This chapter focuses on evaluating the progress made by the WB6 economies in fostering a competitive environment for business operations and expansion. It involves a thorough examination of key policy areas essential for developing domestic enterprises, creating a level playing field, attracting investment and promoting regional integration through trade. It also assesses the main challenges within the regional business environment and the efficacy of government measures in addressing them. The first section presents the regulatory facilities and obstacles encountered by businesses operating in the WB6 economies, focusing on access to finance and taxation. The chapter then delves into how the WB6 economies can foster levelling the playing field for businesses, looking at the prevailing anti-corruption landscape and labour market informality. The chapter also considers how the treatment of state-owned enterprises (SOEs) may potentially impede a level playing field in the region. Finally, policies supporting business expansion are explored, highlighting to what extent WB6 governments implement regional policies that help businesses improve their competitiveness, reach new markets and deepen regional co-operation.
Western Balkans Competitiveness Outlook 2024: Regional Profile
4. Business environment cluster
Abstract
Key findings
The Western Balkan (WB6) economies have made some progress on policies to foster an enabling business environment in recent years, and are increasingly (albeit slowly) converging towards EU levels. Some key achievements are:
On the back of improved legal and regulatory frameworks, the six Western Balkan economies have bolstered banks’ liquidity and solvency. This has resulted in substantial liquidity buffers, offering the potential for further expansion of financing activities to support investment and growth.
Tax administrations across the region have significantly eased the administrative burden on businesses by enhancing key services and streamlining procedures. The expansion of tax services has increased information accessibility, while the growing use of electronic filing and payment has streamlined compliance, making it easier and more efficient.
Supported by the continued reduction or removal of statutory restrictions on foreign direct investment, as well as continued overall improvements in the business environment, the WB6 economies have attracted substantial inflows of foreign direct investment, receiving on average 3.5 times more than the European Union (EU) over the last five years.
The region has taken substantial steps towards regional economic integration. This includes harmonising trade policies, reducing trade barriers and enhancing intra-regional customs infrastructure.
Despite these positive regional trends, there is still scope to strengthen policies and improve outcomes related to access to finance, business taxation, a level playing field, trade and foreign investment. As such, some of the key challenges facing the region are as follows:
Facing liquidity challenges, capital markets remain marginal in the financial landscape of the WB6 economies. At the same time, alternative finance avenues such as private equity or crowdfunding have not been developed, resulting in businesses disproportionately relying on banks for funding investments.
High, flat social security contribution (SSC) rates increase the cost of low-skilled labour, contributing to the region’s high levels of informality. However, few economies have enacted reforms to reduce the burden of SSCs, despite the looming additional strain posed on tax revenues by demographic shifts such as an ageing population and high levels of emigration.
Persistent corruption undermines the competitiveness of the WB6 economies, as evidenced by businesses perceiving corruption as a significant obstacle to their operations and growth. The lack of sustained, long-term strategic frameworks for combating corruption makes it difficult to address high corruption levels.
Region-wide, state-owned enterprises lack centralised ownership institutions and clearly defined ownership policies, hindering fair competition. The level playing field is further distorted as SOEs across the region are frequently loss-making, yet benefit from continued state support.
Further progress in contract enforcement and dispute resolution is needed. An average civil or commercial court case takes 572 days to resolve, more than double the EU average of 234 days, while alternative dispute resolution mechanisms remain underutilised.
Introduction
A favourable business environment with transparent regulations, efficient administrative procedures and effective contract enforcement is essential for attracting investment, fostering entrepreneurship and driving economic growth. By implementing reforms to streamline processes and reduce red tape, promote transparency, and strengthen the rule of law, the Western Balkans can unlock its full potential, attract more investment and position itself as an attractive destination for businesses seeking growth opportunities in South East Europe.
The analysis that follows does not aim to encompass all aspects relevant to a well-functioning business environment, but instead focuses on a subset of issues covered under the Western Balkans Competitiveness Outlook (CO) 2024, namely access to finance, tax, anti‑corruption, state-owned enterprises, employment, trade and investment.
Strengthening financial regulation and taxation policies
Easing access to finance
Access to finance is crucial for businesses as it enables them to invest in growth opportunities such as expanding operations and developing new products or services. In the Western Balkans, banks dominate the financial landscape, holding approximately 90% of total financial assets in most WB6 economies as of 2022,1 compared to 50% held by banks in the euro area. The relative absence of alternative financial institutions in the Western Balkans underscores the importance of ensuring easy access to banking finance, with the credit gap for the region’s businesses estimated at EUR 2.5 billion in 2019 (Akbas, Beltz and Gattini, 2023[1]). This gap hampers corporate investment, which reached 18.5% of GDP in 2021. With the notable exception of Kosovo (26.0%), this figure falls below the EU average of 19.2% in the WB6 economies, posing challenges to the region’s economic convergence with the EU (Table 4.1).
Bank financing for enterprises remains limited in the Western Balkans despite liquidity buffers
The WB6 economies’ banking sector is well-capitalised and liquid, and non-performing loans have fallen to low levels. The share of non-performing loans decreased from 16.4% of total gross loans in 2013 to 4.5% in 2021, substantially converging towards the EU average (3.1%) (Figure 4.1). The financial stability of the banking sector indicates the presence of liquidity buffers and the potential to expand financing activities further.
Despite the potential to further expand financing activities, banks in the WB6 economies are much less inclined to provide credit than their European counterparts. The outstanding loans delivered by commercial banks stood at 45.4% of GDP in 2022, substantially below the EU average of 63.4% (Figure 4.2).
Figure 4.1. Non-performing loans in the WB6 economies and the EU (2013, 2017, 2021)
Percentage share of non-performing loans in total gross loans
Figure 4.2. Outstanding loans from commercial banks in the WB6 economies and the EU (2019, 2022)
Value of outstanding loans from commercial banks in percentage of GDP
Source: IMF (2023[6]).
However, the gap between the EU and the WB6 economies narrowed by 4 percentage points between 2019 and 2022, indicating that the WB6 economies suffered less from the post-pandemic monetary tightening that led to substantial rises in nominal interest rates in both the EU and the Western Balkan region. Notably, outstanding loans delivered by commercial banks recovered to their pre-pandemic level in 2022 (45.4% of GDP), while remaining 3.5 percentage points below (67.8%) in the EU.
Across the region, legal frameworks could be further enhanced to facilitate access to bank finance, especially regarding collateral requirements and asset registration. Stringent collateral requirements impact businesses, especially small and medium-sized enterprises (SMEs), because they limit the availability of assets to pledge (Becchetti, Castelli and Hasan, 2010[7]). Albania, Montenegro and Serbia have implemented regulations that ease provisioning requirements for SME lending through decreased risk-weight coefficients to incentivise commercial banks to develop corporate credit for SMEs, which could offset the negative impact of high collateral requirements on access to finance in the WB6 economies (European Central Bank, 2017[8]).2 In addition, the incomplete coverage of assets in registration systems limits the range of assets banks can use as collateral. While cadastre information systems typically cover all territories and are regularly updated, registries of security pledges are incomplete in the WB6. Except for Albania and Serbia, local banks have limited access to comprehensive information on all assets and their attributes, with documentation often incomplete. This constraint makes it challenging to assess assets for collateral purposes, particularly non-fixed assets.
Difficulty accessing bank credit is especially pronounced for SMEs across the WB6 economies. The region’s SMEs accounted for only 39.0% of outstanding loans from commercial banks in 2022 – a decrease from 41.6% in 2019. By contrast, for EU SMEs, the share of corporate credit has grown from 47.7% in 2019 to 49.5% in 2022, indicating a divergence from the Western Balkan region. Kosovo is the only Western Balkan economy surpassing the EU average, with more than 60% of corporate bank credit directed towards SMEs (Figure 4.3).
Figure 4.3. SME loans in total outstanding loans from commercial banks in the WB6 economies and the EU (2019, 2022)
Percentage share of SME loans in total outstanding loans from commercial banks
In advanced economies, COVID-19 policy support and associated eased financing conditions have increased the number of zombie firms (Albuquerque and Iyer, 2023[11]). In economies where the development of corporate credit is less advanced, such as the WB6 economies, the negative risks of such support programmes are more limited, making credit guarantee schemes and public credit lines valuable instruments to promote access to bank finance. Following the continuous implementation of large-scale liquidity measures, subsidised credit lines and scaled-up state-backed credit guarantee schemes, Kosovo and Montenegro have experienced substantial corporate credit growth in the aftermath of the COVID-19 pandemic (Table 4.2). In 2022, the total financial support to enhance SME access to finance stood at 3.7% of GDP in Kosovo and 3.1% in Montenegro, compared to lower than 1% in Serbia and North Macedonia. Albania stopped implementing such financial support after the COVID-19 pandemic, despite the substantially low level of corporate credit in the economy (Figure 4.2). Moreover, with a robust legal framework, Kosovo stands out as having the most developed microfinance sector in the Western Balkans. In 2022, outstanding loans accounted for 3.2% of GDP (IMF, 2023[6]), surpassing the Western Balkan average of 1.8% and indicating microcredit's role in facilitating SME access to bank finance.
Table 4.2. Credit lines and credit guarantee schemes exceeding EUR 20 million annually in the WB6 economies, active in 2020 and/or 2022
Notes: The overlap of entity and state-level programmes in Bosnia and Herzegovina complicates the identification of credit guarantees and credit lines for each institutional level. * denotes an estimated amount by the OECD.
Source: Information provided by national authorities for the Competitiveness Outlook 2024 assessment.
Businesses rely heavily on bank finance to fund investment
Other financing sources, especially capital markets, serve as avenues for funding riskier projects that typically do not qualify for traditional bank loans (Fiorella Carvajal and Bebczuk, 2019[12]).3 While the size of the WB6 economies poses a challenge to the development of capital markets, the operational stock markets of the region, i.e. Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia, still exhibit considerably low levels of liquidity when compared to similar economies in the EU (Figure 4.4). Low liquidity poses challenges for businesses raising funds through the stock market as it indicates a scarcity of investors willing to buy shares, making it harder and more expensive for companies to secure capital. The most liquid stock market of the WB6, the Belgrade Stock Exchange (BELEX), experienced a turnover ratio of 2.8% in 2022 (compared to 4.0% in 2013), a figure more than ten times lower than the average value of comparable EU economies, i.e. Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia and the Slovak Republic, which stood at 31.5% (World Bank, 2022[13]).
In addition to a stable macroeconomic environment and a robust rule of law, regulations promoting financial openness can foster the development of capital markets (World Bank, 2019[14]). In the EU context, the adjustment of the domestic regulatory framework to the EU acquis reduces the barriers faced by investors from the EU, alleviating the constraints related to the small economic size of the WB6 economies for the development of their domestic capital market (IMF, 2018[15]).
The EU acquis covers crucial aspects relevant to the development of capital markets, from the management rules of institutional investors to the legal protection of investors. The Western Balkans region still has significant ground to cover in aligning domestic financial regulations. Apart from North Macedonia, no WB6 economy has implemented the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) directive, which harmonises rules on the management of investment funds.4 Moreover, apart from the partial alignment of Serbia, no WB6 jurisdiction has harmonised investor protection and transparency requirements with the EU by implementing the EU acquis stemming from the Markets in Financial Instruments Directive (MiFID) II and the Markets in Financial Instruments Regulation (MIFIR).5 The absence of entities providing credit scores in all WB6 economies impedes investors from carrying out a standardised credit risk assessment on bond issuers. This makes it difficult for investors to assess risk in Western Balkan corporate bond markets.
Few businesses in the Western Balkans are willing and able to list their shares in public markets because of the high costs of registration, underwriting and trading, which further limits the development of capital markets (World Bank, 2019[14]). Facilitating access for SMEs, which might currently find regulatory requirements too costly, could leverage the development of capital markets in the Western Balkans, including the emergence of new actors such as insurance companies and pension and investment funds. Among the economies with active stock and bond markets, only North Macedonia and Serbia have introduced less stringent regulatory criteria for SMEs seeking to issue stocks and bonds.
