BACKGROUND REPORT ON THE INNOVATION SYSTEM OF CROATIA

1
 TABLE OF CONTENTS

ABBREVIATIONS...............................................................................................................................................5
FOREWORD......................................................................................................................................................8
EXECUTIVE SUMMARY ....................................................................................................................................9
1. ECONOMIC PERFORMANCE AND FRAMEWORK CONDITIONS..................................................................15
1.1. Economic performance: An Overview ................................................................................................15

1.1.1. GDP growth .................................................................................................................................15

1.1.2 International trade ........................................................................................................................19

1.1.3. Foreign Direct Investment............................................................................................................26

1.1.4. Industry characteristics ................................................................................................................28

1.1.5. Productivity trends .......................................................................................................................30

1.2. Framework conditions for innovation ................................................................................................33

1.2.1 Business Climate............................................................................................................................33

1.2.2. Investment Policy and Promotion ................................................................................................35

1.2.3. Competition..................................................................................................................................35

1.2.4. Barriers to trade ...........................................................................................................................37

1.2.5. Access to finance ..........................................................................................................................37

1.2.6. Labour market institutions ...........................................................................................................40

1. 3. Innovation performance ....................................................................................................................41

1.3.1. Innovation inputs .........................................................................................................................41

1.3.2. Indicators of science, technology and innovation outputs ..........................................................48

2. INNOVATION ACTORS................................................................................................................................55
2.1 Business Sector: Insights from a business survey ................................................................................55
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 2.1.1 General information ......................................................................................................................55

2.1.2. Innovation behaviour ...................................................................................................................56

2.1.3. Innovation motivation and constraints ........................................................................................62

2.1.4. Collaboration and linkages ...........................................................................................................64

2.1.5. Policy Needs .................................................................................................................................68

2.2. Research institutions...........................................................................................................................70

2.2.1 Higher education institutions ........................................................................................................70

2.2.2 Public Research Organisations ......................................................................................................78

2.2.3 Private scientific institutions .........................................................................................................82

2.2.4 Funding of research activities .......................................................................................................83

2.2.5. Research institutions performance - Conclusions .......................................................................87

2.3. Human resources and skills ................................................................................................................88

2.4 Linkages in the innovation system .......................................................................................................95

3. THE ROLE OF GOVERNMENT ...................................................................................................................100

3.1 Science, technology and innovation policy ........................................................................................100

3.1.1 STI policy objectives and priorities ..............................................................................................100

3.1.2. The evolution of STI policy in Croatia .........................................................................................102

3.2. Institutional setup .............................................................................................................................109

3.2.1 Policy formulation level ...............................................................................................................109

3.2.2 Policy advisory level ....................................................................................................................110

3.2.3. Policy implementation and administration level .......................................................................112

3.3 Discussion of the main market and systemic failures ........................................................................117

3.4 Policy instruments..............................................................................................................................119

3.4.1. Research and innovation measures ...........................................................................................120

3.4.2. Scientific research measures ......................................................................................................131

3.4.3. Fiscal measures ..........................................................................................................................133

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 3.4.4. Human resources measures .......................................................................................................134

3.4.5. International Programmes .........................................................................................................135

3.4.6 Summary of current policy evaluation practices ........................................................................138

3.4.7 Intellectual property rights regime .............................................................................................139

3.5. Effectiveness of STI policy .................................................................................................................140

3.6. Governmental infrastructure - Conclusions......................................................................................142

REFERENCES ................................................................................................................................................142
REFERENCES ................................................................................................................................................143
ANNEX - SWOT ANALYSIS BY MEMBERS OF THE EXECUTIVE TEAM AND ADVISORY BOARD .....................148

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 ABBREVIATIONS

AMPEU Agency for Mobility and EU programmes

ASHE Agency for Science and Higher Education

BEEPS Business Environment and Enterprise Performance Survey

BERD Business Expenditure on Research and Development

BICRO Business Innovation Agency of Croatia

CBS Croatian Bureau of Statistics

CEEC Central and Eastern European countries

CEFTA Central European Free Trade Agreement

CEPOR SMEs and Entrepreneurship Policy Centre

CIS Community Innovation Survey

CROSBI Croatian Scientific Bibliography

CSF Croatian Science Foundation

ECTS European Credit Transfer and Accumulation System

ENIC/NARIC Croatian information centre for academic mobility and recognition of foreign higher
education qualifications

EPO European Patent Office

ERA European Research Area

EU European Union

EUR Euro

FDI Foreign Direct Investments

FINA Financial Agency

FP Framework Programme

FTE Full-time equivalent

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GDP Gross Domestic Product

GERD Gross Expenditure on Research and Development

GVA Gross Value Added

HAMAG Croatian Agency for SMEs

HEI Higher Education Institution

HIT Croatian Institute of Technology

HITRA Croatian Programme for Innovative Technological Development

HRK Croatian Kuna

INA Industrija nafte, National oil company

IPA Instrument for Pre-Accession Assistance

IPR Intellectual Property Rights

IRCRO Research and Development Programme

LSAME Law on Scientific Activities and Higher Education

MELE Ministry if Economy, Labour and Entrepreneurship

MoE Ministry of Economy

MoEC Ministry of Entrepreneurship and Crafts

MSES Ministry of Science, Education and Sports of the Republic of Croatia

NCHE National Council for Higher Education

NCS National Council for Science

NIS National Innovation System

OECD Organisation for Economic Co-operation and Development

OG Official Gazette of the Republic of Croatia

PCT Patent Cooperation Treaty

PPS Purchasing Power Standard

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PRO Public Research Organisation

R&D Research and Development

RBI Ruder Boškovic Institute

RC Republic of Croatia

RCA Revealed comparative advantage

RTO Public Research Organisation

S&T Science and Technology

SEE South East Europe

SHEFC Science and Higher Education Funding Council

SIIF Science and Innovation Investment Fund

SIPO State Intellectual Property Office of Croatia

SME Small and Medium Sized Enterprises

SPS Sanitary and Phytosanitary Standards

STI Science, Technology and Innovation

STP Science and Technology Project

TFP Total Factor Productivity

TTO Technology Transfer Office

UKF Unity through Knowledge Fund

WB The World Bank

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 FOREWORD

The Report was jointly prepared by the OECD Investment Compact and Domagoj Racic. The
assessment is primarily based on desk research but also draws on consultations with stakeholders of the
innovation system through focus groups and surveys. Additional input was provided by the project team
and Barbara Ambrus.

The purpose of this Background Report is two-fold. First, it will serve as the basis for Croatia’s
Review of Innovation Policy, which will be carried out by the Directorate for Science, Technology and
Industry of the OECD. The OECD Review of Innovation Policy will build upon the Background Report to
offer a more in-depth understanding of the key players and dynamics of the Croatian National Innovation
System. Second, the findings of the Background Report will help formulate recommendations on how to
enhance Croatia’s innovation policy and where to focus governmental efforts to improve the country’s
innovation performance. Indeed, the results from this first assessment will be used to provide guidelines
for the drafting of Croatia’s future National Innovation Strategy, capitalising on the country’s strengths,
taking advantage of future opportunities as well as bridging remaining policy gaps through a set of
realistic policy targets.

The following report is divided into four parts. Chapter 1 looks at the general economic
performance, framework conditions for innovation and innovation performance of Croatia to understand
the environment in which innovation actors operate. Chapter 2 analyses the role performed by the
different actors of the National Innovation System – including businesses and research institutions – and
the way they interact. Chapter 3 focuses on the role of the government and the current status of
Croatia’s innovation policy. Finally, Chapter 4 summarises the views of project team members on the
strengths and weaknesses of the Croatian innovation system and the opportunities and threats it is faced
with.

Please note that this is a first draft which should not be distributed for wider circulation. Its content
is still subject to discussion. Comments and suggestions from the project and executive teams are
welcome.

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 EXECUTIVE SUMMARY

Over the last twenty years, Croatia has undergone a profound economic and political
transformation, overcoming relative isolation and conflict to achieve growth and stability. Croatia’s
successful transition allowed it to become more closely integrated with the EU and paved the way for its
accession. Yet, in the aftermath of the crisis, it has become clear that Croatia is faced with a number of
challenges, including the strengthening of its international competitiveness and moving closer to a
knowledge-driven economy. Putting in place the adequate framework conditions and the right policies to
stimulate Croatia’s innovation performance will play a key role in the future to support the transition
towards a knowledge-based economy and build the foundations for strong and sustainable economic
development.

This Background Report is based on the proposition that a country’s long run economic growth is
closely linked to the level and quality of its innovation activities, i.e. the capacity to generate, transfer and
absorb technological, managerial, organisational and institutional innovations. The Report provides a
preliminary assessment of the actors, linkages and dynamics which characterise the Croatian National
Innovation System as well as a review of the current status of Croatia’s innovation policy.

A lagging overall innovation performance

Croatia successfully restructured into an open and market-driven economy over the transition period.
Croatia has also managed to establish a national innovation system which performs well in comparison
with other Southeast economies. However, in comparison with EU27 levels, Croatia’s overall innovation
performance is relatively low. Indeed, total expenditure in R&D, amounting to 0.73% of GDP in 2010, was
significantly below the EU27 average of 2% of GDP. Besides, in 2010, investment in R&D reached its
lowest level since 2000, in large part as a consequence of the ongoing economic crisis.

In terms of research and innovation outputs, Croatia also performs relatively poorly. With regard to
publications, Croatia’s record is mixed. While it publishes less per capita than comparable economies, it
outperforms other economies in publications per researcher. Nevertheless, it ranks low on publication
quality and impact indicators. Croatia’s patenting culture is even less developed, with approximately one
registered patent per 100 publications. This situation is largely the result of the career progression system
in research which encourages publications and basic research to the detriment of patents and applied
research. Patenting in Croatia also differs widely across industry sectors and regions.

Croatia's lagging innovation performance is also clear from the country's continued specialisation in
low and medium-low technology production and exports. Generally, compared with other Central and
Eastern European economies, the transition of Croatia’s structure of production and exports towards
technology and skilled-labour intensive products has been slow. One of the reasons accounting for this
slow technological change has been Croatia’s lack of foreign investment in manufacturing and high-
technology industries, which can generate significant gains in terms of technology transfer and
technological upgrading.

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 The Croatian national innovation system remains constrained by a number of regulatory and financial
barriers. In particular, the unpredictability of the administration, difficulties to obtain licenses and
building permits, and regulatory fees deter entrepreneurship. Regulations in certain sectors and barriers
to market exit also prevent the process of “creative destruction” from fully taking place. Finally, access to
finance for innovation remains also somewhat limited, particularly by the fact that venture capital and
equity financing are very under-developed.

Businesses, still a secondary innovation actor…

Enterprises make a vital contribution to innovation, and a dynamic business sector is a main source
of and channel for both technological and non-technological innovation. Yet, Croatian firms have a rather
moderate or low propensity to invest in innovation and are not the central innovation player they should
be. Indeed, the Croatian business sector performed about 44% of total R&D and funded about 39% of
total R&D in 2010. These figures are in stark contrast with trends in the OECD where the business sector
is the main funder and performer of R&D. The private sector’s modest role in R&D is also reflected in the
small share of researchers employed in businesses (19%).

According to a business survey designed by the OECD Investment Compact and carried out by GfK
for the purpose of this background report, 60 % of the companies were involved in some form of
innovation activity in the period 2009-2011. The majority introduced a new product or service, followed
by process, organizational and marketing innovations. Exporting companies as well as their foreign
owned peers are more active innovators compared to non-exporters and domestically owned companies.

While around half of the surveyed companies are seeking joint work with business partners, only a
minority collaborates with research institutions. Significant differences exist between SMEs and large
companies. The latter cooperate on innovation projects relatively often with Croatian universities and
less so with other local research institutes and organizations. In contrast, only less than 20% of SMEs have
joint projects with the research community. Most science-industry collaboration has been in the form of
consultancy services.

Some businesses conduct pure research activities and have units or institutes fully devoted to
research. In fact, some of these private scientific institutes have a long tradition of performing research
and continue to play a crucial role in the national innovation system. However, business scientific
research and investment remain concentrated in a small number of usually large foreign-owned
companies and in a small number of sectors including pharmaceuticals, telecommunications, agriculture
and food and beverages. The R&D contribution from locally-owned enterprises has been minor.

A number of structural factors account for companies’ limited role in R&D. First, the structure of the
national economy is dominated by low-tech industries which do not depend on investments in R&D. In
addition, the private sector – particularly the SME sector – has weak technological capabilities and
absorption capacities, generating only limited interest and demand for R&D. Finally, private R&D
activities suffered from corporate restructurings. While R&D departments used to be active and well-
integrated with production inside state-owned enterprises, many were dismantled in the post-

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privatisation phase and there were only a few cases where R&D laboratories of former state-owned
enterprises were successfully restructured.

Croatia’s accession to the EU will bring about many opportunities for businesses. On the one hand, it
will give Croatian firms full access to EU markets. On the other hand, EU accession implies that domestic
companies will be faced with more vigorous competitive pressure, requiring them to be more innovative.
In fact, according to the business survey, intense competition from other companies and the need to
increase productivity are major incentives pushing firms to innovate.

…In a system still geared towards research in the public sector

Croatia’s seven public universities continue to play the leading role in the higher education system
and research, as they account for more than 85% of all lecturers, employ the majority of researchers in
Croatia and attract more than 75% of all students. They published 65% of all research works published in
Croatia in 2009 and around 59% in 2010.

Public research organisations are the other key player in public research, making up 27% of GERD in
2010 and employing 29% of total researchers. Public research institutes have had complex and different
development trajectories. During the transition many public research institutes found themselves in a
position where former external linkages with former research and/or industrial partners were weakened,
and new ones had to be developed, with different degrees of success. The internationalisation of their
activities has often been a challenge.

Overall, the quality and international integration of the Croatian science system have significantly
improved in the last decade. The number of scientific publications rose from 1254 in 2002 to 2348 in
2008. Croatia also demonstrated above EU-27 performance in international scientific co-publications (IUS,
2011). The Croatian public research sector will also benefit from a new generation of younger researchers
with increased opportunities for mobility and the development of R&D infrastructure. These factors,
combined with the introduction of quality assurance mechanisms and an increasing awareness of the
linkages between science and industry, can facilitate the reform of academic institutions and their
contribution to the development of a knowledge-based society and economy.

A number of weaknesses persist, however, including the limited commercialisation of research

outputs, a continued emphasis on basic research, a relatively fragmented research governance and weak
science-industry cooperation. The research sector’s limited experience in technology transfer and
innovation and the lack of incentives related to research commercialisation contribute to this situation.
Tackling these issues also requires attention to wider structural weaknesses in the governance of
research institutions, IPR policy, and the lack of performance-based research evaluation and promotion.

Some of the key challenges include increasing the inward and outward mobility of researchers,
raising the proportion of researchers in the private sector, increasing the focus on multidisciplinary
research, developing research infrastructure and ensuring its efficient utilisation, reforming research and

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higher education (through improved funding mechanisms, quality assurance, and accountability),
developing science-industry collaboration and supporting the internationalisation of research.

...and characterised by weak linkages in the innovation system

Despite relatively developed innovation and technology infrastructure, both science-industry and
inter-firm linkages remain weak. Science-industry cooperation tends to be sporadic (rather than
systematic) and based on the initiatives of individuals or small teams, rather than on the strategies of
their respective institutions. When it comes to university spin-offs and student start-ups, their
establishment is not systematically monitored or encouraged. Researchers and university students are
more likely to initiate their private businesses without the knowledge or support of faculties and
universities.

Several obstacles have constrained science-industry collaboration and research

commercialisation. On the science side, the career progression of researchers is determined by academic
achievements, an approach which has favoured publications and basic research rather than patents,
applied research and collaboration with the private sector. In addition, the predominance of institutional
over competitive funding has discouraged the diversification of revenues, a key incentive for the
commercialisation of research. More generally, the lack of an entrepreneurial mindset and a limited
understanding of business needs have hindered science-industry links. On the business side, the lack of
competitiveness and technology intensity in the economy resulted in a weak demand for research
services and joint research projects and businesses’ perception of scientific and academic research as
having limited commercial applicability and thus little relevance for their activities. Finally, the capacity of
intermediary institutions designed to facilitate industry-science cooperation has often been limited.

The need for a coherent governance approach

Croatia has had experience in designing and implementing innovation policy over the last decade,
which brought about a dynamic evolution of various strategic documents, institutions and policy
measures. In addition to their own experience, domestic policymakers and stakeholders have also
learned from their counterparts in more developed countries.

Regarding the effectiveness of science and innovation policy, it has varied depending on the levels of
effectiveness and efficiency of the different ministries and their affiliated implementation agencies. While
a number of programmes and measures have had a positive impact, the overall effects of policy
instruments on innovation and socio-economic development seem to be fairly modest, due to the overall
framework conditions which do not favour research and innovation for development and growth.
Additional deficiencies in governance include inadequate planning and evaluation processes as well as
the lack of coordination between the different bodies responsible for innovation policy, which has
resulted in programmes with overlapping objectives.

Redressing the imbalances and filling the gaps in the Croatian innovation system will require a
coherent innovation policy framework and strategy with realistic targets. Innovation policy effectiveness
should also be enhanced through reinforced stakeholder consultation, the involvement of external
12
experts, systematic monitoring and evaluation, better planning and improved coordination between the
different bodies responsible for innovation policy.

Croatia’s accession to the EU is a great opportunity for both researchers and businesses but will
require significant policy improvements to fully reap the benefits from increased integration, openness
and mobility. In particular, the government will have to continuously screen and improve framework
conditions for entrepreneurship and innovation. Innovation policy will also play a central role in
furthering Croatia’s convergence process towards EU standards and restructuring towards more
knowledge-based activities.

Strengths, weaknesses, opportunities and threats of the National Innovation System

Strengths Weaknesses

High general level of education of the
population
A well-developed higher education system
Experience in science and innovation
policy design and implementation
Diversified innovation infrastructure
Commitment to strengthen the innovation
system/Recognition of the role of
innovation in upgrading the economy
Good performance of research institutions
Ability of researchers to participate in
international science networks, in
particular European Framework
Programmes
Low investments in R&D and innovation
capacities concentrated in a small number
of companies
Low absorptive capacities of firms
Focus on theoretical knowledge/Lack of
soft skills
Insufficient linkages within the public
research sector
Weak science-industry collaboration
Lack of research
commercialization/technology transfer
Uncoordinated/overlapping innovation
policy bodies
Lack of systematic policy evaluation
Remaining administrative and regulatory
barriers to entrepreneurship
Lack of performance-based research
evaluation, financing and promotion

Opportunities Threats

Full integration in the EU market Brain drain

Access to additional EU funding/Increasing
exposure to world-class science networks
Increasing competitive pressure to
innovate with EU accession
Increasing foreign investment
Increasing mobility of researchers
Strengthening ties with the Diaspora
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Lack of a coherent innovation strategy
Weak implementation of adopted
strategies and policies
Declining share of S&T graduates
Prolonged recession with a detrimental
impact on budget and investments in R&D
Failure to upgrade industries along the
value chain
Foreign investment concentrated in low
 and medium-low technology sectors

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 1. ECONOMIC PERFORMANCE AND FRAMEWORK CONDITIONS

1.1. Economic performance: An Overview

1.1.1. GDP growth

Growth trends until 2008

The Croatian economy enjoyed a period of steady growth and macroeconomic stability between
2002 and 2008, with relatively contained inflation and a stable exchange rate. Real Gross Domestic
Product (GDP) growth in 2004-2008 amounted to 4.1% on average, which was higher than the European
Union(EU)27 average of 2.25% (Figure 1). Nevertheless, Croatia’s growth may have been somewhat
below potential. Figure 2 illustrates the catch-up effect according to which poorer economies tend to
growth faster than wealthier ones. It reveals that economies like Latvia, Lithuania, Estonia, Poland,
Turkey, Czech Republic and the Slovak Republic, which had relatively similar levels of GDP per capita in
2004, experienced faster growth and catch-up than Croatia between 2004 and 2007.

Figure 1. Annual GDP growth rate, average 2004-2008

0
SVK EST CZE POL SVN HRV FIN AUT HUN EU 27

Source: Eurostat

15
 Figure 2. The catch-up effect

12
LVA
Average annual growth 2004-2007

10
EST
LTU
UKR SVK
8 TUR
MNE
ROM
BGR
BIH
SRB CZE
ALB POL
6 MKD SVN
HRV
FIN
GRC ESP SWE
4 HUN AUTNLD
MLT EUU GBR
FRA
DEU
PRT ITA
2

0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
GDP per capita 2004 (EUR)

Source: Eurostat, OECD analysis

Croatia's sustained rates of economic growth, combined with a decline in the size of the population,
led to a consistent growth in per capita income and progressive convergence towards EU levels. Croatia's
GDP per capita in 2010, reaching approximately EUR 10,400, ranked slightly below GDP per capita levels
in Hungary, Estonia and Poland but was still far below the EU27 average (see Figure 3). Figure 4 shows
that if the current pace of GDP per capita convergence is sustained, Croatia will catch up with the EU-27
average only in 2032.

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 Figure 3. GDP per capita in PPS in 2010, EU27=100

140

120

100

80

60

40

20

0
Austria Finland Slovenia Czech Slovakia Hungary Estonia Poland Croatia
Republic

Source: Eurostat

Figure 4. Croatian GDP per capita (PPP) compared to EU27 average

Source: Eurostat, OECD analysis

Croatia’s economic growth between 2000 and 2008 was primarily driven by domestic demand,
fuelled by strong credit growth and large capital inflows. Indeed, private consumption and investment
(primarily in the construction sector), were the main contributors to economic growth over that period
(Eurostat, 2011). More fundamentally, Croatia’s growth was driven by its deepening integration with the
global economy and particularly the EU, leading to a massive increase in foreign direct investment and to
the expansion of banking services and credit provision to businesses and households.

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Growth trends after 2008

Croatia’s period of sustained economic growth was abruptly interrupted by the global financial crisis.
Croatia’s economy started to feel the impact of the global financial crisis in the last quarter of 2008 (EC,
2011a) and sharply deteriorated in 2009, experiencing a 6% contraction on the back of reduced capital
inflows, dropping export demand and tighter credit conditions. While Croatia was more severely hit than
Austria, Poland and the Slovak Republic, Estonia and neighbouring Slovenia experienced even steeper
declines (Figure 5).

Figure 5. GDP growth in selected countries

15.0

10.0
EU27

5.0 EST
AUT
0.0 POL
2007 2008 2009 2010 2011
-5.0 SVN
SVK
-10.0 FIN
HRV
-15.0

-20.0

Source: Eurostat

Croatia has had a harder time pulling out of the crisis than its neighbours. In 2010, the economy
continued to contract, with real GDP falling by 1.2%. In fact, Croatia is the only economy of the group
which recorded negative growth in 2010. On the one hand, private consumption was hampered by
household deleveraging and growing unemployment, and on the other hand, low confidence negatively
affected investment (IMF, 2011). In 2011, the economy was still stagnating, with close to zero growth.
The eurozone debt crisis has been an additional obstacle to recovery as Croatia has close and direct
investment, banking and trade links with Eurozone economies.

The Croatian National Bank (CNB) quickly responded to the crisis, taking measures to limit liquidity
shortages in the banking sector in 2009 (Economist Intelligence Unit, 2009; IMF, 2011). The government
also introduced a number of short-term measures to contain the budget deficit but the fiscal deficit
widened to 5% of GDP in 2010 due to falling revenues and public debt reached 41% of GDP. Finally, at
the more structural level, the previous government launched in April 2010 the Economic Recovery
Programme, a package of structural reforms with a view to encouraging long-term and sustainable
growth. However, fundamental structural reforms have not been achieved so far (EC, 2011a).

18
 In hindsight, the crisis and its aftermath shed light on the external vulnerabilities of Croatia’s pre-
crisis growth model. Booming domestic demand prior to the crisis led to a deterioration of Croatia’s
trade and current account deficits. Capital inflows and rapid credit growth also resulted in a significant
debt build-up (Figure 6). Indeed, capital inflows were to an important extent debt creating, largely driven
by foreign borrowing of banks and companies. In 2010, the stock of gross external debt increased by EUR
1.2 billion to EUR 46.5 billion, amounting to 102.6% of GDP, and the corporate non-tradable sector
accounted for about 40% of foreign debt (EC, 2011a). Prevalent foreign currency borrowing also
increased balance sheet exposure to exchange rate risk.

Figure 6. External debt by debtors (in billion EUR)

50

40

Direct investments
30
Other sectors
Banks
20
Croatian National Bank
Government
10

0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Croatian National Bank

1.1.2 International trade

Trade openness and performance

Trade flows can be a significant catalyst for the innovation behavior of firms. Both imports and
exports can be channels for technology transfer and involve learning effects for domestic firms.
Furthermore, exposure to international markets increases competition and pushes firms to innovate and
to increase their productivity. In particular, Croatia’s accession to the EU implies that domestic companies
will be faced with more vigorous competitive pressure. Although this process might hurt previously
protected and relatively uncompetitive domestic firms, on average it is expected to increase productivity
and stimulates innovation. Indeed, to adapt to this changing environment and withstand increased
external competition, Croatian firms will be required to be more innovative.
Since 2000, Croatia experienced an increase in trade flows. Exports doubled in euro terms between
2000 and 2008 (see Figure 7). Imports, stimulated by credit growth, increased from about 10.5 EUR billion

19
in 2000 to 23.9 EUR billion in 2008. This increase was in part the consequence of changes in the trade
policy regime. Indeed, unilateral liberalisation, Croatia’s accession to the WTO in 2000 and free trade
agreements led to a rapid decline in average tariffs (WTO, 2010). Trade flows also grew as Croatia
became more integrated with the EU which currently receives more than 60% of Croatia’s total exports.

Figure 7. Croatia's exports and imports of goods and services, EUR million

30,000

25,000

20,000

15,000 Exports
Imports
10,000

5,000

Source: Eurostat

Croatia’s closest trade partners include Italy, Germany, Slovenia and Austria (Table 1). Interestingly,
over time, the shares of exports to Italy and Germany in total Croatian exports registered a decline. The
declining share of exports to Italy may be linked in part to the loss of competitiveness in the Croatian
apparel and textile industry (see below) as articles of apparel and clothing accessories are some of
Croatia’s key export products to Italy. Croatia is also closely integrated with economies of Ex-Yugoslavia,
particularly Bosnia-Herzegovina, which is Croatia’s second largest export destination and primarily
imports mineral fuels, and Serbia.

Table 1. Croatia's main trading partners in 2010

Share of Share of
Main export partners Main import partners
total exports total imports
Italy 19% Italy 15%
Bosnia & Herzegovina 12% Germany 13%
Germany 10% Russian Federation 9%
Slovenia 8% China 7%
Austria 5% Slovenia 6%
Serbia 4% Austria 5%
Luxembourg 3% Bosnia & Herzegovina 3%
USA 2% Turkey 3%
Hungary 2% Hungary 3%
Russian Federation 2% France 3%

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 Source: UN Comtrade

Nevertheless, Croatia’s openness to trade remains more limited than in the comparator economies
(see Figure 8). In fact, Croatia’s openness to trade was lower than Poland’s in 2011. This may seem
surprising as smaller economies tend to be more open to trade and integrated than larger ones. Besides,
Croatia is the only economy where the average of total exports and imports as a share of GDP was lower
in 2011 than in 2000. Croatia’s relatively lower trade openness may be explained by a number of factors
including the persistence of procedural barriers to trade (WB, 2012) and a relatively weak export
competitiveness.

Figure 8. Average of total exports and imports of goods and services as a share of GDP

100
90
80
70
60
50 2011
40 2000
30
20
10
0
EST HUN SVK CZE SVN AUT POL EU27 HRV FIN

Source: Eurostat

Indeed, despite significant export growth, Croatia’s export performance has been disappointing in
comparison with other economies, raising concerns about Croatia’s export competitiveness (IMF, 2011).
In fact, Croatia’s export growth and penetration in EU markets were among the slowest in Emerging
Europe during the last decade and the country’s export market share has been stagnant since 2000 (IMF,
2011). Large current account deficits prior to the global crisis were also an indication of Croatia’s
competitiveness challenge (see Figure 9). The subsequent sharp current account adjustments – with
deficits down to 5.3% of GDP in 2009 and 1.2% of GDP in 2010 – were the result of a significant decline in
the demand for imports rather than a consequence of an improvement in international competitiveness
(source).

21
 Figure 9. Current account balances, % of GDP

10
AUT
5
HRV
CZE
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 EST
-5 FIN
HUN
-10
POL
SVK
-15
SVN
-20

Source: IMF World Economic Outlook Database, April 2012

Trade structure and export competitiveness

Services, primarily tourism, accounted for 48 percent of Croatia’s total exports in 2010, a
considerably higher share than in comparable economies. On the other hand, manufacturing exports
constituted 35% of total exports in 2010. Croatia’s main manufacturing exports include transport
equipment (i.e. mainly ships and boats), machinery, coke and refined petroleum products, chemical
products, food products and textiles and apparel (Table 2).

According to the 2008 Annual Competitiveness Report (National Competitiveness Council, 2009),
Croatian exports are characterised by a low level of concentration in terms of product groups, which may
seem surprising for a small economy. Indeed, the five leading product groups in Croatian exports to the
EU account for less than one-third of the country’s total exports, while the average level for comparable
economies is about 50%. Similar results were found for the ten leading export product groups, with a
decline to the level of 50% for Croatia and a convergence of the comparable countries towards an
average level of about two thirds of total exports (National Competitiveness Council, 2009).

Croatia continues to primarily export low and medium-low technology exports. While some of
Croatia’s top exporters sell high-technology goods, many are not highly technologically advanced (see Box
1). Figure 10 shows that only slightly more than a third of Croatia’s exports are in medium-high and high
technology industries, which is rather low compared to other countries and the 61% share of EU27
countries as shown in Figure 10. In particular, the level of high technology exports, accounting for only 9%
of Croatia’s manufacturing exports, is low compared with countries like Hungary, the Slovak Republic,
Czech Republic, Slovenia and Poland. Table 2 also shows that shares of high technology and low
technology exports in Croatia’s manufacturing exports have decreased while medium-low and medium-

22
high technology industries have gained importance between 2004 and 2010. In medium-high technology
industries, the positive development was mainly driven by Electrical Machinery and Apparatus and
Machinery and equipment.

Box 1. Profile of Top Croatian Exporters

According to the data from the Financial Agency (FINA), the 1,000 largest Croatian companies generated 71.5
billion kuna in exports last year. FINA also publishes every year the list of the top ten Croatian exporters. Among this
year’s top exporters were the following companies:

INA: Leading the list of top Croatian exporters in 2011, Croatia’s national oil company INA recorded 10.47 billion
kuna (1.4 billion Euros) worth of exports, increasing its export performance by 22.3% between 2010 and 2011.
However, this increase was more due to rising oil prices than to increasing market shares in foreign markets.

Petrokemija: Petrokemia is a large chemical company (more than 2300 employees) specialized in the
manufacturing of fertilizers. It exported fertilizers for a value of HRK 1.91 billion in 2011. Its main export markets
include Italy, Slovenia, Western Balkan economies but also Nigeria and Turkey.

Pliva: Pliva develops and manufactures finished dosage forms and active pharmaceutical ingredients. Since
2008, Pliva has been part of the TEVA Pharmaceuticals Group, one of the world leaders in generic drugs. It exports
more than 80 per cent of its total output, and its largest export markets are the United States and Russia.

Uljanik: Uljanik is the only major Croatian shipyard which is profitable. Nevertheless its export revenues fell in
comparison to 2010, showing a decrease in the activity of large domestic shipyards which for years were the largest
and most recognisable Croatian export product.

Koncar – Power transformers: Koncar is majority-owned by Siemens and produces all kinds of high power
transformers. It was selected by the Croatian Exporters Association as the most successful large Croatian exporter.
Koncar Power transformers main export partners in 2010 were the United Arab Emirates (25%), Qatar (17%), Spain
(9%), Jordan (7%) and the Czech Republic (7%).

The other companies listed among the top 10 exporters for 2011 include the Austrian company Boxmark Leather,
which produces seat covers for the world's automotive industry, Croatia Airlines, Ericsson Nikola Tesla, Tankerska
Plovidba Zadar, the largest Croatian shipping company and TLM TVP, which exports rolled aluminium products. Many
of these companies are state-owned, loss-making and not highly technologically advanced.

