Transforming the Western Balkans through Nearshoring and Decarbonisation

This month finally the follow-up study, ???????????????????????? ?????? ?????????????? ?????????????? ?????????????? ?????????????????????? ?????? ??????????????????????????????, once again a collaboration between the Western Balkans Six Chamber Investment Forum (WB6 CIF), six national chambers, DIHK Service GmbH and The Vienna Institute for International Economic Studies (wiiw). It was examined whether nearshoring has happened and how #decarbonisation can boost the region’s appeal.

I am glad to have been able to participate in this study both in my previous position as project manager of Chamber Partnership Western Balkans and now in my new job at Hansgrohe Group in Serbia, and it is extremely interesting to experience at first hand the trends that I have been following and analyzing for years now, out of my own interest.

?The main strengths of the #Westernbalkans region are still:

• the favourable geographical location,
• the quality of the labour force,
• the relatively low wages

?and the main challenges are:

• poor governance,
• weak institutions,
• inadequate infrastructure

The investors satisfaction with the overall experience in the #WB region is high, with 72% of respondents indicating that they are either satisfied or very satisfied. Also, foreign companies see the region as an attractive destination for green investment.

The main conclusions are that near-shoring indeed appears to be taking place in the region, that it aligns well with the global trend of decarbonisation, and that local companies and the Western Balkan economies as a whole stand to benefit from these developments.?

All Western Balkan economies have recently attracted promising foreign investment projects, many of which are linked to either near-shoring or decarbonisation.

• Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia have seen significant projects in renewable energy.
• Albania, Bosnia and Herzegovina, Kosovo, North Macedonia and Serbia have also experienced investment in the manufacturing sector tied to near-shoring, which is driven by investors’ desire to be closer to the European market they serve.
• Notably, some of these manufacturing investments have come from Asian companies, which are strategically investing in the region to align with the ‘local-for-local’ approach, thereby ensuring proximity to their European markets.

1. Trends in FDI in the Western Balkans - My main takeaways about the Serbian market:

• FDI inflows as a percentage of GDP?(2012-2019): Serbia demonstrates a gradual upward trend, with FDI inflows rising from 3% in 2012 to 8% in the final two years
• logarithmic trends fitted to FDI inflows?(2012-2019): Serbia also experiences an upward trend, starting at around 2.5% and rising to 7.5%
• extrapolated trends for FDI inflows (2020-2023): Serbia’s trend continues to rise, approaching nearly 9% by 2023
• comparison of extrapolated logarithmic trends with the actual FDI inflows (2020-2023): the actual FDI inflows during the post-pandemic period remain at around 7% of GDP, which is below the trend line of approximately 8.5%
• Fitted values (Model 1-4: 1. including S&P sovereign credit rating, 2. including S&P credit rating and the Rule of Law Index rank from the World Bank, 3. S&P including credit rating, the Rule of Law Index rank and nominal GDP, 4. additionally includes general government revenues): Serbia has the same dynamic in all models, with the simulated values declining at first and then gradually improving
• Fitted values of all four models alongside the actual FDI inflows: The general conclusions would be that in Serbia, the model-explained FDI inflows show improvement over time, reflecting enhancements in underlying economic conditions.

2. Near-shoring or not?

• Comparison of FDI inflows obtained from the analysis of logarithmic trends and econometric modelling: ?Lastly, in Serbia, the actual FDI inflows between 2020 and 2023 were around 7% of GDP, which is consistently below the simulated range’s lower bound of 7.5%. This indicates that there has not been any significant near-shoring in the post-pandemic period
• sectoral composition of FDI inflows over the past several years as well as the countries of origin of these investments (focusing only on the most significant sectors and source countries): in Serbia, the slowdown in FDI during the post-pandemic period is mainly due to reduced inflows in the transportation, finance and manufacturing sectors. For example, FDI in transportation averaged 0.2% of GDP over the last two years, compared to 1.2% in the previous four years. Similarly, FDI in finance averaged 0.4% of GDP in the last four years, down from 0.8% in the previous four years (Figure 20). Looking at the sources of FDI, the decline is largely attributable to reduced inflows from the EU, which averaged 2.9% of GDP in the last three years, compared to 4.5% in the previous four years. Russian FDI also decreased slightly, averaging 0.3% of GDP in the last four years, down from 0.6% in the previous four years. On the other hand, there has been a significant increase in Chinese FDI, rising from 0.4% of GDP in the 2014-2017 period to 2.1% of GDP in the 2022-2023 period

Casestudies -Serbian market:

Serbia has the most and the biggest announcements for foreign investments in the region, with some noteworthy examples in manufacturing, energy and logistics.

