Western Balkans Competitiveness Outlook 2024: North Macedonia

2. Investment policy and promotion

Abstract

Creating an attractive environment for investors is essential to stimulate economic activity and foster sustainable economic growth. This chapter assesses the scope and effectiveness of existing policies and strategies that aim to enhance investment volume and quality. The first sub-dimension, investment policy framework, assesses the robustness of the legal framework for investment, the efficiency of dispute settlement mechanisms, as well as intellectual property rights enforcement and awareness-raising capacity. The second sub-dimension, investment promotion and facilitation, focuses on investment promotion agency structures, investment promotion strategies and investor incentives, all geared towards attracting foreign direct investment. The third sub-dimension, mobilising sustainable investment, explores the strategic framework for sustainable investment governance while also reflecting on the scope of financial and technical support allocated to sustainable investment.

Key findings

North Macedonia’s performance remained constant in the investment policy and promotion dimension, partially due to suboptimal performance in mobilising sustainable investment (Table 2.1). The economy’s score has slightly increased to 3.2 in the 2024 CO (compared to 3.0 in the 2021 assessment), despite making modest progress in investment policy and promotion.

Table 2.1. North Macedonia’s scores for investment policy and promotion

Dimension	Sub-dimension	2018 score	2021 score	2024 score	2024 WB6 average
Investment policy and promotion	1.1: Investment policy framework			3.7	3.9
	1.2: Investment promotion and facilitation			3.3	3.3
	1.3: Mobilising sustainable investment			2.3	2.8
North Macedonia’s overall score		3.3	3.0	3.2	3.4

The key findings are:

• In January 2023, the Law on Technological Industrial Development Zones was supplemented to adopt the rules for granting aid in accordance with the requests of the OECD Forum on Harmful Tax Practices (FHTP) and for introduction of the “nexus” conditions.1

• In 2021, North Macedonia implemented an updated mediation law, resulting in a nearly twofold increase in launched mediation cases.

• The government adopted the Strategy on Intellectual Property 2022-26, aimed at further aligning with the EU acquis and streamlining intellectual property rights governance.

• North Macedonia currently lacks a dedicated strategic framework for sustainable investment, but there are noteworthy support measures in place. The Strategic Green Investment Fund and the Green Financing Facility stand out, poised to offer funding for eligible initiatives focused on renewable energy and energy efficiency within the green economy.

• To simplify the legal framework for investment promotion, the government is drafting a new law to create a unified investment promotion agency, merging the existing investment promotion agency with the Directorate for Technological Industrial Development Zones.

1. The "nexus approach" permits a taxpayer to obtain benefits for intellectual property income based on the expenditures connected to its generation.

State of play and key developments

Annual inward foreign direct investment (FDI) flows have tended to be rather volatile in North Macedonia compared to other WB6 economies. Having reached a pre-pandemic peak of EUR 663 million (USD 725 million) in 2018, inflows dipped in 2019 before falling further to EUR 210 million (USD 230 million) at the height of the pandemic in 2020. Inflows recovered strongly in 2021, increasing further to reach an all-time high of EUR 725 million (USD 793 million) in 2022 (UNCTAD, 2023[1]). In terms of GDP, annual net FDI inflows reached 6.4% in 2022, a level not seen in North Macedonia since 2006-08 (World Bank, 2023[2]). North Macedonia’s stock of inward FDI continues to trend gradually upwards, reaching 54% of GDP in 2022 (UNCTAD, 2023[1]), or EUR 7 billion (National Bank of the Republic of North Macedonia, 2023[3]). Manufacturing accounts for more than a third of inward FDI stocks (35% in 2021), with the financial sector accounting for more than a fifth (22%) and wholesale and retail accounting for just over an eighth (13%) (National Bank of the Republic of North Macedonia, 2023[3]). Nearly two-thirds of inward FDI is sourced from the EU (65% in 2022), followed by the United Kingdom (9%) and Türkiye (7.6%) (National Bank of the Republic of North Macedonia, 2023[3]).

