Foreign Direct Investment in Bosnia and Herzegovina

Introduction

Foreign Direct Investment (FDI) is considered to be an engine for economic growth (Balasubramanyam, Salisu, and Sapsford 1999; Bevin and Estrin 2004; Demekas, Horvath, and Ribakova 2007), and as such it is pursued actively by government agencies such as FIPA, the Foreign Investment Promotion Agency of Bosnia and Herzegovina (Mustafic-Cokoja 2010).

Foreign direct investment can be described as a company from one country making a physical investment outside its home country, an investment abroad, usually where the company being invested in is controlled by the foreign corporation, which is considered an indirect investment. There are several forms that can be used for capital investing abroad: acquisition of a foreign firm through mergers and acquisitions, investment in a joint venture with a local firm, or construction of a facility as wholly owned operation. FDI has been considered one of the basic motors of economic development of many less developed countries.

However, the war, the perception of political instability, incomplete transition in a country, a poorly integrated internal market, and the complex and unfavorable business environment have combined to make Bosnia and Herzegovina successful in attracting only very limited foreign investments to date. This paper examines the importance of foreign direct investment in Bosnia and Herzegovina in terms of the important determinants of economic development, comparing them with neighboring countries and transition countries in Europe. It explores all FDI data from the post-war period to recent years, examining their progress and setbacks, as well as the impact of FDI on macroeconomic factors and country development. The paper also evaluates the work of government agencies and strategic policies designed to attract investment and create a better international image for the country in the global FDI marketplace.

Foreign direct investment plays an extraordinary and growing role in global business. The role of FDI in economic growth and development is now widely recognized among countries, and many nations are seeking to attract valuable FDI to their economies. Moreover, FDI is generally considered a driving force in the integration of developing countries into the globalization process that characterizes the world economy.

Foreign Direct Investment: Definition and Role

The significance of FDI lies in its capacity to transfer capital, technology, managerial expertise, and market access to recipient countries. In transition economies particularly, FDI serves as a critical mechanism for economic restructuring and integration into global markets. Countries undergoing economic transition often rely on foreign investment to accelerate structural reform and establish competitive industries. For Bosnia and Herzegovina, attracting FDI represents a strategic priority for recovery and sustainable development in the post-war period.

Recognizing the importance of foreign investments in the development of the country, Bosnia and Herzegovina has brought 36 documents about protection and promotion agreements of FDI investors. The Law on the Policy of Foreign Direct Investment in Bosnia and Herzegovina treats foreign investors under the same conditions as those applied to the local population. By this law, FDI investors are attracted to invest in any sector of the economy in the same form as local investors. In general, most economic sectors in Bosnia and Herzegovina are fully open to foreign investors and foreign ownership equity. Foreign investors are under legal protection from measures such as expropriations, nationalizations, requisitions, or any other similar measures. Investors are also free to employ workers of any foreign nationality, subject to the immigration and labor rules and laws of Bosnia and Herzegovina.

Institutional Framework and Government Policy

The Ministry of Foreign Trade and Economic Relations of Bosnia and Herzegovina (MOFTER) addresses issues from the economic sphere, including:

The most valuable and strongest institution in the field of FDI in Bosnia and Herzegovina is the Foreign Investment Promotion Agency (FIPA). FIPA was formed in July 1999 as a government agency acting within the Council of Ministers. It is specialized in providing services to foreign investors, attracting new investors, and developing the country's image in relation to FDI investments. Another agency is the Investment Guarantee Agency (IGA), an independent, commercially based agency owned by the government of Bosnia and Herzegovina, which provides a Leverage Insurance Facility for Trade (LIFT) to mitigate investment risks.

The role of FDI in economic growth and development has become increasingly important as globalization has deepened international economic integration. Foreign direct investment serves multiple functions in developing and transition economies: it provides capital for infrastructure and productive capacity, introduces advanced technologies and management practices, creates employment opportunities, and facilitates integration into global value chains. For Bosnia and Herzegovina, FDI represents not only financial capital but also a signal of international confidence in the country's recovery and future economic prospects.

FDI Trends and Economic Impact

The macroeconomic impacts of FDI include effects on balance of payments, foreign exchange reserves, and productive capacity. Beyond these direct effects, FDI generates spillover benefits through technology transfer, skills development, and competitive pressure that encourages local firms to improve efficiency. Understanding these dynamics is essential for evaluating Bosnia and Herzegovina's FDI performance relative to comparable transition economies in the region.