Sustainable Food Production and Processing

1. Cluster Profile

• Overview

In 2013 the gross value added of primary agricultural activities amounted to HRK 11.9 billion, which represents approximately 4.3% of the Croatian economy. While this share has been decreasing over the past two decades, the primary sector still contributes approximately 9% to employment (The World Bank Group, 2016) and has significant economic multipliers in other linked industries. In fact, the downstream food and beverage sector comprises approximately 20% of total manufacturing production and employment (HRVATSKI SABOR, 2014), the largest share of any individual manufacturing activity (Rašić-Bakarić, 2015). Together the food production and processing economy contributes nearly a tenth to Croatia’s gross domestic product (GDP) and 13% to exports.

1.1.1. History of the Industry in Croatia

While the industry has witnessed several shifts in the structures of production since the 1990’s, the food and beverage sector remains heavily influenced by the “Agro-kombinats” of the former socialist system (Maxwell Stamp, 2012). These SOEs were able to operate at economies of scale given the command system, however when they were privatized it precipitated a drop in primary sector productivity that has never fully recovered.

Since these initial privatizations, an intensive process of vertical integration and Mergers & Acquisitions (M&A) led to the re-emergence of vertically integrated systems—incorporating primary production, processing and distribution—which have been dominated by a few private sector groups. Accordingly, the structure of the industry has consolidated significantly over the past twenty years. The Agrokor group – one of the leading agro-food firms in Croatia – is the best example of how privatized Agro-kombinats came to control much of the Food production and processing sector. More generally most of the Food and Beverage Manufacturing activity takes place in the larger Zagreb area, Koprivnica-Križevci County, Varazdin County and Osijek-Baranja County, where these large domestic enterprises are located.

However, now as Croatia has joined the EU, more modern and efficient processing firms have begun to emerge. A younger and more globally integrated fishing industry is growing on the Adriatic coast with concentrations in Zadar, Split, and Istria. Yet the shift in focus to the EU market has not been universally beneficial. Since accession in 2013 the food production and processing industry has been evolving rapidly. Some former powerhouse firms have been losing their competitive advantage, while new ones have opportunistically seized market opportunities. Understanding how these shifts play out across firms and industries necessitates looking at the patterns in production, export, and price. At the most aggregate levels;

• Primary production is increasing, albeit with a trend towards consolidation in terms of the number of items produced (with a heavy shift in productive resources towards cereals);

• Export values of food products have increased in aggregate, although the export basket has shifted both in terms of its contents and its destinations. Notable declines can be felt in the dairy and vegetable oil sectors;

• Producer/Firm cost structures have had to adjust to the new competitive pressures of the large European markets. Industries have had uneven success in adapting to these structures and as a result of these pressures there has been a net firm death rate in some sub-sectors.

Given the importance of the food production and processing sector to the Croatian economy it is necessary to undertake an assessment of the causes of decline in some sub-sectors and the reasons for growth in others.

1.1.2. Smart Specialization: Food Production and Processing

The government’s Smart Specialization Strategy provides useful insight into the scope and focus of the Food Production and Processing STPA (Republic of Croatia, 2016). The strategy spans a varying set of activities from primary production to food manufacturing (see Annex 2). It also lays out a range of research and development (R&D) topics and key enabling technologies (KET) that can be utilized to support private sector growth and sustainable development. Most notably the strategy specifies a need for;

• Physiology-based innovative solutions (biotechnology and applied genetics) to increase primary production and innovation in the application of agro-processing methods;

• e-services for managing agricultural and food production operations and improved distribution management for integrated supply chains;

• ICT systems, applications and solutions for the control and monitoring of organic farming of food and geographical origin of food products;

• KETs for sustainable food packaging systems that prevent microbial contamination and that improve shelf life (Republic of Croatia, 2016).

Integrated throughout these topics are a range of actors and services that will necessarily need to be involved in order to effectively achieve innovation in the sector. However, it is useful to first take stock of the food production and processing industries in Croatia and assess its place in the global value chain.

