Relevant factors for building competitiveness of manufacturing industry in Bosnia and Herzegovina

Kasumović, Merim; Altumbabić, Vildana Article Relevant factors for building competitiveness of manufacturing industry in Bosnia and Herzegovina Economic Review: Journal of Economics and Business Provided in Cooperation with: Faculty of Economics, University of Tuzla Suggested Citation: Kasumović, Merim; Altumbabić, Vildana (2020) : Relevant factors for building competitiveness of manufacturing industry in Bosnia and Herzegovina, Economic Review: Journal of Economics and Business, ISSN 2303-680X, University of Tuzla, Faculty of Economics, Tuzla, Vol. 18, Iss. 1, pp. 3-19, https://er.ef.untz.ba/index.php/er/article/view/56 This Version is available at: https://hdl.handle.net/10419/307819 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 /// * Faculty of Economics, University of Tuzla, Bosnia and Herzegovina, merim.k[email protected] ** Solana d. d. Tuzla, Bosnia and Herzegovina, vildana.altu[email protected] 1 Available data as of 2017. 3 /// RELEVANT FACTORS FOR BUILDING COMPETITIVENESS OF MANUFACTURING INDUSTRY IN BOSNIA AND HERZEGOVINA Merim Kasumović*, Vildana Altumbabić** Abstract Competitiveness of an industry is conditioned by a number of different factors. These factors may be a part of macroeconomic or microeconomic competitiveness. In essence, macroeconomic competitiveness creates preconditions for generation of microeconomic competitiveness. It is therefore important to identify relevant factors for generation of industry competitiveness in order to promote the microeconomic competitiveness of an industry through adequate macroeconomic competitiveness and industrial policy. In often cases, the government creates industrial policies to encourage development of a particular industry, but these policies do not have targeted effects. By identifying relevant factors of industrial competitiveness, industrial policy will be focused on them, thus avoiding waste of scarce resources and facilitating achievement of industrial policy objectives. This paper examines relevant factors of competitiveness of Bosnia and Herzegovina’s (BiH) manufacturing industry in the period 2010-2017 as basis for its successful long-term growth and development. These factors should be a focal point of industrial policy makers in BiH manufacturing industry. Keywords: competitiveness, relevant factors of competitiveness, manufacturing industry, export competitiveness JEL: L52, L60 1. Introduction Manufacturing is one of the most important sectors of economy. It is the largest exporter, a carrier of a country's economic activity and generally the most competitive sector. Its development and growth are conditioned, among other things, by ability to place products on international markets. In order to do this, businesses must offer products that are competitive with competing products in markets in which they emerge. Competitiveness of manufacturing industry is influenced by a number of factors. The task of industrial policy makers is to identify relevant factors for building competitiveness of BiH manufacturing industry and to devise adequate industrial policies that will enable these factors to be built and strengthened. Industries that have a built-in competitive advantage grow faster, generate more revenue, adequately manage costs, and create basis for investment and innovation that will enable them to survive and further expand in competitive markets. It is a constant pursuit of excellence and the role of the state to support these processes through an adequate industrial policy. The process of de-industrialization has engulfed the whole world, but in BiH this process is much more complex. It is a consequence of devastation during the war and post-war transition that has resulted in the devastation of industrial complexes and their capacities. Following these processes, BiH industry needs adequate support to become competitive in international markets. The aim of this paper is to identify and describe relevant factors for generating competitiveness of the manufacturing industry in BiH in the period of 2010-20171. The central research question is: Which factors of competitiveness are relevant for generating competitiveness of /// . Kasumović M., Altumbabić V.. /// 4 Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 BiH manufacturing industry? In order to answer the central research question using the panel regression method, the following central hypothesis was tested: Individual competitiveness factors, as a part of a complex concept of industry competitiveness, have an impact on building competitiveness of BiH manufacturing industry. The first part of the paper defines the concept and factors of competitiveness of the country and industry and provides literature review. The second part describes the research methodology, sample, variables, sets and tests the model. The third part analyzes the results of the research on the impact of individual competitiveness factors on competitiveness of BiH manufacturing industry. 