in the WB6, compared to 56% for OECD-EU economies. Only 22% of citizens in North Macedonia have confidence in the judiciary system – the lowest rate registered in the region.
Note: The enforcing contracts indicators is scored on a scale of 1 (low ability to enforce contracts) to 100 (high ability to enforce contracts). The enforcing contracts indicator of the Doing Business Index measures the time and cost for resolving a commercial dispute through a local first-instance court, and the quality of judicial processes index, evaluating whether each economy has adopted a series of good practices that promote quality and efficiency in the court system. EU includes all EU Member States in 2015-2019 period. CEEC-11=Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia. OECD average includes high income economies (Colombia, Chile and Turkey are not included).
Source: (World Bank, 2020[18]), Doing Business Index 2020, https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf.
Note: Value for the economy under review 1 (least efficient) and 7 (most efficient). This indicator measures the efficiency of the legal and judicial systems for companies in settling disputes. OECD average includes high income economies with a gross national income per capita exceeding USD 12 056. (Colombia, Chile and Turkey are not included). CEEC-11= Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia. Kosovo is not included in the WEF ranking.
Source: (World Economic Forum, 2019[19]), The Global Competitiveness Report 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf.
The quality of the region’s judiciary is undermined by limited human and financial resources and inadequate training for judges, notably in commercial law. In addition, procedures for enforcing contracts and resolving disputes remain overly bureaucratic and cumbersome, and contract disputes are often not resolved quickly or cost-effectively enough. As a result, backlogs in the courts remain sizeable, especially in Kosovo (European Commission, 2020[14]). Local and foreign investors, which have the same rights and remedies before domestic court systems as domestic investors in the region, often complain that courts are slow in processing cases; that judicial procedures are complex; and that judges’ decisions suffer from lack of capacity as well as interference, corruption, political pressure and nepotism in the justice system, particularly in Albania, Bosnia and Herzegovina, and North Macedonia (US Department of State, 2020[12]).
Several WB6 economies are pursuing comprehensive justice reform agendas as part of their accession negotiations and alignment with EU standards. Key reforms include streamlining the functioning of the judicial system, including by rationalising the courts network; modernising infrastructure and adopting modern information technologies; and promoting mediation as an alternative dispute resolution methods (see next section). However, while positive recent upgrades in Albania, Montenegro and North Macedonia have seen improvement both in terms of efficiency and effectiveness of commercial procedures, progress is still slow and difficult in Bosnia and Herzegovina and Kosovo (European Commission, 2020[14]).
As part of their efforts to improve justice efficiency on commercial matters, all WB6 economies have dedicated commercial courts or designated departments or units to handle commercial matters. Montenegro and Serbia have specialised commercial courts which have first instance jurisdiction on commercial matters. In Bosnia and Herzegovina, commercial cases are handled by commercial courts in the Republika Srpska, and by the commercial departments of municipal courts in the Federation of Bosnia and Herzegovina. In Albania, the Tirana District Court has a special division to judge commercial matters, known as the Commercial Section, while commercial disputes are handled by specialised court divisions in the basic courts with extended competence in North Macedonia. Finally, in Kosovo, commercial cases will be examined by a designated department for commercial matters within the Pristina Basic Court, pending the approval of the draft law on commercial courts.4
Alternative dispute mechanisms should be further reinforced
Alternative dispute resolution (ADR) mechanisms, including arbitration, mediation and conciliation, are additional instruments that are increasingly used for resolving commercial disputes. Multiple economies are fostering the use of ADR to alleviate the burden on judiciary systems, especially for low-value commercial cases. They are favoured by investors as they allow for swift resolution of commercial disputes and/or to cope with an under-performing judiciary with limited commercial expertise, complex procedures, lengthy delays, and hefty costs. In most OECD economies, arbitration plays a primary role as an ADR mechanism, either to settle disputes between foreign investors and host states (international investment arbitration) or to resolve disputes between businesses (private commercial arbitration).
All six WB6 economies have ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the 1958 Convention on the Recognition and enforcement of foreign arbitral awards (New York Convention). Ratification of the New York Convention means that foreign investors can enforce their rights and contracts in the event of a dispute. In addition, in 2019 Montenegro, North Macedonia and Serbia signed the Singapore Convention on Mediation.5 Nevertheless, stakeholders report that enforcement of arbitral decisions can be lengthy. For instance, the enforcement of an international arbitration award in Serbia can be a slow and difficult process and in some cases, it can take up to five years for Serbian courts to recognise International Court of Justice rulings (US Department of State, 2020[20]). However, the number of investor-state disputes in the region that are brought before international arbitration is limited and mainly involve large investors.
All WB6 economies provide for local arbitration and laws on arbitration exist in North Macedonia (2006), Serbia (2006), Kosovo (2007) and Montenegro (2015). These four economies host private arbitration centres in their local or foreign chambers of commerce. In Albania and Bosnia and Herzegovina, arbitration is less regulated. Nevertheless, their law/code on civil procedure regulates arbitration procedures if the parties agree to entrust the resolution of their dispute to arbitration. Montenegro is also in the process of adopting a new law on ADR, which notably provides for compulsory recourse to ADR mechanisms for specific types of cases. Mediation mechanisms are also increasingly promoted and regulated in the WB6 economies. All WB6 economies have mediation laws, with Albania and Kosovo having adopted dedicated legislation in 2018.
Despite the availability of out-of-court methods of dispute resolution in WB6 economies, in practice, the use of arbitration and mediation as an alternative to resolving disputes remains very low partly due to a lack of awareness. The use of mediation and of ADR mechanisms in general varies greatly between WB6 economies. For instance, Montenegro adopted a programme for ADR promotion and an accompanying action plan for 2019-21 and has seen a positive trend in the use of ADR mechanisms since 2017. In North Macedonia, on the other hand, the use of ADR mechanisms is not common, and arbitration is not yet considered a viable tool to ensure justice, either by parties or by the courts and as a result, “the number of mediation cases has decreased over recent years” (European Commission, 2020[21]).
Intellectual property rights laws are in place, but enforcement is a challenge
The granting and protection of intellectual property (IP) rights is an important component of a sound legislative framework that attracts investments. Protection of IP rights through trademarks and patents fosters development and innovation by reinforcing linkages and transfers between local firms and multinationals. It is widely acknowledged that a well-functioning and balanced IP system is key to promoting innovation and creativity, which are the main drivers of economic development in knowledge-based economies.
Developing effective IP systems also requires: 1) a sound legislative framework; 2) effective implementation and enforcement; as well as 3) efforts to raise the awareness of businesses and citizens on the importance of IP rights. IP enforcement involves a high level of co-ordination among the various institutions in charge of implementing and enforcing IP, as well as strong legal structures.
All six WB6 economies generally have sound intellectual property rights legal frameworks which are in line with international practice. With the exception of Kosovo, they are all members of the World Intellectual Property Organization (WIPO) and have adhered to the main international treaties and conventions on IP rights, such as the Patent Co-operation Treaty, the Paris Convention, the Madrid Protocol and the Hague Agreement.
All the economies have progressively introduced IP-specific legislation over the past decade and are continuing their alignment with EU standards through amendments of IP laws and regulations. Albania adopted secondary legislation on trademarks and the legal protection of designs in 2018;6 Bosnia and Herzegovina is largely aligned with the EU acquis on copyright and neighbouring rights; while Serbia has notably adopted a new trademark law that came into force in 2020 and amended its copyright law and related rights in 2019, further aligning with EU acquis. According to the (European Commission, 2020[14]), Serbia and Montenegro’s IP legislation is the most aligned with the EU acquis, while the other four economies still have a way to go. Investors complain that their IP rights are poorly protected in the region, as illustrated by the WB6 economies’ ranking in the Global Competitiveness Index Report 2019, where all economies score in the bottom half of the rankings on intellectual property protection,7 with Bosnia and Herzegovina ranking 134 and Albania ranking 130 out of 140 assessed economies (World Economic Forum, 2019[19]). This policy area remains a challenge in most of the WB6 economies.
