Uros Delevic *
5. Conclusion and policy implications
As shown in the international investment reports (Incentives Monitor, 2018; OECD, 2001), there is a tendency among host countries to provide state incentives to attract FDI. The macroeconomic goal of subsidy-based FDI attraction is to increase employment and establish linkages with MNEs that should result in higher productivity in domestic companies. Ultimately, host countries aim to foster GDP growth by paying MNEs to employ workers and invest in the local economy.
The effect of subsidies on employment can be observed in three ways: (1) direct jobs created – jobs created only by subsidized investment; (2) indirect jobs created – additional jobs created owing to crowding-in and spillover effects; (3) jobs reduction – owing to crowding-out effect as the rest of the companies that are not subsidized decrease employment.
This study is based on data on financial subsidies, which have been an important part of economic policy in transition countries in the last decades. With the use of municipal-level data about subsidies in Serbia, the effect of subsidies on employment is analysed, controlling for other relevant factors.
The results support the idea that financial subsidies for FDI represent an ineffective way to stimulate employment as there is no significant effect of subsidies on employment (no crowding-in) beyond the jobs already created by subsidized MNEs. Moreover, the aim of subsidizing FDI was to direct investments to less developed municipalities, yet the most developed municipalities attracted the most investments.
Subsidies contribute only to the employment generated by subsidized investments.
The result shows that a 10 per cent increase in subsidies would lead to an average 0.2 per cent increase in employment. However, the point of employment subsidies is to create jobs on top of what is subsidized, in the rest of the economy. Therefore, one could say that this is the failing part of subsidizing policy – that subsidies are ineffective in creating a positive employment growth pattern.
The limitation of this study that should be acknowledged is that the generation of job spillover effects, as suggested by Mudambi (1999), may need a longer time than what was observed in this study. This is particularly the case if subsidies increase the extent of the affiliate’s embeddedness and contribute to making the investment
“sticky”. In this perspective, it is the sequential investment that the country seeks, which are worth much more in development terms than the initial investment.
Future research may be needed to advance this analysis and evaluate the effectiveness of FDI policy in even greater detail by assessing how much employment would have been generated if subsidies were used for some other sort of (public)
investment, instead of targeting the attraction of MNEs. Should data availability allow, it would also be important to consider an array of policy measures used to attract FDI, rather than just financial subsidies.
The findings from this study carry important implications for policymakers and fill some gaps in the literature. Although policy recommendations from this paper will inform policymakers in Serbia, they will have broader applicability. First, Serbia serves as an example for other transition countries in the region (namely Albania, Bosnia and Herzegovina, Croatia, Montenegro and North Macedonia). Second, the broader Eastern European region shares FDI policies adopted by Serbia. Countries such as Bulgaria, Romania and Ukraine have also aimed to achieve economic development by attracting FDI with subsidies (EBRD, 2017).
Since the beginning of FDI liberalization in transition countries, policy experts and the academic community have warned policymakers that uncontrolled globalization and the attraction of FDI, and the radical change of international trade rules, threaten to change the labour market dramatically. The introduction of subsidies for FDI was meant to contribute to this change by reducing unemployment, especially in rural areas (Iammarino, 2018).
This study suggests that the ability of subsidies to compensate for institutional and structural macroeconomic weaknesses is extremely limited and such a use is short-sighted. The current regulation on subsidizing policy in the example of Serbia is unsustainable, unfair and unclear. “One size fits all” logic is not applicable, since investors differ within sectors and incentives cannot be tailored by sector.
Therefore, if policymakers are interested in sustainable employment growth, they need to comprehensively restructure the current FDI policy.
FDI policy should concentrate on attracting different types of investments, not just as much FDI as possible. The structure of FDI is crucial for greater effects on employment. This means encouraging high value-adding activities of MNEs that will not only create direct jobs but also allow spillover effect and indirect job creation within the domestic sector (Radosevic et al., 2003). The FDI subsidizing policy was relatively successful when it targeted knowledge-intensive FDI projects and upgrades of MNE activities towards high value-adding activities, as in the case of Ireland (Te Velde, 2001).
The findings of this study reveal the characteristics of FDI policy that do not work.
It is focused on economic sectors and a number of jobs, and it does not make specific requirements for MNEs to cooperate with local companies and source a certain percentage of inputs locally. Since the findings confirm that this approach does not create a sustainable employment growth pattern, it can be suggested that some changes to this policy could lead to more significant employment creation.
• First, FDI policy should focus on specific activities within industries. Inward FDI should be encouraged but not with financial subsidies.
• Second, if investment-stimulating measures persist, in the long run they may be counterproductive as subsidies come at the expense of other socially important goods and services and compete with the private sector.
• Third, from the point of view of the theory of multinational enterprise, the most important externalities from FDI are spillovers and crowding-in effects, which are not achievable with subsidizing policy.
• Fourth, the whole region should adopt regional incentive control rules.
The greater frequency and value of investment incentives lead to greater competition among countries for inward FDI. As a result, every country is driving up the subsidy ladder, trapped in a vicious cycle of catching up with the level of subsidy given by another neighbouring country.
Therefore, the key policy recommendation is to avoid generic subsidies and set priorities:
1. Activities: Establish criteria for incentives that prioritize the specific activity of MNEs (not just a sector, not just industry). Prioritize knowledge-intensive activities and base state incentives criteria on the potential for crowding-in of domestic companies.
2. Linkages: Provide a platform for linkages between MNEs and local suppliers. Offer special treatment for MNEs that supply a certain percentage of inputs from domestic companies and entrepreneurs.
3. Labour: Encourage MNEs that invest in (technical) employee training in fast-growing industries, in part by co-financing human resource development.
4. Transparency: Offer completely transparent and unified rules, corporate taxation, social contributions and income tax systems that are digitally available.
In structuring FDI attraction policy, it is important to investigate the interaction of all the parties involved, the government as a subsidy provider, the MNE activity and the domestic private sector. Yet, incentives can only complement a strong institutional environment and the rule of law. The incentives for FDI attraction can bring some results for economies but only if the domestic sector is at the core of economic policy. The continuous improvement of corporate governance and managerial knowledge and the fight against nepotism and corruption in the public sector are both imperative for greater FDI quality and quantity, specifically in transition countries.
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Appendix Descriptive statistics and correlation coefficients Observations MeanStandard deviationVariable(1)(2)(3)(4)(5)(6)(7)(8) 1,9992009.54.610925(1) ln_empl1 1,87364.04436.23244(2) ln_subsidystockxdl0.32391 1,8738.5868571.148449(3) ln_subsidystock0.33620.99931 1,8733.3424216.197303(4) ln_netsal0.07630.41430.41711 1,8733.1757245.895411(5) ln_jobstock0.35660.98770.99040.41221 1,8739.9783570.5764915(6) ln_investstock0.32950.9960.99650.41620.98221 1,8691.287882.451003(7) ln_pop0.95740.32840.33990.09910.36050.33261 1,6283.6411386.735586(8) ln_totalinveststock0.60470.45140.46070.68920.46750.46030.57311