Source: FINA; http://www.tportal.hr/biznis/gospodarstvo/199635/Top-10-najvecih-hrvatskih-izvoznika.html

23
 Figure 10. Shares of high and medium-high technology manufacturing exports, 2010

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Slovenia

Denmark

Luxembourg
Japan

Poland

Latvia
Malta

Norway

Croatia
France

Italy
Hungary

EU27

Canada

Greece
Romania

Portugal
Switzerland
Mexico

United Kingdom

Belgium

Sweden
Cyprus
Spain

Iceland
Ireland

Estonia

Lithuania
Germany

Finland

Turkey

Australia
United States

Bulgaria

New Zealand
Netherlands

Austria
Slovak Republic
Czech Republic

High Technology Manufactures Medium-high Technology Manufactures

Source: OECD STAN, authors’ compilation

Table 2 shows that Croatia has a revealed comparative advantage (RCA)1 in low and medium-low
technology industries. Croatia has experienced an increase in the competitiveness of its Food products,
Beverages and Tobacco (up 15% to an RCA index of 1.59), Wood and Products of Wood and Cork (up 39%
to an RCA index of 4.60) and Other Non-Metallic Mineral Products (up 12% to an RCA index of 2.89)
industries. Overall, however, Croatia reduced its specialisation for both low and medium-low industries
and in the textiles industry in particular. The relative decline in the export competitiveness of the textile
industry most likely reflects price competition from low wage countries, difficulties to move to higher
value added activities within the industry, but also the growing importance of other industries.

1
Values of the RCA index above 1 indicate a comparative advantage, values below 1 a comparative disadvantage.
When the RCA index is above 1 the country is said to be specialised in the industry concerned.

24
 Table 2. Industry shares in manufacturing imports and exports and revealed comparative advantage

Share in manuf. Share in manuf.

RCA (exports)
Imports Exports
Industry 2004 2010 2004 2010 2004 2010
Food products, Beverages and Tobacco 7.2% 9.5% 8.4% 9.4% 1.39 1.59
Textiles, Textile Products, Leather and Footwear 8.0% 8.0% 13.8% 8.4% 1.83 1.37
Wood and Products of Wood and Cork 1.7% 1.4% 3.9% 3.9% 3.31 4.60
Pulp, Paper, Paper Products, Printing and Publishing 3.9% 3.9% 2.7% 2.5% 0.96 1.02
Coke, Refined Petroleum Products and Nuclear Fuel 2.6% 5.6% 9.8% 11.5% 2.76 2.53
Chemicals excluding Pharmaceuticals 8.4% 11.1% 6.0% 7.9% 0.74 0.78
Pharmaceuticals 3.6% 4.9% 3.5% 4.0% 1.59 0.20
Rubber and Plastics Products 4.0% 4.6% 1.6% 1.8% 0.55 0.61
Other Non-Metallic Mineral Products 2.6% 2.5% 3.7% 3.8% 2.58 2.89
Basic Metals 7.1% 7.4% 2.8% 3.3% 0.44 0.48
Fabricated Metal Products 4.6% 4.6% 3.2% 4.2% 1.23 1.58
Machinery and Equipment, n.e.c. 11.9% 10.4% 6.6% 7.6% 0.65 0.70
Office, Accounting and Computing Machinery 3.0% 2.3% 0.7% 0.4% 0.12 0.09
Electrical Machinery and Apparatus, n.e.c. 3.6% 4.1% 4.6% 6.9% 0.95 1.31
Radio, Television and Communication Equipment 5.7% 5.1% 6.1% 2.8% 0.65 0.30
Medical, Precision and Optical Instruments 2.5% 2.3% 1.3% 1.1% 0.32 0.26
Motor Vehicles, Trailers and Semi-Trailers 11.3% 6.0% 1.8% 2.2% 0.16 0.23
Other Transport Equipment 4.4% 3.3% 14.7% 14.6% 3.66 3.35
Manufacturing not elsewhere classified; Recycling 3.8% 3.1% 4.6% 3.5% 1.46 1.12
High technology industries 15.1% 14.5% 11.7% 9.3% 0.44 0.24
Medium-high technology industries 36.2% 35.6% 19.3% 25.0% 0.52 0.71
Medium-low technology industries 24.2% 25.7% 35.5% 38.0% 2.00 1.95
Low-technology industries 24.5% 24.2% 33.4% 27.7% 1.61 1.50

Source: OECD STAN, authors’ compilation

Croatia has become relatively more successful in exporting medium-high technology products.
However, with an RCA below one, i.e. 0.71 in 2010, Croatia has as of today no revealed comparative
advantage in medium-high technology industries. In medium-high technology industries, Croatia is
specialised in Other transport equipment, i.e. shipbuilding, and has also achieved a revealed comparative
advantage in Electrical machinery and apparatus. Finally, Croatia experienced a significant decline in its
market share and competitiveness in high-technology industries, i.e. in particular in Pharmaceuticals.
Overall, Croatia appears to be under-specialised in high and medium-high technology manufactures.

Compared with other Central and Eastern European countries (CEEC), changes in the structure of
production and exports in Croatia have been slow (Hunya and Skudar, 2006). In the period 1995-2001,
the analysis of the composition of CEEC exports to the EU reveals that the share of unskilled labour-
intensive products declined. On the other hand, there was an increase in technology and skilled-labour
intensive products and a rise in the aggregate share of these products in EU-oriented exports (Crespo and
Foutoura, 2007). Hungary has been the most dynamic economy in this respect, with a significant and
increasing share of high-technology and high-skill industries (Crespo and Foutoura, 2007). In Hungary, the
export-oriented manufacturing sector – which received significant flows of FDI during the transition
process – has been an important engine of growth (OECD, 2008). By contrast, Croatia has been lagging
behind with a continued specialisation in low and medium-low technology manufactures (Stojcic et al.,
2012).

25
1.1.3. Foreign Direct Investment

Inward foreign direct investment (FDI) can play a critical role in boosting a country’s innovation
performance. There are a variety of direct and indirect channels through which it may enhance host
countries’ productivity and innovation activities. With regard to direct channels, firms receiving FDI can
realise efficiency gains through the transfer of technology, better organisational and management
practices, improved human resources, or better integration in supply chains and international markets. In
addition, “knowledge spillovers” may lead to improved efficiency in other domestic firms (OECD, 2012c).
Indirectly, FDI can also stimulate innovation through increased competition. Nevertheless, the impact of
foreign investment on growth and innovation through these channels depends on a variety of factors
including the sectors in which investments are made, the modes of entry of FDI and the absorptive
capacities of domestic firms.

In addition to inward foreign investment, outward FDI connecting an economy with knowledge
centres and innovation networks in other countries can also encourage innovation by increasing access to
cutting-edge information and advanced technology (OECD, 2012c).

Compared to its Central European neighbours, Croatia was for a long time not perceived as an
attractive foreign investment location. During the first half of the 1990s, Hungary and the Czech Republic
proved more successful at attracting FDI mostly because of Croatia’s involvement in the Ex-Yugoslavian
conflict. In fact, up until 1998, Croatia only received small amounts of largely privatisation-related FDI
inflows, although during that period, some of the most successful manufacturing enterprises were
acquired by foreign investors (Sohinger et al., 2004).

Starting in 1999, annual FDI inflows reached about EUR 1 billion or more. Then, from an average of
EUR 1.3 billion per year between 1999 and 2005, annual FDI inflows rose to an average of EUR 3.2 billion
between 2006 and 2009 (Figure 11). As a share of GDP, FDI inflows significantly increased after 2004,
peaking in 2008 at about 9% of GDP. This rapide increase in inflows was in part due to the sale of the
pharmaceutical company Pliva to Barr and the partial takeover of INA, the domestic oil company, by the
Hungarian oil company MOL. Figure 12 shows the dramatic increase in Croatia’s inward FDI stocks, from
13% of GDP in 2000 to 48.3% of GDP in 2011. In contrast, Croatia’s outward FDI stocks remained
comparatively small, reaching only 7.1% of GDP in 2011. This pattern is nevertheless broadly in line with
trends in other Central and Eastern European economies.

However, FDI inflows were largely privatisation-driven and market-seeking. Greenfield and export-
driven (i.e. efficiency-seeking) investment remained limited. Austria, the Netherlands and Germany were
the largest sources of FDI flows to Croatia, contributing to over 50% of the stock accumulated up to 2008.

26
 Figure 11. FDI inflows to Croatia in EUR million

4500

4000

3500

3000

2500

2000

1500

1000

500

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: UNCTADstat

Figure 12. FDI stocks in selected countries in 2000 and 2011, as a % of GDP

80

70

60
Inward2011
50
Outward2011
40
Inward 2000
30
Outward 2000
20

10

0
AUT HRV CZE EST FIN HUN POL SVK SVN

Source: UNCTADstat

With regard to sectors, a clear evolution occurred between the early phase of transition and the
2000s. Between 1990 and 1998, manufacturing accounted for more than 70% of total FDI between 1990
and 1998 (Hunya and Skudar, 2006). After 1999, FDI became mostly oriented towards services (e.g.
banking, trade, real estate services and telecommunications) with only 20% of FDI flowing into

27
manufacturing in 2006. This share is low compared to shares between 36%-39% in Hungary, Romania,
Czech Republic and Slovenia. As shown in the Figure 13, financial services were by far the most attractive
activity for foreign investment, accounting for almost 40% of total inflows between 2000 and 2010.

The lack of new manufacturing FDI has been a major shortcoming in Croatia. Indeed, transition
countries could usually attain faster structural change and export growth if relying on FDI to modernise
the manufacturing sector (Hunya and Skudar, 2006). By contrast, in Croatia, due to limited foreign
investment in manufacturing, increased FDI penetration has not generated the expected benefits
regarding the introduction of new industries and may not have facilitated enough technological
upgrading in the traditional industries (Hunya and Skudar, 2006).

Figure 13. FDI inflows in Croatia by activities, 2000-2010

Financial intermediation, except insurance and pension funds

Wholesale trade and commission trade
18% Manufacture of coke, refined petroleum products
3% Real estate activities
37%
3% Retail trade, except of motor vehicles and motorcycles
3% Post and telecommunications
4% Hotels and restaurants
5%
Extraction of crude petroleum and natural gas
7%
12% Other business activities
8%
Other activities

Source: Croatian National Bank

As a consequence of the 2008 global financial crisis, inward FDI almost halved in absolute terms, and
as a share of GDP fell from 8.8% to 4.7% in 2009 (EC, 2010). In 2010, FDI inflows declined even further to
0.9% of GDP and the total stock of FDI stood at around EUR 24.5 billion (around 53% of GDP) (EC, 2011a).

1.1.4. Industry characteristics

The private sector, particularly the small and medium-sized enterprises (SME) sector, expanded
significantly in size and scope over the transition period. In 1991, large enterprises employed 75% of the
labour force, while in 2000 that figure dropped to 37%. The increasing significance of SMEs in Central and
Eastern European economies in the 1990s was the result of the decline and break-up of the large state-

28
 owned enterprises (Vehovec and Domadenik, 2002)2 as well as the emergence of opportunities for the
creation of new firms (Aralica et al., 2008).

Today, with around 143,434 registered SMEs3 in the country, the SME sector accounts for 67.2% of
total employment, and 57.1% of value added (Table 3). In terms of size class breakdown, the Croatian
SME sector is closely aligned with that of the EU average, with micro and small firms accounting for nine
out of every ten enterprises. In terms of sectors, 39% of Croatian SMEs are active in the service sectors
such as renting and business services, transport, tourism or constructions, 32% are active in trade and
only about 16% work in manufacturing (EC, 2011b).

Table 3. Basic figures on the Croatian enterprise sector

Number of enterprises Employment Value added

Croatia EU27 Croatia EU27 Croatia EU27
Number Share Share Number Share Share Billion € Share Share
Micro 130,066 90.4% 92.0% 305,218 27.8% 29.5% 4 16.6% 21.4%
Small 11,320 7.9% 6.7% 221,155 20.1% 20.5% 5 20.2% 19.0%
Medium-sized 2,048 1.4% 1.1% 210,785 19.2% 16.9% 5 20.3% 18.1%
SMEs 143,434 99.7% 99.8% 737,158 67.2% 67.0% 13 57.1% 58.5%
Large 484 0.3% 0.2% 360,391 32.8% 33.0% 10 42.9% 41.5%
Total 143,918 100.0% 100.0% 1,097,549 100.0% 100.0% 23 100.0% 100.0%
Source: EC, 2011b (SBA Fact Sheet Croatia 2010/2011)

Overall, the Croatian industry is strongly oriented towards services. In 2010, the services sector
accounted for 68.8% of total gross value added (GVA). By contrast, industry represented only 19% of
GVA, construction 6.7% and agriculture 5.5% (see Figure 14). Between 2000 and 2010, the share of
services in GVA, particularly business activities and financial services, increased. The share of the
construction sector in GVA also experienced a moderate increase over the last decade. The shares of
agriculture and industry, on the other hand, declined. These trends are however in line with trends in
other European economies. Indeed, in the EU27, the share of services in GVA increased from 69.7% to
73.5% between 2000 and 2010 while the share of agriculture declined from 2.3% to 1.7% and the share of
industry dropped from 22.4% to 18.7% (EUROSTAT, 2011).

2
According to Vehovec and Domadenik (cited in Bejakovic et al., 2007), the increase in the share of private SMEs in
employment and GDP owes more to the decline of the larger enterprises than to a strong pace of new firm
formation and growth of the SME sector as such.

3
Due to costly and inefficient liquidation procedures, inactive SMEs (which do not conduct any business) are also
included in this figure.

29
 Figure 14. Gross value added by sectors, %

100

21.9 18.7
Other services
80

19.4 27.3 Business activities and

60 financial services
Trade, transport and
23.7 communication services
40 22.8
Construction
5.1
6.7
20 Industry, including energy
23.4
19
Agriculture, hunting and
6.5 5.5
0 fishing
2000 2010

Source: Eurostat

At the subnational level, the coastal regions, Adriatic North and Adriatic South, have experienced
strong growth of GVA from increased tourism in recent years. Central Croatia and, in particular, Eastern
Croatia have a quite unfavourable economic structure, with a relatively large share of agriculture (Becic
and Svarc, 2010).

1.1.5. Productivity trends

Labour productivity, measured as GDP per person employed, improved significantly between 1996
and 2000 in Croatia from about 60% to 77% of the EU27 average (Figure 15). In general, all the Central
and Eastern European countries under study experienced labour productivity improvements, with
particularly marked progress in the Slovak Republic and Estonia. In 2010, Croatia performed relatively
well, demonstrating higher labour productivity than the Czech Republic, Hungary, Estonia and Poland.

30
 Figure 15. Labour productivity per person employed, EU27=100

140

120

100

80
2010
60 1996

40

20

0
AUT FIN SVK SVN HRV CZE HUN EE POL

Source: Eurostat

However, there have been different patterns of labour productivity growth. While in the case of
private firms productivity gains came along with rising employment, in the case of state-owned and
privatized firms, they were to a large extent the consequence of labour shedding (Rutkowski, 2003).
Indeed, over manning was common in state-owned enterprises (SOEs), which was associated with low
labour productivity. As the transition progressed, enterprises faced mounting competitive pressure from
the expanding private sector as well as foreign competitors penetrating the Croatian market. This pushed
firms to reduce costs and cut employment. The resulting labour shedding has led to improved labour
productivity (Rutkowski, 2003).

GDP per person employed gives an idea of how productively labour is used to generate output but it
also reflects the joint influence of a variety of factors. For instance, an increase in capital will increase
output per hour worked and hence increase labour productivity. However, this increase in labour
productivity will reflect the use of additional inputs rather than a more efficient use of inputs. A better
indicator of how efficiently inputs are used is total factor productivity (TFP), which is the portion of
output that cannot be explained by the amount of inputs used in production.

While estimates of TFP growth vary (see Table 4), they concur in showing that TFP growth declined
over time and that capital accumulation was the main contributor to growth after 2002. These trends
may suggest that TFP growth was primarily driven by the structural reforms of the 1990s – including
privatisation, deregulation of product and labour markets, openness to trade, FDI and technology
transfers – and has been difficult to sustain after most inefficiencies from the centrally planned regime
were eliminated (Borys et al., 2008). The growth contribution of capital, on the other hand, may be
explained by FDI inflows and infrastructure investments to rebuild regions that were destroyed during the
war (Moore and Vamvakidis, 2007). Finally, high unemployment rates and relatively low labour

31
participation levels explained the limited contribution of employment to growth. The evolution from a
negative contribution in the second half of the 1990s to a small positive contribution between 2002 and
2005 most likely results from the introduction of labour market reforms in 2003 (Moore and Vamvakidis,
2007).

Table 4. Contributions to GDP growth - Estimates from a production function

4
1996-2001 2002-05 2006-09

Using CNB capital stock estimates

Real GDP growth 3.6 4.7 4.4
Contributions:
Capital 3.2 2.7 2.8
Labour -1 0.9 0.5
Productivity 1.5 1.1 1.1

Using CROSTAT capital stock estimates

Real GDP growth 3.6 4.7 4.3
Contributions:
Capital 1.5 2.2 2.2
Labour -1 0.9 0.5
Productivity 3.2 1.6 1.6
Source: Moore D. and A. Vamvakidis (2007)

In the comparator economies, growth has been driven mainly by capital accumulation and TFP
growth, with a limited contribution of labour. A number of studies find that TFP was the most important
driver of growth in the first half of the 2000s in the EU-105 (Borys, Polgar, Zlate, 2008), highlighting the
role of structural reforms. Others, however, conclude that growth in Central European countries such as
Hungary, Slovenia, Slovak Republic and Czech Republic from the second half of the 1990s to 2007 was
mainly attributable to the accumulation of physical capital (Iradian, 2007; OECD 2009b), mainly reflecting
large FDI inflows into the region.

4
Estimates for this period.

5 . EU-10: Countries that have become EU members since 1 May 2004, with the exception of Cyprus and Malta (i.e.
Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania,Hungary, Poland, Romania, Slovenia and Slovakia).
32
1.2. Framework conditions for innovation

1.2.1 Business Climate

A sound business environment is a prerequisite for strong innovation performance. Indeed, to

innovate, and in particular to invest in research and development (R&D), businesses need a stable
business climate to have a long term perspective. In addition, a sound business climate favours foreign
investment, which can in turn stimulate innovation through a variety of channels (cf. supra). More
generally, the quality of framework conditions are likely to impact on the effectiveness of innovation
policies (OECD, 2012c).

The OECD’s Investment Reform Index measures framework conditions for Southeast European
economies. The 2010 assessment for Croatia is shown in the figure below, alongside with the average for
South East Europe (SEE). A score of 5 indicates OECD best practice. While Croatia is shown to surpass the
SEE average on most dimensions, significant gaps remain, in particular regarding the taxation of SMEs and
multinational enterprises, the taxation of investment and employment, transparency and dialogue in
parliamentary processes and inputs to initial education.

Figure 16. Investment Reform Index: Croatia

33
Source: OECD, 2010

Croatia was ranked 80th out of 183 economies in the 2012 Doing Business Index (WB, 2012), revealing
additional impediments to investment and business in Croatia (Table 5). In particular, Croatia is well
below the average of the comparator economies and the SEE region for registering property – on
average, the procedures take 102 days to complete and cost 5% of the property’s value. The time and
costs entailed to deal with construction permits also affect investment. Croatia also lags behind the
comparative economies and the SEE region when it comes to protecting shareholders, mainly due to the
low disclosure and approval requirements of related-party transactions. On the other hand, Croatia is
ahead of both the SEE region and comparator economies for starting a business, getting electricity and
paying taxes.

Table 5. Doing Business Scores

Comparator
Economies average
Topic Croatia 2011 Croatia 2012 SEE 2012 average

Starting a Business 57 67 80.3 78.0

Dealing with
Construction Permits 142 143 148.4 76.4

Getting electricity 56 56 122 67.3

Registering Property 104 102 74.3 41.0

Getting Credit 64 48 27.5 41.3

Protecting Investors 131 133 74.8 82.9

Paying Taxes 30 32 92.3 92.8

Trading Across
Borders 99 100 89.2 46.1

Enforcing Contracts 47 48 88.1 42.9

Resolving insolvency 94 94 76.7 44.8

Source: World Bank, 2012

Finally, the informal sector remains a problem in the economy: firms identified competition from the
informal sector as one of the main obstacles to doing business according to the 2008/2009 Business
Environment and Enterprise Performance Survey (EBRD and WB, 2010). While it is by definition very
difficult to measure the size of the informal sector, informal employment is estimated to comprise
around 10-15 per cent of the total, with a large share of it in the construction industry (EBRD, 2010).

34
1.2.2. Investment Policy and Promotion

Many legal barriers to investment and foreign direct investment have been removed in the country
over the past years (De Rosa et al 2009). In particular, the country has made reforms to guarantee the
equal treatment of foreign parties. Transfers of capital can notably be made freely and the government
has both signed and ratified numerous bilateral investment treaties and other international instruments
to allow the arbitration of disputes (OECD, 2010). Furthermore, there are no national requirements for
members of board of directors either.

On the other hand, restrictions remain for foreign investment in maritime transport services and
fishing. In addition, while EU legal or physical entities can own industrial or residential land in Croatia
since January 2009, the Ministry of Justice must approve the purchase of real estate or property by
foreign investors from a non-EU state and agricultural and protected areas cannot be owned by foreign
investors. (OECD, 2010)

Croatia publishes investment related laws and amendments to these laws via official media and
relevant ministries and agencies. However, the investment promotion agency of Croatia, the Trade and
Investment Promotion Agency, was shut down in 2010. The current government is setting up a new
Agency for Investment and Competitiveness, which is still not operational.

1.2.3. Competition

Product market regulation includes administrative procedures, such as application procedures,

burdens on start ups and sector level requirement, and economic regulations, such as legal barriers to
entry and state control (De Rosa et al. 2009). Empirical research (Conway et al., 2005, 2006) has shown
that increased competition in product markets contributes to increasing GDP per capita by prompting the
reallocation of resources towards more productive activities.

Competition is also closely linked with innovation. A paper by Aghion et al. (2005) explains that while
low levels of competition offer the possibility to gain a monopoly rent by innovating, thereby inducing
innovation, competition encourages innovation by reducing a firm’s pre-innovation rent more than it
reduces the post innovation rent. The authors find that the relations between product market
competition and innovation is an inverted U-shape (OECD, 2012c). As the paragraphs below will detail,
there are high barriers to entry and high barriers to exit in the Croatian economy. These potentially
prevent the “creative destruction” process from fully taking place.

According to the EC progress report (EC, 2011a), difficulties to obtain licences and building permits,
non tax fees and the unpredictability of the administration deter entrepreneurship. For instance, Croatia
ranks 67 on the ease of starting a business in the Doing Business Index 2012, while Albania and the
Former Yugoslav Republic of Macedonia respectively rank 61 and 6. In addition, the “silence is consent
rule” to grant licenses automatically after a standard response period has expired is not sufficiently used
(De Rosa et al 2009).

35
 Besides barriers to entry, there are also some barriers to exit in the economy. Difficulties to exit the
market can be a barrier to investment because it increases the investment risk for equity and debt,
thereby creating a barrier for access to finance. According to the Doing Business Report (World Bank,
2012), closing a business takes 3.1 years in Croatia while it takes on average 1.7 years in the OECD. The
cost of a bankruptcy is about 15% of the estate, above the average for Eastern Europe and Central Asia,
and the recovery rate is 29.7% (World Bank, 2012). As a consequence, as Table 4 illustrates, Croatia
performs worse than both the SEE region and the comparative economies on the resolving insolvency
indicator of the Doing Business Index.

According to the EC progress report (EC, 2011a) State aid regulations in Croatia are in line with the EU
acquis. However, public subsidies in 2011 represented 2.4% of GDP and have not been reduced since
2010. Much of the state aid is allocated to loss-making companies and most of it is sector-specific aid
rather than horizontal aid. Finally, a large number of companies remain state-controlled and privatisation
has slowed down in the past years (EBRD, 2011). For example, while Croatia has made restructuring plans
that are in line with the EU acquis for shipyards in difficulty, none of the privatisation contracts were
signed yet (EC, 2011a).

The new Competition Act that entered into force in October 2010 provides the Croatian Competition
Agency with new tools to enforce competition rules (EC, 2011a). The Croatian Competition Agency has a
good administrative capacity with about 55 employees and was given a stronger role in the anti-trust and
mergers field. The competition agency has made 37 decisions on antitrust and merger cases since
October 2010, including 7 on agreements, 3 on a dominant position, 12 on concentrations and 15
opinions. The competition agency could however be further strengthened through training of the
members of staff, particularly in the fight against cartels. Indeed, looking at cartels, Mlikotin Tomić and
Pecotić Kaufman (2009) show that the enforcement of competition rules in Croatia is still in an early
phase of development.

While the country has made significant progress in competition policy, regulation in certain sectors
still weighs upon the economy more generally. Croatia has high entry barriers in certain industries
including transport infrastructure, the collection, purification and distribution of water, electricity and
gas. Similar restrictions exist in many EU and OECD countries. On the other hand, Croatia also maintains
barriers to entry in the financial and insurance sectors, which is more unusual. De Rosa et al. (2009) found
that the regulation of the energy, transport and communication sectors has had a negative impact on
Croatia’s convergence of income.

Finally, perceived barriers to competition remain high according to the latest Global Competitiveness
Index based on the World Economic Forum’s Executive Opinion Survey (WEF, 2011). Croatia ranks 114th
out of 142 countries under the “Goods market efficiency” pillar. More specifically regarding competition
and competition policy, Croatia is ranked 115th on the intensity of local competition, 119th on the extent
of market dominance and 94th on the effectiveness of anti-monopoly policy (WEF, 2011).

36
1.2.4. Barriers to trade

Croatia is well integrated in the multilateral trading system. It has been a member of the World Trade
Organisation (WTO) since 2000 and has also been a member of the Central European Free Trade
Agreement (CEFTA) 20066 but will be required to leave the agreement upon its entrance in the EU in
2013. The country’s membership in the WTO and the have kept the country on a path of reforms to
decrease barriers to trade and investment.

Tariffs on industrial goods in 2007 were already lower than those of Hungary and Poland when they
joined the EU (De Rosa et al., 2009). Regarding non-tariff barriers, the country’s score on the Trading
Across Borders component of the Doing Business Index (WB, 2012) is below the SEE region average as
procedures to import and exports are comparatively numerous.

Croatia has an established body for sanitary and phytosanitary standards (SPS). Since 2006, it has also
adopted or revised several pieces of sanitary and phytosanitary related framework legislation on animal
welfare and protection (2006), food (2007), veterinary issues (2007) and sanitary inspection (2009). Even
though Croatia has increased the staff numbers and qualifications for the implementation of SPS, further
improvements in the administrative capacity would ensure the implementation of the adopted
legislation, already in line with the EU acquis (OECD, 2010).

The country has also adopted European standards and abolished conflicting standards (OECD, 2012a).
The standardisation body is a full member of the European Committee for Electrotechnical
Standardisation and the European Committee for Standardisation. However, it has not fully dealt with the
recognition of certification procedures. Relevant agreements were signed with the national standard
bodies of Bosnia and Herzegovina, Montenegro, the FYR Macedonia and Turkey but were not negotiated
with other CEFTA parties (OECD, 2011a).

1.2.5. Access to finance

Access to finance is important to enable innovation and growth. Yet, businesses and more particularly
start ups and SMEs may find it difficult to access finance. SMEs may face barriers that include asymmetric
information, insufficient collateral and a lack of track record (OECD, 2012b).

Croatia is ahead in the SEE region when it comes to access to finance. In the Business Environment
and Enterprise Performance Survey, 43% of firms indicated that access to finance was not a problem
against 34% on average in SEE and in Europe and Central Asia (EBRD and the World Bank, 2010).
However, there is little capital available for risky investments (OECD, 2012a).

The institutional framework is generally conducive to facilitating finance. For example, a private credit
coverage bureau provides full coverage of all individuals’ credit history and since 2012 of firms’ as well

6
CEFTA is formed by eight Parties: Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia, Moldova,
Montenegro, Serbia and the United Nations Interim Administration Mission in Kosovo (UNMIK).

37
(World Bank, 2012) and makes the information available online (OECD, 2010). On the other hand, there is
no legal framework to control the credit bureau other than the 2003 Act on Personal data Protection
(OECD, 2012a). An online cadastre is also available. Collateral requirements are therefore low by regional
standards, amounting to 150% of the loan on average (OECD, 2010 and OECD, 2012). Creditors’ rights
remain to be addressed as secured creditors are not paid first in cases of default outside of a bankruptcy
procedure (OECD, 2012a).

Bank lending

Private credit accounted for 72% of GDP in 2011 (OECD, 2012a); this is more than in Poland, the Czech
Republic and the Slovak Republic but less than in the remaining comparative economies. As Figure 17
illustrates, the share of private credit increased from 59% in 2006 to 70% in 2010. The main source of
finance for SMEs is banking finance, though it declined significantly in 2009 and started recovering only
towards the end of 2011 (OECD, 2012a).

Figure 17. Domestic credit to private sector

(% of GDP)

122%
116%
97% 95% 94%

83% 79% 73% 70%

66% 56% 55% 2010
56% 59%

41% 39% 2006

33%

0%

AUT EST FIN SVN HUN HRV CZE POL SVK

Source: World Bank 2012 (WBI)

The Croatian Financial Supervisory Agency monitors the financial sector, which is still characterised by
a lack of competition as the largest five banks hold 75% of assets. Lending interest rates have remained
fairly stable since 2001, ranging from 9.3% in 2006 and 2007 to 11.6% in 2003 and 2009. The interest rate
was 10.4% in 2010, below the regional average of 12.3% (World Bank, 2012b). The interest rate spread,
the lending rate minus the deposit rate, is 8.69%, significantly above the regional average of 6.74%,
perhaps as a result of the lack of competition in the sector.

38
Alternative sources of finance

Leasing is another significant source of finance for SMEs, representing 14.3% of GDP, and Croatia is
also one of the economies in SEE where factoring7 is most used, representing up to 3% of GDP (OECD,
2010). Leasing companies are licensed and monitored by the Croatian Financial Services Supervisory
Agency but there is no legal framework in place for factoring.

The Croatian Bank for Reconstruction and Development also provides micro loans. However, a legal
framework for microfinance institutions is lacking as these currently operate under the legal status of
Cooperative Savings and Loans.

Private equity and risk capital are on the other hand less readily available. The Zagreb Stock Exchange
has a capitalisation of about HRK 176.38 billion (about 24 Billion EUR) and 280 listed companies (EBRD,
2012). There is some business angel activity, done primarily through the Croatian Business Angel Network
(CRANE). Private equity transactions are low, the SME Policy Index 2012 (OECD, 2012a) estimates that
they represent just over 0.3% of GDP, and venture capital is almost non-existent. The government
launched 5 “Economic Co-operation Funds” to improve access to finance but these only made two
investments in their first two years (OECD, 2012a).

Nevertheless, some institutional framework is in place to support private equity and risk capital as the
country reasonably complies with the OECD principles of corporate governance and the International
Organisation of Securities Commission principles. The EBRD carried out a Legal Indicator Survey in 2007
that revealed initial public offerings and underwriting were not yet common in Croatia at that time. In
particular, disclosure practices need to be improved (EBRD, 2012 and World Bank, 2012a). Courts also
lack capacity and expertise to effectively investigate securities cases.

Croatia has put in place various programmes to support access to finance. The Croatian SME agency
(HAMAG Invest) runs nine credit guarantee schemes, including one targeted to new technologies. The
size of the guarantees varies, covering up to 70% of the credit for microcredits and new entrepreneurs
(OECD, 2012a).

The government has also tried to support risk finance. For instance, innovation agency BICRO
manages the programmes RAZUM and VENCRO. While RAZUM provides seed capital, VENCRO seeks to
finance innovative start-up companies by encouraging private investors to set up a public-private venture
capital fund (Bojic, 2009). However, due to the financial crisis, which reduced the interest of private
investors, this programme has not been successfully implemented yet.

7
Factoring is a financial transaction whereby a business sells « accounts receivables », usually invoices, to a third
party at price inferior to the price of the account receivable.

39
1.2.6. Labour market institutions

Labour market policies can affect aggregate R&D spending and innovation. Some argue that there is
a positive relationship between labour market flexibility and innovation. For instance, strict hiring and
firing policies can raise the cost of innovating, when innovations require labour downsizing or
reorganization (OECD, 2002). Another potential side effect of strict hiring and firing rules is to constrain
worker mobility when mobility helps disseminate technology among companies, between industry
sectors and between universities and industry (OECD, 2002). On the other hand, there may be ways in
which labour market flexibility negatively affects innovation. Innovation may depend on previously
accumulated knowledge within the company, requiring some degree of stability within the company;
flexible contracts may deter firms from investing in training for its employees; and employees may only
be willing to take on the risks of innovation when they get a sense of security in their position (Wachsen
and Blind, 2011).

