Near-shoring is gaining traction in the Western Balkans, driven by geopolitical shifts and regulatory pressures to reduce carbon emissions. Relocating factories from Asia to Eastern Europe remains unlikely, owing to high costs, but Western firms are increasingly opting for Eastern Europe over Asia for new investments. Interestingly, Asian companies are also investing in the region to position themselves closer to the EU market. The recent shift to the right in global politics is likely to influence these trends in complex ways, but the greatest challenge for the Western Balkans lies in addressing the growing risk of a shortage of skilled workers.
Introduction
The concept of near-shoring first gained attention during discussions of ‘slowbalisation’ following the global financial crisis of 2007-2008 (Bakas 2015; The Economist 2019). Its relevance grew with the supply-chain disruptions caused by the COVID-19 pandemic (McKinsey & Co. 2020) and, more recently, the war in Ukraine (Agnew 2022).
In 2021, we published a study exploring whether the Western Balkan economies could benefit from near-shoring trends in the wake of the pandemic (Jovanović et al. 2021). Our findings indicated that the region could indeed capitalise on these trends if it were to focus on upskilling its workforce, enhancing infrastructure and strengthening governance.
More recently, we conducted a follow-up study that revisits and expands on these questions (Jovanović et al. 2024. This new research evaluates whether near-shoring has actually occurred in the Western Balkans, identifies examples of companies that have near-shored to the region, examines these cases in detail and investigates the factors driving the decisions to near-shore.
Trends in FDI in the Western Balkans
Our analysis begins with a quantitative examination of recent trends in foreign direct investment (FDI) inflows across the six Western Balkan economies, aiming to determine whether macroeconomic data indicate an increase in foreign investment following the pandemic.
The approach is straightforward: we analyse pre-pandemic FDI trends, extrapolate them to simulate expected post-pandemic inflows, and compare these simulations with actual data. If actual FDI inflows exceed the simulated values, we interpret this as evidence of near-shoring. The underlying assumption is that pre-pandemic trends represent the level of investment expected under a ‘business-as-usual’ scenario. Any excess in actual FDI over these projections suggests new factors driving increased investment, which we attribute to near-shoring.
To conduct this analysis, we use two complementary simulation methods. The first applies a simple logarithmic trend to total FDI inflows for each economy. The second employs econometric modelling to analyse macroeconomic factors influencing FDI, using four different models with different combinations of the following explanatory variables: sovereign credit ratings, rule of law, nominal GDP, and general government revenues. The analysis is performed separately for each Western Balkan economy, with the pre-pandemic period defined as 2012-2019 and the post-pandemic period as 2020-2023.
Figure 1 illustrates FDI inflows derived from both simulation methods alongside actual recorded inflows. Simulated values are represented as an orange range (spanning the lowest to highest estimates), while actual FDI inflows are shown as dark grey lines. The post-pandemic period is shaded in light grey for context.
The data reveal contrasting trends across the region. In Albania and Serbia, actual FDI inflows from 2020 to 2023 consistently fall below the simulated range, indicating no signs of near-shoring. Conversely, Bosnia and Herzegovina, Kosovo, and North Macedonia show actual FDI inflows exceeding the simulated range over the last two to four years, which we interpret as evidence of near-shoring in the post-pandemic period.
Montenegro represents a borderline case. Although FDI inflows exceeded the simulated range from 2020 to 2022, they fell below it in 2023. This makes it challenging to determine whether Montenegro is experiencing near-shoring or simply reflecting typical cyclical fluctuations in FDI.
Insights from case studies and interviews with companies
We identified examples of near-shoring to the Western Balkans, with such cases found in all economies except Montenegro. Notably, many of these investments come from Asian companies strategically positioning themselves in the region to be closer to EU business partners or to facilitate exports to the European market. In contrast, Western European companies that have near-shored to the Western Balkans have typically done so in preference to investing in Asia, drawn by the region’s low production costs and proximity to the EU. However, we found no evidence of companies closing operations in Asia to relocate to the Western Balkans, probably because of the high costs associated with such moves.
