Forcing FDI into lower value added sectors to achieve short-term results and boost employment by the next election, in the long run delivers a loss for the domestic economy and stifles the growth of small and medium-sized enterprises. Serbia has been named the World Record Holder by the number of foreign direct investments in 2018 in terms of gross domestic product by the British Times. The title was earned the second time in the last three years, which is widely used by government officials to brag about economic performance.
Economists, however, warn that, despite foreign direct investment amounting to a record 3.5 billion euros last year, and perhaps even more this year, Serbia is still the country with the slowest growth in the region. Foreign direct investment enters sectors with lower added value, and thus the problem of economic growth cannot be solved. Foreign investors’ money has helped increase employment, but not the recovery of the domestic economy, and especially the growth of small and medium-sized enterprises.
Foreign direct investment analysis shows that from 2000 to 2013, they mainly came through privatization into the service sectors – trade, banking, insurance, real estate, telecommunications, transport, which did not contribute to an increase in production, exports or even employment. In the last six years, when there were no longer attractive privatization firms, investments coming from other countries have largely been driven by labor-intensive government subsidies, driven by heavy government subsidies. It is indisputable that they helped to create new jobs, which, in addition to contributing to the growth of budget revenues, largely ends their positive effect, and one of the negative is that they stifled domestic entrepreneurial initiative and motivation.
There are an estimated 1,600 highly dynamic medium-sized enterprises in Serbia, which, despite their stated competitive advantages, do not succeed in growing into large ones, partly because foreign firms are unconditional state favorites. “It is not good that economic development is based on attracting foreign investors and that they are given incentives without clearly defined obligations that they have to fulfill, which are in the function of long-term economic development of the country”, said Professor of the Faculty of Economics in Belgrade Ljubodrag Savic. He believes that foreign direct investment did not encourage the growth of small and medium-sized enterprises, as this is not the interest of capital owners outside the country.
“The foreigners came here for a profit and that is not in dispute. The government makes concessions that they come to Serbia because there is not much room for maneuver because the situation in the country would be worse if there was no inflow of that money. The problem is that local businesses do not invest, which is not invested by local businessmen who have money. The explanation is that they do not invest because they have enriched themselves in irregular conditions, they have easily come up with money and do not have an interest in risking new uncertain jobs. Others have enriched themselves after 2001 through privatization and, using a strong dinar policy, have focused on importing and selling domestically and not thinking about investment and industry. And Serbia needs re-industrialization, which requires large investments and a long period and the risk is high”, Savic explains to Business and Finance.
According to him, foreign-owned companies in Serbia are subsidiaries of parent companies abroad and are mainly importers of raw materials and goods for sale in safe markets. Most of them are not interested in developing a supplier network in Serbia, developing at the expense of domestic firms and bringing capital out of the country. “We should learn from other people’s examples. The Czech Republic conditioned the German Volkswagen when selling Skoda 60% of the parts that were domestic production. Fiat had no such contractual clause when it came to Serbia and started production in Kragujevac. As a result, there is no expected development of domestic auto parts suppliers, no export to Russia of even a quote of 5,000 cars”, commented Savic.
The solution, he proposes, is for the Serbian government to change its economic policy, not to give subsidies to anyone who wants to do business in Serbia, but in accordance with a long-term goal: to prevent foreign investors from investing in low-complexity, low-value-added products, with the high involvement of low-skilled workers, but to hire engineers and other high-skilled workers and to hire domestic subcontractors and suppliers. “It is not easy because every government is pressured by daily politics, visible results should be delivered by the next elections, and if the results are expected in the long-term process then the elections are uncertain and no one is ready for it. And delaying such measures has a short-term effect and in the long run everyone is at a loss. It’s a vicious circle”, Savic notes.
How blind the country is to be a record holder for foreign direct investment, even to the detriment of the domestic economy, is best illustrated by the example of the German IT company Continental, whose annual income is higher than Serbia’s GDP, and has received subsidies of nearly 20 thousand euros per employee. This has adversely affected domestic IT firms, who are justifiably afraid that such economic policies will drag them away to foreign companies that can offer far higher salaries.
Asked why such a large inflow of foreign direct investment in Serbia had no significant effect on SMEs, Business Support Network Consultant Dragoljub Rajic replies: “Because most investors who receive subsidies from the state import 95% of raw materials and semi-finished products for their production, that is, it does not buy from smaller, domestic suppliers. At the same time, the overall business environment for SMEs has significantly deteriorated since 2012. Profit and property taxes have increased, and new changes to the law are now being planned that will lead to another wave of property tax increases. Tax credits for SMEs were abolished, while tax credits for large companies were allowed, the price of gas and electricity was increased many times, with the excise tax being introduced for electricity. Only 2% reduced taxes and contributions on wages, but the increase in the minimum wage has eaten up in the last four years”, adds Rajic.
He adds that despite the republican government boasting a budget surplus, it now wants to increase the 20% tax on the smallest lump sums by 20%. Also, prices for many utilities have risen from 18% to 92% since 2013.
“When added to the continuing uncertainty in the uncertain domestic market and the great problem of finding and retaining quality workers, it is understandable why the growth of the SME sector is small. Without the constant cheap money that the European Central Bank has been printing for the last three years and which many foreign companies have used from their banks to come to Southeast Europe – the situation would be far worse for us and our neighbors.
In general, SME development involves a well-organized, unobtrusive and efficient state apparatus, fewer tax forms and reasonable para-fiscal levies, a predictable and stable business environment with a high level of protection of private capital, a free market and knowledge transfer. Most of this is still low in our country or the conditions are completely opposite and as long as it is, Serbia will be one of the last wagons of the European train. We see that in the example of similar countries”, Rajic concludes.
According to the contributors to the Economic Bulletin “Macroeconomic Analysis and Trends” (MAT), foreign direct investment in the first half of this year was even higher than domestic, state and private investment together, and also exceeded half of total gross fixed capital formation. This means that domestic investment is insufficient, and it would be optimal for foreign direct investment to make up a third of total investment, with the rest coming from domestic savings. Whether there is no such savings or it goes into other flows will be clearer in the coming years, when foreign capital finds a new, more suitable destination. By then, one in government should consider warning one professor to “make economic policy seem like repeaters”, writes business and finance.
