Croatia Clusters and GVC Assessment (Deliverables 12-16) Croatia Clusters and GVC Assessment November 2018 This is a product of the staff of the International Bank for Reconstruction and Development/the World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank, the governments they represent, or the Government of Croatia. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This document was prepared by a team consisting of Justin Yap, Austin Kilroy, Blair Lapres, Sherif Muhtaseb and Une Lee of the World Bank. Throughout the project, the team worked with guidance from Emiliano Duch (Lead Sector Specialist), Mariana Iootty (co-Task Team Leader), Todor Milchevski (co-Task Team Leader), Elisabetta Capannelli (Country Manager), Marialisa Motta (Practice Manager), Paulo Correa (Practice Manager), José Ernesto Lopez Cordova (Practice Manager) and John Nasir (Lead Economist). The team would like to express their gratitude to peer reviewers of an earlier version of this document: Agnieszka Krasicka of the European Commission Directorate- General for Regional and Urban Policy (DG REGIO), and John Speakman, Ioannis Dimitropoulous and Alberto Criscuolo of the World Bank. Invaluable contributions were made by staff and consultants of the World Bank (Kazimir Luka Bačić, Lisbeth Sandra Cordova Solis, Ružica Jajčević, Stjepan Mandić, Petar Punda and Stephanie Trpkov) and by a large team from the Center for Industrial Development (CIRAZ), including Danijela Ćenan, Domagoj Šarić, Christian Springer, Jasna Pletikosić, Igor Matanović, Nikolina Udovičić, Dijana Varlec, Stipe Džapo, Katerina Malenica, Helena Ɖerek and Marina Kopjar. The team would also like to gratefully acknowledge current and former officials of the Ministry of Economy, Entrepreneurship, and Crafts: Robert Blažinović, Marija Rajaković, Emina Štefičić, Goran Basarac, Jasmina Raić, Bruno Grubešić, Irina Milošević and Kristina Jurjević. Finally, this project would not have been possible without the participation of numerous representatives of the Croatian private sector and their participation in the strategy groups and working groups, in whose activity and engagement this output is grounded. Table of Contents Acronyms ................................................................................................................................................ 5 Executive Summary ................................................................................................................................ 7 1. Introduction ................................................................................................................................... 17 2. Methodology & Findings .............................................................................................................. 21 2.1. Procedural Framework ................................................................................................................ 21 2.2. Analytical Framework................................................................................................................. 22 2.3. Strategic Segments ...................................................................................................................... 24 3. Framing Interventions ................................................................................................................... 29 3.1. Market Failures ........................................................................................................................... 31 3.2. Social Utility ............................................................................................................................... 36 4. Deliverable 12—Report on Investment Plan Proposal ................................................................. 39 4.1. Innovation Competitions ............................................................................................................. 39 4.2. Firm-Level Technology Adoption and Innovation Fund ............................................................ 42 5. Deliverable 13—Report on Action Plan to Strengthen the Position of Croatia in Selected GVCs46 5.1. Commercial Risk Guarantees...................................................................................................... 48 5.2. Public Procurement of Innovative Goods and Services (‘Innovation Procurement’) ................. 51 5.3. Centers for Skills and Collaboration ........................................................................................... 58 5.4. Testbed Pilots .............................................................................................................................. 64 5.5. Technology Scouting .................................................................................................................. 71 5.6. Workforce Skills and Training .................................................................................................... 73 5.7. Certification ................................................................................................................................ 78 5.8. Business Mentoring .................................................................................................................... 81 5.9. Big Data Initiatives ..................................................................................................................... 84 5.10. Note on Regulatory Reform .................................................................................................... 88 6. Deliverable 14—Report on FDI Strategy ..................................................................................... 93 6.1. Introduction ................................................................................................................................. 93 6.2. Value Chain Gaps ....................................................................................................................... 96 6.3. Outreach: FDI Promotional Activities ...................................................................................... 105 7. Deliverable 15—Report on Export Strategy ............................................................................... 110 7.1. Introduction ............................................................................................................................... 110 7.2. Market Intelligence ................................................................................................................... 112 7.3. Action Plan for Promotion of Exports ...................................................................................... 116 8. Deliverable 16—Report on Territorial and Product Branding Strategy ..................................... 122 8.1. Introduction ............................................................................................................................... 122 8.2. List of Croatian Brands and Territorial and Products Brands in GVCs .................................... 127 8.3. Action Plan for Territorial and Product Branding..................................................................... 129 Bibliography ....................................................................................................................................... 131 Annex A: Table of Publication Advertising Opportunities................................................................. 140 Annex B: Trade Association Contacts: Sources for Industry Research and Company Contact Database144 Annex C: International Trade Fairs and Industry Fairs ...................................................................... 146 Acronyms 3PL Third-Party Logistics 4PL Fourth-Party Logistics AID Academy for Industrial Development AIK Agency for Investment and Competitiveness (Agencija za investicije i konkurentnost ) AOC Appellation d’origine contrôlée APM Automated People Movers ASCAMM Catalonian Association of Enterprises Mould-Makers and Die-Makers BPO Business Process Outsourcing BRC British Retail Consortium C-ITS Cooperative Intelligent Transport Systems CAP Capital CE European Conformity (Conformité Européene) CEI Center for Monitoring Business Activities in the Energy Sector and Investments (Centar za praćenje poslovanja energetskog sektora i investicija) CIRAZ Center for Industrial Development (Centar za industrijski razvoj) CIVC Comité interprofessionel du vin de Champagne CNC Computer Numerical Control CRI Competitiveness Reinforcement Initiative DDU Defense Dual-Use EBRD European Bank for Reconstruction and Development EC European Commission ECA Emission Control Area ERDF European Regional Development Fund ESIF European Structural and Investment Fund EU European Union FAO Food and Agricultural Organization of the United Nations FDI Foreign Direct Investment FFS Fee for Service FTE Full-Time Equivalent FUA Functional Urban Area GDP Gross Domestic Product GDPR General Data Protection Regulation GVC Global Value Chain HAMAG-BICRO Croatian Agency for SMEs, Innovations, and Investments (Hrvatska agencija za malo gospodarstvo i investicije) HGK Croatian Chamber of Economy (Hrvatska gospodarska komora ) HPP High-Pressure Processing HZZO Croatian Health Insurance Funds (Hrvatski zavod za zdravstveno osiguranje) ICT Information and Communication Technology IFS International Featured Standards IMO International Maritime Organization IoT Internet of Things IP Intellectual Property ISO International Standards Organization ITS Intelligent Transport Systems KNO Knowledge LAB Labor LNG Liquefied natural gas MoEEC Ministry of Economy, Entrepreneurship, and Crafts MNC Multinational Corporation MUG Minimum Usage Guarantee NAT Natural Resources NGO Nongovernmental Organization OECD Organisation for Economic Co-operation and Development OEM Original Equipment Manufacturer OPCC Operational Programme ‘Competitiveness and Cohesion’ OTC Over-the-Counter PCP Pre-Commercial Procurement PoC Proof of Concept PPE Personal Protective Equipment PPI Public Procurement of Innovative Solutions PPP Public-Private Partnership PRT Personal Rapid Transit PSDC Penang Skill Development Center R&D Research and Development RAS Reimbursable Advisory Services RES Renewable Energy Sources S3 Smart Specialization Strategy SMEs Small and Medium-Sized Enterprises STPA Sub-Thematic Priority Area TEF Teaching Excellence Framework TTO Technology Transfer Office TVET Technical and Vocational Education and Training UKF Unity Through Knowledge Fund UNCTAD United Nations Conference on Trade and Development VBHC Value-Based Health Care Executive Summary Introduction The goal of the ‘Croatia Clusters and GVC Assessment’ project (the ‘Project’) is to enhance the competitiveness of Croatian firms through the implementation of the country’s Smart Specialization Strategy (S3). The Project has been carried out under a Reimbursable Advisory Services (RAS) agreement between the World Bank and the Croatian Ministry of Economy, Entrepreneurship, and Crafts (MoEEC), and has five components: • Component 1 (Strengthening the Capacity of Beneficiaries and Partners) – a set of six weeklong training modules delivered to staff of MoEEC, the Croatian Chamber of Economy (Hrvatska gospodarska komora, HGK) and the Chamber of Industrial Development (Centar za industrijski razvoj, CIRAZ) – equipped public sector agents with the methodology and knowledge needed to carry out Components 2 and 3. Competitiveness practitioners, academics, and experts delivered sessions covering global value chains (GVCs), industry analysis, segmentation, change management, and cluster theory. These trainings took place in Zagreb between October 2016 and June 2017. • Component 2 (Strategic Analysis and Competitive Positioning) and Component 3 (Action Plans and Policy Design), while notionally separate, follow one after another and make up a single set of activities called a Competitiveness Reinforcement Initiative (‘CRI’). A CRI is a GVC-based methodology that combines sector analysis and change management to help firms identify attractive business segments in which to compete. A CRI also identifies measures and investments to help a cluster compete in those segments.1 CRIs are procedurally complex activities that involve dozens of firms per industry area over an extended period. • Component 4 (Design of Academy for Industrial Development) provides guidelines for the design and management of an Academy for Industrial Development (AID). The AID, which is to be organized under HGK, will have the mandate to offer training to the public and private sectors on topics related to industrial development. • Component 5 (Monitoring and Evaluation) aims to set up a framework to monitor the implementation of cluster initiatives and to evaluate structural changes in the Croatian economy. Two trainings on M&E were also provided to CIRAZ and MoEEC regarding the implementation of such monitoring frameworks. This document contains Deliverables 12-16 of the Project and reflects the outcomes of the CRIs carried out in Components 2 and 3; this document updates Deliverables 5-9. While Components 2 and 3 are characterized as separate components, they are in fact two successive parts of a seamless methodological exercise known as a Competitiveness Reinforcement Initiative or ‘CRI’. A CRI is an intensive, 8-10 month process that consists of: (1) a strategic analysis to identify attractive business 1 In the CRI methodology, ‘Action Line’ refers to an action or activity carried out to help address a barrier to the participat ion of firms in a particular value chain. segments where a cluster of firms in a given sector can be more competitive; (2) an involved firm engagement and change management process to gain private sector buy-in to a strategy and steer the cluster toward more attractive segments; and (3) the identification of measures to address value-chain gaps that need to be filled for the cluster to compete successfully in the attractive segments. (In addition, the Project was designed with a strong capacity-building element; staff from CIRAZ and MoEEC were assigned to specific CRIs and carried out activities with technical guidance from the World Bank.) This process culminates in the definition of ‘action lines’—measures aimed at improving competitiveness. The CRIs were carried out over two years; the Project conducted 7 CRIs during its first year, and those outcomes were presented in Deliverables 5-9. This document updates Deliverables 5-9 by reflecting additional findings from the CRIs carried out, in the Project’s second year, for the following STPAs: Health, Nutrition, Environmental Transport, Intelligent Transport, Cybersecurity and Mine Action. STPAs covered in this second year are marked with an asterisk (*) below: Table 1.1: List of STPAs by Official Name2 No. Official Name Shorthand Name 1 Pharmaceuticals, Biopharmaceuticals, Medical Equipment, & Devices Pharmaceuticals 2 Health Services and New Methods of Preventive Medicine & Diagnostics* Health 3 Nutrition* Nutrition 4 Energy Technology, Systems, and Equipment Energy 5 Environment-Friendly Technology, Systems, and Equipment Environment 6 Added-Value Manufacturing of Road and Rail Vehicles, Parts, & Systems Auto/Rail 7 Environment-Friendly Transport Solutions* Env. Transport 8 Intelligent Transport Systems and Logistics* Intelligent Transport 9 Cybersecurity* Cybersecurity 10 Defense Dual-Use Defense Dual-Use 11 Mine Action Program* Mine Action 12 Sustainable Food Production and Processing Food 13 Sustainable Wood Production and Processing Wood In its entirety, this document applies an economywide lens to the ‘action lines’ identified in individual CRIs, to extrapolate a wider array of horizontal measures that are relevant across all sectors. One of the aims of the document is to aggregate action lines from individual CRIs and use an economywide lens to describe how they might apply in other industry areas. In so doing, this report endeavors both to reflect the outcome of CRIs, and to give decision makers a more comprehensive menu of tools than could be gleaned from a single CRI. Moreover, it should be emphasized that the measures did not arise from an independent World Bank analysis and are not recommendations of the World Bank. Instead, these measures reflect the ‘action lines’ that came out of the working group discussions held, under Component 3, among stakeholders from the private sector, government and academia. Thus, the proposals in this report are not intended to be comprehensive strategies or top-down analyses of investment, FDI, export, or territorial branding for 2 This document will use shorthand terms for the CRIs and STPAs: ‘Pharmaceuticals’; ‘Health’; ‘Nutrition’; ‘Energy’; ‘Environment’; ‘Auto’; ‘Environmental Transport; ‘Intelligent Transport’; ‘Cybersecurity’; ‘Defense Dual -Use’; ‘Mine Action’; ‘Food’ and ‘Wood’. Croatia. Rather, they are intended to reflect the specific outcomes and priorities agreed upon by Project working groups. To be fully implemented, the design in each proposal would need to be finalized and receive committed public investment and financing. This document is divided into sections, several of which correspond to RAS deliverables: • Section 2 briefly describes the analytical and procedural frameworks underpinning the CRI methodology and summarizes the analytical findings of the CRIs carried out in Croatia. • Section 3 summarizes how, for any sector, a set of measures might be selected for implementation and—where appropriate—public funding could be deployed by identifying and addressing underlying market failures. • Section 4 (Deliverable 12—Investment Plan Proposal) describes measures—derived from the strategic segmentation analysis—for shorter-term investment actions to improve Croatia’s position in GVCs. • Section 5 (Deliverable 13—Action Plan to Strengthen the Position of Croatia in Selected GVCs) proposes cross-sectoral measures—derived from the strategic segmentation analysis—that require more concerted implementation efforts, generally over the medium to long term, to improve Croatia’s position in GVCs. • Section 6 (Deliverable 14—Foreign Direct Investment [FDI] Strategy) covers the identification of niches and markets to attract FDI, an action plan to attract investment in high-technology sectors and emerging industries, and an action plan for FDI promotional activities with a marketing plan and branding strategy. • Section 7 (Deliverable 15—Export Strategy) lists products, services, and markets for prioritization and an action plan for promoting exports. • Section 8 (Deliverable 16—Territorial and Product Branding Strategy) lists Croatian brands and territorial and product brands in GVCs and provides an action plan for territorial and product branding. Methodology & Findings This section summarizes the methodological process behind the strategic segmentation and value chain gap analysis that underpin the horizontal measures outlined in this document. 