FOREIGN DIRECT INVESTMENT IN KOSOVO The Investment Climate, Potential and Barriers RESEARCH REPORT BY INSTITUTE FOR FREE MARKET ECONOMY (IFME) December, 2019 ABOUT IFME Institute for Free Market Economy (IFME) is an independent, non-partisan and non-profit public policy organization established by Kosovo Chamber of Kosovo (KCC), based in Prishtina. In the pursuit of its mission, the Institute for Free Market Economy conducts credible research with a focus on key economic topics in private sector in Kosovo and utilize the outcomes of the research for policy dialogue and to influence policy making. Disclaimer: The research report was supported by Konrad-Adenauer-Stiftung (KAS). The views and opinions expressed in this report are those of the Institute for Free Market Economy (IFME) and do not neces- sarily reflect the views of KAS or the Kosovo Chamber of Commerce (KCO) as a founder of the IFME.. Responsibility for the information and views expressed in this report lies entirely with LFMI. Research by: Besa Zogaj Gashi, CEO of IFME, co-author of the study. Serton Ajeti, business analyst, coauthor of this study. Gent Beqiri, advanced researcher at Riinvest Institute, whose contribution was to gather all neces- sary information for database that was used for this study and also compiling the survey question- naire. Design and Layout Norë Potera Published by: Institute for Free Market Economy (IFME), “Nëna Terezë“,Nr. 20 10000 Prishtinë, Republika e Kosovës Web-site: www.ietl-oek.com:Tel: +383 345 233 444 Copyright ©2019 by Institute for Free Market Economy (IFME). All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. Contact the administrative office of the Institute for Free Market Economy for such requests. 2 Acknowledgments Institute for Free Market Economy (IFME) wishes to express its utmost gratitude to Konrad-Adenau- er-Stiftung in Kosovo (KAS) for the partnership to this study, without which it would not have been possible to be done. Special thanks would go to all foreign businesses who accepted to participate in this survey and collaborated with the researchers in most professional manner by providing all information about their businesses as well as barriers they face. The study report will be used by government officials, local authorities, and all relevant stakeholders, including students and interested persons dealing with Foreign Direct Investments (FDI). 3 Executive Summary Furthermore, the study shows that political lished an arbitration tribunal, which greatly facili- been no initiatives by institutions to re-orient instability plays an important role in the decision tates the resolution of business problems in remittances into long term investments. The aim of the research is to raise public aware- of foreign investors to invest their capital in the domestic and international business disputes. ness on the present state of FDI and its signifi- country. In this context, it was shown that there Despite the fact that in recent years there has Also, the IETL Institute through this study cance by analyzing the barriers that foreign is little trust among foreign businesses towards been an increase in interest in resolving busi- provides valuable information about the poten- investors face and by launching a broad based central government as well as local authorities ness disputes through arbitration, without tials and reasons for investing in Kosovo, such debate on the problems currently faced by FDI (28.6% of businesses interviewed stated that having to turn to the courts, yet the results are as: use of the euro as the official currency, access inflows in Kosovo as well as on policy measures they do not trust local, 25% of businesesses do not at satisfactory level. to world markets, low taxes (although 35% of to overcome them and subsequent precaution- not have trust on the central government) and businesses interviewedstate that rates are high), ary measures (post-investment refers to post-in- that there is lack of coordination between these Research shows that foreign businesses are also EU-compliant legislation, strategic location and vestment services) for existing investors in order two levels of government. not satisfied with the power supply, which is large sectoral investment opportunities in partic- to maintain and expand their investment (re often interrupted and lacks regular supply, ular sectors, such as: energy; renewable energy; -investments). In this regard, Kosovo has failed to provide a creating additional costs and unfair competition. mining; Information and Communication Tech- good example of of institutional coordination, Although Kosovo has the youngest population in nology (ICT) and the outsourcing business sector Also, through this study the Institute for Free including adequate policies and actions to sup- Europe, with a good command of English and (the Business Process Outsourcing-BPO); wood Economy (IETL) has provided valuable informa- port foreign investments. Although the Kosovo German and a low-cost workforce, our country and metal processing; agribusiness - food tion on the potentials and reasons for investing Investment and Enterprise Support Agency has the highest unemployment rate in Europe. A processing and packaging; tourism; textiles etc. in Kosovo with the view to continue a broad (KIESA) has been established; National Council detailed analysis in this research report is done A sector-based strategy enables central and local debate on policy measures and the design of a for Economic Development (NECD); Inter-Minis- to identify and reflect on whether foreign com- government to focus resources on sectors that new national economic development strategy terial Committee on Strategic Investments; panies find it difficult to find skilled workers offer the greatest investment opportunities and that will serve a guide for the reforms that are Council of European Investors (CEI) to promote according to their needs. According to the survey maximize FDI benefits in the local economy. needed in the overall economic development and support the investment climate in Kosovo; findings, foreign businesses find it difficult to and attraction of FDI. important Stabilization and Association Agree- recruit the right skilled workers. So far, Kosovo has made progress in the privat- ments (SAAs), the Central European Free Trade ization of property or social assets. Potential Despite a positive trend (slight increase in FDI) in Agreement (CEFTA) have also been concluded However, on the other hand, the survey results investors, foreign or domestic, are all treated 2019 compared to 2018, according to the Central and signed; Double tax treaties have been show that the perceptions of foreign businesses equally in the bidding process. By law, in special Bank of Kosovo (CBK), FDI experienced a signifi- signed with some countries in this regard, yet, operating in Kosovo have full confidence in their cases, the Government of the Republic of cant decline during 2018, and our country is still experiences with foreign companies that have current employees, which is a positive message Kosovo (GoK) has the right to negotiate directly far from attracting large corporations and big expressed interest in investing in Kosovo show for new foreign businesses interested in invest- with potential investors without going through world brands to invest in Kosovo. us that they do not have positive perceptions ing in Kosovo. The Government of the Republic traditional tendering procedures. Challenging due to inefficient inter-institutional coordina- of Kosovo (GoK), support for vocational training for the next government remains the review of The Government of the Republic of Kosovo (GoK) tion. and lifelong education, should have a long-term the legal infrastructure for municipal property since its declaration of independence until now, goal of creating curricula in line with current management. has made considerable progress on several Another important finding is the improvement labor market needs and supporting sector-spe- factors that are known to contribute to FDI of the legal environment, namely the strength- cific training. In conclusion, it is suggested that the Govern- growth, including: a stable financial environ- ening of the rule of law. Although Kosovo has ment of the Republic of Kosovo (GoK) take some ment; liberalization; favorable tax policy; made a lot of progress in doing business as well Although real GDP growth (GDP) has averaged measures for foreign businesses investing in balanced macroeconomic policies; good road as in completing the Legal Framework for about 4 percent annually since 2015, and com- Kosovo: such as the introduction of tax holidays, infrastructure; economic stability and secure Foreign Direct Investment (legal infrastructure pared to the countries of the Western Balkans the coverage of salaries of employees in the first banking system etc,. However research shows regulated and harmonized with EU standards); region, there has been steady growth, but this years, the coverage of training expenses; full that low level of institutional credibility, fiscal however, the improvement of the legal environ- growth rate has not contributed to decrease functionalization of balanced economic zones, barriers, administrative barriers, corruption, ment, namely the strengthening of the rule of unemployment and poverty, and has not creation of free