Accelerating Sustainable Growth in Albania through Targeted Investment Promotion

Authors: Daniela Muhaj and Tim O'Brien

"[Targeted investment promotion] requires people in and out of government to imagine
what is not yet there, figure out what is needed to establish it, and determine whether
it would be both feasible and valuable to society."

- Ricardo Hausmann

Between 2014 and 2018, the Albanian economy experienced accelerating growth and structural transformation, which has been tied to the arrival of foreign companies (Hausmann 2018). Our updated growth diagnostic tracks Albania’s recent growth history and describes key steps needed to seize additional growth opportunities. Albania has the potential to realize much more and more diversified foreign direct investment (FDI), which will be critical to accelerating sustainable growth in the period of global recovery from COVID-19. The Growth Lab team coordinated with the Government of Albania to research, develop tools and build capacity toward this end.

TIP is a coordinated approach to addressing the information
problem in attracting efficiency-seeking FDI that
can thrive without costly incentives.

The Government of Albania (GoA) is pursuing various investment promotion and attraction strategies (see Table 1). The targeted investment promotion (TIP) approach complements existing tools by capitalizing on Albania’s many existing comparative advantages to attract efficiency-seeking FDI. TIP would not displace Albania’s Strategic Investment Law, which provides incentives for certain investments, nor the activities of the Albanian Investment Corporation (AIC), which aim to expand the country’s comparative advantages. Efficiency-seeking FDI — global companies that expand into Albania to serve global markets because it makes them more productive — will not need extensive tax incentives, regulatory exemptions, or other subsidies. In fact, an overreliance on these approaches can — and probably does — crowd out firms that do not want or need to rely on government support (see Figure 1). Leveraging targeted investment promotion within Albania’s growth strategy would lead to more jobs, better quality jobs, faster convergence with the income levels of the rest of Europe, and ultimately less outmigration.

Table 1: Three Distinct Tools for Investment in Albania

Government Tools Goal / Type of Investment / Requirements
Targeted Investment Promotion (TIP) Network

To overcome the information scarcity or misinformation problem in attracting efficiency-seeking FDI that can thrive in Albania without costly incentives.

  • Since TIP requires specific pitches to specific companies, activities must be targeted.
  • Targeting implies using evidence to identify companies whose investment is both viable in Albania and attractive to Albania, creating communication strategies, and coordinating the investment promotion network to generate leads and facilitate investment.1
Law on Strategic Investments

To utilize a private investment incentive package that would deliver very large economic benefits, which may not be commercially viable in Albania without such incentives.

  • Strategic investments will sometimes be related to infrastructure.
  • The criteria to qualify for this package should be strict such that otherwise viable companies hold out for tax breaks and other incentives in order not to absorb all state resources for investment promotion.
Albanian Investment Corporation (AIC)

To develop investment projects that are not commercially viable by the private sector because they require the active participation of the public sector in some form.

  • AIC investments will usually require innovative project vehicles that have not been used previously in Albania and thus need a specialized institution and capabilities to develop them.

1 Promotion does not stop with first contact or the generation of a "lead." It must continue in the form of proactive follow-up (or "facilitation"). This facilitation involves both connecting specific companies to specific locations where they can set up operations and helping companies to efficiently solve specific delays and roadblocks that may arise through coordination with various public sector entities.

Figure 1: Key Elements of Targeted Investment Promotion in Albania

Targeted Investment Promotion
Identify companies through an objective process to prioritize those that would be both likely to thrive in Albania and deliver significant economic benefits. Focus on efficiency-seeking FDI – business investments, which can expand in Albania because they can thrive in producing goods and services that they sell not only in Albania but also to the rest of the world. Engage in proactive and iterative promotion efforts, whereby a coordinated network of Albanian officials’ contacts companies that could thrive in Albania.
Make clear and well-developed cases (pitches) as to why and how a foreign company can succeed by investing to expand their business operations in Albania. Prioritize companies that employ Albanian workers, and seed industries and innovation in the Albanian economy that drives up wages and builds the economy of the future. Support the process of business entry and start-up of operations without the need for use of tax incentives, free land, regulatory exceptions, or other incentives, as these companies are poised to be profitable without such giveaways.

Source: Growth Lab elaboration.

