In order to increase the standard of living and employment of citizens, Serbia must initiate dynamic, sustainable, and inclusive economic growth, relying on the internationalization of activities and a strong entry into foreign markets.. Consumption, financed mostly by loans, was the main engine of growth during the previous decade, which is also one of the main causes of economic collapse after the impact of the global economic crisis. Weak demand versus generous supply in the labor market, low productivity, as well as the need for fiscal consolidation in the public sector, clearly indicate that consumption will not be able to be the pillar of future growth. There is room for investment growth, but the once abundant capital flows, on which new EU member states largely based their growth, are no longer as available. The greatest untapped potential lies in net exports. Serbia is a country close to the large EU market, with a signed trade agreement with Russia – therefore, the share of exports in GDP of 45% can be considered low. Comparable European countries, especially new EU member states, have an export share in GDP of as much as 80% or more. In order to answer the question of how to stimulate exports, from the expenditure approach to GDP composition, we must turn to the production approach. Because, let's not forget, it is firms that produce, that compete, and that export – they are the building blocks of an economy.
Competitive sectors, composed of firms capable of defeating rivals and conquering markets, must be the cornerstone of the long-term development of the Serbian economy. The export activity of the economy also depends on the competitiveness of the firms themselves. Therefore, identifying and getting to know competitive sectors and firms must be the starting point in defining the development strategy. These firms need to be studied more deeply – to recognize „the recipe for their success,“ and to remove obstacles that prevent them from becoming even more successful. In this way, Serbia would „ride the wave“ of the potential that these firms create to a greater extent, but others would also receive indirect help – they would have the opportunity to „try the best recipes in their own kitchens,“ and decision-makers should ensure that the „ingredients“ are as accessible and favorable as possible.
CEVES, in cooperation with the Chamber of Commerce and Industry of Serbia (PKS), has taken the first step in defining the development strategy – we have identified the „development potentials“ of sectors, based on which it is possible to select, prioritize, and step into the process of creating vertical policies tailored to prosperous sectors. Development potentials indicate the ability of firms to directly and indirectly contribute to economic development through healthy and sustainable channels, creating added value and quality jobs. We measure development potentials using a composite index, composed of three supporting components, which complement each other, „explaining“ the potential of the sector from different angles and creating a synergistic effect in the final sum – (1) achieved performance indicates past business success; (2) potential for economic development indicates the ability to maintain or improve that business, spilling over positive effects to the rest of the economy; (3) contribution to socio-economic priorities shows the purposefulness and usefulness of that business from the perspective of the national economy – primarily through job creation and strengthening the private sector. The three components contain over 100 indicators, calculated based on carefully cleaned status and financial data from the Business Registers Agency (APR) for about 70,000 firms, foreign trade data from UN Comtrade and the Customs Administration for over 1,000 export products, as well as data from the Statistical Office of the Republic of Serbia (RZS) and the National Bank of Serbia (NBS).
The sectors ranked among the top 10 according to the Development Potential Index are: (1) motor vehicles; (2) socks; (3) electrical and electronic equipment for motor vehicles; (4) defense industry; (5) household appliances; (6) vehicle tires; (7) electricity; (8) plastic profiles, (9) special purpose machines, and (10) general purpose machines. These 10 sectors generated 18% of total revenues, 15% of employment, and as much as 35% of exports of all tradable sectors. Looking at the ranking and order of sectors, it is noticeable that the leading positions are mostly occupied by concentrated sectors, whose business depends on one, or a small number of firms that are foreign and/or state-owned, and which, due to their connection with the parent company, are strongly export-oriented, but often also import-oriented.
In order to identify the most prosperous sectors among those whose business is not predetermined by the activities of a small number of companies, we cross-referenced the identified potential with the sector structure, i.e., its concentration. If a sector is highly concentrated, potential growth is determined by future investment activities of a small number of firms, which have often already entered the maturity phase and are maximally exploiting their existing capacities. The less concentrated a sector is, the more potential growth is determined by the activities of a larger number of existing micro, small, medium, and large firms, as well as new entrants into the sector. Therefore, we have classified sectors that have shown high development potential into two groups: 1) sectors with active development potential; and 2) sectors with passive development potential..
The graph above shows all 114 tradable sectors in the Serbian economy. Sectors are represented by circles, the colors of the circles are associated with broader economic branches, and the size of the circle depends on the sector's revenue. The position on the y-axis is determined by development potentials, and on the x-axis by concentration. The higher a sector is positioned, the higher its development potential; the further to the right it is positioned, the more concentrated it is. Sectors with active development potential are located in the second quadrant (high potential-low concentration), and sectors with passive development potential in the first quadrant (high potential-high concentration).
