Investment and competitivenss" Boris Vujčić, guverner e-mail: boris.vujcic@hnb.hr
Outline Capital investment and FDI developments in Croatia and peer countries Structural position of Croatia Why are some countries more successful than other?
Capital investment and FDI developments in Croatia and peer countries
Capital investment have started to recover but remain well below pre-crisis level Capital investment in Croatia Croatia vs. peer countries in % 15 1 5-5 -1-15 -2 15 14 13 12 11 1 9 25 26 27 28 29 21 211 212 213 214 215 216 Annual change in capital investment Capital investment (seasonaly adjusted) - rhs index, 21 = 1 in % of GDP 35, 3, 25, 2, 15, 1, 5,, LV EE LT SI HR SK RO BG HU CZ PL 24-28 29-215 Source: CBS Sources: Eurostat; CBS
Adverse developments more pronounced in the private sector, except for Croatia Public investment Private investment 7 3, 6 25, in % of GDP 5 4 3 2 in % of GDP 2, 15, 1, 1 5, HR LT CZ EE LV BG HU RO SI SK PL, LV EE SI LT SK BG RO HR HU CZ PL 24-28 29-215 24-28 29-215 Sources: CBS, Eurostat Sources: Eurostat; HNB s estimate
EU funding has helped to cushion the fall but... Public investment financed by EU funds Private investment financed by EU funds 5, 12, 45, 4, 1, 35, 3, 8, 25, 6, 2, 15, 4, 1, 5, 2,, HU SK LT CZ LV EE PL SI HR, LT LV HU EE PL CZ SK SI HR 24-28 29-215 Difference 24-28 29-215 Difference Sources: CBS, Eurostat Sources: Eurostat; HNB s estimate
... adverse factors more pronounced Expected GDP growth Capacity utilisation in manufacturing 7 2, 1, in % and percentage points 6 5 4 3 2 1 in percentage points, -2, -4, -6, -8, 8, 6, 4, 2, in % BG HR EE SK RO CZ SI PL LV LT HU EA -1, HR SK EE HU CZ SI RO LV PL LT BG, Pre-crisis Post-crisis Difference 24-28, rhs 29-215, rhs Difference Note: Average EC s short term forecast (1 year ahead) for 28 and 29 for the pre-crisis period, and for 215 and 216 for the postcrisis period. Sources: CBS, Eurostat Sources: Eurostat; HNB s estimate
FDI inflows continue declining, both in Croatia and peer countries FDI in Croatia Croatia vs. peer countries, annual average 29-215 8 7 % of GDP 7 6 5 4 3 2 1 % of GDP 6 5 4 3 2 1 1 1 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Assets Liabilities Net FDI 2 EE BG LV HR RO PL HU CZ LT SI SK Assets Liabilities Net FDI Note: Net FDI is calculated as a difference between liabilities and assets. Therefore, positive sign refers to net investment inflow. Source: HNB Note: Net FDI is calculated as a difference between liabilities and assets. Therefore, positive sign refers to net investment inflow. Data for Bulgaria start from 27. Source: Eurostat; HNB
Although stock of FDI is relatively high, greenfield and FDIs in industry are modest in Croatia Greenfield investment projects, annual average FDI composition by sectors, inward FDI stock at the end of 214 as % of GDP 21 18 15 12 9 6 3 Inward FDI stock / GDP 9 8 7 6 5 4 3 2 1 BG RO SK LV EE HU LT PL CZ HR SI 23 28 29 215 23 215 BG EE HU CZ HR SK LV PL RO LT SI Industry Financial interm. Trade Transport, comm. Real estate Hotels Other Source: UNCTAD, World Investment Report 216 Note: Data for Slovakia refer to the end 213. Industry includes mining and quarrying, manufacturing, electricity, gas and water supply. Source: WiiW
FDIs impact on domestic productivity and exports is positive Effects of FDIs on productivity (Marić, 28): 6 Share of FDI firms in Croatian exports Own-firm effects: FDI firms are on average by one-third more productive than domestic firms in the same sector 5 4 Spillover effects: FDIs had positive effect on other domestic firms in different sectors of the economy % 3 2 Positive effects in the 1999-22 period stronger compared to 23-25 period 1 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Sources: FINA for data until 21, later CBS and HNB 1
