This chapter examines investment trends and policies in Croatia at the subnational level and how policy action can promote sustainable investment in regions. The first section examines regional FDI disparities and the strategic context for FDI in support of regional development. The other sections review strategies, policies and institutions related to investment and regional development. The chapter provides policy recommendations that can guide the government of Croatia in the setting up of coordination mechanisms for regional and national investment promotion and facilitation.
FDI Qualities Review of Croatia
Advancing the Strategic Framework for Investment Promotion and Facilitation
4. Harnessing investment for regional development
Abstract
Summary and policy recommendations
Foreign investment significantly contributes to sustainable development in Croatia (Chapter 2), but its impact is uneven within the country, potentially taking a toll on inclusiveness. FDI is concentrated in the Adriatic and north-western regions, particularly in the capital city of Zagreb, Istria, Primorje-Gorski Kotar and Split-Dalmatia. Eastern Croatia has attracted less FDI: Pannonian Croatia concentrates only 3% of the national FDI stock, reflecting its lower business density compared to other regions. Foreign firms perform better compared to domestic firms in all parts of Croatia, especially in terms of labour productivity, but the positive impact of FDI is stronger in Zagreb and in the Northern region, as companies with R&D activities are concentrated in larger cities. The impact of FDI on job creation is also uneven. One million of greenfield FDI in Croatia generates around 4 direct jobs per million USD invested, but this varies by a factor of two between Zagreb (6 jobs) and Pannonian Croatia (3 jobs). Disparities in FDI impact on jobs are largely driven by sectoral distributions, skills availability (or their shortages) and R&D activity.
Croatia could better leverage FDI to support balanced regional development. One objective of the Investment Promotion Act is regional development, but there is no dedicated investment promotion strategy with specific goals and place-based policies, beyond the Regional Aid Map, on how to leverage FDI in support of regional development. All national investment promotion strategies of OECD countries that are EU Members have a regional dimension and many developed their regional convergence plans with FDI attraction as a core component. A challenge for Croatia is to set the strategy cursor to the suitable subnational level. Most of the 20 counties and 555 local governments (428 municipalities and 127 cities) are geographically or economically too small for strategic planning on investment, and attractiveness factors such as business density, skilled labour and local supply chains hardly follow their administrative borders. On the other hand, Croatia’s four larger regions could develop attractive FDI value propositions aligned with their distinct priorities. Large regions lack the administrative setting for policy design and implementation, however, although they could rely on institutions operating at the local or county level.
The multi-layered policy and institutional framework on investment promotion became increasingly more diffused in a decentralised setting with fragmented subnational bodies, and where traditional IPA functions were transferred in 2019 into a department of a Ministry (Chapter 3) – the Internationalisation Directorate of the Ministry of Economy and Sustainable Development (MESD). At the national level, the Directorate recognises regional development as a prime concern but not to the same extent as IPAs of OECD countries, which often lead investment promotion at the subnational level. The Ministry of Regional Development and EU Funds (MRDEUF) is also involved in policies at the intersection of FDI and regional development. It oversees the European Structural and Investment Funds (ESIF) and the Integrated Territorial Investments (ITIs) of the EU Cohesion Policy, which shape regional development policies and orient EU funds to specific sectors or activities to unleash regional competitiveness. The MRDEUF also coordinates the recently established Industrial Transition Plans for the Adriatic, Pannonian and North Croatia regions, which aim to support the development of regional value chains through EU-funded financing instruments. Some ambiguity exists on the role of each ministry in overseeing or coordinating investment promotion at the subnational level.
Policies of the MESD’s Internationalisation Directorate to promote FDI in support of regional development include typical instruments to influence investors’ location decisions such as improving the image of regions as attractive investment destinations and providing tax incentives according to the Regional Aid Map (Chapter 5). Further evidence on the impact of incentives in attracting FDI that creates high-wage jobs in less developed regions and help reduce brain drain is needed. The Directorate relies less on investment generation to win FDI projects to less developed regions, in contrast with OECD national IPAs, but provide FDI-related intelligence to subnational bodies. It is reasonable that the Directorate does not go beyond typical investment promotion efforts to also consider talent attraction as a way to promote FDI in less populated areas, but, with the new policy of facilitating foreigners’ entry, it could consider how investment promotion strategy could support broader goals of retaining youth from migrating.
At the subnational level, important policies to attract and facilitate investment are the Entrepreneurial Zones (EZ) and Entrepreneurial Support Infrastructure (ESI), which are established and run by subnational governments with administrative support from the MESD’s Internationalisation Directorate. The network of EZs is effective in attracting foreign projects but creates little spatial redistribution and spillovers beyond zones’ nearby urban areas. Local and county development agencies – one type of ESI entity under the Act on Improving Entrepreneurial Infrastructure – have, in principle, the mandate to promote investment among several responsibilities. There is a plethora of county and local development agencies, however, and their engagement on investment promotion is unclear; in 2018 some or all of them started operating under the Act on Regional Development, generating confusion on what subnational body, if any, has the mandate over investment promotion and facilitation.
Clarifying mandates across tiers of governments should be Croatia’s first step to improve policy coherence and coordination on investment promotion and regional development. The MESD’s Internationalisation Directorate has good but only informal bilateral relationships with subnational governments that typically cover business establishment support such as land availability. Notwithstanding their effectiveness, informal coordination mechanisms are not suited to address holistic and strategic policy issues on investment promotion and regional development that should require collective agreements. These issues range from strategy design, sectoral targeting and operating a pipeline of investment projects to jointly agreeing on common and harmonised approaches on specific investment facilitation aspects.
Policy recommendations
Equip the planned National Plan on Investment Promotion with a regional pillar, in consultation with relevant subnational entities. The pillar sets FDI targets based on regional priorities and strengths, identifies investment promotion efforts, and clarifies the tasks of national and subnational entities and related coordination mechanisms. The pillar must consider investment promotion at the subnational level as a mutual responsibility of different ministries and levels of government. It should be aligned with the national strategy on regional development, subnational development plans, and the EU Cohesion Policy priorities.
Integrate the wide range of place-sensitive policies in the regional pillar of the investment promotion strategy, beyond typical investment promotion efforts, to make FDI work for regional development. Lagging regions lacking economic and population density could further reinforce their institutions and invest in human capital, while denser lagging areas could benefit from investments in trade logistics to be better integrated with dynamic external markets.
Set the appropriate subnational level for the regional pillar of the investment promotion strategy to overcome fragmented planning. Croatia’s four large regions allow to consider broad regional specificities while still offering attractive FDI value propositions. Should Croatia opt for this level, then the pillar should be backed by all counties to ensure clear and unified messages, and commitments on implementing it within their jurisdiction, in cooperation with the counties of their region. Croatia should also consider cities’ ITIs as one relevant unit for strategic planning on FDI to harness Croatia’s largest cities as poles of regional attractiveness.
Embed FDI attraction priorities in relevant County Development Strategies, Urban Areas Development Strategies and the Plans for Industrial Transition of the three NUTS2 regions. Including a regional pillar in the National Plan on Investment Promotion is not sufficient in a decentralised setting where the central government’s ability to attract FDI depends on regions taking planned actions to improve their attractiveness. Subnational governments should assess how their development plans can better leverage FDI to achieve their goals and identify what local improvements will help attracting the FDI needed to reach these goals, as well as broader investment reforms required at the national level.
Consider revising the legislative framework to clarify which subnational bodies have the mandate to promote investment. The Act on Improving Entrepreneurial Infrastructure refers to local and county development agencies, creating confusion and overlap with bodies of the same name operating under the Act on Regional Development. The Acts should be aligned and clarify which entities carry investment promotion and facilitation mandates. Responsibilities should be balanced across levels of government, adequately funded, explicit, and mutually understood for all actors. This will also help clarify which bodies are part of the Integral Entrepreneurial Infrastructure Register (IEIR) and better assess their impact. The Act on Improving Entrepreneurial Infrastructure could include provisions on monitoring and evaluation.
Clarify responsibilities and strengthen cooperation at the central level. The Investment Sector of the MESD’s Internationalisation Directorate promotes Croatia as an FDI destination while the Incentives and Entrepreneurial Infrastructure Sector is tasked with improving the investment climate for balanced regional development by supporting the ESI network. Close coordination and joint planning between the two Sectors are crucial (see also Chapter 3). Overlapping mandates of the MESD and the MRDEUF would be partly overcome by clarifying if subnational bodies responsible for investment promotion belong to the ESI framework or the Act on Regional Development. Aligning the National Plan on Investment Promotion and the ITIs is another way to nurture strategic cooperation between the two ministries.
Develop coordination mechanisms to address multi-level investment promotion challenges. The MESD’s Internationalisation Directorate could develop with relevant national and subnational entities a cooperation agreement, protocol or guidelines that describe the rules of engagement of each actor with a clear distribution of tasks at different stages of the investment process. This can be a “light-touch” way to coordinate investment promotion and facilitation efforts across tiers of government and to collectively adopt, when reasonable, unified approaches, for instance on non-disclosure agreements with prospective investors. The OECD Recommendation on Effective Public Investment Across Levels of Government provides some guidance to encourage improved coordination of actions across levels of government.
Leverage digital tools to support national-subnational investment promotion activities. The MESD’s Internationalisation Directorate focus on imagine building to promote Croatia’s different regions, while most of OECD national IPAs favour investment generation activities. The Internationalisation Directorate could establish, in cooperation with the relevant subnational entities, a digital platform to announce foreign investors’ expressions of interest received by the ministry. This type of platform can help build trust while strengthening fair competition among subnational bodies that must put strong and clear value propositions to win FDI projects.
Strengthen the effectiveness of place-based policies on attracting FDI that supports regional development. This includes: better integrating EZs into their regional ecosystem to generate further economic spillovers by aligning EZs’ targeted or prioritised sectors and the local supply chains they serve with the County Development Plans, Urban Area Development Plans and the ITIs; further provision by the MESD of FDI-related intelligence to subnational bodies to help them identify and target unique FDI markets; assess local incentives’ impacts on attracting job-creating FDI to regions with higher unemployment rates (see Chapter 5).
Consider talent attraction and retention as tools to attract FDI in disadvantaged regions. The central and subnational governments should consider how investment promotion serves broader goals of retaining youth from migrating while facilitating foreigners’ entry to avoid labour shortages. Addressing skills shortages faced by investors does not have to be a task of the MESD’s Internationalisation Directorate, but the Directorate could consider broader policy complementarity. Identifying trained workers or helping investors establish a training centre can be handled by local agencies that are close to firms' operations and know best their needs.
Investment in support of regional development in Croatia: trends and impacts
The geography of foreign investment in Croatia
Regional attractiveness has shaped the geography of foreign investment in Croatia as it also did within OECD countries (OECD, 2022[1]). The spatial distribution of FDI closely follows the contours of Croatia’s four large regions, with the City of Zagreb – both a region and a county – hosting 62% of the national FDI stock, twice the Adriatic region (27%), eight times the Northern region (8%) and 21 times the Pannonian region (3%). Disparities between the smaller 21 counties are equally marked and further highlight the concentration of FDI in the capital (Figure 4.1, Panel A). Disparities are also large across other counties than Zagreb City. The county of Istria on the Adriatic Sea, the second top FDI performer, concentrates 100 times more FDI than the landlocked county of Virovitica-Podravina in Pannonia. The disparities are visible, albeit smaller, even when considering differences in population levels across counties and neatly illustrate the broader inequalities between the four large regions (Figure 4.1, Panel B).
Figure 4.1. The distribution of FDI stock across Croatia’s regions and counties
Source: OECD based on Croatian National Bank and Croatian Bureau of Statistics.
