Investment opportunities in Kosovo - FDI perceptions

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Foreign Direct Investment (FDI) is an important source of capital and economic growth for developing countries. It provides a package of new technologies, management techniques, finance and market access for the production of goods and services. However, attracting FDI is a major challenge for host countries as it opens the challenge of identifying the major factors that motivate and affect the decision for FDI location.
In this context, this study aims at learning the perception of foreign companies and business associations regarding the business environment and the investment climate in Kosovo. Additionally it tries to understand what do they latter consider to be the strongest potentials that Kosovo provides, and the areas that need to be improved.
Finally, the results from the questionnaire taken with existing foreign investors, interviews with business associations and analyses of the World Bank report “Doing Business2011” will be the main focus of this project. The results of this study aims to give a clear picture of motivations, concerns and suggestions for improving the investment and business environment in Kosovo.

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Investment opportunities in Kosovo - FDI perceptions

  1. 1. Kosovo investment climate and foreign investor perceptionFindings of the foreign investor survey and Doing Business report analysis Master’s Thesis Mustafë Hasani, Economist
  2. 2. Outline of the presentation • Introduction • Analyses of FDI and the structure of the foreign businesses operating in Kosovo. • Analyses about business environment examining the WB Doing Business Report. • Foreign Investment in Kosovo Questionnaire • What are Kosovo’s perceived strengths? • What are Kosovo’s perceived weaknesses? • Summary conclusions and recommendations. 2
  3. 3. Introduction – Why FDI? • Kosovo’s economic growth in the past decade has been solid, yet, with a GDP per capita of €1,760, the country remains one of the poorest in Europe. • Unemployment rate has reached 48 % • Kosovo has a strongly negative balance of trade. (During the first half of 2011, the trade deficit in Kosovo amounted at euro 925.4 million ) • Kosovo has the potential to shift toward faster, private sector–led growth. Kosovo‘s products have free market access to the European Union (EU) and Central European Free Trade Agreement (CEFTA) countries, • The attraction of foreign direct investment as one of the key ways that exports could become an important pillar of growth 3
  4. 4. Major components of this master thesis • Survey through questionnaires with 150 foreign companies in Kosovo (where 20-25 are face to face and for the rest via e-mail or phone conversation); • Interviews conducted with business associations, relevant government departments for economic development, (SME Agency and Investment promotion) and other independent advisers; • Analyses of FDI inflow and structure of the foreign businesses operating in Kosovo; • World Bank Doing Business Report analyses; The results of this study aims to give a clear picture of motivations, concerns and suggestions for improving the investment and business environment in Kosovo 4
  5. 5. Research’s Questions ,Hypothesis and Methodology This research attempted to answer the following main question: Q: What are the most relative important factors for FDI location in the Republic of Kosovo? H1: What is the relative importance of the cost factors on FDI location decision? H2: What is the relative importance of market factors? H3: What is the relative importance of infrastructure and technological factors? H4: What is the relative importance of political and legal factors? H5: What is the relative importance of social and cultural factors? The surveys, which were sent to companies engaged in FDI in the Republic of Kosovo, were used to test the hypothesis and FDI factors. 5
  6. 6. About the foreign investor survey • The foreign investor perception survey for Kosovo was done in summer 2012 • The objectives of the survey were to: – gather information from existing investors about Kosovo’s perceived strengths and weaknesses – Identify barriers to foreign investment (regional, institutional and administrative , areas that need to be improved. – Recommend economic policy measures • Survey was implemented via telephone and face to face interviews (150 firms were interviewed) 6
  7. 7. The survey (FDI Key factors ) • Legal / regulatory framework • Labor force • Rule of law • Quality / education • Court system • Political framework • Complicated regulations • Political stability • Administrative efficiency • Corruption and crime • Tax and Customs systems • Promotion • Infrastructure • Image of the country • Energy / electricity supply • Lack of information • Transport infrastructure • Financial aspects • Cost of financing 7
  8. 8. Component 1FDI Inflow and the structure of the foreign businesses operating in Kosovo 8
  9. 9. Component 1FDI Inflow Kosovo in comparison to other countries beside Macedonia has attracted less FDI. A low trend in attracting foreign investments has followed Kosovo in the last for years compared to the countries in the region Countries 2008 2009 2010 2011 Albania 665 717 793 742 Bosnia & 1,337 353 340 612 Herzegovina Macedonia 400 145 159 304 Montenegro 656 1,099 574 401 Serbia 2,018 1,410 1,003 1,949 Croatia 4,219 2,415 298 1,075 Kosovo 366 287.4 365.8 394.6 9
