Attachment J 7 - USAID Export-Led Growth Activity - Market System and Constraints Analysis.pdf

This report is made possible by the support of the American People through the United States Agency for International Development (USAID).

The contents of this report are the sole responsibility of Cardno Emerging Markets USA Ltd. and do not necessarily reflect the views of USAID or the United States Government.

MARKET SYSTEM AND CONSTRAINTS

ANALYSIS

Wood Processing, Information and Communications

Technology and Food Processing

USAID’s Export-Led Growth Activity

USAID’S EXPORT-LED GROWTH ACTIVITY

MARKET SYSTEM AND CONSTRAINTS

ANALYSIS

Wood Processing, Information and Communications

Technology and Food Processing

USAID’s Export-Led Growth Activity

SUBMITTED BY:

CARDNO EMERGING MARKETS USA, LTD.

SUBMITTED TO:

USAID MISSION IN KOSOVO

CONTRACT NO.:

72016720C00001

USAID ACTIVITY OFFICE:

ECONOMIC GROWTH OFFICE

USAID COR:

FLORA ARIFI

SUBMISSION DATE:

OCTOBER 26, 2020

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 1

TABLE OF CONTENTS

ACRONYMS I

LIST OF FIGURES III

LIST OF TABLES IV

EXECUTIVE SUMMARY V

1. INTRODUCTION TO EXPORT-LED GROWTH ACTIVITY 1

2. PURPOSE OF THE ANALYSIS 2

3. METHODOLOGY 3

4. OVERVIEW OF COMMON FINDINGS 5

5. FINDINGS BY MARKET SYSTEM 7

5.1 WOOD PROCESSING 7

5.1.1. VALUE NETWORK MAP AND DESCRIPTION 10

5.1.2 MARKET LINKAGES AND END MARKETS 17

5.1.3 FIRM MANAGEMENT SOPHISTICATION 22

5.1.4 EXISTING BUSINESS MODELS 24

5.1.5 SUPPORTING SERVICES 26

5.1.6 COMPETITION VERSUS COOPERATION 29

5.1.7 POWER, GENDER, MINORITIES AND VULNERABLE POPULATIONS 29

5.1.8 POLITICAL ECONOMY 30

5.1.9 CONCLUSIONS 32

5.2 INFORMATION AND COMMUNICATIONS TECHNOLOGY 35

5.2.1. VALUE NETWORK MAP AND DESCRIPTION 41

5.2.2 MARKET LINKAGES AND END MARKETS 45

5.2.3 FIRM MANAGEMENT SOPHISTICATION 49

5.2.4 EXISTING BUSINESS MODELS 51

5.2.5 SUPPORTING SERVICES 55

5.2.6 COMPETITION VERSUS COOPERATION 65

5.2.7 POWER, GENDER, MINORITIES AND VULNERABLE POPULATIONS 66

5.2.8 POLITICAL ECONOMY 69

5.2.9 CONCLUSIONS 73

5.3. FOOD PROCESSING 77

5.3.1. VALUE NETWORK MAP AND DESCRIPTION 81

5.3.2 MARKET LINKAGES AND END MARKETS 86

5.3.3 FIRM MANAGEMENT SOPHISTICATION 94

5.3.4 EXISTING BUSINESS MODELS 96

5.3.5 SUPPORTING SERVICES 97

5.3.6 COMPETITION VERSUS COOPERATION 101

5.3.7 POWER, GENDER, MINORITIES AND VULNERABLE POPULATIONS 102

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 2

5.3.8 POLITICAL ECONOMY 102

5.3.9 CONCLUSIONS 107

6. RISKS 110

ANNEX 1 – STAKEHOLDERS INTERVIEWED 114

ANNEX 2 – FIRM-LEVEL QUESTIONNAIRE 117

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS I

ACRONYMS

AGRO Agriculture Growth and Rural Opportunity

ARDA Association of Regional Development Agencies

ARDP Agricultural Rural development Program

AWPK Association of Wood Processor of Kosovo ccTLD country code Top Level Domain

BPO Business Process Outsourcing

BSCK Business Support Center Kosovo

B2B Business to Business

CAGR Compounded Annual Growth Rate

CERT Computer Emergency Response Team

CEFTA Central Europe Free Trade Agreement

CETEP Creating Employment through Export Promotion

CNC Computer Numerical Control

COR Contracting Officer’s Representative

DACH (D), Austria (A), and Switzerland (CH)

