Domestic private investments have been low for a long time, and the cause is not a lack of funds, low profitability of the domestic economy, or low savings, but the business environment, said Professor Milojko Arsić from the Faculty of Economics for Business and Finance.
“As Serbia becomes more developed, the inflow of foreign investments will decrease. For now, there is still a high difference in operating costs between our country and the countries from which most investors come. When that is exhausted, we will have to rely on our own strengths. However, what limits domestic investments is a high level of corruption, unequal treatment of companies, privileged positions for those close to the authorities, lack of legal security, the inability to secure contracts without establishing close ties with the party, including its financing. Domestic industry has not become the core of the economy, and that is why there has been a long-standing talk about the need to create a better business environment, although it is positive that public investments in infrastructure are growing,” said Arsić.
According to his statements, this picture is not changed by the relatively high level of remittances from our people working abroad, which can reach up to five billion euros annually, as that money is mostly used for consumption, while investments are minor and mostly directed towards real estate.
“The level of private investments is also influenced by general conditions, such as interest rates, and since they have been raised, one should not expect significant investments during this year. Therefore, it would be beneficial to stimulate domestic companies. One model was the tax investment credit that covered small investments, but it was abolished in 2014. Also, we should abandon the policy of subsidizing foreign companies and focus on some truly large investments in high technology, while incentives for low-productivity activities such as cable winding are not justified, as they do not withstand the pressure of any significant wage increases,” emphasized Arsić.
Director of the Institute for Development and Innovation, Nenad Jevtović, told B&F that the state has achieved goals in attracting foreign direct investments and state investments in line with the recommendations of the Fiscal Council and the IMF. However, he pointed out that compared to countries in Central and Eastern Europe, domestic private investments in Serbia lag behind.
“For decades, we have not had quality institutions or an investment culture, and 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 companies, but apart from the assessment that they are insufficient, it is difficult to obtain data on their volume because even financial statements are not a reliable source,” noted Jevtović.
He added that some countries with accelerated development had total investment levels of 30% or 40% of GDP, “while we still cannot reach 25%, and in the period from 2013 to 2017, we barely had 17%.”
“The question is 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, might enter the country. They cannot compete against that, and it is more profitable for them to sell the company to that chain and invest the money in real estate,” he emphasized.
Jeftović said that if we were to follow the example of successful countries, the share of investments from domestic companies in GDP should be at least three times higher than it is now.
“That is an unrealistic expectation, especially since the state does not encourage it through tax policy. The problem is that the models for such support are also limited. If we were to talk about domestic savings (which, by the way, are low) as the basis for tax incentives, it would open up a discussion about state interventionism, and supposedly, the balance created by the market should not be disturbed. If support is sought from a strong domestic bank, we have already had that form, as well as state funds, and it was accompanied by numerous scandals. We have discredited and tainted some instruments that could solve the problem of insufficient investment in domestic industry; now we are without tools for that,” he believes, adding that mistrust plays a crucial role in this.
He emphasized that it might help if surplus funds could be invested in a dedicated fund, where a certain percentage of ownership is held by foreign investors as a kind of control guarantee, and where the returns would be relatively higher.
As he said, from such a fund, the state could also draw funds because it is better to pay returns there than on the London Stock Exchange.
However, according to Jevtović, the perception of insecurity hinders the establishment of such an institution, as well as the fact that even now, foreign companies have open doors to all state and administrative structures for investments, while domestic companies have to navigate through informal channels for permits and approvals.
At times, domestic companies are even forced to sell a part of their business to foreigners to ensure protection and access to institutions.
However, Ivan Nikolić from the Economic Institute disputes assessments that foreign investments are mostly directed towards activities with lower added value.
“Foreign investments have contributed to the change or restructuring of our real sector, as on average, 30 percent of them go to the processing sector. In practice, about 65 percent is directed towards the real economy, agriculture, industry, or construction, which alone accounts for about 50 percent. This structure has contributed to the rapid growth of both overall exports and a more favorable trade balance that has recently improved,” says Nikolić for B&F.
He added that when talking about domestic investments, they are growing as much as foreign ones, and their share in GDP has never been higher.
“I believe that the contribution of domestic investments follows the effects of foreign ones, as seen in the number of employed people, salaries, because if it were not the case, I doubt that the private sector would be employing and paying workers to the same extent; it wouldn’t be cost-effective for them,” stated Nikolić, emphasizing that the processing sector dominates in commodity exchange, and there are no state investments or state-owned enterprises concentrated mainly in energy and mining.
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