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Global Business and Economics Review, Vol. 18, No. 2, 2016 227
Copyright © 2016 Inderscience Enterprises Ltd.
Barriers for FDI in Serbia: evidence from the
manufacturing sector
Aristidis P. Bitzenis
Department of International and European Studies,
University of Macedonia,
156 Egnatia Street, Thessaloniki 54006, Greece
Email: bitzenis@uom.gr
Vladimir P. Žugić*
Ball Packaging Europe Belgrade ltd,
Batajnicki drum 21a, 11080 Belgrade, Serbia
Email: vzugic75@gmail.com
*Corresponding author
Abstract: Among countries that emerged after the disintegration of Yugoslavia
in end of the 20th and beginning of the 21st century, Serbia and its neighbours
are experiencing and anticipating the FDI inflows to support their relatively
weak economies. After the initial inflow related to M&A during the
restructuring of the financial sector, as the main driver of the economic growth,
the manufacturing sector is a natural candidate for the promotion of FDI
inflows. Barriers that are recognised by investors in manufacturing sector in
Serbia are determined and investor specific interactions are explored,
confirming that bureaucracy is the barrier recognised by the majority of
investors. Top rated barriers that follow are related to macroeconomic and legal
factors.
Keywords: foreign direct investment; FDI; manufacturing; barriers; Serbia;
transition.
Reference to this paper should be made as follows: Bitzenis, A.P. and
Žugić, V.P. (2016) ‘Barriers for FDI in Serbia: evidence from the
manufacturing sector’, Global Business and Economics Review, Vol. 18, No. 2,
pp.227–246.
Biographical notes: Aristidis P. Bitzenis is an Associate Professor at the
Department of International and European Studies, University of Macedonia,
Thessaloniki, Greece. His main research field includes FDI, entrepreneurship,
privatisation, globalisation, the European business environment and corporate
restructuring in South-East Europe. He has published extensively and
participated in various conferences in his research field. His research record
and forthcoming publications include seven books (four of which are in the
Greek language), 16 book chapters, 15 entries in encyclopaedias, 36 journal
articles, nine papers in conference proceedings and 15 research grants. His
latest book is an edited volume titled Mergers and Acquisitions as the Pillar of
Foreign Direct Investment, published by Palgrave Macmillan in August 2012.
He supervises graduate and PhD students on issues with regard to international
business, entrepreneurship, transition economies, the European Union or
foreign direct investments.
228 A.P. Bitzenis and V.P. Žugić
Vladimir P. Žugić works at Ball Packaging Europe as Regional Manager for
Central and Eastern Europe. With 11 years of experience in the international
business environment, he is actively involved and supports cross border
projects in the CEE region related to metal packaging and beverage industries.
His area of expertise lies in project management in the multicultural climate.
He has engineering background and holds a Masters degree in Business
Administration from the University of Sheffield. He has also specialised in
corporate finance and FDI.
1 Introduction
The last decade of the 20th century in Central and Eastern Europe (CEE) witnessed the
collapse of centrally planned economies, civil wars and political turmoil. Countries that
got through this period, as well as several new countries that emerged after the
disintegration of the Socialist Federal Republic of Yugoslavia, started an economic
transition process and integration with the rest of Europe. Gradually, they experienced
one of the key components of economic integration – foreign direct investments (FDIs).
Considering the relative weakness of their economies during the transition period, FDIs
supplied fresh capital vital for this process (Bevan and Estrin, 2000; Kornecki and
Rhoades, 2007). Furthermore, taking into account the rising trend of FDI inflows towards
the transition economies across the world (UNCTAD, 2010), developing country such as
the Republic of Serbia (Serbia) must get ready for regional competition for potential
FDIs.
While studies regarding the determinants of FDI caught the attention of the academics
worldwide (SECI, 2000; MIGA, 2002), covering the majority of CEE countries, it can be
noted that Serbia in particular has received a limited attention by academics.
Furthermore, taking into consideration all the benefits of the FDI inflows to the
manufacturing sector of the developing countries as discussed in this paper, Serbia has
not yet been sufficiently studied by industry related surveys. This supported the authors’
decision to conduct a detailed, questionnaire-based research on FDI barriers in Serbia
with focus on the manufacturing sector.