To translate the concept of TIP into practice, our Policy Research and Digital Development & Design teams worked closely with the Albanian Investment Development Agency (AIDA) to build several tools to enhance the Government of Albania’s ability to implement TIP, and then convened working meetings to begin to apply them. Our goal was to collaboratively identify several potential starting points where the AIDA Research Unit could begin to develop targeted pitches and informed strategies for outreach. These starting points were generated through an objective process that drew on evidence from our Albania Industry Targeting Dashboard, which can be used together with the Atlas of Economic Complexity. Both are publicly available tools that can be used to help identify global businesses whose investment would be both viable in Albania and attractive to Albania. Our initial analysis indicated that the following industries represented promising starting points for AIDA to organize TIP activities around:

  1. electrical wiring and devices
  2. plastics and derivative products
  3. agriculture exports, food, and seafood processing
  4. software development, data processing, hosting and related activities.

Investment starting points were identified through an evidence-based
process drawing on insights from our collaboratively
developed open-source tools.

Exploring One Example

Once a broad industry is identified, the process then requires a more in-depth research dive to build a business case and a customized investment pitch. Let’s take a closer look at the case for expanding software development, data processing, hosting and related activities. This is an industry with high viability and very high attractiveness in Albania, and a prospective area of dynamic international investment in the wake of the COVID-19 pandemic. Given the development and growth of Business Processing Outsourcing (BPO) in recent years, Albania already has firms intensively involved in business services in comparison to the rest of Europe. While the growth of the sector has been mainly driven by call centers and customer-service related activities, recently higher skilled opportunities such as accounting and auditing services, data processing and web services have emerged. There are examples of successful companies who have been able to invest and scale in Albania (see mozenda as an example). However, the opportunities for moving beyond the call center model to more complex business outsourcing opportunities are vast but poorly identified to date.

The types of questions that could be asked while conducting additional research to identify specific opportunities in software development, data processing, and related activities include:

  • What are the higher end business services that have already emerged in the past few years and how can they be scaled? Are there opportunities to collaborate with leading companies in Albania that would now like to see the ecosystem grow to develop sophisticated pitches to other companies?
  • What additional opportunities does the existence of accounting, web services and data processing activities unlock? What are the main regional and global companies in these areas? Who has expanded into the Balkans in recent years? What are their business and expansion goals? Do they match Albania’s comparative advantage?
  • What emerging sub-sectors and applications are scaling because of COVID-19? Among these, where might Albania have the greatest viability?

The proposed list of starting investment opportunities and the example outlined above are far from exhaustive. They merely provide some ideas with which to start. The process of identifying opportunities and generating customized pitches should be ongoing and iterative within and across targeted industries.

Investment starting points were identified through an evidence-based process drawing on insights from our collaboratively developed open-source tools.

Coordinating within Government to Coordinate with New Investors

It is also important to recognize that targeted investment promotion in practice is not something that can be done by isolated individuals but rather requires a coordinated network of government actions. Albania already has several parts of a network in place (see Figure 2), including AIDA and numerous ambassadors abroad that have been trained in economic diplomacy. AIDA also utilizes the internal e-Invest platform as a tool for coordinating the network to ensure that investment leads receive appropriate follow-up attention and that progress through the investment process is tracked. This network has allowed for some improvement in Albania’s investment promotion. However, the fruits of investment promotion remain limited because the network’s actions are not targeted. Addressing these bottlenecks and expanding the investment promotion network though efforts like the recent Connect Albania platform, which mobilizes diaspora members in advancing investment attraction efforts, could result in many more promising leads and an effective facilitation process.

An effective TIP practice requires a coordinated network of institutions and stakeholders that can pursue well-identified investment
leads by employing a consistent approach.

Growth Lab research and capacity building in Albania has found that the key step needed to make TIP fully functional in Albania is a strong coordination mechanism at the top. This could be an individual appointed by the Prime Minister with a specific mandate to activate TIP, who would be authorized to develop KPIs for various parts of the network, monitor actions, and direct funding to fill in gaps that emerge. Importantly, TIP would be extremely inexpensive for its expected benefits in stronger growth and job creation. Directed spending on the order of a few hundred thousand dollars per year to expand staffing in different units and improve information tools would be expected to increase the rate of economic growth and income levels across Albania for years to come.

Figure 2: Schematic of the Investment Promotion Network in Albania

Source: Growth Lab elaboration.

A successful TIP approach, which should be iterative and adoptive over time, has the potential to unlock complementary investment and growth opportunities in Albania and beyond. As developing countries around the world gradually and unevenly emerge from the COVID-19 pandemic, pressures to deploy scarce fiscal resources wisely will continue to amount. With limited room for costly incentives, countries can utilize a targeted approach to investment promotion to attract the type of investments that can rightly serve their development needs. Instead of merely focusing on compensating desirable investors for what a country lacks, governments can and should target investors that can gain efficiency and scale based on country-specific comparative advantages. TIP provides a framework for organizing an effective investment promotion network that can systematically identify and pursue promising growth enhancing opportunities.