Regional disparities in FDI are also driven by disparities within the large regions of Croatia and not only between them. These disparities capture the concentration of business activity in urbanised counties and the challenge of more remote or rural counties within the same region to keep pace with urban hubs. They also reveal the extent to which a place-based approach to investment promotion is much desirable. The region with the largest levels of FDI stock per capita disparities is the Northern region, followed by the Adriatic and Pannonian regions (Figure 4.2). For the Northern and Adriatic regions, the main driver of the disparities in FDI is the attractiveness of the highly urbanised counties, respectively Zagreb and Istria. On the other hand, it is the significantly low density levels in the less developed counties of Sisak-Moslovina and Virovitica-Podravina that drives the regional disparities in FDI within the Pannonian region.
Figure 4.2. FDI stock per capita disparities within Croatia’s large regions
Note: To allow for comparability between the regions, the Theil indices (called average) have been adjusted by dividing by the LOG(n), where n is the number of counties in the region. Zagreb refers to Zagreb County in Northern Croatia.
Source: OECD based on Croatian National Bank and Croatian Bureau of Statistics.
Foreign investment can lift regional development and productivity growth in Croatia, but it can also exacerbate existing spatial inequalities if it is significantly more concentrated than broader economic activity. Regional disparities in FDI are larger than in GDP both between and within Croatia’s large regions, although the gap between the two strongly varies across regions (Figure 4.3, Panel A). The gap is significantly higher within the Northern region, where disparities in FDI are nearly six times larger than disparities in GDP – the region has the lowest levels of disparities in economic activity, however. Gaps in the disparities between FDI and GDP are smaller in the Adriatic and the Pannonian regions. Large gaps between FDI and GDP disparities are also visible across counties. The bottom 50% of counties, for instance, represent 38% of the cumulative GDP but only 10% of the cumulative FDI (Figure 4.3, Panel B).
Figure 4.3. Comparing disparities in FDI and GDP across Croatia’s large regions and counties
Note: Gini indices in Panel A are adjusted by dividing by (n-1)/n, where n is the number of counties in the region, to ensure comparability.
Source: OECD based on Croatian National Bank and Croatian Bureau of Statistics.
The large regional disparities between and within Croatia’s regions are expected as foreign multinational activity tends to be less widespread than domestic activity (Lejárraga and Ragoussis, 2018[2]; OECD, 2022[1]). Usually, industrial and economic hubs represent the main entry point for foreign investors, especially for transition economies, implying a concentration of FDI in these regions despite the efforts by the governments to achieve balanced regional development (Lovrinčević and Mikulić, 2012[3]). This hints to agglomeration effects in counties such as Zagreb at the higher end of the FDI distribution. The least developed or attractive counties also strongly drive the dispersion of foreign investment relative to domestic investment and broader business activity (Figure 4.4). But the concentration of FDI in specific regions is not unique to Croatia. The top 10% of OECD regions in terms of FDI attractiveness concentrate half of the total amount of FDI hosted by the OECD area and 40% of total GDP and R&D spendings (OECD, 2022[1]).
Figure 4.4. Dispersion of investment and broader economic activity across Croatia’s counties
Note: Values above (below) zero indicate that the county’s outcome is higher (lower) than the national average. The shown counties are the best and worst performers in FDI per capita variations from each region. Yellow = Pannonian, Blue = Adriatic, Green = Northern. FDI (1993 – 2021), Gross investment (2020 – 2021), Active businesses (as of 2020), GDP (2015 – 2020). Zagreb refers to Zagreb County.
Source: OECD based on Croatian National Bank and Croatian Bureau of Statistics.
As a country with strong regional disparities, Croatia is struggling to achieve balanced regional development. Ultimately, policy intervention aims to reduce disparities between the most and the least developed areas. Unchanged or even increased concentration of foreign investment across the four regions suggests that decentralisation in the 2000s and subsequent reforms did not contribute to reducing regional disparities in FDI. Regional income disparities even increased between 2004 and 2015 (Jakšić, Erjavec and Cota, 2018[4]). From 2003 to 2012, there was a slight reduction in the concentration in greenfield FDI projects across large regions that was reversed in the last decade in favour of the Adriatic region, which received more than half of the total greenfield FDI in the last four years (Figure 4.5). The distribution of gross investment also shifted towards the Adriatic regions but in much lower proportions.
The EU’s Cohesion policy promotes regional development. On the other hand, the increased concentration of foreign investment coincides with the entry of Croatia in the EU in 2013, when a series of liberalisation reforms were implemented. From a global perspective, reduced barriers to trade and investment narrows FDI disparities between countries but can exacerbate disparities within countries as regions become the frontline of competition for global investment and the most prosperous regions are better able to compete. This was the case for the Adriatic region, which in the last decade has become one of Europe’s “winners” in FDI attraction, allowing local actors to enjoy higher levels of connectivity and providing new growth opportunities (Crescenzi and Iammarino, 2017[5]). Similarly, international trade did not support economic convergence of Croatian regions (Mikulić and Galić Nagyszombaty, 2015[6]). More recently, remote or less attractive regions were more adversely affected by the COVID-19 pandemic as foreign investors tend to avoid “riskier” regions when faced with higher uncertainty (OECD, 2022[1]).
Figure 4.5. Changes over time in the concentration of regional foreign and domestic investment
Source: OECD based on Financial Times fDi Markets and Eurostat.
Notwithstanding the concentration of FDI in some regions, counties or cities, it does not mean that all of them compete over the same investors and in the same sectors (Burger, van der Knaap and Wall, 2012[7]). In most regions, construction and real estate is the sector with the highest levels of greenfield FDI (Figure 4.6, Panel A). This holds for the Adriatic and Northern regions, as well as for the City of Zagreb where it represents more than half of greenfield FDI. Nevertheless, the nature of the projects varies among these regions. In the City of Zagreb and the Northern region, FDI is mostly in real estate while in the Adriatic region it is primarily in the tourism and involves the construction of hotels and resorts. The Pannonian region is the only one where the manufacturing sector attracted more than half of greenfield FDI. Most of these foreign investments were in capital-intensive activities such as in renewables and wood sector.
Regional specificities and how they shape the sectoral distribution of FDI highlight the value of a place-based approach to investment promotion. Some Croatian regions compete against each other over FDI, while a few have rivals among CEE countries, and a minority, including perhaps the metropolitan area of Zagreb compete in broader Europe or worldwide. Foreign competitors can be very different from one region to another depending, inter alia, on regions’ sectoral specificities and distinct positions in global supply chains. The City of Zagreb, having the highest broadband connection density and highest share of skilled workers concentrates services projects and ICT innovations. The Adriatic region attracts larger amounts of FDI in tourism due to its access to the sea and cultural heritage sites and, therefore, most likely competes with other touristic regions in Europe and less with other Croatian regions. Similarly, Pannonia competes against other European regions with similar features, for instance in the wood industry.
Differences in source countries of FDI are another demonstration of the distinct characteristics of the foreign investments that regions compete for and, in turn, the potential benefits from targeted investment generation activities by national and subnational bodies involved in investment promotion. Akin to trade, FDI in Croatia is closely linked to the EU market, with two thirds of greenfield FDI originating from the EU – other sources include the United States, China and the United Kingdom (Chapter 2). However, FDI source countries vary at the subnational level (Figure 4.6, Panel B). The City of Zagreb attracts a disproportionate amount of FDI from Austria while in Pannonia the United States is the leading investor with 36% of the region’s total FDI, which is much above the country’s share at the national level. Pannonia is also the least diversified in terms of source countries in contrast with the Adriatic and Northern regions.
Figure 4.6. National and regional greenfield FDI by sector and source countries (million USD)
Source: OECD based on Financial Times fDi Markets.
The impacts of FDI on regional development are positive but unevenly distributed
Foreign investment in Croatia can support regional productivity growth – the main driver for higher living standards – through innovation, skills development and the creation of quality jobs that can help retain youth living in disadvantaged regions from migrating. However, not all regions benefit equally from FDI (OECD, 2022[1]). Foreign firms tend to perform better compared to domestic firms in all parts of Croatia, but FDI impacts on productivity, innovation and R&D are often strongest in Zagreb and weakest in Pannonia. The impact of FDI on job creation is also geographically uneven – the same amount of greenfield foreign investment generates twice more jobs in Zagreb City than in the region of Pannonia (Figure 4.7).
Figure 4.7. Number of jobs created per million USD of greenfield foreign investment per sector
Source: OECD based on Financial Times fDi Markets.
Disparities in FDI impact on jobs across Croatia’s regions are largely driven by sectoral compositions, skills availability (or shortages) and R&D activity. Foreign projects in services in the City of Zagreb are the most labour intensive. They often consist of activities relying on high-skilled workers such as business services or IT. Services FDI in the Adriatic region is also highly labour-intensive as it is concentrated in the hospitality industry, in contrast with the Pannonian region where manufacturing is the sector with the highest job creation intensity – most projects are in labour-intensive activities such as textile, food and beverages and industrial equipment. Notwithstanding the large share of manufacturing FDI in the Pannonian region, its job creation intensity is the lowest. Projects are concentrated in capital-intensive manufacturing activities. For instance, one of the biggest foreign investments in the region was a renewable energy manufacturing project that amounted for 878 million USD. Overall, the Pannonian region has a higher unemployment rate than other regions but it attracts FDI in activities with lower labour intensity.
Beyond job creation, FDI affects other local outcomes such as labour productivity, wages and skills development. Foreign firms in Croatia are more productive in all regions, particularly in services, but the productivity premium is much higher in Zagreb City (Figure 4.8, Panel A). Relatedly, organisational and technological premiums of foreign ownership, such as higher wages and stronger R&D intensity, while present in all the country, are more noticeable in the capital and the main urban hubs. This is expected, as companies with significant R&D activities are concentrated in larger cities (Bule and Cudina, 2020[8]). For example, the City of Zagreb’s foreign wage premiums are the highest for both manufacturing and services investments as the region fosters the most competitive business environment (Figure 4.8, Panel B). While all regions have higher foreign productivity and wages premiums, these premiums do not necessarily translate into higher shares of high-skilled workers in foreign firms (Figure 4.8, Panel C). Nonetheless, the higher productivity and wage premiums are associated with an overall higher share of skilled workers.
The impacts of FDI on regional development in Croatia are also the result of the indirect activities of foreign firms. Compared to other CEE countries, Croatia concentrates low-technology manufacturing FDI but high-technology services FDI (see Chapter 2). Regions with higher shares of services FDI such as the city of Zagreb and the Northern region are therefore expected to generate more knowledge or technology spillovers than those concentrating manufacturing FDI. Furthermore, while services and manufacturing FDI in Croatia tend to create positive spillover effects on local firms in downstream sectors, suppliers only benefit from services FDI. On the contrary, the presence of foreign firms can lead to negative effects on the productivity of local rivals both in services and manufacturing activities (Stojčić and Orlić, 2019[9]).
Figure 4.8. Performance comparison of foreign firms versus domestic firms in Croatia’s regions
Source: OECD based on the Financial Agency (FINA) of Croatia.
Place-sensitive policies to promote FDI for regional development
Croatia has not sufficiently and strategically prioritised FDI that supports balanced regional development. This is in contrast with many new EU member states that have developed their convergence strategies with FDI attraction as a central component. In those countries, FDI played a transformative role for regional development by boosting productivity, export diversification, and in upgrading activities in Global Value Chains (World Bank, 2019[10]). The 2030 National Development Strategy of Croatia aims to address this gap and provides directions on improving regional competitiveness and attractiveness.
This section reviews Croatia’s place-sensitive strategies and investment promotion policies to attract FDI in support of balanced regional development. It leverages the results of the OECD survey on investment promotion and regional development filled by national IPAs from the OECD and by Croatia’s Ministry of Economy and Sustainable Development (Box 4.1).