Sub-dimension 1.1: Investment policy framework

Although North Macedonia’s legal framework for investment activities is favourable, it remains complex and complicated to navigate, with no stand-alone investment law in place. These continued shortcomings in the institutional and policy framework hinder productivity growth in the long run (World Bank, 2023[4]). First introduced in 2007, the Law on Technological Industrial Development Zones is an important vehicle for attracting investment. In January 2023, the Law was amended to adopt the rules for granting aid following the requests of the OECD Forum on Harmful Tax Practices (FHTP) and for the introduction of the “nexus” conditions. Invest North Macedonia, the economy’s investment promotion agency, publishes the relevant legal documents and strategies, although not all documents are available in English.

North Macedonia has an open market with very limited exceptions to national treatment. Its 2019 score on the OECD FDI Regulatory Restrictiveness Index, which evaluates market access and exceptions to national treatment, was 0.026. This indicates minimal restrictions, primarily in the transport sector, making its FDI regime less restrictive than the OECD average of 0.064. While the economy does have some discriminatory restrictions on real estate ownership by foreign legal entities, with exceptions for EU and OECD area residents, overall, North Macedonia's foreign investment rules do not hinder FDI (OECD, 2020[5]).

When it comes to dispute settlement, foreign investors have the same rights and remedies before the national court system as domestic investors. While North Macedonia continues its efforts to reform its legal system in line with the necessities of the EU acquis, much remains to be done to tackle corruption, increase transparency, improve enforcement and ensure consistent application laws (European Commission, 2023[6]). Following the implementation of the Strategy on Judicial Reform for the period 2017-22, with an accompanying Action Plan, a new comprehensive strategy on judicial reform for the period 2023-27 is under preparation. North Macedonia offers alternative dispute resolution (ADR) mechanisms – a new Law on Mediation came into force in January 2021 with the aim of improving the quality of mediation as well as ensuring consistent application of the law by all licensed mediators. To implement the new regime, the authorities established in September 2022 a National Council for Mediation while a national co-ordinator was appointed to chair it. The Council is tasked with assessing and ensuring the quality of mediation (European Commission, 2023[6]). The use of mediation saw a notable uptick, rising from 475 initiated cases in 2021 to 772 in 2022. Nevertheless, mediation is underdeveloped in North Macedonia, with only 2.5 mediators per 100 000 inhabitants, falling below the regional Western Balkan average of 14 (The European Commission for the Efficiency of Justice, 2023[7]). There remains scope for increased awareness raising around mediation, as well as for the development of ADR, including a domestic arbitration regime. The economy is revising the current model agreement for Bilateral Investment Treaties (BITs), due to be finalised late 2024.

North Macedonia is working to further strengthen its legal framework for intellectual property rights (IPR). In January 2023, as part of the ongoing EU accession process, it had its first bilateral screening for Chapter 7 (intellectual property law) of the acquis to assess the extent to which relevant EU legislation has been transposed and implemented in North Macedonia. Some advancements were observed in reinforcing the strategy framework for IPR, as the government adopted the Intellectual Property Strategy for the period 2022-26. The strategy covers industrial property, intellectual property and copyright and related rights. It encompasses not just the obtaining of intellectual property rights and their legal safeguarding, but also addresses pertinent legal aspects of generating IP assets and their subsequent commercialisation and use in business operations. It also envisions transferring responsibilities for safeguarding copyright and related rights, currently under the Ministry of Culture, to the State Office of Industrial Property, to consolidate all intellectual property rights aspects within a single regulatory body. Moreover, the strategy outlined plans to launch an online information platform for law enforcement institutions to enable electronic data exchange on IPR (Government of North Macedonia, 2021[8]). However, the platform is not yet operational.

Although the IPR laws and regulations align broadly with EU standards, enforcement leaves room for improvement. Efforts are being made to make use of digital tools to facilitate activities related to IPR. For example, the World Intellectual Property Organization (WIPO) information technology (IT) platform1 can, since July 2022, be used for international patent applications; however, no economy-wide tools have been developed yet. However, in October 2023, the State Office for Industrial Property (SOIP) initiated the operational deployment of the Front Office platform, enabling the online submission of patent applications and subsequent actions. It also began making full use of the European Union Intellectual Property Office’s (EUIPO) standardised database of products and services when registering trademarks.

