This chapter provides an overview of trends and qualities of foreign direct investment (FDI) in Croatia. It first shows how Croatia has improved living conditions and the extent to which trade and investment integration have contributed to it. The chapter then examines FDI trends in more details, including its sectoral distribution and technology-intensity. An assessment of Croatia’s comparative and competitive advantage further supports where the potential for additional FDI may lie. The chapter concludes with a comprehensive overview on how existing FDI and activities of affiliates of foreign multinational enterprises (MNEs) have already contributed to sustainable development in Croatia.
FDI Qualities Review of Croatia
Advancing the Strategic Framework for Investment Promotion and Facilitation
2. Trends and qualities of foreign direct investment in Croatia
Abstract
Summary
Croatia improved living standards substantially over recent decades. Per capita incomes doubled since the mid-1990s, and Croatia reached the status of a high-income economy in 2017. Although FDI plays an increasingly important role, Croatia’s FDI stock corresponds to merely 0.1% of the OECD total and 40% of the average FDI stock in other Central and Eastern European (CEE) countries.1 Croatia is less integrated in global value chains (GVCs) of Western European economies than its neighbouring countries, due to the relatively early accession of several CEE economies to the European Union and the associated outsourcing of Western production to the new member countries. New establishments of foreign-owned businesses (greenfield FDI) are concentrated in construction and services, reflecting Croatia’s specialisation in services – especially tourism and lower technology services such as wholesale and retail trade as well as repair of motor vehicles and real estate activities.
Croatia could aim to further diversify FDI into activities where it has an existing comparative advantage in production and exporting, which would strengthen productivity and competitiveness in these activities and foster sustainable development more broadly. Croatia’s production and export basket covers a wide range of manufacturing products, although measures of revealed comparative advantage (RCA) show that it currently doesn’t have a comparative advantage in most of its exports. Activities that are revealed to have a comparative advantage are on average less complex in production and account for relatively smaller market shares than those in other CEE economies. Beyond diversifying into higher productivity activities, attracting FDI across sub-national regions in Croatia can support country-wide economic development and exploit regional strengths (see Chapters 3 and 4).
Foreign-owned firms represent only 5% of active economic entities in Croatia but they are almost twice as productive as domestic firms and contribute to around 30% of total value-added, 45% of exports and 60% of private expenditures on research and development (R&D). Beyond positive effects on productivity, innovation, and exports, FDI is key for job creation, including for women, and supports the transition to a low carbon economy in Croatia: Foreign firms employ 20% of all registered employees and have on average a higher share of female employees than domestic firms. Although Croatia attracted FDI in labour intensive services, it doesn’t fully capitalise on the potential of FDI to create jobs. The number of jobs created per million of USD invested over recent years is below the CEE average. FDI helped Croatia on its path to a green economy: FDI in the energy sector is increasingly concentrated in renewables and foreign firms steadily improve their energy efficiency. However, compared to domestic peers, foreign firms fall short in environmental expenses and only slightly increased expenses for environmental purposes over the past decade.
Potential for increased integration in global production networks
Croatia experienced substantial economic growth over the past decades, contributing to improving living standards (Figure 2.1). The average Gross Domestic Product (GDP) per capita doubled from USD 7,000 in 1996 to almost USD 15,000 in 2021, on par with the trends seen in CEE economies. Croatia reached high-income status in 2017 but still has significant potential to improve incomes to reach the OECD average. Despite substantial growth in terms of GDP per capita, growth has been volatile over the past decades, mainly due to external economic turbulences. After a period of economic growth from 1999 onwards, GDP growth collapsed after the global financial crisis in 2008 and again after the outbreak of the COVID-19 pandemic in 2020. GDP growth in Croatia largely followed the trend seen in the OECD and other CEE countries, although with deeper recessions than in the OECD and CEE region on average.
Figure 2.1. In recent decades, Croatia experienced a significant rise in living standards
Source: OECD elaboration based on the World Bank (2023[1]).
Growth was sustained by a growing integration in the global economy. Its accession to the World Trade Organisation (WTO) in 2000 as well as to the European Union (EU) in 2013 spurred exports of goods and services over the past two decades (Figure 2.2, Panel A). Croatia is tightly linked to the EU market. In 2021, about two thirds of Croatia’s exports and around three quarters of imports went to or came from EU Member Countries – most notably Italy (13% of exports; 13% of imports), Germany (12% of exports; 15% of imports) and Slovenia (11% of exports, 11% of imports) (Croatian Bureau of Statistics, 2023[2]).
Value added in Croatia is concentrated in services, especially in tourism (Figure 2.2, Panel B). While services generally account for about the same share of value added in the Croatian economy and other CEE countries (54%), tourism contributes far more to value added in Croatia (9%) than in other CEE economies (2%). Conversely, Croatia has a lower value-added share in manufacturing (15%) compared to other CEE economies (21%), pointing to the potential for revamping industrialisation and boosting productivity.
