Foreign Direct Investments Trend in Montenegro

16458 words (66 pages) Full Dissertation in Full Dissertations

06/06/19 Full Dissertations Reference this

Disclaimer: This work has been submitted by a student. This is not an example of the work produced by our Dissertation Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Table of Contents

ABSTRACT

Table of Contents

I INTRODUCTION

1.1. Background

1.2. Significance of the study

1.3. Research question

1.4. Methodology

1.5. Thesis structure

II EU INTEGRATION AND FOREIGN DIRECT INVESTMENTS

2.1. EU integration – from concept to practice

2.2. Montenegro – Integration process and EU challenges

2.4. Montenegro’s EU integration key dates timeline

2.5. Foreign direct investments (FDI)

2.6. Short FDI theories overview

2.7. European countries after EU accession – FDI effects overview

III FOREIGN DIRECT INVESTMENTS TREND IN MONTENEGRO

3.1. Basic FDI situation in Montenegro

3.2. FDI inflow in Montenegro

3.3. Strong and weak points of investing in Montenegro

3.3.1. Strong Points overview

3.3.2. Weak Points overview

3.4. Government Measures to motivate or restrict FDI

3.5. Montenegro’s NATO membership as an impulse for FDI

3.6. EU and NATO Membership – Effects on FDI

IV EU BUSINESS CLIMATE TRANSFORMATION PROCESS AND ITS EFFECTS ON FDI IN MONTENEGRO

4.1. Business climate transformation in Montenegro

4.2. Privatization

4.3. An overview of the progress made in Montenegro’s legal framework

4.4. Regulation on FDI

4.5. Financial assistance

4.6. FDI perspectives in the upcoming period as seen by the Central Bank of Montenegro (CBM)

V MEASURES AND POLICY SUGGESTIONS FOR PROMOTING FDI

5.1. FDI prosperity in Montenegro – A short analysis and suggestions to The Government of Montenegro

5.2. The importance of FDI in Montenegro

5.3. The future prospects of FDI – The final thoughts on FDI priorities

VI CONCLUSION AND LIMITATIONS

VII REFERENCES

 

 

 

 

 

I INTRODUCTION

 

1.1.           Background

The European Union (EU) embodies the idea of powerful economic and political partnership among different sovereign states. The story of the EU begins in the following the end of the Second World War when its historical antecedent, European Coal and Steel Community was founded by six European countries with a goal of preserving peace and achieving prosperity. Today, after decades of development and change, the EU represents a complex structure of 27 member states that participate in the global economy as one unit. This union will continue to expand in the years ahead.

Recently, particular attention was drawn on the EU`s relations with the countries of Southeastern Europe (SEE), especially the ones from the Balkans. The EU membership as a perceived opportunity to create better living standards for its citizens stands as a top strategic priority for most of the Balkan countries. In this paper, our attention will be focused on Montenegro and its path towards joining the EU.

One of the key prospects that enlargement of the European Union brings is the increase in foreign direct investment (FDI) that many new member states, accession countries, and candidates aspire to obtain. Inflows of investment to central and eastern Europe (CEE) has significantly increased since 1994 when the EU committed itself to further expansion. The research conducted by Bevan & Estrin (2000) suggests that this was no coincidence. Mainly, the EU’s dedication brought a new positive view on the front-runner applicants’ as an adequate space for investments (Bevan & Estrin, 2000). Since there is an apparent lack of previous academic research regarding the effects that Montenegro’s EU integration process has on the flow of foreign direct investments in this country, the goal of our paper will be to provide some relevant theoretical insights into this matter.

As defined by Goldberg, “Foreign Direct Investment is an international flow of capital that provides a parent company or multinational organization with control over foreign affiliates” (Goldberg, 2009, pp.193). Foreign direct investments (FDIs) could be considered as one of the crucial drivers of international economic integration. Within adequate policy basis, FDI can provide financial stability, promote economic development and improve the overall well-being of societies (OECD, 2009).

Foreign direct investment is commonly made in open economies. Such is the economy of Montenegro, a country in political and economic transition still involved in the process of establishing a liberal business climate that fosters foreign investments and local production.

The EU integration process can be seen as one of FDI determinants in Europe. In the early 1990s, there was significant increase of incoming foreign investment in Central and Eastern Europe Countries, especially from Western Europe. The Reason behind this is actually beginning of political and economic transition in CEEC`s toward democracy and market economy. This trend was further pronounced because of the commitment of old Member States (OMS). (Bevan, Estrin, Grabbe 2001)  In 1997, EU decided to open negotiation  process with the so-called Luxembourg group.[1] After enlargement, there where three waves of enlargement in 2004, 2007 and 2013.  Reasons for such a changes where improved business environment during integration process, increased legal security and compatibility  with Western Europe norms have increase higher flow of FDI in all new Member states.

The official European Commission’s statements concerning the enlargement and advancements in the accession process identify two different types of influence on FDI during the EU integration. The FDI in low-value sectors like manufacturing will tend to decline, while FDI in the high-value sectors like services will have the ascending trend as the country moves towards EU membership. As Buch and Piazolo point out, after the process of EU integration the new member states receive more FDI flows than they did before achieving membership (Buch & Piazolo, 2001). Razin argues that after the process of integration FDI flows and the number of bank loans first become increased and then, as the country develops, become substituted with portfolio investment (Razin, 1998).

After declaring its independence in June 2006, Montenegro has become the youngest European nation. With the population of only 0.6 million and with the surface of 13.812 km2, it is the 10th smallest country in Europe. Today, Montenegro autonomously develops and conducts its economic policy and forms the path for its own future economic development (World Bank, 2016). Through achieving membership at the United Nations (UN), Montenegro became recognized as a stable environment for foreign investments. In 2008, the new country applied for the EU membership. Two years later, the European Commission issued a favorable opinion while in December 2011, the European Council launched the accession process with an intention of opening negotiations in June 2012. Candidate status has improved Montenegro’s global position and the EU opened the country’s accession talks in June 2012. Montenegro is aspiring to join the European Union by 2020 (COMM 2012). So far, out of the 35 negotiation chapters, two have been provisionally closed and 22 have been opened (EC, 2016).

European Integration and EU membership brings two important implications with regards to FDI. Firstly, it allows small countries such as Montenegro, with the small domestic market to expand de facto market size. Secondly, EU membership in its own way represents political, economic and legal stability.

In May 2016 Montenegro signed its NATO membership accession protocol and by that entered the final phase of becoming its 29th member (Lilyanova, 2016). These memberships indicate that Montenegro is on the right path when it comes to the EU integration. Montenegro’s integration into NATO and the EU are compatible and complementary because they are based on the same values, and the progress in one area is positively reflected on the other. However, NATO is not a financial organization and the economic benefits of this membership might not be felt directly, but NATO membership sends a very important impulse to most of the foreign direct investors and it will make Montenegro more visible to other members of the Alliance. After the fall of the Berlin Wall, twelve countries have joined NATO. Most of these countries recorded the sudden increase of foreign direct investments.

In this thesis, we will attempt to explore the current FDI situation in Montenegro through an in-depth examination of its EU integration process. The analyses will be complemented with comments and opinions of people with a significant role in these endeavors.

Our research methodology will be based on the qualitative analysis of quantitative data and the review of the official reports and scientific articles. The variety of FDI theories will be reviewed in order to achieve a better understanding of this problem. By providing the analyses of its active EU integration process we will attempt to determine the nature of Montenegro’s path towards the EU and how this process can possibly affect the increase of FDI in Montenegro.

1.2.           Significance of the study

Considering the importance of foreign direct investments for a developing country such as Montenegro, findings of this research can be seen as an indirect contribution to its government measures aimed at enhancing the influx of these investments. Our investigation will evaluate this country’s path towards the EU, discuss the strengths and weaknesses in its relevant government policies and as a result help expanding the body of knowledge related to FDI status in Montenegro. The present lack of research aimed at examining the effects that Montenegro’s EU accession process has on the inflow of FDI in this country adds additional significance to our thesis in a sense that it could provide new and relevant information regarding this important topic and be of interest to scholars as well as policy-makers.

1.3.           Research question

The aim of this paper is to examine Montenegro’s path towards the EU membership and determine how this process affects the rise of foreign direct investments. Furthermore, we will review and discuss the effects that FDI had on some of the member states.

The research question elaborated in this thesis consists of two parts. The first part is concerned with the quality of Montenegro’s EU accession process, while the second part investigates the impacts of EU integrations and EU membership on the development of foreign direct investments in Montenegro, as well as in other member states.

Research question part I

Is Montenegro on the right path to access to the EU?

Research question part II

How does the EU accession process influence the flow of FDI in Montenegro?

How does the EU membership affect the FDI in member states?

1.4.           Methodology

This thesis is developed under qualitative research approach. This kind of scientific research has become a broadly accepted form of study in many academic and professional fields. Numerous students and scholars conduct qualitative studies in different social sciences such as sociology, anthropology, political science, economy, philology etc. (Yin, 2010). Its in-depth investigative nature makes qualitative research method the appropriate choice for this thesis and we believe that the use of qualitative method may bring out the most benefit in the exploration of this topic.

