The challenges of investment arbitration: success or failure? A comparative analysis of investment arbitration in north Macedonia and Kosovo

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The challenges of investment arbitration: success or failure? A comparative analysis of investment arbitration in north Macedonia and Kosovo

Njomeza Zejnullahu, Bashkim Nuredini

Abstract

Background: In today's modern business and technological landscape, businesses are increasingly inclined to seek alternative methods for resolving disputes rather than rely solely on traditional court procedures. Businesses are also increasingly aware of the significance of resolving conflicts through alternative means and taking proactive measures to avoid litigation. In recent decades, investment arbitration has gained widespread acceptance and has emerged as a preferred mechanism for resolving disputes involving international investors in Western Balkan countries. Some countries demonstrate a favourable inclination towards employing arbitration as a dispute resolution mechanism by enacting legislation that grants investors the right to initiate arbitration proceedings against the state in case of failure.

This scientific research objective will be achieved through the reflection of the legislative framework in the matter of investment arbitration as well as the reflection of the flow of foreign investments, analysing and not limited to the treatment of concrete cases of arbitration disputes. Through this approach, we will answer the central question of how much arbitration as an alternative dispute resolution mechanism is a stimulating factor for attracting foreign direct investment or whether multinational companies only use the legislative and incentive favours offered by the Republic of Kosovo and North Macedonia.

Methods: The article was conceived based on a modern methodological framework. Within the general methodological framework of scientific research, logical methods play a crucial role in the scientific processing of the research data, drawing conclusions and determining facts through which the truth of the thesis of the work is reached scientifically. In the context of this paper, the method of analysis through which the impact of arbitration as an alternative dispute resolution mechanism in relation to the flow of investments will be analysed is noteworthy.

Additionally, methods of abstraction and concretisation will also be used. Abstraction is the basis of analysis, which sometimes represents the separation of parts from the whole subject. Moreover, the comparative method will highlight the diverse normative solutions in national legislation and international legal sources.

Results and conclusions: In the article, the authors propose considering the effectiveness of existing provisions and determining whether adjustments or alternative approaches are needed to maximise the benefits of foreign investment while minimising potential risks and uncertainties associated with dispute resolution processes.

Introduction

Arbitration's evolution has followed different trends in various periods of economic and social development. The speed and efficiency of dispute resolution are pivotal in attracting foreign investments, which is essential for any country's economic development. From an investigator's perspective, arbitration emerges as a fundamentally more accessible method of dispute resolution. Mariel Dimsey, The Resolution of International Investment Disputes: Challenges and Solutions (Eleven International Pub 2008) vol 1.

This paper aims to identify whether authorising foreign investors the right to sue a country in international arbitration forums serves as a catalyst for attracting foreign investors. It addresses this question in a comparative aspect by comparing the legislation of Kosovo and Macedonia, two neighbouring countries with similar legal, social and economic systems.

Structured logically and chronologically, the paper initially deals with the legislative aspects of foreign investments and then the flow of investments. The theoretical analysis relies on professional literature in the field of arbitration law, specifically examining the works of experts who have significantly contributed to research in alternative dispute resolution. The literature review method aims to summarise reliable prior knowledge and gain insights from the published scientific literature.

In addition to the doctrinal perspective of investment arbitration, as a result of the expectations of the paper's thesis, aspects of the foreign investment pool are treated through empirical data as a reference point in relation to the paper's research objectives.

In countries where the judiciary is slow and inefficient, alternative methods such as arbitration and mediation are sought. This need is expressed primarily in developing countries, which undergo thorough scrutiny by foreign investors evaluating the investment environment they offer. Respecting an investor's property rights is one of the most important elements when deciding whether to start an investment project in a third country. Michal Bors, `Indirect and creeping expropriation and investor's protection under international investment law' (2014) 21 Studia Iuridica Lublinensia 181, doi:10.17951/sil.2014.21.0.181.

In Western Balkan countries, the rule of law and the efficiency of dispute resolution by the judiciary remain challenging. Consequently, the European Commission (EC) Report on Kosovo for 2022 states, “The efficiency of the judicial system remains of concern, and the time taken for judgements (i.e. the average time from filing a court case to receiving a judgment) remains a cause for concern as they are overall far too long. European Commission, `Kosovo* 2022 Report: Communication on EU Enlargement policy' (European Commission, 12 October 2022) 22 While EC 2022 Report on North Macedonia highlights “the positive trend of the efficiency in the judiciary.' European Commission, `North Macedonia Report 2022: Communication on EU Enlargement policy' (European Commission, 12 October 2022)

The attraction of foreign investment is crucial for economic development, particularly for countries under development.