Croatia’s integration in global value chains (GVCs) is less pronounced than the integration of other CEE economies and did not change tremendously between 2000 and 2018. The foreign value-added content of exports captures the use of foreign intermediates in the production of exports thus serving as an informative proxy for the integration of an economy in GVCs (Figure 2.2, Panel C). With 24% of foreign value-added in its exports, Croatia’s backward integration in GVCs is substantially smaller than the integration of other economies in the region which source on average 38% of their export value from foreign suppliers. In 2018, Croatia’s manufacturers with the highest foreign value-added content in their exports were coke and refined petroleum products (52%), other transport equipment (such as e.g. building of ships and boats, air and spacecraft and related machinery) (46%) and basic metals (42%) (OECD, 2022[3]).
On the flip side, and in line with the high relevance of services in the Croatian economy, the domestic value-added content of exports in Croatia is comparably large. Almost two thirds of Croatia’s exports consist of services which typically have a high domestic content. On average, one third of the 76% of domestic value added in exports is driven by foreign final demand – above all tourism, where 73% of value added depends on foreign final demand (OECD, 2022[3]).
Diversifying economic activity and further integrating in GVCs could boost productivity. Croatia’s labour productivity ranks behind the OECD and other CEE economies’ averages. In 2021, Croatia’s GDP per hour worked corresponded to about 90% of the CEE average and 65% of the average of OECD members (Figure 2.2, Panel D). While Croatia’s productivity growth of 15% aligns with the average increase among OECD members, it is less than the average productivity increase of other economies in the region that experienced productivity growth of 26% on average.
Figure 2.2. Croatia can further integrate in global value chains and diversify economic activity
Note: In Panel A, CEE includes Bulgaria, Czechia, Hungary, North Macedonia, Poland, Romania, Serbia, Slovakia, and Slovenia. In Panel B, North Macedonia and Serbia are not covered in CEE. In Panel D, GDP per hour worked is captured in constant 2010 prices PPPs.
Boosting FDI as driver of future growth
FDI has also contributed to improved living standards since the turn of the millennium. During the early 2000s, a wave of privatisations of state-owned enterprises contributed to an increase in the FDI stock until the outbreak of the global financial crises in 2008 (Figure 2.3, Panel A; Bule and Cudina (2020[7])). While Croatia’s stock of FDI was merely 13% of GDP in 2000, it rose to 40% in 2008 and to 59% in 2021 thereby slightly surpassing the OECD aggregate of 56% as well as the average of other CEE economies whose FDI stock accounted for 57% of GDP in 2021 (Figure 2.3, Panel B).
Although Croatia’s stock of FDI relative to GDP is comparable to economies of the OECD and the CEE region, it is far below the average of other economies in absolute terms. By 2021, Croatia’s FDI stock corresponded to only 0.1% of the OECD total and about 40% of the average FDI stock in other CEE countries (OECD, 2023[8]; International Monetary Fund, 2023[9]). Hence, further accumulating FDI and thus productive assets would support economic growth in the future (Iamsiraroj, 2016[10]).
Because of the global financial crisis in 2008, Croatia experienced considerable divestment and thus a decline of the FDI stock in absolute terms. FDI stocks started to recover only in 2015 and FDI reached the pre-2008 crisis levels just recently (Figure 2.3, Panel C). Given the particularly deep recessions experienced by Croatia, the impact on FDI was stronger than in other regions, where FDI stocks just stagnated for some years (CEE) or continued increasing (OECD). Using FDI as a mean to diversify economic activity can thus foster sustainable economic growth and build resilience to external economic shocks.
Slowed attraction of FDI in recent years is also reflected in comparatively low average FDI inflows. Despite an increase in net FDI inflows in absolute terms in 2019 and 2021, FDI inflows as a share of GDP have slowed over the last decade. With average net FDI inflows of 2.4% of GDP between 2011 and 2020, net FDI inflows per GDP in Croatia were clearly lower than the region’s average which amounts to about 5% (Figure 2.3, Panel D). Croatia’s FDI stock built up most intensively in the early 2000s when the country’s average net FDI inflows represented 5% of GDP.
Croatia lost some of its competitive edge to attract FDI in 2004 when some CEE economies– including Poland, Czechia, Hungary, Slovenia, and Slovakia – joined the EU. They benefited from their relatively earlier accession to the EU compared to Croatia and experienced a surge in FDI from Western European economies that offshored some of their manufacturing production to new EU Member States (Bule and Ćudina, 2020[7]; Marin, 2006[11]).Consequently, these countries deepened their integration in international trade and fostered their participation in GVCs.
Figure 2.3. While Croatia’s FDI stock is competitive in relative terms, FDI net inflows did not significantly recover since the global financial crisis
Diversifying into high productivity activities through FDI
The distribution of greenfield FDI in Croatia reflects domestic specialisation patterns but also shows the increasing importance of digital industries and renewables (Figure 2.4). In recent years, Croatia attracted a substantial share of its greenfield FDI not only in activities that already concentrate a lot of value added like construction and services, but also in infrastructure activities related to electricity generation from renewables as well as ICT and internet infrastructure (communications). Over 2017-2021, almost one third of greenfield FDI went into infrastructure i.e. electricity generation from renewables (18%) as well as ICT and internet infrastructure (13%) while 27% was concentrated in construction activities predominantly in real estate (19%) and the tourism industry (8%).
