The events of the 1990s left very deep traces, but since 2000 Western Balkans economies showed a positive turnaround, experiencing a process of rapid integration into world trade. The Balkans: Italy retains a competitive advantage by Matteo Ferrazzi EU remains the area s preferred partner and Italy, Austria and Germany its main investors. But the Italy system has some major cards to play and I n the last fifteen years, many Central- Eastern European (CEE) countries experienced a process of rapid integration in world trade, as the effect of the process of liberalization experienced during the transition and the gradual opening of European markets. International trade and foreign direct investments flows (FDI) have been among the main drivers for economic and political integration around the world, and the transition countries in East Europe can be considered a typical example. Western Balkans countries (Albania and the four former Yugoslavian countries: Croatia, Serbia-Montenegro, Bosnia-Herzegovina, and Macedonia), although very close to European markets, experienced a very different transition process. In particular, Western Balkans countries, after the break up of former Yugoslavia, and the period of instability since 1991 (with 5 military conflicts, sanctions and isolation), followed a different path, characterized by delays in institutional and economic reforms and a difficult economic environment. In the Western Balkans countries the transition from a Socialist economy to a market economy contrary to other CEE Grazia Neri_Bilderberg 136
countries was coupled with the passage from an integrated to a fragmented economic area. This experience prevented the progressive integration in European trade flows and the improvements in their economies. The events of the 1990s left, of course, very deep traces, but since 2000 Western Balkans economies showed a positive turnaround, with a sustainable growth path that spurred the hopes for a rapid recovery and a gradual integration with European economies. The EU convergence process is another important factor, which can be determinant in favoring the transition towards a more stable economic and institutional environment: in 1999 the EU launched the _In the Balkans, there is a considerable number of Italian investments in the services sectors, particularly tourism (Croatia and Bosnia-Herzegovina) and trade (Croatia and Macedonia) Stabilization and Association Process (SAP), offering to South-East European countries the prospects of future EU membership, trade preferences and financial assistance. The recent EU Enlargement package reiterates EU interest in the Western Balkans area through the Stabilization and Association Process. Croatia already started accession negotiations in October 2005 and is targeting possible EU entry in the course of 2009-2010. The other countries are following a gradual process towards the EU: Macedonia recently attained (in December 2005) the status of candidate country, while Bosnia-Herzegovina, Serbia-Montenegro and Albania opened the Stability and Association Agreements negotiations in the last months of 2005. In this economic environment, characterized by sustained economic growth and converge towards EU, the importance of trade flows and FDI for Western Balkans countries will becoming crucial. As far as Italy can be Grazia Neri_Bilderberg
BALKANS: ITALY RETAINS A COMPETITIVE ADVANTAGE considered a natural trading partner and investor, the role of Italian players (firms, banks, institutions) is important. As geographical proximity is one of the main determinant of the amount of bilateral trade flows, and given the special features of the Italian model of internationalization, the developments in this field are of special interest. Trade and Foreign Direct Investments in the Western Balkans: the Role of Italy Trade integration has been relatively recent in Western Balkans countries and it has not been a linear process, as the effects of institutional and political instability in recent years are particularly visible in trade flows. Trade flows in the area are characterized by huge commercial deficits, with imports exceeding by far exports. The relevance of EU as a trading partner is another important characteristic of Western Balkans trade flows, especially on import side, as import dependency is quite relevant. In particular Italy, Germany and Austria are the European countries that play the most preeminent role for Western Balkans. Geographical proximity, historical linkages, inherited trade patterns and the important size of these three markets make them the main markets of destination and among the most important suppliers of goods and services. Italy is playing an important role. Geographic proximity is the main comparative advantage for Italian firms in the area. And in some cases proximity is not only a spatial concept, but also socio-cultural (the Italian language, for instance, is rather widespread in some countries). The role of Italy as trading partner is predominant in all the SEE-5 (South Eastern Europe-5) countries considered, with the partial exception of Macedonia. Italy is the main market of destination for Croatia and Albania; the second market of destination (after Croatia) for Bosnia- Herzegovina and (after Bosnia- Herzegovina) for Serbia; the fourth market of destination for FYR Macedonia (after Serbia, Germany, and Greece). Italy is also one of the main supplier of imported goods for Western Balkans countries. If