1. Analytical Framework The CRI methodology carries out a ‘strategic segmentation’ analysis of the sector in which a cluster is operating. This analysis defines strategic segments in terms of both a solution (product and service) and the end customer (or group of customers) that the solution serves. For example, rather than evaluating ‘automobile parts’ or ‘truck’ segments, a strategic segmentation might focus on mobility solutions for customers in either urban or rural areas. The segmentation is referred to as ‘strategic’ in the sense that each segment has its own value chain that calls for a unique strategy for firm entry, survival, and growth. Strategic segments are evaluated under the ‘Five Forces’ framework to identify the relative attractiveness of different segments. The eponymous five forces in this framework are (a) the relative bargaining power of buyers, (b) the relative bargaining power of suppliers, (c) the intensity of competitive rivalry, (d) the threat of new entrants, and (e) the threat of substitutes (Porter 1979). The combined interaction of these five forces, when applied to any given segment, can provide qualitative insight into how much profit can be captured in a segment, and by whom. For example, the threat of new entrants, competitive rivalry, and threat of substitutes determine the profitability of a sector, whereas bargaining power of buyers and bargaining power of suppliers determine who is capturing the margin. Variations in the interplay of the five forces in different segments make some segments more attractive than others. The analysis of each STPA consisted of a strategic segmentation exercise followed by the identification of the value chain activities needed to serve individual strategic segments. For the STPAs covered during Year 1 of the Project, the Five Forces framework was applied to explain the change in industry margins, including the STPAs’ expected evolution over the next 10 years. This analysis was supported by qualitative and available quantitative data. This analysis was applied both in the strategic segment in which Croatian firms are currently most active, as well as in other segments that represent combinations of new products/services and user groups. An idealized value chain was drafted for each STPA and gaps in the participation of Croatian firms were identified. The idealized value chain was constructed after a thorough literature review and a reference trip to visit advanced buyers and service providers already competing in this segment. The Croatian industry was then benchmarked against this value chain. The benchmarking analysis was taken from a mixture of firm interviews, fieldwork, and data analysis. Where data were not available, expert opinions were used to assess the benchmarks. 2. Procedural Framework The CRI approach combines intensive analytical research (as described above) with a change management process designed to help a cluster move into more attractive strategic segments. This is accomplished through three phases of managed public private dialogue. Phases 1 and 2 correspond to Components 2 of this Project, while Phase 3 corresponds to Component 3. • Phase 1—Identification and challenges: From a procedural perspective, Phase 1 is mainly a fact-gathering period during which the team reaches out to firms individually. The team interviews firm representatives to understand their concerns about the industry, their operational challenges and the regulatory environment. Phase 1 culminates in a ‘First Public Meeting” (one for each cluster), during which firm representatives are given the opportunity to air their concerns in a public forum. Deliverables 3 and 10 (for the first and second set of CRIs, respectively) reported on the state of the industry and cluster for each STPA in Croatia. • Phase 2—Guiding the strategy: During Phase 2, the teams begin the analytical work whose methodology is described in Section 1 and present their findings to the cluster. Hypotheses for the strategic segmentations are tested during international ‘reference trips’. The team finalizes the strategic segmentation analysis and vets it in a series of ‘strategy groups’ with key firms in the cluster. After testing the segmentations and strategies in the strategy groups, the teams hold a set of ‘Second Public Meetings’ to present their findings to the wider cluster members. Deliverables 4 and 11 (for the first and second set of CRIs, respectively) presented the strategic segmentation analyses for all 13 STPAs in Croatia. • Phase 3—Launching the actions: In Phase 3, the teams guide and work together with the cluster to come up with a set of proposed ‘action lines’ that could move Croatia’s industry toward the attractive segments. Working groups are set up for each action line—again, through a combination of an open call at the Second Public Meetings and targeted invitations to motivated participants—to flesh out the action lines by identifying actions, responsible parties, and proposed timeline and budgets. These action lines are then presented—ideally by firm or industry representatives—in the Third Public Meetings. In Croatia, the action lines were not themselves deliverables of the Project, though as discussed above they have been summarized and presented from an economy-wide perspective in Deliverables 5-9 (for the first set of STPAs) and here in Deliverables 12-16 (summarizing all 13 STPAs). 3. Strategic Segments The strategic segmentation analyses for each STPA are described extensively in Deliverables 4 and 11. These analyses were validated in the third phase of the CRIs, which culminated in private sector representatives presenting the proposed action lines. Table 2.1 provides brief descriptions of the strategic segments identified for each STPA. For more detailed information, please refer to the report for the relevant STPA contained in Deliverables 4 and 11. Framing Interventions The action lines that emerged from the CRIs reflect common market failures that arise across Croatian industries. Market failures are situations where free markets alone are unable to achieve an efficient economic outcome. In Croatia, three types of market failure came up repeatedly: innovation failure, information asymmetry, and coordination failure. (All of these are forms of incomplete or missing markets.) A fourth—(negative) externalities—came up along with information asymmetry in the context of skills and training. For policymakers, these market failures can provide a framework for deciding how to use public funds to increase the competitiveness of Croatian clusters. Not all value chain gaps identified during a CRI make suitable targets for public financing. In principle, public financing should avoid distorting markets and ‘crowding out’ private investment and should instead aim to correct market failures. A combination of interventions or funding measures that target market failures could be an effective way to improve the competitiveness of a cluster. Structuring interventions around market failures helps provide more nuanced solutions, as opposed to broader measures—such as generous tax incentives for R&D—that may miss the mark by not addressing a particular market failure in a sector. The measures described in this document can be viewed according to two parameters: (1) the problem they solve, and for whom (in economic terms, the underlying market failure and social utility); and (2) their function in strengthening a cluster’s competitive position. Understanding the underlying market failure is useful for assessing the appropriateness of using public funds to finance an intervention. Understanding an intervention’s function in cluster development is key to putting together a broader set of measures to strengthen the cluster’s overall competitive position. The measures coming out of the Croatian CRIs boost cluster development mainly in four ways. They are geared toward: (1) encouraging general R&D; (2) establishing a positive enabling environment for a sector; (3) strengthening the cluster’s technical and collaborative framework; or (4) helping individual firms within the cluster. While three market failures arose repeatedly in the CRIs, wide traction could likely be gained by focusing on two of them—innovation and coordination failure. The prominence of innovation market failures is no doubt due partly to the fact that most of the STPAs—including Energy, Environment, Environmental Transport, Intelligent Transport, Health, Nutrition, Pharmaceuticals, Cybersecurity and Defense Dual-Use—are on the cusp of being transformed by disruptive technologies. In such an environment, knowledge gaps and uncertainty about the future direction of these industries creates a situation that is ripe for innovation-related market failures. The second prominent market failure, coordination failure, is relevant to fewer functional areas but is fundamental to the very notion of a working cluster. Fixing coordination failures can have significant payback in terms of cluster functionality; clusters that have mechanisms to coordinate effectively are better able to deal with other market failures and challenges. A full program to improve cluster competitiveness would draw from interventions that intersect with different functions in developing and strengthening a cluster. While the CRI’s emphasis on firm engagement is designed to identify and win private sector support for a smaller number of key catalytic actions, individual CRIs may face time and resource constraints in coming up with a full array of tools. Thus, a roadmap for boosting competitiveness in an STPA would tackle one or both of innovation and coordination failures while putting in place measures, as needed, to make sure that they serve different needs of cluster development. Once the underlying market failure has been identified, another consideration is an intervention’s social utility—whether it benefits the whole cluster, a subgroup of members, or just one member. Measures can be characterized by whether they produce ‘public’, ‘common,’ ‘club’ or ‘private’ goods. These four types of goods are fuirther defined by reference to two characteristics: (a) whether they are excludable or non-excludable—that is, whether it is possible to exclude consumers who have not paid for a good from having access to it; and (b) whether they are rivalrous or non-rivalrous—that is, whether the consumption of a good diminishes its availability for another The remaining sections lists the measures proposed as part of Phase 3 of the Project. Report on Investment Plan Proposal The ‘Investment Plan Proposal’ in this section describes investment-focused measures aimed at improving the position of Croatian firms in GVCs. There is not necessarily a clear line of demarcation between measures characterized as belonging to an ‘investment plan’ rather than to an ‘action plan’—or indeed from the other chapters of this report. However, this section generally discusses measures that involve the short-term or ‘one-off’ disbursement of public funds (i.e. ‘investment plans’), while measures that require longer-term management and implementation are covered in the next section. The fact that there are many more action-oriented measures than strictly investment-oriented ones highlights the need for sustained commitment. Correcting market failures and value chain gaps is not simply a matter of allocating finances through one-off investments, but also of delivering sustained and sophisticated management of the market failure which is bottlenecking access to more lucrative opportunities. However, in the meantime several shorter-term interventions can be achieved through the financing of: • Innovation Competitions. To motivate business innovations, Croatia could organize and fund a set of competitions to catalyze complementary private sector investments. Such competitions could help address the problem, due to innovation failure, of suboptimal investments in innovation. • Firm-Level Technology Adoption and Innovation Fund. A publicly supported innovation fund that would address firms’ financial needs for investment to upgrade their products and services and compete in new business segments. Report on Action Plan to Strengthen the Position of Croatia in Selected GVCs The measures outlined in this section call for longer term commitments and implementation efforts than the investment items described in the previous section. While these interventions can be designed and deployed flexibly to address different market failures and perform different functions, they can be generally grouped into the following categories: (a) Encouraging R&D and innovation: • Risk guarantees. Commercial risk instruments (partial risk guarantees and minimum usage guarantees) help firms offset the risk of investing in new technologies or segments. Such guarantees can also be a tool for drawing necessary FDI. • Public procurement for innovative goods and services. This specialized form of public procurement harnesses the buying power of governments to either drive innovation for new products and services or provide economies of scale that can help bring existing solutions to market. (b) Strengthening the functioning and capacity of a cluster: • Centers for skills and collaboration. Having an institutional framework (by which a cluster can strengthen collaboration and develop needed skills) helps address coordination and innovation/information failures. Such frameworks (or centers) can also serve as platforms that can host and support other measures listed in this section. • Testbed pilots. Testbed pilots provide collaborative spaces in which firms can come together to test the interoperability and performance of new products and services. Such pilots can be particularly effective in overcoming coordination failures in an industry and in helping actors bring innovative solutions to market. • Technology scouting. Technology scouting refers to a systematic process of identifying providers of innovative technologies or services to fill gaps in a potential or existing offering. • Workforce skills and training. The establishment of relevant skills and training programs is important for helping firms upgrade their capabilities and move into new business segments. (c) Helping firms scale up and compete: • Certification. Support for firms to comply with certification standards can be critical for these firms to compete successfully in export markets—especially in new segments involving fast- changing technology and innovation. • Business mentoring. Entrepreneurs in some Croatian sectors seem to suffer from a suboptimal set of essential business skills. Business mentoring programs could help firms upgrade their capacities to better compete with their regional and global peers. (d) Strengthening the enabling environment: • Big data initiatives. ‘Big data’ is emerging as a cornerstone of technological development in several STPAs. In such cases, having a legal framework that sets clear rules for the registration, storage and ownership of data can