This chapter provides an assessment of the investment promotion and facilitation framework in Croatia. It discusses the existing strategies and institutions governing investment promotion and highlights key reforms to improve the investment climate and attract high value-added investments that contribute to a sustainable and resilient recovery. It also focuses on specific sustainable development outcomes and examines whether and how the investment promotion framework in Croatia contributes to them.
FDI Qualities Review of Croatia
Advancing the Strategic Framework for Investment Promotion and Facilitation
3. Investment promotion and facilitation for a sustainable and resilient recovery
Abstract
Summary and policy recommendations
As highlighted in the OECD Policy Framework for Investment and the FDI Qualities Policy Toolkit, investment promotion and facilitation can be powerful means to attract investment and maximise its contribution to sustainable development, but their success depends on the quality of investment-related policies and on the overall investment climate. As such, countries worldwide decide to not only remove restrictions on foreign direct investment (FDI) and provide high standards of protection to investors, but also to proactively promote and facilitate investment to maximise potential economic, social and environmental benefits to the host economy. One size does not fit all, and different approaches are suitable for different countries. Effective investment promotion and facilitation can be particularly important to address the economic consequences of the COVID-19 pandemic and the ongoing energy crisis, which have weakened economic prospects and increased the risk of slowing down progress to make societies and economies more resilient, inclusive and sustainable.
In Croatia, responsibility for investment promotion and facilitation falls primarily under the Ministry of Economy and Sustainable Development (MESD). The MESD’s Internationalisation Directorate was established in 2020 after the abolishment of the Agency for Investment and Competitiveness (AIK) with the aim to promote Croatia as an attractive investment destination and support foreign MNEs to set up their operations in Croatia. Since then, the Directorate has gradually started to develop its investment promotion and facilitation tools and strategies. Efforts have focused primarily on collecting and disseminating information on the MESD’s website, developing investor guides and other promotional materials, and accompanying investors in regions to facilitate their investment projects. What distinguishes the Directorate from other OECD Investment Promotion Agencies (IPAs) is the significantly higher allocation of resources for the implementation of image-building activities and the rather limited emphasis placed on investment generation, including direct investment targeting and prioritisation.
As the Internationalisation Directorate seeks to consolidate many of the nascent organisational and functional aspects of its work, insufficient resources and inadequate staff are the two greatest challenges that it has to face to fulfil its investment promotion mandate. Although in recent years, financial resources have started to gradually increase, staff shortages put a strain on the activities of the Directorate and jeopardise the use of the available budget, a large part of which remains underutilised. Endowing the Directorate with capacities to provide a fuller portfolio of services to potential investors should be a priority for the Croatian government. The development of the forthcoming National Plan and Action Plan on Investment Promotion provides an opportunity to rethink Croatia’s strategic framework for the promotion and facilitation of private investment, address existing challenges stemming from the transition to the new institutional set-up and equip the new structure with tools that have previously been missing.
The fragmentation of the institutional environment is another factor that should be taken into consideration for the elaboration of investment promotion and facilitation policies in Croatia. Many of the investment-related mandates of the Internationalisation Directorate are shared with other government bodies, in particular ministries that are responsible for investments in sectors of strategic importance for the Croatian economy (e.g. energy, agriculture, financial services) and subnational governments (e.g. regional development agencies, counties, municipalities) that often promote their own regions and provide investment facilitation services. Coordination and collaboration among these actors are limited and takes place on an ad hoc basis and through informal channels, often resulting in disjoined actions and separate strategies across different ministries and implementing agencies. These findings highlight the importance of policy coordination and the need for the Internationalisation Directorate to foster synergies with other parts of the government, share resources, implement joint initiatives and strengthen its coordinating role.
The Croatian government implements several policies to leverage international investment for the sustainable development of the economy. Investment tax incentives are conditioned to undertaking R&D and creating a certain number of jobs, while additional financial grants are available to support job creation, innovation and workforce skills development. However, Croatia is placed among OECD and EU economies that provide one of the lowest levels of total government support to R&D investments. Recent initiatives to promote green investment have focused on providing incentives for investments in renewables and setting low-carbon transition targets that send investors, including foreign ones, strong signals regarding the government’s climate ambitions. There are, however, administrative, regulatory and technical barriers remaining, including lengthy procedures for authorisation and permitting, as major challenges for further investment in renewable energy.
Policy recommendations
Ensure that Croatia’s forthcoming National Plan on Investment Promotion is guided by clearly identified strategic objectives and that these are reflected in the Internationalisation Directorate’s governance processes, allocation of resources, key functions and activities. The National Plan should be clear and specific about Croatia’s FDI attraction targets, tools to reach the set targets, performance indicators to measure progress, and the procedures in place to coordinate effectively with other relevant government bodies (e.g. ministries, public agencies, subnational authorities) and stakeholders (e.g. the private sector).
Expand investment generation activities to identify and approach potential investors that can support national development objectives, notably by targeting companies in priority sectors and in high value-added activities. Boosting investment generation activities will require thorough sector-specific knowledge and a good understanding of MNEs’ internationalisation strategies.
Improve the internal governance of investment facilitation and aftercare services by exploiting synergies with subnational actors that may have more staff on the ground to provide the services that are currently not provided by the MESD. As a first step, specific areas for collaboration could be identified, such as for instance helping investors navigate the licensing process, the joint development of an online suppliers database and the organisation of matchmaking events, business fairs and sector-specific promotional activities.
Continue efforts to address resource-related challenges faced by the Internationalisation Directorate and strengthen its capacity to generate prospective investment leads and maximise the number of realised investments. Financial resources available for investment promotion and facilitation are gradually increasing, but staff shortages hinder the use of these resources.
Develop a comprehensive investment prioritisation framework with clearly defined criteria that will be used for the pro-active targeting of activities, sectors, and investments that contribute to the sustainable development of the Croatian economy. Such an approach would facilitate the work of the MESD by allowing to manage the current limited resources more efficiently and support investments with the greatest impact. The criteria should be carefully selected to reflect Croatia’s priorities with regard to sustainable development, be the result of consultations with key stakeholders in the business community, and subject to regular reviews.
Introduce robust monitoring and evaluation (M&E) systems to track the investment promotion and facilitation activities undertaken by the Internationalisation Directorate and evaluate its organisational performance and success in reaching the target objectives set in the forthcoming National Plan and Action Plan for Investment Promotion. The recent establishment of a Customer Relationship Management (CRM) system should be complemented by the development of Key Performance Indicators (KPIs) to assess the types of firms and investments that benefit from public assistance, and their sustainability-related impacts.
Set up coordination mechanisms that place the MESD at the epicentre of cross-government efforts to promote investment and allow the Internationalisation Directorate to effectively collaborate with sectoral ministries, subnational IPAs, regional and local governments. This would require, however, clarity about the official mandates, roles and responsibilities of the various entities that are currently involved in investment promotion and more broadly the provision of business support services.
Review the innovation support programmes to make them more accessible to foreign and domestic firms that seek to engage in innovation-based partnerships. The various sources of funding should be better linked, be more targeted and coordinated and supplemented with technical assistance that allows foreign MNEs to perform R&D in Croatia, identify qualified R&D workers, and collaborate with domestic R&D institutions, sectoral clusters and science and technology parks.
Strengthen knowledge and technology spillovers from FDI by helping foreign MNEs identify local suppliers and strengthening the capacities of Croatian SMEs to collaborate with them. The Internationalisation Directorate could consider implementing a supply chain development programme jointly with the MESD’s Directorate for Industry, Entrepreneurship and Crafts, HAMAG-BICRO, and subnational governments.
Address skills shortages in FDI-intensive sectors through targeted sectoral upskilling programmes that allow foreign MNEs to tailor them to the needs of their employees. The MESD’s Internationalisation Directorate could further promote sectors in alignment with the existing skills base and help investors find qualified employees. Better coordination and collaboration between the Directorate and the Croatian Employment Service will be key to improve FDI’s contribution to skills development.
Establish robust labour market information and skills anticipation systems that involve investment actors to design evidence-based employment or training policies and effectively monitor their impacts. The MESD could bring forward its sectoral expertise to the National Council for Human Resource Potential and voice the concerns of investors in terms of skill shortages and future training needs.
Step up policy efforts to promote and facilitate renewable energy investments by removing regulatory barriers, simplifying licensing and permit systems, ensuring the continuity of the new feed-in-premium incentive scheme, and strengthening interoperability between government bodies. Procedures for obtaining environmental approvals take significantly longer than the legal deadlines prescribe, and licensing approval rules are also not always clear. Croatia’s long-term goal of at least 65% renewable energy generation by 2050 will require policy coordination and consultation with industry to keep a fast pace of investment in clean energy.
Harmonise and improve the governance of spatial planning rules to facilitate land acquisition for large-scale investment projects. Emphasis should be placed on streamlining information on land administration and tenure for potential investors through digital means. Subnational governments could be further supported to effectively coordinate with county authorities and resolve challenges arising from potential overlapping spatial planning rules.
The institutional framework for investment promotion and facilitation
The institutional framework for investment promotion and facilitation has gone through many organisational reforms
IPAs are key players in bridging information gaps that may otherwise hinder the realisation of foreign investments, and their potential sustainable development impacts. Their primary role is to create awareness of existing investment opportunities, attract investors, and facilitate their establishment and expansion in the economy, including by linking them to potential local partners (OECD, 2018[1]). The organisational structure and legal form of IPAs can determine their degree of autonomy in the design, coordination and implementation of promotional activities. Depending on the way they are supervised, managed and controlled, it can also have a particular incidence on how they interact with other government actors and the type of strategic relations they form with them.
The Croatian investment promotion framework has undergone several organisational reforms over the past decade. Until 2019, an autonomous public agency, the Agency for investments and Competitiveness (AIK, Agencija za investicije i konkurentnost), was responsible for promoting Croatia as an attractive investment destination, proactively attracting and assisting in the implementation of investment projects and facilitating the development of the Croatian economy (OECD, 2019[2]). During the same period, investment promotion competencies had been also assigned to the Croatian Agency for Small and Medium-Sized Enterprises, Innovations and Investments (HAMAG-BICRO), which was however expected to focus on SMEs and other smaller, primarily domestic, investors. There were also separate agencies responsible for investment attraction in certain sectors such as the Centre for Monitoring Energy Sector Operations and Investments, as well as several actors operating at the subnational level. In this context, as part of a wider government reform aiming to streamline central state bodies, AIK was abolished, effective as of 1 January 2019, and all of the agency’s responsibilities and staff were absorbed by the Ministry of Economy, Entrepreneurship and Crafts – which was later on restructured to become the current Ministry of Economy and Sustainable Development (MESD). A separate regulation was officially adopted in 2020, outlining the new organisation of the Ministry and the structure of the newly established Internationalisation Directorate, which is currently considered AIK’s natural successor (Figure 3.1).
AIK’s absorption into the MESD could have potentially given Croatia’s investment promotion framework more political clout and strengthen its investment prioritisation and policy advocacy functions. In fact, one third of OECD IPAs are fully governmental and operate as a department or unit in a ministry (OECD, 2018[1]), which allows them to potentially benefit from greater access to resources and more opportunities to influence the design of investment climate reforms due to their proximity to the centre of government. Many IPAs also undergo reforms in search of the right institutional and organisational set-up to adapt to changing environments, shifted policy priorities and emerging challenges. Reforms often involve modifications to their organisational structure and legal status and changes to their reporting ministry, responsibilities and mandates.
In the case of Croatia, however, the 2019 organisational reform was motivated by reasons other than improving the quality of the institutional framework for investment promotion and lacked a thorough reflection on key strategic factors pertaining to the new Directorate’s functions, the services offered to foreign investors, the allocation of financial resources, and the risks that had to be managed during the transition. Although in recent years significant efforts have been made to ensure continuity and improve the effectiveness of services offered to investors, the delay observed between the abolishment of the agency and the establishment of the new Directorate severely impacted the delivery and level of coordination of investment promotion and facilitation services. Interviews with private sector representatives conducted for the purpose of this Review point towards the disruption of services, the lack of resources and the loss of autonomy (in contacting investors, performing tasks, or hiring workers, for example) as key barriers to attracting quality FDI. Many also stressed that the dismantling of AIK as a separate entity led to lack of clear guidance to investors in terms of who to contact to acquire information on investment opportunities in Croatia1.
Figure 3.1. Structure of the MESD’s Internationalisation Directorate
Note: Departments and units whose work touches upon investment promotion and facilitation are highlighted in red.
