Evaluating Croatia's Business Environment

Introduction

The corresponding evaluative assignment has been oriented towards the analysis of the business environment of Croatia and the primary objective of the study has been to specify effective recommendations through which the complete potential realisation of the private business sector of the country under consideration could be achieved. The underlying rationale has been the stimulation of competitiveness of the Croatian national economy. The utilisation of specific competitive indexes such as the Global Competitiveness Index and the Worldwide Governance Indicator for investment and business operations within any national economy, has been also utilised. The study has also entailed the comparative analysis of the Croatian business environment with other East European countries such as Romania, Bulgaria, Hungary and Poland. The prime objective is to analyse the quality of Croatian business environment.

Competitiveness analysis of the business environment of Croatia

Prajogo (2016) has observed that the issues regarding the Croatian business environment and the national economy have been considerably deep rooted when the factor of competitiveness could be considered. These have entailed consistent decline in terms of the growth projection indices related to the Global Competitiveness Index (GCI) as per the benchmarks of World Economic Forum (WEF). Schaltegger, Lüdeke-Freund and Hansen (2016) have outlined that the most extensive gross scalable growth had been achieved only during the period of 2005 to 2007. Puljiz, Maleković and Keser (2019) have observed that the Global Competitiveness report 2017 – 2018 had highlighted that Croatia has been ranked at 74th out of all of the 137 enlisted countries and this is a direct indication of the growth stagnation prospect of the Croatian economy in comparison to the previous financial years. Šimić Banović (2015) has elaborated on such perspectives through the outlining of the economic and business growth indices in the following measures:

1: Indices of institutions: This benchmark has registered a decline by13 places.

2: Professional training and higher education indices: This registered a decline by 11 places.

3: Labour market efficiency indices: This registered a decline by 7 places.

On the contrary, the positive growth prospect had been registered at the following indices:

1: The macroeconomic environment measure: This registered an improvement of 24 places. 2: Primary education and health conditions of the populace: This registered an improvement of 22 places. 3: Technological aptitude and readiness: This registered an improvement by 4 places. 4: Market size expansion: This registered a marginal improvement of 1 place in the GCI.

Fabritz, Falck and Saavedra (2016) have interpreted the GCI outcomes in terms of the observations that Croatia, from the perspective of an open market economy, is having to consistently contend with extensive degree of control exercised by the state over the entirety of the economy. Thus, such control could be translated into subsequent obstacles for establishment of entrepreneurship based ventures within Croatia. In terms of the particular values outlined by the GCI report, in spite of the increment of the index values during the 2015-16 financial year, it could be observed that Croatia is currently trailing all other comparator nations which have been previously mentioned as Bulgaria, Hungary, Poland and Romania.

Furthermore, the analysis by Alpeza, Erceg and Oberman Peterka (2015) of the obtained rank of Croatia in the GCI report, in terms of the linear interpretation of the index value trends for the period from 2007 to 2017, has outlined the fact that stagnation of competitiveness has affected the business opportunity growth capabilities of Croatia in comparison to the other four selected countries.

Gomezelj Omerzel and Smolcic Jurdana (2015) have analysed the current situation of Croatia from the perspective of specific stages of development such as the basic requirements of any business establishment, the management of enhancers of efficiency and innovative sophistication based factors. The analysis has been credibly demonstrative of the ongoing transitional phase of the Croatian national economy regarding competitiveness perspective from the second to the third phase. However, such a process of transition has not been swift or satisfactory enough.

In this context, the above demonstrated data table has provided an overview of the current ranks of the individual component phases of the Croatian business environment which could be further supported through the information which could be gleaned from the “Global Competitiveness Report 2017-2018”. The demonstrated table outlines the lowest value of GCI in context to the innovation and sophistication phase and the institutions related to labour and goods market efficiency development indices have also recorded considerable downturn (Bejaković, 2017). Bartlett (2016) has highlighted the indicators outlined by the World Bank report, “Doing Business 2018”, where the consistent existence of bottlenecks within the business environment of Croatia in terms of relative comparison to the other comparator nations. Croatia has achieved the lowest rank in this scale. This observation has been reinforced by the Distance To Frontier (DTF) indicator. The indicator highlights the ranking of the various included countries in terms of Ease of Doing Business (EoDB) to suggest the quality of the business environment in existence of the evaluated countries. The DTF further demonstrates the distance of the individual economies to the frontier which is the threshold of the best performance exhibited by the individual indicators across the involved economies within the EoDB sample.