For small economies with limited capacity for full-fledged capital and debt markets, such as the WB6 economies, alternative financing sources such as business angel networks (BANs) and private equity could ease access to finance for businesses, as SMEs continue to face greater challenges than larger corporations in accessing finance. However, Western Balkan businesses operate with barely any active equity funds, restricting their options to fund early-stage investments. The lack of operating alternative investment funds (AIF) is partly due to the absence of dedicated legal frameworks that allow the establishment of private equity activities. The exception is Serbia, which has also standardised regulations regarding the operations of AIFs with the EU acquis by implementing the Alternative Investment Fund Managers Directive.6 The development of BANs faces challenges due to the lack of specific legal frameworks and financial incentives. They are non-existent in Albania and Bosnia and Herzegovina, and their impact is limited in other WB6 economies. In 2022, BANs collectively generated EUR 1.8 million in investments, a figure similar to 2020 (EUR 2.0 million) but notably lower than 2016-18, when annual investments ranged between EUR 3 million and EUR 4 million (EBAN, 2019[16]; 2021[17]; 2023[18]).
Figure 4.4. Turnover ratio in the WB6 economies and EU-11 economies (2013, 2022)
Percentage of market capitalisation value
Notes: No stock market operates in Albania and Kosovo. EU-11 economies denote Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia.
Source: World Bank (2022[13]).
Advancing digital technologies such as crowdfunding could open new avenues of finance for businesses, particularly by facilitating and reducing the transaction costs of their significant remittance flows (World Bank, 2013[19]), estimated at 10.1% of GDP in 2021 (World Bank, 2022[13]). However, the current situation indicates limited potential for crowdfunding growth in the region as recorded activity is minimal, and no economy has established a dedicated legal framework.
Factoring and leasing remain underutilised across the region
The financing and further growth of business operations in the Western Balkans are compromised by the relative underdevelopment of non-bank financial intermediaries, such as factoring and leasing companies.
Factoring allows businesses to obtain immediate cash by selling their unpaid invoices, also known as accounts receivable, to a third-party company at a discount, thereby providing a solution for businesses facing liquidity constraints. Factoring is especially useful for businesses considered risky or hard to evaluate, as financing is based on the risk of the accounts receivable themselves rather than the risk of the seller (Klapper, 2006[20]). Except for Kosovo and, to a lesser extent, Bosnia and Herzegovina (specifically the Federation of Bosnia and Herzegovina (FBiH) entity), the WB6 have established robust legal frameworks for factoring, the most advanced economy in this regard being Montenegro.7 However, the growth of factoring across the region has been limited due to ongoing challenges in financial education and the lack of initiatives encouraging businesses to use factoring. Except for the FBiH entity of Bosnia and Herzegovina, where interest costs on factoring are deductible and value-added tax (VAT) is only applied to service fees, no Western Balkan economy has implemented active policies encouraging the development of the factoring market. In 2022, the value of factoring and invoice discounting reached an average of only 0.48% of GDP in the WB6, which is below the 2020 level of 0.76% and very marginal compared to the EU average of 12.6% (Figure 4.5). Montenegro is the top performer in the Western Balkans, with factoring activities accounting for 1.78% of GDP in 2022. This growth stems from significant developments following the 2013-17 reforms of factoring contracts, with activities increasing to 1.50% in 2017 (0.84% in 2013).
Leasing is a way for businesses to use an asset without owning it by making regular payments to the asset owner for the right to use it for a specified period. Leasing enables borrowers with limited track records or collateral to access the use of capital equipment, often even in cases where they would not qualify for traditional commercial bank lending (Berger and Udell, 2005[21]). Most WB6 economies have established a robust legal framework for leasing activities, except for the entities of Bosnia and Herzegovina and Kosovo, where the regulatory landscape lacks provisions for leasing mediators and leaseback conditions. No WB6 economy has implemented active policies encouraging market development, such as excluding interest from the VAT calculation base to reduce the cost of leasing contracts.8 In 2022, the average value of leasing and hire purchases amounted to 1.04% of GDP in the Western Balkans, slightly higher than in 2019 (0.83%), but still less developed than the EU average of 2% (Figure 4.5). Figures are relatively consistent across the WB6, except for Bosnia and Herzegovina, which lacks a comprehensive legal framework and lags behind with leasing and hire purchases, which accounted for 0.29% of GDP in 2022.
Overall, despite relatively advanced legal frameworks, factoring and leasing in the WB6 economies are hindered by the fact that entrepreneurs are often not aware of the existence and functioning of these options (OECD, 2022[22]), highlighting the need for additional training opportunities for entrepreneurs and awareness-raising campaigns.9
Figure 4.5. Value of factoring and invoice discounting (left) and leasing and hire purchases (right) in the WB6 economies and the EU (2020, 2022)
Value in percentage of GDP
Sources: World Bank (2022[13]); EUF (2023[23]); FCI (2023[24]).
Business taxation
Governments must raise more tax revenue to finance public policies and prepare for future challenges. However, they must do this without compromising growth and investment or continuously increasing the public debt. Economies can navigate this challenge by capitalising on international tax developments and designing a tax system that supports a competitive labour market while at the same time addressing key structural challenges. This approach can help economies raise more tax revenue and drive inclusive and sustainable growth and well-being.
Clear and transparent tax policies are pivotal for cultivating a favourable business environment. Generally, the WB6 economies boast low corporate income tax rates and generous investment incentives. Nevertheless, complex tax systems, misaligned incentives and the absence of presumptive tax regimes can escalate businesses' requirements and burdens, particularly those characterised as very small or vulnerable.
Businesses enjoy relatively low corporate income tax (CIT) and VAT rates
In the WB6, the average statutory CIT rate is relatively low: Bosnia and Herzegovina, Kosovo and North Macedonia levy a 10% statutory CIT rate, while the top CIT rate in Albania, Montenegro and Serbia is 15% (compared to the OECD average of 21.5%). All the WB6 economies currently also operate worldwide tax systems that tax resident companies on income earned domestically and abroad. In the context of the low CIT rates, these systems will likely not yield substantial additional revenue and may impose unnecessary administrative burdens.
In terms of standard VAT rates and registration thresholds, the WB6 economies are overall well within the range of OECD countries (Figure 4.6). The exceptions are Albania and Serbia, which boast a relatively large VAT registration threshold. Setting the threshold requires the careful balancing of policy priorities. On the one hand, higher thresholds lower compliance costs for small businesses and decrease the burden on the tax administration. Conversely, high registration thresholds narrow the VAT base, which can have efficiency implications and can come at a significant revenue cost (Ebrill, Keen and Perry, 2001[25]).
Figure 4.6. Value-added tax registration thresholds (left) and value-added tax rates (right) in the OECD and the WB6 economies (2022)
VAT registration thresholds (EUR) Standard VAT rates (percentage)
Sources: OECD (2024[26]); data provided by national authorities for the Competitiveness Outlook assessment.
High social security contribution rates increase the cost of labour to businesses and represent a significant present (and future) obstacle for the WB6 economies
The lack of progressivity of personal income tax (PIT) in the WB6 economies, combined with high and flat SSC rates, imposes a disproportionately high tax burden on low-income employees, which may induce businesses to hire them informally. The total contribution rate (share of aggregated employee and employer contributions as a proportion of gross income) is over 20% for all economies except Kosovo and reaches over 35% in Serbia and Bosnia and Herzegovina (Figure 4.7). These high SSC rates and the comparatively low CIT and VAT rates mean that SSCs constitute a significant part of the region’s total tax revenue. Indeed, while SSC total contribution rates are similar in the WB6 and the OECD (26.1% and 25.9%, respectively), they stand for a larger share of total tax revenue in the WB6 (29.8% vs. 26.6% in the OECD). The reliance on SSCs is even higher in North Macedonia (34.3%), Bosnia and Herzegovina (42.1%) and Serbia (44%).
Figure 4.7. Social security contributions rates (left) and share of social security contributions in tax revenues (right) in the WB6 economies and the OECD (2022)
Percentage of total tax incomes Contribution rates in percentages
Sources: OECD (2024[26]); data provided by national authorities for the Competitiveness Outlook assessment.
High SSC rates can impose a financial strain on firms by raising the cost of low-skilled labour and increasing the overall cost of employment, encouraging businesses to operate in the informal economy to avoid the financial burden of formal employment (Asik et al., 2022[27]). Several economies have implemented reforms targeting SSC rates. For example, in 2021, Montenegro reduced its SSC rate from 32.3% to 20.5%, while Serbia and Republika Srpska (RS) entity in Bosnia and Herzegovina have modestly lowered their SSC rate in recent years (albeit by less than 1 percentage point).
Reforming SSC rates is particularly important given the trends of ageing and emigration in the Western Balkans, as well as population ageing and labour demand in Western Europe, which is the main destination for Western Balkan emigrants. Population ageing, compounded by high emigration rates, risks shrinking the labour force and therefore tax revenue while simultaneously putting more pressure on the SSC system (Coline and Bert, 2019[28]). However, as labour demand in Western Europe increases, the WB6 economies with a competitive business climate and a well-designed tax system could capitalise by attracting jobs and companies. This is particularly relevant for sectors in which remote work is common, such as software development or other information technology (IT) fields, and would also be key to reducing high-skilled emigration.
Despite the importance of demographic trends, few economies have analysed how these changes impact their tax systems. Montenegro stands out as it has implemented a comprehensive reform package aimed at addressing issues related to informality, ageing and emigration. Albania and Bosnia and Herzegovina have initiated some analysis, but this has yet to result in policy reforms.
Capital income in some WB6 economies is taxed more favourably than wage income
In Bosnia and Herzegovina and Kosovo, domestic dividends are untaxed; in Albania, realised capital gains are taxed at a reduced rate. Moreover, capital income is generally excluded from the SSC base in the WB6 economies. As in many OECD countries, this leads to a gap in the effective tax rates of labour and capital income in most WB6 economies, which may affect the tax systems’ efficiency. Further aligning PIT and CIT can mitigate problems caused by tax-induced incentives and encourage entrepreneurs to incorporate their businesses. This kind of income-shifting behaviour can negatively impact tax revenue and lead to market distortions. Balancing these implications with other policy objectives, such as promoting investment, is a key challenge for policy makers. Additionally, as capital is more mobile than labour, implementing the Automatic Exchange of Information (AEOI) standards increases transparency regarding the income earned abroad by tax residents, allowing for better compliance and creating an opportunity for capital income tax reform.10 In this regard, Albania and Montenegro have implemented the AEOI standards, and Montenegro aims to start sharing information in 2024. North Macedonia plans to implement the standards for AEOI in 2025, and they have yet to be implemented in Bosnia and Herzegovina, Kosovo and Serbia.
Efforts to improve taxpayer services and filing procedures have reduced the compliance burden for firms in the Western Balkans
Improvements to taxpayer services have been central to increasing the ease of compliance for businesses. Readily available and comprehensible taxpayer services help to maximise compliance by providing firms with the information and assistance necessary to meet any tax obligations. The tax administrations of all the WB6 economies have made a comprehensive range of tax information easily accessible to taxpayers, making it easier for businesses to find and employ information that might aid compliance. Moreover, most of the tax administrations respond quickly to any information requests; for example, Kosovo’s tax administration reports that it responds to most requests within two to three days (with a maximum of 15 days), while Serbia responds to all standard requests within three working days and all written questions within seven working days. North Macedonia solved 99.7% of its written requests within 15 working days in 2022. Conversely, the tax administrations of Montenegro, RS and FBiH report that it can take up to 30 days to respond to written requests.