ECDL European Computer Driving License

ERP Enterprise Resource Planning

EU European Union

FDI Foreign Direct Investment

FQSS Food Quality and Safety Standards

GCK Girls Coding Kosova

GDP Gross Domestic Product

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit

GIZ German International Cooperation

GoK Government of Kosovo

HoReCa Hotel, Restaurant and Cafe gTLD generic Top-Level Domain

ICANN Internet Corporation for Assigned Names and Numbers

ICK Innovation Center of Kosovo

ICT Information and Communications Technology

IFC International Finance Corporation

ISO International Organization for Standardization

ITP Innovation and Training Park

KAS Kosovo Agency of statistics

KCFG Kosovo Credit Guarantee Fund

KFVA Kosovo Food and Veterinary Agency

KIESA Kosovo Investment and Enterprise Support Agency

LLC Limited Liability Company

MAFRD Ministry of Agriculture Forestry and Rural Development

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS II

MAPs Medicinal and Aromatic Plants

MED Ministry of Economic Development

MEE Ministry of Economy and Environment

MDF Medium-density Fiberboard

MoH Ministry of Health

MSA Market System Analysis

MSME Micro, Small and Medium Enterprises

MTI Ministry of Trade and Industry

NBFI Non-bank Financial Institutions

NGO Non-Governmental Organizations

NQA National Qualifications Authority

NSEIK National Strategy for European Integration of Kosovo 2020

PPSE Promoting Private Sector Employment

PTK Post and Telecom of Kosovo

RAEPC Regulatory Authority of Electronic and Postal Communications

R&D Research and Development

RKS Republic of Kosovo

SAA Stabilization and Association Agreement

SDC Swiss Development Cooperation

SIRED Project Sustainable and Inclusive Rural Economic Development

SME Small to Medium Enterprises

STIKK Kosovo Association for ICT

TAK Tax Administration of Kosovo

TAIEX Technical Assistance Information Exchange

TIKA Turkish Cooperation and Coordination Agency

UBT University of Business and Technology

USAID United States Agency for International Development

VAT Value-Added Tax

VET Vocational Education and Training

VNA Value Network Analysis

VTCs Vocational Training Centers

WB World Bank

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS III

LIST OF FIGURES

Figure 1: Value network map of the wood sector

Figure 2: Kosovo goods exports by destination, expressed in percentage

Figure 3: Top export destinations of select Kosovo wood products, by nominal € value

Figure 4: Export of selected wood-related products, by destination, in nominal € value

Figure 5: Export of selected wood-related products, by share at top destination, in %

Figure 6: Export of selected wood and articles of wood, in € value

Figure 7: Export of wood and articles of wood, by share in top destinations, in %

Figure 8: Value network map of the ICT sector

Figure 9: Overview on the analysis on high-potential market segments, incl. industries, company sizes, geographies and services/products

Figure 10: Gender distribution of start-up representatives

Figure 11: Share of agricultural crops to total crop production in 2018

Figure 12: Turnover (€000s) by agricultural activities, 2018

Figure 13: Number of employees by agricultural activities, 2018

Figure 14: Value network map in the food processing sector

Figure 15: Top EU-destined agricultural Kosovo food exports in 2019

Figure 16: Top country export destinations of Kosovo prepared food exports, by share

Figure 17: Top export destinations of cereal products, as %

Figure 18: Top export destinations of coffee, tea and herbs, in %

Figure 19: Top export destinations of alcoholic drinks and vinegars, in € value

Figure 20: Top export destinations of fruits, edible nuts, melon & nut peels, in € value

Figure 21: Top export destinations of meat and meat products, in € value

Figure 22: Top export destinations oily fruits et al, in € value

Figure 23: Top export destinations of vegetables, fruit or other plant parts, in € value

Figure 24: Top export vegetables, roots, in € value

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS IV

LIST OF TABLES

Table 1: Methodology and process of constraints analysis

Table 2: Registered agribusiness enterprises, 2014-2018, by turnover and employees

Table 3: Export of agricultural products 2014-2018, in €000s

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS V

EXECUTIVE SUMMARY

By virtue of the size of its gross domestic product of approximating $8 billion, and a population of about 1.8 million citizens, Kosovo is a relatively small player in the global economic architecture.

However, it can certainly be a small, open, nimble economy with a knowledge-intensive industry and the ability to sustainably compete in the global economy. It has a large, multi-lingual, young workforce, a number of globally competitive firms, a large and active diaspora in North America and Europe, competitive wages and an advantageous position on the doorstep of the European

Union’s (EU’s) huge market. The conditions are there for Kosovo to achieve the vision of prosperity and self-reliance it laid out 12 years ago, when it declared its independence as a newborn democracy.

When it achieves this vision, Kosovo will hopefully host sophisticated clusters of firms that reach far into export markets. These companies will take advantage of a highly skilled and adaptive workforce that will be prepared by agile training institutions who stay current and can meet the needs of an adaptable labor market. They will enjoy the benefit of active, effective government efforts to promote Kosovo’s products and services abroad, and they will reap the fruits of collaborative industry associations that promote innovation, market access and constant upgrading. When global competitive trends change, as they continually do, Kosovo’s exporters will be able to quickly adapt to those changes, communicating with educators and vocational trainers to modernize curricula while enjoying the support of policymakers who can respond rapidly to address export bottlenecks. An attentive business services sector will hover around exporters, providing market intelligence, digital business solutions and strategic support to help exporters take advantage of new opportunities.

