Croatia Against Investments? Economists: Quality Capital is Needed

Although we are hanging on the brink of World War III, Croatia is fighting its battles – those against investments. From Sisak and megafarms of chickens to solar power plants (in Pregrada and Sinj), citizens are showing investors the middle finger. Are Croats (ecologically) spoiled, do they simply dislike money and employment, or are they perhaps more analytical than general practice economists who advocate for every investment? More precisely, what kind of investments do we actually want?

That protests are not without reason is confirmed by mathematics from Marinko Škare of the Faculty of Economics and Tourism in Pula. – According to data from the Croatian National Bank (HNB), financial services absorb 28 percent of FDI, real estate 15, and trade 13. Together, 56 percent of everything that comes from abroad goes to sectors that create few jobs, do not transfer technology, and do not generate export competitiveness. Manufacturing? Only 19 percent. ICT seven. Tourism four. The current structure of FDI in Croatia shows a clear orientation towards sectors with low added value. Using data from HNB and DZS, it is evident that financial services, real estate, and trade account for almost 60 percent of all FDI, although the desired composition and ratio of industries in the age of AI is completely different – specifies Škare.

The key question is not whether Croatia needs investments; after all, thanks to them, the average gross salary has doubled in ten years (from 1,069 euros in 2015 to 2,010 in 2025). However, this salary growth has not been driven by productivity growth in manufacturing, but by a combination of inflation, labor shortages, and public reforms, thus the question is what kind of investments we want.

How to Measure Good Investments

The European Commission and The World Bank already have a methodology for cost-benefit analysis that includes the monetization of externalities — pollution, health damages, impact on infrastructure. The application of such analysis for projects over ten million euros should be mandatory, not a matter of goodwill. Škare says that instead of accepting or rejecting investments based on intuition or lobbying, a standardized set of key performance indicators (KPI) is needed. The European Commission, OECD, and The World Bank recommend a framework that includes, for example, the calculation of employment multipliers (a quality investment must create more than 15 new jobs), local value chain (40 percent of total expenses must go to local suppliers), export orientation (more than 50 percent of output must be for export), measurable knowledge transfer, reduction of ecological footprint, and digital transformation (more than 60 percent of operational processes must be digital).

Regardless of that framework, our economists know well that there is a tangible measurement tool for distinguishing desirable from undesirable investments. Nebojša Stojčić, rector of the University of Dubrovnik, says it is crucial to know what impact investments leave on the local economy and society. Does it create added value that remains in the country, does it raise productivity and wages, does it leave knowledge and skills that can be used elsewhere, does it build local supply chains, or is it a project that is extremely spatially and environmentally demanding, yet economically relatively ‘thin’.

– There is increasing talk about the quality of growth, not just its speed. The European industrial strategy, as well as documents related to the green deal and the new competitiveness of the EU, clearly state that investments must be directed towards those that strengthen domestic capacities and reduce long-term vulnerabilities. An investor who cannot show how they fit into these goals simply does not pass, regardless of the amount they offer. In my new book Elusive Innovation, I deal precisely with the difference between investments that look impressive on paper and those that truly change the developmental trajectory of the country. One of the key theses is that innovation and development are not the result of individual, large projects, but rather the accumulation of knowledge, institutional quality, and the ability to ‘root’ investments in the local context. When that is absent, the investment remains an isolated island, visible, politically attractive, but with limited long-term effect. Therefore, I would say that the question is not which investments ‘we do not want’, but which are ready to pass the public interest test. When that framework becomes clear and consistent, a large part of today’s conflicts disappears by itself, as the discussion is conducted in advance, not when it is already too late – Stojčić is categorical, adding that this in practice means that with every larger investment, the impact it leaves on the economy and society after the initial investment cycle ends is examined. One of the first indicators is how much real added value remains in the country (it is not just about the amount of investment or total turnover, but about how much value is created locally through wages, taxes, procurement, and reinvestment).

Example of the Czech Republic and Slovakia

The Czech Republic and Slovakia, he says, after the initial wave of FDI, consciously began to favor projects that raise added value per employee, precisely because they realized that large plants with low margins do not bring long-term convergence of wages. This shift is now visible in their industrial transformation strategies. Closely related to this is the issue of jobs. It is not just the number of employees that matters, but the quality of those jobs over time.

– It is not the same whether an investment creates seasonal, low-paid jobs or stable jobs with salaries above the local average, with opportunities for learning and advancement. In Scandinavian countries and Germany, there is an increasing demand for investors to show a workforce development plan, what skills will be developed, whether there is cooperation with schools, faculties, or vocational centers, and whether those competencies remain in the local economy. This way, the investment fits into a broader knowledge ecosystem, rather than remaining an isolated project – specifies Stojčić.

