Serbia's foreign investment model leaves factories isolated from local economy, says UCL professor Slavo Radošević

Serbia has drawn large volumes of foreign direct investment (FDI), but much of that capital remains poorly integrated with the domestic economy. According to Slavo Radošević, professor emeritus at University College London, this limits the transfer of technology, productivity gains and business opportunities to Serbian companies.

Radošević argues that foreign factories often operate as isolated production enclaves. They employ local labour but rely heavily on imported technology, components and established international supply chains. The model can support employment and exports without necessarily producing the broader industrial upgrading expected after years of high FDI inflows.

In his assessment, the key policy question is no longer how much foreign investment Serbia attracts, but how deeply those investors are embedded in the domestic economy.

Limited role for local suppliers

Serbia has traditionally competed for investors through subsidies, comparatively low labour costs and preferential treatment for large projects. Radošević argues that the country has generally not used investment agreements to systematically raise the participation of domestic suppliers or to build industrial clusters around major foreign companies.

A more strategic approach, he suggests, could require or encourage investors to gradually increase local sourcing, develop Serbian suppliers and cooperate with universities and technical schools. The aim would be for one large foreign investment to eventually support dozens of domestic firms rather than remain a stand-alone plant.

Research cited by Radošević indicates that such spillover has largely failed to materialize so far. He describes foreign investments in Serbia as effectively industrial enclaves, with insufficient transfer of knowledge, technology and demand to the wider economy.

Rising wages add pressure

The issue becomes more pressing as labour costs in Serbia rise. A factory that came mainly because workers are inexpensive may have little reason to stay once wages approach those available elsewhere in Central and Eastern Europe.

Radošević says policymakers should therefore move existing investors toward higher-productivity activities instead of trying to preserve labour-intensive production indefinitely through subsidies. This could mean shifting plants toward engineering, research and development, automation and higher-value components. Universities and vocational schools would supply the skills such operations require, while lower-value production could gradually move to cheaper locations.

Without such upgrading, he argues, rising wages could turn one of Serbia's main investment advantages into a vulnerability.

EU alignment is not a development strategy

Radošević also questions the assumption that closer alignment with the European Union will automatically speed up economic convergence. Serbia and other Western Balkan economies have access to European markets, investment and funding while gradually adopting EU legislation and institutions. But in his view, proximity and regulatory alignment are tools, not development strategies.

Governments need their own industrial objectives, he says, and must decide how EU funds, trade access and foreign investment will be used to expand domestic productive capacity. Without that, EU money can finance infrastructure and public services without changing the structure of the economy. He warns of a risk that governments focus on how much external financing they can absorb and spend, rather than on whether it raises productivity.

From investment policy to industrial policy

The argument draws a line between two approaches. An investment policy asks how to attract another foreign company. An industrial policy asks what the Serbian economy should look like 10 or 20 years from now, which sectors should become more competitive, and how foreign investors can help build the needed capabilities.

Under the latter model, state incentives would be tied to outcomes such as:

• participation of domestic suppliers;
• technology transfer and workforce training;
• research and development carried out locally;
• higher domestic value added;
• cooperation with universities;
• movement toward technologically advanced production.

Success would then be measured less by the number of jobs announced at a factory opening and more by how much additional economic activity the investment generates around it.

Regional coordination and Chinese capital

Radošević further argues that Serbia's negotiating position could improve if Western Balkan economies coordinated their industrial policies instead of competing individually for investors. Serbia, North Macedonia and neighbouring economies often offer subsidies and concessions to attract the same types of manufacturers, which can strengthen the investor's bargaining position at the expense of governments.

A more integrated regional market could be presented as a larger production base, with governments agreeing on basic principles for subsidies, local sourcing and industrial development. According to Radošević, this would give the region more leverage with multinational companies and major economic powers.

He sees this as particularly relevant for Chinese investment, given Serbia's location next to the EU market. The goal, he says, should not be to restrict Chinese capital but to use it to develop local suppliers, skills and technologies, rather than letting projects remain economically detached from the rest of the country.

What happens after the money arrives

Headline FDI figures show only part of the picture, the analysis notes. A fuller assessment would look at how much equipment and intermediate goods are bought domestically, how many Serbian suppliers join the value chain, whether employees gain transferable skills, whether research is done locally and whether Serbian companies eventually develop their own products.

These indicators determine whether foreign investment builds a lasting industrial ecosystem or simply a collection of foreign-owned factories located in Serbia. Cheap labour and subsidies can attract production in the early stages of industrial development, but they are less effective at delivering the productivity gains needed in the next stage.

Radošević describes the challenge as a shift from attracting capital to extracting development value from capital. If foreign companies stay isolated, FDI can keep supporting exports, employment and headline GDP with limited effect on the technological capacity of the wider economy. If they are systematically linked with local suppliers, universities and domestic industrial policy, the same capital could help Serbia move toward a higher-productivity economy.

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