Foreign Direct Investments, Albania lags behind its Balkan neighbors. The recommendations are numerous, but the steps taken are non-existent

Authors: Armela Toska, Clara Bates and Grace Mayer

Across Albania, one can find several foreign companies that have decided to open their doors despite persistent reasons to go elsewhere.

Big American companies like KFC, ExxonMobil, and others are doing business here but experts agree that the gap between Albania’s potential and its current foreign direct investment (FDI) remains wide.

Only a major effort by the Albanian government to attract foreign companies, they say, could change that and help benefit an economy which still remains among the poorest in Europe.

“We would expect the Albanian government to at least strategize about bringing in more FDI as a way to balance out these issues that exist on the ground,” said Albana Shehaj, a Harvard University visiting scholar with the Minda de Gunzburg Center for European Studies and who is from Albania.

Albania’s GDP evolution

Shehaj has charted foreign direct investment in the Western Balkans regions and has noted that foreign direct investment in Albania has been on a steady decline since 2013. FDI in 2013 was $1.3 Billion but by 2019, that number had fallen to $1.2 Billion. Although there have been occasional incremental increases in FDI within the past decade, the growth has only contributed a small percentage to the country’s overall GDP, has had little impact on the country’s economy.

Foreign Direct Investments in Albania during the years

Serbia, by comparison, has seen its net FDI as a percentage of GDP increase steadily since 2012.

Large Italian companies, such as Ferrero Rosher, Geox and Benetton chose to invest in Serbia over Albania, according to an article by monitor.al published in 2018.

North Macedonia, also beat out Albania for several foreign direct investments in 2018, including the companies Johnson and Johnson, Lear Corporation, Johnson DOEL, and CapCon.

Shehaj said several factors—unemployment rates reaching 12.8% in 2020, the migration of young Albanians to other countries in search of jobs and the recent decline in economic growth—has made foreign direct investment especially essential to Albania’s economy. But the government response, critics say, has been tepid.

“The steps [the government has] taken to advance the measures and policies taken to address FDI were either limited relative to some other countries, or they were doing ‘lip service,’ so to speak,” Shehaj said.

The “lip service” Shehaj is referring to is a law that Albania passed in 2016 in an attempt to attract more domestic and foreign investments. Despite the law’s guidelines outlining strategic steps the government can take to assess and determine successful investments, the law has failed to attract a greater number of foreign investments since its passage.

Enio Jaco, President of the American Chamber of Commerce

“The legal framework that facilitates trade and investment for foreign companies, does not help,” said Enio Jaco, President of the American Chamber of Commerce. “It is enough to see the ranking of Albania in the regional competition. Albania ranks last. Northern Macedonia and Serbia lead. Which means that the legal framework offered by Albania is less attractive for foreign investments and is losing in the regional competition.”

Jorida Tabaku, a deputy from the opposition party and an economy expert, blames the lack of FDI on several other factors, including competition for investment from neighboring countries.

“The fundamental problem that our country faces in attracting foreign direct investment (FDI) is related to the competitiveness that Albania has in relation to other countries in the region, in the absorption of these investments and serious investors. Along with lack of competition the other main problems are fiscal policy and corruption,” Tabaku said.

In other words, Tabaku said, the fiscal policies of neighboring countries are simpler and more accommodating than those of Albania, and the various subsidies other countries offer are more attractive.

Why is this happening?

In 2018, Ricardo Hausmann, director of the Center for International Development at Harvard, termed the country’s economic development from 2013 to 2018 the “Albanian Miracle.” Several macroeconomic crises had abated. After a steady freefall in the three previous years, GDP growth had accelerated. Yet despite progress, Albania remained then, and now, among the poorest countries in the Balkans—and was particularly devastated by the global pandemic.

Albania’s economy is among the least diversified in the region, ​​according to the Harvard Kennedy School Growth Lab’s Atlas of Economic Complexity. Two sectors, information & communications technology and travel & tourism, dominated export growth, according to Atlas  data from 2019.

A country’s ability to export a broad, complex array of goods and services is crucial to economic growth, the Growth Lab’s research found. Albania’s limited  goods and services contribute to its  lagging behind peer countries, leaving it even more vulnerable to disruptions like Covid, which gutted the tourism industry.

The Harvard researchers point to foreign direct investment as the crucial hinge to bolster Albanian economic growth.

“Foreign direct investment is super important for accelerating the pace of economic growth,” said Harvard Kennedy School economic researcher Tim O’ Brien, “because Albania needs to diversify into more industries.” Investment could introduce novel sources of knowledge from abroad, in turn, allowing Albanians to produce new goods and services.

Albania Should Be Appealing to Investors

Advocates of foreign investment point to several factors which should attract investors to Albania. Namely, wages are low. After an increase in April of this year, the minimum wage is 32,000 leke per month, equivalent to roughly $1.78 per hour. This is, along with Kosovo’s minimum wage, the lowest minimum wage in the Western Balkans. Normally, investment would follow given the decades-long trend of companies outsourcing labor to developing countries in order to maximize profit.

“Investing in Albania would also help to expand international investors’ market footprint, leading to higher profits,” Shehaj said. That factor, along with Albania’s geographic location as an appealing tourism spot, Shehaj added, should make the country an attractive investment for companies.