Keeping tax filing and payment procedures streamlined and simple limits compliance costs imposed on businesses. This is particularly true for SMEs, which may have less funding or resources to devote to compliance. All the WB6 economies self-assessed the complexity and length of these procedures as being either relatively or reasonably simple.
One major stride to improve efficiency has been progress on the electronic filing of taxes. Catalysed by the COVID-19 pandemic, many economies fast-tracked the advancement of their e-filing systems, with it becoming mandatory in Albania, Kosovo and Serbia since the last CO assessment in 2021. In general, the digitalisation of tax administration facilitates a host of benefits: it enhances the audit function, reduces compliance and enforcement costs, optimises staff utilisation, minimises errors, and curtails the potential for corruption. Moreover, these systems enable the cross-checking of data across various taxes and the effective use of third-party information, further aiding compliance. E-filing has been progressively implemented and increasingly widely used, even in economies where it is not required. For example, both entities in Bosnia and Herzegovina observed a significant increase in the proportion of taxes electronically filed between 2019 and 2022: in RS, the figure rose from 43% in 2019 to 90% in 2022, and in FBiH, there was a 9 percentage point increase, from 55% in 2019 to 64% in 2022.
Recommendations for financial regulation and taxation policies
Leverage a regional approach in establishing a common capital market aligned with the EU acquis, including environmental and social standards. Establishing a common market helps address constraints that small economies face in developing capital markets and is crucial for funding the significant investment needs in the WB6. The Baltic countries’ experience in establishing a common capital market can offer useful insights for the Western Balkans (Box 4.1).
Box 4.1. The pan-Baltic capital market and the rise of private equity
Between 2012 and 2022, annual private fundraising in the Baltics grew from EUR 40 million to EUR 300 million, allowing the region to exhibit the highest penetration rates of the EU (S&P Global, 2023[29]).
The Baltics are small, with a total of 6 million inhabitants, which is approximately three times less than the WB6. One key element explaining the rise of private equity has been alleviating the burden of developing a domestic capital base by establishing an integrated pan-Baltic capital market.
Recognising the need to combine national markets to attract investors and enhance liquidity, the Baltics signed a memorandum of understanding in November 2017 to harmonise capital market regulations and eliminate investment barriers across the region, aligning with the EU's capital markets union initiative.
Substantial progress has been made, particularly in enhancing financial integration, as evidenced by significant growth in cross-border portfolio investment holdings. Key legislative milestones include progress in establishing covered bond frameworks. Estonia, Latvia and Lithuania have made strides in this regard, with Estonia and Lithuania enacting new frameworks in 2019 and Latvia advancing draft legislation. These frameworks facilitated covered bond issuance backed by pan-Baltic assets, appealing to major financial institutions operating in the region. In 2020, Luminor Bank AS and LHV Bank issued the first two covered bonds in the Baltic states, raising substantial amounts. The Baltic states benefit from a well-integrated market infrastructure, exemplified by the merger of their national central securities depositories in 2017, creating Nasdaq Central Securities Depository (CSD) Societas Europaea. Iceland's integration into this unified CSD in 2020 further enhanced market integration.
Note: The penetration rate is the share of private equity and venture capital-backed private companies in total private companies.
Sources: EBRD (2022[30]); S&P Global (2023[29]).
Address SMEs' credit constraints to ensure the accessibility of bank finance. As long as SME access to finance remains substantially challenging, the Western Balkan governments should explore establishing permanent credit guarantee schemes and public credit lines to alleviate SMEs’ specific credit constraints. However, the ordinary support of government should be clearly distinguished from temporary extraordinary measures and be designed to ensure additionality and avoid excessive transfer of risk from the private to the public sector (OECD, 2018[31]).
Promote environmental and social standards to benefit the financial market. By promoting environmental and social standards, the region can leapfrog to a sustainable financial market, increase the capacity to attract and absorb international climate finance, and ultimately integrate into the European financial market. The region has struggled to capture and channel international climate finance flows, partly due to the weakness of environmental and social safeguards in investments. Many actions can be undertaken to improve this situation, such as developing sustainable finance taxonomies, sustainability disclosure regulations, green bonds standards, and environmental and social standards.
Introduce training opportunities for entrepreneurs and awareness-raising campaigns to cultivate the leasing market. While most WB6 economies have instituted robust legal frameworks, leasing remains underdeveloped in the WB6 economies, indicating that measures to address entrepreneurs' financial literacy are needed.
Consider adopting territorial tax systems. Given the financial and administrative challenges a worldwide tax system engenders, the WB6 economies could consider transitioning to a territorial tax system. This would mean resident companies would be taxed on their income generated domestically (rather than on their global income), which could alleviate administrative complexities without sacrificing tax revenue (Box 4.2).
Box 4.2. Territoriality of tax systems in the EU
Of the 27 EU economies, 19 employ a fully territorial tax system that exempts all foreign-sourced dividend and capital gains income from domestic taxation. Such income is partially exempted from domestic taxation in the remaining eight countries.
Of the eight countries with a partially territorial tax system, only Ireland fully taxes foreign-sourced dividend income (reduced rate for a business that is tax resident in the EU or a country with which Ireland has a double taxation agreement); it also fully exempts foreign-sourced capital gains income. The opposite is the case in Poland, which fully taxes foreign-sourced capital gains income and fully exempts foreign-sourced dividends. The remaining six countries have partial exemptions for both foreign-sourced dividends and capital gains income. However, Slovenia allows for a 95% exemption on dividend income but only a 47.5% exemption on capital gains.
Many countries treat foreign-sourced income differently depending on the country in which it was earned. For example, many countries restrict their territorial systems based on a “blacklist” of countries that do not follow certain requirements. Among the EU member countries, it is common to restrict the participation exemption to EU member states or the European Economic Area.
Sources: Deloitte (2024[32]); Locher (2021[33]).
Assess the impact of the Global Anti-Base Erosion Rules on domestic tax systems. Depending on the outcome of such an assessment, the WB6 economies may use this opportunity to revise some of their tax incentives or reform their CIT rates more broadly, both of which could significantly impact the business environment. In the short term, the WB6 economies should consider introducing a Qualified Domestic Minimum Top-Up Tax (QDMTT) to avoid forgoing revenue.
Use microdata to simulate the tax and business environment implications of domestic demographic shifts such as population ageing and emigration. Unilaterally lowering SSC rates might be too costly for the region’s economies. Instead, they should assess whether there is room to improve the design of the SSC system to strengthen employment and reduce informality.
Foster regional co-operation and tax information sharing. Most WB6 economies are dealing with similar challenges and undertaking reforms in similar areas. Fostering regional co-operation and information sharing is crucial for a robust and unified approach to addressing cross-border tax evasion and avoidance.
Fostering a level playing field
Corruption and informality pose significant challenges to businesses in the Western Balkans, affecting their competitiveness and hindering a level playing field. Furthermore, ensuring that state-owned enterprises (SOEs) operate efficiently and on a level playing field with private companies is crucial for well-functioning markets in the WB6.
Countering corruption
Anti-corruption policies are crucial for ensuring fair competition as they help create a level playing field where companies compete based on the quality and price of their products, services and innovation, rather than on bribes and unfair access to public resources.
Corruption persistently hampers competitiveness in the Western Balkans, and is mirrored in the lack of sustained anti-corruption strategic frameworks
Corruption remains a persistent challenge to the competitiveness of the Western Balkans, and is mirrored in the performance of the WB6 economies against international anti-corruption indicators such as Transparency International’s Corruption Perceptions Index. This index reflects a limited change in the WB6 economies between 2018 and 2023: on a scale from 0 (highly corrupt) to 100 (very clean), the region scored an average of 38.7 in 2018 and 39.5 in 2023 – significantly below the EU average of 64, indicating limited convergence. Bosnia and Herzegovina has consistently recorded a lower score than the other WB6 economies, whereas Montenegro’s scores have consistently remained above the WB6 average (Figure 4.8). Businesses in the region also view corruption as a significant obstacle to their growth (RCC, 2023[34]).
Figure 4.8. Corruption perception in the WB6 economies and the EU (2018-23)
Note: 1 – highly corrupt; 100 – very clean.
Sources: Transparency International (2024[35]); Eurostat (2024[36]).
The region’s performance in this regard could be partly attributed to the absence of sustained, long-term strategic frameworks for combating corruption. At the time of writing, only North Macedonia had such a framework in place: the National Strategy for Prevention of Corruption and Conflict of Interest 2021-25. In contrast, anti-corruption documents have expired in Albania (in 2023), Bosnia and Herzegovina (in 2019 at the state level, in 2022 in RS, with a provisional action plan still in place in FBiH), Kosovo (in 2017), Montenegro (in 2018-19) and Serbia (in 2023). These five economies have all prepared to develop new strategies, but various factors such as lack of political will or controversies over specific goals and actions have hindered their swift finalisation and adoption. As such, the anti-corruption policy framework in most of the region is incomplete and fails to fully implement the advice of the OECD Recommendation on Public Integrity to “develop a strategic approach for the public sector that is based on evidence and aimed at mitigating public integrity risks” (OECD, 2024[37]).
Prevention, investigation and prosecution of anti-corruption in the region remains challenging, despite improvements
All the WB6 economies have corruption prevention bodies that mostly have safeguards for their independence and observe due public accountability, although some, as in Kosovo and Serbia, struggle to fully implement their mandate due to limited resources – possibly indicating a lack of political commitment to combat corruption more effectively. Encouragingly, prevention bodies in Albania, Montenegro and North Macedonia witnessed increased resource allocation in budgetary allocations and/or staff augmentation between 2021 and 2023. Furthermore, several prevention bodies have either launched (Albania, Kosovo) or are in the process of developing (Montenegro, North Macedonia) new digital systems for managing asset and interest disclosure. This development can enhance the effectiveness of monitoring conflicts of interest and help prevent public officials from favouring specific companies unfairly. Prevention bodies across almost all WB6 economies have also demonstrated a track record in enforcing conflict of interest regulations. The exception is Bosnia and Herzegovina, where implementation is weak and both FBiH and RS lack adequate legal frameworks for preventing conflicts of interest.
Obstacles to the sustainability and long-term efficacy of efforts to fight high-level corruption in the region include vulnerabilities in the independence of investigative, prosecutorial and judicial bodies, as well as resource constraints. This can lead to businesses facing increased risks and barriers to operating fairly and efficiently. The track record of the investigation and prosecution of high-level corruption has slightly improved in Albania, North Macedonia and Serbia, where increasing numbers of convictions for high-level corruption have been recorded (Table 4.3).
Table 4.3. Number of convictions and/or imprisonments for high-level corruption in the WB6 economies (2018-22)
Notes: Con. = convictions; Imp. = imprisonments. Number of convictions for high-level corruption (subject to appeal and final); number of imprisonments for high-level corruption without conditional or other type of release. The data of the economies may not be mutually comparable because of differences in methodologies used by different authorities. “/” indicate the absence of available data.
Sources: Based on data provided by authorities in the context of the Competitiveness Outlook 2024 assessment. For Serbia also European Commission (2020[38]).
However, across the region the confiscation of proceeds from high-level corruption cases remains weak, especially regarding assets located abroad. Moreover, the potential for recovering pecuniary benefits acquired through corruption continues to be underutilised. The absence of continuous anti-corruption strategies likely impedes corruption prevention, investigation and prosecution bodies from realising their full potential.
The WB6 economies do not sufficiently encourage companies to adopt stronger internal controls and anti-corruption compliance measures for greater integrity
Business integrity policies are generally weak in the WB6, and laws do not explicitly cover corruption risk management in companies. However, there are general obligations for all or certain types of company to have risk management policies in Kosovo, Montenegro, North Macedonia and Serbia. Publicly traded companies in North Macedonia and RS are subject to codes of corporate governance or conduct and must report on compliance to the stock exchange (North Macedonia) or the meeting of shareholders (RS). A good practice example can be seen regarding the Stock Exchange of North Macedonia in 2022, which published a report on company compliance with the corporate governance code (Macedonian Stock Exchange, 2023[39]). Several economies have legally non-binding corporate governance or ethics codes, but there are no data regarding their implementation or impact.
