Sectors with the biggest development potential in Serbia
How to help sectors with development potentials drive Serbian economic growth
Ten sectors with the biggest development potentials generated 18% of overall revenues, 15% of employment and as much as 35% of exports of all tradable sectors. In order to make companies in these sectors even more competitive, the creation of appropriate vertical policies is needed; this will strengthen their capacities, improve productivity, and make their entrance and survival on the foreign markets easier.
Author: Nemanja Šormaz*
In order to increase the living standards and employment of Serbian citizens, Serbia needs to start a dynamic, inclusive and sustainable economic growth, using all the benefits of internationalization and stronger presence on foreign markets. Even though our country is close to the big market of EU, and has a trade agreement with Russia, exports only account to 45% of GDP, while the situation is very different in similar European countries, where they represent over 80% of GDP. Exporting ability of the whole economy is dependent on the competitiveness of firms, therefore a more detailed analysis of sector and firm competitiveness should be a starting point in defining a development strategy. Getting to know the ways in which the most successful companies work and develop can be good knowledge for other firms, so they can use some of those recipes in “their own kitchen”, but also can be a good signal for policy makers in order to define which barriers need to be taken down in order to make these companies even more successful.
The Center for Advanced Economic Studies (CEVES), together with the Serbian Chamber of Commerce and Industry (PKS), made the first step in defining a development strategy. We identified development potentials of 141 tradeable sectors, which can be a basis to define and select priorities while creating appropriate vertical policies directed towards high-potential sectors. Development potentials show the ability of firms to contribute to economic development both directly and indirectly through healthy and sustainable canals, by creating value added and opening new qualified jobs, with better conditions.
Development potentials are measured through a composite index, which consists of three defining components, each one of them showing sector potentials from a different angle, with one angle building onto another. These components are: (1) exhibited competitiveness, which shows the past success of companies; (2) potentials for economic development, which show the ability of businesses to expand and sustain their operations, while in the same time giving off positive externalities to the rest of the economy; and (3) contribution to socio-economic priorities, which shows the relevance and usefulness of that business from the point of view of a national economy – mostly through its ability to create jobs and strengthen the private sector.
These components contain over 100 indicators, calculated on the basis of carefully revised statutory and financial data from the National Registry Agency for about 70.000 firms, data on foreign trade acquired from UN Comtrade and Serbian Customs and Borders Patrol for more than 1.000 exported products, and the data acquired from the Statistical Bureau of Serbia (RZS) and the Serbian National Bank (NBS).
Sectors with the biggest development potential
According to the Index of Development Potentials, the top ten rated sectors are: (1) motor vehicles, (2) socks, (3) electric and electronic equipment for motor vehicles, (4) defense industry, (5) household appliances, (6) rubber tires, (7) electrical energy, (8) plastic profiles, (9) machines for specialized purposes, and (10) machines for general purposes.
These 10 sectors generated 18% of total revenues, 15% of employment, and as much as 35% of total exports in all tradeable sectors. It should be noted, though, that top positions in these sectors are occupied by concentrated sectors, whose business are dependent on one, or a small number of companies which are either owned by the state or by foreign investors, and which are, because of their close connections with the mother company, strong exporters, but also strong importers in most of the cases.
In order to better identify the most prosperous ones out of those sectors which do not depend on a small number of companies, we put the identified potential against the structure of the sectors, i.e. its concentration.
If a sector is highly concentrated, potential growth is dependent on the future investment activities of a small number of companies, which are usually already in the phase of maturity, and already use their existing capacities to their maximum extents. As a sector progresses towards being less concentrated, its growth is determined by the activities of a bigger number of micro, small, medium and big companies, but by new companies entering the sector as well. Therefore, we grouped these sectors which show development potentials into two groups: (1) sectors with active development potentials, and (2) sectors with passive development potentials.
The graph above shows all 114 tradeable sectors in Serbian economy. Each sector is shown as a circle, whose color is determined by the industry the sector is part of, and the size is determined by the volume of its revenues. On the Y axis we can see development potentials, while the X axis shows the concentration of the sector. As the sector is higher up its development potentials are higher, and as it is more to the right, it is more concentrated. Sectors with active development potentials are present in the second quadrant (high development potential – low concentration), while those with passive development potentials can be found in the first quadrant (high development potential – high concentration).
Active development potential
Active development potentials of Serbian economy are in those sectors which produce higher value added in the food industry (based on cereals, milk and fruit), chemical industry (products made from rubber and plastic), metal industry (fabricated metal products like packaging, blades, tools, heaters, profiles and structures), and machines (for general and special purposes, for food and metal industry). Development potential is “active” because it is not dependent on the potential of one or a small number of companies, but on the synergy between more factors embedded into the Serbian economy, which give companies the ability to be competitive. Those factors include resources, know-how, infrastructure, tradition, geopolitical position, etc.
Sectors with active development potentials are usually characterized by a relatively big number of companies, out of which majority is internationally competitive, even though they face problems which can undermine their competitiveness. These problems include outdated technology, accessing appropriate financial sources, analytical planning and finding right partners. These problems can be alleviated by specific vertical development policies, which would make sectors more integrated and develop them further through investments and entrepreneurial actions, and through a rapid growth of already existing companies.