Source: OECD based on MINGOR (2022[3]), https://mingor.gov.hr/UserDocsImages//O%20ministarstvu//Organigram%20MINGOR.pdf
The government will need to ensure that Croatia’s investment promotion framework is guided by clearly identified strategic objectives and that these are reflected in the Directorate’s governance processes, allocation of resources, key functions and specific activities related to investment promotion and facilitation. As the Internationalisation Directorate is still consolidating many of the nascent organisational and functional aspects of its work, it is important to address existing challenges stemming from the transition to the new institutional set-up and equip the new structure with tools that have previously been missing. The overall goal should be to learn from the past performance and develop certain best practices to ensure tangible improvements. Advancing Croatia’s strategic framework for the promotion and facilitation of private investment will also require high-level political commitment to overcome potential policy siloes, mobilise public resources and government actors and build momentum behind the investment policy agenda. To assist in this process, the following sections will present the results of the benchmarking of the Internationalisation Directorate to OECD IPAs and draw comparisons with and examples from other EU countries, which present significant opportunities for mutual learning and the exchange of good practices. The analysis is complemented by a comparison of the Internationalisation Directorate with AIK on the basis of the latter’s responses to the 2018 OECD-IDB IPA Survey and the findings of the 2019 OECD Investment Policy Review of Croatia (OECD, 2019[2]).
Box 3.1. The OECD-IDB survey of IPAs
The OECD and the IDB have partnered to design a comprehensive survey of IPAs. The questionnaire provides detailed data that reflect the multiple recent policy developments as well as rich and comparable information on the work of IPAs in different countries. The survey was displayed and shared with IPA representatives from OECD and Latin America and Caribbean (LAC) countries in the form of an online questionnaire that was divided into nine parts:
Basic profile;
Budget;
Personnel;
Offices (home and abroad);
Activities;
Prioritisation;
Monitoring and evaluation;
Institutional interactions; and
IPA perceptions on FDI.
National IPAs from 32 of the then 35 OECD countries participated in the OECD-IDB survey, representing a 94% response rate. IPA respondents completed the questionnaire between May and September 2017. The data gathered through the survey served as a basis for a preparation of a mapping report of IPAs in OECD countries, as well as benchmarking with other regions (e.g. LAC, Middle East and North Africa, and Eurasian countries).
The Internationalisation Directorate has been entrusted with a higher number of mandates than other OECD IPAs
IPAs have been created with the primary mandate to promote and attract inward foreign investment. There are however substantial variations in the number and scope of mandates for IPAs in OECD and non-OECD countries. In certain cases, IPAs are part of a broader agency that includes additional mandates such as the promotion of exports, innovation, regional development, domestic investment, and the granting of business permits or incentives, among others. The combination of these mandates can be motivated by the need to maximise synergies and foster economies of scale by grouping together policy areas that target various aspects of investment and business growth (e.g. internationalisation, innovation, productivity). This is particularly true for governments that seek to strengthen the domestic business environment by attracting export- and R&D-intensive investors, as similar industries and markets can be targeted.
The MESD’s Internationalisation Directorate reported in its responses to the IPA survey to have 10 official mandates (out of 18 possible mandates) (Table 3.1), including inward foreign investment promotion; export promotion; innovation promotion; domestic investment promotion; granting fiscal incentives; granting financial incentives; granting other incentives; screening and prior approval of investment projects; management of public-private partnerships; and management of free trade or special economic zones or industrial parks.
Table 3.1. Evolution of mandates entrusted to MESD’s Internationalisation Directorate compared to other OECD IPAs
Overall, it is rare for an IPA to have so many mandates integrated under the same roof. Compared to AIK, the number of official mandates has more than doubled (10 compared to just 4 in 2018), reflecting the new Directorate’s wide scope of responsibilities and activities, which are strongly articulated around policy areas that support the openness and competitiveness of the Croatian economy. The new institutional set-up allows to address and build synergies with a more diverse range of policy areas that affect investors’ experience and decisions about where to locate their investments, such as for instance the quality of the business environment and the (export and innovation) performance of the economy. It also allows to link investment promotion activities to specific types of policy instruments such as the granting of financial and other incentives, the management of business zones and industrial parks, the promotion of public-private partnerships and the approval processes for certain investment projects. Combining inward FDI promotion with export promotion and innovation promotion is common among OECD IPAs, included as mandates in 56% and 53% of IPA respectively (Table 3.1). The other reported mandates are entrusted to IPAs less frequently, however.
In the OECD area only four IPAs have 10 or more mandates while half of them report to have a maximum of five, reflecting their desire to pursue a more targeted and specialised role. The MESD’s Internationalisation Directorate ranks far from the OECD average of 5.5 mandates as well as far from the number of mandates that other Central European IPAs have (e.g. Slovak Republic, Slovenia, Austria) (Figure 3.2). This may be due its legal status, i.e. being part of a ministry implies proximity to many other policy areas that may affect investors’ decisions, including those touching upon regulation or policymaking (e.g. operation of one-stop shops, granting of incentives, issuing of relevant licences, negotiation of international treaties, screening and prior approval, etc).
Figure 3.2. Number of mandates entrusted to the MESD’s Internationalisation Directorate and to other IPAs in peer EU countries
Although the wide scope of responsibilities may help place investment promotion closer to broader policy objectives that support the sustainable development of the Croatian economy, it can also lead to potential risks if the new institutional set-up is not supported with the necessary resources, processes and tools. For instance, some studies show that those IPAs focusing exclusively on investment promotion achieve significantly higher results in attracting investors than those which carry out both regulatory and promotional tasks (World Bank, 2011[6]). Some governments choose to establish agencies with a narrow mandate to ensure that their skillsets are sufficiently specialised, and activities targeted to respond to the needs of their respective clients. Beyond the number of mandates, a broader range of factors affect the effectiveness of IPA activities. More recent studies using firm-level data on IPA assistance and firms’ investment decisions show that outcomes depend on the type of mandate and the agency’s budget per mandate, among others. For instance, IPAs with more, better-funded mandates that are also responsible for innovation promotion, green investment promotion or regional development show higher effectiveness in attracting new foreign MNEs (Volpe Martincus et al., 2021[7]). The Internationalisation Directorate’s expanded mandates require, therefore, both a wide scope of skillsets, administrative capacities, financial and operational resources, and a clear strategic orientation that all divisions and units can hang on to.
Another challenge is that the multiplicity of mandates increases the risk of policy overlaps with the work of other government bodies that may be involved in investment promotion activities at the national or subnational levels. The results for Croatia from the OECD-IDB IPAs survey demonstrate that many of the investment-related mandates of the Internationalisation Directorate are shared with several public institutions, in particular other directorates within the MESD as well as sectoral ministries that are responsible for investments in the energy, agricultural, financial services, health and social services sectors (Table 3.2). Investment promotion activities are also undertaken by many regional development agencies as well as local authorities. In this context, emphasis should be placed on ensuring robust coordination mechanisms with other directorates within the MESD (e.g. Energy Directorate, Climate Activities Directorate, Directorate for Environmental Impact Assessments) as well as other ministries (e.g. Ministry of Science and Education, Ministry of Regional Development and EU Funds) and subnational agencies (see section on policy coordination).
Table 3.2. Other government institutions in Croatia performing investment promotion activities
Source: OECD based on the OECD-IDB Investment Promotion Agencies Survey (2022[5])
Resources devoted to investment promotion and facilitation are gradually increasing but challenges remain
Adequate financial and human resources are essential success factors of any institution and IPAs are no exception. Access to resources determines the scope of the IPA’s activities, the quantity and quality of staff, the mechanisms to evaluate success, and other important organisational aspects (OECD, 2018[1]). For those agencies that have a high number of mandates, the difference between the total IPA budget and the one dedicated to investment promotion can be quite significant.
In 2022, with an investment promotion budget of EUR 0.2 million and 11 employees, the Investment Sector at the Internationalisation Directorate was one of the smallest IPAs across the OECD and peer EU countries (Figure 3.3). The OECD-IDB IPAs survey finds that the two greatest challenges faced by the Internationalisation Directorate in the mid- to long-term to fulfil their investment promotion mandate are respectively inadequate resources and inadequate staff. Other challenges such as the instability of the mandates and the lack of political support for the IPA are also mentioned as obstacles. The limited financial resources for the implementation of investment promotion and facilitation activities has been a longstanding issue in Croatia. The 2019 OECD Investment Policy Review, which was undertaken before AIK’s abolishment, found that, although the agency’s total budget had increased since 2012, the resources devoted to FDI promotion had stayed constant and were still far from the average budget of OECD IPAs (OECD, 2019[2]).
A similar picture emerges when looking at the evolution of resources over time (Figure 3.4). When comparing AIK’s average annual budget for investment promotion in the period 2012-16 (for which data are available), to the Internationalisation Directorate’s budget since its establishment in 2020, it becomes clear that the share of investment promotion within the IPA’s total budget has been significantly reduced (from 9% to 1%) – the difference reflecting the relative importance of other mandates that are currently entrusted to the new Directorate. This may also be due to shifting policy priorities, the change in AIK’s legal status and the subsequent loss of autonomy, and the limited political clout of the Ministry’s investment promotion agenda over other policy issues – such as, for instance, the streamlining of public administration services and the reduction of regulatory burden on business which have been prioritised by the government in recent years.
Overall, in absolute nominal terms, it appears that the average annual budget in the period 2020-2022 is slightly higher than in the period 2012-2016, reflecting recent efforts by the Internationalisation Directorate to scale up its activities (Figure 3.4). This may be interpreted with some optimism given that many IPAs have experienced budget cuts due to the COVID-19 pandemic and the pressure that the economic crisis has put on government budgets. According to interviews conducted with MESD officials, the investment promotion budget is expected to continue its upward trend and almost double in 2023. This is a step in the right direction as it could help the Directorate scale up its activities.
Figure 3.3. IPA resources for investment promotion and facilitation in Croatia and selected EU countries
Another challenge is the “brain drain” observed since the transition to the new legal status. As presented in Figure 3.4 (Panel A), the Internationalisation Directorate has lost almost one third of its investment promotion staff. Similarly, the share of investment promotion employees has moved from an average of 48% in 2012-2016 to less than 20% in 2020-2022. Although the current staff is significantly experienced in investment promotion and facilitation, the departure of a large number of employees over the past few years has put a strain on the activities of the Directorate and jeopardised the use of the available budget, a large part of which remains underutilised. This is further undermined by the government’s decision to avoid the increase of employment in the public sector and by the lower wages that ministry officials receive compared to AIK, resulting in a lack of incentive for investment promotion staff to remain in the MESD. Human resources are the most important asset of an IPA. They usually represent the highest share of OECD IPAs’ budget expenditures, and their quality and motivation are a prerequisite to the success of an IPA (OECD, 2018[1]). Attracting adequately skilled staff in sufficient numbers can highly influence the ability of the new Directorate to scale up its nascent activities and attract investments in line with its targeted objectives.
Figure 3.4. Evolution of financial and human resources devoted to investment promotion and facilitation activities in Croatia
Note: There is no available data for the period 2017-2019. The figures compare the average of personnel and budget that were available for investment promotion and facilitation activities during the periods 2012-2016, when AIK was operational, and 2020-2022 under the Internationalisation Directorate of the Ministry of Economy and Sustainable Development (MESD).
Addressing these various challenges will require a concerted effort on the part of the government to ensure that resource-related challenges arising from the transition to the IPA’s new legal status are addressed effectively. This becomes even more crucial in the context of the forthcoming National Plan for Investment Promotion, whose implementation will likely further strain the limited capacities of the Investment Sector in the Internationalisation Directorate. The latter should be supported with the necessary resources to strengthen its capacity to generate prospective investment leads and maximise the number of realised investments. Given that financial resources are gradually increasing but staff shortages remain an issue, one option would be for the Croatian government to consider hiring additional qualified staff. Another, potentially complementary, option is for the Investment Sector to collaborate with other ministries, subnational IPAs and local business support institutions for the implementation of joint promotional activities and the development of new tools that help investors acquire information on investment opportunities. This would allow to leverage the human resources available in other parts of the Croatian government and put the current investment promotion budget into use until staff shortages in the Directorate are addressed.
Higher budgets are found to be associated with a larger number of investment generation and facilitation activities (including aftercare services). In addition, IPAs that prioritise certain investors and projects tend to have higher budgets enabling them to provide higher quality services to selected firms (OECD, 2018[1]). Recent evidence suggests that support from IPAs with larger budgets (both overall budgets and those specifically targeting investment promotion) makes it more likely for foreign firms to open a first affiliate in the respective countries than support from less well-endowed counterparts. This holds both when considering the absolute investment promotion budget and when normalizing this budget by country size as proxied by GDP (and population) (Volpe Martincus et al., 2021[7]).
Investment generation efforts could be strengthened and better targeted
In the vast majority of countries, IPAs are major players in the implementation of four core investment promotion functions: i) image building consists of fostering the positive image of the host country and branding it as a profitable investment destination; ii) investment generation deals with direct marketing techniques targeting specific sectors, markets, projects, activities and investors, in line with national priorities; iii) investment facilitation and aftercare is about providing support to investors to facilitate their establishment phase as well as retaining existing ones and encouraging reinvestments by responding to their needs and challenges; and iv) policy advocacy includes identifying bottlenecks in the investment climate and providing recommendations to the government in order to address them.
