CROATIAN INDUSTRY DEVELOPMENT GUIDELINES
Nataša DRVENKAR, univ.spec.oec.
Faculty of Economics in Osijek, Gajev trg 7, Osijek
Anita FRAJMAN-JAKŠIĆ, univ.spec.oec.
Faculty of Economics in Osijek, Gajev trg 7, Osijek
Abstract:
Although it has been more than two centuries since the importance of industry for a country's development was fully grasped, industry is still one of the main levers of economic growth in most countries around the world. Combining the imagination of scientists, technicians and innovators with the logic of capital provided a solid foundation for the industrial development in today's highly developed nations. Industry has been changing exponentially in modern times – new areas of industrial production are emerging, which are based on knowledge as a key development factor. Optimization of industrial development and harmonizing industry with other business activities is a prerequisite for achieving economic prosperity in a country. This paper aims to give an overview of the Croatian industry and suggest guidelines for its future development. Long-term development of the Croatian industry cannot be based upon “traditional industries”, particularly if one takes into account emerging economies with cheaper labour. The Croatian industry as a whole has to be restructured towards “new industries” based on competitiveness achieved through knowledge, innovation, creativity, sustainable development and advanced technology in all areas of operation. The Porter’s diamond model was applied to the Croatian industry in order to examine its competitiveness and explore the implications of its future development.
Keywords: “new industry”, “traditional industry”, Porter’s Diamond Model for Croatian industry
Introduction
Republic of Croatia, in the times when it was a constituent republic of the ex SFRY (until 1991) and with more than a century delay for The first industrial revolution, did not timely caught “the rhythm” in the development of its industry. The Croatian starting phase of industrialization came no less than 127 years later than the one in Great Britain, and in the phase of its fastest industry development no less than 137 years
(Institute for industry economics, 1975, p. 36). Apart from bad starting development position, the big role for the current state of the Croatian industry played the Croatian Homeland War (1991-1995), which through direct and indirect damages significantly slowed down the economic growth of Croatia. Devastated factories, being cut off the main export markets, the inability to compete with the international companies and badly conducted privatization, are just a few consequences. A series of political decisions and decisions of the creators of the economic policy which followed, resulted in difficult economic situation in Croatia. Along with numerous problems from the past, the present-day Croatian industry is facing with old-fashioned technologies, indifference of young people for technical sciences, concentration of equity, knowledge and activities in the leading region – North-WesternCroatia, lack of national industrial vision and strategy, as well as lack of financial means required for investments into “new industry”[1]. All-pervasive globalization processes have become an integral part of the macroeconomic deliberations, by which the necessity for adjustment of national economy to the resulting changes in the industry becomes an imperative. There appears a necessity for creating and implementing an adequate industrial policy, which should be the result of a total analysis of past and future relevant industrial factors.
The lack of industrial policy has aggravated the velocity of the economic growth of Croatia as well as the transformation of the traditional industry towards new industries. The above mentioned has caused an unfavorable position of Croatia in the region: in 2009 Croatia was in 72nd place (out of 133) on the global competitiveness ranking, 41 places lower thanCzech, 35 places lower than Slovenia, 25 places lower than Slovakia and 14 places lower than Hungary (World Economic Forum, 2009). Apart from that, most of foreign direct investments, which Croatia received (EUR 4,190,2 million in 2008), have been invested into covering of current consumption, and the part which has been directed at the production has mostly relied on unproductive investments – financial intercession 27 % and sales 23 % out of total foreign direct investments in 2008 (Croatian National Bank, 2010).
Bad competitiveness of Croatian producers on foreign market has resulted in week import coverage by export which was 47.9% in 2007. Croatian export business is at the level of 48.4% of GDP, whereas in Hungary export business is not less than 77.3 % andSlovenia 69.2% (authors according to: The Federation of International Trade Associations - Country Profiles, 2009). In 2006 export of high technologyin the total export of processing industry in Croatia was at the level of 10%, whereas in Czech Republic it was 14% (authors according to: Development Indicators Database, 2009). According to the data (UN Development Programme, 2008), the world’s biggest export is accomplished in the following sectors: crude oil production, car industry, small electronic parts, telecommunications, computers and equipment, medicine and animal health. Those several areas are surely the most attractive since the export of those products increased for almost 32% in 2006 compared to 1995, and in 2006 the share of those products in the total value of the world’s export was not less than 30%.
