The Western Balkans as an FDI Destination in a Changing Global Order
Lea Bellušová
Foreign direct investment (FDI) is a key factor in the global economy and has a significant impact on the world economy, the integration of countries into larger economic or political entities, and thus on globalisation. FDI strongly influences macroeconomic indicators such as economic growth and unemployment levels. Political and economic factors within individual countries, geographic regions, and economic blocs affect their ability to attract and effectively utilise foreign direct investment. FDI not only supports economic growth and development in host economies but also contributes to international economic integration through globalisation. One of the defining features of the contemporary global economy is the growing presence and importance of FDI. These investments facilitate the flow of trade, capital, labour, and technology, making them a key driver of globalisation and an important engine of development for many countries. The countries of the Western Balkans recognise the importance of attracting foreign capital through FDI and consider it a central priority for their economic growth.
The Western Balkans is a significant region for future economic development for several reasons, including its strategic location, access to markets within and beyond Europe, potential for deeper integration, and investment opportunities. The region comprises Albania, Bosnia and Herzegovina, Montenegro, Croatia, Kosovo, North Macedonia, and Serbia. Despite its location and resources, the Western Balkans still has underutilised economic potential, with room for improvements in infrastructure, human capital development, and support for entrepreneurship. The region offers investment opportunities in sectors such as energy, tourism, industry, and infrastructure. There is potential for growth and development in these sectors, and the Western Balkans has the potential to become a prosperous and competitive region with significant opportunities for economic development.
This article tracks the development and changes in FDI flows into the Western Balkan countries (the WB6 region) before and after 2020—a milestone year in global geopolitics and the world economy—and provides forecasts for future trends. The aim is to analyse how the volume, structure, and motivation of FDI in the Western Balkans have changed before the pandemic and the associated economic crisis, considering the impacts of the war in Ukraine, the energy crisis, and new directions in geopolitics and the global order.
Photo: Shutterstock.com
FDI in the Western Balkans before 2020
The region’s attractiveness to external investors stems from a combination of geographic location, underdeveloped infrastructure, relatively low labour costs, and weaker regulatory frameworks. It is also a region with an ongoing European integration process, creating a political vacuum in which FDI becomes a tool for gaining influence over key sectors of the economy, energy, and infrastructure. In this context, FDI is not only an economic capital supporting growth but also a strategic instrument with consequences extending beyond the economic sphere, directly affecting political stability, foreign policy orientation, and the strategic autonomy of the Western Balkans.
Before 2020, the Western Balkans was primarily a “catch-up” region for foreign investors, offering relatively cheap labour, geographic proximity to the EU market, and active investment incentive policies. FDI inflows were volatile and unevenly distributed among countries, but they played a key role in the region’s industrialisation, particularly in the automotive industry, energy, and services. However, this growth model was largely based on cost competitiveness with limited technology transfer.
The European Union (EU) has long been the most significant investor in the region. However, the 2008 economic and financial crisis disrupted the EU’s enlargement policy toward the Western Balkans. Since then, economic actors from non-EU countries—especially China, Russia, Turkey, and the United Arab Emirates—have become increasingly active. Their engagement is most visible in the areas of direct investment, trade, and energy security. In China’s case, most investments take the form of loans, increasing the region’s dependence on China, with a focus on strategic energy sectors, such as in Serbia and Bosnia and Herzegovina. Russia has long been the largest individual investor in Montenegro. Turkey focuses on infrastructure and banking, the UAE primarily on the real estate sector, and the United States participates in road and infrastructure construction projects.
The Western Balkans in a Changing Global Economy
Foreign direct investment (FDI) inflows to countries in Central, Eastern, and Southeastern Europe (CESEE – 23 economies) fell by 58% in the first half of 2020 compared to the same period in 2019. This decline was sharper than the global drop in FDI, yet less severe than the decline experienced by advanced economies. The impact varied across CESEE country groups: in the Western Balkans, FDI fell by only 8%. In EU-CEE countries, FDI had already started to decline in 2019, ending a three-year growth period.
The last decade has witnessed a profound transformation of the global economic landscape. The COVID-19 pandemic, the war in Ukraine, and rising geopolitical tensions accelerated trends that were already visible: the fragmentation of global markets, the reassessment of supply chains, and a shift from efficiency maximisation toward resilience and security. FDI, long considered a key engine of convergence for developing economies, is now becoming not only an economic but also a strategic tool.
Recent simultaneous shocks have called into question the sustainability of the previous approach. The pandemic exposed the vulnerability of global value chains, while the war in Ukraine highlighted the importance of geopolitical stability, energy security, and political alignment for investment decisions.
The Western Balkan economies are among the most open to FDI globally, as measured by the OECD FDI Regulatory Restrictiveness Index, which covers statutory measures that discriminate against foreign investors. The region’s score in 2020 was just over half the OECD average, indicating a relatively less restrictive investment regime.