In general terms, foreign investment involves a person or legal entity from one economy investing in another economy that involves a transfer of funds or capital into the economy in which the investment is made. Foreign investment involves capital flows from one country to another, granting foreign investors extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategy.

A modern trend is toward globalisation, where multinational firms have investments in various countries. James Chen, `Foreign Investment: Definition, How It Works, and Types' (Investopedia, 26 October 2020) It is worth emphasising that investment arbitrations and commercial arbitrations differ in several aspects, particularly in terms of how jurisdiction is established. In investment arbitrations, there is no arbitration agreement; rather, jurisdiction is based on an investment protection agreement that includes a general "offer" by the state or permission for a foreign investor to initiate arbitration proceedings if they believe their investment has been harmed.

Mamingi and Martin highlight the role of FDI in facilitating growth and economic transformation among developing countries and the fact that FDI has become the largest source of external finance for developing economies. Nlandu Mamingi and Kareem Martin, `Foreign Direct Investment and Growth in Developing Countries: Evidence from the Countries of the Organisation of Eastern Caribbean States' (2018) 124 CEPAL Review 79,

Kosovo legislation defines foreign direct investment as “any asset owned or otherwise lawfully held by a Foreign Person in the Republic of Kosovo to conduct lawful commercial activities.” Law of the Republic of Kosovo no 04/L-220 of 12 December 2013 `On Foreign Investment' [2014] Official Gazette of the Republic of Kosovo 1/1, art 2, para 1.4.

In contrast to the Law on Foreign Investments in Kosovo, which provides a clear definition of a foreign investor as a foreign individual or entity investing in the Republic of Kosovo, the legislation in North Macedonia lacks a specific normative definition that directly outlines the status of foreign investors.

Consequently, some countries tend to use arbitration to strengthen dispute resolution and, hence, attract foreign investments. Other countries offer attractive conditions for investors while leaving arbitration as an option for dispute resolution but not an obligation. Federica I Paddeu, `The Impact of Investment Arbitration in the Development of State Responsibility Defences' in Christian J Tams and Stephan W Schill (eds), International Investment Law and General International Law: Radiating Effects? (Edward Elgar Pub 2023) 209.

Both countries have adopted laws on the arbitration procedure, which are fully unified with the international arbitration law. However, the names of these two laws differ. The law in Kosovo bears the title “Law on Arbitration”, while in Macedonia, this act is called the “International Commercial Arbitration Act”. Mentor Lecaj, Granit Curri and Donat Rexha, `The Application of the International and Domestic Arbitration Law in Settlement of Legal Disputes: A Comparative Study' (2022) 6(3) Corporate Governance and Organizational Behavior Review 150,

This paper is structured as follows: an introduction, the second section providing an overview of foreign investments, the third section delves into the legal and policy framework for FDI in Kosovo and Macedonia followed by statistical data on FDI in the fourth section, and finally, the results and conclusion.

The paper's conclusion will reflect the general analysis of the facts and the interpretation of the legislative framework in the states under analysis. Based on the proven facts, it will be ascertained whether arbitration as an alternative dispute resolution mechanism is a factor simulative in increasing the level of foreign investments or if, in some cases, arbitration may pose challenges to governments and strain state budgets, without significantly affecting the increase in the flow of investments. In some cases, it may present a privileged status of foreign companies over domestic companies, which, in case of eventual disputes, resort to judicial forms of dispute resolution.

Statuses of the FDI in Kosovo and north Macedonia

As illustrated in the graph below (Graph 1), CEIC, `North Macedonia Foreign Direct Investment' (CEIC Data, 2023) Foreign Direct Investment (FDI) in North Macedonia experienced a notable rise of USD 59.6 million in September 2021, marking an increase from the previous month's growth of USD 49.3 million. The data peaked at USD 347.3 million in January 2001 while hitting a record low of - USD 159.1 million in

December 2020. According to the most recent reports from North Macedonia, the Current Account displayed a surplus of USD 20.8 million in September 2021. Furthermore, North Macedonia's Direct Investment Abroad expanded by USD 35.0 million in the same month, whereas its Foreign Portfolio Investment witnessed a decline of USD 551.4 million. Notably, the country's Nominal GDP was reportedly USD 3.6 billion in December 2020.

In January-September 2021, total direct investments in the country amounted to EUR 285.6 million, mainly as a result of the reinvestment of earnings and equity (EUR 196.7 million and EUR 113.2 million, respectively) amid decreased net liabilities based on intercompany lending (by EUR 24.3 million).