In other words, Kosovo’s economic prosperity will rely on its adaptability. Unfortunately, a daunting array of constraints holds back Kosovo’s economic adaptability at the moment. From disinterested educational institutions to donor-dependent associations and inattentive policymakers, the actors who should foster dynamism instead either are not sufficiently active or act to undermine it. Competition between firms often tends to be zero-sum instead of value-creating, information is zealously guarded, and most businesses stay in a rudimentary holding pattern – poised for growth but unable to get past the family-run models that predominate in the market. Kosovo’s promise as a new nation is alive, but it struggles beneath the smothering effects of its yet underdeveloped market systems.

The USAID Export-Led Growth Activity has a critical task to play to help Kosovo on its way forward, fostering significant industry growth and job creation for businesses in its focal sectors:

Food processing;

Wood processing; and

Information and communications technology (ICT).

The Export-Led Growth Activity will take a market systems approach to promoting export growth and job creation in these three key industries. From the vantage point of an understanding of systemic constraints, patterns of behavior and opportunities, the Export-Led Growth Activity will work with a wide range of actors across all three market systems to promote economic

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS VI

dynamism: experimentation, risk taking, new market linkages, robust information flows and responsive policies.

A market systems perspective sees a market as a dynamic, evolving ecosystem that is the product of its past, its context, its components (firms, consumers, government, etc.) and the interactions between its components. A successful market systems program pushes that ecosystem in a promising direction, with greater and more inclusive benefits for marginalized groups and a more sustainable growth pathway. That ecosystem has a pathway and a character of its own – a good market system analysis (MSA) helps describe it in ways that detail its history and path, pace of evolution and innovation, and how it benefits which groups.

This MSA provides the starting point for Export-Led Growth Activity’s understanding of the three focal market systems. Each section of the analysis depicts market linkages and the characteristics of major end markets, firm management behaviors, prevailing business models, the state of supporting services, cooperation and competition, youth and gender considerations, and important aspects of the political economy surrounding actors in each market system.

Each analysis also features a value network map – a stylized representation of the dynamics of each market system. The maps highlight the roles key actors play in the system, including important aspects of the relationships between and among those actors. They show areas of intense interaction as well as significant gaps in collaboration and, especially, breaks in the flow of information between actors. The map also serves as a guide to the technical discussion of conditions and constraints in each section.

While many of the constraints identified in this analysis are unique to each market system, many others are common across all three systems. These common findings are discussed separately, prior to the in-depth analysis of each market.

In the larger framework of the global economy, Kosovo must evolve productively and efficiently or risk forgoing opportunities which can lead the private sector to consolidate its role as a generator of jobs, wealth, increased equity, and ultimately welfare. This MSA identifies and describes constraints that slow the pace of productive evolution in the Kosovo economy.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 1

1. INTRODUCTION TO EXPORT-LED GROWTH ACTIVITY

USAID/Kosovo Export-Led Growth Activity is a five-year activity that began on August 11, 2020. The purpose of the Activity is to promote resilient, self-sustaining market systems, and to facilitate the private sector’s improved competitiveness in local, regional, and global markets. The Activity utilizes a market systems approach aligned with USAID’s Private Sector Engagement Policy. The Activity focuses in three key export-oriented sectors—Wood Processing; Information and Communications Technologies (ICT);

and Food Processing—to sustainably increase competitiveness. By working to address constraints across the system, the Activity will enable scalable and systemic change, stimulate job creation, and foster the private sector’s increased ability to engage in local, regional, and international markets. The expected results of the Activity across all three sectors are: 1) market systems are strengthened to increase sector competitiveness; and 2) market actors within those market systems are more productive and competitive.

During the initial stage of the inception phase, Export-Led Growth Activity mobilized a team of experts to analyze constraints in the market systems of the Activity’s focus sectors using the market systems development (MSD) approach. Concentration on MSD is part of an evolved thinking among the donor community, including USAID, to support private sector development by identifying (and then seeking to address) systemic constraints. While this approach recognizes the power of market-based solutions as an instrument to ensure self-reliance and sustainability, it also implies that certain parts of the market system may face constraints that require a systemic approach. As further elaborated under the methodology section, this report adopts value network analysis (VNA) as the tool to map out actors, roles, and relationships within the market system of each focus sector. By extension, the aforementioned tool provides a useful way to capture system dynamics and to locate the prevailing system constraints within each sector.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 2

2. PURPOSE OF THE ANALYSIS

Per Section C (“Statement of Work”) of the award, the Contractor is required to conduct a Market

System and Constraints Analysis to understand market system dynamics within the Activity’s focus sectors, in order to effect systemic change through a facilitative approach. In addition to the methodology agreed with the Contracting Officer’s Representative (COR), the scope of work under Section C also refers to the following items when conducting the analysis:

Current performance and potential capacity of vertically- and horizontally-linked firms operating within a sector;

The nature of relationships between these actors, including their levels of cooperation and competition;

Current and potential end markets (including assessing export market potential and barriers to exploiting that potential);

Performance and potential capacity of available relevant support services (technical, business, and financial) and resources;

The state of institutions, technology, and other production conditions;

The political economy and context, including policy constraints limiting development; and/or

Formal and informal rules which drive stakeholder behavior within the applicable market system.