According to the results from the OECD-IDB IPAs survey, 60% of the budget devoted to the Sector for Investments of the Internationalisation Directorate is spent in the implementation of image building activities, while less resources go for investment generation (15%), investment facilitation (15%) and policy advocacy (10%)2 (Figure 3.5, Panel A). These findings set Croatia apart from other OECD and EU IPAs who exhibit a more balanced allocation of resources across their four core functions as well as more focus on direct investor engagement and targeting. The average trend among OECD IPAs is to allocate the bulk of their resources to investment generation (46% of total budget) and investment facilitation and retention (30%), while image building (18%) and policy advocacy (6%) receive less attention (OECD, 2018[1]). When looking at human resources within the Sector for Investments, the relatively high allocation of staff to investment facilitation (50%) should be expected considering the important labour-intensive activities that this function includes (Figure 3.5, Panel B). However, the overall balance remains skewed compared to the OECD average – significantly less staff works on pro-actively generating investment leads and projects (10% in Croatia compared to 42% on average among OECD IPAs).
Figure 3.5. Resources of the MESD’s Sector for Investments devoted to the four core functions of investment promotion and facilitation compared to the OECD average
These findings reveal the ongoing challenge of equipping the new Directorate with the necessary tools to engage in more sophisticated investment promotion activities. When compared to AIK, the Internationalisation Directorate exhibits a narrower scope of activities, focused primarily on public relations events (e.g. road-shows and business fora, general investor missions abroad and at home), producing investor guides and other promotional materials, and disseminating information to potential investors (Figure 3.6). Certain investment facilitation activities that help foreign MNEs define their investment projects are also undertaken while aftercare services are limited to the sharing of information on regulatory developments through digital means (e.g. emails, newsletters). Other activities such as comprehensive aftercare services, assistance with administrative procedures, monitoring of investment climate, formal and informal feedback to government take place less frequently.
Given that Croatia’s IPA operates as part of a ministry and investment-related mandates are spread across multiple departments (Figure 3.1), it is important to note that some of these core functions are undertaken with financial resources other than the investment promotion budget managed by the Sector for Investments (and which was considered for the purpose of the OECD-IDB IPAs survey). For instance, this is the case of policy advocacy activities which are primarily conducted by the Directorate’s Competitiveness Sector. The Competitiveness Sector is tasked with monitoring the business environment and consulting with market stakeholders to identify hurdles in doing business in Croatia as well as potential business climate reforms. Indicatively, in 2022, the Competitiveness Sector managed more than EUR 1 million while the Sector for Investments EUR 0.2 million – pointing towards potential complementarities between the two departments in the execution of certain investment-related responsibilities.
Figure 3.6. Extent of investment promotion and facilitation activities in Croatia
Since the establishment of the Internationalisation Directorate, investment promotion efforts have focused primarily on collecting and disseminating information on the MESD’s website (Table 3.3). A set of interactive maps have been created to provide information on land sites and business zones that are ready to receive investment projects and indicate public and private sector projects that seek investors or strategic partners. A regional map was also launched in 2022, offering statistical data for each subnational county, including the availability of infrastructure, trade and investment-related trends, investment incentives applying to specific areas, labour market characteristics as well as the contact details of regional development agencies and local authorities.
Having a single-entry point for investors to acquire information on investment opportunities is indeed a cost-efficient way to offer centralised, available, up-to-date and key information for a large audience of prospective foreign investors. Focusing investment promotion efforts on specific, ready-made investment projects is common in other countries too, and can constitute a good selling point for some specific investors, but targeting should not be limited to this practice, as most businesses appreciate flexibility as to where and how their investments will be channelled. Croatia should complement these efforts with more direct marketing techniques to identify and approach potential investors that can support national development objectives, notably by targeting companies in priority sectors and in high value-added activities. Such activities may include initiating one-to-one meetings with potential investors, holding pro-active campaigns in Croatia and abroad, and undertaking market studies (e.g. on Croatia’s relative position vis-à-vis its competitors).
Boosting investment generation activities will require thorough sector-specific knowledge and a good understanding of MNEs’ internationalisation strategies. The Directorate’s staff members have to be able to grasp companies’ investment location decision processes and identify their requirements long before their investment decision is taken, to effectively respond to their needs and enquiries during their investigation phase and influence their decision making. Endowing the directorate with capacities to provide a fuller portfolio of services to potential investors should therefore be a priority for the Croatian government. Such an approach highlights, however, the importance of resources and cross-government collaboration, mentioned earlier, to allow the department to appropriately serve its function, develop new services and improve its functioning.
The policy advocacy function could be also strengthened by fostering synergies between the Directorate’s Investment Sector and the Business Climate Service. The latter operates under the Competitiveness Sector and is responsible for undertaking consultations with business enterprises operating in Croatia and collecting their feedback on how to improve the business climate. Collaboration could focus on developing specific channels and tools through which investors supported by the MESD’s Investment Sector could be regularly consulted and their feedback transmitted to higher levels of the government. This could include dedicated surveys of foreign investors, periodic consultation meetings with the private sector and industry associations, and the production of reports or position papers that include investors’ perspectives and can be used when evaluating investment promotion policies.
Table 3.3. Digital tools used by MESD’s Internationalisation Directorate to promote and attract FDI compared to other OECD IPAs
Source: OECD Survey on Investment Promotion and Digitalisation (2021[8]).
Investment facilitation could focus more on embedding foreign MNEs in local value chains
Investment facilitation and aftercare services can be instrumental in encouraging greater embedding of foreign affiliates in local economies and building relationships that contribute to greater use of local SME suppliers (OECD, 2022[9]). They often involve accompanying investors in their project definition, ensuring that they identify local suppliers and clients, providing additional assistance once the project is implemented and encouraging expansions and reinvestments through aftercare.
In Croatia, the MESD’s facilitation activities are primarily concentrated on offering assistance to investors during their establishment phase (e.g. site visits, working meetings, airport pick-ups) (Figure 3.7). Investors are often accompanied in regions to identify appropriate sites for their investment projects, receive information on sectoral regulations and the availability of land in business zones, and get connected with other parts of the Croatian government which are responsible for licensing procedures, construction permits and business support services. Currently, the MESD’s Internationalisation Directorate does not implement any active FDI-SME linkage programmes and does not operate a suppliers database, which is a common tool used by IPAs to support foreign MNEs’ local sourcing strategies. When foreign investors need information on local suppliers, the MESD connects them with the Croatian Chamber of Economy and subnational governments, which may have the capacity to identify domestic firms depending on the sector and region of the investment project.
Figure 3.7. The share of IPAs conducting different investment facilitation and aftercare services in Croatia relative to OECD
Interviews conducted with regional and local authorities in the cities of Osijek and Novska for the purpose of this Review revealed that a wider range of facilitation services are offered to investors at the subnational level (see Chapter 4). These often include information on tax and other incentives offered by local municipalities and counties, assistance to obtain land and resolve legal issues that may arise from investors’ activities, and matchmaking services to help investors identify local suppliers and find qualified employees. In some cases, subnational governments form dedicated investor support teams made up of different local officials, which accompany investors during the pre- and post-establishment phase of their investments. In Osijek, the city’s administration has also connected a recently established foreign MNE with local universities in order to explore (re-)training opportunities of the local workforce to accommodate the skill needs of the investor. As highlighted in Chapter 4, there are large disparities in the availability and quality of services offered by subnational actors to foreign investors, while the dispersion observed in their provision raises the issue of coordination and standardisation.
Efforts to improve the internal governance of facilitation and aftercare services should be stepped up and coupled with sufficient resources and dedicated staff that is trained to identify the sourcing needs of foreign investors and steer FDI projects towards locations with the greatest potential for supporting supplier linkages. This can be done by exploiting synergies with subnational actors that may have more staff on the ground to provide the services that are currently not provided by the MESD. Given existing resource constraints, the Internationalisation Directorate could consider playing a coordinating role through an inter-institutional network as suggested in the following sections (Figure 3.9). As a first step, specific areas for collaboration could be identified, such as for instance the joint development of an online suppliers database, helping investors navigate national and local licensing procedures and identifying skilled workers, and the implementation of a series of matchmaking events and business fairs throughout Croatia. Box 3.2 presents examples of linkage programmes implemented by EU IPAs. Synergies with the local supply chain development programmes implemented by the Ministry of Regional Development and EU Funds (MRDEUF) could be also enhanced to ensure that the MESD’s clients are involved. As part of its 2021-2027 programming for the industrial transition of the Adriatic, Panonian and North Croatia regions, the MRDERUF plans to introduce new financial instruments that promote strategic partnerships for innovation focusing in particular on networking between SMEs and large companies in regional value chains.
To reduce the disparities that are currently observed in the quality of facilitation services offered by subnational actors, the Internationalisation Directorate could provide training to regional and local authorities on how to effectively facilitate investments, in particular in regions with lower capacities, as well as how to collaborate and complement the support provided by the MESD3. In recent years, similar standardisation efforts have been made in the area of entrepreneurship policy through the BOND network that is managed by HAMAG-BICRO. The network established an online educational platform, which allows its members to communicate, exchange experiences, and undertake virtual trainings to standardise and improve the quality of their services. Up until 2022, more than 22 thematic workshops and seminars had been organised throughout Croatia, with the participation of more than 1100 representatives of local entrepreneurial support institutions. A similar approach could be followed by the MESD.
Box 3.2. Promoting value chain linkages and strategic partnerships: EU country examples
Most IPAs provide matchmaking services to reduce the information barriers that prevent foreign investors from identifying local suppliers or customers. In the Slovak Republic, SARIO supports several matchmaking programmes targeting foreign firms and their affiliates, including the flagship Business Link events and Slovak Matchmaking Fairs, implemented under the auspices of the Ministry of the Economy (OECD, 2022[10]). The use of online tools and platforms is common in this area. In Bulgaria, the national SME promotion agency BSMEPA runs an online platform to advertise requests of foreign companies looking for partners in the domestic industry (e.g. local suppliers, local exporters, potential business partners). The Hungarian Investment Promotion Agency (HIPA) maintains a database of domestic firms to help large companies identify suppliers that meet their requirements and could integrate their value chain.
Many EU governments organise or actively support the participation of domestic SMEs in knowledge exchange and information events, which can provide matching opportunities with foreign partners. The Spanish agency Red.es, in collaboration with ICEX Spain Export and Investment, organises national stands in international events to support the internationalisation of domestic firms operating in the digital economy. In Bulgaria, the BSMEPA runs a dedicated project to support domestic SMEs’ participation in business fairs, exhibitions and conferences within the country and abroad, in a view to enhancing their export activities, facilitating the establishment of direct contacts and commercial linkages with foreign partners, and fostering their integration in European and international markets.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021[11]).
Promoting and attracting investment: strategy and tools
A well-articulated national strategy and action plan could provide a coherent framework for investment promotion
Specific measures to promote and facilitate investments can be successful if they take place within the context of, and not substitute for, a coherent and well-articulated strategic framework that takes full account of a country’s policy priorities and implementation capacity. Croatia has a few elements of such a strategic framework (e.g. investment promotion law); however, they are largely used for the provision of incentives and allocation of EU funds. Stakeholders consulted in the course of this review also stressed the lack of a more comprehensive and long-term government vision about the role of private investment in the country’s economic development, resulting in disjoined actions and separate strategies across different ministries and local authorities.
The Act on Investment Promotion, adopted in 2015, sets the goals of Croatia’s investment policy, lists specific activities and investment projects that can benefit from the state support, and outlines the type of support available and the applicable requirements. The criteria set out in the act are used primarily for the allocation of investment incentives (see Chapter 4). Furthermore, the Act on Strategic investment Projects, adopted in 2013, serves a complementary role to the Act on Investment Promotion, defining what constitutes a “strategic investment project” in Croatia as well as providing information on the applicable selection criteria and procedures and the associated benefits. The main goal of the law is the provision of more expeditious administrative proceedings for strategic projects, which can involve private, public or private-public investments. Available data on the number and type of investment projects recognised as strategic show that the Act’s contribution to the promotion of private investment has been limited so far since it has been used primarily to facilitate the execution of public investment projects.
More recent strategic documents of the Croatian government fall short of laying out specific measures, reforms and policy initiatives to improve the investment climate as well as providing a long-term and country-wide vision for inward investment attraction. The National Development Strategy 2030, which aims to support the twin digital and green transition of the Croatian economy, provides some general direction on the priorities that should guide investment policy until 2030. For instance, it calls for measures to encourage investments in R&D and from high-tech foreign firms and acknowledges the importance of infrastructure development as a precondition for attracting FDI. Similarly, the government’s National Reform Programme 2020 recognises the need to “establish an effective system for promoting private investments into sustainable development goals, in order to contribute to a proper and inclusive transition to a competitive green and digital economy” (Government of Croatia, 2020[12]). However, the document makes no reference to the role that FDI can play in achieving these objectives and does not include specific measures or policies to be implemented by the MESD’s Internationalisation Directorate. Overall, the latter’s role in the promotion and facilitation of private investment does not seem to be sufficiently reflected in national strategic documents while policy linkages with other areas that affect investors are limited.
