Investment Obstacles in the Manufacturing Sector in FYR Macedonia: Do the Subsector Specifics Matter?

We provide clear insights into the key foreign direct investment obstacles for the manufacturing sector in FYR of Macedonia, an EU candidate country. The survey results, based on data for 79 manufacturing companies, revealed that the investors in this particular sector perceive the bureaucratic and administrative constraints, corruption and bribery, and the lack of law enforcement as three major investment obstacles. Furthermore, we found that the perception of the investment obstacles largely differ depending on the industry the companies operate in, the country of origin, and the export orientation. Therefore, we recommend a tailor-made approach in pursuing the national investment promotion policies and strategies. KEYWORDS: foreign direct investmentFYR MacedoniamanufacturingmultinationalsobstaclesView correction statement:Corrigendum Notes *The figures for the period 2006–2009 are calculated as averages for 2008 and 2009 (Serbia; Montenegro) and for 2006 and 2007 (Serbia and Montenegro). Source: UNCTAD 2011. Note. Light shading: cited by 30%–49% of respondents. Medium shading: cited by 50%–69% of respondents. Dark shading: cited by 70%–100% of the respondents (color figure available online). Note. The mean difference is significant at the .05 level. Note. The mean difference is significant at the .05 level. Note. The TTP industry assigned lower importance to all these obstacles than the sample average, and lowest or second-lowest importance for obstacles are marked with (*). Note. Light shading: cited by 30%–49% of respondents. Medium shading: cited by 50%–69% of respondents. Dark shading: cited by 70%–100% of the respondents (color figure available online). Note. The mean difference is significant at the .05 level. *Not significant. Note. The comparison to the results from table 11 shows that Greek investors for all these obstacles have assigned importance below the sample average, and for the majority of them the importance was the lowest or second lowest (marked with *). The data presented refer to 2005, as the research was conducted in the period November 2005–February 2006. To provide information on the current situation, the latest available data are given in the endnotes. The latest available data show that the FDI stocks in manufacturing reached €886.28 million as of 2008, which indicates the declining trend of investing in this sector. Simultaneously, the share of manufacturing in the total FDI inward stocks dropped to 29.85%, which is mainly due to the substantial increase of FDI stocks in mining and quarrying and the steady trend of investing in the services sector (National Bank of the Republic of Macedonia Citation2011a). DIEs: Direct Investment Enterprises. OECD (2004) defines DIE as “an incorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares or voting power for an incorporated enterprise or an unincorporated enterprise in which a foreign investor has equivalent ownership.” This definition is also applied in the statistical evidence in FYR Macedonia. As of 2008, the number of employees in manufacturing DIEs increased to 16.959 persons, whereas the participation of this sector in the overall DIEs employments declined to 44% (State Statistical Office Citation2009). Authors' calculation based on data from the National Bank of the Republic of Macedonia (Citation2011a) and the State Statistical Office (2006). The figures as of 2007 show decrease in number of employments per €1.0 million investment in the manufacturing sector (from 19 to 17) and transport, storage, and communications (from 8 to 5), and increase in financial intermediation sector (from 11 to 15) (National Bank of the Republic of Macedonia Citation2011a; State Statistical Office Citation2009). Also, they do not consider differing value added per employee. This rate slightly decreased to 31.7% in the third quarter of 2010 (National Bank of the Republic of Macedonia Citation2011b). The share of manufacturing sector in country's exports declined to 74% in 2010 (State Statistical Office Citation2011). The trade deficit continued its upward trend in the subsequent years and has reached the maximum level of 26.2% of GDP in 2008. This trend was reversed in 2009 (23.3%), which further led to a trade deficit of 21.3% of GDP in 2010 (Ministry of Finance 2011a). The gross fixed capital formation to GDP ratio improved considerably over the latter period and has reached 24.8% in 2010 (Ministry of Finance 2011b). The manufacturing sector comprises any industry that makes products from raw materials by the use of manual labor or machines and is engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products. The Classification of Economic Activities of the European Union is also applied by the State Statistical Office of the Republic of Macedonia (see also http://ec.europa.eu/comm/competition/mergers/cases/index/nace_all.html). As some of the companies with mixed capital have a foreign capital participation of less than 10% (no data on the exact number of these companies are available), the population actually entails less than 482 companies. The needed sample size was determined according to the formula for the population proportion (Lind, Marchal, and Mason Citation2002, 320): n = p(1–p)(z/E)2, where n is the sample size, p is an estimate of the population proportion, z is the standard normal value corresponding to the desired level of confidence, and E is the maximum allowable error. In this case, the desired level of confidence is 90%, the maximum allowable error is 0.10, and the most conservative approach is used for estimating the population proportion being determined at 0.50: The necessary number of companies to be contacted was found based on the formula: n a = n × 100/re%, where n a is the actual sample size required, n is the minimum sample size, and re% is the estimated response rate in percentages. The expectations were that, due to the direct contact with the companies, the response rate would be 40%, n a = (69 × 100)/40 = 6900/40 = 172.5 = 173 companies to be contacted: that is, 35.9% of the total population. We should stress that the non-inclusion of companies that have decided not to invest in FYR Macedonia and those companies whose investments were closed due to bankruptcy might have led to omitting additional insights into the effects of FDI obstacles. In the further analysis, the tobacco industry (represented by only two companies) was treated as a separate industry due to its specific characteristics as an outlier (primarily motivated by natural resources and pure export orientation) to prevent the distortion of the results of the food products and beverages industry, except when the comparison with official data required joint presentation of food products, beverages, and tobacco. Although Ekholm and colleagues (Citation2003, 1) define EXPFDI as those largely selling to third markets and not to parent or host country markets, in our case also FDI exporting to parent companies is included in the EXPFDI type due to our interest to study exporters in general and also due to the fact that virtually all surveyed companies that export to the home country are actually using it as a distribution channel for exports to third countries. The perceived importance of the FDI determinants was measured on a five-point Likert scale (very unimportant, unimportant, neutral, important, and very important). The results show frequencies of answers stating “important” and “very important.” According to NCSU (n.d.), the Welch test of equality of means and Brown & Forsythe's F-test of equality of means instead of ANOVA are used when variances and/or group sizes are unequal (the latter being the characteristics of the groups compared). In addition, Brown & Forsythe's F-test of equality of means is more robust than ANOVA when the normality assumption is violated. Due to space limitations, the table displaying the results of the robust test of equality of means is not provided. The existence of significant (mean) differences means that the analyzed sectors differ among them in ranking the investment motives (i.e., a sector is related to the motive perception) and that these differences are not caused by chance. 92% of TTP export more than 60% of their output compared to 37% of FPB product industry. The Chi-square test requires a maximum 20% of cells having less than five expected frequencies. If this analysis would be performed for the TTP (as the largest group) and any other sector, the number of cells with less than five expected frequencies would be much higher (i.e., no valid results can be obtained). In all Chi-square analyses, the rule for maximum 20% of cells with less than fuve expected frequencies has been respected. Due to space limitations, the table reporting on the crosstab frequencies is not provided. Due to space limitations, the table displaying the results of the robust test of equality of means is not provided. The requirement for maximum 20% of cells having less than five expected frequency respected. Due to space limitations, the table reporting on the crosstab frequencies is not provided. In 2010, FYR Macedonia shared with Croatia the second position within the Eastern Europe and Central Asia region and has scored better than the EU member countries Romania, Bulgaria, and Greece (Transparency International Citation2010).