  10. 10. Component 1FDI Structure The biggest investments are in the financial sector, the construction sector is the second most attractive in absorbing foreign investment and third one is real estate sector. 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 10
  11. 11. Component 1FDI Inflow - Country origin (2000-2011) Germany, Austria, Slovenia, Great Britain , Albania, Switzerland, Holland are the states where these investments came from contributing towards the major part of the FDI in Kosovo. 350 300 250 200 150 100 50 0 AT DE SI GB CH TR NL AL LU RS US FR BG MK HR IT GR 11
  12. 12. Component 1The structure of enterprises The largest number of enterprises are: Micro enterprises thus taking over about 94%. The rest of enterprises are small (about 5%), medium (about 1%) and large (less than 1%). Type of enterprises Number of employees Number of enterprises Micro enterprises 1-9 4032 Small enterprises 10 -49 199 Medium enterprises 50 - 249 46 Large enterprises Over 250 18 12
  13. 13. Component 1Kosovo’s foreign companies profile Such an indicator should serve as an example for creation of policies to attract investors in those sectors that can create more job opportunities and bring more investments BANKING AND FINANCIAL SECTOR FDI by Sectors 4% CONSTRUCTION 3% EDUCATION 12% 1% HOTELS AND TOURISM 7% MEDICAL 40% 1% OTHER SERVICES 4% PROCESSING 15% SERVICES 11% SERVICES ACTIVITY TELECOMMUNICATION TRADE 2% 0% TRANSPORT 13
  14. 14. Component 2Benchmarking Kosovo with neighbouring competitors based on World Bank Report on Doing Business 14
  15. 15. Component 2Benchmarking Kosovo - World Bank Doing Business Report Kosovo seems to be less attractive for investment than other countries in the region In Doing Business 2011 Kosovo ranks 119th out of 183 economies, significantly behind all of its neighbors.Country Over Starting Dealing Registeri Getting Protecti Payin Tradi Enforci Closing all a with ng credit ng g ng ng a Rank Business Constru property investor taxes a/c contrac business ction bord ts permits ersMacedonia 38 5 136 69 46 20 33 66 65 116Montenegro 66 51 161 116 32 28 139 34 135 47Albania 82 45 170 72 15 15 149 75 89 183Croatia 84 56 132 110 65 132 42 98 47 89Serbia 89 83 176 100 15 74 138 74 94 86Bosnia 110 160 139 103 65 93 127 71 124 73Kosovo 119 163 173 65 32 173 41 130 155 31 15
  16. 16. Component 2Doing Business Ranking FIVE “worst” indicators • Dealing with construction permits (173); • Protecting investors (173); • Starting a business (163); • Enforcing contracts (155); and • Trading across borders (130) While Kosovo it ranks relatively high on some indicators including: • Closing a business (31); • Getting credit (32); and • Paying taxes (41) 16
  17. 17. Component 3 NGOs and other institutions feedbackA number of institutions were referenced – such as Chambers ofCommerce, Kosovo Alliance of Business, Foreign Chambers, and ForeignRepresentations – as to the status of the FDI offering which Kosovocurrently presents. 17
  18. 18. Component 3 – NGO and other institutions feedbackNeeds for improvement • Definite need to promote the values of Kosovo first – there is an image problem with Kosovo internationally • Industrial park in Prishtina as the first and flagship Business Park in Kosovo should be used as a pioneering platform for proactive attraction of FDI (eg offering packages to foreign investors such as “available 100 employees, free lease for 99 years”. • Persisting problems with functioning of the rule of law, property rights law etc • Need for greater initiative on the part of municipalities to accommodate FDI: providing land free of charge to build factories? • Persisting problems with infrastructure, power, water supply 18
  19. 19. Component 3 – NGO and other institutions feedbackPositive commentary • Young, well-educated, versatile workforce • Well located in the centre of the Balkans • Access to the CEFTA market • Represents the “new spirit of Europe” • Kosovo is interesting: “discover the opportunity” • Natural resources abundant • The people represent the greatest natural resource • Access to cheap local raw materials 19
  20. 20. Component 4Foreign Investment in Kosovo Questionnaire What are Kosovo’s perceived strengths? 20
  21. 21. Component 4Major strengths of Kosovo Young and Dynamic workforce 68.5 Natural resources 68.2 High rate of unemployment 59.37 Geographic Position 52 Market developement 50 Potential for growth 45 Labor Costs 45 Climate Condition 43.75 The level of optimism 40 Increased political stability 33.33 Competitive prices 31.7 Low tax RATE 25 Good Education 16.66 Infrastructure 12.12 Lack of competition 9.37 Integration with neighbouring countries 2.43 Close to EU membership 2.38 No Strengths 27 0 10 20 30 40 50 60 70 80 21
  22. 22. Component 4 – Major strengthsKosovo comparative strengths for investment • Kosovo has comparative strengths both for domestic and export-oriented investment • The abundant supply of young and dynamic labor force, natural resources, high rate of unemployment and emerging domestic market, offers possibilities for inward-oriented foreign investment • The low-cost labor and Kosovo’s geographical location (and free access to the EU and CEFTA markets) could attract investors interested in exports 22