2. Theoretical framework and literature review 2.1. Review of previous research When it comes to research on BiH manufacturing industry and its competitiveness, it can be concluded that this topic is still underresearched. Much more research has been done in Republic of Croatia and Republic of Serbia. Vukšić (2005) investigated the impact of Foreign Direct Investments (FDI) on exports of Croatian manufacturing industry. He concluded that the impact of FDI on exports of Croatian manufacturing industry is relatively weak. Džafić and Terzić (2007) investigated competetiveness of BiH economy in the function of European integration. They concluded that strategic positioning within European Union (EU) internal market is important for future prosperity and membership of the EU. They emphasized the importance of foreign direct investments, high-tech processes and creation of recognizable “brands”. Halilbašić and Brkić (2017) explored export specialization of Southeast European countries in trade with the EU before and after the start of trade liberalization, initiated by the conclusion of the Stabilization and Association Agreement. Using the Michaely Index, they found that high export specialization is still in primary industry products and resource-based products, low technology products and skills. The key failure of these countries is their poor performance in the production of goods based on research and innovation. Using the Balassa Revealed comparative advantage Index (RCA) of Open Comparative Advantages, they found that concentration level of exported products has decreased while exports to the EU are still highly concentrated on a small group of products. Branković (2015) analyzed export competitiveness of the economy of Republic of Serbia using the Revealed comparative advantage Index (RCA). She concluded that long-term structure of Serbia's export competitiveness is unfavorable, given that the sections in which Serbia traditionally has comparative advantages primarily include resource and laborintensive activities. Filipović, Nikolić, and Ilić (2015) examined whether Serbian economy lagged behind in terms of competitiveness and speed of development of a knowledge-based economy relative to most highly developed European countries and selected countries in the region. They pointed to the most important factors for development of a knowledge-based economy in Serbia, and the need to enhance opportunities for significant development of high-tech and knowledge-based activities as basis for future competitiveness of the domestic economy. Teodorović and Buturac (2006) analyzed the perspectives of development of industrial production in Croatia. In the comparative advantage analysis, Revealed Comparative Advantages (RCA) indicators are used, the entropy index for the purpose of dispersion and concentration analysis and the GL (Grubel- Lloyd) index for the analysis of specialization in intra-industrial exchange. They concluded that there has been a loss of comparative advantage in most industrial sectors and a decline in specialization in intraindustrial exchange. Stronger development of industrial production can be ensured by acting . Relevant factors for building competitiveness of manufacturing industry in B… /// Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 5 /// on key factors of productivity and competitiveness. Bogović and Peteh (2007) analyzed the importance of innovation policy for increasing competitiveness of Croatian manufacturing industry. They concluded that one of the key causes of poor competitiveness of Croatian manufacturing industry is the lack of innovation and innovation capacity of Croatian companies. They proposed implementation of the EU innovation policy known as the new horizontal policy that integrates elements of scientific, technological and industrial policy. Bakarić and Vizek (2010) analyzed structural characteristics and dynamics of production activity and production factors in manufacturing industry of Republic of Croatia from 1997 to 2007. The results of this analysis showed that the structure of manufacturing industry of Republic of Croatia was declining and increasingly lagging behind European manufacturing industry, which ultimately means that it was losing competitiveness. The weakening of competitiveness of Croatian manufacturing industry is a result of the unfavorable technological structure, namely dominance and strengthening of low technological intensity industries. Bezić, Cerović and Galović (2011) analyzed the position and determined competitive advantages of Croatian manufacturing industry in international trade, using the Revealed Comparative Advantage Index (RCA) as a method of determining the comparative advantage of exports, the Export Competitiveness Index (XC), as a method of measuring the export competitiveness of the observed countries, the Export Specialization Index (ES), as a method of comparing the export activity of manufacturing industry of Republic of Croatia and EU, and the Relative Trade Preference Index (RTA), which integrates the RCA and Relative advantages of import (RMA) indices. They concluded that in order to improve competitiveness of Croatian manufacturing industry exports, the following are necessary: stronger integration and complementarity of economic policy (monetary and fiscal) in order to achieve a better competitive position of Croatian manufacturing industry, revision of plans and business strategies of companies in the manufacturing industry, creation of an attractive environment for investors and technology transfer of foreign investors, and cluster formation. Tkalec and Vizek (2011), by using multiple regression, examined the impact of macroeconomic policies on Croatian manufacturing industry. They concluded that fiscal policy is particularly important for manufacturing industry because of the size of its fiscal elasticity and the short run of action. Basarac and Vučković (2012) identified sectors of Croatian manufacturing industry and their growth potential by increasing their absolute and relative share of world market. A competitiveness analysis was performed based on the index of trade efficiency of Croatian manufacturing industry. The results of this analysis showed that the offer of Croatian manufacturing industry is dominated by traditional, labor and raw material intensive sectors with low technological intensity. Stojčić (2012) investigated competitive-ness of exporters of Croatian