Intellectual property rights enforcement also remains a challenge in the region and intellectual property right infringement problems persist in all six Western Balkan economies. All WB6 economies have established IP institutions in charge of implementation and enforcement. However, IP enforcement institutions generally lack human and financial resources as well as the authority and means to co-ordinate the various institutions involved in IP enforcement.
Governments in the region are well aware of these challenges and are increasingly focusing on IP rights implementation and enforcement. Most of the WB6 economies have also adopted IP dedicated strategies and action plans and implemented reforms in order to better protect investors’ rights. However, their implementation and outcomes vary greatly.
Albania, Kosovo, and Serbia have seen positive progress by reinforcing the resources and capacities of the agencies in charge of registration, protection, and enforcement of IP rights. For instance, the General Directorate of Industrial Property (GDIP) in Albania has seen its staff increase from 24 to 38 since 2018. The Industrial Property Agency (AIP) in Kosovo added three new staff in 2019, and Albania has progressed on IP implementation with increases in the number of applications to register trademarks since 2018.8 Kosovo has reduced the backlog of applications for patents, trademarks and industrial designs (European Commission, 2020[22]), while in Serbia the procedures for registering industrial property rights and to deposit works and authorship are efficient and in line with EU standards (US Department of State, 2020[20]).
In Montenegro and North Macedonia, developments are more subdued. Montenegro is still to adopt its National Intellectual Property Strategy (2021-2024) and its already understaffed IP office has seen a further reduction in staff (OECD, 2018[16]). In the meantime, the government has stepped up its efforts to reinforce the capacity of enforcement agencies and specialised judges on IP matters through regular training. It has also reinforced co-ordination among relevant institutions. In North Macedonia, the State Office of Industrial Property (SOIP), in charge of industrial property rights, has improved its registration process. However, effective IP implementation and enforcement in the economy are still hampered by the myriad institutions in charge and their lack of human resources, which tend to limit their co-operation and efficiency.
IP enforcement is particularly problematic in Bosnia and Herzegovina as the enforcement agencies and the judicial system lack capacity and resources and their co-operation is limited in this very decentralised state. In 2019, the economy adopted the Strategy for the Enforcement of Intellectual Property Rights in Bosnia and Herzegovina for the period 2018-2022. This sets out guidelines and measures to develop and improve the legislative and institutional framework for IP enforcement and to establish inter-institutional co-operation. However, progress has been slow, and the strategy has yet to be implemented (European Commission, 2020[23]).
Intellectual property rights awareness raising and access to information play an important role in the broader IP policy framework. However, with a few exceptions, there is generally little awareness of IP rights and obligations, either among the general public or the judiciaries of the six economies. In Albania, additional resources for the GDIP have improved IP rights awareness-raising efforts and access to information. Since 2018, the GDIP has intensified its IP rights awareness-raising activities in co-ordination with businesses and technical and scientific information centres through seminars and lectures in public and private universities as well as for interest groups. It has also enhanced access to information through various services including a help desk, Patlib (providing local access to patent information and related issues), information kits and other information brochures, etc.
The way forward for investment policy
Continue reform efforts to improve the efficiency of the judiciary. The ability to make and enforce contracts and resolve disputes is fundamental if investors’ rights are to be protected. Good enforcement procedures enhance predictability and trust in commercial relationships by assuring investors that their contractual rights will be upheld promptly by local courts. To this end, it is essential to further reinforce the ability of commercial justice to handle conflict resolution and enforce contracts, including by greater capacity building and training for judges in dealing with commercial and IP cases.
Streamline investment legislation and improve its predictability. Throughout this process, governments should reinforce transparency and ensure well-structured and inclusive public participation in policy making. It is also important to ensure that the effectiveness of regulations is regularly monitored and evaluated. These reforms will help to build an environment of trust that fosters compliance with laws and regulations, strengthens investor confidence and reduces risk aversion.
Improve the clarity of the investment regime, notably for foreign investors. To make the legislation more intelligible, governments could establish negative lists of the sectors that are prohibited or restricted for foreign investors, as well as the discriminatory conditions that apply – even if the latter are very limited in the WB6 economies. Gathering all relevant regulations into a single platform in English and regularly updating it would also increase accessibility.
Improve the definition of indirect expropriation in order to reinforce investor property protection. Better definitions of indirect expropriation should also clarify whether the governments’ actions require compensation for investors while better protecting the general public’s interests and welfare.
Continue to strengthen the frameworks for alternative dispute resolution and encourage their use by businesses. These mechanisms, which are generally appreciated by the business community, could help to alleviate the pressure on the judiciary systems and reduce the backlog of cases.
Reinforce IP implementation and awareness raising. This will mean reinforcing the capacity and resources of IP agencies. IP policy and implementation requires a whole-of-government approach and strong co-ordination among various IP-related institutions, as recommended by WIPO guidelines (Box 4.2). Efforts to sensitise businesses and the public about IP matters should be bolstered. Doing so will help to reinforce linkages between local and multinational firms as well as fostering innovation.
Private enterprises and academic institutions see patents, trademarks, copyrighted works and other forms of IP as economic assets. Solid IP regulations permit universities, enterprises or R&D institutions to assess existing stock of IP and human capital, which can also help entrepreneurs and innovative SMEs to access bank financing using IP capital as collateral. The WIPO guidelines on developing IP strategies include several key recommendations that may be useful for WB6 economies in the strengthening and reinforcement of existing IP action plans or developing new strategies:
Including essential features of a strong IP strategy by specifying strategic goals and objectives, mechanisms, policies, actions, costs and resources, as well as links with other planning tools, including development, economic and education plans. While many economies opt to develop stand-alone IP plans, economies may also choose to establish economic plans with IP components, or multifaceted strategic plans integrating education, technology, health, agriculture, commerce, IP and finance.
Targeting specific areas of competitive advantage allows economies to select clusters or target areas in which their enterprises or research institutions may have a competitive advantage, or which harmonise with national needs and capacities. This definition of cluster areas may also work as a strategy for researchers and enterprises.
Incorporating incentives and awards by establishing multifaceted motivations and support for IP asset development and commercialisation. These may include tax incentives, payments, patent application funds, venture funds for SMEs in cluster areas and financial rewards in private enterprise for inventors and creators.
Making the IP system easy to use, accessible and affordable through reduced fees for individual inventors and research institutions or those with incomes under an established threshold. Economies may also create funds to support patent applications by national research centres and individuals. Surveying research institutions, private enterprises and other users to understand the challenges of existing IP systems can allows governments to tailor IP strategies to their economy’s specific needs.
Building public awareness concerning IP by developing programmes for public secondary-level education to raise awareness of the importance of invention and creativity at an early age through information products like interactive websites and even comic books explaining the basic concepts of IP. Granting publicised awards to inventors, creators and IP professionals also raises recognition of the cultural and economic value of IP.
Source: (WIPO, 2006[24]) IP Asset Development and Management: a Key Strategy for Economic Growth, https://www.wipo.int/edocs/pubdocs/en/intproperty/896/wipo_pub_896.pdf.
Investment promotion and facilitation measures can be powerful means of attracting investment and maximising its contribution to development, but their success depends on the quality of investment-related policies, as reviewed in the previous section (OECD, 2015[2]). The roles of investment promotion and investment facilitation are complementary: the former focuses on marketing an economy or a region as an investment destination, while the latter aims at making it easy for investors to establish, operate and expand their existing investments.
The investment promotion and facilitation sub-dimension is assessed through five qualitative indicators (Table 4.5). As the scores indicate, the quality of the institutional framework for investment promotion and facilitation varies across the region. Strategies to promote, attract and retain FDI are well established overall, but there is scope to further enhance their implementation.
Institutional frameworks and strategies for investment promotion and facilitation are solid
Most governments around the world have established investment promotion agencies (IPAs) to create awareness of investment opportunities, attract investors and support their expansion (Box 4.3) – although many functions can also be carried out by other public structures. Their institutional settings differ in their organisation, function and strategies as well as their levels of interaction with other government bodies.