Figure 2.4. Greenfield FDI in Croatia reflect existing specialisation patterns but also the increasing importance of digital industries
Note: This chart shows the distribution of all opened and announced greenfield FDI projects in Croatia from 2017 until 2021 by activity and sector. The inner circle shows how greenfield FDI is split among activities while the outer circle shows how greenfield FDI is distributed across sectors within these activities. Infrastructure activities include electricity generation and ICT & internet infrastructure; Service activities include business services, customer contact centres, headquarters, logistics, distribution & transportation, sales, marketing & support. For industries, chemicals summarise biotechnology, chemicals and pharmaceuticals while hotels and tourism summarises hotels, tourism and entertainment (label adjusted for presentation purposes).
Source: OECD elaboration based on FT fDi Markets (2023[12]).
Foreign investors may enter a country to expand sales in a new market (i.e. market-seeking); to tap into natural resources (resource-seeking), which is often the case in commodity sectors and agribusiness; to achieve efficiency (efficiency-seeking) by reducing costs (e.g. labour costs) or by seizing new local assets in the form of technology, innovation and related skills (i.e. asset-seeking) (OECD, 2023[13]). Relatively small FDI inflows into tradable manufacturing (15%) and large proportions of sales on the domestic market, particularly in services, suggest that foreign investors enter Croatia, at least partially, to seek the Croatian market.2
Other CEE economies attract more FDI in tradable manufacturing than Croatia mirroring their tight integration in manufacturing GVCs and a strong motive of investors to seek efficiency gains in these economies. In recent years, greenfield FDI in other CEE economies was more concentrated in manufacturing like the automotive industry as well as services such as logistics whereas Croatia’s greenfield FDI inflows were more concentrated in infrastructure, the construction of hotels as well as software and IT services (Figure 2.5).
Figure 2.5. Compared to other CEE economies, greenfield FDI in Croatia is more concentrated in construction and infrastructure as well as software and IT
Note: This chart shows the concentration of opened and announced greenfield FDI in Croatia versus other CEE economies across different activities (infrastructure, manufacturing, construction, services, and R&D) and sectors. For presentation purposes, only sectors and activities that account for at least 1% of greenfield FDI in Croatia or CEE economies are shown. Differences are computed as sectoral greenfield FDI shares in CEE economies subtracted from sectoral greenfield FDI shares in Croatia. Differences are expressed in %points. CEE includes Bulgaria, Czechia, Hungary, North Macedonia, Poland, Romania, Serbia, Slovakia, and Slovenia.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
FDI in ICT manufacturing and ICT services offers the potential to unlock new growth and productivity opportunities and attract more investment in digital-intensive industries in the future. Following an amendment to the Investment Promotion Act in 2015, that lowered the minimum investment threshold from 150,000 to 50,000 EUR while simultaneously increasing the minimum threshold of new jobs created from 5 to 10, Croatia experienced steady growth in the stock of greenfield FDI in ICT-related sectors. Over 2015-21, the stock of greenfield FDI in the Croatian ICT industry grew by 22% more than during the years prior to the policy change suggesting that investment promotion policies can contribute to investment momentum in target sectors. Chapter 5 discusses the use, design, and effectiveness of investment incentives in greater detail.
Figure 2.6. Greenfield FDI in Croatia’s ICT-related industries steadily increased following an amendment of the Investment Promotion Act in 2015
Note: This chart shows the increase of the cumulated greenfield FDI stock of opened and announced projects in ICT-related sectors in Croatia between 2005 and 2021.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
Box 2.1. Classification of economic activities
The successful diffusion of FDI benefits hinges on the attraction of FDI into sectors that have sufficient domestic absorptive capacities and the potential to further diffuse advanced FDI technologies, knowledge, and best practises. Given the relevance of productivity and innovation spillovers, the sectoral analysis in this chapter is based on technology‑intensity. As such, most sectoral analyses focus on four main sectoral groupings based on R&D-intensity, which are adapted from Galindo-Rueda and Verger (2016[14]): higher technology manufacturing, lower technology manufacturing, higher technology services and lower technology services. R&D-intensity is measured by the ratio of business R&D expenditure relative to gross value added in each industry covered in a given group. Table 2.1 lists industries based on ISIC Rev. 4 two-digit sectors, which is the classification applied for most of the data used (e.g. OECD and BACI), as well as sectors from fDi Markets. The classification has the caveat that R&D-intensity is an imperfect measure of innovation and innovation potential across industries. Not all firms that are successful at developing or implementing innovation are necessarily R&D performers. Many of these firms are successful adopters of technology that they have not developed. Measuring R&D intensity or embedded R&D in their purchases may not effectively characterise the innovative performance of firms or industries. Other OECD indicators measure skill intensity, patenting activities and innovation by industries that facilitate a more refined description of the overall knowledge intensity in different economic activities, although these measures are not always widely available across a majority of OECD and partner economies (OECD, 2015[15]). Another caveat of this classification is related to the fact that it is not entire sectors that involve either higher or lower technologies, but it is specific activities or segments within these sectors that involve different technology intensities. This caveat needs to be considered for any conclusions made.
