The Decline of Development and Research

When you are bad at something and then decide to be even worse. This would be the shortest description of Croatia’s relationship with research and development (R&D), an activity in which the most developed countries in the world compete to invest more.

Croatia is, as is well known, among the EU countries that invest the least in research and development. But that was not enough, as it has managed to happen that due to the failure to adopt regulations, tax incentives for 2015 were omitted, and according to all indications, at least for the first half of this year as well, which will have an additional negative impact on the level of investment in R&D.

Namely, in the vacuum between the Ministry of Science, Education and Sports (MZOS) and the Ministry of Finance, the State Aid Program for Research and Development Projects 2015-2020 has been lost, which is why state aid in the form of tax incentives will be absent for the past and at least half of this year. Although this may not sound so terrible, it is because such mechanisms for encouraging investment in R&D are an important factor in investment decisions, both for companies already present here and for those that might come. This is especially a significant blow to small and medium-sized enterprises that already struggle to finance research and development.

The previous Regulation on State Aid for Research and Development Projects expired at the end of 2014. Under it, state aid for research and development projects was awarded for basic, applied, and developmental research, and was realized through additional reductions of the tax base (by 100, 125, 150 percent) for justified project costs. MZOS initiated the development of a new State Aid Program for Research and Development Projects 2015-2020 last year as a basis for granting support for research and development projects in the form of tax incentives, but it has not yet been adopted.

– At this moment, there is no legal basis on which state aid for research and development projects in the form of tax incentives could be granted since the mentioned Program was not approved by the Ministry of Finance at the end of 2015. Therefore, the Ministry of Science, Education and Sports has initiated the adoption of the Law on State Aid for Research and Development Projects – states the response from MZOS.

 As they state, on April 8, a public consultation was opened on the Statement of Impact Assessment for the mentioned law, and in May, a public consultation on the draft regulation is expected, which, they say at MZOS, will be an opportunity for users to see how this measure of state aid will be implemented in the future and before the adoption of the Law. It is anticipated that the Law will be submitted for adoption to the Croatian Parliament during July 2016.

However, only after new rules of the game are adopted can research and development projects begin to be submitted, and not those that have already started. It is redundant to speak about how much trouble this has brought to companies that plan such projects in the long term, over several years, and how difficult it is to plan further activities in conditions of constant changes in institutional rules of the game for companies. The significance of tax incentives is undeniably great as they have been proven to increase investments in R&D, especially among small and medium-sized enterprises. In addition, they play a role in retaining foreign direct investment in Croatia.

Companies that invest significant funds in R&D and have used tax privileges are quite outraged by this development. One of the biggest losers is Ericsson Nikola Tesla, a company that invests the most in research and development, employs almost half of all employees in R&D in Croatia, and has the largest R&D center in the region. In that company, they know how important R&D is for the overall economy, so they find it hard to understand this move by the state, especially considering that all other countries are trying to attract investors with such incentive measures.

Pliva has invested more than 800 million kuna in this segment over the past few years, and their research and development center in Zagreb is now one of the leading R&D centers of the Teva Group. In the past year, Pliva invested 75 million dollars in this business segment, which accounts for almost 20 percent of total investments in research and development in Croatia. Pliva believes that all necessary legal and sub-legal acts should be harmonized as soon as possible so that such a situation does not happen again and so that companies that need to make long-term investment and development plans can realize their planned investments. – Any delay in the adoption of the State Aid Program for Research and Development Projects can put Croatia in a less favorable position compared to some other EU countries and thus encourage the transfer of investments to countries with a stable incentive system – they warn at Pliva.

All Croatian manufacturing and development companies have been facing misunderstanding for years regarding what product development, its commercialization, and export mean for a country.

– Nothing surprises us anymore. A company like ours, which has a large number of people in development and whose one of the biggest competitive advantages is precisely the rapid development of products and new solutions that global customers are looking for, cannot afford to abandon development activities because they will not exist. Only in Croatia do companies finance most of their development from regular business operations and bank loans – says Zvonimir Viduka, owner of Altpro, a company engaged in the development and production of signaling and safety equipment for railway vehicles and infrastructure.

Viduka claims that most companies engaged in development and innovation have achieved business growth and an increase in the number of employees this year despite the lack of sufficient incentive measures from the state. The question is only how long Croatian development companies will be able to continue this small upward trend without state assistance. His proposal is for the state to analyze the development, innovative, manufacturing, and export entrepreneurial potentials and then grant all possible incentives in one year to those who are the best according to clear criteria. An analysis conducted after one year would be an indicator of whether it is possible to move forward quickly if we work like the strongest countries. – If we continue like this, we who develop will declare ourselves a discriminated minority in society, so we will not need incentives but will seek real incentives to survive in this unfavorable environment for development and production. Or seek other exits, which many companies are doing – concludes Viduka.

KING-ICT is also a company that will suffer damage due to the absence of support for research and development. According to their analyses, technology companies should ensure three to six percent of their investments in R&D from total annual revenues to remain competitive. Domestic ICT companies are undercapitalized to invest that much in R&D from their own resources. Without incentives, companies will have to cover these investments from their own funds, which is almost impossible in Croatia without incentive programs and sources of financing.

Until then, in some European countries, in addition to state aid for research and development projects and activities in the form of tax incentives, there are also additional incentives to encourage the development of this sector. Thus, employees who are exclusively engaged in research and development pay personal income tax at a reduced rate or are granted non-repayable funds for conducting research, development, and innovation activities.

One of the possibilities is also new sources of financing such as EU funds, but here too, we have been delayed in adopting the Smart Specialization Strategy, which has recently finally been adopted, and now we are waiting for the announcement of tenders.

For research and development activities and innovations in the private sector, under the Operational Program Competitiveness and Cohesion, the Ministry of Economy announced an EU tender ‘Increasing the development of new products and services arising from research and development activities’. The tender is expected soon (although in Croatian bureaucracy, this is a relative term) and will remain open until the final expenditure of the allocated funds, i.e., no later than the end of 2020. The total funds allocated for this priority axis amount to 664.8 million euros, and approximately half of this amount is allocated to the economic sector. Justified activities of both small and medium-sized enterprises as well as large companies will be co-financed, and the co-financing rate will range from 25 to 100 percent depending on the type of research and development activities and the size of the entrepreneur. The main thematic areas whose goals must be met by the applicant projects are health and quality of life, energy and sustainable environment, transport and mobility, security, and food and bioeconomy. The maximum non-repayable funds planned to be awarded to entrepreneurs range from 25 thousand to 7.5 million euros. However, a problem has also arisen here, as ICT is not a vertical but only a horizontal area that serves more as support for priority thematic areas. ICT companies naturally believe that it should be a vertical area due to the high innovativeness, necessity of investment in R&D, and global competitiveness of this sector.