The aim of this article is to point out the promising industrial areas in the Western Balkans, in which the region as a whole, or its individual economies, has the potential to upgrade its current position in the global value chains. Furthermore, the article also devised a set of policy options that policy makers but also the companies in the region can use to support these industrial areas.

The article is focused on the following 6 industrial areas:

·        Agri-food;

·        Textiles;

·        Automotive;

·        Energy;

·        Tourism;

·        IT

The selection took into account a wide range of criteria, including:

·        the share of the industries in GDP;

·        the number of people employed in the industries;

·        the revealed comparative advantage of the

·        Western Balkan economies in these industries;

·        the relative position of the Western Balkan economies

·        in the global value chains in these industries;

·        the share of domestic value added in the industries’

·        exports;

·        the share of value added in the industries that comes from the Western Balkan economies;

·        the number of patents in the industries;

·        the number of scientific citations;

·        the existence of export

·        and innovation promotion programs;

·        the existence of business support organizations;

·        the compatibility with existing EU agendas.

In turn, we summarize the main reasons for the selection of each of the six industries.

The agri-food industry is characterized by a large share in most economies of the Western Balkans, both in terms of GDP and in terms of employment. In terms of GDP, the share of agri-food varies from 25% in Albania to slightly above 10% in Montenegro and Bosnia and Herzegovina. All economies in the region (except Albania) have a revealed comparative advantage in this sector. In addition, the industry is supported by various public or government programs. It aligns with the agenda outlined in the European Green Deal, primarily in terms of ecological and sustainable food production. Scientific potential in agricultural and biological sciences is one of the strongest in the region, with several regional institutions having a high reputation even in the EU bodies.

The share of the textile sector in GDP is not very high in the Western Balkans – it accounts for up to 4% of value added in North Macedonia, for around 3% in Albania and Bosnia and Herzegovina, and for 2% or less in the remaining economies. Even so, the sector is important because it employs a large number of people in the region, despite being low-value-added and labor-intensive. For Albania, Bosnia and Herzegovina, and North Macedonia, the data indicate that the industry has a revealed comparative advantage. The industry is also important for social cohesion, as it is mainly located in poorer or even deprived areas with fewer opportunities and thus helps to reduce poverty and inequalities. The industry also employs predominantly female workers, contributing in this way towards gender equality and emancipation. Furthermore, the industry has a strong tradition in the Western Balkan economies, whose workforce is skilled in such activities. It also has great potential for interindustry linkages (e.g. connections with the automotive industry, agriculture and food) as well as intraregional linkages (i.e. connections between different companies from different Western Balkan economies), thus offering scope for intra-regional co-operation.

The automotive sector accounts for a relatively small share of value added in most Western Balkan economies – the share is highest in Serbia and North Macedonia, at around 1.5% of GDP. Of the six economies, only Serbia and North Macedonia have a slight revealed comparative advantage in the sector. The main reason why this industry was selected is because it has the greatest potential for catch-up and technological upgrading. It is highly integrated into global supply chains, and although at the moment the backward linkages dominate (i.e. it has a high share of imports), over time it is expected that the forward linkages will grow (i.e. the share of exports will increase), as the companies that are active in this area are rather new, having been established only in the past few years, and are expected to upgrade in the coming years. The industry is continuing to attract strong inflows of FDI into the region. It is also characterized by a pronounced scope for linkages to other technology-intensive industries. Finally, it has a direct connection to the European Green Deal agenda.

The energy sector is rather large in the Western Balkans, with shares of value added ranging between 3% and 6% in all the economies. All the economies show strong revealed comparative advantages, in most cases even with an increasing trend. Moreover, in all the Western Balkan economies the sector has an ‘upstream’ position in the global value chains (i.e. high share of exports), which is another positive feature. The industry is supported by various government initiatives in the region and is also very relevant for the European Green Deal. The scientific potential of the region in the energy field is also strong, with a number of educational, scientific and research organizations that may support and improve industry competitiveness through innovation and research and development (R&D). Finally, Western Balkan economies possess rich and unused natural resources for the production of energy from renewable sources.

The share of the tourism sector in total value added varies between 1% in Kosovo to just above 10% in Montenegro. In all economies with the exception of Bosnia and Herzegovina, these shares have shown a slight upward trend since 2012. Albania and Montenegro have a revealed comparative advantage in this sector, which is to be expected because they are recognized tourist destinations. The other economies do not have this advantage, but their prospects are improving, as all economies from the region have a high potential for tourism development, including winter, spa, rural, historical and health tourism, for example. Tourism has also many linkages to other industries, such as agriculture and food, as well as to future goals for preserving and restoring ecosystems and biodiversity, which are directly related to the European Green Deal agenda. Finally, tourism can have positive implications for social outcomes, as it contributes to balanced regional development and employs many people, especially from socially disadvantaged groups, such as women and youth.