Consequently, this paper provides a deep insight on the barriers that affect FDI
inflows in the manufacturing sector in Serbia. With attention to the respective academic
studies in the region, similarities and differences are examined and discussed in detail.
Accordingly, the benefits of this paper are threefold. On the academic level, the expanded
body of knowledge allows further and more detailed assessment of the forces affecting
the FDI inflows to the region. From the investor’s perspective, the detailed understanding
of the potential or experienced barriers is the important part of development of entry and
operation strategies. Finally, this paper provides a solid foundation for policy makers in
Serbia to decide on the specific and focussed improvements of the business environment
in order to bring the strongest positive results.
Barriers for FDI in Serbia: evidence from the manufacturing sector 229
2 The barriers for FDI: literature review
The countries’ abilities to attract and to exploit the potential FDIs vary according to their
national political, economic and legal cultures, traditions and infrastructures, together
with the economic objectives and policies pursued by host governments (Bitzenis et al.,
2009). On the other hand, the minimisation of the investment’s risk is the broad criterion
for a MNC’s decision to choose where to invest directly. In their effort to analyse the
determinants of this criterion, Bitzenis (2009) and Bitzenis and Szamosi (2009)
categorise the barriers/constraints of FDI according to country/geographical location,
business environment (market), legal framework, taxation, government constraints,
macroeconomic conditions, infrastructure, culture and religion, environmental concerns
and external issues (war, domino effect of an economic crisis, etc.) and recognise other
factors such as the lack of participation in regional initiatives or international
organisations and unions.
The economic variables such as GDP, factor prices, tax treatment and other
firm-specific and country-specific variables are considered as first order determinants in
the greater part of the literature (see Caves, 2007; Dunning and Lundan, 2008).
Nevertheless, there are observations in emerging and transition markets that consider
political and macroeconomic stability, the legal framework and corruption and
bureaucracy as first order determinants (Jun and Singh, 1996; Lankes and Venables,
1996; Holland et al., 2000).
Bevan and Estrin (2000) in their paper claim that studies on FDI in emerging markets
have emphasised the importance of the economic and political risk in terms of
macroeconomic, institutional and political stability. The results presented by Garibaldi
et al. (2001) confirmed the positive relationship between FDI and macroeconomic
stability, level of economic and trade liberalisation and fixed exchange rate policy and
indicate that the legal barriers and insider privatisation reduce the FDI inflows. Economic
instability, in relation to the balance of payments deficits and inflation has a negative
effect on FDI inflows (Apergis and Katrakilidis, 1998; Sayek, 2000). The analysis of
Baniak et al. (2005) confirmed that stable macroeconomic performances and a stable
legal system exert a stimulating influence on FDI inflows. On the other hand, the unstable
host country environment may lead to an adverse selection of investors, meaning that it
would primarily attract short-run speculative foreign capital. Campos and Kinoshita
(2003) provided evidence that the level of law enforcement and bureaucracy are
significant FDI determinants. Furthermore, there have been observations that specify the
negative effects of political risk on FDI (Schneider and Frey, 1985).
Tondel’s results (2001) proved that FDI inflows are driven by the transition progress
(the transition index being the only significant variable), as well. The author claimed that
higher risk sensitivity suggests a role for the efficiency seeking or vertical investments.
The trade integration or ‘degree of openness’ variable that goes hand in hand with the
transition progress is positively associated to FDI inflows by many empirical and
theoretical studies (Resmini, 2000; Skabic and Orlic, 2007). Also, the private sector share
of GDP, denoting the pace and method of privatisation, proved to affect the FDI pattern
(Lansbury et al., 1996). Similarly, Carstensen and Toubal (2004) and Holland and Pain
(1998) confirmed respectively that the level and method of privatisation and the country
risk factor have a strong influence on FDI. Moreover, the research done by Janicki and
Wunnava (2004), using the institutional investor country risk rating, provided evidence
230 A.P. Bitzenis and V.P. Žugić
that higher risk acts as a barrier and reduces the FDI inflows – the country risk indicator
and FDI were negatively correlated.