While most WB6 economies have introduced the disclosure of beneficial owners, the reliability of recorded information remains uncertain as it is difficult to determine to what extent the economies verify the accuracy and completeness of the data. In recent years, Albania, Montenegro, North Macedonia and Serbia have established registers, with all except Montenegro making some or all of the data accessible to the general public. RS has the legal requirement to submit data on beneficial owners to the register of business entities, but its implementation is unclear; FBiH lacks legislation concerning the registration and disclosure of beneficial owners. In February 2024, Kosovo approved the draft Law on the Register of Beneficial Owners. Legal definitions of beneficial owners in the WB6 largely align with those outlined in EU directives, which have served as benchmarks for the WB6 economies.
There is no evidence of any WB6 government making active efforts to incentivise companies to introduce corporate anti-corruption policies to mitigate potential liability. Additionally, in Bosnia and Herzegovina, Kosovo and North Macedonia, existing laws do not allow mitigating sanctions for legal persons that have adopted due diligence, compliance, internal control or other internal anti-corruption policies. In contrast, Albania, Montenegro and Serbia recognise such measures as grounds for mitigating sanctions. Overall, legal frameworks for corporate liability in the WB6 would benefit from guidance on anti-corruption compliance that managerial and supervisory bodies of legal persons should ensure.
Strengthening governance and performance of SOEs
The importance of the efficient operations of SOEs for broader economic and societal outcomes in the Western Balkans cannot be overstated. First, SOEs in the Western Balkans are often prevalent in systemically important sectors on which other businesses depend for their efficient operations, such as electricity and gas, telecommunications, and transport. Second, as they often compete with private companies, for example in the manufacturing, agricultural and services sectors, a level playing field is crucial for building efficient markets in which the most productive firms thrive. Finally, the extent to which commercially operating SOEs deliver financial returns – or depend on state support – is critical for public finances and more broadly maintains the framework conditions for economic competitiveness.
The central governments of the Western Balkans together own approximately 470 enterprises, with the largest number of SOEs in Serbia (225) and the smallest number in Kosovo (18) (Table 4.4). SOEs accounted for an estimated 3.4% of total regional employment in 2022, ranging from 1.4% in North Macedonia to 8.4% in Bosnia and Herzegovina11 (Table 4.5). This makes the size of the region’s overall SOE portfolio (as measured by employment share) broadly comparable with the 15 largest SOE portfolios in the OECD area, where SOEs accounted for 3.8% of non-agricultural employment on average in 2017, ranging from 1.9% in New Zealand to 9.6% in Norway (OECD, 2017[40]).12
Table 4.4. Number of central SOEs in the WB6 economies (2022)
Sources: Information provided by the national and entity authorities in the context of this assessment and IMF (2019[41]) for Bosnia and Herzegovina.
Table 4.5. SOEs’ share of employment in the WB6 economies and the OECD (2022 or the latest available year)
Notes: *OECD data relate to SOEs’ share of non-agricultural (rather than total) employment, making the comparison with WB6 economies imperfect. The OECD figure is a simple average of SOEs’ employment shares in the top 15 countries.
Sources: OECD calculations are based primarily on information provided by the national and entity authorities in the context of this assessment. Figures for North Macedonia are based on OECD (2021[42]) and figures for Bosnia and Herzegovina are based IMF (2019[41]).
Figure 4.9. Sectoral distribution of SOEs in the WB6 economies (2022 or latest available year)
In percentages
Notes: Figures on SOEs’ sectoral distribution exclude Bosnia and Herzegovina, 7 SOEs in North Macedonia and 23 SOEs in Albania for which recent employment data were not available. Figures are from 2022 or latest available.
Sources: OECD calculations based primarily on information provided by the national and entity authorities in the context of this assessment.
When measured by employment share, SOEs in the region are highly concentrated in sectors with elements of natural monopoly such as electricity and gas, and transportation, which represent 30% and 21%, respectively, of all regional SOEs by employment (Figure 4.9).13 SOEs also operate in other, less traditional activities, including construction companies, hotels, tourism companies and football clubs. SOEs are also present, although less concentrated, in the primary sectors14 (4% of all SOEs by employment), which notably include a number of enterprises engaged in mining, forestry and other agricultural activities.
Efforts to strengthen state ownership institutions and policies are nascent or underway in several economies
Strong state ownership entities and clear ownership policies can support a more level playing field by ensuring that state owners are well equipped to monitor and oversee SOEs’ implementation of international standards, performance and contributions to market efficiency (OECD, 2024[43]). Across the region there is an absence of centralised ownership entities that are driven by clear ownership rationales and supported by clearly defined ownership policies, as can be found in OECD countries. This has historically allowed the region’s SOEs and their ownership ministries to operate in an accountability vacuum, where SOE objectives, if they exist at all, are set in an ad hoc manner and often subject to the changing priorities of responsible ministers.
Most of the region’s ownership portfolios are managed in a decentralised manner by sectoral line ministries (exceptions are Kosovo and, since 2023 legislative amendments, Serbia). This is problematic because sectoral ministries are often tasked with other functions such as market regulation, and thus objectives may conflict with shareholding objectives. The OECD SOE Guidelines recommend that the ownership function be either fully centralised and undertaken by a dedicated state ownership entity without policy or regulatory functions or, if this is not possible, subject to central co‑ordination by a co‑ordinating entity with a clear mandate to act on a whole-of-government basis (Box 3.4).
Currently, efforts to professionalise state ownership by building central state ownership institutions and/or to clarify ownership policies are nascent or ongoing in Kosovo, Montenegro, RS and Serbia.15 The authorities in these economies have notably taken some steps (or, in the case of Montenegro, announced plans) to professionalise state ownership institutions, including by centralising SOE monitoring or ownership co-ordination functions under dedicated units or ministries. The authorities of Kosovo and Serbia have also elaborated ownership policies outlining the overarching objectives of state enterprise ownership and establishing some basic principles to be followed by shareholding ministries to ensure the more professional management of SOEs. In some cases, efforts to strengthen state ownership institutions have come with enhanced public accountability, such as the online disclosure (either foreseen or already implemented) of data on SOEs’ financial performance.
Despite these initial steps towards improved ownership practices, the institutional strength and responsibilities of SOE monitoring and/or co-ordination units vary considerably across the region, and in most cases the units in place play primarily a performance monitoring role, with very limited formal involvement in ownership decisions such as objective setting that, among other things, could impact SOEs’ financial performance and accountability. There is also scope across the region to improve the centralised collection of performance data on individual SOEs to better inform shareholding decisions for improved efficiency. Only Kosovo produces annual aggregate reports on SOEs’ performance and activities. Strengthened data collection on SOEs can support a level playing field by informing the development of heightened performance expectations, thus mitigating the need for state support that distorts the competitive landscape with private companies.
Concerning the characteristics of SOE portfolios, many SOEs in the region operate in sectors where there is no obvious or compelling rationale for continued state ownership. This points to scope for a more thorough review of why the state owns these companies and whether any would be strong candidates for privatisation. Although SOE privatisation activity has continued to some extent over the past decade (with Serbia undertaking the largest number, at 71 SOEs since 2015), most privatisation across the region has been small in scale, with much privatisation activity involving relinquishing real-estate assets rather than selling fully operational companies. This general trend can be expected to continue as no regional authority has announced definitive plans to privatise any large or systemically important SOE in the near term.16
A dedicated ownership policy that outlines the agreed rationales for state ownership would help identify candidates for privatisation, with enterprises for which the agreed rationales are no longer present potentially proposed for privatisation. This would ensure that maintaining companies in state ownership results from an informed policy decision. There is also scope for the region’s authorities to accelerate bankruptcy or liquidation proceedings that have already been initiated or announced, for example in economically inactive SOEs.
SOEs’ underperformance distorts the level playing field and hinders market efficiency
Most SOEs in the region are incorporated as limited liability or joint stock companies, and thus subject to the same laws applicable to private companies, in line with OECD good practice. Bosnia and Herzegovina, North Macedonia, Montenegro and Serbia maintain some portfolios of SOEs that operate under the legal form of “public enterprise” and are subject to special legislation (Table 4.6). This is not considered good practice as it can create differences in legal treatment that distort the level playing field with private companies. In some cases, the laws applicable to these public enterprises (collectively or through individual laws of incorporation) may effectively shield SOEs from bankruptcy or insolvency, perhaps creating a disincentive for their management to address structural performance issues. In other cases, such laws introduce problematic governance provisions, for example, by allowing the state shareholder to directly nominate the chief executive, effectively stripping boards of directors of their fundamental role of independently supervising management and therefore shielding SOEs from political interference. Although most economies of the region perform relatively well in this regard, with a high degree of SOE corporatisation, eliminating the special legal form of public enterprise would support an even more equal playing field for all SOEs.
Table 4.6. SOEs with special legal form in the WB6 economies (2024)
Sources: OECD calculations based on information provided by the national and entity authorities in the context of the CO assessment.
Available data suggest that SOEs across the region are frequently loss-making, which amounts to a cost of equity capital that is not market consistent and that distorts the level playing field with private companies. Although SOE performance monitoring is limited in the region – only Kosovo, RS and, most recently, Serbia, have established centralised SOE monitoring units – external assessments and data collected for this review show that a non-trivial proportion of the region’s SOEs underperform or are outright loss‑making. A 2019 IMF study examining the performance of SOEs and private firms in Central, Eastern and South East Europe (including four WB6 economies) found that SOEs in every economy and sector posted lower revenues per employee, paid a wage premium comparable with private competitors and were less profitable than private competitors (IMF, 2019[44]). The same study found limited evidence that SOEs were achieving any specific non-financial objectives, such as improved infrastructure that could potentially justify their underperformance, and pointed to high staff costs as a significant source of inefficiency. Although it remains possible that some SOEs in the region have low profitability because they cross‑subsidise from profit-making to loss-making non-commercial objectives, none of the region’s authorities have attempted to quantify the costs of SOEs’ non-commercial objectives systematically, or indeed to establish key performance indicators to track their achievement.
Reducing labour market informality
Informality poses a significant challenge to businesses in the Western Balkans, affecting their competitiveness and hindering a level playing field. Common practices such as tax evasion and unregistered employment undermine the rule of law and create unfair competition. This limits formal businesses' ability to invest, innovate and access finance and markets.
Informality remains a challenge in all WB6 economies, with moderate progress achieved
Addressing informality requires comprehensive reforms to improve governance and enforcement mechanisms, and thus foster a more conducive environment for formal business growth. In all the WB6 economies (except Kosovo), the proportion of firms competing against informal businesses surpasses the EU average. The percentage of companies citing informal business practices as a hindrance to their operations is also notably higher than the EU average (excluding Bosnia and Herzegovina) (Figure 4.10).
Figure 4.10. Competition of firms with the informal sector in the WB6 economies and the EU
Percentage of firms
Notes: For Albania, Kosovo, Serbia data refer to 2019, for Bosnia and Herzegovina, Montenegro and North Macedonia data refer to 2023. EU-27: without Malta (no data available). Data for EU countries contain the most recent available data between 2019 and 2023. Unweighted average.
Source: World Bank (2023[45]).
Identifying informality and undeclared work is primarily the responsibility of labour inspectorates. Enhanced co-operation among various ministries and relevant stakeholders is likely to facilitate the detection of informal employment, with notable progress observed in Albania and Serbia. However, most economies have yet to advance on intensifying inter-institutional co-operation, potentially limiting opportunities to detect and combat labour market informality.