Graph 1. Foreign direct investment in North Macedonia from October 2000 to September 2021

The data reached an all-time high of USD 347.3 million in January 2001 and a record low of -USD 223.7 million in November 2022.

Hence, the data in the above table indicate a positive trend of FDI in North Macedonia, which, in particular, is focused on the reinvestment of earnings and equity. The trend has remained constant and has not changed significantly over the years. The National Bank of the Republic of North Macedonia provides monthly Foreign direct investment in USD (Graph 2). National Bank of the Republic of North Macedonia, `Direct Investment-Flows' (National Bank of the Republic of North Macedonia, 2023)

Graph 2. Direct investment in the North Macedonia - transactions

North Macedonia's Foreign Direct Investment (FDI) increased by USD 66.3 million in June 2023, compared with an increase of USD 99.0 million in the previous month (more data in Table 1). CEIC (n 10).

In 2022, the net flow of FDI in Kosovo was estimated at EUR 778 million, a significant increase from EUR 420 million in 2021 (Table 2). Central Bank of the Republic of Kosovo, `Foreign Direct Investment - by Country' (Banka Qendrore e Republikes se Kosoves, 2023)

Largest FDI by country is Germany and Switzerland, followed by the US and Albania (Table 3). idid.

Table 1. Foreign direct investment in North Macedonia from January 2001 to June 2023

Table 2. Foreign direct investments in Kosovo by country (net)

Table 3. Largest Foreign direct investments in Kosovo by country

According to the tables above, data show no significant increase in FDI. It is important to analyse this in view of the fact that the above-given investment data are investments provided by the diaspora and not FDI in terms of attracting foreign companies to invest in Kosovo. Investments from the diaspora have been an important driver for FDI in Kosovo. Germany, which hosts the largest diaspora in the world, is the leading country of FDI in Kosovo, followed by Switzerland and Turkey. However, the question remains whether such investment should be considered as FDI.

A range of measures were implemented in the last decade to stimulate FDI, such as the introduction of a flat corporate tax rate at 10%, the establishment of economic zones with a range of benefits for investors, and the adoption of the “Law on Strategic Investments” facilitating the transfer of public assets and infrastructure support for investors in key sectors. Law of the Republic of Kosovo № 05/L-079 of 11 October 2016 `On Strategic Investments in the Republic of Kosovo' [2017] Official Gazette of Republic of Kosovo 6/15. However, FDI remained at a relatively low level.

Kosovo faces constraints in its capacity to draw foreign investment, primarily stemming from deficiencies in disseminating information, inadequate communication about its economic prospects and foreign investment opportunities, and the absence of a credit rating from a reputable foreign rating agency. See more: `2023 Investment Climate Statements: Kosovo' (US Department of State, 2023) Moreover, the inflow of foreign investment has been impeded by sluggish and inefficient reforms in the business environment, a lack of transparency, limited economic activity across various sectors, the weak rule of law, and unfavourable perceptions held by foreign investors and diaspora communities.

Legal framework and policies for FDI

North Macedonia

In the comparative analysis of foreign direct investments and their impact in both countries, the initial focus should be on presenting the legal framework related to the overall business environment unique to each nation. Ivan Bimbilovski and Elizabeta Spiroska, `Macedonia' in Csongor Nagy (ed), Investment Arbitration in Central and Eastern Europe: Law and Practice (Edward Elgar Pub 2019) 261. From the perspective of Euro integration, it is evident that Northern Macedonia is making more progress than Kosovo.

North Macedonia generally offers a favourable environment for conducting business, and its legal framework aligns well with international standards. However, corruption remains a persistent issue. See more: `2023 Investment Climate Statements: North Macedonia' (US Department of State, 2023)

According to the 2020 World Bank Doing Business Report, North Macedonia was ranked 17th in the world for doing business, dropping seven positions from the previous year. The institutional framework with legislative powers in foreign direct investment (FDI) in the Republic of Macedonia covers many entities. Biljana Petrevska, `Foreign Direct Investment in Macedonia - Is there Dicrimination in Practice?' (Knowledge Based Sustainable Economic Development: 4th International Scientific Conference ERAZ 2018, Sofia, Bulgaria, 7 June 2018) 40. Nevertheless, large foreign companies operating in the Technological Industrial Development Zones (TIDZ) generally express positive experiences with their investments and maintain good relationships with government officials. See more: `2021 Investment Climate Statements: North Macedonia' (US Department of State, 2021)

To attract foreign direct investment, the Republic of Northern Macedonia has established several institutions whose exclusive competence facilitates the procedures for attracting foreign investment. Foremost among these is the role of Invest North Macedonia - the Agency for Foreign Investments and Export Promotion, which serves as the primary government institution facilitating foreign investments. This agency works directly with potential foreign investors, provides detailed explanations and guidance for registering a business in North Macedonia, analyses potential industries and sectors for investing, shares information on business regulations, and publishes reports about the domestic market. See more: Invest North Macedonia (2023)

The companies in TIDZ realised exports of 275.4 million EUR in January 2023, the highest level in the last five years. Compared to January 2022, exports increased by 11%, i.e. 9% higher than in 2021, and by 45% and 15% higher compared to 2020, i.e., 2019.