While the Croatian labour market experienced a significant decline in unemployment between 2000
and 2008, from a peak of 16.1% to the historically low level of 8.3% (see Figure 18), the employment rate
remained lower than in other European economies and well below the Lisbon target of 70%. Besides,
following the global downturn, the trend reversed and unemployment increased. Youth unemployment,
which was already at a very high level in 2009 (25.1%) also rose, reaching 34.4% in 2010 (EC, 2011a).

Figure 18. Unemployment rate, % of total labour force

20

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: IMF World Economic Outlook Database, April 2012

Croatia’s high rates of youth and long-term unemployment can be attributed in part to rigidities in
the labour market and the lack of a good incentive structure. Indeed, by European standards, Croatia’s
employment protection legislation (EPL) is strict. A World Bank study (WB, 2011) which benchmarks EPL
in Croatia against EPL in other European countries using the OECD Employment Protection Legislation
Index and the World Bank Employing Workers indicators shows that EPL in Croatia is stricter than in most
European economies. Employment protection legislation in Croatia is also stricter than in new EU
member states, including
40
1. 3. Innovation performance

Under the socialist system in former Yugoslavia, Croatia had a relatively strong research capacity
compared to other Eastern Europe countries (Bartlett and Cuckovic, 2006). To some extent, the
development of research capacities and investments in R&D were encouraged by the import substituting
regime prevalent in former Yugoslavia (Radosevic, 2010b) and the closed nature of the economy
(Kravtsova and Radosevic, 2012). However, with the transition towards a market economy in the 1990s,
the Croatian science system suffered significant losses in research personnel, scientific productivity and
technological capabilities, particularly in the industrial sector (see p.27). Scientific capacity in public
research institutes and universities was somewhat better preserved (Bartlett and Cuckovic, 2006). Since
2000, the R&D sector has been gradually recovering (Svarc and Racic, 2011).

1.3.1. Innovation inputs

Gross domestic expenditure on R&D (GERD)

Expenditure on R&D is one of the most widely used measures of innovation inputs. While it does
not capture all forms of innovation, particularly non-technological innovations, R&D expenditure as a
percentage of GDP is used as an indicator of an economy’s relative degree of investment in generating
new knowledge (OECD, 2011b).

Overall investments in R&D culminated in 2004 reaching 1.05% of GDP, followed by a sharp
decline in 2006 (0.76%) and recovery in 2008 (0.9%). R&D expenditure fell again to 0.83% of GDP in 2009,
at least partly as a consequence of the economic and financial crisis. Investment in R&D further declined
in 2010, dropping to 0.73% of GDP, its lowest level since 2000 (Figure 19).

Figure 19. GERD in Croatia between 2002 and 2010, % of GDP

1.2

0.8

0.6

0.4

0.2

0
2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Eurostat

41
 Figure 20 shows that Croatia’s total expenditure on R&D in 2010 was lower than in all the comparator
economies, with the exception of the Slovak Republic. It was significantly below the EU27 average of 2%
of GDP, and R&D investments in Slovenia (2.11%), Austria (2.76%) and Finland (3.87%). Croatia is also the
only country in the group where GERD as a percentage of GDP in 2010 was lower than in 2002.

Figure 20. GERD in selected countries, % of GDP

2 2010
2002

0
FIN AUT SVN EU27 EST CZE HUN POL HRV SVK

Source: Eurostat

As shown in Figure 21, the countries that had invested more in R&D between 2004 and 2008 are also
the ones that exited the crisis faster. This may suggest that investment in R&D is a long-term and more
stable driver of growth which helps economies avoid major and prolonged economic downturns. The
Slovak Republic and Poland appear as two exceptions, having invested little in R&D between 2004 and
2009 but recording high growth rates in 2010. In the Slovak Republic, while the large export-oriented
manufacturing sector intensified the impact of the global economic crisis, it also generated considerable
gains from the upturn in global export demand in 2010. On the other hand, Poland – the largest internal
market of the EU’s transition economy Member States – benefited from strong domestic demand, with
private consumption rising by 3.9%.

42
 Figure 21. R&D investments between 2004-09 and GDP growth in 2010

7%

6% SE

5%
SK
PL
4% DE FI
GDP growth, 2010

3% CZ LUX
EE BE AT
UK EU27
2% IT NL
LT HU SI FR
DK

1% NO

ES
0% LV IE
0% 1% 2% 3% 4%
-1% HR

-2%
Average GERD as a share of GDP, 2004-2009
Source: Eurostat

The Croatian innovation system is strongly oriented towards research in the public sector. Indeed,
higher education institutions and public research institutes together perform about 56% of total R&D. In
comparison, in the EU, the public research sector performs on average 37% of total R&D (see Figure 22).

On the other hand, the Croatian business sector performed about 44% of total R&D in 2010, which is
low compared with the EU27 average of 61% and very low compared with Austria, Slovenia and Finland
where about 70% of total R&D is carried out in the business enterprise sector. According to the CBS
(2012), in 2010 there were 106 business sector legal entities engaged in R&D activities. This suggests that
innovation activities tend to remain relatively marginal in Croatian companies’ competitive strategies,
which devote limited resources and competences to their development (Aralica et al., 2008).

43
 Figure 22. GERD by sector of performance in 2010, %

100%

80%

60% Private non-profit sector

Higher education sector
40% Government sector
Business sector
20%

0%

Source: Eurostat

In terms of funding, the government and the higher education sector together fund 51.2% of total
R&D. In parallel, the business sector funds about 39% of total R&D (Figure 23). With the exception of
Poland and the Slovak Republic, the business sector plays a larger role in funding R&D in comparator
economies than in Croatia. For instance, in Slovenia and Finland the business sector respectively funds
58.4% and 66.1% of total R&D. Finally, resources from abroad accounted for about 10% of GERD in 2010,
an increase from 6.9% of GERD in 2009. This is broadly in line with foreign R&D funding shares in other
economies.

The majority of foreign funds came from the private sector for joint ventures in the pharmaceutical
industry (Svarc and Racic, 2011). Croatia also benefited from EU Framework Programme (FP) funds,
particularly after Croatia obtained full membership in the Sixth Framework Programme (FP6) in 2006.
Under the Seventh Framework Programme (FP7), 164 Croatian partners have contracted a total of 132
projects with EC financing in the amount of EUR 27.5 million (data as of March 2011). In comparative
terms, Croatia’s FP participation per 1000 researchers has been close to Finland’s and higher than in the
Czech Republic, the Slovak Republic, Poland and large old EU members include France, the UK and
Germany (see Figure 24).

44
 Figure 23. GERD by sources of funds in 2010, %

100

80 Abroad

60 Private non-profit
sector
Higher education
40 sector
Government sector
20
Business sector

0
EU27 AUT CZE EST FIN HUN POL SVK SVN HRV

Source: Eurostat, data for EU27 is from 2009.

45
 Figure 24. Number of FP7 participations per 1000 researchers

Number of FP7 participations per 1000 researchers

Switzerland

Slovenia

Belgium

Ireland

Austria

Latvia

Bulgaria
Number of Participants
Denmark per 1000 researchers
FP7
Romania

Finland

United Kingdom

Czech Republic

Lithuania

Portugal

Turkey

-5 5 15 25 35 45

Source: Innovation Union Competitiveness Report, 2011

Recently, Croatia has been experiencing a decline in business R&D investment (Svarc and Racic,
2012). Indeed, since 2008 business sector investments in R&D have decreased in comparison to the
previous year both in absolute terms and in relative terms (see Figure 25). These trends towards
decreasing business investments in R&D can also be partly explained by the recent economic
developments. Lower revenues and mounting liquidity pressures forced many companies to shorten their
decision-making horizons and cut their R&D spending (Svarc and Racic, 2011). While this is not specific to
Croatia, as business R&D is typically procyclical, it further weakens an already limited industrial R&D base.
Besides, traditional R&D performers – including the pharmaceutical company Pliva – have experienced
restructuring in which the role of R&D was diminished (Svarc and Racic, 2011). Finally, neither greenfield
investments nor indigenous new technology based firms could make up for the reduced level of R&D in
already established businesses (Svarc and Racic, 2011).

46
 Figure 25. Evolution of BERD in Croatia since 2005

200 0.45
180 0.40
160 0.35
140
0.30
EUR million

120

% of GDP
0.25
100
0.20
80
0.15
60
40 0.10
20 0.05
0 0.00
2005 2006 2007 2008 2009 2010

BERD in EUR million BERD as % of GDP

Source: Eurostat

Business investment in R&D (BERD) is concentrated in a limited number of sectors (Figure 26) and in
a few multinational companies. Indeed, business R&D is almost entirely performed by a few large
companies in the pharmaceutical, telecommunications, agricultural and the food and beverage industries
(Svarc and Racic, 2011). The very limited number of corporate research institutes – four in total (Ericsson
Nikola Tesla, INA, Koncar Electrotechnical Institute and Galapagos, the successor of the former Pliva
Institute) – is also an indication of how concentrated business R&D capacities are. More generally, the
R&D contribution from locally-owned enterprises has remained minor in Croatia8 (Svarc and Racic, 2011).

8
However, business expenditure on R&D should always be interpreted with caution as the data does not
always accurately capture R&D in smaller firms.

47
 Figure 26. BERD by sectors in 2009, %

Scientific research and development

6.1% 9.1% Telecommunications

27.3% Manufacturing of pharmaceutical products

6.1% and preparations
Manufacturing of motor vehicles and
6.1% shipbuilding
Manufacturing of food products and beverages
9.1%
Construction
21.2%
15.2% Computer programming, consultancy and
related activities
Other

Source: Eurostat

1.3.2. Indicators of science, technology and innovation outputs

Innovation outputs – including scientific publications and patents – can help assess a country’s
innovation performance, though innovation should not be reduced to these formal outputs. The
following section shows that, overall, the Croatian national innovation system continues to emphasise
knowledge creation by the public research sector to the detriment of knowledge exploitation by the
private sector (WB, 2009).

Croatia publishes less per capita than comparable economies; there are 262 publications per million
inhabitants in Croatia against 929 in Finland, 607 in Slovenia and 185 in the Slovak Republic. However,
taking into account the small number of researchers in the country reveals that Croatia’s researchers
outperform those of comparative countries in terms of publications. As figure 27 illustrates, in 2009,
researchers published on average 0.17 articles in Croatia against 0.12 in Finland, 0.17 in Slovenia and 0.08
in Slovakia. Scientific publications in Croatia are dominated by the following fields: clinical medicine
(about 27.6% of all publications), biology (17.6%), engineering and technology (15.4%) and chemistry
(10.8%) (Radosevic, 2010).

48
 Figure 27. Scientific and technical journal articles 2009 per researcher

0.18 0.17 0.17

0.16
0.14 0.14
0.14
0.12 0.12 0.12 0.12
0.12
0.10
0.08
0.08
0.06
0.04
0.02
0.00

Source: World Development Indicators

Nevertheless, when looking at publication quality and impact indicators, Croatia performs relatively
poorly. Indeed, Croatia is below all the comparator countries, with the exception of Estonia, in terms of
citations and the H index which measures both scientific productivity and impact9 (Table 6). For instance,
Slovenia, which published less citable documents than Croatia between 1996 and 2010, demonstrated
higher publication quality and impact as evidenced by both its higher number of citations and H index.

Table 6. Publication quality and impact indicators, 1996-2010

Citable
Country Citations H index
documents
Austria 155,111 2,324,954 336
Finland 149,390 2,447,743 330
Poland 259,850 1,853,462 258
Hungary 86,438 923,883 224
Czech Republic 118,930 942,579 206
Slovakia 42,903 296,161 131
Slovenia 37,586 285,289 127
Croatia 40,676 215,609 118
Table 7. Estonia 14,106 150,084 111

Source: Scimago database

9
The h index is a country's number of articles (h) that have received at least h citations.

49
 Patents indicate whether a country manages to commercialise innovations, in particular new
products and processes. De Rassenfosse and van Pottelsberghe (2008) have found that countries’
patenting activities are correlated to R&D productivity and do not depend solely on the propensity to
patent (OECD, 2009a). However, patents do not depend solely on a country’s capacity to innovate but
also on the extent to which the economic environment incentivises and facilitates patenting.

Figure 28, which shows European Patent Office (EPO) patent applications and patents granted and
PCT patent applications, reveals that Croatia lies behind its peers when it comes to patenting; only Poland
and the Slovak Republic were granted fewer patents per million inhabitants from 2006 to 2011. Poland
and Croatia both perform relatively better in publishing scientific journal articles than in patenting.
Indeed, in Croatia there are about 100 publications per one registered patent (Pozzi, 2010). This situation
is largely the result of the career progression system for researchers which puts more emphasis on
academic achievements, encouraging publications and basic research rather than patents and applied
research (WB, 2009).

Figure 28. European patents and PCT patent applications per million inhabitants 2006-2011

2330

1889

1072
823 764

452
326351
86 14487 93 62 26 82 72 23 78 31 16
22 45 30 9 25 27 5

Finland Austria Slovenia Estonia Hungary Czech Croatia Slovakia Poland

Republic

PCT patent applications 2006-2011 per country of residence of the applicant (per mill. inhabitants)

European patent applications 2006-2011 per country of residence of the applicant (per mill. inhabitants)

Patents granted by the EPO 2006-2011 (per mill. Inhabitants)

Source: EPO database and WIPO Statistics Database, August 2012.

Looking at domestic patents, around 4000 patent applications have been filed with the State
Intellectual Property Office of Croatia (SIPO) in the last decade and more than 1000 patent rights have
been granted. Despite the absence of any support, and thanks to the activity and professional support of
the Innovators’ Organisation, individual innovators report the vast majority (86%) of Croatian patent
rights. However, huge differences in patenting activity exist at the regional level (see Figure 29). As
50
expected, the region of Zagreb is characterized by the highest concentration of innovation activity
followed by Primorsko-goranska (in terms of patent applications) and Splitsko-dalmatinska (in terms of
granted patent rights).

Figure 29. Domestic patents per county, 2000-2010

Zagrebačka i Grad Zagreb 1696

524
Primorsko-goranska 463
120
Meñimurska 117
30
Varaždinska 170
46
Karlovačka 109
26
Istarska 153
46
Splitsko-dalmatinska 294
165
Brodsko-posavska 109
12
Osječko-baranjska 196
51
Koprivničko-križevačka 64
27
Virovitičko-podravska 41
8
Zadarsko-kninska 63
13
Požeško-slavonska 32
21
Vukovarsko-srijemska 63
17
Šibenska 34
20
Dubrovačko-neretvanska 36
24
Bjelovarsko-bilogorska 37
6
Sisačko-moslavačka 51
15
Krapinsko-zagorska 27
10
Ličko-senjska 4
1
SIPO Patent applications 2000-2010 per county Patents granted by SIPO 2000-2010 per county

With regard to industries, most EPO patents from Croatia were granted in the fields of chemistry and
organic chemistry, as illustrated in Figure 30. This finding is consistent with the fact that most R&D
conducted in the private sector is undertaken by a few large firms in specific industries such as the
pharmaceutical one. The preeminence of these sectors in patent numbers may also be a reflection of
these sectors’ greater than average propensity to patent rather than an indicator of their innovative
dynamism. The low patenting activity results in low receipts from royalty and license fees. Figure 31
shows that in 2010, receipts represented 32 million US$ in Croatia against 105 million US$ in the Czech
Republic and 69 million US$ in Slovenia.

51
 While the agribusiness sector represents an important share of Croatia’s exports (see Table 2), data
from the European Patent Office reveals that there was not any patent application in the field of food
chemistry from 2006 to 2011. This can be explained in light of the sector’s relatively low expenditures on
research, in particular in comparison to the telecommunications and pharmaceutical sectors (see Figure
26) and by the fact that the sector is not highly R&D-intensive. More surprisingly, only one patent was
granted in the fields of communications and digital communications even though the sector accounted
for more than 20% of BERD in 2009.

Figure 30. Patents applications and patents granted by field 2006-2011

34

26
24

15

10 10
8 8
4 4 4 4 4 4 4
1 0 0

Patent applications Patents granted

Source: European Patent Office

52
 Figure 31. Revenue from Royalty, receipts

In millions, current US$

2,500

2,000

1,500

2010
1,000 2008

500

0
Finland Hungary Austria Poland Czech Slovenia Slovak Croatia Estonia
Republic Republic

Source: World Development Indicators

According to the Innovation Union Scoreboard (see Figure 32), Croatia is a moderate innovation with
below EU average performance. Croatia performs particularly poorly in intellectual assets and license and
patent revenues from abroad. Other areas of weakness include the quality of scientific publications (i.e.
top 10% most cited scientific publications worldwide) and business investment in R&D, confirming this
section’s findings. On the other hand, the country slightly outperforms the EU on a few indicators; youth
aged 20-24 upper secondary level education, international scientific co-publications, on R&D innovation
expenditure, innovative SMEs collaborating more with others and sales new to market and new to firms
innovations.

53
 Figure 32. Innovation Union Scoreboard: Croatia's profile

0 20 40 60 80 100 120 140

HUMAN RESOURCES
New doctorate graduates
Population aged 30-34 completed tertiary education
Youth aged 20-24 upper secondary level education
OPEN EXCELLENT ATTRACTIVE RESEARCH SYSTEMS
International scientific co-publications
Top 10% most cited scientific publications worldwide
Non-EU doctorate students
FINANCE AND SUPPORT
R&D expenditure in the public sector
Venture capital
FIRM INVESTMENTS
R&D expenditure in the business sector
Non-R&D innovation expenditures
LINKAGES AND ENTREPRENEURSHIP
SMEs innovating in-house
Innovative SMEs collaborating with others
Public-private scientific co-publications
INTELLECTUAL ASSETS
PCT patent applications
PCT patent applications in societal challenges
Community trademarks
Community designs
INNOVATORS
SMEs introducing product or process innovations
SMEs introducing marketing or organis. Innov.
ECONOMIC EFFECTS
Employment in knowledge-intensive activities
Medium-high and high-tech product exports
Knowledge-intensive services exports
Sales of new to market and new to firm innovations
Licence and patent revenues from abroad

0 20 40 60 80 100 120 140

Source: Innovation Union Scoreboard, 2011

54
 2. INNOVATION ACTORS

2.1 Business Sector: Insights from a business survey

This section explores the innovation landscape of the Croatian business sector. The analysis is based
predominantly on the results of a business survey designed by the OECD Investment Compact and carried
out by GfK in Croatia. The survey aims at understanding local firms’ innovation behaviour, motivations,
constraints and policy needs. It has been carried out on a sample of 300 companies randomly selected
from Croatia’s business registry, which contains more than 130,000 active firms, for the period 2009-
2011. Further insights about Croatian firms’ propensity to innovate will be gained from the Community
Innovation Survey of the European Commission.

2.1.1 General information

Croatia’s business sector is dominated by small and medium-sized enterprises which build up more
than 90% of the total economy. Small firms alone, employeeing less than 50 people, account for 65% of
the sample (see Figure 33). Only 10 per cent of the firms are, at least partly, foreign owned entities.
Manufacturing and services are the main sectors of activity for the same share of firms, 41% each, while
construction and agriculture cover around 14 and 3 per cent of the economic activity, correspondingly.
Compared to the contribution of each of these sectors to the gross value added of the country (see
Section 1.1.4 Indsutry Characteristics), there is a clear bias towards manufacturing and construction
companies in the survey sample.

Figure 33. Distribution of companies by company sizes, number of companies

20 7

76

197

Small Medium Size Large DK/NA

The majority of firms (57%) are export-oriented; however, only one quarter of them generate the bulk of
their turnover by exporting their goods and services (Figure 34). Furthermore, while only 50% of the small
firms are exporters, 70% of the medium and large enterprises export. As expected, half of the traded
Croatian goods and services are shipped to the EU (51%) and another large part (40%) to the South East
European region.
55
 Figure 34. Exports by company size

60%
% of exporting companies 50%

40%

30%

20%

10%

0%
1 to 15% 16 to 30% 31 to 50% Over 50%
Exports as % of total turnover

As shown in Figure 35, companies operating only domestictically do not perceive any need for export
(70%). Nevertheless, around 12% of the peers in that group would consider international trade if they had
more information on foreign markets and customer preferences abroad or could offer better prices for
their products and services. In contrast, only 12% of the exporters claim no need for export, while the
largest share among them consider their prices as not competitive enough (19%) or refer to tariff barriers
(13%) and high fixed costs (10%) as main obstacles to exporting.

Figure 35. Main obstacles to exporting

No need for export

Lack of information on foreign markets…
Price of product/service is not…
Insufficient marketing and branding…
High fixed costs to start exporting
Tariff barriers
Difficulty in obtaining…
Other

0% 10% 20% 30% 40% 50% 60% 70% 80%

Non-exporters Exporters

2.1.2. Innovation behaviour

Throughout the survey, innovation is characterized as something that is new to the company, new to
the market or to the world. Innovative enterprises are defined as enterprises that introduced i) a
substantive product or service innovation (new or improved product/service with new features and
functionalities), ii) process innovation (different production process of same product), iii) marketing
56
innovation (same product or service, marketed differently through different distribution channel, pricing,
market positioning, advertising, etc.) or iv) organizational innovation (different logistics, storage or
procurement). The definition of innovation here conforms to the one adopted by the Community
Innovation Survey (CIS) of the European Commission thus allowing for a comparison between the
findings.

Croatian companies consider themselves, in general, innovative: only 8% object being involved in
any innovation activity. On the other hand, only 43% tend to be very or extremely innovative. Small sized
enterprises are less often innovators than large or medium-sized ones10, the same being valid for fully
domestically-owned (8%) versus majority foreign-owned (4%) companies. While sectors (manufacturing
versus non-manufacturing) do not differ much, companies that are exporting seem to be much more
innovative (50%) than enterprises targeting only local and regional markets (33%). Aditionally, as the CIS
2008-2010 wave finds out, the more markets an enterprise is serving, the higher its propensity to
innovate tends to be (Croatian Bureau of Statistics 2012a).

Table 8. How innovative is your company?

Companies Not at all Somewhat Very Extremely

in sample innovative innovative innovative innovative
Total 300 8% 49% 37% 6%
Small 197 9% 47% 37% 7%
Medium 76 5% 51% 39% 4%
Large 20 5% 60% 30% 5%
Exporting 172 4% 46% 41% 9%
Non-exporting 128 13% 53% 30% 3%
Manufacturing 125 4% 54% 35% 7%
Non-manufacturing 175 11% 46% 38% 6%
Fully domestically-owned 269 8% 51% 35% 6%
Majority foreign-owned 28 4% 29% 57% 11%

In the period 2009-2011, 60 % of the companies were invoved in any or several of the four types of
innovation activity. The majority introduced a new product or service (45%), followed by process,
organizational and marketing innovations (see Figure 36). As emphasized above, exporting activity as well
as ownership structure and, to a lesser extent, company size are key factors for innovation performance.
Exporting companies as well as their foreign owned peers are more active innovators compared to non-
exporters and domestically owned companies. The first two groups have introduced twice as many
product and process innovations, in particular, while with regard to organizational innovation, no large
differences exist. There are no major differences across industries in terms of types of innovation activity.
In all industries but wholesale and retail trade services the majority of firms have innovated in products

10
According to the Croatian CIS 2008-2010, nearly 3 out of 4 large enterprises, a little more than half of medium-
sized enterprises and a little more than one third of small enterprises are innovative. Moreover,
innovation activities are more common in the manufacturing sector with half of its companies introducing
innovations, while there are just a little less than one third of service enterprises that introduced
innovations (Croatian Bureau of Statistics 2012a).

57
and processes only. Some sectors like chemicals and pharmaceuticals, agriculture and forestry and energy
have innovations exclusively of this type. In comparison, only up to 33% (wholesale and retail trade) of
firms in each sector have introduced exclusively marketing and organizational innovations (see Figure
below). However, in general, when innovation is measured in terms of patent applications, only 3.7 or 3
percent of Croatian companies have applied or obtained a patent by the State IP Office, correspondingly,
and even less so by the EPO (less than 1%).

Figure 36. Did your company introduce any of these innovations between 2009-11?

45%
40%
35%
% of companies

30%
25%
20%
15%
10%
5%
0%
product process organisational marketing No our company
innovations innovations innovations innovations did not innovate

58
 Did your company introduce any of these innovations between 09-11?, by
industry
30
25
Number of firms

20
15
10
5
0

Product and process innovators only

Marketing and organisational innovators only
Product and process and marketing and organisational innovators simultaneously

In contrast, the share of innovators participating in the last wave of CIS (2008-2010) amounted for
37.3% only, out of a sample of 10,068 enterprises. These differences may be explained by a potential bias
towards innovators in the OECD Investment Compact survey11. The share of product and process
innovators (26.5%) and organizations and marketing innovators (29.5%) was almost equal and these two
broad types of innovations were usually simultaneously introduced in an enterprise. Observed by the
type of expenditures on innovation activities in 2010, the largest share was spent on in-house R&D,
followed by acquisition of machinery, equipment and software. Large enterprises had a larger share of
expenditures for innovation activities compared to small and medium-sized enterprises, while medium-
sized and small enterprises had a larger share of expenditure for acquisition of machinery, equipment and
software compared to large enterprises (Croatian Bureau of Statistics, 2012a).

By using data from three consequtive waves of the Community Innovation Survey from Eurostat,
further insights can be gained about the Croatian firms introducing product and process innovations, in
particular. Figure 37 reveals that after a positive 2008 increase, the number of innovating companies in
2010 dropped sharply below its 2006 level. This trend can be explained to a large extent by the recent
global economic and financial crisis. The decline has been most pronounced for those companies
innovating in both, products and processes, while the share of companies innovating in products only has

11
Indeed, the survey was presented as an ‘innovation’ survey. Out of the 7970 companies contacted, 4621 refused
to participate. This number may include companies that identified themselves as non-innovators.

59
remained rather stable. The last result is driven mostly by the rising number of large companies active in
product innovation over the last several years.

Figure 37. How innovative is your company?

Share of companies introducing product and/or process innovations in

40% the period 2006-2010
35%
30%
25%
20%
15%
10%
5%
0%
Enterprises with Novel innovators, Novel innovators, Novel innovators,
technological product only process only product and process
innovation innovators
2004-2006 2006-2008 2008-2010

Source: Community Innovation Survey

The business survey shows that within the group of innovators, innovation has brought no benefit (27
percent) or just very little (29 percent) for the majority of them. Only 12 percent of the companies
enjoyed a higher than 30% growth in turnover, while 33 percent registered 10-30% increase (Figure 38).

Figure 38. What has been the impact of your innovations on turnover?

3%
12% Negative impact
24% No impact
Low impact (<10%)
33% Moderate impact (10-30%)

29% High impact (>30%)

Own funds are the most common source of finance for innovation acitivities in Croatian companies.
Additionally, some 30 % had access to bank loans, while the government subsidized, at least partly,
around 15% of the innovation investment. In contrast, only a very small share of innovators had access to
EU funds (see Figure 39). The small size of most Croatian companies combined with their reliance
predominantly on in-house funds may explain the low share (35%) of companies devoting any financial or
human resources to R&D. This is very much the case for non-exporting companies among whom only less
than 25% invest in R&D at all (see Figure 40). Another plausible explanation is that technological
60
innovation activities in enterprises require a mix of inputs, with R&D just one of this and often not used at
all.

Figure 39. Which sources of financing did you use for your innovative activities?

Own funds/no external sources of

finance
Commercial bank loans

Financial support from the government

Co-financing with other firms

Funding from the EU

Other sources

0% 10% 20% 30% 40% 50% 60%

% of companies that innovate

Figure 40. Does your company devote financial or human resources to R&D?

100%

80%

60%

40%

20%

0%
Exporting Non-exporting
Yes No

Croatian companies tend to rely on in-house resources not only for innovation funding but also for
innovation ideas. In total, one third of local innovators get their ideas exclusively and other 20 percent
mostly from internal sources, while only 18 percent use mostly external expertise (Figure 41). There are
however big differences between SMEs and large companies in searching for new ideas, whereas almost
half (40%) of the large companies benefit from external sources but only 17% of SMEs do so. Similarly,
exporters have higher propensity to reach for external sources (23%) than non-exporters (13% only).
Concerning external sources of ideas, more than one fourth of innovators refer to the internet, customers
and suppliers, as well as fairs and exhibitions. In contrast, research output and institutions, consultants’

61
expertise and industry associations seem to play only a minor role (Figure 42). This could be taken as
evidence of weak links between the public science base and technological innovation in firms.

Figure 41. Where does your company get most of its ideas from?

Exclusively from internal

5% sources
13% Mostly internal sources
31%

Equal internal and

external
31% Some internal but mostly
20% external sources
Entirely external sources

Figure 42. Which external sources of ideas do you predominantly use?

Internet
Customers
Fairs and exhibitions
Suppliers
Scientific literature, patent specifications
Universities and research institutions
Consultants
Industry associations, chambers of commerce
Other

0% 5% 10% 15% 20% 25% 30% 35% 40%

% of companies

2.1.3. Innovation motivation and constraints

Business’s innovation behavior in Croatia is mainly driven by customers’ needs and preferences. The
majority of companies involved in innovation activity do so to address demand. Intense competition from
other companies (35%) as well as the need to increase productivity (24%) are two other major incentives
to innovate. Furthermore, around one fifth of the business sector expects better access to export markets
as a result of successful innovation. Interestingly, in 7% of the cases innovation takes place thanks to
employees’ own initiative (see Figure 43).

62
 Figure 43. What motivates your company to innovate?

Customers' needs and preferences

Competition from other companies
Increase productivity
Allow or improve access to export markets
Need to adapt to suppliers
Employees' own initiative
No need to innovate
Other

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

% of all companies

The survey also asks about the factors that hinder firms from innovation activities. A ranking of barriers to
innovation is shown in Figure 44. Limited access to internal and external resources (funds, qualified
personnel) as well as market factors, including unfair competition and uncertain demand, are regarded as
the major barriers. In contrast, IP protection, government regulation and cooperation opportunities seem
to be least important. These findings are confirmed by some other studies about innovation in Croatia.
According to Radas and Bozic (2009), financing and innovation cost is the most important hurdle for
Croatian companies to innovate, followed by lack of qualified employees and information about
technology and markets. This study finds out, however, that firms which face obstacles are not less likely
to innovate, which suggests that Croatian innovators are able to work around obstacles without
damaging effects to innovation.

Figure 44. Which factors prevent your company from innovating more?

Lack of internal funds

Lack of qualified personnel
Uncertain market demand
Unfair competition from established enterprises
Lack of access to external financial resources
Lack of consumer demand
Lack of information on available technology
Inadequate government regulation
Difficulties to identify cooperation partners
Ineffective IP protection
Other

0% 5% 10% 15% 20% 25% 30% 35%

% of all companies

63
Although lack of qualified personnel was ranked as the second most important barrier to innovation, only
44% of Croatian firms claim to face some difficulty in finding skilled employees (see Figure 45). Most
often employees lack experience (80%) or the education system does not equip them with the right set of
skills (40%). Additionally, around one fifth of Croatian companies consider their salaries as not
competitive to attract skilled employees from the labour market or complain about universities not
offering enough graduates in their field and brain drain (Figure 46).

Figure 45. Does your company have difficulties finding skilled employees?

8% Difficulties for all skilled

recruitments
15%
Difficulties for most skilled
recruitments
56% Difficulties only for few
21% skilled recruitments
No difficulties

Figure 46. If yes, why is it difficult to find skilled employees?

Lack of skilled people with experience

Students not equipped with the right skills in the…

Our salaries are not competitive

Not enough graduates in our field

Brain drain

The legislation makes it difficult to hire foreign…

Other

0% 10% 20% 30% 40% 50% 60% 70% 80%

2.1.4. Collaboration and linkages

Co-operation between companies and public research institutions, as well as among companies, is widely
recognized to be of crucial importance for the introduction of innovations. The literature on innovation
examines various types of cooperation. R&D cooperation with suppliers through process innovation is
aimed at cost-reduction, while cooperation with rivals is motivated by the need to share R&D costs. R&D
cooperation with customers is a source of new ideas for innovation and/or reduces the risk associated
with the market introduction of the innovations, and ensures market expansion when products are novel
and complex or when they require adaptations when used by the customer. Cooperation with universities
is aimed at radical product innovation or at entering a new market or market segment. Moreover,

64
complementarities between various types of R&D cooperation have been observed. Complementarities
were found for joint cooperation strategies with competitors and customers, and with customers and
universities, in which case, the role of customer cooperation in facilitating commercialization and quicker
diffusion of product innovations may result from competitor and university cooperation (Aralica et al.
2008).

