Investment opportunities in Croatia (part 2)

Croatia is a great place for investors looking to expand their business in Central, Eastern and Southeastern Europe. With a population of less than 4 million, Croatia’s market potential is relatively small on a global scale, but Croatian consumers and companies have proven their ability to quickly adopt new technologies. That’s why Croatia could be an ideal pilot market for your business.

Top Sectors for Investment

Energy

Renewable energy sources make up 31.33% of Croatia’s energy balance, with 53.47% of total electricity production coming from renewable energy sources, primarily large hydroelectric power plants. The country imports around 54.54% of its total energy consumption per year: 74.48% of natural gas, 78.34% of oil and oil products, and 100% of its solid fossil fuel needs. Croatia is also a co-owner of the Krsko nuclear reactor in Slovenia, which is included in its energy balance as imported electricity.

Croatia is counting on its abundant renewable energy sources to become energy independent and sustainable. In February 2020, the Croatian government adopted a new Energy Strategy for the period up to 2030 with a perspective up to 2050. The strategy includes a wide range of energy policy initiatives that will improve energy security, increase energy efficiency, reduce dependence on fossil fuels, increase local production and increase renewable resources. The strategy forecasts that renewable energy as a share of total energy consumption will grow to 36.4% in 2030 and to 65.6% in 2050.

The government intends to spend about $1.4 billion on grid modernization with the aim of increasing renewable energy connections by at least 800 MW by 2026 and 2,500 MW by 2030.

Leading subsectors

Renewable energy

Croatia has many ongoing wind and solar projects. For example, the EU is funding a preparatory study for a 300 MW offshore wind farm in the northern Adriatic Sea, between Italy and Croatia.

According to foreign consulting company BCG, Croatia has significant untapped potential for solar energy, with one of the highest levels of solar radiation in Europe (3.4-5.2 kWh/m2day), but one of the lowest levels of installed photovoltaic capacity per capita (15.6 Wp).

The country also has high potential for geothermal energy, with six active exploration projects for power plants and heating installations in central and eastern Croatia. These regions, located in the Pannonian Basin of Central Europe, have an average geothermal gradient that is 60% higher than the European average.

Liquefied Natural Gas (LNG)

Croatia has installed a floating LNG terminal on the island of Krk, allowing the country to quickly receive LNG from other countries and the Middle East. Imports through the Krk terminal have successfully replaced 60% of Croatia's gas demand.

The government has launched a project to double the capacity of the LNG terminal by the end of 2025 to 6.1 billion cubic meters per year. To support the growth of the LNG terminal and diversify gas into neighboring countries, Croatia plans to build the Ionian-Adriatic Pipeline to provide exports to Bosnia and Herzegovina, Albania and Montenegro, as well as to extend existing pipeline systems to Slovenia and Hungary.

Opportunities

• Battery storage.
• Grid integration and improvement technologies.
• Geothermal well drilling equipment.
• Geothermal power plant construction services and equipment.
• Gas pipeline construction services and equipment.

Healthcare

The Croatian healthcare system is largely public, accounting for 83% of healthcare expenditure. Long waiting lists in the public health system and medical tourism are the strongest growth drivers for the private sector.

Healthcare in Croatia is financed mainly by the compulsory health insurance system, which is managed by the Croatian Health Insurance Fund (HZZO). The Ministry of Health is responsible for health policy, capital investments in public health facilities, university hospitals and university hospital centres. The counties control public health centres, public pharmacies and general and specialist hospitals. Most primary health care and dental care providers are privatised and serve the population under contracts with the HZZO.

Croatia is a member of the European Union, with fully harmonised legislation. Therefore, all medical and pharmaceutical products registered in the EU can easily be placed on the Croatian market.

The Croatian healthcare market is expected to change significantly in the coming years. The current government has set itself a challenging task: to eliminate the debt of public hospitals, while improving the efficiency and quality of the Croatian public healthcare system. To support these goals, more than €340 million has been allocated for healthcare from the EU Recovery and Resilience Fund, with the project implementation period set for 2026.

E-healthcare is well developed in Croatia. All hospitals have digital systems connected to the Croatian Health Insurance Fund. The healthcare portal on the government platform eCitizen offers patients access to centralized electronic health records and is fully integrated into the National Central Health Information System (CEZIH). Croatia has integrated its healthcare systems with several EU countries, allowing for the exchange of data and e-prescription services across these countries.

Opportunities

• Modernization of medical equipment — equipment in Croatian hospitals needs to be modernized and expanded to meet demand, especially for innovative procedures.
• Digitalization of healthcare - Croatia has good systems in place, but the data collected by these systems is not being used.
• Medical tourism - the country is a popular medical tourism destination for dental services, rehabilitation, orthopedics, dermatology and aesthetic surgery, with high potential for further growth.
• Solutions to improve financial and operational efficiency.
• Accessibility of health services in remote areas.