catalyze innovation. • Regulatory reform. A sector-by-sector analysis of needed regulatory reforms would require a separate in-depth analytical exercise that is beyond the scope of this report. However, this section gives examples of regulatory improvements that would boost competitiveness in selected industries. Report on FDI Strategy Active FDI promotion efforts should be utilized to provide for the enhanced competitiveness of Croatian industry or for some public good. In this respect, a needs-driven FDI strategy must identify the types of keystone investment – that only foreign investors can adequately provide – to unlock new opportunities for Croatian firms in emerging segments. A state therefore must not only identify opportunities to receive greater benefits from existing investments but also consider what other types of investment the country needs to develop. For the purposes of increasing competitiveness of Croatian sectors, FDI outreach efforts should aim to attract investment from international companies aligned with the specific policies being proposed for the STPAs covered in this report. Needs-based FDI attraction efforts that can increase Croatia’s competitiveness are more likely to succeed when they are highly targeted and a clear audience is identified for outreach activities . Therefore, the analysis in earlier deliverables regarding value chain gaps and new segment opportunities is especially important because it helps to identify which STPAs have a need for FDI attraction. It will be important for Croatia to launch an outreach program that raises awareness of Croatia as an investment destination by communicating the country proposition, defining relevant platforms for information sharing, and fostering relationships with potential investors. Report on Export Strategy This action plan outlines the following export-related activities that could improve the position of Croatian firms in GVCs. • Market intelligence. Market and consumer research is needed to overcome information asymmetries and coordination failures. However, because there is often an underappreciation for the value of such knowledge (or the uncertainty on its benefit for SMEs), there is a need to provide this as a public good to prove the concept and to socialize costs.3 • Action plan for promotion of exports. Government could take a more proactive role in promoting improved trade links by arranging trade missions, coordinating suppliers to jointly apply for foreign tenders, and facilitating export documentation for products and visas for workers to ensure that Croatian firms can deliver. Report on Territorial and Product Branding Strategy Territorial branding can differentiate a set of similar products produced in a delimited area. Territorial brands have been established all over the world for many products—Cuban cigars, Gruyère cheese, Champagne wine, and Italian leather. Territorial branding is used to promote both services (particularly tourism) and goods. ‘Croatia: The Mediterranean as it once was’ is one instance of this practice, which aims to enhance the individual product and service offers of tourism companies in Croatia by providing an overarching brand. The goal of territorial branding is to increase the ability of individual producers to differentiate their products as a group. This increased differentiation helps producers compete on quality and charge higher prices for their products compared to substitute products outside this group. The territorial brand offers a superordinate means to differentiate the products. The benefits from territorial branding should not be overstated compared to the need to build sustainable underlying competitive products. Territorial branding could be a strategic approach to increase differentiation of goods and services that are impossible to include in the larger strategy of advanced segments within each STPA. For example, if the Food STPA focuses on the fresh convenience segment, territorial brands may provide a temporary way to increase value in other segments, even where they are not part of a longer-term competitiveness strategy. Territorial branding offers one route to increase differentiation and value in the short term if certain preconditions can be met. However, in the long term, producers in Croatia will increasingly aggregate in the competitive segments where value can be captured sustainably4. 3 Procuring such intelligence is usually too expensive for individual firms. Since SMEs are often too uncoordinated to procure this jointly, these services generally go underprovided altogether. Therefore, it is often necessary to commission public market and consumer research so that the private sector can make informed decisions and investments using this knowledge. The market research becomes precompetitive intelligence that informs all agents in the sector equally. 4 The strategic diagnostics and analysis summarized at the beginning of this document show there are many other determinants of competitiveness beyond branding: global trends in demand, underlying market structure and power relationships, and technological Overall, it may be wise to consider territorial branding as a secondary intervention rather than a primary program of activities. Because of the large budgets required for territorial branding, the complex preconditions for a branding strategy to be effective, and the many other priorities outlined in these reports, territorial branding may be considered for a secondary or subsidiary phase of implementing the smart specialization strategy. Large public investments are being made in many aspects of smart specialization implementation, and it may be plausible for aspects of territorial branding to be incorporated in those measures rather than as a separate program of activities on its own. change. Even highly branded products and services can fail over time, owing to exogenous changes in their industries. Cases of profound decline such as British stainless-steel cutlery, West African textiles, or American automobile manufacturing—all illustrate that even strong territorial brands will fail if underlying competitiveness of their products evaporates compared to competitors elsewhere in the world. These changes can eclipse the value added by a territorial brand. 1. Introduction 1. The goal of the ‘Croatia Clusters and GVC Assessment’ project (the ‘Project’) is to enhance the competitiveness of Croatian firms through the implementation of the country’s Smart Specialization Strategy (S3).5 (Throughout this document, ‘cluster’ refers to a general geographic grouping of firms operating in the same industry area. The term is never used to denote a formal cluster organization, including those set up by the former Agency for Investment and Competitiveness (Agencija za investicije i konkurentnost, AIK).) The Project has been carried out under a Reimbursable Advisory Services (RAS) agreement between the World Bank and the Croatian Ministry of Economy, Entrepreneurship, and Crafts (MoEEC), and has five components: • Component 1 (Strengthening the Capacity of Beneficiaries and Partners) was a set of six weeklong training modules – delivered to staff of MoEEC, the Croatian Chamber of Economy (Hrvatska gospodarska komora, HGK) and the Chamber of Industrial Development (Centar za industrijski razvoj, CIRAZ) – that equipped public sector agents with the methodology and knowledge needed to carry out Components 2 and 3. Competitiveness practitioners, academics, and experts delivered sessions covering global value chains (GVCs), industry analysis, segmentation, change management, and cluster theory. These trainings took place in Zagreb between October 2016 and June 2017. • Component 2 (Strategic Analysis and Competitive Positioning) and Component 3 (Action Plans and Policy Design), while notionally separate, follow one after another and make up a single set of activities called a Competitiveness Reinforcement Initiative (‘CRI’). A CRI is a GVC-based methodology that combines sector analysis and change management to help firms identify attractive business segments in which to compete. A CRI also identifies measures and investments to help a cluster compete in those segments.6 CRIs are procedurally complex activities that involve dozens of firms per industry area over an extended period. • Component 4 (Design of Academy for Industrial Development) provides guidelines for the design and management of an Academy for Industrial Development (AID). This institution, to be organized under HGK, will have the mandate to offer training to the public and private sectors on topics related to industrial development. • Component 5 (Monitoring and Evaluation) aims to set up a framework to monitor the implementation of cluster initiatives and evaluate structural changes in the Croatian economy. 2. In Croatia, implementation of the S3 is potentially linked to the disbursement of up to €100 million in European Structural and Investment Funds (ESIF) for the Operational Programme 5 The promulgation of an S3 is a requirement for European Union (EU) member states to receive structural funds from the European Regional Development Fund. 6 In the CRI methodology, ‘Action Line’ refers to an action or activity carried out to help address a barrier to the participat ion of firms in a particular value chain. ‘Competitiveness and Cohesion’ (OPCC). The findings of this Project may inform the design of funding calls to be issued under Thematic Objective 3 of the OPCC: Enhancing the competitiveness of small and medium-sized enterprises (SMEs). 3. This document contains Deliverables 12-16 of the Project and reflects the outcomes of the CRIs carried out in Components 2 and 3; this document updates Deliverables 5-9. The Project carried out CRIs in 13 sub-thematic priority areas (STPAs) defined in the S3 and listed in Table 1.17. Formal cluster organizations, including some set up by AIK, were still active in a handful of the industry areas covered by the STPAs (notably Defense Dual-Use, Energy and Wood). While the Project engaged with these organizations—and some of the leading members of the formal organizations became heavily involved in the CRIs—the Project treated all companies operating in the relevant industry areas as the effective ‘cluster’, without regard to participation or membership in any formal organization. The CRIs were carried out over two years; the Project conducted 7 CRIs—for the Pharmaceuticals, Energy, Environment, Auto/Rail, Defense Dual-Use, Food and Wood STPAs)—during its first year (simultaneously with the training carried out under Component 1), and those outcomes were presented in Deliverables 5-9. This document updates Deliverables 5-9 by reflecting additional findings from the CRIs carried out, in the Project’s second year, for the following STPAs: Health, Nutrition, Environmental Transport, Intelligent Transport, Cybersecurity and Mine Action. 4. Formal cluster organizations, including some set up by AIK, were still active in a handful of the industry areas covered by the STPAs (notably Defense Dual-Use, Energy and Wood). While the Project engaged with these organizations—and some of the leading members of the formal organizations became heavily involved in the CRIs—the Project treated all companies operating in the relevant industry areas as the effective ‘cluster’, without regard to participation or membership in any formal organization. The CRIs were carried out over two years; the Project conducted 7 CRIs—for the Pharmaceuticals, Energy, Environment, Auto/Rail, Defense Dual-Use, Food and Wood STPAs)—during its first year (simultaneously with the training carried out under Component 1), and those outcomes were presented in Deliverables 5-9. This document updates Deliverables 5-9 by reflecting additional findings from the CRIs carried out, in the Project’s second year, for the following STPAs: Health, Nutrition, Environmental Transport, Intelligent Transport, Cybersecurity and Mine Action. Table 1.1: List of STPAs by Official Name8 No. Official Name Shorthand Name 1 Pharmaceuticals, Biopharmaceuticals, Medical Equipment, & Devices Pharmaceuticals 2 Health Services and New Methods of Preventive Medicine & Diagnostics Health 3 Nutrition Nutrition 4 Energy Technology, Systems, and Equipment Energy 5 Environment-Friendly Technology, Systems, and Equipment Environment 6 Added-Value Manufacturing of Road and Rail Vehicles, Parts, & Systems Auto/Rail 7 Environment-Friendly Transport Solutions Env. Transport 8 Intelligent Transport Systems and Logistics Intelligent Transport 7 By agreement with the MoEEC, a single CRI was carried out for STPAs 4 and 5, because of the overlapping synergies between the two STPAs. 8 This document will use shorthand terms for the CRIs and STPAs: ‘Pharmaceuticals’; ‘Health’; ‘Nutrition’; ‘Energy’; ‘Environment-Friendly’; ‘Auto’; ‘Environment-Friendly Transport; ‘Intelligent Transport’; ‘Cybersecurity’; ‘Defense Dual-Use’; ‘Mine Action’; ‘Food’ and ‘Wood’. 9 Cybersecurity Cybersecurity 10 Defense Dual-Use Defense Dual-Use 11 Mine Action Program Mine Action 12 Sustainable Food Production and Processing Food 13 Sustainable Wood Production and Processing Wood 5. CRIs focus on strategic analysis, firm engagement and change management; the CRIs in this Project also had an important capacity-building element. A CRI is an intensive, 8-10 month process that consists of: (1) a strategic analysis to identify attractive business segments where a cluster of firms in a given sector can be more competitive; (2) an involved firm engagement and change management process to gain private sector buy-in to a strategy and steer the cluster toward more attractive segments; (3) the identification of measures to address value-chain gaps that need to be filled for the cluster to compete successfully in the attractive segments. In addition, the Project was designed with a strong capacity-building element; staff from CIRAZ and MoEEC were assigned to specific CRIs—for example, Food, Wood or Health—and carried out activities with technical guidance from the World Bank. (The teams became integrated to the extent that, unless this document states otherwise, ‘team’ should be understood as generally encompassing staff from CIRAZ, MoEEC and the World Bank.) The training modules of Component 1 were delivered during the first year of CRIs, and the roles and responsibilities of CIRAZ and MoEEC team members expanded accordingly in the second year. 6. This document applies an economywide lens to the ‘action lines’ identified in individual CRIs, to extrapolate a wider array of horizontal measures that are relevant across all sectors. In the final stage of each CRI, Project teams engaged the input of firms in designing ‘action lines’ to address any market failures or value chain gaps that might be keeping Croatian firms from competing successfully. For example, in the Intelligent Transport CRI, whose analysis identified a segment involving ‘cooperative intelligent transport systems’, working groups zeroed in on the setting up of two pilots and a national technical center as key measures needed for Croatian firms to compete more effectively. CIRAZ teams detailed such measures in ‘action line documents’ that are not official Project deliverables. (This document will use ‘action lines’ to refer to specific items proposed during the CRIs, and ‘measures’ or ‘interventions’ more generally.) One of the aims of the current document is to aggregate action lines from individual CRIs and use an economywide lens to describe how they might apply in other industry areas. (Of course, different CRIs sometimes identified similar action lines). In so doing, this report endeavors both to reflect the outcome of CRIs, and to give decisionmakers a more comprehensive menu of tools than could be gleaned from a single CRI. 7. However, the measures presented in the following sections do not purport to comprehensively describe all possible tools that policymakers could wield to improve competitiveness; they reflect instead the specific outcomes of the CRIs carried out in Croatia. Policymakers have at their disposal a wide array of tools and measures—many of them well described in the literature. The usefulness of aggregating the outcomes of individual CRIs lies not in providing an exhaustive set of measures, but rather in identifying the types of market failures and value chain gaps that arise repeatedly in Croatia, and in this way to inform any cross-sectoral approach. 8. Moreover, it should be emphasized that the measures did not arise from an independent World Bank analysis and are not recommendations of the World Bank. Instead, these measures reflect the ‘action lines’ that came out of the working group discussions held, under Component 3, among stakeholders from the private sector, government and academia. Thus, the proposals in this report are not intended to be comprehensive strategies or top-down analyses of investment, FDI, export, or territorial branding for Croatia. Rather, they are intended to reflect the specific outcomes and priorities agreed upon by Project working groups. To be fully implemented, the design in each proposal would need to be finalized and receive committed public investment and financing. 