2. National Supply

2.1. Primary Production

2.1.1. Agricultural regions and their production

Croatia has three distinctive geo-climatic regions of agricultural production, including the Pannonian region (including parts of North Croatia, Slavonia and the greater Zagreb Region), the Mediterranean region (including parts of Dalmatia, Lika, Istra and Primorje), and the mountain region (including parts of Lika-Gorski Kotar). Pannonia is the largest area and covers 46.3% of arable land. This area lies to the East and is the traditional breadbasket of the country with the factor endowments suitable for cereal production amongst other things. The Mediterranean region covers approximately 34.1% of agricultural land and is suitable for horticultural production. This geo-climatic region also has access to the Adriatic Sea, which plays a considerable role in food production systems. The Mountain region covers approximately 19.6% of the agricultural land (Croatian National Committee of ICID), but is less focused on food production.

2.1.2. Primary Production Structures

In 2015 the Chamber of Agriculture estimated that there were 148,619 registered farms; including 144,405 family farms and 2,059 corporate farms, amongst other entities (Croatian Chamber of Agriculture, 2015). The average size of these farms is only about 5.6 hectares, which is quite small for a European country especially given UMIC/HIC trends toward consolidation (EuroStat, 2013). The fragmentation of land holdings may have contributed to low yields and to the decline of agricultural productivity since the 1990s. Today plant production is approximately 80% of the pre-war period while livestock production is approximately 30% of pre-1990 levels (Franić, Jurišić, & Gelo, 2014).

2.1.3. Primary Production Volumes

The agriculture sector in Croatia is dominated by the production of cereals, which comprise approximately 50% of the total volume of agricultural production intended for food consumption. The horticulture sector produces 34% of food production volume, inclusive of Fruits (7%) and Vegetables (27%). The animal products market is also significant contributor to the food sector by volume (16%), although this is a composite of the dairy (11%), meat (3%), and fish (2%) industries.

One important characteristic of raw agricultural produce is its perishability. Items that have low perishability tend to have lower absolute values and lower margins for those engaged in production. Non-perishable produce is more often traded as a commodity, which are indistinguishable from the produce of competitors, have a long shelf life and high competition. On the other hand, produce that is highly perishable at harvest often has higher values, higher barriers to entry (due to the coordination needed in the steps of production), and therefore higher margins for their producers. These can either be sold ‘fresh’ or can be further prepared through some degree of food processing.

Cereals tend to have low levels of perishability, while almost all animal products are highly perishable directly after harvest. Approximately 5% of produce are moderately perishable, meaning they are stockable/perishable to some degree; these are mainly in the horticultural category. However, given that Croatia’s horticultural production is largely in varieties that have low perishability (e.g. potatoes and beet root) these tend to have commodity type features. At an aggregate, nearly three quarters of output is therefore in produce where immediate preservation or consumption is not required.

It is also important to understand the structural changes that have occurred in primary production since accession to the EU, which have been causing a reorganization of the industry. While production data is only available up to 2013, expansions in cereal production can be immediately observed. The growth in horticulture also underlies an increase in production of horticultural commodities, mainly sugar beet and potatoes. More encouragingly, while the processing and packaging of marine and fresh-water fish is a relatively new activity with limited quantities, it has the fastest growth rate of any major category of goods.

Cereals. The Croatian cereal sector is dominated by the production of maize (2,046,966 tonnes in 2014) and wheat (648,917 tonnes) and barley (175,592 tonnes) with lesser quantities being produced in triticale, oats, rye, buckwheat, sorghum, millet, and other mixed grains. This cereal production is serving both as an input into food commodity markets and as an input into animal feed6. Production of cereals is majorly focused in Slavonia where 64% of firms engaged in cereal processing are also located.

Horticulture. In Croatia the horticulture sub-sector is unevenly split between Fruit production (21% of volume) and Vegetable production (79%). In the Fruits category, Grapes (181,096 tonnes) and Apples (128,211 tonnes) are the most highly produced items. Vegetables production is dominated by sugar beet production (1,050,715 tonnes), which comprises almost two thirds of production. Potatoes are the second highest produced item at 9% of production (162,501 tonnes). The rate of perishability is particularly important for assessing the potential value of the sector and the support structures necessary to market the produce7. As a percentage of all horticultural production less than 14% is highly perishable at harvest, suggesting that the sector is operating in a low value non-perishable segment.

