McKinsey: Croatia Needs Investments, Sustainable Tourism, and Digital Economy to Strengthen Competitiveness

The global competitiveness of Europe is currently threatened, with some of the causes being the energy shock, the race for leadership in artificial intelligence, and industrial regulatory barriers. All of this affects not only the economic trajectory of the continent but also the way of life of its population and strategic autonomy, according to a study by the McKinsey Global Institute titled ‘Investments: Measuring the Pulse of European Competitiveness’. The study measures competitiveness through the so-called ‘investment pulse’ by analyzing investments based on data from three thousand large companies and emphasizes that investments in capital expenditures and research and development (R&D) play a key role in strengthening the competitiveness of European economies.

Investment Pulse of Competitiveness

It is confirmed that the investment pulse of Europe is currently low and that Europe significantly lags behind the US in terms of investments, reminding that investments are the lifeblood of competitiveness, accounting for 70 to 80 percent of productivity growth. In 2022, large American companies allocated about €700 billion more for capital expenditures and research and development than European companies, and European venture capital assets under management are equivalent to one-quarter of the total of the same assets in the US.

Also, between 2010 and 2022, average investments in intellectual property and machinery and equipment as a percentage of GDP in Europe amounted to 8.7 percent, which is two percentage points lower than the same investments in the US.

Europe will need to increase its focus on removing well-known barriers – energy costs, lack of skilled labor, business and labor market regulation, and geopolitical and macroeconomic uncertainty – if it wants to increase its level of investment.

Croatia, like other EU countries, faces many similar challenges, such as low investment levels and the aforementioned regulatory barriers, but it has certain specificities such as the potential offered by sustainable tourism.

Croatia records a low level of investment in the most productive sectors. Net investments in Croatia are significantly below the levels that were present before the global financial crisis, which is also in line with the European average where investments have fallen by approximately 2.8 percentage points or about €550 billion (nominally) annually. Additionally, we lag in investments in high-tech sectors as most research and development funds are directed towards medium-tech sectors, while high-tech industries, such as software and biotechnology, receive less funding.

ICT Has Great Growth Potential

The digital economy, sustainable development, and tourism are some of the specificities through which Croatia can strengthen its economy and make it more resilient to future disruptions. McKinsey’s 2022 study titled ‘Digital Challengers at the New Frontier’ already highlighted that Croatia recorded an annual growth of the digital economy of 16 percent and a growth of digital commerce of as much as 28 percent between 2019 and 2021. It was also estimated that the ICT industry could increase its value up to five times by 2030, amounting to around €8 billion and becoming a major component of the digital economy in Croatia.

By 2030, Croatia could achieve an average annual growth rate of the digital economy of about 12 percent, estimates Tomislav Brezinščak, director of McKinsey & Co. Adriatic.

– The ICT industry, which has the potential for growth of nearly 20 percent annually, could be primarily responsible for such growth. Furthermore, unlike many European countries, Croatia has significant potential in tourism and sustainable development, so investments in these sectors can be crucial for long-term economic growth and increasing competitiveness at the European level. We must not forget that Croatia has a high share of small and medium-sized enterprises that form the backbone of the country’s economy but often have limited capacities for investing in innovation and technology. Increasing the availability of venture capital, such as venture and private equity, could significantly boost their growth. Let us not forget, the long-term threat to our labor market and productivity is the fact of an aging population in Croatia. It is essential to invest in training and retraining the workforce so that it can adapt to new market needs. Therefore, the focus on removing regulatory barriers, increasing investments in innovation and technology, and adapting the workforce will be crucial for achieving future economic growth in Croatia, concludes Brezinščak.