Grow your Businessin the Western Balkans

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A BASE OF INVESTORS IN PLACE Across many sectors and product lines, manufacturers are already operating – and in some cases, expanding – in the Western Balkans to supply global and regional customers. Some of these investors are well known for their worldwide brands, such as Coca-Cola, Volkswagen and Ericsson; others are leading competi-tors in supplying their respective industrial sectors.

The region is quickly moving beyond the post-conflict challenges of its past, and now offers investors a signif-icantly improved investment climate and risk profile. Investors still concerned about political risks in the region have mitigation tools available from both public and private sources. For example, the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group has provided more than $650 million in guarantees for Western Balkan investments in the man-ufacturing, infrastructure, financial services, tourism and health care sectors. Insured investors include companies from Austria, Cyprus, the Czech Republic, Greece, Italy, the Netherlands, Norway and Slovenia.

AN INSIDERS’ PERSPECTIVE A recent benchmarking and competitiveness study conducted by MIGA substantiates the region’s opportu-nity for manufacturers on a country-by-country basis. Based on personal interviews with 76 existing investors in five countries – Albania, Bosnia and Herzegovina, Croatia, Macedonia, Serbia and Montenegro – the study reveals emerging, yet evident strengths in the sample sectors among a growing industrial base of local and foreign investors. Among the surveyed companies, products range from those requiring light to medium assembly, such as leather shoes in Albania, to auto brake sensors incorporating substantial technical design in Croatia, to heavy machinery and parts in Serbia.

YOUR PARTNER IN THE WESTERN BALKANS The European Investor Outreach Program (EIOP), an independent, pan-regional program based in Vienna, offers customized services to help investors consider their options and plan site visits in the Western Balkans. All services are provided at no cost to investors, including:

r Information and research on business conditions in the region

r Coordination of site visits r Cooperation with the region’s investment promotion

agencies r Investment facilitationr Access to an extensive network of key contactsr Assistance with risk mitigation, such as MIGA’s

political risk tools r Assistance in the sourcing of finance

CONTACT EIOP

European InvestorOutreach Program (EIOP)

An initiative administered by:World Bank GroupMultilateral Investment Guarantee Agency (MIGA) Strauchgasse 3A -1014 Vienna, Austriat. + 43 (1) 535 53 82-2115f. + 43 (1) 535 53 82-5115dermot.coffey@eiop.org or info@eiop.org

www.eiop.org

June 2005

Czech Republic

Austria

Germany

BurkinaFaso

Norway

IrelandUnited

Kingdom

SwedenFinland

Denmark

Estonia

Latvia

Lithuania

Poland

Russian Fed.

Belarus

Ukraine

Moldova

Romania

Bulgaria

Greece

Italy

Belgium

Netherlands

Luxembourg

SwitzerlandFrance

Portugal

Spain

Malta

Morocco

Tunisia

Algeria

Mauritania

Mali

Senegal

The Gambia

Guinea-Bissau

Ghana

Togo

Benin

Niger

Libya Arab Rep. of Egypt

Sudan

Chad

Eritrea

Djibouti

Ethiopia

Somalia

Rep. of Yemen

Oman

United Arab Emirates

Qatar

Bahrain

Saudi Arabia

Kuwait

Israel

Jordan

Lebanon

Syrian

Arab

Rep.

Cyprus

Iraq

Islamic Rep.of Iran

TurkeyAzerbaijan

Armenia

Georgia

Turkmenistan

Uzbekistan

Kazakhstan

Afghanistan

Tajikistan

Kyrgyz

Rep.

Pakistan

India

Bhutan

Nepal

Bangladesh

Myanmar

Thailand

LaoP.D.R.

Vietnam

Cambodia

Japan

Rep.ofKorea

Dem.People’sRep.of Korea

Mongolia

China

Russian Federation

FormerSpanishSahara

West Bank and Gaza

Croatia

Bosnia andHerzegovina Serbia

andMontenegro

Albania

FYRMacedonia

Slovenia

Hungary

SlovakRepublic

IBRD 31992

JUNE 2002

As the EU expands south and east,

the Western Balkan region is

Europe’s next high-value location

for manufacturers. Early investors

can maximize their opportunity

before countries of this “last frontier”

join the EU, especially if the region’s

economies enjoy a pre-accession

boom as recently seen in South East

Europe.

Average Labor Costs in Manufacturing Industries

(Annual cost to employer in US$, includes gross salary + social security)

Source: Field interviews with existing investors and desktop research, April 2005.

THE EUROPEAN UNION EXPANDSThe expansion of the European Union (EU) has created a dynamic environment for investors locating facilities to serve Europe. As the EU reaches into former Eastern Europe, economic growth – and the gravity point for foreign direct investment (FDI) – has shifted to the continent’s east and south. South East Europe has become a burgeoning regional market economy with strong country contenders for FDI. The next wave of countries poised for EU accession includes Bulgaria and Romania, then Croatia followed by Turkey. Especially for manufacturers, the changing European landscape presents opportunities to realize cost efficiencies in relocating or expanding their export platforms.

