FDI Determinants, Incentive Policies and FDI Effects in the Western Balkan Countries

Abstract

Foreign direct investment (FDI) is one of the least understood concepts in international economics. Their main proponents argued that FDI is a long-term and stable cross-border flow of capital that enhances productive capacity of domestic economies and helps them to meet their balance-of-payments shortfalls. Moreover, FDI supports transfers technology and management skills and links domestic economies with the wider global markets. But, in reality, the effects from FDI for the host countries are very ambiguous. There are number of debates among scholars and policy makers regarding its nature and impact on capital accumulation, technological progress, industrialization, growth and development in the host countries. However, in the last two decades, FDI has increasingly been viewed by policy makers in the Western Balkan countries (WBCs) as one of the most important external sources to finance development, increase productivity and import new technologies. This has been accompanied by an increase in competition among the WBCs to attract FDI, resulting in higher investment incentives offered by the host governments. So, for policy makers one of the most important issues is being able to determine which factors are crucial in driving FDI inflows and what the real effects of these policies are. Thus, the main focus of this paper is to address these questions.