Although corruption is negatively correlated with FDI inflows in highly corrupted or
developed countries, this relation is doubted in countries with low levels of corruption or
in developing countries (Field et al., 2003; Caetano and Caleiro, 2005; Han, 2006). There
are observations to support this assumption, which indicate that corruption loses its
significance as a market barrier to foreign investors and point towards a positive relation
between bribery and bureaucracy and on local takeover synergies (Hannafey, 2004;
Weitzel and Berns, 2006). Empirical investigations on the determinants of FDI barriers
can be broadly categorised in groups according to their observations: economic and
political risk, transition progress and privatisation, national culture and the general
country risk factor.
While above mentioned barriers are commonly recognised by academics, matching
them against specific origin of investors, industries, entry modes or market orientation is
essential for efficient assessment of country specific determinants. In other words,
barriers for one industry could be observed as a motive for another (e.g., the missing
specific infrastructure barrier for industries using them is a motive for industries that are
constructing them). In light of the fluency and dynamics of the international business
operations, Bitzenis (2003b) and Bitzenis and Papadimitrou (2011) proposed the
universal model of theories determining FDI that suggest review of existing theories in
project specific framework and application of relevant ones only. Using the universal
model approach that is already tested in the neighbouring countries1, the key barriers
related to Serbia could be found under resource, location, government/legal, market and
financial factors (see Table 1).
Table 1 Barriers of FDI in CEE
Author Area Key barriers
Resmini (2000) CEE Level and pace of reforms
Corruption
Bureaucracy
Campos and Kinoshita
(2003)
CEE/CIS
Restrictions on capital flow
Unstable legal system
Bureaucracy
Corruption, crime, mafia
Bitzenis (2004) and
Bitzenis and Marangos
(2008)
Bulgaria
Country risk/credit rating
Low macroeconomic stability Baniak et al. (2005) CEE
Bureaucracy
Skabic and Orlic (2007) CEE Corruption
Bureaucracy
Corruption
High VAT
Bitzenis and Szamosi
(2009)
Albania
Unstable legal system
Source: Literature review
Barriers for FDI in Serbia: evidence from the manufacturing sector 231
Table 1 Barriers of FDI in CEE (continued)
Author Area Key barriers
Corruption Mateev (2009) CEE
Bureaucracy
Macroeconomic instability
Political instability
Corruption
Bitzenis (2003b) and
Bitzenis and
Papadimitriou (2011)
Universal
Bureaucracy
Bureaucracy
Corruption
Lack of enforcement of law
Economic crime
Bitzenis and Nushkova
(2011)
FYR Macedonia
Slow transition and reforms
Source: Literature review
It is important to note that bureaucracy and corruption are the most commonly recognised
barriers in CEE, closely followed by macroeconomic stability. Detailed studies done on
this topic confirm that FDI inflows are encouraged by a stable exchange rate, a stable/low
inflation rate and a stable depreciation of host currency in relation to home currency
(MacDermott, 2008; Gast and Hermann, 2008; Phillips and Ahmadi-Esfahani, 2008).
Accordingly, MNCs do not support investing into economies with unsuitable
infrastructure and unstable and unfavourable legal and tax regimes (Blonigen, 2005).
3 Impact of FDI inflows to the manufacturing sector
As one of the main tools of globalisation, the FDI became the prevailing type of capital
inflows to developing economies (Roberts et al., 2008). The effects of FDI to the host
economy evolve through several phases, with overall improvement of key
macroeconomic parameters of the host country such as growth of the economy and trade,
improvement of the standard of living and employment (Kornecki, 2010). During the
initial phases of transition, the new (foreign) capital is required for privatisation and
restructuring of state owned companies (Bitzenis and Marangos, 2007). The positive
effects of FDI inflows to the manufacturing sector in this early phase are recognised by
Barrell and Holland (2000). They argue that the pace of reforms and restructuring is
accelerated by increased labour productivity driven by improved knowledge and
management rather than by capital investments. Furthermore, Alfaro (2003) in her study
argues that among other sectors, the manufacturing sector has the strongest positive effect
on the growth of the economy. Small economies in CEE have great benefit of improved
productivity, trade and exports (Vukšić, 2005; Bitzenis et al., 2007a).
The manufacturing sector, in particular, delivers strong spill over benefits that are
reflected in learning and imitation, technology transfer and improved management
(Hejazi and Safarian, 1999; Chung, 2001; Javorcik, 2004). Based on the empirical
evidences, workers that are employed in foreign companies have higher wages and wages
growth, leading again to higher productivity (Bedi and Cieslik, 2002).