In the business survey, the majority of Croatian companies report to be members of formal domestic
business networks and 20% to belong to informal networks12 (Figure 47). When it comes to actual
collaboration, Figure 48 reveals that around half of Croatian enterprises collaborated with their partners
from the business sector in the period 2009-2011. However, huge differences exist across the groups of
companies. While only one third of SMEs cooperate with their suppliers, half of large companies do so.
Similarly, customers are innovation partners for 40 and 34% of large and medium-sized companies,
correspondingly, but only for 18% of small enterprises. Companies that produce complementary products
work twice more often with large companies than with SMEs. Overall, competitors are not preferred
innovation partners for any of the three groups.

Figure 47. Does your company belong to business networks?

70%
60%
50%
40%
30%
20%
10%
0%
A formal domestic A formal Informal networks Other
network of international
companies network of
companies

12
More than one fourth of the firms do not see any benefit in belonging to a business network. Among those
interested in networking, new business-to-business relationships, sharing information about technologies
and marketing are ranked as the main advantages.

65
 Figure 48. Has your company collaborated with business partners on innovation between 2011-09?

60%

50%

40%

30%

20%

10%

0%
No Suppliers Customers Competitors Complementors Other
collaboration Small Medium Large

While around half of the companies are seeking joint work with business partners, only a minority
collaborates with research institutions as Figure 49 shows. Again huge differences exist between SMEs
and large companies. The latter cooperate on innovation projects relatively often with Croatian
universities (40%) and less so with other local research institutes and organizations. In contrast, only less
than 20% of SMEs have joint projects with the research community. Overall, around 70% of all companies
do not experience any need to cooperate with the public research sector. The other two most important
reasons are the lack of information about potential partners in the academia and the cost of this type of
collaboration (Figure 54).

Figure 49. Has your company collaborated with research institutions between 2009-11?

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
No collaboration Universities in Local research Foreign research Foreign universities
Croatia institutes and institutes and
organisations organisations
Small Medium Large

66
 Figure 50. If you have not collaborated with research institutions, specify why:

No need to collaborate

Lack of info on possible collaboration partner

Costs of collaboration

Lack of interest from Ris

Complex administrative procedures

Mismatch between the company's needs and the
research capacities of the RI
Culture divide between academia and industy
Lack of formal collaboration programmes supported
by the gvt
Other

0% 10% 20% 30% 40% 50% 60% 70%

In general, most of the companies that worked with the research sector could register very successful
collaboration which takes different forms. The majority of them provided consultancy services. An important
finding is that 30% of companies were involved in joint research projects with research institutions, used
their training courses and/or technical facilities, and 10% cooperated with the academia on the
commercialization of academic research. Furthermore, Figure 51 shows that company representatives are
often invited as guest speakers. For collaborations to take place, the business sector has approached the
public research sector six times more often than vice versa (43% vs. 7%). The other large share of
cooperation projects is based on personal connections (43%), while the least significant factor seems to be
government sponsorship (Figure 52).

Figure 51. If you have collaborated with research institutions, what was the nature of the collaboration?

Consultancy services
Joint research project
Provision of training by the RI
Use of technical facilities
Guest speakers
Help Ris commercialise their research
Other

0% 10% 20% 30% 40% 50% 60%

67
 Figure 52. If you have collaborated with research institutions, how was the collaboration initiated?

Personal connections
3%3%
The research institution
approached us
43%
We approached the research
43% institution

Our collaboration was part of a

gvt-sponsored project
7%
Other

Although only less than half of the companies presented here have had any collaboration experience
with business or public research, the majority are willing to pursue such cooperation projects in the
future. Among the potential collaboration partners, customers, suppliers, and universities/research
institutions rank highest. In contrast, Croatian companies do not seem very interested in cooperating with
their direct competitors (see Figure 53).

Figure 53. Which entities would your company like to collaborate with in the future?

80%
% of total companies

60%
40%
20%
0%
Suppliers Customers Competitors Universities and Not interested in
research collaboration
institutes

2.1.5. Policy Needs

Enterprises make a vital contribution to innovation, and a dynamic business sector is a main source
of and channel for both technological and non-technological innovation. Yet as shown in the current
section, Croatian firms have a rather moderate or low propensity to invest in innovation. Thus, improving
incentives for firms to innovate through better framework conditions can strengthen overall innovation
capacity.

Different types of policies can contribute to achieve better innovation performance of the business
sector in Croatia. When asked about the potential policies that would be most useful to help them
develop their innovation potential, Croatian companies welcome a simplification of administrative
procedures as well as better designed government subsidies, taking the form of i) tax incentives, ii) grants
for innovation-related expenditures and iii) support schemes for personnel training. A recent study by

68
Radas amd Bozic (2009) finds out that innovation subsides have not been linked to innovativeness in
Croatia, which may be the consequence of poor design of those incentives. This together with the fact
that a very small number of firms received a subsidy suggests that the existing subsidy schemes are not
effective, and that policy makers need to devise better incentives. As Figure 54 reveals, although still very
relevant, the following three policy measures receive less attention by the business sector – measures to
generate customized consultancy/research support and to increase cooperation with research
institutions and other companies.

Figure 54. Which policies would be most useful to help your company develop its innovation potential?,
average scores by company type

Tax incentives for

innovation-
related
expenditure
5 Grants for
Measures to help
4 innovation-
access export
related
markets 3
expenditure
2
1 Support schemes
Simplification of
to develop
administrative 0 employees
procedures
training

Measures to Measures to
generate increase
customised networking and
consultancy/res… cooperation…
Measures to
increase
cooperation with
universities and…

Small Medium Large

69
2.2. Research institutions

Higher education and public research institutions comprise the public research sector in Croatia and
provide the basic infrastructure for research and development activities. This sector employs over 80% of
all researchers, while private institutions contribute to the overall R&D performance to a significantly
lesser extent, employing only around 19% of researchers in 2010, as reported by the CBS (2012b). Overall,
the Croatian innovation system remains strongly oriented towards research in the public sector.

Based on their structure and core activities, Croatia’s research institutions can be structured into
three main types:

Higher education institutions (HEIs)

Public research institutions (PROs)

Private research institutions

This Chapter provides an overview of the main characteristics of institutions performing research
and development activities in Croatia, including their evolution, assessment of performance and
recommendations for their further development.

2.2.1 Higher education institutions

HEIs are universities, polytechnics and schools of professional higher education (colleges) with all
their constituents. All higher education institutions can be either public or private.

University constituents are: faculties, art academies, departments, institutes, foundations,

associations, student centres, health care institutions, libraries, and technology centres.

A faculty is a higher education institution that organises and carries out university studies, and
develops scientific research and professional work in one or more scientific and professional
fields. The faculty may also establish and carry out professional studies.
An academy of arts is a higher education institution that organises and carries out university
artistic studies, and develops first-rate artistic creative endeavour and scientific research in arts.
The academy of arts may also establish and carry out professional artistic studies.
A university department participates in the implementation of study programmes and develops
scientific, artistic and professional work in a single field of science or in an interdisciplinary area of
science.
A university institute performs scientific activity in a single or several related scientific fields,
normally related to the higher education process at the university. A university institute may
perform highly professional work and participate in teaching, according to the enactments passed
by the university.

70
 Polytechnics and schools of professional higher education (colleges) organise and implement
professional studies. A polytechnic implements at least three different studies in at least three fields.

The network of HEIs in Croatia is still evolving. According to the National Council for Higher
Education – NCHE (2011), there are currently 122 higher education institutions:

7 public universities (Table 7)

3 private universities (Table 7)

67 faculties and academies (legal entities also belonging to universities)

13 public polytechnics

2 private polytechnics

27 private colleges

3 public colleges

Table 9. Croatian universities

University Location Type

University of Zagreb Zagreb Public university

University of Split Split Public university

University J.J. Strossmayer in Osijek Osijek Public university

University of Rijeka Rijeka Public university

University of Zadar Zadar Public university

University Juraj Dobrila in Pula Pula Public university

University of Dubrovnik Dubrovnik Public university

Croatian Catholic University Zagreb Private university

71
 Media University Split Private university

Dubrovnik International University Dubrovnik Private university

Source: NCHE (2011)

In the period 2005 - 2011, the number of higher education institutions doubled and the number of
study programmes tripled (NCHE, 2011). NCHE reported that when the Law on Scientific Activity and
Higher Education was introduced in 2003 there were 6 universities, 7 polytechnics and 15 colleges in
Croatia. By the end of 2011, there were 10 universities, 15 polytechnics and 30 colleges. In 2005, when
study programmes were harmonised with the Bologna principles, there were over 400 study
programmes. By the end of 2011, the number of study programmes had increased to almost 1,300. This
increase was primarily caused by the increased demand for higher education in recent decades. However,
the trend of expansion has significantly slowed down during the last few years, largely due to the
exhaustion of the numbers of potential students and the economic crisis which has affected both the
ability of central and regional governments to support new institutions, and the ability and interest of
private education providers to offer new study programmes.

Research performance and funding

Public universities are still the key institutions of the higher education sector. The network of public
universities currently comprises four established universities in the largest urban centres,Zagreb, Split,
Rijeka and Osijek, and the three newer universities founded in the last decade,Zadar, Dubrovnik and Pula.

As reported by the CBS (2012b) the higher education sector accounted for 28% of GERD in 2010,
equivalent to 0.21% of GDP. Universities employ the majority of researchers in Croatia (51% in 2010).

Universities play the leading role in the production of research works and publications (Figure 55).
They published 66% of all research works published in Croatia in 2009 (CBS, 2011) and around 59% in
2010 (CBS, 2012b).

72
 Figure 55. Published research works by sector in 2009

Published research works by sector in 2009

100%

80%
64% 66% 66%
60%
Higher education

40% Government sector

Business sector
20% 22%
34% 30%

12%
0% 2% 4%
Basic Applied Experimental
development

Source: CBS (2011)

A survey conducted for the purpose of this report on 29 university faculties and 3 universities13
provided an insight into the research activities of higher education institutions. About 39% of research
activities in universities refer to basic research, followed by applied research (37.2%), while the smallest
share of performed activities being related to development (23.5%). However, only 22% actually applied
for patents over the last three years and only 6% were granted patents in the same period. On the other
hand, all of the faculties and universities reported scientific publications and theses/dissertations as their
outputs over the last three years. The results indicate the strong orientation of Croatian HEIs toward
scientific research activities, rather than towards the commercialisation of research results.

Data on patents and inventions (CBS, 2012b) indicate the limited application of research results in
the economy and weak science–industry linkages. The higher education sector applied for 13 patents in
2010, which was around 23% of all patent applications in Croatia in 2010. However, no patents were
granted to Croatian HEIs in 2010. In 2009, HEIs accounted for about 8% of patent applications and 7% of
all granted patents in Croatia. There have been no patent applications or granted patents from HEIs
abroad.

Table 10. Inventions and patents in the higher education sector, 2010

Inventions and patents Rights granted for

Patent applications Granted patents Industrial designs Service brands Trade brands

13
The Survey was conducted on a sample of 29 university faculties, 3 universities, 13 independent public research
institutes, 2 corporate institutes and 6 community colleges

73
 In
Abroad In Croatia Abroad
Croatia

Sectors - total 53 69 22 85 2 7 18
Business sector 14 56 20 84 2 7 18
Government sector 26 8 2 1 0 0 0
Higher education 13 5 0 0 0 0 0
Source: Adapted from CBS (2012b)

This low number of patent applications can be partly explained by the limited patentability of
research outputs. The management of intellectual property rights (IPR) at Universities and the limited
resources available for patent application may also play a role. All IPR usually belong to the institutions,
but there is a lack of experience in assessing the commercial potential of research outputs. Moreover,
incentives and resources available both to the institution and to the inventor are limited. As the inventor
has no share in the intellectual property, there is little incentive to apply for patents.

With regard to funding, the government finances about 80% of research at universities, while
enterprises (both public and private) finance about 10% of university research (CBS, 2012). Less than 7%
of research activities in HEIs was financed by HEIs in 2010, while the remaining resources came from
foreign investors (2.8%) and non-profit institutions (0.2%).

Budget funds are provided by the Ministry of Science, Education and Sports (MSES) through
institutional funding, research project grants and other smaller supporting programmes. As reported by
Erawatch (Švarc & Račić, 2012), budget funds account for about 70% of the university’s total revenue ,
while the remainder originates from scholarships and commercial projects. The survey of the activities of
research institutions in Croatia (OECD, 2012d) indicates that among the responding university faculties
and universities, 97% have benefited from state budget funds, while only 3% reported income from
intellectual property rights. The predominance of institutional over competitive funding has discouraged
the diversification of revenue, a key incentive for the commercialisation of research (WB, 2009).

Research grants are awarded directly to researchers through a competition based programme called
Research Projects. Universities can decide to allocate resources autonomously. About 9% of university
faculties and universities reported in the OECD Investment Compact survey that they do not apply
specific criteria to determine the allocation of institutional funding, while only 19% indicated that the
allocation of funding is based on the excellence of project proposals. The overview of main criteria, based
on the research results from 29 university faculties and 3 universities, is given in Figure 56.

74
 Figure 56. What are the main criteria which determine the allocation of institutional funding/block grants to
your institutions?

(multiple answers possible)

Other 9%

The government's budget situation 63%

Continuing the previous level of funding to maintain
22%
payroll
Patents 0%

Excellence of projects proposed for the following period 19%

Excellence of recently completed research measured by
47%
publications
Meeting the planned research objectives 31%

No specific criteria 9%

0% 20% 40% 60% 80%

Source: OECD Investment Compact (2012)

Reform of the higher education system

The reform of higher education in Croatia began in 2003 with the adoption of the Law on Scientific
Activity and Higher Education. The Law introduced the framework for following: the implementation of
the Bologna process, the legal and functional integration of universities, a lump-sum budgeting principle
for the funding of higher education institutions, the European Credit Transfer and Accumulation System
(ECTS) system, quality assurance mechanisms, and other new approaches to the higher education system
in Croatia.

However, as reported by Švarc and Račić (2011), the reform was poorly implemented, leaving the
internal organisation of universities the same, i.e. as a loose association of its constituents. Today, there is
a significant difference between larger and more established universities (Zagreb, Split, Rijeka and Osijek)
and smaller, more recently founded ones (Zadar, Dubrovnik and Pula). The older universities largely
consist of faculties and arts academies which are independent legal entities, whereas the recently
established universities largely consist of departments which are not independent legal entities. An
exception is the University of Rijeka, which has a ‘hybrid’ structure whereby constituent units founded in
the past are organised as independent legal entities, whereas more recently founded units are organised
as departments (and are not legally independent).
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 In the case of larger universities, much of the decision-making power remains at the level of
constituent units (faculties and academies of arts), making the governance of the university as whole a
challenging task. Consequently, larger Croatian universities still often function as confederations of semi-
independent faculties and arts academies. This results in weak decision making structures that absorb
and waste large amounts of time and effort for senior personnel (EUA, 2011).

The current Law on Scientific Activities and Higher Education (LSAHE) and the implementation of the
Bologna process have given universities more autonomy in a variety of different areas – either by
explicitly transferring responsibility from the MSES to the university or its constituent units, or by simply
not regulating the university. Areas in which universities now have more autonomy include (MSES, 2011):
enrolment criteria and procedures, tuition fees, quotas, issues related to studying, hiring procedures and
decisions, distribution of resources. Funds from the state budget are allocated to universities, polytechnic
schools and colleges as lump sums. In turn, they break down their budgets to individual cost items. The
consolidated university budget is adopted by the Senate, following the recommendation of the University
Council. MSES collects draft budgets from tertiary education and research institutions and makes a draft
overall budget. The Council for Financing Science and Higher Education submits it to the National Council
for Science (NCS) and the National Council for Higher Education (NCHE) together with its opinion. These
bodies approve the final proposal for the allocation of funds and deliver it to the Minister.

The Council for Financing Scientific Activity and Higher Education was obliged to define the criteria
for allocating budget funds for scientific activity and higher education, and propose them to the NCS and
the NCHE, which then determine the final criteria. However, this process was never implemented in
practice (MSES, 2011). Consequently, the budgeting process and its outcomes have been prone to inertia.

Budget audits conducted by the MSES are based exclusively on input criteria, such as the number of
state-subsidised full-time students, the number of employees and other material expenses. Since budget
allocations from the state are based almost entirely on the previous year’s allocations, no calculations are
made regarding rates of budgetary investments per field of study or particular study programme. Control
is usually centralised and focused on input utilisation, rather than on the delivery of outputs. There is a
lack of medium and long-term planning and strategic investment targets, as well as insufficient flexibility
in reallocation when necessary. In order to reform the higher education and research system, the
Government proposed a triplet of the Law on Science, the Law on Universities and the Law on Higher
Education in October 2010. The proposed Law on Universities (MSES, 2011) has attempted to introduce a
variety of changes that would strengthen the position of the university in relation to its constituent units,
as well as at the level of accountability. However, these proposals were strongly opposed by a significant
part of the academic community and many higher education institutions. The stakeholders stated that a
partial centralisation of functions at the level of the university was against the autonomy and legal
independence of constituent units, and that a stronger role of external members in governing bodies
implied an attempt of political control of the university, which could also jeopardise its public purpose.

In December 2011, the new Government was elected and withdrew the draft laws prepared by the
former Government. Instead, new Draft amendments of the Law on Science and Higher Education from
2003 were introduced in 2012. The public debate ended in May 2012, during which MSES received more

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than 200 individual remarks regarding the proposed amendments and a significant number of proposals
for new stipulations to be included in the new Law. The main issues addressed by the amendments
include: the establishment of the new National Council for Science, Technology and Higher Education,
introducing clearer and more transparent hiring procedures for research and academic positions, new
institutional financing of public scientific institutes and universities through three-year programming
contracts, a new definition of part-time study programmes, definition and usage of the ECTS system in
line with the EU standards, and determining the obligation of HEIs in the introduction of electronic
communication systems.

It is planned that the new National Council for Science, Technology and Higher Education will assume
some current responsibilities of the NCS, the NCHE and other existing bodies, but with a greater focus on
guiding and monitoring the higher education, science and innovation system in Croatia. The Council will
have reduced administrative tasks and an increasing role in deciding and directing public policy in higher
education, science and technology, thus providing increased integration and coordination of policy
measures for the development of science as a public good within the strategy of the Croatian
Government.

The new recruitment system for assistants and post-docs is intended to increase the efficiency of the
education and training of young scientists and to establish clear lines of responsibility of institutions and
mentors for the success of young researchers. Competitive employment brings harmonisation with the
European Charter for Researchers and the Code of Conduct for the Recruitment of Researchers, and will
therefore ensure the retention of excellent young scientists in science and higher education and
encourage highly educated people with PhDs to work in the public and private sectors.

The introduction of programming contracts as a possible form of cooperation between the ministry
responsible for science and higher education, and public research institutes and universities, is expected
to provide greater autonomy for institutions’ use of public budget funds.

Evaluation of higher education institutions

Pursuant to the Act on Quality Assurance in Science and Higher Education (OG, 45/09), the study
programmes of public universities can be financed from the national budget solely on the basis of a
contract with the Ministry and with a previously obtained positive opinion of the Agency for Science and
Higher Education.

Effective internal and external systems of quality assurance are particularly important in the context
of the Bologna process. The initial accreditation of all study programmes that were redefined in
accordance with the Bologna Process was completed in spring 2005. All programmes were evaluated by
peers who focused on the content, whereas institutional arrangements were evaluated by the NCHE.

Quality assurance is a relatively new practice in the Croatian education system and is comprised of:
(1) the accreditation of academic programmes, (2) the accreditation of HEIs and (3) the audit of quality
assurance systems. The audit of quality assurance systems of HEI consists of an external evaluation

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carried out by the ASHE and international evaluators, and an internal evaluation carried out by
institutions themselves according to the guidelines provided by ASHE.

However, the results of the evaluation are not yet used as a base for institutional funding (such as
the government’s Research Assessment Exercise for the UK). Instead, the present criteria for institutional
funding are more formal and include input from a number of researchers and their scientific coefficients.

In order to improve scientific excellence at the institutional level, the Law on quality assurance in
science and higher education system was enacted in April 2009 (OG 45/2009). It regulates the procedures
of periodic external independent assessment of the internal quality assurance system (audit), and the
organisation of the ASHE as the pillar institution of the national system of quality assurance of research
system in Croatia.

2.2.2 Public Research Organisations

Public research organisations in Croatia include public research institutes and scientific research units
classified as other legal entities.

Public research institutes primarily carry out scientific programmes of strategic interest to the
Republic of Croatia and establish, together with the universities, the scientific infrastructure for the
overall science and higher education system.

The public research institutes managed by the MSES, according to the Register of Scientific
Organisations, are as follows:

1. Ruder Boškovic Institute

2. Croatian Institute of History, Zagreb

3. Institute for Anthropological Research, Zagreb

4. Institute of Archaeology, Zagreb

5. Institute of Economics, Zagreb

6. Institute for International Relations, Zagreb

7. Institute for Medical Research and Occupational Health, Zagreb

8. Institute of Physics, Zagreb

9. Institute for Social Research, Zagreb

10. Institute for Tourism, Zagreb

11. Ivo Pilar Institute of Social Sciences, Zagreb

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 12. Croatian Geological Survey, Zagreb

13. Croatian Veterinary Institute, Zagreb

14. Institute of Ethnology and Folklore Research, Zagreb

15. Institute of Philosophy, Zagreb

16. Institute of Croatian Language and Linguistics, Zagreb

17. Institute of Public finance, Zagreb

18. Institute of Adriatic Crops and Karst reclamation, Zagreb

19. Institute of Migration and Ethnic Studies, Zagreb

20. Institute of Oceanography and Fisheries, Split

21. Institute of Art History, Zagreb

22. Institute of Agriculture and Tourism, Porec

23. Agriculture Institute, Osijek

24. Old Church Slavonic Institute, Zagreb

25. Forest Research Institute, Jastrebarsko

In addition, there are other scientific research units that are combination of research institutes and
service providers. They are established as independent legal entities, frequently attached to business,
cultural, health and state institutions. The majority of such units are medical research units at hospitals.
Other examples include the Croatian Hydrographic Institute, the Zagreb Fruit Centre, and the
Meteorological and Hydrological Service of Croatia. Finally, there are some institutes in public ownership
which operate as limited liability companies (e.g. Brodarski Institute).

Another important public institution involved in research is the Croatian Academy of Science and
Arts, which has a special status defined by the Croatian Academy of Sciences and Arts Act. Its main tasks
include the promotion and organisation of scientific research, the development of artistic and cultural
activities, and the protection and affirmation of the Croatian cultural heritage. Fellows of the Academy
are organised into nine departments. The Academy also has thirty scientific councils and committees, and
smaller research units (institutes). However, due to the traditionally decentralised nature of the research
system, the role of the Academy in research has been more limited than in many former Eastern bloc
countries.

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 Public research institutes have had complex and different development paths, which have resulted
from a variety of influences in the past, sometimes even before the World War II. Two major groups may
be identified - the institutes that were founded within the University of Zagreb or the Croatian Academy
of Arts and Sciences (and were subsequently separated), and those which were founded as independent
institutions. Depending on the competences and strategies of each institution, the institutes have
differed in terms of reliance on state-sponsored or industry-related projects, the internationalisation of
research activities, and staff participation in teaching activities. The transition period (after 1990) brought
about the privatisation of some former public institutes with a strong commercial potential, for example,.
the Civil Engineering Institute of Croatia that developed into one of the leading civil engineering
institutions in the region, but has recently been affected by the economic crisis.

However, most institutes remained public and tried to adapt to the changing circumstances,
including the weakening of linkages with former industrial partners (who had often faced the loss of
former markets, downsizing and delays in the usage of technology), the corresponding weakening of
industry demand, and the changing political and budgetary landscape. In the post-war period, science
and innovation were affected by the limited availability of resources and the EU integration processes
were only intensified from the year 2000 onwards. At the same time, the cooperation between public
research institutes and HEIs in the same field was often sporadic. Despite some joint projects and the
participation of researchers from universities in teaching, the linkages between these two types of public
academic institutions have often been somewhat neglected.

The Ruđer Bošković Institute (RBI) is regarded as Croatia’s leading scientific institute in the natural
and biomedical sciences, as well as in marine and environmental research. Research activities at the RBI
are performed mainly through domestic and international projects carried out in collaboration with
universities and other scientific institutions. The scientific areas covered are: theoretical and
experimental physics, physics and materials chemistry, electronics, physical chemistry, organic chemistry
and biochemistry, molecular biology and medicine, the sea and the environment, informational and
computer sciences, and laser and nuclear research and development. According to the RBI (2010), at the
end of 2009, the Institute had a total of 887 employees. This included 308 scientists, 68 postdoctoral
researchers, 172 Ph.D. students, and 112 support scientists and technicians. The total number of research
articles published by RBI scientists in 2009 was 559. Amongst these, 434 were published in journals cited
by Current Contents, the majority of which were published in high ranking international Journals. In the
same year, two patents arising from work at the Institute were granted – one European patent and one
United States patent. In addition, Ruđer Innovations also applied for six patents on behalf of the RBI in
2009.

The CBS (2012b) reported that the public research sector made up 27% of GERD in 2010 and
contributed to 0.21% of R&D expenditure in GDP, a similar figure as in previous years. The public sector
employs 29% of researchers in Croatia, with 51% engaged in the HE sector.

In relation to sources of funding for R&D in 2010, 84.3% of R&D in the government sector was
funded by central and local government, while only 5.8% was funded from institutions within the sector.

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The remaining funds originated from foreign investors (4.9%), private and public enterprises (4.7%) and
non-profit institutions (0.4%).

Government funding is mainly provided by the MSES and is allocated as separate funds for
personnel, equipment, travelling, etc., which leaves very little decision-making for the institution itself.

In terms of research works, public research organisations published around 32% of all research
works in 2010 (CBS, 2012b), out of which 56% was basic research, 38% applied research, and 6%
experimental development research.

In 2010, public research institutions applied for 26 patents in Croatia and two abroad, while eight
patents in Croatia and one abroad were granted in the same year. Compared to 2009, there was a
decrease in applied patents abroad (18 in 2009) and a significant increase in patent applications in Croatia
(7 in 2009). This increase in patent applications in Croatia may be explained by the discontinuation of
funding to pay international patent procedures, which incentivised institutions to apply for patents at the
national level and then, depending on commercial prospects, decide whether or not to enlarge to PCT.
Out of 26 patent applications in Croatia in 2010, total of 25 were reported in biotechnical sciences –
agronomy, while one was reported in the field of basic medical sciences.

The OECD Investment Compact Survey on the activities of research institutions in Croatia, with a
sample of 13 independent public research institutes, provided valuable insight into their performance.
Within the last three years, all of the institutes produced both publications and theses/dissertations, 92%
produced scientific publications, while none applied for patents. In terms of funding, most of the public
institutes (92%) benefited from state funds, 54% received funds from international sources and 46% from
contracts with private companies.

All of the public institutes identified the lack of funds as a main factor to constraining research
activity. However, it is important to note that none of the institutes singled out the lack of linkages with
business as a constraining factor. The overview of all constraints singled out by the institutes is provided
in the figure below.

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 Figure 57. What have been the main factors constraining your institution's research activities?

(Multiple answers possible)

Other 8%
Regulations 8%
Lack of linkages with businesses 0%
Fragmentation of the research community 31%
Lack of adequate research equipment 31%
Lack of personnel 54%
Lack of funds to carry out research 100%
Brian drain 8%
Lack of adequate skills 8%

0% 20% 40% 60% 80% 100% 120%

Source: OECD Investment Compact (2012)

2.2.3 Private scientific institutions

The business sector in Croatia employed around 19% of researchers in Croatia (FTE) in 2010, with
the vast majority working in engineering (68%). Most of these business entities involved in R&D
performed activities in engineering (67%), followed by biotechnical sciences (19.81%), while research and
development activities in other fields of science were represented by a much smaller proportion.

In 2010 around 69% of funds for R&D were derived from the resources of companies engaged in
R&D, with a remaining 17% from foreign investors, 10% private and public enterprises, and only around
4% from central and local government. (CBS, 2012b)

In 2010, the business sector produced around 8% of all research works in Croatia, the majority of
which was applied research (55%), with a remaining 27% experimental development research, and only
around 18% basic research.

With regard to patents, the business sector accounted for 26% (14 applications in total) of patent
applications in Croatia in 2010, and for 95% of patent applications abroad (56 applications in total). In the
same year, a total of 104 patent applications were granted to the business sector entities: 20 in Croatia
and 84 abroad. In 2009, the business sector applied for 50 patents and was granted with 158 patents,
both in Croatia and abroad.

Private scientific institutions play a major role in the overall national innovation system. Currently,
there are around twenty private scientific institutions in Croatia. These include the Energy Institute, the
Bc Institute for the Improvement and Production of Crops, IGH - the Civil Engineering Institute, the

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Tobacco Institute, the Mediterranean Institute for Life Sciences, and INETEC (Institute for Nuclear
Technology). Most of these institutions underwent privatisation, whereas the last two were founded later
on. With the exception of the Mediterranean Institute for Life Sciences (which performs basic research
financed by grants), these institutes are engaged in applied research and testing services. The
sustainability of their business models is likely to require the further internationalisation of their
activities.

Some private scientific institutions operate as corporate research institutes in industry, such as
Ericsson Nikola Tesla (telecommunications technology), INA (oil and gas), Končar Institute (engineering)
and the Galapagos (pharmaceuticals, formerly GlaxoSmithKline / PLIVA). They are major research
performers in the business sector, which are well integrated into international knowledge flows.

A number of structural factors account for companies’ limited role in R&D. First, the structure of the
national economy is dominated by low-tech industries that do not depend on investment in R&D (Svarc
and Racic, 2011). The overall structure of industry has not significantly evolved in the past three decades
and is still dominated by low-profit “traditional Croatian industries” (Svarc, 2006). In addition, the private
sector,particularly the SME sector, has weak technological capabilities and absorption capacities,
generating only limited interest and demand for R&D (Radosevic, 2010a).

Private R&D activities also suffered from corporate restructuring. While R&D departments used to
be active and well-integrated with production inside state-owned enterprises, many were dismantled in
the post-privatisation phase (WB, 2009). There were only a few cases where the R&D laboratories of
former state-owned enterprises experienced successful restructuring (WB, 2009). Indeed, while public
R&D institutes continued to receive public funds, state funding was withdrawn from industrial R&D
institutes and these were left at the “mercy of the market” or under the responsibility of their parent
companies (Svarc, 2004). This led to the closing or downsizing of industrial institutes and the dispersion of
research teams (Goldberg et al., 2011). Ultimately, this ‘shock without therapy’ (Radosevic, 1996) led to
heavy losses in technology accumulation and skills (Svarc, 2004).

2.2.4 Funding of research activities

Public research activities in Croatia are predominantly financed by budget resources allocated by the
MSES through the four main channels: institutional funding, competitive research grants, junior
researchers programme, and other research supported programmes. As reported by Švarc & Račić (2012),
and based on the data of the MSES Financial Department, the total budget of the MSES in 2010
amounted to EUR 1,571.6 million, equalling 9.8% of the State budget or 3.5% of GDP. In 2009, the MSES
budget amounted to 10.07% of the State budget.

The budget of the MSES for research and development activities amounted to EUR 163.4 million in
2010, equalling 1.02% of the State budget (compared to 0.95% in 2009) and 0.37% of GDP (compared to
0.33% in 2009). The largest part of the MSES budget for R&D was (and usually is) spent on institutional
funding for public institutes (around 27% of the budget, out of which 83% is spent on the salaries of
researchers) and the rejuvenation of the research community through the Junior Researchers

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Programme. These resources are allocated directly to universities and research institutes for scholarships
and salaries. (Švarc & Račić, 2012)

Around 10% of the MSES budget for R&D is spent on competition-based grants for research projects
(Z-projects), while 15% is spent on support for institutions of national interest like the Meteorological and
Hydrological Service, the Geological Service, the Institute of Lexicography, and the National Library.
Remaining resources are spent on different supporting programs (e.g. research associations, publishing of
books and journals, organisation of conferences) that are also carried out on a competition basis. (Švarc &
Račić, 2012)

As reported by Švarc & Račić (2012), block grants are currently the most important source of
financing for research organisations. The grants cover gross salaries and material costs within the
research institutions. Each year, the Institutes send capital investment plans to the MSES in order to
finance their additional requirements (e.g. investment in maintenance). There is no clear connection
between the scientific excellence measured by bibliometric indicators, the number of patents, and block
financing. Flexibility in redirecting block funds is rare.