While the legal framework is relatively well aligned with that of the EU, there is significant room for improvement in terms of IPR enforcement (US State Department, 2023[9]). The institutional framework for enforcement and implementation remains relatively fragmented. While there are no specialised courts dealing with IPR cases, judges and public prosecutors are regularly trained on IPR laws and enforcement. Due to the relative rarity of IPR cases, however, judges and prosecutors lack adequate experience (US State Department, 2023[9]). The government continues its IPR awareness-raising efforts. The SOIP leads IPR awareness seminars, workshops and training courses that are included in its annual work programme.

Sub-dimension 1.2: Investment promotion and facilitation

North Macedonia continues to reinforce its solid investment promotion agency structure and strategy. The government is preparing a draft Law that would establish a single, unified investment promotion agency which will incorporate the two existing agencies, the Agency for Foreign Investments and Export Promotion (ASIPI) and the Directorate for Technological Industrial Development Zones (DTIDZ). It is expected that this will contribute to a more efficient system and procedures in the area of investment support, both foreign and domestic, such that investors can avail of a single contact point. It will be important that the new agency is assigned sufficient financial and human resources to fully implement its mandate, and particularly to promote linkages between small and medium-sized enterprises (SMEs) and multinational enterprises effectively.

North Macedonia retains a robust institutional setting and co-ordination mechanisms for its investment facilitation services and aftercare activities. The DTIDZ has a dedicated department that handles aftercare services. During the COVID-19 pandemic lockdowns, it helped companies operating in Special Economic Zones (SEZs) to obtain special permits for the movement of their employees. During this time, it also actively assisted companies in implementing the salary programme. In February 2021, DTIDZ adopted a new “single entry point” approach to aftercare based on the principle of personalised support and active two-way communication, enabling full professional support for each investor. The strategy is based on two pillars: i) a personalised aftercare system, where each company has its own designated contact person in a position to provide dedicated support and present new opportunities for expanding existing capacities, and ii) “TIDZ dialogues”, a series of discussions with the business community aimed at improving services and the business climate for investment. In April 2023, a new artificial intelligence-based public sector digital assistant, ADA, was launched to ensure that client companies could get comprehensive information about the investment conditions in the economy and state aid being offered. This innovation is expected to improve transparency and communication. The DTIDZ investor relations team also enables an online option for the majority of the required procedures.

A wide range of investor incentives is available in North Macedonia, provided through a network of investment-related legislation that includes the Law on Financial Support to Investment, the Law on Technological Industrial Development Zones and the Strategic Investment Law. Tax incentives within the TIDZ contain sunset clauses of up to 10 years of exemption from tax payment or earlier if the tax exemption and other measures of regional aid have already reached the maximum aid intensity expressed as a percentage share of the assistance in the investment expenditures (Box 2.1). The Law on Strategic Investment offers various subsidies for job creation, capital investments and financial assistance to exporters. Investors benefit from customs duty exemptions on equipment, machinery and spare parts. Additionally, they are not required to pay utility taxes to the local municipality or fees for land building permits.

Box 2.1. Technological Industrial Development Zones (TIDZ): The key driver of inward FDI

Since the Law on Technological Industrial Development Zones was first introduced in 2007, it has been amended and updated on several occasions. These updates have sought inter alia to improve the attractiveness of investment incentives on offer and to streamline procedures.

Among the investment incentives available in TIDZs are low-cost, long-term land rental, free connection to utilities, and exemptions for building permit fees and local municipality utility taxes. In addition, investors are entitled to a 10-year tax holiday for corporate and personal income tax as well as an exemption from paying VAT (value added tax) on imports. There is also an exemption from payment of customs duties for equipment, machines and spare parts as well as rebates of 10% on investment in land, plant and machinery (Invest North Macedonia, 2023[10]). These tax incentives are specific to the TIDZs but are not specifically for foreign investors. They are a form of regional aid to the users of the zones, and the state aid rules and conditions apply to these measures. Direct state assistance of up to EUR 1 million is also available. The experience of large foreign firms operating in the zones is generally reported as positive, as are relations with government officials (US State Department, 2023[9]).