Decentralisation has shaped Croatia’s policy and institutional framework on investment
The policy and institutional configuration for investment promotion and regional development is inherently complex and Croatia is not an exception. This configuration is largely shaped by the level of centralisation of economic policy and the related governance mechanisms between central and subnational governments or authorities of regions, provinces, cities, etc. Some countries choose to centralise investment promotion at the level of the national body in charge of investment promotion and facilitation, which may or may not have a network of subnational offices. Others, often with more decentralised governance or economic systems, might establish subnational IPAs or similar bodies such as economic development organisations (EDOs) that are partly or fully independent from the central agency (OECD, 2022[1])(Box 4.1).
The process of decentralisation that started in 2001 shaped the architecture for investment promotion and facilitation in Croatia, which became multi-layered, involving many subnational entities in a country of small geographical size. Croatia is subdivided into 4 regions, 21 counties and approximately 555 local governments (428 municipalities and 127 cities) – the city of Zagreb has the status of both a region and a county. Only the third (municipality/city) and second (county) levels are self-governments, however, and therefore nearly all subnational institutions operate at the county and municipality/city level, including those in charge of investment. The first level (regions) is a statistical subdivision created after the country’s accession to the EU in 2013 (and revised in 2021 to include 4 NUTS2 regions) and serves to set the amount of EU aid to regions. OECD countries with similar geographical size like Czechia, Costa Rica, Denmark or the Slovak Republic are divided into comparable or slightly higher numbers of third level administrative subdivisions but are composed of significantly fewer second and first levels subdivisions than Croatia (Table 4.1).
Table 4.1. Tiers of governments and investment bodies in Croatia and selected OECD countries
Note: * Copenhagen Capacity serves greater Copenhagen, an urban area that covers 2 out of the 5 provinces of the Capital region of Denmark.
Source: OECD Survey on Investment Promotion and Regional Development (2022); OECD Territorial Grids; EU NUTS classification.
Box 4.1. The OECD Survey on Investment Promotion and Regional Development
The OECD IPA Network – a platform that brings together senior investment promotion practitioners to facilitate peer-learning – is exploring how governments can promote, facilitate and retain FDI in support of regional development and what is the role of IPAs. The OECD designed a survey to collect information on investment promotion and regional development. It focuses on the role of national IPAs, their relationships with subnational bodies and their objectives and priorities with regards to attracting FDI in support of regional development. The survey was shared with IPA from OECD countries in the form of an online questionnaire that was completed in 2022 by 36 OECD countries. The results of the survey were presented at the 7th OECD IPA Network meeting in October 2022.
The survey was completed by the Croatian Ministry of Economy and Sustainable Development in 2022 as part of the project on “Advancing the Strategic Framework for the Promotion and Facilitation of Private Investment in Croatia”. The Regional Development Agency and Regional Coordinator of Medimurje County – REDEA – and the Public Institution Development Agency of Lika-Senj County – LIRA – completed the EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages, which also informed the analysis in this Chapter.
The architecture for investment promotion and facilitation varies greatly from one country to the other. It can be multi-layered and involve several types of subnational entities. The survey defines subnational bodies in charge of investment promotion and facilitation in the following way:
Subnational IPAs, which are organisations fully or principally dedicated to the promotion and facilitation of FDI in their region, state, province, municipality or city, independent from the national IPA or the central government, and usually reporting to subnational authorities.
Subnational economic development organisations (EDOs), which are also independent entities from the central IPA and government, reporting to subnational governments, but with a broader portfolio that often includes investment promotion and facilitation.
Subnational authorities, many of which are directly involved in economic development issues that sometimes include an investment promotion or facilitation component.
Subnational offices of the national IPAs, which are sometimes established in specific or all regions of their jurisdictions.
Note: See www.oecd.org/investment/investment-promotion-and-facilitation.htm for more information.
Source: OECD (2022), "The geography of foreign investment in OECD member countries: How investment promotion agencies support regional development", OECD Business and Finance Policy Papers, No. 20, OECD Publishing, Paris, https://doi.org/10.1787/1f293a25-en.
Defining the “right” territorial division for effective regional planning is a central but complex issue that goes beyond the scope of this report. However, it is crucial to examine what are the implication of Croatia’s territorial divisions on policies at the intersection of investment and regional development. Subnational governments have the autonomy in decision making and management over a widely defined range of policies, including economic development, and the autonomy in establishing independent bodies to implement these policies. They independently dispose of their own income, can adopt general acts for their independent internal organisation and that of their administrative bodies and can cooperate at the national and international levels – an aspect that is potentially non-negligible for investment promotion. State control over subnational governments is limited to verifying the constitutionality and legality of their actions.
The process of decentralisation in Croatia has implications on the capacity of subnational governments to deliver effectively on their economic priorities. Dispersed funding, administrative and oversight responsibilities across different agencies, and the large number of subnational governments spreads capacity thinly, creates inefficiencies and adds to the challenges of coordinating and monitoring policy (OECD, forthcoming[11]). Large Croatian cities are economically influential as attractive investment hubs but politically they depend on their counties, except for Zagreb city that has the administrative status of a county. Furthermore, the bulk of budget continues to come from the central government. In general, decentralisation processes with unfunded mandates, that is, a mismatch between the powers transferred to subnational governments and the resources allocated to them, can represent a serious drag on the positive economic effects of decentralisation (Rodríguez-Pose and Vidal-Bover, 2022[12]). For the benefits to materialise in Croatia, it is crucial to ensure that finance adequately follows mandates.
Strategies should better connect investment promotion to regional development
The National Plan on Investment Promotion should include a place-based dimension...
Investment promotion strategies should consider the challenges but also the reasons for FDI to locate in different regions. Croatia has no investment promotion strategy and, in turn, has not set a vision with goals and activities to leverage FDI in support of regional development. The future National Plan on Investment Promotion is an opportunity to consider subnational specificities while also ensuring a balanced approach across regions. If most of Croatia’s regions share similar comparative advantages and attractiveness factors, there are also unique specificities. The tourism and wood sectors are obvious examples. Investment promotion efforts – and policy more broadly – to attract FDI in one of these sectors has different effects on the coastal Adriatic region or the hinterland region of Pannonia. In OECD countries that are EU members, all investment promotion strategies include a regional dimension (OECD, 2022[1]). In some of them, such as Ireland, regional development is even at the core of the strategy with clear targets (Box 4.2).
The National Plan on Investment Promotion could set targets that reflect FDI attraction priorities of regions, identify specific policies and activities to reach these targets and clarify the role played by different institutions and the related coordination mechanisms. A regional pillar in the Plan should be aligned with the 2030 National Development Strategy, national strategy on regional development, Urban Areas Development Strategies and County Development Strategies. It should be also aligned with EU Cohesion Policy priorities, including priority regions, sectors or activities receiving aid. The development of a regional pillar should involve national and subnational actors such as the Ministry for Regional Development and EU Funds (MRDEUF), local governments of main urban areas and EDOs operating at the county level. In OECD countries, 60% of national investment promotion strategy are developed in cooperation with subnational EDOs (OECD, 2022[1]).
…and subnational governments’ strategies should include an investment promotion angle
Proactive and coordinated efforts to attracting FDI in support of regional development in Croatia require regional plans. Including a regional dimension in the National Plan on Investment Promotion is not sufficient in a decentralised setting where the central government’s ability to attract FDI depends on regions taking actions in a planning and development context to improve their attractiveness. Subnational governments may craft their own investment promotion strategies, but most of them are geographically or economically too small to develop a different value proposition from their neighbours. Should a few have a distinct value proposition, possibly urban hubs as the city-county of Zagreb, their investment promotion strategy must be aligned with the National Plan on Investment Promotion. Nearly 75% of OECD countries have regional investment promotion strategies, and 67% of the strategies are embedded in broader regional development strategies. The ministry in charge of investment, subnational EDOs and local authorities are most often leading – or at least involved in – the regional investment promotion strategy design. The private sector and civil society are also strongly involved (OECD, 2022[1]).
Box 4.2. The Regional pillar of IDA Ireland Investment promotion strategy 2021-2024
IDA Ireland Investment Promotion Strategy 2021-2024 is framed through five interlinked pillars: Growth, Transformation, Regions, Sustainability, and Impact. The Region pillar covers the following dimension:
Overall objectives. Partnering with existing regional clients to transform through innovation and upskilling, developing clusters to support transformation, spillovers and linkages, collaborating with clients and stakeholders to facilitate remote working opportunities, and continue to roll-out IDA Ireland essential regional property programme (provision of land).
Alignment with regional development strategies. The national context for IDA’s approach to attracting FDI for the regions is set by Project Ireland 2040 and the associated National Planning Framework, National Development Plan and Regional Spatial and Economic Strategies. The overarching ambition of national policy on regions is to promote balanced, compact and sustainable growth outside of Dublin. The realisation of these strategic outcomes, through the growth and development of regional cities and towns, would significantly enhance Ireland’s value proposition to FDI and support emerging urban locations of scale to become future FDI growth drivers.
Region’s attractiveness to FDI, initiatives and targets. The pillar has sections for each of the six NUTS-3 level regions with dedicated economic rationale, goals, initiatives to undertake as well as specific targets of investments. In setting goals and targets for each region, IDA considered key attractiveness factors such as population, talent availability, quality of live, industry specific clusters and ecosystems, land availability, local infrastructure and connectivity, availability of property solutions (public and private sector), and alignment with IDA’s sector targets.
Cooperation. The Strategy indicates that key to IDA Ireland success is strategic collaboration with national and local stakeholders on the enhancement of the regional value proposition for FDI. It recognises that the regional targets will not be achieved without the collective effort and collaboration of all stakeholders with responsibility for regional development. This includes the delivery of necessary infrastructure, the availability of a skilled and future ready workforce, and better quality of life as pre-requisites to attracting FDI. On skills, the IPA will deepen collaboration with training providers and actively participate in the Regional Skills Fora, which provide a single point of contact in each region for employers to connect with the providers as they seek to address emerging skills needs.
Role of local authorities. The Strategy indicates that local authorities have a very specific role in placemaking, the provision of infrastructure and services and in ensuring that their regions are seen as attractive to FDI. IDA’s ability to attract and retain FDI is dependent upon local authorities successfully and consistently taking actions in a planning and development context to improve the liveability of towns and cities. This includes interrelated policies to ensure: critical population mass and density levels to support services and infrastructure; appropriate mix of housing solutions; access to multiple modes of transportation; and social and cultural amenities to support vibrant communities.
IDA Ireland Property Division. IDA Ireland seeks and develops partnerships with key regional stakeholders and local authorities to ensure land, infrastructure and building permits are available in all regions. The Strategy defines specific and concrete actions that IDA Ireland will undertake with local authorities to ensure the availability of property solutions.
Source: (IDA Ireland, 2021[13]), IDA Ireland Investment Promotion Strategy 2022-2024: driving recovery and sustainable growth, Government of Ireland, https://www.idaireland.com/driving-recovery-and-sustainable-growth-2021-2024
A more realistic and potentially more effective option for Croatia is to embed private investment in County Development Strategies and Urban Areas Development Strategies. Subnational governments should assess how regional development strategies can better leverage FDI to achieve their targets. Strategies should identify what local improvements will help attracting the FDI needed to reach their goal, primarily on land, infrastructure, services and skills, as well as broader investment reforms required at the national level. They should be aligned with sectoral strategies and, if developed, the regional pillar of the National Plan on Investment Promotion. Not all the counties have County Development Plans, however, which largely focus on budget allocation to respective policy areas. They do not include an investment promotion angle but define key sectors that can steer broader regional development. There is no information on Urban Areas Development Strategies, although from the perspective of investment promotion they can be crucial considering the central role of agglomerations on attracting FDI that may also benefit close rural areas.