Foreign direct investment is commonly performed on behalf of an organization or a nation and it is made within a particular context that includes certain rules and boundaries. In order to capture its complexity, as well as to understand different facets of FDI, an in-depth process is an imperative. The literature review will provide the theoretical foundation for our further qualitative analysis of EU integrations with a special focus on Montenegro and the effects that accession process has on its FDI flow.

The most of the data relevant to our research come from the World Bank sources. The World Bank provides information about several important variables and focuses on high-quality data through the use of internationally accepted standards, methodologies, sources, definitions, and classifications (Ragin 1989, 1994).

 

1.5.           Thesis structure

This paper is divided into seven­ separate chapters. It starts with a short theoretical introduction to concepts relevant for our study along with its definitions and the explanation of selected research methods. Further, it offers a review of literature through known facts about the EU integrations as well as the position of Montenegro in this ongoing process. As the aim of our research includes analysis of the mutual effects of foreign direct investments and EU accession, we are assessing the Montenegrian juncture through the prism of other members states experiences with FDI during and after their accession processes with a focus on the correlation between joining NATO and the increase in FDI. We also discuss the nature and the attitude towards some business reforms conducted by the government of Montenegro which are aiming to bring the increase of foreign investments. Finally, we will address these issues and attempt to offer constructive suggestions for new creative solutions and conclude.

Ch. 1. Introduction

Ch. 3. Foreign direct investments trend in Montenegro

Ch. 2. EU integration and Foreign direct investments

Ch. 4. EU Business Climate Transformation process

Ch. 5. Measures and policy suggestions for promoting FDI in Montenegro

Ch.6. Conclusion and limitations

Ch. 7. References

Figure 1. Thesis structure

 

 

II EU INTEGRATION AND FOREIGN DIRECT INVESTMENTS

2.1. EU integration – from concept to practice

The European Union is commonly defined as an economic and political association consisting of twenty-seven member countries that make common policies in several different areas. On the other hand, European integrations can be defined as a process of economic, industrial, political, legal and social reforms paving the path towards the EU membership. Considering the progression of European integration process, from six original founding countries to a new number of twenty-seven EU member states, we could argue that the European integration represents the most intense process of legal and economic integration of European countries today.

Although the concept of the European Union was formally introduced in 1992 as a result of the signing of the Treaty on the European Union (often referred to as the Maastricht Treaty)[2], the modern-day EU was actually preceded by various European organizations that significantly contributed to its development.

The creator of a single economic block idea was French Foreign Minister Robert Schuman and this idea was later called the Schuman plan. The Schuman plan led to the signing of European Coal and Steel Community (ECSC)[3] Treaty in April 1951 by a core group of six nations: France, West Germany, Belgium, Italy, Luxembourg and the Netherlands. Signed in Paris, this treaty also established the European Court of Justice as a part of ECSC.

Next came the Treaty of Rome which was signed in 1957 by the original six countries and as a result, the European Economic Community (EEC) and European Atomic Energy Community (Euratom) were created. This treaty provided the decisive step towards establishing the common market, customs union, and free movement of capital and labor.

Despite the progress these institutions have brought, the free movement of persons, capital and services continued to be subject to many limitations until the Single European Act was signed in the year 1986. This brought about the European Union Treaty in 1992 which became effective in 1993. Today, all member states of the European Union can be perceived as independent players performing together on the global market as one economic unit. .

The contemporary Treaty of Lisbon, signed in 2007, plays the most important regulating role for the present-day European Union. Reform Treaty, as it is also called, amends the previous Maastricht Treaty and Treaty of Rome (EU, 2016). It provides the EU with modern institutions and more efficient working methods.

After EU enlargement in 1997, there where three waves of enlargement in 2004, 2007 and 2013.  For the most EU countries euro is now the new currency, including Montenegro even if is not EU member. EU countries begin to work much more closely together to fight crime, after attack on hijacked airliners are flown into buildings in New York and Washington, in  2001[4]. There was always political division between east and west Europe. However, with the second  wave of EU enlargement this division disappeared. In 2004, 10 new countries join the EU, followed by Bulgaria and Romania. (EU) In 2013 Croatia became 28th member of European Union. So far, Croatia is the  first of seven countries from the Balkan region that join EU.  While other six countries are official candidate[5] or potential candidate.[6] (De Munter, 2016) In June 2016, the United Kingdom held a referendum on membership of the EU, and they decided to leave the EU.

2.2. Montenegro – Integration process and EU challenges

Independent statehood in the area of what is now called Montenegro dates back several centuries. In the year 1878, The Congress of Berlin recognized Montenegro as an independent state. Still, the short history of Montenegrin independence ended in 1918 when Montenegro unconditionally joined Serbia in a controversial decision of the Podgorica Assembly. Afterward, Montenegro became a part of the Kingdom of Serbs, Croats, and Slovenes. Later on, between 1918 and 1941, as well as between 1946 and 1992, Montenegro had a status of a constituent republic of Yugoslavia. After the break of former Yugoslavia in the early 1990s, Montenegro was the only constituent among six Yugoslavian republics that decided to remain in a union with Serbia. This choice was advocated by the post-communist political elite who felt closely associated with the idea of Yugoslavia and cultural links with the Serbians. In 1992, Montenegro and Serbia established the Federal Republic of Yugoslavia (FRY) the successor of Socialist Federal Republic of Yugoslavia (SFRY). In the year 1997 Montenegro started increasingly distancing from Serbia and implementing reforms aimed at establishing a market economy (Stiftung, 2015).

Essentially, 1997 marks the beginning of Montenegro’s integration into the EU as on this year the Council of European Union established political and economic criteria for development of bilateral relations with Western Balkan countries. In November 2000 the Stabilization and Association Process was launched for five countries of South-Eastern Europe, including the former Serbia and Montenegro, while in October 2010 “twin-track” negotiations between EU and Serbia and Montenegro started. The principle of “twin-track” was supported by the Member States. Meetings of its foreign ministers in Maastricht have indicated EU’s aspired objectives for stabilization of the entire zone and the autonomy of both republics. Montenegro and Serbia separately negotiated the trade part of Stabilization and Association Agreement (SAA), while political part of SAA was negotiated as a unique state (De Munter, 2016). This approach was valid until 2006 when Montenegro proclaimed its independence via referendum.

The EU recognised the independence of Montenegro in June 2006, and this country became potential candidate for EU membership.  The important year for Montenegro’s EU integration process was 2007. This is when the European Partnership, the signing of SAA as well as the acquisition of rights to resources from EU IPA (Instruments for pre – Accession Assistance) funds were established. An Interim Agreement on free trade and Community matters was also signed in 2007 but entered into force in January 2008.

The Constitution of the Republic of Montenegro adopted by the Montenegrin Parliament on October 17, 2007, made it clear that it stems from “the dedication to cooperation on equal footing with other nations and states and to the European and Euro-Atlantic integrations” (Preamble, Constitution 2007).

Furthermore, the Constitution states that Montenegro “shall cooperate and develop friendly relations with other states, regional and international organizations, based on the principles and rules of international law” and, more importantly, “may accede to international organizations.”

When it comes to possible caveats, the Constitution empowers the Parliament to “decide on the manner of accession to the European Union.”

The adoption of constitution its important step as it define Montenegro as civic state and guaranties the independence of judiciary. However, implementation in the line  with European standards require further efforts and further building of democratic institutions.(EC, 2007)

The EU enlargement process can be defined as a process of reunification of Europe in order to help countries that suffered from political instability. Further, the European integration process can be defined as the most intense process of legal, social, political and industrial reforms, in which Montenegro is now involved in. After going through all necessary EU reforms, Montenegro will become an EU Member. This thesis will attempt to provide a contemporary insight into the current state of Montenegro’s EU integration efforts.

By signing the Association Agreement (AA) with the EU, Montenegro engaged itself in a transformation process with a final goal to meet the requirements and accomplish the EU membership (EUC, 2016). We can state that Montenegro’s actual reformation agenda is closely linked to its EU integration process. The Government of Montenegro is now fully focused on fulfilling the accession criteria.

These are the essential conditions and criteria that Montenegro must satisfy in order to become a member state.

One of the important steps toward EU path was visa liberalisation for citizens of Montenegro travelling to the Schengen zone[7]. Visa liberalization is in force since December 2009.

In 2010 the European Council granted Montenegro with the EU candidate status thus allowing it to became the first of SEE6 countries that got the candidature. The accession negotiations are formally opened in June 2012 at the first Intergovernmental Conference.

Thanks to the EU integration of Montenegro, series of structural reforms were conducted in many fields, especially in the areas of democracy, rule of law, the judiciary and economic sustainability. In order to build the necessary institutional and economic framework in line with EU standards, Montenegro must ensure that actual implementation of reforms should enable sustainable growth.

According to the theory of institutionalism, the institutional arrangement can determine the acceleration or the postponement of the changes, their scope, and course of action. Article 49 of the Treaty of the European Union states that when making decisions, institutions “should take into account the accession criteria established by the Council of Europe.” Thus, the first step consists of fulfilling the so-called “Copenhagen criteria”, the accession criteria that has been defined by the Heads of States and Governments at their meeting in Copenhagen in June 1993. These criteria are divided into the following groups:

  • Political criteria: the country that wants to become a member of the Union must have stable institutions guaranteeing democracy, the rule of law, human rights as well as respect and protection of minorities.
  • Economic criteria: the need to have a functioning market economy, to be able to cope with competitive pressures in the single market.
  • Legislative criteria: the country that wants to become a member must be able to meet its obligations as a member state and accept the acquis of the Union (COMM, 2016).

