TCN was present at the “White Book 2016” presentation held by the Foreign Investors Council at the Mimara Museum in Zagreb on 25 October, 2016. The “White Book 2016” is the annual publication of the Foreign Investors Council on the investment climate in Croatia, with recommendations on how to improve the overall business environment in the country. The presentation was led by Prof. Boris Vujčić, Ph.D, Governor of the Croatian National Bank, and Hrvoje Stojić, Chief Editor of the White Book 2016.
First off, what is the Foreign Investors Council (FIC)? The FIC was founded in Croatia in January 2012 by 11 companies that had the intention to initiate constructive dialogue with the Croatian Government, along with other stakeholders in Croatia, in an effort to improve the adverse business climate that exists within the country. As the climate has never fully been in favor of both domestic and foreign companies, the FIC stands by their claim that international companies doing business in Croatia can only positively contribute to the business climate, achieving faster and more sustainable economic growth.
Attracting foreign investments and encouraging present investors to develop their businesses in Croatia is crucial for the economy to generate growth in Croatia - foreign investors play a major role in the economic recovery with positive attributes such as fresh capital, new qualities, innovative technologies and job openings as just some of the many possibilities.
As the newest member of the EU, Croatia is now a part of the most competitive market in the world - how do we add up next to everyone else?
In order for Croatia to pick up with the rest of EU countries and move forward in its path to development, Croatia should look at increasing efforts in order to attract more Foreign Direct Investments (FDI). Studies show that a 1% increase in FDI increases the total investment of 0.5%-1.3%, and GDP growth to 0.5%-1.0%.
The role of FDI in a host country’s growth and development has already been confirmed by many studies, including those from FDI companies in Croatia. FDI companies show faster growth in revenues and capital than domestic companies, a growth in productivity, and a major portion of FDI companies’ retained profit is even reinvested (approximately ⅔) - confirming the on-going interest of a company in which investment has been made.
FDI companies represent a significant part of the Croatian economy already, whether it be through capital, total revenues, exports, employment or investment - they actually represent almost a third of overall companies' capital in Croatia, with the share of export approaching 40%.
How does Croatia then foster and encourage more FDI into the country?
Despite the fact that the government has declared its commitment to attracting foreign investments to further benefit the Croatian economy, there are still some factors that might hinder FDI to Croatia in the long term. These factors are considered crucial to amend in an effort to encourage further FDI to Croatia.
Currently, the FIC ranks the toughest problems in the business climate in Croatia as:
legal uncertainty
tax compliance
para-fiscal charges
public administration and judicial drag
labor issues
access to finance
How does the FIC suggest amendments be made?
For legal uncertainty, FIC recommends ideas such as an Extensive Regulatory Impact Assessment on each new legislation or by law, and an extension capacity for the Regulatory Impact Assessment.
For the tax system, the FIC suggests ideas such as resolving tax dispute procedures quicker, a reviewal and adjustment of all tax allowances on an annual basis, introducing “bad debt relief” and reducing the tax on purchase of real estate.
For para-fiscal charges, a permanent body consisting of business associations, Government ministries and agencies should be established to work on abolishing and reducing para-fiscal duties to ensure their permanent session until all chargers are gone. Legislations and by-laws should also be sent that introduce para-fiscal charges to Regulatory Impact Assessment.
Public administration and judicial drag can be changed with reform and active education towards more business-like and client-oriented work, or by modifying the structure of lawyer’s fees that currently create incentives to prolong litigation.
Labor issues can be fixed by reducing the overall labor tax burden, eliminating numerous codes in payment for reference numbers, and introducing simple requirements for working hours from home.
Access to finance can be made easier by proposing clear, unambiguous criteria for write-offs - i.e. unpaid debt due for at least 180 days or no material collaterals of value, while conditions for out of court write-offs should equally apply on all creditors/debtors irrespective of sector or type of credit relationship.
While this is only a sliver of the suggestions the FIC has proposed per category, we can summarize that an unpredictable and unstable regulatory framework, lack of transparency of administrative procedures, insufficient institutional capacity on a national and local level, and corruption are the key obstacles for foreign investment in Croatia.
With that said, where do we go from here?
The FIC does remain optimistic, but one thing is clear: in an effort to become attractive to foreign investors, a change in Croatia’s business climate and environment is conducive.
Croatia is near the bottom in education, with a system only better than Bulgaria, Romania and Greece in math - without education reform, how can we raise a business intelligent youth?
Croatia is one of the least competitive countries with essentially no equity - we are a country that must create credit and develop a capital market.
Studies show that a better business environment is essential to receiving EU funds. While Croatian tourism is looking up and increasing the capacity and accommodation quality definitely attracts higher spending tourists - is that enough?
We can conclude with this: Croatia has a long way to go and the new government has a big task ahead of them. Inbetween every finite detail, one thing remains clear: in order to be more efficient and competitive, Croatia must make changes to their business climate which will in turn be more attractive to foreign investors.
TCN was grateful to be a part of this presentation and we thank the FIC for having us.