Furthermore, the scope of work under Section C states that “The analysis must include an evaluation of all material constraints specific to the sectors being examined, seeking to identify if, why, and how constraints impact competitiveness based on an assessment of the market system as a whole. The analysis must also account for the extent to which sector focus overlaps, the extent to which interventions can be concentrated within specific subsectors, and consider what specific risks during activity implementation would undermine overall activity progress.”

Often, the tendency in a market analysis is to exhaustively analyze a value chain or another aspect of a market system to producing a comprehensive document that is not updated as a team learns more about the market. Such an exhaustive exercise is usually self-defeating, especially when the purpose of the analysis is to put a program team in position to start implementing quickly and productively. Part of the goal of this document is to strike a balance between the need to demonstrate a strong analytical understanding of the three markets in which the Activity will work (on one hand), and the need to build relationships and establish starting points for a quick transition into implementation (on the other).

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 3

3. METHODOLOGY

Upon proposal to, and consent from, USAID, Export-Led Growth Activity adopted the value network mapping methodology to capture key relationships among relevant actors, financial flows, product/service exchanges, and governance oversight through individual visits and virtual interviews with key stakeholders

(i.e., businesses, industry associations, input suppliers, transportation and logistics companies, and government actors). The value network diagrams show all major roles and flows in each market system, anchoring the Activity’s market system approach, providing an orienting picture and paradigm for understanding each system’s dynamics. According to the methodology, roles include input supply, skills development, utility services, transport, finance, production, export, wholesale/retail, regulation, etc. On the other hand, flows constitute anything that moves between actors in a market system, typically financial resources, raw materials, information, products, cash, etc.

The methodology to produce the market system constraints analysis was multi-pronged. It involved:

Primary research with a cross-section of businesses in each sector, industry associations, government stakeholders, business service providers, financial institutions, workforce development actors, etc. A specific questionnaire for businesses was designed and administered to collect relevant information. A total of 101 entities were interviewed (see Annex 2);

Secondary research of available documents, strategies, export-related data, and similar;

Internal workshops within the Export-Led Growth Activity team, supported by the team’s MSD

Expert, to develop a value network map for each focus sector;

External validation workshops were held with key stakeholders in each focus sector to review initial findings and solicit feedback from key participants to feed into the constraints analysis:

A workshop with key companies and Association of Wood Processors of Kosovo from the wood processing sector was held on Wednesday, October 14, 2020

A workshop with actors from the fruits and vegetables subsector was held on Friday, October 16, 2020

A workshop with milk processing and other confectionary industry actors was held on

Monday, October 19, 2020

A daylong workshop with actors from key subsectors in the ICT industry (namely, software development, digital services, and call centers and Business Process Outsourcing (BPO)) companies was held on Tuesday, October 20, 2020.

Table 1: Methodology and process of constraints analysis

Steps Timeline

Step 1: Data collection – Data collection consisted of key informant interviews and focus groups, desk research and the solicitation of additional data from Government of Kosovo (GoK) ministries. The Activity team members agreed on a list of key informants and data sources for each sector, tailored a common interview guide to the specifics of each market, and interviewed key informants. A total of 101 stakeholders were interviewed.

September 1-October 10, 2020

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 4

Steps Timeline

Step 2: Workshop – the Activity held one session per sector to digest and ground-truth the information that each Sector Lead collected. Workshops were two hours long, centering on constructing a value network map that represents each market system, and identified major opportunities in constraints in each sector.

The Activity then ran external validation workshops with key participants to build consensus around key systemic constraints that are holding back growth, while also vetting potential solutions.

October 14-October 20, 2020

Step 3: Write-up – Lastly, with the value network map for each market in-hand, the team drafted separate sections of the analyses that detail the information collected. After completing the MSAs, the Export-Led Growth Activity team will be able to transition immediately into work planning, with a list of high-potential partnerships established during the analytical process.

October 2-October 26, 2020

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 5

4. OVERVIEW OF COMMON FINDINGS

This MSA highlights a large number of unique constraints that impede the growth and dynamism of the wood processing, food processing and ICT market systems. However, a number of constraints identified are common to all three. The list below details the five most significant of these.

Workforce Preparation: The dysfunctional workforce development system is a clear constraint that inhibits the growth of all three market systems (indeed, the entire national economy). From primary education through secondary VET and gymnasium instruction, up to 5th level schools and public and private universities, the workforce development system operates within the confines of an overly outdated system that prevents a desperately-looking private sector for finding useful employees. As a result, actors in the core market of each of the three sectors look for creative ways to train, certify and keep skilled staff members. Many have started private training efforts in the last few years.