Fish. Fish production data gathered from EUROSTAT shows a steady increase in wild catches. In 2014 nearly 80,000 tonnes of wild caught fish were produced in Croatia, while aquaculture production contributed another 14,000 tonnes. The production of fish is largely centered in Dalmatia around the Zadar region with a few firms forming a well-organized conglomerate (Zajc, 2010). Some production also takes place in Istria.

Livestock. The livestock sector contributes primary products in the Dairy and Meat sectors. Despite considerable public support for livestock, the sector has a history of underperformance (Franić, Jurišić, & Gelo, 2014). Primary production in the dairy sector (as measured by milk output), has declined 7 percent per annum between 2007 and 2013 (including a 10 percent drop between 2012 and 2013). Over 97 percent of production is in cow milk, while goat milk is two percent and sheep milk is just one percent, despite being the most valuable. The meat sector has a greater variety of primary products, although nearly half of the sector is in pig production (106,500 tonnes), with the other half comprising cattle (28,450 tonnes), eggs (36,685 tonnes), and poultry (31,614 tonnes) in roughly equal parts. Production of other types of meat was more marginal (5,478 tonnes). At an aggregate level meat production has maintained aggregate output, despite a reduction in pig production since 2009.

2.1.4. Gross Production Value of Primary Products

In the context of gross production quantities, it is also important to look at data that give a better sense of the value in each product. In 2013 the Gross Production Value of all cereals was estimated to be USD$608.24 million or HRK 3,469.1 million. In 2013 livestock products contributed approximately a third of the value to all terrestrial production (FAOSTAT, 2016). This level of analysis can provide a useful lens for understanding the unit values in the sectors, although it is important to note that this does not reflect the margins of producers in those segments.

2.1.5. Food Products

Nearly all primary agricultural goods go through some further preparation or processing at some point in the value chain before being sold to the final consumer. The degree of preparation can span from simple cutting and packaging through to drying or chemical alteration (Austin, 1981). Processing often effects the perishability of the product, though it is important to note that not all highly processed products are of greater value than the primary items of agricultural production. Value can also be created through other means such as certification, packaging, storage, distribution and branding. Often times these types of value addition are greater than the value obtained through agro-processing.

In Croatia, the food and beverage manufacturing sector has changed rapidly in the past few years. For example, cheese output has been growing steadily from 2006 with a compound annual growth rate (CAGR) of 3.81%. However other sectors of the food manufacturing industry have reduced production. Most notably the vegetable oils industry has decreased output at an annualized rate of 7.04% since 2006; including a 20% decrease in olive oil, a 9% decrease in soybean oil, and 10% decrease in sunflower oil. In the beverages sector wine production stood at 46,000 tonnes in 2013 after dropping precipitously between 2004 and 2005. Beer of barley production has remained substantial and consistent over the past 10 years as this has been a necessary input into the beverage sector. These divergent trends within the food production and processing sector are largely the result of expanding markets and competition. Some producers have been able to use the expanded EU markets to increase production.

2.2. Croatian Food Exports

Exports are an important source of growth for the food production and processing sector in Croatia and generally they have been doing well. In 2015 Croatia exported approximately US$1.5 billion worth of food, of which primary industry products (including dairy) account for nearly US$619 million and processed/prepared food products account for $890 million. At an aggregate level it is apparent that most of the export earnings come from the Food & Beverage Manufacturing sector rather than the primary sector (see Annex 5). Yet it is notable that Fish exports (a primary sector product) are the most valuable individual source of food sector foreign exchange earnings with US$170 million worth of exports reported in 2015. At the same time the sector comprises less than 2 percent of production by weight.