Budget resources provided by the MSES usually make up 80% to 85% of total research funding in
public research institutes. Due to the lack of data, it is difficult to calculate the ratio between institutional
and competition-based project funding. Generally speaking, 70% of the allocated budget resources are
spent on salaries, 10% on direct institutional funding (overheads, phone, energy, etc.), 10% on research
grants (material and operational costs) and 10% on other research-supporting activities (conferences,
publishing, etc.)

Some revenue for PROs and HEIs (15% to 20% of the total budget depending on the market potential
of the research) is derived from contract research with other central government ministries, local
government, funding agencies such as CFS or BICRO (10%), and foreign resources (from 8.8 % at public
institutes to 2.7 % at universities in 2010). The contribution of the business sector is small and varies from
year to year. In 2010 the share of the business sector was 4.6% of total revenues of PROs and 9.8% of
universities.

In relation to companies that invest in public research, these are primarily large and research-
intensive companies that possess their own in-house research institutes. The principle mechanisms of
cooperation are contract research projects that include development research as well as the routine
services of quality control and testing. The main partners from the public research sector are research
institutes and universities, with the stronger R&D potential coming from the Ruđer Bošković Institute and
Zagreb University, especially the faculties/departments for electrical engineering and computing, food
technology, chemical engineering and agriculture.

Another important source of funding is contract research between research institutions/universities

and the local and central government. Examples of such projects at the central government level include
projects on the cost-benefit analysis of the integration with the EU or about the role of the Croatian army
in the society. There are various projects financed by the cities and counties that contribute to the

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revenue of the research institutes and universities, but such projects often revolve around topics with a
direct application (e.g. economic analysis). Unfortunately, there are no aggregate data on the revenues
generated through these projects.

As reported by Švarc and Račić (2012), Croatian science policy is missing large scale and networking
projects that could bring together private and public stakeholders in joint development and strategic
research activities, such as joint technology initiatives, technology platforms, and networks of knowledge.
Such joint activities could raise the interest of the private business sector for research and increase
investment in public research, as well develop the competences and partner networks necessary for the
future participation in large scale projects funded by the EU.

2.2.5 Technology transfer and university spinoffs

The establishment of spin-offs and student start-ups is not systematically monitored or encouraged. It
is more likely that researchers and university students are going to initiate their private businesses
without the knowledge or support of faculties and universities. During the recent years, Technology
Transfer Offices (TTOs), attached to universities and the Ruđer Bošković Institute, have been established
across Croatia. These are:

1. Technology Transfer Office at the University of Zagreb

2. Technology Transfer Office at the University of Split
3. Technology Transfer Office at the University of Rijeka
4. Technology Transfer Office at the University of Osijek
5. Technology Transfer Office at the Institute Ruđer Bošković – “Ruđer Inovacije”

The World Bank supported Science and Technology Project (STP) was implemented in the period 2005
– 2011 with two main objectives:

i. to strengthen and restructure selected research and development institutions to achieve higher
levels of applied research, while maintaining their scientific excellence,
ii. to increase the ability of enterprises to develop, use, adapt and commercialise technology.

The project significantly influenced the development of research institutions in Croatia and, among
other research institutions, provided support to Ruđer Innovations, the University of Zagreb and the
University of Rijeka.

Ruđer Innovations Ltd. was a notable case, was established as a company for innovation services and
technology transfer at the Ruđer Bošković Institute in 2006. Under the STP project (with the contribution
of EUR 1.5 million), Ruđer Innovations Ltd. have launched five spinoff companies: Ruđer Medikol
Diagnostics, Ruđer Medikol Cyclotron, Initium Futuri, BioZyne, and Artes Calculi (Box 3). As reported by
the World Bank (2012c), two of these companies are already sustainable, one is in an incubation period
and the remaining two have made initial steps towards sustainability. The World Bank (2012c) also
reported that four other innovations from RBI have been assessed as possessing promising commercial
value, however need further development and financing for the pre-commercial phase. A total of 12

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licensing agreements, amounting to EUR 750,000, were concluded with clients such as the Massachusetts
Institute of Technology and Brown University. In addition five patents were granted and 37 patent
applications were filed.

Box 2. Ruder Innovation spinoffs

Ruđer-Medikol Diagnostics was established in 2007 in cooperation with Ruđer Innovations and Medikol Polyclinic as a
company specialising in the molecular diagnosis of hereditary susceptibility to cancer. Its headquarters are within the
Ruđer Bošković Institute, where the laboratory testing is performed, while the genetic counselling and sampling are
performed within the Medikol Polyclinic. Research studies have proved that certain gene mutations increase the
chance of developing cancer, depending on family history. Voluntary screening of people whose close relatives have
developed cancer could establish whether they have the gene mutations and possibly increased risk of developing the
disease. IRB has already been certified with the European protocol for breast cancer screening.

Ruđer Medikol Cyclotron Ltd. was established in 2008 by Ruđer Bošković Institute, Medikol Ltd and Ruđer Innovations,
with the aim of starting production of radiopharmaceuticals for PET / CT diagnosis. The company is also situated within
the Ruđer Bošković Institute. The Medicol Cyclotron provides highly sophisticated nuclear medicine services for
diagnostics of cancer – PET/CT – which has not been available in Croatia. The Croatian Health Insurance Fund
committed to co-finance PET tests for the general population, based on international standard criteria. The knowledge
of the IRB scientists will be used to operate the cyclotron, which is needed to create radionuclides for the PET. At the
same time, researchers will be able to use cyclotron, purchased by Medicol, to do the research work on creating new
radionuclides

Initium Futuri was founded in 2007 by Ruđer Innovations and group of four undergraduates from the Faculty of
Organization and Informatics (University of Zagreb) in order to offer solutions based on the latest IT platforms. Its core
activity is the development of high information and communication technologies with a focus on software development.
Funding of EUR 154.000 provided by RI has enabled the establishment of Initium Futuri and operational costs for one
year. In less than one year, it has already signed interesting business contracts and employed additional staff.

The Science and Innovation Investment Fund (SIIF), within the IPA IIIc Regional competitiveness
programme, is also used for projects that facilitate technology transfer, academic entrepreneurship, and
engage RTO and universities in local and regional development. Within the project’s first call, five project
were approved: Technology mapping in University of Zagreb by the University of Zagreb; Marasca Sour
Cherry as ingredients of Functional Foods by the Faculty of Food and Technology, Centre Zadar;
Innovation, Technology Transfer and Research Provision Infrastructure Development in Karlovac –
INTERPID-Karlovac. by the Polytechnic of Karlovac; Development of Innovation System at Ruđer Bošković
Institute and University of Rijeka; and Creation of research related infrastructure for Translational
Medicine and Applied Genomics by the Ruđer Bošković Institute.

Seed funding for spinoffs can be obtained through the RAZUM programme, but this programme is
primarily used by private companies (please see Chapter 3.3 Policy instruments). On the other hand,
there are still no policy measures that attract venture capital and business angels to university spin-offs.

PROs rarely establish spinoffs because of the lack of research outputs that could be developed into
new products. The situation in HEIs is similar. They have an incentive to keep all core research activities
under the umbrella of the HEIs as that enables them to build up their competences, references, staff,

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research infrastructure etc. Some professors set up their own companies to offer research services, which
are peripheral to their home institutions. The issue of potential conflicts of interest is rarely raised. For
the future development of university spinoffs and student start-ups, stronger incentives related to the
intellectual property rights should be provided. Other steps may include further strengthening the
existing technology transfer offices at universities and providing funds for technology mapping and
patenting.

2.2.5. Research institutions performance - Conclusions

The key strengths of research institutions include their experience in R&D activities, a relatively
high number of younger researchers, increasing opportunities for mobility, and the development of R&D
infrastructure. These factors, combined with the introduction of quality assurance mechanisms and an
increasing awareness of the linkages between science and industry, can facilitate the reform of academic
institutions and their contribution to the development of a knowledge-based society and economy in
Croatia.

The weaknesses of research institutions include the underdevelopment of applied research and
development, and the low levels of the commercialisation of research results and science-industry
cooperation in general. The lack of experience in technology transfer and innovation and the lack of
incentives related to research commercialisation contribute to this situation. Tackling these issues also
requires attention to wider structural weaknesses in the governance of research institutions, IPR policy,
evaluation culture etc.

Major opportunities for research institutions have been identified, such as access to international
funding (especially with Croatia’s accession to the EU), development of S&T supporting infrastructure,
new programmes supporting human development and research activities, and the improvement of
evaluation. Most opportunities are linked to the process of internationalisation of the research and
innovation system, which will enable access to new resources and sources of knowledge.

On the other hand, the risks include the possible lack of financial resources (from both public and
private sources), a non-strategic approach to R&D on a national level, insufficient government support,
and the low absorption capacity of Croatian economy. These threats mainly stem from the ‘status quo’
scenario, in which the reforms would not occur and the current weaknesses would become even more
pronounced.

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2.3. Human resources and skills

Croatia is a leading country in youth education among European countries. Over 95% of the
population aged 20-24 completed some kind of upper secondary school while the average in the EU
(EU27) is 79,5% in 2011, as reported by the EUROSTAT. In contrast, measured by the share of people aged
30-34 who have successfully completed university or university-like education at level 5-6 of the
International Standard Classification of Education 1997 (24.5%) Croatia still lies behind the Europe 2020
strategy’s headline target of 40%. The majority of university students graduated in social sciences,
business and law (44.2% of all gradates), engineering, manufacturing and construction (12.3%) and
humanities and art (11.9%). These trends are similar to those observed in other economies (Figure 58).
Figure 59 seems to point to a lack of human resources in science and technology. Indeed, the number of
tertiary graduates in science and technology per 1000 persons aged 20-29 years amounts to 11.6 which is
lower than the EU27 average (12.5). Nevertheless, it represents a significant improvement from 2003,
when the corresponding figure was 5.6.

Figure 58. Tertiary education graduates by fields in 2010, as a % of all fields

100 Services

Health and welfare

80
Agriculture and veterinary
60
Engineering, manufacturing and
construction
40 Science, mathematics and
computing
Social science, business and law
20
Humanities and art
0 Education and training
EU27 CZE EST HUN AUT POL SVN SVK FIN HRV

Source: Eurostat

88
 Figure 59. Tertiary graduates in science and technology in 2010 per 1000 population aged 20-29

25

20

15

10

0
FIN SVK CZE POL AUT SVN EU27 HRV EST HUN

Source: Eurostat

However, the number of new doctorate graduates per 1,000 population aged 25-34 was 0.8% in
2009, which is only 57% of EU average of 1.4%. Although relatively low, the number shows an increase,
compared to 0,7% in 2007. The share of doctors of science is very low and amounts to 0.23% of the total
population (see Figure 60) while the target is to increase their share to 1% in the next 10 years.

Figure 60. Doctorate students in S&T fields, selected countries, 2009

Doctorate students in S&T fields, selected countries, 2009

1,5 1,3

1 0,81
0,53 0,55
%

0,33 0,43
0,5 0,16 0,17 0,23 0,26
0
ry

a
tia

ia

nd
d

ia

p.
a

kia
i
lan

ni

on
an

str
ga

Re
oa

la
va
ve

t
n

Po

Au

Fin
Cr

h
Es
Slo
Hu

Slo

Ro

ec
Cz

Source: Eurostat

The total number of in full-time equivalents (FTE) researchers decreased from 8,572 in 2000 to 6,597
in 2010. As shown in Figure 61, relative to the comparator economies, Croatia had the smallest number

89
of FTE researchers per million inhabitants in 2010, amounting to about 1,493 or only 49% of the EU27
average14.

Figure 61. Researchers (FTE) per million inhabitants, 2010

8000

7000

6000

5000

4000

3000

2000

1000

0
FIN AUT SVN EU27 EST SVK CZE HUN POL HRV

Source: Eurostat

Figure 62 shows that higher education institutions and public research institutes together employ
more than 80% of Croatian researchers. By contrast, only 18% of researchers were employed in the
private sector in 2010. This pattern is somewhat similar to the one in Poland and the Slovak Republic but
contracts with patterns in the rest of the comparator economies where the share of researchers
employed in the business enterprise sector ranges from 31% in Estonia to 62% in Austria.

14
EU27 average in 2009.

90
 Figure 62. Researchers by sectors of employment, 2010

100%

80%
Private non profit
60%
Higher education
40% sector
Government sector
20%
Business sector
0%
EU27 CZE EST HUN AUT POL SVN SVK FIN HRV

Source: Eurostat

In terms of fields of research, the largest shares of Croatian researchers are in engineering and
technology (29%), natural sciences (19%) and medical sciences (18%). However, in comparison with other
economies, Croatia has relatively larger shares of researchers in medical and health sciences, agricultural
sciences and humanities and relatively lower shares in natural sciences and engineering and technology
(Figure 63). This may be an issue as natural sciences and engineering and technology – unlike humanities
– constitute primary fields for innovation.

Figure 63. Researchers by fields of science, 2009

100%

Humanities
80%
Social sciences
60%
Agricultural sciences
40%
Medical and health
sciences
20%
Engineering and
technology
0% Natural sciences
CZE HUN POL SVN SVK HRV

Source: Eurostat

91
 The figure on human resources in science and technology (HRST)15 as a percentage of labour force in
Croatia was 32,1% in 2010 (EUROSTAT) whereas in developed countries it often exceeds 50% (EU27 –
40.51%). Still, the share is continuously increasing and shows positive trend compared to previous years
(29,2% in 2006). The most recent World Competitiveness Report (WEF, 2012) is encouraging for Croatia’s
math and science education, whose quality ranked 29th out of 140 countries. However, deficiencies
remain with regard to the whole educational system (rank 89) and the availability of scientists and
engineers (rank 88).

Another indicator for policy makers to be concerned about is the very low share (2.3%) of Croatian
population aged 25-64 which takes part in any form of life-long learning. This means that the workforce is
not involved in any sort of knowledge transfer and thus not well prepared for the adoption of new
knowledge and technology. As a consequence, the Croatian workforce is to be considered as not
competitive on the global market, in particular, when compared to counties like Sweden with a quarter of
their population participating in a life-long learning process.

Additionally, in terms of labour unit costs, Croatian labour market remains one of the least
competitive in the region based on the relatively high wages, even after adjusting for productivity
(Rutkowski, 2003). In other words, wage differentials between Croatia and other transitional economies
are larger than productivity differentials. For example, while labour productivity in Hungary is at a similar
level as in Croatia, Hungarian wages are on average one-third lower which implies that unit labour costs
in Hungary are lower (Rutkowski, 2003).

The future development of the human resources will depend on further improvements of the
educational system which would enable students to use their skills in a more productive way. The entry
quotas for higher education programmes generally do not follow labour market trends and are mostly the
result of revenue maximization strategy, established by the faculty boards. As reported by Švarc and Račić
(2011), the excessive quotas for courses in social sciences and humanities, coupled with emergence of
new private schools offering similar course, created distortions in the university educated segment of the
labour market. About two thirds of students of private professional schools study social sciences and
humanities (e.g. business management). At the same time, there is an alarming trend in declining of the
share of young people who are taking up technical and natural sciences.

Currently, most of the educational programmes are primarily oriented towards theory rather than
practical usage of gained knowledge and acquisition of soft skills. A recent survey run by the Croatian
Internet portal www.EduCentar.net states that 35% of Croatian employers complain about skill mismatch
between their employees’ formal training and the nature of job tasks to be performed. In particular,
employees lack communication and presentation skills (61%) followed by knowledge of foreign languages

15
This indicator gives the percentage of the total labour force in the age group 25-64, which is classified as
HRST, i.e. having either successfully completed an education at the third level in an S field of study or is
employed in an occupation where such an education is normally required. HRST are measured mainly
using the concepts and definitions laid down in the Canberra Manual, OECD, Paris, 1995.

92
and specific marketing and sales skills (35%). General management, human resources and project
management skills are missing in both private sector and public administration, but Croatian business
schools, ranked below average internationally (88th rank), do not seem to be in a position to cover this
gap.

Furthermore, the Erawatch Country Report for 2010 (Švarc and Račić, 2012), evaluated the market
for researchers in Croatia as underdeveloped. This is primarily caused by the lack of interest of the private
business sector for R&D activities and services and presents a threat to a great number of PhD students
to become unemployed if forced to leave RTO or universities after PhD accomplishment. There are legal
restrictions for people outside of the public research sector to follow a dual-track career path and to
move from the business sector to research. In addition, the Law on Scientific Work and Higher Education
foresees a certain time period of at least three years for a candidate to be able to reapply for a higher
position in research. The current career promotion practice at universities and public research institutes
is characterized by lack of flexibility, transparency, and consistency. There are no clear evaluation criteria
for candidates: some are being evaluated by colleagues at their home institutions while others by peers
of another institution16.

Nevertheless, based on the statistic provided above, one must conclude that some improvements
have been made. These positive trends in human resources and skills are predominately caused the
implementation of different programmes aimed at the rejuvenation of the scientific community, mobility
of students and researchers and others, which are elaborated in more detail in Chapter 3.2. Despite the
fact that the Bologna process is most commonly perceived as unsatisfactorily implemented with Croatia
still being a rather ‘closed’ or ‘limited’ system (see Figure xxx), it has had an overall positive effect on the
development of human resources in Croatia. It puts the foundations for the workforce inflow and outflow
with the European Union and enables Croatian students and researchers to participate in international
programmes.

Additionally, the Unity through Knowledge Fund (UKF) has successfully implemented a programme
to financially support the collaboration between Croatian researchers and the Diaspora on common
research projects. As per tentative estimate based on reports by the Croatian consulates and diplomatic
and catholic missions, around three million Croatian nationals and their descendants lived abroad in
200117. However, there is no evidence of governmentally supported initiative of any kind to attract
people from the Diaspora and enable exchange of innovative and entrepreneurial ideas between them

16
It is common for Croatian institutions like the Croatian Academy of Science and Arts (HAZU) not to accept
some eminent scientists as members. Examples include Miroslav Radman who became a member of the
French Academy of Science and Ivan Dikic, a member of the German Academy of Science, after being
rejected by HAZU.
17
Source: Ministry of Foreign and European Affairs (online data link:
http://www.mvep.hr/hmiu/tekst.asp?q=02hi-hi00). There are virtually no reliable data about Croatian
migrants, since until 2011, when the Emmigration Office was established, there was no legal obligation
for the Croatian citizens leaving the country to declare their departure and its purpose.

93
and local Croatian researchers, inventors and enterprises, and cooperation on scientific, artistic and
cultural projects. For this to happen and for fully benefiting from joining the common EU labour market,
the current immigration policy and labour legislation of Croatia should be reconsidered and aligned to
attract the best international workforce to Croatia18.

Figure 64. Education, mobility and system openness

Source: Eurostat, UOE data collection

Unfortunately, special mobility schemes allowing R&D students/PhDs to conduct innovation projects
in companies are still not widely present. There was only one programme run by UKF – Research in
industry and academia grant that addresses directly the inter-sectoral mobility, while others are aimed at
science-industry cooperation. Although the programme is currently closed, it is expected that National
Science Foundation is to take over its implementation and the programme should be active in the future.
However, the new Action plan for the mobility of researchers 2011 – 2012 has put a great emphasis on

18
There are no official statistics on the share of non-national HRST in Croatia. The EU average lies at 6%, out
of which 3% are non-national having EU citizenship.

94
the inter-sectoral mobility of researchers. The measures that are to be implemented by the end of 2012
include: (1) Facilitating the access to research results and encouraging the expansion of their usage; (2)
Facilitating access to financial sources; (3) Investments into the mentor capacities for young researchers
and (4) Supporting the implementation of the existing and future EU initiatives targeted towards
eliminating barriers to inter-sectoral mobility.

2.4 Linkages in the innovation system

The infrastructure aimed at strengthening innovation linkages in the Croatian economy and
facilitating the commercialisation of research results has been continuously developing. This
infrastructure includes institutions serving as the interface between the public research sector and
industry (such as technology-transfer offices), business supporting institutions, and associations of
innovators. There are also several government agencies providing funding for innovation activities, which
are addressed in more detail in Chapter 3. The Role of Government.

The Centre of Technology Transfer (CTT) was established in 1996 at the Faculty of Mechanical
Engineering and Naval Architecture, University of Zagreb. Similar initiatives have recently been launched
at different university centres all over Croatia and include the Technology Centre in Split, the Technology-
Innovation Centre of Rijeka, the Technology Development Centre Osijek,the Research and Development
Centre for Mariculture, Dubrovnik, and the most recently established, the Centre for Karst. These
institutions provide a mixture of research, technology and service-oriented activities and are usually in a
mixed ownership of local authorities, universities and local private entities.

Infrastructure development has continued in the form of three TEMPUS projects: CREATES, OPUS
and FoSEntHE. These projects have facilitated entrepreneurship in different universities and connected
the main stakeholders (universities, government and businesses) in order to implement the reforms of
university management in Croatia. Three technology transfer offices were supported by CREATE and
OPUS: the Technology transfer office of the University of Split, the Technology transfer office of the
University of Zagreb, and the Technology transfer office of the University of Rijeka. .

In 2007, BICRO (presented in more detail below) started the implementation of the TEHCRO
programme that supports the development of technology business centres, technology incubators and
research and development centres. Six technology centres have already completed the programme, while
and another six are currently being supported by the TEHCRO programme.

The centres that completed the five-year co-financing period are:

Technology Park Varaždin Ltd.

Science and Technology Park of the University of Rijeka Ltd. (STeP Ri)

Technology and Business Innovation Centre for mariculture MARIBIC d.o.o. in Dubrovnik

95
 Industrial Park Nova Gradiška Ltd. (project: Business-incubation support centre Nova Gradiška)

Regional Development Agency Međimurje REDEA Ltd. (project: Technology and Innovation
Centre Međimurje)

TERA Tehnopolis Ltd. in Osijek

After the co-financing period, in which the institution is provided with funds from the programme,
the institutions need to be financially self-sustainable and operate without co-financing from the
programme.

Ruđer Innovations Ltd. (RI), another technology transfer centre, was established in 2007 at the Ruđer
Bošković Institute. It was supported with the Unity though Knowledge Fund (UKF, see Section 3.3) and the
World Bank and is operating with the goal of commercialising the results of fundamental research. One of
its projects is a spin-off company Ruđer Medikol Cyclotron Ltd. for the commercial use of the new
cyclotron device to produce radionuclides for cancer diagnostics.

There are also other institutions initiated by the local government and the former Ministry of
Economy, Labour and Entrepreneurship (MELE) (now MoEC) such as regional development agencies and
different business centres. Although the exact data is not available, it is estimated that in Croatia there
are currently 29 regional development agencies, 35 entrepreneurial centres, 28 business incubators
(most of them are attached to regional development agencies) and 7 technology parks (including the
ones from the TEHCRO programme).

The associations of innovators have a long tradition in promoting innovation and innovation linkages
in Croatia, since the first association of innovators was established in 1957. The former Croatian
Association of Innovators was divided into two parallel national associations – the Croatian Union of
Innovators (Hrvatski savez inovatora - HSI) and the Croatian Association of Innovators (Udruga inovatora
Hrvatske - UIH). They are both supported by the umbrella organisation of technical culture, the Croatian
Association for Technical culture.

Today, the Croatian Association of Innovators accounts for over thirty regional associations of
innovators and companies, as well as sixty individual innovators. Its members are provided with various
benefits, which include discounts for participation in international exhibitions of innovations, support
and consulting in innovation development, networking opportunities with companies, and the promotion
of innovators and their innovations. Among its members and affiliates, there are several medium-sized
and large companies which have developed into successful export-intensive businesses on the basis of
their innovative products, such as Tehnix (equipment for environmental protection and waste
management), HS Produkt (defence products), KONČAR – Electrical Engineering Institute, Altpro (railway
signalling systems for rolling stock and infrastructure), PIP (apiary products) and others. These companies
are successful exporters of their products, which are developed in cooperation with different research
organisations. Their development paths can be used as a role model for other technology based Croatian

96
SMEs, with the special emphasis on the linkages these companies create between innovation, science and
business.

The Croatian Union of Innovators is national federation oriented towards the promotion of
innovators and the commercialisation of their innovations. The main part of its activities is the
organisation of the participation of Croatian innovators and innovative entrepreneurs in renowned
international exhibitions of innovations in the world. For its members, HSI organises technical, legal and
other forms of support during the innovation process.

Interviews with stakeholders of the Croatian innovation system, conducted for the purpose of this
background research, reveal that inter-firm linkages need to be significantly improved in order to ensure
the development of businesses based on knowledge and innovations. Currently, the most common form
of inter-firm linkages in Croatia are clusters, whose establishment has been recognised as one of the
national development priorities. Through their work, based on creating and promoting inter-firm
linkages, clusters can strongly influence the business activities structure with the adoption of new
technologies and business restructuring, as well as the overall networking of industry and science.
Different programmes and initiatives support the establishment and growth of cluster associations in
Croatia, such as the Programme for Supporting Small and Medium-Sized Entrepreneurship 2008 – 2012.
Through this programme, the Ministry of Entrepreneurship and Crafts (MoEC) co-finances the
establishment of new clusters and the business activities of existing clusters. In the period 2008 – 2011, a
total of 184 beneficiaries were awarded with over HRK 20.5 million (around EUR 2.74 million).

The support given to bottom-up clusters has so far not significantly contributed to sustainable
linkages between companies and research institutions. Only in a few examples (e.g. Intelligent Energy
Cluster) have clusters included a university department. However, there is an initiative with the potential
to intensify the linkages among different institutions within the national innovation system. The Ministry
of Economy (MoE) is coordinating the development of regional clusters which will be in line with the
smart specialisation principle. They will focus on specific sectors and involve all relevant stakeholders,
including companies, research institutions and centres of excellence. Their activities will be based on a
cluster strategy and will be co-financed by EU sources. They will include joint projects, networking,
branding, internationalisation, attraction of foreign direct investment, and other relevant activities that
will contribute to competitiveness and regional development.

Despite relatively developed innovation and technology infrastructure, both science-industry and
inter-firm linkages remain weak. The scientific community is primarily oriented towards scientific output
and does not devote special attention to the specific application of research results. This is because the
existing evaluation methods of scientific work that stimulate standard scientific work (publications) are
based on specific socio-cultural and political factors (Švarc & Račić, 2012). There is also a lack of incentive
for science-industry cooperation and R&D commercialisation. Science-industry cooperation and
technology outputs have not been recognised as critical factors of scientific promotion, which represents
a significant problem in Croatia.

97
 On the other hand, the restructuring of the economy entailed the downsizing of most of the industrial
players from the past that used to create demand for research activities, and this loss has not been
adequately compensated by new business development and new science-industry projects and
partnerships. The lack of competitiveness and technology intensity in the economy is also translated into
a weak demand for research services and joint research projects. Businesses often perceive scientific and
academic research as having limited commercial applicability and thus little relevance for their activities.
Business-funded PhD research projects are restricted to a few leading R&D performers. Moreover, the
activities of intermediary institutions (technology transfer offices, technology parks, regional
development agencies etc.) are still insufficient to transform them into hubs that can bring together
partners from science and industry and facilitate their cooperation. Consequently, science–industry
cooperation tends to be sporadic, rather than systematic, and based on the initiatives of individuals or
smaller teams, rather than on the strategies of respective institutions. In order to change that situation, it
would be useful to learn from the examples of successful partnerships and develop existing or new
platforms for cooperation, such as the aforementioned regional clusters.

The survey conducted by the OECD Investment Compact on universities and public research
institutes provided an insight into the types of collaboration between research institutions and the
private sector. In most cases, the collaboration of universities with the private sector involved the
provision of consultancy services, the use of technical facilities and joint research projects. In the case of
public research institutes, cooperation usually involved the provision of training, consultancy services, the
use of facilities, and commercialisation activities (Figure 65).

Figure 65. If your institution has established contacts with the private sector, please indicate what this
cooperation involve

Source: OECD Investment Compact (2012)

98
 Finally, the innovation focus groups held at MoE in Zagreb on 9-11 May 2012 with the members of
Croatian business and research community resulted in several main conclusions regarding the linkages in
the innovation system. The main conclusions can be summarised as follows:

There is a trend of increasing cooperation between business and the science community.
However, some participants concluded that it is often easier to find a partner within the EU than
within the universities in Croatia. The overall conclusion is that the innovation linkages are still
rather limited and further efforts should be invested in supporting the science–industry
collaboration.

National funding is limited and oriented towards small projects. Further efforts should be
invested in supporting commercialisation activities. Supporting schemes and funding
procedures should be simplified. In addition, the existing supporting measures are not visible
enough in the business or research community

Governance lacks priority setting and clear strategic approaches to supporting innovation
activities. Coordination among various government institutions and levels should be improved
further to avoid the overlapping of responsibilities and the fragmentation of already limited
financial resources.

Public debate in terms of policy design and priority setting should be further developed.

Evaluation culture is not developed when it comes to the evaluation of policies, the impact of
individual policy measures, or implementing organisations. Significant efforts should be invested
in the creation of effective evaluation procedures at all levels.

99
 3. THE ROLE OF GOVERNMENT

3.1 Science, technology and innovation policy

3.1.1 STI policy objectives and priorities

Science, technology and innovation objectives are primarily outlined within the Science and
Technology Policy of the Republic of Croatia 2006 – 2010. Accompanying documents include:

The Guidelines for Promotion of Innovation and Technology System (2006), which define the
policy measures within the Programme for Promotion of Technology R&D Projects and the
Programme for Promotion of Innovation- and Technology-Based Entrepreneurship.

The Action Plan 2007 – 2010 (2007), which defines the implementation priorities of the Science
and Technology Policy of the Republic of Croatia 2006 – 2010.

The Action Plan to Encourage Investment into Science and Research (prepared in 2007, adopted
in 2008), prepared in order to address the Barcelona objectives.

The main STI goals defined in these strategic documents are:

Increase investment in research and development towards the "3% target" to overcome low
investment in R&D (0.76% of GDP in 2006); this assumes an increase in funding for R&D in both
the private and public sectors at a rate of at least 25% annually. Increase investment in private
business to reach a 1:1 ratio of public vs. private sector investment in R&D by 2010;

Reform the Croatian science system in order to integrate research potential and increase
efficiency. This is especially important as the management of scientific research at the RTO is
obsolete due to universities suffering functional and financial disintegration;

Strengthen cooperation among science, government and industry when creating knowledge and
goods in order to increase the level of capitalisation of scientific research, overcome
weaknesses in the sectors of high technology, and foster innovative SMEs;

Increase the participation of Croatian scientists in EU framework programmes. ERA is of growing

significance for the national science policy and financing of research projects.

Unfortunately, most of the goals set out to be fulfilled by 2010 were not achieved. For example, the
investment plan for R&D (e.g. 3% of GDP) implementation is more distant today than in 2006, since the
GERD in 2010 is lower than in 2006 (0.73% of GDP vs. 0.76% in 2006). The BERD has slightly increased
100
from 0.28% of GDP in 2006 to 0.32% of GDP in 2010, but the public–private ratio has not significantly
changed and amounts to 60:40 in favour of public sector. Additional targets defined by the Action Plan to
Encourage Investments in Science and Research such as a 10% annual increase for GERD, 15% annual
increase of BERD, and a 20% annual increase of value of R&D contracts between science and industry,
have also not been accomplished. (Švarc and Račić, 2012)

After the Science and Technology Policy 2006 – 2010 was adopted, the Croatian economy
experienced significant changes: the global economic and financial crisis, the orientation of the Croatian
scientific organisations to the ERA, the participation of Croatia in new EU programmes, among others. In
order to adapt to the new circumstances, the Croatian government produced a plethora of policy
documents to provide a framework for further development of the issues that were not included within
the Science and Technology Policy 2006 – 2010. The overview of the main policy documents in the area of
science and technology that have been introduced between 2004 and 2010 is provided in the table
below.