As regard political criteria we can say that Montenegro overall is doing good but many improvements are needed to bring it in line with EU standards. The parliamentary elections in Montenegro where conducted in October 2016 and they are characterized by general respect for fundamental freedoms. What requires alignments is electoral legislative and institutional framework, as they should be in line with the international standards. Very important efforts that Montenegro is making are set in the area of human rights, democracy, and civil freedom. On the other hand, the most difficult and worrying changes are the ones needed in the public administration and judiciary. Regarding public administration some progress has been made, notably with the adoption of the public administration reform strategy 2016-2020. (EC, 2016)

 

As regard economic criteria moderately prepared in developing a functioning market economy. The Government and  Parliament of Montenegro lacked  the commitment to adopt economic reforms, before parliamentary elections in 2016. Overall economic growth is improved thanks to the investment and tourism. Some improvements can bee seen in business environment and strengthen the functioning of the financial and labour markets, but further progress is needed. According to the European Commission report from 2016 of concern are rising public debt and high fiscal deficits, together with high external imbalances and high unemployment rate. (EC, 2016) On table … can bee seen key economic…

 

 

 

Below are the achieved macroeconomic indicators for, 2013, 2014, 2015 and 2016 (II

quarter)

 

INDICATOR 2013 2014 2015 2016
(IIIQ)
GDP at current prices (€ million) 3,335.9 3458 3625 2827
Real GDP growth (%) 3.5 1.8 3.2 2.4
Inflation (%) 1.8 -0,3 1,9 -1,0
Unemployment rate (%) 15.02 18,0 17,2 17
External debt (€ million) 1,699.5 2.022,21 1956,4 2.300,8
External debt (% of GDP) 51.1 59,60 67,3 62,9
Net foreign direct investment, 323.9 498 619,3 347,4
current prices (€ million)
Net foreign direct investment (% of GDP) 9.7 14,4 26,6 12,28

 

Source: Central bank of Montenegro and MONSTAT

 

In particular, the economy of Montenegro has benefited from high level energy production and some new investment projects. Output growth projected in 2017 is 4,1 percent (brojtabele). However in the coming years, new highway project Smokovac-Matesovo will raise public debt and bring risks to fiscal and debt sustainability. Compered with other SEE6 countries revanues already  appear relatively high (MIPA, 2016).

 

Montenegro has invested an effort in creating a quality legislation framework by adopting five very important acts: Law on Financing of Political Parties, Law on Lobbying, Law on the Prevention of Corruption, Law on Special Prosecutor’s Office and Code of Ethics of the MPs. However, it is difficult to analyze and record the results of those changes because the changes usually work without the preliminary needs analysis and impact assessments.

Bearing in mind the crucial importance of discussed criteria needed to be fulfilled in order of achieving EU membership, we can perceive the magnitude of the task standing in front of the Government of Montenegro on its EU path.

2.4. Montenegro’s EU integration key dates timeline

  • 1999: The EU proposes the new Stabilisation and Association process for countries of Southeast Europe;
  • June 2000: The European Council states that all the Stabilisation and Association countries are potential candidates for EU membership;
  • 2003: Thessaloniki Summit: EU perspective for the Western Balkans is confirmed;
  • June 2006: The EU decides to establish relations with Montenegro as a sovereign and independent state;
  • October 2007: The Stabilisation and Association Agreement (SAA) with the EU is signed;
  • December 2008: Montenegro presents its application for membership to the EU;
  • December 2009: Visa-free travel to Schengen area for citizens of Montenegro;
  • May 2010: The SAA enters into force;
  • November 2010: The European Commission issues its Opinion on Montenegro’s application for EU membership;
  • December 2010: The European Council grants candidate status to Montenegro;
  • June 2012: The accession negotiations are formally opened at the first Intergovernmental Conference;
  • June 2013: The screening meetings are completed;
  • May 2016: Montenegro has signed accession protocol, the accession of Montenegro to NATO (North Atlantic Treaty Organization) is expected to be completed by spring 2017.

2.5. Foreign direct investments (FDI)

Foreign direct investment is defined as “an international flow of capital that provides a parent company or multinational organization with control over foreign affiliates” (Goldberg, 2009, pp.193). According to Duce (2003), another important aspect of FDI is reflected in direct investor’s aim of obtaining a lasting interest. Establishing a lasting interest implies a long-term partnership between the direct investor and its foreign affiliate (Duce, 2003, p. 2).

The progress in EU integration is often perceived as one of the key influences on FDI flow in Europe. After the process of EU integration is completed, the new member states will receive more FDI flows than they did during the accession process (Buch & Piazolo, 2001).

Common classification of foreign direct investments usually includes its three different forms. It can be categorized as horizontal, vertical or conglomerate. In horizontal FDI, the investor only expands its business operation to a new country without changing the original type of business. On the other hand, vertical investment implies that the investor seeks to acquire or establish a new type of business that will supplement its core business, and finally, a conglomerate type of foreign direct investments indicates that the investor seeks to start a completely different type of business in a foreign country comparing to the one already established in its own. Since the latter type of investment often means entering a completely new type of industry, the investment often takes the form of a joint venture with a foreign company that already operates in that specific industry (Investopedia, 2003).

A large percentage of European FDI stocks was destroyed during the World War I. After the war, both global FDI stock and the number of multinational corporations’ subsidiaries increased but the pre-war level of global FDI stock was not reached again until the 1930s (Johnson, 2005). After the World War II, the international trade of FDI grew rapidly. At this period there were no well-structured theories attempting to explain how and why countries conduct foreign direct investments. However, after the World War II, many theories on FDI started to emerge (Denisia, 2010).

2.6. Short FDI theories overview

One of the first and most significant models that examine the foreign direct investments is the Kemp-MacDougall model. This model was developed in the 1960s and it was based on 1933 neoclassical Heckscher-Ohlin model. These two-country models hypothesized that FDI was motivated by higher return on investments in foreign markets, its lower labor costs and lesser exchange risks. Its assumption of perfect markets was one of the main reasons for abandoning these theories and the shift was made in the direction of new models that analyzed FDI through the prism of imperfect markets where the imperfections serve as the means of gaining the advantages (Assunção et. al., 2011).

Numerous theories that investigated reasons underlying FDI followed. Denisia (2010) argues that some of the main studies regarding this issue were developed by researchers such as S. Hymer, R. Vernon or J. Dunning with his influential Eclectic paradigm (Denisia, 2010).

As one of the major FDI theories that emerged in the 20th century, we will review the main aspects of John Dunning’s Eclectic paradigm or “O-L-I” as it is often called.

It has proved to be an extremely fertile approach to thinking about the investments of multinational enterprises. Dunning’s work has provided a quality framework for research on FDI and stimulated a large number of applied work in economics and international business (Neary, 2008).

According to Dunning’s taxonomy, there are three major factors capable of motivating one corporation to invest in a foreign country. Those factors are Ownership, Location, and Internalization. The first factor implies that company has to have an ownership advantage over its competitors. Having such edge over competition can be in a tangible form such as an end product or in an intangible form by means of a good company image or efficient management. Location as a second feature indicates the importance of location benefits that foreign country needs to offer in order to encourage the FDI to occur in their country rather than somewhere else. The final potential source of advantage was called Internalization, and it affects the manner in which a company chooses to do business in a foreign country (Wren, 2006; Neary, 2008).

Time brings new challenges, and the Dunning’s “O-L-I” framework is insufficient to offer the explanation to all of the new arriving FDI trends. Models and theories concerning FDI are still emerging, but the importance of this paradigm for addressing FDI issues irrefutably stays.

2.7. European countries after EU accession – FDI effects overview

Foreign direct investments play an indispensable part in the development strategies of numerous less economically advanced European countries. Older member states of the EU such as Greece, Ireland, Portugal and Spain were following this approach which had brought tangible success to some of them. As a result, new member states (NMS) and those aspiring to join followed the same path (Narula and Bellak, 2009).

In Table 1, we can see the list of EU enlargements and years when different members acceded to EU. In 2013 the EU completed its fifth enlargement, with Croatia as the newest member state. Eight former communist countries, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia joined the EU in 2004.

This thesis will attempt to provide a glimpse on how the EU integrations and EU membership affected those countries, with the special focus on their increase in FDI. At the same time, our attention will mostly be directed towards the countries that are in a similar geopolitical and economic position as Montenegro. It is important to state that EU membership doesn’t mean that all members share the same economic situation, but we could argue that the members of the Eurozone do have similar economies. According to the EC’s 2009 report, the EU accession has brought many challenges to the NMS. The authors of this report analyzed the activities of 27 EU members covering the period between 1960 and 2008. According to their findings, through the accession in the EU, the foreign investment in NMS increased rapidly, boosting economic restructuring, growth, and employment. Nevertheless, this rapid credit growth and foreign borrowing “overheated” the economy and led to large external imbalances (European Commission, 2009. p.3.).