As Croatia seeks to advance its investment promotion framework, a more comprehensive and long-term National Plan on Investment Promotion could help further define and consolidate the work of the MESD’s Internationalisation Directorate by providing a clear and coherent framework for its activities. The National Plan should be very clear and specific about FDI attraction targets, tools to reach the set targets, and performance indicators to measure progress. It should provide clear indications on its implementation, including how resources should be allocated, the main activities it should focus on, the key performance indicators to measure outputs and outcomes, and the procedures in place to collaborate effectively with other relevant government bodies (e.g. ministries, public agencies, subnational authorities) and stakeholders (e.g. the private sector).
Investment promotion plans are prepared to ensure that promotion efforts are well-targeted and contribute to the government’s broader national development objectives, including those related to productivity growth, innovation, regional development, job creation, and the digital and low-carbon transitions (OECD, 2022[9]). They revolve around the question of what to promote (i.e. sectors, countries, projects, investors) and how to implement this promotion in practice. Clearly delineating the role of private investors, both domestic and foreign, in achieving these sustainable development objectives can help adequately tailor investment promotion efforts to target investors that help further these objectives. Such a strategic document would therefore be an opportunity to demonstrate the government’s commitment to foster investment and provide a positive signal to potential and existing investors about the economy’s openness to FDI.
While a National Plan for Investment Promotion would provide an overarching framework for the relevant public institutions, a short-term Action Plan could play a complementary role as a more focused and operational policy tool. It should refer to specific actions and policy initiatives that will be undertaken by the government over a defined timeframe and link them to the policy priorities and targets set in the national strategy. By specifying the institutions that should lead and/or contribute to the implementation of each action, the action plan can serve as an instrument for policy coordination and mobilise the necessary resources and actors behind the government’s investment promotion agenda.
Clearly defined investment prioritisation criteria could help Croatia target quality FDI in line with its development objectives
Through prioritisation, i.e. choosing to focus on certain types of sectors and countries, investment projects or individual investors – either because they have a higher probability of being realised or because they may bring unique benefits to the host economy – IPAs can focus better their resources and tailor the services offered to investors considered as the most important (Sztajerowska and Volpe Martincus, 2021[13]). Targeting can be a difficult function as it requires clearly defined criteria, strong coordination mechanisms to ensure alignment with the government’s sectoral strategies, and the ability to adapt existing investment promotion tools and focus on some firms and investment projects more than others. In the OECD area, 84% of IPAs target specific sectors, 59% target specific countries, 78% target investment projects and 47% target specific types of investors (OECD, 2018[1]).
Unlike the majority of OECD IPAs, the MESD’s Internationalisation Directorate reported not to prioritise specific investment projects, investors, sectors or countries. The MESD’s website provides information on a few sectors with potential for investment growth (e.g. automotive, pharmaceuticals, logistics, tourism, creative industry). The Act on Investment Promotion also stipulates that investment aid should be provided to investment projects in manufacturing and processing activities, development and innovation activities, business support activities and high added value services (Government of Croatia, 2022[14]). However, interviews with Ministry officials revealed that the sectors and types of investment stipulated by the Act are primarily used for the provision of investment tax incentives (see chapter 4) and that they are not taken into account when promotional campaigns are organised or investment facilitation services offered to foreign MNEs. In addition, no specific criteria are used when pro-actively approaching potential investors even though the Act sets out certain performance criteria that investment projects should fulfil such as contributing to the green and digital transition of the economy, using technologically advanced Industry 4.0 solutions, generating higher employment and training opportunities for employees and contributing to regional development, among others.
Another aspect illustrating the limited capacity of the Directorate to promote investments in a more targeted way is the exclusion of many sectors, which fall under the jurisdiction of other government bodies. These include, for instance, agriculture, infrastructure, energy and water supply, financial and insurance services, health and social services, arts and the entertainment industry as well as construction, trade and real estate. Investment promotion activities for these sectors are usually undertaken by other directorates in the MESD or by other ministries and government agencies, reflecting the fragmentation of the institutional set-up for investment promotion and facilitation in Croatia. It also highlights the importance of policy coordination and the need for the Internationalisation Directorate to foster synergies with other parts of the government, share resources, implement joint initiatives and strengthen its coordinating role.
The MESD should consider developing a comprehensive investment prioritisation framework that will go beyond investment aid and also include the pro-active targeting of activities, sectors, and investment projects that contribute to the sustainable development of the Croatian economy. More detailed and clearly defined prioritisation criteria should be included in the forthcoming National Plan for Investment Promotion and guide the work of the Internationalisation Directorate. Such an approach would also facilitate the work of the Directorate by allowing to manage the current limited resources more efficiently and support investments with the greatest impact. While having a clear list of priority activities can be helpful, it should be the result of consultations with key stakeholders in the business community and specialised bodies that have thorough knowledge of challenges and opportunities in specific industries. It is important that the elaboration of the priority list be given due attention and subject to regular reviews, especially as it can translate into special treatment such as in the form of faster replies to inquiries and tailored investment facilitation solutions.
The prioritisation criteria should be carefully selected in order to also reflect Croatia’s policy priorities with regard to sustainable development. Recent OECD work on IPAs’ practices found that sustainability is an important objective for IPAs when setting their internal prioritisation criteria, with some of them using specific indicators and scoring mechanisms to quantify investment projects’ contribution to sustainable development and decide about the agency’s assistance (Sztajerowska and Volpe Martincus, 2021[13]). Business Finland, for instance, uses an internal quality scoring to categorise firms; and Germany Trade and Invest has recently adopted a new sustainability scoring for this purpose. The Croatian government could consider developing such a framework, although this will require a robust monitoring and evaluation system to collect and analyse data on investors’ activities (see next section).
It would also be advisable to prioritise sectors that, on the one hand, help diversify the economy, and, on the other hand, offer the possibility for investors to rely on strong domestic capacities. Drawing on Chapter 2 of the Review on trends and impacts of FDI in Croatia, the MESD’s Internationalisation Directorate could focus on investment projects in sectors where FDI’s performance is higher than domestic firms, notably in terms of productivity and innovation (e.g. lower technology services), wages and skills development (e.g. ICT services and R&D-intensive industries), and environmental performance and clean technologies (e.g. electricity generation, renewables), as well as on sectors for which Croatia exhibits emerging specialisation patterns (e.g. machinery, transport, and metals industries).
M&E tools and processes will be crucial to track and evaluate the implementation of the forthcoming strategic framework for investment promotion and facilitation
The monitoring and evaluation (M&E) of investment promotion activities are important to manage FDI attraction and facilitation on the basis of results and to ensure, on the one hand, that investors are satisfied and, on the other hand, that the IPA learns from experience and provides value for money (Sztajerowska and Volpe Martincus, 2021[13]). A comprehensive strategic framework for investment promotion should therefore not only include well-articulated FDI attraction targets and adequate prioritisation criteria but also a solid M&E system and well-targeted performance indicators to measure the effectiveness of IPA services (OECD, 2018[1]).
As a first step for effective M&E, an IPA needs to know well what it does, how it does it, and how these actions translate into firm investment decisions over time. For this purpose, IPAs use a customer relationship management system (CRM), which allows the agency to have an institutional memory and an overview of its current and past activities. It allows, among others, to track the assistance offered to prospective investors, the sources of investment leads and contacts, and the investor’s eventual decision to establish or not. Most IPAs in OECD have a CRM (about 94%) albeit their quality differs widely (Volpe Martincus and Sztajerowska, 2019[15]; OECD, 2018[1]).
As a small IPA, the MESD’s Internationalisation Directorate should aim to ensure that its actions achieve the maximum possible effect with limited resources by investing in robust M&E systems, particularly in internal data collection and analysis. Until recently, the Directorate did not have a specific framework to track its investment promotion and facilitation activities. At the time of writing this Review, a basic version of a CRM system was being developed with the aim to be officially launched in 2022. The CRM will allow the Directorate to track the provision of investment generation and facilitation services on the basis of several criteria such as the month and year of first contact with potential investors, the status of supported investments (e.g. initial enquiries, follow up meetings, granting of permits, start of construction, post-investment support), the sectors and subnational counties in which supported projects take place, the size of investment, the number of jobs created as well as the country of origin of the foreign firm.
The establishment of the CRM system is important since it will help the Directorate improve its internal data management and facilitate systematisation of investors’ information for proactive targeting. The system should be pilot tested first to ensure functionality and potentially adjusted and upgraded in the future to include additional aspects of the Directorate’s work. For instance, beyond services offered to investors, the CRM could keep track of the Directorate’s broader promotional and policy advocacy activities (e.g. number of investor missions organised, public relation events attended, actions to monitor the investment climate, consultations with the private sector, business associations and foreign embassies, etc). Some of its functions could be also improved to facilitate internal resource management, for instance by tracking response times to each inquiry and sending automatic reminders to project managers if an investment does not move forward after some pre-defined time. As development and tailoring of CRM systems takes time and often is a reiterative process, the Directorate may need to consider future resources required for the upkeep and adjustments of the system and any possible training of staff.
The data acquired from the CRM would facilitate the use of Key Performance Indicators (KPIs) to measure the organisational performance of the Directorate and its success in reaching the target objectives set in the forthcoming National Plan for Investment Promotion. IPAs’ performance indicators can be divided into two sets (OECD, 2018[1]). Activity indicators focus on the agency itself, its inputs (e.g. number of campaigns launched), processes (e.g. time to respond) and results (e.g. number of assisted firms). Performance indicators focus on characteristics of the attracted investment and measure the benefits of IPA actions in the economy (e.g. size of FDI, number of jobs created). Unlike the majority of OECD IPAs which usually combine several indicators from both categories, the Internationalisation Directorate uses mostly activity indicators, namely the number of assisted firms, number of promotional events, and the time to respond to investors’ inquiries (Table 3.4). Performance indicators focus only on the number of investment projects supported, the number of jobs to be created, and general business climate reforms.
Table 3.4. Monitoring and evaluation indicators used by the MESD’s Internationalisation Directorate compared to other OECD IPAs
Note: Information on the input and output indicators used by OECD IPAs may has changed since the survey was conducted in 2017-2018. For instance, it is very certain that the share of IPAs using green investment and sustainability-related indicators is currently much higher.
The implementation –and subsequent evaluation– of the National Plan for Investment Promotion will require a comprehensive set of KPIs that will enable the MESD to display a clear track record of its accomplishments and inform future resource allocation and strategic decisions at management level. The Directorate could consider developing and using a broader range of KPIs that will help get a better understanding of the types of firms and investments that benefit from public support (e.g. metrics on number and value of investment projects), the activities of the Directorate (e.g. number of meetings, participants, inquiries and visits), and the sustainability-related impacts of supported investments (e.g. jobs created, R&D projects, projects related to green energy). These indicators are common among OECD and EU IPAs (Figure 3.8). Agencies tend to rely predominantly on metrics relating to the type of projects supported and the IPA activities undertaken, but many IPAs put attention on sustainability-related indicators (such as Germany, Ireland, Denmark and Hungary) (Sztajerowska and Volpe Martincus, 2021[13]). The Hungarian IPA, for instance, uses indicators on jobs and skills (e.g. number of new employees, number of firms supported with training subsidies), productivity and innovation (e.g. number of R&D projects, number of suppliers recommended) and exports (e.g. trade balance) while IDA Ireland goes even further by monitoring the gender balance within its portfolio of clients.
For many OECD countries, the development of better systems to track and collect reliable statistical data based on international standards is a pre-requisite to the development of more robust outcome indicators. For example, in order to be able to better assess the effects of IPA’s assistance on sustainable development, the agency could ensure access to relevant granular data from external data providers and relevant public agencies (e.g. Croatian Statistics Bureau, Financial Agency), for example on trade patterns of firms or census of foreign investors present in the country. In some countries, IPAs are able to gain access to administrative data on firm-level emissions, energy consumption and other environmental and social variables from environmental protection, certification and emission-disclosure monitoring bodies. Cross-checking data provided by investors with these official statistics and tracking a wider range of data through the Directorate’s CRM system could help evaluate the impact of investment promotion activities in a more consistent and accurate way.
The use of qualitative evaluation methodologies (e.g. surveys, consultations), and the establishment of data tracking tools and feedback processes can also provide some relevant data on IPA services and assisted firms. The Investment Sector already monitors the findings of business surveys undertaken by private sector associations (e.g. Employers’ Association, American Chamber of Commerce, Advantage Austria), but does not conduct targeted surveys to receive feedback from its own clients. Although it is a resource-intensive process, data from the Directorate’s new CRM system could be combined with surveys of supported firms to gain insights on how to adjust services and help identify key obstacles to investment. Publishing surveys’ results or using them in conversations with the government can be a potent policy advocacy tool (De Crombrugghe, 2019[16]).
Figure 3.8. KPIs used by EU IPAs for monitoring and evaluation by type
Note: “Sustainability” encompasses KPIs relating to the number and quality of jobs or full-time equivalents (total, created, maintained), R&D projects or R&D expenditure, exports or trade balance, regional development, projects related to green energy and indicators relating to gender, digital, diversification, and other sustainability related metrics (e.g., IPA sustainability scoring). “Projects” encompass KPIs relating to new projects, assisted projects, completed projects, won projects, greenfield or brownfield projects, and leads. “Investment Value” encompasses KPIs relating to investment value, CAPEX, FDI stock or other metric of the value of the investment project. “Activities” encompass KPIs relating to the number of meetings, inquiries, site visits, number of participants, campaigns, PR activities, roadshows, and other indicators relating to IPA’s own activities. “Other” encompasses all other KPIs (e.g., customer satisfaction).