9. This document is divided into sections, several of which correspond to RAS deliverables: • Section 2 briefly describes the analytical and procedural frameworks underpinning the CRI methodology and summarizes the analytical findings of the CRIs carried out in Croatia. • Section 3 summarizes how, for any sector, a set of measures might be selected for implementation and—where appropriate—public funding could be deployed by identifying and addressing underlying market failures. • Section 4 (Deliverable 12—Investment Plan Proposal) describes measures—derived from the strategic segmentation analysis—for shorter-term investment actions to improve Croatia’s position in GVCs. • Section 5 (Deliverable 13—Action Plan to Strengthen the Position of Croatia in Selected GVCs) proposes cross-sectoral measures—derived from the strategic segmentation analysis—that require more concerted implementation efforts, generally over the medium to long term, to improve Croatia’s position in GVCs. • Section 6 (Deliverable 14—Foreign Direct Investment [FDI] Strategy) covers the identification of niches and markets to attract FDI, an action plan to attract investment in high-technology sectors and emerging industries, and an action plan for FDI promotional activities with a marketing plan and branding strategy. • Section 7 (Deliverable 15—Export Strategy) lists products, services, and markets for prioritization and an action plan for promoting exports. • Section 8 (Deliverable 16—Territorial and Product Branding Strategy) lists Croatian brands and territorial and product brands in GVCs and provides an action plan for territorial and product branding. 2. Methodology & Findings 10. Each CRI consists of an analytical and a firm engagement/change management component. For each STPA, the CRI teams conducted a ‘strategic segmentation’ analysis (described below) to identify attractive business segments. At the same time, the team carried out an intensive process—extending over several months—of engaging firms and increasing the likelihood that they would take up (and take ownership of) any changes needed to compete in the more attractive segments. 2.1. Procedural Framework 11. The CRI approach combines intensive analytical research (as described above) with a change management process designed to help a cluster move into more attractive strategic segments. This is accomplished through three phases of managed public private dialogue. Phases 1 and 2 correspond to Components 2 of this Project, while Phase 3 corresponds to Component 3. • Phase 1—Identification and challenges: From a procedural perspective, Phase 1 is mainly a fact-gathering period during which the team reaches out to firms individually. The team interviews firm representatives to understand their concerns about the industry, their operational challenges and the regulatory environment. (During this Project, the CRI teams conducted a total of 250 interviews across 13 industry areas; almost all these were with firms, though the team also met a selection of representatives from academia and trade organizations.) Phase 1 culminates in a ‘First Public Meeting” (one for each cluster), during which firm representatives are given the opportunity to air their concerns in a public forum. Deliverables 3 and 10 (for the first and second set of CRIs, respectively) reported on the state of the industry and cluster for each STPA in Croatia. • Phase 2—Guiding the strategy: During Phase 2, the teams begin the analytical work whose methodology is described in Section 1 and present their findings to the cluster. Hypotheses for the strategic segmentations are tested during international ‘reference trips’. The purpose of the reference trips is to clearly understand the demands and needs of advanced buyers in markets where the attractive business segments are already developed, and to benchmark the domestic value chain against advanced practice in other countries. The team finalizes the strategic segmentation analysis and vets it in a series of ‘strategy groups’ with key firms in the cluster. (All firms are invited to take part in strategy groups; in addition, the teams target specific participants on the basis of their motivation, innovation, and/or thought leadership). After testing the segmentations and strategies in the strategy groups, the teams hold a set of ‘Second Public Meetings’ to present their findings to the wider cluster members. Deliverables 4 and 11 (for the first and second set of CRIs, respectively) presented the strategic segmentation analyses for all 13 STPAs in Croatia. • Phase 3—Launching the actions: In Phase 3, the teams guide and work together with the cluster to come up with a set of proposed ‘action lines’ that could move Croatia’s industry toward the attractive segments. Having benchmarked the Croatian value chains to advanced markets and identified key gaps in the value chain, the teams conducted a ‘problem tree’ analysis to associate the underlying market failures with measures that could address these failures. Working groups are set up for each action line—again, through a combination of an open call at the Second Public Meetings and targeted invitations to motivated participants— to flesh out the action lines by identifying actions, responsible parties, and proposed timeline and budgets. These action lines are then presented—ideally by firm or industry representatives—in the Third Public Meetings. In Croatia, the action lines were not themselves deliverables of the Project, though as discussed above they have been summarized and presented from an economy-wide perspective in Deliverables 5-9 (for the first set of STPAs) and here in Deliverables 12-16 (summarizing all 13 STPAs). 2.2. Analytical Framework 12. The CRI methodology carries out a ‘strategic segmentation’ analysis of the sector in which a cluster is operating. This analysis defines strategic segments in terms of both a solution (product and service) and the end customer (or group of customers) that the solution serves. For example, rather than evaluating ‘automobile parts’ or ‘truck’ segments, a strategic segmentation might focus on mobility solutions for customers in either urban or rural areas. The segmentation is referred to as ‘strategic’ in the sense that each segment has its own value chain that calls for a unique strategy for firm entry, survival, and growth. Figure 2.1: Segmentation Matrix 13. Strategic segments are evaluated under the ‘Five Forces’ framework to identify the relative attractiveness of different segments. The eponymous five forces in this framework are (a) the relative bargaining power of buyers, (b) the relative bargaining power of suppliers, (c) the intensity of competitive rivalry, (d) the threat of new entrants,9 and (e) the threat of substitutes (Porter 1979). The combined interaction of these five forces, when applied to any given segment, can provide qualitative insight into how much profit can be captured in a segment, and by whom. For example, the threat of new entrants, competitive rivalry, and threat of substitutes determine the profitability of a sector, while bargaining power 9 The threat of new entrants is sometimes referred to as ‘barriers to entry’. of buyers and bargaining power of suppliers determine who is capturing the margin. Variations in the interplay of the five forces in different segments make some segments more attractive than others. Figure 2.2: Porter’s Five Forces 14. A strategic segmentation gives a picture of how an industry is changing at the global level. A strategic segmentation analysis is not country specific but reflects a global overview of the segments within an industry. Countries usually participate in many different segments but only compete well in a few. The attractiveness of individual segments is highly dependent on the evolution of global supply and demand trends, which themselves reflect changes in consumer preferences and expectation, technology, regulation, and firm structure (Mukim et al. 2015). The Five Forces analysis takes such trends into account by reflecting the changes in market forces over time. 15. The Five Forces framework was applied to explain the change in industry margins, including the STPAs’ expected evolution over the next 10 years. This analysis was supported by qualitative and available quantitative data. This analysis was applied both in the strategic segment in which Croatian firms are currently most active, as well as in other segments that represent combinations of new products/services and user groups. 16. An idealized value chain was drafted for each STPA and gaps in the participation of Croatian firms were identified. The idealized value chain of relevant activities was constructed after a thorough literature review and a reference trip to visit advanced buyers and service providers already competing in this segment. The Croatian industry was then benchmarked against this value chain. The benchmarking analysis was taken from a mixture of firm interviews, fieldwork, and data analysis. Where data were not available, expert opinions were used to assess the benchmarks. The value chains also consider the factor intensities of various sets of activities, namely, • Capital Intensity, as measured by investment cost; • Labor Intensity, as measured by number of staff; • Knowledge Intensity, as measured by years of training; and • Natural Resource Intensity, as measured by input cost. Together these factor intensities help assess the economy of scale needed for firms to compete in each activity. Moreover, it is important to note the intensity of the linkages between activities (in terms of both time criticality and knowledge flow) and how globally concentrated or rare each activity is. A legend representing the factor activities for an individual activity is given by the following figure. Figure 2.3: Legend for Interpreting the Value Chains 2.3. Strategic Segments 17. The strategic segmentation analyses for each STPA are described extensively in Deliverables 4 and 11. These analyses were validated in the third phase of the CRIs, which culminated in private sector representatives presenting the proposed action lines. Table 2.1 provides brief descriptions of the strategic segments identified for each STPA. For more detailed information, please refer to the report for the relevant STPA contained in Deliverables 4 and 11. Table 2.1: Brief Descriptions of Identified Segments by STPA STPA Brief Description of Identified Segments Pharmaceuticals Networked and intelligent healthcare. Pharmaceutical, biopharmaceutical, medical equipment and technology industries are undergoing change globally. New business models and product categories are emerging which allow smaller companies to capture value and to compete on quality and product differentiation. These new opportunities are prompted by several key trends: empowered consumers (‘prosumers’), an ageing population, increasingly pervasive digital integration, and personalized medicine. Croatian companies’ ability to embrace these opportunities will depend on their ability to link into newer GVCs, and to embrace the integration of services with manufactured products. Advanced buyers increasingly demand that firms supply their products and services based on guaranteed outcome rates, and can integrate their products with personalized healthcare and remote monitoring technologies. In consumer-facing segments (OTC, herbal supplements, and so on), producers will be expected to integrate medicinal and emotional benefits in how products are packaged and marketed, and to facilitate experimentation by buyers in retail sales channels. In some activities, Croatia is already a pioneer. For example, digital health technologies are already being implemented in Croatia. But several characteristics of the newer segments are not yet well-developed in Croatia, and can be supported through well-targeted catalytic initiatives—for example, to connect Croatia's outlying populations via logistics and remote-based healthcare. Health Outcome-based healthcare: In advanced outcome-based healthcare segments (also called “value-based health care” [VBHC]), insurers are reimbursing providers on the outcomes they deliver for their patients. This stands in contrast to the input focused, Fee-For-Service (FFS) system that had ineffectively dominated healthcare practices for centuries prior. Fortunately, outcome-based reimbursement systems naturally hold more value for both patients and the health industry at large because it rewards providers for the outcomes they achieve for their patients. Such properly structured incentive systems create opportunities for health service firms to specialize their practices and differentiate their products. At the same time, they create better incentives for health services firms to begin effectively treating an increasingly common set of chronic-disease patients. Opportunities for Croatia may lie in generating a private health sector that can compete for new patients (in private insurance pools) based on the quality of outcomes that they deliver for chronic-need patients. Nutrition Personalized nutrition: The nutrition industry has only very recently begun to evolve and advance from a supply-driven purveyor of unproven supplements, to a targeted and science-based means of treating nutritional ailments that plague particular individuals. In the advanced personalized nutrition segments, firms are beginning to diagnose their patients with a specific nutrition-related illness, deficiency, or predisposition prior to recommending a solution. Only after being diagnosed will the firm then recommend a solution that is tailored to the customer. Firms utilizing this personalized approach to nutrition then sell recurring subscriptions offering nutritional counseling, supplements, or even regular meal plans. Whereas industry in the former business model only sold supplements in a one-off exchange that lacked any margins for supplement manufacturers; Companies specializing in personalized nutrition are able to retain customers for longer periods and can compete on the basis of the quality of their verifiable results. Opportunities for Croatia may lie in developing a set of firms that can develop the capacity to diagnose and deliver a personalized nutritional solution (involving some mixture of nutritional counseling, supplements, and meal plans) on a subscription basis for European markets. Energy Energy islands (microgrid/minigrid): The term 'energy island' does not denote an actual island surrounded by water but refers to 'microgrids' or 'minigrids' that can disconnect and operate independently from the main power and heating grid for extended periods of time (for example, during catastrophic events). Some microgrids might lack any connection to the wider grid. The ability to 'island' ensures energy reliability for microgrid customers and can increase the resilience of the wider grid by reducing strain during emergencies. Microgrids can readily accommodate local renewable energy sources (RES) such as rooftop solar panels and reflect a new reality of 'distributed energy', where consumers or businesses may be both sellers and buyers of energy rather than just end-users. The energy island segments have emerged from the rise of RES, improved energy storage capabilities, and smart-grid controlling technologies. Opportunities for Croatia may lie in harnessing the country's existing capacities in energy technology to combine the various component systems of microgrids and deliver integrated solutions to customers. Environmental See description for 'Energy' (overlapping segmentations). Auto/Rail Urban mobility. The personal urban mobility segment is concerned with the transport of small groups of people over short distances—generally within urban areas. This segment is witnessing a sea change as new technologies and business models revolutionize the way that people move around cities: autonomous vehicles, electric vehicles and shared mobility are the disruptive technologies and consumer trends that define the sector. In the rail portion of this STPA, traditional modes of urban rail transport, such as trams, rapid transit, monorail, and commuter rail, are being supplemented by new modes such as automated people movers. The targeted constituents of the CRI in this STPA were mostly parts suppliers to foreign Original Equipment Manufacturers (OEMs); there are no automotive or rail OEMs engaged in mass production in Croatia. The challenge and opportunity in this STPA lie in aligning the activities of parts manufacturers with the trends that are disrupting the sector; these trends presage the elimination of some types of parts entirely, or a shift in buyer demands due to changing use