Table 1: EU Enlargement

Year of accession New members
1953/1957 The founders of the European Coal and Steel Community, which was followed by the European Economic Community and the European Atomic Energy Community: Belgium, Germany, France, Italy, Luxembourg and the Netherlands
1973 Denmark, Ireland and the United Kingdom
1981 Greece
1986 Spain and Portugal
1995 Austria, Finland, and Sweden
2004 Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and   Slovenia
2007 Romania and Bulgaria
2013 Croatia

 

Between 2004 and 2007, twelve countries joined the European Union. This was the biggest enlargement in EU history. Newly joined members from Central and Eastern Europe have made the EU stronger and much more culturally diversified. South-Eastern European countries have been improving their institutions and investment policies to bring them in line with EU standards. All these countries have established the liberal regimes in order to attract more FDI, providing equal treatment for foreign and domestic investors along the way. That is exactly what Montenegro attempts to achieve during its integration process to the EU (European Comission, 2009).

First of all, it is important to mention two key benefits of EU membership reflected in FDI. First, countries with the small domestic market can expand their market and attract European funds. One of the countries with such small domestic market is Montenegro. In perspective, EU membership could positively affect the expansion of the domestic market. Positive effects of the integration process are already perceivable in Montenegro’s citizens’ everyday life. Second, the membership brings political, economic and legal stability. However, the lack in effective work of institutions can delay the efficient accumulation and transfer of knowledge.

In 1995 the transition process of the Central and Eastern Europe was followed by massive privatization process. In this process foreign capital was of big importance, the inflow of FDI was bound to privatization deals. According to Éltető, FDI was the important mean of integration of these countries into the EU and by that the Western markets (Éltető, 2010).

In the year 2000, FDI stock as a share of the GDP reached high as 20-30% in Bulgaria and Slovakia, similar was in Spain, while Romania and Poland were just below 20%. The highest levels were recorded in the Czech Republic and Hungary.

Table 2: FDI in percentage of GDP during 1995-2000 (Source: UNCTAD, FDI database)

Country 1995 1996 1997 1998 1999 2000
Bulgaria Flow 0.69 1.10 4.87 4.22 6.32 7.95
  Stock 3.40 5.60 10.22 12.54 16.86 21.46
Czech Republic Flow 4.64 2.30 2.28 6.01 10.51 8.79
  Stock 13.30 13.82 16.16 23.24 29.16 38.16
Hungary Flow 11.12 7.11 8.87 6.90 6.71 5.76
  Stock 24.64 28.63 38.26 42.91 47.14 47.70
Poland Flow 2.63 2.87 3.12 3.68 4.33 5.45
  Stock 5.64 7.32 9.28 12.99 15.54 19.98
Romania Flow 1.17 0.74 3.42 4.82 2.89 2.85
  Stock 2.30 3.09 6.80 10.75 15.37 18.78
Slovakia Flow 13.12 1.73 1.07 3.23 2.08 9.45
  Stock 6.58 9.57 9.75 13.02 15.48 23.21
Slovenia Flow 0.73 0.84 1.67 1.01 0.49 0.70
  Stock 12.73 13.16 11.04 13.04 12.28 14.76
Spain Flow 1.35 1.55 1.56 2.36 3.03 6.82
Stock 17.52 19.24 18.39 20.98 20.29 26.93

The share of FDI is highest in Hungary during the whole measured period, reaching 47% in 2000. Slovenia, Romania, and Poland remained below 20 %, but the latter two also showed a rapid increase in FDI inflow (Table 2).

There is a clear investment policy between CEE countries and Western European countries. While the former may gain most by focusing on infrastructure and R&D policies, the latter group’s policies to reduce the share of low-skilled workers. The most important changes occurred in the years after 2000, Spain became a member of the Economic and Monetary Union, while CEE countries became the members of the European Union in 2004. EU membership was an attractive factor for FDI in CEE countries and these kinds of investments continued to play an important role in the CEE region. Certain new trends could be detected and there the changes such as registration of FDI came along.

In CEE countries there are considerable fluctuations of FDI inflow which are caused by some large privatization deals. In the Czech Republic, in 2001-2002, big banks and the gas company went through privatization and in 2005 the local telecommunication company was sold to the Spanish Telefónica. In Slovakia, the FDI inflow during 2002 was raised on outstanding level thanks to the privatization of the electricity and gas sector (Éltető, 2010) (Table 3).

Table 3: FDI in percentage of GDP during 2001-2010 (Source: UNCTAD, FDI database)

Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Bulgaria Flow 5.98 5.8 10.49 14.01 14.43 24.35 29.4 19.02 6.88 4.53
  Stock 21.66 26.12 31.88 41.01 50.95 74.06 90.08 84.89 100.95 100.22
Czech Rep. Flow 9.12 11.28 2.21 4.55 9.3 3.82 5.99 2.99 1.54 3.53
  Stock 43.81 51.37 49.57 52.28 48.64 55.83 64.52 52.37 66.15 67.64
Hungary Flow 7.38 4.49 2.53 4.41 6.97 6.67 2.87 4.75 1.59 1.84
  Stock 51.42 54.37 57.25 61.25 56.08 72.7 69.23 56.95 76.7 71.02
Poland Flow 3.00 2.08 2.25 5.05 3.37 5.75 5.54 2.8 3.18 2.07
  Stock 21.66 24.38 26.68 34.27 29.86 36.84 41.97 31.04 43.22 41.22
Romania Flow 2.88 2.49 3.69 8.52 6.55 9.27 5.82 6.81 3.01 2.24
  Stock 20.75 17.12 20.51 27.13 26.10 37.06 36.9 33.23 44.69 43.94
Slovakia Flow 7.5 16.89 6.55 7.21 5.12 8.52 4.77 4.96 -0.06 0.6
  Stock 26.45 34.78 44.2 52.07 49.88 61.01 56.86 54 60.1 58.09
Slovenia Flow 1.83 7.14 1.07 2.49 1.67 1.69 3.2 3.56 -1.18 1.75
  Stock 12.87 18.24 22.29 22.87 20.6 23.52 30.38 28.62 30.77 31.47
Spain Flow 4.66 5.72 2.92 2.37 2.21 3.00 4.46 4.83 0.62 1.75
Stock 29.1 37.46 38.44 39.02 34.04 37.43 40.63 36.95 43.37 43.68

However, between 2001 and 2003 privatization processes slowed down and as we can detect in Table 3, the most of the countries faced the decrease in FDIs. There was almost no privatization at this time and wages, as well as labor costs, increased. In 2004 CEE countries joined the EU, as a result, FDI inflows were increased again. This can be interpreted as an effect of the EU accession. Reinvested earnings became more and more significant (in Poland also between 2004-2007, together with the increase of FDI from the EU). The Bulgarian wave of privatization ended late in 2008 and attracted the largest FDI inflows in the entire region. In Romania, this process accelerated after 2004. On the other hand, Slovenia has the lowest penetration of FDI recorded in this specific period.  The reason lies in the fact that privatization policy was more cautious towards foreign owners (Éltető, 2010).

The Czech Republic, Slovenia, and Slovakia became members of the EU. All these countries tried to adjust to the EU economic policies and adapt to the open market economy. Montenegro is currently on that same path. In mentioned countries, FDI levels are lower the in other, however, the situation changed after EU accession. These countries need to work more on their economic development, as to join the EU is not enough to fix all the problems. When we compare Slovenia and Slovakia we can see that Slovakia has higher levels in economic indicators than Slovenia. On the other hand, Slovenia has the worst inflow and outflow levels among all member states. Also, its GDP legs behind the other member states. All this leads to a conclusion that EU membership is not enough and that investments are still needed in order of improving other economic factors.

Hungary joined the EU in 2004 and FDI inflows increased after this country gain a membership. Durin the 1990s in Lithuania rates of FDI inflows were low, but as a result of the accession to EU, the numbers peaked in 2004 and achieved its maximum in 2006.

The wave of enlargement brought together countries of different economic and cultural backgrounds, making the EU the largest integrated economy of the world with more than 30% of the world’s GDP (Efstathiou, 2004; European Commission, 2009, p2).

The EU Membership provided all these countries with important advantages. They have gained access to much larger and more affluent market and many other valuable resources which can be used for achieving improvement in numerous fields. Just like other countries mentioned in this section, Montenegro has gone far on its path to become a new member state and utilize on changes it had to make during the accession process.

\

III FOREIGN DIRECT INVESTMENTS TREND IN MONTENEGRO

 

3.1. Basic FDI situation in Montenegro

Montenegro is a small European country with the population of only 0.6 million. It has a business oriented economy characterized by its freedom and monetary stability. Nevertheless, obstacles such as corruption and organized crime, the politicization of justice, as well as approximate and unreliable land registry, stands in the way of even greater development of FDI in Montenegro. In order to become an EU member, Montenegro needs to overcome these obstacles. This country’s top priorities are maintaining its course of EU integrations and implementing necessary EU reforms.