This is precisely what Marijana Ivanov, chief economist of Croatian Exporters, insists on. Besides the fact that we lack investments in the industrial sector and those in agriculture, which has similarly recorded a decline over the last three decades, she says that those with which productivity grows are desirable. This is also associated with a high share of labor-intensive industry (and services) and resource-intensive industry – in both cases with low employee wages and low added value, while there is a very small share of technologically intensive innovative industry that creates innovations, Industry 4.0, robotics, and digitalization of production.

– So, we need investments that will stimulate innovations, technological progress, Industry 4.0, digitalization, that is, investments that will make a leap into global trends of the current sixth innovation cycle (the use of artificial intelligence in the development of new technologies, the Internet of Things, robotics and automation in production, clean technologies that are energy-efficient and environmentally oriented, production of components for big data storage; technologies and systems for energy storage; quantum technologies applied in various fields: from medicine, finance, data protection and cybersecurity to the development of new innovative materials and increasing agricultural yields and sustainability of agriculture). The criterion of added value and productivity growth also includes jobs where higher employee wages are possible with the engagement of employees who have higher knowledge and skills and which support investments in human capital development. Therefore, the goal of new investments should not be to employ cheap labor with low wages or to import labor from poor countries that generally has almost no skills and knowledge, thus performing low-paid and low-skilled jobs. That is why the goal of investment and industrial policy should be to change the structure of the production sector, reducing the share of labor-intensive production that supports the creation of low added value and low employee wages, as well as reducing resource-intensive industry that has or can have a number of negative externalities, as it pollutes the environment, harms the health of employees and the surrounding population, or is generally insufficiently productive and creates low added value – Ivanov is categorical, explaining that we all know we have demographic problems and are losing population, but that does not mean we need investments that will bring cheap uneducated foreign labor from poor countries, especially not investors who will introduce slave labor models in Croatia as a developed economy at a high level of human and institutional development and violate all labor and human rights of employees, ignore laws, rights, and institutions, and especially we do not need those who will strengthen crony capitalism and corruption in the state.

In short, we need investments in technologically and capital-intensive production, highly productive, profitable, that employ higher-paid labor and create greater added value, not labor and resource-intensive activities with low added value.

– Megalomaniac projects should be rejected from the start, or if accepted, then it should be with smaller production capacities and labor force that exists in a certain area, with a requirement for the application of higher technology, robotics, digitalization, encouraging new innovations and investing in research and development, and certainly with a requirement for production with higher added value and possibilities of achieving both profit and higher employee wages, while respecting labor standards and workers’ rights – concludes.

ICOR is a Key Indicator

Škare goes a step further explaining how the impact of investments can be calculated, through ICOR. ICOR is an indicator of how much capital we need to create one unit of growth; it measures the profitability of our investment.

– Let’s look at what projections for Croatia tell us through three scenarios – optimistic, baseline, and pessimistic. In the baseline scenario, the one in which we continue as before, GDP grows, but increasingly slower. Even more concerning is that our ICOR is rising. This means we need more and more investments for less and less growth. The economy then becomes like an old car that consumes more and more fuel, while driving worse and worse. On the other hand, in the optimistic scenario, both investments and GDP grow, but the key is that ICOR falls. This is an economy where investments are made wisely, which knows how to extract the maximum from every euro invested. Such a scenario is achievable. But it requires that investments be redirected to where they truly yield results and create added value. And where are those results? At the top are research and development, innovations, ICT, and manufacturing industry. These are sectors that return multiple times for every euro invested – they create new knowledge, export, and employ. Their ICOR ranges between 2 and 3.5. At the bottom of the scale, surprisingly or not, are financial services and real estate, with ICOR rising to eight. And here we come to the core of the problem. How many times in the last ten years have we had investment cycles that were actually – real estate? Real estate is important, but it does not create new value outside its own walls. It does not create technology, does not increase exports, does not activate supply chains – explains Škare.