The sector of manufacturing of machines for general purposes serves as a great representative for sectors with active development potentials. It consists of over 300 companies, mainly micro and small in size, which employ almost 4.000 people and generate over 5 million dinars of value added. This sector grew by an annual rate of 6% in the post-crisis period, and every fourth company in it was profitable, managed to expand their activities and employ new people. Total exports of this sector grew by 60% annually from 2009, and managed to get as high as 250 million EUR in 2014. Out of this growth, more than 60% was generated because of the better competitiveness of companies and their growing influence in international markets.
Maybe the most important information is that every other company in this sector was able to sell its products internationally. But still, the productivity of this sector in Slovenia and Croatia is almost twice as large as it is in Serbia, in Hungary, Czech Republic and Slovakia it is three times higher, while the EU28 has recorded six times the productivity of that in Serbia. Furthermore, less than half of the companies in this sector are capable of surviving the first year on the international market, and every fifth company is capable of surviving three years in a row. This is why policies, which would be able to help boost productivity and sustainability, would influence the further growth of this sector and opening of new jobs. A need for such policies is even more evident if we state that a sector like manufacturing of machines for general purposes is closely related to a vast amount of other sectors, so development potentials of this sector in sight would expand on those affiliated, such as manufacturing of metal product, machines, electronics, electric and chemical industries.
Passive development potential
Passive development potential is present in the defense industry, primary metal processing (mining metal ores, casting or iron and steel, and copper production), chemical industry oriented towards agriculture (manufacture of agrochemical products, and manufacture of fertilizers), and medical industry (pharmaceuticals, and manufacturing of personal care products). In this case, development potential is usually passive because it does not come from the characteristics of Serbian economy, but it is concentrated in “the hands” of one or a small number of dominant companies, whose own characteristics are what create their competitiveness. Therefore, if one of those companies was to leave the sector, the competitiveness of that sector would be drastically reduced (eg. Železara). For this passive potential to be activated and translated onto other companies, a set of stimuli needs to be created based on a cost/benefit analysis, in order to stimulate new investments of main players in these sectors, transfer of technology and know-how, a surge of innovations and better processes, and adding other companies to their value chains.
Sectors with passive development potentials are usually heavily influenced by foreign investments or state owned firms, which expressed high competitiveness on international markets, along with the above average profitability, productivity and growth. Still, the main problem remains in the topics of sustainability and diversification – how to enable these sectors to give growing contributions in the future. For example, the industry of motor vehicles was a base for economic development in the past five years. With the introduction of Fiat to the Serbian economy, a lot of other affiliated industries prospered, with the overall sector reaching a growth of 77% per annum. The overall exports have rapidly overgrown the amount of one million EUR, with the growth of productivity and profitability being visible in the whole industry. But, after five years of extremely rapid growth, Fiat has reached its peak. In order to be a carrier of growth in the future, the production of new models of vehicles is needed, in order to create dynamic growth once again and make attaining maximum resource efficiency possible. This would further stimulate growth in the industries of electronic and electric equipment, and manufacture of bodies for cars and vehicles. Furthermore, new work on inclusion of domestic firms in the global value chain of motor vehicles industry is needed (most notably from the sectors of metal, plastics and rubber).
From development potentials to development policies
First step in a development policy should be to identify “potential champions”, whose capacities need to be supported and whose opportunities for foreign exposure need to be backed up by specific development policies oriented towards them only, which will be supported by all decision and policy makers. Horizontal policies should create a stimulating business environment for the whole economy, which includes smaller obstacles when it comes to entering the market, cheaper and better sources of finance, better educated workers, fully functional legal system created to guard the rights of individuals and firms, macroeconomic stability, good infrastructure and other such elements. Vertical measures and policies are an addition to this, and should be concentrated on those sectors with high development potentials.
When it comes to the sectors with passive development potentials, which are dominated by the foreign-owned firms, first and foremost should be the analysis of their contributions and importance for the overall Serbian economy, through a cost/benefit analysis. This includes their contribution to the added value, creation of high quality jobs, possibility of including domestic partners in their global value chains, their effects on competition and the complexity of their products. In accordance with their contribution to the economy, right stimuli should be set in place. Apart from financial stimuli, which should still be the initial hook, other high quality stimuli are needed, in order to secure sustainability and stability of investments – first of all, through better education of the workforce, developed network of suppliers, stimulating and mutually connected industrial zones, proactive approach of municipalities and other local governments.
Sectors with active development potential should be analyzed even more thoroughly, in order to get a precise overlook of specific characteristics of each sector, such as: the resource abundance and availability, transportation costs and economy of scale if there is not a strong resource base, their position in the global value chain, the importance of marketing and innovations, possibility of cooperation, easiness of finding partners, etc. Groups of sectors separated by these characteristics should be further assessed with right policies, which will take into account their biggest sectoral problems. In the process of creation and implementation of these vertical policies, it is very important to get the cooperation of every policy and decision maker – from those which influence the business environment the most (ministries and agencies, especially when it comes to those related to the economy and finances), through institutions in the fields of standardization, accreditation and harmonization, to the financial institutions (such as AOFI, Development Fund) and the PKS, which has the most direct contact with the economy itself.
* Author is the Director of Center for Advanced Economic Studies (CEVES)
** The whole research, with a detailed methodology, scope, results and recommendations, is available on the websites of CEVES and PKS