232 A.P. Bitzenis and V.P. Žugić
Considering the positive effect of FDI inflows to the level of employment in the
manufacturing sector, Hunya and Geishecker (2005) suggest that FDI should be explored
in relation to the entry mode. Accordingly, early phases of restructuring are generally
characterised by privatisation with short term negative effects of substantial layoffs. On
the other hand, the long term effect is positive considering the improved trade and
business development with partner companies. A Greenfield or Brownfield investment
has an immediate job creation effect.
4 Statistical data of FDI inflows in SERBIA (2005–2013)
Based on the data available from the National Bank of Serbia (NBS2), between the years
20053 and 2013, €13.3 billion NET went to Serbia in the form of FDIs – of which
over90% was derived from European countries (NBS). However, it is important to note
that NBS monitors cash transfers and thus limitsthe available information to country of
payment rather than to country of origin of the investors. According to the described
criteria, Austria holds the strong leader position with close to €2.4 billion NET FDI
inflows (Figure 1).
Figure 1 FDI inflows in cash net by top ten countries, 2005–2013, in million € by country of
payment (see online version for colours)
Source: NBS database, http://www.nbs.rs/internet/english/80/
platni_bilans.html (accessed 11 May 2014)
If evaluated on a yearly basis, the NET FDI inflows remained relatively stable between
2005 and 2008 but peaked in 2006 mainly driven by privatisation of telecommunication
operators. However, a decline was observed in 2009 and 2010, the period of global
economic crisis. The sharp decline in 2012 is driven by the government repurchase of
stakes in the telecommunication companies that were privatised in 2006, thus reducing
the NET inflows (Figure 2).
Barriers for FDI in Serbia: evidence from the manufacturing sector 233
Figure 2 FDI inflows in cash net on a yearly basis, 2005–2013, in million € (see online version
for colours)
Source: NBS database, http://www.nbs.rs/internet/english/80/
platni_bilans.html (accessed 11 May 2014)
An analysis in depth shows that the financial sector had the highest recorded capital
inflows in the explored timeframe with the manufacturing sector firmly positioned in
second place of the overall FDI inflows between 2005 and 2013 (Figure 3). Moreover
and as highlighted by literature review, with strong positive benefits to the host economy,
the manufacturing sector is a natural candidate for further promotion.
Figure 3 FDI inflows by sectors (2005–2013), thousand € (see online version for colours)
Source: NBS database, http://www.nbs.rs/internet/english/80/
platni_bilans.html (accessed 11 May 2014)
234 A.P. Bitzenis and V.P. Žugić
Exploring the FDI inflows to Serbia in respect to the two highest ranked sectors on a
yearly basis (Figure 4), it can be noted that between 2005 and 2008 the financial sector
significantly outperformed the manufacturing one. The high level of FDIs in the financial
sector in the early phase of the transition process can be explained by initial M&As of the
Serbian banks (Marinova et al., 2004; Zubovic et al., 2009). However, the restructuring
was completed rather quickly and after 2008 this important channel of capital inflows has
been exhausted. In order to absorb the reduction of capital inflows to the financial sector,
other sectors must be stimulated to attract and to keep as much FDIs as possible.
Considering the trends in FDI inflows in the manufacturing sector, it peaked in 2006
(€790 million) and then gravitated at the level of about €380 million on a yearly basis.
However, the overall trend of FDI inflows between 2007 and 2013 raises concerns,
suggesting that there is a need for the further development of the suitable activities to
stimulate and to promote the FDI inflows to the manufacturing sector.
Figure 4 FDI inflows by sectors (2005–2013), financial versus manufacturing, thousand €
Source: Available at http://www.nbs.rs/internet/english/80/platni_bilans.html
(accessed 11 May 2014)
5 Research methodology
Taking into the account the nature of this research, the number of companies and their
characteristics, the proposed method for primary data collection is the questionnaire
survey, probably the most common method used by academics for gathering quantitative
and qualitative data for further analysis (see Roberts, 1999; Saunders et al., 2007). The
Barriers for FDI in Serbia: evidence from the manufacturing sector 235
design of the questionnaire survey is in line with recent practices of academic research in
the area of FDIs in the SEE region4 and structured to follow the universal model
approach.