Stojčić adds a layer of criteria related to spillover effects – a good investment typically stimulates local supply chains, opens up space for cooperation with domestic companies and institutions, and over time creates a network of activities that transcend the project itself. In Poland, this is very clearly seen in the automotive and battery industries, where systematic efforts were made to ensure that foreign investors are not just assembly platforms, but that a range of domestic suppliers and engineering competencies develop around them. This approach, Stojčić says, is increasingly mentioned in EU industrial policy documents as an example of smart investment direction. In CEE countries that have undergone strong industrial transformation, such as Hungary or the Czech Republic, experience has shown that ignoring these issues quickly returns as a political and social problem. Therefore, there is an increasing tendency to look in advance at resource consumption, impact on land and water, traffic load, and cumulative effects of multiple projects in the same area. Thus, investments are not halted, but adapted to the local context and made more sustainable in the long term.

– The case of the chicken megafarm is very illustrative as it shows how quickly the discussion can be reduced to a conflict of two extremes. On one side, we hear the argument that Croatia needs stronger domestic food production and greater self-sufficiency. On the other side, the local community warns of environmental, spatial, and social risks, and that cannot be easily dismissed either. The problem arises when there is no serious, publicly grounded analysis between these two positions, and the discussion remains at the level of emotions and distrust. If we look at this project through the lens of modern industrial and agricultural policy, the key question is not whether we need poultry farming, but what type of poultry farming and under what conditions and what net effect on the local community becomes crucial. If it is a highly automated model with a relatively small number of jobs, poor integration of local suppliers, and sensitive environmental aspects, it is entirely legitimate to ask whether this is the best developmental choice for a specific area. Successful European and Central European examples show that intensive agriculture can make sense only if it is part of a broader system. In The Netherlands or Denmark, poultry and livestock farming are linked to a high level of processing, development of the food industry with higher added value, export of final products, and very strict monitoring of environmental impact. Similar trends have been seen in Poland in recent years, where large agricultural and food projects are increasingly linked to local processing and logistics. If these elements are absent, there is a risk that the local community will be left with negative externalities such as pressure on water and land, traffic, changes in spatial structure while profits and key decisions are made elsewhere. This can be described as the developmental paradox of large, but poorly rooted investments that are visible and politically attractive, but without real impact on local capabilities and long-term resilience – explains Stojčić, analyzing the aversion to ‘green’ technology, stating that in Germany, after the initial wave of large solar and wind projects, there was a clear turnaround.

Brownfield Locations are an Opportunity

There is increasing insistence on rooftop systems, the use of brownfield locations, former industrial zones, or degraded land, as well as models in which the local community participates in ownership or at least has a stable income through energy cooperatives and local funds. Similar models are being developed in Austrian and Denmark, where energy is increasingly seen as a common resource, not exclusively as an investment opportunity. In Central and Eastern European countries, this transition is often still underway. Poland and the Czech Republic, after initial conflicts, have begun to more clearly define spatial criteria and encourage projects that are better integrated into the local context, precisely to reduce conflicts over land and expropriation. Experience shows that resistance does not arise from opposition to the green transition as such, but from the feeling that the transition is being carried out ‘over the backs’ of the local community.

– The most desirable investments are those in production that combine technology, knowledge, and export, as this combination changes the structure of the economy in the long term. It is not about ‘bringing back production’ in some nostalgic sense, but about developing activities that create competencies that remain in the country and can be further built upon. Advanced food processing, pharmaceuticals, medical and biomedical equipment, specialized industrial niches in the metal and electrical industries, as well as industrial services related to production, are examples of areas where Central and Eastern European countries have made strides in recent years. The Czech Republic and Slovenia are good examples of how the industrial base can gradually shift towards higher added value, precisely through a combination of foreign investments and strengthening domestic capacities. In Poland, for example, there has been strong investment in developing engineering, logistics, and development functions alongside large manufacturing plants, thus avoiding a model where the country serves only as a location for cheap production. Such experiences show that production makes sense when it is part of a broader knowledge ecosystem, not an isolated facility – concludes Stojčić.

And what do we need for that? Reliable infrastructure and energy, available under competitive and predictable conditions, especially in the context of the green transition. The speed and predictability of procedures are equally important. Investors who bring knowledge and technology generally do not have a problem with strict rules, but they have a big problem with uncertainty, frequent changes in rules, and improvisation in implementation. Education and connections with research institutions hold a special place. In countries that have successfully attracted quality manufacturing investments, cooperation between companies and universities and vocational schools is not an addition, but the foundation of industrial policy.

Ivanov emphasizes that we do not need investors who come to Croatia to exploit and destroy our land, coast, people, and environment for their profits that will be directly or indirectly exported elsewhere (thus there will be no public revenues from profit taxation), but those who will support productivity growth and growth of added value that remains and multiplies in Croatia.

Škare puts the dot on the ‘i’ – it is not the same to build walls or to build knowledge for creating added value. One is a cost, and the other is an investment.