Due to its geographical proximity to the European Union market as well as its impressive production quality, Bosnia and Herzegovina stands out as a favorable investment destination in particular for European manufacturers.
Jelica Grujic, Director of the Foreign Investment Promotion Agency (FIPA), highlighted that the largest share of foreign investments in Bosnia are directed at the country’s manufacturing sector. In a 2014 report the European Bank for Reconstruction and Development noted that the country has strong potential to further develop its processing industry: “BiH has a strong industrial heritage, an abundant supply of energy, and significant resources to support processing industries”.
Accounting for more than the quarter of the GDP (26.2%) industrial sector in the BiH represents a substantial driving force behind the economic development of the country. Raiffeisen Research in a 2014 report noted that industrial production grew at 6.7% in 2013 and is estimated to have risen by 1% in 2014 and 6.5% in 2015.
Mining & Metal Processing
Bosnia and Herzegovina is traditionally characterized by a strong metal processing sector. During the communist regime of the Yugoslavian period industrialization and in particular heavy mining and metal industry rapidly increased. Currently the sector is focused on manufacturing of basic metals such as iron, steel, lead, aluminum, copper, zinc as well as production of fabricated metal products. The metal processing industry in the BiH can be clustered into categories as follows: base metal joinery production (e.g. aluminum, iron, steel etc.), metal products (e.g. metal construction elements, machinery production), and automotive parts. Abundance and plurality of natural resources such as coal, iron ore and bauxite throughout the country is typical of the BiH. One illustrative figure is that according to estimates Bosnian reserves of iron ore reach over 650 million tons. Furthermore, with total aluminum production in 2012 BiH ranked as 32nd most important producer, surpassing countries like Italy, Turkey, United Kingdom as well as neighbors Montenegro and Slovenia. Moreover, Bosnia and Herzegovina is largest European exporter and producer of zeolite. Additionally, the availability of highly skilled labor force is yet another factor contributing to a strong metal processing industry. Presence of a redundant but qualified labor potential that is not matching with the labor supply leads to the easy an access to potential employee with necessary capabilities in the sector. Besides, inherited know-how from pre-war period as well as existing technical schools ensure the technological affinity and technical basis for metal processing.
Accounting for more than one third of Bosnian exports, the metal processing sector demonstrated an impressive performance in recent years with a steady growth rate of over 10%, making it the strongest exporter in the economy. The total exports of the metal processing industry was recorded at $1.98 billion in 2013. Moreover, CIB reported that the sector’s share in manufacturing is almost the quarter of the entire industry. Metal industries accounted for 2.87% of GDP in 2012. In 2014, the metal industry employed 31,716 workers equivalent to 4.7% of the overall workforce. According to 2014 figures by FIPA the cumulative FDI attracted by BiH amounted to $292 million by the end of 2013.
Zenica and Mostar are two important industrial centres in the BiH. While Mostar region is known as “aluminum valley”, Zenica is nationally known for its importance as an iron and steel production centre. Large firms both foreign and domestic take the lead in exports. ArcelorMittal, one of the world’s prominent steels and mining companies, has a production site in Zenica. In 2013 the ArcelorMittal facility in Zenica was the largest steel and iron producer in the BiH. The facility produced over 220 million Euros worth of metal exports. Comparatively, Aluminum Mostar, a large local firm produces around 150 million Euros per annum in exports.
An established steel and iron production capacity has long supported a domestic automotive industry with raw materials. A Volkswagen spin-off, Tvornica Automobila Sarajevo (Sarajevo Automobile Factory) was established in 1970 to assemble several models including the Golf, Jetta, and legendary Beetle in 1970s. In 2002 Volkswagen restarted their operations in the BiH and today several components are sourced from the country.
A broad spectrum of parts and components ranging from engines, gears, brake parts, pumps, filters and electronic parts are supplied by Bosnian manufacturers. 90% of Bosnian automotive sector production is for international consumption and is delivered to more than 30 countries around the world. In 2013, exports in the sector achieved a growth rate of 26.3%. The automotive parts manufacturing industry was valued at 176 million dollars in 2012 and remains the fastest growing sub-category of the local automotive industry. Foreign direct investment in the automotive sector was valued at roughly 80 million Euros or 1,42% of the total FDI stock by the end of 2013.
At a glance two issues are clear: Automobile industry in BiH is still in its infancy in terms of its size despite the long tradition and accumulated expertise. It remains focused on automotive parts.
In 2004 the Automotive Cluster in cooperation with GT (Gesellschaft für technische Zusammenarbeit, Association for Technical Cooperation) was established to foster the development of the industry by bringing together all actors in automotive supply chain. This initiative exemplifies one of many linkages between the larger German automotive industry and the BiH. That same year the American and Swedish development agencies agreed to fund $20 million worth of capacity building in the automotive sector.
Other manufacturers are beginning to take interest in the BiH’s automotive industry. The Enterprise Europe Network of the European Commission noted that “the Bosnian automotive industry provides numerous opportunities for investment… Potential investors can benefit from a highly skilled labor force and supporting infrastructure”. BiH offers possibilities for addressing high-value added components production as many firms in the industry are currently focused on manufacturing of specific components which have a low value and need to be further processed. Several prominent firms such as Cimos (Slovenia), Mann+Hummel (Germany), Bekto GmbH (Austria) as well as Prevent (Slovenia) have already been take the advantage of opportunities offered by BiH. In short, current relatively small size of automotive industry of the BiH should not be misleading as it deserves a closer look due to its promising future growth potential.
