Kosovo’s investment landscape is at a critical juncture characterized by both significant positive potential and complex structural impediments.
To navigate the structural and political hurdles hindering the inflow of foreign direct investment (FDI) in Kosovo, the USAID Investment Promotion and Access to Finance Activity (the Activity), implemented by DT Global, has adopted critical approaches from the Market Systems Development framework.
USAID’s market system framework highlights the importance of understanding how public and private stakeholders interact within established rules and informal norms to influence the flow of goods and services. Effective engagement in this space demands a deep understanding of the motivations driving these actors and the relationships that shape their actions.
Key Challenges in Attracting Foreign Direct Investment
Initially, in tandem with USAID, the Activity advocated for the creation of a new investment promotion agency (IPA) based on a hybrid public-private model, including ensuring a degree of operational autonomy with an ability to recruit top talent, which is often hindered if entities are fully governmental. However, despite this concerted advocacy, the government ultimately chose to establish an executive public agency.
After this decision, the project undertook a thorough diagnostic of the primary challenges to greater investment promotion in Kosovo, identifying two major issues: an under-resourced, understaffed IPA and a still-limited government capacity to engage the private sector. Certain political rivalries and a lack of willpower have further hindered efforts to strengthen the existing agency.
Additionally, constitutional challenges slowed down the passage of the Law on Sustainable Investment (LSI), a critical prerequisite in establishing a new and revamped IPA and implementing structural reforms for attracting FDI. This had slowed the transfer of the IPA from the Ministry of Industry, Entrepreneurship and Trade to the Office of the Prime Minister (OPM). This slowdown may have contributed to persisting low FDI in Kosovo (among the lowest in Western Balkan countries).
The Activity’s Strategic Response: Navigating Political Agendas and Building Capacity
Once these challenges were identified, the Activity designed a strategy that balanced progress, agility, and strategic patience. By adopting a politically aware approach, the program ensured continued progress within Kosovo’s complex market system.
Building and Shaping Political Will
The enabling environment, which resulted in a low performance of the current IPA, required a more careful and adaptable approach. The Activity worked to emphasize political considerations that could strengthen best practices while being sensitive to the current political landscape. In Kosovo, the government has made efforts to demonstrate that strong public institutions can be developed and that governance challenges can be effectively addressed. With this in mind, the program decided it would be more prudent not to push for the creation of an autonomous, hybrid public-private entity, as it could risk undermining the progress and sustainability of the new IPA.
Shoring Up the IPA
When the government decided on the purely government-run IPA, the Activity pivoted to focus on supporting institution-building by providing best practices, lowering the risk of decisions being taken that would undercut potential growth and setting the new IPA ready to enable growth.
For example, the Activity provided direct advisement to the government on high priority markets and sectors for FDI attraction and encouraged them to design the new IPA’s structure, including personnel and services, around those markets and sectors thereby laying the groundwork for new investment. The program has also stressed the need to properly incentivize talent and build capacity to ensure the success of the IPA, while providing alternative solutions to strengthen its capabilities.
Since the new IPA is bound by public sector salary caps that fall short of attracting high-level talent, the Activity has advised the Kosovo government to consider subcontracting private service providers. Additionally, the Activity has emphasized the importance of the government effectively managing these providers to ensure the agency’s success. The program aims to guide the government on building a sustainable IPA. Building such an institution includes, among others, a range of activities such as: service design, organization processes definition, and key performance indicators (KPIs) development.
Furthermore, the Activity has taken the lead on supporting the development of a strong brand identity and branding strategy for the new IPA along with a sound business plan, which will include ongoing assistance in developing the agency’s future services.
Recommendations for Future Investment Promotion Programs
As the Activity continues to work within the complex market system in Kosovo, it has identified three primary recommendations for other projects also focused on promoting investments amid fluid incentive structures and political agendas.
Be mindful of institutional rivalries—By setting up the IPA in the OPM, the new Law on Sustainable Investments sought to placate the Ministry of Industry, Entrepreneurship and Trade, which lost the IPA. However, this balancing act risks fragmenting institutional effectiveness and policy coherence.
Build a strategic, diverse coalition of partners— the Activity began providing support for designing the new IPA after the first draft of the LSI had already passed in the parliament. Had the timing allowed pre-legislation strategic planning, the Activity would have sought to assemble a coalition of key donors, private sector leaders, and civil society stakeholders to ensure a more functional IPA structure.
Bring policymakers to successful models—Ensuring key policymakers and government officials understand the purpose and structure of successful IPAs in other contexts can significantly help preempt waning political will and commitments. Facilitating study visits to high-performing IPAs abroad can be immensely beneficial for garnering support for innovative IPA solutions.