Setting the “right” subnational level for an investment promotion strategy can help overcome fragmented planning
A challenge for Croatia in crafting investment promotion and regional development strategies that echo each other is in setting the cursor to the “right” subnational level. But dimensions such as economic density, connectivity, or local supply chains only partly follow Croatia’s administrative borders. The reform in 2019 that realigned first-level subdivisions – statistical regions – from two to four regions carries opportunities to improve regional planning and, relatedly, aligning investment promotion strategy with regional development (World Bank, 2019[14]). The initial first-level subdivisions in just two regions were too large to serve as the basis for regional planning and lacked a clear mandate. From the perspective of investment promotion, the realignment can allow to consider broad regional specificities while generating an attractive FDI value proposition with still large regions allowing for economies of scale. It might be less relevant in terms of investment facilitation, however, as services are best delivered when they are closest to investors.
Should Croatia adopt the first-level subdivision as the unit for the regional dimension in the National Plan on Investment Promotion, then the Plan should be backed by all counties with commitment on implementing it within their jurisdiction and in cooperation with other counties of their first-level subdivision – clear and unified messages across the counties will be essential to ensure implementation. This commitment is crucial as the first-level subdivision lacks a proper institutional setting. Partnership Councils of the first-level subdivision have not fully operated since the realignment of the regions while they could ensure stronger inter-county strategic planning. The realignment to four regions might continue to suffer weaknesses in becoming the basis for broader strategic planning, however, including fragmenting the City of Zagreb from its metro area and vicinity, and separating Karlovac from the more dynamic Zagreb metro to which it is connected. In addition, the other three regions are still large, with the Adriatic region, for instance, remaining unchanged (World Bank, 2019[14]).
Croatia should also consider the Integrated Territorial Investments (ITIs) as one relevant unit for strategic planning and implementation of the National Plan on Investment Promotion. The Plan should be aligned with, and supported by, the ITIs to harness Croatia’s largest cities as poles of regional attractiveness. The ITIs is a territorial development tool of the European Structural and Investment Funds that enables the implementation of a territorial strategy with the aim of providing a response to the specific needs or challenges of this territory. The ITIs covers Croatia’s seven largest cities, comprising one fifth of municipalities and nearly half the national population. The impact of the ITIs has been moderate, however, as the underlying strategies have sometimes pooled the distinct priorities of their municipalities, rather than creating a unified approach (World Bank, 2019[14]). Furthermore, the ITIs was accountable to the central government – the MRDEUF – rather than their municipalities. It also has narrow geographical boundaries, creating a risk that hinterland rural areas have poor coordination with their nearby cities.
Craft place-sensitive policies to attract FDI for balanced regional development
Croatia’s national and subnational strategies and plans relating investment to regional development should consider the wide range of place-sensitive policies to make FDI work for regional development. They should also identify the complementary reforms and development measures needed to unlock the benefits of investment in the most disadvantaged regions, at the forefront of these institutional and skills development reforms. Furthermore, Croatia should also anticipate how reforms such as the National Plan on Investment Promotion may affect regions differently. While the place-blind nature of national policies, including investment, is often unavoidable and mostly desirable, it is difficult to use them to address challenges in specific regions (OECD, 2019[15]).
Croatian regions are not always affected in the same way by national policies such as trade and investment agreements; horizontal or sector-specific FDI restrictions, including on land ownership; company registration; and sectors-specific tax and non-tax incentives. Trade and investment liberalisation, for example, is in aggregate positive for a country, but not all regions benefit equally from it (OECD, 2019[15]). In Slavonia, for instance, the central government could better align investment incentives with the region needs and reassess regulatory barriers to FDI in some dynamic sectors of the region such as the wood industry (World Bank, 2019[10]).
Place-based investment promotion and facilitation policies that can directly influence the location choice of foreign firms include tax and non-tax incentives (see also Chapter 5), establishing industrial parks or special economic zones and, as discussed in the next section, creating dedicated subnational bodies in charge of promoting and facilitating investment (OECD, 2022[1]). Other policies encompass broader regional business climate policies, such as public investment in skills and infrastructure, as well as support to local firms – including advice on how to enter foreign markets, financing of R&D activities and policies to favour labour mobility (OECD, 2018[16]). By improving the local ecosystem, a region not only becomes more attractive but can also benefit more from FDI, including through high-skilled job creation and higher productivity spillovers (OECD, forthcoming, 2023[17]). Chapter 3 reviews broader business climate policies.
Investment promotion efforts to attract FDI for regional development can be improved
Targeted policy tools and measures used by Croatia to promote FDI in support of regional development are similar to those used by OECD countries, with one main difference (Table 4.2). The services provided by the national IPA is the most frequently reported measure in OECD countries while in Croatia the MESD’s Internationalisation Directorate indicates that the services it provides are less relevant than granting tax and non-tax incentives and establishing industrial parks or Entrepreneurial Zones. This corroborates the discussions in the next section that the Directorate does not see itself as the main institution responsible for promoting FDI in support of regional development.
Table 4.2. Policy tools and measures to promote FDI in remote or less developed regions
Source: OECD Survey on Investment Promotion and Regional Development (2022).
Entrepreneurial Zones are established under the Act on Improving Entrepreneurial Infrastructure (Figure 4.11). Most of them provide amenities to businesses such as energy, utilities, transport and communication infrastructure. In some cases local governments also provide benefits in form of reduced communal fees or buying land for buildings at favourable conditions. It is not mandatory to locate in a business zone, but they provide a fast-track to establish an investment in an area equipped with the adequate infrastructure. Croatia counts 313 zones that are listed on the MESD website. The occupancy rate of zones in Northern Croatia is higher than in other regions and in some zones it reached 100%.
Place-based tax incentives are commonly used by Croatia and OECD countries, but the schemes vary across countries depending on their policy goals (OECD, 2022[1]). Their effectiveness is uncertain, however, particularly since some of Croatia’s schemes use the unemployment rate to single out beneficiary locations (see Chapter 5). In fact, the job creation intensity of FDI projects in the City-County of Zagreb or Northern Croatia is higher than in Pannonia. Incentives in Croatia are financed by the state budget but must comply with EU state aid rules. Evidence suggests that much of the success of the FDI-led economic growth policies of CEE Countries is due to investment incentives that national governments made available in the form of state aid. Not all types of state aid are equal in their impact on attracting FDI for regional development, however (Schito, 2022[18]). Overall, there is no relationship between EU spending and FDI inflows in poorer regions that also receive the bulk of financial support (Crescenzi, Di Cataldo and Giua, 2021[19]).
Entrepreneurial Zones have a positive impact on domestic and foreign investment – the share of foreign firms is higher than outside of the zones, sales and export of firms located within them. Their positive effects are confined to host and neighbouring urban areas, however, with limited spatial redistribution and economic spillovers effects (Stojčić, Pylak and Alibegović, 2022[20]). This calls for better integrating Entrepreneurial Zones into their regional ecosystem by aligning targeted sectors – if any – and local supply chains they serve with County and Urban Area plans. Organising or attending fairs and establishing free zones are the least frequently used tool to attract FDI in support of regional development according to the MESD; free zones have lost much of their benefits since Croatia joined the EU.
Among the different activities of the MESD’s Internationalisation Directorate to attract FDI in less developed or remote regions, image building and investment facilitation are more used than investment generation and policy advocacy (Figure 4.9, Panel A). Investment facilitation is also the most useful function for national IPAs in the OECD, yet equally with investment generation, while image building is less important. Among CEE countries, the IPAs of the Slovak Republic and Slovenia rank their functions in a way comparable to Croatia, while the Czech IPA relies more on investment generation than image building. The focus on image building may be related to the fact that the less developed regions of recent EU members are less known to investors and suffer from a negative image due to, inter alia, perceptions of corruptions, labour shortages and distance from target markets. Regions’ unfavourable image is listed by the MESD as a more important challenge for FDI to locate in remote or less developed regions than for OECD countries (Table 4.3). Surprisingly, advocating for reforms that can promote FDI in support of regional development is a relatively unimportant function of the Directorate, while an IPA that is part of a Ministry could give it more political clout.
Figure 4.9. Activities of national IPAs to promote and facilitate FDI in support of regional development
Note: * Countries with no subnational IPAs or EDOs and therefore excluded from the category “Providing FDI intelligence”.
Source: OECD Survey on Investment Promotion and Regional Development (2022).
The MESD’s Internationalisation Directorate provides other services to investors or subnational partners that can make FDI work for regional development, in addition to core investment promotion and facilitation activities. They include typical activities such as matchmaking services to investors – this is even more relevant in the case of Croatia as SME development is one of the MESD’s mandates – and providing FDI-related intelligence to subnational EDOs (Figure 4.9, Panel B). Providing FDI intelligence reflects a good degree of collaboration between national and subnational agencies and can help identify distinct FDI markets across Croatian regions (Box 4.3).
Conflict mitigation between investors and local stakeholders is one service that the Directorates provides that is less commonly delivered by IPAs of OECD countries. This could be due to the need for third-party intervention in a context of regional autonomy. The service could be also a result of the Act on Strategic Investments that the MESD oversees. The Act aims at solving conflicts with subnational governments, often on land issues, to fast-track business establishment. The Act covers only large investment projects; most of them are public investments and only few are foreign owned.
Box 4.3. FDI intelligence can help craft strategies and policies tailored to regions’ potentials
The multiplicity of investment promotion activities at the subnational level does not necessarily have to generate a race to the bottom. While the risk of exacerbated competition between Croatian counties or cities is real, particularly considering the small size of the country, competitors can often be regions outside the national borders. If FDI concentrates in Zagreb, it does not mean that all Croatian regions compete for the same investors and in the same sectors, as shown in section one. This underlines the importance for IPAs involved in investment promotion, either the MESD’s Internationalisation Directorate or local agencies, to know whom their rivals are and for which economic activity they are competing. This comparative information can help the Internationalisation Directorate and some EDOs craft investment promotion strategies tailored to the competitive strengths and potentials of each territory. It can also help developing policies that connect foreign investors with local suppliers. For instance, small cities may deploy massive efforts to attract large, top-end, companies (e.g. by offering generous and discretionary tax incentives, although EU state aid rules limit this) instead of focussing on smaller investors that they can realistically attract. Investment promotion efforts to attract such second-tier firms might prove useful as these may forge stronger linkages with local companies than large top-firms because of lower absorptive capacity gaps and higher labour mobility (OECD, 2022[21]).
Attracting FDI for regional development goes beyond typical investment promotion efforts
Policies to increase regional attractiveness in Croatia – and, in turn, reduce FDI disparities – should go beyond investment promotion to address the country’s broader regional development challenges, including skills shortages or imbalances, inadequate infrastructure and logistics and low business density levels (Table 4.3). Policies addressing regional disparities are often designed and implemented at national level, however, with limited involvement of subnational governments. This is also the case in other EU countries where subnational authorities execute only a small share of public expenditure such as Hungary, Portugal and Slovenia (European Commission, 2022[22]). Measures that can support improving the broader regional business climate should also be better tailored to the needs and potential of the different Croatian regions. Lagging-behind regions lacking economic and population density could further reinforce their institutions and invest in human capital, while denser lagging areas could benefit from investments in trade logistics to be better integrated with dynamic external markets (World Bank, 2019[14]).
Table 4.3. Main challenges for FDI to locate in remote or less developed regions
Source: OECD Survey on Investment Promotion and Regional Development (2022).