Table 2.1. Sectoral grouping based on R&D-intensity
Note: Mining and extraction (Mining and quarrying; Coke and refined petroleum products); Infrastructure (Electricity, gas, water supply, sewerage, waste and remediation services; Telecommunications) and other services (Public administration and defence; Compulsory social security; Education; Human health and social work) are not classified in these groups as they are either highly specialised and would require a more focused analysis, or their role/potential for FDI spillovers is limited.
FDI can generate knowledge and technology spillovers to the host economy. For example, by implementing foreign technology in subsidiaries abroad, foreign multinational enterprises (MNEs) contribute to the diffusion of tacit and formal knowledge as well as technology to workers and local firms engaging with foreign affiliates (OECD, 2023[13]). This diffusion is likely to be more important for investments in manufacturing and services sectors, which use higher technologies more intensively and are closely integrated in GVCs such as the automotive sector or software and other IT services (Criscuolo and Timmis, 2018[16]; Timmer et al., 2015[17]).
Using a standard classification of lower and higher technology sectors reveals that, in Croatia, almost half of greenfield FDI in manufacturing and services is in higher technology intensity activities (Box 1.2). These sectors attracted in total 42% of opened and announced greenfield FDI projects since 2017 (Figure 2.7). Software and IT services as well as communications made up for the largest inflows in higher technology services – each accounting for almost 14%. In manufacturing, automotives attracted the largest share of greenfield FDI inflows (4%) followed by consumer products, industrial equipment, and aerospace (around 2-3% respectively).
Figure 2.7. Higher technology services received the largest share of greenfield FDI in Croatia
Note: The chart shows the distribution of open and announced greenfield FDI projects across different sector aggregates measured as percentage of total capital expenditure values per sector aggregate. See Box 2.1 for an overview of the classification of sectors and activities in higher and lower technology manufacturing and services. Infrastructure refers to electricity generation from renewables and coal, oil & gas; Construction refers to construction activities mainly in the real estate and hotel sector. Other services (healthcare as well as space and defence), mining and extraction each receiving less than 1% of greenfield FDI in Croatia and other CEE economies are not shown for presentation purposes.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
Building on existing comparative advantages
FDI into high value-added activities and sectors with growing markets can support productivity, job creation and economic growth. Croatia can capitalise on existing advantages in the production and export of certain products to further develop key industries and to foster sustainable development. Croatia’s production and export basket covers a wide range of manufactured products, although Croatia currently doesn’t have a comparative advantage in most of its exports (Figure 2.8). Analysing more than 1,000 manufacturing products over two time periods from 2007-2013 and 2014-2020 allows to distinguish if Croatia has a traditional revealed comparative advantage (RCA) that is persisting over both time periods, whether an RCA is emerging in the second time period, or if Croatia has a declining or marginal RCA implying that it lost its RCA in recent years or that Croatia didn’t have an RCA in neither of the two periods (Box 2.2).
Box 2.2. Assessing Croatia’s competitiveness
Identification of Croatia’s revealed comparative advantage: methodology and data
The revealed comparative advantage (RCA) measures the relative advantage or disadvantage of a country in a given sector, as evidenced by its trade flows (Feenstra, 2016[18]).
Croatia has an RCA in a good if it exports relatively more of that good than the rest of the world. Tracing the RCA over time allows to identify if an RCA of the Croatian economy persists, emerges, or declines. Accordingly, the analysis assigns RCA outcomes of goods to four different categories depending on the development of respective RCA developments over 2007-2013 and 2014-2020, respectively:
Goods with a traditional RCA are those in which Croatia has had an RCA in at least 5 years in both 7-year periods used in the analysis. Consequently, goods with a traditional RCA are those in which Croatia has traditionally had a comparative advantage in exports.
Goods with an emerging RCA are those in which Croatia has gained a comparative advantage more recently; that is, Croatian producers had an RCA in at least 5 years in 2014-2020, but in less than 5 years in 2007-2013. Consequently, goods with an emerging RCA can be considered as potential new growth pools.
Goods with a declining RCA are those where Croatia has lost its comparative advantage in the last decade. These goods had a comparative advantage in the past but experienced an RCA in less than 5 years in 2014-20.
Goods with a marginal RCA are those that did not have an RCA in at least 5 years in both periods. These sectors may therefore be further away from gaining a competitive advantage in Croatia.
The analysis distinguishes a total of 1,158 4-digit HS products (HS 2007) that map into sixteen manufacturing sectors (Gaulier and Zignago, 2010[19]).
Evaluation of revealed comparative advantages with respect to product complexity and market potential
To evaluate the quality of Croatia’s RCAs, the analysis focuses on the product complexity, i.e. knowledge intensity, of goods in which Croatia has a traditional or emerging RCA as well as on global market shares of these products.