Source: OECD survey on IPA monitoring & evaluation and prioritisation, (Sztajerowska and Volpe Martincus, 2021[13]), www.oecd.org/daf/inv/investment-policy/Investment-Insights-Investment-Promotion-Prioritisation-OECD.pdf
Formal coordination mechanisms could help address resource constraints
Actions to attract and facilitate FDI that contributes to national development priorities need to be aligned with the objectives and priorities set across different policy areas and tiers of government. IPAs operate in a dense and complex network of public stakeholders (e.g. ministries, implementing agencies, subnational authorities), which requires strong cooperation and coordination skills and processes. Although there is no standard inter-institutional coordination approach to the successful implementation of investment promotion policies, much of the success or failure of attempts to coordinate appear to depend upon country contexts (e.g. complexity of the institutional environment, coordination mechanisms in place).
The OECD-IDB IPAs survey finds that the MESD’s Internationalisation Directorate coordinates its work primarily with subnational IPAs, i.e. local and county-level Economic Development Organisations (EDOs), which are often contacted to undertake joint investment facilitation in regions; entities responsible for the management of business zones and industrial parks (usually subnational governments), which provide information to potential investors on how to access investment-ready land plots; and the Ministry of Foreign Affairs and its network of diplomatic missions abroad. These entities are also qualified as the Directorate’s key strategic partners in the delivery of investment promotion and facilitation services. Interactions with other stakeholders such as sectoral ministries (e.g. Ministry of Physical Planning, Construction and State Assets, Ministry of Tourism and Sports, Ministry of Finance) and industry groups (e.g. Chambers of Commerce) take place to acquire information on regulatory matters and other investor support schemes as well as to address specific investor enquiries (e.g. construction permits, licenses for specific sectors, domestic suppliers availability).
These findings are generally in line with the practices of OECD IPAs, the vast majority of which consider their relationships with subnational entities, embassies and consulates and the ministry of foreign affairs of critical importance for the effective delivery of investment promotion and facilitation services to foreign investors (OECD-IDB, 2018[4]). According to the 2022 Sustainable Governance Indicators, however, Croatia exhibits a weak performance about the quality and frequency of inter-institutional coordination, ranking 39 out of 41 countries behind most EU economies (Kotarski et al., 2022[17]).
OECD consultations with the Croatian government suggest that coordination on investment policy matters between the MESD and other government actors takes place on an ad hoc basis and through informal channels (Table 3.5). Several government officials described the lack of willingness to cooperate as an important challenge that they have to face in their everyday work, and indicated that inter-agency collaboration often depends on personal relationships between ministry officials. In certain cases, coordination provisions may be stipulated in sectoral laws and regulations but are rarely implemented in practice. The coordination challenge is further undermined by the high employee turnover in the MESD and other sectoral ministries (e.g. Ministry of Foreign Affairs), which results in communication channels being halted once officials leave their post and move to a different part of the public administration.
Table 3.5. Main coordination mechanisms used by the MESD and selected EU IPAs
Note: The EU total includes IPA responses from Austria, Bulgaria, Croatia, Czechia, Finland, France, Hungary, Italy, Lithuania, Luxembourg, Portugal, Romania, Slovak Republic.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023[18]), https://doi.org/10.1787/688bde9a-en
Similarly, despite the existence of several high-level government councils, the Investment Sector of the Internationalisation Directorate is not usually represented in their deliberations. For instance, although the National Competitiveness Council (NCC), which falls under the Directorate’s jurisdiction and is managed by the Competitiveness Sector (Figure 3.1), could theoretically drive inter-ministerial coordination on investment policy, it lacks a clear mandate on the actual monitoring and coordination activities that should be undertaken by its members, while delays have been observed in the past with regard to the approval of its annual budget (Figure 3.9). Given that the forthcoming National Plan for Investment Promotion will require high-level political commitment, an Investment Policy Working Group or Task Force could be created in the NCC, which will be responsible for monitoring the implementation of the National Plan, addressing bottlenecks in coordination and mobilising public resources to ensure that the investment promotion targets are achieved.
The capacities and inclusiveness of high-level government councils could be also strengthened so that they can play their role as independent advisory and coordination bodies. It is important to ensure that the Internationalisation Directorate is adequately represented in those council meetings and activities that relate to investment policy and business climate reforms more generally. Participating in the activities of other councils focusing on productivity, innovation, sustainability and skills development could help foster greater synergies between sustainable development policy areas and the MESD’s investment promotion priorities (e.g. National Innovation Council, National Council for Sustainable Development) (Figure 3.9).
Regarding subnational IPAs and regional/local authorities, coordination is often challenged by the ambiguity in the role and responsibilities of many local and county-level economic development organisations (EDOs) (see Chapter 4). Depending on the region, it is not always clear which subnational body (e.g. Local Development Agencies, County Development Agencies, Entrepreneurial Centres, etc.) is responsible for investment promotion and facilitation, while in many cases subnational entities are in contact with, and provide facilitation services to, potential investors without the MESD being involved or aware of it. It is important to note that an earlier version of the Act on Investment Promotion and Improving the Investment Climate included provisions that called the national and subnational investment bodies to coordinate by forming joint teams for specific investment projects. However, these provisions were reportedly never implemented in practice, and were eventually dropped at the last revision of the Act in 2018. Chapter 4 of this Review focuses on the role that subnational IPAs can play to promote and facilitate investment and provides specific recommendations on how to improve collaboration between the MESD and regional/local actors.
Although informal coordination is frequent among OECD IPAs, and can suggest a relatively well-developed culture of trust and communication among public administration officials, it may not be sufficient in the case of Croatia given the increased complexity and fragmentation of the institutional environment. Formal coordination mechanisms that place the MESD at the epicentre of investment promotion efforts and allow it to serve as a coordinating platform will be key for the effective implementation of the forthcoming National Plan and Action Plan. To this end, the Croatian Government could consider the establishment of inter-institutional networks, teams and working groups for specific investment promotion functions (Figure 3.9). Such an approach could also help address current resource constraints by allowing the Directorate to exploit resources available in other parts of the government and broaden the scope of its activities in areas and regions in which these are currently limited.
To strengthen investment generation activities, as mentioned earlier, the existing ad hoc collaboration with the Ministry of Foreign and European Affairs and its diplomatic missions abroad could be further consolidated through the establishment of a working group comprising representatives of Croatian consular offices located in countries of strategic importance for FDI attraction, and other sectoral and regional institutions. Coordination with diplomatic missions in foreign countries can be very important for IPAs and for investment promotion in general because it spearheads the efforts of a country to promote itself and establish strategic relationships with investor networks abroad (OECD, 2018[1]). Alternatively, the Internationalisation Directorate could consider appointing its own representatives in targeted markets abroad, who will provide investment information and advice to potential investors and conduct intelligence work by collecting information and monitoring investment attraction opportunities.
Figure 3.9. Illustrative example of inter-institutional coordination for investment promotion and facilitation in Croatia
Note: This figure is presented for illustrative purposes to showcase the type of institutions with which coordination could take place in a more structured manner. Subnational IPAs refer to those regional and local entities that undertake investment promotion and facilitation irrespective of their current legal status. Business Support Institutions include other types of entities that provide business support services or infrastructure which may be of relevance to foreign investors (e.g. Entrepreneurship Centres, Innovation Centres, Industrial Parks, Science and Technology Parks, and Competence Centres).
Source: OECD elaboration.
Three out of four OECD IPAs have their own offices abroad, meaning that they have personnel abroad, dedicated to investment promotion, on their payroll (OECD, 2018[1]). IDA Ireland, for example, shares local market plans and teams with embassies abroad. Invest in Canada, in addition to its network of 35 offices abroad, relies on some 140 diplomatic missions around the world. Among them, 24 are located in strategic markets and are tasked to actively attract FDI, whereas other missions are given “reactive” mandates. IPAs’ overseas offices can make a difference for the agencies’ ability to attract FDI. Nonetheless, they can strongly weigh on agencies’ finances. IPAs have different arrangements to operate their secondary offices overseas with reduced cost. Some agencies hire local staff in foreign offices to lower costs. Other agencies do not have their own offices abroad, but place staff in the foreign diplomatic representations or cooperate closely with them.
Similarly, the creation of an inter-institutional network, comprising subnational IPAs, local business support institutions (e.g. entrepreneurial centres, science and technology parks, industrial parks), and city administrations could be envisaged for the coordinated provision of investment facilitation and retention services to foreign firms. This would allow the Directorate to get involved in a broader set of activities provided by other organisations and offer complementary guidance and support in a more consistent manner, including assistance with administrative procedures, matchmaking services between investors and local firms, and troubleshooting for investors on the ground. Box 3.3 presents the modus operandi of the Invest in Holland Network, which is managed by the Netherlands Foreign Investment Agency (NFIA) and provides a good example of how IPAs operating as part of a ministry can leverage the power of collaboration to streamline the quality of services provided to foreign MNEs.
Such an approach would require, however, clarity about the official mandates, roles and responsibilities of subnational entities which are currently involved in investment promotion and more broadly the provision of business support services. As presented in Chapter 4 of this Review, there are currently overlapping responsibilities between county-level and local Economic Development Organisations (EDOs) while in certain regions other types of entrepreneurial support institutions (e.g. Entrepreneurship Centres) undertake investment facilitation too. Reforming the currently fragmented institutional environment at the subnational level is a pre-condition for the effective functioning of such a network (see chapter 4 for recommendations).
Involving the Ministry of Regional Development and EU Funds (MRDEUF) in the strategic oversight of these networks would also facilitate the mobilisation of local actors and bring in complementary resources for joint actions. The MRDEUF manages the allocation of several EU funding instruments that could be used to promote investments in less developed areas. It also possesses the necessary knowledge and experience in identifying the comparative advantages of regions as well as managing regional coordination groups such as the Coordination Councils for Industrial Transition. These have been established at the NUTS2 level and have been tasked with the implementation of industrial transition plans that define regional value chains and priority niches of the regional economy.
Effective collaboration across policy areas and tiers of government will need well-functioning processes and mechanisms such as shared customer relationship management systems, dedicated communication channels and tools, and clear and well-defined responsibilities to enable follow-up on investment project leads and requests. These strategic links could be formalised through inter-agency collaboration agreements (e.g. contracts, MoUs) that define the responsibilities of each institution and specify the internal management processes that will be used for the delivery of investment promotion services. Collaboration could also build upon existing initiatives such as the BOND Network that is managed by HAMAG-BICRO and comprises more than 100 entrepreneurial support institutions operating in different regions across Croatia.
Box 3.3. Coordination on investment promotion and facilitation: The Invest in Holland Network
The Netherlands Foreign Investment Agency (NFIA) operates as a department in the Ministry of Economic Affairs and Climate Policy while its activities take place under the umbrella of the Netherlands Enterprise Agency (RVO). In 2021, there were 28 NFIA offices abroad, including own premises in countries of strategic importance for FDI attraction, as well as agency representatives located across the Dutch embassies and consular offices. Although the agency has no subnational offices, it manages the Invest in Holland Network, which comprises 14 organisations, including regional development agencies, city administrations and other non-profit entities. The network aims to provide a continuum of support services to foreign investors and connect them with the right public and private sector partners depending on the type and location of their investments. The Invest in Holland Strategy 2020-2025 describes the policy areas for which the network operates jointly while indicating that each partner is free to undertake complementary investment promotion activities in line with their own priorities. In the period 2015-2019, approximately 1800 investment projects were successfully completed with the help of the Invest in Holland Network, with a total investment value of EUR 12 billion and having created or maintained approximately 57.000 jobs.
The network is coordinated through the National Acquisition Platform (NAP), which is chaired by the NFIA Commissioner, and includes representatives of each organisation. Members meet once per quarter to discuss on the basis of joint short-term activity plans, take stock of progress in achieving FDI targets and evaluate the implementation of the Invest in Holland Strategy. Throughout the year members benefit from networking and knowledge sharing events as well as brainstorming meetings on how “working together” can be further simplified. To ensure consistency in the quality of services provided to foreign investors, the Invest in Holland Academy has been established to provide courses and seminars for new employees that join one of the 14 organisations as well as for more senior members and investment promotion staff located in the Dutch diplomatic missions abroad.
Investment prioritisation takes place through inter-agency Focus Teams that work on promoting investments in high-priority activities (ICT, Agri food, Life sciences and health, sustainable energy). Focus Teams hold regular meetings with companies and research institutions operating in various industries with the aim to identify new investment opportunities. They are also responsible for monitoring the business climate and bringing opportunities and threats to the attention of policymakers. For instance, in 2019, the Focus Team ICT, with NFIA and 5 regional partners, developed various value propositions, drew up target lists and visited conferences and events to generate new investment leads. Thanks to these efforts, a total of eight high-quality ICT investment projects were attracted in 2019.