These indicators of the world’s movements of industrial production and foreign trade exchange can serve as a good guideline for reconstructing the Croatian industry. It is necessary to create industrial policy, which will recognize the existing deindustrialization as the beginning/first phase of reindustrialization. Croatian industry, although caught up in the mentioned deindustrialization, could be considered as an extremely relevant activity of the Croatian economy. In favor of its importance speak the basic industrial indicators, according to which about 97% of the Croatian export in 2007 has been realized through industry; in the same year it employed about 22% of the Croatian active workforce (Table 1.) and made about 23% of Croatian GVA in 2005 (CBS, 2009a).
Table 1. Key indicators of Croatian industry in 2002, 2005 and 2007
Indicators / 2002 / 2005 / 2007Total number of employed persons in industry (000)
% in the total employment of Croatia / 319
23 / 322
22,7 / 335
22
Average net salaries (Kn)
+/- variation of the standard of Croatia (Kn) / 3,832
+112 / 4,607
-231 / 5,142
+301
Active legal persons
% of all active legal persons of Croatia / - / 11,514
12 / 13,612
11
Export (mil.$)
% of the total export of Cratia / 4,748
96.8 / 8,625
97.9 / 11,976
96.9
Import (mil.$)
% of the total import of Croatia / 10390
96.9 / 17,990
96.9 / 20,898
80.9
Source: authors have adjusted the data according to: CBS, 2004, 2006 and 2008.
Croatia is currently in the third phase of industry development[2]in which involvement in the international work division and sectoral productivity should be increased, the importance of technics and technology should be emphasized, the role of entrepreneurship should be increased and quality personnel should be developed in order to reach the effect of optimization of development with more intensity and make the prerequisite to enter the phase which is marked by efficacy of the total development and postindustrial society. In early phases of industry development the key role had the geographic position and natural resources which created the dynamics and the development success based on their availability. Current development factors rely on science and technology development through innovations and inventions, therewith the market becomes global and the term globalization of production is more and more used. Through creation of new demand, technics and technology development the market is expanding, the importance of certain productions is changing, organization is improving, and specialization is developing. This shows that the concentration of scientific-research work on immediate application in industry is a necessity for the development of Croatian economy. For example, a Porter’s diamond model could be of use for the very analysis of industry and creation of recommendation for its future development.
The analysis of Croatian industry using the Porter's diamond model
Porter's diamond model (Porter, 1990, p. 127.) is a relativelywell accepted model for the analysis of competitiveness. There are numerous examples which prove the application of this model for analyzing the competitiveness of countries, regions, individual economic activities – industry and industrial branches.For example it was applied for the analysis of the textile industry of the Chinese province Ningbo (Wang, L., P. and R., 2005), tobacco industry of Macedonia (Tuna, E. 2006), wine cluster in Macedonia (Porter, M.E. et al., 2006), the financial sector in Singapore(Kuah, A. and Day, J., 2005),world’s automobile industry (Sledge, S., 2005) and even the whole states, like the state of Armenia (Chobanyan, A. and Leigh, L., 2006). However, from the very appearance of this model to its wide application, the model has faced a lot of criticism. Those critics are mostly directed towards the lack of concrete causal relationships between the very model factors and the lack of its forecasting value (Davies, H. andEllis, P., 2000). Likewise, Downes (1997) objectsthefact that it did not comprise the digitalization, globalization and deregularization as important contemporary competitiveness factors. However, according to Porter (1998) the analysis of competitive forces or advantages should be directed towards the key factors of competition and the analysis of their influence on the enterprise, industrial branch, activity, region or country. Porter’s diamond model offers a holistic and flexible concept which enables all interest groups in a certain country to examine the competitiveness in all its complexity, as well as the constructive communication that servesthe improvementof surroundings with and aim to improve the industrial competitiveness.
