Foreign Direct Investment (FDI) in Bosnia and Herzegovina

outside(prenominal) Direct investment funds (FDI) in Bosnia and HerzegovinaMerjema Aletic mental hospitalThe very definition of contrasted direct investing is controlling willpower in a bussiness enterprise in one farming by an entity based in another country. The collapse of the former Yugoslav Federation, Croatia and Slovenia decl ared independence in 1991 while paramilitary origins from Serbia occupied several Bosnia and Herzegovina towns cleanup courteous Bosniaks and Croat. In this clash of ethnic groups, BIH was confronted with serious humanitarian and cordial problems in which thousands of people died. The conflict lasted (1992-1995) until the Dayton Peace transcription was signed in Paris in December 1995 between the counterparts (Malcolm 2002). With one confederation, two entities, cardinal skunktons in the Federation, five administrative areas in the Serb Republic, a redundant Brcko district, positivist municipalities and topical anaesthetic government unit p resents a very convoluted governmental system in the world which conceals meaningful barriers and bureaucratic obstacles that will regard to overcome (Ilgun, 2009). M either aspects of the regulatory fiber reforms have stagnated over a result of years, making BiH among the least belligerent economies in the Europe and interchange Asia (ECA) neighbourhood. To enhance the prospects of the country as a destination for hostile enthronization funds further steps were taken, especially by establishing the Promotion mental representation (FIPA), privatization and incentives for inappropriate investors.Literature reviewForeign direct investment (FDI) plays an extraordinary and suppuration role in global duty. It has long been recognized that the benefits of FDI for the forces country bed be significant, including knowledge and technology transfer to domestic firms and the fatigue force productivity spillovers, enhanced competition, and improved access for exports remote , notably in the source country (Demekas et al, 2005 and Botric, 2010). Due to the low domestic savings thither is need for cajoleion of foreign direct investment for future sparing growth (Botric, 2010).The consensus view in the literature is that the benefits of FDI tend to significantly preponderate its cost for host countries (Demekas et al, 2005). There are two types od FDI flat FDI (HFDI) is market-seeking investment, aimed primarily at the domestic market in the host country, when local production is seen as a to a greater extent efficient way to come in this market than exports from the source country, and Vertical FDI (VFDI) is cost-minimizing investment, when a multinational corporation chooses the billet of each(prenominal) link of its production chain to minimize global costs (Demekas et al, 2005). As a result of these differences in motivation, a number of host country factors, such(prenominal)(prenominal) as market size, share restrictions, and transport costs , can have different effects on HFDI and VFDI.Predictable policy purlieu that promotes macro economical stability, ensures the rule of law and the enforcement of contracts, minimizes distortions, supports competitiveness, and pass ons private area ontogeny can be expected to stimulate all private including foreign investment (Demekas et al, 2005). Among the macroeconomic and political environs factors it is the political stability as the close important factor that influences investment decision. Furthermore in the case of the institutional environment, certificate of investors is one of the important factors. Those can be the tax systems, lose of corruption, the ease of starting up a company, law of contract, transparency, safeguarding of property rights and might of justice (Ilgun, 2009). Although Serbia and Montenegro and Bosnia and Herzegovina are slightly lagging behind the other countries, they are on a good path to make further distribute in this area of reform im plementation (Penev and Rojec, 2004). High political risks in the region in the past decade posed one of the greatest obstacles to FDI influx although this varied amongst countries. Private foreign capital is very excitable to any investment risk, so that the countries with an unstable political and economic environment are almost un cute to private foreign investors (Penev and Rojec, 2004). After the political failure, BIH has to a fault started a wide reaching process of reconstruction and suppuration of its political, economic, social and healthy systems of the country (Ilgun, 2009).All Southeastern European countries, each to a different degree, need to make further efforts to simplify complex tax and customs laws and regulations, facilitate access to land and construction permits, sanction the judiciary, accelerate the resolution of commercialized disputes, and eliminate remaining discriminatory feed against foreign investors. It is found that highschool unit labor costs , a high corporeal tax burden, and, to a lesser extent, a high level of import tariffs discourage FDI (Demekas et al, 2005), while a disinterested foreign transform and flip-flop regime and advanced reforms in the infrastructure sector encourage FDI (Penev and Rojec, 2004).Reforms in Bosnia and Herzegovina related to FDIThe role of FDI in economic growth and development is now widely acknowledged, and all countries are actively seeking to attract it. Several forms can be used for capital investing abroad investment in a articulatiot venture with a local firm, acquisition of a foreign firm (mergers acquisitions) or construction of a facility (wholly owned) (Ilgun, 2009). In order to create and improve bussiness climate