For three years in a row in between 2006 and 2009, Montenegro has recorded the highest FDI per capita in Europe. In this period, total FDI amounted to over 3 billion Euros. Many of these inflows were the result of large privatizations. For example, in 2009 the inflow of 1.07 billion Euros was recorded due to the privatization of the national electricity company called “Elektoprivreda Crne Gore.” Foreign direct investments are considered to be a very important factor for the increase in growth and competitiveness. However, in 2011, Montenegro recorded a considerable decrease in FDI which was seen as the effect of reduction in equity and debt investments (SFDI 2013-2015). Foreign direct investments flow trends in Montenegro are shown in Figure 2.

Figure 1: FDI flow in Montenegro (2001-2011); Source: MIPA. 2013

 

3.1.2 Investment Opportunities

Montenegro is focused toward three sectors with great potential:

  • Tourism
  • Agriculture and
  • Renewable energy sectors

The promotion of foreign direct investment is going among those above mentioned  sectors. According to the World Travel and Tourism Council Montenegro is predicted to come one of the become one of the fastest growing tourist countries in the period of next 10 years. The coastal part of the country has been in the focus for development of tourism while there is not a particular attention on the northern parts of Montenegro. (MIFC, 2016) However, northern part have huge potential for development and I believe that special attention should be given in the future to the those undeveloped parts of the country.  The northern region actually represent the center of mountain tourism but  there is just with several ski resorts. The arrears of untouched nature in northern parts represents big development potential that’s why Goverment of Montenegro should promote this parts with the same intensify in order to attract more foreign investors.

Agriculture represents one of the biggest potentials of Montenegrin economy. It accounts for around 8% of Montenegrin GDP. According to the statistics of the Ministry of Agriculture and Rural Development of Montenegro, only 1.6% of all permanent employees in Montenegro work in agriculture, but, unofficial data says that the number is much higher, reaching around 30% of the total number of employees in the state. (MARDM, 2015) Montenegro has the potential to grow in this area  further. The unspoiled nature, clean water and unexhausted land resources gives Montenegro big potential for development of this sector. There is a big potential in organic agriculture and the number of organic food producers is constantly increasing. Producers need to follow strict standards represented in the Law on Organic Production, according the European Union standards. Organic and healthy food originating from Montenegro is of big interests from domestic people and many tourists coming from all around of the world for that.[8] Montenegro is a country very rich with a water but  only 17% of the water resources in Montenegro is being used. There is a big potential for investment in this sector as well. (MIC, 2016)

The energy sector in Montenegro has been marked with significant progress. There has been only one supplier – the Electric Power Company of Montenegro (EPCG). In the coming years is expected that complete liberalization of energy market and due that energy in Montenegro has become one of the most interesting sectors for foreign direct investors. In the near future citizens of Montenegro will be able to choose their supplier.[9] In 2014 there were seven small hydroelectric power plants providing around 9.3 MW and planned annual electricity production is roughly 35.4 GWh. It is estimated that the value of the investments in these 6 micro power plants is around €15.3 million. While wind energy is energy in development and there are some places in Montenegro that have been recognized as good for setting up this kind of devices. The huge potential is in solar energy as well, that’s why this should be promoted in order to attract more foreign investors. (MIC, 2016)

 

 

 

 

 

3.2. FDI inflow in Montenegro

According to preliminary data, in 2016 net FDI inflow amounted to 371.6 million euros, which is a decline of 40% in comparison to the same period in 2015. Total FDI inflow in the observed period amounted to 687.2 million euros, while the outflow recorded at the same time were 315.6 million euros (CBMN, 2017).

Since proclaiming its independence in 2006, up until December 2015, Montenegro achieved the inflow of 6.6 billion Euros in FDI as shown in Figure 3.

Fig. Montenegro Foreign Direct Investment – Total Inflow

Description: montenegro-foreign-direct-investment

Figure 2: FDI in Montenegro 2006-2016 – Total inflow; Source: Central Bank of Montenegro

Foreign Direct Investments in Montenegro averaged around 738 million EUR from 2007 until 2015, reaching an all-time high of around 1.2 billion EUR in 2009.

There are over 100 countries currently investing in Montenegro, and the highest number of investments comes from Russia, Switzerland, Austria and Serbia. Russia was single most important foreign investor until 2015 with 28% of tourist visits and FDI inflows, while 20% of tourist visits and 39% of FDI inflows comes from the EU countries (MIPA, 2015).

However, FDI situation is slightly different today and the list of top investor countries has gone through certain alterations. More precisely, after years of being the top investor in Montenegro, Russia has been replaced with Norway. Norway currently invests the total of around 85 million EUR in Montenegro. Italy follows with 30.8 million invested and Hungary is present with approximately 25 million euros of investments. However, due to confidentiality of Norwegian and Hungarian data, there is no public information regarding the exact areas in which the investments occurred. On the other hand, Italy mostly invests in Montenegrin domestic companies and banks while Russia mostly focuses on the real estate investment (CBMN, 2016).

In 2016 the share of equity investments in the total recorded FDI inflow summed up to 44.9% bringing 308.4 million euros. It included investments of 175.4 million euros in companies and banks (25.5% of total inflow), and the investments of 133.1 million euros in real estates (19.4% of total inflow). FDI inflow in the shape of intercompany debt amounted to 186.9 million euros or 27.2% of total inflow, and the inflow of monetary assets arising from the extraction of residents’ money invested abroad amounted to 191.9 million euros (27.9% of total inflow) (CBM, 2017). Total recorded FDI inflow is presented in Figure 4.

Figure 3: Structure of total FDI inflow 2016 (Source: CBM 2017)

 

 

 

 

3.3. Strong and weak points of investing in Montenegro

 

3.3.1. Strong Points overview

Some of the main reasons why Montenegro attracts foreign direct investors:

  • National and foreign companies enjoy the same rights.
  • Montenegro has one of the most competitive tax systems in Europe (9% rate).
  • Euro is a national currency.
  • The quality of workforce and relatively low wages.
  • Establishing a company in Montenegro is quick and easy.
  • Montenegro is stable and democratic country.

3.3.2. Weak Points overview

Factors that make foreign direct investors reject the investments in Montenegro:

  • Still unresolved problems of corruption.
  • Foreign debt.
  • Deficit in balance and current transactions.
  • Regulations on the subject of intellectual property are almost non-existent.

3.4. Government Measures to motivate or restrict FDI

The government’s privatization policy has attracted many foreign investors. In addition, there is a real equal treatment of Montenegrin and foreign investors. As part of its EU approximation path, Montenegro has implemented numerous reforms and the business environment has been significantly improved. The government has established customs and fiscal incentive measures. The amount of tax can be reduced up to 25% of the amount invested in shares and bonds for the fiscal period concerned. Newly established legal entities active in the field of production can be exempted from tax on profits during their first three years of activity (Satander, 2017).

 

3.5. Montenegro’s NATO membership as an impulse for FDI

In May 2016 Montenegro has signed the accession protocol with North Atlantic Treaty Organization (NATO) and membership in this organization is expected to be accomplished by spring 2017.

The fundamental purpose of North Atlantic Treaty Organization (NATO) is to guarantee freedom and provide security to its members, all in accordance with the principle of the UN Charter (EP, 2016). It is beyond any doubt that this fundamental purpose drives the long-standing strategic decision of Montenegro to accede to the Organization. Montenegro’s integration into NATO and the EU are compatible and complementary because they are based on the same values, and the progress in one area is positively reflected on the other. Without a doubt, one of the most important events for Montenegro since proclaiming its independence in 2006 is achieving NATO membership. By signing its accession protocol, Montenegro entered the final phase of becoming 29th NATO member (EP, 2016). This membership influences Montenegro’s path towards the EU integration.

Statements given by Montenegrin officials might provide us with a better insight on how FDI inflow will be affected by the upcoming NATO membership. National Coordinator for NATO Vesko Garcevic pointed out the fact that NATO is not a financial organization and that economic effects of such membership might not be felt very quickly, but he also suggests that there are some strong indications suggesting that in the long run economic effects will be very positive. The Deputy Finance Minister, Marija Radenovic argued that FDIs are of great significance for Montenegro since such investments represent a long-term guarantee for generating new jobs and increasing production and exports. Ms. Radenovic concluded that NATO membership sends a strong message to foreign investors that Montenegro is a safe and stable environment.[10]

The experiences of other NATO member countries imply that Montenegro could hope to benefit from this membership. After the fall of the Berlin Wall, twelve countries have joined NATO.  Most of these countries recorded a sudden increase in foreign direct investments with an exception of Croatia who joined the Alliance during the period of global financial crisis in 2008.

In conclusion, NATO membership might not have the immediate effect on FDI status in Montenegro, but it would most definitely send a positive signal to foreign investors.

3.6. EU and NATO Membership – Effects on FDI

Many have argued that NATO membership brings not only security benefits but also the ones for the country’s economy. Some relevant data concerning effects of NATO membership on its Central European members stands in support of this argument. Economic statistics recorded in these countries shows that the level of new foreign direct investment remained stable after joining NATO. The positive trend is noticeable even in those countries that completed its large-scale privatization programs.

Article 2 of the North Atlantic Treaty (1949) states that: “the Parties will contribute toward the further development of peaceful and friendly international relations by strengthening their free institutions, by bringing about a better understanding of the principles upon which these institutions are founded, and by promoting conditions of stability and well-being. They will seek to eliminate conflict in their international economic policies and will encourage economic collaboration between any or all of them” (North Atlantic Treaty, 1949). Hence, the economic cooperation among NATO members is not limited to military industry and services, but rather refers to the national economy as a whole.