The positive growth trend continues concerning imports. In January, the companies in TIDZ imported 221 million EUR. This is 8% more than the same period 2022, which is 44% more than January 2020 and 15% more compared to 2019. The analysis shows that Imports in January 2021 were higher by 10%.

There is a particularly positive growth trend in net exports, which in January were 24.5%. This is due, among other things, to the increased investment activities in the Zones and the increased number of jobs.

The zones' employees reached almost 16,400 in January, 16% higher than in January 2022. Only in the first month of the year were almost 80 new jobs created in the companies in the zones. Otherwise, TIDZ rounded off last year with 2,300 newly created jobs and the highest export of EUR 3.7 billion, making 2022 the most successful year of the zones existence. `Positive Growth Trend in TIDZ Continues in 2023 - Increased Exports and New Jobs in January 2023' (TIDZ, 5 February 2023)

Table 4. Investment Climate and Incentives in North Macedonia

Legal Framework in North Macedonia

In North Macedonia, no singular law governs foreign investments, nor is there a comprehensive "one-stop-shop" website providing all the relevant laws, rules, procedures, and reporting requirements for investors. Instead, the legal framework comprises numerous laws, including the Trade Companies Law, the Securities Law, the Profit Tax Law, the Customs Law, the Value Added Tax (VAT) Law, the Law on Trade, the Law on Acquiring Shareholding Companies, the Foreign Exchange Operations Law, the Payment Operations Law, the Law on Foreign Loan Relations, the Law on Privatization of State-owned Capital, the Law on Investment Funds, the Banking Law, the Labor Law, the Law on Financial OECD, Competitiveness in South East Europe 2021: A Policy Outlook (Competitiveness and Private Sector Development, OECD Pub 2021) North Macedonia profile, 1447-1651,

Discipline, the Law on Financial Support of Investments, and the Law on Technological Industrial Development Zones (free economic zones). Decree no 08-1873/1 of 12 May 1993 `Law on Foreign Loan Relations' [1993] Official Gazette of the Republic of Macedonia 31/700; Decree no 08-2820/1 of 24 July 1996 `Law on Privatization of State- owned Capital' [1996] Official Gazette of the Republic of Macedonia 37/791; Decree no 07-2969/1 of 14 July 1999 `Law on Value Added Tax' [1999] Official Gazette of the Republic of Macedonia 44/1298; Decree no 07-3371/1 of 26 July 2000 `Securities Law' [2000] Official Gazette of the Republic of Macedonia 63/2540; Decree no 07-1600/1 of 25 April 2001 `Law on Foreign Exchange Operations' [2001] Official Gazette of the Republic of Macedonia 34/735; Decree no 07-1148/1 of 12 March 2004 `Law on Trade' [2004] Official Gazette of the Republic of Macedonia 16/279; Decree no 07-1761/1 of 30 April 2004 `Law on Trade Companies' [2004] Official Gazette of the Republic of Macedonia 28/459; Decree no 07-437/1 of 29 January 2007 `Law on Technological Industrial Development Zones' [2007] Official Gazette of the Republic of Macedonia 14/190; Decree no 07-3839/1 of 6 September 2007 `Payment Operations Law' [2007] Official Gazette of the Republic of Macedonia 113/1494; Decree no 07-1913/1 of 19 May 2005 `Customs Law' [2005] Official Gazette of the Republic of Macedonia 39/595; Decree no 07-2918/1 of 22 July 2005 `Law on Labor Relations' [2005] Official Gazette of the Republic of Macedonia 62/910; Decree no 07-2327/1 of 21 May 2007 `Law on Banks' [2007] Official Gazette of the Republic of Macedonia 67/884; Decree no 04-486/1 of 27 January 2009 `Law on Investment Funds' [2009] Official Gazette of the Republic of Macedonia 12/257; Decree no 07-1954/1 of 13 May 2013 `Law on Acquiring Shareholding Companies' [2013] Official Gazette of the Republic of Macedonia 69/1461; Decree no 07-5101/1 of 27 December 2013 `Law on Financial Discipline' [2013] Official Gazette of the Republic of Macedonia 187/4616; Decree no 07-2934/1 of 23 July 2014 `Law on Profit Tax' [2014] Official Gazette of the Republic of Macedonia 112/3354;Decree no 07-3053/1 of 3 May 2018 `Law on the Financial Support of Investments' [2018] Official Gazette of the Republic of Macedonia 83/1507. Changes and additions to the Laws were made by decrees in subsequent years. North Macedonia has concluded an Agreement for Promotion and Protection of Foreign Direct Investments with the following countries: Albania, Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, the Czech Republic, Egypt, Finland, France, Germany, Hungary, India, Iran, Italy, Luxembourg, Malaysia, Montenegro, the Netherlands, North Korea, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Turkey, and Ukraine.