Bosnia and Herzegovina speed stinting Reform process. The aim of BH is to eliminate legal and administrative obstacles for doing business in BH, as well as create the most showy business environment in the SEE (FIPA). Many aspects of the regulatory quality refo rms have stagnated over a number of years, making BiH among the least competitive economies in the Europe and primaeval Asia (ECA) region. BiH currently ranks 131st out of 189 economies on the Doing agate line indicators for 2014 (World shore). The business environment in BiH is the least friendly in the region, as it is burdened by a large and complex public administration system and layers of administrative approval authorities which increases costs (World bank).World bank (2013) supports BiHs business environment reforms and includes areas such as reducing the cartridge holder and cost for registering a business, streamlining procedures for obtaining construction permits, and facilitating trade across borders shown in watch 1. Based on IAB results (2010), countries tend to attract more FDI if they allow foreign ownership of companies in a variety of sectors, make start-up, land acquisition, and commercial arbitration procedures efficient and transparent, and have strong law s protecting investor interests. For instance, studies have shown that 70% of countries miss out on foreign investment due to deficiencies of investment promotion institutions in providing potentiality investors with accurate and up-todate information (IAB, 2010).These policies target astir(p) BiHs competitiveness, helping to facilitate the countrys dialogue with the EU on accession, and promoting economic growth. The May 2014 floods are estimated to have caused around US$2.9 billion in damages and losses, the equivalent of nearly 15 percentage of GDP in 2014.Figure 1. Fastest and slowest countries for starting a foreign business.BiH is in a delicate position, caught between the middle-income trap ( similarly little to be a world-class innovator and service provider, but too rich to compete for low-cost manufacturing) and legacy issues on the one hand, and having the potential and opportunities to improve the business environment and attract more investment on the other (world b ank, 2013).The main goal of BH is EU membership. Bosnia and Herzegovina is a potential chance country for EU accession and BH has signed the Stabilization and Association Agreement with the European Union, which is a step toward EU membership (FIPA, 2012). Bosnia and Herzegovina has signed the Central European Free Trade Agreement (CEFTA), creating a eject trade zone with access to a large consumer market. Also,the process of negotiation to join the World Trade Organisation is underway.Privatization in Bosnia and Herzegovina is an overall process, through which attractive investment opportunities are opened up to foreign investors in sectors such as the energy sector and telecommunications. Bosnia and Herzegovina is accelerating the privatization process for companies of strategic importance in order to increase economic growth and enhance the volume of foreign investment. The existence of free zone as part of the customs rule of Bosnia and Herzegovina, which is specially fenced a nd marked and where business activities are carried out under special conditions in accordance with the legality on Customs Policy of BH and the Law on Free Zones of BH (FIPA). Any industrial, commercial or service activity, (banking, indemnity and reinsurance of property and persons, etc.), can be carried out in the free zone. The users of free zone do not pay VAT and import customs, so investment in the free zone, transfer of profit and transfer of investment are free of charge. One of the main reasons for investing in BH is also favorable tax system. Bosnia and Herzegovina has one of the lowest rates of VAT (17%) in the region and Europe, as well as the very acceptable corporate tax rates that are also among the lowest in the region and Europe (10%) (FIPA).Bosnia and Herzegovina has Agreements on avoidance of double taxation with the undermentioned countries Albania, Algeria, Austria, Belgium, China, Croatia, Czech Republic, Cyprus, Denmark, Egypt, Finland, France, Germany, Hu ngary, Iran, Ireland, Italy, Jordan, Kuwait, Malaysia, Moldova, Montenegro, Netherlands, no.way, Pakistan, Poland, Qatar, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Sri Lanka, misfire, United Arab Emirates, United acres and no(prenominal)thern Ireland (FIPA). Agreements on Avoidance of divalent Taxation, which mean that companies only have to pay tax in their home base country, accelerate the flow of investments into the signatory countries, encourage joint ventures, create more investment opportunities, expedite the transfer of technology and constitute a legal framework to bolster economic cooperation and enhance strategic economic partnership (FIPA). With the purpose of facilitating trade, creating preconditions for the increase in substitute of goods (and particularly export), the creation of a favorable environment for domestic and foreign investments, Bosnia and Herzegovina concluded certain number of bilateral/multilateral free trade agreements.Bosnia and Herz egovina has signed the Central European Free Trade Agreement (CEFTA), in effect as of November 2007, with the following countries Albania, Serbia, Croatia, Macedonia, Moldova, Montenegro, UNMIK/Kosovo (FIPA). BH has also signed a Free Trade Agreement with jokester which provides additional free access to this consumer market with 70 billion people. Bosnia and Herzegovina has 40 Agreements on Promotion and Protection of enthronizations with the following countries Albania, Austrua, Belgium