Petar Veselinovic

Can a Multinational Company Create a Real Estate “Bubble” at the Local Level? The Case of Fiat and City of Kragujevac

Abstract The aim of the paper is to analyze the recent dramatic increase in housing prices in Kragujevac, related to the opening of a multinational company facility. The main question is whether increasing house prices have been driven by market fundamentals or by speculative behaviour of the market players. We have decomposed variables influencing house prices in Kragujevac into supply and demand driven fundamentals to explore speculative ‘bubbles’ and detected the evidence of irrationally exuberant investors (constructors and buyers). The findings show a lack of rational behaviour among market players, absence of fundamentaldriven influence on real estate prices and expectancy-driven prices. The main characteristic is a strong relationship between price and rental price with no significant change in price-rent ratio.

ECONOMIC SITUATION IN THE CITY OF KRAGUJEVAC

Kragujevac economy is mainly based on metal-processing complex, and within it, the production of transport equipment and weapons. Loss of markets and cooperative relationship following the dissolution of the former SFRY in 1991 and the UN embargo in 1992, and the bombing of significant facilities in the business system “Zastava” in 1999, caused a negative impact on the socio-economic development of the city. In addition to the technological lag behind developed countries, the city was faced with the problem of unemployment, so that in June 2004 it was named one of 13 devastated areas in Serbia. After that, the city is making significant progress in economic development through the creation of a favourable business environment (adopted Local Economic Development Strategy 2007– 2012, based on modern standards and defined set of stimulus measures for investors in productive activities; infrastructure supplied to industrial zone, support for self-employment and other), which resulted in bringing significant companies (“Fiat”, “Sigit”, “HTL”, “Promo Magnieti”, “Johnson Controls”, “TPV”, “Metro”, “Mercator”, “Idea”, “DIS”, “Plaza”, “Supernova”, “TUS” and others) and promoting economic activity in the city. The creation of the joint venture “Fiat Automobiles Serbia” created the opportunity, together with local cooperation, to gradually start the engine of development, not only of the city but of the whole of Serbia. These results influenced the fact that in 2007, before the arrival of “Fiat”, Kragujevac gained recognition of Club of Business Journalists: “City of the Future” Silver Cup. In 2008 the city was awarded the Golden Cup “City of the Future” and certification as a city with a favourable business environment, which was awarded by the National Alliance for Local Economic Development (NALED) and the Ministry of Economy and Regional Development. Important economic development objectives of the city of Kragujevac include the following: infrastructure improvements; economic development and entrepreneurship; environment; rural development; improvement of health and social care; promotion of education and culture; development of sport and tourism.