Foreign direct investment in Croatia

Vanja Kalogjera and Tatjana Bozic
Executive Director and Project Manager, Marketing Department, Croatian Investment Promotion Agency

In order to stimulate and promote foreign direct investment, the Government of Croatia decided in June 1996 to establish the Croatian Investment Promotion Agency (CIPA). The agency formally started its operations in September 1996. The most interesting feature of CIPA is its semi-private and semi-public character. In structuring CIPA, the Government has obtained the assistance and support of the World Bank's Foreign Investment Advisory Service (FIAS).

Although the Government played a key role in establishing CIPA, the agency will also aim to attract other co-founders from the private domestic and foreign sector. In fact, all companies operating in Croatia which feel that CIPA may help them in their investment plans have already been invited to join as co-founders. The companies which decide to join are expected to pay a nominal founding contribution and a small yearly fee. In return, co-founders will have the opportunity to participate in the principal decision-making body and in the advisory body of CIPA.

The principal organ of CIPA is the Supervisory Council, composed of four members of the Croatian Government, with the Prime Minister as its chairman. Co-founders from the private sector shall among themselves elect four other members of the Supervisory Council - two members from among the Croatian co-founders and two from among the foreign. It is expected that the participation of the representatives of the private sector in the highest organ of CIPA will give them the opportunity to meet the most important officials in the Government and influence their decisions, while the Government will benefit from listening to the needs of the business community. It is therefore expected that the governing organ of CIPA will at the same time serve as a forum for permanent dialogue between the Government and the private sector.

The principal aim of the Agency is to promote Croatia as a country with business opportunities, in order to attract foreign direct investment and to assist foreign investors and their hosts in setting up and organising their investment in Croatia.

The activities of CIPA include:

  • identifying projects appropriate for foreign investment;
  • informing foreign investors of those projects and opportunities;
  • assisting foreign investors in their relations with government authorities;
  • stimulating the development of a favourable environment for foreign investment in Croatia.

One of the priorities of CIPA is to establish close links with foreign investors already present in the country and to centralise their experience in doing business in Croatia. By identifying possible problem areas which these companies encounter, steps can be taken to eliminate possible problems altogether, or at least to lessen them in the future.

Regulatory framework for foreign direct investment

Since gaining independence in 1991, Croatia has had to create an entirely new legal framework for foreign investment suitable for a modern market economy. The Croatian Constitution of December 1990 guarantees foreign investors free transfer of profits and repatriation of the invested capital, in foreign currencies, after payment of taxes and other legal obligations. It also offers full protection against repatriation, which is allowed only for a public purpose and with mandatory compensation of the market value for the expropriated property.

One of the principal legislative acts was the new law on Commercial Companies (LCC), which was enacted in 1993 and which became applicable from 1 January 1995. The LCC guarantees national treatment to foreign investors and eliminates altogether the need for approval of foreign investments. LCC provides for the creation of several types of commercial companies in the form with which foreign investors are familiar from their own legal systems. Foreigners doing business in Croatia, on the condition of reciprocity, own real estate in Croatia in the same way as Croatians without special approval.

The tariff rates, as quoted in the Customs Tariff Act, reveal a relatively low level of tariff protection. The tariffs range from duty-free to 30 per cent. The tariff rate for raw materials and semi-finished goods and finished goods is between two and five per cent, while domestic products are protected by customs duties of 20-25 per cent. A special rate is imposed on certain products such as oil and oil derivatives, tobacco products, alcohol, soft drinks, beer, coffee and imported new cars. From 1 January 1997 the new Value-Added Tax has been in force. The rate of VAT is 22 per cent.

The Croatian Customs Act offers certain tariff concessions and exemptions from customs duty on goods imported into Croatia. Equipment invested in a Croatian company can be imported duty-free provided that the foreign investment is for not less than five years and that it amounts to at least 20 per cent of the total investment. On capital equipment, imported by a foreign investor in this way, only one per cent customs administration charge is payable. This concession does not apply to investment in amusement or gambling equipment.

There is also a tariff benefit based on an import-for-export principle for foreign investors. Raw materials and production materials can be imported duty-free if the imported goods are to be used in the manufacture of goods for export. The export value must be at least 30 per cent higher than the value of the raw material imported.

All taxpayers (domestic or foreign) pay a profit tax of 25 per cent of the assessed tax base, while the corporate profit tax rate on activities in free trade zones is 12.5 per cent.

Investment climate

Although there was considerable investment in Croatia even during the war years, the investment climate was undoubtedly affected by the war and, in 1993, by high inflation rates. Since 1993, the economic and political situation has markedly changed. The general economic situation is constantly improving, the privatisation process is continuing and exchange rates and prices are stable. In addition, there is no more danger of a war and thus the political risk is significantly reduced. All levels of the Government welcome foreign investment.