The link between FDI and NATO membership can be understood through the foreign investor’s perspective. NATO membership means increased security, and more security is always a good sign. With that in mind, the foreign investor will perceive NATO membership as a sign of stability and choose to invest in such market rather than somewhere else.

Foreign Direct Investments are one of the most important sources of economic growth for any country, especially the ones going through a transition. However, measuring the expected rise in FDI in connection with NATO membership is a challenging task. Ona way of addressing this issue is examining the experiences of other countries that went through the similar process.

There were three waves of NATO enlargement after the fall of the Berlin wall. In 1999, Hungary, Czech Republic and Poland all became members of NATO. The second wave occurred in 2004 and it included the joining of the Baltic countries Latvia, Lithuania, and Estonia, as well as Slovakia, Slovenia, Bulgaria, and Romania. Finally, in 2009 two more countries acceded to NATO those are Albania and Croatia. Countries that acceded in the first and second wave, with the exception of Romania and Bulgaria, all became EU members in 2004. Albania is still on its EU integration path, while Croatia joined the EU in 2013. These differences in dates, one of acceding to NATO and other to the EU may be helpful for establishing a comparative analysis. This way we can see for example how NATO membership effects Foreign direct investments before and after the EU membership is achieved. Table 4 shows three waves of NATO expansion and the year new NATO members acceded to the EU.

Table 1: NATO enlargement 1999-2009

Country NATO membership EU membership
Czech Republic 1999 2004
Hungary 1999 2004
Poland 1999 2004
Estonia 2004 2004
Latvia 2004 2004
Lithuania 2004 2004
Slovakia 2004 2004
Slovenia 2004 2004
Romania 2004 2007
Bulgaria 2004 2007
Albania 2009 Still not a member
Croatia 2009 2013

After the fall of the Berlin wall, twelve countries have joined NATO. Most of them have recorded the increase in foreign direct investments inflow. The data shows that for all the observed countries foreign direct investment flows rose considerably during the period of accession (Karaulac, 2009). These trends are shown in Figure 4 and Figure 5.

Figure 4: FDI inflows and NATO accession (Poland, Czech Republic, and Hungary); Source: OECD

 

 

Figure 5: FDI inflows and NATO accession (Estonia, Slovakia, and Slovenia); Source: OECD

We could conclude that NATO and EU membership has positive effects on FDI in new members. These Figures indicates that after achieving NATO and EU membership, countries such as Poland, Czech Republic, Hungary, Estonia, Slovakia and Slovenia recorded the considerable increase in FDI. Also, NATO membership can be perceived as a good indicator of progress in EU integrations. By achieving NATO membership, country improves its institutional and economic framework and becomes stronger in enforcing its rules (CEOR, 2014).

Of all twelve countries who joined NATO after the fall of the Berlin wall, Croatia was an only exception regarding the rates of FDI. In the case of Croatia, an increase in foreign direct investment had not been recorded, probably due to the fact that global financial crisis occurred during the time of its accession.

IV EU BUSINESS CLIMATE TRANSFORMATION PROCESS AND ITS EFFECTS ON FDI IN MONTENEGRO

 

4.1. Business climate transformation in Montenegro

Montenegro faces a number of important transition challenges as it aims to attain sustainable growth in the economy and advance further in its EU integration process. Overcoming these challenges positively reflects on the growth of FDI in Montenegro, as well as on its overall business climate.

According to the World Bank, Montenegro belongs to the group of middle-income countries. However, some further progress in poverty reduction and social inclusion is needed (World Bank, 2016). Since obtaining a formal EU candidate status and starting its accession negotiations in June 2012, it has become easier to start and run a business in Montenegro. As part of its EU approximation path, Montenegro has implemented numerous reforms and the business environment has been significantly improved over the past several years but some challenges still exist. The remaining issues include the presence of administrative barriers such as receiving licensing and permits, as well as infrastructure bottlenecks that continue to hamper the competitiveness of Montenegrin businesses (EB 2013).

The World Bank’s findings suggest that important reforms have been made with regard to accelerating the process of starting a business in Montenegro. In 2013 Montenegro was ranked 51st among 183 countries in the world for doing business, while in 2016 it was ranked 48th in the same category. Such results place Montenegro ahead of all but one SEE country, but still below most EU countries (World Bank, 2016). There are indicators showing that the authorities have taken positive steps towards easing the access to credit and reduce the tax burden on businesses. This was accomplished by abolishing some taxes as well as reducing the social security and corporate income tax. (EBRDS, 2013). As a result of the reforms Montenegro is recognized as a low-tax area among foreign investors. However, further reforms are expected  with regards to the predictability of taxes and equalization of municipal tax policies. (MFIC, 2016)

Even if is not European Union  Member Montenegro use euro as a currency and this has been seen as positive aspect for foreign direct investment. Euro is adopted in 2002 and has been used ever since. Using euro as a currency has positive benefits for all foreign investors , s(ince it significantly reduces the inherent foreign exchange risk as well as the inflation risk when conducting business in Montenegro. One of the positive aspect is that Montenegro signed a free-trade agreement with the EFTA in 2014.  I would say that Montenegro is becoming the business-friendly environment with freely floating capital and  commitment to free trade by the Government of Montenegro, provide foreign investors with many opportunities.(MFIC,2016)

South East European countries have been improving their institutions and investment policies to bring them in line with EU standards. These countries have established liberal regimes in an attempt to attract more FDI and provide equal treatment for foreign and domestic investors. Montenegro is currently on the similar path with efforts directed in the development of a liberal business climate that fosters foreign investment and local production. It is of importance for the government of Montenegro to recognize the importance of business environment reforms. Such transformation will further eliminate the structural barriers and open Montenegrin economy to foreign investments.

4.2. Privatization

The process of privatization in Montenegro occurred in several different phases, all closely connected to changes in legislative framework behind them. The first phase of privatization happened in 1982 and it included all six socialist republics of former Yugoslavia. It consisted of the implementation of Federal Legal Act on Social Capital, the model based on the idea of internal privatization. However, a strong ideological campaign against such privatization had disabled enforcement of this Law in Montenegro. The Legal Act on Property and Management Transformation enacted in 1992 representing the first legislation concerning the privatization in Montenegro. This Law stipulated that all companies should become share companies, that their value should be estimated and that before being privatized its capital should be distributed between workers and three different state funds.By this Low, social ownership in Montenegro has been officially eliminated.The new Privatization Law passed the Parliament in 1996 and Montenegro entered its third phase of the privatization. With a focus on privatization of state capital in public companies and state capital in funds, this Law introduced voucher privatization through the distribution of shares to all citizens of legal age (Vukotic, 2001).

Overall, today privatization process in Montenegro is in advanced stage. According to the European Commission report from 2016 state ownership in the economy is basically reduced to public utilities and state owned enterprise is actually a small part of total employment. Regard metal industry, it was liquidated and sold to the new owners which means that state support to the metal its finished. While the new aluminium and steal companies are under the process of restructuring. In April 2016 aluminium company started importing electricity. Actually before started import of electricity aluminum. While in September 2016, contract for replacing old sate-owned thermal power plant by a new one was signed. However, this thermal power plant  will be in function before 2020.The one and only national state airlines concluded cooperation greement with Air Serbia in 2016, while there are some negotiations about partnership with the Arab Emirates national airlines.  Ulcinj saltworks  is bankrupt, but second year in a row was taken by National Parks of Montenegro with the aim of revitalizing salt production. (EUC, 2016)

Nowadays, Foreign investors can equally participate in any privatization process with the highest inflow of foreign capital coming to Montenegro by investments through privatization (Bjelić & Živković, 2017). In 2009 Montenegro achieved its record high FDI inflow of 1.07 billion Euros due to the large-scale privatization of its national electricity company.

We may argue that today the privatization process in Montenegro is in its final phases with around 85% of all Montenegrin state-owned businesses privatized. The remaining companies are of strategic importance to the Montenegrin economy. However, further privatization of state-owned companies should contribute to better economic performance, increase the competitiveness of the country and enable the Government of Montenegro to generate higher revenues which will enhance capital investments and reduce debts. In 2012 Montenegro adopted a Competition Law, updating its legal framework and harmonizing it with the European Union (Wismer et al., 2016).

4.3. An overview of the progress made in Montenegro’s legal framework

In its official report on the improvement of legal issues, European Commission recognizes the important work Montenegro has invested in the alignment and preparation for the implementation of the acquis. The EC discerned a moderate level of advancement in Montenegro’s preparedness for negotiating chapters such as the free movement of goods, public procurement, statistics as well as justice, freedom and security. Montenegro has continued to align with all EU common foreign and security policy positions and declarations. However, EC noticed that Montenegro is still at an early stage of preparation regarding fisheries and budgetary – financial provisions. Also, at some level, progress is noticeable in the area of environment and climate change. Finally, the European Commission commended the important progress made in the areas of agriculture and rural development, food safety, veterinary and phytosanitary policy, energy, customs union, external relations and financial control (EUC, 2016).  In the period ahead, Montenegro should focus its efforts on economic and monetary policy. Still, strengthening the administrative capacity for ensuring the application of the acquis remains a substantial task for Montenegro.

