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Sound reasons not to invest in Croatia yet 
Croatia is widely heralded as a success story among transition countries in south eastern Europe. It certainly has the potential for being a successful and stabilizing force in the region. But it is arguably not one yet.  Even the most cursory look at objective data and reliable sources demonstrates where Croatia actually stands. 
The is the first contribution in a series of insightful op-ed pieces focusing on Croatia's economic outlook and investment climate.
By Joseph Molitorisz, Ph.D., Senior Fellow, Ethics and Culture, Adriatic Institute for Public Policy and Robert Moraal, Senior Fellow, Economics and Investments, Adriatic Institute for Public Policy

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Back in the Balkans
By Kyle Wingfield, October 25, 2007

SISAK, Croatia - The first thing you notice after passing the gate to the old iron works and the oak trees filled with shrapnel, but before you reach the shiny new machines for polishing silicon wafers, is the sign - brightly painted, low to the ground and slightly trapezoidal, straight out of Office Park, U.S.A. It represents the fresh face that Matt Sertic is trying to put on his depressed hometown, and Croatian business generally.

Two decades ago, Mr. Sertic left his job at these iron works to find success in Silicon Valley. Now he owns the communist-era building where he once worked and is equipping it to make various products for the semiconductor industry.

You might think that Croatian officials, facing 14% unemployment and mindful of the need for foreign investment, would move mountains to smooth the way for this local boy made good. Heavily shelled during the 1991-95 war with Serbia, Sisak is particularly desperate for jobs so that residents don't have to commute - or move - to the capital, Zagreb, about 35 miles away.

If only. Mr. Sertic had to jump through more hoops than he cares to recount to open this week the Croatian division of his company, Applied Ceramics.

"You have to somehow see that people are not mean. This is just the way systems run, how they live here," says Mr. Sertic, the president of the privately held firm out of Fremont, California, a supplier to Intel, Sony and Motorola, among others. The company has put $12 million into the Croatian venture, which employs about 100 people.

"You cannot be called, for example, "Applied Ceramics Croatia," he begins. "Why not? Well, someone might think that you are a state-owned company." Another picayune trouble arose over naming the street out front - a public road that apparently existed without a name for decades - so that he could put an address on business cards and begin to advertise. "Everything [has] to run through official bodies, and so there are always a lot of people involved and with a lot of people nothing gets decided and nothing gets done, and everything turns political. Even the name of the street."

Registering the business was more of an ordeal. First, the original California business-registration paperwork for the company was deemed too old. Then the Croatian authorities wanted the company's current financial statements to magically be included in those same founding documents, which are now 13 years old. "So it took three months until some judge went on vacation, and another judge came and says, "All right," Mr. Sertic says with a weary chuckle.

To close on the purchase of a building and land, located on a larger industrial park, took over a year. In between the time Mr. Sertic thought he had a deal with the president of the iron works until he was able to move in this past March, he was forced to go through three separate public bids for the property. It took three months to get the supervisory board of the iron works to sign off on the sale, and even longer for them to vacate the place.

Then there were the taxes. Applied Ceramics received government approval to import new, American-made machines without paying the normal 22% tariff. Well, without paying it permanently, anyway. "You have to pay it, even though they return it back to you," Mr. Sertic says. "So then you have to submit all these documents, and then they return the tax to you in two months." If you don't have additional money, then you just wait for this money to use it for the next import.

"So if next month comes another container of equipment, you have to pay again. You cannot tell them, "Look, you owe me one million, and here is coming another million, let's split it, right" No way! You have to pay again. And so that's how the state constantly works with your money, and basically my view is it stimulates you not to do anything," he laughs again. Many small-business owners in Croatia choose to forgo the tax refund rather than deal with the bureaucracy and risk a visit from the state's financial police.

Did he ever think about giving up? "Several times I came to the point that something seems it cannot be done," Mr. Sertic says. "And then I would stop calling or pushing. And then I would find out that, two months later, things get done by themselves."

He had decided to try the European expansion only after talking with a professor in Sisak whose students were training as machinists, chemists and metallurgical engineers. "Then he says, "You know, their best bet is they can be waiters in hotels or in restaurants," supporting Croatia's main growth industry, tourism. "And that looked to me like a huge pity and a waste of talent." With the professor's help, he identified 19 young people who went to Fremont for six to eight months of training. They now form the core of Applied Ceramics' Croatian team.

Eventually Mr. Sertic made it to Tuesday, when dozens of dignitaries, including President Stjepan Mesic, attended a grand-opening ceremony. "What Croatia needs is greenfield investment. We want investment in production for exports," Mr. Mesic told me through an interpreter after the festivities.

Perhaps the president isn't aware that, in his country, state incentives for such investments are, like the names of streets, subject to the interpretation of local officials. Applied Ceramics didn't qualify for "greenfield investor" incentives, even though it represents an entirely new industry for the country, because it renovated an existing building rather than constructing a new one.

* * *


Mr. Sertic's story, so far, has a happy ending. Many don't. Lawyers and bankers in Zagreb say corruption in the country's judiciary, particularly when it comes to registering property deeds, is pervasive. The Wall Street Journal/Heritage Foundation's 2007 Index of Economic Freedom ranked Croatia only 30% free when it comes to property rights, 34% free from corruption, and 50% free for foreign investors. All three scores are below the world averages in those categories, and Croatia's overall score of 55.3% free places it well below neighbors Slovenia (63.6%) and Hungary (66.2%).

"We have lost on a fairly steady basis good [foreign investors] who come in, try, can't do it and get out," says Mark Gero, a past president of the American Chamber of Commerce in Croatia who has tried since 2000, unsuccessfully so far, to set up a waste-management business.

In the past, Mr. Gero says, "it was who you know here, and the deals that can be done through the people you know." Pressure from foreign investors working inside Croatia, as well as from outside forces such as the European Union, which Croatia aspires to join, has helped to level the playing field only slowly.

For his part, Mr. Sertic says he "never came to be in the situation that I had to grease up anybody with money or promises or anything like that." But he's aware that his new venture will be viewed as a barometer for how much has really changed. "Croatia got liberated in 1991, and then during this first decade, many Croatian Diaspora people returned to Croatia to start something, to invest somewhere, and some of them succeeded, but I would say especially small ones did not," he says.

"So I would say in Silicon Valley there are several Croatian-owned companies that are now looking: Will I survive or not?" He laughs again. "Then they will decide that maybe they can go too."

- Mr. Wingfield edits the Business Europe column.

Mr. Sertic is a founding leadership board member of the Adriatic Institute for Public Policy, Rijeka