Italy is particularly suffering the competition of emerging markets in Europe and in North America, on the contrary some Eastern European markets can still be considered a niche where Italian exporters and entrepreneurs maintain a significant role. As shown in Figure 1, almost one fifth of total Croatian imported goods comes from Italy, more than one third for Albanian imported goods. The presence of Italian firms in Bosnia-Herzegovina and Serbia- Montenegro is also relevant, but not in Macedonia, where the Italian presence is marginal. Italian market shares in Western Balkans are particularly high not only if compared with the Italian presence worldwide, but also in comparison with the New Member States and Eastern Balkans countries (Turkey, Bulgaria, Romania). Italian firms are also important investors in South Eastern Europe. In particular Italy is the first investor in Serbia- Montenegro and Albania. But Italy is not among the top-3 investors in Croatia (where Austria and Germany play a leading role), nor in Bosnia-Herzegovina (Austria, Croatia and Slovenia are respectively the main investors), nor in Macedonia (where Greece is the first investor). In terms of Foreign Direct Investments (FDI), the Italian role in Western Balkans is not so significant as for trade flows. Indeed, the presence of Italian investors and entrepreneurs in South-East Europe, however relevant, seems less focused on stable and long term investments in the area. This is a relatively common feature of the Italian presence in many Eastern European countries. In particular Small and Medium Enterprises (SME), because of their limited size, prefer to use contractual measures rather than FDI, or different kinds of partnerships or shareholdings in order to avoid sunk costs and reduce entrepreneurial risks that are not able to cope with. These patterns must be related with other specificities of the model of internationalisation of Italian firms, like the absence of big leading firms, the presence in sectors with lower economies of scale, the difficulties to build 138
strong and stable commercial links, the role of industrial district1. These features are partially reflected in the sectorial specialization of Italian Foreign Direct Investments in Western Balkans. If we consider the main destination of Italian direct investments, Leather and Textiles is among the three most important sectors for Bosnia- Herzegovina, Serbia-Montenegro and Albania; this is a common feature of the Italian presence abroad and it s mainly the effect of the relocation of some productive capacity of Italian firms in some labor intensive productions (labor cost in the former Yugoslavian countries, as a reference, is around one-fifth of the Italian one). But the presence of Italian investments in the service sectors mainly to serve the needs of local population is relevant, especially in trade (Croatia, Macedonia), finance (Croatia, Serbia) and tourism (Croatia, Bosnia-Herzegovina). These trends increase the probability that in the future high value added productions, and services, will be at the centre of the Italian presence in the area, overcoming the structural weakness of the Italian internationalization mainly based, at the moment, on labor intensive productions. Since there is room for further integration of SEE countries (with the obvious effects of trade and FDI flows on their productive structure), it will be interesting, in the next years, to understand if Western Balkans will become simply an area where production of traditional sectors is relocated, or will be able to develop, especially with the support of foreign investors, more sophisticated productions and innovative services to serve the increasing needs of the population. Different stages of development, and consequently different production costs and wealth, drive this process: Croatia, for instance, is of course more important as a market of destination, while other Southern States can be considered more attractive, at the moment, on cost side. Figure 2 Taking into account the numerical presence of Italian firms in Western Balkans, it is still relatively limited, especially in some specific country: the latest available information signals around 300 Italian firms, with different kind of involvement and dimension, in Croatia, around 55 in Bosnia and Herzegovina, 58 in Serbia-Montenegro, 1. ITALIAN EXPORT SHARES IN SELECTED COUNTRIES 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% Croatia Bosnia- Herzegovina Serbia- Montenegro Macedonia Albania SEE-6 NMS-8 Eastern Balkans Source: IMF-DOTS, declaration of exports, current prices; National Sources (Federation of B.H. Federal Office of Statistics, National Bank of the Republic of Macedonia) 139