Addressing labour and skills shortages or imbalances in Croatia is potentially the most pressing policy action to attracting FDI to regions (see also Chapters 2 and 3). In the Adriatic region, for instance, a third of people are not yet familiar with using a computer, which has a direct incidence on using e-government services to start a business (European Commission, 2022[22]). With Croatia’s new policy of facilitating foreigners’ entry, the central and subnational authorities should consider how investment promotion efforts serve broader policies to retain the youth from migrating while letting foreign workers enter to reduce labour shortages. This may improve the situation in the tourism and construction sectors, for instance, on which Western Croatia strongly relies to attract FDI. The inadequacy of skills available with investors’ needs is one related challenge. Attracting talent, including foreign, and facilitating workers’ entry is becoming intrinsically connected with FDI attraction (OECD, 2022[21]). The MESD’s Internationalisation Directorate connects human resources agencies with investors as in several OECD countries where the national IPA helps investors identify local workers with relevant skills (Figure 4.9, Panel B). Agencies such as IDA Ireland go even further by collaborating with local training providers to facilitate training and by participating in regional skills fora to anticipate and, in turn, address emerging skills needs (Box 4.2).
Providing support to investors to address skills shortages does not have to become an activity of the MESD’s Internationalisation Directorate, but the Directorate should consider broader policy complementary. In fact, identifying suitably trained workers or helping investors establish a training centre can be successfully addressed by relevant subnational bodies such as EDOs as they are close to investors' operations and know best their skills needs (Crescenzi, Di Cataldo and Giua, 2021[19]). Reducing labour or skills shortages is not only important to attracting FDI in less attractive regions of Croatia but also to ensure that FDI generates positive impact. Less heated local labour markets mitigate possible adverse effects of FDI on the labour market. Foreign entrants’ competition for talent with domestic firms drives up wages, but potentially reduces the ability of the latter to hire or retain more skilled workers. This effect is stronger in industries facing skills shortages and in locations with limited labour mobility (OECD, 2022[21]). In Croatia, employees that left their employers to work in a foreign firm were likely to do it because they held temporary contracts, were better educated, and worked in a small firm that did not invest in workers’ training and offered lower average wages. Employees moving from a domestic to foreign firm often move within the same region, suggesting limited geographical labour mobility (Laengle and Srhoj, forthcoming[23]).
The OECD team consultations with the cities of Osijek and Novska, where foreign firms account respectively for 14% and 10% of employment, revealed how the local government coordinates with local actors such as public employment services and universities to address skills shortages by granting scholarships or opening education centres to provide skills in high demand such as ICT expertise. The consultations also indicated that domestic companies sometimes fear that large foreign entrants might hire their talented workers by offering higher wages. While reskilling or upskilling support is essential to respond to skills shortages, pre-employment training programmes can also be considered by Croatia to help some host regions prepare future workers, particularly youth transitioning from school to work, with relevant skills. Pre-employment training programmes could be even designed specifically to quickly respond to the needs of large foreign firms considering investing. One example is Assured Skills, a state programme in Northern Ireland that that prepares and trains workers for guaranteed jobs in new foreign firms (OECD, 2020[24]). Supporting investors – for instance through targeted tax incentives or administrative simplification – in establishing their own training centres or programmes is another avenue to addressing labour shortages.
Lack of infrastructure connectivity is another obstacle for the attractiveness of regions in Croatia, particularly in denser areas that could benefit from investments in trade logistics to be better integrated with dynamic external markets (World Bank, 2019[14]). Croatia enjoys high levels of accessibility to international markets and a strong network of transport infrastructure (namely ports and motorways), but road performance is lower than most EU countries (European Commission, 2022[22]). Furthermore, Croatia lacks essential connectivity complements, such as trade logistics, which inhibit its trade capacity, human capital movement and overall integration to global value chains. On the other hand, FDI can finance infrastructure connectivity needs in Croatia, but spatial differences exist. The region of the City of Zagreb, for instance, attracts more than two thirds of greenfield FDI in the ICT sector. Furthermore, the City of Zagreb and the Adriatic region concentrate two thirds of total transportation and logistics greenfield FDI while the Pannonian region receives the lowest amount of FDI in connectivity-related projects. The lack of skilled workers, critical for sectors such as ICT, has only exacerbated the problem (World Bank, 2019[25]).
Other major challenges for the attraction of FDI into remote and less developed regions – particularly those in the East of Croatia – are the low business density and low productivity levels of local SMEs. Businesses tend to concentrate in large urban hubs, contributing to agglomeration effects that help attract FDI (Figure 4.10, Panel A). Regions in East of Croatia tend to report more that regulations, including business licensing, are major challenges. Policies to address these challenges include local bodies in charge of facilitating business establishment. A higher number of ESIs that are local or county development agencies are present in regions with lower levels of FDI and business density, which may indicate an effort to addressing existing challenges. More broadly, the quality of local institutions is a strong factor of FDI attractiveness, including to attract higher quality FDI with larger gains from spillovers (Amendolagine, Crescenzi and Rabellotti, 2022[26]). Increased transparency and reduced corruption levels, faster procedures in courts and, relatedly, land ownership are all essential to unlocking regional development in Croatia.
Figure 4.10. Relationship between FDI per capita, business density and EDOs
Source: OECD based on Croatian National Bank and Croatian Bureau of Statistics.
Cluster policies can also help increase business density and boost local productivity in less developed regions through industrial specialisation (i.e., specialised skilled workers and suppliers) and geographical proximity that make knowledge spillovers more likely to happen (OECD, 2022[21]). For instance, firms that form part of the Croatian wood cluster in the Pannonian region presented higher productivity levels, higher revenues and above average wages compared to non-members as they facilitate knowledge-sharing between actors and help firms reduce transaction costs (Stojčić, Anić and Aralica, 2019[27]). In the past, the development of clusters was supported by the MESD and resulted in collaborative business initiatives such as those in the wood processing and automotive sectors (see Chapter 3).
The multi-level institutional framework for investment and regional development
This section reviews the multi-level institutional framework for investment promotion and facilitation practices in Croatia. The way Croatia and governments around the world organise the institutional framework relating investment promotion to regional development reflects their strategic priorities and policy objectives. These choices can influence success in attracting FDI at the subnational level and reap its benefits for balanced regional development. The section leverages the results of the OECD survey on investment promotion and regional development (Box 4.1). The responses of the Regional Development Agency of Medimurje County and of Lika-Senj County to the EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages also informed the analysis in this Chapter (see also Chapter 3).
Several national and subnational bodies share the mandate to promote investment
With the decentralised governance arrangements in place, policymaking in Croatia should consider FDI in support of regional development as a mutual responsibility shared by different ministries and levels of government. Rather than a clear-cut separation of responsibilities, most duties, including investment, have increasingly been shared across different ministries and levels of government, each with different reporting lines (Figure 4.11). The trend toward shared responsibilities has increased over the past decades in other countries too (OECD, 2019[28]). The need to share responsibilities arises for practical reasons – as is common between different tiers of government around issues of transport, infrastructure, and environment. On the other hand, decentralised investment promotion calls for investment priorities defined at the subnational level to be effectively aligned with national strategies and policies.
Figure 4.11. Croatia’s institutional framework for investment in support of regional development
Source: OECD elaboration.
At the national level, the MESD has authority over several levers to channel FDI in support of regional development that are comparable to those in the hands of national IPAs of OECD countries (Table 4.4). Regulation No. 97 of 2020 organising the Ministry’s work states that the Internationalisation Directorate oversees improving the investment climate and the country’s entrepreneurial infrastructure for balanced regional development. The Directorate has also the mandate to coordinate investment promotion and facilitation activities, in cooperation with all relevant national and subnational government units and agencies. Responsibilities of the Directorate go beyond typical investment promotion and facilitation to also cover policy or supervisory mandates influencing regional development, particularly the responsibility over the Act on Improving the Entrepreneurial Infrastructure that provides for the creation of entrepreneurial zones and entrepreneurial support infrastructure (ESI) discussed in the next sections.
Table 4.4. Investment promotion mandates related to regional development in Croatia and OECD
Note: Autonomous agencies include public, private and public-private investment promotion agencies.
Source: OECD Survey on Investment Promotion and Regional Development 2022 and OECD Survey of Investment Promotion Agencies 2018.
In practice, however, the MESD does not seem to use all levers it has at its disposal – or does not use them to their potential – to promote investment for regional development. The greatest impediments seem to be the lack of resources within the Ministry, unclear mandates or overlapping responsibilities with other ministries and limited coordination with relevant national and subnational bodies. The Internationalisation Directorate indicates in the OECD Survey on investment promotion and regional development that it is the least important body in promoting and facilitating FDI at the subnational level (Table 4.5). This contrasts starkly with OECD countries where the national IPAs overwhelmingly report being the main agencies in charge of this mandate. Relatedly, the Internationalisation Directorate places regional development at 6 on a scale from 1 to 10 in terms of its priority, against an average of 7.3 for IPAs of OECD countries and 7.5 for those that are also EU members (OECD, 2022[1]). In Czechia and the Slovak Republic, both national IPAs place regional development as a top priority, with a score of 10.
Table 4.5. Agencies promoting FDI in support of regional development in Croatia and OECD
Ranking of agencies from the most to least important (1= most important agency)
Source: OECD Survey on Investment Promotion and Regional Development 2022.
Regional development is less of a priority for the MESD’s Internationalisation Directorate because it perceives the MRDEUF as the most important body for promoting FDI in support of regional development (Table 4.5). Regional development policies of the MRDEUF aim at improving working and living conditions in all parts of Croatia, especially in less developed areas. These policies also contribute to improving the overall attractiveness of regions and, in turn, should complement the work of the MESD on attracting FDI and improving the investment climate. Overlaps exist over which ministry is acting as the central coordinating body for the network of subnational local and county development agencies established under the Act on Improving Entrepreneurial Infrastructure. Regulation No. 97 of 2020 on the organisation of the MRDEUF states that the Ministry manages their accreditation process, as indicated in the Act on Regional development of 2018. Other areas of overlap exist but they are less problematic. For instance, according to Regulation No. 97, the MRDEUF’s Department of Island Development Policy coordinates and implements promotional activities to attract investment. It is not clear if these activities overlap with or complement the work of the MESD’s Internationalisation Directorate.
Beyond regional development policies, the MRDEUF is also the coordinating body for the management of the European Structural and Investment Funds and for implementing the EU Cohesion Policy (Figure 4.11). This mandate is behind most of the overlapping responsibilities between the two ministries on FDI in support of regional development. The EU-level policy shapes Croatia’s priorities and targets of development policies, including in terms of focus sectors, through mandatory co-financing and various regulatory constraints. EU policy also directs regional fundings towards specific sectors and activities to unleash regional competitiveness.
The MRDEUF has also undertaken work on regional value chains and investment promotion, including a project on leveraging FDI as a driver of economic growth in Pannonia. The project includes a component on establishing an institutional framework for investment promotion in this region (Box 4.4). MRDEUF has also established Coordination Councils for industrial transition on NUTS 2 level for Adriatic, Pannonian and North Croatia, which consists of County perfects. Cooperation between the MRDEUF and the MESD should be reinforced in this area.
Box 4.4. FDI Promotion: Ministry of Regional Development and EU Funds project with Pannonia
Croatia launched in 2017 a project aimed at helping Slavonija, Baranja and Srijem increase the efficiency and effectiveness of EU funding. The region includes the five counties of Osijek-Baranja, Vukovar-Srijem, Brod-Posavina, Pozega-Slavonia, and Virovitica-Podravina. In 2020, the counties of Bjelovar-Bilogora, Sisak-Moslavina and Karlovac have been added to the project to reflect the new NUTS-2 territorial classification, and now cover Croatia’s Pannonia region (NUTS 2 level). The World Bank was requested to support the government through a technical assistance intervention labelled “Growth and Jobs in Eastern Croatia”. The assistance covers several aspects, including one pillar on promoting FDI in Eastern Croatia. The MRDEUF initiated the project and set the framework, but the beneficiary of the work would be the MESD. Activities under the pillar include:
1. Planning and sector prioritisation. Develop an FDI Action Plan for Eastern Croatia to set targets, prioritise promising subsectors (ICT, agribusiness, mechanical engineering), outline investor services and clarify other investment-related aspects of the strategy.