To understand how the industry has been performing in the exports markets, it is important to understand the history of the trade structures under which Croatia has been operating. The past decade production has been driven by a switch in market focus from the relatively small market in the Central European Free Trade Area (CEFTA) to the large European market. Croatia joined CEETA in 2003, but it was not until 2007 that its bordering countries (Serbia and Bosnia) joined the block and its trade accelerated. Then as Croatia was beginning the process of EU accession it was largely able to negotiate MFN status for its exports, while at the same time maintaining its own import tariffs for EU producers (Boulanger, Ferrari, Michalek, & Vinyes, 2013). Thus between 2007 and 2013 Croatia had low tariff barriers to markets in the EU, CEFTA, and to many third countries. This protection against cost-competitive EU producers allowed some Croatian producers to remain in operation by producing for the smaller CEFTA markets that did not require economies of scale to remain cost competitive (as is now required).

From 2008 to 2012 Croatia exported roughly equal shares to both CEFTA and the EU. Since accession to the EU, external tariffs to CEFTA and other third country markets have come into conformity with EU rules, which exposed inefficient Croatian producers to cost competitive pressures of EU producers for the first time. While the increased trade has benefited the industry at large, the export basket and market focus has shifted. The contraction of some subsectors underlies the cost structures necessary to compete with European economies of scale. The image that emerges is one of a horse in full stride. CEFTA were the legs that Croatia used back in 2007 (when Bosnia and Serbia joined) to kick off the ground; however, it really only hit its gait in 2013 when competitive producers headed to European markets.

2.2.1. Cereals

Cereal grain exports to the EU have increased considerably since Croatia joined the EU and now comprise about half of all grain exports. Exports to CEFTA comprise the other half. The main export destinations for Croatian cereal grains are Italy, Bosnia & Herzegovina, and Slovenia. While Croatia is a cost-competitive producer of such grains, the demand pull from these countries has contributed to the commoditization of primary production.

2.2.2. Horticulture

Exports of fruits, vegetables and other horticultural items have grown over the past decade, although there was a slight decrease in some categories in 2015 and the sector is expected to be further affected by the stagnation in the global economy. The main countries to which Croatia exports fruits are Serbia, Slovenia, and Bosnia & Herzegovina, while the main countries for export of vegetables are Slovenia, Bosnia & Herzegovina, and Italy.

2.2.3. Livestock and Animal Products

Leading up to EU accession the aggregate production of meat increased in Croatia as a result of strong price signals coming from Europe. After joining the EU traditional markets in CEFTA shrank and the remaining exports shifted towards Europe. The most notable export destination to increase its share was immediately neighboring markets in Slovenia. It is important to note that access to EU markets did not increase performance in sales to higher value exports destinations further afield (e.g. the United Kingdom, France, Germany), indicating that there are still some logistical barriers to trade.

It is also important to note that the Dairy sector has declined in recent years as a result of the loss in CEFTA markets. However, this was not evenly distributed across the dairy sector; cheese makers have improved exports to high value markets in Europe, while producers of lower value items (e.g. milk, butter, whey, etc.) have all declined.

2.2.4. Fish

Fish exports have been one of Croatia’s most competitive products with exports mainly destined for Japan, Italy and to a lesser extent Slovenia. The fact that Croatian firms have been able to sell product to buyers as far away as Japan underlies an advanced marketing network.

2.2.5. Food and Beverage Manufacturing Exports

Food and beverage manufacturing exports have not benefited as much as the primary sectors. The reason why the sector has not benefited as much lies in the economies of scale necessary to compete in the competitive European market. Examining primary producer prices can be indicative of the food and beverage manufacturing industry’s cost structure since the raw supply of the materials is a significant part of the total value added. The case of olive oil production perhaps best represents a loss in competitiveness as a result of these factors. Prior to accession Croatia had a small but viable production for olive & olive oil that was produced and sold regionally. However this production system was only able to exist within a small and isolated regional market since competition with larger producers was not possible. Benchmarking Croatian producer prices against some of the world’s leading producers reveals this higher uncompetitive cost structure. In 2013, Spain (the largest global producer of olives) was able to produce olives at US$563 per tonne, while Croatia was producing the same for US$1,403. In fact the Croatian producer price of olives was above the producer price of nearly every other major olive producing country.

