Free Trade and FDI in Kosovo: Prospects for Integration into the EU and Turkish Production Networks

Abstract. Kosovo has recently signed two major trade agreements, the SAA with the EU, andan FTA with Turkey. However, as the experience from developing countries shows, trade liberalisation is a precondition, but it does not ensure economic growth and prosperity, especially when the supply-side constraints limit country’s ability to reap the benefits of free trade. Violencein the nineties; years of underperforming post-war institutions; the neglect of policy reforms, especially poorly managed privatisation process; reduced greatly Kosovo’s industrial base and its manufacturing capacities. Moreover, these factors, coupled with problems with the rule of law, produced a high-risk environment that is deterring the inflow of foreign capital. Following the signing of the two agreements, one can expect that Kosovo will become more attractive tothe European and Turkish investors. In addition to other benefits, the flow of foreign capital may enable Kosovo’s industries to integrate intothe global value chains. However, as with free trade, the impact of FDI inflow and the integration into global value chains depend largely on domestic market conditions. This paper provides a discussion on the developments regarding trade liberalisation and FDI, and the opportunities the latter create on the integration of Kosovo’s industries into global production networks. In terms of policy directions, the paper argues that, although the trade liberalisation will act as a pull factor, the existingstructural impediments in Kosovo will mostlikely limit the flow of foreign capital and the impact of the existing FDI in Kosovo, specifically, integration into global value chains.Keywords. Trade liberalisation, FDI, GVC, Kosovo.JEL. F15, F23, F60