North Macedonia has simplified regulations and procedures for large foreign investors operating within the Technological Industrial Development Zones (TIDZ). However, the overall regulatory environment in the country remains complex and lacks full transparency, although the government is striving to enhance it.

The Law on International Commercial Arbitration of the Republic of Macedonia establishes the criteria for determining whether arbitration is international. Decree no 07-1252/1 of 21 March 2006 `Law on International Commercial Arbitration of the Republic of Macedonia' [2006] Official Gazette of the Republic of Macedonia 39/492. According to this law, arbitration is deemed international if either: 1) one of the parties involved, at the time of entering into the arbitral agreement, is a natural person with domicile or habitual residence abroad or a legal entity with its place of business located abroad; or 2) a substantial part of the obligations arising from the commercial relationship is to be performed in a specific location, or the dispute is most closely connected with a particular place.

Law on Strategic Investments Decree no 08-437/1 of 16 January 2020 `Law on Strategic Investment in the Republic of North Macedonia' [2020] Official Gazette of the Republic of North Macedonia 14/256.

North Macedonia adopted the Law on Strategic Investment to create more favourable conditions for selected investments in the following sectors: energy, transport, telecommunication, tourism, manufacturing, agriculture and food, forestry and water economy, health, industrial and technological parks, wastewater and waste management, sport, science and education.

This Law should encourage economic growth, employment, and the use of new technologies and innovations, increasing North Macedonia's competitive economic opportunities for export, decreasing the trade deficit, and improving the well-being of the citizens of North Macedonia overall.

The Law defines a strategic investment project as a project which fulfils one or more purposes as described above and which realises investments in the amount of:

• At least EUR 100 million on the territory of at least two or more municipalities,

• At least EUR 50 million in the municipalities with a seat in a city, municipalities in the City of Skopje, and the City of Skopje, and

• At least EUR 30 million in municipalities with a seat in a village. ibid, art 4. As an exception, projects realised in the scope of agreements between countries, projects which are conducted and financed in collaboration with the European Union, the Ministerial Council of the Energy Community (PECI - Project of Energy Community Interest; PMI - Project of Mutual Interest), and projects with international financial institutions are considered as strategic investment projects under this Law.

The strategic investment projects must be in one of the following areas: Energy and infrastructure, transport and telecommunications, tourism, manufacturing, agriculture, forestry and water economy, food industry, healthcare, industrial and technological parks, wastewater and waste management, IT zones, sport, science and education, and construction of large multifunctional construction complexes of construction buildings that cover more than one of the areas mentioned above. ibid, art 5.

If the investment is over EUR 150 million, it can be granted the status of a strategic investment project even if it is not in the areas mentioned above.

Law on the Financial Support of Investments Decree no 08-3053/1 of 3 May 2018 `Law on the Financial Support of Investments' [2018] Official Gazette of the Republic of Macedonia 83/1507. Amendments and additions to the Law on the Financial Support of Investments were made by decrees: Decree no 08-2600/2 of 17 May 2019 [2019] Official Gazette of the Republic of North Macedonia 98/1243; Decree no 08-3487/1 of 12 June 2019 [2019] Official Gazette of the Republic of North Macedonia 124/1759; Decree no 08-3677/1 of 30 July 2021 [2021] Official Gazette of the Republic of North Macedonia 178/2979.

The 2021 Legislation concerning the provision of financial backing for Investments establishes guidelines for the categories, quantities, prerequisites, modalities, and processes involved in providing financial aid to enterprises making investments within the confines of the Republic of North Macedonia. This framework of support conforms to the protocols governing the oversight of government assistance.

In the previous period, many Macedonian companies received financial support, increasing the country's economic capacity.