The active development potential of the Serbian economy lies in higher value-added sectors within the food industry (based on cereals, milk, and fruit), chemicals (rubber and plastic products), metals (manufactured metal products such as tools, blades, packaging, heating elements, profiles, and structures), and machinery (general and special purpose, intended for the food and metal industries). Development potential is called active precisely because it is embedded in the activity in a unique way – it does not depend on one or a small number of companies that have „brought“ the potential, but on the synergy of multiple factors that „enable“ companies to be competitive in a systematic way – resources, knowledge, infrastructure, tradition, geopolitical position…
Sectors with active development potential are, as a rule, composed of a relatively large number of companies, a significant number of which have proven competitive in foreign markets, despite problems undermining their competitiveness – primarily outdated technology, difficulty in assembling financial structures and analytical planning, and finding adequate partners. With adequate vertical policies, which would address the concrete and sector-specific problems faced by companies, it is possible to increase the number and scale of sectors, both through new investments and entrepreneurial ventures, and through the accelerated growth of existing companies. The general-purpose machinery sector is a representative example of a sector with active development potential. The sector consists of over 300, mostly micro and small firms, employing nearly 4,000 people and generating over 5 billion dinars in added value. Sector activities grew by 61% annually in the post-crisis period, with every fourth company being profitable, increasing its activities, and hiring new staff. Total exports grew by as much as 60% annually since 2009, reaching 250 million euros in 2014. Of this growth, more than two-thirds was achieved thanks to improved competitive position and increased market share, at the expense of foreign rivals. Perhaps the most important fact is that every second company in this sector managed to place its product on the foreign market. Policies that would enable increased productivity (productivity is twice as low as in Croatia and Slovenia, three times lower than in Hungary, the Czech Republic, and Slovakia, and 6 times lower than the EU28 average) and greater sustainability (less than half of companies manage to survive their first year in a foreign market, and one in five companies manages to survive a full three years) would lead to hundreds of companies expanding their activities, hiring staff, and reinvesting profits. The need for such policies becomes even more significant when considering that the presented sector is intensely connected with a wide range of other sectors, so the development effects would spill over to other branches of the metal processing, machinery, electronics, electrical, and chemical industries.
Passive development potential is present in the defense industry, basic metal industry (copper mining, casting, and production), chemical industry focused on agriculture (agrochemicals and fertilizers), and healthcare (pharmaceutical and hygiene products), electrical appliances and equipment, automotive industry (motor vehicle production, tire production, body production), and final products of the textile industry (socks, underwear, footwear). Development potential is called passive because it is generally not rooted in the characteristics of the Serbian economy itself, but is „in the hands“ of one or a small number of dominant companies whose characteristics enable competitive business – with the exit of one of them, competitiveness is drastically undermined (as in the case of Železara). In order to activate passive potential and transfer it to other economic entities, it is necessary to create a network of incentives (not necessarily financial) through cost/benefit analysis and stimulate additional investments from dominant players, technology transfer, knowledge, innovative activities, and advanced production processes, as well as the inclusion of their extensive value chain by domestic companies.
Sectors with passive potential, mostly driven by foreign direct investment or state-owned enterprises, have shown competitiveness in foreign markets, coupled with an above-average combination of profitability, productivity, and activity growth. However, the main question concerns sustainability and diversification – how to enable the growing contribution of these sectors in the long term. For example, the automotive industry was the cornerstone of economic development in the previous five years. With the arrival of Fiat, many related industries „revived,“ and the entire sector grew by as much as 77% annually. Total exports soon exceeded one billion euros, and the productivity and profitability of the entire economic branch were significantly raised. However, after five years of extremely rapid growth, Fiat reached its peak – in order to continue being the engine of growth, it is necessary to start producing new models, which would continue the dynamic growth initiated and enable the achievement of maximum capacities, but also stimulate further growth of the electronics and electrical equipment sector, and body production. Also, it is necessary to continue working on training and involving domestic companies in the value chain of motor vehicle production (primarily metal, plastic, and rubber sectors).
The development strategy should start by identifying „potential champions,“ whose capacities should be strengthened and chances of entering foreign markets increased through „tailor-made policies,“ consistently supported by all decision-makers and policymakers in the decision-making chain. Horizontal policies should enable a stimulating business environment for all sectors and companies – lower market entry barriers, more accessible and favorable financing sources, a better-educated workforce, a functional legal system that protects their rights, macroeconomic stability, a satisfactory infrastructure network, and all other elements that make a business environment attractive. Vertical measures should represent an upgrade and be directed towards sectors with high development potential. For sectors with passive development potential, dominated by foreign-owned companies, their real significance for the Serbian economy should be determined, primarily through cost-benefit analysis – through their contribution to added value and the creation of quality jobs, opportunities for involving domestic suppliers, impact on competition, and product complexity. In line with their contribution, a network of incentives should be developed, preferably not exclusively financial – which should still serve as an initial lure, but also qualitative ones, which should ensure the sustainability and stability of the investment – through educational staff, supplier networks, industrial zones, and the proactivity of regions and local self-governments. Sectors with active development potential should be approached through even deeper analysis, answering questions about the existence and availability of resources, transportation costs and economies of scale in the case of a non-existent resource base, position in the value chain, the importance of marketing and innovation, opportunities for association, finding a client base. Adequately tailored policies should be applied to these created groups of sectors, addressing the most significant problems faced by promising sectors. During the process of creating and implementing vertical policies, it is of essential importance that decision-makers are on the same page – from those who most directly influence the business environment (ministries and agencies, primarily those responsible for economy and finance), through institutions that influence the sectors themselves in the areas of standardization, accreditation, and harmonization, then financial institutions (AOFI, Development Fund), all the way to the Chamber of Commerce of Serbia (PKS) which has the most direct contact with the economy itself.
The direct link to the article published in the magazine “Biznis i finansije” is available at the following address: http://bif.rs/2015/11/sektori-sa-najvecim-razvojnim-potencijalom-u-srbiji/