Enabling Environment: An unresponsive set of government ministries and agencies (with a few exceptions) means that actors in all three market systems have difficulty addressing important enabling environment issues. These include tax reimbursements, customs procedures, industry promotion and representation abroad, accreditation of private training initiatives, and anything else that touches on a function that should be played by government actors. What can be termed as competitive clientelism that appears to characterize significant portions of state of governance in Kosovo focuses in significant part on entrenching interest groups within government at the expense of building the policy-focused, innovative and responsive governance a small economy like Kosovo needs.

Firm Sophistication: Leaving aside firms in the ICT market system, wood processors and food processors show similar characteristics and face similar challenges. Principally, they tend to have rudimentary business models – family-run management with limited capacity for the challenging task of accessing and sustaining linkages with export markets. They also tend to underinvest in digital business solutions that boost productivity and relatively few of them possess the international certifications required by many international trading partners.

Where the food and wood processing market system differentiate strongly is in the characteristics of their end markets – wood processors already have strong inroads to the DACH market, while food processors remain largely focused on meeting Western Balkan regional demand, with a few actors able to maintain strong market presences in Europe and, increasingly, Africa and Asia. Food processors also face a unique challenge with the (justifiably) intense regulatory environment around food production.

Supporting Services: Many of the other conditions that relate to wood processing also hold for food processors. These include a challenging and asymmetrical set of regulations around cross-border transport in the Western Balkans and the US, low utilization of strategic (especially export-focused) business services and poor availability of machinery maintenance services.

The inadequacy of financial products available to Kosovar firms is a supporting service constraint that affects all three market systems. The financial sector in Kosovo is oriented toward consumer banking and real estate finance, with insufficient attention paid to the needs of producers, processors and service providers. The lack of contract-based financing is a particularly significant constraint, as it forces ICT firms and processors to draw on their existing assets for the working capital they need to meet new orders for their products and services. All actors in these markets desperately need more responsive financial partners who have the freedom and risk tolerance to offer more appropriate and responsive financial products.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 6

Associations: The final common constraint that holds back the growth of all three market systems is the underperformance of the associations that represent the interests of these industries. To varying degrees of severity, these associations have two prevailing characteristics:

They represent a fraction of the overall number of firms in their industries. They have either not persuasively argued their value proposition to a majority of would-be members, or their interest extends only to a small group of favored businesses.

They are largely dependent on donor funds and have yet to build the base of membership dues, fees and other revenue that will allow them to sustain their work in the future.

Each association faces unique challenges – for example, the ICT sector association, STIKK, struggles to produce an accurate picture of the ICT sector each year, which leads to the ironic result that few in

Kosovo have sufficient information about the market system that traffics in information technology.

However, the vision for all of the associations is the same. In order to foster a thriving, outward-facing, market system that can grow and compete in global markets, associations in all three market systems will need to dramatically improve their outreach to businesses, their commercial viability, and their capacity to provide valuable information and market linkages.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 7

5. FINDINGS BY MARKET SYSTEM

5.1 WOOD PROCESSING

Sector Overview: The wood processing industry in Kosovo is an important economic sector with a growing ability to serve local consumers and international markets. The wood industry’s competitiveness has been improving in significant part due to the growing adoption of modern production technologies by key industry participants, which has translated into substantial growth in sales in both, the domestic and export markets. From interviews the Export-Led Growth Activity team conducted with two of the largest machinery suppliers, wood processors in Kosovo invested close to 30 million euros in technology adoption during the past five years.

Technological upgrading has also been accompanied by a growth in the number of companies in the sector, an expansion of employment in response to growing market opportunities, and an upward trend in the growth of exports. Exploiting price differentials, Kosovo exports of wood products to Switzerland, Germany, Belgium, and the Scandinavian countries resulted in an estimated Compounded Annual Growth

Rate (CAGR) of 31.9% over the period 2015 – 2019. Importantly, the already existing and established linkages with export markets have acted as a cushion for many businesses in the sector to absorb the shocks of the COVID-19 pandemic, although no data is currently available to make a concrete assessment.

The economic impact potential of the industry is significant. The wood sector is comprised of a large number of small- and medium-sized enterprises (SMEs), with an increasing number of medium-sized firms.

A prior USAID activity (EMPOWER Private Sector) supported and partnered with 16 medium-sized firms

(Palma, BINNI, Sela Impex, Elnor, Ukaj, Albed, TC, Ciao Berto, Mob Prishtina, Lumi, Te Naseri, Euro-

Modeli, Graniti, Tiki, Mob Idrizi, and Loni Dekor). Several smaller firms, such as Dekoriti, Doni, Dekra, Hoti, and Greenhouse, are also close to becoming medium-sized (exceeding €1M per year in export sales).

This increasing capacity is enhancing Kosovo’s ability to scale production to meet future demand.