The Directorate for Technological Industrial Development Zones, part of the Ministry of Economy, is responsible for overseeing development of the TIDZs. This involves the establishment of a service centre for each zone, through which the Directorate and the Customs Administration can provide administrative consultations and services for investors, as well as facilitate customs clearance.

By late 2023, 15 TIDZs had been established throughout North Macedonia, with varying levels of construction; 7 are considered to be fully operational (US State Department, 2023[9]). In 2022, the most recent zone, Skopje III, was announced. Located on a 44-hectare site 10 kilometres east of the capital, it will be the economy’s first dedicated high-tech TIDZ (TIDZ, 2022[11]). Whereas past efforts to attract inward investment focused on lower value-added activities – notably including the automotive sector, for which low wages were a key attraction – the Skopje III TIDZ aims to attract higher value added activities, and higher-paying, higher-skill jobs. In this respect, it represents an effort to move up the value chain.

When constructed, the Gevgelija TIDZ, located on a 50-hectare site at the Bogorodica border crossing with Greece, will be the first dedicated green, or eco, zone in the Western Balkans. As with other TIDZs, it is being developed on state-owned land using a public-private partnership model. An international call for investors with a competitive bidding process is envisaged. The zone will aim to attract investors in the medical components sector among others, and aims to have zero greenhouse gas emissions by 2050.

Recent years have seen the legal regime underpinning the TIDZs come under scrutiny by the OECD Forum on Harmful Tax Practices (FHTP). To meet the substantial activities requirements in relation to IP aspects, the authorities committed at the FHTP meeting of October 2020 to amend the TIDZ Law with substantive requirements based on the “nexus approach”. The relevant implementing legislation came into force on 23 January 2023.

Source: TIDZ (2023[12]).

Sub-dimension 1.3: Mobilising sustainable investment

North Macedonia does not yet have a dedicated strategic framework and governance for sustainable investment. This may reflect or inhibit the development of an integrated vision across government for linking investment promotion to sustainable development policy and objectives. However, there are several forms of financial and technical support for sustainable investment. The Green Financing Facility (GFF),2 which is supported by the European Bank for Reconstruction and Development (EBRD), the United Nations, the government, and private banks, aims to assist in funding eligible initiatives focused on renewable energy and measures promoting energy efficiency within the context of the green economy. It is the first initiative of its kind to focus on renewable energy investments. The GFF provides access to affordable green financing for small and medium-sized enterprises (SMEs) and individuals and households for investments in renewable energy and energy efficiency solutions. Within the existing network of 15 SEZs, DTIDZ is developing the first “eco zone” in the Western Balkans in Gevgelija; it is also developing a Strategic Green Investment Fund (SGIF) (Box 2.2). Despite the existence of financial and technical supports for sustainable investment, North Macedonia has yet to undertake a thorough needs assessment to evaluate the scope of financial and technical support required. This evaluation aims to identify and address existing market failures that pose obstacles to sustainable development. Conducting such an assessment is crucial for formulating targeted strategies and interventions to foster a more robust and sustainable economic landscape.

Box 2.2. North Macedonia establishing a Strategic Green Investment Fund (SGIF)

In October 2021 the government of North Macedonia announced that it would establish a fund to finance green structures, technologies, and infrastructure within the SEZs. This adds a new element to the economy’s already wide range of investor incentives.

Developed jointly by the TIDZ and the World Bank, the SGIF aims to support investments totalling EUR 750 million, to create 15 000 jobs, to increase exports by EUR 2.8 billion, and to boost economic growth by one percentage point by 2025.

The fund is to operate on two pillars: i) promoting green investments and ii) upgrading the technological capacity of local companies to assist them in integrating into global value chains. The SGIF is to be established with an initial EUR 70 million capital investment from a combination of public (capped at 10%), private and international financial institution (IFI) sources.