Agricultural sector

Croatia has about 1.5 million hectares of usable agricultural land and 2.8 million hectares of forests. The country has favourable conditions for diversified agriculture, but is self-sufficient only in the production of wheat, corn, oats, barley, basic oilseeds, mandarins, cherries and cherries.

Croatia's market for imported food products (consumer-oriented agricultural products) is valued at over $3 billion and is dominated by European suppliers. Thriving tourism along the Dalmatian coast and recovering consumer demand in urban areas have fuelled demand for consumer food products in recent years, as evidenced by the growth of supermarkets.

The quality of the country's natural and human resources is recognised by numerous international companies such as Lactalis, Heineken, Carlsberg, Coca Cola and HiPP, while the export successes of companies such as Podravka, Kraš and Ledo in the European Union market and beyond, contribute to the recognition and further development of the Croatian food industry.

Today, the food industry employs more than 57,000 people and has more than 3,400 companies.

Aerospace and Defense

Croatia has been a NATO member since 2009. Due to economic growth, the country has begun modernizing its armed forces, with the largest funds allocated to the Air Force. The government plans to further increase the budget to $ 1.176 billion in 2025.

In 2021, the Croatian government decided to purchase Dassault Rafales F-3R aircraft from the French government. The first aircraft are expected to arrive to replace the aging MIGs. In addition to the purchase of fighter jets, Croatia's largest ongoing defense modernization projects include the modernization of combat vehicles, the construction of a new corvette for the navy, and the modernization of the military's cyber capabilities.

The most developed and largest part of the Croatian Armed Forces is the army. The Croatian Armed Forces have more than 15,000 personnel: about half in the army, 10% in the navy, and 10% in the air force. This number is in line with the Long-Term Development Plan 2015-2024, which calls for the number of personnel to be around 15,000. The plan also identifies personnel as the army's key asset and emphasizes the importance of training and education.

Most of Croatia's defense equipment is imported from Western countries. However, Croatia also has several advanced defense equipment companies, including HS Produkt (a firearms manufacturer), Sestan-Busch (armor-piercing protective gear), and DOK-ING (demining equipment). Croatian defense equipment manufacturers are grouped in the Croatian Defense Industry Competitiveness Cluster.

Opportunities

Croatia plans to modernize legacy systems and platforms in all segments of the army. Key projects include:

• Purchase of modern short-range air defense systems.
• Modernization of the radio communications network.
• Purchase of unmanned aerial vehicles.
• Modernization of the naval radar.
• Cybersecurity.

Information and communication technology

ICT services account for about 70% of the market, followed by 26% of equipment sales and only 3% of equipment production. The ICT market is still relatively unsaturated, so the country is expected to maintain a positive outlook for corporate IT adoption, focusing on cloud computing, enterprise resource planning implementation, customer relationship management software, the Internet of Things, e-commerce and work-from-home solutions.

The PC market in Croatia is saturated with the dominance of smartphones, which further reduces the demand for PCs. The largest ICT customers are telecommunications, financial institutions, healthcare and retail, while growing demand has been recognised in utilities, manufacturing, transport, tourism, the public sector and small and medium-sized enterprises (SMEs).

75% of Croatia’s population uses the internet, and the country has the highest proportion of 16-24 year-olds with basic or above basic general digital skills (97%) in the European Union. Although Croatia has good, fast broadband coverage (86% nationally and 39% in rural areas), its overall fixed-broadband usage is slightly below the EU average.

Use of internet services in Croatia is comparable to the EU average, with the most used services being news, video calls, music, video and games. Advanced technologies are becoming increasingly popular among Croatian businesses: 35% use cloud solutions, 43% use e-invoices and 9% use AI-based solutions.

Numerous internationally recognized Croatian companies have demonstrated rapid growth, such as Infobip (unicorn), Infinum, Microblink, Infodom, Agrivi, Q, Span, Electrocoin, Serengeti, Sedam IT, Syntio and Devot, which regularly appear on the Financial Times list of the fastest growing companies in Europe and on the Deloitte list of the 50 fastest growing tech companies in Central Europe.

Telecommunications

According to DESI, Croatia is still among the least connected countries in the EU, although 4G coverage is 98%, which is above the EU average. Almost complete 4G mobile coverage, and the mobile broadband penetration rate is at the EU level (81%). Croatia has allocated the entire 5G spectrum in pioneer bands (5G availability has reached 100%), but still does not have full 5G coverage. In March 2021, the Croatian government adopted the National Broadband Development Plan. The plan takes into account the EU 2030 goals, but mainly covers the components of the previous strategy from 2016-2020.