Having in mind the contents of the official reports on Montenegro’s judicial system, we may conclude that to some extent progress has been made. The issues of strengthening the legislative framework as well as increasing the independence, accountability, and professionalism of the judiciary were all adequately addressed. However, the problem of corruption requires being addressed more efficiently.

4.4. Regulation on FDI

With a desire to promote investment and foster economic development, Montenegro strives to reduce bureaucracy and maintain the growing trends of FDI inflow. For that purpose, The Government of Montenegro founded the Montenegrin Investment Promotion Agency (MIPA) in 2005, an agency committed to promote country’s potentials and support foreign investors.

In accordance with standards of the European Union, Montenegro has made important changes regarding the laws and procedures related to the foreign direct investments. The business registration procedures have been simplified to such extent that it is now possible to register a firm in Montenegro electronically. Bankruptcy laws have been streamlined to make it easier to, if needed, liquidate a company. The accounting standards have been brought up to international norms and customs regulations have also been upgraded.

There is a specific set of legislation and regulations in Montenegro outlining guarantees and safeguards for foreign investors. Montenegro’s Foreign Investment Law establishes the framework for investment in Montenegro. This new law eliminates previous investment restrictions, extends national treatment to foreign investors, allows for the transfer of profits and dividends, provides guarantees against expropriation and allows for customs duty waivers for equipment imported as capital-in-kind.

In accordance with EU standards, Montenegro has adopted almost twenty other business-related laws. Some of the most significant laws that regulate foreign investments in Montenegro are: The Foreign Investment Law, the Enterprise Law, the Insolvency Law, the Law on Fiduciary Transfer of Property Rights the Accounting Law the Law on Capital and Current Transactions the Foreign Trade Law, the Customs Law, the Law on Free Zones, the Labor Law, the Securities Law, the Concession Law as well as the set of laws regulating tax policy (USAD, 2016; EUEC, 2016).

It is safe to say that Montenegro has made significant steps towards both amending investment-related legislation in accordance with world standards and creating the necessary institutions for attracting investments.

As we pointed out in the previous pages of this thesis, many laws aiming to improve business environment were passed but there is still some inconsistency in their application. We may argue that the relevant authorities failed to implement some of these legal provisions in practice.

4.5. Financial assistance

During the integration process, EU provides significant financial assistance to Montenegro. This assistance is made possible under the Instrument for Pre-accession Assistance. For the period between 2007-2013, it amounted to €235.7 million. Based on the priorities set out in the Indicative Strategy Paper from the year 2014 until the end of 2020 Montenegro will benefit around €270.5 million. These financial resources facilitate the reformation process and provide Montenegro with the funding needed for the important projects. With IPA support, Montenegro participates in the following EU programs: Erasmus+, Creative Europe (Culture and Media strands), Employment and Social Innovation, Horizon 2020, Customs 2020, Fiscalis 2020, Competitiveness of Enterprises and Small and Medium-Sized Enterprises Programme (COM, 2016).

According to the EU Commission priority sectors of funding in Montenegro by 2020 are:

  • Democracy and governance
  • Rule of law and fundamental rights
  • Environment and climate action
  • Transport
  • Competitiveness & innovation
  • Education, employment and social policies
  • Agriculture& rural development

Focusing on this sectors  the plan of European Commission is to help  reforming of civil service and strengthening democratic institutions. Beside of that this financial support will serve to improve independence and efficiency of judiciary,  then fighting corruption and organised crime and in protecting fundamental rights and minorities. While regard environment and climate action EU will help Montenegro to fully align with the EU standards in this fields. Further help is planed in transportation sector, ten for better policy-making and implementation of reforms in economic governance, competitiveness and human resources development. As EU recognized financial support is needed in order to make a better link between education and labour market needs and for the social inclusion policies. While in agriculture and rural development financial support is needed as well for better implementation of common agricultural policy with in EU standards. (EC, 2016)

4.6. FDI perspectives in the upcoming period

According to reports issued by CBM, Montenegro will remain among the top transition economies with high inflows of foreign direct investments. The interest for Montenegro is still very present and the announcements of new foreign investments could be regularly heard. However, announcements and expressed interest don’t necessarily mean that the subject investment will be actualized (CBM, 2016).

Factors that had the biggest impact on the inflow of FDI were the privatization process and the attractiveness of the Montenegrin coast. The highest FDI were in the area of tourism, real estate, energy sector, telecommunications, banking sector, and construction. The energy sector, tourism, and industryare the areas most likely to attract new foreign direct investments in the future (CBM, 2017).

By adopting the Decree on Fostering Direct Investments, Montenegro joined some other countries from the region that implemented similar legislative solutions in order to improve its business environments and boost the economic growth. The Government of Montenegro is committed to stimulate direct investments in the country and for that reason In January 2015  Decree on Fostering  Direct Investment was adopted. The aim of this Decree is “fostering national and foreign investments, increasing competitiveness and export potential of Montenegrin economy, and decreasing the unemployment rate“. (OGM, 2016) Hence, a number of stimulating measures are to be implemented in order to improve  business environment and facilitate faster economic growth. Such as , the amendments to the Law on Spatial Planning and Construction abolishes utility contribution payment for the construction of 4 and 5 star hotels, and the amendments to the Law on Property Tax have defined the reduction of annual property tax of up to 30% for 4-star hotels and up to 70% for 5-star hotel.(Vujacic, 2016)

 

V MEASURES AND POLICY SUGGESTIONS FOR PROMOTING FDI

5.1. FDI prosperity in Montenegro – A short analysis and suggestions to The Government of Montenegro

As we highlighted in the previous chapters of this paper, Montenegro records some of the highest inflow of FDI per capita in the South East Europe. Nevertheless, there are still numerous obstacles which create difficulties in the investment department. In this part of the thesis, we will discuss these issues and attempt to offer constructive suggestions on their resolution.

In its reports, the World Bank advises The Government of Montenegro to focus on increasing the economic growth in the country. If sustained over a longer period, even a slight increase could reflect on the living standard of its citizens.

As foreign direct investments represent the substantial factor for Montenegro’s overall economic growth, we may argue that any obstacles for its development should be thoroughly investigated. As the most persistent difficulties, we could single out the inefficiency of bureaucracy, corruption and the poor infrastructure. The additional efforts should be made in order to increase the competitiveness as well.By improving some of these aspects, Montenegro could attract and animate more foreign investors and through that channel influence the increase of its GDP.

Many reforms have been introduced as part of the EU accession efforts. Nevertheless, further improvements are needed in order to make the business climate more favorable for foreign investments.  The Government of Montenegro did recognize the need for changes but it should be stronger in its implementations.

The changes will be visible only after fully accomplishing the legislative aspect of the reformation process. Aforementioned obstacles are complex and there are no quick solutions for problems such as corruption or inefficient bureaucracy, the only way for them to be overcome is through hard and determined work of government officials.

Late in 2012 World Bank issued a report on Montenegro’s path towards prosperity emphasizing three critical areas for development: sustainability, connectivity, and flexibility. With progress in firming these three pillars, Montenegro could hope to achieve prosperity in all fields including attracting foreign investment as well as making the tangible progress in EU integrations. These three critical areas imply the need for policies that foster skills and knowledge, an openness to other markets and regional cooperation as well as readiness to adapt to new circumstances (World Bank, 2012).

Montenegro has all it takes to achieve prosperity and progress in its strategic goals. Its geographic advantages provide the possibilities of exploiting renewable energy sources and Montenegrin Adriatic coast provides a strong potential for further expansion of tourism. With these and many other advantages on its side, The Government of Montenegro could substantially increase its economic growth and with that the living standard of its citizens in the years to come.

5.2. The importance of FDI in Montenegro

By now, we have introduced Foreign direct investments as one of the key drivers of economic growth in Montenegro. For that reason, The Government of Montenegro should intensify promotion of country’s potentials appealing to foreign direct investors.

The Legatum Prosperity Index describes Montenegro as a country in transition with restructuring reforms aimed to encourage the economic growth. As perceived by the Legatum institute, tourism, and foreign direct investments are positioned as two most important factors of economic growth in Montenegro. Following the global financial crises in 2008 economy of Montenegro entered into recession but since then it has recovered to a great extent. It is an interesting fact that Montenegro was the only country in Western Balkans that have not recorded a decrease of foreign direct investments during the crises (Prosperity Index, 2016).

Since tourism is one of the most valuable facets of Montenegro’s efforts for achieving economic growth, it is important to point out the Government’s current measures regarding this matter. The number of projects is created to attract investments and develop the seaside of Montenegro. If realized, these projects are estimated to bring more than 3 billion EUR of foreign capital in the forthcoming period (MIPA, 2017).

Overall, we could conclude that the business environment has significantly improved in the last two decades and that the EU integrations have brought additional benefits by opening Montenegro’s economy to foreign investments. The inflow of FDI remains of key strategic importance for achieving sustainable development and the economic growth in Montenegro.