PESTEL analysis of Croatian business environment

Political

Croatia had become the member of the EU during 2013. Prior to that, since 2009, the country had been gripped with recession. From 2015 onwards, Croatia had returned to the trajectory of growth, however, the comparatively higher debt measures at both the state and corporate levels, augmented by comparatively low rate of employment and unsuitable demographic trends, contributed to the problematic and cumbersome environment regarding investment opportunities within the country. Vučković (2018) has specified that successive Croatian governments have been subjected to the obligations of increasing transparency in the equitable applications of legislative stipulations in terms of both the foreign and domestic business sectors from multiple external sources. These sources could be identified as the formulated trade policies of the EU, the obligatory provisions stated under the IMF loaning agreements and arrangements, the conditions associated with issuing of loans by the World Bank and the membership criteria associated with the WTO. Despotovic, Filipović and Ilić (2016) have argued that these external factors have obliged the Croatian governments to maintain trade agreements with multiple political and financial institutions of the EU as well as with the neighbouring countries. Furthermore, anti-inflationary policy implementation by the governments and progressive privatisation policy application are two significant elements of the political factors which currently influence the business environment of Croatia. These had culminated in the development of the Priority Action Plan (PAP) by the Croatian government during 2015.

Economic

Tica (2018) has stated that the nominal Gross Domestic Product (GDP) of Croatia has been estimated by the IMF to register a consistent CAGR growth of 3.7% from the achieved HRK 333.836 billion (2015 statistics) to HRK 430.523 billion by 2022. In terms of the difference between the nominal and actual GDP of Croatia during the financial year of 2016-17, the available statistics outline a discrepancy of 13.642 billion as the actual GDP had been HRK 329.552 billion and the nominal GDP was HRK 343.194 billion. This could be calculated as a GDP deflation of 104.14 points. Bečić and Švarc (2015) have further observed that the per capital GDP of Croatia during the same financial year period had been $ 12095.48 and the Purchasing Power Parity (PPP) had been $ 22795.31. According to Jovičić and Kunovac (2017), the governmental revenue of Croatia during 2016-17 financial year had been HRK 156.252 billion and the expenditure had been HRK 161.358 billion and this highlighted the eventual negative net borrowing extent of HRK 5.107 billion. This is indicative of the relative insufficient capability of the Croat national government to made available the necessary measure of financial resource which could provide further impetus to the economic and business sector based growth of the Croat economy. Such aspects highlight the current weaknesses in the Croatian national economic structure in terms of supporting a vigorous and expansive, indigenous business initiative by the private sector. However, Borozan (2017) has argued that these economic indicators could also specify the necessity of infusion of increased measure of Foreign Direct Investment (FDI) by global business groups, including those who lead the business consortiums of other EU nations. One positive aspect has been highlighted by Bilas, Bosnjak and Novak (2017) to be the expected CAGR decline of the current account balance of Croatia of 30.94% from the $1.961 billion in 2016 to that of $ 0.186 billion by 2022. This denotes a specific progress in the current account balance of Croatia and also indicates that Croatia could effectively undertake transform from the global borrower a positive lender in the near future.

Social

The decline in the population CAGR growth, Škare, Sinković and Porada-Rochoń (2019) have observed, would be 0.24% by 2022 (involving 4.133 million) from that of 2016, when the Croat population had been 4.17 million. Consequently, the marginal GDP growth rate has contributed, on the national level, to the extensive unemployment rate of 14.958% of the available labour forces. Apart from this, the general populace of the Croatia does prefer the most attractive and instantaneously available products which could provide greater value for the invested money. The necessity to emphasise on intense advertising campaigns is thus palpable. The majority of the population at Croatia is aging with each progressive year and the preference is towards gradual yet steady progression of living standards. Švarc (2017) have outlined that the greatest measure of disposable income is concentrated at the hands of Croats who are aged between 20 t o 55 years.

