Can the Western Balkans benefit from near-shoring?

28 May 2021

Watch the presentation of our new study, which argued that countries must take decisive policy steps to maximise the potential gains.

In view of protectionist tendencies in global trade, a shift in production from the Far East closer to Western Europe can be observed. This phenomenon, known as nearshoring, is set to increase after the pandemic.

A new study, ‘Getting Stronger After COVID-19: Nearshoring Potential in the Western Balkans’, explores whether and how the Western Balkan economies could benefit from this phenomenon. It discusses recent trends in global supply chains, international trade and foreign investment and presents key determinants of foreign direct investment. It furthermore provides a set of surveys, interviews and case studies of foreign and local companies, as well as investment promotion agencies, from the Western Balkans.

Branimir Jovanovic, wiiw economist and co-author of the study, assesses the nearshoring potential for the Western Balkans in this way: “The Western Balkan economies can indeed benefit from nearshoring but would have to take the right policy steps in order to benefit fully.’ ‘Even if nearshoring turns out to be on a smaller scale”, he argues, “it can still have a major impact on these economies.” They are attractive not only because of their geographic location and competitive wage levels, but also because of ‘soft’ factors such as cultural proximity and the good reputation of their workers. Building on the competitive advantage of low labour costs alone may not be sufficient to attract more investment. Rather, the countries are advised to focus on skilled labour, to invest in education and training, modernise their educational system and transport infrastructure and improve governance.

Sophia Kluge and Olga van Zijverden jointly coordinate the “Chamber Partnership Western Balkans” and both co-authored the new study. Olga presented insights from major surveys with German companies working or investing in the Western Balkans. According to one of them, out of 2,400 German companies with foreign operations, 40% are experiencing supply-chain problems and 68% of those with problems are considering changes in their supply chains. Central and Eastern Europe is an attractive investment destination for them.

Sofia shared in-depth interviews with German investors in the region. These companies very much appreciate the cultural proximity they find in the Western Balkans, as well as the positive experiences they have had with people from the region. Soft factors turned out to be just as decisive for investment decisions as hard facts and represent a key strength for the Western Balkans. The main shortcomings they found were, in order of priority, poor governance and institutions (rule of law, legal certainty, corruption, and government ineffectiveness) as well as a lack of government support and incentive schemes, skilled workforce and poor infrastructure.

Tatjana Sterjova Duskovska, Secretary General of the Western Balkans 6 Chamber Investment Forum (WB6CIF) shared a survey of local companies in the Western Balkans which explored how local companies perceive foreign investors and assess collaboration with them. When asked about the form of cooperation, 72% of the local companies stated they were either selling or buying goods and services to or from foreign companies. Only 6% collaborated in the joint development of products. Nevertheless, the level of satisfaction with foreign companies was very high.

The authors conclude that improving cooperation between domestic and foreign companies has the potential to ensure positive technological spill-overs and supplier linkages with domestic companies.

The study was prepared in cooperation with the Union of Chambers of Commerce and Industry of Albania, the Foreign Trade Chamber of Bosnia and Herzegovina, the Kosovo Chamber of Commerce, the Chamber of Economy of Montenegro, the Economic Chamber of Macedonia, the Chamber of Commerce and Industry of Serbia, the Western Balkans 6 Chamber Investment Forum, the Chamber Partnership Western Balkans, and Germany Trade and Invest. It was financially supported by the Federal Ministry for Economic Cooperation and Development (Germany).