Interviews with foreign investors and other stakeholders underscore that multinational companies are actively discussing and implementing near-shoring strategies. Geopolitical developments, such as the war in Ukraine and growing global polarisation, are accelerating this trend. One prominent strategy gaining traction is the ‘local-for-local’ approach, in which companies locate production and other activities closer to their final markets.
The interviews also highlight the increasing importance of environmental sustainability and decarbonisation in shaping investment decisions. Regulatory pressures and consumer expectations are driving companies to reduce carbon emissions and shorten supply chains, further reinforcing the case for near-shoring.
Some tentative lessons for Europe and the world as a whole
Companies are actively considering and implementing near-shoring strategies, driven by two main factors. First, geopolitical tensions and rising global uncertainty are prompting firms to de-risk their operations and reduce costs. Second, there is increasing pressure to shorten supply chains and lower carbon emissions, arising both from regulatory demands and from expectations from partners seeking to minimise their own environmental impact.
Traditional near-shoring (for example, closing factories in Asia and relocating them to Eastern Europe) remains unlikely, as the costs involved are prohibitively high. Instead, Western companies already operating in Eastern Europe are likely to expand their activities there rather than investing in Asia. Similarly, new Western firms are expected to choose Eastern Europe over Asia for future investments.
Another significant trend involves Asian companies investing in Eastern Europe to be closer to the EU market. This allows them to sell directly within the EU and/or support EU-based companies more efficiently.
Recent geopolitical developments, such as the rise of far-right movements in Europe and Donald Trump’s return to power in the US, are likely to influence near-shoring dynamics in complex ways. On one hand, rising geopolitical uncertainty and global polarisation may accelerate near-shoring. Trade wars and the imposition of tariffs could incentivise Chinese and other Asian companies to establish operations in Eastern Europe to bypass EU tariffs. On the other hand, the anticipated rollback of environmental policies could reduce the regulatory and partner-driven incentives to near-shore.
The greatest challenge for near-shoring and FDI in Eastern Europe lies in the region’s growing shortage of skilled workers. This issue risks deterring foreign companies from investing. Governments must address this by expanding the pool of skilled workers through upskilling and reskilling initiatives, attracting foreign talent, and embracing greater automation. Additionally, there should be a stronger focus on high-tech industries that are less labour-intensive.
References:
Agnew, H. (2022). ‘Ukraine, supply chains and the end of globalisation’. Financial Times, 28 March. www.ft.com/content/bec75c62-a0e6-4ad1-8365-2671d40ef48e
Bakas, A. (2015). Capitalism & Slowbalization: The Market, the State and the Crowd in the 21st Century. Dexter.
Jovanović, B., Ghodsi, M., van Zijverden, O., Kluge, S., Gaber, M., Mima, R., et al. (2021). ‘Getting stronger after COVID-19: Near-shoring potential in the Western Balkans’. wiiw Research Report No. 453, May, wiiw, Vienna. https://wiiw.ac.at/getting-stronger-after-covid-19-near-shoring-potential-in-the-western-balkans-dlp-5814.pdf
Jovanović, B., Zlatanović, A., Kluge, S., Zec, A., Ibrahimi, M., Brašanac M. et al. (2024). Transforming the Western Balkans through near-shoring and decarbonisation. wiiw and Western Balkans 6 Chamber Investment Forum. Available at: https://wiiw.ac.at/transforming-the-western-balkans-through-near-shoring-and-decarbonisation-p-6999.html
McKinsey & Co. (2020). ‘Risk, resilience, and rebalancing in global value chains’. www.mckinsey.com/capabilities/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains
The Economist (2019). ‘Slowbalisation: The steam has gone out of globalisation’, 24 January. www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation
Authors:
Branimir Jovanović is Economist at wiiw and country expert for North Macedonia and Serbia. His current research interests lie mainly around economic inequality, poverty, fiscal policy, taxation, social policies, labour rights, as well as financial crises and post-crises recoveries. Previously, he has done research on monetary policy, credit activity, exchange rates, trade, FDI, remittances, current account sustainability, forecasting, house prices.
The interactive graphics were created by Alireza Sabouniha. He is university assistant and a PhD candidate at the Leopold-Franzens University Innsbruck