Operating on a public-private partnership basis, DTIDZ would initiate the PPP while public funding of any SGIF-financed projects is to be capped at 40%. To incentivise private investment in the SGIF, the public equity element is subordinated, such that private investors get paid first upon the completion of the investment and payment of the royalty period. Private investors also get priority in terms of returns of 50‑75%. Once this hurdle is met, returns are divided according to investors’ equity share.

Green investment projects financed by the SGIF include energy, transport and service infrastructure projects, located both within and connecting to the existing SEZs. Other bespoke projects (e.g. build and lease options for investors) may be designed to serve specific investor needs.

Among the initial projects expected to be financed by the SGIF are the Balkans’ first eco-SEZ, the Gevgelija TIDZ, and the installation of solar power plants in the SEZs. It has been reported that 90% of the EUR 120 million cost of these projects would come from private sources.

Sources: TIDZ (2021[13]); Spasic (2021[14]).

Overview of implementation of Competitiveness Outlook 2021 recommendations

North Macedonia’s progress in implementing 2021 CO Recommendations has been overall limited, with modest progress achieved only in reinforcing the independence and capacity of the court system through the steady implementation of judicial reforms (Table 2.2). Advancements have been limited in improving the transparency of the investment framework, raising awareness about alternative dispute resolution, and improving co-ordination between IPR implementation and enforcement bodies. No progress has been made in reinforcing the implementation capacity of ASIPI, as the agency’s human and financial resources declined since the last assessment.

Table 2.2. North Macedonia’s progress on past recommendations for investment policy and promotion

Competitiveness Outlook 2021 recommendations	Progress status	Level of progress
Continue to simplify and increase the transparency of the investment framework	Progress was limited in this respect.	Limited
Reinforce the independence, resources and capacity of the court system, particularly for commercial disputes	North Macedonia continues to make modest progress through steady implementation of the judicial reform strategy. In addition, the authorities began to implement significant anti-corruption reforms in 2022 with the aim of improving judicial independence and impartiality.	Moderate
Increase public awareness and implementation of the recently adopted mediation mechanisms	Even though the new law has been implemented, the uptake remained low with businesses not fully capitalising on the potential benefits that mediation offers.	Limited
Reinforce the co-ordination between IPR implementation and enforcement bodies, increase IPR agency capacity and resources, and step up IPR awareness-raising efforts	Progress was limited in this respect. The institutional framework for enforcement and implementation remains relatively fragmented. Nevertheless, the SOIP continues to organise capacity-building activities and workshops to raise awareness about the importance of IPR.	Limited
Give ASIPI the capacity and resources it needs to fully implement its mandate	The agency has seen a decline in both financial and human resources since 2019.	None
Streamline existing investment incentives and reinforce the evaluation of their costs and benefits, appropriate duration and transparency	Progress was limited in this respect.	Limited

The way forward for investment policy and promotion

North Macedonia continues to take steps to improve its investment climate. However, limited progress has been made on those Recommendations set out in the 2021 CO, many of which remain valid. In addition, further efforts will be needed to incorporate the sustainable investment agenda into its policy framework and institutional setting:

• Ensure that the new Investment Promotion Agency is adequately resourced to deliver on its mandate. Plans to integrate the ASIPI and the DTIDZ into a new agency will clarify and streamline the institutional framework for investment. It will be important that the new agency is assigned sufficient financial and human resources to deliver on its revised mandate. In particular, more resources should be assigned to the new agency than is currently received by ASIPI for the purpose of promoting linkages between SMEs and multinational enterprises.

• Continue advancing judicial system reforms, particularly in the context of improving transparency. While North Macedonia's judiciary reform aligns with its European Union membership negotiations, there is room for improvement in strengthening the accountability of the judiciary. Furthermore, the enforcement mechanisms of legal provisions demand strengthening to ensure effective implementation across the board. Achieving consistency in the application of laws is another essential facet of legal reform, requiring careful attention to avoid discrepancies and ensure a fair and just legal environment. Moreover, to bolster trust and accountability within the judiciary, the justice system needs to make significant strides in investigating, prosecuting, and adjudicating cases related to corruption.

