Croatia: an improving business environment
Opinion 5 minute read

Croatia: an improving business environment

29 October 2014

A land caught between emerging and developed, Croatia still offers plenty of opportunity for investment says our Sub-Regional Director for CEE.

As part of Central Europe, Croatia is caught in an economic no-man’s-land: it no longer has the excitement of an emerging economy, but it has yet to reach the status of a developed economic region. Nevertheless, there are still plenty of attractive investment opportunities available. The addition of most South East European nations to the European Union has triggered a material change in how businesses operate there, and many new investors in the region are having positive experiences.

With GDP of US$13.530 per capita (World Bank 2013), Croatia is the second richest economy in the SEE region after Slovenia.  After five years of recession, however, the market is still struggling to recover from the global financial crisis of 2008 and the conflict of the 1990s. GDP fell by roughly 1% in 2013 and the economy has now shrunk by 12% since 2008. Household spending, gross fixed investments, exports and imports have all continued to fall and the only year-on-year contributor to growth in Q4 2013 was government spending which rose by 1.2%.

Even without the global financial crisis, there have historically been a number of barriers to doing business in Croatia. Foreign companies have faced excessive bureaucracy, a lack of clarity and transparency in tax administration, as well as perceived high levels of corruption, incomplete and sometimes incorrect land register, and a torpid judicial system.

EU accession negotiations proved the initial incentive for the Croatian government to tackle corruption and reduce bureaucratic and judicial inefficiencies, and since its admission to the European Union on July 1st 2013, the Croatian business climate has noticeably improved.

In early 2014, the Croatian government implemented an additional series of legislative adjustments designed to further strengthen measures taken during the EU accession process.

The government established a formal Working Group for Business Climate and Private Investments comprising high-level representatives of 23 ministries and institutions. In 2013, the Group adopted 120 reform activities and handled 21 projects worth €1,249.13m, creating 3,090 jobs.

Overseeing the Group is the newly established Agency for Investment and Competitiveness which is dedicated to promote: the image of Croatia as an attractive destination for foreign investment; the implementation of investment projects by large companies; and the enhancement of the competitiveness of the Croatian economy on a global level.

At a session on October 25th 2013, the Croatian Parliament also adopted the Strategic Investments Act. The Act is designed to streamline and expedite the process of obtaining all the documentation and approval necessary for starting a project in Croatia if the project is deemed ‘strategically important.’ Under the law, a project is deemed ‘strategically important’ if it has a threshold value of €20m and is related to: production or processing activities, innovation, business support, high added value activities, the energy sector or infrastructure. The Act represents a major step in Croatia’s current agenda for improving the national investment climate.

Croatia has a high average wage - around US$1,360 per month - when compared to some other countries in the CEE, sometimes even countries with higher GDP per capita. The unemployment, however, reaches almost 18% while the population is comparatively young (42 years on average). In a bid to access this resource, labour legislation has also come in for an overhaul after the previous legislation was heavily criticised for being too rigid and unfavourable to employment growth.

The reforms have made labour legislation more straightforward and created greater harmonisation between Croatian law and that of the wider union of European states, vastly reducing the administrative burdens previously associated with expanding into the Croatian market.

In the construction sector, the Construction Act, the Planned Zoning Act and the Building Inspection Act have vastly simplified industry regulation and strengthened the authority of the Ministry of Construction and Physical Planning over local government units. This will reduce corruption, the time and cost previously entailed in the issuance or building permits, and should increase the uniform application of permits.

Improvements in this area are particularly important in terms of attracting foreign investment. Up until the recession, construction was one of the most propulsive sectors in the Croatian economy - especially given its linkages to the tourism industry which makes up 14% of the Croatian GDP. Today, the biggest opportunities in Croatia tend to be related to the burgeoning tourism industry; the long Adriatic coast is proving very attractive for foreign investors.

Renewable energy also presents an attractive growth area for Croatia and in 2013 the government adopted an action plan for renewable energy sources in accordance with the EU Renewable Energy Directive. There is considerable potential for fuel production from biomass with high consumption in rural areas where agricultural waste could be recycled.

Croatia has amended feed-in tariffs for electricity produced from renewable energy sources and cogeneration to further incentivise production of renewable energy, but has yet to meet its 2010 target for electricity production from renewable energy sources, suggesting that this is likely to be an area of ongoing investment.

Croatia currently ranks at number 33 out of 82 in TMF Group’s Global Benchmark Complexity Index which measures the difficulty of doing business in different jurisdictions. This places Croatia just below the average for the CEE nations included in the survey with only Hungary, Poland and Romania ranking worse. Clearly then there is still work to be done, particularly in the public sector and national infrastructure where Croatia has traditionally relied heavily on foreign equipment and service suppliers.

Nevertheless, as Croatia becomes further aligned with the EU, there are increasing opportunities for foreign companies positioned to assist in the modernisation of infrastructure, the introduction of environmentally friendly energy initiatives, the development of the tourist industry and the expansion of communications and technology networks.

Read more about doing business in Croatia

Written by

Juraj Gerženi

Managing Director

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