manufacturing industry using the GMM (Generalized Method of Moments) system dynamic panel method. The survey results were consistent with theoretical predictions about the behavior of pricecompetitive firms. In building their international competitiveness, Croatian exporters mainly rely on cost reductions and improved labor productivity. The sensitivity of these companies to wage increases implies that labor costs are an important determinant of their success in the international market. In overcoming barriers to exports, analyzed companies rely on their own resources, previous experience, sharing of costs, and knowledge through agglomeration externalities. Since price competitiveness based on price factors is not a long-term source of competitive advantage, techno-logical transfer is necessary /// . Kasumović M., Altumbabić V.. /// 6 Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 in order for the manufacturing industry to survive and prosper; economic policy, strategic alliances and intra-industrial exchange play an important role in this process through which the technological structure of Croatian exporters can be improved. 2.2. Competitiveness of the country and industry The term competitiveness does not have an unambiguous definition. Competitiveness can be observed at the level of state, sector, and company, and is a very complex term. The Organisation for Economic Cooperation and Development (OECD) defines competitiveness as a measure of a country's ability or inability to sell its products in the international market (OECD, 2017). The OECD Secretariat calculates two different competitiveness measures based on the difference between domestic and competitive labor costs per unit of production and product sales price (OECD, 2017). From the above definition, it can be clearly concluded that competitiveness of national economy is conditioned by competitiveness of its enterprises, especially those that export their products to inter-national markets. On the other hand, competitiveness of an enterprise is determined by the ability to produce a product that will be more competitive than that offered by the competition. In order for businesses to be successful in this, in addition to the internal resources, they need to have a stable and supportive business environment. This means that competitiveness of a country's economy depends directly on competitiveness of its enterprises and vice versa. National environment plays a central role in competitive advantage of enterprises and some national economies are more stimulating than others. In Porter’s view, the state should create conditions for the production factors to be invested in activities with the highest productivity of labor. Increasing productivity of enterprises is necessary in order to increase competitiveness of the national economy (see more on this: Porter, 1990, p. 79; Porter, 2002, p. 31). Krugman (1994) in his article argued that competitiveness is an insignificant term when applied to the national economy. He believed that competitiveness is a more interesting way to express the term productivity and that it has nothing to do with international trade. In his work he focused on the US economy, which is characterized by a much larger domestic market relative to exports. US companies place most of their production on the domestic market, in order from the business environment point of view, they are all in an equal position. In such economies, export competitiveness is a much less important issue of economic strategy instead of productivity, which is much more important. He also believed that states should not compete in the way businesses do because they rely on their power and have much more benefit from the success of others. Competitiveness for him is a term used to implement unpopular policies such as financial deregulation, diminishing workers' rights, etc. Insisting on a country's competitiveness can also lead to trade wars and protectionism which can be detrimental. Many of these claims have been criticized by various authors who cite the example of the EU, which particularly emphasizes competitiveness of national economies where many member states such as Greece have many problems because their economies are not at the level of other member states such as Germany. According to the Global Competitiveness Index (GCI), BiH ranks 92nd out of 141 countries. The GCI measures competitiveness of a country using 12 pillars that are classified into four sub-indexes: supportive environment (institutions, infrastructure, information and communication technologies, macroeconomic stability), human capital (higher education and training, health) markets (goods market, labor market, financial system, market size), and innovation (innovation capability, business dynamism). . Relevant factors for building competitiveness of manufacturing industry in B… /// Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 7 /// If we look at the first sub index, we will see that in the first pillar institutions, the institutional environment of a country is the worst rated and ranks 114th out of 141 countries. On the other hand, if we take a look at the factors that make it more difficult for an enterprise to operate, government inefficiency comes first; where we rank 139th out of 141 (World Economic Forum, 2019). In addition to the GCI that measures a country's competitiveness, the Global Manufacturing Competitiveness Index (GMCI) measures the global competitiveness of production. According to this index, there are 12 factors of production competitiveness and the first four are key factors (Delloitte, 2016). The first and most important factor is talent. Cost competitiveness comes second, productivity is ranked third and supplier network fourth. The