Some economies have incorporated combating informal employment into their employment and economic strategies, have established specific strategies, or are in the process of formulating such objectives to ensure good employment opportunities universally, although monitoring activities to combat informal employment remains inconsistent across the region. There are indications that awareness-raising campaigns advocating for the reduction of informal employment are conducted in most economies, including Albania, RS, Kosovo and Montenegro. Some economies have also introduced incentives to combat informal employment, such as lowering the taxation of lower-tier incomes (Albania, RS and Serbia).
Recommendations for fostering a level playing field
The following recommendations consist of the policy options most directly relevant to levelling the playing field in the WB6 economies, focusing on tackling corruption and informality and improving SOE governance and performance.
Ensure the continuity of anti-corruption policy frameworks by avoiding gaps between the validity of old and new policy documents. A long-term strategy in the fight against corruption is crucial for enhancing the effectiveness of corruption prevention, investigation and prosecution bodies. Moreover, by facilitating dialogue and knowledge exchange on developing anti-corruption strategies, economies can synergise their efforts and enhance agility in combating cross-border corruption cases. As such, existing regional anti-corruption initiatives, such as RAI,17 should be further promoted. Another good example of regional co-operation is the adoption of a Regional Roadmap on Anti-Corruption and Illicit Finance Flows to fast-track the implementation of the United Nations Convention against Corruption (UNCAC) (UNODC, 2023[46]).
Strengthen corporate liability. This can be achieved by ensuring that the applicable fines for all corruption offences conform with the standard of effective, proportionate and dissuasive sanctions; and by introducing incentives for compliance in the law, such as considering companies’ due diligence efforts and anti-corruption policies as mitigating circumstances. Monetary sanctions should be sufficiently severe to affect large corporations that may engage in corrupt acts, which, if carried out undetected, could yield them millions of euros in profits. It is imperative to compile and publish detailed statistics to enable an assessment of the effectiveness of the corporate liability framework. Moreover, private sector best practices regarding corporate liability should also apply to SOEs (OECD, 2019[47]).
Consider ways of encouraging and incentivising companies to fight bribery in international business transactions, as outlined by the OECD Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions (Box 4.3). The tools in this recommendation may be equally effective in preventing domestic bribery.
Develop state ownership policies and establish, or strengthen, central ownership or co‑ordination entities. Authorities in the WB6 should adopt state ownership policies that clearly outline why the state owns enterprises, what it expects them to achieve and which institution(s) are responsible for implementing the ownership policy (Box 4.4). To develop and implement these policies, the authorities should establish, or strengthen, central ownership monitoring or co‑ordination bodies. Such ownership institutions could eventually play a role in developing publicly available annual aggregate reports on SOE activity and performance to enhance accountability and incentivise performance improvements. They could also usefully contribute to developing and implementing new SOE board nomination procedures that effectively establish independent and qualified boards of directors to meet SOE performance expectations.
Box 4.3. Encouraging and incentivising company compliance: The OECD Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions
Member countries should encourage:
Companies, including state-owned enterprises, to develop and adopt adequate internal controls, ethics and compliance programmes or measures to prevent and detect foreign bribery [...].
Business organisations and professional associations, where appropriate, in their efforts to encourage and assist companies […] in developing internal controls, ethics, and compliance programmes or measures to prevent and detect foreign bribery [...].
Company management to make statements in their annual reports or otherwise publicly disclose their internal controls, ethics and compliance programmes or measures, including those which contribute to preventing and detecting bribery;
The creation of monitoring bodies independent of management, such as audit committees of boards of directors or supervisory boards.
Companies to implement frameworks for protecting persons reporting potential violations of law and channels for reporting [...].
Member countries should:
Encourage their government agencies to consider […] internal controls, ethics and compliance programmes or measures for the purpose of preventing and detecting foreign bribery in their decisions to grant public advantages, including public subsidies, licences, public procurement contracts, contracts funded by official development assistance, and officially supported export credits.
[…] provide training and guidance to their relevant government agencies on how internal controls, ethics, and compliance programmes or measures are considered in their decision‑making processes and ensure such guidance is publicised and easily accessible for companies.
Encourage law enforcement authorities […] to consider implementing measures to incentivise companies to develop effective internal controls, ethics and compliance programmes or measures, including as a potential mitigating factor. […].
[…] ensure that competent authorities consider providing training and guidance on assessing the adequacy and effectiveness of internal controls, ethics and compliance programmes or measures for the purpose of preventing and detecting foreign bribery, as well as on how such programmes or measures are taken into consideration in the context of foreign bribery enforcement, and ensure such information or guidance is publicised and easily accessible for companies, where appropriate.
Source: OECD (2021[48]).
Elaborate market-consistent performance expectations for SOEs and separate accounting and clear cost structures for non-commercial objectives. In many of the region’s economies, a non-trivial proportion of SOEs are loss-making. Authorities could investigate the structural sources of SOEs’ losses – for instance whether losses are indicative of weak performance or inadequate support for pursuing public service obligations – to inform an appropriate approach, for instance including the development of clear financial and non-financial objectives that can be subsequently monitored. Where SOEs are subject to public service obligations they should be separately accounted and funded for, with funding proportionate and disclosed.
Fully corporatise SOEs engaged in commercial activities. SOEs should be subject to the same laws and regulations as private companies when undertaking commercial activities. Several economies maintain small portfolios of incorporated SOEs subject to a separate legal form. SOEs operating commercially should be incorporated as joint stock or limited liability companies subject to company law.
Box 4.4. OECD Guidelines on Corporate Governance of State-Owned Enterprises
The OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines) provide a blueprint for establishing sound ownership, corporate governance and transparency arrangements for SOEs to ensure that they operate transparently, efficiently and on a level playing field with private companies. Recommendations can be summarised as follows:
Rationale for state ownership: The state should define and disclose the rationale for state ownership in a clear ownership policy. State enterprise ownership should be undertaken to create value for the general public, who are the ultimate shareholders of SOEs.
The state’s role as an owner: The state should act as an informed, active and accountable owner and should not intervene in the day-to-day management of SOEs. The exercise of state ownership rights should be centralised in a single ownership entity or carried out by a co‑ordinating body not responsible for market regulation or other functions that could conflict with the shareholding function.
SOEs in the marketplace: When SOEs undertake economic activities in the marketplace their financing conditions and legal framework should ensure a level playing field with private companies.
Equitable treatment of shareholders: Non-state shareholders should have the same rights and equitable treatment as state shareholders, including equal access to corporate information.
Disclosure, transparency and accountability: SOEs and the state shareholder should observe high standards of transparency and accountability. The state should publish regular aggregate reports on the activities and performance of the SOE portfolio.
Composition and responsibilities of SOE boards: SOE boards should have adequate responsibilities, competencies and independence to carry out their strategic guidance and monitoring management role, without political interference.
SOEs and sustainability: The state as a shareholder should integrate sustainability considerations into ownership policies and ensure that SOEs conduct business responsibly and with integrity.
Source: Adapted from OECD (2024[43]).
Implement comprehensive strategic frameworks to combat informal employment. Addressing informality requires whole-of-government approaches across various policy domains. These include enhancing the capabilities of labour inspectorates to detect undeclared work and enforce penalties, fostering inter-institutional collaboration to identify informal employment, conducting awareness campaigns targeting both employers and employees, implementing lower taxation on low incomes, enhancing safety net schemes, and simultaneously bolstering efforts to deliver integrated employment and social services.
Supporting business growth
Fostering competitiveness through business expansion drives innovation, efficiency and sustained growth. It can attract investment and encourage market expansion and overall economic development. Facilitating trade can strengthen regional businesses, promoting a dynamic environment for growth.
Promoting trade
Moving from local to global markets is a natural next step for companies looking to expand their operations and grow. This is particularly important for companies in the Western Balkan economies, which, as small, open economies, rely on international trade as the driver for economic growth. Companies need a conducive business environment to be able to expand their operations internationally and reap the benefits of integrating into global value chains (GVCs). However, ongoing obstacles such as trade barriers, administrative bottlenecks, limited export capacity and restricted access to finance collectively impede the internationalisation efforts of businesses.
Trade openness has increased in the region, fuelled by strengthened regional co-operation
Trade openness can fuel growth through increased imports and exports (Vujanović, 2023[49]). Regional progress in the business environment cluster underpins the region’s significant level of openness and integration in trade and investment. Notably, the regional average for trade expressed as a percentage of GDP consistently exceeds that of the EU (Figure 4.11).
Figure 4.11. Trade openness in the WB6 economies, the OECD and the EU (2019-22)
Percentage of GDP
Source: World Bank (2022[50]).
Regional integration is vital for the business environment in the Western Balkans as it enables market expansion, infrastructure development, harmonisation of regulations and stimulation of investment, while fostering political stability and co-operation. Apart from trade with the EU, intra-regional trade between Central European Free Trade Agreement (CEFTA) members is growing in importance, with intra-CEFTA goods exports consistently rising since 2013 (albeit with a slight decrease in 2020 during the pandemic) to reach EUR 8.4 billion in 2022 (CEFTA, 2023[51]). This co-operation will play a crucial role in further enhancing trade openness and building stronger regional trade ties.
The region has made significant strides in advancing regional integration through several horizontal initiatives, which underscore the commitment to converge with the EU. The economies have advanced in harmonising trade policies and regulations, and in enhancing intra-regional infrastructure (RCC, 2024[52]), primarily through the adoption of CEFTA in 2006, the implementation of the Regional Economic Area (2017-20), followed by the enactment of the Common Regional Market Action Plan (CRM) (2021-24) (Box 4.5). The Additional Protocol 6 to CEFTA was ratified in December 2019 by all Western Balkan economies, and notable strides have been achieved in facilitating trade in services. Also relevant are the mobility agreements signed at the Berlin Process summits in November 2022 and October 2023 regarding the recognition of professional qualifications in various fields within the CEFTA context. The agreements have expanded opportunities for professional mobility across the region. In addition, the Western Balkans 6 Chamber Investment Forum – in co‑ordination with the six Western Balkans chambers of commerce and industry – represents businesses in the region, supporting the establishment of the CRM, and facilitating and promoting the region as an investment destination.
In November 2023, the European Commission adopted the new Growth Plan for the Western Balkans to address the region’s socio-economic convergence with the EU. This plan aims to stimulate growth and grant the Western Balkans access to specific areas of the EU single market before formal accession, while simultaneously accelerating preparations for EU membership (see Box 1.2 in Chapter 1: Context).
Box 4.5. Common Regional Market 2021-24 as a tool for deepening regional integration
The Leaders’ Declaration on the Common Regional Market and its Action Plan, ratified during the Berlin Process Summit in November 2020, introduced a framework for regional co-operation in the Western Balkans, emphasising regional collaboration and convergence with EU standards. Recognised as a pivotal regional initiative, CRM established the primary framework for regional socio-economic recovery and the twin green and digital transitions.
The key elements to create the CRM are the following:
1. Free movement of goods
2. Free movement of services
3. Free movement of capital
4. Connecting economies
5. Digital market
6. Regional innovation space
7. Regional investment space.
There have been several achievements under the regional trade area based on four freedoms (movement of goods, services, capital and people), such as the extension of the Green Lanes for essential goods to all CEFTA border crossing points (BCP), including rail, and the provision of pre‑arrival notifications for goods subject to veterinary and phytosanitary controls. Moreover, to further reduce trade costs parties have compiled and shared lists of trade-related fees and charges with the CEFTA Secretariat to embark on the related technical work for streamlining these. Negotiations for the CEFTA Additional Protocol on Dispute Settlement have progressed positively at the expert level. Discussions on Intellectual Property Rights and trade in services under Additional Protocol 6 have advanced, with finalised guidelines expected later in 2024. Regional efforts to reduce the cost of regional payments have begun with the endorsement of a framework for modern payment systems by the Working Group on Financial Markets. Collaborating with the World Bank Group, consultations addressed all framework aspects, including interoperability and safety. The WB6 economies endorsed the European Central Bank's Target Instant Payment Settlements (TIPS) for its efficiency and low implementation time. This decision supports SEPA readiness and reduces transaction costs for citizens in cross-border transactions.