Structural position of Croatia
Employment protection and product market regulation Employment protection legislation(213) Product market regulation (213) 4, 3,5 3, 2,5 2, 1,5 1, 3,5 3 2,5 2 1,5 1 EU 15 US (28),5, EE HU SK HR PL LT CZ SI LV Regular contracts (EPRC) Temporary contracts (EPT),5 SK EE HU CZ LT BG LV PL RO SI HR SK EE HU CZ LT BG LV PL RO SI HR SK EE HU CZ LT BG LV PL RO SI HR PMR index State control Barriers to entrepreneurship SK EE HU CZ LT BG LV PL RO SI HR Barriers to trade and investment Note: Data for Croatia and Lithuania refer to 215. Sources: CBS, Eurostat Sources: Eurostat; HNB s estimate
Labour cost Compensation per employee Tax wedge 225 55 EUR 2 175 15 125 1 % 5 45 4 35 75 3 5 25 25 BG RO HU PL LT LV CZ HR SK EE SI 2 BG PL HR EE RO LT SK SI LV CZ HU 67% of AW 1% of AW 167% of AW 3% of AW* Sources: CBS, Eurostat *Data refer to 214, except for Croatia which are for 215. Sources: OECD; HNB s estimate
Different educational outcomes according to PISA test results PISA test 212 Student performance in maths (mean score) 54 PISA test 212 Student performance in maths (mean score), 15 years old students 52 5 48 46 44 42 4 519 51 5 494 478 523 515 514 56 495 487 485 484 453 518 51 499 FI IE DE UK SE NL BE DE AT FR PT IT ES EL PL SI CZ SK HU HR EE LV LT RO BG US EU15 North EU15 Continental EU15 South 482 477 EU1 North 471 521 491 EU1 Continental 479 445 EU1 South 439 481 Note: EU15 = Denmark, Finland, Sweden, Ireland and United Kingdom(North), Austria, Belgium, France, Germany, and Netherlands, (Continental), Greece, Italy, Portugal, and Spain (South). EU 1 = Estonia, Latvia and Lithuania(North), Croatia, Czech Republic, Hungary, Poland, Slovakia and Slovenia (Continental), Bulgaria and Romania(South) Source: OECD
Disposition time (DT) for litigation and non-litigation civil and commercial cases - number of days to complete proceedings in 1st instance court 15
Time needed to resolve insolvency full or partial collection of claims by creditors in years Source: EU Justice Scoreboard 216 16
Access to finance Diversified sources of finance would boost growth of young and innovative companies Note: Groupings ranks are based on GDP-weighted country rankings. Source: Global Competitiveness Report 216
Business climate indicators 7 Ease of doing business Enforcing Contracts Resolving Insolvency Ease of Doing Business Rank 15 1 5 Starting a Business Dealing with Construction Permits 6 5 Trading Across Borders Getting Electricity 4 3 CEE Paying Taxes Protecting Minority Investors Getting Credit Registering Property 2 EU15 1 Croatia CEE countries US DK UK SE FI DE IE AT PT FR NL ES BE IT EL LU EE LT LV PL SK SI CZ RO BG HR HU Note: A high ease of doing business (a low numerical rank) means that the regulatory environment is conducive to business operation. EU-15 stands for average of old EU member countries. Source: World Bank, Doing Business 216
Business climate indicators (2) Global Competitiveness Index 9 8 7 6 5 CEE 4 3 EU15 2 1 US FI DE NL UK SE DK BE AT FR IE ES PT IT EL EE CZ LT LV PL BG RO HU SI SK HR Note: High ease of Global Competitiveness Index (a low numerical rank) means higher degree of competitiveness. EU-15 stands for average of old EU member countries. Source: World Bank, Doing Business 215
Better business environment also enhances absorption of EU funds Average annual withdrawal of EU funds since the EU accession vs. 215 Doing Business ranking, in % of GDP 6 Doing Business 215 ranking 5 4 3 2 1 CZ RO SK BG EE HU LV LT 1 2 3 4 5 Average withdrawal of EU funds, in % of GDP Sources: ECB and World Bank.