All six Western Balkan economies have established solid investment promotion agency structures and strategies to efficiently promote and facilitate investment. The region’s IPAs include the Albanian Investment Development Agency (AIDA), the Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina, the Kosovo Investment and Enterprise Support Agency (KIESA), the Agency for Foreign Investments and Export Promotion (ASIPI) of North Macedonia, the Montenegro Investment Agency (MIA) and the Development Agency of Serbia (RAS). In North Macedonia, the Directorate for Technological Industrial Development Zones (DTIDZ) also plays an important role in investment promotion and facilitation in Special Economic Zones. Investment promotion also largely takes place at the entity level, for example, through the Ministry of Economy and Finance in the Republika Srpska which, among other services, promotes investment potentials, attracts foreign investors, provides pre- and post-investment support, and promotes and regulates free zones.
Montenegro has recently modernised its institutional framework and strategy for investment promotion and facilitation. Following the adoption of the new Public Private Partnership Law in December 2019, the Montenegro Investment Promotion Agency (MIPA) and the Secretariat for Development Projects ceased to exist and were replaced by the Montenegro Investment Agency (MIA) in 2020 with a much broader set of responsibilities and reinforced resources. However, as this new institutional setting has yet to have an impact, this report mainly assesses the old institutional setting for investment promotion and facilitation.
World Bank and OECD research and operational experience have identified the following key success factors common to high-performing investment promotion agencies (IPAs) in developing economies:
Strong strategic alignment stemming from consultations with public and private sectors and cascading from a national development plan or FDI strategy down to IPA corporate plans and industry-specific strategies.
A clear, uncontested mandate, ideally focused on investment promotion, especially when starting or restructuring the IPA. Developing economy IPAs with multiple mandates take much longer to, or never do, deliver substantial FDI impact. Regulatory functions (including one-stop shops) are best performed by a separate public institution that ensures proper delivery of this essential function without compromising the equally essential investment promotion mandate of an IPA.
A high degree of institutional and financial autonomy (or semi-autonomy), emulating private sector flexibility to act according to agreed-upon strategic plans and to hire staff using specified and transparent job qualifications; avoiding political interference; and providing sustainability through political cycles.
An independent and well-functioning board of directors or advisory board with strong and active private sector representation to better understand investors and provide direction in catering to their needs.
A strong investor-centric service orientation to design and provide relevant and high-quality services to investors throughout their investment cycle.
Management and key promotion staff with strong private sector experience, as well as international exposure and language skills, within the IPA’s mix of employees with public and private sector experience.
Sufficient and sustained financial resources over three- to five-year periods to provide continuity of strategic efforts over the long-cycle nature of investment promotion and to avoid struggling over funds every year or having to charge fees.
Source: (World Bank, 2020[25]), Global Competitiveness Report 2019/2020, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf; (OECD, 2018[26]), Mapping of Investment Promotion Agencies in OECD Countries, https://www.oecd.org/investment/investment-policy/mapping-of-investment-promotion-agencies-in-OECD-countries.pdf.
The governance of an IPA is related to the way it is supervised, guided, and managed. When IPAs are established, their legal status – often formalised by law – will determine many of their organisational and functional aspects. It will have a particular bearing on the IPA’s level of autonomy vis-à-vis the government, especially in terms of financial and human resources management. From the least to the most autonomous forms of IPA, the most common types of legal status are the following: 1) governmental (often as a department or a unit within a ministry); 2) autonomous public agency; 3) joint public-private body; and 4) entirely privately-owned organisation (OECD, 2018[26]).
All economies in the region have established their IPAs as autonomous public agencies except for AIDA, which is a governmental entity under the Ministry of Finance and Economy. As a comparison, in OECD economies, the majority of IPAs (60%) are autonomous public agencies while 31% are governmental. Most of the IPAs around the world have also established boards providing supervisory or advisory roles to the agency, or both. For instance, 69% of the IPA agencies in OECD economies have included boards in their organisations (OECD, 2018[26]). When IPAs are public agencies or autonomous public agencies, it is particularly important to include private sector and civil society – notably research and academia representatives – on their boards.
The IPA boards in the region have varying compositions and roles. For instance, AIDA’s board has a supervisory role, while the boards of IPAs in Serbia and Bosnia and Herzegovina have advisory roles. With the exception of Kosovo’s IPA KIESA, which did not report having a board, all of the economy’s IPA boards comprise both public and private sector representatives. Kosovo’s IPA reports directly to the National Council for Economic Development of Kosovo (NCEDK),9 which is chaired by the Prime Minister of Kosovo and composed of the ministries with an economic orientation as well as the economic business associations.
The IPAs in the six economies differ in their mandates and functions (Table 4.6). All the national IPAs’ official mandates include the promotion and facilitation of inward FDI. While the mandates of FIPA and MIA are more focused on foreign investment promotion, KIESA and AIDA have very large mandates, performing respectively 10 and 9 functions. It is also worth noting that domestic investment promotion, followed by export and innovation promotion, are the most frequent additions to the investment promotion mandate of the region’s agencies. In the OECD economies, IPAs’ mandates range from 2 to 13, with an average of 5.7 (OECD, 2018[26]).
In addition to the above-mentioned mandates, IPAs in the region also perform other functions. These include participating in the design of policies related to FDI and overall economic development strategies. For instance, in Serbia, RAS is systematically involved in the design and implementation of all policies, programmes and measures for investment promotion, including the Strategy for Development of SMEs, Entrepreneurship and Competitiveness 2015-2020, the Strategy and Policy for Industrial Development 2011-2020, as well as work on the new strategy for 2021-2030. Meanwhile, in addition to designing and implementing policies, programmes and measures related to foreign investment, the Ministry of Economy and Entrepreneurship of Republika Srpska also establishes and implements several economic development strategies at the entity level, such as the Foreign Investment Encouragement Strategy for the period 2021- 2025, Strategy for the Development of Small and Medium Enterprises for the period 2021-2027 and Strategy and Policy of Industrial Development for the period 2016-2020 (a new strategy is being drafted).
Most of the IPAs have well-established mechanisms for developing annual strategic plans and objectives derived from the national investment strategies. They also conduct annual reporting on their activities and spending. AIDA, ASIPI, MIA and RAS have established monitoring and evaluation units that primarily report to the board of the IPA. Most of these IPAs report on the performance of the agency itself using indicators such as the number of campaigns launched, time to respond to investors or number of assisted firms, etc. Only AIDA, and to a lesser extent RAS, reported monitoring the effectiveness and efficiency of their actions for investment promotion. It should be also noted that MIA only recently set up a monitoring and evaluation unit and that the evaluation indicators are yet to be discussed by the board.
Since the last assessment, all six economies have concluded national strategies that include provisions for attracting investment. For instance, Montenegro, North Macedonia, and Serbia have all established industrial strategies that aim to increase investments in the manufacturing sector, facilitate innovation and technology transfers, and incorporate green growth into future investment objectives. These three economies have also adopted long-term strategies on sustainable development until 2030 that aim to strengthen regulatory frameworks and incentives, especially for attracting FDI to infrastructure and green energy projects. Meanwhile, Albania has established the comprehensive National Diaspora Strategy 2021–2025. This lays out 72 specific actions to create a favourable climate for diaspora investment through fiscal stimulus activities, disseminating information, reducing corruption and risks, and improving other incentives, as well as the responsible institution and time limit for their implementation. Kosovo has also established the Strategy for Local Economic Development 2019-2023, which lays out innovative solutions to overcome barriers to attracting foreign investors, such as increasing vocational capacities, investing in human capital and infrastructure projects, as well as enhancing the regulatory environment to offer better protection and security for potential investors. All the IPAs in the region are also involved in developing linkages between local companies and multinationals, with services extending from match making to the management of funds aiming at reinforcing the capacities of local firms in Serbia10 and Albania.