One of the biggest announced investments in Serbia is by the Japanese company Nidec, which specialises in electric motors for electric cars. In May 2023, it opened a factory near the city of Novi Sad in the Serbian province of Vojvodina. The investment is part of Nidec’s plan to establish a robust production and supply chain within Europe so as to reduce its dependence on imports from Asia and to align with near-shoring trends to be closer to its key markets. This project can be also categorised as green because it is related to electric vehicles. The company has also announced a second project in the same part of Serbia. The total investment volume is expected to be around EUR 1.5 billion, and 1,000 new jobs are expected to be created. Another company investing in Serbia is Profine Energy, a German company that specialises in renewable energy. In March 2023, it was reported that a new 450 MW solar plant will be built on around 800 hectares between the cities of Belgrade and Novi Sad. The plant will be in an in[1]dustrial park, which the company will also build there. The investment is reported to involve EUR 1.5 billion and is expected to create 579 new jobs in the area. The plant is expected to be built beginning in 2025 and to enter into commercial operation in 2027.

The Chinese company Zijin Mining has announced two projects in Serbia in the field of renewable energy. The bigger of the two projects is a plant that aims to use wind and solar power to create hydrogen, an important source of energy, in an eco-friendly way. The plant will be located near the city of Bor in eastern Serbia. The project will involve an investment volume of around EUR 2 billion and is expected to create 760 jobs in the area. Construction is expected to begin in the first quarter of 2025, with the first phase of the project to be completed by mid-2026. The smaller project will involve the construction of a 300 MW solar plant to meet the needs of the company. The investment volume is reported to be EUR 184 million, and 71 jobs are expected to be created. As of April 2024, it is still unknown whether the investment has already started.

Another noteworthy investment in Serbia is by the Czech company CTP, which specialises in building logistical parks. In January 2023, it announced that it was developing a logistical hub in Belgrade, called CTPark Belgrade City, with an expected cost of EUR 94 million. In explaining why it chose to invest in Serbia, the company explicitly mentioned near-shoring. Petar Kolognat, Head of Business Development at CTP Serbia, said: ‘The growing outsourcing of Germany’s industrial supply chain to CEE markets, combined with the near-shoring trend, where companies are opting to build resilience into their global supply chains by locating manufacturing closer to their main markets, is generating strong demand for industrial and logistics space along the axis of CTP’s core markets.’

3. What do interviews with foreign investors reveal about near-shoring, decarbonisation and collaborating with local companies?

Near-shoring is a key strategy being adopted by the interviewed investors to address challenges revealed by the pandemic and other global disruptions.

• COVID-19 has been a pivotal factor in reshaping business strategies, especially in terms of supply chain management and risk mitigation, while geopolitical events, such as the war in Ukraine, are pushing them more in this direction.
• Driven by regulatory requirements and consumer expectations, environmental sustainability and decarbonisation are becoming crucial factors in investment decisions.
• There is a window of opportunity for local suppliers to become part of broader supply chains of foreign investors if they become more competitive.?
• However, investors have identified several barriers that hinder companies in the Western Balkans from cooperating more with foreign firms, including the absence of quality production standards and a lack of relevant certifications.
• To overcome these challenges, policy makers should provide financial and technical assistance.?
• Another issue that has been raised by investors is the need for improved regulatory frameworks for investing in renewable energy, allowing energy produced from renewable sources to be sold back into the grid, and the development of decarbonisation strategies for manufacturing

Conclusions

The interviews with German investors, local companies and expert institutions showed that the Western Balkans is an attractive investment destination for companies serving the European market owing to the region’s low labour and energy costs, available workforce, accessible renewable energy, compliance with EU standards, and potential to minimise supply chain risks due to geographic proximity and geopolitical alignment with the EU. The interview analysis showed that German companies operating abroad are bound by and must adhere to EU directives, such as the Green Agenda and the CBAM, and that they must heavily rely on local companies and suppliers to meet these standards. Close and stable cooperation in implementing the energy transition is crucial for all parties involved. The pressing question is whether local companies can withstand this pressure and swiftly adapt to the new circumstances. With support from regulatory and financial institutions, they must strive to avoid being outpaced by established high-profile suppliers from Asia that are ready to position themselves closer to German producers in the Western Balkans. However, investors have identified barriers that could prevent companies in the Western Balkans from taking advantage of this window of opportunity and becoming truly competitive and strong partners. Local companies should address the barriers to collaboration mentioned by German investors through:

• Enhancing quality standards in production
• Obtaining relevant certificates
• Increasing know-how
• Expanding production capacity
• Investing in new technologies

Governments in the Western Balkans can support the region’s business community in their efforts to surmount these obstacles by providing financial support schemes, improving legislation and regulations, and reducing bureaucratic inefficiency in implementing energy-transition activities.?

If the WB6 want to attract more investors from Germany, the EU and Japan, they need to foster decarbonisation by streamlining the procedures for obtaining licenses, expanding recycling and waste management capabilities, implementing regulations for the use of photovoltaic panels, and investing in grid technology to facilitate electricity feed-in, particularly for production companies.

4. What do foreign companies say about their experience in the Western Balkans, cooperation with local companies, decarbonisation and the CBAM?

The main reason for investing in the Western Balkans is its good geographical location, followed by the quality of the labour force and the relatively low wages. These three reasons remain unchanged compared to our previous survey from 2021.

