In Serbia, since 2006, there has been a program to attract foreign direct investment by paying subsidies for every job created in this way. Although there is still no official analysis of the effects of such a policy, politicians (primarily those who were in power or those who still are) point out that this is a great policy: for example, former Economy Minister Mladjan Dinkic said every dinar was paid as a subsidy, it is returned to the budget sevenfold through the payment of taxes and contributions. If this statement is true, then we should direct all the money from the budget into subsidies for foreign investments, since they would become Germany in just a few years. The statement is meaningless for another reason: most of these companies are exempt from paying income tax, employee wages and social security contributions for years after starting work – so the budget can’t even benefit sevenfold because at least for a period of time it has no revenue from of these projects.
The main argument for subsidies – the diffusion of knowledge
On the other hand, most economists generally criticize these subsidies. Criticisms are mostly related to the issue of efficiency: money is taken from entrepreneurs through taxes who know how to manage it, and then given to others. These can often be companies that are in competition with domestic already existing companies. There is also the issue of fairness: these subsidies are direct transfers from us taxpayers to the owners of these companies, and it seems to me that the average resident of Serbia is slightly poorer than the owner of a multinational company, which makes this policy super-hack (Super Hick is a character from Alan Ford’s comic book which is anti-Robin Hood, as he steals from the poor and gives to the rich). The media reported on cases in which some companies that received subsidies shut down production overnight and disappeared, not fulfilling their part of the contract after receiving the funds, as well as that there was no serious control of companies that received subsidies in terms of how much they actually employed workers and how long – whether the workers were hired only during the subsidies or after.
But there is also one argument that some economic experts mention when they want to justify giving subsidies for investments. It is a diffusion of knowledge and technology. What is the basic idea in this case – in a certain economy that has comparative advantages for a production, investments in that sector will not come because it lacks the necessary ecosystem – from specialized knowledge of how the industry works, from how to operate machines and tools in production to softer knowledge of managing large complex systems in the industry, from material selection and procurement, to quality control, logistics and sales channel management, etc. The subsidy serves to cover these initially higher costs for the investor who has to create the entire knowledge and technology transfer system himself.
Textile industry in Bangladesh
One illustrative example of the diffusion of technology is the textile industry in Bangladesh. As a country with a large and cheap labor force, Bangladesh has comparative advantages for labor-intensive industries, such as the textile industry. However, in 1979, there were only about 40 small workshops throughout the country, and production and exports were negligible. Then one former state official Nurul Kader with international connections decided to start his workshop Desh d.o.o. for the production of T-shirts – he signed a contract with the Korean company Daewoo, whose production of clothes at home for export to the USA faced high protective tariffs introduced by the American administration of President Carter. Daewoo sent 130 workers from Bangladesh for training to its factory in Busan, Korea, and Desh pledged to pay 8% of the proceeds from the sale of its products as compensation. In its first year of operation, this small factory recorded exports worth 55,000 dollars. However, in 1987, Desh’s factory exported clothes worth 2 million dollars. But that’s not all – this factory inadvertently and reluctantly spread the knowledge about how the textile industry operates. Of the 130 workers who went to Korea for training, 115 left the factory in the following years and opened their own workshops. In addition to T-shirts, they began to produce other clothing items – gloves, pants and even coats. Other entrepreneurs who wanted to start their production in this industry could now rely on workers who already have the necessary knowledge and skills, and attract them with higher wages and better working conditions instead of investing in creating this knowledge from scratch.
This leak of knowledge outside the factory that first brought it to Bangladesh to the rest of the economy led to the emergence of a large number of other workshops that produced clothing, and thus to the development of the entire textile industry. While Bangladesh almost did not export clothes until 1980, at the end of the 1990s it already exported clothes worth almost 2 billion dollars, and in 2019, the export of clothes was worth over 34 billion dollars.
Is there a diffusion of knowledge in Serbia
To see if subsidy programs for foreign investment in Serbia made sense, we should see if, and to what extent, there was a diffusion of knowledge. Take here, for example, subsidies for the automotive industry, most of which involved funds for Fiat’s factory in Kragujevac and its subcontractors. The total amount of subsidies paid directly to this company or indirectly from waiving the collection of various taxes (on profits, property, taxes and contributions to employees’ salaries), giving property (land and buildings) and taking over the state’s obligation to build a highway branch from Batocina to Kragujevac, etc., is still not collected or communicated to the public. Some estimate that this amount could amount to over 400 million euros. The factory in Kragujevac started operating in 2012.
Has any other car factory opened in Serbia in the meantime? For now, it is not, nor is there any indication of such a thing. Therefore, the conclusion is that during this investment there was no diffusion of knowledge through the rest of the economy that would lead to new investments that are not supported by subsidies. The issue of auto parts production remains – Fiat’s subcontractors did come to Serbia and produce some car parts assembled in Kragujevac, but they were also paid with high subsidies and there was no greater involvement of locally produced parts in the production of models assembled in Serbia.
On the other hand, there have been the opening of new factories that produce various parts for the automotive industry in Serbia. But these companies often produce parts that Fiat’s local subcontractors from Serbia do not produce, so it is quite certain that in this case there was no diffusion of knowledge. Another important segment is that these new companies also mostly received subsidies for employment, while the whole point of the diffusion of knowledge is that the increase in investments comes spontaneously, without state support. Another argument in favor of the fact that even in this segment of industry there was no diffusion of knowledge through the economy (and thus to new investments and increased production) is that these new parts factories are not located in a cluster near Fiat or its subcontractors, but spread across the country. If you produce cables for cars in Prokuplje, it is difficult for you to settle there because you expect to attract workers with that knowledge from Kragujevac. If the newly created knowledge is important to you, you would choose a location closer to where there is that knowledge – which in this case is Kragujevac or its immediate surroundings.
This situation shows us that the situation, even from the point of view of the main economic argument that supports subsidies for foreign investments in Serbia – the diffusion of new knowledge – is quite lean. For the time being, it has simply not been shown that in practice there is a diffusion of knowledge through the economy initiated by those investments that came to Serbia with the help of subsidies. Therefore, there is no emergence of new investments and growth of these industries beyond those for which subsidies have been paid. That is why this most important economic argument, which is in favor of the policy of subsidizing foreign investors, is hollow and clearly says that such subsidies should be stopped, Talas reports.