More than the half of the BiH is covered by forests (53%) and had been an important source of timber since Bosnia was part of the Austro-Hungarian Empire in the 19th century.
The World Bank reported in 2013 that the BiH, proportionate to its size, is one of the richest European countries in terms of breadth and array of its forestry resources. Bosnian timber capacity is estimated as 7 million m3 of round wood a year. A broad spectrum of raw timber materials ranging from oak, pine, ash etc. are produced in the country. In particular Bosnian beech wood is a high value product. Known as fagus sylvatica, it is widely used for furniture making as well as flooring. Thus, the BiH wood industry is capable of supplying a vast array of products such as all types of furniture and wood constructions, engineered products, panels, or plywood, veneer, pallets, decorative and ornamental confectionery and so on.
The wood processing sector in the BiH is export-oriented. Bosnian timber exports remain competitive due to the abundance of timber, production facilities and low costs of labor compared to nearby the EU countries. According to FIRMA, the timber industry in the BiH recorded a positive foreign trade balance. The export success of the BiH’s timber industry was also recognized by Food and Agriculture Organization of the United Nations (FAO). In 2011, the FAO counted the BiH among the top exporters of wood fuel. More recently timber and processed timber products earned the BiH a foreign trade trade surplus of $291 million in 2013, with total timber exports reaching $578 million recorded in 2013.
Forest resources in Bosnia & Herzegovina are among the richest in Europe in terms of their extent and variety relative to the size of the country, covering almost 50 percent of the land area. (World Bank, 2014)
The core export area for Bosnian timber is the European Union, Serbia and Egypt. The European Union markets such as Italy, Slovenia, Croatia, Germany, and Austria are all reachable via a few hours of highway travel are important destinations for timber exports. In 2013 the timber industry saw double digit growth of 14.2%, a total higher than the average export growth rate of 6.6%. Production of wood products is also growing faster than the economy as a whole. 2014, saw 12.5% increase in production versus 9.5% growth in the manufacturing sector over all. The 17,050 employees in the sector represent 13.5% of all manufacturing employees and 2.5% of total employment in 2013.
Despite this growth the wood processing industry is still far from reaching its actual capacity. Trade liberalization is an important aspect of attracting FDI in the sector. The enactment of the CEFTA (Central European Free Trade Agreement) in 2006 paved the way for a more open and liberal trade regime. Accordingly, there is an ongoing and rapid expansion of the industry due to rising external demand. The country’s labor market is competitive when compared to many OECD countries. Not only in terms of human capital but, also in terms of costs. In 2013, the average Bosnian industrial work had a monthly wage around 300 EUR, only one fifth of their Western European or American counterparts.
Taking such advantages into account, a number of prominent companies such as Hayat Group from Turkey located in Maglaj, Italian Cora Group in Omarska, as well as Daccomet AG in Prnjavor exemplify successfully running FDIs. Hayat Group is involved in the production of various types of paper and paper packaging while employing more than 800 workers. Cora Group has been in Bosnia since 2000 with a focus on production of semi-trimmed planks and furniture parts. Investment of Daccomet AG in Bosnian timber industry took the form of an acquisition as the Swiss company overtook 84.5% of the shares of Standard AD in 2004. The company is specialized in production of veneer furniture and has around 250 employees.
The first vocational school in the Balkan region focused on leather and footwear was established in Visoko in 1929. Today, the Textile industry in Bosnia is heterogeneous in character as it encompasses a plethora of manufacturing activities: textile production of raw materials (e.g. fibers, yarns), textile finishing, apparel manufacturing, leather processing, and footwear production.
The textile sector employs nearly 30,000 people, whereas 21,500 workers are in Federation of the BiH and the rest in Republike Srpska. This means that since 2006 employment in the industry has almost doubled. Average net salary was calculated as 190 Euros per month in 2012, making it very competitive against the European counterparts. The export performance of the apparel industry was valued at around $640 million in 2013, accounting for around 11% of Bosnian exports. According to statistical data provided by the Central Bank of the BiH the combined increase of exports in the textile sector was 13% in 2013.
Given that traditionally in Bosnian women have played an important role in the textile industry, promotion of the sector can lead to an increase in women’s employment. One of the key goals of the BiH is to reach above 50,000 workers in the industry. A step towards easier access to European Union for local textile products, was taken in 2001 when the agreement between the EU and BiH was signed. Combined with its free trade agreement with the Repblic of Turkey, the BiH has linkages throughout global textile markets, making it a favorable investment location in this sector. The U.S. sports apparel giant Nike operates in the BiH through a partnership with Sportek. Nike’s factory in the city of Kotor Varoš, employs more than 1600 workers in footwear production. It is the only Nike production site in Balkan region as of 2014 with the exception of a small facility in Rousse, Bulgaria. Another important shoe manufacture, Adidas maintains a full factory in Prnjavor. In sum, especially footwear production in the BiH is very impressive and textile industry as a whole is clearly promising.
Mining and metal processing, automotive, timber, food processing, and textile are considered as the promising sectors of Bosnia and Herzegovina. Amongst others, abundance of natural resources such as iron, steel, lead, aluminum, copper, zinc as well as accumulated expertise give the country a competitive advantage in metals and mining industry. Automobile components manufacturing dominates the domestic automotive sector. The wood processing sector is highly export oriented, which brought the highest foreign trade surplus in 2013. The textile industry has a long tradition and a strong export orientation and major international brands like Adidas and Nike now have production facilities in Bosnia. Nevertheless, manufacturing potential of the country still remains unleveraged and therefore foreign investors are encouraged.