An injection of much-needed investment funds awaits Croatia when it joins the European Union on July 1: An amount equivalent to about 4 percent of the country’s GDP will become available to Croatia through the EU Cohesion Policy when it becomes the EU’s 28th member nation. The funds offer Croatia a unique opportunity for financing strategic investments, aiming to restore the country’s growth prospects and generate better employment opportunities.
Experience shows, however, that seizing this opportunity is not easy: New member countries of the EU have often allocated those funds to projects with low economic and social returns, or have simply failed to effectively deploy these funds.
The Second Science and Technology Project (STPII) – which was approved by the World Bank’s Board on April 26 – will help Croatia overcome such problems by helping the country’s research and innovation sector absorb the new EU funds effectively.
The project is a EURO 20 million loan to build capacity in government institutions; to prepare project applications for submission to the EU; and to finance research and development (R&D) and innovation in the business and scientific communities. That initial EURO 20 million is expected to mobilize at least EURO 200 Million in EU funds in the period from 2014to 2020.
The EU funds will be a large and stable source of financing for research and innovation in Croatia, in a period when Croatia’s austere fiscal policy has been reducing public expenditures and when the country is struggling to shift its growth pattern away from the expansion of aggregate demand, hoping to become more productivity- and export-driven.
Research and innovation can help reduce Croatia’s productivity gap and promote exports. Studies using World Bank data from its Enterprise Survey illustrate that gap: The contribution of innovation to the productivity level of an average firm in Croatia is almost 30 percent less than in the eight other Central European countries that have recently joined the EU. Croatia has strong potential, however, for increasing its exports: Simulations show that increasing aggregate R&D to 3 percent of GDP would raise exports, by 2025, by a projected 13 percent. Estimates of the social rate of return of R&D investment in Croatia are at 73 percent – double the value of returns on infrastructure investments.
STP II will help unlock Croatia’s potential. Project applications under STP II will support investments in infrastructure for research and innovation in areas that aligned with Croatia’s economic specialization – in such areas as the marine sector and renewable technology industries. In addition, STPII will also finance programs that support innovative startups; small and medium-sized companies’ investments in R&D; and collaboration between science and industry. Such programs are currently implemented by the country’s innovation agency, BICRO.
In addition, STP II project applications will include the financing of the current “Unity Through Knowledge Fund,” which promotes collaborative research between Croatian scientists and the country’s diaspora of scientists who have migrated overseas. They will also support research by leading young scientists. All those programs have been developed, implemented and evaluated by a previous operation: the first Croatian Science and Technology Project), which was concluded in May 2011.
Croatia has strong potential to apply its capabilities in science, R&D and innovation, and the new Bank lending through the STPII program will help energize the country’s investments in the future. At a moment when austerity policies and domestic budget cuts have been constraining investments, the Bank lending will help make the most of the EU accession funds’ potential for helping Croatia capitalize on its new identity as part of the European Union.