E-Government Service

The eCitizen platform was launched in 2014 to unite all e-government services for citizens. The platform offers 66 e-services, and 75% of internet users used it to submit forms. To make the platform more user-friendly and unite services for citizens and business entities, the government upgraded the platform in 2021 and again in 2023. EU funds are the main source of financing for digital advances in the public sector. According to the National Development Strategy of Croatia 2030, the four priority digital areas for the government are: digital transition of the economy, digitalization of public administration and the judiciary, development of broadband electronic communications networks, and development of digital competencies and digital jobs. Achieving the goals of the strategy will increase the share of the information and communication technology (ICT) industry in GDP to 15% by 2032.

The best performance in e-government in Croatia is observed in the use of e-health services. An estimated 22% of citizens use these services, which is above the EU average of 18%. The National Health Information System (CEZIH) offers ePrescription, eReferral, eBooking, Electronic Health Record (EHR), Patient Portal, eSickLeave, eMedicalAids, as well as eHealthcare and eWorkInjury services for employers. Croatia is among several EU countries that have begun implementing cross-border services, including electronic prescriptions and access to patient data for doctors in EU countries.

Smart City

The development of Smart City infrastructure in Croatia continues, but still lags behind other Western countries. This segment is actively supported and driven by European Union funds. The Association of Cities promotes the development of Smart City concepts and increases the use of EU funds for such projects.

According to the study "Digital Readiness of Croatian Cities" conducted by the regional consulting company Apsolon, Rijeka and Zagreb are the leading large smart cities in Croatia. Among medium-sized cities, the best results were achieved by Pula and Karlovac, and among small cities - Varaždin, Dubrovnik and Bjelovar. Some smaller cities, such as Pleternica and Koprivnica, also have large-scale smart city projects focused on quality of life and transparency.

Cybersecurity

Croatia - a new regional leader in cybersecurity that excels particularly in detection and response capabilities – skills that are in high demand due to the increased number of cyber-attacks across Europe. Croatia is transposing the EU Directive on the Security of Networks and Information Systems 2 (NIS 2 Directive), which is expected to increase demand for cybersecurity solutions.

The Ministries of Defence and the Interior are intensively developing cybersecurity capabilities, including the newly established Military Cyber Command Centre in Zagreb. NIS2 will formalise the Security and Intelligence Agency (SOA) as a detection and response leader, require all critical infrastructure companies to report breaches, and create an expanded National Cyber Security Centre. SOA built the Cyber Technology Center in 2019 to protect the national cyberspace from state-sponsored cyberattacks and advanced persistent threats (APT), and its SK@UT program, a distributed sensor network that protects more than 60 key government and critical infrastructure organizations, is among the top three in the EU.

Automotive Industry

The development of the Croatian automotive industry is based on a long tradition in related industries such as metalworking, welding, glass and plastics production, and mechanical engineering. Croatian entrepreneurs involved in the production of automotive parts have a tradition of high-precision manufacturing with zero tolerance for failure, and their main competitive advantage is the excellent quality of their products. Croatia also boasts the production of electric cars, such as the Nevera from Rimac Automobili, which recently became a unicorn.

The automotive industry employs more than 2,400 people, and the number of companies exceeds 150.

Buyers of auto parts produced in the Republic of Croatia are such well-known companies as PSA, GM, Fiat, BMW, Audi, Ford, Renault, Toyota, Volvo, Porsche and many other representatives of the industry. Companies such as AD Plastik, Boxmark, Cimos-PPC Buzet, Saint Jean Industries, Wollsdorf and Yazaki are just some of the major manufacturers operating in the Republic of Croatia.

Among the Croatian experts and innovators are also suppliers of software solutions for well-known car manufacturers. Companies such as Infinum, HSTec, Visage Technologies, dSPACE, Amodo and Xylon stand out.

In addition to a highly educated workforce, other advantages that companies in the automotive industry can count on when entering the Croatian market are excellent infrastructure and close proximity to markets and car manufacturing plants in Western and Central Europe.

Pharmaceutical Industry

The pharmaceutical industry in the Republic of Croatia is an industry with a long tradition. The knowledge and experience of the workforce promise successful future development of the industry and related sectors. In addition, the pharmaceutical industry is one of the sectors of the Croatian economy that is experiencing intensive investment in research and development.

The discovery of the innovative antibiotic azithromycin has placed Croatia among the top twenty countries in the world that can boast of developing a completely new drug. In addition to Pliva (Teva), the largest pharmaceutical manufacturer in the region, companies such as PharmaS, Belupo, Fidifarm and JGL are successfully operating in the Republic of Croatia and have established excellent cooperation in foreign markets.