BALKANS: ITALY RETAINS A COMPETITIVE ADVANTAGE only around 15 in Macedonia, and around 400 in Albania. These numbers are not particularly relevant if compared with the presence in Eastern Balkans countries: Italian firms are around 650 in Bulgaria, almost 300 in Turkey and 8,000 in Romania. Romania is by far one of the preferred destinations of Italian investments abroad, especially because of the relocation of part of the production process in Textile and Leather. Given the presence of Italian firms, Italian banks are at the same time expanding their activities in Western Balkans. Italian banks are now present both in Central- Eastern Europe and in Western Balkans, even if with different intensity. The presence of the major Italian banks in CEE countries is very significant, with an important role of all the major Italian banks, namely UniCredit (in 16 countries), Banca Intesa (in 8 countries), San Paolo (in 7 countries), and Capitalia (in 3 countries). MPS (Monte Paschi Siena) and BNL (Banca Nazionale del Lavoro) are present with representative offices. Of those banks, only two entered Western Balkans markets: UniCredit, and Banca Intesa are now present in four and two, respectively, of the five SEE countries. In particular UniCredit controlled banks are among the top-3 banks in Croatia and Bosnia Herzegovina, while Banca Intesa banks are among the top-3 in Croatia and Serbia. UniCredit Group is also present in Serbia (and in Macedonia, with a representative office). UniCredit and Banca Intesa are not present in Albania. Overall the presence of Italian banks in Western Balkans can represent another comparative advantage for Italian firms vis-à-vis other competitors. In particular, the presence of UniCredit and Banca Intesa in Western Balkans must be considered in light of the establishment, by these two banks, of broad networks of banks in many CEE countries. Italy in the Balkans: a potential not fully exploited Western Balkans countries, as already mentioned, have been able, in recent years, to show a macroeconomic stabilization with high growth and 2. ITALIAN TRADE FLOWS IN CENTRAL AND EAST- ERN EUROPE (%, 2004) New Member States Eastern Balkans SEE-5 49% 37% 14% Source: IMF-DOTS, declaration of exports, current prices; National Sources (Federation of B.H. Federal Office of Statistics, National Bank of the Republic of Macedonia) lower inflation in a context of an improved and more stable political and institutional environment. Meanwhile the process of relocation of production of European firms is still continuing, and Eastern Europe is one of the main destinations of EU investments. In this scenario, Western Balkans could become a future destination of foreign investments. This is of particular interest, as FDI flows are usually motivated by long term considerations and they have already been an important source of capital accumulation and technological enhancement in many countries around the world, and especially in CEE. To attract more FDI it will be important to achieve political stability, as a prerequisite, but also macroeconomic stability especially to gradually break the Current account deficit-aid trap in view of decreasing international donor funding and improve the business climate. Given the geographical position of Western Balkans, export-oriented policies and FDI attraction could be a decisive component. But it s important to underline that Balkans countries have also another important channel that will be helpful in attracting FDI, as SEE countries have the big opportunity to take advantage of the EU convergence process. This possibility is, of course, not common for other emerging countries, which lacks a so strong external anchor that can facilitate the transition. Italy, in this context, could really become an important player. Italy has intense economic relations with the area, but it 140
_Given the presence of Italian companies, banks are expanding their activity in the Western Balkans to support national business still cannot be regarded as a regional power. From this point of view the role of Italy can be considered still a big potential, but not fully exploited, especially if we compare the role of Italy in other CEE countries and if we take into account some comparative advantages such as the geographical proximity, the importance of EU convergence process, and the relative absence, at the moment, of some major players. In particular some elements (proximity, lower costs, small domestic markets, absence of big players with important economies of scale, absence of high tech producers) make Western Balkans countries a suitable target for Italian Small and Medium Enterprises (SME). SME and their presence in the form of the so called industrial districts are the backbone of the Italian manufacturing industry but they find difficult to export and especially invest abroad, as the limited dimension is a stringent limit to their possibilities. In this sense, the possibility to develop trans-adriatic cooperation is not only a problem of the recipient countries but it s also dependent on the strategy and ability of Italian firms. The current sectorial specialization Contrasto_Reuters of Italian FDI in Western Balkans make possible, in particular, to develop a partially different model of internalization, finalized not mainly to decentralize production, but rather to produce for local markets ( market seeking FDI ). In this sense the growing presence in the service sector in the field of banking, utilities, telecommunications is already an important signal. A systemic model of internationalization should also target different kind of relations, in the field of geo-political and cultural influence, migratory flows, education. In this area Italy could start to build up relations that has not been able to develop in the past and in other countries, hence contributing to the current fragility of the Italian model of internationalization. Western Balkans countries, on the contrary, are a natural candidate to expand the activity of Italian firms abroad and to develop strong links in many field. The path of EU convergence process will be a further stimulus and will be a guarantee for future trade integration and investment attraction. 141