Foreign Direct Investment (FDI) is an important source of capital and economic growth for developing countries. It provides a package of new technologies, management techniques, finance and market access for the production of goods and services. However, attracting FDI is a major challenge for host countries as it opens the challenge of identifying the major factors that motivate and affect the decision for FDI location. In this context, this study aims at learning the perception of foreign companies and business associations regarding the business environment and the investment climate in Kosovo. Additionally it tries to understand what do they latter consider to be the strongest potentials that Kosovo provides, and the areas that need to be improved. Finally, the results from the questionnaire taken with existing foreign investors, interviews with business associations and analyses of the World Bank report “Doing Business2011” will be the main focus of this project. The results of this study aims to give a clear picture of motivations, concerns and suggestions for improving the investment and business environment in Kosovo.

1. Kosovo investment climate and foreign
investor perception
Findings of the foreign investor survey and Doing
Business report analysis
Master’s Thesis
Mustafë Hasani, Economist

2. Outline of the presentation
• Introduction
• Analyses of FDI and the structure of the foreign
businesses operating in Kosovo.
• Analyses about business environment examining the
WB Doing Business Report.
• Foreign Investment in Kosovo Questionnaire
• What are Kosovo’s perceived strengths?
• What are Kosovo’s perceived weaknesses?
• Summary conclusions and recommendations.
2

3. Introduction – Why FDI?
• Kosovo’s economic growth in the past decade has been solid, yet, with a GDP
per capita of €1,760, the country remains one of the poorest in Europe.
• Unemployment rate has reached 48 %
• Kosovo has a strongly negative balance of trade. (During the first half of
2011, the trade deficit in Kosovo amounted at euro 925.4 million )
• Kosovo has the potential to shift toward faster, private sector–led growth.
Kosovo‘s products have free market access to the European Union (EU) and
Central European Free Trade Agreement (CEFTA) countries,
• The attraction of foreign direct investment as one of the key ways that exports
could become an important pillar of growth
3

4. Major components of this master thesis
• Survey through questionnaires with 150 foreign companies in Kosovo
(where 20-25 are face to face and for the rest via e-mail or phone
conversation);
• Interviews conducted with business associations, relevant government
departments for economic development, (SME Agency and Investment
promotion) and other independent advisers;
• Analyses of FDI inflow and structure of the foreign businesses operating
in Kosovo;
• World Bank Doing Business Report analyses;
The results of this study aims to give a clear picture of motivations, concerns
and suggestions for improving the investment and business environment in
Kosovo
4

5. Research’s Questions ,Hypothesis and Methodology
This research attempted to answer the following main question:
Q: What are the most relative important factors for FDI location in the Republic
of Kosovo?
H1: What is the relative importance of the cost factors on FDI location
decision?
H2: What is the relative importance of market factors?
H3: What is the relative importance of infrastructure and technological
factors?
H4: What is the relative importance of political and legal factors?
H5: What is the relative importance of social and cultural factors?
The surveys, which were sent to companies engaged in FDI in the Republic of
Kosovo, were used to test the hypothesis and FDI factors.
5

6. About the foreign investor survey
• The foreign investor perception survey for Kosovo was
done in summer 2012
• The objectives of the survey were to:
– gather information from existing investors about Kosovo’s perceived
strengths and weaknesses
– Identify barriers to foreign investment (regional, institutional and
administrative , areas that need to be improved.
– Recommend economic policy measures
• Survey was implemented via telephone and face to face
interviews (150 firms were interviewed)
6

7. The survey (FDI Key factors )
• Legal / regulatory framework • Labor force
• Rule of law • Quality / education
• Court system • Political framework
• Complicated regulations • Political stability
• Administrative efficiency • Corruption and crime
• Tax and Customs systems
• Promotion
• Infrastructure • Image of the country
• Energy / electricity supply • Lack of information
• Transport infrastructure • Financial aspects
• Cost of financing
7

8. Component 1
FDI Inflow and the structure of the foreign
businesses operating in Kosovo
8

9. Component 1
FDI Inflow
Kosovo in comparison to other countries beside Macedonia has attracted less
FDI. A low trend in attracting foreign investments has followed Kosovo in the
last for years compared to the countries in the region
Countries 2008 2009 2010 2011
Albania 665 717 793 742
Bosnia & 1,337 353 340 612
Herzegovina
Macedonia 400 145 159 304
Montenegro 656 1,099 574 401
Serbia 2,018 1,410 1,003 1,949
Croatia 4,219 2,415 298 1,075
Kosovo 366 287.4 365.8 394.6
9

10. Component 1
FDI Structure
The biggest investments are in the financial sector, the construction sector is
the second most attractive in absorbing foreign investment and third one is
real estate sector.
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
10

