Competitive Near Sourcing of international companies in Serbia, foreign investors come to Serbia because of higher profits, new markets, new resources and lower operation costs.
Capital moves from countries where it is abundant and where the returns on it are low to countries where it is scarce and where the returns are high. Profit rates of foreign companies in Serbia are significantly higher than in their home countries. And that is why the fear of their withdrawal from Serbia is unfounded.
Prominent representatives of the position and the opposition, seemingly angry political opponents, accuse each other of thievery, but together they form a perfect tandem that believes that the plan should not be rejected, according to which Serbia should accept Kosovo and Metohija as a neighbor, an independent state, and in support of this they cite economic arguments , because allegedly “rejecting the EU proposal would lead Serbia to isolation, a drop in living standards and a reduction in wages and pensions” and that “investments would cease and unemployment would increase”.
The basic hypothesis Is that multinational companies, as generators of foreign direct investments, would stop doing business in Serbia if the EU blocked its membership (as if foreign capital does not go to countries that are not members of the EU), and then a whole series of logical explanations is built on it. That, without investments, there is no employment, no wage growth… The problem, however, is that any explanations based on a wrong hypothesis are null and void.
This way of reasoning is what Aristotle calls an “unfortunate state of mind” because being logical does not mean being right. The problem with this kind of manipulative way of thinking is that the universality of the hypothesis and its theoretical soundness are missing, which is the basic condition for a valid deduction. That is why it is necessary to point out the groundlessness of such pseudo-arguments.
There is no theory that would explain that international capital flows depend on the membership of any country in a political organization. On the contrary, it mostly moves from countries where it is abundant and where returns on capital are low to countries where it is scarce and where returns are high. Profit rates of foreign companies in Serbia are significantly higher than in their home countries. For example, German companies, on average, have a profit rate of about 15 percent in Serbia, and about six percent in Germany.
Multinational companies resort to foreign direct investment for four main reasons – seeking new markets, resources, knowledge or ways to increase efficiency. In Serbia, unfortunately, they are mainly motivated by efficiency – access to cheap labor and low energy costs. Locational advantages determine the attractiveness of a country for FDI, and geographical position, human capital or developed infrastructure are not something that anyone can take away from Serbia.
Some would say that it has to be in the EU because legal and political security is an important locational advantage. Yes, but where does the idea that such security comes from EU membership come from? Institutions cannot be built overnight, it takes time. The rate of corruption and organized crime in Croatia is not lower because of EU membership, nor has it increased in Great Britain after leaving the Union.
Politicians use analogies to prove the validity of their claims. It is said that because of the conflict between Russia and the EU, foreign investors left the country. It starts from the fact that if there is a connection between the EU and FDI “here and now”, then the connection exists “always and everywhere”, and threatens to withdraw investments from Serbia. Examples of the number of employees in German factories evoke the necessity of servility towards the EU.
There is an emphasis on donations from EU funds as well as GDP growth. All this should convince the citizens of Serbia that they have their own sovereign state and it is not so important as long as it is done for foreign employers. Many people are troubled by causality. Those who do not understand what causes variations in economic variables are easily intimidated by poverty.
This religious understanding of the EU led to the manipulative narrative that without accepting its plan for Kosovo and Metohija, there is no economic development in Serbia. And if, like some politicians, we used the same manipulative way of reasoning, we could conclude that the higher the inflow of FDI as a percentage of GDP, the smaller the population in Serbia (chart number 1). Does this mean that we would have even more foreign investments if the population were to decrease even more? Just as in this case no such conclusions about causation can be drawn, due to the bias of the omitted variable, in the same way no conclusions can be drawn about the mutual dependence of EU integration and FDI inflows.
The fact that some multinational companies have left Russia, which is practically at war with NATO, has nothing to do with Serbia. According to a Yale study, about 1,400 or about nine percent of multinational companies left Russia. On the other hand, although it did not impose sanctions on Russia, Serbia had a record 4.4 billion euros of FDI in 2022, and in the first quarter of this year, their inflow is practically at the same level as in the first quarter of 2022.
Finally, the EU has donated a total of 3.7 billion euros to Serbia, or 150 million euros per year, which is a negligible 0.25 percent of Serbia’s current GDP or only 0.02 percent of the EU’s GDP. By way of comparison, the Government of Serbia spent as much as two billion euros on direct payments to citizens on various grounds during the pandemic alone.
The politicians here deliberately ignore the basic principle of diversification in the international economy and keep saying that “we” have opened hundreds of factories, when in fact it is not “us” but “them”. Our creators of economic policy consciously place Serbia in a position of dependence. According to the data of the Republic Institute of Statistics, foreign subsidiaries employ 20 percent of workers in Serbia, while seven percent of employees work in companies from the EU.
At the same time, economic growth is not always directly related to an increase in the number of employees, because growth can be achieved with the same number of employees, with higher productivity. The average GDP growth rate of Serbia in the last ten years of around three percent is one of the lowest among developing countries. And even such growth cannot be attributed to the inflow of FDI, because to the extent that FDI contributes to economic growth, GDP growth also contributes to the inflow of new FDI.
Finally, if the issue of Kosovo and Metohija is already put in the context of investments, where does the government’s condescension towards representatives of the USA come from if American companies invested only 100 million euros in Serbia in 2022, while more than one billion euros poured in from China.
Moreover, if servility towards Western powers is beneficial for investments, why is Albania still one of the poorest countries in Europe and why does that country consistently have a lower inflow of FDI compared to GDP than Serbia (chart number 2)? And how is it that the authorities in Pristina are not worried about the fact that the secession of the Republic of Kosovo is not recognized by the world’s largest economies such as China, India, and Russia, and they cannot have any economic cooperation with them. There are no politicians there advocating reintegration with Serbia, fearing that otherwise they will not be able to have FDI from some of the largest countries in the world.
Finally, it is paradoxical that the plan for Kosovo and Metohija is mostly supported by advocates of EU membership, who at the same time point to the lack of legal order in Serbia. The paradox is that the rule of law cannot be established if it rests on illegal acts such as this one from the EU. Such an act would create general legal uncertainty.