Porter's diamond model comprises four key factors which influence the industry (Picture 1): 1) factor conditions, 2) demand conditions, 3) supporting and associated industries onditionsažnjeving the industrial competitiveness.terest groups in a certain countrys r analysing 4) company's strategy, structure and rivalry.Mutual influence of these factors, as well as their weaknesses, determines the growth of industry and its tendency towards innovation. Apart from these factors, Porter included the influence of government and chance into his model. The government should not interfere all too much into market relationships. What it should do is to offer macroeconomic stability and entrepreneurship atmosphere in the country,so that the companies could, on microlevel, achieve their competitive advantages and recognize the chances from the surroundings.
Picture 1. Porter's diamond model of Croatian industry
Source: authors have adapted according to: Porter, 1990, p.127
Factor conditions
Factor conditions represent the basis of any analysis. These conditions relate to the basic things a certain country, region or activity disposes of and what is relevant for the long-term development of the same. Under factor conditions one should consider the basic (geographic characteristics, natural resources, infrastructure, work force, financial infrastructure and alike) and advanced factors(level of technical and technological equippedness, sophisticatedness, aptitude towards innovation, education and alike).
Population characteristics of a certain country can be selected out of the basic factors. In 2007 the population of Croatia was around 4.440.000 (CBS, 2008a). In the total population of Croatia the active population made up 40%, and the employed 34%. The registered unemployment rate for the same year was 14.8% with a total number of the unemployed mounting to 263.797. 2.31% of the total number of persons employed were employed in agriculture, hunting, forestry and fishing, 47% in industry, 8% in construction, 18% in sales, and 42% in other services. The total unemployment rate in Croatia was significantly under the Lisbon goal (70%); in 2004 it was on the level of about 55%, whereas, for example in Slovenia it was on the level of about 64% (World bank, 2007). Croatia, like the most of European countries, records the problem of depopulation. In 2007 the proportion in the young population (0 to 14 years of age) was 15.7%, in the working age population (men from 15 to 64 and women from15 to 59 years of age)64.4%, and in old population (from 65 years of age and more) 17%.
There is no serious economic improvement without highly educated population which should be the creator of knowledge and innovation. With a proportion of students to the overall population of 3%Croatia is rankedlast compared to the othercomparable transition countries.The proportion in students is for example in Rumania on the level of 5.4%, Slovenia 5.3% and Hungary4.1% (National Competitiveness Council, 2007, p. 17). In 2007 in Croatia there were 458 employed PhD's in total, butonly 8 of them were employed in processing industry and 6 in electricity, gas and water supply. Apart from that, there are6.8% of MS' and university specialists employed in the processing industry out of the total number of employed MS’(759).[3]The stated indicators show a reason for concern sincehighly educated work force, which will among other macroeconomic force be the “bearer” of the economic growth, is neededto transform the Croatian industry into the new industry.
Apart from certain „problems“which appear in qualitative and quantitative characteristics of the population, we can see how the Croatian economy records an extremely slow economic growth (2002, 2005 and 2007) which causes the slow solving of economic problems. In 2002 the rate of growth of GDP was 5.2%, and in 2007 it was moving at almost the same rate of 5.6%. Considering the current economic crisis, as well as the Croatian long-term crisis (within the meaning of external debt of 87,8% of GDP and in 2007 export inefficacy with export-import coverage of 47,8%for the same year), it is difficult to forecast the optimistic economic results.
Since the population numbers and its work productivity determine the dimensions of the internal market of every country, the industry is identified as the crucial activity which activates the available population and contributes the general development through the making of GDP and added values. This shows usthe important indicators which indicate the importance of industry in economy. One of those indicators is work productivity in industry. Observing the period from 1997 to 2006 we can identify the increase of work productivity in industry by no les than 76%, mild increase of industrial production volume by 38%, but also an extraordinary decrease by 22 % of the number of people employed in industry. While the indexes of industrial production and indexes of work productivity depict the growing increase year after year, the index of people employedin industry shows the constant falling trend. Therefore, the flow of work productivity depends on the capital work equippedness, but only if it is shown in relation to the actually used means in the production means in the process own in comparison with work productivity show the increase trend year after year, process, and not only as an inherent value. The way employment is influenced by the production situation, so is the flow of work productivity indirectly depended on the employment flow. By comparing the proportion in flow of work productivity, industrial production volume and people employed in industry, we could conclude that the increase of 76% in work productivity in Croatian industryis not the result of technical improvement, innovations and similar improvements in industrial production, but the result of decrease in the number of employed persons compared to the base year, as well as decelerated growth in industrial production.