patterns of urban vehicles. Environmental Short-sea movements of cargo and mass numbers of people. Short-sea Transport (focus transportation refers to: on maritime • with respect to people—the mass transport of passengers from point A to transport) point B for short distances within range of coastal waters. (Ferries— passenger or car—are the archetypal vessel type in this segment.) • with respect to goods—the segment is defined by coastal trade and includes the transfer of freight from sea shipping to other modes of transport as well as last-mile transport on inland waterways. It also includes inland waterway trade. (In Croatia, the latter is relevant along the Danube.) These segments present a local opportunity due to Croatia’s coastal geography, where such vessels are commonly deployed, and due to the fact that they provide a more manageable testbed for innovations such as green shipping and smart shipping than the more challenging conditions of the ‘deep-sea’ or oceangoing segments. Intelligent Urban mobility. While the Auto/Rail STPA reflects the upstream portion of the land Transport transportation/mobility value chain, the Intelligent Transport STPA represents the downstream part. Thus, the strategic segmentation of the two STPAs were broadly analogous. As in the Auto/Rail STPA, the identified segments of the Intelligent Transport STPA center on personal urban mobility—that is, the movement of individuals (or small groups of people) over short distances. But whereas the constituents of the Auto/Rail STPA were mostly parts manufacturers, the participants in the Intelligent Transport CRI were providers of technologies and applications related to ‘Intelligent Transport Systems’ (ITS)—or the management of transportation networks through a melding of telecommunications, electronics and information technologies with transport engineering. Within the urban mobility segments (as in all segments), opportunity lies in Cooperative ITS (C-ITS), which represents the next step forward in ITS technology. Conventional ITS mainly transmits one-way information—for example, the arrival time of the next bus or delays in the road ahead. In C-ITS, however, vehicles will interact with one another and with roadside infrastructure to share data about vehicle location, speed and direction of travel, or about road or weather hazards. For Croatian firms, opportunities lie in designing innovative applications that take advantage of the advances in this ‘vehicle-to-everything’ (V2X) technology. Cybersecurity Integrated and customized cybersecurity solutions. Most Croatian cybersecurity companies currently operate as system integrators and resellers, and are experiencing growing pressures on their margins due to increasing labor costs, difficulties in talent retention (faced with competition from higher value segments), and high competition given low barriers to entry into this market segment. Companies that develop their own innovative cybersecurity solutions that are patented and aimed at global market have been better positioned for sustainable competitive advantage. Croatian cybersecurity firms can enter this segment by finding unserved market demands or opportunities arising from new regulatory requirements, perceived customer needs or as a response to new cyber threats. Integrated solutions are patented and protected which raises barriers to entry into these segments. Defense Dual- Integrated security solutions for public and private buyers. ‘Defense Dual-Use’, Use broadly defined, denotes products and services that can be used for a civilian or military purpose. (The CRIs focused strictly on civilian applications.) But regardless of the end user, the dual-use sector is concerned with providing safety or security solutions. The identified segments in this STPA focus on integrated, value-added solutions as opposed to standalone goods and services. For example, a conventional supplier of personal protective equipment (PPE) sells only a product, but an integrated solution might include a service that monitors the performance and condition of the equipment (or even the user) and might make automatic adjustments or schedule replacements accordingly. Opportunities in this segment for Croatian firms may lie in the provision of comprehensive, extremely complex safety solutions that incorporate a mix of elements including transport, communications and PPE. Such a high level of integration can be harnessed to respond to large-scale natural or engineered disasters. Mine Action ‘Preventive Detection’ enters the domain of homeland security, counter-terrorism and public safety in general. The key characteristic is that the threat is unknown, and companies are offering advanced prevention systems and quick threat neutralization when the threat has been identified. There are two different Preventive detection segments, with different value chains and solutions for uninhabited and inhabited areas. The most common solutions in uninhabited areas are the advanced border protection services, critical infrastructure protection in rural areas, territory monitoring for threats to environment like forest fires or natural disasters etc. On the contrary, the other segment is focused on preventive safety solutions in the dense and urban areas, where there are huge threats to civilian population and where any incidents can lead to severe loss of human lives. Dense metropolitan areas, public transport routes, tourist destinations, concerts, stadiums etc. are the most common examples where advanced preventive security is needed to protect the civilian population. Opportunities for local firms lie in many services that were traditionally served by the public security forces which are nowadays being outsourced to private companies primarily caused by the huge increase in demand and the development of cutting edge software and hardware solutions. ‘Remediation’ represents the reuse of contaminated land and unleashing the potential for future redevelopment while protecting the environment. It is important to emphasize that the land treatment in this segment does not mean the removal of the contaminated land to landfills but using the advanced technologies to remediate the contaminated land on the location (in situ). Opportunities for local firms depend on improving performance for a number of crucial activities in the remediation value chain that are not yet well-developed by local firms. Increasing competitiveness, skills, advanced technologies and processes will be crucial for successful participation in this segment. Food 'Fresh convenience' food products. While many consider the food industry to be a rather static, in an increasingly busy and wealthy world, the nature of demand for food is changing. As such, there is considerable scope that exists for innovation in the way we deliver food to match people’s lifestyles. Many consumers are increasingly willing to pay higher prices for the convenience of having a readymade meal available for their ease-of-use or their ease of at-home preparation. At the same time, consumer trends have begun to favor fresh products and meals over their stockable predecessors. Whereas frozen TV dinners had dominated convenience markets in decades prior, freshly prepared meals are able to capture more value in a less crowded regional market. Opportunities for Croatia may lie in harnessing the country's access to high value European urban markets, where consumers are demanding freshly made convenience products. To enter these markets, Croatian firms will have to develop the capacity to understand exactly what foods are being demanded in those markets, as well as the capacity to deliver them - using qualified logistic providers - on a constant and continual basis. Wood Customized wooden interiors. Firms that are able to design, manufacture, and install a customized wooden interior in a unique space are able to capture significantly higher margins than a firm that only mass produces wooden furniture. As such, firms that can deliver interior solutions, from concept to installation, have integrated several value chain activities to provide a seamless service. Demand for such interior solutions stems most strongly from a new set of high-value commercial buyers (such as the hospitality industry and luxury retail stores) that are expanding their presence across the globe. Such buyers are keen on differentiating their store fronts/spaces in order to build a distinct and unique brand. These firms are willing to pay a premium in order to get an end-to-end flawless service. Opportunities for Croatia may lie in delivering these integrated interior solutions for commercial buyers. Particularly, hotels, restaurants, and retail outlets in European capitals could be desirable clients for Croatian firms. However, in order to be able to participate in such a business, Croatian wood manufacturing firms will need to develop the capacity to adaptively design solutions in-house, as well as the capacity to adapt their manufacturing lines to make customized cuts. Finally, they will also need to develop the capacity to deploy an on-site workforce, which can install such interior solutions in the buyer's location. 3. Framing Interventions 18. The action lines that emerged from the CRIs reflect common market failures that arise across Croatian industries. Market failures are situations where free markets alone are unable to achieve an efficient economic outcome. In Croatia, three types of market failure came up repeatedly: innovation failure, information asymmetry, and coordination failure. (All of these are forms of incomplete or missing markets.) A fourth—(negative) externalities—came up along with information asymmetry in the context of skills and training.10 19. For policymakers, these market failures can provide a framework for deciding how to use public funds to increase the competitiveness of Croatian clusters. Not all value chain gaps identified during a CRI make suitable targets for public financing. In principle, public financing should avoid distorting markets and ‘crowding out’ private investment and should instead aim to correct market failures. For EU member states like Croatia, the European Commission (EC) has codified this principle in the EC Notice 2016/C 262/01 on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union. This notice emphasizes the concept of a ‘market economy operator’; essentially, this is the idea that in disbursing public funds, governments should not stand in the place of market actors. While not binding on member states, the EC position provides strong guidance for how public (especially EU) funds should be used to finance competitiveness initiatives. 20. A combination of interventions or funding measures that target market failures could be an effective way to improve the competitiveness of a cluster. Structuring interventions around market failures helps provide more nuanced solutions, as opposed to broader measures—such as generous tax incentives for R&D—that may miss the mark by not addressing a particular market failure in a sector. Moreover, since a sector may be facing multiple market failures at the same time (and even different instances of the same market failure), combining interventions that attempt to solve different value chain bottlenecks can provide an approach that is both comprehensive and targeted at the same time. 21. The measures described in this document can be viewed according to two parameters: (1) the problem they solve, and for whom (in economic terms, the underlying market failure and social utility); and (2) their function in strengthening a cluster’s competitive position. These parameters are integrated in the table below. Understanding the underlying market failure is useful for assessing the appropriateness of using public funds to finance an intervention. Understanding an intervention’s function in cluster development is key to putting together a broader set of measures to strengthen the cluster’s overall competitive position. The measures coming out of the Croatian CRIs boost cluster development mainly in four ways. They are geared toward: (1) encouraging general R&D; (2) establishing a positive enabling environment for a sector; (3) strengthening the cluster’s technical and collaborative framework; or (4) helping individual firms within the cluster. 10 See Stiglitz and Rosengard, Economics of the Public Sector, Chapter 4. Table 3.1: Action Line Measures by Market Failure and Cluster Development Function Function Encouraging R&D Strengthening the Strengthening the Helping individual enabling cluster capacity and firms scale up and environment framework compete Innovation • Innovative • Regulatory • Testbed pilot • PPI Research Call framework • Technology scouting • Firm-level upgrading • Pre-competitive • Open data • Innovation/business • Technology scouting procurements initiatives competitions • Certification (PCPs) • FDI • Certification • Business mentoring • Risk guarantees • Export Promotion • Skills & training • Skills & trainings • Market intelligence • Business Market Failure competitions • Market intelligence Information • Regulatory • Technology scouting • Business mentoring Asymmetry framework • Technical • PPI center/collaboration • Competitive risk framework guarantee • Market intelligence Coordination • Testbed pilot • Technical center/collaboration framework 22. While three market failures arose repeatedly in the CRIs, wide traction could likely be gained by focusing on two of them—innovation and coordination failure. The prominence of innovation market failures is no doubt due partly to the fact that most of the STPAs—including Energy, Environment, Environmental Transport, Intelligent Transport, Health, Nutrition, Pharmaceuticals, Cybersecurity and Defense Dual-Use—are on the cusp of being transformed by disruptive technologies. In such an environment, knowledge gaps and uncertainty about the future direction of these industries creates a situation that is ripe for innovation-related market failures. Moreover, many of the measures that address information asymmetry are also relevant to innovation failure. This is perhaps unsurprising given the difficulty of keeping up with fast-changing trends and technologies. The second prominent market failure, coordination failure, is relevant to fewer functional areas but is fundamental to the very notion of a working cluster. Fixing coordination failures can have significant payback in terms of cluster functionality; clusters that have mechanisms to coordinate effectively are better able to deal with other market failures and challenges. Moreover, fostering a practice of collaboration can take some time, so may it may be worthwhile getting an early start. 23. A full program to improve cluster competitiveness would draw from interventions that intersect with different functions in developing and strengthening a cluster. While the CRI’s emphasis on firm engagement is designed to identify and win private sector support for a smaller number of key catalytic actions, individual CRIs may face time and resource constraints in coming up with a full array of tools. Thus, a roadmap for boosting competitiveness in an STPA would tackle one or both of innovation and coordination failures while putting in place measures, as needed, to make sure that they serve different needs of cluster development. 