11. Component 1
FDI Inflow - Country origin (2000-2011)
Germany, Austria, Slovenia, Great Britain , Albania, Switzerland, Holland are the
states where these investments came from contributing towards the major part of the
FDI in Kosovo.
350
300
250
200
150
100
50
0
AT DE SI GB CH TR NL AL LU RS US FR BG MK HR IT GR
11

12. Component 1
The structure of enterprises
The largest number of enterprises are:
Micro enterprises thus taking over about 94%.
The rest of enterprises are small (about 5%),
medium (about 1%) and large (less than 1%).
Type of enterprises Number of employees Number of enterprises
Micro enterprises 1-9 4032
Small enterprises 10 -49 199
Medium enterprises 50 - 249 46
Large enterprises Over 250 18
12

13. Component 1
Kosovo’s foreign companies profile
Such an indicator should serve as an example for creation of policies to attract investors
in those sectors that can create more job opportunities and bring more investments
BANKING AND FINANCIAL SECTOR
FDI by Sectors 4%
CONSTRUCTION
3%
EDUCATION
12% 1%
HOTELS AND TOURISM
7% MEDICAL
40% 1%
OTHER SERVICES
4%
PROCESSING
15% SERVICES
11% SERVICES ACTIVITY
TELECOMMUNICATION
TRADE
2% 0%
TRANSPORT
13

14. Component 2
Benchmarking Kosovo with neighbouring
competitors based on
World Bank Report on Doing Business
14

15. Component 2
Benchmarking Kosovo - World Bank Doing Business Report
Kosovo seems to be less attractive for investment than other countries in the region In
Doing Business 2011 Kosovo ranks 119th out of 183 economies, significantly behind all
of its neighbors.
Country Over Starting Dealing Registeri Getting Protecti Payin Tradi Enforci Closing
all a with ng credit ng g ng ng a
Rank Business Constru property investor taxes a/c contrac business
ction bord ts
permits ers
Macedonia 38 5 136 69 46 20 33 66 65 116
Montenegro 66 51 161 116 32 28 139 34 135 47
Albania 82 45 170 72 15 15 149 75 89 183
Croatia 84 56 132 110 65 132 42 98 47 89
Serbia 89 83 176 100 15 74 138 74 94 86
Bosnia 110 160 139 103 65 93 127 71 124 73
Kosovo 119 163 173 65 32 173 41 130 155 31
15

16. Component 2
Doing Business Ranking
FIVE “worst” indicators
• Dealing with construction permits (173);
• Protecting investors (173);
• Starting a business (163);
• Enforcing contracts (155); and
• Trading across borders (130)
While Kosovo it ranks relatively high on some indicators including:
• Closing a business (31);
• Getting credit (32); and
• Paying taxes (41)
16

17. Component 3
NGOs and other institutions feedback
A number of institutions were referenced – such as Chambers of
Commerce, Kosovo Alliance of Business, Foreign Chambers, and Foreign
Representations – as to the status of the FDI offering which Kosovo
currently presents.
17

18. Component 3 – NGO and other institutions feedback
Needs for improvement
• Definite need to promote the values of Kosovo first – there is an image
problem with Kosovo internationally
• Industrial park in Prishtina as the first and flagship Business Park in Kosovo
should be used as a pioneering platform for proactive attraction of FDI (eg
offering packages to foreign investors such as “available 100 employees,
free lease for 99 years”.
• Persisting problems with functioning of the rule of law, property rights law
etc
• Need for greater initiative on the part of municipalities to accommodate
FDI: providing land free of charge to build factories?
• Persisting problems with infrastructure, power, water supply
18

19. Component 3 – NGO and other institutions feedback
Positive commentary
• Young, well-educated, versatile workforce
• Well located in the centre of the Balkans
• Access to the CEFTA market
• Represents the “new spirit of Europe”
• Kosovo is interesting: “discover the opportunity”
• Natural resources abundant
• The people represent the greatest natural resource
• Access to cheap local raw materials
19

20. Component 4
Foreign Investment in Kosovo Questionnaire
What are Kosovo’s perceived
strengths?
20

21. Component 4
Major strengths of Kosovo
Young and Dynamic workforce 68.5
Natural resources 68.2
High rate of unemployment 59.37
Geographic Position 52
Market developement 50
Potential for growth 45
Labor Costs 45
Climate Condition 43.75
The level of optimism 40
Increased political stability 33.33
Competitive prices 31.7
Low tax RATE 25
Good Education 16.66
Infrastructure 12.12
Lack of competition 9.37
Integration with neighbouring countries 2.43
Close to EU membership 2.38
No Strengths 27
0 10 20 30 40 50 60 70 80
21

22. Component 4 – Major strengths
Kosovo comparative strengths for investment
• Kosovo has comparative strengths both for domestic and export-oriented
investment
• The abundant supply of young and dynamic labor force, natural
resources, high rate of unemployment and emerging domestic
market, offers possibilities for inward-oriented foreign investment
• The low-cost labor and Kosovo’s geographical location (and free access to
the EU and CEFTA markets) could attract investors interested in exports
22