In addition, world-renowned companies such as Hospira (member of the Pfizer Group), ACG Europe (member of the ACG Worldwide Group), Dechra Group (Genera) and Nipro Pharma Packaging have recognized the efficiency and knowledge of Croatian employees.

Pharmaceutical production in Croatia continues its strong growth trend and has a significant impact on production in the entire industry. Today, the pharmaceutical sector employs over 6,000 people and comprises 50 companies.

Tourism

Croatia fully joined the Schengen Area on 26 March 2023, thereby significantly easing travel restrictions between it and other Schengen countries, which has had a positive impact on the tourism sector as the dominant sector of the Croatian economy.

The country is well known for its coastline and historical attractions, which has led to tourism becoming a major contributor to the national economy. This is evidenced by the fact that tourism accounts for almost 20% of the country's GDP. Foreign investors have in the past exploited the opportunities available to provide hospitality and accommodation services to tourists, but there has also been a steady influx of investment in real estate.

The new Tourism Law, passed in December 2023, could have a significant impact on future foreign direct investment in the tourism and real estate sectors. The introduction of provisions in the Tourism Act allowing local municipalities to limit the number and types of units for the provision of hospitality and accommodation services, as well as new rules on state aid in the tourism sector, reflect the government's aim to move away from traditional household rentals to more sustainable accommodation options such as family or heritage hotels, etc. The Croatian government considered these restrictions necessary to protect local municipalities from overtourism and the lack of affordable long-term accommodation for the local population, especially in tourist destinations.

The regulations affecting tourism and aimed at addressing the housing shortage did not stop there, and in 2024 the government proposed several pieces of legislation that, if adopted, would mainly affect short-term rentals. This legislation is primarily the Building Management and Maintenance Act, which introduces a requirement for hosts wishing to provide short-term rentals in buildings to obtain consent to do so from a two-thirds majority of their neighbours/co-owners. The proposed amendments to the Croatian Hospitality Act further aim to limit the number of short-term rentals in buildings, as the amendments would make the issuance of relevant short-term rental licences conditional on obtaining the above-mentioned consent and would set a five-year deadline for existing hosts to obtain such consent or lose their licences.
The impact of the restrictions set by the Tourism Act on foreign direct investment will primarily depend on the extent to which local municipalities will use their powers to limit tourist accommodation capacity (as the Act provides that local municipalities may, but are not obliged to, adopt such restrictions based on tourism capacity calculations and destination management plans). On the other hand, the restrictions, which primarily affect short-term rentals, are not expected to have a direct impact on foreign direct investment (as most recipients are still domestic).

Real Estate Sector

Foreign investment in real estate has become more popular and much easier since Croatia joined the EU, while currency risks and exchange costs were completely eliminated by Croatia's accession to the eurozone on 1 January 2023. Currently, citizens and entities from EEA countries and Switzerland enjoy equal rights with Croatian citizens and entities when it comes to acquiring real estate, including agricultural land, for which restrictions were lifted on 1 July 2023. However, the Croatian state has a right of first refusal in the case of a proposed sale of certain types of agricultural land, and failure to offer a plot of such agricultural land to the Croatian state first will result in the other sale and purchase agreement being considered null and void. On the other hand, citizens and organizations from non-EEA countries may purchase real estate in Croatia only on the condition of reciprocity and on the basis of obtaining approval from the Croatian Ministry of Justice and Administration.

Logistics

Croatia has excellent transport links with Eastern and Central Europe and the rest of Europe by air, road, rail and sea, and acts as a bridge connecting Western and Central Europe with the Black Sea, and Eastern Europe and the Baltic States with the Mediterranean. Three pan-European corridors (Vb, Vc, X) pass through Croatia. The Port of Rijeka is one of the most important ports connecting the Far East and Central Europe in terms of shortest transit and transport times. Via the river port of Vukovar, which is also part of the Pan-European Corridor VII, Croatia is also connected to European countries by river transport routes.

Users of the transport infrastructure can also count on modern communications and mobility infrastructure, as well as integrated software solutions in all regions of the Republic of Croatia.

Croatia's excellent geostrategic position, EU membership, modern infrastructure and good transport links with European countries provide numerous opportunities for the development and implementation of investment projects in the logistics sector, especially in the field of construction of logistics and distribution centers. Croatia ranks 49th out of 160 countries in the World Bank's Logistics Performance Index.

Reliability, security and the availability of sufficient human and material resources represent an opportunity for the development and implementation of investment projects in the logistics sector. It employs more than 79,000 people and has more than 14,000 companies.