There are three other critical factors that also add to the industry’s growing competitiveness potential:

namely, 1. proximity to EU and Swiss markets; 2. the presence of a sizable Albanian diaspora, which itself is heavily engaged in the construction and renovation industry; and 3. an established but growing local base of skilled designers and architects, who are feeding the growth of the “contract furniture” subsector of the industry.

Important segments of the wood processing sector have shown business dynamism and vibrancy, manifested through a growing interest and capacity by industry firms to participate in leading international fairs (i.e IMM, MOW and SwissBau), and an increased frequency of the presentation of sector opportunities by companies in various B2B events in the EU market. Such a dynamic manifests itself also throughout the market system of the sector in which the interaction between various actors and players in the market system is changing and evolving, as will be discussed later in this report.

Export opportunities have been critical to begin forging collaborative practices within the industry, but also with other industries. Supplying Swiss and German markets with finished wood products has placed key industry firms on an upward trend of improving competitiveness. Producers in the sector are entering a new era of inter- and intra-sectorial cooperation and coordination of all actions related to exports. For instance, there are growing firm collaborations between wood companies, on the one hand, and metal, glass and leather (apparel), on the other hand. Intra-sectorial collaboration within the sector is growing, USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 8 especially with regard to the need to resolve pressing gaps in skills availability and complexity, logistics and transportation, improved coordination for joint presentations in international markets (including, but not limited to, international fairs), and greater participation and communication within the confines of the work of the industry association, AWPK.

Notably, over the past decade, the sector has made progress in addressing significant challenges such as improving product quality, upgrading technology across all chains of production, an improvement in working conditions and facility maintenance, including the slow but gradual adoption of lean management, an improvement in promotion and marketing (in the domestic market only), and improved skills upgrading in critical technological processes such as computer numerical control (CNC), and machine usage. Many of the challenges faced and addressed by the industry are often a result of the individual initiative and business acumen of its entrepreneurs, which has been aided in no small part by the support of key international donors.

With respect to the industry’s level of employment, there is evident lack of verifiable data, with diverging estimates that vary significantly. According to estimates developed by Recura (and confirmed by the industry’s Association of Wood Processors of Kosovo, AWPK), there are about 6,000 workers in the industry, including production, installation, sales, and showrooms. Some other, more optimistic estimates, discussed with various industry representatives, put the employment figures in the sector at between

8,000 and 10,000 workers in the sector.

A notable facet of the industry’s institutional dynamics is the fact that there is a strong commitment and interest by the industry to collaborate in overcoming sector constraints and challenges. The industry’s main sector association, the AWPK, is regarded as one of the most consolidated and proactive associations in Kosovo, representing over 100 companies, around half of which pay regular membership fees. Leading exporting companies include BINNI (furniture, exports to Europe), Ciao Berto (furniture, exports to Europe), PALMA (furniture, exports to Europe), Elnor (furniture, exports to Germany through

Producers Sales Agent), and SHEHU (furniture, exports to Europe). As an example of the engagement of sector stakeholders, at USAID EMPOWER Private Sector activity’s final closing event, Greenhouse demonstrated a prefabricated house, resulting in wide media coverage and several orders for the product.

Despite significant inroads and its still-untapped potential, the wood processing industry continues to face challenges in improving its access to export markets. Such challenges and constraints include: a) the lack of the visa liberalization regime with the Schengen zone which is complicating the process of visiting potential and actual buyers regularly; b) challenging delivery and installation of Kosovo-made products in the EU and Switzerland, especially due to challenges facing Kosovo workers to legally work in such markets

(made worse during the pandemic); c) limited, and sometimes outright lack of, promotion of the industry in the export markets (besides fairs); d) limited direct links of the industry with international buyer and supply chains; e) limited understanding of customer behavior and trends in international markets; and f) lack of skilled labor, and systemic failures in the skill provision system in Kosovo.

Additionally, there are challenges related to inclusiveness, as the sector is traditionally male-dominated

(only 10.3% of employees are women) and has a low level of inclusivity of minorities. Men generally own wood sector companies, whereas female owners face significant challenges in securing collateral for bank financing.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 9

Summary of Key Sector Constraints: There are numerous constraints that inhibit the sustainable, inclusive growth of the wood processing market system. Some of these are imbedded in the management structure of the firms and their limited internal capacities, while others are external factors, such as lack of institutional support and regulatory barriers. In order for the market system to improve its operation, both types of constraints would need to be addressed.

One of the leading internal constraints faced by wood processing companies is the predominance of relatively rudimentary business models. Most firms are typically family-owned businesses and do not invest adequately in functions such as branding, export market development, management sophistication, ad

R&D. Quality control of the finished products is often weak and industry certification mechanisms are lacking. Online sales, while highly demanded, are a rare occurrence and largely take place through the previously established producer sales agents such as amazon.de.

Most wood processing companies do not have adequate business representation in targeted export countries and do not know how to build that capacity. This limits Kosovo companies from participating in international procurements and even engaging as sub-contractors to help international businesses fill large contracts. Links to foreign retailer and producer chains are of great importance to Kosovo producers, and improved linkages with them would create a base for further consolidation and growth.