If Croatian producers were operating in a higher-value segment where the product could fetch a premium – such as the Italian specialty, olive oil producers – then the price and production could be sustained. However when Croatia entered the EU the industry witnessed a dramatic collapse in primary production and a decline in olive oil exports. This case underlies the importance of; a) economies of scale when producing for segments that are indistinguishable from global commodities, or b) product differentiation for maintaining value in a cost-competitive global market.

2.3. Export Indicators for Statistical Codes

In the face of reduced protection, these high production costs for olive oil have led to a loss in global market share for Croatian producers, a product segment that is otherwise increasing in global traded values. In the chart below, the vertical axis represents the world growth of imports between 2011 and 2015. The horizontal axis represents Croatia’s share in those imports for a select group of food products. Product categories falling in the right quadrants indicate areas where Croatian industry is increasing its market share, while those in the left quadrants are product segments where it is decreasing. Similarly those in the top quadrants are product segments that are becoming more traded globally, while those in the bottom are product segments that are becoming less traded. Fresh or Chilled swine meat has been rapidly gaining global market share between 2011 and 2015; however, it started from a lower position.

Beyond the growth rates, a number of calculated indicators can help reveal where the industry holds an advantage. The table below shows the Revealed Comparative Advantage (RCA) of the Croatian food industry in the observed period. By analyzing the trend of RCA index, we can conclude that the Croatian food products industry has decreased its competitiveness in comparison to other countries. While this measure considers exogenous variables, it is indicative of the relative performance of the sector. These statistics are also useful to view in the context of the Herfindahl–Hirschman (HH) Product Concentration Index, which measures diversification. Since 2014 the HH product index for “vegetables” (this includes cereals, vegetables and fruits) has risen as a result of an increasing export concentration in cereals. Conversely, Croatia has been diversifying its export mix of animal and food products. A similar HH index for the market share shows high values prior to 2013 (indicating a highly concentrated export environment) that decreased precipitously from 2012 to 2013 onwards. The reduction in barriers to entry in European trade is now allowing more domestic players to take part. However this could also indicate that traditionally large companies are rapidly losing revenue from export sales.

Comparative advantage can also be observed at the more granular six digit product level. For example, Croatia has high volumes of live pig export; yet, it has only marginal pig meat exports. The export of live animals denotes a lack of cold chain logistics and underlies the low tradability for meat with existing firm capacities. Instead the value brought by processing is being lost upstream in neighboring countries. Fortunately, the growth rate in fresh pig meat exports seems to indicate that this industry is sorting out these logistics. The revealed competitiveness (or not) of these products underlies a more nuanced participation of firms in various strategic segments.

Data Source: (Simoes & et alia, 2016)

2.4. Benchmarking (Cold Chain) Logistics in Croatia

Data from a variety of sources confirm a historical underperformance of the logistics sector. In 2013 the percent of products lost to breakage or spoilage during shipping to domestic markets was worse than the average for all other countries and was more than twice as bad as the High Income countries which are not a part of the Organisation for Economic Co-operation and Development (OECD). The World Bank’s Logistics Performance Index (LPI) also provides insights into the performance of the sector. Croatia’s 2016 index score (3.16) is well below that of other European countries (The World Bank Group, 2016A). Croatia also fares poorly in the World Bank’s Doing Business indicator for the Cost to Export where it underperforms against all regional comparators (The World Bank Group, 2016B). As a result of underinvestment by logistic service providers, one industry expert estimates that only 30-40% of Croatian companies are able to outsource this function compared to the EU average of 70% (Pavlovic, 2015). Other surveys have found the situation to be a bit more optimistic (STANKOVIĆ, ŠAFRAN, & HRUPAČKI).

3. Cluster Figures

3.1. Primary Production (A1/3)

While Agricultural enterprises are notoriously difficult to quantify given the small scale production systems in Croatia, official statistics from the Croatian Bureau of Statistics state that there were 9,486 incorporated Agriculture, Forestry and Fishery firms of which only 5,254 (55.4%) were estimated to be active in 2015.

Fishery Firms. Croatia’s fishing industry is one of the most profitable in the food production and processing sector. It is dominated by several large companies that mainly produce indigenous Adriatic fish and tuna. Production is dominated by wild catch (91%), although 9% of firms are engaged in relatively more capital and knowledge intensive aquacultural activities.