2. Investor services. Detail the specific services provided to potential and existing investors in the priority subsectors (proactive promotion) as well as in other subsectors where investors show interest (reactive promotion). Investor services will cover the full investment lifecycle, including FDI attraction, retention, growth and linkages to the domestic economy.
3. Institutional Framework. Ensure a coordinated, mutually reinforcing agency framework with clear roles and responsibilities. New elements relate to the Eastern Croatia FDI Steering Committee (strategic role), the Eastern Croatia Investment Hub (operational role), the County Governments (operational role) and the Ministry of Economy, Entrepreneurship and Crafts (operational role). The framework will be underpinned by a Memorandum of Understanding and operating procedures.
4. Recruitment, capacity building and office space. Boost the investment promotion resources and capacity of all agencies, and to develop a capacity building programme on investment promotion for staff both at the Hub and in the County Governments.
The project’s document indicates that operations would run through to the end of 2022, but funding would be required beyond this date for the FDI Promotion activities to continue running throughout the 2021-2027 period. Point 3 on the revamped institutional framework has not been implemented yet.
Source: (World Bank, 2019[25]), Strategic projects for Slavonija, Baranja & Srijem 2014-2020: FDI Promotion, The World Bank.
Subnational investment promotion evolved with the absorption of the IPA into a Ministry
Challenges in delineating the responsibilities of the MESD and MRDEUF in promoting FDI in support of regional development are expected for a mandate that can hardly sit in one single body. This challenge is ever greater in a context where EU Funds play a massive role in determining investment and regional development policies. Unclear or overlapping responsibilities are, however, only one reason why promoting FDI across regions is not a top priority for the MESD. The configuration where a directorate in a ministry – and not an autonomous agency as it was the case until 2019 – is responsible for promoting investment might be another, albeit related, reason (see also Chapter 3). Among the IPAs of OECD countries, for instance, more than two-thirds of autonomous agencies have a mandate to promote regional development, while this ratio is of 10% for IPAs that are departments in a ministry (Table 4.4). On the other hand, managing SEZs or industrial parks is more common in IPAs within Ministries, as in Croatia, than when they are separate agencies.
The national IPA that was dismantled – AIK – did not have regional development as part of its official mandate, but it has de facto supported regional development in certain ways (OECD, 2019[29]). For example, AIK helped promote regions in its activities with investors and created promotional materials for certain regions. Most importantly, under the Strategy for the regional development of the Republic of Croatia until 2020, AIK was in charge of creating a unified communication model towards investors on all levels of the Government, providing support to the activities of regional development agencies and developing joint actions for several counties and local units in attracting foreign and domestic investments.
The absorption of the AIK into a Ministry can give it more political clout, but it is likely that autonomous IPAs have more flexibility in promoting FDI for regional development. They operate at the implementation level with often limited involvement in the policymaking process, in contrast with IPAs in departments of Ministries that tend to combine investment promotion with regulatory or policy functions, as it is the case in Croatia. Furthermore, autonomous agencies can report to different ministries or to an inter-ministerial taskforce. In France, for instance, the national IPA is an autonomous agency that reports to four different Ministers, including the Minister of Economy and the Minister of Regional Cohesion, and, in turn, the agency has the mandates of promoting both investment and regional development. The IPA established Team France Invest, a system that brings together public actors in charge of attractiveness at regional, national and international level to support new investors and to anticipate the needs of already established firms and of territories. The structure supports coordinated action at different levels of government to ensure better clarity of the available offer vis-à-vis foreign targets (OECD, 2022[1]).
Notwithstanding the existing governance challenges, Croatia’s revamped institutional framework to channel FDI for regional development presents some opportunities. Realising them implies to clarify responsibilities, ensure coherence of objectives, and facilitate cooperation not only between the MESD, other ministries and subnational bodies, but also within the MESD. The absorption of the AIK into the MESD brough the mandates over investment promotion and the oversight of subnational entrepreneurship support institutions and free zones under the same roof – the one of the Internationalisation Directorate. Accordingly, the Directorate is home to the Investment Sector, a department composed of former AIK staff, and the Sector for Incentives and Entrepreneurial Infrastructure, which was historically part of the Ministry.
If the MESD’s Investment Sector promotes Croatia as an FDI destination, in cooperation with local bodies, it is the Incentives and Entrepreneurial Infrastructure Sector that is tasked with improving the investment climate for balanced regional development. The division of labour between the two Sectors on promoting FDI for regional development could be further clarified as both are mandated to conduct investment promotion and provide services to potential and established investors as per the Ministerial Regulation. Furthermore, within the Incentives and Entrepreneurial Infrastructure Sector, it appears that, while the Sector is formally the central body for ESI, the de facto oversight bodies are the subnational authorities. There is no central coordinating body for the network of ESI (OECD, 2019[29]).
Subnational agencies promoting investment are crucial but highly fragmented players
Croatia’s subnational bodies and authorities dealing with investment-related matters operate at the county and city/municipality levels (Figure 4.11). The most relevant actors are the local and county development agencies of the ESI – referred to as EDOs in Box 4.1, followed by regional and local government authorities (Table 4.5). Croatia has no dedicated subnational IPAs, as 58% of OECD countries, and the MESD’s Internationalisation Directorate has no subnational offices, in contrast with 61% of OECD national IPAs (OECD, 2022[1]). Most OECD countries with no subnational IPAs also rely on EDOs to promote and facilitate investment at the local level, although differentiating between the two bodies is not always straightforward – some subnational IPAs operate within wider EDOs such as in Spain “Catalonia Trade & Investment”, which is part of the regional Agency for Business Competitiveness (Lewis and Whyte, 2022[30]). EDOs are often independent entities from the central government, reporting to subnational authorities. Likewise, EDOs in Croatia are legal entities that are established subnational governments, although they must be registered within the MESD’s database of ESI as a prerequisite for using the ministry’s grants for the creation of the agency.
The mandate of Croatian EDOs goes beyond investment promotion and facilitation, as it is the case of EDOs in OECD countries (OECD, 2022[1]). Croatian EDOs operate, in principle, under the Act on Improving Entrepreneurial Infrastructure and are responsible for the operational implementation of measures for the development of the economy and entrepreneurship, encouraging and attracting investments, and initiating and implementing projects to encourage economic development and entrepreneurship, unifying the work of economic entities, local and regional entrepreneurial institutions, and higher education institutions and knowledge centres. The Act states the conditions and criteria for granting incentives through EDOs (see Chapter 5). The group of ESI includes a large variety of institutions other than EDOs such as technology parks, business incubators and entrepreneurial centres. They differ by services offered and firms served, but their common goal is to encourage business activity through training programmes, counselling, informing and connecting companies (see also Chapter 3).
There is a plethora of subnational development agencies but their impact on FDI is unclear
Despite Croatia’s small geographic size, the country counts 79 EDOs according to the MESD’s database of ESI, which is significantly more than in OECD countries, both in absolute value – Croatia has as many EDOs as Canada or France – and relative to the number of second-level subnational governments, i.e. counties in Croatia (Figure 4.12). There is, on average, 3.8 EDOs serving each of the 21 Croatian counties. Among the group of OECD countries with a similar geographical size, only Denmark has significantly more EDOs than Croatia. Overall, the MESD’s database of ESI included 212 ESI institutions in 2022.
Figure 4.12. Subnational Economic Development Organisations in Croatia and OECD countries
Note: Subnational EDOs refer to local and county development agencies in the Register of Entrepreneurship Support Institutions.
Source: OECD Survey on Investment Promotion and Regional Development (2022).
There is a lack of a coherent, unified and strategic approach and a clear economic rational to setting up as many ESI, however, and the Act on Improving Entrepreneurial Infrastructure is silent on this matter. Plethora of EDOs – and of business support infrastructure more broadly – were established after the autonomy that counties and their 555 municipalities/cities have gained in 2001 (Figure 4.13). This was also enabled by the low population threshold to be administratively counted as a grad or city and, in turn, have the rights to establish their own business infrastructure. In some cases, two or more towns or municipalities have founded joined ESIs. The accession of Croatia to the EU in 2013 and the related EU aid received since then to reduce territorial disparities seem to have accelerated the creation process of ESI, particularly in economically less developed regions (Stojčić, Pylak and Alibegović, 2022[20]).
Figure 4.13. The impact of reforms on the creation of business support infrastructure over time
Note: EDOs in Croatia correspond to local and county development agencies listed in the Register of Entrepreneurship Support Institutions.
Source: OECD based on the Ministry of Economy and Sustainable Development Register of Entrepreneurship Support Institutions.
The distribution of EDOs is uneven across Croatian counties, which are more concentrated in the less developed regions with lower business density levels. If there is one county development agency operating at the level of each of the 21 counties, the number of EDOs varies significantly at the municipality/city level. Osijek-Baranja and Split-Dalmatia, for instance, have each seven local development agencies while Istria and Primorje-Gorski Kotar have two, reflecting differences in business activity (Figure 4.14, Panel A). This uneven configuration remains unchanged when examining the distribution of all ESI bodies. Split-Dalmania and, to a lower extent, Osijek-Baranja continue to stand out as the counties with many ESIs, often serving fewer businesses than in other counties (Figure 4.14, Panel B). The two counties also rely on entrepreneurial centres more than incubators or accelerators, in contrast with the more developed regions of the northwest such as Istria, Primorje-Gorski Kotar and Zagreb. For instance, 18 of the 30 ESI bodies of the City-County of Zagreb are incubators or accelerators and only seven are entrepreneurship centres. This highlights the more R&D-intensive nature of investment projects in a metropolitan area like Zagreb.
Figure 4.14. Entrepreneurship support institutions by county, type and business density levels
Note: EDOs in Croatia correspond to local and county development agencies listed in the Register of Entrepreneurship Support Institutions.
Source: OECD based on the Ministry of Economy and Sustainable Development Register of Entrepreneurship Support Institutions.
Croatia’s different tiers of government should better assess the performance of EDOs and design more strategic, responsive, reforms to address potential bottlenecks. The large number of EDOs should, in principle, help promoting and facilitating investment as subnational bodies endowed with such tasks proved to be effective in other contexts (Box 4.5). Their cost-effectiveness in Croatia is not established, however, considering the relatively low performance on increasing productivity, competitiveness, and innovation (World Bank, 2019[14]). The concentration of ESI institutions does not correlate with business density, including of foreign firms, which may suggest that existing facilities do not address the most important bottlenecks to foreign and domestic investment. On the other hand, this might indicate that economically less developed regions needed to deploy more of these bodies to address severe business climate issues (Kontošić Pamić and Belullo, 2018[31]; Stojčić, Pylak and Alibegović, 2022[20]). In fact, the more developed regions established most of their ESI earlier before the less developed regions.
It is critical to design robust M&E mechanisms to monitor EDOs – and ESI more broadly – performance. At the central level, and as the administrator of the IEIR, the MESD could develop a unified set of indicators to help EDOs monitor their impacts as well as the impact of reforms that affects them. The MESD’s only tool to monitor the impacts of its activities on regional development is FDI distribution across regions. Furthermore, the MESD’s Customer Relationship Management (CRM) is not connected to the CRM of EDOs – should they have one – but this is the case in most OECD countries as well (OECD, 2022[1]). Overall, performance-monitoring systems of decentralised investment environments need to be simple, with a reasonable number of standardised indicators. Higher levels of government should be able to monitor subnational performance of governments below them.
