Mission Director Addresses Participants of the Foreign Investment Conference in Cavtat

Prime Minister Sanader, Ministers Škare-Ožbolt, Suker and Vukelić, Ladies and Gentlemen. It is my pleasure to welcome you here this morning to discuss an issue of vital importance to Croatia 's future -- "Foreign Direct Investment".

In today's inter-connected, global world Trade and Foreign Direct investment are the twin engines of economic growth. Both have great potential to transform the economic environment in Croatia - but ultimately FDI may have the greater impact. Why? Clearly, FDI can rapidly provide finance and market access for new production here. But more importantly, FDI also transfers new technologies and best practices to Croatian firms.

For example, recently, I visited Varaždin where I saw the transforming effects of FDI. In an area where textile production was considered a dying industry, an Italian investment of $36 million refocused and revitalized the sector. The Italian company imported state-of-the-art technology, hired and trained nearly 300 people and are now producing - and exporting high value-added textiles. The Italian investors were able to achieve excellent results by introducing advanced technology and raising the productivity of Croatian labor. As a result of that investment the area around Varazdin is benefiting from sustainable job creation, enhanced tax revenues and economic growth.

The benefits of FDI are highly valued in other countries in South East Europe and the world at large. Competition for investment is intense. Leaders in other countries are taking a close, hard look at their business environments and assessing comparative and competitive advantages to build effective investment promotion strategies. They are identifying and removing obstacles to investment and offering a wide range of incentives to attract new investment projects. And they are establishing credible, competent investment agencies to implement their investment promotion strategies.

Throughout the world, more than 400 investment promotion agencies now compete to attract foreign investment. These agencies generate FDI prospects through marketing and investor targeting, they facilitate the development of investment projects, and provide after-care services to investors. They typically work with both foreign and domestic investors, and - because of their knowledge of business conditions - investment promotion agencies are increasingly involved in advocating policies to improve the business environment.

Until very recently, Croatia 's National Investment Promotion Agency consisted of two individuals and an organizational shell. In Serbia and Montenegro , by contrast, the national investment promotion agency employs thirty-three professional staff and has an annual budget of over $3 million. In Bulgaria , the IPA has a staff of 36 and a budget of $5 million. The Slovak Investment and Trade Development Agency employs over 100 investment promotion specialists.

Yes, Croatia is in the race for global foreign direct investment but it is not running fast enough to keep up with the leaders. According to U.S. billionaire Steve Forbes: "The Slovak Republic is set to become the world's next Hong Kong .a small place that's an economic powerhouse. Foreign direct investment in this country of 5.4 million people has grown from $2 billion to $10 billion since 1999." By contrast, since 2000 FDI in Croatia , excluding privatized assets, has averaged only around 300 million Euro per year.

We can be cautiously optimistic about raising Croatia 's FDI levels in the near term. The Government's success in opening negotiations for entering the EU and its measures to improve the judicial and educational systems will have positive effects on attracting new FDI. Likewise the Government's decision to re-invigorate the Croatian Export and Investment Promotion Agency will provide the country the means for capturing new investor interest. Another piece of good news is that regional economic councils throughout Croatia are impressively developing local investment promotion strategies, creating industrial zones and developing investment incentive structures - something I am very proud to say we helped with USAID assistance.

Despite all of this, Croatia 's ultimate success in attracting new FDI will depend upon answering a seemingly simple question: what do investors want ?

Over the last few months several international organizations have published rankings of how well individual countries are answering the basic issues that investors care about. There was the World Bank Doing Business Report, the World Economic Forum's Annual Global Competitiveness Report, and Transparency International's Index of Perception of Corruption. In most of these reports, I think it is fair to say that Croatians were disappointed to see how their country ranked. Data and methodology aside I think everyone in this room agrees that Croatia must be higher ranked in the future and that the country obtains every investment dollar/euro/yen that it needs.

The challenge for this conference, and for each of us, is to constructively work together to build the region's most attractive investment environment maybe not for every sector- but certainly a few with the highest prospects. How will that happen?

First, Croatia 's business-enabling environment must be fixed to attract new investment. Inefficient government bureaucracy, corruption, and property rights are some of the key reasons why investors do not invest in Croatia . They also cite concerns about the process of registering property, the protection of their investment, and enforcement of contracts. Public and private sector leaders must identify administrative and regulatory impediments to investment and progressively eliminate them or re-engineered them to be more transparent, predictable and user-friendly. Opportunities for petty corruption must be eliminated. Other countries have overcome these problems and Croatia can too.

Second, CEIPA must lead a rigorous analysis of comparative and competitive advantages to determine which industry sectors could be most attractive to new investment IF the investment climate and costs of production could be enhanced. CEIPA must capitalize on the work of already done by regional, multi-donor, investment promotion organizations. USAID has provided resources to these organizations to conduct detailed analyses of Croatia 's competitiveness in the automotive and food processing sectors. A third analysis - of the ICT sector - is also underway. USAID stands ready to help CEIPA and the Government of Croatia to tackle each of these critical tasks.

We will continue to provide assistance to CEIPA to help professionalize their operations, distill lessons learned from global competitors, and incorporate "best practices" in investment promotion - as appropriate in a Croatian context. We will assist in strategic analysis and the preparation of targeted promotional materials and web content.

We are prepared to support key counterparts such as the National Employers Association, the National Competitiveness Council, FINA, and others, who are willing to fight the battles necessary to reform the investment climate. This is not an area where international organizations can - or should - lead. But as private and public sector "champions" of regulatory reform emerge, we want to be effective partners.

And we will supplement the efforts of CEIPA with projects like Poduzetna Hrvatska. That $20 million project has the mandate to help identify FDI opportunities and work with Croatian counterparts to "close the deal" through investor-specific marketing and technical support. In the last 12 months USAID facilitated two major greenfield investments valued at $51.6 million. There are currently nine investment projects in the pipeline, valued at over $32 million.

None of this is easy. But Rome wasn't built in a day.

One of the key messages from the World Bank's 2005 World Development Report is that investment climate improvements are a process, not an event. The report goes on to state that "Government policies and behaviors influencing the investment climate cover a wide field. But everything does not have to be fixed at once, and perfection on even a single policy dimension is not required. Significant progress can be made by addressing important constraints facing firms in a way that gives them the confidence to invest-and by sustaining a process of ongoing improvements."

That's what we're here to discuss. There's much to be done and USAID wants to be your partner. So let's get to work.

Thank you HBOR for providing this opportunity.

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