The CRM offers numerous benefits to companies operating within the region. One significant advantage is the harmonisation and simplification of export-related documents, professional qualifications and licences throughout the WB6 economies, facilitating smoother business operations and trade in goods and services. Additionally, implementing one-stop shops is poised to drastically reduce waiting times at crossing points by up to 70%, providing efficient 24/7 services and establishing Green Lanes and corridors within the WB6 and with the EU. This streamlined process saves time and reduces costs in regional payments, fostering the growth of a robust regional e-commerce market. The abolition of work permit requirements for intercompany transfers and service providers encourages fluidity in the labour market, stimulating foreign direct investment (FDI) in promising sustainable regional value chains. The region also benefits from a roaming-free zone with reduced charges between the Western Balkans and the EU, enhancing connectivity and business communication.
The aim of the second phase of the CRM (2025-2028) – currently under development – is to put forward a set of activities to contribute further to economic integration within the region and with the EU single market as the main driver of economic growth, in line with the Growth Plan for the Western Balkans. The focus is also shifting to boosting human capital in education, enabling business environment and competitiveness, innovation and digitalisation, as well as labour migration and women’s economic empowerment. The Action Plan for the new phase of the CRM is due to be endorsed at the next Berlin Process summit in October 2024
Notes: While the implementation of the CRM lies within the purview of each of the WB6 governments, the Regional Cooperation Council (RCC), CEFTA, the Energy Community and the Western Balkans Transport Community are pivotal in co-ordinating and assisting the Western Balkans in their efforts. The European Commission, specifically the Directorate-General for Neighbourhood and Enlargement Negotiations (DG NEAR), collaborates closely with these entities, providing them with political backing and financial and technical assistance.
Sources: WB6CIF (2021[53]); RCC (2023[54]); RCC (2024[55]).
CEFTA membership has had a significant effect on regional integration and the internationalisation of businesses in the Western Balkans. The liberalisation of trade within the region has enhanced intra‑regional trade flows, further benefitting local businesses by facilitating access to new markets and thus diversifying their export destinations. CEFTA’s entry into force contributed to a 37.7% increase in intra-regional exports (Grieveson, Holzner and Vukšić, 2020[56]). CEFTA's achievements in promoting intra‑regional trade in the Western Balkans stand in contrast to the free trade agreements it superseded (Vujanović, 2023[49]). Moreover, studies show that before joining CEFTA, Western Balkan economies had a revealed comparative advantage in primary sectors such as agriculture, forestry and mining, whereas now most WB6 economies have started to gain a revealed competitive advantage in more knowledge intensive services, albeit at a moderate pace (Vujanović, 2023[49]).
Trade in services has been steadily rising since 2019 (Figure 4.12), with the exception of a decrease due to the COVID-19 pandemic. However, it is worth noting that, mirroring the global trend, the digital services sector in the Western Balkans showed greater resilience to pandemic-related shocks, demonstrating a smaller decline than overall services (IMF et al., 2023[57]). CEFTA’s adoption of the Additional Protocol 6 on Trade in Services18 lay the legal framework for trade in services and co‑operation among CEFTA parties. This protocol encompasses comprehensive commitments aimed at promoting trade liberalisation, notably ensuring market access and national treatment for services suppliers across various sectors. Moreover, it set the stage for enhanced co-operation to address remaining barriers, including those related to domestic regulation and e-commerce. Additional Protocol 6 is also a tool for convergence with EU standards and encompasses provisions relevant to competition within the EU.
Figure 4.12. Trade in services in the WB6 economies, the OECD and the EU (2019-22)
Percentage of GDP
Source: World Bank (2022[58]).
Trade facilitation performance in the region has improved, but non-tariff measures can hinder trade flows
Since 2019, the Western Balkans region has improved its trade facilitation performance, which is reflected in the 2022 OECD Trade Facilitation Indicators (Figure 4.13). This modest improvement stems from advances in internal and external border co-operation and streamlined documents submission, mainly through the digitalisation of customs procedures and streamlined import/export procedures within the context of the Green Lanes. Further improving the trade facilitation policy environment of the Western Balkan economies will be of particular importance to the region and its overall economic growth. Some studies show that reducing the border waiting times by three hours, for example by implementing national single window solutions, can result in a 1.5-3% increase in real income across the Western Balkans. If these efforts were co-ordinated, the gains would increase to 8%19 (Gómez, Zárate and Taglioni, 2023[59]).
While the Western Balkans has made strides towards establishing a tariff-free trade environment and facilitating trade, some non-tariff measures (NTMs)20 continue to hinder trade flows between the economies. Traders identify the most common NTMs as price control measures, additional formalities related to export and import, release and clearance of goods, and sanitary and phytosanitary measures (SPS)21 (GIZ, 2022[60]). The percentage of companies perceiving cross-border costs as too high for exporting rose from 34% in 2022 to 43% in 2023 (RCC, 2023[61]). The challenge posed by NTMs is that they may inadvertently lead to increased costs of trade through burdensome procedures (GIZ, 2022[60]). As such, the reduction of the negative impact of NTMs is emphasised in the new Growth Plan for the Western Balkans22 as a means to increase convergence with EU standards and strengthen trade ties between WB6 and the EU.
Figure 4.13. OECD Trade Facilitation Indicators: Performance of the WB6 economies and the OECD (2022)
Note: The assessment covers Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia (WB5).
Source: OECD (2022[62]).
Within the context of the Common Regional Market, one of the flagship trade facilitation initiatives in the region is the establishment of Green Lanes. Initially, Green Lanes facilitated trade between only the Western Balkan economies; however, due to their success in streamlining border procedures they now extend to the EU, further contributing to the region’s integration into the EU single market (Box 4.6)
Although some progress has been achieved, challenges remain in harmonising regulations, minimising trade barriers and bolstering infrastructure to foster competitiveness and access to markets. Further improvements are needed in terms of electronic data exchange and electronic payments to establish a robust paperless trade environment. Additionally, effective pre-arrival processing and the swift clearance of shipments are crucial components of a paperless trade environment, which is needed to support the rising uptake of e-commerce in the region (see Chapter 5). These practices facilitate faster trade flows and reduce bottlenecks at borders; however, they are not uniformly adopted across the WB6 economies. Efforts to address these obstacles require collaborative initiatives among CEFTA members to streamline processes and enhance cross-border efficiency, ultimately paving the way for smoother trade operations and economic growth in the region.
Box 4.6. Green Lanes/Corridors as a tool to reduce border waiting times
Green Lanes are a regional co-operation initiative that aims to reduce waiting time in border passages between Western Balkan economies. Launched in 2020 as a response to the COVID-19 pandemic, Green Lanes/Green Corridors are the result of a joint proposal between CEFTA, the Regional Cooperation Council and the Transport Community to facilitate the cross-border transport of necessary1 goods in the Western Balkans.
During the COVID-19 pandemic, Green Lanes helped preserve trade flows and provided a well‑functioning transit system through the improved exchange of information and co-operation between customs administrations. In 2021 a “one‑stop‑go” model was introduced that further facilitates the two‑way transit of goods. The prioritisation of essential goods in transit and the system’s simplified procedure lower the time of transit and reduce the transport and trade cost for all businesses. Three months into its launch, Green Lanes accounted for more than 70% of all truck transit in the border crossing points where they were established. The total transit of trucks went from 18 000 trucks in March 2020 to 134 000 trucks in June 2020. This increase in trade volume was also facilitated by the electronic exchange of customs data before the arrival of the transported goods, which helped to significantly reduce waiting times by 30%, or three hours on average, representing the equivalent of a 2% reduction on tariffs (European Commission, 2023[63]).
Green Lanes use the System Exchange of Electronic Data (SEED) infrastructure, a CEFTA initiative in place since 2010 that was subsequently amended with Additional Protocol 5 to become SEED+. A main characteristic of SEED+ is CEFTA TRACES NT, which facilitates the issuance of veterinary and pharmaceutical certificates and entry documents for animals and goods, as well as provides assistance in risk management by notifying authorities of non-compliant consignments for animals and goods. The adoption of the SEED+ system has facilitated the exchange of customs information within the region and between Western Balkan economies and neighbouring EU countries.
The first functional Green Lanes border between North Macedonia and Greece became operational in July 2022, marking a milestone in the region’s co-operation with the EU’s common single market.
1. Some of the essential goods included food supplies, livestock, animal feed, chemicals, and medical supplies and equipment.
Sources: European Commission (2023[63]); Transport Community (2023[64]); CEFTA (2024[65]); Berlin Process (2023[66]).
Lack of export capacity among Western Balkan SMEs hinders integration into global value chains
The EU is the region’s predominant trade partner, constituting 67.2% of its merchandise exports and 51.9% of imports in 2022. The Western Balkans also directed 35.6% of its total service exports and 36.9% of its imports towards the EU in the same year (CEFTA, 2022[67]). With the use of implemented trade facilitation and regional initiatives, the governments in the region have continued to ensure that they can trade with minimum obstacles. However, the trade trajectory of the Western Balkans is tied to the economic outlook of the EU. Partially affected by the EU’s lower growth, some exports of goods from WB6 economies to the EU have decreased (Figure 4.14).
Figure 4.14. Exports of goods from the WB6 economies to the EU (2019-23)
Billions of EUR (left); Millions of EUR (right)
Source: Eurostat (2024[68]).
Increasing efforts to support existing exporters, particularly SMEs, has not translated into the improved participation of SMEs in economies’ exports, with the proportion of exports contributed by SMEs remaining stable since 2018, reaching 49.7% in 2021 compared to 49.1% in 2018 (Figure 4.15). While the share has increased in Albania, North Macedonia and Serbia, it has experienced a gradual decline in Bosnia and Herzegovina and Kosovo. However, the WB6 average remains higher than the EU average, which reached 45.5% in 2021 (OECD, 2022[22]).
SMEs can export either directly or through indirect forward participation, which entails supplying inputs to another exporter (WTO, 2019[69]). In the Western Balkans, one of the main obstacles hindering SMEs from exporting is their limited access to information on foreign markets. The scope of capacity-building programmes varies across the region, with many economies lacking a strong emphasis on SME internationalisation. In 2023, 23% of surveyed companies identified lack of export capacity and information as their main obstacle to exporting, marking an increase from 17% in 2022 (RCC, 2023[61]).
By participating indirectly in exports, Western Balkan SMEs can overcome some of the barriers associated with direct exporting, such as navigating complex international markets, securing financing for expansion and meeting stringent export regulations, thereby improving their export capacity. This approach allows SMEs to leverage the expertise and resources of larger exporters while still benefitting from access to global markets and potential growth opportunities.
Export promotion programmes can help build export capacity among SMEs. Since the last CO assessment in 2021, the region has seen progress, with an increasing number of economies implementing more targeted programmes, especially regarding SME integration into GVCs. These programmes have a broader reach and adequate monitoring and evaluation. However, their impact is continuously hampered by the limited human and financial resources of the region’s export promotion agencies. The administrative capacity of these agencies is of particular importance in the Western Balkans, where in some economies the agencies have a broad mandate encompassing SME development (Albania, Kosovo, North Macedonia, Serbia) and investment facilitation (Albania, Kosovo, Montenegro, North Macedonia, Serbia). While this is common practice, with 56% of agencies in OECD countries sharing an export promotion and investment facilitation remit (OECD, 2018[70]), the broader mandate requires enhanced resources.
Figure 4.15. SME contribution to total exports in the WB6 economies and the EU (2018, 2021)
In percentage of total exports
Notes: The last available year for Albania is 2022 and Bosnia and Herzegovina is 2020. No data are available for Montenegro in 2018, 2020 and 2021.
