The importance of foreign direct investments on economic development of kosova

• Author: Myrvete Badivuku-Pantina/Mihane Berisha-Namani
• Position: Ph.D. Associate Professor/PhD. Assistant Professor, University of Prishtina-Faculty of Economics
• Pages: 71-81

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Introduction

Physical capital has always stood at the core of economic progress explanations. Countries that invest a large portion of GDP tend to develop faster. In order to invest, a country needs to make savings or have access to foreign savings or assistance. Except for the private sector, the government also has an impact on the level of national savings, and it conducts this through its budgetary policies. After utilizing its internal economy, countries may attract foreign savings in order to finance investments. A country under development may draw foreign investments in the following three ways. One possibility is to have foreign companies invest directly in the country. The second method, through which a country may draw foreign resources, is by means of credits obtained at the global capital market or through financial institutions such as the World Bank. Thirdly, a country may be able to obtain foreign assistance from industrialized countries. However, the lower the income per capita in a country, the more important are foreign savings, such as in the case of Kosovo.

Foreign Direct Investments (FDI) represent the flow of international organisations in various countries, to which on the latter decades a great deal of attention is given, since their number has increased in an extraordinary manner. Based on the OECD and IMF data, the total value of FDI at the global level has increased from $105 billion, in 1967, to 596 billion dollars in 1984. Only in the USA during the period of 1960-1985, FDI increased form 6.9 to 183 billion dollars.¹

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Bearing in mind the fact that Kosovo currently faces problems with impediments of various natures, which impede its economical development, FDI could play a key role in the economical development of Kosovo. Kosovo faces lack of financial resources for financing investments, while there is constant pressure for resolving the unemployment problem. Therefore, it is considered that FDI will play a positive role in the Kosovo economy, by introducing fresh capital, modern technology, western experience in the field of marketing and management. Simultaneously, they will assist the restructuring of the economy, opening up of new working places, increase of export and decrease of the trade balance deficit. Factors that characterize the current condition of the Kosovo economy and that make Kosovo a specific country that needs FDI is as follows:

* Significant decrease of foreign assistance in the form of donations after 2003, * Kosovo banking system is still unable to provide adequate financing for business development (long-term loans, low interest rates, greater volume),

* Considerable decrease of remittances from Kosovo emigrants located in various countries of the world,

* Great needs for investment in the public infrastructure,

* Low rate of unemployment,

* Lack of financial markets.

General information on the Kosovo economy

Economic activities of Kosovo prior to the conflict in 1999 were focused in the industry, energy, mines and metalurgy, construction materials and processing of agricultural products. During the 90's, the Kosovo economy has marked a considerable decrease, initially due to a lack of required investments, secondly due to the devastation of production infrastructure and capacities devastated by the conflict of 1999. Therefore, Kosovo as a post-war country, as well as with a subsequent transition phase, compared to the countries of the region, has also faces a very low level of foreign investments.

In 1988, the general production of Kosovo was dominated by industry, which comprised about 50% of the GDP, whereas agriculture comprised only about 20% of GDP². Economic development during the 2000-2006 period was characterized by a small economic increase compared to the fairly low base at the commencement of the transition, as a generally unsustainable macroeconomic indicator, which may be observed from the table provided below.

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The immediate increase of the GDP until 2002 was fairly affected by the large amount of international donor contributions, which amounted to approximately 900 million Euros and was concentrated in the construction of houses and infrastructure damaged by the conflict of 1999. Afterward, this assistance had decreased considerably and by 2006 it is considered to be two times lower than in 2002. The adoption of Euro as a national currency has been in favour of sustainable monetary policies and exchange rates. The trade deficit remains high, whereas exports are scarce and due to limited production capacities for export and inability to cope with the competition. The coverage of import with export is still very low, at about 8%.

Even though it is clear that Kosovo needs a higher rate of economic growth in order to address the challenges it faces, the level of economic growth in 2006 should be considered encouraging, because it had been achieved not with standing the limiting effects that have resulted from the reduction of donor assistance (from 426 million Euro to 343 million Euro) as well as the reduction of government capital expenditures. This growth has been mainly supported by the private sector investments, which were financed by credits of the banking sector and FDI.

Due to the high consumption rates in relation to GDP, national savings in Kosovo are negative, achieving the mark of 15.3% of the GDP. At the end of 2006 investments in Kosovo amounted to 618 million Euros and were by 4.0% higher than those of 2005. From 2001, when investments were at their peak by amounting to 661 million Euros, a gradual decrease of investments was noted until 2003, whereas from 2004 a slight increase of investments followed. During 2005 about 22% were spent from the total budget on behalf of capital investments, which is about 1% lower than in 2004. On the table below you have the total investments in Kosovo from 2001 until 2006.

Except for volume-based growth, investments also increased as part of GDP, at 28.3% in 2006, which is one of the highest in the region. However, the value of GDP in Kosovo, during the reviewed period, was lower; in 2006 it amounted to 2,477 million Euros, which is noticeable on the data presented on table 3. Only Croatia...