The increased attention that investment generation activities receive in the Netherlands is reflected in the annual resources dedicated for that purpose. Roughly 70% of the NFIA resources are spent to find and guide potential initial investments, 20% of them are spent to find and guide potential follow-up investments (i.e. maintaining and expanding activities), 5% is spent for the role of the NFIA in the Invest in Holland network (i.e. cooperation between regional partners) and 5% to collect feedback from foreign companies on opportunities for improvement of the business climate.
Source: OECD based on NFIA (2020[19]), Evaluatie van de NFIA 2010-2018, https://open.overheid.nl/repository/ronl-2342ca2e-27ee-4da1-a407-ea24af4d63ad/1/pdf/bijlage-evaluatie-van-de-nfia.pdf and NFIA (2020[20]), Invest in Holland Strategie 2020-2025, https://open.overheid.nl/repository/ronl-1b3f0055-62a6-4757-80e7-7f32236d8f43/1/pdf/bijlage-invest-in-holland-strategie.pdf
Leveraging investment promotion and facilitation for sustainable development
Besides providing a source for financing, FDI may support sustainable development in the host country by contributing to the diversification of the economy; the transfer of technology and knowledge; the development of the host country’s skills base; a boost of productivity, and the establishment of linkages with local firms, which help them access new markets and integrate in global value chains. The rest of this chapter investigates how investment promotion policies can contribute to selected aspects of sustainable development (i.e. the Sustainable Development Goals, SDGs), including productivity growth and innovation, notably through FDI-SME linkages, the creation of quality jobs and the development of skills in the local workforce as well as green growth and the transition to a low-carbon economy.
Knowledge spillovers from FDI require strengthening domestic firms’ capacities
Business linkages between foreign firms and domestic firms can be an important channel for the transfer of technology, knowledge and skills (OECD, 2023[18]). Business linkages can take many forms. They may involve buyer-supplier arrangements along local value chains or formal strategic partnerships such as joint ventures, contract manufacturing, and R&D collaborations. While foreign MNEs can generate knowledge and technology spillovers depending on the spillover potential of the particular type of investment in the host economy, domestic firms, in particular SMEs, will benefit from them if they have sufficient absorptive capacities and can become successful suppliers and partners of foreign investors. SMEs and their productive capacities are an important determinant of FDI location decisions. Foreign MNEs choose to invest in specific countries or regions based on the availability of local suppliers and the capabilities of domestic entrepreneurial ecosystems. Creating a business environment that is favourable for both domestic and foreign firms, supplemented by SME development policies and programmes to maximise their absorptive capacities, should be an equally important component of the Croatian government’s strategy to attract FDI that is firmly anchored in the local economy.
In Croatia, SME policies are implemented by several institutions. The MESD’s Directorate for Industry, Entrepreneurship and Crafts is responsible for promoting entrepreneurship and encouraging the application of innovation and new technologies in industry, in particular SMEs. The Directorate has been coordinating the implementation of the Strategy for Entrepreneurship Development 2013-2020 and the Cluster Development Strategy 2011-2020. A new National Plan for Industrial Development and Entrepreneurship is currently being developed with the aim to operationalise the strategic priorities identified in Croatia’s National Development Strategy 2030. HAMAG-BICRO and the Croatian Bank for Reconstruction and Development (HBOR) are the two key institutions that offer scale-up and financial support to Croatian SMEs to help them grow, improve their competitiveness, and engage in innovative activities. HBOR also serves as Croatia’s official export bank and export credit agency, supporting local SMEs’ internationalisation efforts through supplier/buyer credit lines and export guarantees. HAMAG BICRO focuses on supporting SME investments in innovation and R&D and facilitating their access to finance and collaboration with business networks abroad.
In recent years, several measures aimed to strengthen the performance of domestic firms have been implemented. The MESD operated the Business Internationalisation of SMEs programme, which provided financial support to facilitate the presentation of SME products and services, foster international market cooperation with foreign partners and participate in international fairs and B2B meetings. Efforts have been also made to encourage R&D collaboration between domestic enterprises and academia, introduce product certification schemes to facilitate SMEs’ access to foreign markets, and foster SMEs’ in-house R&D capacities through innovation vouchers. Until 2016, the development of industrial clusters was supported through financial and technical support and had led to the emergence of collaborative business initiatives (e.g. in the wood processing, and automotive sectors); however, when support was discontinued, several cluster organisations ceased their activities.
Despite policy efforts, several indicators point towards weaknesses in Croatia’s policy framework. At the EU’s Small Business Act (SBA) 2019 performance assessment, Croatia scored below the EU average in 6 out of 10 dimensions pertaining to SME policy, including entrepreneurship support, access to finance, skills and innovation, with many of them following a downward trend over the past decade (EC, 2019[21]). When compared with a group of Central European countries (e.g. Slovak Republic, Hungary, Austria, Slovenia, Germany) Croatia exhibits the lowest performance in the quality of the overall policy support system, access to financing and R&D transfer opportunities, and the availability of commercial and professional infrastructure supporting SMEs, according to the Global Entrepreneurship Monitor 2022 index. Croatia does perform better than the Slovak Republic in terms of programmes directly assisting SMEs, but its score is still far from most Central European countries and the EU average (Figure 3.10). Key reasons for the limited effectiveness of the current policy system appear to be the lack of a strategically targeted and coordinated approach to SME development, the lack of continuity of measures and the insufficient focus on tackling SMEs’ practical needs, in particular the lack of skilled labour for SMEs in the manufacturing sector (CEPOR, 2022[22]).
Figure 3.10. The quality of public policy support provided to domestic SMEs in Croatia and selected Central European countries
Source: OECD based on Global Entrepreneurship Monitor (2021[23]), www.gemconsortium.org/data
It is important to note the disconnect that currently exists between investment promotion policies implemented by the Internationalisation Directorate and SME/entrepreneurship and more broadly industrial policies undertaken by the MESD and HAMAG-BICRO. Supplier development programmes should be aligned with the priorities and objectives of investment promotion and facilitation (e.g. in terms of sectors, activities and types of firms targeted, see previous section) and combined with other types of support such as capacity building for local firms, training programmes for local staff, and cluster development initiatives (OECD, 2022[9]). Evidence from OECD economies shows that MNE-SME linkage programmes and other matchmaking services are often combined with policy initiatives aimed at promoting supply chain development and strengthening SME absorptive capacities. This mix of policy instruments allows to align domestic supplier capabilities with the needs of foreign investors.
The Investment Sector could consider implementing a supply chain development programme jointly with the MESD’s Directorate for Industry, Entrepreneurship and Crafts and HAMAG-BICRO. The Supplier Clubs programme implemented by the Portuguese SME agency IAPMEI in collaboration with the investment promotion agency AICEP is a good example of how public policy can mobilise actors across the business ecosystem to help local SMEs collaborate with foreign MNEs (OECD, 2022[24]). The programme combines matchmaking services to help foreign multinationals established in Portugal and domestic firms identify collaboration opportunities and agree on jointly implemented projects; business consulting services and training programmes provided by foreign affiliates to their suppliers based on an assessment of the latter’s performance; and financial support through EU-funded incentive schemes to help SMEs upgrade their technological capabilities for the implementation of the agreed joint projects.
The 2021-2027 programming period of the EU Structural and Investment Funds provides opportunities to channel the necessary technical and financial support to sectors and regions with higher potential for FDI-SME linkages and spillovers. In the coming years, the MESD plans to devote EUR 250 million in the form of grants and other financial instruments to encourage the establishment of companies in smart specialisation areas, promote the inclusion of SMEs in value chains and support them to adopt product certification standards and participate in international fairs and business networking events. These interventions are expected to further support the internationalisation of Croatian companies and enhance their exposure to the product and service quality standards expected by global investors.
R&D investments could be scaled up by facilitating collaboration between Croatia’s business and innovation ecosystems
Croatia is placed among OECD and EU economies that provide one of the lowest levels of total government support to R&D investments (0.007% of GDP in 2021), ranking far from top innovators such as the UK, France, Belgium and Portugal (OECD, 2022[25]). An R&D tax allowance is administered by the Sector for Innovation of the MESD’s Internationalisation Directorate and several direct funding instruments (e.g. innovation vouchers and grants) are managed by HAMAG-BICRO. The tax allowance was introduced in 2019 under the Act on State Aid for Research and Development Projects in order to increase private sector investment in R&D and encourage cooperation of entrepreneurs with R&D organisations (Abdellatif et al., 2022[26]), but its uptake has been limited. In 2021, it accounted for only 3% of the total government support to business R&D (as opposed to 97% for direct financial support).
The overall small magnitude of public support by international standards (in absolute and relative terms) could be a barrier to attracting additional investment in R&D-intensive activities, in particular given that peer economies in the geographical vicinity of Croatia, such as Slovenia, the Slovak Republic, Czechia and Hungary, provide significantly more generous schemes. Cross-country differences in the generosity of R&D tax allowances can lead to differences in the cost of capital faced by foreign firms – and subsequently encourage or discourage them from increasing their R&D investment or locating their R&D functions in a country (OECD, 2022[9]). Additional analysis is also required to understand the reasons behind the limited uptake of the R&D tax allowance. It could be caused in part by complex application procedures and a lack of awareness about the incentive among knowledge-intensive firms. It may also be a sign of weak domestic capacities in the area of innovation, which could be an important barrier for domestic enterprises, in particular SMEs, to develop value chain linkages and knowledge-intensive partnerships with foreign investors operating in Croatia.
The MESD could consider monitoring the scheme’s impact and evaluating whether its benefits outweigh potential costs (e.g. in terms of forgone public revenue, market distortions, etc). It is crucial that the MESD examines whether certain provisions, application procedures and design features could be simplified to make the scheme more attractive and less burdensome for firms that seek to engage in innovative activities. The Ministry’s intention to digitise the application procedure, which is one of the reforms envisaged by Croatia’s Recovery and Resilience Plan, is a step in the right direction and could help increase the number of companies that benefit from incentives.
Similarly, direct funding instruments could be increased, better coordinated, targeted and linked to each other to leverage FDI for Croatia’s transition towards a knowledge-based economy. In the period 2014-2020, EUR 0.53 billion of EU funds were made available to stimulate the innovation performance of the Croatian economy through targeted support to Croatian companies and investments in R&D infrastructure. Based on 9 tenders, a total of 868 contracts were signed with SMEs for the development of innovative products and services, with a total project value of EUR 1 billion. Additional investments are envisaged in Croatia’s National Programme of Recovery and Resilience (NPOO) for the period 2021-2026, which will support newly founded SMEs to engage in innovation (e.g. innovation vouchers and grants), use advanced technologies, digitalise their business processes and develop skills for smart specialisation.
Direct financial support includes a variety of calls and funding tenders with different objectives, timeframes, target groups and implementing authorities that do not provide the necessary long-term perspective, which is important when foreign and domestic firms consider engaging in innovation. Recent World Bank analysis has found that smaller and younger firms are less represented among beneficiaries of support programmes funded from the EU Structural and Investment Funds (ESIF) and linkages between the business and research sectors are very weak (World Bank, 2021[27]). Application costs for innovation support programmes are high and firms usually have to bring in experts and consultants to assist with application and project management. Many firms have also reported significant delays between the publication of the funding calls and contract signing, which can severely disrupt business planning and in the case of R&D partnerships undermine business-to-business collaboration.
Figure 3.11. Croatia’s government support to R&D investments is among the lowest in the EU
Source: OECD R&D Tax Incentives Database (2022[25]), http://oe.cd/rdtax
Many of these shortcomings stem from challenges in Croatia’s governance framework for R&DI. R&DI policy is jointly managed by the MESD and the Ministry of Science and Education, while high-level governance is ensured by the National Innovation Council (NIC). In the past, the lack of clarity over decision-making responsibilities for Croatia’s Smart Specialisation Strategy and the need to coordinate with other government actors responsible for the management of the EU Structural and Investment Funds, had resulted in weak enforcement of government decisions and bottlenecks in coordination (European Commission, 2023[28]). The 2021-2027 Smart Specialisation Strategy of Croatia, which will be officially adopted in the course of 2023, has streamlined the governance structure and clarified the power and functionality of the NIC.
Incentives are not the only policy tool to boost R&D investment, putting aside the question of their effectiveness and the forgone revenues that they can generate. To be successful, public support to R&D investments should be accompanied by technical assistance, training and the necessary infrastructure that allows foreign and domestic firms to interact, network and engage in collaborative R&D projects. In many cases, the expansion of existing investors seems to be the most common entry mode of R&D-intensive FDI. Foreign MNEs are encouraged to perform science and technology development work when they can develop ties with local universities, public research institutions and participate in business networks led by local industry associations. Building connections between Croatia’s business and innovation ecosystems can be achieved through open innovation mechanisms such as testing and piloting infrastructures/platforms.
