While building an image of the most favorable destination for foreign investments, the countries in the region can fall into the trap of “race to the bottom.”

Although in different stages of the European integration process, the countries in the Western Balkan region, are obliged to comply with the rules for state aid.

The countries in the WB region over the past decade, in the search of foreign capital, have been providing state aid to attract foreign investments. However, the regional competition to attract foreign investments through the long “list” of stimuli and incentives could also have negative effects on public finances. In the process of competing with the neighboring countries in building an image of the most favorable destination for foreign investments, the countries can fall into the trap of “race to the bottom.”

The analysis shows that the countries in the Western Balkan region with higher value of state aid granted also have higher inflows of foreign direct investment. However, the countries in the region with higher economic growth also have more foreign direct investments compared to the countries with lower economic growth rates. Contrary to the expectations, the countries with higher profit tax rates have higher inflows of foreign direct investment, while countries with lower profit tax rates have lower inflows of foreign direct investment.

The primary decision-making factor for the foreign investors is not the amount of state aid granted, but much more the business environment. Thus due to the “inability” of the countries in WB to compete with strong rule of law, corruption control, institutional trust… the countries are attempting to overcome each other with the incentives to attract FDIs. What also lacks is an effective national oversight and regional cooperation thorough common goals and strategy in state aid.

CEA STUDY on the following link: Attracting foreign investment in the Western Balkan region and state aid: race to the bottom or necessity?

CEA BRIEF on the following link: Is state aid a factor in attracting foreign direct investment? FDI in the Western Balkan region