3.2. Manufacturing of Food Products and Beverages (C10/11)

More precise estimates from the CBS on the number of firms in upstream manufacturing of Food and Beverage reveals an aggregate reduction in employment across both sectors. From 2008 to 2012 there was a net positive firm entry rate (Aprahamian & Correa, 2015). The picture emerging since then reveals a net firm death rate in the Food industry (C10), a possible outcome of the increasing pressures on inefficient producers from the large European market.

The composition of firms in the Food Manufacturing sector is split between Meat Processing (13%), Fish Processing (2%), Fruit and Vegetable Processing (7%); Vegetable/Animal Oils (4%), Dairy products (5%), grain mill and start products (3%), Bakery products (53%), other food products (11%) and animal feeds (2%). The dominance of bakeries in firm composition (53%) and employment is the result of a competitive network of bakeries selling for the domestic markets. Companies have strong geographic presence in Zagreb (707 companies) and Split (528 companies). Given that these are the most populated urban areas it can be concluded that they are locating production facilities as close as possible to their customers. While this sector is largely a domestic activity, a few large firms have international operations.

3.3. Economic Geography

The geographic concentration of firms across the country is critical for understanding how specialized clusters can develop and cooperate to improve their competitiveness. Below are presented a set of heat maps for each major sub-sector. While the factor intensities for each sub-sector vary according to the geography of primary production and the markets they serve, it is apparent that Split and Zagreb have a significant concentration of firms in each category. The clustering of firms in these urban areas is a natural outcome of economic agglomeration.

4. Industry Functioning

To understand how the industry shifts are affecting firms it is useful to look at the relative growth rates – for firms, revenues and employment – across the food and beverage manufacturing categories. Firm exit in Croatia is known to be a prolonged process and many companies continue to exist in a state of inactivity. Therefore in order to get an accurate view of the ‘active’ industry, FINA data can be utilized to gain a sense of how the industry is actually performing. Using these statistics, a positive firm growth rate is observed. However, at the same time we see that the number of ‘active’ firms entering are increasing faster than revenue is growing, suggesting that firms are becoming smaller and that domestic competition is increasing. This is consistent with a falling HH Export Market index.

While the above reveals structural shifts in the industry, it does not identify the effects at the sub-industry level and what it means for firm profits in those industries. The magnitudes of the margins for each can be indicated by the Gross Margin. In a perfectly competitive environment, (economic) profits tend to zero over time. Where barriers to entry exist and where firms or countries have some competitive advantage, profits can remain positive and persistent over the course of successive years. While the beverage sector has maintained substantial and positive margins their revenues have been declining. The fish industry has only recently achieved positive margins. The food manufacturing sector has seen a slight increase in margins over the past year, but this is likely biased by a significant exit rate for inefficient firms. Crop and animal producing firms have conversely seen very little profit, which may indicate that they are operating in a perfectly competitive environment. A sector wide financial view is offered in Annex 4.

4.1. Primary Production

Crop & Animal. It is important to note that the equity of agricultural producers has increased by almost EUR 200 million in the last three years indicating that the money has been flowing into the sector. However, given the margins calculated it is apparent that this sector is driven by cost competition.

Fish. The sector has recorded substantial growth rates over the past three years (CAGR of 8.50%) and in 2015 the return on equity of totaled 12.3%. The sector is also adding new jobs at the rate of 4.2% per annum. After witnessing losses in 2013 – an effect of the EU fleet scrapping campaign that banned companies that could not meet EU standards – the sector recorded a net profit in excess of EUR 12 million for 2015. At the same time, the largest company in the industry, Cromaris, finished their investment cycle and are now starting to reap the profits.

4.2. Food & Beverage Manufacturing

Food Products. The food manufacturing sector is somewhat concentrated in a small number of large players with the top 10 companies accounting for 44% of the total revenue generated in 2015. EU accession had a positive effect on the performance of the sector as evidenced by an annualized revenue growth of 2.34%, however this may be skewed by the recent exit of inefficient firms. The companies remaining in the sector are increasing their capacities and adding new jobs at the rate of 1.8% per annum. The sector is also improving its profitability with average return on equity jumping to 6.15% in 2015 compared to 3.91% in 2013.