The MESD could increase efforts to convince already established firms to relocate their R&D activities to Croatia. This will require stronger support from the government with regard to advanced technology and machinery, technical assistance to link applied university research with the needs of foreign investors, as well as training and skills development programmes to help investors find qualified R&D workers. The existing network of science and technology parks could be further supported and leveraged to attract knowledge-intensive foreign MNEs in line with the specialisation patterns of local economies. The Investment Sector of the Internationalisation Directorate could collaborate with the Entrepreneurial Infrastructure and Innovation Infrastructure Services to identify challenges and opportunities in linking established investors with actors of Croatia’s research and innovation ecosystem.
Strengthening labour market institutions could improve FDI’s contribution to job creation and skills development
Balanced labour market regulations can support foreign firms’ adjustments while providing a level of employment stability that encourages learning in the workplace. In Croatia, labour market regulations do not appear to be the biggest constraint for either domestic or foreign firms (Figure 3.12). In 2013-2014, the government reformed the employment protection legislation with the aim to increase labour market flexibility and harmonise the Croatian labour market regulations with those of the EU (World Bank, 2023[29]). Reforms included reducing hiring costs, liberalising collective dismissals, introducing working time flexibility and making part-time employment less costly for employers (World Bank, 2019[30]). Less rigid labour market regimes imply that firms’ adjustment costs when hiring or firing workers in response to FDI entry and spillovers are not likely to restrain labour mobility and wider resource reallocation (OECD, 2022[9]). For foreign investors, flexibility of the host country’s labour market matters for their location choice and investment volumes – and thus job creation potential.
Despite the progress achieved in striking the right balance between workers’ protections and firm adaptability, the Croatian labour market faces challenges. Delays in court rulings regarding dismissals, abstruse labour law amendments and subordinate decrees and the high costs of dismissals, even in the case of misconduct or performance issues, make the legal framework complex. Skills shortages and mismatches have also accentuated over the past decade due to the outflow of talent and the overall shift of employment towards services sectors, which tend to be more reliant on highly skilled workers (World Bank, 2023[29]). According to the 2019 World Bank Enterprise Survey of Croatia, the inadequately educated workforce appears to be a bigger constraint for foreign than domestic firms (25.1% vs 15.3%) (Figure 3.12). This may be due to the high concentration of FDI in sectors that experience significant labour and skills shortages such as higher-technology services (e.g. software and IT), construction and tourism sectors. Croatia’s plan to hasten its transition towards a knowledge-based economy and to attract investment accordingly, will be possible if labour shortages and skills gaps are addressed quickly. Ensuring that everyone has the right skills for an economy increasingly driven by the green and digital transitions is essential to spur innovation, productivity and economic growth.
Figure 3.12. Share of firms identifying skill shortages and labour regulations as their biggest obstacle
Source: OECD based on World Bank (2019[31]), www.enterprisesurveys.org/en/enterprisesurveys
The Croatian government has sought to incentivise investors to create quality jobs and offer on-the-job training to their employees through the Investment Promotion Act, which stipulates several tax benefits that are conditioned to the creation of a certain number of jobs. Additional financial grants are available to support job creation depending on the level of the unemployment rate in each of Croatia’s subnational counties. For labour-intensive investment projects, i.e. projects that create more than 100 jobs, several top-ups apply that raise the generosity of the grants. Similarly, training grants are available for all sectors covered by the Act, and cover up to 70% of costs incurred for training employees in newly created jobs. Incentives conditioned to increasing employment or providing on-the-job training are common among EU and OECD countries. Evidence on their effectiveness is mixed, however, in both developed and developing countries (OECD, 2022[9]). When they are not well targeted, incentives might benefit firms that did not need support to hire or train workers in the first place. As suggested in Chapter 5, which provides an assessment of investment tax Incentives, the MESD could consider undertaking an impact evaluation to ensure that their targeting and design remain effective in the attraction of productivity-enhancing and skill-intensive investments. Systematic ex-post evaluations could help ensure that the costs of financial incentives, in terms of revenue forgone and potential economic distortions, outweigh their benefits.
While incentives can help prioritise FDI in job-creating and skill-intensive activities, it is as relevant for the Croatian government to align the existing skills base with the needs of global investors. Overall, policy inter-linkages across the areas of investment promotion, employment and skills development appear to be limited. There is currently no systematic and coordinated skills anticipation process that takes into account MNEs’ changing needs with regard to workforce skills. The Croatian Employment Service (CES) is responsible for analysing the needs of the labour market and accordingly prepare recommendations for training and educational programmes, but there is no evidence that this has any influence on workforce development policies (CEDEFOP, 2022[32]). The National Council for the Development of Human Potential is also responsible for making recommendations about how the skills supply system should respond to the changing skills demand. But its recommendations are not binding for education and training providers. Cooperation between the various institutional labour market actors is limited and active policies and programmes in support of labour participation and activation have been traditionally underfunded and short in duration (World Bank, 2019[30]; Corti and Ruiz de la Ossa, 2023[33]). Many of these challenges are often attributed to the limited administrative and financial capacities of the CES and regional disparities observed in the quality of services offered by its subnational offices. Although participation in vocational education and training (VET) is high, upskilling and re-skilling programmes face challenges in targeting their objective population and are insufficiently aligned with the needs of employers (World Bank, 2019[30]).
If Croatia wants to attract more skill-intensive investment, it needs to strengthen its labour market institutions so that they can support the development of a broader set of workforce skills, beyond those required in sectors where FDI is already present. This will require robust skills anticipation systems that involve the investment community and allow to design evidence-based and forward-looking programmes that match expected skills needs in emerging sectors, in particular digital and knowledge-intensive services. The MESD’s Internationalisation Directorate could collect information on foreign firms’ operations and skill needs and participate in the skills anticipation assessments organised by the CES. It could also further promote sectors in alignment with the existing skills base and provide appropriate information to investors on labour market characteristics. Currently, the Directorate does not provide any services to help foreign investors identify local workers with relevant skills. Some of the labour market monitoring tools developed by the Ministry of Labour, Pension System, Family and Social Policy could be leveraged to improve the quality of investor services. This includes the Catalog of Green and Digital Skills (https://vjestine.hzz.hr) and the Labour Market Portal (http://trzisterada.hzz.hr/hr), which provide data on the supply and demand for specific occupations and skills as well as general information about labour market characteristics at the county level.
Recent policy efforts to align upskilling and reskilling programmes with emerging market needs (e.g. digital and R&D skills, skills related to emerging green technologies) should continue and be scaled up. The implementation of a voucher system, introduced by the Ministry of Labour, Pension System, Family and Social Policy in 2021, can enable greater participation of unemployed and employed persons in lifelong education with an emphasis on the acquisition of skills related to the green and digital transition. As of the end of 2022, 64 educational programmes for acquiring green and digital skills had become available through the vouchers programme and were offered by 107 accredited educational institutions (CES, 2023[34]).
Experience from peer EU countries suggests that such sectoral training programmes should be flexible enough to allow foreign MNEs to tailor them to the needs of their employees. For instance, IDA Ireland has partnered with Skillnet Ireland, the Irish public agency responsible for skills development, to facilitate foreign investors’ access to Skillnet’s talent development programmes. Sometimes, foreign MNEs create their own training centres, and many IPAs support them by ensuring that trainings are recognised by the relevant authority. The Croatian Ministry of Labour is currently developing a set of guidelines for the development of non-formal education programmes for the acquisition of competencies required for work, which will allow companies that already have their own in-house education programmes to align them with the Croatian Qualifications Framework and become eligible for funding through the voucher system.
Box 3.4. Tailored skills development programmes for foreign investors in Ireland
In 2022, Ireland’s investment promotion and skills development agencies, IDA Ireland and Skillnet Ireland respectively, launched a strategic talent development partnership. The partnership aims to supporting FDI companies who are looking to attract and retain talent by offering them access to tailored skill development initiatives implemented across Skillnet Ireland’s 73 networks nationwide. This new engagement model combines the IDA’s business development and support services for foreign MNEs with Skillnet Ireland’s talent development expertise and extensive delivery network to help drive companies’ growth.
Before the official launch of the partnership, the two agencies successfully piloted the programme by helping a selected number of foreign MNEs put together a strategic training and development plan to meet their business objectives. The programme involved coaching and mentoring to help companies assess their talent needs. External consultants were also assigned to work with them and help them address skill gaps and identify strengths and opportunities for further improvement. By the end of 2022, more than 20 companies are expected to have gone through the programme in a wide range of different sectors such as financial services, biopharmaceuticals, aviation communications, manufacturing and software development.
Skillnet Ireland has previously teamed up with IDA Ireland and Technological University Dublin to develop its Transform programme, an accredited course designed to help companies equip their staff with automation and tech skills. The programme has had notable success for Dell Technologies in supporting the company to enhance the talent capacity of 600 members of its Ireland-based workforce and has resulted in the development of 190 business innovation projects. In 2021, Skillnet invested EUR 1m to bring the programme to a wider network of businesses in Ireland. This will support businesses – large and small – in their adoption of digital transformation and propel their workforce to embrace digitisation as it applies to leadership, strategic business models and advancing human digital capital capabilities.
Source: OECD based on IDA Ireland (2022[35])
Promoting green and low-carbon investment will require removing regulatory barriers for renewable energy projects
Promoting green investment is an opportunity for Croatia to avoid locking in environmentally and economically unsustainable development. The government has taken steps towards promoting green investment by setting low-carbon transition targets and long-term policy strategies that send investors, including foreign ones, strong signals regarding the government’s climate ambitions. The Croatian Low-carbon Transition Strategy, adopted in 2021, includes a commitment to reduce greenhouse gas emissions (GHG) by 57%-73% by 2050 compared to the 1990 baseline and the Energy Development Strategy, adopted in 2020, includes a long-term target for a renewable energy share of 65% by 2050 (European Parliament, 2021[36]). 40% of Croatia’s Recovery and Resilience Plan is also dedicated to climate objectives, featuring crucial reforms and investments to step up the transition to a more climate-resilient economy (European Commission, 2022[37]). Such clear and long-term targets are critically important to build capacity for investors to understand transition risks and to attract foreign investment that contributes to the country’s climate agenda.
Environmental taxes play an important role in Croatia’s sustainable development policy. Environmental tax revenue reached 3.9% of GDP in 2020, significantly higher than all CEE countries and the OECD average of 1.35% (Figure 3.13). The taxes cover environment pollutants, excise duties on energy products and electricity, the environmental impact of waste and a special environmental charge for motor vehicles. These carbon- and environmentally-related pricing instruments provide a technology-neutral case for low-carbon investment and consumption. While they do not specifically target FDI, they are a necessary first step to send the socially optimal price signals to all investors, including foreign ones, and raise the returns on low-carbon relative to high-carbon investments. This is also the case for fossil fuel subsidies. Reducing and reforming economically-inefficient and environmentally-harmful fossil fuel subsidies has become a key issue on the political agenda of governments across the world. Policy makers are now better informed and more aware of the negative fiscal, social, environmental and climate-related impacts of government support to fossil fuels (OECD, 2021[38]). Croatia provides one the lowest levels of fossil fuel subsidies among EU and CEE countries, reaching only 1.4% of GDP in 2021, as opposed to 8.7% in Bulgaria (Figure 3.13).
In 2020, renewable sources produced 65% of electricity (Figure 3.14, Panel A); natural gas was still used to generate one quarter of total electricity. When looking at the use of renewables in total energy consumption, Croatia is significantly above the EU average (31% compared to 21%) and above most CEE countries with the exception of Latvia and Estonia (Figure 3.14, Panel B). These findings suggest that Croatia’s renewable energy generation capacity has gained traction over the past decade, allowing it to reduce fossil fuel dependency and the exposure to energy price shocks. The long-term goal of at least 65% renewable energy by 2050 will require to further accelerate investments in clean energy. As suggested by Figure 3.14 and the findings of a recent energy sector assessment funded by the European Bank for Reconstruction and Development (EBRD) (OIE, 2022[39]), there is still room for further expanding solar and wind energy generation in coastal areas as well as geothermal energy in the continental part of Croatia.
Figure 3.13. Policy instruments that raise the returns on low-carbon relative to high-carbon investments in Croatia and CEE countries
Source: OECD database of Policy Instruments for the Environment (2020[40]), https://stats.oecd.org/Index.aspx?DataSetCode=ERTR, and IMF Climate Change Indicators (2021[41]), https://climatedata.imf.org/
Figure 3.14. Renewables represent an important share of Croatia’s energy mix
Source: OECD based on IEA Electricity Information (2020[42]), www.iea.org/data-and-statistics/data-product/electricity-information, and Eurostat energy statistics (2021[43]), https://ec.europa.eu/eurostat/web/products-datasets/-/nrg_ind_ren
Over the past decade, Croatia’s incentive system for investments in renewables has been characterised by a lack of continuity and certain delays in developing and implementing the necessary legal framework for the provision of state support. In 2016, the feed-in-tariffs (FiT) scheme (OIE, 2022[39]), a type of incentive that reduces the risk of energy investments by guaranteeing a pre-determined price (or revenue) for the electricity generated for a predefined period of time, was discontinued. In 2018, the Act on Renewable Energy Sources and Highly Effective Cogeneration was amended to re-introduce the FiT scheme for small-scale power plants of a maximum output of 500 KW and complement it with a feed-in-premium (FiP) system for large-scale power producers (above 500 KW). The FiP offers financial support to a winning bidder under a contract made with the Croatian Energy Market Operator (HROTE) (Lexology, 2020[44]). The subsequent adoption of implementing regulations and revision of the Electricity Market Act to create a legal framework for the tendering procedures led to significant delays in the implementation of the new incentive system, with the first public auctions for small (FiT) and large-scale (FiP) projects taking place in 2020 and 2022 respectively (Figure 3.15).