While the IPAs’ financial and human resources should be adapted to their mandate and role, staffing levels in the region do not necessarily reflect important differences in mandates (Table 4.7). Only AIDA, RAS and MIA seem to be adequately staffed given their mandate and objectives, while KIESA has a very large mandate, but only 22 staff members. Since the adoption of the strategic law in Albania, AIDA has substantially increased its staffing from 28 employees in 2018 to about 38 employees in 2020. In 2019 alone, the agency concluded 20 new employment contracts and confirmed 17 existing contracts (AIDA, 2019[27]). These changes are a direct result of an expanded mandate and aim to achieve the most effective division of tasks. The agency is split into 5 directorates: directorate of investment (13 employees), SMEs and projects (8), marketing and research analysis (5), co-ordination (4), and support services (8). While there is no “one size fits all” staffing level for IPAs, the following 2017 examples from OECD economies can provide guidance on the balance between staff numbers and agencies’ mandates: Hungary’s IPA had 129 staff members to execute 7 mandates, the Czech IPA had 147 staff members to execute its 9 mandates, while the Estonian agency had 300 staff to execute 12 mandates (OECD, 2018[26]). Financial constraints are also an important common challenge for IPAs in the region. Most of the IPAs in the WB6 economies report that inadequate resources – along with the lack of political support and weak business climate or regulatory framework – are among the top three biggest obstacles to their ability to attract investment in the next 5-10 years (OECD, 2018[26]).
Attracting FDI requires a whole-of-government approach as it entails effective co-ordination and co-operation among various stakeholders in the public sector (national and subnational administration and public or semi-public organisations) and the private sector (industry groups, associations, and chambers of commerce). In the OECD economies, IPAs have a dense interaction network as they deal on average with 25 different organisations, 50% of which are deemed strategic (OECD, 2018[26]). All the WB6 economies try to ensure effective co-ordination between the IPA and other public entities through formal co-ordination mechanisms, including the participation of key ministries on the IPAs boards, as well as joint task forces. However, in some economies, like Bosnia and Herzegovina, effective co-ordination with other government bodies involved in investment promotion and facilitation, both at economy-wide and entity levels,11 continues to be challenging due to a lack of resources and sometimes the lack of political support.
None of the IPAs in the region have reported having offices abroad, whereas more than three-quarters of IPAs in OECD economies have a network of offices abroad that are affiliated to their headquarters (OECD, 2018[26]). However, most of the agencies report relying on their embassies to boost the image of their economies and attract foreign investment. Although how IPAs are presented overseas is primarily a matter of institutional setting and cost-benefit analysis, relying on embassies that are under the purview of a different line ministry requires a higher level of co-ordination and co-operation and additional effort.
The co-ordination of investment promotion and facilitation activities and monitoring of interactions with investors can be helped by using the Customer Relation Management System (CRM). According to the OECD-IDB survey, 94% of surveyed IPAs in OECD economies use CRM software (OECD and IDB, 2017[28]). AIDA, FIPA and RAS reported using CRMs, whereas ASIPI uses a dedicated platform for planning activities, keeping records, and supervising economic promoters.
Investment facilitation could benefit from more IPA involvement
Investment facilitation aims to make it easier for investors to establish, operate and expand their existing investments in an economy. Investment facilitation starts at the pre-establishment phase, when an investor shows interest in a location, and involves a whole-of-government approach to encourage investments by providing investors with a transparent, predictable, and efficient regulatory and administrative framework for investment. It combines policies, tools, and processes that should be adopted by host economies to reduce or eliminate potential and existing obstacles faced by investors once they have decided to invest and to maximise the positive contributions of investment to the economy (Novik and de Crombrugghe, 2018[11]).
Facilitation activities include: 1) policies aiming at developing sound and consistent legal frameworks for investment, as well as regulatory measures to simplify and streamline administrative procedures; 2) tools to help investors navigate the various regulations and procedures, such as setting up one-stop shops, online business registration systems, information portals for business establishment, etc.; and 3) processes to make these policies more useful and effective, such as building IPA capacity, bolstering inter-agency co-operation and co-ordination as well as reinforcing public-private dialogue (OECD, 2018[26]).
The WB6 economies have adopted a number of policies for developing sound and consistent legal frameworks for investment – see Investment policy (Sub-dimension 1.1). They also continue to streamline their regulations, and reduce the costs and steps involved in starting a business. For instance, several economies have begun digitalising business permit and licensing registration processes as well as improving access to information and administrative procedures by providing documentation online and opening governmental portals. Even so, some WB6 economies have regressed in the starting a business rankings of the annual World Bank Doing Business survey (World Bank, 2020[18]). For example, in Bosnia and Herzegovina, regulations for starting a business remain very complex, as they differ among the entities and cantons. This is illustrated in the 2020 Doing Business Index: the economy is among the most difficult environment in the world for starting a business (ranking 184th out of 190 economies) (Figure 4.10). It should be noted that some positive developments have been recorded in the entities. For instance, the Republika Srpska has conducted major reforms to its business registration, cutting the time necessary for business registration from 23 to 3 days, as well as cutting the number of procedures from 11 to 5.
Note: The starting a business indicator is scored by rank and takes into account the number of procedures, time, cost and paid-in minimum capital requirement for a small- to medium-sized limited liability company to start up and formally operate in each economy’s largest business city. Economies are ranked for their ease of doing business from 1–190. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. Time to start a business is measured in days.
Source: (World Bank, 2020[18]) World Bank, Doing Business Index, https://www.doingbusiness.org
WB6 economies have adopted tools to help investors navigate the various regulations and procedures. As part of this effort, they have also accelerated the digitalisation of the services dealing with investors, and are at different stages in developing electronic portals of administrative procedures and formalities for business activities. All the economies have established one-stop shops for business registrations. It should be mentioned that reforms in North Macedonia will facilitate business operations through the establishment of a virtual one-stop shop for investors that gathers 10 online services12 in a single portal.
Some WB6 economies could further reinforce their processes and co-operation mechanisms for investment facilitation. All the economies have sound mechanisms to design and reform policies, and have established solid consultation mechanisms for public-private dialogue. However, burdensome procedures for investors in the region are still fuelled by the uncoordinated actions of the various government agencies and levels of government involved in approving and granting business licences, which result in suboptimal treatment of investors. Stakeholders have also indicated that difficulties in obtaining licences in some sectors prevent investment and affect the whole economy (UNCTAD, 2017[29]). However, governments in the region have engaged in processes to simplify their licensing requirements and improve their administration, notably at lower administrative levels.
Investment facilitation is further weakened by the limited role played by the IPAs in this area in the region. For instance, none of the IPAs are officially mandated to issue business permits and the issuance of business permits at the lower administrative level in WB6 economies creates confusion and overlap in responsibilities between the different levels of government (UNCTAD, 2017[29]). One-stop shops in the region are also primarily operated by business registration agencies,13 with limited involvement by the IPAs. Overall, the IPAs’ role in facilitating investment in most of the WB6 economies is limited to providing information to foreign investors to help them navigate the administration while redirecting them to the relevant authorities as they do not have the authority to collect or approve documents. MIA is the exception, having recently been mandated to speed up administrative procedures and provide the conditions for efficient work (its predecessor MIPA was not involved in business registration procedures). It should also be noted that RAS and AIDA play more advanced roles in facilitating important or strategic investment projects.
Investment facilitation in the WB6 economies would benefit from greater involvement by the IPAs. Indeed, as IPAs are the first point of contact for international investors, they can play a central co-ordination and liaison role with other government entities in charge of managing and delivering business licences. It is therefore crucial to build the capacity of both the IPA and the relevant civil service agencies. Finally, regular monitoring and evaluation are also necessary to ensure that investment facilitation tools and policies are useful, up-to-date and respond to investors’ needs (Novik and de Crombrugghe, 2018[11]).
Proactive investor targeting is progressively being adopted
Investor targeting is one of the key functions of IPAs. It is one of the most resource-intensive, but also one that can lead to the best results in terms of securing actual FDI projects. Research has found that one dollar spent on investment promotion in a specific sector translates into USD 189 of FDI inflows (Harding and Javorcik, 2011[30]). It refers to the direct targeting of investors, sectors, projects or economies through events, including one-to one meetings with investors, pro-active campaigns, and inquiry and request handling (OECD, 2018[26]). It is the opposite of reactive promotion, in which IPAs answer investor-initiated inquiries. A clear prioritisation strategy that is in line with national development strategies is needed to guide IPAs’ targeting activities.