As per the stipulations of the legislation, the following categories of entities are eligible recipients of financial assistance:

• Those entities that have initiated Initial Investments

• Entities demonstrating an increase in total operational revenues

• Entities where the reduction in the workforce does not exceed 5%

• Newly registered companies

• Manufacturers within the Textile & Leather-processing sector

• Companies engaged in military equipment production

For Initial Productive Investments made by business entities founded by residents or temporarily residing individuals of the Republic of North Macedonia located outside the country, the financial support amount will be augmented by 15% of the justified investment expenses, up to an annual limit of EUR 1 million.

Recent modifications to the legislation in 2021 broadened the financial support available for technological advancement and research, bolstered investment endeavours of notable economic significance, assisted the takeover of distressed companies, and fortified market competition. `Changes in the Financial support of investments in North Macedonia' (Lalicic & Boskoski Law Office, 2021)

The underlying intent behind these legislative changes is to expedite economic growth and advancement in the Republic of North Macedonia by promoting investments that enhance the country's economic competitiveness and boost employment opportunities.

Investment Climate in Kosovo

Kosovo has three economic zones. Zones are established upon the municipality's request to the Ministry of Trade and Industry and are administered by the municipality. Business organisations or associations can also submit requests for establishment to the ministry or the municipality.

Incentives are broadly categorised into fiscal and non-fiscal incentives. Fiscal incentives provide tax and customs duty concessions, while non-fiscal incentives are any other form of state support to investors. Kosovo has established a flat corporate income tax of 10 percent. To encourage investment, the government can grant certain VAT-related privileges, such as a six-month VAT deferment upon presentation of a bank guarantee for companies importing capital goods. Suppliers may export goods and services without being required to collect VAT from foreign buyers. Suppliers may claim credit for taxes on inputs by offsetting those taxes against gross VAT liabilities or claiming a refund. The government can issue guarantees or jointly finance foreign direct investment projects but has not yet done so. Kosovo does not have legislation that incentivises businesses owned by underrepresented investors. See more: `2023 Investment Climate Statements: Kosovo' (n 16).

Table 5. Investment Climate and Incentives in Kosovo OECD (n 23) Kosovo profile, 1042-1236, doi:10.1787/573f3543-en.

Kosovo was only able to partially tap its potential in terms of the quantity and quality of attracted investments in the last decade. Despite efforts, inflows remained at relatively low levels without fully recovering after the global financial crisis. In contrast, most neighbouring economies were more successful in attracting investment projects during the same period.

As shown in the above graph (Graph 3), World Bank, `Foreign direct investment, net inflows (BoP, current US$)' (The World Bank, 2023) Serbia received the largest portion of the overall Foreign Direct Investment (FDI) inflows in neighbouring nations, accounting for 51%, trailed by Albania with 20%. In comparison to countries within the Southeast European (SEE) region, the statistics indicate that the percentage of FDI in relation to GDP in Kosovo has paralleled that of North Macedonia, stood above that of Bosnia and Herzegovina (B&H), and remained notably lower than Montenegro.

In terms of legislation, there are three laws in Kosovo specifically addressing investors: namely, the Law on Foreign Investors and the Lad on Strategic Investment.

The legal framework for foreign investors in Kosovo encompasses various laws, including those mentioned below. Antonis Bredimas, `Kosovo and Foreign Investment Protection' in Katia Fach Gomez, Anastasios Gourgourinis and Catharine Titi (eds), International Investment Law and the Law of Armed Conflict (Euroyear, Springer 2019) 113. However, continuous updates and harmonisation of legislation are necessary to address the evolving needs and demands of the investment landscape. Stakeholders consistently emphasise the importance of enhancing capacities related to understanding and implementing these laws. Steven C Young, `Foreign Direct Investment Disputes with Unrecognized States: FDI Arbitration in Kosovo' (2016) 33(5) Journal of International Arbitration 501, doi:10.54648/joia2016037.

The government recognises the significance of filling gaps in existing legislation to complete the legal framework for Foreign Direct Investments (FDIs). However, it must be noted that the Law on Foreign Investments alone is insufficient to address all gaps in the legal framework; this requires alignment with other laws, too.

Low numbers in foreign investment in Kosovo show that to attract foreign investment, Kosovo must focus on improving and aligning the legal framework and effective implementation by increasing the efficiency of institutions, particularly those that serve businesses. In regard to alignment, it is important that aside from the Law on Foreign Investments, Kosovo also pays attention to harmonising this law with other laws by providing more flexibility and incentives for foreign investors, in particular, removing the administrative burden and unnecessary bureaucracies.