Environmental

The environmental consciousness concerning the Croatian population could be identified as extensive since the consumer lifestyle of the Croatian society is primarily reflective of the Italian social model of healthy and active sporting living. As a direct consequence, investments in the sport centres, health improvement resorts, ski facilities and spa centres could become the primary investment attraction for the foreign direct investors. This process could be augmented through the existing technology, capacity and skill measure of the workforce. Familiarity of environmentally friendly policies and procedures would be central to the process of business investment and dividend sharing with the local stakeholders. Rialti et al (2017) have been of the opinion that the Croatians are cognizant of the environmental issues and are also oriented towards protection of the environment. The direct access to the shores of Adriatic Sea could be utilised to invest in greater environmentally sustaining tourism investment. The major concerns, in this context, are waste management and treatment of waste and sewage.

Technological

The significance of tourism industry has culminated in the implementation of the Project of 177 for coastal township improvement to develop adequate environmental protection. Eterović, Jalšenjak and Krkač (2015) have specified that the Innovative Technological Development (ITD) has been formulated for the purpose reinforcement of the research and development activities. Furthermore, the Croatian Ministry of Science, Education and Sports (MSES) performs the appointment of particular councils for the development of specific scientific disciplines such as Biomedical, Technology, Information Technology, Social Science as well as the Humanities based researches (Šegota, Tomljanović and Huđek, 2017). The Croatian IT society currently organises the R&D activities in the information technical sector as well as in the interdisciplinary research sectors. The two major developments have been ECDL implementation and the E-learning academy.

Legal

The legal aspects of the business environment could be categorised into two specific indicators (Korez-Vide and Tominc, 2016). The first one is the strength of the existing legal institutions which are inclusive of the mechanisms of credit acquisition, minority investment protection, contract enforcement and insolvency resolutions. The second one is the regulatory process related costs and complication estimates and this category involves business project initiation permit obtainment regulations, investment opportunity accessing complications and infrastructure management through electricity connection availing. Other parameters are registering of property, tax remission and cross-border trading.

Popescu et al (2017) have concluded from the above demonstrated comparison of different legal indicators that Croatia does not perform effectively in terms of the strength of the legal institutions in existence. Greater reforms would be required within the Croatian business environment so at to improve the position of the country in terms of formulation of a global marketing strategy and improve the competitive capabilities of the country in the international domain.

Recommendations

1: The preceding evaluative study report has been demonstrative of the necessity of enacting reforms at the business suitability growth levels and at the competitiveness scale. This requires consideration of the particularities of circumstances at the Croatian national economic perspectives so that no underestimation of the current situations could plague the implementation of business environmental reforms.

2: Defining of the appropriate measure of regulations without abolishing them completely is of crucial significance. The involvement of each stakeholder is necessary to ensure that no substantial risk of political inefficiency in change implementation could emerge.

3: The analysis of the primary competitiveness parameters and indicators of business environment within Croatia could outline the necessity to capitalise on the opportunity of increment of business suitability and competitiveness through improvement of the property registration systems and taxation mechanisms. Furthermore, greater systematic judicial reforms are required concerning the contract enforcing area.

4: The future designing of formation programs has to take into consideration, would have to be cognizant of the necessity to curtail the detrimental one off costs in terms of formalisation of businesses. This would have a direct impact on the transaction costs which get now incurred at the Croatian national economic perspective. The reduction of such barriers could provide greater impetus to the start-up ventures at Croatia.

5: Introduction of electronic systems for the contributions in the social security sector could be another such recommendations. This would have to be synchronised with the contributions by the Croatian chamber of Commerce.

6: Improvement of the infrastructure at Rijeka port so as to better harmonise trading procedures with EU.

Conclusion

The structure of the preceding study involved a brief discussion on the significance of the business environment as a critical factor of competitiveness concerning Croatia in the current circumstances. This was followed by the PESTEL analysis of the business environment of Croatia so as to ascertain the influence of such individual factors on the probable marketing strategy of global business firms which could be interested in investment within Croatian national markets. Furthermore, the study has also delved into the comparative assessment of the previously stated selected EU members with Croatia in terms of market competitiveness. Finally, the conclusive stage has been preceded with the development of speculative reforms which could be implemented to increase the Croatian national business environmental suitability to the global investors through identification of potential investment sectors within the national economy for international enterprises.

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