In the 1970s and early 1980s my family’s yearly vacation trip from Southern Germany to Greece involved a grueling 36 hour trek through the infamous “Auto-put” : Maribor-Ljubljana-Zagreb-Belgrade-Nis-Skopje-Evzoni. The trip was hazardous, always an adventure. To fill our car in “socialist Yugoslavia”, we had to buy gasoline vouchers upfront at the border.
We drove a Fiat 132 which served us well during these long road trips. These memories came back to me when a World Bank team recently visited the brand new FIAT car factory in Kragujevac , two hours South of Belgrade. This is a high stakes investment for FIAT and a strong signal for Serbia’s dormant manufacturing. The factory is producing the new 500L (in several different variants), a modernized version of its legendary Cinquecento . Early this October, the company and the factory celebrated the first anniversary of the 500L’s  regular production. During that year, some 100,000 units were produced, overwhelmingly for export around the world, including to the USA. As a result FIAT is now Serbia’s largest exporter (over a billion euros’ worth -15% of total exports of goods from Serbia- in the first three quarters of 2013 ). Just two years before, exports of vehicles amounted to 2% of total exports (see figure). Today, Kragujevac  is producing 600 cars daily and has created more than 3,000 jobs with the potential for more. Importantly, a network of suppliers is springing up, both in Kragujevac, as well as in other towns in Serbia.
Perhaps a no-brainer in hindsight, attracting FIAT to Serbia was nor easy nor cheap nor uncontroversial and it involved resolute action by the Serbian state. The merits of such industrial policies, where the state takes the lead in boosting private sector development, remain hotly debated. On one hand there have been miserable failures: British Leyland  in the auto sector, French attempts to develop an indigenous ICT cluster  (CII-Honeywell-Bull), or Indonesia’s shot at creating an airline industry . On the other hand, the most successful economies of the last decades, including the East Asian “Tigers” have all deftly relied on heavy state intervention to nurture the ‘infant industries’ that became today’s global giants like Korea’s  Samsung and LG or Taiwan’s TSMC  (the world's largest dedicated independent semiconductor foundry). Europe’s Airbus  would not have survived but for a healthy dose of public subsidies .
In Serbia, the government took a 33% stake in FIAT and provided the land and necessary infrastructure (though delays in building connecting highways have become a source of frustration). It also provided Euro 100 million in capital, as well as generous job creation subsidies. Likewise, FIAT also made a significant commitment with total investments of Euro 1.2 billion in the company (now FIAT’s most advanced worldwide).
So what are the lessons for industrial policy? When should a government actively engage and where should it draw the line? In Serbia, there were three pre-conditions to make this investment a likely success:
First, the new factory was built on an existing industrial cluster and history of cooperation. Serbia had a tradition of car production in Zastava, a local car company , which was at the center of a broad cluster that had the technical skills, capacity and infrastructure to produce nearly 250,000 automotive units in 1989 . There was also a strong track record of cooperation with FIAT, as Zastava has been producing FIAT-licensed cars since 1950s. The supply chains, and powerful industrial tradition, were already there and only needed to be expanded and modernized.
Second, Serbia offered competitive labor costs and low tax burden, together with free access to the EU market. The Government also engaged strongly and saw the presence of a large exporter as a stepping stone in addressing Serbia’s competitiveness deficit. Serbia’s economy needs to transition out of consumption-led growth – financed by significant but volatile capital inflows – and start its export engine to achieve higher productivity . With FIAT, Serbia received state-of-the-art technology and operating procedures, high productivity and high value exports. This is in sharp contrast with Serbia’s traditional low value-added exports, including basic metals, chemicals and food products.
Third, the investment was significant enough to generate important spill-overs. Other international suppliers  are now setting-up shop in Serbia , among them Magneti Marelli, Johnson Controls, Leoni, and Yura. More critically for the local economy, local producers – many of which SMEs – are also increasingly integrated in the new supply chains.
Most importantly, investors need a predictable and consistent business environment, especially a strong legal framework. Smart industrial policies may help in special cases such as Fiat in Kragujevac  but the key is to use this momentum to let markets do the rest.