and Luxemburg, Belarus, bungholeada, China, Croatia, Czech Republic, Denmark, Egypt, Finland, Germany, Greece, Hungary, India, Iran, Italy, Jordan, Kuwait, Lithuania, Macedonia, Malaysia, Moldova, Netherlands, OPEC Fund, Pakistan, Portugal, Qatar, Romania, San Marino, Serbia, Slovakia, Slovenia, Spain, Switzerland, Sweden, Turkey, Ukraine, United Kingdom and USA OPIC (FIPA). Foreign investors concerned about risks of transfer restrictions, expropriation, war and civil disturbances and denial of justice, can be insured against these risks with the European Union investiture attempt Trust Fund for Bosnia and Herzegovina, administered by the Multilateral investment Guarantee Agency (MIGA, member of the World imprecate Group).According to the Central Bank of BH (CBBH) annual data shown in Figure 2. And Figure 3., total measuring of Foreign Direct Investment (FDI) in Bosnia and Herzegovina till December 2013 was 11,044 trillion BAM or 11 billion BAM (5,647 million EUR or 5.6 billion EUR). The inflow of FDI in 2013 amounted to 418 million BAM (214 million EUR).Figure 2. Foreign currency reserves, in million euroSource FIPAFigure 3. Flow of FDI in Bosnia and Herzegovina, by years, million Source FIPA *preliminary data withouth reinvested earningsThe biggest amount of investments in BIH was make by companies from Austria (27.1 %) and Serbia (15.6%). Croatia (11.7%), Slovenia (11.4%), Switzerland (6.8%), Germany (5.5%), Russia (5%), The Netherlands (2.5%), Italy (2.1%), USA (1.9%), Turkey (1.3%), and other countries (9.1%) follow them (Table 1).Table 1. aggrandisement investor countries in BiH,CountryAmount (Million Euro)PercentAustria1,44627.10%Serbia83215.60%Croatia62611.70%Slovenia61011.40%Switzerland3646.80%Germany2945.50%Russia2685.00%The Netherlands1342.50%Italy1142.10%USA991.90%Turkey681.30%Other Countries4879.10%TOTAL5,300100%Source FIPA Foreign Investment Promotion Agency of Bosnia and Herzegovina (2012), InvestmentOpportunities in Bosnia and Herzegovina, February 2012, Sarajevo.A part of the efforts aimed at attracting foreign investors, the Bosnia and Herzegovina Parliamentary Assembly adopted the Law on Foreign Direct Investments, which established political directions for favorable treatment of foreign investors and protection of their interests. Foreign investors enjoy the following benefits (APF 2009 FIPA 2012)Exemption from customs duties on investments outright right to open and keep an account in all commercial banks in the entire t erritory of Bosnia and Herzegovina, in domestic or any other foreign convertible currencyThe right of free and sedate foreign transfer of all income realized by investments in Bosnia and Herzegovina in all convertible currenciesEqual property rights with all citizens of Bosnia and HerzegovinaProtection from nationalization, expropriation, requisition, or measures with similar consequencesThe right to employ foreign citizens in accordance with Bosnia and Herzegovina laws on labor and immigration.International Development Agency (IDA) and Investment Guarantee Agency (IGA) provideguarantees for protection from political risks for short confines and medium term commercial transactions between Bosnia and Herzegovina companies and foreign companies, suppliers and banks.ConclusionThe main receipts of FDI is its contribution to economic growth in host countries. The extent of such growth enhancing responses depends on country specific characteristics such as liberal trade regimes, accumu lation of human and physical capital and macroeconomic stability (ilgun, 2009). Bosnia and Herzegovina is accelerating the privatization process for companies of strategic importance in order to increase economic growth and enhance the volume of foreign investment. BiHs business environment reforms includes areas such as reducing the time and cost or registering a business, streamlining procedures for obtaining construction permits, and facilitating trade across borders. With the purpose of facilitating trade, creating preconditions for the increase in exchange of goods (and particularly export), the creation of a favorable environment for domestic and foreign investments, Bosnia and Herzegovina concluded certain number of bilateral/multilateral free trade agreements. Due to the good reputation and long industrial tradition of Bosnia and Herzegovina, the manufacturing sector received the largest amount of FDI (32%). A significant share of investment has been in banking sector (22%). ReferencesAPF Agency for Privatization in Federation of Bosnia and Herzegovina, (2009),http//www.apf.com.baBotric, V. (2010). Foreign Direct Investment in the Western Balkans Privatization, Institutional Change and Banking Sector Dominance. Economic Annals. Voolume LN, No. 187. The Institute of Economics, Zagreb.Demekas, D.G., Horvath, B., Ribakova, E., Wu, Y. (2005). Foreign Direct Investement in Southeastern Europe How (and How Much) Can Policies Help? IMF Wroking Paper. European Department.FIPA Foreign Investment Promotion Agency of Bosnia and Herzegovina (2012). Investment Opportunities in Bosnia and Herzegovina. March 2012, Sarajevo.Investing Across Borders. (2010). Investment Climate informative Services. World Bank Group.Ilgun E., Coskun A. (2009). Foreign Direct Investments in Bosnia and Herzegovina Banking sector example. Vol. 4. No. 2. Alatoo Academic StudiesMalcolm, N. (2002). Bosnia A short history, Pan Books, Pan Macmillian Ltd. LondonPenev, S. Rojec, M. (2004). Fore ign Direct Investment and Investement Climate in South-East Europe. Economic Annals. Economic Institute, Belgrade.World Bank Group Bosnia and Herzegovina Partnership Country Program snapshoot. (2014). http//www.worldbank.org.ba1