Overview of Croatia from an Investor’s Point of View

Croatia is a country in Southeastern Europe bordering the Adriatic Sea, between Bosnia, Herzegovina, and Slovenia. In 1991, Croatia declared their independence from Yugoslavia. They have since joined NATO (2009) and the EU (2013) which shows that they are motivated to improve the country to more universally accepted standards. With a population of 4.7 million they have relatively modern human rights ideas and basic civic freedoms as arranged by their constitution. They have accepted the idea of global protection of human rights which points towards a progressive society on the move towards more freedoms and success. Current issues of human rights include moves toward social protection such as social security, stronger protection of property, and freedom of speech. They have moderate levels of corruption which can add costs for business ventures and can be ethically challenging. However, the relatively high growth potential and opportunities for first mover advantage from an international perspective could be very successful. There have been minimal outside investments in Croatia because of its youth and potentially because of the corruption and cultural standards. Croatia also has disputes left over from the independence conflicts. The Danube border with Serbia and Bosnia and Herzegovina borders are still in dispute, although peaceful. Due to the corruption and dormant potential for unrest the capacity of growth is large, but the risks are too high in the current state.

From an economic perspective, although currently risky, Croatia is of growing interest for investment. With increased government interest in privatization of non-strategic assets, there is a shift towards a freer market economy. They are one of the richest of the former Yugoslav Republics and missed the initial investments in Central and Eastern Europe after the Berlin wall came down. That could place them in a profitable spot for investment. By 2019 or early 2020 Croatia is planning to become a regional energy hub by taking liquefied natural gas and undergoing regasification, they then want to redistribute it all over Southeast Europe. Their 2000-2007 GDP improved between 4% and 6% due to tourism and credit driven consumer spending along with currency inflation remaining stable. During the 2008 recession, Croatia’s growth was stagnant, and even negative at times. However, by 2014 they were back to a positive GDP and ended 2017 with an average of 2.8% growth. 2017 was a good economic year for Croatia, the government worked to fix the economic crisis with income tax reduction and some business costs were removed from the income tax in 2018. With the first budget surplus of .8% since independence in 1991 it seems Croatia is on a track toward success. New government economic reform plans are supposed to take hold in 2019 and continue to improve the economy. They are taking steps to become a greater part of Europe, including plans of adopting the euro by 2024. If that is successful, it could signify large growth potential for the future in addition to increased economic security and a stronger climate for investment. In 2017 the largest private Croatian company almost collapsed, but an American investor provided the resources they needed to continue running. This could mean that others are starting to see the possibilities that Croatia may hold which could be a sign that investment opportunities are strong. With tourism being a large industry, the familiar American chain “Pizza Hut” has expanded in 2016 which again points toward investments being lucrative in the future.

Croatia is a collective parliamentary democracy. The individualism score on the Hofstede Insights is 33/100 which means that the individualistic attitude is not very prevalent. Their branches of government are like that of the US; they include Legislative, Executive, and Judicial branches. The executive branch of government includes a division of power between the President and the Cabinet. The President, who is elected every 5 years and has the opportunity for 2 terms, is the face of the country and runs most of the diplomacy and state ceremonies. The Cabinet holds the largest amount of executive power. The president appoints the Prime Minister, who is then confirmed by Parliament and then has the power to appoint members to the Cabinet. There is a total of 13 Ministries. The legislative branch is the highest part of the judicial branch and is classified as “The Parliament”. The Parliament has one house whose representatives are elected in direct elections every 4 years. In theory, they can keep separation between the courts and the rest of the government body, which should allow for lower risk of corruption and greater trust in the courts being fair and just. However, Croatia is ranked 57 out of 175 countries on corruption. One in six public officials expect gifts and bribes to be given to get things done. This would not only be an extra cost of business but also indicate that the country is not yet fully reformed from their war for independence and have more internal work to do until they are a country trustworthy of investment. Croatia is using a civil law system which can be beneficial if investments are completely legal and don’t have any potential gray areas because the laws are spelled out in a way that doesn’t leave room for consideration. There are also strong intellectual property laws and several highly capable law offices available to US exporters.

Some other considerations include the Hofstede Scale which provides insight into the culture and values of a society. Croatia scores high on “Power Distance” (73/100) which means that people accept the order of society and the idea that everyone has a job to do and a place that needs no further justification. This could have positive implications when expanding a company into this region. If the company has a rigid hierarchy that demands obedience and accuracy when performing tasks, it may fit this society well. Croatia also scores high on “Uncertainty Avoidance” (80/100) which means that there is a rigid code for norms and values and may even be intolerant of unorthodox behaviors. There can be an emotional need for structure and rules, there is a push to be busy and work hard, punctuality is valued, but innovation may be resisted. This could mean that although the hard workers and punctual employees can benefit the investment, if the company does not properly adjust to societal standards they may be met with dissatisfaction and stonewalled when innovating. In accordance to this cultural ideas and values may need extra attention to be successful.

Overall, although Croatia currently holds the possibility of a risky investment, it has the potential to be very successful. With minimal investments from outside the country the first mover advantage could be drastic. Croatia is on the move towards a future of a profitable country but first has some internal issues to work out. Because of the corruption within the society, the potential rigid cultural expectations, and potential unwillingness to innovate, I cannot recommend a foreign direct investment. However, because of the ideas to become an energy hub for southeast Europe and because of the plan switch to the euro, I can conclude that while an FDI isn’t the right decision now, there needs to be reevaluation in 2020 and 2022. The potential for growth is large but the risks are too high in the current state.