IPAs in the six Western Balkan economies have historically focused on image building and strengthening their economies’ profiles as competitive investment destinations. However, they are increasingly moving towards more proactive approaches for targeting sectors and economies. All WB6 economies have well-identified targets in terms of economic sectors and markets for FDI attraction. These are laid out in the strategic investment laws of Albania,14 Kosovo and North Macedonia,15 and in strategic documents and medium-term documents in Bosnia and Herzegovina, Montenegro and Serbia.
Since the last assessment, most of the WB6 economies have put in place more sophisticated mechanisms for targeting potential investors in a proactive and systematic manner:
Albania’s AIDA organised outreach campaigns for the agriculture sector in 2019 and the car manufacturing sector in 2020.
In Bosnia and Herzegovina, outreach is conducted at both state and entity levels. FIPA and the Federation, in co-operation with the International Financial Corporation and the World Bank, launched an outreach programme in 2016 that targets the agriculture and automotive industries for investment. To date, Bosnia and Herzegovina has successfully conducted three outreach missions in Italy, Germany and the Netherlands, with a fourth having been postponed due to the pandemic. The Republika Srpska organised outreach campaigns in the fruit and vegetable processing sector targeting German companies in 2017 and Austrian companies in 2018.
In Montenegro, MIA has already started to move from the reactive stance of MIPA to a more proactive targeting of potential investors and economies. It has defined target economies and started organising missions. For instance, it embarked on an investor outreach campaign for the furniture manufacture sector in 2020.
Serbia has also continued to organise targeted outreach campaigns that are followed by analysis, lessons learned and follow-up mechanisms.
KIESA, on the other hand, does not have a clear strategy targeting priority sectors. It promotes the economy as an investment destination through participation in international fairs, and organising FDI conferences abroad. It should be noted that both Kosovo and Albania have also established mechanisms to target their respective diasporas, mainly relying on their representations abroad and embassies.
Most of the WB6 economies have also developed dedicated approaches to investment targeting in special economic zones, which have become a widely used instrument for attracting investment to the region (OECD, 2017[31]). For instance, in North Macedonia, DTIDZ has developed a more proactive and direct investor targeting strategy. It regularly reaches out to potential high value-added manufacturing companies to host in the zones in order to support a competitive environment and generate links with domestic firms. KIESA is also mandated with promoting the emergence of industrial clusters in special economic zones.
Investor incentives in WB6 economies are driving a “race to the bottom”
WB6 economies have long used investor incentives as a key tool for attracting investors through an abundance of tax breaks, relief and incentives (IMF, 2018[32]). Such policies include profit tax breaks, exonerations from social contributions, custom tax relief, tax holidays for employee benefits, subsidies for salaries and grants for investments. Economies also often offer preferential treatment when dealing with the administration, notably for strategic investment (under the new strategic investment laws) as well as in special economic zones.
The economies of the region seem to be competing to attract foreign investors, with incentives being used as the main instrument in a “race to the bottom”, or where host economies compete for foreign investment by unilaterally lowering standards due to co-ordination failure (Fitzgerald, 2001[33]). The positive impacts of these policies are often difficult to evaluate in terms of growth, development or job creation, but their negative consequences are rapidly felt as they lead to the erosion of public revenue. In addition, there is little evidence that lower taxes are a determining factor for attracting FDI. For instance, a World Bank survey found that predictability and transparency of public institutions, ease of setting up businesses and legal protection are considered more important than financial incentives for multinational companies when selecting an investment destination (World Bank, 2018[34]).
Over the last decade, most of the WB6 economies have increased their investment incentive schemes, rendering their incentive system more complex and sometimes difficult to navigate for investors. The management of these incentives is not always centralised as incentives are often managed by different and sometimes competing public bodies and at different levels of government, with limited accountability to a central authority. Comprehensive evaluations of the cost of these measures are often hampered by the multiplication of the structures as well as the lack of transparency in the management and implementation of FDI incentives.
For example, in North Macedonia, incentives are included in: 1) the 2018 Plan for Economic Growth, which provides incentives16 to domestic and foreign companies operating in the 15 free economic zones; 2) the 2019 Law on Financial Support to Investment; 3) the 2018 Law on Technological Industrial Development Zones; and 4) the 2020 Strategic Investment Law. Albania also has a complex and multi-layered investment incentive regime characterised by multiple tax breaks included in various laws and changing fiscal measures (most recently the 2019 fiscal package) as well as incentives for strategic sectors in the 2015 Law on Strategic Investment and to investors in the Technological and Development Areas (TEDA). In Bosnia and Herzegovina, direct taxes and tax incentives, including supervision, are primarily provided at the entity level.
Nevertheless, some economies have simplified their investment incentive regimes by adopting a simple and predictable tax regime providing greater clarity for investors. For instance, Serbia has a 15% flat corporate profit tax and provides tax incentives that target large projects in which no special groups or regions benefit more than any others. The only tax incentive applied in Serbia is a 10-year corporate profit tax holiday for an investment superior to approximately EUR 8.5 million in fixed assets and with employment for at least 100 additional employees throughout the investment period. Kosovo has also adopted a 10% flat corporate profit tax and other investment incentives are provided in the 2016 Strategic Investment Law. These are directly negotiated with the government on a discretionary basis. It also offers customs breaks for investors in the free trade zones.
It is important to ensure that tax incentives do not place a disproportionate or unplanned strain on domestic resources. Reinforcing transparency and good governance allow for better distinction between beneficial and wasteful tax incentive programmes. A good practice to reinforce transparency and facilitate control by the relevant authorities is to include all tax incentives in the main body of tax law and under the authority of the tax administration (OECD, 2015[2]). This is the case in Serbia and Montenegro. In North Macedonia, tax incentives are provided through the tax laws and the Law on Technological Industrial Development Zones and are under the authority of the Public Revenue Office (PRO), which is the institution authorised for tax assessment and collection. In Albania, the Tax Administration and the Customs Administration oversee the introduction and granting of tax incentives, while the Ministry of Finance is in charge of avoiding unintended overlaps and inconsistencies in tax incentives policies. Finally, in Bosnia and Herzegovina, incentives for direct taxation are under the competence of the entities, while incentives for indirect taxation are the state’s responsibility. The economy has nevertheless established mechanisms to avoid unintended overlaps and inconsistencies.
Aftercare services are more focused on policy advocacy
It is crucial for investors, notably foreign investors, to understand that the government is listening to their problems and concerns and that they have a reliable and responsive counterpart that can settle their problems. A key outcome effect of aftercare is policy advocacy, as maintaining a regular and constructive dialogue with the private sector can provide crucial insights and feedback that influence policy design and reforms to enhance the overall investment climate (De Crombrugghe, 2019[35]). In addition, efficient and proactive aftercare services are important for investors to maintain and expand their activities in an economy.
Aftercare services are not limited to solving problems encountered by businesses – increasingly they support existing businesses to expand their activities by anchoring their operations in the local economy. Key aftercare functions and services that can be offered by IPAs include: 1) problem solving through structured trouble-shooting with individual investors; ombudsman intervention and mitigation of conflicts; and 2) business support services by providing databases of local suppliers, matchmaking between investors and local firms; capacity-building support for local firms; promoting cluster programmes; and facilitating the recruitment of local staff through assistance programmes and training or educational programmes (OECD, 2018[26]).
All six Western Balkan economies are increasingly reinforcing their aftercare services and formally including them in their IPAs’ official mandates. In Serbia, aftercare activities have been defined as a permanent activity of the RAS following the adoption of its 2017-2019 strategic framework. In Albania and Kosovo, aftercare services are included in the official mandates of both AIDA and KIESA. In Bosnia and Herzegovina, post-investment investor support is recognised as a key component of FIPA’s mandate, along with policy advocacy and drafting proposals for legislation and legal measures aimed at improving investment conditions. In Montenegro, the recent establishment of the new and better resourced investment promotion agency MIA is a positive step towards improving the economy’s aftercare services, although the agency does not have a formal mandate to provide aftercare services.