legal framework is fifth, education and training are positioned sixth, infrastructure is seventh, economic, trade, financial and tax system are in the eighth place, the ninth is innovation, the tenth is energy policy, the eleventh is the attractiveness of the domestic market and the twelfth is the health system. According to the 2016 Global Production Competitiveness Report, CEOs in USA, China, and Europe emphasize that their countries are increasingly working to create policies that support the construction of key factors for manufacturing competitiveness. According to this report, the key barriers to increasing competitiveness of production in these three leading economies of the world are labor costs, legislation, tax rates and fiscal policy (Delloitte, 2016). According to Harvard Business School (2018), competitiveness is determined by microeconomic competitiveness and macroeconomic competitiveness. Microeconomic competitive-ness is determined by the quality of business environment, degree of cluster development, sophistication of business processes, and enterprise strategies. Macroeconomic competitiveness is deter-mined by stimulating monetary and fiscal policies, effective political institutions, and human resource development. Macroeconomic competitiveness creates conditions for high productivity and development of microeconomic competitiveness. Numerous economic theorists have addressed the problem of competition and competitive advantage of firms, most notably within the theory of the firm. Some of the most significant approaches are: neoclassical model of perfect competition, school of industrial organization, Schumpeter’s theory, Chicago school, and transaction cost theory (Daraboš, 2015, p. 16). Table 1 gives an overview of defining the concept of competitive advantage through schools of economic thought. /// . Kasumović M., Altumbabić V.. /// 8 Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 Table 1. Competitive advantage through schools of economic thought Approach Key features The most important representatives Neoclassical model • Is based on a simplified model of perfect competition • The following assumptions apply: (a) it is easy to determine the optimal input ratio (b) the marginal contribution of each input can be calculated (c) all businesses have complete and accurate information, (d) resources are fully mobile and shared • By combining inputs in an optimal ratio, companies produce the final output • The behavior of the company is completely determined by market prices and marginal costs Alchain (1982), Alchain & Demsetz (1972) Edgeworth (1881) Stigler (1957) McNulty(1968) School of Industrial Organization •Competitive advantage is achieved by limiting production, using monopoly power or negotiating with competitors • Companies seek to restrict production in order to cause price increases •Industries where most output is produced by a few businesses can provide above-average profits in the long run • Much attention is paid to the size of the enterprise, assuming that larger enterprises control most of the industrial outputs and thus have a greater impetus for so-called monopolization of the industry, ie agreement with competitors • These assumptions open up the theoretical possibility of separating certain companies from the successful group of average and do not exclude the possibility of possessing some specific characteristics that certain businesses can provide longterm profitability at a level higher than the industry average. Therefore, the concept includes competitiveness theories enterprise heterogeneity, which implies the inherent ability of an enterprise to generate returns Bain (1948, 1950, 1951, 1954), Scherer (1980), Tirole (1989), Gale (1972), Mann (1966), Hall & Weiss (1967), Shepherd (1972) Schumpeter's theory •Competition as a contest to create and apply innovation • The focus is on the dynamism of competition while criticizing the static view of pricing products and processes that do not change • Competitive advantage is achieved through innovation that distorts competitors' market position Schumpeter (1950), Mason (1951,1957a) Cohen & Levin (1989), Markham (1975), Scherer (1980), Nelson & Winter (1982) Chicago School •By applying neoclassical price theory and weakening certain assumptions of perfect competition it opposes the thesis of monopolizing the market as a source of competitive advantage • Competitive advantage is explained by efficient production and distribution, ie internal efficiency of the company • The size and the volume of the business of a company are determined by its efficiency, in which the growth of the company is based on efficiency achieved • The state should remove all barriers to profit Kitch (1983), Stigler (1951, 1961, 1964, 1968c, 1968a, 1986b), Nelson (1974), Demsetz (1968, 1975), McGee (1975) Transaction cost theory • Aimed at defining the optimal size of a business through consideration of the relationships between market transaction costs and costs managing internal transfers • The enterprise will tend to grow until the cost of organizing a market transaction equals the cost of implementing those same transactions Coase (1937, 1952), Williamson (1972, 1975, 1983, 1989), Klein, Crawford & Alchian (1978), Ouchi (1980), Walker & Weber (1984, 1987), Klein & Leffler (1981) Source: Adapted from (Daraboš, 2015, pp. 17-18) . Relevant factors for building competitiveness of manufacturing industry in B… /// Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 9 /// In this paper, we define competitiveness of an enterprise or industry as its ability to offer a product that is more competitive than products offered by the competition. This means that the company has to offer a product that will have a higher value for the customer than its competitor, at a price equal to or lower than offered by its competitor. Competitiveness of an industry is determined by competitiveness of its enterprises. This ability can be viewed and evaluated from multiple perspectives, such as: value of investments, exports, innovation, profitability, and number of employees. They interact together to increase competitiveness of the enterprise, industry and its fields. The following factors of competitiveness were considered in the analysis of the key factors for building competitiveness of BiH manufacturing industry: investments, innovation, productivity, profitability, and their impact on competitiveness of the manufacturing industry, measured by the value of exports and competitiveness index representing the ratio of exports and total sales revenue (see more on this: Stojčić, 2012, p. 5). 