3.1. Market Failures 24. Incomplete or missing markets—where the market for a commercially viable good or service is underdeveloped or does not exist—account for the bulk of the market failures reflected in the CRIs. Markets may be incomplete for one of three main reasons: • Innovation failure (segments are new and untested) • Information Asymmetry (one party to a transaction has insufficient information) • Coordination (related products or actors need to be combined) Innovation Failure 25. Innovation market failures often arise in relation to new products and services; the ‘failure’ here has to do with insufficient knowledge or understanding of novel business segments. In fast- changing or emerging segments, firms may hold back from introducing innovative products and services out of uncertainty over what the market is demanding, or over how to commercialize that product or service. This type of market failure tends to affect sectors where new business and financial models are emerging and untested. Innovation market failure has some conceptual overlap with information asymmetry; while the latter emphasizes difference in knowledge between parties, the former is more concerned with knowledge gaps generally. In several industry areas, Croatian firms face disruptive trends and technologies that are upending established business models and leading to innovation market failures: • Energy and Environment. Developments like distributed energy, community energy, renewable energy sources (RES), smart grids, microgrids and advanced battery storage systems are disrupting traditional models of distribution and transmission and challenging long-established assumptions about the role of utilities. Important questions remain, including how much users will pay, what financial models can be profitable, and what is the best customer interface. Business and financial models are being developed and tested in other EU countries, the United States, Singapore and Korea (among others). Full-scale piloting has not taken place in Croatia, leaving firms at a disadvantage. • Environmental Transport. In the maritime sector, the rise of electric and hybrid vessels propulsion systems mean not only that companies have to master new technology, but that the value chain is orienting itself more around electrical systems integrators—regardless of propulsion type. Moreover, several potential propulsion types remain in the mix, including electric, LNG (liquefied natural gas), hydrogen and hybrid systems. Finally, policymakers in other countries with ambitious climate change mitigation targets are steadily pushing the technological frontier—often farther and faster than might be the case in Croatia. • Nutrition. Segments emphasizing the personalization of nutrition are all quite new and are rapidly evolving on the world market. As such, the competition failures identified for this segment are the result of firms being slow to adopt a set of innovations that would allow them to participate in the high-value global markets that demand such products. As mentioned earlier, innovations need to occur not only on the product level, but also in the sales and process models of the firms. The dramatic and evolving nature of these product, process and sales innovations implies that firms will have to make an entirely new business model and a number of considerable investments. At the same time, these models are still being tested on the world stage. As such, there is a risk associated with this new segment. Croatian firms are not able to raise the necessary long-yield capital for such investments, given the market uncertainty and the likely schedule for return on investment. Resolving the financing and risk constraints posed by the new model will be necessary to incentivize firm entry into these new segments. • Intelligent Transport. The functionality of ITS and especially C-ITS are heavily tied to ‘5G’ (for fifth generation) wireless technology. 5G technology is brand new and is only now starting to be piloted and rolled out—especially in Asia (China, Japan and Korea) and the United States. Regulatory and interoperability standards are still being worked on. Thus, while the advent of 5G is a certainty, the kinds of applications that can be derived from it are much less so. This represents both opportunity and uncertainty for industry players. • Auto and Rail. Like ITS, Croatian auto and rail part manufacturers have not been as readily capable of adapting to innovations in urban mobility markets. The segment is just emerging, and firms are uncertain of how to adapt their production lines to the new demands of the segment. A changing set of input parts, along with a new set of buyer standards and specifications, is unknown to many firms. Without such knowledge these firms are ill adept at meeting the demands of the newer and more innovative buyers in the market. • Wood Production and Processing. The wood processing industry has gone through rapid changes with the increasing globalization of the industry. The market for wooden furniture has increasingly become a mass market business, and traditional production lines are ill suited to supply at the scale and efficiency required by buyers. Such production lines require advanced Computer Numeric Control (CNC) machinery and specialized skills to operate them. Moreover, new and emerging segments are requiring a set of process and sales innovations (such as integration of customized design and installation) in their business models. However, Croatian firms have been unable to adapt these features into their offer due to the complexity of the product/service combination. As such, there are clear innovation failures in the way that Croatian firms have adapted to these shifting markets. • Food Production and Processing. The food industry has witnessed rapidly evolving demand in tandem with shifting demographics, consumer behaviors and incomes. Particularly, there is a rising demand for ‘fresh convenience’ products, which require advanced methods of processing (such as high-pressure treatments). Such methods utilize expensive equipment that is typically beyond the reach of any individual firm. Generally, such processing functions are carried out by third party service providers which have specialized knowledge of how to operate the machinery. There are specialized firms that carry out this function in Europe, but none of them are willing to invest in servicing the Croatian market because there is not a substantial cadre of firms willing to utilize their services. Consequently, this lack of access to advanced processing methods, inhibits Croatian firms from being able to innovate new convenience products for the market. 26. Measures to fix innovation market failures need to address one or more of the following areas: (a) Risk. Companies naturally try to avoid unnecessary risk. This is especially true of SMEs— which make up the bulk of the firms taking part in the CRIs—since they are less able to bear the potential fallout. Banks may also shy away from funding innovative and novel investments. While risk aversion is understandable, it can also lead to firms failing to move to more attractive segments. (b) Technology and skills capacity. In fast-moving segments, businesses may have trouble staying abreast of advances in technology and knowhow. This problem is self-reinforcing, as businesses that fail to grasp and take on board industry developments will also fail to nurture skills they need to stay ahead of or keep up with the competition. For example, though cybersecurity and data analysis have become prevailing features of the competitive landscape across several sectors, many Croatian firms—though aware of this—have not yet adjusted their business models and skillsets. (c) (Market) information. To invest in a new product or service, firms need to know the size of the potential market and the costs involved. Even where this information does exist, firms may not have access to it. (d) Regulations and quality. A lack of adequate certification and standards regimes in new segments can hinder Croatian businesses from establishing credibility in critical areas like cybersecurity. The cost to firms of getting certified can be prohibitive, especially if the domestic market does not yet demand it. This creates a cyclical underinvestment in standards, perpetuates substandard quality, and prevents Croatian businesses from moving into higher- value segments. Information Failures 27. ‘Information failure’ or ‘information asymmetry’ describes a situation where one party to a transaction lacks the information it needs to confidently price a transaction. This not only makes it difficult to price a good or service correctly; it may prevent the good or service from being offered at all. Examples of information failure found in the CRIs include: • Foreign partners. In industry areas where technology is developing fast—like the Cybersecurity, Energy, Environmental, Intelligent Transport, Environmental Transport and Defense-Dual Use STPAs, Croatian firms may have a hard time identifying partners with the components or technologies they need. For example, energy storage for RES is a potential value chain opportunity for the Croatian energy sector. But there is a bewildering array of technologies and providers—such as flywheel technology, lithium batteries, thermal energy, and concrete-based solutions—for Croatian companies trying to find the best fit. A similar challenge exists in the environment-friendly maritime sector, where similar considerations of battery storage are compounded by an array of choices available for alternative propulsion systems. • Business development services. According to the Global Entrepreneurship Index, Croatian entrepreneurs lag behind their peers in Slovenia, Poland, Romania, and Austria in the commercialization of innovation. The underlying reason for this gap often includes inadequate entrepreneurial skills in areas like marketing, operations, strategy, and risk assessment. While support might be available, information failures may be keeping some Croatian firms from stepping forward; often entrepreneurs do not perceive the value of such services to be worthwhile and are not willing to pay for them even when they are clearly needed. This tendency to undervalue business skills seems especially prevalent in STPAs like Pharmaceuticals, where there is a strong emphasis on research rather than entrepreneurship. • Innovation financing. The Croatian Business Angel Network (CRANE) estimates that every year, about EUR 2 million worth of otherwise bankable projects do not go ahead because of a lack of financing. (Other estimates place this demand at about EUR 20 million a year.11) Especially in relation to early-stage funding, financiers lack information about potential markets to invest in bringing new goods and services to market. This gap persists despite the presence of programs in Croatia—such as the Unity through Knowledge Fund (UKF) and the Proof of Concept (PoC) Program—that have been providing public funds for innovative projects. Coordination Failures 28. Coordination failures exist when parties fail to collaborate even when doing so would bring mutual benefits. The CRIs uncovered numerous examples where firms could benefit by offering a combined good or service or otherwise exploiting complementarities but have not coordinated their activities. Examples include: • Defense Dual-Use/Mine Action. In STPA 10, firms have expressed an awareness of the potential of offering a comprehensive service solution in protection or emergency services, but most do not have the ability to provide such solutions alone. Cooperation between firms for joint solutions is still nascent, implying that there are specific constraints on collaboration that are preventing joint initiatives. • Energy. Microgrids are delineated energy grid networks that can work independent of the main grid. Microgrids usually need more integration of distributed RES, more interaction between energy producers and consumers (sometimes blurring the lines between these two groups), and greater resiliency against disruptions in supply. Because microgrids are ‘miniature’ grids (at least when compared with the vast geographies covered by wide-area grids), they must incorporate several interoperable elements, including substations, RES, battery storage systems, smart grid controllers, and building energy management systems. However, while Croatian firms supply most of the individual components necessary for the 11 These estimates are compiled from a number of sources: European Investment Fund (EIF) study, Croatian Private Equity and Venture Capital Association (CVCA), and Croatian Technology Transfer Offices (TTOs). These estimates were compiled in a study on Croatia’s venture capital environment, commissioned by the World Bank in preparation for the Croatia Innovation and Entrepreneurship Venture Capital Project (2013). working of a microgrid, these firms have not collaborated to supply the market with a joint integrated community energy solution. This is a clear example of a coordination failure. • Intelligent Transport. C-ITS involves technologies and applications that link a large number of technology and service providers as well as end users in a communications web involving the constant transmittal and analysis of vast volumes of transportation data. (The potential scale of these interactions is reflected in the nomenclature of ITS technology, including ‘vehicle-to-vehicle’ (V2V), ‘vehicle-to-infrastructure’ (V2I) and ‘vehicle-to-everything (V2X). The interplay of such a complex communications system requires a concerted level of coordination—especially since the platform for C-ITS (5G wireless technology) is itself a novel emerging technology. Thus, the ITS sector is a prime example of an industry that potentially faces innovation failure/information asymmetry compounded with coordination failure. • Health. In a health services industry that is increasingly focused on outcomes, a variety of actors have noted a need to monitor the success rates of various treatments and of various providers across time. However, an individual will rarely rely only on one treatment or one provider in order to ensure their health status remains optimal. Moreover, the information on outcomes has often fallen between the cracks between payers (insurance companies) and different levels of health care providers (primary care, specialist care and hospitals), who often fail to cooperate on ensuring efficacy of health care delivery. Therefore, measurement of outcomes and payment for those outcomes has always proved elusive in the health network. Ascribing responsibilities for both the collection of outcome data and the results obtained has historically been absent. In order to eliminate this market failure, coordination between firms needs to be enhanced to ensure efficacy of the healthcare providers. • Pharmaceuticals. This industry caters to the growing worldwide market for home-based care (which stems from the cost savings available compared to hospital-based care). In Croatia, it could leverage the country’s own need for such solutions for its populations on remote islands, which are too small to sustain specialized health facilities. Stakeholders in this industry include pharmaceutical manufacturers and distributors, the public health system (or private health insurers), delivery solution companies, medical device manufacturers, system designers (such as Pharmalogger in Croatia), and ICT and software development companies which create an interface to weave the components together. The challenge of coordinating the actions of all these stakeholders has prevented the emergence of a remote home-based patient care industry in Croatia. Alleviating this coordination failure could allow the industry to bloom. • R&D ecosystem. Croatia has an extensive network of institutions related to R&D, yet there are many opportunities to improve the relevance of funded topics and connect them with Croatian industrial needs (Aprahamian and Correa 2015). Although training and R&D are sometimes both housed within the system of university faculties and vocational schools, they serve distinct functions and their different financing and governance models isolate them from each other and the needs of the private sector.12 These market and governance failures prohibit these functions from contributing to the competitiveness of industry. At the root, some of these issues may be able to be solved through improved information flow from industry to academia and vice versa and through better opportunities to collaborate on common projects of mutual benefit. 29. Externalities occur when the prices of goods or services do not reflect their actual societal cost. For example, pollution from a factory may be a negative externality if its toll on the environment and human health is not fully priced into the factory’s goods. More of these goods would then be sold than if their price factored in all the externalities of their production. Goods or services can also have positive externalities; that is, they produce net social benefits that are not reflected in their price. 30. In Croatia, the impact of externalities is most evident in skills. During the CRIs, companies time and again reported that Croatian vocational training and education institutes did such a poor job at training graduates that the companies were forced to spend months retraining new employees in-house. Moreover, this situation created a negative externality; high attrition rates due to the large numbers of skilled Croatian workers migrating to other EU countries led businesses to underinvest in training—out of fear that they could never recoup their losses when workers leave. 