The role of Italian FDI in Southeast Europe's international integration. A focus on investors from the Marche region.

• Author: Cutrini, Eleonora
• Position: Foreign direct investments - Statistical data

Introduction

During the first decade of 2000, Southeast European (SEE) countries experienced significant economic integration into the world economy through international capital flows and especially foreign direct investments (FDI). This area of Europe has become an increasingly popular destination for FDI by EU member countries and overseas multinationals, and is benefiting from the recent worldwide surge in investment flows. During the period 2003-07, the average growth rate of inflows to SEE was 50%, much higher than the rise experienced by the developing (25%) and developed countries (30%). Geographically, two large countries--Croatia and Serbia and Montenegro--account for 77% of world investment in the Western Balkans (3) in the period 2003-07. Their role is comparatively still smaller than the roles of other main Balkan countries--namely Romania and Bulgaria, but since Croatia and Serbia and Montenegro are demonstrating resilience to the global financial crisis, their importance is likely to increase.

Several factors have contributed to recent trends: relatively low labour costs, increased institutional and political stability, and a general expectation that the more advanced countries in the region will join the EU. In fact, even if initially economic integration of the "Old Europe" mainly involved the Central and Eastern European (CEE) countries, it has later broadened including SEE. In this respect, political actions, such as the Adriatic-Ionian Initiative (AII), are promoting greater integration--even at the economic level--between the two areas. The AII involves three EU member countries (Italy, Slovenia and Greece) and five Western Balkans countries in the pre-accession stage (Serbia, Croatia, Montenegro, Bosnia-Herzegovina and Albania) (4). At the inter governmental level, there is a proposal to set up an Adriatic-Ionian Macro Region, with the aim of developing strategic actions, using a cooperative approach, to encourage inclusion of the Balkans in the EU (5). Other initiatives include the Adriatic Euro region and the IPA Adriatic Cross-border Programme (6).

Analysing macro data on FDI, we find out that Italy ranks among the ten major investors in most of the Balkan countries, and in 2007-2009, SEE has become increasingly important as a destination for Italian FDI, in the context of the Balkan area as a whole. Serbia, Croatia and Albania--the main Western Balkans recipient countries - attracted substantial shares of Italian FDI to the area--46%, 28% and 19% respectively during the most recent period (2007-2009).

While the main economic activities involving Italian FDI in the 2000s were privatization-related sectors, in 2007-09, the sector receiving the most Italian FDI was manufacturing. We identify two main patterns of economic integration through FDI: basic integration related to delocalization of labour-intensive tasks (first tier) and more complex integration (second tier). The former type of integration is typical of the economic relationships between Italy and the Western Balkan countries--such as Serbia, Bosnia-Herzegovina, Albania, Macedonia--and involve mostly traditional manufacturing industries such as textiles, clothing, footwear and furniture. Second tier integration pertains predominantly Croatia, Romania and Bulgaria which seem to have embarked on a second level of integration that includes traditional, capital-intensive and high-tech manufacturing industries (see Section 3).

In our analysis, we pay particular attention to the Marche region (central Italy, Adriatic coast) for two main reasons. First, because of its relevance for commercial flows, outward processing flows and manufacturing FDI in the Balkans area. The Marche region has exhibited a recent and increasing propensity to invest in the area, and especially in the Western Balkans. Since 2005, the Marche region FDI in SEE has increased continuously at an average annual growth rate of 46%. Today, the Marche region accounts for almost 12% of total Italian FDI in the Western Balkan countries, with a particular concentration in Serbia, Croatia and Albania. It is an important investor, particularly in some of the traditional manufacturing industries typical of the Italian specialization pattern. In fact, the Marche region accounts for significant shares of the national FDI in textiles, wearing apparel and footwear (64%), electrical equipment (42%) and food products (39%).

Second, the Marche region is characterized by a high specialization in traditional manufacturing industries with a high incidence of industrial districts and small and medium-sized firms: two distinguishing characteristics of the so-called Italian "anomaly".

