Wednesday Column - Croatia Business 2: A Picture of Foreign Investment In Croatia

I went to a very instructive seminar in London a year or so ago, on the tourism trade in Croatia. A large international hotel group elaborated on their perception of risk and their various stages of participation to reflect that risk. If country risk was perceived to be low, they would invest in a new local company, with bricks and mortar, and run it themselves; if the risk was perceived to be high they would take on a management contract, at a fee, to run a local hotel or chain. There were various stages in between, but, at the time, this group perceived Croatia to be in the highest risk group. Maybe one of the geographical areas with the most undeveloped potential, but certainly not worth, in their eyes, the risk of substantial capital investment.

It may be unfair to say that UK companies aren’t the best at adapting to different cultures and climates and have a low risk tolerance. However, it is true to say that the UK features very low on the list of foreign direct investment into Croatia. There are clearly some good reasons for this – other European markets are closer and more transparent, the Croatian population is less than 5,000,000, it’s a transitional country evolving rapidly, and the bureaucracies and murkiness of the old regime are still in evidence. However, in general, I’d suggest that it’s more a question of “overlooking” Croatia as a potential market, rather than doing some thorough research and then discounting it. RMC, the concrete group, did invest here in a big way and we’ll be looking at their story in a future column, but a great amount of anecdotal evidence tends to suggest that UK interest in Croatia is, at the moment, mostly limited to finding local agents or reps, forming strategic alliances, or the result of individuals deciding to live in Croatia, and starting up in estate agency, tourism, catering or other services.

For a rounded picture, it’s impossible not to refer to a few statistics. Croatia’s total GDP in 2004 was 207,282 million kunas, that’s about £19,192 million. Direct Foreign Investment in the same period was about £676 million, about 3.5% of GDP. This is not the place for a detailed comparison with other countries, and last week’s business overview gave a summary of the general business climate. However the intuitive conclusions are:

1) that Croatia could benefit from much more foreign investment
2) sensible foreign investors, with good local advice and the proper market research, might achieve a much better return than they could hope to get in the much more developed countries of western Europe
3) an investment in business in Croatia may not only open the doors to Croatian customers, but also to neighbouring Bosnian, Serbian, Montenegrin and Macedonian ones. Slovenia is also a neighbour and perceives itself to be the gateway to the whole area, being already in the EU. However it is a very small country with a culture, and position in the area, somewhat similar to that of Switzerland in Western Europe.
4) It is possible to limit exposure and risk, in a number of ways, and the Croatian government is doing its best to encourage foreign investment, with incentives and a transparent and favourable tax regime

Certainly some countries seem to have the knack of making it work and it is interesting to look at the leaders and the ones who are moving up the table. Austria is top of the list, averaging around 25% of the total over the past three years. The Austrian banks must be playing a large role in this, either by ownership of several banks in Croatia, or by funding other activities. Surprisingly, the much larger Germany has averaged only 17.2% and has reduced to 13.2% in the first three quarters of 2005, though this may be seasonally affected.

Hungary’s three year average is 8.85% but has achieved a remarkable climb in the first three quarters of 2005 to gain a share of 21.69%. The US is third, on average, but seems to have invested nothing, to date, in 2005 and Sweden has made the top 10 in 2005 though was off the scale previously. Italy, Holland and Luxembourg are consistently in the middle rankings. As for the UK, its average places it 9th on the list at 2.36% but is in 10th place for the first three quarters of 2005 at 1.99%.

What does this tell us? Well, reading behind the statistics a little and paying attention to the deals being done at the moment, it suggests that Austria has a fairly tight grip and Hungary is intent on increasing its share, whilst other countries continue to look opportunistically at certain businesses and sectors. Germany is certainly big in the Telecoms sector, Austria in banking and finance, and Hungary already has a slice of the national oil company INA. Slovenia, France, Germany and Italy have all set up a number of large retail stores over the past few years.

Surprisingly Hotels and Motels account for only 3.92% of the total foreign investment over the last three years. Unsurprisingly this percentage has increased to 9.21% in 2005. Estate agency and property development/sales have only made the top 10 in 2005 but look set to rise in position.

If you are looking to invest in Croatia then the normal rules of common sense and proper research apply. The business climate is quite different from Western Europe and there’s no substitute for finding a local partner that you can trust and will help you acclimatise. The British Embassy is also much more proactive than it was a few years ago and there are regular Trade Missions. We took part in one two years ago and found it very useful. There are also a growing number of business clubs and networks that can help, though most of the larger businesses have their head offices in Zagreb and hence, that’s where the networks meet. I’m trying to encourage some of the UK business organisations to participate more actively though I suspect UK interest may have to grow a little before it becomes worthwhile to them.

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As with every subject tackled so far on Croatia Online, this one deserves much more coverage. The writing of it has already led to a note of a number of more detailed topics for the future, and I’m sure readers will be interested in the details of clubs, websites and associations that might help. However, I’m also, on a small scale, a foreign investor looking to make a modest return. Good networks, gleaned over three hard years at the front end, in a number of fields, has a value which I’m not quite ready to start releasing just yet!