In the WB6 economies, the sophistication of IPAs’ aftercare services and their extension to business support activities are often hampered by the absence of dedicated units and structured services as well as their limited human and financial resources. A good model in the region is North Macedonia, where ASIPI has developed an online platform to make it easier to find local suppliers, and to communicate with other administrations and local authorities. The DTIDZ offers a broad range of aftercare services for investors in the zones, including dealing with administrative services (taxes, visas, construction permits, customs, etc.) as well services for creating linkages with universities, developing company linkages, and identifying local suppliers, etc. In addition, DTIDZ is developing an online aftercare registration platform in order to improve the services for existing investors in the zones through improved communication protocols and aftercare services.
In addition, most of the WB6 IPAs organise targeted field visits to collect feedback from businesses on recurrent issues affecting their activities. In Bosnia and Herzegovina, such visits to investors are primarily conducted within the entities. For instance, between 2016 and 2019, joint teams including representatives from the Ministry of Economy and Entrepreneurship of the Republic of Srpska and local self-government units visited around 135 companies and discussed the business difficulties that investors are facing. By 2020, FIPA representatives (from all three offices: Sarajevo, Banja Luka and Mostar) had visited a total of 664 companies under the Post-Investment Support Programme or the Aftercare Programme. FIPA has also established a database of companies that includes the feedback received from field visits. It publishes an annual report of aftercare visits consisting of suggestions for improving the business environment, proposals for amending the legal framework, and recommendations for resolving business community issues. This is then submitted to the Council of Ministers of Bosnia and Herzegovina. Similarly, the Ministry of Economy and Entrepreneurship of Republika Srpska conducts aftercare visits and creates a report on the problems encountered by investors, which is then sent to the government. A regulatory impact assessment is done based on the results. In Kosovo, KIESA, despite its limited resources, visits 300 to 350 foreign investors each year to get their perspectives on the investment and business climate. It drafts a report with proposed measures that is submitted to the Kosovo Economic Council so it can take the measures proposed. In Albania, AIDA conducts an annual investor satisfaction survey, as well as on-site visits, to collect concerns and needs by sector.
The majority of the WB6 economies have well-established and structured public-private policy dialogue platforms that feed into policy making. These include Foreign Investors Councils or National Economic Councils that organise regular dialogue between representatives of foreign and multinational companies, as well as SMEs and local businesses, and high-level government officials. The IPAs’ level of involvement in public-private dialogue depends on the characteristics of the overarching institutional framework for investment facilitation and retention. However, IPAs’ involvement in aftercare and policy advocacy should be fostered. Their interactions with foreign investors mean they are best placed to understand their challenges and expectations and can provide invaluable insights and feedback to enrich the policy-making process and enhance the overall investment climate (Novik and de Crombrugghe, 2018[11]).
In Bosnia and Herzegovina, FIPA has developed a collaborative network for post-investment support to investors and prepares the annual Proposals for Improving the Business Environment and Investment Conditions in Bosnia and Herzegovina report. Similarly, the Ministry of Economy and Entrepreneurship of Republika Srpska has formed a collaborative network consisting of local government and line ministry representatives which annually gives proposals for improving the business environment, amending relevant laws and creating plans to attract investment. In Kosovo, KIESA organises regional conferences with the private sector in different municipalities in order to ensure public-private dialogue. In North Macedonia and Serbia, ASIPI and RAS maintain strong collaboration with business associations such as the Chamber of Commerce and Industry and Foreign Investment Council. They also maintain active dialogue through a working group consisting of representatives of the public and private sector within the Support Programme for Entering Supply Chains. Albania’s Investment Council was established in 2015 as the main public-private dialogue mechanism and AIDA has permanent membership status on the council.
Most IPAs in the region are also involved in resolving the problems and issues faced by individual investors. However, their interventions are not structured and often conducted on an ad-hoc basis, redirecting the investors to the competent services and with limited follow-up. Around 81% of the IPAs in the OECD economies offer structured troubleshooting with individual investors (OECD, 2018[26]), which is becoming a popular approach to solving their problems; 45% of the IPAs engage in conflict mitigation.
The findings of this assessment, particularly in the domain of investment promotion and facilitation frameworks, are also relevant for the WB6 economies’ implementation of the Common Regional Market Action Plan, which includes a component on regional investment (Box 4.4).
The following key findings of the CO2021 investment promotion and facilitation sub-dimension can inform the implementation of actions under the investment component of the Common Regional Market (CRM) 2021-2024 Action Plan (Regional Cooperation Council, 2021[4]):
Albania, Bosnia and Herzegovina, Montenegro and Serbia already conduct targeted outreach campaigns and organise missions while promoting their economies through participation in international fairs.
All WB6 economies have developed investment incentives to promote the emergence of industrial clusters in special economic zones and facilitate the establishment of businesses in these areas.
All WB6 economies have outlined strategic sectors for investment targeting within their regulations or IPA mandates, with agriculture and manufacturing being the most commonly promoted industries, followed by the tourism, ICT and energy sectors.
Regarding information databases, only AIDA, FIPA and RAS use CRMs, while ASIPI uses a dedicated platform for planning activities, keeping records, and supervising economic promoters.
Albania, Bosnia and Herzegovina, Kosovo, Montenegro, and Serbia have begun to implement green investment promotion schemes aimed at renewable energy and energy efficiency projects, with several of them having already released large public procurement opportunities in these fields.
Source: (Regional Cooperation Council, 2021[4]) Regional Cooperation Council, Common Regional Market 2021-2024 Action Plan, https://www.rcc.int/docs/543/common-regional-market-action-plan.
The way forward for investment promotion and facilitation
Strengthen the IPAs’ abilities to implement their mandates efficiently. It is particularly important to clearly define the roles and objectives of the IPAs and to ensure that they have sufficient resources and capacity to conduct key investment promotion and facilitation functions, such as investor targeting, facilitation and aftercare.
Simplify and clarify tax incentive regimes for investors. Unclear, complicated or overlapping tax legislation where incentives are dispersed across multiple laws can be difficult for investors to navigate and open the door for discretionary decisions. Reinforcing transparency, facilitating control by a single relevant authority, and including all tax incentives in the main body of tax law under the authority of the tax administration creates a clear incentive regime for investors to follow.
Ensure the effective participation of the IPAs in investment facilitation as well as in defining priority sectors and economies. As the first point of contact between the government and the foreign investor, the IPA is often well placed to understand the concerns of investors, help resolve problems and provide useful feedback to inform public policy. Investment promotion agencies will play an even bigger role in the post COVID-19 investment landscape to reinvigorate foreign interest in the region. To this end, IPAs can support previous investors with ongoing projects and supply chain issues while creating a stable investment landscape for new investors through adapted policies and incentives (Box 4.5).
The COVID-19 pandemic has not only provoked a worldwide health crisis, it has also halted global trade and international investment transactions, further hampering the ability of economies to best respond to and overcome the social and financial costs of the pandemic. IPAs, as key players in business attraction and supply chain management, have the unique ability to adapt and adjust to changes in the investment landscape to better mitigate the economic consequences of COVID-19.
To overcome these challenges in the short-term, IPAs have taken to reorganising their work methods and refocusing their priorities. Most OECD IPAs have switched to digital tools such as dedicated and regularly updated COVID-19 sections on their website to counter the inability to work through in-person investor visits, events, fairs, and missions. Meanwhile, focus has been shifted from marketing to new investors towards concentrating on existing clients, helping them cope with supply chain disruptions and business operations as well as actively updating them on COVID-related developments and ongoing government support programmes. IPAs are also using their business networks to mitigate supply chain issues in hard hit sectors by helping them acquire equipment necessary to avoid further disruptions.