The focus on this region--made also via case study - enables a deeper analysis of the phenomenon under study: it serves as a laboratory to closer observe transnational corporations that have built or extended their international production networks in the Balkans through equity holdings (FDI) or even through contractual relationships with partner firms, without equity involvement (i.e. non-equity modes - NEMs)).

Grasping indepth information on such a recent issue, this exploratory study aims at identifying possible areas for further and deeper academic inquiry and to give some first policy suggestions to foster and improve economic integration via FDI and other NEMs.

The paper is organized as follows. Section 1 reviews the literature; Section 2 describes the data and the methodology used. Section 3 provides an overview of the country-level evidence based on secondary data sources and Section 4 analyses the Marche region in terms of FDI towards the Balkans. Section 5 presents some case studies of Marche region companies that have invested in Balkan countries. The final section concludes and discusses some future developments of this research.

1. Literature review

   This exploratory study is grounded on three main research strands in the literature: the contributions on international fragmentation of production and FDI, the international business literature based on the Dunning's OLI paradigm, and the Global Value Chain approach.

   As for the theoretical issues of FDI and the international fragmentation of production, the topic has been discussed, extensively and separately, in the international economics literature, typically in relation to their macroeconomic effects (e.g. Feenstra and Hanson 1996; Feenstra 1998, Arndt and Kierzkowski 2001, Hummel et al. 1998, Deardorff, 2001, Baldone et al., 2007, Markusen, 1995, Markusen and Venables, 1999). However, very few works have examined the interplay between fragmentation of production and FDI activity. Since the sourcing strategies of business firms have become more complex, some models consider heterogeneous firms in terms of either their internalization decisions (outsourcing versus integration) (Grossman and Helpman, 2002, 2003), or location choices related to outsourcing (home versus abroad) within the context of incomplete contracts (Grossman and Helpman, 2005). This body of work focuses on why some companies source inputs abroad primarily via FDI, while others use the strategy of outsourcing for the same purpose. Grossman and Helpman (2003) find that outsourcing is more prevalent in larger markets and that the availability of higher quality contracting institutions abroad and lower customization costs, increase the prevalence of outsourcing over FDI. Grossman and Helpman (2005) see the cost of customization as central for deciding about the acquisition of intermediate inputs at home or abroad. Therefore, differences across countries in terms of their legal systems and institutions related to contract enforcement, may explain the pattern of international outsourcing and FDI across countries.

   On the empirical ground, a large body of country-level analysis are available, but only a few provide evidence of the involvement of Western Balkan countries in international capital flows and their role in the global fragmentation of value chains (Brada et al., 2004; Damijan et al., 2006; Redzepagic and Richet, 2008; Dragusha and Bejleri, 2008). Studies focusing specifically on Italy-Western Balkans economic relationships are even more scarce (Coletti and Panizza, 2007; Giovannetti and Luchetti, 2007; Simest, 2010).

   The case study analysis developed in this paper is specifically related to the literature on international business and industrial organization, and, more generally, to the Global Value Chain approach. The OLI (Ownership, Location, Internationalization) paradigm7 addresses three main aspects from the investor standpoint: (1) the reasons why firms go abroad (O); (2) the location of the investment (L); (3) the mode of entry in foreign markets (I). The locations chosen for firms' investment abroad is based on a combination of the ownership-specific advantages of the firm and the location-specific advantages of the host country (Dunning, 2002a), that the firm wants to exploit through internationalization (through intra-firm rather than arm's-length transactions).

   The underlying principles for investing abroad may be: resource seeking, market seeking, efficiency seeking and strategic asset seeking (Dunning, 1977, 1993). Resource seeking investment is aimed at accessing natural, physical or human resources; market-seeking investment is driven by the search for domestic, adjacent or regional markets. Efficiency-seeking investment is aimed at rationalizing production to exploit economies of specialization and scope across or along value chains, i.e. product or process specialization; strategic-asset-seeking investment is aimed at advancing the company's regional or global strategy or linking into foreign networks of created assets, such as technology, organizational capabilities and markets.

   In this respect, Dunning (1980, 1996) distinguishes between the main motives for initial investment--namely (natural) resource-seeking and market-seeking-and the...