FOCUS ON THE WESTERN BALKANS As the last frontier amid a rapidly integrating continent, the Western Balkans has emerged as Europe’s next high-growth destination for FDI. The region, now directly adjacent to the EU’s expanding border, has attracted the focus of the leadership of the European Commission. Western Balkan country governments are moving on several tracks of reforms that benefit investors and

THE WESTERN BALKANS AS A PRODUCTION PLATFORMThe study’s analysis of critical location factors suggests key advantages for manufacturers, including:

r The highly competitive overall cost structure. In a comparison of major operating costs, i.e., labor, property and utilities, the costs in most Western Balkan countries are lower than in the Slovak Republic, the Czech Republic and Hungary.

r The “value-add” workforce. Investors consider the low-cost, high-quality workforce a significant advantage, and they rank availability of skilled and unskilled workers as excellent. Labor costs are among the most competitive in Europe. Workers are well educated and experienced; current investors cite their technical expertise and strong work ethic.

r Strategic location and trade access. Uniquely situated on the Adriatic and next to major country markets, the region is well positioned to serve immediate trading partners and the EU. A regional free trade agreement (FTA) is in place for South East Europe, including the Western Balkans. The region also offers exporters preferential trade access to Russia’s 150-million market through Serbia’s FTA.

r Local availability of raw materials and supply network.Inputs can increasingly be sourced locally, and an existing supply network is based in the region’s long-standing history as a production center.

r Improving fiscal and incentive regimes. The govern-ments of the region are committed to the attraction of FDI, as evidenced on several fronts, including progress on regulatory, fiscal and tax policy reforms and investor incentives.

anticipate EU accession. Croatia applied for EU mem-bership in 2004, and is slated to become a full member by 2009. Given the rapid pace of EU expansion, it is expected that other countries of the Western Balkans will enjoy EU membership within ten years.

A STRATEGIC TIME TO INVEST Forward-looking investors can maximize their oppor-tunity in the period leading up to the Western Balkan countries’ integration into the EU. Recent experience among new EU country members vividly underscores the investment potential. Not only have South East European economies seen major pre-accession boosts in GDP and exports, but post-privatization FDI also has skyrocketed, particularly in manufacturing sectors. The Western Balkan region is already showing extraor-dinary GDP growth relative to that of Western Europe. Early entrants in the region can build advantage in the strategic timing of their investments, before the expected economic boom and free market forces drive increases in cost factors and competition.

Operating Cost Index

(Includes labor, property and utilities, based on com-posite of two “model” plants in the automotive and food industries)

Albania 35Bosnia and Herzegovina 62Croatia 96Macedonia 55Serbia and Montenegro 48Slovak Republic 59Czech Republic 84Hungary 100

The study’s findings of manufacturers

in two sectors are relevant for a range

of industries and “greenfield” projects.

The 76 surveyed investors both export

within the EU and serve the region’s

home markets.

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% Real GDP Growth

2004 2005(f)

Albania 6.0 6.5

Bosnia and Herzegovina 6.0 5.0

Croatia 3.7 3.5

Macedonia 2.0 4.0

Serbia and Montenegro 7.0 5.0

Romania 7.8 5.0

Bulgaria 5.6 5.0

Germany 1.8 0.7

AUTOMOTIVE COMPONENTSIn recent years, component suppliers have followed the original equipment manufacturers (OEMs) setting up operations in Central Europe, a trend that will impact the Western Balkans as more suppliers decide to relocate. The study revealed a base of “Tier 1” suppliers already located in Bosnia, Croatia, Serbia and Montenegro. The region’s developing automotive cluster produces a wide variety of products to serve major automakers and their partners, primarily in Europe and Russia. For instance, Western Balkan-based suppliers export leather interiors and precision spare parts from Bosnia, tires from Serbia, safety belts and batteries from Macedonia and ball bearings from Montenegro.

Among the factors critical to automotive investors noted in the study’s findings: r Proven ability with the technical content of complex

subcomponents in Croatiar Availability of low-cost, experienced workers in

Serbia and Macedoniar In-house R&D and highly automated production

in Bosniar High standards for quality, including ISO 16949

certification in many cases

FOODS AND BEVERAGESEastward destinations are driving robust FDI growth in food and beverage processing, now a mature sector in Western Europe. In fact, in this sector Eastern Europe is the top region worldwide for FDI. Investors in the Western Balkans are expected to capitalize on this trend, especially given the strong Russian market. The study indicates that in certain niches, exporters can take advantage of the region’s abundant resource base. For instance, Albania has 250 endemic species of herbs and spices, and in Serbia and Macedonia, the climate favors a variety of fruits for commercial harvest. Montenegro produces excellent wines and brandy. For investors looking to serve the region, opportunities exist to gain “first mover” advantage in this fragmented sector, through import substitution and the further develop-ment of local and regional brands.

% Annual Exports Growth

(For production goods in 2004)

Western Balkan countries are showing GDP and exports growth comparable to that of their South East European neighbors, and GDP growth in the Western Balkans way exceeds that of Western European countries, such as Germany.

Source: Vienna Institute for International Economic Studies (WIIW) and other desktop sources.

Source: MIGA Western Balkans Benchmarking Study, 2005.

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Technical Skilled Unskilled