The economic complexity of products captures “the amount of diversity of know-how required to make a product” and is calculated based on “how many other countries can produce the product and the economic complexity of those countries”. The product complexity of exports has empirically been proven to be a good predictor for future economic growth of countries and can thus be used to assess to what extent Croatia is an effective exporter of goods that add higher value and support higher wages (Hausmann et al., 2013[20]; The Growth Lab at Harvard University, 2023[21]).
Market potentials are assessed by considering the global market shares of Croatia’s export products in which manufacturers have a traditional or emerging RCA. While large market shares can imply fierce competition that make it difficult for manufacturers to expand their activity, they are also indicative for sales potentials and productivity gains.
Out of the scope of about 1,150 analysed products, Croatian manufacturers had a traditional comparative advantage in 18% of goods, an emerging comparative advantage in 7% of goods and a declining comparative advantage in 3% of goods. Croatian manufacturers have no comparative advantage in 72% of analysed goods. Croatia has generally fewer products with a traditional or emerging RCA (25%) compared to other economies in the region like Czechia (29%) or Poland (34%) but more products with a traditional or emerging RCA than other CEE economies like for example North Macedonia (10%) or Slovakia (16%).
Figure 2.8. Croatia has a competitive number of products with a revealed comparative advantage
Note: This chart shows the number of products in which different CEE economies have an RCA. See Box 2.1 for details on methodology and data.
Source: OECD elaboration based on international trade data from BACI (Gaulier and Zignago, 2010[19]).
Both Croatia’s traditional and emerging RCAs are predominantly in lower technology manufacturing. While lower technology manufacturing products account for about two thirds of Croatia’s RCA products, lower technology products make up for around half of RCA products of less advanced CEE economies and for 38% of products of advanced CEE economies (Table 2.2). Within lower technology manufacturing, Croatia has more products with a traditional or emerging comparative advantage than both advanced and less advanced CEE economies in the wood industry (56%), paper products and printing (46%) as well as in food products (36%). Although advanced CEE economies are generally more dominant in higher technology sectors, Croatia has more products with a traditional or emerging RCA in other transport equipment (40%) and pharmaceuticals (30%).
Advanced CEE economies are more established in manufacturing and have on average more products with a traditional comparative advantage than Croatia, both in lower and higher technology manufacturing. However, compared to the average of CEE economies, Croatia has more products with an emerging RCA in all lower technology manufacturing sectors and also in a few higher technology manufacturing industries like pharmaceuticals, machinery and equipment as well as chemicals.
Table 2.2. Croatia’s revealed comparative advantages are most concentrated in lower technology manufacturing
% of products per industry in which CEE economies have a traditional or emerging RCA, 2007-2020
Note: This chart shows the share of products per sector in which Croatia and other CEE economies have a traditional or emerging RCA. Less advanced CEE includes the following upper-middle income economies: Bulgaria, North Macedonia, Romania, and Serbia. Advanced CEE includes the following high-income economies: Czechia, Hungary, Poland, Slovakia, and Slovenia. Income classifications are based on the World Bank (2022) for 2021/22.
Source: OECD elaboration based on international trade data from BACI (Gaulier and Zignago, 2010[19]).
The product complexity or knowledge intensity of a country’s exports as a predictor for future economic growth in conjunction with world market shares of exported goods are insightful indicators of competitiveness regarding the potential for sustainable economic development (Box 2.2). Croatian manufacturers produce and export a comparably high number of products with a traditional or emerging comparative advantage, but these products are on average less complex and account for relatively smaller market shares than those of competitors from other CEE economies.
Although Croatian products with a traditional or emerging RCA are on average less complex than RCA products from their competitors in the region, there are signs that Croatian manufacturers have started to catch up (Figure 2.9). While large complexity gaps exist between Croatia and other advanced CEE economies for products with a traditional RCA in both higher and lower technology manufacturing, the gap for products with an emerging RCA is narrowing, suggesting that Croatian manufacturers are expanding their capacity to produce more sophisticated goods in recent years.
RCAs of Croatian manufacturers are concentrated in relatively small markets which can have different effects (Figure 2.9). Croatia's emerging RCAs in higher technology intensive manufacturing are focused on products with comparatively lower global market shares than other CEE economies. On the one hand, this pattern may imply an unfavorable competitive position on the world market due to the limited absorption capacity for exports, but on the other hand, it may also present an opportunity for Croatian manufacturers to develop a strong competitive position in certain specialised products.
Based on its current know-how in the production of certain goods, Croatia can further expand and intensify its export portfolio of manufacturing goods to uncover growth opportunities. Studies from the Growth lab at Harvard University on economic complexity identify products that require knowledge that is close to the existing know-how in a country and are thus feasible to be produced and exported more intensely. Within higher technology manufacturing, opportunities are identified especially for the machinery industry (for example, lifting machinery or pumps for liquids) or for the transport industry (for example, parts of motor vehicles and vehicle bodies) while opportunities are identified for lower technology manufacturing for textiles (for example, textile articles for technical use) or for the metals industry (for example, flat rolled products of other alloy steel) (The Growth Lab at Harvard University, 2019[22]).