• Develop a strategic framework and governance apparatus for sustainable investment. Establishing a clear, long-term, overarching, and comprehensive strategic framework for sustainable investment promotion policy fosters the creation of an integrated vision across government and the setting out of long-term strategic objectives, quantifiable targets, policy pillars, related programme actions and clearly defined roles for all the institutions involved. At the policy implementation level, clarifying the mandates of inter-agency working groups, committees and task forces and integrating a sustainable investment focus into the existing structure can help policy makers pull resources from different parts of government to advance specific policy agendas effectively.

• Conduct a comprehensive needs assessment to ascertain the scope and scale of financial and technical supports that may be required to address remaining market failures hampering sustainable development. The provision of such forms of support should be transparent and subject to regular review, including ex ante cost-benefit analyses, and eventual phaseout once the relevant market has reached sufficient maturity.

References

[6] European Commission (2023), Screening Report - North Macedonia, https://neighbourhood-enlargement.ec.europa.eu/system/files/2023-07/MK%20Cluster_1%20Draft%20screening%20report_external%20version.pdf.

[8] Government of North Macedonia (2021), National Strategy on Intellectual Property of the Republic of North Macedonia, http://ippo.gov.mk/docs/xFiles/xfile/1045/1aad11e0-ea8c-4d43-9f64-d3e85f96bdf7.pdf.

[10] Invest North Macedonia (2023), Technological Industrial Development Zones, https://investnorthmacedonia.gov.mk/tidz/ (accessed on 1 March 2024).

[3] National Bank of the Republic of North Macedonia (2023), External Statistics, https://nbstat.nbrm.mk/pxweb/en/Eksterni%20statistiki/ (accessed on 1 March 2024).

[5] OECD (2020), FDI Regulatory Restrictiveness Index (database), http://www.oecd.org/investment/fdiindex.htm (accessed on 1 March 2024).

[14] Spasic, V. (2021), North Macedonia to Establish Strategic Green Investment Fund to Boost Green Economy, Balkan Green Energy News, 29 October 2021., https://balkangreenenergynews.com/north-macedonia-to-establish-strategic-green-investment-fund-to-boost-green-economy/ (accessed on 1 March 2024).

[7] The European Commission for the Efficiency of Justice (2023), Towards a Better Evaluation of the Results of Judicial Reform Efforts in the Western Balkans, https://rm.coe.int/north-macedonia-deliverable-2/1680ad53b2.

[12] TIDZ (2023), The Directorate for Technological Industrial Development Zones, https://fez.gov.mk/en/home-english/ (accessed on  January 2024).

[11] TIDZ (2022), TIDZ Skopje 3, https://fez.gov.mk/en/tidz-skopje-3/?lang=en.

[13] TIDZ (2021), Strategic Green Investment Fund (SGIF) - Way Forward to Financing Infrastructure and Investments, https://fez.gov.mk/wp-content/uploads/2022/05/Green-fund-PPT-f-eng.pdf.

[1] UNCTAD (2023), UNCTADstat, https://unctadstat.unctad.org/wds/ (accessed on 1 March 2024).

[9] US State Department (2023), 2023 Investment Climate Statements, https://www.state.gov/reports/2023-investment-climate-statements/northmacedonia/.

[4] World Bank (2023), North Macedonia Systematic Country Diagnostic Update: Navigating Challenges, Embracing Opportunities, https://openknowledge.worldbank.org/entities/publication/13fe13a0-674e-45c5-a933-6fb5e014aa1e.

[2] World Bank (2023), World Development Indicators, https://databank.worldbank.org/source/world-development-indicators (accessed on 1 March 2024).

Notes

← 1.  The international Patent Cooperation System (PCT) helps individuals in pursuing global patent protection for their inventions, supports patent offices in making decisions on patent grants, and enables public access to a vast repository of technical information associated with these inventions. As of July 2022, ePCT-Filing is available for online submission of documents.

← 2.  More information is available at: www.ebrd.com/work-with-us/projects/psd/53583.html.