Source: OECD (2022[22]).
Facilitating foreign direct investment
Providing investors with a stable regulatory environment, transparent and fair policies, and effective implementing institutions can significantly enhance both the quantity and quality of foreign investment. FDI can play a crucial role in enhancing the business environment and competitiveness of local enterprises by fostering technological advancements and expanding market and employment opportunities (OECD, 2015[71]).
Since 2019, net inflows of FDI to the Western Balkans have been uneven, with Montenegro standing out as the largest recipient of FDI in terms of percentage of GDP, followed by Kosovo, Albania and Serbia, with Bosnia and Herzegovina recording the lowest ratio in the region (2.6% of GDP) (Figure 4.16). In terms of net FDI inflows in nominal value, Serbia outperforms the region, attracting a record EUR 4.2 billion in 2023 (National Bank of Serbia, 2024[72]). The highest increases since 2019 were observed in Kosovo and Montenegro, both of which almost doubled their ratios, reflecting a notable surge in foreign investment confidence. The EU remains the main source of FDI in the region, accounting for 70% of FDI inflows (RCC, 2024[52]).
Figure 4.16. Net FDI inflows in the WB6 economies, the OECD and the EU (2019-22)
Percentage of GDP
Sources: World Bank (2023[73]; 2024[74]).
The Western Balkan economies consistently outperform EU and OECD countries, partly due to the steady reduction and elimination of statutory restrictions on FDI, as well as a favourable business environment. The WB6 is notably open to FDI, as indicated by the OECD FDI Regulatory Restrictiveness Index, and compares favourably to the EU average included in the index23 (OECD, 2021[42]).
Continued high FDI inflows could also be partially explained by Western Balkan economies becoming an increasingly preferred investment destination for EU companies, especially following the COVID-19 pandemic. This is mostly due to tax incentives, strategic connectivity and the low cost of labour (Vienna Institute for International Economic Studies, 2021[75]). However, to maintain investment attraction and mobilise sustainable investment, the Western Balkans must prioritise skilled labour, modernise education, improve infrastructure and governance, and strengthen SMEs' participation in global value chains. These are also pre-requisites for the Western Balkans to benefit from the emerging nearshoring trend. By fostering workforce upskilling and integrating local firms into global supply chains, the region can position itself as a competitive and attractive destination for nearshoring investments (RCC, 2024[52]).
The region's stable investment framework continues to draw investment inflows
Fostering an enabling business environment that attracts investors and fosters sustainable growth relies on establishing a solid legal investment framework. This framework encompasses laws, regulations and policies to streamline investor entry and safeguard their assets. Almost all WB6 economies have implemented comprehensive legal frameworks to support investment. Continuous revisions and updates to investment regimes are underway as economies aim to enhance market access for foreign investors. Across the region there have been improvements in the quality of investment frameworks as governments continuously align their legislation with EU standards.
Moreover, each of the six economies has signed an extensive investment agreement network that provides extra safeguards for foreign investors. Notably, in July 2021 Montenegro introduced a new bilateral investment treaty (BIT) model, while in August 2023, Bosnia and Herzegovina established new foundational principles for a new BIT model. Some economies in the region, such as Albania, are presently revising their current network of BITs to establish a new model that strikes a balance between investor protection and national strategic interests. This entails incorporating protection provisions, balanced with domestic ones to achieve sustainable development objectives.
Since 2019 there has been an increase in the number and size of greenfield investment deals, with Serbia emerging as a prominent recipient of such investment (Table 4.7 and Figure 4.17). The post-pandemic rise of greenfield investment projects in the region and a recent decrease in the inflow of greenfield investment projects to the EU24 suggest an increasing confidence among investors towards the Western Balkan investment environment. The inflow of greenfield investment projects offers domestic companies an opportunity to become partners or suppliers to incoming multinational investors and create new export opportunities. FDI inflows in the Western Balkans have historically focused on less knowledge-intensive sectors25; however, there is growing evidence of higher technology and capital-intensive sectors attracting more greenfield investment projects in the Western Balkans. The largest increases in both the number of announced greenfield investment projects and their pledged value occurred in the electricity, business services, and sales and marketing sectors (Vienna Institute for International Economic Studies, 2022[76]). As the Western Balkan economies continue to attract FDI inflows and gradually increase greenfield investment projects, it will be crucial to direct investment to strategic sectors with the highest potential for technology and knowledge transfer.
Table 4.7. Number of greenfield investment deals in the Western Balkan economies (2019-22)
Note: Data for Kosovo are unavailable.
Source: UNCTAD (2023[77]).
Figure 4.17. Greenfield investment volumes by destination in the WB6 economies (2019-22)
Millions of EUR
Notes: Data for Kosovo are unavailable. Data have been converted from USD using the European Central Bank average exchange rate for 2024 of 1 USD = 0.9222 EUR.
Source: UNCTAD (2023[77]).
The region relies on generous tax incentives to foster business activity and create an investment-friendly environment
All the WB6 economies offer an array of investor incentives. These incentives have been a cornerstone strategy for the WB6 economies and include tax reductions, social contribution exemptions, customs duty relief, tax holidays, salary subsidies and investment grants. Special economic zones and strategic investment laws also play significant roles, receiving preferential treatment in administrative processes and enhancing the WB6's investment attraction strategies.
The WB6 economies offer generous tax incentives to businesses operating within their borders. Most economies offer several types of incentives, with the most common being for intellectual property (in Kosovo, Montenegro, North Macedonia, Serbia and FBiH). Other common incentives include those for SMEs, research and development (R&D), and staff training. The scope of these investments varies: for instance, while Kosovo’s R&D incentives are only available for firms working with minerals or natural resources, Albania offers R&D incentives for any scientific research and development area.
Regardless of the target of these incentives, most economies rely on a mix of cost- and profit-based tax incentives, with little evidence showing any shift towards the increased use of cost-based incentives. Exceptions to this trend include Serbia, where the 2018 tax reform mainly introduced cost-based incentives, and the two entities of Bosnia and Herzegovina. Profit-based tax incentives may reduce effective corporate tax rates below 15% and are less efficient in stimulating investment than cost-based incentives. In the past, profit-based tax incentives in WB6 economies were used to compensate for non‑tax constraints to productivity, such as a lack of infrastructure.
Developments in the international tax system are thus an opportunity for the WB6 economies to increase tax revenue through growth-oriented policies that aim to improve available infrastructure and attract additional jobs and investment. The economies will need to maintain an attractive business climate to attract additional investment; however, this will not necessarily require tax incentives, but rather investment in infrastructure, skills and other measures to enhance productivity. Policy makers may wish to reassess tax incentives in the context of the GloBE Rules and introduce a Qualifying Domestic Minimum Top-Up Tax (QDMTT) not to forgo revenue (OECD, 2021[78]). Jurisdictions that adopt the GloBE rules (which are not mandatory) will apply an effective tax rate test using a common tax base and a common definition of covered taxes to determine whether a multinational enterprise is subject to an effective tax rate below the agreed minimum rate of 15% in any jurisdiction where it operates. This means that in-scope ultimate parent entities of multinational enterprise groups that have their headquarters in a jurisdiction that has implemented the GloBE Rules and that operates a subsidiary (or constituent entity) in the WB6 economies may be subject to a top-up-tax in the residence jurisdiction if the profits earned in the subsidiary are taxed at an effective rate below 15%. The top-up-tax is levied on the parent entity to bring the multinational enterprise’s effective tax rate on income from low-taxed constituent entities up to the minimum rate. Consequently, the WB6 economies that levy an effective tax rate below 15% on profits of in-scope businesses will forgo tax revenue, as these profits will be taxed in the residence jurisdiction instead. The rules apply to constituent entities that are members of a multinational enterprise group with an annual revenue of EUR 750 million or more (OECD, 2021[78]). Montenegro is the only WB6 economy that plans to implement a QDMTT.
Regional governments must exercise caution when using fiscal incentives to attract investment. International evidence indicates that incentives can be costly for governments and may not adequately address fundamental shortcomings in investment conditions, such as the rule of law or public governance. (EBRD, 2024[79]; OECD, 2023[80]). Between 2021 and 2024, the Western Balkan economies generally improved in evaluating tax incentives for businesses. Regular tax expenditure (TE) reporting can improve the efficiency of tax incentives by facilitating independent and transparent evaluations. In economies that have adopted TE reporting, the resulting data can also aid in conducting cost-benefit and distributional analysis and show how tax relief is allocated across various taxpayer groups, thereby promoting a fairer tax system. Albania continues leading TE reporting, and RS completed its first TE report in 2023. North Macedonia plans to report TE more regularly in the budget from 2025. Kosovo, while calculating some TE, has yet to publish a publicly available report regularly. Montenegro and Serbia currently do not regularly and systematically report TE.
Inefficient judicial systems in the Western Balkans could deter foreign investors
Investors attempting to enter the Western Balkan market can overall rely on sound investor regulations, with improved transparency since the last CO in 2021. However, the Western Balkan economies fall short when it comes to contract enforcement, dispute settlements and efficient alternative dispute resolution, which potentially reduces attractiveness for foreign investors.
A robust judiciary is essential for ensuring fair business conditions, protecting property rights and enforcing contracts (RCC, 2024[52]); however, there are shortcomings in the efficiency of the judicial system in all WB6 economies. Despite reforms undertaken since the last assessment cycle in Albania, Kosovo, North Macedonia and Serbia, there have been no significant improvements in clearance rates,26 which decreased in all economies (except Serbia) from 2021 to 2022. Nevertheless, clearance rates overall remain below the EU median of 100% (Figure 4.18). The disposition time27 for cases has increased in all economies except Serbia, which stands out in the region and is the closest to converge with the EU median of 234 days to process a first instance court case, followed by North Macedonia (Despite the well-developed legal frameworks for alternative dispute resolution (ADR) in the region, the adoption rate remains low. The minimal utilisation of ADR mechanisms in Western Balkan economies hinders their effectiveness in alleviating the burden on the courts. Only 6% of judges in the Western Balkans regularly suggest mediation in commercial court proceedings, which underscores the limited integration of ADR methods within the region’s legal systems (RCC, 2021[82]). The Western Balkans struggles with enforceability and awareness-raising capacity. Given that case backlog is perceived as the main obstacle to achieving judicial efficiency in the region (RCC, 2024[83]), efforts to improve the take-up of mediation mechanisms should be intensified.
Figure 4.19). Kosovo is an outlier in the time to process civil and commercial court cases, although the recent establishment of a dedicated commercial court is poised to significantly improve the disposition and clearance rate for commercial cases (see Economy profiles).
Figure 4.18. Clearance rate for first instance court cases in the WB6 economies and the EU (2019‑2022)
Percentage of cases
Notes: The data cover civil and commercial litigious cases. The data for the EU refer to the 2021 benchmark.
Source: CEPEJ (2022[83]).
Despite the well-developed legal frameworks for alternative dispute resolution (ADR) in the region, the adoption rate remains low. The minimal utilisation of ADR mechanisms in Western Balkan economies hinders their effectiveness in alleviating the burden on the courts. Only 6% of judges in the Western Balkans regularly suggest mediation in commercial court proceedings, which underscores the limited integration of ADR methods within the region’s legal systems (RCC, 2021[81]). The Western Balkans struggles with enforceability and awareness-raising capacity. Given that case backlog is perceived as the main obstacle to achieving judicial efficiency in the region (RCC, 2024[82]), efforts to improve the take-up of mediation mechanisms should be intensified.
Figure 4.19. Clearance time for first instance court cases in the WB6 economies and the EU (2019‑2022)
Days
Notes: The data cover civil and commercial litigious cases. The data for the EU refer to the 2021 benchmark.
Source: CEPEJ (2022[83]).
