Trade Reintegration of Southeastern Europe : The Role of Slovenia

This paper analyzes economic cooperation between Slovenia and the countries of the former Yugoslavia. We find the region still highly unstable and bearing a high trade deficit that may prompt the governments in the region to put restrictions on trade. In order to secure exports markets, a number of Slovenian firms are actively drawing foreign direct investment (FDI) into the region. We analyze this increased investment activity in some depth, combining survey and accounting data of Slovenian major investors into the Southeastern European (SEE) region in order to reveal their motivation for FDI. We find that, so far, trade-promoting rather than efficiency-seeking or resource-seeking motives are the driving force behind this increased investment activity. Slovenian firms are predominantly oriented toward increasing sales to the region from their Slovenian headquarters rather than toward setting up SEE production facilities in order to exploit local comparative advantages. The rationale for this is the still too-unstable political and economic environment of the SEE region, the low financial discipline of local customers, and the still underutilized resources of Slovenian-headquartered firms. Trade promotion might be a short-term strategy of Slovenian firms; in the longer run, however, we find some evidence in support of efficiency-seeking and resource-seeking motives.