The establishment of a premium-based incentive scheme is a step in the right direction and could help Croatia achieve its decarbonisation targets as long as it is accompanied by reforms to remove regulatory barriers, and targeted policy interventions to create conducive framework conditions for private investment. The effectiveness of incentives will depend on energy market conditions, the ease and speed of granting licenses and permits for the construction of large-scale power plants, and the ability of investors to access land (see next section) and secure the necessary financing. On the latter, interviews with government and private sector stakeholders conducted for this Review revealed that investors face significant challenges in Croatia to ensure the bankability of their renewable energy projects. In certain cases, licenses are being granted and incentives provided by government agencies, but many renewable energy projects are cancelled or postponed due to the lack of financing.
Figure 3.15. Renewable energy projects supported by Croatia’s feed-in-premium scheme in 2022
Source: HROTE (2022[45]), Public Tender Results, https://files.hrote.hr/files/PDF/OIEIK/2022/Javni_natjecaj_1_2022/tablice%20za%20objavu%202022-07.pdf
Regarding regulatory barriers, Croatia performs significantly better than CEE economies in the area of regulatory complexity and simplification of licensing and permit systems (Figure 3.16). In the period 2018-2020, the government adopted three Action Plans and undertook several reforms, including 356 measures, to simplify administrative procedures and digitalise a range of processes, achieving a culminated savings of approximately 245 million EUR (1.85 billion HRK) in burden reduction (as of September 2022) (Government of Croatia, 2022[46]). The MESD has developed the START platform to optimise the business registration process, effectively creating a portal where procedures are merged in a single platform. The Ministry of Physical Planning, Construction and State Assets has also established the e-Permit (e-Dozvola) information system to facilitate communication between investors and licensing authorities and accelerate the issuance of building and construction permits.
Despite the progress achieved so far, the European Commission’s 2022 country report for Croatia identifies administrative, regulatory and technical barriers, including lengthy procedures for authorisation and permitting, as major challenges for investments in renewable energy (European Commission, 2022[37]). Procedures for obtaining environmental approvals – namely environmental impact assessments and assessments on the impact of investment projects on Croatia’s ecological Natura 2000 network take significantly longer than the legal deadlines prescribe (OIE, 2022[39]). Licensing approval rules are also not always clear. Although the deadline for the approval of a preliminary environmental impact assessments by the relevant authority can be prolonged beyond the legally prescribed two months, the Environmental Protection Act does not specify what the maximum time for the approval process must be, resulting in delays and a lack of predictability for investors.
Many of these challenges stem from the weak administrative and strategic planning capacities of the MESD’s Energy Directorate and the Directorate for Environmental Impact Assessment and Sustainable Waste Management. These Directorates, and more broadly the Croatian public administration, are facing significant human resources issues directly hindering their ability to hire and retain trained and qualified staff that is able to handle the workload of licensing and permit systems. The Directorates should be sufficiently supported with the necessary resources to effectively implement the renewable energy incentives and handle the associated licensing requirements. Policy efforts should also focus on optimising digital services offered by the public administration. The transformation of paper-based processes to online procedures will not be sufficient to reduce regulatory burden unless it is accompanied by simplification measures, interoperability between government bodies and enhanced coordination between levels of government.
Figure 3.16. Regulatory burden on business in Croatia compared to CEE countries
Source: Author’s elaboration based on OECD (2021[47]), Product Market Regulation database, www.oecd.org/economy/reform/indicators-of-product-market-regulation/, and World Bank (2019[31]), Enterprise Surveys, www.enterprisesurveys.org/en/enterprisesurveys
Given the rapid pace of technological developments in the renewable energy sector, emphasis should be also placed on ensuring that licensing procedures are flexible enough to accommodate technological upgrades of existing projects (or projects under development), and that regulatory requirements for changes to investment projects are proportional and provide a degree of predictability. Currently, changes to the initial technology model for renewable energy projects under development usually require amendments to the location and building permits, which cannot be obtained before a new environmental impact assessment is conducted (European Commission, 2022[37]; OIE, 2022[39]). While scrutiny of changes to investment activities that may have negative impacts on the environment is necessary and legitimate, screening should remain closely tailored to risk in the case of investment projects that have already been subject to prior impact assessments and involve activities that contribute to the green and low-carbon transition. Portugal’s zero-licensing scheme is a good example of government efforts to ensure that existing rules serve a legitimate public interest purpose (OECD, 2014[48]). Under this scheme, license requirements in non-risk activities were largely replaced by a simple prior notification to the authorities through electronic means, combined with reinforced ex-post inspections and sanctions for non-compliance.
Spatial planning rules could be further harmonised to facilitate land acquisition for large-scale investment projects
Secure rights for land tenure and an efficient, reliable system for land administration are indispensable for investors in many countries, including Croatia. This requires a clear legal framework for acquiring, registering and disposing of land rights, as well as land use plans at all levels of government. In Croatia, the 2013 Physical Planning Act regulates the spatial planning system (Katurić and Simov, 2021[49]). Depending on the type of land that is needed for an investment project, different public bodies are responsible for regulating land rights and issuing the necessary permits (Table 3.6). Responsibility at the national level lies with the Ministry of Physical Planning, Construction and State Assets, which has recently adopted the National Spatial Development Strategy, a document laying out Croatia’s strategic objectives for spatial development up to 2030, including policy priorities and guidelines for public bodies involved in the design and approval of spatial plans (MPGI, 2020[50]). Apart from this strategic document, there are no binding planning instruments in force at the national level. Practically, all responsibilities are with the county authorities, municipalities and city administrations (Scharmann and Cibilić, 2020[51]), each one of which issues complementary regional (i.e. county) and local (i.e. cities, municipalities) spatial plans specifying the type of economic or other activities that can be undertaken in different areas of their territory. According to the current legal framework, subnational plans shall be mutually aligned and aligned with higher-level plans.
While decentralisation was generally welcomed, it has created some persistent governance concerns associated with coordination issues between the various national and subnational entities that hold responsibilities for land administration. For foreign firms to undertake investment projects in Croatia, alignment between local and regional spatial plans is of paramount importance given that plans set conditions for economic and building activities and serve as the basis for issuing permits. In practice, disparities in the scope and level of detail of subnational plans as well as overlapping mandates in the assignment of land for business activities often result in delays in licensing procedures for large-scale investment projects (OIE, 2022[39]). An analysis of the provisions of county spatial plans undertaken for Croatia’s recent Spatial Development Strategy showed that some of them are very prescriptive with regard to defining conditions and criteria while others delegate responsibility to municipalities (MPGI, 2020[50]).
Table 3.6. Government bodies responsible for land rights in Croatia
Source: OIE (2022[39]), Guide for the Development and Implementation of Renewable Energy Projects in Croatia, https://oie.hr/wp-content/uploads/2022/02/RESC-EBRD-Guide-for-develop.-impl.-of-RES-projects-in-Croatia.pdf
The quality of spatial planning processes is further undermined by weaknesses in the capacity of local authorities to fulfil their spatial planning obligations, as well as by a lack of clarity and formal procedures for amending municipal plans to accommodate new investment activities (Katurić and Simov, 2021[49]). These weaknesses are reflected in the quality of cadastral and land registries which are often not aligned with the actual state of property rights – in particular regarding municipal and state property –, resulting in significantly prolonged procedures for securing land rights since the status of land plots cannot be determined with certainty (OIE, 2022[39]).
The current fragmented system has serious implications particularly for investment projects in the energy sector due to the different land tenure needs of energy generation technologies. Some renewable energy projects may require direct land acquisition by the investor (e.g. biogas plants) while others may be developed on third parties’ land by securing servitude or the right to build (e.g. wind and solar panel farms) (OIE, 2022[39]). Resolving issues relating to land rights and other location permits is crucial for the bankability of capital-intensive projects since investors are often required to pledge any rights to land as collateral in order to receive debt financing. Securing land rights is also a prerequisite for foreign firms to benefit from incentive schemes enacted by the Croatian Government. Until 2023, a valid location or building permit was required for investors to participate in public auctions for renewable energy projects and benefit from public support provided in the context of the FiT and FiP schemes. A recent law passed by the Croatian government has abolished this requirement, allowing winning bidders to acquire and submit their construction permits after the conclusion of public tenders.
The Government of Croatia could scale up efforts to harmonise spatial planning rules and ensure that the status of land plots can be determined with certainty. Subnational governments could be further supported to effectively coordinate with relevant county authorities and resolve challenges arising from potential overlapping spatial planning rules. To this end, county and municipal authorities could consider at which level the assignment of land tenure rules should be made for certain activities that may require large land areas or technical infrastructure that goes beyond the responsibilities and capacities of a single municipality (e.g. electricity grid connections for renewable energy projects). The Government of Croatia is aware of these challenges and is taking steps to address them. In 2023, the Spatial Planning Act was amended to make the process of developing county and municipal spatial plans more efficient through the digitalisation and e-verification of all the necessary documents, data and procedures. The Ministry of Physical Planning, Construction and State Assets is also planning to establish a comprehensive information system, which will enable better communication of all participants in the process of creating spatial plans.
Access to information regarding land administration and tenure might also be improved. Emphasis should be placed on streamlining information for potential investors through digital means. Croatia’s Recovery and Resilience Plan sets out measures to upgrade the Spatial Planning and State Property Information System (ISPU) and enable the digitisation of procedures related to the preparation and implementation of investment projects, from identifying the localisation of the project, acquiring digital spatial plans, downloading satellite images of land plots, and obtaining the necessary permits (Government of Croatia, 2021[52]). The creation of a digital platform that guides investors through every stage of the process could further facilitate investments.
For large-scale investments of strategic importance for the sustainable development of the Croatian economy, different institutional arrangements could be envisaged too. In 2018, the MESD amended the Act on Renewable Energy Sources and High-Efficiency Cogeneration to create a centralised public tendering procedure for the allocation of state-owned property for investments in renewables. Such an approach could indeed replace the current fragmented system whereby several approval processes are managed by different public bodies involving different timeframes and permit requirements. At the time of writing this Review, the government had not approved an implementing regulation to specify how the public tenders would be organised. The delay has made relevant authorities to temporarily halt any pending procedures regarding state-owned property while in some cases ministries have rejected the issuance of location permits for renewable energy projects planned on state-owned land in anticipation of the new tendering procedures (OIE, 2022[39]). Moving forward, the adoption of an implementing regulation should be prioritised by the government so that the process for the organisation of public tenders can be unlocked.
Croatia also offers investors advantages associated with locating in one of the entrepreneurial zones, i.e. designated land areas for investment activity owned by the Republic of Croatia, local municipalities or private entities. In most of these zones, legal issues with regard to land ownership have been settled and spatial plans adopted specifying the types of economic activity that are permitted (e.g. manufacturing, logistics, production and services activities). Several financial and non-financial benefits are also made available for investment projects located in the zones such as full or partial exemption from county and/or municipal fees and taxes, low-price schemes for land acquisition, financial incentives offered by subnational governments as well as high quality transport, energy and ICT infrastructure (MESD, 2021[53]).
Although entrepreneurial zones have been found to have a positive impact on domestic and foreign investment (Chapter 4 and 5) (Stojčić, Pylak and Alibegović, 2022[54]), interviews conducted with the Croatian Government and local authorities in the municipalities of Osijek and Novska pointed towards challenges arising from the size and quality of certain zones, in particular in less developed regions. According to the MESD, a key concern is the small size of certain zones, which does not allow large-scale investors to set up their operations and benefit from the available support. Other concerns relate to administrative delays in their expansion through the merger of various land plots. Creating areas of such type of good quality and that deliver broad-based development impacts for the local economy can be a difficult task. The government could reflect on the factors needed to ensure a good governance framework. Given that responsibilities for land administration in the zones lies on municipalities, these should be sufficiently supported with the necessary financial and strategic resources to ensure high quality infrastructure. The Entrepreneurial Infrastructure Service of the Internationalisation Directorate could play a coordinating role to ensure that challenges faced by zone authorities are identified and resolved. For instance, beyond the management of the register, the MESD could regularly collect information on available facilities and their characteristics, and help decide about the zones’ current value-added and potential reforms needed.
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Notes
← 1. AmCham has recently called on the government to re-establish the agency and strengthen its role as a single point of contact for potential investors (AmCham, 2021[55]).
← 2. Policy advocacy functions are undertaken by the Competitiveness Sector of the Internationalisation Directorate, which is responsible for consulting with the private sector on the quality of the business environment and other business climate reforms.
← 3. Training on investment promotion and facilitation was provided by the Internationalisation Directorate to regional and local authorities in 2019-2020 as part of the Croatian Government’s 2010 Reform Programme.