Small and Medium Enterprises in the Western Balkans: European Expansion and the Role of Emilia-Romagna (Part 1)

Translated by Andy Troska, Harvard College ’17 - PECOB Staff


Until now, the western Balkans have enjoyed a stream of considerable direct foreign investment, most of which is divided between public institutions and private stakeholders. Being geographically close to the European Union and economically rated among the ranks of other European nations, the western Balkans are becoming a popular destination for investors from larger countries in western Europe.
Furthermore, the desire for social stability and political integration with the rest of Europe, present in the area since the collapse of Yugoslavia and communist Albania, has constituted an ulterior motive for directing investment to these countries.
From the point of view of investments and public aid, the EU concessions made through programs managed by the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) stand out in terms their size and their comprehensiveness. These two agencies reflect the stabilizing and developing role that the EU intends to play in the western Balkans; its primary goal may be to promote compliance with the economic and social standards for EU accession.
The recent accession of Croatia as the twenty-eighth member state of the EU demonstrates the success of this strategy, although it is not exempt from its deficiencies and doubts.
In terms of private investment, the western Balkans have mostly attracted the attention of large foreign industrial manufacturing groups, who benefit from the low cost of labor and the even lower taxes on opening factories in Croatia, Serbia, Bosnia-Herzegovina, Montenegro, Macedonia, and Albania.
These two investment sources, public and private, share some common ground that is particularly important for industrial and economic development in the area.
Small and medium enterprises (SMEs) are particularly relevant to this discussion. This sector is considered by private investors as well as by European public institutions to be an important area in which to work and invest in order to enhance opportunities for socio-economic growth in the western Balkans.
The business environment in the western Balkans presents a number of problems that have slowed the development of the sector. Of these, corruption is among the more difficult and pressing problems. In an attempt to counteract this phenomenon, the EU has recently established anti-corruption measures in collaboration with the authorities in interested countries. These efforts have produced some concrete effects, improving the environment for businesses to emerge and operate normally. Nevertheless, much remains to be done; there is evidence that many of the shortcomings in the creation, consolidation, and growth of SMEs are often related to corruption and its prevalence in the region.
SMEs are seen as extremely important for western Balkan economies and societies for two main reasons. First of all, these enterprises play a significant role in advanced economies and are recognized to be crucial in every country for their contribution to the growth of GDP. Even in EU founding nations, SMEs have provided the framework for the economic system, which benefits greatly from the presence of these flexible and dynamic producers. Secondly, SMEs are invaluable for their ability to create jobs and foster social cohesion. Examples from Western Europe have demonstrated how this business model has been important for employing skilled labor and for forging connections with society, offering solutions close to the lives of citizens and workers.
Another area for improvement in the western Balkans concerns training for entrepreneurial skills in countries where the concept of economic agency is relatively new. As it did to confront corruption, the EU has put forward an initiative to address this weakness and, thanks to their collaboration with foreign private investors, has made some steps in the right direction. The diffusion of a market economy structure and the resulting entrepreneurial model are objectives still to be pursued.
Despite this lack of entrepreneurial experience, an SME sector has been effectively created in the western Balkans in recent years. The emergence of a legislative framework for the Balkans, inspired by legislation currently in effect in the European Union, is a factor for development that is already active and capable of promoting the emergence of a productive sector with great potential for SME growth. These changes also signal the possibility of future EU accession.
The repercussions of the 2008 global economic crisis on both EU member states and other European countries significantly limited the scope for improvement in western Balkan economies. Had the western Balkans not been as severely affected by the economic downturn, it is likely that the profuse efforts of the EU and local government institutions would have been more visible, appreciable, and effective.
By June 2008, the European Union had already adopted the “Small Business Act for Europe.” Intended for businesses with fewer than 250 employees,  the program is aimed at facilitating the creation of small businesses by reducing and establishing formal recognition of the bureaucracy to which SMEs are frequently subjected. This measure indicates the guidelines for EU countries, but has become the de facto model for European intervention in the Balkans, especially in western Balkan countries that are not yet EU members.
As a result, in 2012, the EU approved and set into action a specialized intervention scheme to facilitate the emergence of SMEs in the western Balkans.