Figure 2.9. Croatia has RCAs in products that are on average less complex and account for relatively smaller market shares than those of other CEE economies
Note: This chart shows the median, i.e. the midpoint, as well as the range of complexity and market shares of products in which Croatia and countries of reference groups have a traditional or emerging RCA. Outliers above and beyond the upper and lower quartiles, i.e. bottom and top 25% of observations, are left out. Product complexity values are taken from the Growth Lab at Harvard University for 2019 and are normalized to range between 0 (least complex) to 1 (most complex). Global product market shares are calculated based on international trade data from the BACI database. Less advanced CEE refers to upper-middle income economies in the region: Bulgaria, North Macedonia, Romania, and Serbia. Advanced CEE refers to high-income economies in the region: Czechia, Hungary, Poland, Slovakia, and Slovenia. Income classifications are based on the World Bank (2023[23]) for 2021/22.
Source: OECD elaboration based on international trade data from BACI (Gaulier and Zignago, 2010[19]) and the Growth Lab at Harvard University (2019[22]).
Leveraging higher productivity and innovation performance of foreign firms
While FDI can support diversification into high productivity activities that build on existing comparative strengths, foreign firms in any sector contribute to higher productivity and innovation in Croatia. Foreign firms – as compared to domestic ones – contribute more than proportionally to various metrics of Croatia’s economic performance (Table 2.3). In 2021, there were about 100,000 active firms in Croatia of which around 95,000 firms were domestic micro firms with less than or around 10 employees while 5,000 firms were foreign owned.3 Although foreign firms represent merely 5% of the total number of active firms in Croatia, they account for almost a third of value added (28%) and almost half of exports (45%).4 On the domestic market, foreign firms have a smaller market share than domestic firms. Yet, the majority of foreign firm’s sales is sold locally (68%).
FDI can contribute to boost innovative capacity in Croatia. Although Croatia's spending on research and development (R&D) as a share of GDP is in line with R&D spending in other CEE economies, Croatia spends less in R&D than the OECD average. In 2021, Croatia and other CEE economies spent on average about 1.2% of GDP on R&D, while OECD members invested about 2.2% (OECD calculation based on World Bank (World Bank, 2023[1])). Croatia’s innovative capacity benefits from the presence of foreign firms. While high R&D intensive manufacturing counts far less foreign than domestic firms (49 vs. 407), foreign firms account for more than half (62%) of private R&D expenditure in Croatia (Table 2.3). Attracting FDI in high R&D intensive sectors may thus not only help generate knowledge and technology spillovers to other sectors but also spur innovation in Croatia.
Table 2.3. Foreign owned firms are important drivers of economic activity and innovation in Croatia
Descriptive firm level statistics based on FINA, 2021
Note: Apart from the number of firms and the number of employees, total values are represented in millions of kuna. A firm is classified as foreign owned if the share of foreign ownership exceeds 10%.
Source: OECD elaboration based on census data from the Financial Agency (FINA) of Croatia.
Labour productivity in Croatia hinges substantially on the presence of foreign firms. In recent years, foreign firms’ labour productivity exceeded the labour productivity of domestic firms by about 90% (Figure 2.10 and OECD (2022[24])).5 Relatively high premia in non-tradable services and relatively low premia in tradable manufacturing indicate that international competition in export-oriented industries increases the efficiency of firms in these industries and leads to lower productivity differentials between foreign and domestic firms (Bule and Ćudina, 2020[7]). FDI in export oriented, higher technology industries can thus leverage competitiveness by raising the productivity of the Croatian export sector and to foster GVC participation and the integration in international trade.
Figure 2.10. Foreign owned firms outperform domestic competitors in terms of labour productivity
Note: This chart presents the foreign ownership premium of labour productivity across sectors (evaluated at the median productivity of foreign and domestic firms). The premium is computed as ((median labour productivity of foreign firms / median labour productivity of domestic firms) -1)*100. A foreign ownership premium above 0 thus indicates that foreign firms are more productive than domestic peers. Original NACE 4-digit industries were converted into ISIC rev. 4 industries and classified into lower and higher technology intensive sectors as described in Box 2.1.
Source: OECD’s elaboration based on census data from the Financial Agency (FINA) of Croatia.
Supporting sustainable development through FDI
Beyond its role for growth, GVC integration, productivity, and innovation, FDI can promote sustainable development on labour markets and can support gender equality and decarbonisation in Croatia. Despite the improvement of living standards in recent decades, Croatia’s performance in terms of labour market conditions, gender equality and decarbonisation is mixed.
