Western Balkans participation in GVCs and FDI potential in the context of Smart Specialisation

This study examines the position of Western Balkan economies within global value chains (GVCs) and their capacity to attract foreign direct investment (FDI), linking the analysis with the broader framework of Smart Specialisation as a key pillar of the EU accession process and a strategic instrument for strengthening regional innovation ecosystems and deepening integration into the European Research Area. The results point to a steady increase in FDI between 2007 and 2022, accompanied by a growing role for services and knowledge-intensive activities, alongside differentiated trajectories of functional upgrading. Across multiple econometric specifications, the analysis shows that: (i) economic size, institutional proximity, EU integration and social connectedness are key drivers of international investment; (ii) obtaining EU candidate status increases FDI from EU countries by approximately 25–35% compared with non-EU sources; and (iii) while overall alignment with Smart Specialisation domains remains limited, it is more strongly driven by EU investors and reinforced by host-country R&D intensity and social connectedness. From a policy perspective, these findings suggest that more sophisticated economies - those more deeply embedded institutionally and relationally - are better positioned to attract strategic investment and support processes of functional upgrading and leverage Smart Specialisation as a mechanism for convergence within the EU integration process.