1. Sources of Regional Competitiveness Alistair Nolan Investment Compact for South East Europe Private Sector Development Division OECD

2. Regional competitiveness Competitiveness- concept Macro – micro components OECD Investment Reform Index 2010 examines the institutional conditions and policy environment for investment Increasing investment, and particularly private investment in export-oriented greenfield projects, is central to raising productivity (evidence exists of effects of FDI on sectoral productivity in Croatia, Serbia, Former Yugoslav Republic of Macedonia).

3. An overarching message To improve the policy and institutional environment for investment: There are some quick fixes….. …..but much of the needed improvement requires medium to long-term capacity building. ….plus a parallel engagement of donors, with commitment to reforms by governments.

4. IRI 2010 covers 10 economies Albania Bosnia and Herzegovina Croatia Kosovo under UNSCR 1244/99 Former Yugoslav Republic of Macedonia Montenegro Serbia Moldova Bulgaria Romania With the financial support of: The European Union

5. The IRI 2010 measures reform in 8 policy dimensions Access to finance Investment policy and promotion Trade policy and facilitation Human capital development Regulatory reform and parliamentary processes Tax policy analysis Infrastructure for investment SME Policy ……..and part of a process launched at the RCC in autumn 2008.

6. Stylized facts - investment in Western Balkans Investment rates well below the EU-8. Private investment as % of GDP also low compared to EU-10. Limited greenfield - much in real estate and construction, rather than machinery and equipment. Privatisation a limited source of new investment (financial services and telecomms almost fully privately owned in SEE).

7. Human Capital Development An additional year of educational attainment in the population raises the stock of FDI by 1.9% (Nicoletti et al, 2003). Increasing average educational attainment by one year raises aggregate productivity by at least 5%, with stronger long-term effects through innovation (de la Fuente and Ciccone, 2003). More skilled entrepreneurs tend to operate firms which survive longer, grow faster and innovate more (Koellinger, 2008). Human capital is particularly critical for competitiveness in high-tech sectors (Bartelsman et al, 2004).

8. Education system reform ongoing almost everywhere. But… Misalignment between skills supplied and market needs: Almost nowhere are employers fully satisfied with the employability of graduates. Private sector feels curricula are out of date. Significant demand from businesses for initiatives that promote skills matching. Lack of practical training – excessively theoretical curricula. Human Capital Development – regional synopsis

9. Investment Policy and Promotion – FDI policy Non-discrimination firmly anchored in legal and regulatory frameworks. Restrictions to national treatment reduced in many countries.

10. Investment Policy and Promotion –FDI policy (cont.) Non-discrimination firmly anchored in legal and regulatory frameworks. But progress on land title registration and digitization of cadastres slow, particularly in rural areas.

11. Investment Policy and Promotion – FDI policy (cont.) Non-discrimination firmly anchored in legal and regulatory frameworks. Intellectual property right enforcement is improving, but the pace is modest - estimates of pirated software in SEE range from 54% in Croatia to nearly 90% in Moldova.

12. Investment Policy and Promotion – Promotion Only two countries - Serbia and Croatia - and to a lesser extent Former Yugoslav Republic of Macedonia, operate programmes to link FDI and local businesses. IPAs could do more to help investors navigate license and permit approval procedures at the local level.

13. Access to Finance : Financial Instruments Bank lending dominant. Leasing companies operate across the region (for some time), but monitoring/regulation could often be improved. Some recent development of factoring services – Croatia. Despite some efforts to establish framework conditions, risk finance (VC, Business Angels…) largely absent.

14. Access to Finance Growing number of guarantee schemes – and donor support: but limited-take-up. Most developed credit guarantee schemes operating in Croatia (and Romania). No Western Balkan economy systematically collects data on access to finance. Loan guarantees

15. Trade Policy and Facilitation – Trade liberalisation Progress across much of the region. Bosnia and Herzegovina, Montenegro and Serbia have made progress in WTO accession negotiations. In 2008 interim trade measures with EU entered into force for Bosnia and Herzegovina and Montenegro and were applied unilaterally by Serbia. Customs duties on capital goods are on average at OECD level.

16. Transposition of European standards ranges from 1,200 adopted standards in Kosovo under UNSCR 1244 to 21,368 in Croatia. Some notable areas of progress: in 2008 Albania adopted a new law on accreditation and conformity assessment; the former Yugoslav Republic of Macedonia and Serbia are aligning legislation with EU requirements. In the SPS area, all economies have made progress in setting up institutions and aligning legislation with the EU acquis, but administrative capacities remain weak across the region. Trade – NTBs - TBT and SPS measures

17. A few (random) parting thoughts….. There are some regional competitive advantages – build on these. More research analysing this region in a global context. There are also some sectors common to the region – opportunities for efficiency gains from regional collaboration. Build inter-firm networks - with concrete commercial objectives. Need a high rate of opportunity-driven company births. Regional Competitiveness Initiative – Western Balkans.

18. All comments welcome: Alistair.Nolan@oecd.org THANK YOU