2.3. Industrial policy and competitiveness There are significant differences among the authors who worked on defining industrial policy. Adams and Klain defined industrial policy as a set of different measures, policies, and programs that foster industry competitiveness. Grant defined industrial policy as a set of measures used by governments to influence investments decisions in companies to reduce unemployment, improve the balance of payments and create a more efficient industrial economy in general. For the OECD, industrial policy is the focus on a set of goals related to industry activities and its development. Ohlin and Hesselborn under industrial policy implied all legal, fiscal and financial frameworks of a business (Savić, 2010, p. 130). Industrial policy, its meaning and role in the economy have changed and evolved over time. Since after the depression 1929-1933 up to the early 1980s, industrial policy was part of state intervention in the economy with the goal of regulating the market and eliminating market externalities. With the development and strengthening of liberal economic thought in the 1980s and 1990s, the number of opponents of industrial policy increased. However, in many cases, it has shown that the market itself is not a good enough regulator, since it is driven by profit. One example are investments in research and development (R&D). The environment can often benefit more from the research so that business profits do not always have to cover the costs incurred. At the same time, a company cannot predict future behavior of participants in its production “chain.” The modern market does not always provide complete information on what to produce and requires the intervention of public authorities to remedy this major market failure (Savić, 2010, p. 134). As a result of the mortgage market collapse, liberal governments around the world faced a global economic crisis in 2007. This crisis affected the real sector and sampled the global recession in 2009. The crisis resulted in an increase in unemployment, decline in living standards, environmental pollution, and decrease and disappearance of natural resources. The solutions to these problems were sought precisely in industrial policy measures. Most economists do not believe that the active role of governments in promoting economic growth and industrialization produces good results because past experience showed that such policies are often very expensive and do not meet most of the set objectives (Lutovac, 2014, p. 74). However; the most common cause for such an outcome of industrial policy measures lies in the fact that they were not properly targeted and implemented. This means that government's policy of promoting and diversifying industries must be based on industries that have some potential comparative advantage, to enable emerging industries to become competitive in domestic and international markets soon (Lutovac, 2014, p. 74). The key to industrial policy success lies primarily in identifying industries that ha-ve the potential to build competitive adva-ntage and then, through appropriate industrial policy /// . Kasumović M., Altumbabić V.. /// 10 Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 measures, influence the construction and maintenance of competitive advantage. One of the preconditions for the success of industrial policy measures is certainly the way of approach, i.e. whether it is an ex-post or ex-ante approach. With the ex-ante approach, the state regulates market movements, while with the ex-post approach the state intervenes only when the problem arises. Due to the neglect of importance of industrial policy and ex-post approaches, the EU has faced a number of problems such as falling productivity, rising unemployment, and losing competitiveness over its two leading competitors, Japan and the United States. This is why the European Commission has proposed a Europe 2020 strategy to increase competitiveness of the EU. The first of the seven pillars of this strategy is the industrial policy for the globalization era, aimed at improving the business environment, especially for SMEs and supporting the development of a strong and sustainable industrial base capable of competing globally (World Economic Forum, 2014). 