When the Covid-19 pandemic disrupted global supply chains, many anticipated that it would accelerate a shift towards nearshoring. The expectation was that multinational companies, having recognised the risks of concentrating production in distant, low-cost locations, would start relocating some operations closer to home, thus shortening their supply chains.
In a study published three years ago by the Vienna Institute for International Economic Studies (wiiw), it was predicted that this trend would lead to increased investment in the Western Balkans – as a region situated close to Western Europe that offers a skilled labour force and relatively low production costs. In the new wiiw study entitled Transforming the Western Balkans through Nearshoring and Decarbonisation, the institute reassesses these predictions with the benefit of hindsight.
WHAT WAS DONE IN THIS STUDY?
The study aimed to do three things: firstly, evaluate whether nearshoring has occurred in the Western Balkans and identify specific examples; secondly, explore how it can be aligned with ongoing decarbonisation efforts; and thirdly, examine the implications of the two megatrends of nearshoring and decarbonisation for local companies and how they might foster greater cooperation between local and foreign firms.
To achieve this, we conducted a quantitative analysis of macroeconomic data on FDI inflows to the region, examined case studies of recent investment projects and drew insights from interviews with investors and from surveys of both international and local companies operating in the region.
ARE WE SEEING SOME NEARSHORING?
Our quantitative analysis of post-pandemic FDI inflows across the six Western Balkan economies suggests that three of them (Bosnia and Herzegovina, Kosovo and North Macedonia) are likely experiencing nearshoring. We draw this conclusion because FDI inflows in these economies between 2020 and 2023 consistently exceeded the long-term equilibrium values simulated by the econometric models we used (Figure 1). In contrast, Albania and Serbia show no evidence of nearshoring, despite still having very strong FDI inflows, with actual FDI inflows falling below simulated values.
The results are inconclusive when it comes to Montenegro: while FDI inflows exceeded expectations between 2020 and 2022, they fell in 2023.
FIGURE 1 / ACTUAL FDI INFLOWS VS FDI INFLOWS GIVEN BY THE MODELS (% OF GDP)
In addition to this, our case study analysis of recent investment projects revealed that all six Western Balkan economies have attracted significant foreign investments, many linked to either nearshoring or decarbonisation. Major investments in the manufacturing sector, motivated by nearshoring, have been observed in Albania, Bosnia and Herzegovina, Kosovo, North Macedonia and Serbia. Some of these investments have come from Asian companies seeking proximity to European markets. Major renewable energy projects have additionally been identified in Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia.
WHAT DO THE COMPANIES SAY?
The interviews we conducted with foreign investors confirmed that many of them are coming to the region motivated by nearshoring options, as a response to the challenges exposed by the pandemic and recent geopolitical events, such as the war in Ukraine. These interviews also highlighted the growing importance of environmental sustainability and decarbonisation to international companies – not just because of regulatory requirements, but also because of consumer expectations.
The survey of foreign companies that have invested in the Western Balkans indicated that the primary reasons for investing in the region are its favourable geographical position, skilled labour force and relatively low wages. On the other hand, poor governance, weak institutions and inadequate infrastructure were identified as the main challenges. Satisfaction levels are high, with 72% of respondents stating they were satisfied or very satisfied with their overall experience of operating in the region. Moreover, two-thirds of these foreign companies indicated they would increase their investments if improvements were achieved in terms of decarbonisation.
The survey of local companies revealed that two-thirds were familiar with the concept of decarbonisation. Many companies have a positive view of decarbonisation and recognise that investing in new technologies to reduce emissions could improve their chances of exporting to the EU. However, respondent companies were also clear that financial support would be essential to reduce their carbon footprint effectively.
WHAT COMES NEXT?
In order to capitalise fully on the opportunities presented by the global nearshoring trend, policymakers must exert some efforts. Previous recommendations – like improving governance, strengthening institutions and enhancing infrastructure – remain essential, as foreign companies often cite these as major obstacles. Additionally, investing in renewable energy and decarbonisation is crucial, as progress in these areas could attract more foreign investment. This would also help local companies by increasing their appeal to foreign partners. They are keen to adopt new technologies to reduce their carbon footprint, but they require financial assistance.
By addressing these challenges, the Western Balkan region can indeed transform itself.
1 This study was jointly prepared by the Vienna Institute for International Economic Studies, the Western Balkans 6 Chamber Investment Forum, the Chamber Partnership Western Balkans and chambers of commerce from Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia
Note: The orange areas show the range of equilibrium FDI inflows provided by the models, while the grey line shows actual FDI inflows. If the grey line is above the orange area, we interpret that as a sign of nearshoring. Source: wiiw calculations, using data sourced from wiiw FDI and Annual databases.