Finally, the IT industry accounts for almost 3% of value added in Serbia and almost 2% in Bosnia and Herzegovina and North Macedonia, although only around 1% in Montenegro, Albania and Kosovo. In all economies (with the exception of Montenegro) the shares are increasing. Data for Serbia and North Macedonia indicate a slight revealed comparative advantage with an increasing trend. Such a trend can also be seen for Bosnia and Herzegovina and Albania, albeit from a lower level. The industry is linked to the EU digital agenda, and also has support from the regional governments through various initiatives. It has a strong business community in the region, and links with global players from the industry already exist and increase the potential for employability and competitiveness.

HOW TO SUPPORT THESE INDUSTRIAL AREAS?

The general strategy for the agri-food sector should be to focus on providing premium rather than cheap products. The Western Balkan economies have the potential to provide high-quality, ecologically friendly products that can be competitive even with a relatively high selling price, and should thus try to capitalize on this advantage. This would have certain positive social effects as well, such as reducing poverty and inequality, as individual agricultural producers in the Western Balkans often tend to come from poorer backgrounds. In addition, future policies should bring about more environmentally friendly production strategies in agriculture. Some of the actions that policy makers in the Western Balkans could undertake in order to achieve this would be:

·        Providing support for adopting new, modern and clean production technology;

·        Providing support for introducing new premium products and own brands;

·        Designing special financing schemes for individual agricultural producers and the food industry, such as favorable loans or loan guarantee schemes;

·        Providing direct support to producers and firms for adopting quality standards required in EU countries

·        Assisting with the transportation of final goods, especially for small producers;

·        Investment in agricultural infrastructure (irrigation, sewerage etc.);

·        Fostering networking between producers through clusters, for example, in order to improve cooperation between them.

The overall strategy for the development of the textile industry should be to transform the sector from its current low-value, low-cost position to a high-value position, where local firms would provide highquality final products, under their own brands, that will compete not only on price but also on quality. Some options that policy makers in the Western Balkans could undertake for this sector would be:

·        Providing special support, both in finance and in knowledge, for developing own clothing brands;

·        Support for technological upgrading of the firms operating in the sector in order to improve productivity and competitiveness and to increase production capacities;

·        Ensuring that there is enough skilled labor for the industry for the coming period by improving vocational education in this area and by improving the existing professional schools;

·        Increasing the attractiveness of the industry by improving the working conditions and ensuring that the level of wages corresponds to them;

·        Repairing the broken linkages between agricultural production from the region and the textile industry by promoting sheep and cattle breeding in order to improve the availability of cheaper and higherquality raw materials.

The automotive sector, which has been dominated by foreign companies recently, should turn towards higher-value-added activities that are based on high technology, instead of relying only on cheap labor. Additionally, efforts should be made to improve co-operation between local and foreign companies in this area. Some options that policy makers from the region could pursue would be:

·        Focusing efforts to attract foreign investors in technologically more advanced companies at the highervalue-added end of the supply chains;

·        Enhancing co-operation between foreign investors specializing in this area and local educational

·        institutions (i.e. universities and high schools) by opening research centers, technological parks and the like;

·        Enhancing co-operation between local and foreign companies through B2B events, fairs, expos and other similar events, so that local companies become parts of value chains in this area;

·        Ensuring that raw materials are sourced locally as much as possible by helping local companies to adopt international standards;

·        Providing financial support to local companies for investment in new technologies and innovation so that they could co-operate more closely with foreign companies

The overall strategy for the energy sector should be to focus on renewable energy, energy efficiency, reduction of emissions and reduction of pollution in accordance with the Green Agenda for the Western Balkans and the European Green Deal.

Some possible policy options for this industry could be:

·        Increasing public investment in renewable energy, energy efficiency, ecological transportation,

·        reduction of CO2 emissions and reduction of pollution;

·        Improving access to finance for companies willing to invest in this area by designing special favorable

·        credit lines and providing credit guarantee schemes;

·        Enhancing co-operation between higher education institutions and companies through opening

·        technology parks, innovation centers etc.;

·        Fostering the adoption of new technologies by companies from this field through direct financial

·        Measures;

·        Providing subsidies to citizens and firms for use of renewable energy and energy efficiency.

The overall strategy for the tourism industry should be to transform the sector into an industry that offers a unique and premium experience, based on alternative tourism. Several recommendations could look at:

·        Developing alternative tourism activities by focusing on the areas in which the region is rich, such as ecotourism, rural tourism, heritage tourism, religion tourism, spa tourism, hiking tourism, culinary tourism, wine tourism etc.;

·        Increasing public investment in infrastructure related to tourism;

·        Improving the promotion of the region to clients from the big global markets (the EU, the US and Asia) with the purpose of entering those markets and establishing the region as an alternative to conventional tourist destinations;

·        Upgrading the skills of tourism workers by improving existing vocational education and providing special tailor-made professional education.

Finally, the overall strategy for the IT industry should be to focus on greater innovation while supporting the successful development of the sector in general.

Some options for this industry could be:

·        Providing special support for innovation activities through financial aid and guarantees, so that local innovative companies can become leaders in their fields of operation;

·        Providing an attractive ecosystem for the development of the sector by supporting start-ups, opening technological parks etc.;

·        Increasing the availability of IT workers by expanding the capacity of the educational institutions in this field;

 

·        Providing favorable financing opportunities for firms that want to invest in this area and expand their activities.