Kosovo investment climate and foreign investor perception

Findings of the foreign investor survey and Doing Business report analysis

Mustafë Hasani, Economist

Master’s Thesis

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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.

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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

Introduction – Why FDI?

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• 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

Major components of this master thesis

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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?

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?

The surveys, which were sent to companies engaged in FDI in the Republic of Kosovo, were used to test the hypothesis and FDI factors.

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• 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)

About the foreign investor survey

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• Legal / regulatory framework• Rule of law• Court system• Complicated regulations• Administrative efficiency• Tax and Customs systems

• Infrastructure• Energy / electricity supply• Transport infrastructure

• Labor force• Quality / education

• Political framework• Political stability• Corruption and crime

• Promotion• Image of the country• Lack of information

• Financial aspects• Cost of financing

The survey (FDI Key factors )

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Component 1FDI Inflow and the structure of the foreign

businesses operating in Kosovo

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Countries 2008 2009 2010 2011

Albania 665 717 793 742Bosnia & Herzegovina

1,337 353 340 612

Macedonia 400 145 159 304Montenegro 656 1,099 574 401Serbia 2,018 1,410 1,003 1,949Croatia 4,219 2,415 298 1,075Kosovo 366 287.4 365.8 394.6

Component 1

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

FDI Inflow

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0.0%5.0%

10.0%15.0%20.0%25.0%

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.

FDI Structure

Component 1

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AT DE SI GB CH TR NL AL LU RS US FR BG MK HR IT GR0

50

100

150

200

250

300

350

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.

FDI Inflow - Country origin (2000-2011)

Component 1

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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

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%).

The structure of enterprises

Component 1

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3%12%

1%7%

1%

4%

15%

0%

11%

2%

40%

4%

FDI by Sectors BANKING AND FINANCIAL SECTOR

CONSTRUCTION

EDUCATION

HOTELS AND TOURISM

MEDICAL

OTHER SERVICES

PROCESSING

SERVICES

SERVICES ACTIVITY

TELECOMMUNICATION

TRADE

TRANSPORT

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

Kosovo’s foreign companies profile

Component 1

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Component 2Benchmarking Kosovo with neighbouring

competitors based on World Bank Report on Doing Business

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Country OverallRank

Starting aBusiness

Dealing with Constructionpermits

Registeringproperty

Getting credit

Protecting investor

Paying taxes

Trading a/cborders

Enforcingcontracts

Closing a business

Macedonia 38 5 136 69 46 20 33 66 65 116

Montenegro 66 51 161 116 32 28 139 34 135 47

Albania 82 45 170 72 15 15 149 75 89 183

Croatia 84 56 132 110 65 132 42 98 47 89

Serbia 89 83 176 100 15 74 138 74 94 86

Bosnia 110 160 139 103 65 93 127 71 124 73

Kosovo 119 163 173 65 32 173 41 130 155 31

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.

Benchmarking Kosovo - World Bank Doing Business Report

Component 2

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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)

Doing Business Ranking

Component 2

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Component 3NGOs and other institutions feedback

A number of institutions were referenced – such as Chambers of Commerce, Kosovo Alliance of Business, Foreign Chambers, and Foreign Representations – as to the status of the FDI offering which Kosovo currently presents.

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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

Needs for improvement

Component 3 – NGO and other institutions feedback

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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

Component 3 – NGO and other institutions feedback

Positive commentary

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Component 4Foreign Investment in Kosovo Questionnaire

What are Kosovo’s perceived strengths?

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No StrengthsClose to EU membership

Integration with neighbouring countriesLack of competition

InfrastructureGood Education

Low tax RATECompetitive prices

Increased political stabilityThe level of optimism

Climate ConditionLabor Costs

Potential for growthMarket developement

Geographic PositionHigh rate of unemployment

Natural resourcesYoung and Dynamic workforce

0 10 20 30 40 50 60 70 80

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2.38

2.43

9.37

12.12

16.66

25

31.7

33.33

40

43.75

45

45

50

52

59.37

68.2

68.5

Major strengths of Kosovo

Component 4

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• 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

Kosovo comparative strengths for investment

Component 4 – Major strengths

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All aspects of the labor force, apart from its quality, are perceived very positively

46.15%

46.15%

7.69%1 2

3 4

5

Excellent Very good good satisfactory Not satisfactory 1 2 3 4 5

0% 46.15% 46.15% 0% 7.69%

Component 4 – Major strengths

Labor force

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• 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.

Exellent Very good good satisfactory

Not satisfactory

1 2 3 4 525% 17.50% 42.50% 10.50% 4.50%

Tax system

Component 4 – Major strengths

25.00%

17.50%42.50%

10.50%4.50%

Exellent Very goodgoodsatisfactory Not satisfactory

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What are Kosovo’s perceived weaknesses?

Component 4

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No weaknesses

Do Investors feel at risk

Weak financial system

Lack of information about Kosovo

Country geographic position

Mentality (inefficient workers

Very low level of development

Lack of administrative efficiency

0 10 20 30 40 50 60

154

7.147.698.33

1012.5

192020

21.4433.3333.3334

51.8555.88

Major weaknesses of Kosovo

Component 4 – Major weaknesses

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• 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

Lack of Legislation

Component 4 – Major weaknesses

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• 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

Energy and Transport

Component 4 – Major weaknesses

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While the cost of labor is low, dissatisfaction with the quality of labor is highInvestors find the level of education and skills of the labor force to be a constraintThis is not unexpected given that less than 5% of unemployed people have a university degree

43.47% 12345

Exellent Very good good satisfactory

Not satisfactory

1 2 3 4 528% 15.21% 6.52% 7% 43.47%

Component 4 – Major weaknesses

Education

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• 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

Regulatory

Component 4 – Major weaknesses

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• 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

Summary conclusions

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Recommendations

The recommendations that come from the various analyses and studies in this project indicate that the institutions should pay close attention to foreign investors – thus improving further the business climate

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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 LegislationSpecial Economic Zone/Free Zone legislationInvestment IncentivesBusiness 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

Recommendations

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4 Enhancing Infrastructure:Transportation: Roads, Airports, RailroadService ProvidersTelecommunications & UtilitiesFinancial 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”

Recommendations (continued)

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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;

Recommendations (continued)

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Thank you