Box 4.5. Establishing subnational IPAs: why and for what? a brief review of the literature
Agencies promoting and facilitating investment are playing an increasingly central role in the development of the regional economies in which they operate – most OECD national IPAs have put regional development high on their agenda, regardless of the size of their economy (OECD, 2022[1]). At the same time, the number of subnational IPAs has grown significantly over the past couple of decades, with the geographic proximity between local IPAs and investors becoming more important (Lewis and Whyte, 2022[30]). Subnational factors became crucial in the location and expansion decisions of firms in a globalised world economy with fewer national barriers to trade and investment and, more recently, with changes in GVCs following the COVID-19 pandemic (Crescenzi and Harman, 2023[32]).
The rationale for establishing a subnational IPA can be related to specific economic challenges or opportunities that a region faces such as industrial restructuring leading to the need for sector diversification and new job creation. IPA creation may also be influenced by situations in which national and subnational economic goals and priorities are different, for example, in relation to the focus on different priority sectors (Lewis and Whyte, 2022[30]). The intensity of investment promotion at the subnational level can also be related to the situation in the regional labour market. For instance, Czech, Polish and Slovak regions with higher unemployment rate and lower income levels developed more holistic investment promotion approaches (Capik, 2020[33]).
The rationale for setting-up subnational IPAs became stronger with FDI forming an integral part of regional growth policies and strategies, including of CEE Countries. Many subnational IPA mandates are set within a wider regional economic strategy, with investment promotion forming one pillar of the growth plans for the territory, alongside policies that promote trade, improve skills, support SME development, and enhance infrastructure for the region. That positioning enables the subnational IPA to influence wider regional competitiveness and attractiveness factors, making advocacy for investment reform more straightforward (Lewis and Whyte, 2022[30]).
Subnational institutions striving at informing investors about the attractiveness of regions and improving the local business climate proved to be effective. They can ensure that the geographical distribution of FDI is governed by local market conditions and not information asymmetries or transaction costs. Regions are the most knowledgeable when it comes to providing specific information of critical interest to foreign investors, such as land location options, access to local talent or contact with local partners (Fernández, Blanco and Aranda-Larrey, 2021[34]). Foreign firms prospecting potential locations face information asymmetry and business uncertainties that create information costs. When information is scarce, investors mimic the decisions of already established firms and, in turn, existing agglomerations of investors become the only signals for decision-making (Mariotti, Piscitello and Elia, 2010[35]).
Furthermore, subnational IPAs act as local ‘institutional plumbers’ in support of foreign investors and their operations (Crescenzi, Di Cataldo and Giua, 2021[19]). Their activities can cut operational or search costs of foreign investors – for example when setting up a training centre or contributing to its creation, reducing transaction costs when interacting with local actors. The relevance of IPAs is stronger when information asymmetries are more severe, markets less transparent and institutional conditions weaker. Furthermore, by enhancing the local supply of human capital and modern infrastructure and by improving other fundamentals for growth, not only do regions become a more attractive location for investors but the extent of benefits FDI generates can increase through spillover mechanisms.
Croatia should clarify subnational bodies’ engagement on investment promotion
The revision of Croatia’s Act on Regional Development in 2018 led to a reorganisation of EDOs, generating some confusion but also an opportunity to clarify their role in promoting and facilitating investment. The Act on Regional Development provided for the creation of local and regional development agencies – or Regional Coordinators. These agencies have broader mandates than EDOs, including regional strategic planning, formally interact with the MRDEUF and sit on local or county Partnership Councils. This has led some EDOs operating under the Act on Improving Entrepreneurial Infrastructure as development agencies to rename themselves or to separate their business functions from the broader regional development activities. For instance, the Regional Development Agency of Zagreb County, created in 2004, split after 2018 into the Development Agency of Zagreb County, which started to operate under the Act on Regional Development, and the Entrepreneurship Centre of Zagreb County – another type of ESI – that continues to operate under the Act on Improving Entrepreneurial Infrastructure.
If the reorganisation of EDOs following the 2018 reform on regional development seem to have taken place – or is taking place – smoothly, there is no sufficient clarity on which subnational agency took over the tasks of investment promotion and facilitation. A disproportionate number of EDOs were added to the register of ESI in 2018 following the 2018 reform, although these agencies operate under the Act on Regional Development (Figure 4.13). For instance, the Regional Development Agency (or Regional Coordinator) of Medimurje County – REDEA – was added to the register in 2018 while in the OECD Survey the agency indicates reporting to the county government authorities and the MRDEUF. Furthermore, it is not clear if the revamped local and regional development agencies (or regional coordinators) created under the 2018 reform are, in practice, carrying the investment promotion mandate of their predecessors of the Act on Improving Entrepreneurial Infrastructure. For instance, the Regional Development Agency of Lika-Senj County – LIRA – indicated that regional development is its sole core responsibility, in contrast with REDEA that listed FDI promotion as a core responsibility, together with regional development.
Furthermore, EDOs listed in the IEIR are, in principle, the development agencies that are mandated with IPA-type of activity at the subnational level, but there is a large discretion in the extent to which they carry such responsibility, both vis-à-vis other ESI bodies and the development agencies created under the Act on Regional Development. OECD consultations indicated that local or county development agencies are perceived by the central and subnational government actors as bodies mostly in charge of managing EU aid – and thus operating under the Act on Regional Development, with little or no involvement in attracting FDI. They also have a misperception that investment promotion only includes offering incentives rather than promoting a full investment offer (World Bank, 2019[10]). On the other hand, the Entrepreneurship Centre of Zagreb County, for instance, identifies itself as the de facto IPA, although most of the services of an Entrepreneurship Centre focus on SMEs and are limited to some business facilitation aspects such as providing support on the location of the project through the business zone map. In practice, most foreign firms rely on their own lawyers to navigate business rules instead of ESI institutions.
Any future revision of the Act on Improving Entrepreneurial Infrastructure should clarify the existing references to local and county development agencies to avoid confusion with those created under the Act on Regional Development. The Act should also clarify which, if any, of the subnational ESI carry explicit investment promotion and facilitation mandates that are recognised and clearly understood by all central and subnational, public and private, actors. Their role should be also clearly distinct from the development agencies operating under the Act on Regional Development to avoid overlap, unless it is the latter that are put forward to carry the investment mandate. Furthermore, the MESD’s registry of ESI should be updated. The database continues to include bodies than are established under the Act on Regional Development, creating uncertainty on the exact composition of the network of ESI and limiting the possibility to properly evaluate their role in and impact on local development.
There is a large discretion in how local government authorities attract investment
Another important actor in the investment climate landscape of Croatia are the subnational local and county self-governments (Table 4.5). Likewise, many local authorities of OECD countries such as economic departments of city authorities are directly involved in economic development issues that sometimes include an investment promotion or facilitation component (OECD, 2022[1]). Most of the support provided by municipality/city officials happens once the potential investor knocked on their door. The type of support often relates to allocating land in business zones – over which they have responsibility – with the adequate infrastructure (e.g. electricity, roads) and issuing local permits such as construction permits. They dedicate less efforts to promote themselves as investment destinations or to identify potential projects through investment generation activities.
There is a large amount of discretion in the efforts subnational governments in Croatia put on attracting FDI, and their level of involvement varies strongly both across levels of government and from one local government to another. It is likely that self-governments of large cities with attractive urban hubs are more inclined to engage in foreign investment promotion and facilitation, in contrast with smaller cities or municipalities of rural areas that have less specific value proposition as investment destinations and that might rely on their development agencies or on the MESD to attract investors. Ultimately, the question is not only whether subnational governments should engage in FDI attraction or not, but to have clarity among all involved actors on the responsibilities of each.
Croatia could further clarify why and how some subnational government authorities carry themselves the task of promoting and facilitation investment while others leave that to their development agency, when such task is ever performed. This can have consequences on investment priorities, the financial resources allocated by the county or central government and on reporting lines – development agencies operating under the Act on Regional Development report to the MRDEUF on several matters while self-government authorities do not. Relatedly, the political parties in power at the national level can be different from those at the subnational level and, in turn, the degree of confidence that local governments have in the ability and willingness of the national IPA or central government to represent their priorities can influence the need for and scale of investment promotion and facilitation activities. That factor can be accentuated when different sector priorities exist at the national and subnational levels (Lewis and Whyte, 2022[30]).
The OECD team consultations with elected government officials of the cities of Novska, Osijek and Zagreb revealed some of the different approaches to attracting FDI across subnational governments. When there is a potential and large foreign investment project, cities form a dedicated, albeit ad hoc, team comprising representatives from different city departments (Economy, EU Funds, etc.) to support the investor – the team does not include representatives from the county or the MESD’s Investment Sector. It is possible that cities such as Osijek directly engage in investment promotion and facilitation partly because they did not establish their own local development agencies, in contrast with the smaller city of Novska that seems to also rely on the local agency – NORA – as an entry point for foreign investors, although the agency focuses mostly on SMEs and export facilitation.
The involvement of municipalities/cities significantly facilitates the business establishment process, but the success of this support can largely be discretionary and depend on the proactiveness of staff, including of elected officials. This can generate conflicts of interest and distort the level-playing among investors, particularly in cases where the approval of the municipality/city council for sizeable investment projects is required. Separating oversight (municipality/city Council) and implementing (the entity providing support to investors) functions increases transparency. Providing clear information as well. The city of Zagreb, for instance, has a single window where investors can get information on permits needed to start a business, thereby reducing any discretionary behaviour and corruption risks by officials.
Coordination mechanisms could be improved across tiers of government
Considering Croatia’s complex institutional architecture and the plethora of national and subnational actors involved in investment promotion and facilitation, maintaining a good relationship with peers is key to achieve successful results. Relationships between the central and subnational bodies in charge of investment can face obstacles and bottlenecks of different natures. They are also different depending on the subnational level and subnational institution with which they interact, be it an EDO or local authorities of self-governments. Uncoordinated activities at subnational levels can lead to redundant activities, conflicting messages to investors, a misuse of public spending, unhealthy competition across regions and increased regional disparities (OECD, 2022[1]).
Coordination can hardly take place when mandates are not well defined in the first place
The main challenge faced by the MESD’s Internationalisation Directorate in its relationship with subnational entities relates to the confusion over the strategic issue of mandates (Table 4.6). This has major implications on which subnational bodies the MESD should coordinate with, at what level of subnational government and on what and how to coordinate with them. The Directorate has no formal mandate to coordinate subnational initiatives. While this certainly represents a limit to effective coordination, it is a challenge that is shared by other IPAs. What is specific to Croatia – and more problematic – is the lack of clarity over the mandates assigned to each actor. Coordination can hardly take place in a context where responsibilities are not well defined in the first place or not clearly communicated to all actors. This also affects the strength and quality of the relationships. The MESD is often in contact with subnational EDOs and subnational governments. Most IPAs of OECD countries report having strong relationships with their subnational EDOs (Figure 4.15).
Table 4.6. Main challenges faced by the Croatian IPA in their relationship with subnational entities
Source: OECD Survey on Investment Promotion and Regional Development (2022).
The MESD’s Internationalisation Directorate relationship with the subnational level is particularly limited or inexistent when it comes to complementarity of activities, in contrast with collaborative aspects involving, for instance, information-sharing (Figure 4.15). It is the opposite in OECD countries where there is often better complementarity of activities than collaboration, reflecting the clearer roles national IPAs and subnational bodies play vis-à-vis investors (OECD, 2022[1]). The MESD also indicates that the lack of willingness to cooperate is the least of the challenges it faces with subnational entities (Table 4.7).This suggests that conducting complementary activities is more complex than working jointly in Croatia, highlighting again the necessity of clarifying responsibilities across levels of government as a first step to avoid overlapping activities and achieve effective coordination and good cooperation. The fact that the coordination challenges the MESD faces are identical for EDOs and local government authorities– while they vary for OECD national IPAs – also reveals that there is no clear distinction in the work of different subnational entities in Croatia.