According to the International Monetary Fund, the main investors in 2022 were as follows: in Albania – Switzerland, the Netherlands, Canada, Italy, and Turkey; in North Macedonia – Austria, Greece, the United Kingdom, Germany, and the Netherlands; in Kosovo – Germany, Switzerland, Turkey, the United States, and Austria; in Montenegro – Russia, Serbia, Azerbaijan, Hungary, and Italy; and in Bosnia and Herzegovina – Austria, Croatia, Serbia, Slovenia, and the United Kingdom. For comparison, according to total FDI inflows as of December 2021, the countries investing most in Bosnia and Herzegovina were Croatia and Austria, followed by Slovenia, Germany, the Netherlands, Switzerland, and Turkey. In the Republika Srpska, the largest investors were Serbia, followed by Italy, the United Kingdom, Austria, Russia, and Slovenia. The most recent data for 2022 indicate that the largest FDI inflows in Serbia came from Germany, Italy, the USA, Russia, China, France, and Austria.
In contrast to FDI, the Western Balkans’ trade relations with non-EU countries remain relatively weak, especially compared to the dominant position of the European Union. Between 2017 and 2021, more than four-fifths of regional exports—over 80%—went to the EU market, while exports to Russia accounted for only 2.8–4.2%, to China 0.8–2.9%, and to Turkey 2–2.6%. Exports to the United States averaged around 2%, while Gulf countries played only a marginal role in regional exports, with a share of just under 1%.
Beyond economic cooperation, China has continued to strengthen its presence through political engagement with Balkan countries. Cooperation with Serbia includes investments, loans, cultural and educational initiatives, and the security sector. Supported by politicians and media, China has been presented as Serbia’s most important strategic partner. Notable Chinese investments in the Balkans include the construction of the first section of the Bar-Boljare highway and the ecological reconstruction of the Pljevlja thermal power plant in Montenegro.
The Western Balkan economies continue to attract significant FDI, with net inflows reaching 6.4% of GDP between 2020 and 2023, more than four times the EU average. Montenegro stands out, with net FDI inflows during this period reaching nearly 11% of GDP, followed by Albania, Kosovo, and Serbia, all of which were around 7% of GDP.
According to the World Bank, perceptions of corruption in the region further worsened between 2020 and 2023, except for Kosovo and Albania, while the situation deteriorated significantly in Bosnia and Herzegovina, North Macedonia, and Serbia.
Photo: National bank of Serbia
Recent Economic and Political Developments in the Western Balkans
The Western Balkan countries remain among the most open economies to foreign direct investment (FDI), with foreign investors treated as domestic legal entities once registered. FDI restrictions generally apply only to a narrow set of strategic sectors such as defence, energy, and media. However, the region has not yet established a comprehensive FDI screening mechanism, which reduces entry barriers but also increases vulnerability to potentially problematic types of investment.
Montenegro has long dominated FDI inflows relative to GDP, driven primarily by investments in tourism, real estate, and financial services. Serbia follows, maintaining strong FDI inflows at roughly half the level of Montenegro relative to GDP, supported by investments in manufacturing and technology, as well as the operation of special economic zones and tax incentives.
Kosovo and Albania have seen fluctuating FDI trends in recent years. Albania remains attractive for energy and infrastructure investments, though FDI inflows declined by about 1% in 2022. North Macedonia and Bosnia and Herzegovina lag in attracting foreign capital, largely due to political instability, weaker institutional frameworks, and lower business predictability.
The structure of FDI in the Western Balkans varies significantly across countries and sectors. Serbia has been successful in attracting investment in manufacturing and the automotive industry, benefiting from the presence of major foreign producers such as Fiat. In contrast, Montenegro and Albania have received high FDI inflows in real estate and tourism, driven largely by foreign purchases of coastal properties. Renewable energy and infrastructure are also growing sectors, with projects in hydropower and solar energy expanding in Albania, North Macedonia, and Serbia. Although ICT and financial services are gradually growing across the region, technology-focused FDI remains relatively low, highlighting a persistent gap in digital investment and innovation capacity.
Legal frameworks for investment are generally stable and supported by extensive networks of investment agreements, enhancing investor protection. An exception is Bosnia and Herzegovina, where differing regulations across entities and cantons increase administrative burdens and uncertainty. Generous investment incentives remain important, including low corporate income tax rates (up to 15%), R&D tax breaks, and benefits within special economic zones.
Despite high FDI inflows, investments often do not target export-oriented or high-tech sectors. In Albania, Kosovo, and Montenegro, manufacturing accounts for less than 10% of FDI, while real estate dominates; for example, more than half of Kosovo’s FDI inflows go into the property market. Corruption remains a long-term challenge, raising business costs and reducing regulatory predictability.
The current economic situation in the Western Balkans is diverse, ranging from advanced economies to countries urgently needing structural reforms. The region continues to overcome the legacy of past conflicts and transform its economies toward sustainable growth and prosperity.