“These would be all the ingredients that national corporations would need to have their demands met and their profits met in the case of Albania,” Shehaj said.

Despite these upsides, foreign investors have been dissuaded from investing in Albania for a variety of reasons including persistent systemic corruption.

Albania’s ranking in corruption on the global rank

Albania scored a rating of 36 on the corruption perceptions index in 2020, according to data from Transparency International, a nonprofit that monitors corruption around the globe. This figure measures the level of corruption perceived in a country’s public sector on a scale of 0 to 100, in which countries earning scores closer to 0 equate to higher levels of corruption.

Corruption perception index for Albania during the years

Albania’s Western Balkan neighbors, Kosovo, Serbia and Montenegro, earned scores of 36, 38 and 45.

Harvard’s Tim O’Brien points to Albania’s electricity challenges and transportation problems as other factors scaring away potential foreign investors.

“The [Albanian] government needs to be a more active player in putting itself on the map and overcoming some of its bad reputation,” said O’ Brien.

“If you’d asked a decade ago, I would have said, ‘Well, the electricity system is just non-viable,’ O’ Brien said, “But those pieces are okay, they’re not great…there are some challenges, but the space for efficiency seeking FDI is there. A more pro-active Albanian government should be connecting foreign companies to locations in Albania to establish operations and continue working with them.”

In an article written in May,  O’ Brien and Daniela Muhaj, formerly an economic researcher with the Harvard Kennedy School, wrote that strengthening Albania’s targeted investment promotion would produce “better quality jobs, faster convergence with the income levels of the rest of Europe, and ultimately less outmigration.”

What Difference Would This Make for the Average Albanian

According to an Economics study published in 2021, foreign direct investment can aid in the reduction of poverty in the Western Balkans, but only, the authors suggest, alongside government regulations.

The study found that foreign investment is especially beneficial when it inserts new capital into the country, which can then affect local welfare by way of technology transfer or employment.

On the other hand, the authors note, forms of investment which do not produce something new—such as mergers and acquisitions—might in fact increase unemployment. ​ To ensure that investment benefits locals and not just foreign businesspeople, the study says that the government could, for instance, prohibit FDI from penetrating into key industries or small enterprises that could be outcompeted by their foreign counterparts.

Even seemingly ‘green’ kinds of foreign investment also might face public opposition. A booming interest in hydropower plants across the Balkan rivers has been met with some dissent because of its environmental impacts on local agriculture, water, and biodiversity.

Overall, the consensus of experts is that the Albania government hasn’t done enough to attract FDI.

“From McDonald’s all the way to Apple or car companies—all these institutions have their umbrellas in every single country,” Shehaj said. “But they are not as present as you would think in Albania. The idea is that Albania hasn’t done much to bring in these FDIs.”

As for the likelihood for change in attracting foreign direct investment into Albania, Shehaj said the Albanian government will have to promote and foster more legislative and policy changes—unlike the ineffective law passed in 2016. In the past, Shehaj said, Albania has focused too much of its efforts on supporting domestic investors over international investors.

“The recipients of those contracts from the government were people well-connected with the government, meaning it’s kind of like a system where they cater to their own more so than bringing in FDI,” Shehaj said.

But recently, Shehaj said, Albania has taken measures to address these issues. The pandemic, which stalled foreign direct investments around the globe, has made attracting new investors all the more urgent for Albania’s economy, Shehaj added.

“It’s going to be a partnership that will benefit all mutual parties, because Albania offers great tourism and potential for growth, which will be appealing to investors,” Shehaj said. “But also the government of Albania finally is ready to expand its FDI because at the moment it is hurting and it needs FDI to sort of get the economy running again.”

To attract FDI, Shehaj said there are three tactics the Albanian government should consider. One is targeted investment promotion, in which a country identifies and targets specific companies to invest in Albania. The other is the country’s law on strategic investments. Both, Shehaj said, should help to create conditions that are attractive to foreign investors. The Albania Investment Corporation, an organization that is meant to foster innovation and work with companies, could also help to promote FDI.

“If Albania does not target companies, then it will continue to fall behind,” Shehaj said. “But if it provides established legislation or if it provides institutions incentives as to why different countries should invest in Albania, I think that will provide optimal outcomes in the long run.”

Each of these factors could help to lift Albania’s World Bank Ease of Doing Business score from 67.7, a score that places it much lower than its neighboring countries, including Montenegro, Kosovo, Serbia, and North Macedonia.

Even then, some economic experts believe that attracting substantially more foreign investment  will require additional adjustments to various laws including the law passed in 2016.

“If there is good political and institutional will, Albania has all the opportunities to overcome these challenges and make a strong turn toward opening the potentials for strong economic growth,” Jaco said.

And that political and institutional will might be slowly emerging.

Investment Council meeting

At the first Investment Council meeting held this year, the Minister of Finance Delina Ibrahimaj announced a series of recommendations that could improve Albania’s future for FDI.

“There is a total of 194 recommendations that have been identified, which are categorized into 27 topics that will help improve the business climate and foreign direct investments,” Ibrahimaj said at the meeting held in January.

The Ministry of Finance and Economy and three other institutions have started working on their implementation.

But when the state Minister for Entrepreneurship Protection, Ministry of Finances and Economy and the Albanian Investment Agency (AIDA) were asked why Albania lags behind in foreign direct investments, they refused to respond.