Why are some countries more successful than other?
Why are some countries more successful (1) Europe and US Faster recovery in US could be explained by... Real GDP 27 = 1 11 18 16 14 12 1 98 96 94 27 28 29 21 211 212 213 214 215... better structural position Business sophistication Market size Technological readiness Innovation Financial market sophistication Labor market efficiency Global Competitiveness Index 12 1 8 6 4 2 Institutions Higher education Goods market efficiency Infrastructure Macroeconomic stability Health and primary education EU US US EU Sources: Eurostat and BEA. Source: World Economic Forum, Global Competitiveness Report 215-216
US firms specialize in technologically advanced and R&D-intensive products, younger firms lead... Europe specializes in old sectors, the US in new Note: R&D intensity is measured as the ratio of R&D spending to total sales, for firms established after 1975 (young leading innovators or Yollies ) or before 1975 ( Ollies ). The relative technological advantage is calculated as the share of each region or country (say Europe) in the R&D of a particular sector (say the Internet) relative to the share of Europe in world R&D; values greater than 1 indicate the region is technology specialized in the sector. Source: Bruegel and World Bank staff calculations, based on the European Commission s Institute for Prospective Technological Studies R&D Scoreboard
Europe is lagging in business dynamism... Source: Biosca, A. B., A look at business growth and contraction in Europe, 211, 3rd European Conference on Corporate R&D and Innovation Why were firms like Facebook, Google and E-bay created in the US and not in EU?
Labour market institutions in EU not conducive to adopt risky ICT investment decisions... Employment share in ICT intensive sectors Labour productivity growth in ICT intensive sectors Source: Bartelsman, Eric J, Pieter A Gautier, and Joris de Wind (21), Employment Protection, Technology Choice, and Worker Allocation, IZA DP No. 4895
..nor are the financial markets - a key to the growth of young companies... Access to finance rankings 6 5 EU 4 Rank 3 2 1 US Financing through local equity market Venture capital availability Financing through local equity market Venture capital availability Note: EU is a GDP weighted average of EU28 country rankings Source: Global Competitiveness Report 214-215
Why are some countries more successful (2) Peripheral EU countries - GIIPS 27 = 1 Fastest post-crises recovery in Irelan could be explained... Real GDP 11 15 1 95 9 85 8 75 7 27 28 29 21 211 212 213 214 215 Portugal Italy Ireland Greece Spain Source: Eurostat... by better structural position Global Competitiveness Index Innovation 14 12 Institutions 1 Business sophistication 8 6 4 Market size 2 Technological readiness Financial market development Labor market efficiency Infrastructure Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Portugal Italy Ireland Greece Spain Note: Lower ranking indicates that country is more competitive. Source: World Economic Forum, Global Competitiveness Report 215 216
Why are some countries more successful (3) Croatia and CEE countries 27 = 1 Slower recovery in Croatia than in CEE countries could be explained... Real GDP 12 115 11 15 1 95 9 85 8 27 28 29 21 211 212 213 214 215 Croatia CEE Business sophistication Market size Technological readiness...by worse structural position Innovation Financial market development Labor market efficiency Global Competitivenes s Index 12 1 8 6 4 2 Institutions Infrastructure Macroeconomi c environment Health and primary education Higher education and training Goods market efficiency Croatia CEE Note: CEE includes Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Source: Eurostat Note: CEE includes Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Lower ranking indicates that country is more competitive. Source: World Economic Forum, Global Competitiveness Report 215-216
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