The basic criterion for the selection of companies to be included in this research was
their operation in the manufacturing sector per NACE5 classification. Additionally, an
investment process had to be performed between 2001 and 2011 and a minimum of 10%
of foreign capital had to be invested6. Companies were chosen from the Serbian
Investment and Export Promotion Agency (SIEPA) database, backed up with data from
the Statistical Office of the Republic of Serbia and the Serbian Business Registers
Agency. Statistical analysis in order to determine correlations between expected and
observed results was performed by using Pearson’s chi-square test with the statistically
significant p-value as considered by this research below 0.17. The logit or probit analysis
for the decision to invest as an independent variable was not conducted since the sample
consists only of enterprises that have invested in Serbia. Therefore, an analysis of the
interactions is performed in relation to the basic characteristics of investments (industry
sector, origin, entry mode, market orientation, value of investment and number of
employees) and barriers. Where applicable, the Fischer exact test was used to assess 2 × 2
tables. Barriers in the specific statistical analysis are rated according to their importance
to the respondents as follows: high (> 30%), med (20% to 30%) and low (< 20%).
Based on described research criteria, the total number of investments in Serbia is 1448
and due to the available resources for performing the questionnaire survey all of them
were included in this research project. The questionnaire was designed to be
self-administered, containing the cover letter with information about the research
objectives, ethical aspects, gratitude for feedback and instructions for handling of
questionnaire. Finally, in order to record valid and relevant data, the questionnaire was
distributed to relevant company representatives, senior management and/or executives.
6 Questionnaire design
The main purpose of the questionnaire was to record necessary characteristics of the
population such as characteristics of investment on the one hand and barriers for FDI on
the other. Accordingly, the first part of the questionnaire was based on attributive and the
second part on descriptive variables. The questionnaire was structured by following the
OLI theory (Dunning, 2001) under the universal model (Bitzenis, 2003b; Bitzenis and
Papadimitriou, 2011) and the existing design that was tested and used for studies in
Bulgaria, Albania and Greece (Bitzenis, 2003a; Bitzenis et al., 2007a; Bitzenis and
Szamosi, 2009). In particular, the first part of the questionnaire aimed for general
characteristics of investment – sector, number of employees, value of investment9, home
country, entry mode and market orientation. The second part looked for common barriers
in the area of macroeconomic, political or government related factors. Questions had
mainly multiple-choice answers, with several category questions for specific items. In the
majority of cases the e-mail delivery was used due to the authors’ experience regarding
the response rate in similar projects and the subjectivity in face to face interviews
(Roberts, 1999). Finally, the questionnaire design was tested and confirmed in advance
with two companies randomly chosen from the population.
236 A.P. Bitzenis and V.P. Žugić
7 The outcome of the survey
The questionnaires were distributed from October to December 2011 directly to the
senior management or executives of the previously determined companies. From the
144 investments, questionnaires were successfully delivered to 117 companies while in
27 cases it was not possible to reach the relevant persons. A total of 47 completed
questionnaires were returned. This represents 33% of the total population or an actual
response rate of 40%, in all cases answered by the executive, PR or Senior Manager.
With a desired level of confidence of 90%, a maximum allowable error of 10% and the
most conservative approach for population proportion of 50%, the calculated and
achieved sample size of 47 is appropriate10 (Bitzenis et al., 2007a, 2007b). Structure of
the sample is presented in Table 2.
Table 2 Structure of the sample, stratified
NACE Description Pop. Resp.
10 Manufacture of food products 14.6 12.8
11 Manufacture of beverages 4.2 8.5
12 Manufacture of tobacco products 2.1 2.1
13 Manufacture of textiles 1.4 4.3
14 Manufacture of wearing apparel 8.3 4.3
16 Manufacture of wood and products of wood and cork 2.1 2.1
17 Manufacture of paper and paper products 0.7 0
19 Manufacture of coke and refined petroleum products 4.9 2.1
20 Manufacture of chemical and chemical products 5.6 8.5
21 Manufacture of basic pharmaceutical products and
pharmaceutical preparations
3.5 4.3
22 Manufacture of rubber and plastic products 2.8 6.4
23 Manufacture of other non-metallic mineral products 7.6 8.5
24 Manufacture of basic metals 3.5 2.1
25 Manufacture of computer, electronic and optical prod. 6.9 4.3
25 Manufacture of fabricated metal products, except the
machinery and eq.
