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18 I Companies & Markets bne March 2023
Geopolitics overshadows Western Balkan nearshoring ambitions
Clare Nuttall in Glasgow
During the pandemic the Western Balkans was pegged as having the potential to become an important destination for nearshoring as people rethought
and shortened their supply chains. Two years on, the war in Ukraine and not the pandemic dominates headlines and has caused a whole new set of disruptions to global trade as well as a global economic downturn.
So where does this leave the Western Balkan states longing for a boost to foreign direct investment (FDI)? The region’s economies, like others in Europe and worldwide, have been damaged by the war, sanctions and rampant inflation. Yet data so far shows there was an increase in investment in the region in 2022 — with the glaring exception of Serbia, which has refused to join international sanctions on Russia, with negative consequences for its reputation in the West and its EU accession prospects.
Nearshoring dreams
After the pandemic revealed the vulnerability of international supply chains, companies in Europe started rethinking their strategies to look at manufacturing destinations closer to home, rather than relying on far-flung suppliers in East Asia. With the start of the pandemic, links in international supply chains were abruptly severed, and this followed on from the protectionist policies in some
key world economies in the years before the pandemic that appeared to signal a slowdown or even a reversal in the long- standing globalisation trend.
This was seen as creating opportunities for the Western Balkans: the six EU-aspiring states are geographically and culturally close to the Central and West European countries but with considerably lower costs, as pointed out in two separate studies from 2021. (Both studies did, however, stress that to attract potentially billions of euros in FDI, the Western Balkans needs to make reforms.)
This was a welcome development for the region, where countries such as Bosnia & Herzegovina, North Macedonia and Serbia in particular had received a series of investments in sectors such as textiles and car parts production, strongly encouraged with subsidies and other incentives.
A year and a half later, full data from 2022 isn’t available
yet, but data for the first three quarters of the year from
most countries indicates a rebound in investment. Branimir Jovanovic, economist at the Vienna Institute for International Economic Studies (wiiw), says that the data gives “very strong indications that some nearshoring is going on in the region”.
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North Macedonia, for instance, saw investments double
in the first three quarters of 2022 compared to the same period in 2021, while in several other countries it has risen by around 30-50%. That comes on top of the very strong inflows in 2021.
Jovanovic does, however, say it’s rather early to say to what extent this is nearshoring or just pent-up investment from the pandemic years. After barely three years since the pandemic began, companies have had little time to make and carry out investment decisions. And as he points out, companies are more likely to enter the region for greenfield investments rather than relocate existing production facilities.
“We won’t see many companies moving factories because it’s costly; they have fixed investments, sunk costs,” comments Jovanovic. “We do expect to see in future Western companies deciding to invest more in the Western Balkans, North Africa and Eastern Europe, rather than in East Asia.”
Yesterday's buzzword
Despite these encouraging figures, the invasion of Ukraine shifted the emphasis from investing in nearby countries to investing into friendly countries with shared values. “Nearshoring is the story of the past. Friendshoring is the new trend,” says Jovanovic.
The Ukraine war has not only had a massive impact on international trade and investment, with the related sanctions, commodity shortages and inflation now causing economies to slow, but also on international geopolitics. Natalia Otel Belan, regional director for Europe and Eurasia
“We do expect to see in future Western companies deciding to invest more in the Western Balkans, North Africa and Eastern Europe, rather than in East Asia”
at the Center for International Private Enterprise (CIPE), says investment destinations are now viewed in the context of the "global fight between autocracy and democracy”.
“If we look back to when we were coming out of the pandemic, before the war in Ukraine, there was a lot of