IPAs are also implementing medium and long-term solutions in response to the pandemic. Agencies are creating long-lasting digital solutions for servicing existing clients and identifying future clients, such as video-conference systems, virtual sit-visit facilities and new investor facilitation tools such as digital signatures, one-stop shops and, electronic licenses or permits. They are also amplifying the reliability and accessibility of client databases. Finally, IPAs are also beginning to revise previously strategic sectors and are moving towards a narrower mix of industries, while putting more effort into better developed investor targeting practices for projects with the highest impact to help overcome revenue losses due to the pandemic.
Source: (OECD, 2020[36]) Investment Promotion Agencies in the time of COVID-19, https://doi.org/10.1787/50f79678-en.
Developing an investment landscape that prioritises green growth and sustainable development requires a strong commitment to environmentally conscious practices and legislation, as well as comprehensive strategies that promote economies as green destinations through well-crafted incentives, focused targeting and widespread awareness-raising campaigns.
The investment for green growth sub-dimension is assessed through two qualitative indicators (Table 4.8). As a newly assessed sub-dimension for the investment chapter of the Competitiveness Outlook 2021, the scores for the investment for green growth sub-dimension are lower than the first two sub-dimensions. This can be attributed to the very recent adoption of green investment strategies that have yet to be fully implemented, partially due to the effect of COVID-19 on foreign investment attraction. Kosovo was given a score of zero as information and data were too limited for a reliable analysis of the economy’s green investment initiatives.
Green investment frameworks and initiatives are generally in the early stages
Green investment projects, like most infrastructure projects, provide unique advantages for investors. These include steady, long-term, inflation-linked income streams for renewable energy and energy efficiency projects irrespective of returns on other investments. As these sectors typically provide low to modest interest rates and generally low yields for fixed income, governments should be inclined to provide an adequate enabling investment environment to attract institutional investors and exploit the industry’s potential (Röttgers, Tandon and Kaminker, 2018[37]). However, green infrastructure projects often remain seriously constrained by specific investment barriers such as erratic and undefined policy frameworks, subsidies and regulator rigidities that promote inefficient resource use and an inability to capture the value of sustainable natural resource management, among others.
All WB6 economies are generally in the early development stages of green investment policy and promotion initiatives. Every economy has shown commitment to establishing and revising environmentally conscious legislation and long-term strategies for the environment (Box 4.6). Bosnia and Herzegovina and North Macedonia have recently amended their energy strategy and energy law (respectively), to further promote the use of renewable energy sources and energy efficiency. Governments can promote their economies as green investment destinations by creating campaigns to raise awareness of investment opportunities in energy efficiency or renewable energy projects, as well as eco-tourism, green transportation, circular economy, waste management and sustainable agriculture. However, only half of the WB6 economies (Albania, Montenegro and Serbia) have a clear strategy or programme for attracting and incentivising green investment, or clearly outline green growth priorities.
Montenegro has shown a particularly strong commitment to improving its green economy and increasing projects that ensure energy efficiency and encourage the use of renewable energy. The economy has adopted several policies to ensure good energy practices, including the Energy Policy of Montenegro until 2030, Energy Development Strategy by 2030, Energy Law, Strategic Environmental Assessment Law and National Renewable Energy Action Plan to 2020 and action plan for implementation of the Energy Development Strategy by 2030. The Government of Montenegro also introduced financial incentives for new projects in the renewable energy sector, leading the economy to achieve 41.6% of energy gross final consumption from renewable sources in 2018. From May 24 to June 2, 2019, for the first time, Montenegro produced all its electricity from renewable sources. In the field of energy efficiency, the Government of Montenegro is currently implementing three projects to improve the green landscape:
Energy efficiency in Montenegro (MEEP): in partnership with the International Bank for Reconstruction and Development (IBRD), the project will improve energy efficiency and monitor energy and water consumption in 20 health facilities around the economy, and create a sustainable system of financing energy projects in the public sector by December 2023.
Energy efficiency programme in public buildings (EEPPB): in partnership with KfW bank, Montenegro has reconstructed 20 primary and secondary schools to improve energy efficiency and will continue to implement measures for better energy efficiency in selected educational, social and administrative institutions. It has set energy consumption standards of maximum 150 kilowatt hours per metre squared (kWh/m²) for facilities in the north, 125 kWh/m² for facilities in the central zone and 100 kWh/m2 for facilities in the south of Montenegro.
Energy efficient home programme: this provides a sustainable financial mechanism for applying energy efficiency measures in households. The Ministry of Economy subsidises interest rates and loan fees for households in Montenegro to:
Additionally, since 2018, the UNDP has been implementing the Growing Green Business in Montenegro project which promotes private sector investment in low-carbon and green businesses, stimulating low-emission economic growth and green job creation in the economy. The project uses a combination of policy de-risking (implementation of favourable policy frameworks and provisions of business support services) and financial de-risking instruments (improving access to finance for innovative green businesses and partnerships, in particular agriculture, tourism and energy sectors).
Source: (European Commission and Government of Montenegro, 2020[38]) Montenegro Progress Reports under Renewable Energy Directive 2009/28/EC as adapted by the Ministerial Council Decision 2012/04/MC-EnC, https://energy-community.org/dam/jcr:5dfac2b4-b0bd-4204-a820-86555cb2d2fd/MO_3RES_progress_032020.pdf.
Governments can support private investment for green growth by establishing a predictable policy and regulatory environment for green investment. The OECD has created several references and recommendations to guide economies in creating policies to attract sustainable and green investment (Box 4.7). Most economies have implemented environmental strategies that include green investment objectives; however, they remain at varying levels of development and specificity. Only half of the region’s strategies include in-depth details such as compliance requirements, cost estimates, financing sources and strategies, or project priorities. Institutional frameworks to support green investment remain complex and unclear in some WB6 economies. Montenegro’s national strategy, the Smart Specialization Strategy of Montenegro or S3.me (2019-2024), promotes green growth and encourages green investments by defining the priorities and focal areas to be developed for sustainable and green growth. In 2020, Serbia also established its Multi-annual Investment and Financing Plan (MIFP) for the environment that includes detailed priorities and strategies for investment projects, particularly for waste, wastewater and drinking water infrastructure. Bosnia and Herzegovina and Kosovo have also implemented strategies aimed at promoting green investment – the Integrated Energy and Climate Plan of Bosnia and Herzegovina (NECP BiH) for the period 2021-2030 and Kosovo’s Strategy for Supporting Innovation and Entrepreneurship (2019-2023).
In 2016, the OECD established its Centre on Green Finance and Investment to support member states in transitioning to green, low-emission and climate-resilient economies. The centre aims to increase the attractiveness of economies for green investments by developing effective policies, institutions, and instruments to facilitate these transactions while further harmonsing members with the principles of the Sustainable Development Goals and Paris Agreement.
The centre holds a global annual forum on green finance and investment to enable knowledge exchange between leaders from the private sector, government and regulatory institutions, academic and civil society on integrating and prioritising green goals in their agendas. The institution also develops innovative analysis and practical recommendations for supporting the rapid scaling-up of green investment and financing flows that can help relevant actors implement policies to achieve these goals.
Source: (OECD, 2020[39]) OECD Centre on Green Finance and Investment (webpage), https://www.oecd.org/cgfi/.
Some economies have implemented strategies at the lower administrative level that align with economy-wide strategies to create a predictable strategic and legal framework for investors. In Albania, for instance, the municipality of Tirana has adopted its Sustainable Development Strategy 2019-2022, which covers sustainable economic, social, and ecological development in line with the national Green Development Agenda. Meanwhile, in 2019 Serbia launched its National Strategy for Sustainable and Integrated Urban Development as well as a three-year action for its implementation, further aligning all administrative levels with the EU Urban Agenda.
Governments can mitigate regulatory risk by providing greater certainty for investors through transparency and comprehensive regulations to afford investors equal opportunity and protection (OECD, 2015[2]). In this sense, all economies continue to respect core investment principles such as investor protection, intellectual property rights protection and non-discrimination in most areas of investment, including those inclined to attract green investment. These rights are typically enshrined in the economies’ laws on investment or foreign investment.