• The satisfaction of foreign companies with their overall experience in the region is very high. In total, 72% of respondents indicated that they are either satisfied or very satisfied. This marks an improvement over the previous survey from 2021.
• Companies highlight the quality of the labour force as the main positive aspect of working in the Western Balkans, followed by geographic location and the relatively low wages.
• The main challenges of working in the region are poor governance, weak institutions and inadequate infrastructure.
• The majority of foreign companies in the region report that they already cooperate with local companies, with only 14% of them saying they do not. Buying goods and services remains the most common form of cooperation, followed by selling products.
• 11% of the companies indicated that they have relocated operations from a distant location to one closer to their headquarters, potentially indicating a near-shoring trend.
• Foreign companies see the region as an attractive destination for green investment, with two thirds of them indicating that the region is either very attractive or somewhat attractive.
• Around two thirds of the foreign companies responded that they would either probably or definitely invest more in the region if it were to make improvements in decarbonisation.
• Around one third of the foreign companies surveyed said the CBAM will affect their operations in the Western Balkans, most commonly by making their products more expensive on the EU market and by burdening them with reporting requirements.

The survey results seem to suggest that the Western Balkan region might indeed be experiencing some near-shoring. Most of the companies surveyed (72%) reported that they have not relocated operations from a distant location to one closer to their headquarters in the past three years. An additional 17% said they do not know. However, 11% of the companies (seven in total) indicated that they have relocated operations, potentially indicating a near-shoring trend.

5. What do local companies say about decarbonisation, the CBAM and cooperating with foreign companies?

• Around two thirds of the local companies said they are familiar with what decarbonisation means.
• Most of the companies said that most of their carbon emissions come from the electricity they use, with transportation being the second source and the production process being the third.
• Companies tend to have a rather positive view of decarbonisation, with most of them saying that decarbonisation is making them invest in new technologies in order to reduce carbon emissions.
• The majority of the companies are getting their electricity from the grid, with just 14% getting it from their own renewable sources.
• Companies think that if they reduce their carbon emissions, they might have greater chances to export to the EU market.
• Most of the companies say they have concrete plans for reducing their carbon emissions in the next five years.
• To reduce carbon emissions, companies say they plan to switch to cleaner energy, to reduce energy consumption and to invest in green technologies.
• Companies are unequivocal in their belief that they need first and foremost financial support to reduce their carbon footprint.
• Most companies surveyed are not familiar with the EU’s CBAM and do not know whether they will be affected by it.
• Companies are concerned about the CBAM’s effects, with almost half of them fearing that it will increase prices and will burden them with reporting requirements.
• But companies are positive when asked what they intend to do because of the CBAM, with most of them saying that they plan to invest in new technologies and to cooperate with other companies to overcome challenges together.
• Companies primarily identify a need for increased information and technical assistance to cope with the challenges posed by the CBAM.
• Almost half of the local companies surveyed said they are cooperating with foreign companies present in the region, which is slightly lower than in the 2021 survey.
• Satisfaction with working with foreign companies is high, with almost 80% of respondents indicating that they are satisfied or very satisfied.
• Local companies are unsure whether reducing their carbon emissions will increase their cooperation with foreign companies.
• Of the local companies that do not work with foreign firms, more than half expressed a desire to cooperate with them.
• The dominant reason why companies are not cooperating with each other is that local companies do not know foreign companies with which they can cooperate, but this share is significantly lower than in the 2021 survey.

6. Conclusions

The study concludes that near-shoring is occurring in the Western Balkans, particularly in Bosnia and Herzegovina, Kosovo, and North Macedonia, driven by multinational companies relocating operations closer to European markets. Although foreign direct investment (FDI) trends in Albania, Serbia, and Montenegro are less clear, concrete cases of near-shoring have been identified, with many investments coming from Asian companies seeking proximity to the EU market. The study found no evidence of companies closing operations in Asia to move to the Western Balkans, likely due to high relocation costs.

Near-shoring strategies are increasingly tied to decarbonization, as multinational companies prioritize environmental sustainability in decision-making. Foreign investors appreciate the region's location, skilled labor, and low costs but cite governance, infrastructure, and institutional challenges. Many companies express a strong interest in further investment if decarbonization efforts improve.

Local companies are aware of the importance of reducing carbon emissions but need financial support and assistance to meet sustainability and certification standards. Decarbonization presents opportunities for collaboration between foreign and local firms, with foreign companies likely to invest more if local firms reduce their carbon footprint.

In conclusion, the Western Balkans are standing at a crossroads where near-shoring and decarbonisation present both opportunities and challenges. To capitalize on near-shoring and decarbonization, the study urges policymakers in the Western Balkans to improve governance, infrastructure, and renewable energy investment to attract sustainable economic growth.

Investing in renewable energy and reducing CO2 emissions is also likely to strengthen collaboration between foreign and local companies. If local companies can reduce their carbon footprint, they will become more attractive partners for foreign firms seeking environmentally responsible suppliers. While local companies are eager to invest in new technologies to advance decarbonisation, they have emphasised the need for financial support to make this feasible. By addressing these needs, the region can enhance its attractiveness to foreign investors, foster greater collaboration between local and foreign companies and, ultimately, drive sustainable economic growth.