Foreign Direct Investment in the Republic of Macedonia

Macedonian Privatisation Agency

Currently, one of the main objectives of the Macedonian development policy is to attract foreign capital into the country. The legal environment has been designed to provide national treatment to foreign investors, as well as tax and duties incentives for foreign investors in the Republic of Macedonia. There is no restriction for the industry in which the foreign capital can be invested, nor for the percentage of the company's equity the foreigner can possess. The foreign investor can freely decide whether to retain or transfer the profits out of the country.

The Republic of Macedonia and its Government have been very decisive in carrying out thorough and daring reforms. It has had high performance in all four fundamental elements of the reforms: institutional, macroeconomic, microeconomic and structural reforms. It has undergone a massive activity of change, of essential social reforms that the Macedonian state has continuously conveyed since the beginning of the 1990s. The Government of the Republic of Macedonia has been implementing stabilisation macroeconomic policy during the period of the last four years, with the monetary policy holding one of the central places. The result of such a policy was the decreasing trend of the inflation rate (from 25 per cent in 1992 to two per cent in 1996), with a stable denar exchange rate. Monetary reforms were oriented to further growth of the monetary independence of the Central Bank, as well as to reform instruments for monetary regulation, in respect of more efficient control on money supply in the national economy. A mutual feature of the tax reforms is the simplicity of the system, having eliminated a large number of tax allowances for many tax payers (and allocating them to reinvested profits, to profits in companies with foreign ownership etc), as well as having reduced a large number of different tax rates to single tax rates. After independence a massive liberalisation of export and import regimes were implemented, following the basic World Trade Organisation (WTO) principle to eliminate quantitative restrictions to trade. In the import regime, limited protection is affixed only to the products which are more significant for Macedonia, such as the agricultural products, ferrous alloys, vehicles, chemicals, etc.

Macedonia has a complex geological structure and a large number of ore deposits, including reserves of lead-zinc, copper, nickel, decorative and architectural building stone, and non-metallic materials. Marble is the most significant stone, whose quality and variety of colours make it famous all over the world. Four-fifths of energy needs are satisfied by domestic production of thermo and hydro-electric power, and the deficit is imported from FR Yugoslavia and Bulgaria. There is a good network of road, railway and air transportation communications. The non-expensive and well-educated human resources are among the strongest standpoints of the country's competitiveness.

The privatisation process in the Republic of Macedonia is approaching the end of the first phase1. It should be emphasised that the privatisation of the Macedonian economy occurred with the entry of new private enterprises in the Macedonian market. On the basis of the financial reports of the enterprises for mid-1997, an assessment of the significance of the private sector in the Macedonian economy was made. Both privatised and originally private enterprises (by the end of June 1997) account for more than 73.5 per cent of gross revenues in the economy. Approximately 62.4 per cent of the employees work in private enterprises and they generate 76.3 per cent of all the profits in the economy. This assessment shows that the private sector has become the most significant factor in the Macedonian economy. The process of privatisation has obviously approached the end of the first phase defined with the existing Law. The Republic of Macedonia is now entering new privatisation projects, such as the privatisation of agricultural enterprises and the privatisation of other industries primarily excluded from privatisation with the existing privatisation law. It has also started making strong post-privatisation efforts. One most recent privatisation decision is the Macedonian Telecom. This privatisation is scheduled to ended by mid-1998. The Government is planning to offer some investment opportunities in the infrastructure industries, such as some BOT projects in road construction, hydro-plant and similar projects.

Some of the main advantages of the Macedonian site for investment are the following:

  • reputation for maintaining good and stable political and economic climates, even in hard times;
  • although it was perceived as a politically risky country, during most of the period after independence it managed to maintain political stability. It was the only country of the former Yugoslavia which obtained its independence without conflict with its neighbours. It is now a stable and calm country which can offer a sound domicile for many businesses;
  • the business friendly legal environment has been established to a great extent. It is still subject to further adjustments in order to better meet the requirements of potential investors;
  • the Republic of Macedonia possesses a relatively good infrastructure and is also subject to continuous improvement, in order to better serve the needs of businesses.
  • it has well-educated and relatively non-expensive human resources. The technical skills of the workers is at an especially high level. They have both a high starting educational basis and a good potential to acquire new knowledge and skills with very little investment;
  • a great percentage of the population has proved to possess entrepreneurial spirit, which can be used for developing various businesses;
  • the existing industrial base is very diverse. It may be a good start for many different businesses;
  • the Republic of Macedonia already possesses competitive advantages in some sectors and has the potential to develop such advantages in some other sectors too. The most significant investments to date are in gypsum, technical gases, tobacco leaf production, supermarkets, textiles and clothing, shoes, food processing, etc. It is expected that there will soon be significant foreign investment in the banking sector.
  • these favorable points can make the Republic of Macedonia a possible hub for some businesses in the Balkan or south-eastern European area, where a lot of businesses can be located in order to service a broader region.

On the other hand, the Republic of Macedonia still has some weaknesses:

  • Macedonia is a small market and this is one of its major weaknesses. Knowing this, the Government has made an effort to conclude free trade agreements with most of its neighbours: Yugoslavia, Slovenia, Croatia, Bosnia and Herzegovina and there are also plans to do so with Bulgaria and Albania, as well with Romania later on;
  • the Macedonian population has relatively low purchasing power, emphasising the first weakness of the small market;
  • Macedonia is not very visible on the international market and very little is known about it. Although there are some natural reasons for this, it is also true that the country itself has not made much effort to promote its investment site. It was estimated that the investment promotion activities would not be effective due to the problems the country was facing. Now that the political climate has improved, it has gained the momentum to show the world the potential of its location for investment and business;
  • the capital market is not well-developed. The banking system is still facing difficulties, although it has been subjected to massive rehabilitation programmes. The biggest problem is the loss of credibility of banks among the local population, resulting in there keep their savings out of banks and out of the potential financial flows. This has produced a low level of national savings, at least a low level of bank savings. It is expected that upcoming foreign investment in the banking sector will tremendously restore credibility and start improving the banking sector operations. On the other hand, although there is a stock exchange, it is still rather unstable;
  • the overall legal framework has not been entirely completed. Some laws, institutions, or even procedures, are still missing or are not well-established;
  • the development process has still not recovered in all areas, so there are still some negative indicators and movements.

Business sectors which can be the focal points for creating clusters are considered:

  • raw material based sectors such as agriculture (early vegetables, fruits), the food processing industry, forestry, non-metals, ferrous-metals, etc, have immense opportunities for new value added;
  • mature traditional industries can be competitive if restructured and market niches are discovered;
  • for high growth and human resources intensive industries, eg, pharmaceuticals, telecommunication, computer software, services, etc, strategic alliances are needed;
  • public sector (utilities), energy generating plants, irritations and melioration, road construction, through various BOT and similar schemes.

This focusing on business sectors is not intended to discriminate in any way, since the overall policy approach for promoting FDI is project driven (any profitable project is appreciated). Instead it is more a target indication.

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