Demand conditions
Demand conditions imply the very segment of the total and targeted demand in economy (in the country and abroad), consumer characteristics and purchasing power which reflects the life standard of the population. Timely recognition of domestic and world demand can play an important role in industry restructuring and acceleratingthe economic growth of a certain country. An important factor which influences the very demand is certainly the poverty risk rate, GDP indicator per capita and similar indicators which directly influence the level of achieved life standard of the population and their basis for demand creation.
In Croatia the GDP per capita is on the level of 50.3% of the EU25 average, while in Slovenia it amounts to 84.5% of EU average, in CzechRepublicto 77.2% and Hungaryto 63.1%. The only countries with a lower GDP per capita compared to the EU average(out of the 12 observed ones) are Rumania with 37.3% and Bulgariawith 36.2% (National Competitiveness Council, 2007). Withpovertyriskrate of 19% the Croatiais among the countries with the biggest rate in Europe. For Example that rate is 10% in Czech Republic, in Slovenia 12% and in Hungary 16% (CBS, 2009b). Apart from that, in Croatia there are around 20.5% of households which are late with the payment of overhead expenses,whereas in EU15there are only 7% of those, the same situation isin CzechRepublicand in Greece 12%. It worries the fact that most of those households in Croatia (not less than 30%) is in Sisak-Moslavina County, Brod-Posavina County and Vukovar-Srijem County (UN Programme in Croatia, 2007). As much as 62% of the household expenses are spent onpaying forthe basic needs like food, housing and health care compared to the total life expenses (CBS, 2009c).
Apart from the mentioned indicators, the problem of regional inequality of Croatia influences the demand. According to the last available data, in 2006 the GDP of the Republic of Croatia was EUR 34.212 million, in that North-Western Croatia makes48,1% of GDP. Adriatic Croatia follows with 31%, and the last and undeveloped is Pannonian Croatia which makes only 20.9% of GDP of the Republic of Croatia.
Related and supported industries
Good networking between the industry and relevant economic institutions, financial institutions and suppliers themselves can significantly influence the total efficacy and effectiveness. Namely, information which could be gathered from the institutions, new working methods, optimization in using the input, new technologies and the very business surroundings could significantly contribute the competitiveness of the Croatian industry.
Considering the stability of numerous institutions for direct or indirect support of the industry development, we could say that the existingsituation in this segment is relatively favorable. This way, industrial companies have the access to the information of the Ministry of Economy, Labour and Entrepreneurship andof the whole academic community in the County or wider, to the guarantees of the Croatian Agency for Small and Medium Enterprises, to favorable loans of the Croatian Bank for Reconstruction and Development, to support and collaboration of the Croatian Chamber of Commerce with County chambers, to Croatian Employers’ Association, to numerous Development Agencies, to SMEs and Entrepreneurship Policy Center, to Entrepreneurship Centres, Incubators and similar institutions. Apart from that there are numerous international, national and local fairs which are a great opportunity for meeting the supply and demand, development of business collaboration, communicationwith consumers and alike. Apart from the business surroundings and institutional support of that level, professional high-school education and high education should be reformed according to real business needs. The existing educational infrastructure offers an extremely good basis for that reform. Participating in the row of available EU programms, prequalification programms, and additional education towards the needs of new industry can raise the level of productivity, and therewith also the industrial competitiveness and the production of products which arethe result of scientific and research work. No or untimelyadaptation to the legal regulations and EU standards, as well as insufficient involvement of the economic participants of local and national administration in the development priorities and strategic plans are definitely the important threats to the industry development.