Beverages. The Croatian beverages sector has 736 active companies throughout Croatia although it is highly concentrated, with the top five players accounting for more than 70% of revenues. The sector is further characterized by strong international ownership; Besides Jamnica d.d. (a member of the Agrokor group), the next top 5 beverage producers are foreign owned. The sector also represents one of the most profitable sections of Croatian economy, as evidenced by high profitability rates and operating efficiency. In 2015 the sector delivered 13.02% return on equity and 6.45% return on assets. Revenues have stood steady in 2015 at EUR 840 million while net profit has been declining. To protect its margins, the beverages sector responded with reductions in employment (-1.75% CAGR). High operating efficiencies can be partly explained by foreign ownership of the local companies that allowed transfers of technology and best management practices. It is also interesting to note that the sectors’ performance is very seasonal with production peaking during the summer months, reflecting a possible connection with tourism industry demand. Wine producing regions can be found in areas around Split, Istria and Slavonia.

4.3. FDI in the STPA

Total foreign investment in Croatia from 1993 to 2015 amounted to EUR 29.6 billion, of which 1.5 percent (EUR 366 million) was generated in the food and beverage industries during the 1993–2010 period (FAO, 2012). FDI inflows in the food and beverage industry have vacillated as well. In 2006 there were inflows of US$225 million and US$124 million in 2008 (FAOSTAT, 2016). Most of the FDI in the country is concentrated in the Beverage sector where foreign companies have located in Croatia as a result of Market Seeking and Resource Seeking (there is substantial beer of barely production) incentives. Notable FDI in the country has also come from Bayer, a Life Science company with offices in Zagreb. Bayer maintains businesses line in the biotechnology and agriculture sectors, which is expected to expand as a result of the 2016 merger with Monsanto.

4.4. Conclusions

The Croatian Food Production and Processing industries have experienced rapid changes in the parameters of competition as a result of EU ascension. While the increased trade has benefited the industry at large, the export basket and market focus has shifted. Firms engaged in primary production of crops have seen notable capital inflows, with equity increases of nearly EUR 200 million in the last three years. However, these inflows have been concentrated in the production of commodities (mainly cereals) which is creating an industry that is driven by cost competition and low profits.

Conversely indicators show that Croatia has been diversifying its export mix of animal and food products. The reduction in barriers to entry in European trade are also now allowing smaller domestic producers to take a greater part in export activities, although food products still remains moderately concentrated in the hands of a few large players. At the same time the Food Manufacturing industry has also witnessed new pressures coming from the large European markets and an aggregate decrease in its relative competitiveness. This is reflected in the net death rate in the food manufacturing sector. Notable declines can be felt in the dairy and vegetable oil sub-sectors. While the beverage sector has maintained substantial and positive margins, their revenues have also been in relative decline. The contraction of some subsectors underlies the cost structures necessary to compete with European economies of scale and the need for product differentiation for maintaining value in a cost competitive global market.

Others Industries (such as the Fish industry) have been more successful in creating the investments necessary to compete. The fish industry has recently achieved positive margins, an outcome of a recent investment cycle that is just beginning to reap profits. However, the same capacities that are leading to the fish industry’s success – namely quick logistics – are yet to be achieved by other sub-sectors and regions of the country. In 2013 the percent of products lost to breakage or spoilage during shipping to domestic markets was worse than the average for all other countries and are more than twice as bad as the non-OECD High Income countries.

Fortunately, the articulated priorities of the food production and processing sector have set forth a number of R&D and KETs that will be supported through government programing. The process that created these priorities has also mobilized an extensive network of agents that are working in different sub-sectors and at different parts of the value chain. In order to create complementary private sector investments, a group of stakeholders will have to identify and agree on a strategic shift in focus that allows them to compete at the economies of scale dictated by the global market. The competitiveness of these actors will ultimately rest on their ability to make investments that integrate services and improve the efficiency and productivity of their activities.