3.2. Social Utility 31. Once the underlying market failure has been identified, another consideration is an intervention’s social utility—whether it benefits the whole cluster, a subgroup of members, or just one member. Measures can be characterized by whether they produce ‘public’, ‘common,’ ‘club’ or ‘private’ goods. These four types of goods are distinguished according to whether they are: (a) excludable or non-excludable—that is, whether it is possible to exclude consumers who have not paid for a good from having access to it (b) rivalrous or non-rivalrous—that is, whether the consumption of a good diminishes its availability for another 32. The interaction between these two characteristics determines whether goods are public, club, common-pool, or private. Table 3.2: Private, Common, Club, and Public Goods Non-excludable Excludable Non-rivalrous Public Good Club Good Rivalrous Common-Pool Good Private Good 12 Industry consultations have widely noted that secondary schools inadequately prepare graduates for jobs in the real sectors and R&D institutions are often disconnected with the trends and needs of private industry. Public Goods 33. In the CRI context, a measure provides a public good if its benefits are non-excludable (they can be enjoyed by all cluster members), and non-rivalrous (one cluster member’s enjoyment of the benefits will not affect the ability of other members to enjoy them). National defense is a classic example of a public good.13 Such goods tend to be provided by governments, since the inability to exclude any users creates a ‘free rider’ problem of users enjoying the benefits of such goods without paying. Examples of public goods among the measures discussed in this document are: • National investment promotion (Section 6) • Public procurement reforms (Section Error! Reference source not found.) • Certification (Section 5.7). Club Goods 34. A club good is non-rivalrous but excludable—that is, while access to its benefits can be kept to certain users, access once granted is undiminished. Classic examples of club goods are movie theaters, private parks, or satellite television. The following measures can be classified as club goods: • Joint R&D/testbed pilots (Section 5.4) • Technology scouting (Section 5.5) • Market intelligence (Section 0) • Export promotion (Section 7.3) • Territorial and product branding strategy (Section 8). Common-Pool Goods 35. A common good is non-excludable (available to all), but rivalrous (it is diminished as more agents have access to it. Classic examples of common goods are mineral resources or fish stocks in the ocean. The following interventions may be classified as common good interventions and reforms: • Centers for Skills and Collaboration (Section 5.3) • FDI liberalization (Section 6) 13Public goods may also occur as positive externalities of other economic activities, where their provision is a by-product of the decision to produce a private good. In this case, the public good will be produced without anyone having taken the decision to produce it or having to pay for its provision. However, it will be provided in quantities that are suboptimal from the social point of view, because the benefit of the externality that is enjoyed free of charge by others is not taken into account by the economic decision maker. Private Goods 36. Private goods are both excludable and rivalrous—that is, users can be prevented from accessing the good, and it is depleted through use. Governments would not usually need to intervene in the markets for private goods let alone provide such goods. 37. However, market failures do sometimes arise in the provision of private goods. These failures prevent firms from providing private goods, thus creating a suboptimal outcome. Such failures may be through innovation-related issues, information asymmetries, or coordination failures). The following interventions may be classified as private goods interventions: • Innovation competitions (Section 4.1) • Firm-level technology adoption and innovation fund (Section 4.2) • Workforce skills and training (Section 5.6) • Business mentoring (Section 5.8) 4. Deliverable 12—Report on Investment Plan Proposal 38. The ‘Investment Plan Proposal’ in this section describes investment-focused measures aimed at improving the position of Croatian firms in GVCs. There is not necessarily a clear line of demarcation between measures characterized as belonging to an ‘investment plan’ rather than to an ‘action plan’—or indeed from the other chapters of this report. However, this section generally discusses measures that involve the short-term or ‘one-off’ disbursement of public funds (i.e. ‘investment plans’), while measures that require longer-term management and implementation are covered in the next section. 39. The fact that there are many more action-oriented measures than strictly investment- oriented ones highlights the need for sustained commitment. Correcting market failures and value chain gaps is not simply a matter of allocating finances through one-off investments, but also of delivering sustained and sophisticated management of the market failure which is bottlenecking access to more lucrative opportunities. However, in the meantime several shorter-term interventions can be achieved through the financing of: • Innovation Competitions. Croatia could organize and fund a set of competitions to catalyze complementary private sector investments. Such competitions could help address the problem, due to innovation failure, of suboptimal investments in innovation. • Firm-Level Technology Adoption and Innovation Fund. Such funds would address firms’ financial needs for investment to upgrade their products and services towards advanced segments of the STPAs. 40. Specifics on how these instruments can be utilized in each of the STPAs are detailed in the following sections. 4.1. Innovation Competitions Allocating funds to organize and fund innovation-related competitions can help catalyze complementary private sector investments. Such competitions could help address the problem, due to market failures which lead to a a less than optimal level of investment in innovation. This proposal arises from the working group discussions that were held in Phase 3 with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 41. It is important to have in place a system of incentives that encourages firms to innovate in developing and improving their business models. Although public R&D is better at providing some types of innovation, firms’ own investments typically have more impact. Thus, public funds should, where possible, aim to leverage private sector financing for innovations in product, processes, and marketing within firms. However, such leveraged financing should be backed by adequate market research, as unguided investments in R&D often lead to wasted resources. 42. Competitions that aim to spur innovation are one way of providing such incentives. Innovation competitions award monetary or other prizes to firms for designing business models or solutions. In the past, HGK has organized competitions that recognized producers for the excellence of their goods (for example, for the best prosciutto, the best wine, or the best honey). However, these competitions did not award monetary prizes—thus reducing incentives for private investment—and were targeted at the attributes of existing products. It would not take a great leap—and would arguably be of much greater benefit—for HGK or other agencies to organize competitions that reward firms for excellence in innovation. Such competitions could be relevant in several STPAs where moving into new business segments would require firms to devote more attention and resources to R&D. 43. Participation in the competition should be open to as wide a range of interested firms as possible. However, authorities should publish specific entry criteria at the start of the competition, to make sure that any innovation that ensues is directed toward the right segments and solutions. A sufficiently attractive monetary prize (along with an appropriate level of public recognition) would be key to enticing firms to take part. Prize winnings could be apportioned in various ways; for example, the competition rules might stipulate that 50 percent should go to the company and 50 percent the project team itself; this could help increase individual participants’ motivation. Of course, the criteria for evaluating the entries must be transparent, objective and should include quantifiable indicators such as likely sales volume and value. Where appropriate, consumers or independent expert could serve as judges. Applications in Croatia 44. Even if a competition is a one-time event, organizing a successful contest calls for a dedicated management team. Existing organizations like HGK or the Croatian Agency for SMEs, Innovations, and Investments (Hrvatska agencija za malo gospodarstvo i investicije, HAMAG-BICRO) could host innovation competitions. Aside from the prize money itself, funding would be needed for project management and administration. Examples of STPAs where innovation competitions might be held include: • Food. A competition in the food STPA would motivate firm participation in, and marketing for, business segments identified in the CRI. Organizers could invite firms to send new products to a third-party retail outlet that would serve as a neutral broker and sales point. The competition could run over a day or week, and awards could be based on real-life demand for products (for example, sales volume or aggregate sales value). Competitions might center on tourist destinations, which offer convenient testing labs for high-value consumers from targeted foreign markets. • Wood. A competition might give traditional wood processing firms the opportunity to practice the design and outfitting of interior spaces. The competition would invite firms to outfit a space with a customized wooden interior (flooring, paneling, furniture, and so on). Judging criteria would include aesthetic design, function, and the quality of installation (as inspected by a certification body like the Architectural Woodwork Institute). • Defense Dual-Use. A competition in this STPA could be held to design products, services, or solutions for search and rescue applications. This competition would encourage innovation that would help solidify Croatia’s position in several relevant areas, as well as encourage collaboration across different industries. For example, a garment manufacturer might pair with an ICT company to design clothing that would meet technical requirements such as monitoring capability, resistance to heat or fire, and so on. Judging criteria might include the efficacy of the technology, resistance to physical threats, and the cost-effectiveness of the solution. • Energy/Environment-Friendly. An innovation competition could be part of the selection process of a testbed pilot to help find the most suitable partners to take part in the pilot. For more information, see Section 5.4. Innovation Competition Description: A scheme to encourage the private sector investment in innovation that will enable the domestic industry to upgrade to higher-value segments Estimated Time frame: 2 years Estimated Budget: EUR 10 million Responsible Agency: MoEEC 4.2. Firm-Level Technology Adoption and Innovation Fund An innovation fund could help finance firms’ investments in upgrading their products and services to compete in new business segments. Such a fund would broaden the support available under existing schemes by enabling investments in innovations and technology. The fund would focus on critical value chain activities that allow Croatian firms to compete in the newer segments of the STPAs. This proposal arises from the working group discussions that were held in Phase 3 with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 45. Despite various public investments in innovation financing, Croatia does not yet have a mature innovation system and many firms lack modern production technologies. According to an OECD assessment of innovation carried out on Croatia in 2014, the country’s R&D expenditure – 0.8 percent of GDP, compared to 2 percent in the rest of the EU – represents the second-lowest level of investment among all European Research Area (ERA) countries. Moreover, R&D expenditures14 have stagnated since the economic crisis of 2009 (Croatian Smart Specialisation Strategy 2016-20. 2016). Underinvestment in technology adoption and innovation more generally has led many Croatian firms to fall behind. Thus, there is a need to reinforce government capacities to finance innovation and boost the participation and competitiveness of Croatian industry in new segments. 46. Firm-level technology adoption or innovation funds would help companies develop or upgrade to new technologies, particularly when innovation failures hinder firms from moving into new segments15. Such funds could supplement financing available under pre-existing schemes, several of which already exist in Croatia and are run by institutions like HAMAG-BICRO16. Some schemes are financed with EU structural funds while others are financed by the World Bank. Though many existing funds tend to prioritize (rightly) R&D activities, Croatian firms may also need support for adopting new technologies that will allow them to compete in attractive segments. An innovation fund for firm-level technology development and/or adoption could help more firms enter innovative segments. Ideally, such investments would complement those of other Croatian firms in the same value chain. 14 In absolute terms, Croatia spent about 354.7 million EUR in 2013 and about half of this came from private R&D expenditures. 15 Innovation failures could impose challenges to firm level upgrading. When it comes to investing in new and emerging segments, firms might be might not be inclined (risk-averse) to innovate unless they see that it will be commercially profitable. Where the segments are still emerging it would be difficult for Croatian companies to justify such an investment. Use of public funds for such cutting-edge innovation or technology adoption may allow firms to test products and solutions with a high risk coverage in the case the technology or the market does not eventuate. 16 These include UKF, IRCRO, PoC, and RAZUM. These have been configured to meet specific gaps in Croatia ’s innovation financing system—for example, to develop proofs of concept to validate technical and commercial viability or to support an increase in the number of knowledge-based technology-driven SMEs. However, many firms perceive that accessing EU structural funds (beyond the start-up phase) can be a time-consuming and unpredictable process. As a result, many firms decline to seek such funding. 47. The financial instrument should include these features: Innovation Fund for Firm- Level Upgrading • Intervention goal. Financial support given by the fund would mitigate a firm’s risk of developing or adopting Description: Financial support to innovative technologies. These technologies may relate firms upgrading their machinery and equipment to cater to to innovation of products, processes or services. Such advanced segments of the STPAs calls should be focused around themes specific to the STPAs where a topic of interest has been identified. In Estimated Timeframe: To all cases, themes should be developed in a way that coincide with the existing OPCC (2014–2020). STPA priorities can moves the firm closer to the more advanced segments of then be reassessed ready for the each industry. The call could further specify whether the subsequent programming period funding would be made available for firms planning to (2021–2027). develop their own technology, or those who wish to Estimated Budget: As per the adopt an existing technology. The Project has identified relevant measures in OPCC some themes (listed below) that would be suited to the new and attractive segments in several industries. Proposed Responsible Agency: MoEEC • Process. The allocation of funds should be decided by a transparent competitive process. As is common practice, a two-stage process could apply; the first stage would be a light-touch screening that assesses technical eligibility17 and that would culminate with an invitation for short-listed applicants to submit full proposals18. The second stage would make funding decisions—preferably determined by an evaluation committee consisting of qualified experts with relevant technical and business credentials. The fund would precisely define and publish selection criteria beforehand. Crucially, these criteria should include a demonstration of commercial viability. It will be essential for funding decisions to be made in a timely manner. • Co-financing. Applicants should co-finance investments with (at least) a 50 percent contribution. The proportion of co-financing should be in line with existing schemes in Croatia. • Joint applications. Joint applicants by multiple participants (including firms and/or research bodies) should be allowed to encourage club goods. In joint applications, two or more partners would share the commitment to reach a common goal, by pooling resources or coordinating activities. If a partnership of beneficiaries developed their own technology through this grant, they would be required to specify how the Intellectual Property (IP) developed from the grant would be split. • Administration. A competent implementing agency, such as HAMAG-BICRO, should administer and manage the fund. 17 The initial concept submission should not be too complex, in order to motivate and allow wider participation. Such simplified procedures help encourage more firms to participate, especially SMEs, which enables a greater chance of receiving qualified applicants. 