The Law on Foreign Investment has been adopted with the primary objective of attracting foreign investments in Kosovo. Law of the Republic of Kosovo no 04/L-220 (n 7). This law provides a fairly comprehensive legal basis setting forth the rights of investors, protective measures, and fundamental guarantees to ensure a favourable investment climate. Incorporating these guarantees in the law adheres to the best practices observed at an international level and is fully in line with EU legislation. The current Foreign Investment Law consists of 26 articles, and the Ministry Industry, Entrepreneurship and Trade (MINT) assumes the responsibility of formulating, developing, and monitoring the policies related to foreign investments through its established mechanisms. It is important to note that foreign investors possess the right to settle investment disputes based on mutually agreed requirements between the investors and the Republic of Kosovo. In the absence of such an agreement, foreign investors retain the right to seek resolution of investment disputes either through judicial proceedings in a competent court in Kosovo or via local and/or international arbitration.

The provision allowing dispute settlement through arbitration is regarded as a protective measure for foreign investors, considering certain challenges within Kosovo's legal system, such as weak rule of law, limited court efficiency, difficulties in contract implementation, and prolonged property disputes. Arianit Kaandolli and Bashkim Nuredini, `Legal Treatment of Foreign Investment and Role International Investment Arbitration through the prism of Kosovo' (UBT International Conference 2021) 96

In cases where no agreed procedure exists, the foreign investor retains the right to settle the investment dispute through litigation before a competent court in the Republic of Kosovo or through local and international arbitration. According to Art. 16 of the Law on Foreign Investment, there are provisions regarding the resolution of investment disputes in the Republic of Kosovo. The article states that a foreign investor has the right to request the resolution of an investment dispute based on applicable requirements or procedures agreed upon in writing between the foreign investor and the Republic of Kosovo.

The Republic of Kosovo consented to submit an Investment Dispute for arbitration under this article, as authorised by the current law. The foreign investor can provide consent by filing a request for arbitration or submitting a written statement expressing their consent to the Agency.

Unless otherwise agreed upon in writing between the concerned foreign investor and the Republic of Kosovo, any arbitration conducted under this law is expected to occur in an EU member country that is also a party to the New York Convention.

Law no. 05/L-079 on Strategic Investments Law of the Republic of Kosovo no 05/L-079 (n 15). is specifically designed to promote and facilitate strategic investments within the Republic of Kosovo. Its primary objectives include encouraging investment, attracting investors, and establishing favourable conditions for the realisation of strategic projects. The law also outlines administrative procedures and criteria for evaluating, selecting, implementing, and supervising such projects. Additionally, it provides guidelines for granting the use of the Republic of Kosovo's property for strategic investment projects. The sectors covered by this law include energy, infrastructure and mining, transport and telecommunications, and tourism, among others. The definitions outlined in this law largely correspond to those outlined in the Foreign Investment Law.

One of the key features of the law is the establishment of the Inter-Ministerial Commission for Strategic Investments. This commission plays a pivotal role in the decision-making process. The Agency for Investments and Enterprise Support serves as the Secretariat, while the Commission, on a case-by-case basis, issues recommendations regarding granting strategic investor status. These recommendations are provided after consideration of professional advice from the Operational Group responsible for preparing and implementing strategic investments. However, the final decision for each individual case lies with the Government of Kosovo. Instituti per Ekonomi te Tregut te Lire, Investimet e Huaja Direkte ne Kosove: Klima e investimeve, potenciali dhe barrierat (IETL, KAS 2019).

The law guarantees various rights to strategic investors. These rights include protection and continuous guarantees, non-discriminatory treatment, compensation in instances of nationalisation, expropriation, or violations of legislation, and protection against the retroactive application of laws. Furthermore, the Government of Kosovo has already decided to grant tax exemptions for 3 to 7 years for new investments, depending on the value of the investments and the number of employees. However, the practices have shown some weaknesses of the law in force, starting from the high threshold necessary for a project to be classified as a "strategic investment" and limited due diligence on the proposed strategic investments.

The above-mentioned concerns pose challenges for foreign investors, as the financial commitment needed to meet the criteria may discourage potential investors from pursuing strategic investment opportunities in Kosovo. Consequently, this may limit the number of projects that benefit from the preferential treatment and incentives associated with strategic investments, potentially impeding overall economic growth.

Dispute resolution for foreign investors

Regarding investor protection, it should be noted that a state may undertake different measures and incentives to enact investment legislation ensuring certain treatment for investors. Such legislation might guarantee exemption from taxation regimes or provide a specific fiscal regime for investors in a particular industry sector. However, investors may be concerned that any protections contained in legislation may be subject to revocation by a subsequent government. `International Investment Protection' (Ashurst, 11 February 2020)

One category of agreements pertains to situations where an investor can engage in an investment contract with a host nation. Concession agreements and production-sharing contracts are such arrangements primarily found in extractive industries. These contracts offer investors specific safeguards that facilitate their participation in developing a country's natural resources. The investment contract shields investors against unfavourable alterations in laws or regulations that may impact their interests. However, the effectiveness of these clauses when confronted with government actions can vary.