Table 11. Main STI policy documents in Croatia

Organisation
Title of document Date Type of Document
responsible
Development strategy of the
2004- This is the first comprehensive strategic document which provides the
Republic of Croatia "Croatia in MSES st
06-26 long-term strategic orientation of science policy in the 21 century.
the 21st Century- Science"
Government of This Law is the most important legal document for the organisation
Law on Scientific Activity and 2003-
the Republic Of and functioning of the entire science and higher education system in
Higher Education 07-23
Croatia Croatia.
Strategic plan of the National
Croatian
Foundation for Science, Higher The document is the Strategic plan of the CSF for the period 2004-2008
2004- Science
Education and Technological and defines research priorities and orientation for CSF supporting
07-05 Foundation
Development (now Croatian programmes.
(CSF)
Science Foundation) 2004-2008
Science and Technology Policy of
2006- This is a policy document that presents a vision of the development of
the Republic of Croatia 2006- MSES
06-05 the science and technology sector in Croatia by the end of the century.
2010
Action plan for the
The Action plan proposes eight priority and strategic actions to
Implementation of the Science 2007-
MSES implement the Science and Technology Policy 2006-2010.
and Technology Policy 2007- 06-20
2010
Action plan to increase This document defines policy measures and sets up an operational plan
2008-
investments in science and MSES for increasing investment in science and technology in Croatia by the
04-18
research end of the century.
This document is driven by the perspective of Croatian membership in
the EU. It defines the policy recommendations for removing the
The Action plan for mobility of 2009-
MSES obstacle for international mobility (inward and outward) of researches
researchers 2009-2010 09-09
with the aim of encouraging the cohesion of the Croatian research
community with the ERA and EHEA.
The document was initiated by the full membership of Croatia in the FP
Action Plan to Encourage
EU since 2006. It defines the policy measures needed to increase the
Absorptive Capacity of the 2008-
MSES participation of the Croatian scientists in FP7, such as strengthening
Republic of Croatia for the FP 7 12-10
administrative capacities, participation in technology platforms,
in the Period 2009-2010
connecting PhD studies with research projects, etc.

101

Title of document
Law on Quality Assurance in
Science and Higher Education
Action plan for overcoming
obstacles and enhancing
international mobility in
education for the period 2010-
2012
Organisation
Date Type of Document
responsible
This is a legal document that provides a framework for the
improvement of the quality of the research and higher education
2009- Government of
system in Croatia and its harmonisation with the European standard. It
4-06 Croatia
is driven by Government efforts to reform the research and higher
education sector.
Following the signing of the Memorandum of Understanding between
the European Union and the Republic of Croatia, Croatia will become a
full member of the two European mobility programmes: Lifelong
Learning Programme and the Youth in Action programme, in 2011. The
2010 Government of
purpose of the document is to propose the amendments, in the form
Sept. Croatia
of the Multi-annual Action Plan, to legislation supporting international
mobility in education and other activities contributing to increasing
and promoting mobility.

This is a continuation of the Action plan for Mobility of Researchers

Action plan for mobility of
researchers in 2011-2012
2009 – 2010 that aims to remove obstacles to and promote
2010 Government of
researchers' mobility as a central factor of science and research
Dec. Croatia
development, and consequently of economic recovery

Source: adopted from Švarc & Račić (2011)

The main research priorities (as defined within the main strategic documents) are biotechnology,
new synthetic materials and nanotechnologies, as well as in the nation-specific research themes such as
the understanding of humanity and national identity or the preservation of natural wealth and cultural
heritage. The STI policy in Croatia is mainly generic in character while sectoral R&D policies or support for
specific thematic areas are not very common in policy practice (Švarc & Račić, 2012).

New areas which recently came into focus of the Croatian STI policy are the participation of the
Croatian scientific organisations in ERA, especially FP and the mobility of researchers and students, and
the participation of scientific institutions in the IPA programme (Instrument for Pre-Accession Assistance).
The participation in ERA is mainly supported through the Agency for Mobility and EU programmes
(AMPEU). The participation in IPA is mainly supported through the Science and Innovation Investment
Fund and an incubation centre for bioscience technologies (BIOCentre).

Sectoral priorities are not specifically addressed within the STI policy in Croatia. The only document
providing at least some sector orientation is the Policy for technological and innovation development. The
policy consists of several different programmes to foster innovation, and innovation-based SMEs that
could be described as sector-oriented. The programmes are carried out by BICRO and, until recently, HIT.
Financial resources are provided by the state budget and a World Bank loan via the STP project.

3.1.2. The evolution of STI policy in Croatia

During the last twenty years, the Croatian STI policy developed in four different phases (Švarc, 2006),
characterised by different developments and policy approaches.

The first developments took place in the 1990s, a post-war period characterised by economic
downturn, transition into a market economy and privatisation process. The privatisation and
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restructuring of large enterprises initiated a chain effect of breaking existing innovation linkages. In
addition, the privatisation process was not transparent and, combined with the economic downturn, left
severe consequences on the manufacturing industry that used to be the driver of the Croatian economy,
as well as on the overall development potentials. Public investment in infrastructure was mainly focused
on road infrastructure with limited effects in terms of international competitiveness (Aralica and
Redžepagić, 2012).

In these unfavourable conditions, the first policy approach was based on the construction of
necessary science and innovation infrastructure. The planning and implementation of innovation policies
were allocated to the MSES that focused on technical assistance for patenting with extensive financial
support by the German and Italian governments (Švarc, 2006). According to Aralica and Redžepagić
(2012), the first phase presented an institutional setback in terms of innovation programmes in
comparison to the period of Yugoslavia, when Croatia participated in a significantly larger market. The
first innovation programmes were established by the MSES with the aim of providing support for
innovation policies and ensure resources necessary for its implementation. One of the main programme
goals was the establishment of the technology and innovation centres in order to support science and
industry cooperation, but no significant results in this area were achieved (Švarc, 2004).

The second development phase took place during the period 1994 – 2001. This period was
characterised by capacity building in line with an increasing number of public bodies to stimulate
innovation activities with long-term results and efforts to improve the commercialisation activities and
results. Science and business infrastructure started to develop, with a focus on technology transfer and
technological centres in the three largest cities - Zagreb, Rijeka and Split. As reported by Aralica and
Redžepagić (2012), this approach was much closer to the integrative nature of innovation policy and thus
enabled its greater effectiveness. Additionally, its successful implementation requires a better
understanding of the importance of innovation policy and its effects, as well as a higher capability of
public administration for policy implementation and cooperation with business and academic institutions.

The third phase, lasting from 2001 to the first half of 2008, was characterised by the strengthening of
institutional capacities within the national innovation system. This phase was marked by the introduction
of two important institutional changes – the establishment of the Croatian Programme for Innovative
Technological Development (HITRA) and the adoption of the Science and Technology Policy 2006-2010.

In 2001, the Government launched HITRA, targeting science and industry cooperation with the goal
of boosting public-private partnerships. HITRA is targeted at initiating the national innovation system
through the permanent development of three strategic and long term goals:

Fostering science and industry cooperation

Revitalisation of industrial R&D

Encouraging commercialisation of research results.

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 HITRA provided a framework for the direct cooperation between industry and entrepreneurs with
higher education institutions and research institutes, and is implemented through two complimentary
sub-programmes: TEST and RAZUM. These programmes were later restructured into the form they
operate in today (see Section 3.3).

In 2005, a World Bank loan was approved to Croatia within the Science and Technology Project. By
its closing in 2011, the total disbursed amount was USD 41.67 million (World Bank, 2012c). Primary
beneficiaries of the project were the MSES, the public research institutions Brodarski Institute Ltd and
Ruđer Bošković Institute (RBI), the University of Zagreb, and University Rijeka (both joining after the start
of the project). MSES benefited from the development and implementation of innovation programmes by
the Business Innovation Centre of Croatia (BICRO) and the implementation of the UKF. As reported by the
World Bank (2012c), the project enabled R&D institutions to commercialise research outputs, increased
the ability of enterprises to develop, use and adapt technology by addressing and correcting the market
failures of programmes focusing on R&D financing for enterprises. Overall, the project had a significant
effect on the development of the Croatian research infrastructure, its overall performance was rated as
satisfactory with substantial risks to development outcome mainly based on the lack of funding (WB,
2012c). Key achievements of the project include (WB, 2012c):

Increased volume of private funding for R&D activities mobilized by firms: EUR 13.7 million, 30
percent higher than the initially envisaged target of EUR 9.2 million.
69 new research contracts (target was 55) with industry were concluded by the Brodarski
Institute and UKF, with a total value of EUR 10.9 million (against the target of EUR 9.8 million).
Ruđer Innovations (RI) established five spillover companies (two new companies to be completed
within the next two years). Total value of the five spillovers amounts to EUR 3.1 million (target
was EUR 2.9 million for eight spillovers).
RI signed 12 licensing agreements (exceeding the target of eight agreements), including with the
Massachusetts Institute of Technology and Brown University, reaching about EUR 800,000 (falling
short of the target EUR 1.0 million).
UKF‟ s cooperation program established collaboration with 133 foreign research institutions
including Max-Planck Institute, Swiss Federal Institute of Technology, and Johns Hopkins
University.

The Science and Technology Policy 2006-2010 was adopted in May 2006 as the main policy
document in Croatia. The overall aim of the STP of the Republic of Croatia 2006-10 has been to stimulate
scientific excellence and enable the transfer of knowledge and results of scientific discoveries to industry
and business in order to increase competitiveness and generate sustainable growth and productivity.
Although it expired in 2010, no new policy has been adopted, so the STP 2006-2010 remains the main
strategic S&T document.

Activities implemented in this phase created the foundation for further strengthening of the overall
science, technology and innovation infrastructure and fostering the industry-science cooperation. The

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Science-Technology Park in Rijeka and TERA in Osijek were established in 2007. The establishment of
technology-transfer offices (TTO) within the universities followed, as well as within public institutes
(Ruđer Innovations at the Ruđer Bošković Institute).

On the other hand, greater attention was directed towards cooperation among government bodies,
specifically the MSES and the former MELE (now MoEC). MELE recognised the importance of innovation
and its benefit to the overall economy and started with the implementation of programmes aimed at
supporting investment in R&D, the development of science and business infrastructure, as well as
entrepreneurial education. These activities were, among others, supported within the Programme for
Supporting Small and Medium-Sized Entrepreneurship in the period 2008 – 2012.

The current (fourth) development phase started in the second half of 2008 and is characterised by
the global economic crisis and institutional funding problems. The global crisis brought about a
contraction in trade and in FDI inflows, thereby reducing the contribution of foreign sources to gross
value added in Croatia. The increasing costs of loan refinancing and the decreasing credit supply in SMEs
(Kundid and Ercegovac, 2011) further complicated the situation of the business R&D sector and
hampered institutional functioning as well as public investment into research and development,
education, and innovation. However, the Croatian approach to the EU resulted in the internationalisation
of the science and research sector.

In order to intensify inter-governmental cooperation in planning and monitoring science and

innovation policy, the Strategic Council for Science and Technology (SVEZNATE) and the National
Innovation System Council of MSES (VNIS) were established in 2008. However, the councils have not
appeared as active stakeholders in innovation policy.

The main challenges of policy making in the recent period were focused on the international
mobility of researchers and their participation in the EU Framework programmes. Several action plans
were adopted within this framework: Action plan for overcoming obstacles and enhancing international
mobility in education for the period 2010-2012, Action plan for mobility of researchers 2009 – 2010 and
Action plan for mobility of researchers 2011 – 2012).

Recent developments include the initiation of the new Government (elected in December 2011) to
develop new strategic documents and legal acts. The first such document is the Guidelines for strategy of
teaching, education, science and technology carried out by the MSES in collaboration with the Croatian
Academy of Science and Arts. Second, the project "National Strategy for the Croatian innovation
development 2013-2020” will be carried out by the MoE and the MSES with the support of the OECD. The
Memorandum of Understanding and cooperation between the two Ministries was formally signed on 10th
May 2012.

In relation to the reform of the science and higher education system, the new Government has
withdrawn from the parliamentary procedure the proposals of three laws from October 2010: the Law on
Science, the Law on Universities and the Law on Higher Education. The main intention of the proposed
laws was to strengthen the functional and financial integration of universities (presently fragmented into

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faculties) by changing the current model of financing, election of staff and granting of licenses. The
overall functioning and funding of universities and public RTO is now considered as state-centred, state-
controlled and lacking autonomy and responsibility. The bills bring also many other significant changes in
the process of the promotion of scientists, retirement, position of junior researchers, etc. Obviously, the
concept of autonomy as well as the balance between autonomy and accountability needs to be revisited.
However, these laws were significantly opposed by the scientific community and withdrawn once the
new Government took office.

The Government has proposed a new draft of the law amending the Law on Science and Higher
Education from 2003 which is currently in the process of a public debate. Important issues include the
establishment of the new National Council for Science, Technology and Higher Education, introducing
clearer and more transparent procedures for choosing candidates for research and academic positions, a
new definition of part-time study programmes, the definition and usage of ECTS system in line with the
EU standards, and determining the obligation of HEIs in introduction of electronic communication system.

In addition, the Law amending the Law on the Croatian Foundation of Science was adopted in July
2012. The changes introduced by the new law are significant since the funding of scientific projects is
transferred from the central public administration (MSES) to the Croatian Foundation for Science as a
professional institution.

Recently, the national policy mix has increasingly become aligned with the ERA (European Research
Area) pillars and objectives. Recent policy developments in this area are summarised in the table below.

Table 12. Assessment of the national policies/measures supporting the strategic ERA objectives (derived
from ERA 2020 Vision)

ERA dimension Main challenges at national level Recent policy changes

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 ERA dimension
1 Labour Market for
Researchers
2 Cross-border cooperation
3 World class research
infrastructures
Main challenges at national level
Remove barriers for
employment of foreign
researchers in Croatia;
Overcome the concentration of
researchers in the public sector
and strengthen the research
workforce in the private sector;
Harmonise educational
programmes with market needs
Strengthen Croatian
participation in the European
cross-border cooperation like
HERA, SEE-ERA NET-PLUS and
assure financial means for such
cooperation; use the IPA funds
for cross-border cooperation
Strengthen and enlarge the
participation of Croatia in ESFRI
initiatives (like DARIAH, CLARIN,
ESS) and research infrastructures
(like CERN, EMBL);
Make a national roadmap in the
field of research infrastructures;
involve IPA and FP funds in
establishing large infrastructure
in Croatia;
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Recent policy changes
The participation of foreign scientists
in research programmes in Croatia was
simplified in 2008 with the adoption of
the Ordinance on Determining the
Requirements for Granting Temporary
Residence to Foreigners for the
Purpose of Scientific Research (Official
Gazette No. 42/08).
By October 2010, 32 institutions
included in Croatia’s education system
had signed the Declaration of
Commitment to the Principles of the
European Charter for Researchers
The MSES established in 2009 the
Committee for the Hosting Foreign
Researchers in Croatia to assist the
process of hosting foreign researchers
The Ordinance on the registry of
scientists with regard to the
registration of foreigners have been
relaxed since the Croatian citizenship
will no longer be required for
registration
There have been no recent policy
changes.
Through the Component IIIc of the IPA
two programmes have been launched
which enable the establishment of
new facilities: the Science and
Innovation Investment Fund (SIIF) and
incubation centre for bioscience
technologies (BIOCentre). The latter is
a green- field investment that has
been recently (February 2011)
approved by the European
Commission with the total value of
EUR18m.
 ERA dimension
4 Research institutions
5 Public-private
partnerships
6 Knowledge circulation
across Europe
7 International Cooperation
Source: adopted from Švarc & Račić (2012)
However, more efforts need to be invested to address current challenges and achieve further
alignment with the ERA, thereby increasing the level of internationalisation of research. Some of the key
challenges include: increasing inward and outward mobility of researchers, increasing the proportion of
Main challenges at national level
Increase public support for RTOs;
Implement the new bills for
reforming research and higher
education in Croatia;
Strengthen the system of quality
assurance and connect it with
allocation of the block grants
Strengthening science-industry
collaboration in joint research
projects and industrial PhD
research.
Strengthening international
mobility of researchers;
Participation of Croatia in the EU
mobility programmes such as
Marie Curie-People, EURAXESS
and opening scholarships
schemes for the Croatian under-
graduate and graduate (doctoral)
students via Scholarship fair and
internet portal; participation of
Croatia in the EU programmes of
the lifelong learning. Enlarged
mobility helps the integration of
the Croatian youth, researchers
and teachers into EU and
contributes to knowledge
circulation in Europe
Expanding research and
innovation cooperation both
within Europe and with other
international partners
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Recent policy changes
The Draft law amending the Law on
Science and Higher Education from
2003 has been initiated by the new
Government elected in December
2011 to reform the science and higher
education sectors.
The Law amending the Law on the
Croatian Foundation for Science was
adopted in July 2012
The Law on quality assurance in
science and higher education system
has been enacted in April 2009 (OG
45/2009). A system of internal and
external evaluation of research at
RTOs and universities has been
established by the ASHE; three
universities (out of seven) have quality
assurance offices (Zagreb, Rijeka,
Split).
There have been no recent policy
changes.
Several action plans are adopted in
this framework: Action plan for
overcoming obstacles and enhancing
international mobility in education for
the period 2010-2012, Action plan for
mobility of researchers 2019 – 2010
and Action plan for mobility of
researchers 2011 – 2012.
The Action Plan for Mobility of
Researchers 2011 – 2012, which was
introduced in December 2010, aims to
increase international mobility.
The Action Plan for Overcoming
Obstacles and Enhancing International
Mobility in Education for the Period
2010 – 2012 has also been adopted.
researchers in the private sector, developing research infrastructures and securing their efficient
utilisation, reforming research and higher education (through improved funding mechanisms, quality
assurance, and accountability), developing science-industry collaboration and internationalisation. (Švarc
& Račić, 2012)

3.2. Institutional setup

Innovation governance in Croatia is performed through a complex system involving various

institutions with different responsibilities regarding policy design, implementation, advice and
administration. When it comes to innovation development, the governance consists of various
institutions primarily oriented towards the development of higher education, science and technology or
the overall economy and business infrastructure. The main institutions of the Croatian innovation system
are presented in the figure below.

When combining the existing institutions and their respective responsibilities, the institutional setup
can be structured into the three main policy levels:

Policy formulation level which includes Parliament Committee for Education, Science and
Culture, MSES, MoE and MoEC;

Policy advice level, which includes the NCS and the NCHE, which are the highest advisory
bodies in their fields and the Science and Higher Education Funding Council (SHEFC) that
provides assistance for both the councils;

Policy implementation and administration level which includes the Agency for Science and
Higher Education (ASHE), the Croatian Science Foundation (CSF), the Business Innovation
Agency of Croatia (BICRO), the Agency for Mobility and EU Programmes, MoEC and other
institutions included in implementation of policy measures.

The overview of main institutions in the Croatian innovation system and their responsibilities is
provided within this chapter.

3.2.1 Policy formulation level

High policy level institutions are mainly responsible for the development of the national innovation
system in a strategic sense, i.e. the overall functioning of the innovation system and governance in
Croatia. These institutions include Parliament Committee for Education, Science and Culture, MSES, the
MoE and MoEC.

The Parliament Committee for Education, Science and Culture is responsible for establishing and
monitoring the implementation of policies, procedures and legislation in the area of education (from pre-
school to higher education), science, culture and technical culture, international scientific and technology
co-operation, protection and utilisation of cultural resources, co-operation with religious communities,

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information technology and other matters of education, science and culture. In particular, this committee
discusses the relevant laws before their submission to teh Croatian Parliament.

The Ministry of Science, Education and Sports (MSES) is the central government body responsible
for implementing, coordinating and monitoring the science, innovation and technology activities. Until
recently, MSES was also in charge of the allocation of the budgetary funds for R&D activities in public
institutes and higher education institutions, as well as the allocation of budgetary funds for technology
programmes and related activities (including science-industry cooperation and commercialisation of
research results). However, these activities were transferred to the National Science Foundation in July
2012 by the introduction of the Law amending the Law on National Science Foundation (please see Policy
implementation and administration level below). The issues of innovation and technology transfer are
currently under the governance of the Directorate for Science.

The Ministry of Economy (MoE) was established in December 2011 by the newly elected
Government. It took over some responsibilities of the former MELE. MoE is responsible for the
competitiveness development of the Croatian economy, industrial policy, policy of application of
innovation and new technologies, application and usage of intellectual and industrial property rights. The
Ministry operates through five main divisions: Division for Industrial Policy, Energy and Mining, Division
for Commerce and Interior Market, Division for Competitiveness and Investments, Division for Public
Procurement System and Division for Commodity Stocks. The Division for Industrial Policy is, among other
responsibilities, in charge of the development of intellectual property rights, innovation and sustainable
development.

The Ministry of Entrepreneurship and Crafts (MoEC) has a similar scope of work as MoE, with an
emphasis on small and medium-sized entrepreneurship and concrete support measures. The scope of
work includes fostering SME competitiveness, fostering application of innovations and new technologies,
development of business infrastructure for SMEs, etc. Activities are performed through divisions, which
include the Division for international cooperation, investments and development, the Division for small
and medium entrepreneurship and crafts, and the Division for EU programmes, bilateral assistance
programmes and projects of other international institutions.

3.2.2 Policy advisory level

Policy advice mainly refers to the area of higher education and science and is primarily concentrated
within the MSES. Institutions responsible for policy formulation and implementation include the NCS and
the NCHE, the SHEFC, National Competitiveness Council and International Scientific Council.

The National Council for Science (NCS) is an expert advisory body responsible for the development
and quality of science. The Council proposes and encourages the measures for the improvement of
scientific activity, provides evaluation of scientific organisations, monitors development and determines
the scientific artistic fields, appoints area scientific and artistic councils and committees for specific fields
of science, specifically determines the conditions for obtaining scientific councils, and performs other
activities with the aim of the development of science.

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 The National Council for Higher Education (NCHE) is an expert advisory body responsible for the
development and quality of higher education. NCHE undertakes evaluation of tertiary education
institutions and study programmes, proposes the network of public tertiary education institutions etc.
These tasks are executed in cooperation with the Agency for Science and Higher Education.

The Science and Higher Education Funding Council (SHEFC) is an advisory body of the NCS and the
NCHE. Its task is to develop the criteria for the distribution of public funding for higher education and
research. However, such criteria have not been adequately developed so far (MSES, 2011).

The National Competitiveness Council is an advisory body (comprising representatives of the

government, business and academic sectors, as well as trade unions) with significant influence on the
public policy development. The most influential document produced by the Council is its "55 Policy
recommendations for Improving Croatia’s Competitiveness" from 2004. The recommendations can be
grouped in several main groups, including Education for Growth and Development; Rule of Law in
Compliance with EU standards; Cost and Price Competitiveness; Development of Innovativeness and
Technology; Strengthening Small and Medium-size Enterprises; Regional Development and Cluster
Development, and Creation of Positive Mind-set and Leadership. These recommendations are based on
four key national strategic objectives, set up by the NCC: (1) Enabling sustainable GDP growth, (2)
Reducing unemployment; (3) Improving the quality of life and (4) Enhancing social inclusion. On a
biannual basis, the Council also produces a Competitiveness Report. However, there is no publicly
available evaluation of the implementation of these recommendations.

Besides these official advisory bodies, the following informal channels for the provision of advice on
science policy in Croatia can be identified (Švarc & Račić, 2012):

Direct hiring of experts, both at the national and international levels, for delivery of specific
documentation, such as various strategic papers, action plans or background materials;

Expert advice through projects under the pre-accession structural funds such as IPA; this is
an important channel since pre-accession activities assume the carrying out of a number of
background and analytical studies and the creation of strategic documents and action plans
that usually includes the policy advice of European and international experts who closely
cooperate with Croatian administrative staff and experts within pre-structural funds;

Expert advice provided by the ad-hoc advisory groups or task forces of experts and scientists
appointed by the Ministry as needed, usually for drafting and carrying out strategic
documents, regulations, acts, etc. (e.g. the "3% working group")

Individual high-level policy makers' formal and informal professional networks on the
international and national level, intra- or inter-ministerial networks, etc.;

Participation of middle-management policy-makers in international networks (e.g. EU, OECD,

UNESCO-based working groups), seminars and workshops.

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 The International Scientific Council was recently established by the new Minister of Science,
Education and Sports. It consists of three prominent scientists from abroad whose main task is to provide
advice and technical assistance to improve the efficiency of the science and higher education system.

The Croatian Union of Scientists also drives some of the major decisions related to the science
policy, particularly, those related to the salaries and rights of researchers, and can thus affect reform
processes in the future.

3.2.3. Policy implementation and administration level

Policy implementation and administration in the area of innovation in Croatia is, as on the other
levels, distributed between institutions oriented towards the development of education, science and
technology and entrepreneurship. These include the Agency for Science and Higher Education (ASHE), the
Croatian Science Foundation (CSF), the Business Innovation Agency of Croatia (BICRO), the Agency for
Mobility and EU Programmes, the MoEC and other related institutions, as described below.

The Agency for Science and Higher Education (ASHE) undertakes activities related to the evaluation
and/or accreditation of research and higher education institutions, their study programmes and research
projects, as well as the distribution of scientific equipment, and the collection and analysis of all relevant
data etc. The Agency is in charge of setting up a national network for quality assurance in higher
education and providing professional assistance to the NSC, NCHE, SHEFC and CESHE. Within the Agency,
the National ENIC/NARIC Office operates as a reporting centre for academic mobility and the recognition
of higher education qualifications. Since 2009, ASHE has been responsible for collecting information on
Croatian higher education and research scientific developments, for providing support to the
implementation of the state matura, and for administering the centralised applications and admissions to
higher education.

The Business Innovation Agency of Croatia – BICRO was established by the Croatian Government in
1998 as a public limited liability company with the aim to develop financial incentives that will support
innovation and technology-based businesses in Croatia. Today, the primary roles of BICRO include the
development and the implementation of government support programmes aimed at strengthening
technology development. Programmes administered by BICRO include RAZUM, TEHCRO, VENCRO, IRCRO,
KONCRO and Proof of Concept (please see Chapter 3.2. Policy measures). In addition, BICRO is the
implementation agency for EUREKA and several international cooperation programmes in Croatia. The
programmes administered by BICRO have been developed based on the international best practices,
World Bank procedures and with the support of international experts. Besides promoting and supporting
science, technology and innovation activities, BICRO also initiated the decentralisation of the policy
implementation by allocating a part of the procedures within the Proof of Concept programme to
business supporting and research institutions throughout Croatia.

The evaluation and monitoring procedures should be further developed and regularly implemented
in order to result in the improvement of the programmes and the effects of their implementation on
Croatian economy. In addition, further efforts should be invested in promoting supporting programmes

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to a wider community in order to increase the number of applications and, consequently, to increase the
overall productivity of research and innovation activities in Croatia.

In order to facilitate the absorption of EU funds and simplify the administration and implementation
of policy measures, several changes were recently introduced regarding BICRO’s legal status, organisation
and scope of work. BICRO is now legally a government agency. The main changes in the scope of work
include the change of the role of the Agency as the intermediary body in the management of funds from
EU structural funds. In March 2012, the Croatian Institute of Technology (HIT – please see below) was
merged into BICRO. Therefore, BICRO further widened its scope of work with activities that were HIT’s
responsibilities, including the management of the TEST programme and the implementation of FP7 in
Croatia.

The economic crisis in recent years has had a negative effect on the budget of BICRO, which was
exacerbated by the end of the Science and Technology Project supported by the World Bank (through
which a part of the funding was secured in the past). Reduced budget and a non-consistent inflow of
financial resources may have a negative effect on current and future beneficiaries, whose projects may be
slowed down. That may eventually affect the absorption capacity of companies in the initial period upon
EU accession. In order to address this issue, MSES is seeking assistance from the World Bank.

The Croatian Institute of Technology (HIT) was founded in March 2006 by the Croatian government
(i.e. MSES) and was merged with BICRO in 2012 by the Government directive (Official Gazette No.
31/2012). The main reason for this decision was to ensure the efficient absorption of EU funds and to
avoid overlapping in both responsibilities and policy measures for innovation. HIT was established
primarily to create the pre-conditions for accelerated application of new knowledge and technologies by
providing services, expertise and project funding. In December 2006, HIT took over the implementation of
the TEST programme and undertook the programme restructuring. TEST provides funding for pre-
commercial research activities aimed at developing new technologies (products/processes/services)
through the development of original solutions (prototypes/pilot solutions), as well as research linking
fundamental sciences and their technological application to the development of industry sectors. HIT was
also in charge of developing the national technology foresight platform and business intelligence system,
and was supposed to take over the consolidation of the administrative structure of the national focal
points of the EU Framework Research and Technology Development Programmes from the MSES.

Croatian Science Foundation (CSF) was founded in December 2011 by the Croatian Parliament. Its
mission is to promote science, higher education and technological development in Croatia in order to
ensure the development of the economy and to support employment. CSF provides support to scientific,
higher education and technological programmes and projects, fosters international cooperation, and
helps the realisation of scientific programmes of special interest in the field of fundamental, applied and
developmental research. In July 2012, the new Law amending the Law on National Science Foundation
was introduced. The changes introduced by the new law are significant since the funding of scientific
projects is transferred from the central public administration (MSES) to the Croatian Foundation for
Science as a professional institution.

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 The Agency for Mobility and EU Programmes is the national agency responsible for the
implementation of the Lifelong Learning Programme and Youth in Action Programme in Croatia. It is also
responsible for the implementation of Europass, Eurodesk, EURAXESS, Euroguidance and Erasmus
Mundus.

The MoEC implements the Programme for Supporting Small and Medium-Sized Entrepreneurship
2008 – 2012, which comprises several projects aimed at increasing competitiveness of Croatian SMEs,
and accompanying yearly operational programmes. Based on this programme, over HRK 1 billion was
allocated for fostering entrepreneurship and crafts in Croatia. In 2012, the Plan for Supporting
Entrepreneurship in 2012 “Business Impulse” was introduced, which comprises the following areas:

• Competitive entrepreneurship

• Affordable financing and guarantees

• Education for Entrepreneurship and Crafts

• Improving business infrastructure

• EU projects

Institutional support for the development of entrepreneurship and crafts

The Croatian Agency for SMEs and investments (HAMAG – INVEST) is an implementation agency
that provides support to SMEs and implements measures focusing on financial incentives schemes and
business advisory services through a network of certified consultants.

HAMAG - INVEST has traditionally been the implementing agency only for credit guarantee schemes,
while the former MELE has directly implemented measures of a non-financial nature. In 2007, HAMAG
began to take over a number of MELE programmes relating to the improvement of business support
infrastructure (business centres, regional development agencies), entrepreneurship of target groups
(youth, start-ups, disabled persons) and support of student cooperatives and student enterprises.

The Agency also implements public guarantee funds and grants guarantees for loans given by
commercial banks and other creditors focusing on financing fixed assets and working capital. The value of
HAMAG’s grant capital is EUR 65 million. Grants are awarded to different types of SMEs under different
conditions, depending on the territory in which they operate. HAMAG - INVEST encourages small business
creation, growth and investments; provides loans; issues guarantees for small business loans, and
provides financial support for loan cost reduction. Additionally, HAMAG - INVEST supports high growth
export-oriented businesses (‘gazelles’), subsidises participation in international fairs and exhibitions,
marketing, certification, introduction of new technologies and protection of intellectual property, and
develops women and youth entrepreneurship. HAMAG - INVEST has also developed an accreditation
system for trainers and has started to implement a project for the Accreditation of Business Consultants,

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based upon regular participation by Croatian consultants in tailored training programmes for business
service providers.

The State Intellectual Property Office (SIPO) of the Republic of Croatia is the administration body
with responsibilities in the field of the protection of intellectual property rights. The Office carries out
procedures for granting industrial property rights (patents, trademarks, industrial designs, geographical
indications and designations of origin, topographies of semiconductor products) and performs the
accompanying professional and legislative activity. In addition to the legislative and professional
activities, a significant part of the Office activities provides information and services in relation to
intellectual property, cooperation with other institutions for the support of innovation activity, as well as
cooperation with economic and R&D entities.

SIPO concluded cooperation and NDA agreements on IP information services and other services in
the scope of SIPO regular activities with HIT, Ruđer Inovations and the Croatian Science Foundation.
Cooperation agreements concerning IP education according to the IP4INNO methodology is concluded
with BICRO and TERA Tehnopolis. Through its Information centre (INCENTIV) SIPO is providing, directly to
the SMEs, service of Intellectual Property Pre-diagnostic (methodology originated from INPI France)
which includes estimating the company's innovative and IP potential. In the scope of its educational
activities, SIPO is providing education on various aspects of IP to universities, public research institutes
and public-private research and technology organisations and to the business sector (SMEs).

There are also other public or private institutions that are in charge of SMEs and entrepreneurship
development. The key ones are mentioned below. The Croatian Chamber of Economy and Croatian
Employers Association are two leading organisations representing employers. The former one is more
traditional, with a compulsory membership and stronger linkages to the government, whereas the latter
is voluntary, smaller and more flexible. Both of them have an important role in the entrepreneurial policy
arena, but are arguably not sufficiently active in promoting innovation. CCE has excelled in information
dissemination related to EU accession, whereas CEA has initiated the establishment of the National
Cluster Centre.