Figure 4.15. Relationships between national IPAs and subnational entities in OECD and Croatia
Note: Complementarity: the national IPA and the subnational bodies bring different qualities that are improved or accentuated by the relationship (e.g. exploiting synergies, ensuring mandates and activities reinforce each other). Collaboration: the national IPA and the subnational bodies decide to work together to achieve a result or produce something jointly (e.g. sharing information, co-ordinated activities);
Source: OECD Survey on Investment Promotion and Regional Development (2022).
Coordination could be particularly reinforced over some strategic investment matters
The coordination challenge in Croatia is further undermined by the fact that there are no formal coordination mechanisms between the MESD’s Internationalisation Directorate and EDOs, despite that they are in the IEIR and need approval from the Ministry on land allocation (Table 4.7). Financial support from the MESD stopped in 2014, although it was allocated afterwards on couple of occasions through EU funds. Relationships are informal, albeit frequent, and consist to a large extent of bilateral interactions on land availability in entrepreneurial zones and on other aspects related to businesses’ establishment (see also Chapter 3). National IPAs of OECD countries also largely rely on informal coordination mechanisms with subnational agencies such as information exchange and co-ordination meetings, as opposed to more constraining mechanisms involving budgetary contributions and board membership. These informal mechanisms can sometimes be perceived by IPAs to be more effective (OECD, 2022[1]).
Table 4.7. Coordination mechanisms between the national IPA and EDOs in Croatia and OECD
Source: OECD Survey on Investment Promotion and Regional Development (2022).
Notwithstanding the effectiveness of informal coordination mechanisms between national and subnational investment bodies in Croatia, they are not suited to address all sorts of challenges. While good informal relationships between the MESD and local entities can help assist foreign investors in establishing their business and operations, they cannot address holistic, long-term and strategic policy issues. The development agency of the city of Novska, for instance, mentioned four ways through which the MESD could further assist them: put at the disposal of subnational entities a database or a pipeline of potential investment projects, invite them more often to participate in fairs to reinforce networking opportunities, consider local specificities in the prioritisation of subsectors for FDI promoting – even if minor, and provide clear information on industry requirements. Support by the MESD on matters that are largely related to investment promotion functions can hardly be achieved through existing ad hoc coordination mechanisms.
Reinforcing coordination on investment facilitation challenges in Croatia also requires a collective decision process involving multiple actors. This cannot be achieved through ad hoc, bilateral, exchanges between the MESD and subnational entities. For instance, some prospective investors ask the authorities to sign non-disclosure agreements until the project is concluded to avoid information leaks. The MESD policy is to not sign such agreements, while some local governments have no such policy. Notwithstanding the relevance or not of such agreements, this may lead to situations where one actor – the central government – is excluded from the negotiations with the investor. This increases the risk that the project does not materialise due to the uncertainty created by the asymmetry of information and the less holistic approach to supporting the investor. This and other similar issues warrant that the MESD with all or at most relevant subnational actors collectively agree on a common approach (see also Chapter 3).
Croatia has several options to strengthen coordination on subnational investment
There are several avenues Croatia could opt for to strengthen coordination over investment promotion and facilitation, including on more strategic matters. These avenues should be realistic considering the decentralised political landscape. A desirable option would be to set coordination mechanisms at the level of large NUTS 2 regions in light of the great number of subnational governments and bodies for a small country like Croatia. This can also help develop an attractive value proposition in terms of investment promotion – most counties are economically too small to make a difference. There is no legal framework to allow for such cooperation and counties may not be politically willing to engage to the extent that a coordination mechanism at the NUTS 2 level would require a joint and new body (World Bank, 2019[25]).
A more realistic option is that the MESD, MRDEUF, subnational EDOs and relevant departments of large cities involved in IPA type of activities, for instance, jointly develop a cooperation agreement, protocol or guidelines that describe the rules of engagement of each actor with a clear distribution of functions and roles at different stages on both investment promotion and facilitation aspects (see also Chapter 3). This can be an effective “light-touch” tool to coordinate subnational governments across administrative boundaries, and to coordinate between central ministries and local authorities, without creating new bodies (World Bank, 2019[14]). In the OECD, 44% of national IPAs that are also EU Members signed formal cooperation agreements with EDOs, as for instance in Czechia (Table 4.7). This document could clarify if and how each actor is involved in investment promotion activities, including in targeting specific subsectors that are relevant to the region, and address a variety of investment facilitation issues – adopting a unified approach on non-disclosure agreements is one example of such issues.
A cooperation agreement can also reinforce coordination and cooperation by clarifying and streamlining the tasks and composition of the teams subnational entities sometimes create to assist foreign investors. Forming a team with different levels of government can ensure alignment while reducing uncertainty for the investor – investors engage sometimes in separate and overlapping discussions with the central and local government. The previous Act on Investment Promotion and Improving the Investment Climate included a provision that requests the national and subnational investment bodies to coordinate by forming joint ad hoc bodies for specific investment projects that must include at “least one representative from the local government, one from the county development agency responsible for promoting and attracting investment, and one from the central body responsible for promoting and attracting investment”. This provision was hardly implemented. This provision is now inexistent as the Act itself was abolished.
Croatia could strengthen coordination mechanisms on investment promotion activities. The MESD could establish, in cooperation with relevant subnational entities, a platform to announce foreign investors’ expressions of interest received by the ministry. This would enable a proactive approach to attracting FDI and provide insight into investment projects in the county that will contribute to growth and regional competitiveness (World Bank, 2022[36]). Croatia is a small country, but investors may still not be aware of differences between different regions or counties. This platform can help build trust while strengthening fair competition among subnational bodies that must put strong and clear value propositions. Shared investment pipelines are a feature of some national-subnational collaborations (Fernández, Blanco and Aranda-Larrey, 2021[34]). The Spanish national IPA, for instance, has an online tool that allows all subnational IPAs to view leads, identify those they would like to compete for, and notify the national agency (Box 4.6). Similar mechanisms are in use by subnational bodies such as Copenhagen Capacity (Lewis and Whyte, 2022[30]).
Box 4.6. Interactua: Spain’s ICT coordination tool on subnational investment promotion
ICEX-Invest in Spain, the national IPA, in conjunction with the subnational IPAs of the 17 autonomous communities, have developed several mechanisms, tools and activities that have enabled good collaboration, including the Interactua ICT platform, an innovative CRM-type software that became a fundamental tool in articulating ICEX-Invest in Spain relationship with subnational IPAs.
The tool allows the joint management of numerous activities related to investment projects, the management of investment promotion activities, and the exchange of information (news, documentation or databases, among others). The most attractive functionality of the platform is a mechanism to announce foreign investors’ expressions of interest received by ICEX-Invest in Spain, and its subsequent dissemination through the platform to subnational IPAs.
Once the project information is disseminated through the platform, the subnational IPAs can submit their proposals by presenting their value propositions as potential locations for the investment project. The coordination tool also helps communicate and coordinate with the potential investors, making the announcement of the potential investment project confidential with respect to the client and transparent with respect to the subnational IPAs, ensuring that the latter are all informed of the opportunities.
Interactua is an example of successful platform for the foreign investors, who may not be always aware of the differences between locations, and at the same time strengthens fair competition among subnational IPAs that must put strong and clear value propositions. The transparency of the platform can also help maintain of trust among the diverse range of stakeholders.
Source: (Fernández, Blanco and Aranda-Larrey, 2021[34]), National-Subnational Coordination for Investment Attraction: The Case of Spain, Washington, DC: World Bank, https://openknowledge.worldbank.org/handle/10986/35235.
An additional yet complementary avenue Croatia could consider is to establish an informal network or an inter-institutional coordinating body that brings together all relevant actors involved in subnational investment promotion and facilitation. Developing a joint agreement that clarifies the role and functions of each body or a digital tool sharing the pipeline of potential investment projects require effective dialogue platforms between the MESD’s Internationalisation Directorate and subnational entities. France, Czechia, the Netherlands or Portugal all established formal or informal networks or coordination bodies that bring together national and subnational actors involved in investment promotion and facilitation (Box 4.7). These bodies often bring together subnational IPAs or bodies of the same territorial subdivision – the one thought to be the most suitable. Overall, coordination mechanisms are more prevalent and sophisticated between national and subnational IPAs than with EDOs or local authorities (OECD, 2022[1]).
Another option is to leverage existing networks of bodies involved in investment and regional development. Croatia’s IEIR represents the most natural starting point. It is only a database, however, that includes too many agencies with different functions and spreading over both the county and municipality/city self-governments. The MESD has also no role as a central coordination body. BOND, an informal network established by HAMAG-BICRO, brings together around 100 ESI bodies – nearly half of the MESD register – with the objective of building their capacity, including through peer-learning, and improving the quality of services provided to entrepreneurs as well as their harmonisation. The focus of BOND is not on FDI promotion and facilitation, however, and the MESD’s Investment Sector is not part of the network. Croatia could consider expanding the topics of BOND to cover FDI and regional development.
Box 4.7. Multi-level investment promotion and facilitation coordination tools in the OECD
IPAs have at their disposal several coordination mechanisms with subnational agencies, but not all are used with the same intensity. In general, there are more coordination mechanisms with subnational IPAs than with EDOs. The difference is particularly striking in the cases of regular coordination meetings, formal agreements and shared offices abroad. Half of IPAs in the OECD have formal agreements with subnational IPAs, but only 29% with EDOs. Furthermore, there is approximately one national IPA out of five that shares its offices abroad with subnational IPAs, but none has the same approach at subnational level, except with few EDOs (13%). This reinforces the fact that coordination tends to be easier with agencies that have similar mandates and objectives.
To improve cooperation with local agencies and authorities, some national IPAs established specific departments or networks. In Türkiye, the IPA had originally a dedicated department whose main mandate was to develop cooperation mechanisms with subnational IPAs. Eventually, the department did not go beyond organising "cooperation meetings" and could not present any concrete results. It was hence dissolved and the responsibility was given to an operational department of the agency that is now able to carry out concrete activities in cooperation with subnational IPAs. The IPA of Costa Rica adopted the opposite approach and established a specialised division for investment promotion outside of the Greater Metropolitan Area. This unit works with several constituencies in the community, including municipalities and private-public development agencies as well as academia and training institutions.
France launched in 2021 Team France Invest and the IPA has a formal information-sharing process to increase the efficiency of the collaboration with subnational IPAs. The IPA created a “marketplace” of projects and shares information weekly with its regional partners about new FDI projects identified, and requests made at the regional level. Thanks to this platform, partners can coordinate their responses and identify areas for joint action. This framework guarantees the impartiality and neutrality of the IPA vis-à-vis all the regions (not favouring one over the other when bringing new projects).
Portugal also launched in 2021 the National Economic Internationalisation Programme, which aims to strengthen the promotion of territories and the skills of territorial agents in their investment promotion and follow-up processes. The programme promotes inter-institutional action to increase FDI flows and achieve a balanced distribution of investment across the country. AICEP Portugal Global closely collaborates with local authorities, promoting different locations across regions to foreign investors.
Spain’s Investment Attraction Committee (CAI), a permanent inter-administrative collaboration body, is composed of ICEX-Invest in Spain (which serves as permanent Secretariat), IPAs of the 17 autonomous communities, the Confederation of Business Organisations, and the Chamber of Commerce and Industry. Investment promotion activities, technical workshops, business missions, improvements of the investment climate and the analysis of sectors hold prominent places in the CAI. The CAI is one of the two committees of the Interterritorial Council for Internationalisation – established by law – that sets out the foundations for the coordination between the state administration, autonomous regions and the private sector. Institutional cooperation on FDI attraction is one of the Council’s objectives
Source: OECD (2022), "The geography of foreign investment in OECD member countries: How investment promotion agencies support regional development", OECD Business and Finance Policy Papers, No. 20, OECD Publishing, Paris, https://doi.org/10.1787/1f293a25-en
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