2.1 2.1
27 Manufacture of electrical equipment 5.6 10.6
28 Manufacture of machinery and equipment n.e.c. 6.9 4.3
29 Manufacture of motor vehicles, trailers and semi – trailers 15.3 10.6
30 Manufacture of other transport equipment 1.4 2.1
31 Manufacture of furniture 0.7 0
Source: Author’s questionnaire survey
Considering the entry mode, the majority of investors used the Greenfield approach
(30%), followed by the multiple entry mode (25%) and acquisition through the
privatisation programme of Serbia (15%). Acquisition, joint ventures, Brownfield and
Portfolio investments are less present (Figure 5).
Barriers for FDI in Serbia: evidence from the manufacturing sector 237
Figure 5 Entry mode. source: author’s questionnaire survey (see online version for colours)
30%
25%
15%
11%
11%
6%
2% Greenfield direct investment
Multiple entry mode
Acquisition through privatisation
programme of Serbia
Acquisition
Joint ventures / strategic aliances
Brownfield investment
Portfolio investment
When the entry mode is analysed according to the value of investment, the statistically
significant p-value 0.006 is noted, thus confirming the Ha hypothesis –a correlation exists
(see Figure 6). Accordingly, small value investments tend to choose a single entry mode,
while medium and large value investments prefer a multiple entry mode. In line with
studies by Claver et al. (2007) and Rahman and de Feis (2009), the multiple entry mode
is considered as a risk reduction strategy commonly referred to as the incremental or
Uppsala model.
Figure 6 Entry mode multiple way vs. value of investment (see online version for colours)
Small
9%
Medium
46%
Large
45%
Source: Author’s questionnaire survey
When investments are explored in respect to market orientation, only 9% of the investors
are solely focused on the Serbian market, while 91% of investors are oriented to export
(50%) and on both exports and on the Serbian market (41%). It is important to note that
within 9% of the investors that are oriented on the Serbian market, the majority originate
from South-Eastern Europe (Figure 7). The positive correlation between market
orientation and origin is confirmed with a p-value of 0.069.
238 A.P. Bitzenis and V.P. Žugić
Figure 7 Market orientation in % (see online version for colours)
Serbian
market
9%
Export
50%
Both
41%
4.5% 9.1%
50.0%
50.0% 36.4%
25.0%
100.0%
60.0%
45.5% 54.5%
25.0%
40.0%
0%
50%
100%
WE CE SEE NA MA
Serbian market Export Both
Source: Author’s questionnaire survey
Observing the Europe vs. non-Europe level, FDI originating from Europe is represented
by 81% of the respondents. On the regional level, companies from Western Europe
(WE11) are represented in the sample by 49% of the respondents, followed up by Central
Europe (CE) with 23%. Details are presented in Figure 8.
Figure 8 Home region overview of the respondents (see online version for colours)
Europe
81%
Non
Europe
19%
WE
49%
CE
23%
MA
11%
NA
8%
SEE
9%
Source: Author’s questionnaire survey
8 FDI Barriers in Serbia
The questionnaire survey revealed that bureaucracy is the most significant barrier for
investors in the manufacturing sector in Serbia (87.2%). It is followed by two
macroeconomic parameters – exchange rate volatility (68.1%) and inflation level
(57.4%). Two other highly ranked barriers are related to the legal system – lack of
enforcement of the laws (55.3%) and slow progress in the reforms (55.3%). A detailed
Barriers for FDI in Serbia: evidence from the manufacturing sector 239
overview of the significant barriers is presented in Figure 9 while barriers below 10% are
excluded from the list.
Figure 9 Frequency of experienced barriers in % (see online version for colours)
Source: Authors’ questionnaire survey
With bureaucracy as the top rated barrier, results confirm similar findings by academics
in respect to the CEE and transition economies. On the other hand, data related to the
importance of the corruption barrier do not confirm the results from similar studies in the
region, placing it on a low to medium importance level.
240 A.P. Bitzenis and V.P. Žugić
At the same time, macroeconomic stability parameters in the neighbouring countries
are rated by investors as a barrier with medium to low importance (Table 3) while in
Serbia they rank second and third respectively. Barriers related to the legal system are
rated high in academic studies in the region similarly to the questionnaire data for Serbia.
