Does doing business in Croatia pay off? Will others leave after Meggle?

Does doing business in Croatia pay off? Will others leave after Meggle?
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IN LESS than a month, two large investors - British American Tobacco (BAT) and Meggle - announced their withdrawal from Croatia. While in the case of BAT, i.e., tobacco factory in Rovinj, which is owned by BAT, the final decision whether they stay or leave is still pending, it seems that Meggle is sticking to its decision to phase out its operations in Osijek and shut its production in Croatia.

The announcement about the departure of investors is the last thing that Croatia needs right now, especially after the coronavirus crisis ravaged its economy and brought its main business - tourism, on its knees. All the more due to many investors complaining about the business conditions here.

Moreover, foreign chambers of commerce in Croatia have been warning for years that their companies are considering investing in neighboring countries, whether they are EU state members or not, due to better business conditions. It’s sufficient to remind here that these warnings have been recently arriving from the Association of German Chambers of Industry and Commerce, as well as the American Chamber of Commerce in Croatia. That similar tones have been coming for years from Austrian, and even Slovenian investors.

We’ve attracted a lot of foreign investments, but there are few real ones

According to Croatian National Bank’s data, Croatia has attracted a decent number of foreign investments so far. To be more precise, in the period from 1993, when the investment statistics started, until the end of March this year, the foreigners have invested in Croatia a total of 32.2 billion euros.

Although it’s a large number of foreign investments, Croatia doesn’t have a reason to celebrate. Other transition countries have not only been more successful in attracting foreign investments, but they, unlike Croatia, have attracted large greenfield investments, i.e., investments from scratch, which result in starting new productions, opening new workplaces, and increasing export. These are investments that have fundamentally changed the image of their economies. On the other hand, investments in existing assets and companies dominate in Croatia, which is the result of privatization. The consequences of such investments are rarely an increase in production, employment, and exports.

Considerable investments in the automotive industry in Slovakia, Hungary, and Romania

Other transition countries fared much better. At the end of the last and the beginning of this century, many of them, such as Slovakia, Hungary, and Romania, attracted large investments in the automotive industry. Although many have predicted that investing in the automotive sector in transition countries has come to an end, the news that Jaguar, due to Brexit, built a large factory in Slovakia’s Nitra in October 2018 shows that this isn’t exactly the case.

Some transition countries, such as Slovenia, have turned to attract investment in Industry 4.0, so, for example, Japan’s Yaskawa has opened a robot factory in Kocevje, while Austria’s Palfinger has decided to start crane production in Maribor, not Croatia, although, economy analyst Damir Novotny said, it would be more logical concerning Croatian shipyards.

The government isn’t trying to attract investors

“Croatian governments aren’t overly active in attracting investment. Unlike Croatia, Slovenia, Hungary, Slovakia, Romania, and Bulgaria are much more active in attracting investment,” Novotny warned in an interview with Index.

Damir Novotny

He added that some countries, such as Slovakia, have made good use of EU funds to attract investment, which, combined with the tax breaks given to investors, have made their investments profitable from the start.

Even though Croatia has incentives for investors, they are still lower than in other countries, such as Serbia, offer to investors. When insufficient campaigns to attract investment are added to that, then the result is relatively weak.

The main obstacle is the poor business climate in the country: excessive state payments, poor governance, and the justice system

However, the main obstacles to investing in Croatia remain, as investors like to say, the bad business climate, which domestic employers have been warning about for years. High tax burdens, high parafiscal levies, massive and inefficient public administration, a weak justice system, and often uneven decision-making practices are significant obstacles to attracting investment, economists are warning. In short, foreign companies are leaving Croatia for the same or similar reasons as Croats do it. In addition to that, Croatia seems to be forgetting to compete with other countries in attracting investment.

“Other countries are also trying to attract investment, not just Croatia. Companies make investment decisions based on profitability; capital goes where it will be most fertilized,” macroeconomist Goran Saravanja told Index.

Goran Saravanja

Or, as Meggle put it in very simple words when they announced the shutdown of production in Croatia, the decision to put the key in the lock of the Osijek plant was made after they realized that the business climate in Croatia would not change that easily.

“The decision to shut down production has been postponed several times over the last few years in the hope that business conditions and circumstances will improve and was finally made only when all other options were definitely explored,” Meggle said.

Will the departure of capital follow?

In this entire story, we can only hope that other companies that have invested in production here won’t follow Meggle’s example. Analysts say they don’t expect similar decisions to be made by other investors, but warn that some change must be made in Croatia to keep investors and to attract new ones.

“I hope that the capital will not leave Croatia. But we must know that companies are going where they are better off. Croatia must speed up the reform process and constantly work on strengthening the business climate. Joining the European Exchange Rate Mechanism II will also help us, as well as further integration into the EU,” concludes Saravanja.

On the other hand, Novotny points out that Croatia should be more active in attracting investment. This especially refers to attracting investments in Industry 4.0, i.e., in new technologies.

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