1.

1 Foreign Direct Investment: and overview

FDI has been considered as a very important element of economic integration worldwide. FDI is
often considered to be a factor of great importance for technological improvement such as transfer of
know- how technology and financial stability between investor and recipient economies. In addition,
it is a type of cross-border investment where investing country’s goal is setting up an enduring
interest in the enterprise in another country. Accordingly, an enduring interest indicates a substantial
impact on a management of an enterprise in another country. According to UNCTAD (2007, p. 245),
“foreign direct investment (FDI) is defined as an investment involving a long-term relationship and
reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or
parent enterprise) in an enterprise resident in an economy other than that of the foreign direct
investor (FDI enterprise or affiliate enterprise or foreign affiliate)”. An equity ownership is a point of
differentiation between FDI and other types of investment like foreign portfolio investment
(hereinafter: FPI). De Mooij and Ederveen (2003) explain that FPI usually denotes to 8
investment in financial assets like stocks and bonds mostly channeled through mutual and pension
funds.
Over the last decade, FDI has significantly affected the accelerated economic development and
increased economic growth of transition economies. FDI tends to convey more advantages than
disadvantages to the socio-economic development of the host (recipient) country. Its significance lies
in the duration and in the nature of investment which makes crucial difference from other types of
capital investment (Barrell & Holland, 2000). The goal of FDI is to utilize the managerial impact it
has over the foreign enterprise as well as to create pan-commercial relations. Silajdzic and Mehic
(2016) found that in the period between 2000 and 2011, FDI employs positive effects on economic
growth in ten Central and East-European (hereinafter: CEE) countries included in their study. As
their study reveals, FDI has a greater effect on economic growth in recipient countries with
satisfactory absorptive capacity. In their previous research which included seven SEE countries
within period 1998-2007, Mehic, Silajdžić and Babić-Hodović (2013) proved that FDI has
statistically significant and positive impact on the economic growth in the countries investigated.
According to UNCTAD (2015), FDI investment into transition economies and particularly
investments to Russian Federation and Kazakhstan has been the lowest in the past ten years. In 2015,
investment to transition economies amounted to only $35 billion, meaning that FDI flows decreased
by 38%. FDI flows are unequally distributed across transition subgroups which include: SEE and
Commonwealth of Independent States (hereinafter: CIS) which includes former Soviet countries. In
relation to improved macroeconomic performance and investor’s risk insight due to EU accession
process, FDI inflows in SEE rose by 6 per cent and amounted to $4.8 billion, while in CIS countries
FDI fell to $30 billion or by 42%. The increase in FDI investments to SEE is associated with increase
in investments mainly from the western European countries. These FDI flows were mainly
distributed towards manufacturing industry like chemical industry, food and tobacco, textile industry,
automobile and pharmaceutical industry. According to UNCTAD (2015) World Investment Report
the amount of FDI flows for Albania stayed above $1 billion, in Macedonia decreased, while FDI
flows in Serbia and Montenegro recorded an increase. The main investors for SEE region are Austria,
Netherlands, Italy and Greece along with China and United Arab Emirates who have recently
increased their investment activities. UNCTAD (2015) predicts that FDI flows towards transition
economies in 2016 will increase in the range between $37 and $47 billion after an experienced drop
in 2015, excluding possible political tensions and conflicts in the region. SEE’s FDI inflows are
expected to increase following intensified regional integration and EU accession process. In 2015,
increase in greenfield investment encouraged projections for FDI recovery for the next couple of
years. 9

According to UNCTAD (2015), FDI inflows in developed countries in 2015 amounted to $962 billion
and it almost doubled. After three consecutive years of reduced investments, in 2015 developed
countries have experienced the highest level of investment since 2007. A large rise in inward FDI
flows was recorded in Europe. Accordingly, the share of FDI inflows among developed economies
increased from 41% in 2014 up to 55% in 2015 in total global FDI. In contrast, as noted previously
transition economies recorded a decline in FDI inflows. The reasons for such a decrease in SEE
economies could partly be explained by weakened domestic markets and rising political tensions in
the region. The Netherlands has the leading role as the biggest investor in Europe with the amount
of $113 billion in outflows followed by Ireland which outflows amounted to $102 billion. Germany is
still considered a top investor regardless of decline in its FDI outflows by 11% amounting to $94
billion in outflows. Other major European investors are Switzerland, Luxembourg, Belgium and
France (UNCTAD, 2015).