FDI creates jobs in Croatia but contributes to income inequality among workers as foreign firms pay higher wages than domestic firms
Labour market conditions in Croatia are less favourable than in the OECD on average and pose challenges to sustainable development. There are gaps of about 10 percentage points in both labour force participation and educational attainment levels between Croatia and OECD members (OECD calculation based on the World Bank (2023[1]) and ILO (2022[25])). Ongoing emigration and the demographic change risk to further tighten labour market conditions in Croatia. In 2021, net emigration amounted to -4,512 and the population shrank by almost 400,000 inhabitants over the past decade (Croatian Bureau of Statistics, 2022[26]; World Bank, 2023[1]). Attracting FDI into sectors and activities that create quality jobs and pay competitive wages can thus help tackling brain drain, i.e., the emigration of well-educated, young individuals, by promoting employment and career advancement opportunities domestically (see also Chapter 3).
Greenfield FDI created jobs in Croatia over recent years although other CEE economies were more successful in exploiting job creation opportunities through investment. Between 2017 and 2021, greenfield FDI created on average 3.5 jobs per USD million invested in Croatia – half of the job creation intensity of less advanced CEE economies (8) and slightly less than the job creation intensity of investments in advanced CEE economies (5) (Figure 2.11, Panel A).
Differences in the job creation intensity across countries are linked to the structure of FDI inflows. With a high concentration of investment in infrastructure like renewable energy as well as ICT and internet infrastructure, which require relatively fewer human resources, Croatia harvests fewer direct jobs from investment than other, especially less advanced, CEE economies (Figure 2.11, Panel B).
Figure 2.11. FDI created relatively less jobs in Croatia than in other CEE economies
Note: This chart shows the number of direct jobs created per invested million USD by all opened and announced greenfield projects in Croatia and other CEE economies between 2017 and 2021. Less advanced CEE refers to upper-middle income economies in the region: Bulgaria, North Macedonia, Romania, and Serbia. Advanced CEE refers to high-income economies in the region: Czechia, Hungary, Poland, Slovakia, and Slovenia. Income classifications are based on World Bank (2023[23]) for 2021/22.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
Although wages in Croatia are comparable to levels in other CEE economies, they did not grow substantially over the past decade. Between 2012 and 2021, Croatian wages increased by 19%, while they increased by 68% on average in other CEE economies (Figure 2.12, Panel A).
FDI can contribute to sustained wage growth in Croatia but can also exacerbate domestic income inequalities (OECD, 2022[27]). Productivity differentials between domestic and foreign firms typically translate into higher wages paid by foreign firms. Even though productivity advantages of foreign firms in Croatia translate into higher wages for employees to a certain extent, there is still a gap between the productivity and wage premia in the Croatian economy (Figure 2.12, Panel B). While differences in productivity and wage premia of Croatia are comparable to the OECD average, other CEE economies like Slovenia and Slovakia have neglectable gaps between productivity and wage premia of foreign firms.
Figure 2.12. Productivity differentials between domestic and foreign firms in Croatia translate into higher wages paid by foreign firms
Note: Panel A shows salaries and wages of CEE economies in 2012 and 2021. Panel B shows wage and productivity premia of foreign firms in CEE economies and OECD members. Wage and productivity premia of foreign firms are computed by dividing average wages (productivity) of foreign firms by average wages of domestic firms. Premia above zero imply that foreign firms pay higher wages (are more productive) than domestic firms.
Source: OECD elaboration based on Eurostat (2022[28]), World Bank Enterprise Surveys (2022[29]) and census data from the Financial Agency (FINA) of Croatia.
Foreign firms create employment opportunities for women
Croatia performs comparatively well in terms of gender equality and can build on existing advantages to further improve labour market conditions for female employees. Similar to other CEE economies, the Croatian labour market is shaped by communist labour practices that aimed to create equal opportunities for women and men in education and the labour market in order to accelerate industrialisation (ILO, 2018[30]). While the labour force participation of women in Croatia aligns with the OECD average, wage differentials between women and men are lower on the Croatian labour market than in OECD countries. In Croatia, women earn on average around 8% less than men whereas the wage gap amounts to an average of 13% in OECD countries (Figure 2.11).
Foreign firms create important employment opportunities for women in Croatia – especially in sectors where women would otherwise be under-represented. While employment differentials among domestic and foreign firms are small at the aggregate level, there is evidence that foreign firms employ significantly more women in ICT services and R&D intensive industries than domestic competitors (Figure 2.13, Panel A). Relatively high average wages in these sectors, with an extra wage premium paid by foreign companies, can further reduce gender pay gaps and thus foster more equitable pay in Croatia.
FDI supports career advancement of women but does not promote female participation in ownership. Considering career advancement by the percentage of firms with a female top manager, Croatia performs relatively well compared to the OECD average as well as to other CEE economies. In Croatia, women are represented in top management in about 30% of foreign and 27% of domestic companies, while in OECD countries only 16% of foreign and 18% of domestic companies have a female top manager (Figure 2.13, Panel B). However, large gaps among foreign and domestic firms persist with respect to the participation of women in firm ownership. Although one third of domestic companies report that women are involved in ownership, women are involved in ownership in only 17 % of foreign companies (Figure 2.13, Panel C).
Figure 2.13. Women benefit from employment and career advancement opportunities in foreign firms but are merely involved in ownership
Source: OECD elaboration based on census data from the Financial Agency (FINA) of Croatia and World Bank Enterprise Surveys (2022[29]).