5.3. The future prospects of FDI – The final thoughts on FDI priorities

After carefully reviewing numerous reports generated by institutions such as the World Bank, OECD, and the World Economic Forum, and associating their findings with the recommendations offered by the EU, the Government of Montenegro was able to define a list of priorities demanding more attention in order to accelerate the economic growth and achieve macroeconomic stability. The priorities recognized by The Government of Montenegro include achieving better fiscal sustainability, the systematic reduction of informal employment, the creation of conditions for lending growth and strengthening the external position of the country. Apart from the focus on macroeconomic stability, the government recognizes the priorities directed at fostering competitiveness such as the further development of basic infrastructure, creating a favorable investment environment, as well as securing the support of small and medium-sized enterprises. The development of human capacities stands as a precondition for success in accomplishing any of these goals (Montenegro Economic Reform Program, pp. 61, 2016).

We have established that many reforms were conducted during the Montenegro’s EU integration process with regard to the business environment improvement. However, we believe that further improvements in the investment and business environment are necessary. According to the World Bank’s Doing business report from 2017, Montenegro is currently ranked 51st on a global level.  In comparison to the previous years, Montenegro made significant progress in registering property and tax payments, while in some other areas evaluated in this report it recorded a drop on the global list. Some of these drop indicators most relevant to our thesis are: starting a business (-5), enforcing contracts (-2) and construction permits (-1) (WBDBR, 2017). These data clearly indicate that the process of reforms needs to continue and we may add that there should be more flexibility, especially in reinforcing the areas which attract investments.

In 2014, The Foreign Investors’ Council published the fifth issue of the “White Book” for Montenegro. This book criticized the existing business barriers and procedures, especially the ones at the local level. One of the biggest detected problems is the poor coordination between local and state institutions (White Book-Montenegro 2014). Three years have passed since this book was issued but the addressed problems still remain unresolved as we can see from the World Bank Investment Ranking for 2017. To make any relevant progress, it is necessary to create efficient bureaucracy and legal system. Procedures for the realization of domestic and foreign investments should be shortened and simplified. New reforms are needed in the area of labor legislation as well. The cooperation between institutions at local and state level must be enhanced, as such cooperation is crucial for any kind of investment to be made.

Many laws aiming to improve business environment were passed in the past few years but the inconsistency in their application is a very significant problem. The relevant authorities didn`t provide an efficient implementation of those laws and the gap between theory and practice is fairly noticeable. That is one more priority on which Government of Montenegro should focus. Montenegro should improve a stability of its business environment and secure investors’ confidence in it. Furthermore, feasible strategies to fight corruption must be developed as this problem represents a serious challenge for any business. According to Transparency International’s Corruption Perception Index (CPI) published in 2017, Montenegro was ranked 64 out of 176 countries (Transparency International, 2017).

A clear line between politics and business should be drawn in order to send a positive signal to investors. As stated in the World Bank’s report, multinational companies tend to select locations where its business venture is most conducive to non-politicized economic activity. The ambitious reforms should lead to a public sector in which public servants deliver services to citizens solely relying on the public interest as their main guideline (World Bank, 2012). The contemporary reports issued by the European Commission estimate that Montenegro has achieved a certain level of readiness to fight corruption but this phenomenon is still prevalent in many areas and continues to be a serious issue.

Compared to most of the EU member states, Montenegro lags in transport, energy connectivity, information and communications technologies. In order to attract more FDI, Montenegro should focus on quality and safety of the roads and improve rail links. The Information and Communications Technologies (ICT) bring opportunities for growth and development and ICT can help strengthen the country investment climate and competitiveness.

With the smart use of available financing sources such as European Union’s IPA funds, Montenegro could improve its current situation regarding issues such as infrastructure and many others.

One of the biggest potentials of the country lies in tourism and its natural beauty. The association representing tourist agencies and tour operators from 32 European countries, the ECTAA, declared Montenegro a favorite destination in 2015. Besides tourism, we may argue that agriculture and renewable energy sources have potential to become pillars of the future economic growth in Montenegro. The Government of Montenegro should continue to promote its coastal area as an attractive destination for investors but more attention should be paid on the north part of Montenegro which has huge potential as well. In the northern part of Montenegro, there are unexploited potentials for the development of forestry, water engineering, organic food production, animal husbandry and fishery. In the previous years, there was a lack of promotion in Greenfield investment, our suggestion to the Government of Montenegro would be to examine the possibilities of development in this area.

Our analysis has led us to conclude that Montenegro`s overall socioeconomic situation has improved over the past two decades. The influence of EU integrations on the reformation process in Montenegro, as well as the importance of foreign direct investments for Montenegrin economy, remains indisputable.

VI CONCLUSION AND LIMITATIONS

In this paper, we have presented some relevant facts and findings concerning foreign direct investments and its importance to a transitioning country such as Montenegro. By shedding light on Montenegro’s path towards the European Union our research portrays the difficulties contained in the process of reformation and explores the experiences of other countries that went through a similar development.

We attempted to analyze how the European integrations and membership affects the inflow of FDI and the effects it can have on a transition economy. After such analysis, we are able to conclude that the enlargement of the European Union brings the increase in FDI which many new member states, accession countries, and candidates aspire to obtain. Further, this carries an opportunity for countries such as Montenegro to expand its markets and, in its own way, achieve political, economic and legal stability through the EU membership.

Positive effects of the integration process are already perceivable in Montenegro’s citizens’ everyday life. For three years in a row in between 2006 and 2009, Montenegro has recorded the highest FDI per capita in Europe. In this period, total FDI amounted to over 3 billion Euros. Many of these inflows were the result of large privatizations. Numerous reforms were carried out over the past several years but some challenges still exist. It is of importance for the government of Montenegro to recognize the value of business environment reforms. Such transformation will further eliminate the structural barriers and open Montenegrin economy to foreign investments.

According to our findings, through the accession to the EU, the foreign investments in new member states increased rapidly, boosting its economic restructuring, growth, and employment. South-Eastern European countries have been improving their institutions and investment policies to bring them in line with EU standards. All these countries have established the liberal regimes in order to attract more FDI, providing equal treatment for foreign and domestic investors along the way. That is exactly what Montenegro attempts to achieve during its integration process.

Nevertheless, the persistent problem of corruption requires being addressed more efficiently.  Montenegro has made significant steps towards both amending investment-related legislation and creating the necessary institutions for attracting investments. As we pointed out in the analyses, many laws aiming to improve business environment were passed but there is still some inconsistency in their application.

The remaining issues include the presence of administrative barriers such as receiving licensing and permits, as well as infrastructure bottlenecks that continue to hamper the competitiveness of Montenegrin businesses.  We singled out the NATO membership as a positive impulse for investors. This membership implies that the country is secure, and more security is always a good thing. Some foreign investors perceive NATO membership as a sign of stability and choose to invest in such market rather than somewhere else.

In conclusion, in order to remain an attractive place for foreign investors and bring more FDI in the country, the government of Montenegro has to come out with an effective sustainability master plan with strategies for achieving development and investments. On top of that, the high-profile problems such as bureaucracy and corruption should be dealt with as soon as possible in order to prevent the further damage they may bring to Montenegrin economy. The overall socioeconomic standard has improved in the last two decades and the EU integrations have brought many benefits to the country. All these improvements have increased the attractiveness of Montenegro as a destination to be invested in.

The main difficulties of this research are reflected in the lack of prior academic studies conducted on the topic of EU Integration and effects it has on FDI in Montenegro. For that reason, the present thesis mostly relied on the data generated in reports of the relevant institutions. We attempted to critically analyze these data and expand the body of knowledge related to FDI status in Montenegro. Our observations might have implications for further research on the nature of FDI in Montenegro, as well as an indirect contribution to policy-makers dedicated to this field.


[1] Czech Republic, Slovenia, Hungary, Poland, Estonia. Helsinki Group

Slovakia, Lithuania, Latvia, Bulgaria and Romania followed suit in 1998.

[2] The Maastricht Treaty was signed by the leaders of 12 member nations, and it reflected the serious intentions of all countries to create a common economic and monetary union. Also known as the Treaty on European Union.

[3] It was formally established in 1951 by the Treaty of Paris, signed by Belgium, France, West Germany, Italy, the Netherlands and Luxembourg. The ECSC was the first international organisation to be based on the principles of supranationalism, and started the process of formal integration which ultimately led to the European Union.

[4] synonymous with the ‘War on Terror’

[5] Montenegro, Serbia, the former Yugoslav Republic of Macedonia and Albania

[6] Bosnia and Herzegovina and Kosovo

[7] The border-free Schengen Area guarantees free movement to more than 400 million EU citizens, as well as to many non-EU nationals, businessmen, tourists or other persons legally present on the EU territory.

[8] The Montenegrin Ministry of Agriculture and Rural Development has initiated various projects to attract investors into the field of cultivation of medicinal herbs and milk and dairy products.

[9] Its an important precondition for establishing more energy supply companies in Montenegro

[10] https://www.cdm.me/english/nato-membership-an-impulse-for-foreign-investors/

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please:

McAfee SECURE sites help keep you safe from identity theft, credit card fraud, spyware, spam, viruses and online scams Prices from
£29

Undergraduate 2:2 • 250 words • 7 day delivery

Order now

Delivered on-time or your money back

Rated 4.0 out of 5 by
Reviews.co.uk Logo (23 Reviews)

Get help with your dissertation