According to the Foreign Investors Council in Serbia (FIC, 2011), the main issue in this
respect is related to the absence of appropriate laws or by-laws for laws’ implementation.
Additionally, laws could be unclear enough to allow their implementation in a
discriminatory manner. Research data confirms that most of the investors have
experienced barriers in the government controlled issues (bureaucracy, lack of law
enforcement and unstable legal framework) and in financial or macroeconomic issues
(exchange rate volatility and inflation level).
Table 3: Comparative evaluation/barriers
Top 5 barriers Serbia % Rank Albania
% Rank Bulgaria
% Rank FYROM
% Rank
Bureaucracy 87 1 67 1 58 2 82 1
Exchange rate
volatility
68 2
Inflation level 57 3
Lack of
enforcement of the
laws
55 4 67 3
Slow progress in
reforms
55 5 62 5
Corruption 23 14 65 2 53 3 68 2
High VAT 45 3
Unstable legal
framework
32 9 43 4 73 1
Lack of
transparency1
23 14 41 5 64 4
High investment
risk
52 4
Low GDP per
capita
50 5
Note: 1Corruption/lack of transparency for Serbia is treated as the single barrier;
classified under ‘economic crime’ for FYROM
Source: Serbia, authors’ questionnaire survey, manufacturing sector; Albania
(Bitzenis and Szamosi, 2009); Bulgaria (Bitzenis, 2004); FYROM,
manufacturing sector (Bitzenis and Nushkova, 2011)
9 Statistical analysis of the results
Starting with a statistical analysis of location related barriers, a significant correlation
between the political instability and industry sector is found with a p-value of 0.074.
Accordingly, the political instability is recognised as a significant barrier in the
manufacture of beverages, tobacco, textiles and wearing apparel, non-metallic and
Barriers for FDI in Serbia: evidence from the manufacturing sector 241
mineral products and basic metals and pharmaceutical industry. This may reflect the
sensitivity of related industries to government interventions in the area of external and
internal trade, licences and taxation.
Within location related factors, lack of transport infrastructure is classified as of low
importance (14.9%) but it is included in this overview due to its strong correlation to the
high value of investments (p-value of 0.057). In line with expectations, large investments
require suitable infrastructure to support their operation.
On the government related factors, the key barrier recognised by 87.2% of
respondents is Bureaucracy. When analysing data in relation to the origin, non-European
investors do not perceive it as a barrier as strong as European investors do, further
supported by the Ha hypothesis and a p-value of 0.040. This could lead to different or
contradicting conclusions. On the one hand, bureaucracy could be ‘expected
performance’ of the transition economy by non-European investors, or on the other hand,
non-European investors might receive stronger government support or incentives in
overcoming this issue.
Considering corruption and lack of transparency, investments with a medium number
of employees as the most sensitive group show a statistically significant difference to
investments with a low and high number of employees with a p-value of 0.094. On the
industry level, the strongest negative effect is recognised in the pharmaceutical industry
with a p-value of 0.078.
In the market factors area, low per capita income acts as a barrier to large value
investments (a p-value of 0.004) and is associated with the multiple entry mode, as well
(a p-value of 0.024). It confirms the importance of the ‘served’ market strength to high
value projects. Lastly, exploring the financial factors area the access to credits barrier
mainly affects the food industry and wearing apparel with a p-value of 0.051.
10 Conclusions and policy recommendations
The key lesson that can be learned from this research is that key barriers for FDI inflows
to the manufacturing sector in Serbia are related to legal and macroeconomic factors.
Moreover, they are recognised by the majority of investors without a lot of statistically
significant differences between investors or sectors.
The findings of this study confirmed that all major negative influences to business
operations of foreign investors in Serbia are related to government and policy makers
either on the administrative, legal or macroeconomic level. Unfortunately, this paper
confirms that Serbia follows the negative path of the most commonly experienced barrier
in similar transition economies – bureaucracy. Accordingly, in order to improve inflows
of investors into the manufacturing sector, the first action to be undertaken by policy
makers is to significantly reduce bureaucracy. Furthermore, the urgent need for tailored
policies to tackle highly rated barriers in respect to the distinctive characteristics of the
FDI cannot be confirmed – all highly rated barriers are under direct control or influence
of the government and improvement in this area will positively affect FDI inflows in the
manufacturing sector in Serbia.