One of the remarkable developments accompanying the surge in foreign direct investment involves the proliferation of investment treaties initiated by host states. These treaties can be bilateral investment agreements (BITs) between two countries or multilateral investment agreements (MITs) involving multiple nations. Designed to foster foreign investment, these treaties frequently include provisions that establish distinct protections for investors from the respective states. The concept of MITs permits a group of states, often regionally aligned, to extend these protective measures. It's important to highlight that recent times have witnessed significant trade agreement negotiations involving countries holding substantial sway over global trade. For instance, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a significant trade accord following the North American Free Trade Agreement, as well as the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States (although these negotiations have encountered challenges). ibid.

North Macedonia

Creating a stable regulatory framework is undeniably crucial for facilitating foreign investment. In pursuit of both attracting foreign investment and progressing towards EU membership, North Macedonia has consistently pursued a reform-oriented strategy within its legislative domain. This strategy places notable emphasis on legislation directly relevant to foreign investment. This legal sphere encompasses an array of statutes, including: Decree no 07-2969/1 of 14 July 1999 `Law on Value Added Tax', Decree no 07-1148/1 of 12 March 2004 `Law on Trade', Decree no 07-1761/1 of 30 April 2004 `Law on Trade Companies', Decree no 07-1913/1 of 19 May 2005 `Customs Law', Decree no 07-437/1 of 29 January 2007 `Law on Technological Industrial Development Zones', Decree no 07-2934/1 of 23 July 2014 `Law on Profit Tax', Decree no 07-3053/1 of 3 May 2018 `Law on the Financial Support of Investments' (n 24); Decree no 07-173/1 of 16 January 2002 `Law on the Takeover of Joint Stock Companies' [2002] Official Gazette of the Republic of Macedonia 4/59. Changes and additions to the Laws were made by decrees in subsequent years.

The foundation of the Law on International Commercial Arbitration draws from a mix of international sources, including bilateral and multilateral agreements that North Macedonia has either independently entered into or inherited from its past association with Yugoslavia.

Notably, the Republic of North Macedonia is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards and the Geneva Convention on Execution of Foreign Arbitral Awards. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (10 June 1958); Convention on the Execution of Foreign Arbitral Awards (26 September 1927)

North Macedonia is also a party to the Washington Convention on the Settlement of Investment Disputes between States and Nationals of the Other States and the European Convention on International Commercial Arbitration. Convention on the Settlement of Investment Disputes between States and Nationals of other States (18 March 1965); European Convention on International Commercial Arbitration (21 April 1961) Macedonian Law gives preference to ratified international agreements over domestic legislation.

In April 2006, North Macedonia adopted the Law on International Commercial Arbitration, Decree no 07-1252/1 (n 25). which is exclusively applicable to international commercial arbitration processes within the country's jurisdiction. Under this law, an arbitration award holds the same weight as a final judgment and can be executed promptly. Arbitration awards originating from external jurisdictions are classified as foreign arbitral awards. They are duly acknowledged and enforced in accordance with the principles outlined in the 1958 New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards.

North Macedonia adheres to the concept of obligatory international arbitration when addressing conflicts involving foreign investors. The nation acknowledges the validity of foreign arbitration awards and their enforceability within its borders, contingent upon satisfying the stipulated enforcement conditions as set forth in both the Convention and the Law on International Private Law. Decree no 07-3099/1 of 4 July 2007 `Law on International Private Law' [2007] Official Gazette of the Republic of Macedonia 87/1096.

Thus, so far, the country has encountered six documented investor-state disputes resolved through international arbitration panels, none of which have involved U.S. individuals or enterprises. The local courts within North Macedonia uphold and implement foreign arbitration awards issued against the Government, and the nation has not historically demonstrated a propensity for extrajudicial actions against foreign investors.

North Macedonia embraces the decisions of international arbitration in matters concerning investment disputes. The nation's Law on International Commercial Arbitration mirrors the structure of the United Nations Commission on International Trade Law (UNCITRAL) Model Law. See: UNCITRAL Model Law on International Commercial Arbitration (21 June 1985, with amendments as adopted in 2006). Domestic courts duly acknowledge and enforce foreign arbitral awards along with judgments rendered by foreign courts. While mechanisms for alternative dispute resolution exist for settling disputes between private entities, they are infrequently utilised.