FDI in Croatia

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During the process of transition from a planned to a market economy, much like other transition economies from Central and Eastern Europe (CEE), Croatia turned to international financial markets to boost growth, transfer technology, increase private ownership in its economy, and finance gross fixed capital formation. Although Croatia has attracted a considerable amount of foreign direct investment (FDI) inflows since its independence, the type of investment has generally been unfavorable for supporting economic growth. Croatian War of Independence and its aftermath, combined with isolation from the international community in the 1990s, largely excluded Croatia from European and global value chains. Subsequently, most of its FDI inflows took the form of acquisitions of existing companies and big market-share firms in non-tradeable sectors such as finance, retail, and real estate. The lack of both domestic and foreign investment in high value-added and high-tech industries such as machines, vehicles, electronics, and chemicals, resulted in a suboptimal industrial production structure and acute deindustrialization that was particularly detrimental for the inland regions of Croatia. Notwithstanding an unfavorable sectoral composition of FDI and lack of greenfield investments thus far, the Croatian economy remains an attractive investment destination. As a European Union (EU) member since 2013, Croatia’s expected accession to the Eurozone in the mid-2020s will eliminate the exchange rate risk, reduce the risk premium, and thus make Croatia even safer as a location for FDI.