For accelerated economic growth in Serbia of at least five percent annually, there is a need for domestic company investments that should be at least three times larger than the current ones. However, these investments have been low for quite some time due to a lack of trust in the state, as reported by the monthly magazine ‘Business and Finance.’
In the last five to six years, Serbia has more than doubled its foreign direct investments (FDI), reaching a record high of 4.4 billion euros or 7.3 percent of the gross domestic product (GDP) in 2022. It is estimated that last year, this amount remained the same or was slightly higher, around 4.5 billion euros.
At the same time, state investments in infrastructure and capital projects experienced robust growth, reaching approximately five billion euros in 2022, accounting for about 7.4 percent of the GDP. However, despite such significant investments, the GDP grew by only about three percent annually in the last decade. Many economists believe that this modest economic growth is a result of domestic companies not investing enough in industrial development and new technologies.
It is expected that the overall level of investments in 2023 will be similar to that of 2022, constituting 24.2 percent of the GDP. However, domestic private investments accounted for only 9.5 percent, compared to reaching up to 13.9 percent of the GDP in the last decade. Additionally, more than half of these investments are made by private citizens, usually in real estate, while the contribution of businesses, especially small and medium enterprises, is symbolic. The magazine “Business and Finance” notes that the percentage of domestic business investments in EU countries is twice as high.
Analysts and business experts agree that no country has rapidly developed solely on the basis of foreign investments. However, for a greater share of domestic investments, incentives are lacking, and since May of last year, access to subsidies has become more challenging for domestic investors. The minimum investment threshold has been raised from 150,000 to 300,000 euros, along with a requirement of employing at least 30 new workers, which is a significant challenge for small and medium-sized enterprises.
Milojko Arsić, a professor at the Faculty of Economics, believes that the cause of insufficient investments by domestic entrepreneurs is not a lack of funds, low profitability of the domestic economy, or low savings but rather a poor business environment.
“As Serbia becomes more developed, the inflow of foreign investments will decrease. Currently, there is still a significant difference in operating costs between our country and the countries from which most investors come. Once that advantage is exhausted, we will have to rely on our own strengths. However, what limits domestic investments is the high level of corruption, unequal treatment of companies, privileged positions for those close to the authorities, the absence of legal certainty, and the inability to secure contracts without establishing close ties with the political party, including financial support,” stated Arsić.
He emphasized that the level of private investments is also influenced by general conditions such as interest rates, and with the recent increase, significant investments are not expected during this year.
“So it would be worthwhile to encourage domestic companies. One of the models was the tax investment credit that covered small investments, but it was abolished in 2014. Also, the policy of subsidizing foreign companies should be abandoned. Instead, focus on some truly significant investments in high technology, while incentives for low-productivity activities such as cable winding are unjustified, as they do not survive under the pressure of any significant increase in wages,” said Arsić.
Nenad Jevtović, the Director of the Institute for Development and Innovation, stated that in Serbia, for decades, there have been no quality institutions or investment culture. Even citizens with surplus income see relative security in the least productive investment in real estate.
“The most desirable would be investments from domestic private enterprises, but besides the assessment that they are insufficient, it is difficult to obtain data on their extent because even the financial statements are not a reliable source,” emphasized Jevtović.
He pointed out that it is questionable how a small or medium-sized enterprise can invest when there is a risk that a large foreign investor, in the same industry and with state subsidies, may enter the country.
“They cannot fight against that, and it is more profitable for them to sell the company to that chain and invest the money in real estate,” said Jevtović.
Sign up for business updates & specials