3. Methodology 3.1. Research sample Manufacturing is one of the most impor-tant sectors of an economy. It is an industry branch that deals with the processing of materials and substances of plant and animal origin into finished products. The end products of this industry may be fnished products for sale to customers or intermediate goods used further in production processes. It is the basis for the development of every country, especially developing countries, it enables import substitution and export expansion. According to the BiH Business Classification 2010 (Sections of Standard Industrial classification (KD) BiH, 2010), manufacturing industry comprises 23 sections. It is the largest exporter, the carrier of country's economic activity and generally the most competitive sector. Its development and growth among other things are conditioned by the ability to place products on international markets. In order to do this, the businesses must offer products that are competitive with competing products in the markets in which they appear. According to the BiH Industry Classification 2010, there are 15 fields of activity, namely: B- mining and quarrying, C-manufacturing, D- production and supply of electricity, steam, gas, E-water supply, F-construction, G- commerce wholesale and retail, H- transportation and storage, I-catering, J-infor- mation and communications, K-financial activities, L-real estate business, M-professional, scientific and technical activities, N-admini- strative activities, O-public administration, P- education, Q-health care activities, R-arts, entertainment, S-other service activities, T- activities of households, U-activities of extraterritorial organizations. The total number of registered companies in BiH as of June 30, 2018 was 37,587 (The Agency for Statistics of Bosnia and Herzegovina - BHAS, 2018), out of which 4,957 were enterprises in the manufacturing industry or 13.18%. As shown in Figure 1, according to the latest published data of enterprises in BiH, 28.3% of them are in the section G (wholesale and retail trade; repair of motor vehicles and motorcycles), the BHAS (2018) out of the total number of 13.5% in C (manufacturing), 8.6% in M (professional, scientific and technical activities), 7.8% in S (other service activities), 5.9% in F (construction) and 5.7% in H (transportation and storage). . Relevant factors for building competitiveness of manufacturing industry in B… /// Economic Review – Journal of Economics and Business, Vol. XVIII, Issue 1, May 2020 17 /// 1% increases competitiveness by 0.556% on average, and it can be concluded that profitability is the factor that has a significant impact on building competitiveness of BiH manufacturing industry. Similar results were obtained by applying a static panel analysis by Škuflić, Družić and Mlinarić (2016). Productivity growth of 1% on average in-cre- ases competitiveness of the manufacturing industry by 576.321%. This result is in line with theoretical assumptions about productivity as the most significant factor in building competitiveness of BiH manufacturing industry. Similar results were obtained using GMM methods by Stojičić (2012) and using panel regression analysis by Vukšić (2005). The estimated results of stochastic regression model parameters reject the hypothesis H1 or confirm the alternative hypothesis that investments have a negative impact on competitiveness of BiH manufacturing industry and confirm the hypotheses H2 and H3 that factors of competitiveness productivity and profitability have a positive impact on competitiveness of BiH manufacturing industry in the observed period 2010-2017 at a significance level of 5%. Confirmed influence of individual competitiveness factors on competitiveness of BiH manufacturing industry in working hypotheses confirms the main research hypothesis that individual competitiveness factors have an impact on competitiveness of BiH manufacturing industry in the period 2010-2017 at a significance level of 5%. 6. Conclusion Increasing competitiveness of BiH manufacturing industry is conditio sine qua non of its development and survival, and thus the development of overall BiH economy. A strong and competitive manufacturing industry can be generator of the country's economic development. Given the destroyed industrial capacities, in the post-war period, instead of economic and industrial policies aimed at rebuilding and strengthening manufacturing industry, they went towards de-industri- alization (decrease in industry's share of GDP). The consequences of entering this process prematurely are large and far reaching for the country's economy, including high unemployment, high foreign trade deficit, high indebtedness and high budget deficits. The aim of this paper was to identify relevant factors for enhancing competitiveness of BiH manufacturing industry in order to make appropriate recommendations for the formulation of adequate industrial policies on the basis of obtained results. The statistical analysis concludes that profitability and productivity have a positive impact on competitiveness of BiH manufacturing industry, while investments have a negative impact on competitiveness of BiH manufacturing industry. According to the results of the analysis, investments in the manufacturing industry in BiH have a negative impact on competitiveness of the manufacturing industry. Reasons for this should be sought in the fact that the level of FDI is not high enough, that domestic investments are rising and that FDI very often did not result in the transfer of knowledge and technology by investors. The findings are in line with theoretical assumptions about building competitive advantage of BiH manufacturing industry based on cost leadership strategies. It is necessary to allow the appropriate industrial policies to further strengthen the stated competitiveness factors (profitability and productivity) which will create space for innovative manufacturing activities and a gradual transition from cost management strategies to differentiation strategies. A significant limitation in analysis is certainly a short period of observation. In order to obtain a more complete picture of the state and trends of the individual factors of competitiveness and competitiveness of BiH manufacturing industry, the observation period should be longer, at least ten years. 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