23. Component 4 – Major strengths
Labor force
All aspects of the labor force, apart from its quality, are perceived
very positively
Excellent Very good good satisfactory Not satisfactory
1 2 3 4 5
0% 46.15% 46.15% 0% 7.69%
7.69% 0%
0% 1
2
46.15%
3
46.15%
4
5
23

24. Component 4 – Major strengths
Tax system
• The tax system is perceived also to be very favorable
• Over 42% of surveyed investors assessed tax rates as good or very good.
• Kosovo has among the lowest taxes in the region, and the tax wedge on
labor is much lower than anywhere else
• Doing Business 2011 finds that in terms of the time to prepare, file return
and pay taxes as well as the number of payments per year, Kosovo’s tax
system performs quite well compared to the rest of the region.
Very Not
Exellent good good satisfactory satisfactory 4.50%
1 2 3 4 5
10.50% 25%
25% 17.50% 42.50% 10.50% 4.50%
Exellent
Very good
17.50%
42.50% good
satisfactory
Not satisfactory
24

25. Component 4
What are Kosovo’s perceived weaknesses?
25

26. Component 4 – Major weaknesses
Major weaknesses of Kosovo
Lack of Legislation 55.88
Lack of administrative efficiency 51.85
Energy Supply 34
Very low level of development 33.33
Crime and Corruption 33.33
Mentality (inefficient workers 21.44
Bad Infrastructure 20
Country geographic position 20
No industrial company 19
Lack of information about Kosovo 12.5
Lack of transparency 10
Weak financial system 8.33
Very poor population 7.69
Do Investors feel at risk 7.14
Lack of education 4
No weaknesses 15
0 10 20 30 40 50 60
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27. Component 4 – Major weaknesses
Lack of Legislation
• Lack of legislation and administrative efficiency continues to be a
strong deterrent for investors
• 55% of the investors surveyed stated that lack of legislation and lack
of administrative efficiency continues to be a major weakness!
• The other major concerns relate to the energy supply, crime and
corruption and low level of development
27

28. Component 4 – Major weaknesses
Energy and Transport
• Energy and Transport are the biggest barriers in terms of
infrastructure
• On transport, poor conditions of roads were stated as biggest
concern, and in terms of energy most complaints refer to the
frequent power shortages
28

29. Component 4 – Major weaknesses
Education
While the cost of labor is low, dissatisfaction with the quality of labor is
high
Investors find the level of education and skills of the labor force to be a
constraint
This is not unexpected given that less than 5% of unemployed people
have a university degree
Very Not
Exellent good good satisfactory satisfactory
1 2 3 4 5 1
28% 15.21% 6.52% 7% 43.47% 43.47%
2
3
4
5
29

30. Component 4 – Major weaknesses
Regulatory
• Most aspects of the regulatory environment are
perceived to be extremely weak
• Corruption, slow and inefficient procedures, and lack
of transparency are stated as the most common
reasons for these weaknesses
30

31. Summary conclusions
• Investors are considering Kosovo as a potential
investment location
• Kosovo’s business environment has important
strengths that could attract both inward and export-
oriented FDI
• However, several weaknesses, mostly related to the
rule of law and regulatory regime, deter many
investors from coming to Kosovo
31

32. Recommendations
The recommendations that come from the various analyses and
studies in this project indicate that the institutions should pay close
attention to foreign investors – thus improving further the business
climate
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33. Recommendations
1. Development of Business Enabling Framework - improving the
process that leads to the formulation of a reform agenda and
manages to institutionalize an ongoing reform process.
2. Drafting, enacting and implementing laws and regulations:
Investment Legislation
Special Economic Zone/Free Zone legislation
Investment Incentives
Business Establishment procedures
3 Enhancing Human Resource education and training required by the
target industries and segments
Altering University Curriculum to produce skilled laborers for new FDI
sectors
33

34. Recommendations (continued)
4 Enhancing Infrastructure:
Transportation: Roads, Airports, Railroad
Service Providers
Telecommunications & Utilities
Financial Institutions
5 Increase the efficiency of judiciary system for trade dispute
resolution.
6 Simplification of trade in line with best international practices and
principles
7 Establish one-stop “Investment Support & Business Development
Centre,” offering a full range of services designed to “fast track”
34

35. Recommendations (continued)
8 Hands-on contact with potential investors throughout the process of
soliciting investment, including aftercare once enterprises have been
established
9 Vision, future opportunities, emerging segments Selection of 10 top
priority sectors Conducting market research and sector research
related to selected countries in order to identify potential inward
investors;
10 Pursue the process of establishing the Foreign Investors Council of
Kosovo;
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36. Thank you
36