Recommendations for business growth
By providing a conducive environment with clear guidelines, economies can enhance their appeal to foreign investors, thus fostering economic growth and development. Moreover, by placing emphasis on policies that facilitate business expansion through boosting exports and further fostering cross-border trade, governments can help companies tap into new markets, access a wider array of resources and bolster their competitiveness on the global stage. Policy makers in the Western Balkans should:
Accelerate the implementation of trade facilitation measures and eliminate prohibitive non‑tariff measures. While progress has been observed since the last assessment cycle, especially in terms of streamlining the submission of trade documentation and reducing trade costs, mainly through the Green Lanes initiative, more targeted efforts are needed to automate border procedures. This entails further simplifying customs procedures, upgrading trade infrastructure, adopting electronic documentation systems, providing capacity-building programmes, enhancing regulatory co-operation, facilitating trade finance, and engaging in regional and international collaboration. By expediting the implementation of these measures, economies in the Western Balkans can significantly reduce trade barriers, boost cross-border trade flows and enhance competitiveness.
Prioritise the transition to a paperless trade environment. Adopting digital trade solutions could streamline customs and border control processes, cutting down on bureaucratic obstacles. Electronic documentation would enhance efficiency, decrease errors and shorten processing times. Accelerating the implementation of national single window solutions for customs would further facilitate trade operations and promote harmonisation across borders.
Encourage a shift toward cost-based incentives. The low CIT rates across the region undermine the need to offer substantial profit-based incentives. As such, economies should review their use of profit-based CIT incentives and special development zones and consider a more sustainable and effective approach, such as raising revenue to invest in non-tax factors such as education and infrastructure that will attract investment and foster a sustainable and competitive business climate.
Start estimating additional investment created by tax incentives. Regular tax expenditure reporting and cost-benefit analysis of tax incentives could help governments better understand which investment incentives achieve their purpose and which are inefficient.
Identify and support sectors strategic for nearshoring. The WB6 economies stand to gain from the nearshoring trends in the post-pandemic era. However, governments must adopt a proactive approach and use available policy tools to benefit from these opportunities fully. Furthermore, investment promotion agencies should refine their strategic focus on key sectors, emphasising those with the greatest potential for growth and development. They should tailor their marketing efforts to attract investors to these strategic sectors while collaborating with governments to create supportive policies and streamline regulatory processes (see example from Mexico in Box 4.7).
Box 4.7. Investment promotion efforts to boost nearshoring: Evidence from Mexico
The global trend of company relocation is reshaping global value chains across strategic sectors. Nearshoring, which involves businesses streamlining their value chains by locating closer to their core markets, has been increasing since the 2008 economic crisis, and has been further triggered by the COVID-19 pandemic and geopolitical tensions.
In October 2023, Mexico started offering fiscal incentives to companies in key export industries, which were identified in a sectoral analysis conducted by the government. The key strategic sectors identified were semiconductors, the automotive industry, electrical and electronic equipment, medical devices and pharmaceuticals, agribusiness, and food products. The financial incentives offered include additional tax deductions for workforce training and retraining, and accelerated depreciation for investment in new assets.1 These measures aim to promote nearshoring by encouraging companies to move part of their production to Mexico. Moreover, the Mexican government has intensified efforts to attract nearshoring investment and enhance the inclusion of SMEs as suppliers or partners for investors and companies relocating to the country. Through the Mano a Mano programme, a comprehensive policy package, the government supports SME integration into global value chains and boosts their absorption capacity, which is necessary for successful knowledge and technology transfers.
According to a recent study by the Mexican Institute of Competitiveness, FDI related to supply chain relocation in Mexico rose by 47% in the first three quarters of 2023 (Mexican Institute of Competitiveness, 2024[84]). This shift favours European, Canadian or Asian companies seeking to export to the United States while benefitting from Mexico’s tariff-free regime. In 2023, the proportion of Mexican businesses perceiving an impact from business relocations surged to 21.5%, marking a notable increase from the 10.1% observed between 2020 and 2022. This figure is projected to rise further to 40.6% by 2024-25 (Banco de México, 2023[85]).
1. Accelerated depreciation allows companies to write off new assets more quickly, providing immediate tax benefits and encouraging investment by improving short-term cash flow.
Sources: Gonzálex Pandiella and Maravalle (2024[86]); Banco de México (2023[85]); OECD et al. (2023[87]); UNCTAD (2023[88]).
Increase the uptake of alternative dispute resolutions. Despite the prevalence of legal frameworks for mediation and alternative dispute resolutions, uptake remains low. Running awareness workshops, capacity building and information campaigns could contribute to increasing demand for mediation solutions. Creating a centralised portal containing all necessary legislation and a step-by-step guide to ADR could also streamline and facilitate the procedure for companies.
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Notes
← 1. In 2022, banks accounted for 91% of total financial system assets in Albania (Bank of Albania, 2022[89]), 88% in Bosnia and Herzegovina (Central Bank of Bosnia and Herzegovina, 2022[92]), 94.2% in Montenegro (Central Bank of Montenegro, 2024[93]) and 91.1% in Serbia (National Bank of Serbia, 2022[94]). The dominance of bank finance is slightly lower in North Macedonia and Kosovo, where banks respectively control 79.2% (National Bank of the Republic of North Macedonia, 2023[90]) and 68.3% (Central Bank of the Republic of Kosovo, 2023[91]) of total financial assets.
← 2. For positions lower than EUR 1 million, exposures to non-defaulted SMEs can have their risk weights reduced to 0.7619 from 0.85. For positions exceeding EUR 1 million, the risk weight remains at 0.85.
← 3. This figure does not consider Albania and Kosovo, which do not have any publicly listed companies.
← 4. Harmonisation is planned in Montenegro by the end of 2024, and harmonisation projects are in the drafting phase in Albania and RS without a specific timeline communicated. The UCITS directive aims to provide a single European market for investment funds and allows for selling these funds to retail investors throughout the EU (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02009L0065-20140917).
← 5. MiFID II is a comprehensive set of regulations enhancing investor protection, increasing transparency and standardising regulatory disclosures across financial markets (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065). Serbia has aligned its capital market regulations with MiFID II but not with MiFIR, a set of regulations that complements MiFID II within the EU. It directly addresses issues such as transaction reporting, pre-and post-trade transparency, access to clearing and trading venues, and regulating commodity derivatives (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0600).
← 6. The AIFMD directive regulates the activities of alternative investment fund managers (AIFMs) within the EU (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32011L0061). Legislation for alignment with AIFMD is in the drafting phase in Montenegro and North Macedonia, without a specific deadline communicated for future adoption and implementation
← 7. The registration of assignments is not covered in Serbia.
← 8. FBiH is preparing legislation to exclude interests calculated under financial leasing contracts from the VAT calculation base and extend fiscal incentives similar to those for factoring activities. No specific timeline has been communicated.
← 9. As shown in OECD (see: https://www.oecd.org/financial/education/Financial-Literacy-of-Adults-in-South-East-Europe.pdf) , adults in South East Europe scored on average about 57% of the maximum possible, lower than comparable scores obtained through the same methodology from surveys of European Union and OECD member countries, at 64% and 65%, respectively.
← 10. On 21 July 2014, the OECD released the full version of the Standard for Automatic Exchange of Financial Account Information (AEOI) in Tax Matters. The Standard calls on governments to obtain detailed account information from their financial institutions and automatically exchange it with other jurisdictions annually. The Standard provides annual automatic exchange between governments of financial account information, including balances, interest, dividends and sales proceeds from financial assets reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
← 11. SOEs held only by the central entity governments (notably excluding a large number of municipal utilities companies) employ 58 000 people, accounting for 8.4% of total employment in Bosnia and Herzegovina.
← 12. This comparison is imperfect as OECD-area data relate to SOEs’ share of non-agricultural, rather than total, employment. If the OECD figures used total employment, then the employment contributions of SOEs in the Western Balkans economies would appear larger in comparison.
← 13. Data on the characteristics of SOEs in the region relate to end-2022, or latest available, and are based primarily on reporting by the national authorities in the context of this assessment, with some exceptions. For Bosnia and Herzegovina, only the number of SOEs is presented in this assessment and is based on IMF (see:https://www.imf.org/en/Publications/WP/Issues/2019/09/20/State-Owned-Enterprises-in-Bosnia-and-Herzegovina-Assessing-Performance-and-Oversight-48621) , while sectoral distribution data were not available and therefore not included in regional figures. For North Macedonia, figures on SOEs' sectoral distribution are based on earlier reporting by the national authorities published in OECD (see: 10.1787/dcbc2ea9-en) concerning the year 2018 and only cover 23 entities (rather than the 30 SOEs reported by the Ministry of Finance to be held by the central government). For Albania, employment figures on 23 enterprises were not available and are therefore not included.
← 14. The primary sector includes agriculture, fishing, forestry and mining.
← 15. Kosovo already has predominantly centralised ownership arrangements, wherein the vast majority of SOEs are overseen by the Ministry of Economy and monitored by a dedicated unit. In Serbia, new legislation foresees a greater centralisation of SOEs under the Ministry of Economy. In RS, the 2024-2026 Economic Reform Programme of the RS establishes the ambition to improve SOE management and supervision practices and to restructure SOEs in the energy and rail sectors to improve their efficiency. RS has also established a new SOE performance monitoring unit with ambitious SOE data collection plans that have the potential to inform improvements in state shareholding practices and SOE performance. Kosovo and Montenegro have announced but not yet implemented plans to introduce legislative reforms to improve central SOE monitoring and co-ordination arrangements.
← 16. The near-term privatisations of several small SOEs have nonetheless been announced in three economies (Montenegro, RS and Serbia). In 2022, the authorities of North Macedonia announced an ambition to privatise, or partially privatise, the national postal services operator, but no definitive plans have yet been undertaken.
← 17. Regional Anti-Corruption Initiative (RAI) is an intergovernmental regional organisation that deals with anti-corruption issues in nine member states: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Moldova, Montenegro, North Macedonia, Romania and Serbia, see https://rai-see.org/.
← 18. The Additional Protocol 6 on Trade in Services entered into force on 11 January 2021.
← 19. 8% more relative to the scenario in which each economy implements the trade facilitation measures independently.
← 20. Non-tariff measures refer to all policy measures aside from tariffs and tariff-rate quotas that have some degree of influence on international trade. These measures can be categorised into two main groups: 1) "technical" measures, which encompass regulations, standards, testing and certification, with a focus on sanitary and phytosanitary (SPS) and Technical Barriers to Trade (TBT) measures; and 2) “non‑technical” measures, which include quantitative restrictions (quotas, non-automatic import licensing), price measures, and enforced logistics or distribution channels. See OECD: https://www.oecd.org/trade/topics/non-tariff-measures/.
← 21. GIZ surveyed 238 companies for the study of NTMs and their impact on traders.
← 22. The European Commission has introduced the new Growth Plan for the Western Balkans, designed to draw the Western Balkan partners nearer to EU standards by providing them with certain EU membership benefits ahead of accession, thereby stimulating economic growth.
← 23. Bulgaria, Cyprus and Malta were not included in the assessment.
← 24. From 2019 to 2020 there was a considerable decrease in the number of greenfield investment projects coming to the EU. Having fallen from 6 337 in 2019 to 4 847 in 2020, they experienced a temporary increase due to the COVID-19 pandemic to reach 5 854 in 2021. In 2022, they amounted to 5 710. See UNCTAD: https://unctad.org/publication/world-investment-report-2023.
← 25. In 2019, 83% of incoming FDI was in real estate, while 12% was in construction. See World Bank: https://documents1.worldbank.org/curated/en/643781570478210132/pdf/Rising-Uncertainties.pdf.
← 26. Clearance rate is calculated by dividing the number of resolved cases by the number of incoming cases in a given year.
← 27. The Calculated Disposition Time sheds light on the efficiency of the judicial system by comparing resolved with unresolved cases over a reporting period, indicating how quickly cases are processed and providing insight into overall proceedings length.