Amid weakening global demand, growth in the Western Balkans slowed during 2022, a trend continuing into 2023. The lasting impacts of Russia’s invasion of Ukraine, rising inflation, and tighter financial conditions have reduced global demand, with varying effects across the region. Slower global demand has contributed to weaker industrial performance across the EU and the Western Balkans, while demand for services has proven more resilient, particularly in tourism. By the first quarter of 2023, international travel had doubled compared to the same period in 2022, benefiting Albania, Kosovo, and Montenegro, where the services sector reached record highs. Conversely, global demand for goods has negatively affected Bosnia and Herzegovina, North Macedonia, and Serbia. Private consumption remains an important growth driver despite rising price pressures.
The orientation of industry and economies in the Western Balkans continues to evolve in response to global trends, regional factors, and domestic political conditions. Efforts to modernise and diversify economies, improve the business environment, and stimulate investment create both opportunities and challenges for the region’s economic development.
Forecasts, Directions, and Recommendations
The Western Balkans stands out for its economic resilience. These countries are currently experiencing growth that surpasses many of their neighbours in Central, Eastern, and Southeast Europe (CESEE). This paradox stems from the fact that, although the region faces global challenges, its relatively lower integration into global value chains and lower level of industrialisation have provided some protection against trade shocks. Additionally, demographic decline is driving wage growth, domestic demand, and investments in automation, while the late adoption of an FDI-driven growth model means the countries are now benefiting from new investment opportunities, including near-shoring.
Companies are increasingly adopting near-shoring strategies in response to rising geopolitical tensions and global uncertainty, which push them to reduce risks and costs. At the same time, there is growing pressure to shorten supply chains and reduce carbon footprints, driven both by regulators and business partners. Current geopolitical developments may affect this trend in opposing ways: higher uncertainty, trade conflicts, and tariffs could accelerate the relocation of production closer to European markets, particularly for Asian firms, while potential relaxation of environmental policies could reduce the incentive for near-shoring. The greatest obstacle to further development of near-shoring and FDI in the WB6 region is the shortage of skilled labour. Addressing this requires investment in education, attracting foreign talent, supporting automation, and focusing on high-tech sectors.
The Western Balkans continues to attract relatively high FDI inflows, often exceeding those of other CESEE regions, though investments have declined since 2022 due to geopolitical uncertainty following the war in Ukraine. The largest greenfield investments are concentrated in software, IT services, and renewable energy, better preparing the region for future technological and green transitions. Despite these advantages, the declining investment trend and global competition—sometimes referred to as “Cold War 2.0”—pose risks. A potential new driver could be increased investment in defence manufacturing. Sustainable growth, however, depends on deeper EU integration, attracting FDI into more technologically advanced sectors, and strengthening the domestic investment environment. If no major global shock occurs, the WB6 region is expected to remain attractive for FDI, and a sharp decline is unlikely.
A key question for the future is whether investors or FDI from China and Russia could displace the European Union in the region. Data indicate that the EU remains the dominant investor in all Western Balkan economies, often accounting for more than half of total accumulated FDI, with historical proximity and integration ties playing a crucial role.
Although the share of non-EU investments has increased, their significance remains lower than that of the EU. Investments from the USA, Russia, and China make up substantially smaller portions of total FDI. The USA holds a relatively small share except in Kosovo, while Russian investments are significant mainly in Montenegro and, to some extent, in Serbia and Bosnia and Herzegovina. Chinese investments are rising, particularly in Serbia.
In addition to external investments, intra-regional investment among Western Balkan countries is expected to continue growing, reflecting historical, cultural, and economic ties. Despite the growing presence of various global actors, the European Union retains its leading position as the main source of FDI in the Western Balkans.
Medium-term forecasts for FDI in the WB6 are optimistic but heavily dependent on geopolitical, economic, and institutional developments. The region is expected to continue benefiting from near-shoring trends and the diversification of supply chains, as European firms seek production and investment locations closer to the EU market. The Western Balkans offers a combination of relatively low costs, geographic proximity, trade connectivity with the EU, and gradual integration into European policies and markets.
FDI is expected to continue flowing mainly into manufacturing, energy, infrastructure, real estate, and tourism, with growing importance for renewable energy and logistics. Serbia is likely to remain the main recipient of FDI in terms of volume due to its market size and active investment policies, while Montenegro and Albania will continue to attract capital mainly in tourism and real estate. Over time, however, there may be increasing pressure from the EU to direct investments toward more productive, export-oriented, and technologically advanced sectors.
Significant risks remain. The shortage of skilled labour, weak institutions, corruption, and political instability in some countries may hinder high-quality investment inflows. Additionally, the EU’s growing focus on controlling strategic investments and the origin of capital may affect investments from China, Russia, or Gulf states. Overall, FDI volumes are expected to remain relatively high, but their composition will gradually shift toward more sustainable and strategically sensitive projects if the region succeeds in improving its business environment and aligning with EU policies.
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Lea Bellušová is an Intern at the Strategic Analysis Young Leaders Programme
Disclaimer: Views presented here are those of the author solely and do not necessarily reflect the views of the Strategic Analysis.
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