CEPOR is the first think-tank in Croatia that deals with SMEs and enterprise policy. Ten institutional
founders of CEPOR are the leaders in their fields of work - from the academic community to business
associations, development agencies and entrepreneurial centres. CEPOR’s mission is to influence the
public and political environment, emphasising the key role of entrepreneurship and SMEs in the
development of the Croatian economy. Its most important activity is carrying out the Global
Entrepreneurship Monitor research, that enables an international comparison of Croatian
entrepreneurship and helps to set priorities and design national policies in the SME sector.

The Agency for Investment and Competitiveness was established in accordance with the Law on
establishing the Agency for Investment and Competitiveness adopted in April 2012 and is not fully
operational yet. Its activity is focused on systematic and operational implementation of policies and
measures to increase the competitiveness of the Croatian economy, with particular emphasis on
encouraging investments. The agency will have two main aspects: strategic one, which is to enable the

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creation of a foundation for making strategic decisions on the level of government and other institutions;
and operating one, which is to work more effectively on the promotion of the Croatian economy and
implement the defined strategies. The Agency will primarily be focused on:

o Encouraging corporate investment and supporting investors in all stages of the investment, as
well as after the completion of the implementation

o Promotion of Croatia as a desirable investment destination

o Supporting the development and implementation of new financial mechanisms to support the
economy

o Encouraging the specialisation of regions in sectors that have the greatest potentials for gaining
competitive advantage in the global market

o Promoting cooperation between public, private and scientific research sectors for the
development and application of innovation, new technologies and research excellence in the
industry

o Harmonizing the needs of the business sector and the labour market

o Designing and managing database development potential and investment projects

To summarise, the Croatian Innovation System is comprised of a large number of bodies responsible
for policy design, implementation and monitoring. The overall system is complex, the linkages between
the institutions within the system are inadequate, and the individual responsibilities of the various bodies
are often overlapping (for example when it comes to implementation of EU funding programmes), which
makes it almost impossible to ensure a coherent strategic approach in innovation development on a
national level. In addition, some of the bodies (with the emphasis on councils) that have been established
to ensure better inter-ministerial coordination do not appear as active stakeholders at all. Another
problem emphasised by the stakeholders who participated in the focus groups held during the
preparation of this report, was the lack of business experience of the people working in innovation-
related institutions.

However, it seems that this problem was recognised by the new Government, elected in December
2011, which introduced several measures with the aim of increasing the competitiveness of the Croatian
economy. With reference to the innovation system, recent measures include merging the Croatian
Institute of Technology to BICRO, a new Law on Croatian Science Foundation and new draft Law on
Science and Higher Education. A positive step forward is the cooperation between MSES and MoE in
drafting the innovation strategy. All of these changes, together with the new innovation strategy, should
significantly contribute to increasing the innovation capacity of the overall Croatian economy. However,

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the impact of these measures remains to be seen in the future and additional efforts should be invested
in creating an environment that stimulates innovation.

3.3 Discussion of the main market and systemic failures

Research and innovation have not been considered as key drivers of competitiveness and job
creation. They are pushed to the margins of other priorities such as budget deficits, wage insurance and
pensions, European integration, agricultural policy, fight against corruption, etc. The policy debates about
the role of innovation are underestimated in policy circles and often restricted to academic and
professional communities. This is due to the low awareness of political and business elites about the
critical role of innovation and insufficient communication among key innovation stakeholders about
knowledge-based strategic development and visions. Administrative burdens and complicated regulations
hinder innovation in companies.

Some of the main structural challenges the Croatian NIS is currently facing include (Švarc & Račić,
2012):

The lack of strategic, coherent and integrated policy framework

The development and adoption of the new policy is currently being undertaken. The key gaps that
need to be addressed are related to the creation of a strategic development vision tightly based on
national sources of competitive advantage and related to policy implementation mechanisms. A
structural deficiency is also the lack of coordination between different bodies responsible for innovation
policy, as well as inadequate planning and evaluation processes which are either underdeveloped or
missing.

However, these challenges have been recognised and a new innovation policy is being planned. In
addition, EU accession and implementation of regional (NUTS 3) development strategies for the period
2011 - 2013 provide some stimuli to innovation policy development. The programme of the new
government is expected to include improvements in innovation policy development and implementation.

A business environment not conducive to innovation

The overall business environment creates disincentives to innovation. Its key features includes
inefficient state administration (sometimes prone to political voluntarism) at central and local levels,
access to finance dominated by bank credit (with relatively shallow and illiquid capital market), high costs
of utilities and local services, widespread deficiency of mutual payment, limited state support to
innovation, and weak linkages between the education sector and the labour market. Consequently,
enterprises with more ambitious business strategies based on innovation and higher governance and
competitiveness standards are likely to be burdened by high risks and costs.

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 In order to improve the overall business environment, the state administration reform has been
initiated by the previous Government, but it has progressed very slowly. The Government improved the
availability of credit and equity financing through programmes of the Croatian Bank for Reconstruction
and Development.

The Draft law amending the Law on Science and Higher Education from 2003 has been initiated by
the new Government elected in December 2011 to reform the science and higher education sectors.

Low technology capability and R&D expenditures of companies

Innovation and R&D occupies a marginal role in the development strategies of most Croatian
companies. Although the level of business R&D expenditures is higher than in some new EU member
states, this performance is clearly insufficient. Innovations are mainly incremental and forced by survival
on the domestic market than a result of a meaningful and long lasting strategy for competition on
international markets.

According to Švarc & Račić, the policy measures in this domain have been appropriately designed.
Exploratory research related to RAZUM and IRCRO undertaken by the Institute of Economics (2011a)
indicates that these measures contribute to increases in R&D activities. Effectiveness of policy measures
is constrained by their limited budgets.

Tax exemptions are mostly claimed by medium-sized and larger companies, as has been
demonstrated by the Institute of Economics (2011b). Tax exemptions are conducive to their parent
companies allocating their R&D budgets to Croatia. However, the effect of tax exemptions on increasing
the level of R&D activities remains to be evaluated.

Inadequate technology transfer mechanisms

Knowledge production and circulation needs to be significantly improved in order to create

preconditions to more effective innovation processes. The overall productivity of Croatian scientists was
above the average productivity in the world (Podobnik and Biljaković, 2008), but achieving research
excellence, effective technology transfer and the international recognition of the Croatian universities
would require additional efforts. Although the number of Seventh Framework Programme projects with
Croatian participants is increasing, performance can still be improved. Both inward and outward mobility
of researchers in Croatia is unsatisfactory.

The key areas of potential improvements include internal quality assurance mechanisms, university
integration and the development of new institutional funding for both universities and public research
organisations, as well as the evaluation of institutions and their performance. Internal and external
quality assurance mechanisms are being developed through the activities of the Agency for Science and
Higher Education. Collaborative projects between science and industry should be further supported and
their development should be systematically monitored.

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 The Labour Law on the national level established a basic set of rules for dealing with employee
inventions and technical advancements, while Copyright and Related Rights Law established rules for
dealing with employee copyright issues. These rules consequently apply to all University employees. Since
the basic rules attribute 100% of IP rights to the institution, there are no incentives to the individual
researcher for filing a patent.

Weak regional innovation systems

There is significant lack of data on sectoral or regional aspects of innovation performance. However,
on the basis of available evidence it can be concluded that regional innovation systems are weak. This is
related to the overall centralisation of the country, as well as the limited role of regional actors (e.g.
regional development agencies and academic institutions) in innovation policy. The role of universities as
vehicles of regional development has so far been only partially recognised – partly due to the lack of
university integration which would lead to a unified strategy and the development of common interfaces
that would link the university and its environment.

It is likely that the current policy measures will be insufficient to facilitate a stronger development of
regional innovation systems – new policy responses at the regional level should thus be developed.

Key policy responses include:

Regional development strategies (at NUTS 3 level) for the period 2011 - 2013 include measures
related to research and innovation - usually through enterprise development, science-industry
cooperation and the development of technology infrastructure.

Some national innovation policy measures (e.g. Proof of Concept) are implemented at the
regional level.

Analysis of regional labour market has been undertaken in late 2010 by the Croatian
Employment Office.

The Network of Higher Education Institutions was defined in 2011 by the NCHE.

3.4 Policy instruments

The main policy instruments aimed at funding and promoting research and innovation can be
categorised in several main groups. These are:

Research and innovation measures

Scientific research measures

Fiscal measures

Human resources measures

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 International programmes

The MSES is the key institution financing research and innovation activities in Croatia. The Ministry
allocates the state budget resources directly to beneficiaries or through other institutions responsible for
the implementation of different policy measures, such as BICRO, the Croatian Science Foundation, the
Agency for mobility and EU programmes and, until recently, the Croatian Institute of Technology.
However, with the new Law on Croatian Science Foundation, the funding of scientific projects has been
transferred from the central public administration (MSES) to the Croatian Science Foundation as a
professional institution.

The MoEC and HAMAG – Invest also plays an important role in funding innovation activities in
Croatian companies and associations of innovators, as well as funding entrepreneurship (including
innovation) infrastructure.

Unfortunately, the effects on innovation and socio-economic development remain fairly modest.
Besides, the aforementioned five structural challenges which hinder innovation are not appropriately
addressed through the policy mix.

When it comes to public-private partnerships, this form of financing still has not had a significant
effect on innovation funding in Croatia. However, it may gain importance in innovation financing in the
future – for example in the case of new the science and technology parks and similar infrastructure.

3.4.1. Research and innovation measures

The Croatian policies that support research and innovation activities can be grouped in four main
categories based on their overall goals:

Strengthening science-industry cooperation

Supporting innovation-based companies

Development of technology and innovation infrastructure

Development of venture capital.

Strengthening science-industry cooperation

Science–industry cooperation measures include different programmes such as Technology oriented

projects (TEST) managed by BICRO (until recently by HIT), Collaborative research development (IRCRO)
managed by BICRO and “Science and Innovation Investment Fund“, developed under the IPA programme.

Technology oriented projects (TEST) is one of the oldest and most important programmes
implemented in Croatia in the field of research and development. The programme provides state
subsidies for applied research in the field of technology, with an emphasis on high technology. The
programme co-finances research projects initiated by Croatian scientists to support new technology
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development and leads to further commercialisation of new products or services. Funds awarded through
the programme are based on a general public call. If necessary, the specific calls for support for certain
types of research and development activities can be published as well.

The duration of projects from the TEST programme is 12-36 months. The maximum financing
amount is not specified, but in most cases projects are being financed at HRK 300.000-3.000.000. Eligible
costs include equipment, external expertise, labour costs and operating and material expenses, as well as
costs related to IPR and certification.

According to the HIT official website data, the TEST statistics for the period 2007-2012 include 13
completed projects, co-financed with around HRK 18.5 million (around EUR 2.5 million) and 18 ongoing
projects with concluded co-financing agreements and agreed co-financing of around HRK 28.4 million
(EUR 3.8 million).

No official evaluation of the TEST programme has been undertaken so far. However, the scientific
article (Švarc et al., 2009) provided an insight into its results , i.e. achieved results of the projects co-
financed through the TEST programme until 2007.

The main conclusions are as follows:

The TEST programme led to an important achievement by introducing various organisational

and formal institutional measures in standard science policy. These include: the formation of
the Technology council, new application procedures, monitoring and evaluation of projects, the
orientation of research toward actual application, the cooperation of science and industry.

Most of the research results of the TEST projects have been used for scientific purposes or have
not been used at all. Around 15% of projects were commercialised, while around 40% of project
results served as a basis for further cooperation with the industry. Around 75% of TEST projects
failed to commercialise the research results, despite the fact that participants have met all of
the required formal and administrative conditions of the programme.

The project evaluation process was very detailed and included two independent evaluators, the
evaluation of the Technology council, and public presentation of the project.

The programme mobilised mostly the scientific community, with only 20% of project ideas
coming from industry.

Funding resources were mostly provided by the MSES, while the participation of companies in
project financing was weak – around 62% of projects did not receive co-financing from
companies, 27% of projects were co-financed from companies with up to 30% of total project
budget, and only 12% of projects received funding from companies in the amount of over 30%
of total project budget.

Project results were mainly scientific, with 21 patent applications.

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 The commercialisation of project results was not the main goal of project applicants. Around
65% of respondents applied to the programme in order to gain additional experience in
cooperation with the industry, 64% of the respondents expected to purchase equipment mainly
used in scientific and educational work and 50% aimed at gaining additional financial resources
for their scientific project. The actual application of research results is positive, but not the main
motivation for participation in the TEST programme.

The Research and Development Programme (IRCRO) aims at encouraging small and medium-sized
enterprises to establish R&D activities. The programme is administered by BICRO and intends to
encourage and stimulate the demand for services of public research institutions, as well as to encourage
SMEs to invest in R&D activities. The Programme envisages the utilisation of extensive facilities available
within the universities and research institutions in the country. Projects under the IRCRO Programme
involve cooperation between an industrial firm and research/academic institutions and are jointly funded
by the IRCRO programme and the industrial company involving a 50/50 matching grant scheme. Thus, the
private sector participates 50% in the funding of R&D activities. The main policy priorities tackled by the
IRCRO programme are the creation of science-industry linkages by stimulating the demand for services of
public research institutions, as well as encouraging SMEs to invest in R&D. Eligible costs include
equipment, external expertise, and other costs (facilities, materials and consumables, fees payable to
technology institutions, project-related travel and overhead expenses.

In the period 2007-2010, a total of 43 project applications were submitted for co-financing from the
IRCRO programme. A total of 17 projects were approved for co-financing of HRK 13 million (around EUR
1.73 million).

In 2011, six new projects were approved for co-financing from the IRCRO programme, with approved
co-financing of just over HRK 3.5 million (around EUR 467,000).

No new projects have been approved for funding in 2012, since the official public call for
applications ended in 2011 and the new call has still not been published due to the lack of funds.

The IRCRO programme was officially evaluated for the first time in 2011 by the Institute of
Economics (2011a). The evaluation results were published in May 2012 and consist of two main parts -
the analysis of IRCRO projects and the main conclusions and recommendations to improve the
programme.

Out of 20 programme beneficiaries, a total of 18 projects have been analysed by the Economic
Institute. Out of these 18 analysed projects, five finished the research-development phase, while the
remaining projects were in the research and development phase. Five IRCRO projects started in 2008, six
in 2009, four in 2010 and three in 2011.

The total financing for the analysed projects amounted to HRK 10.5 million (around EUR 1.4 million),
while the enterprises contributed with HRK 12.5 million (around EUR 1.7 million). The evaluation results
indicate that the contracted financial resources had been sufficient to complete the project in the case of

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nine projects. In the case of the remaining nine projects, the contracted financial resources were not
sufficient for project completion.

Most of the enterprises included in the research had not cooperated with science and research
institutions before entering the IRCRO programme. Based on the research data, the evaluators concluded
that participation in the IRCRO programme enabled the cooperation between science and research
institutions with one part of the participating companies, and contributed to strengthening the linkages
between the economy and science.

The main benefits for the participating companies have been the access to favourable financing for
R&D projects and an increase in their competitive position in the domestic and international markets.
Based on the evaluations of the analysed companies, their R&D activities would have been performed on
a significantly smaller scale, which indicates that IRCRO projects have helped increase the R&D activities
of SMEs. In addition, without the IRCRO financing, the implementation period of the projects would have
been significantly longer, which indicates that the IRCRO programme contributed to shortening the time
cycles of the implemented projects.

Although only five companies have completed the R&D phase, eleven projects already started with
some form of commercialisation activities.

The main conclusions of the evaluation are as follows:

Given the fact that the IRCRO programme efficiently achieved its goals, the evaluators
concluded that the IRCRO programme should be continued in the future.

The entrepreneurs expressed a high level of satisfaction with the programme, and the IRCRO
financial support has been rated as very important by analysed companies and projects.

The main recommendations to further improve the programme are to:

Improve the communication about the IRCRO programme, in order to ensure that the necessary
information about the programme is available to all potential beneficiaries.

Improve the planning project phase and its evaluation, in order to minimise the number of
projects in which planned financial resources prove to be inefficient for project completion.

Encourage the creation of a database of services that the scientific community can provide to
the economy, in order to help companies find partners from the scientific community.

Develop additional programmes that would assist companies in commercialising the results of
IRCRO projects.

The Science and Innovation Investment Fund was developed through the IPA programme to
enhance technology transfer and the commercialisation capacities of HEIs and PROs. Ultimately, the idea

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was that this would contribute to sustainable regional development and increase the competitiveness of
high value added sectors of the economy and knowledge-based SMEs. The programme supports
innovation commercialisation in the public R&D sector in order to bridge the gap between the pre-
commercial and commercial phases of R&D in Croatia, and thus create a productive environment where
innovation capacity can develop.

The SIIF grant-scheme project was launched on 28 May 2009 with an overall budget of EUR 5 million.
According to the Call for Proposals the SIIF grant-scheme covers nearly all possible activities in the area of
technology transfer. In terms of beneficiaries, the call for proposals is limited to HEIs and PROs.

Technical Assistance to SIIF was launched on 4 January 2010 to help SIIF build a project pipeline
through training and advisory services for project applicants, providing on-going help for grantees during
the implementation period of the projects. The Technical Assistance period is foreseen to last until July
2012.

There is no publicly-available evaluation of the programme’s success.

The main mission of the Unity through Knowledge Fund (UKF) is to unify the scientific and
professional potentials in Croatia and the Diaspora for the development of the Croatian society based on
knowledge. The programme was launched by the Government of Croatia in 2007, represented by the
MSES and supported by the World Bank Loan. The International Labour Organisation was elected as an
example of good practice in promoting the linkages between migration and development by providing an
opportunity for Croatians from Croatia and the Diaspora to contribute to scientific research and
enterprise development, as well as facilitating their professional advancement. The evaluation
undertaken by the Institute of Economics (2011a) indicated that the UKF projects led to substantive
research results, new academic collaborations and projects funded by international (FP7 and other)
sources. Some opportunities for commercialisation have also emerged, but that is an area which requires
improvement.

In the period from December 2007 to March 2011, 80 scientific and technological projects were
launched, 30 of which are still ongoing and the funds committed totalled over EUR 5.3m. In the same
period 299 project proposals were submitted to all UKF Fund Programmes and the overall funds
requested amounted to about EUR 30m.

UKF project performance indicators related to the number of scientists involved in the projects
(domestic, foreign, Diaspora), number of institutions involved (domestic, foreign), number of partners
from the industry, and the total amount of matching funds ensured by the economy sector already show
good programme results.

Project performance indicators related to the overall number of scientists and experts, particularly
foreign scientists and institutions involved in the UKF projects, show an intense transfer of knowledge
and technology has been achieved.

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 Good results were also achieved in the promotion of scientific projects and their recognition by the
industry that invested additional funds in UKF projects.

In addition, the Fund was elected in September 2009 by the International Labour Organisation as an
example of good practice in promoting the linkages between migration and development.

The World Bank Loan, the main source of financing for the UKF, was closed on May 3, 2011 and all
calls for applications were closed in April 2011.

Supporting innovation-based companies

Support for innovation-based companies involve mainly BICRO’s programmes, such as RAZUM
(Development of the knowledge-based companies), KONCRO (Competitiveness and technology process
advancement) and the Proof of Concept (PoC) programme. The MoEC, in cooperation with HAMAG
Invest, also supports innovation-based companies through several measures, based on yearly public calls.
These measures include the Innovation Development and Application project, the “Increasing
international competitiveness” project, the New technologies project, the Gazelles project and other
programmes, which are not necessarily oriented towards innovation activities, but support them within
other priorities.

The Development of the knowledge-based companies (RAZUM) programme is aimed at the

development of new-technology-based enterprises and academic entrepreneurship. The programme
provides support for the commercialisation of products and services whose market value is primarily
based on the results of R&D and which are (or may become) internationally competitive.

The RAZUM programme provides financing to start-ups or established SMEs that are undertaking
applied research leading to new or improved products or services. The subsidies are only available for
projects which are at the pre-commercial stage of development. The projects that already include
investment in manufacturing or service facilities are evaluated by RAZUM, but can only be financed by
the Croatian Bank for Reconstruction and Development.

The actual expenditure in 2011 and planned budget for 2012 are still not publicly available. Within
the State Budget, a total of EUR 674,666 in 2011 and EUR 666,667 in 2012 have been allocated for the
RAZUM programme.

In the period 2007-2010, a total of 31 projects were approved and 22 were contracted, while a total
of six projects in the category of commercial projects were directed to the Croatian Bank for
Reconstruction and Development.

The contracted resources for these 22 projects amounted to HRK 105,375,444 (EUR 14,050,059). Up
to 31 December 2010, a total of HRK 70,964,609 (EUR 9,461,948) was paid to the beneficiaries.

There is no publicly available data on actual payments in 2011 and 2012.

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 The RAZUM programme was officially evaluated for the first time in 2011 by the Institute of
Economics (2011a). The evaluation results consist of two main parts - the analysis of RAZUM projects and
main conclusions and recommendations to improve the programme.

The main results of RAZUM projects evaluation are as follows:

The main expected results of the approved projects are new products or prototypes, aimed at
international markets in 95% of all projects. For about half of the companies, the expected
project result is a patent, which leads to the conclusion that the innovation level of RAZUM
projects is very high.

Most of the companies had conducted innovation and research activities before participating in
RAZUM. However, thanks to their participation in RAZUM their science and research capacities
significantly improved, mostly through the employment of new experts and knowledge transfer.
The participation in the RAZUM programme also led to positive effects on other projects
implemented by the participating companies, mostly through the creation of new ideas and
implementation of the new knowledge. The most important benefit of participating in the
RAZUM programme expected by companies is the improvement of their international
competitiveness.

Around 35% of the participating companies have cooperated with science and research
institutions, while 65% have cooperated with other companies. Based on the respondents’
evaluation, it has been estimated that around 30% of companies would have not begun the
implementation of their projects in the planned scope without the RAZUM programme. Without
support, other companies could have started the project, but project development would have
lasted significantly longer, planned activities would have been reduced and the increase in
science and research capacity would probably not have been achieved. Based on the results, the
evaluators concluded that the RAZUM programme had a significant impact on innovation
development and the improvement of research and innovation capacities in companies that
were beneficiaries of the RAZUM programme.

As the RAZUM programme finances R&D activities up to the prototype development, companies
have to implement the commercialisation activities themselves. Around half of the companies
expect difficult commercialisation, and around 85% expect to need the additional financing of
the commercialisation activities. Companies plan to acquire the necessary financial resources
internally or through strategic partnerships, while only a small share of companies turns to
venture funds and banks. A potential danger is the inability of the company to acquire financial
resources for commercialisation activities.

The main conclusions of the programme evaluation were the following:

Overall, the RAZUM programme achieved its specified short-term goals and its implementation
should continue in the future.

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 The medium-term goals still cannot be evaluated since the programme has only been
implemented for a short period of time (since 2006).

The participating companies have expressed a high level of satisfaction with the programme and
financial contributions have been evaluated as very significant.

The main recommendations to improve the programme were to:

Design new programmes with the aim of supporting companies during the commercialisation
process of the results achieved within the RAZUM projects. The new programmes should
include financial assistance and transfer of marketing and other necessary knowledge.

Further improve the programme visibility, in order to ensure that all potential participants have
all the necessary information on the programme.

Shorten the time period between the application and decision on financing.

Further improve the project planning phase and its evaluation to avoid situations where
planned financial resources prove to be insufficient for project completion.

The KONCRO programme provides support to high technology SMEs that want to hire consultants in
order to acquire technology and management competences, develop new products and processes,
enhance productivity and quality of their products or invest in environmental protection.

The KONCRO support is provided by subsidising consultancy services related to these areas. The
project may involve product design and development, IPR protection, marketing activities, restructuring,
process improvements and standardisation, environmental protection etc. The applicants need to
demonstrate that the project will enhance their competitiveness. They are obliged to hire consultants
that have been pre-approved by BICRO. Due to a lack of available funds, the KONCRO programme was
postponed in 2009 until further notice.

The Proof of Concept (PoC) Programme was created to ensure pre-commercial capital for technical
and commercial testing of innovation concepts. The programme was first introduced in 2010 and has
achieved significant results in terms of the number of applications and the quality of applied projects.
Through the programme, the applicant can receive a grant of between HRK 35,000 and 350,000 (EUR
4,700 – 47,000) to cover external expenses incurred during the commercialisation of new products and
processes. The programme is implemented with the help of eleven recognised centres that provide
support to applicants in the preparation of project applications, which are then forwarded to BICRO and
enter the evaluation process. Evaluation procedures are transparent and effective, which is one of the
reasons for the continuous increase in the number of applications.

The activities eligible for funding under the PoC programme include: the protection of intellectual
property, the demonstration of technical visibility, and the development of a functional prototype. In
addition to these three basic activities, the funds can be used for market analysis, business planning,

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concept development and/or strategies for the development and commercialisation of products and
business support for the establishment of market viability.

A total of four public calls have been published so far, with the number of applications growing each
time. In 2010, a total of 284 pre-applications and 159 full applications were receivedthat required a co-
financing amount of HRK 29.4 million (EUR 3.9 million). A total of 46 applications were approved and the
amount of PoC resources for these applications amounted to HRK 8 million (EUR 1.07 million). In 2011,
the third public call was published, which resulted in 33 approved projects. During the fourth public call
(published in 2012), a total of 241 project applications were received, applying for almost HRK 60 million
(EUR 8 million), with a private sector participation of an additional HRK 30 million (EUR 4 million). The
requested amount was around 12 times higher than the total programme budget, which amounted to
HRK 5 million in 2012, which indicates a problem of underfunding.

Due to this high interest and ensuring better regional coverage of the programme, six new centres
have been included in the programme – Istrian Development Agency – IDA, Zagreb Development Agency
– TPZ, Pakrac Entrepreneurial Centre, Zadar County Development Agency – ZADRA, The Ruđer Bošković
Institute and BIOS Entrepreneurial Incubator19. These centres have an important role in the programme
implementation, since the first contact with potential applicants is established through these centres,
which provide the support during projects preparation and application.

The Innovation Development and Application project is aimed at providing support to increase the
capacity for research and innovation, with the goal of the development of small and medium
entrepreneurship. Support is provided to SMEs and associations of innovators in the form of grants by the
MoEC. The budget in 2012 amounted to HRK 11 million. The minimum grant was HRK 15,000 (EUR 2,000)
for associations of innovators and HRK 30,000 (EUR 4,000) for SMEs, while maximum individual grants
amounted to HRK 150,000 (EUR 20,000) for associations of innovators and HRK 300,000 (EUR 40,000) for
SMEs, with the co-financing rate up to 85% of eligible costs. Eligible activities include the protection of
industrial ownership, the development of a new product and/or service and presentation of innovations
and new products.

Through the Increasing the International Competitiveness project, the MoEC provides financial
support in the form of grants to SMEs for individual and joint participation on international fairs,
enhancing the competitiveness through the development of new products, preparation activities for
introduction of new or existing product to new markets, and the organisation of trade missions in
international markets. The budget for 2012 amounted to HRK 25 million. Currently published results (30
August 2012) on awarded grants indicate that, within the programme, a total of 96 companies received
grants totalling HRK 18.2 million (EUR 2.4 million). The highest grant awarded was HRK 550.000.

Within the New Technologies project, HAMAG allocated HRK 22.5 million (EUR 3 million) of budget
resources for co-financing investments in the development and procurement of new technologies and

19
In addition to the TECHRO centres that participated in the programme from its beggining

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application of knowledge in production processes. The lowest individual grant was HRK 50,000 (EUR
6,667) for micro enterprises and HRK 150,000 (EUR 20,000) for SMEs, while the highest individual grant
amounted to HRK 250.000 (EUR 33,333) for micro enterprises and HRK 700,000 (EUR 93,333) for SMEs,
with the co-financing rate up to 85% of eligible costs. In 2012, all of the allocated resources have been
allocated to 61 beneficiaries.

The Gazelles project supports the most successful companies in their business activities in relation to
investment aimed at technological development, innovative business solutions, innovation application,
and strategic business and management. Individual support varies between HRK 200,000 and 700,000
(EUR 26,667 to 93,333), with a co-financing rate of up to 100%. The overall budget of this measure,
implemented by the MoEC, amounted to HRK 10 million (EUR 1.3 million) in 2012. In the period 2008 –
2011, the programme supported 68 beneficiaries, for a total amount of HRK 26.5 million (EUR 3.5
million).

Development of technology and innovation infrastructure

Measures aimed at technology and innovation infrastructure include the TECHRO programme of
BICRO, which supports the development of infrastructure for science–industry cooperation such as
technology parks, transfer centres, etc., and the supporting programmes of the MoEC for innovation
infrastructure such as entrepreneurial zones, business incubation centres, development agencies,
technology park clusters, etc. The planned budget of the Ministry for improving business infrastructure in
2012 amounted to HRK 56.3 million (EUR 7.5 million).

The TEHCRO programme provides financial support to establish organisations that provide facilities,
advisory services, and overall support to technology transfer and the commercialisation of research
results. These organisations provide the necessary resources and stimulating conditions for new
technology-based firms. The programme provides support to establish technology transfer centres,
business incubators and R&D centres.

In particular, the TEHCRO programme includes:

setting up specialised technology incubators for life sciences, including nanotechnology and ICT

setting up technology transfer centres

providing equipment for the aquaculture R&D centre founded by the University of Dubrovnik
and co-financed by the International Bank for Reconstruction and Development.

The applicants to the TEHCRO programme are consortia that must include a public body (e.g. a
regional development agency) and an R&D partner (public or private). Other private partners may also be
included (but they cannot hold a controlling stake in the consortium). Following a successful TEHCRO
application, a special purpose vehicle (SPV) needs to be founded; it is required that such an SPV be
registered as a non-profit limited liability company. The management of that company is then outsourced
to a private company selected through a public tender. The subsidies provided through the TEHCRO

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programme may last up to five years. From then onwards, it is expected that the company will become
self-sufficient.

Project evaluation is conducted on the basis of eligibility criteria and selection criteria. Project
applications that meet the eligibility criteria are forwarded to the evaluation of independent experts. The
experts evaluate the content of the project according to the degree of compliance with the criteria for
selection. At the same time, BICRO performs financial and economic analysis of the project.

Eligible costs include labour costs (including overheads), infrastructure (buildings), equipment,
training (including study trips) and external expertise (consultants, studies, etc.).

A total of six technology parks / technology transfer offices have already been financed, while a total
of eight technology parks, TTOs and incubators are currently being financed through the programme.

Although no official evaluation of the TEHCRO programme was performed, its success can be
evaluated from the perspective of companies that are residents of the centres financed through the
TEHCRO programme.

TEHCRO centres reported a significant increase in their activities, including:

781 requests received for the provision of services of the TEHCRO centres;

196 feasibility studies, business plans and other studies conducted;

28 newly established companies (start-ups) entering the incubation programmes;

51 events held on entrepreneurship promotion, 41 educational programmes for SMEs and the
scientific community with a total of 1.677 registered participants.

By the end of 2010, a total of 52 companies were residents of the TEHCRO centres, with 484 full-
time employees, out of which 177 were high value-added jobs, i.e. R&D posts. A total of 38 resident
companies had benefited from the incubation programmes.

In the period 2008-2010, a total of 217 new jobs were created in resident companies of the TEHCRO
centres. The total income of these companies amounted to HRK 413 million (EUR 55 million) in the period
2008-2010.

The estimated value added created by the resident companies amounted to HRK 160 million (EUR
21.3 million), and companies achieved a net profit of HRK 18 million (EUR 2.4 million).

Since the beginning of the programme up to end of 2010, a total of 12 pre-applications and 18 full
applications for the participation in the TEHCRO programme have been received, applying for HRK 101
million (EUR 13.5 million). A total of 12 projects have been approved. By the end of 2011, six projects
have been completed and eight projects were in process. In 2010, one project was contracted, two
projects in 2011 and, so far, none in 2012.
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 The amount of contracted financial resources from the TEHCRO programme amounted to HRK 75.6
million (EUR 10.1 million). By the end of 2010, a total of HRK 42 million (EUR 5.6 million) has been paid to
the TEHCRO beneficiaries.

Based on the data above, it can be concluded that the TECHRO programme has proven to be very
successful and resulted in a significant improvement of the Croatian innovation and technology
infrastructure.

Development of venture capital

Measures for the development of venture capital include a single programme “VENCRO” run by
BICRO, but the programme is still not fully operational due to the lack of financial sources and interest of
potential private partners.