This scheme is a clear example of the EU integration politics so relevant in the Balkans today; it provides an example of cooperation for development based on the promotion of financial instruments intended specifically for the growth and consolidation of SMEs.
As previously mentioned, the EU allocated more than 300 million Euros directly to innovative small and medium enterprises with potential for development in the western Balkans. The fund, active since 2013, is principally financed by the EIB, EBRD, with the European Commission responsible for the contribution of almost 66 million Euros. The goal of the fund was, as it still is today, to promote the development of SMEs in the western Balkans, acting on several fronts.
First of all, the funding aimed to simplify and streamline SME lending, thus increasing the capabilities and strengths of these businesses while promoting expansion in both size and number, enabling them to remain strong on the market.
Secondly, it sought to lower the costs associated with loans for SMEs in the western Balkans to promote area businesses to make investments.
Finally, the funds were allocated to facilitate and accelerate a series of administrative and fiscal reforms of western Balkan nations interested in developing SMEs.
Through this plan of European community financing, the European Commission wanted to create a regional market in which SMEs could be established and commercial relations with other EU businesses easily formed.
The fiscal resources are distributed by the Western Balkan Enterprise Development and Innovation Facility (WB EDIF), an international organization created and controlled by lenders. The management also involves the bilateral participation of countries and state agencies interested in western Balkan countries.
The funding described above is explicitly intended for the development of the private sector in the western Balkans; it is particularly innovative in its focus on types of business that are often undervalued and neglected, both by national fiscal programs and by private foreign investors.
At present it is still impossible to put a value on the impact of this European funding plan on local economies in the western Balkans, although substantial benefits are expected to arise from this strategy, which employs public aid to sustain and strengthen production benchmarks for SMEs.
There is currently a particularly strong push for greater European economic integration. This initiative is directed not only towards the western Balkans but also towards neighboring EU member states.
Taking Italy into consideration, the region of Emilia-Romagna has a series of characteristics that could qualify it as a potential partner in this undertaking. Emilia-Romagna is in fact a region in which the number of SMEs is elevated; their development has reached an enviable level over time.
Despite the current economic difficulties due to the recent economic crisis, which struck southern Europe particularly painfully, many examples of SMEs still exist in Emilia-Romagna that are capable of producing wealth, innovation and employment.
Recently, SMEs from Emilia-Romagna have developed characteristics that place them at an advantage for forming foreign commercial ties, especially with businesses in the western Balkans. The SMEs of Emilia-Romagna exemplify the potential of this entrepreneurial model to improve societal cohesion and local economic growth.
The funding made available by the European agencies appointed to carry out this goal could also be used for the aim of promoting greater interaction and collaboration between established SMEs from Emilia-Romagna and developed or developing SMEs on the other side of the Adriatic Sea. This could happen in two ways.
The first would be a bilateral collaboration that would combine the aims and provisions of the funding plan in order to create a business environment tailored to promote the emergence and maintenance of SMEs in the western Balkans.
Fostering an entrepreneurial culture was among the goals listed as a part of the European funding plan, as was developing entrepreneurial capacities and skills, which still require improvement and development throughout the western Balkans.
Individuals and businesses who are experienced and recognized in this sector, such as the SMEs of Emilia-Romagna, could play an important role in opening new commercial possibilities and set the stage for a more prosperous future for both sides of the Adriatic.
The second way to promote this goal could be for the SMEs in Emilia-Romagna take advantage of the presence of similar businesses across the Adriatic.
The simultaneous dynamism and stability of the western Balkan market could be attractive to SMEs from Emilia-Romagna looking engage themselves in foreign markets.
Considering the possibility of the future expansion of the European Union to include the western Balkans, these possibilities are very significant.
A single EU market that included the western Balkans would offer a great deal of possibilities to European businesses, but would at the same time lead to a great deal of competition. For this reason, taking action before further European expansion would increase the productivity of SMEs and would place Emilia-Romagna at an advantage over other areas in the EU.
The geographical proximity between the two banks of the Adriatic would facilitate the establishment and maintenance of bilateral commercial networks, which would offer Emilia-Romagna and the western Balkan nations mutual economic and social benefits.