Despite high political risk, many foreign investors took advantage of the opportunities offered by the newly opened market and invested in Croatia even during the war years. Among the companies which did so are Ericsson, Asea Brown Bovery (ABB), Interbrew, Messer Griesheim, Société Suisse de Cement Portland, Coca-Cola Amatil, IBM, Tuborg and many others. Due to the favourable developments since, the total value of foreign exports is expected to grow in coming years. Although in previous years there were no major greenfield investments, the top 15 foreign investors committed rather high capital to Croatia (approximately US$30 million per acquisition). The sectors of investment are quite similar to those in other countries in the region: the cement industry, chemicals, pharmaceuticals, brewing and soft drinks, telecommunications and electrical equipment. These are the industries which bring profits in the medium and long term, which leads to the conclusion that foreign private investment is not speculative.

By country of origin, the largest investors are Germany, Austria, Switzerland, Italy and Denmark. Investors have found a lucrative opportunity, and none of them has changed their mind in the years after the initial investment was made. The attractions of Croatia as an investment destination are:

  • improved economic conditions, with low inflation and stable exchange rates;
  • a favourable legal environment for foreign investment;
  • a relatively cheap and skilled labour force (the average net salary in 1996 was US$400);
  • a fast-growing market;
  • Croatia's favourable geographic position, which enables access to other markets in the region (Ericsson for example used Croatia as a door to the Russian market);
  • opportunities to develop tourism and trade (favourable for beer and soft drinks producers);
  • and a profit tax of 25 per cent (one of the lowest rates in Europe).

It is noticeable that recently there has been an increase in the number of investment projects with higher capital contributions, though there are still many investors with small capital committed per project. The most recent example is the DM180 million-worth of Pliva shares sold on the London Stock Exchange. Similarly, there is an increasing number of foreign banks in Croatia, such as Raiffeisenbank, Bank Austria, Société General, Banka de Risparmio de Trieste and Creditanstalt.

The principal growth sectors in industry, which are expected to receive foreign capital in the near future, are power generation, infrastructure projects, tourism, construction, transportation and telecommunications.

FDI statistics

Since foreign investment does not require registration, at present there is no reliable data on foreign direct investment in Croatia. There are several independent sources of information which give different figures. The date in the Balance of Payments, compiled by the National Bank of Croatia, take into account only figures from bank transactions and the Customs Authorities, and thus underestimate the real level of foreign investment in Croatia. On the other hand, data collected by the Ministry of Foreign Affairs, where foreign investors in earlier years received approval for investing, are overestimated, since not all of the registered projects materialised. The Croatian Privatisation Fund has only the figures about companies whose shares they sold to foreign buyers out of the Fund's own portfolio.

Table 1: FDI Inflows (in DM millions)
Source of the data199219931994
National Bank of Croatia26.0120.2159.2
Ministry of Economic Affairs 617.4 476.0409.8

Table 2: FDI Inflows 1991-94 (in US$ millions)
Country1991199219931994Population (as of 1992) in millionsCumulative Inflows/pc (1992-1994)
Bulgaria564255 300 8.96344.29
Croatia 412 305 273 4.764 207.81
Czechoslovakia 600 1,10315.559 166.87
Czech Republic
568 862
Slovak Republic
Hungary 1,4621,479 2,350 1,510 10.313 517.70
Poland 291 6781,715 1,400 38.365 98.87
Romania40 77 94 650 22.748 36.10
Slovenia 111112731.996 148.30

Source: For Croatia, from the Ministry of Economic Affairs; for all other countries, UNCTAD (1995) World Investment Report 1995: Transnational Corporations and Competitiveness, Geneva: UN.

The difference between these sources is not negligible. For example, in 1992, the inflow of foreign investment in Croatia was, according to the National Bank, DM26 million, while the Ministry of Economic Affairs has a figure of DM617 million (for other years, see Table 1). It is estimated that the value of FDI is somewhere in between these two figures. If we compare the level calculated as 50 per cent of the registered projects in Croatia with the level of foreign direct investment in other countries in the region, the figure for Croatia is, counted per head of the population, higher than could have been expected (see Table 2). UNCTAD, in the latest World Investment Report, has the same figures as the National Bank of Croatia.

The National Bank of Croatia and the Central Bureau of Statistics have initiated a survey of foreign investment which includes questionnaires to be sent to all foreign investors in Croatia. The first results are expected to be consolidated by March 1997.

The future

CIPA is expected to bolster foreign investment in Croatia by making it easier for domestic and foreign investors to find their way in establishing themselves in Croatia and by making contacts for foreign investors, domestic firms and the administration, easier. The semi-public and semi-private character of CIPA may inspire other promotion agencies to try the same approach.

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