Institutional support, particularly when it comes to marketing Kosovo products and services abroad, is not sufficient. Economic attachés at the Kosovo embassies abroad and dedicated staff from the Ministry of Foreign Affairs in those markets could be a great asset to exporting companies; however, aside from limited courtesy visits little is done to support Kosovo business interests abroad.

Currently, domestic producers face unfair price competition due to the lack of application of consistent customs rules across the range of the markets. Also, a notable concern relates to the return of Value

Added Tax (VAT) on imports. Producers within Kosovo purchase raw wood from local importers, and due to this purchase being a domestic market purchase, they also pay VAT on the raw wood, and then have to wait on Tax Administration prolonged internal control procedures to get reimbursed.

Industry representation is limited and donor dependent: Some firms within the sector are well-organized, and industry leaders have shown a strong desire and willingness to invest in innovation, digitalization and technology that address buyers' needs and requirements. However, the Association of Wood Producers represents only a small part of producers in Kosovo and relies significantly on donor funds for its activities.

Transportation of the products from Kosovo to EU and Switzerland remains a challenge. Kosovo producers are forced to rely on transportation and logistics companies that are from neighboring countries. This is a highly political issue and relates to disputes between Kosovo and Serbia. Kosovo trucks are obliged to pay additional fees to enter Serbia, and special licenses in countries such as Italy and Austria.

From the access to finance perspective, one of the biggest issues for wood processing companies is lack of functional financial products to help with liquidity issues. The typical supply of raw material is based on imported industrial wood and semi-processed wood products, which all require advance payments.

Processors face delays in payments from buyers in the local market, while also facing contractual payment terms with the foreign buyers of between 60-90 days. As such, this dynamic creates a liquidity gap of between 3-6 months.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 10

The entire VET system in Kosovo is severally underdeveloped, resulting in skill shortages and high competition for skilled workers. While few private training outfits offer more feasible opportunities to improve the workforce, the industry continues to struggle with the supply of skilled workforce.

The sector is traditionally male-dominated (only 10.3% of employees are women) and has a low level of inclusivity of minorities. Men generally own wood sector companies, whereas female owners face significant challenges in securing collateral for bank financing.

A more detailed list of constraints is presented in the conclusions of this chapter in the 5.1.9 section below.

5.1.1. VALUE NETWORK MAP AND DESCRIPTION

This value network map for the wood-processing sector was developed using the methodology outlined in section 3. The map identifies the a) main actors in the market system of the wood industry; b) key roles of such actors; and c) the type of relationships, or lack thereof, among the key actors. Mapping the relationships among actors provides a way to capture dynamic complexity within the market system of the sector, which also paves the way for the identification of system-level constraints. As noted in the methodology section of this report, the mapping of the relationships among the key actors in the market system is shown by color-coded arrows to provide for a clearer understanding of the nature of such relationships. To better understand the value network map of the sector, presented below, the color-coded arrows are broken down in the several categories:

Green color arrows indicate a “financial flow”;

Black color arrows indicate a “product or service flow”;

Red color arrows indicate an “information flow”;

Blue color arrows indicate a “regulatory oversight role/flow”; and

Purple color indicate denote a “skilled labor flow”.

The wood industry’s value network map is presented in Figure 1, followed by a detailed description below about the main actors, their roles in the market system, and the flows among the key ac

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 11

Figure 1: Value network map of the wood sector

Source: Export-Led Growth Activity research and analysis

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 12

MAIN MARKET SYSTEM ACTORS1

The box in the middle of the map represents wood processors and producers. Following the analysis of the nature and prevalence of current producers in the wood processing sector, a determination was made that producers in the sector can be grouped as follows: 1) flat-furniture producers; 2) solid wood producers; 3) upholstered producers; and 4) contract furniture producers.

The internal Kosovo market is unofficially estimated (based on discussions with industry representatives) at 120 million euros annually, while exports of the furniture and wood products were estimated at between 25-30 million euros in 2019 (based on company reporting and the review of available customs data). It is estimated that there are between 300 – 350 flat furniture companies with an estimated 4,000-5,000 workers; 50-70 solid wood companies with up to 2,500 workers; and approximately 100 upholstered producers engaging between 3,000 and 3,500 workers. Such employment figures are on the optimistic end of estimation.

Sector A on the map represents current buyers of wood/furniture products, both foreign and domestic buyers. Outside of the domestic market, the main buyers are diaspora in Switzerland and the European Union (EU), with the estimated annual export market valued between 25-30 million euros (which includes producers of plastic windows and doors, also known as PVC).

Sector B on the map represents the main workforce actors in the system, including state- and privately-owned, as well as formal vocational education and training (VET) schools, training centers and higher education providers. Despite years of support and huge demand for skilled labor, the workforce development actors in the wood processing market system continue to provide an insufficient supply of adequately trained workers to the growing wood processors.