3.4.2. Scientific research measures

Scientific research policies are measures aimed at funding and promoting research activities within
the scientific community, and usually comprise the main instruments for the allocation of State Budget
funds to public research organisations.

The programme Research projects (Z-projects) is administered by the MSES. The main aim of the
programme is to support the long term scientific research activities of strategic national interest carried
out by research institutes and universities. The programme covers the operational costs for research
projects in all fields of science. This is the main instrument for the allocation of competitive-based
research grants from the State budget in Croatia at the national level. However, as the focus group
(OECD, 2012) discussion revealed, evaluation is not strict (e.g. 84% of submitted projects have received
support in 2007) and funds are spread too thin across a large number of small projects. While such a
system contributes to the development of a wide and balanced national research base and to the
diversification of scientific disciplines, the main criticisms of the programme are related to the weak
competition process and the large number of projects which do not individually reach a critical mass of
researchers and resources. Efforts to support large collaborative projects have remained limited. Funding
needs to be used in a more productive way and increasingly targeted at excellence.

The key policy priority of the programme is to support and maintain the scientific activities in Croatia
on a wide thematic basis. The programme is horizontal in nature and covers six fields of science: natural
sciences, technical, biomedical, biotechnical and social sciences, and humanities. The same classification
by scientific disciplines is used by the MSES to coordinate, monitor and administer all research and
research related activities.

The expected results of the Programme are research publications. All research publications resulting
from the Programme are publicly available through the Croatian Scientific Bibliography (CROSBI) which
stores scientific papers published from 1997 onwards. The list of projects accepted for financing is
available on the web page of the MSES.

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 The programme contributes to the development of the entire research system in Croatia. Its success
can be measured by the number of projects approved and by the awarded research grants. Currently, the
MSES supports about 2300 projects while the state budget for this programme has been increased from
2002 to 2006 by EUR 6.6 million, or 52%.

There is no formal evaluation of the Programme as a whole. Progress is usually evaluated through
the overall improvement of the scientific system and scientific excellence in Croatia. However, on a
project level, the programme uses three kinds of evaluation: ex-ante, interim and ex-post evaluation. Ex-
ante evaluation is implemented by the Assessment groups nominated by the NCS in order to accept or
decline project proposals. The ranking of accepted projects is publicly available on the Internet page of
the MSES. The results achieved by the research projects are evaluated on an annual basis (interim
evaluation) and upon finalisation of the project (ex-post evaluation). The achieved results determine the
chances of researchers obtaining a new project in the following project cycle. The main criteria include
scientometric and bibliometric analysis (i.e.number of scientific papers in highly-ranking international
journal and cited in the specialised databases like CC, Web of Science, etc).

The programme Research projects of the Croatian Science Foundation (CSF) complements the
programme Research projects (Z-projects) administered by the MSES. Unlike the programme of the MSES
which serve to maintain the national science base and whose acceptance rate of submitted projects is
above 80%, the CSF aims to support only scientifically excellent projects, meaning about 20% of project
applications. The ultimate goal is to create a critical mass of research groups that will be competitive at
the international level.

The programme was launched in 2010 and no evaluation has been performed so far.

The programme “Applied information technology projects” (I-Projects) was launched by the MSES
in 2000. The Programme supports the development and application of new methods and procedures of
information and communication technologies in the following areas:

education – to improve teaching processes and encourage students to use e-learning

science - to support research activities and the system of scientific information

all other areas of activities with the aim of building the information society

The beneficiaries of the programme are research and higher education institutions registered with
the MSES in Croatia.

The last 26 projects were approved for financing in 2009, based on the 2008 public call. No further
public calls have been published since then.

The programme “Research equipment” is administered by the MSES. The main aim of the program is
to provide financial support from the State budget for the procurement of scientific equipment in

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Croatian public research institutes and universities. Such a method for the allocation of state funds for
scientific equipment has a long tradition in a science policy.

The Croatian government tries to invest heavily in scientific infrastructure and technical equipment
to overcome decades of neglect of research infrastructure during the transition period and to enable
Croatia to successfully compete in the ERA. According to available estimates, over EUR 30 million was
invested between 2001 and 2005 in research infrastructure, including scientific equipment.

However, due to the economic and financial crisis, the budget for scientific equipment has been
reduced.

The programme “Partnership in basic research” was created to attract non-budgetary investment in
basic research at Croatian universities, public institutes and other research institutions, primarily from
industry and entrepreneurship. Only project proposals that ensure at least 50% of funds from other
partners, preferably from private companies, are eligible for funding. The programme enables the
establishment of collaborative research projects between public higher education institutions and
scientific institutes with partners from industry and entrepreneurship (from Croatia and abroad). The
programme was launched by the Croatian Science Foundation (CSF) in 2005 on the basis of the Strategic
plan of the SCF for the period 2004-2008.

3.4.3. Fiscal measures

Fiscal measures to promote private investments in R&D involve tax relief and the exemption of
custom duties for importing research equipment. The Government initiated the first fiscal instruments in
late 2007 by the decision on the state aid for R&D and innovation in the form of tax reductions for
companies. In the area of corporate tax deductions, there has been a reduction on income tax for R&D
activities within companies since 2004 as stipulated in the Law on Income Tax (OG 177/2004) and
Instructions on Income Tax (OG 95/2005).

The new regulations on the reduction of profit tax for R&D activities in companies are formulated
under the Law on the Amendments and Supplements to the Scientific Activity and Higher Education Law
(OG 46/2007). The new regulations simplify the old regulations on profit tax and harmonise them with EU
rules. Regarding the profit tax, taxpayers can lessen the tax base for justifiable costs of scientific and
developmental research projects according to the following rules:

50% of justifiable costs for fundamental research

25% of justifiable costs for applied research

100% of justifiable costs for developmental research

The tax base may be changed due to the size of a company. Recent analysis (Aralica at al., 2011)
reveals that tax incentives are a more generous form of state aid for R&D than support measures and
subsidies. Namely, several large business R&D performers claim tax incentives that exceed the overall

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public R&D subsidies. Evidence can be found in corporate financial reports. For example, in 2009 subsides
amounted to less than a third of aid granted by the tax incentives. Although over 270 companies used tax
incentives, 90% of the total tax incentives is realised by a small number of companies: 9 in 2008 and 27 in
2009. This indicates that a few companies conduct large research projects and the concentration of tax
incentives into a small number of users is present. However, tax incentives have proven to be a great
assistance to companies and have some effects of additionality (increase the investment of companies in
R&D), as was confirmed by the Institute of Economics (2011b).

3.4.4. Human resources measures

The human resources development for science and technology in Croatia relies on two basic types of
programme implemented at the national level. The first type of programme is aimed at rejuvenating the
scientific community; encouraging a sufficient inflow of young researchers and attracting the interest of
young people in pursuing a scientific career.

The most important programme is the Junior Researchers Programme, which provides new
employment positions for young researchers at institutes and universities as well as support for their
training and education. The top 10% undergraduate students can apply for this programme. In the 15-
year period of the programme, the number of young researchers employed as research/teaching
assistants has increased significantly from 915 in 1996 to 2,945 in 2009. A majority of them are employed
at universities (73%). However, the dropout rate of doctoral students is r high. Between 2002 and 2009
around 1150 (46%) PhD students left the junior research programme without earning their doctoral
degrees.

The Croatian Science Foundation (CSF) also manages three programmes. Two of them provide
support for the training of doctoral students via Fellowships for Doctoral Students and National Research
Training Courses and Summer Schools while the Science Award programme promotes scientific work
among students by presenting an award for the best student research works.

The second type of programme encourages research cooperation and mobility between Croatia-
based and expatriated Croatian scientists with the ultimate goal of motivating the expatriates to return
home. The most important programmes were managed by the UKF. Since the World Bank credit loan
which supported UKF expired in 2010, the programme is currently closed.

The Brain Gain programme is managed by CSF and consists of the five sub-programmes entitled:
Visitor, Senior, Postdoc, HRZZ Installation Grant, and the Homing Programme. The latter provides
returnees with significant financial means for research infrastructure (about EUR 100,000) while the HRZZ
Installation grant supports the independence of young scientists working in Croatian educational and
research institutions. However, the Brain Gain sub-programmes are currently closed and there is no
information on future activity.

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 Aside from the national programmes, there are also various international programmes aimed at
promoting education and the international cooperation of students and scientists. These programmes are
implemented by the Croatian Science Foundation and Agency for mobility and EU funds.

The international programmes supported by the Croatian Science Foundation are focused on the
integration of Croatian scientists within the ERA. The programmes include Support for Joining European
Science Foundation Programmes, EMBO Installation Grant, European Social Survey and International
Collaborative Workshops. However, currently there are no open calls for participation in these
programmes.

The Agency for Mobility and EU programmes implements EU programmes in the area of education
science and youth, with the aim of internationalising the education system and enhancing the mobility
instruments for learning. Programmes currently implemented by the Agency include Lifelong Learning
Programme, Youth in Action, CEEPUS and EURAXESS. In addition, the Agency promotes FP7 sub-
programmes Energy and Environment and People, as well as Erasmus Mundus.

The international mobility of researchers is of growing importance to Croatia in the context of

researchers’ increasing participation in the Framework Programmes and the implementation of the
Bologna process. The MSES has adopted, in addition to the two mobility programmes for researchers, the
Action plan for overcoming obstacles and enhancing international mobility in education for the period
2010-2012 in September 2010 to fulfil the goals of the Bologna process.

The immigration policies to attract foreign researchers and support their mobility have been
improved over the last few years. The Ordinance on the method of determining requirements for the
approval of temporary residence to foreigners for the purpose of scientific research (OG 42/08) was
adopted, simplifying the involvement of foreign scientists in research projects.

Further plans involve increasing the quota of work permits for foreign scientists who will become
permanent residents of the Republic of Croatia. It is also planned to simplify the Ordinance on the
registry of scientists with regard to the registration of foreigners. Croatian citizenship will no longer be
required for registration, so foreigners will be able to assume the position of project leaders.

In 2009, the MSES established the Committee for Hosting of Foreign Researchers in Croatia to assist
the process of hosting foreign researchers on research projects implemented at Croatian universities and
institutes. Finally in September 2009 the MSES established the Committee for the mobility of researchers,
which prepared the Action plan for the mobility of researchers.

3.4.5. International Programmes

International S&T cooperation, mainly managed by the MSES, primarily focuses on cooperation with
EU member states and multilateral cooperation. The country has also concluded a variety of bilateral
agreements with other countries, but this practice is now gradually being abandoned in favour of direct
inter-institutional cooperation.

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 In order to achieve faster integration of Croatia in the European Higher Education Area and
European Research and Innovation Area the main task is to create conditions for the free movement of
students, professors, scientists and researchers in the field of higher education and science, which is in
the spirit of creating a common European policy of education and research space.

The entire international collaboration of educational, academic and scientific institutions involves
the exchange of different forms of scholarship in all categories, the implementation of common (scientific
research) projects, and the organisation of international conferences and seminars.

Innovations and research are financed mostly through Seventh Framework Programme (FP7),
European Cooperation in Science and Technology (COST) and EUREKA programmes. The orientation
towards the Instrument for Pre-Accession assistance (IPA) IIIc programmes related to the regional
development also has an important role in financing the research and innovation of large scale
programmes and science–industry cooperation. The IPA programme currently includes the Science and
Innovation Investment Fund (SIIF) and the Biosciences Technology Commercialisation and Incubation
Centre – BIOCentre. The financial resources for SIIF amount to EUR 5 million while the BIOCentre is a
greenfield investment of approximately EUR 18 million.

Croatia acquired full membership in the EU FP in June 2006. In the period between 2002 and 2006
Croatia participated in the programme as a third country, and therefore only had limited access to
funding. However, all the countries of the Western Balkans (except Kosovo*) obtained the status of
associated countries to FP by the “FP7 Third Country Agreements” issued by the EC in 2009. In the period
2002 – 2006, Croatia participated with 154 partners and signed 134 project contracts, based on which
Croatian partners' activities received EUR 16.2 million.

Within the FP7, which followed the FP6, a total of 164 Croatian partners have contracted 132
projects with EC co-financing in the amount of EUR 27.5 million.

Croatia has been a full member of COST since 1992. It has taken part in over 250 projects and is
currently cooperating in 70 COST actions. The annual membership fee is around EUR 7,000. Special
attention should be paid to the project COST B-35: Lipid Peroxidant Associated Disorders, whose
coordination at the European level was entrusted to Croatia's largest institute for natural sciences, the
Ruđer Bošković Institute. Within the COST project, several significant international conferences were
organised in Croatia in 2007, including Smart Health Care, which gathered experts from the fields of
medicine, environment protection, social sciences and the humanities.

Croatia has participated in the EUREKA programme since 2000. Up to 2010, Croatian organisations
participated in 31 completed projects totalling EUR 137.10 million. A total of 57 Croatian organisations
have participated in these projects, among which 17 are SMEs, 9 research organisations, 26 universities
and 2 are National Administrations.

By the end of 2010, Croatian organisations were participating in 22 projects (9 multilateral and 13
bilateral), out which 18 were implemented in cooperation with Slovenia. A total of 38 Croatian

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organisations were participating in these projects (17 SMEs, 4 companies, 4 research organisations, 10
universities and 3 national administrations.)

Croatia officially joined the European Molecular Biology Laboratory (EMBL) in June 2006 as the
organisation’s 19th Member State. It is expected that Croatia’s participation in such a world class
European research organisation will give the country’s rapidly growing field of molecular biology a boost
and will help integrate Croatia’s scientific elite further in the ERA. It should also provide the infrastructure
and services needed to conduct research at the highest level as well as include Croatia in the renowned
PhD Programme and advanced training for scientists in molecular biology.

The Croatian Science Foundation (CSF) carries out, in cooperation with the European Molecular
Biology Organisation (EMBO), a programme EMBO installation grants aimed at helping leading scientists
in life sciences set up a research laboratory in Croatia.

Croatia signed a cooperation agreement with CERN in 1991 and renewed it in 1998. Since 1998
Croatian physicists were mainly involved in the SPS heavy-ion programme, in the NA49 experiment, and
in the preparation of the physics programme for ALICE. Presently, Croatia participates in the following
projects: ALICE / CMS, CMS, LHC, OPERA and CAST.

The participation of Croatian scientists in CERN is defined by a separate memorandum. Co-financing

of participation is made on a functional basis, meaning that the MSES’s financial contribution is provided
only for special experiments. It is considered very favourable because it pays only actual work, rather
than formal membership. MSES allocated around EUR 70,000 in 2003. The funds are intended for the
travel costs of scientists from Croatia and minor equipment. The main collaborative institutions from
Croatia are the Ruđer Bošković Institute (IRB), which plays a coordinating role, and the Technical
University of Split. The company "KONČAR" (electrical equipment) makes parts for CERN projects. Croatia
will become eligible for Structural Funds such as the European Regional Development Fund and European
Social Fund upon accession in July 2013.

The absorption of EU funds is expected to increase in the future, since Croatia will become eligible
for Structural Funds like the European Regional Development Fund and European Social Fund upon
accession in July 2013. However, additional efforts should be invested in preparing the framework
conditions for Croatian applicants for funding, especially in terms of elaboration of operating
programmes (which have not been prepared yet) and distribution of responsibilities among implementing
agencies.

For Croatian researchers, the new EU Framework Programme for Research and Innovation – Horizon
2020 presents significant opportunity for project funding and development. The programme is expected
to run from 2014 to 2020. Through the public consultation process which led to Horizon 2020, the
Croatian Government issued the Position on Green Paper “From Challenges to Opportunities: Towards a
Common Strategic Framework for EU Research and Innovation Funding”, with recommendations that
should be included in the Framework Programme. The main recommendations included:

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 The simplification of the programmes’ administrative and financial procedures, in order to ease
access for the beneficiaries

The acceptance of small to medium-scale cooperative projects to avoid funding large-scale

projects exclusively to the detriment of smaller actors

The preservation of bottom-up funding to balance out top-down activities

A continued emphasis on human resources by maintaining the implementation of Marie Curie

Actions

Ensuring that COST and EUREKA programmes supplement the new strategic framework, but
clearly define their roles to avoid an overlap in activities

With reference to the increasing number of initiatives and bodies related to the ERA, clearly
define mandates of each individual body and ensure that their work is complementary and not
overlapping

Increased focus on research output and uptake, contributing more broadly and significantly to
innovation, competitiveness, growth, social cohesion and sustainable development

The creation of synergies with other instruments, programmes and policies

International cooperation with third countries and opening up the ERA to the rest of the world

An increased visibility and public awareness of the results and outcomes of EU funding

3.4.6 Summary of current policy evaluation practices

The evaluation of innovation policy, programmes and institutional set-up is not common practice in
Croatia and the culture of science and technology evaluation is relatively weak (Švarc, 2004).

In practice, there are three main types of evaluation aimed at improving the quality and excellence
of knowledge (Švarc & Račić, 2012): the evaluation of individual researchers, the evaluation of research
projects, and the evaluation of HE/RTO institutions.

The evaluation of the individual researchers is carried out for promotion of researchers into the
higher scientific/teacher grade. The criteria are mainly based on bibliometric indicators – the number of
scientific papers in the relevant, highly-ranked international journals and the number of citations of
papers which are listed in the CROSBI.

The evaluation of research projects includes ex-ante, interim and ex-post evaluation. Ex-ante
evaluation usually includes an international peer review process while interim and ex-post evaluation are
mainly based onthe number of publications and (Current Content) articles.

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 The evaluation of individual research institutions and universities is new in science policy and was
launched in 2007. It consists of the external evaluation usually carried out by the ASHE and an internal
(self) evaluation. The evaluation is, in principle, carried out by domestic experts but in the case of large
scientific institutions like the Ruđer Boskovic Institute, the Brodarski Institute, and the University of
Zagreb, foreign experts were also involved. However, the results of such evaluation are not yet used as a
basis for institutional funding. Instead, the current criteria for institutional funding are rather formal and
based on the number of researchers and their scientific coefficients.

The Law on quality assurance in science and higher education system was introduced in April 2009
(OG 45/2009), with the aim of improving scientific excellence at the institutional level. The Law regulates
the procedures of periodic external independent assessments of the internal quality assurance system
(audit), initial accreditation and re-accreditation procedures, and thematic evaluations of study
programmes. The Law also regulates the status, activities and organisation of the ASHE as the pillar
institution of the national system of quality assurance of research in Croatia.

The most underdeveloped part of evaluation is performance assessment of the research and
innovation programmes such as Z-projects, TEST, RAZUM, etc. Although all projects within the
programmes are subject to serious ex-ante evaluation and monitoring, the ex-post evaluation at the
aggregate level of programmes based on output indicators, international benchmarking or impact studies
is usually missing.

However, some improvements have been observed in this area. The first publicly available
evaluation of several programmes (RAZUM, IRCRO and UKF) was performed by the Institute of Economics
(2011a).

The practice of ex-ante, mid-term and ex-post evaluations should be further improved in Croatia in
order to enable the evaluation of the overall national innovation system and its direct contribution to
increasing innovation performance and creating the knowledge-based economy.

3.4.7 Intellectual property rights regime

The intellectual property protection regime is regulated by the Law on Patents and other related
Laws, such as the Trademark Law, Industrial design Law, Copyright Law, Law on Geographical Indications
and Designations of Origin. The intellectual property protection falls under the responsibility of the SIPO.
However, there are still modest capabilities regarding intellectual property rights (IPR) which require a
systematic approach to develop the strategy and policy on this matter. First steps have been taken within
the CARDS 2003 project to establish the IPR infrastructure and strategy entitled Intellectual Property
Infrastructure for the R&D Sector - Promoting research institutions - SME interactions. As a result of these
efforts, SIPO organised its information centre, INCENTIVE, through which SIPO provides professional
information assistance, services and educational programs intended for universities, public research
institutes, and business sector (SMEs) with the aim of effectively protecting, utilising or managing
intellectual property. There have been no recent initiatives aimed at promoting and facilitating

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knowledge transfer. However, technical assistance within the Science and Innovation Investment Fund
project has contributed to knowledge transfer.

Regarding the overall development of the intellectual property rights regime in Croatia, The National
Strategy for the Development of the Intellectual Property System of the Republic of Croatia for the period
2010 – 2012 sets out main strategic and corresponding measures that aim to further develop the national
intellectual property system, and protect intellectual property rights and intellectual property use
(exploitation). The five strategic goals are as follows:

(1) The adaptation of the legislation framework in the field of intellectual property rights by its
harmonisation with the EU acquis communautaire and international legal order in the field of
intellectual property
(2) Improvement of the national intellectual property system (NIPS) institutional framework,
primarily through the development of institutions, modernisation of methods and procedures,
development of human resources and increasing the level and transparency of cooperation
between stakeholders in the NIPS
(3) Improvement of the national intellectual property infrastructure and its integration into the
global one
(4) Improvement of the use of intellectual property
(5) Increasing the level of recognition and respect for the IPR through raising public awareness about
the importance of intellectual property and increasing the efficiency of the legal enforcement of
rights
(6) Regional and global integration of NIPS and active international cooperation

When it comes to IPR at universities, this area is stipulated by the Labour Law which refers primarily
to the inventions and relations between inventors (employee) and employers and gives the rights of
appropriation to the employers. This basic principle extends in practice to other areas including research
and HE institutions by providing those institutions with free disposition of the IPR.

However, the lack of special regulations covering IPR at universities contributes to the fact that many
opportunities for the commercialisation of research results are not utilised and there is a low number of
established university spin-off and start-up companies.

3.5. Effectiveness of STI policy

The overall impression is that the effects of policy measures on innovation and socio-economic
development remain fairly modest, probably due to the overall framework conditions which do not
favour research and innovation for development and growth. The policy measures, with some exceptions,
do not appropriately address current challenges of the Croatian economy.

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 Švarc & Račić (2012) reported that, if evaluated from the perspective of the Self-assessment tool of
the Innovation Union Flagship initiative (EC, 2010) that includes the ten features for a well-functioning
national innovation system, the performance of the Croatian Innovation system is largely unsatisfactory.

Positive examples achieving objectives include policy measures implemented by BICRO, UKF and SIIF.
On the other hand, some analyses (Švarc et al., 2009) have revealed that the projects implemented
through the TEST programme usually do not result in the commercialisation of research results and were
not aimed at commercialisation in the first place.

Policy measures implemented by the MSES (e.g. Research projects) usually provide financial
resources for researchers’ salaries, provision of research equipment or expert literature, while co-funded
projects usually do not achieve results applicable in industry.

The detailed overview of direct results arising from the implementation of selected policy measures
is provided in Section 3.2. Policy Measures, while the results from the TEHCRO programme are detailed in
Section 3.2.6.

Regarding the effectiveness of policy delivery, it varies between the levels of effectiveness and
efficiency of ministries and their affiliated implementation agencies. However, to analyse them in detail,
thorough monitoring and evaluation should be undertaken, which is currently not the case. One of the
main remaining issues relates to the separation between policy design and implementation. Today, the
MSES is responsible for policy design, as well as for providing financial resources under the designed
policy measures. This issue has been tackled by the new Law on Croatian Science Foundation, enabling
funding of scientific projects to be transferred from the central public administration (MSES) to the
Croatian Foundation for Science as a professional institution. This should generally be the case when it
comes to policy implementation and evaluation and these areas should be separated from policy design.

Good practice (in terms of effectiveness and the transparency of the overall implementing
procedures) can be observed at BICRO and CSF, which have reached satisfactory degrees of effectiveness
and efficiency in policy implementation.

However, the level of coordination and the process of innovation policy delivery, as well as
evaluation procedures, should be further developed. Innovation policy effectiveness could also be
facilitated through more stakeholder engagement, the use of external experts and systematic monitoring
and evaluation.

Based on available data and reports (Švarc & Račić, 2012), the overall STI policy is still missing large
scale and networking projects which could pull together the private and the public stakeholders in joint
development and strategic research activities, such as joint technology initiatives, technology platforms,
networks of knowledge, etc. Such joint activities could raise the interest of the business sector for
research and increase investment in public research.

The policy debate in Croatia is still underdeveloped and often restricted to academic and
professional circles. This could partially be attributed to the lack of data and evaluation studies as well as
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to insufficient communication among policymakers and business and academic communities. The reform
of academic institutions and enhanced networking can create more opportunities for science-industry
collaboration, technology transfer and innovation development.

More attention should also be paid to coordination between the different bodies responsible for
innovation policy, better planning and evaluation processes, including the definition of specific linkages
between policy priorities, policy measures and performance indicators.

3.6. Governmental infrastructure - Conclusions

The most important strengths of governmental institutions are based on Croatia’s valuable
experience in the design and implementation of science, technology and innovation policy. There is an
awareness of the strengths and weaknesses of the S&T system, which are being addressed through
different policy measures. The National Innovation System is increasingly oriented towards ERA, science-
industry cooperation, the development of knowledge-based SMEs and the improvement of the science,
technology and innovation infrastructure.

However, these strengths are often not translated into adequate R&D and innovation performance.
The share of total investments into R&D is declining and business sector R&D investments are
insufficient. There are weaknesses at the governmental level which constrain R&D and innovation
performance including the lack of a strategic approach to R&D, an under-developed culture of ex ante
and ex post evaluation of policies, insufficient innovation infrastructure dedicated to technology transfer
to the SME sector, the lack of resources, and inadequate regulations regarding S&T and IP.

To address these weaknesses and fully reap the benefits of future opportunities – including
increased access to international funding and cooperation – the government will need to adopt a
coherent innovation strategy, clearly define the responsibilities of the bodies and institutions involved in
innovation policy, reinforce stakeholder involvement and establish systematic monitoring and evaluation.

142
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 ANNEX - SWOT ANALYSIS BY MEMBERS OF THE EXECUTIVE TEAM AND ADVISORY BOARD

Members of the project team, including representatives of the business sector, research institutes,
universities and innovation-support institutions, were asked to provide their views on the Croatian
National Innovation System. They filled out SWOT analysis tables identifying the strengths, weaknesses,
opportunities and threats which characterise the different players of the National Innovation System. The
SWOT tables below summarise the answers from the project team.

The first objective of this exercise is to agree on a common diagnosis of Croatia’s strengths and
weaknesses through a consultative approach. In a second phase, the results of this exercise will be
used to prioritise policies capitalising on Croatia’s strengths, taking advantage of potential opportunities
and bridging remaining policy gaps in the innovation support system. This exercise complements findings
from the previous chapters of the Background Report.

With regard to the business sector (Table 19), members of the project team identified human
resources for innovation as well as the existence of innovative businesses as key strengths. On the other
hand, major weaknesses – contributing to low investments in R&D – included the weak absorptive
capacities of Croatian businesses, the lack of linkages between innovation actors, the concentration of
innovative capacities in a small number of firms and the limited awareness of the potential benefits of
innovation. While new opportunities are expected to arise with EU accession, particularly through access
to EU markets and increased funding for innovation, a number of factors were seen as potential threats
to Croatian businesses including brain drain and the negative impact of a prolonged economic recession
on R&D investments.

Research institutions were overall viewed as having good research capacity (Table 20). Openness to
foreign collaboration and the increasing focus on applied research and commercialisation were also
perceived as strengths. However, research capacities remain lower than in more advanced economies,
the system continues to encourage the production of bibliometric outputs to the detriment of research
commercialisation, and research collaboration is relatively limited. According to project team members,
future opportunities lie in the strengthening of research collaboration, particularly at the European level,
the efficient use of Structural Funds for research infrastructure, stronger ties with Croatian scientific
Diaspora and increased research commercialisation efforts. The Croatian research sector is nevertheless
faced with threats, particularly a potential decline in financial resources for R&D as a consequence of
budget restrictions and a relative decline in research excellence if the system for the allocation of R&D
funds is not reformed and the research sector not further integrated into innovation networks.

Finally, the Croatian government was recognised as having experience in implementing innovation
policies and support programmes through established innovation support institutions (Table 21). Project
team members also highlighted the increasing convergence of innovation policies towards EU practices.
Nevertheless, the innovation support system suffers from a lack of coordination between its main bodies,
the absence of an overall strategy, weaknesses in policy implementation and evaluation and a lack of

149
funds for some programmes. Failure to tackle these issues constitutes a major threat to the Croatian
National Innovation System and will limit the impact of the innovation support system. Instead, the
government should take advantage of future opportunities by efficiently using Structural Funds,
strengthening coordination in innovation policy-making and implementation and better tracking the
effectiveness of innovation support programmes.

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 Table 13. SWOT analysis for the business sector
Strengths
Human resources for innovation: relatively
well-educated and trained workforce
Creativity in Croatian SMEs
Large number of business support
institutions and programmes and support
for innovation
Existence of some innovative firms and
individual innovators
Flexibility of SMEs
Opportunities
Access to EU markets: access to a large
market without borders
Access to additional EU funding
Stronger cooperation between Croatian
businesses and EU partners
Trend toward knowledge-based innovation
which does not require much capital (e.g.
IT)
Potential for increased collaboration with
research institutions
Potential for strengthening of existing
networks of businesses
Development of human resources for R&D
management
151
Weaknesses
Low investments in R&D and innovation
R&D capacities concentrated in a small
number of innovative companies
Low absorptive capacities of firms
Lack of awareness of the potential benefits
of innovation
Lack of linkages between innovation actors
Low technological level in the Croatian
industry
Lack of risk-taking attitudes in the business
sector
Lack of access to finance for risky
projects/insufficient knowledge about
sources of financing
Threats
Brain drain
Lack of competitiveness on EU markets
Prolonged recession with a detrimental
impact of investments in R&D
Lack of harmonisation with EU standards
Limited domestic market for innovative
products
Foreign investment in low value-added
activities
 Table 14. SWOT analsis for research institutions and universities

Strengths Weaknesses

Relatively good quality of Research capacity still limited in

universities/teaching system comparison with top universities
Good research capacity/valuable Uneven quality of researchers and research
intellectual capital in research institutions institutions
and universities More time devoted to teaching than
Openness to collaboration through EU research by university professors
funded programmes Limited patenting and commercialisation
Universities relatively well-distributed culture
across regions Lack of interdisciplinary research
Some examples of university-business Lack of linkages with the private sector
collaboration Fragmentation of the research community
Active technology transfer offices (TTOs) in Basic-research orientation of the research
some universities system
Growing importance of applied research Focus on bibliometric outputs of
researchers
Lack of access to advanced research
equipment/obsolete infrastructure and
equipment in the academic community
Insufficient and dispersed funding for R&D
(i.e. funding spread too thin across a large
number of research groups)
Opportunities Threats

Access to and efficient use of EU Structural Brain drain

Funds to strengthen the research
infrastructure
Increased international collaboration and
access to international research funding
Support for the mobility of researchers
Increased focus on technology transfer
Greater support for IP management and
protection
Increased focus on multidisciplinary
research
Enhanced links with the private sector
Strengthened links with Croatian
researchers in leading world research
institutions
Targeting of research funding at excellence
Decrease in financial resources for R&D
because of budget restrictions
Resistance to change
Lack of high-quality projects because of
dispersed funding and unclear criteria to
evaluate the innovation potential of
research projects
Relative decline in research capacity
because of research institutions’ limited
integration in innovation and research
networks

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 Table 15. SWOT analysis for governmental infrastructure
Strengths
Awareness of the need to support
knowledge-based development
Valuable experience in the implementation
of innovation policies
Established institutional framework for
innovation support
Established state-support programmes for
innovation
Harmonisation of national policies for SMEs
and innovation with EU good practices
IP protection and enforcement legislation
constantly harmonised with EU legislation
Opportunities
Access to and efficient use of EU Structural
Funds
Gradual alignment with EU innovation
policies
Potential for strengthening communication
and coordination between key institutions
involved in innovation policy
Potential for tracking and increasing the
effectiveness of innovation support
programmes
Greater support for linkages between
innovation actors
153
Weaknesses
Too many uncoordinated bodies
performing similar activities/Parallel
structures which do not cooperate to a
sufficient extent
Lack of an innovation strategy at the
national level
Limited effectiveness of financial support
for innovation
No systematic evaluation of policies and
institutions
Misunderstanding of the value chain in
innovation commercialisation (too much
focus on small businesses, which actually
need to be connected with medium and
large firms to make real impact)
Lack of support for linkages between
innovation actors
Insufficient financial resources
Threats
Weak implementation of adopted
strategies and policies
Lack of people with the skills necessary for
the optimal use of EU-pre accession funds
and Structural Funds
Overlap and waste of resources because of
failure to adopt a clear strategic focus
Failure to clarify the distribution of roles
between innovation policy institutions
Programme underfunding because of
budget restrictions
Limited effectiveness of future
programmes because of the lack of a
monitoring and evaluation system