FDI supports sustainable resource management and the expansion of the renewable energy sector in Croatia
The transition of Croatia into a carbon-free and environmentally sustainable economy is on its way but there is room for further investment into green technology and renewable energy generation. Although carbon emissions in the Croatian economy is relatively low, Croatia has higher levels of air pollution and produces less electricity from renewable sources than OECD countries (OECD calculation based on World Bank (2023[1]) and OECD (2023[31])). Attracting FDI in renewables and incetivising the use of green technologies offer Croatia the opportunity to tap into sustainable industrial growth potential and to drive forward the decarbonisation of the economy. Chapter 3 discusses opportunities for FDI in renewables in Croatia in more detail.
Foreign firms are important drivers of energy efficiency in Croatia and contribute to a substantial share of environmental expenses. Despite the relatively small number of foreign firms in the Croatian economy, foreign companies accounted for about 30% of private environmental expenses in Croatia between 2008 and 2021 (Figure 2.14, Panel A). Moreover, foreign firms contribute to energy efficiency of the Croatian economy implying opportunities for technology and knowledge spillovers to local entities. In the last decade, energy efficiency, i.e. the value added per energy use, has increased by about 20% for domestic companies and 45% for foreign companies, so foreign companies play an important role in the efficient use of resources in Croatia.
Figure 2.14. Foreign owned firms perform well in terms of energy efficiency but spend substantially less on environmental protection
Note: Panel A shows energy efficiency measured as value added over energy costs at the firm level (median among all firms). Panel B captures environmental expenses of domestic and foreign firms in Croatia measured as percentage of total environmental expenses.
Source: OECD elaboration based on the Financial Agency (FINA) of Croatia.
Croatia can further capitalise on investments in renewable energies. Greenfield FDI in renewables did not only became more important in the Croatian energy sector but also in total greenfield FDI inflows. While renewables accounted for 6% of all opened and announced greenfield FDI between 2012 and 2016, the share rose to 18% between 2017 and 2021 when almost all greenfield FDI in the Croatian energy sector (98%) went into renewables (Figure 2.15). Conversely, the share of fossil fuels in Croatia’s total greenfield FDI inflows declined from 25% to 0.3% in the same time span. In other CEE economies, renewable energy sources also have the largest share of FDI in the energy sector, but fossil fuels still play a more important role than in Croatia, accounting for around 30% and 20% of FDI in the energy sector in the advanced and less advanced CEE economies, respectively.
Figure 2.15. Greenfield FDI in renewables has picked up in recent years
Note: This chart shows the share of fossil fuels (coal, oil and gas) and renewables in all opened and announced greenfield FDI projects.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
Even though Croatia succeeded in attracting more greenfield FDI in renewables over the past few years, Croatia is not fully exploiting the investment potential of its renewable industry. Over the past decade, Croatia’s greenfield FDI inflows in renewables increased by 13% but are still much smaller than greenfield investment in renewables in other CEE economies. Even considering the economic size of countries, the average value of announced and opened greenfield FDI projects in renewable energy in other CEE economies is almost four to five times higher than the total value of greenfield FDI projects in renewable energy in Croatia (Figure 2.16). EU members, especially Austria and Germany, as well as China are the largest investors in renewable energy in Croatia, with 44%6 and 42% respectively. While a similar pattern holds for advanced CEE economies, less advanced CEE economies also receive almost one-third of their greenfield FDI from Canada, the UK, and the US.
Figure 2.16. EU members and China are the largest investors in renewable energy in Croatia
Note: This chart shows the value of all opened and announced greenfield FDI projects in renewables in Croatia and other CEE economies. The chart is based on total capital expenditure values weighted by average GDP before aggregating flows in different country groups. Less advanced CEE includes the following upper-middle income economies: Bulgaria, North Macedonia, Romania, and Serbia. Advanced CEE includes the following high-income economies: Czechia, Hungary, Poland, Slovakia, and Slovenia.
Source: OECD elaboration based on FT fDi Markets (2023[12]).
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Notes
← 1. CEE economies that are covered in the analysis are Bulgaria, Czechia, Hungary, North Macedonia, Poland, Romania, Serbia, Slovakia, and Slovenia.
← 2. In 2021, domestic sales of foreign firms in Croatia accounted for 68% of total sales (OECD calculation based on census data from the Financial Agency (FINA) of Croatia).
← 3. A firm is defined as “active” if it has positive sales and labour costs in a given year.
← 4. A firm is defined as “foreign firm” if 10% or more are owned by a foreign investor.
← 5. The productivity premium of the overall economy aligns with results from the literature where foreign productivity premia are calculated taking into account differences in the distribution of firms across sectors, firm sizes etc. For example, Bule and Cudina find a productivity premium of 87.8 which is close to the unconditional labour productivity premium of 90 presented in Figure 1.10.
← 6. Austria and Germany accounted for about 12% of opened and announced greenfield FDI projects in Croatia between 2017 and 2021.