Contrary to studies done in other countries in the region, corruption and crime are
positioned relatively low on the barriers importance list. On the macroeconomic level, the
NBS has recognised the need for the reduction and stabilisation of the inflation level and
its harmonisation with EU. Moreover, if the targeted inflation level of 4% is reached and
242 A.P. Bitzenis and V.P. Žugić
sustained (see Figure 10), it will have a strong positive impact on the recovery of the
economy after the global economic crisis in general and on foreign investors in the
manufacturing sector in particular. Furthermore, top level barriers that are related to the
legal system and reforms as highlighted by this paper are confirmed by the Foreign
Investors Council (FIC, 2011) as well, requiring a stronger focus on laws and by-laws
implementation.
Interestingly, with the political issues and instability that have plagued Serbia in the
years following the disintegration of Yugoslavia, only 29.8% of investors have
highlighted the political instability factor as negative – contrary to our initial expectation
that this barrier would be ranked much higher. Also, contrary to studies done in other
countries in the region, corruption, lack of infrastructure and crime are positioned
relatively low on the list of barriers.
Figure 10 Inflation projection, NBS (y-o-y, in %) (see online version for colours)
Source: http://www.nbs.rs/internet/english/30/30_9/index.html (accessed 17
May 2014)
In the policy recommendation area, the high value investments require the reduction of
barriers in the area of the unsuitable transport infrastructure. Room for improvement lies
in the maintenance and development of major roads and alignment of road tolls with the
region to support movement of goods and trade. The second barrier, low per capita
income, due to the market orientation of the investors strongly depends on regional
development. The improvement in Serbia will directly affect 50% of the investors, while
regional improvement will affect the majority of them (91%). No specific
recommendation could be made on this particular issue as the activities in this respect are
related to the overall growth of the economy in a region that is still recovering from the
global economic crisis. Considering bureaucracy in respect to the high value investments,
it has to be examined relative to the multiple entry mode. Accordingly, policy makers
must align the business and legislative environment in order to provide backing for all
steps during the incremental entry process.
In order to support the food and wearing apparel industries, incentives for the
financial institutions should be developed and promoted to ease the access to the credit
lines. The pharmaceutical industry on the other hand, mainly affected by corruption and
crime barriers requires detailed assessment and revision of the existing financial and trade
Barriers for FDI in Serbia: evidence from the manufacturing sector 243
practices in order to develop preventive and corrective measures to effectively tackle
observed issues.
The recommendation for future research lies in broader analysis in a more
representative sample within underrepresented sectors in order to fine tune existing
results. The key limitation and concern of this study lies in the small time span between
investments and research that could influence research results – time and accumulated
experience is needed for investors in order to recognise and address all factors that
negatively influence their operation in Serbia. Finally, determined barriers are valid for
analysis in a specific timeframe and could change in the years to follow.
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Notes
1 Bitzenis and Szamosi (2009) and Bitzenis (2004).
2 NBS is the successor of the National Bank of Yugoslavia
3 FDI data from the NBS start from 2005
4 Bitzenis, 2003a, 2004; Bitzenis et al., 2007a, 2007b; Bitzenis and Marangos, 2007; Bitzenis
and Szamosi, 2009.
5 NACE rev.2 classification. Available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/
KS-RA-07-015/EN/KS-RA-07-015-EN.PDF (accessed 31 August 2011).
6 Classification of FDIs according to IMF Balance of Payments Manual, 5th ed.
7 General formula for calculation of Pearson’s chi-squared (x2) x2² =∑ (fo – fe)2/fe where fo =
achieved results/fe = expected results.
8 SIEPA database, operation in manufacturing sector per NACE2 classification, investment
process concluded between 2001 and 2011 and minimum of 10% of foreign capital invested.
Data till 2 September 2011.
9 Classification of investments:
Value of investment: small (up to €10 M); medium (€10 M to €50 M); large (over €50 M)
Size of investment: small (up to 100 employees); medium (100 to 300 employees); large (over
300 employees).
10 Based on the adjusted minimum sample size calculation; z-value 1.65, total population 144
[Saunders et al., (2007), pp.585–586].
11 Legend: WE – Western Europe, CE – Central Europe, SEE – South-Eastern Europe,
NA – North America, MA – Middle East and Asia.