  23. 23. Component 4 – Major strengthsLabor force All aspects of the labor force, apart from its quality, are perceived very positively Excellent Very good good satisfactory Not satisfactory 1 2 3 4 5 0% 46.15% 46.15% 0% 7.69% 7.69% 0% 0% 1 2 46.15% 3 46.15% 4 5 23
  24. 24. Component 4 – Major strengthsTax system • The tax system is perceived also to be very favorable • Over 42% of surveyed investors assessed tax rates as good or very good. • Kosovo has among the lowest taxes in the region, and the tax wedge on labor is much lower than anywhere else • Doing Business 2011 finds that in terms of the time to prepare, file return and pay taxes as well as the number of payments per year, Kosovo’s tax system performs quite well compared to the rest of the region. Very Not Exellent good good satisfactory satisfactory 4.50% 1 2 3 4 5 10.50% 25% 25% 17.50% 42.50% 10.50% 4.50% Exellent Very good 17.50% 42.50% good satisfactory Not satisfactory 24
  25. 25. Component 4 What are Kosovo’s perceived weaknesses? 25
  26. 26. Component 4 – Major weaknessesMajor weaknesses of Kosovo Lack of Legislation 55.88 Lack of administrative efficiency 51.85 Energy Supply 34 Very low level of development 33.33 Crime and Corruption 33.33 Mentality (inefficient workers 21.44 Bad Infrastructure 20 Country geographic position 20 No industrial company 19 Lack of information about Kosovo 12.5 Lack of transparency 10 Weak financial system 8.33 Very poor population 7.69 Do Investors feel at risk 7.14 Lack of education 4 No weaknesses 15 0 10 20 30 40 50 60 26
  27. 27. Component 4 – Major weaknessesLack of Legislation • Lack of legislation and administrative efficiency continues to be a strong deterrent for investors • 55% of the investors surveyed stated that lack of legislation and lack of administrative efficiency continues to be a major weakness! • The other major concerns relate to the energy supply, crime and corruption and low level of development 27
  28. 28. Component 4 – Major weaknessesEnergy and Transport • Energy and Transport are the biggest barriers in terms of infrastructure • On transport, poor conditions of roads were stated as biggest concern, and in terms of energy most complaints refer to the frequent power shortages 28
  29. 29. Component 4 – Major weaknessesEducation While the cost of labor is low, dissatisfaction with the quality of labor is high Investors find the level of education and skills of the labor force to be a constraint This is not unexpected given that less than 5% of unemployed people have a university degree Very Not Exellent good good satisfactory satisfactory 1 2 3 4 5 1 28% 15.21% 6.52% 7% 43.47% 43.47% 2 3 4 5 29
  30. 30. Component 4 – Major weaknessesRegulatory • Most aspects of the regulatory environment are perceived to be extremely weak • Corruption, slow and inefficient procedures, and lack of transparency are stated as the most common reasons for these weaknesses 30
  31. 31. Summary conclusions • Investors are considering Kosovo as a potential investment location • Kosovo’s business environment has important strengths that could attract both inward and export- oriented FDI • However, several weaknesses, mostly related to the rule of law and regulatory regime, deter many investors from coming to Kosovo 31
  32. 32. RecommendationsThe recommendations that come from the various analyses andstudies in this project indicate that the institutions should pay closeattention to foreign investors – thus improving further the businessclimate 32
  33. 33. Recommendations 1. Development of Business Enabling Framework - improving the process that leads to the formulation of a reform agenda and manages to institutionalize an ongoing reform process. 2. Drafting, enacting and implementing laws and regulations: Investment Legislation Special Economic Zone/Free Zone legislation Investment Incentives Business Establishment procedures 3 Enhancing Human Resource education and training required by the target industries and segments Altering University Curriculum to produce skilled laborers for new FDI sectors 33
  34. 34. Recommendations (continued) 4 Enhancing Infrastructure: Transportation: Roads, Airports, Railroad Service Providers Telecommunications & Utilities Financial Institutions 5 Increase the efficiency of judiciary system for trade dispute resolution. 6 Simplification of trade in line with best international practices and principles 7 Establish one-stop “Investment Support & Business Development Centre,” offering a full range of services designed to “fast track” 34
  35. 35. Recommendations (continued) 8 Hands-on contact with potential investors throughout the process of soliciting investment, including aftercare once enterprises have been established 9 Vision, future opportunities, emerging segments Selection of 10 top priority sectors Conducting market research and sector research related to selected countries in order to identify potential inward investors; 10 Pursue the process of establishing the Foreign Investors Council of Kosovo; 35
  36. 36. Thank you 36

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