Frameworks for public and private partnerships for green growth are improving
Mobilising and scaling-up green investment implies leveraging domestic and international public and private investment. Public-private partnerships (PPPs) can be mutually beneficial, especially while economies battle the financial consequences of the COVID-19 pandemic and public spending on green infrastructure is likely to be low as decreasing deficits take priority. The private sector benefits from risk transfer, increased investment opportunities and business development. Most economies have developed strong frameworks for public-private partnerships and continue to show commitment to non-discriminatory public procurement opportunities for green projects.
Albania, Montenegro, North Macedonia and Serbia have developed relatively strong frameworks for choosing public and private partnerships for green growth. These economies not only have dedicated PPP laws, but have also shown a commitment to non-discriminatory public procurement opportunities in energy efficiency and renewable energy projects. For instance, the 140 MW Karavasta photovoltaic park project in Albania is being implemented by the winner of a non-discriminatory public procurement auction (the French company Voltalia). Meanwhile, the energy laws of both Albania and North Macedonia provide for feed-in premium tariffs for investment in renewable energy sources. However, Bosnia and Herzegovina only partially encourages PPP for green growth, as Republika Srpska and selected cantons of the federation have PPP laws and regulations that do not explicitly define investment in green growth, and the economy’s regulatory framework is hindered by institutional complexities and unclear division of responsibilities.
The way forward for green investment
Integrate green growth priorities into existing strategies on investment promotion. While some economies have already established dedicated strategies to attract green investment, those economies without such frameworks could streamline green investment promotion efforts by incorporating these principles into existing investment strategies.
Create awareness-raising campaigns to promote the region as a green investment destination. Economies can design national or regional campaigns that highlight successful energy efficiency or renewable energy projects, emphasise innovative or green product manufacturing, and promote opportunities in green sectors and activities (Box 4.8). Nominating as “brand ambassadors” the domestic enterprises that are pursuing green initiatives would show potential investors the real green opportunities available in the region. Campaigns could be accompanied by easily communicable information materials such as brochures, websites and videos that can be shared with investors at external events.
Promote public-private dialogue on green investments. Although most WB6 economies are conducive to public-private partnerships, enhancing the dialogue between public and private institutional and financial entities on the challenges, areas in need of support, and opportunities that exist for green investment can enhance investor confidence in bidding for existing renewable energy and energy efficiency projects.
In recent years, Slovenia has renewed its commitment to encouraging green and sustainable projects, notably by providing EUR 10 million in cheap loans for environmental investments; approving grants on top of subsidised interest rates for investment in renewables and energy efficiency; and renewing subsidy schemes for companies and entrepreneurs dedicated to energy efficiency, renewables and measures to reduce pollution and greenhouse gas emissions.
In 2019, Slovenia’s investment promotion agency, SPIRIT, launched an international communications campaign called “Green. Creative. Smart.” In line with the CO2021 green investment recommendations, the campaign was incorporated under the existing business branch of the economy’s tourism brand “I feel Slovenia”. The campaign highlights key economically competitive advantages of the Slovenian economy in the fields of environmental technologies, robotics, mobility, research and development, digitisation, and creative industries.
The movement draws attention to Slovenian enterprises involved in, among others, light aviation, greenhouses powered by geothermal energy with production controlled by smart-censors, and self-sustainable zero emission houses. The campaign is disseminated through promotional videos, external fairs, outreach programmes and partnership ambassador testimonials. As part of this project, SPIRIT held a series of webinars for investors of ongoing projects and potential foreign investors in 2020, covering Slovenian sustainable mobile solutions for road, air and sea transport; top solutions in the field of health; and green solutions for transition into the circular economy.
Source: (SPIRIT Slovenia, 2020[40]), SPIRIT Slovenia “Green. Creative. Smart.” (2020), https://www.sloveniabusiness.eu/.
Overall, the WB6 economies have established solid legislative frameworks that have become the building blocks for open and favourable investment climates. In addition, they all benefit from solid institutional frameworks and well-crafted strategies for investment promotion and facilitation, with dedicated IPAs that conduct the core functions of investment promotion and facilitation. Several economies have also strengthened their investor incentive and aftercare services to simplify procedures for foreign investors.
Further efforts are required to reinforce their policy framework, notably in conflict resolution, enforcing contracts and intellectual property rights. The IPAs’ ability to fulfil their mandates is often hampered by a lack of capacity and resources, as well as complex institutional settings and limited co-ordination with other government bodies. The WB6 economies should continue streamlining administrative procedures for investors and improving the predictability of their regulatory environment, while pushing for greater capacity and resources to ensure IPAs can carry out their investment facilitation roles. Leveraging on their strong investment frameworks, the WB6 economies are well-positioned to pursue their reforms and further align themselves with international standards.
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Notes
← 1. The Competitiveness Outlook 2021 assesses Bosnia and Herzegovina at the state-level and the entity-level. For more details on the methodology used to evaluate Bosnia and Herzegovina, please refer to the Assessment methodology and process chapter and Annex A on Bosnia and Herzegovina scoring models.
← 2. Protection against unlawful expropriation is also enshrined in the constitution and the Law on Foreign Investment of the Republika Srpska as well as the Law on Foreign Investment for the Federation of Bosnia and Herzegovina.
← 3. Kosovo’s Law No. 04/L-220 on Foreign Investment defines expropriation as: “any act or measure, any series of acts or measures, any failure to act or series of failures to act, if the direct or indirect effect thereof is to deprive the concerned foreign investor of the ownership or control of, or a significant benefit or use of, an asset”.
← 4. As of December 2020, the draft law to establish a Kosovo commercial court was at the public consultation stage. The draft has received a wide and positive public response according to key stakeholders.
← 5. The Singapore Convention on Mediation is a uniform and efficient framework for international settlement agreements resulting from mediation. It applies to international settlement agreements resulting from mediation, concluded by parties to resolve a commercial dispute.
← 6. Albania has also prepared a draft law on trade secrets to further align with EU acquis. It is pending adoption.
← 7. Kosovo is not included in the WEF Global Competitiveness Report.
← 8. In 2018, the number of applications to register trademarks rose by 24.4% compared to 2017 and applications for patents and utility models increased by 11.7% in Albania.
← 9. The NCEDK was reorganised in August 2020. It is now named the National Council for Economy and Investments (NCEI). The NCEI should act as an active forum for economic and investment promotion and is expected to be more active in the development and steering of KIESA. Detailed information on the new body and its mission is not yet available.
← 10. In Serbia, RAS manages the Support Programme for Companies to Join the Supply Chains of Multinationals with a budget of circa USD 5 million. It provides advisory and financial support aiming at reinforcing the capacity of manufacturing firms in targeted supply chains.
← 11. In addition to FIPA, numerous bodies are involved in FDI attraction activities at the entity level notably the Ministry of Economic Relations for Investment Promotion of the Republic of Srpska, which also undertakes investment promotion and facilitation activities.
← 12. 1) e-Tax; 2) Central Registry; 3) e-Construction Permit; 4) Online Employment Registration; 5) E-Procurement; 6) EXIM (Export –Import licensing); 7) Automated System for Management of International Cargo Transport Licenses; 8) Government Land Auction; 9) Online Cadastre; 10) System for issuing Work and Residence permits to foreigners
← 13. The National Business Centre in Albania, the Kosovo Business Registration Agency, the Central Register in North Macedonia, the Central Register of Business Entities in Montenegro and the Serbian Business Registers Agency
← 14. The law on strategic investment in Albania considers strategic sectors to be: energy and mining; transport, electronic communications infrastructure and urban waste; tourism (tourist structures); agriculture (large agricultural farms) and fisheries; economic zones; and development priority areas.
← 15. Strategic sectors defined in North Macedonia’s 2020 Strategic Investment Law are: energy, transport, telecommunication, tourism, manufacturing, agriculture and food, forestry and water economy, health, industrial and technological parks, wastewater and waste management, sport, science and education.
← 16. The incentives include a variety of measures including job creation subsidies, capital investment subsidies, and financial support to exporters.