Sector C on the map covers both, domestic and foreign input suppliers of the industry and those that are importing from the EU and the region (including Turkey). We estimate that Turkish suppliers provide roughly 50 percent of the total raw material imported in a given year, while EU-based suppliers provide about 40 percent and domestic and regional suppliers provide the remainder.

Sector D on the map indicates some of the critical support service actors (i.e. machinery, servicing, maintenance and financial services for exporters) that are key for the success of the industry. There are only a few who are partially present in the country, therefore this is one of the weakest links of the chain in wood processing sector’s market system – this is discussed in greater detail in the

Supporting Services section, below.

Sector E covers business environment actors and those that are directly responsible for institutional support of the industry in domestic and international markets.

Sector F indicates other significant players/actors that are important as the sector is growing, including the Association of the Wood Processors of Kosovo (AWPK), donor community actors and different agencies/business service providers that will support the transformation of the industry to become a fully functional and self-reliant market system.

KEY ROLES OF THE MARKET ACTORS

An important part of value network mapping is the description of the main roles and functions of the key actors in the market system. Below is a detailed description.

1 See letter markers in the map above for easier reference and orientation.

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 13

Flat furniture producers are mainly using melamine, veneer and medium-density fiberboard (MDF) as a key raw material in the production. Key products include kitchens, cabinets, bedrooms, tables, doors, bathroom furniture, and other interior furniture for food services and hotel industries

(HoReCa). This group of producers invested heavily in technology, facilities, and, to some extent, staffing. This group of producers has some exposure to the export markets and is experienced and capable in customized production. In export markets, there is high competition in serial production from producers in Germany, Poland and Italy. At the present time, flat furniture producers are able to compete on a range of customized products, flexible and response times to special requests from

EU and Swiss buyers. In addition, the Albanian diaspora is playing a key role in facilitating connections and transferring know-how to Kosovo wood producers. Lately, some foreign architectural agencies

(from Switzerland, Greece, and Sweden) are starting to cooperate with Kosovo producers directly.

Solid wood producers are considered to be relatively less consolidated compared to flat furniture producers, but foreign demand for their products is increasing in export and domestic markets. This group of producers is using mainly domestic raw materials, which is dependent on the still-small capacities in Kosovo for drying and preparing raw material for industry. Suppliers are concentrated more on servicing the wider population with wood parts that are used for the heating of houses and some apartments. There is a substantial market opportunity in this group due to the increased demand in the export market, but companies that are engaged in this segment need to invest further in technology and facilities. Export finance is fundamental for this group due to the production cycle that is longer than for flat furniture producers, involving cutting slabs, drying preparation, and drying itself, before it can be used in processing factories.

Upholstery producers represent the smallest group (by production capacity) within the wood processing industry in Kosovo. They produce at a mid-to-low price range, primarily for the domestic market. Due to the handmade processes involved in production, this group of products is demanded in export markets. Moreover, besides production, a crucial enticement for customers is tailored design, comfort and availability on short notice. Kosovo is importing a wide range of products in this category from Turkey and the region (Albania, North Macedonia and Serbia). The small number of high-end, leather-based products is imported from Italy and other EU countries. This group of producers can grow fast if there is a system in place that brings together producers, wholesalers and designers that are operating in Kosovo.

Contract furniture actors represent a new group of entrepreneurs, which is a recent phenomenon, and are growing fast. Most furniture for hotels, cafeterias, bars and restaurants in Kosovo is now produced locally. There are no official statistics about the rate of growth of this subsector, but according to anecdotal evidence and Export-Led Growth Activity’s team knowledge, the interior furnishings of many café bars around in Kosovo are being designed, produced and executed by local contract furniture producers. This group of entrepreneurs has opportunities in both the domestic and export markets. This group is pushing producers to cooperate with designers and architects and, therefore, the group is becoming important for the better operation of the market system of the sector and is also exporting regularly. The biggest challenge that this group of producers faces is access to installers/fitters in the EU and Swiss markets.

Raw material suppliers’ network in Kosovo plays a crucial role in the market system of the wood sector and is concentrated in a few areas:

Elementary elements supply of the melamine, MDF, veneer, raw wood (slabs) and solid wood plaques;

Suppliers that are offering fittings and accessories;

USAID EXPORT-LED GROWTH ACTIVITY—MARKET SYSTEM AND CONSTRAINTS ANALYSIS 14

Providers of the lacquer and colors;

Appliances suppliers;

Foam and fabrics suppliers.

Smaller companies are often reliant exclusively on domestic suppliers, while larger companies in the sector have managed to establish direct links with raw material suppliers in Turkey, China and the EU.

Local domestic raw material suppliers have recently started to diversify their core supplier business by investing in own CNC machinery and offering semi-finished products. As such, they have reached out to workforce of the wood producers, generating tension among industry players. The new entrants are seeking to engage the staff of producers after working hours, in a bid to expand market share controlled by local producers.

Domestic wholesalers played a bigger role in distribution in the past, but in…