18 Full proposals should include all activities related to the technical feasibility and the commercial potential of the project. Such proposals should contain a risk assessment, market research, regulatory analysis, feasibility assessment, amongst other areas. • Risk paradigm. Not every investment need succeed, but the portfolio should generate positive commercial value overall. • Fiduciary management. The implementing agency must define and enforce accountability for expenditures using fund resources, using business visits to verify expenditures and their outcomes. Disbursements should occur against agreed milestones (for example initial concept, prototyping, concept testing, commercialization19) as defined in advance in the funding contract. • Financing model. Potentially, the innovation fund could consider using the EU repayable assistance instrument. In this model, part or all of the grant would be repayable, but only if the overall investment succeeds. • Value of eligible applications. The fund would have a minimum value (for example, EUR 30,000) to avoid the excessive transaction costs of dealing with small, low-impact grants. There should also be a maximum value—most likely a threshold of EUR 200,000 per firm in a three-year period to comply with EU de minimis requirements for state aid. Application in Croatia 48. The proposed intervention would narrow the focus of support to SMEs being given under the OPCC. The OPCC includes several measures to support the competitiveness and innovation of firms. These measures include a combined budget of several hundred million euros for such purposes. The innovation fund proposal is to target financial support more narrowly at firms upgrading their products and services to meet the needs of advanced buyers. The disbursement of OPCC funds would follow the strategic segments named in the STPAs. 49. Example innovations might include: • Energy. Adaptation of hot water boiler designs to include variable energy usage (as determined by smart meter and control preferences); substations configured for microgrids (within microgrids and between microgrid and main grid); • Auto/Rail. Develop a business model of a small and flexible system integrator to offer smart mobility solutions; • Wood. Adoption of CNC machinery for wooden furniture manufacturers seeking to modernize production lines for precise cuts and customizable production needs. 19 This phase will put on trial the readiness of the project for its full implementation in the market. This means that all activities related to the product/service’s test, prototyping, demonstration, and validation under real-market conditions are included. It is important to note that based on international standards, all primarily technological innovations in this stage should have a TRL619 (Technology Readiness Level) – defined as technology demonstrated in an industrially relevant environment in the case of key enabling technologies – or above. (European Commission NA) • Nutrition. Adoption of the latest do-it-yourself (DIY) diagnostic technologies that allow firms to diagnose their customers’ nutritional needs remotely; Development of clinical studies that test the efficacy of different personalized nutritional treatments. • Mine Action20. Development of preventive detection technologies, including those for improvised explosive device (IED) detection, weapons detection, fire and natural disasters detection, border protection, threats detection, etc. 50. Overall, the proposed activity will give financial support to individual firms to help with the development and commercialization of new products and services within the attractive segments in each STPA. The main instrument for applying a strategic direction to OPCC funds would be the evaluation criteria for such funds—that is, to include at least one score in the evaluation criteria to measure the relevance of the applicant’s project to strategic segments of the STPAs. This will motivate applicants to steer their proposed project toward use in these segments. 20 For the drafting of the call, the lead participants could be represented by the Ministry of Interior and the Ministry of Defense which have all the necessary specialties needed to specify the terms needed in the tender and the types of technologies being sought. 5. Deliverable 13—Report on Action Plan to Strengthen the Position of Croatia in Selected GVCs 51. The measures outlined in this section call for longer term commitments and implementation efforts than the investment items described in the previous section. While these interventions can be designed and deployed flexibly to address different market failures and perform different functions, they can be generally grouped into the following categories: (a) Encouraging R&D and innovation: • Risk guarantees. Commercial risk instruments (partial risk guarantees and minimum usage guarantees) help firms offset the risk of investing in new technologies or segments. Such guarantees can also be a tool for drawing necessary FDI. • Public procurement for innovative goods and services. This specialized form of public procurement harnesses the buying power of governments to either drive innovation for new products and services or provide economies of scale that can help bring existing solutions to market. (b) Strengthening the functioning and capacity of a cluster: • Centers for skills and collaboration. Having an institutional framework (by which a cluster can strengthen collaboration and develop needed skills) helps address coordination and innovation/information failures. Such frameworks (or centers) can also serve as platforms that can host and support other measures listed in this section. • Testbed pilots. Testbed pilots provide collaborative spaces in which firms can come together to test the interoperability and performance of new products and services. Such pilots can be particularly effective in overcoming coordination failures in an industry and in helping actors bring innovative solutions to market. • Technology scouting. Technology scouting refers to a systematic process of identifying providers of innovative technologies or services to fill gaps in a potential or existing offering. • Workforce skills and training. The establishment of relevant skills and training programs is important for helping firms upgrade their capabilities and move into new business segments. (c) Helping firms scale up and compete: • Certification. Support for firms to comply with certification standards can be critical for these firms to compete successfully in export markets—especially in new segments involving fast- changing technology and innovation. • Business mentoring. Entrepreneurs in some Croatian sectors seem to suffer from a suboptimal set of essential business skills. Business mentoring programs could help firms upgrade their capacities to better compete with their regional and global peers. (d) Strengthening the enabling environment: • Big data initiatives. ‘Big data’ is emerging as a cornerstone of technological development in several STPAs. In such cases, having a legal framework that sets clear rules for the registration, storage and ownership of data can catalyze innovation. • Regulatory reform. A sector-by-sector analysis of needed regulatory reforms would require a separate in-depth analytical exercise that is beyond the scope of this report. However, this section gives examples of regulatory improvements that would boost competitiveness in selected industries. 5.1. Commercial Risk Guarantees Specially tailored financial instruments can help mitigate commercial risks associated with the adoption of new technologies or the transition to new segments —and thus catalyze further investment. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 52. There is a need for financial instruments that can incentivize investment in emerging segments. Investing in innovation for new segments can carry significant risks that reflect the innovation market failures and information asymmetries associated with the adoption of new technologies, products or processes. Thus, even when a new segment seems to hold considerable promise, the perceived risk may cause Croatian firms to hesitate in making needed investments—thus potentially missing a critical window of opportunity. This can have a ripple effect on the whole cluster when firms in one part of the value chain fail to make investments that are needed for investments in other parts of the chain. In such cases, the provision of a risk-mitigating “guarantee” could help kickstart investment, particularly in value chains where market failures exist at more than one point21. Commercial risk guarantees take mainly two forms: (a) a partial guarantee for financiers of new/innovative business segments, and (b) a minimum usage guarantee (MUG) that can be applied directly to a targeted firm. 53. A partial risk guarantee would cover a portion of private investment (whether from debt or from direct capital investment) against loss or the failure to meet certain financial goals after a set period. This type of guarantee could help unlock long-term financing. Some multilateral organizations may partner with governments to offer partial risk guarantee schemes22 (World Bank Guarantees, 2018). Figure 5.1 shows how a partial guarantee might be structured. The guarantee provider would partially cover the debt incurred or capital financing made by companies entering innovative business segments. The time horizons, percentage of investment covered, and party obligations would be tailored to the conditions of each sector. The private investors could agree to either assume certain costs from the start, or to pay back a percentage of revenues that exceed an agreed amount. Such instruments have been widely used in the United Kingdom and the United States, where they are called ‘Social Impact Bonds’ (SIB) (Barajas, et al. 2014). SIBs may also be designed to award investors a premium if a project achieves cost savings for the government or if it provides a public good more effectively. 21 Due to the high initial investment costs, high operating and maintenance costs and long-term concession periods, some projects, although necessary, become less attractive for national and international investors. 22 The aim in those programs is to attract foreign direct investment (FDI) to developing countries, where government performance could represent a risk (World Bank Guarantees, 2018). Figure 5.1 Risk Capital / Debt Scheme Design 54. A minimum usage guarantee is another type of instrument that guarantees a certain level of return for investors and is often used to encourage foreign direct investment (FDI). Such schemes can be useful for targeting suppliers of critical products or services whose presence in Croatia could prove catalytic for other parts of the value chain. Such suppliers might be reluctant to invest if they do not already have a critical mass of domestic clients, so promising to make up at least part of any initial revenue shortfall can help overcome their hesitation. (Such a mechanism is called a ‘put option’ .) Of course, the decision to offer a minimum usage guarantee should only be made after a detailed economic and value chain analysis. Applications in Croatia 55. Partial risk and minimum usage guarantees could be introduced to drive innovation or investment in several STPAs, including Health, Nutrition, Food and Environmental Transport: • Health. The transition to a ‘value-based health care’ (VBHC) system in Croatia imposes a temporary burden to firms because of the considerable organizational changes and investments needed to move into this segment. Firms may need to convince investors of the business case for the move and may have to adopt different accounting and pricing systems. During the initial transition, it is estimated that revenue may decline by as much as 40 percent (Brown and Crapo n.d.). The combination of high investment levels and a steep (but temporary) revenue drop may deter firms from entering the segment. A partial risk guarantee could help ease this transition. Such guarantees have been used to support firms transitioning to VBHC in Germany, Sweden and the United Kingdom (Economist Intelligence Unit, 2016). A guarantee might cover 80 to 90 percent of a loss (on an accelerable payment scheme), in which companies/lenders will assume the risk on principal and interest of the first 7 years. Nevertheless. the maturity of the guarantee could be set at a 15-year time horizon, to allow firms to adjust to long-term structural changes in their business models. • Environmental Transport. The maritime industry, which was the focus of the Environmental Transport STPA, faces an innovation market failure related to the fact that diesel engines are increasingly being replaced by cleaner propulsion systems. This uncertainty is compounded by the likelihood that replacements for diesel may not be a single type of propulsion system, but rather an array of alternatives like electric, hybrid, hydrogen fuel cell, or LNG, whose application will vary by route type and conditions. As described in Section 5.2, commercial risk instruments have already been incorporated into innovation procurements in Norway and could also be applied in Croatia23. • Food. The Croatian food sector lacks access to sophisticated High-Pressure Processing (HPP) service providers. While present elsewhere in Europe, such providers have not opened facilities in Croatia because they would not have a critical mass of food manufacturing companies to service. This creates a chicken-or-egg dilemma, since Croatian firms cannot viably enter the segment and export without HPP facilities. A minimum usage guarantee is one potential way to entice a foreign service provider to set up shop in the Croatian market. Such a guarantee would make up at least part of any shortfall in income on the part of the HPP provider. (See Section 6 for an in-depth explanation of the sector’s FDI needs.) 23 https://www.wr.no/en/news/publications/green-shipping/support-schemes-for--green-and-sustainable-shipping-in-norway/ 5.2. Public Procurement of Innovative Goods and Services (‘Innovation Procurement’) A comprehensive financial support scheme for public procurement of innovative goods and services (sometimes called ‘innovation procurement’) would allow the public sector to procure cutting-edge technical solutions while creating opportunities for Croatian firms to establish a beachhead in emerging technologies. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 56. Though sometimes overlooked, public procurement is an important tool the public sector can use to encourage the development and commercialization of innovative goods and services. The public sector wields enormous buying power; the total value of public procurement is estimated at 14 percent of gross domestic product (GDP) in the EU and 12 percent across the Organisation for Economic Co-operation and Development [OECD] (EC, n.d.). This buying power can play an important role in jumpstarting markets for new products and solutions by driving demand for innovation. A forward-looking strategy for maximizing the potential for public procurement to drive private innovation would include two main tools: Pre-Commercial Procurement (PCP) and Public Procurement of Innovative Solutions (PPI). Together, PCPs and PPIs can help: • Drive innovation for new solutions to existing challenges; • Confirm the marketability of innovative goods and services; • Open consumer and public procurement markets for SMEs; • Spread the risk of innovation; and • Providing a reference for firms for cutting-edge innovations. 57. PCP (Pre-Commercial Procurement), as its name suggests, applies to goods and services for which further R&D may be needed to produce a marketable good or service. For example, a PCP in the Environmental Transport STPA might invite bids for a low-emissions ferry that can travel specific Croatian routes, but with emissions targets that push the boundaries of currently available technology. Such a PCP could also set technical requirements like speed and the ability to sail under certain weather conditions. It could be technologically neutral—that is, it could set an emissions target without specifying whether the propulsion system should be based on electric, hybrid, LNG or hydrogen fuel cell technology. If designed properly, PCPs can drive cutting-edge innovation and give winning firms an almost world- leading commercial reference. At the initial design stage, government procurers would invite bids from different suppliers and identify the most promising ones. The number of competing bids would ultimately be narrowed down until only one or two remain for testing and validation. 58. PCPs can be designed to mitigate and compensate for commercial risk. PCPs are a tool that addresses a classic case of innovation failure. As a result, however, PCPs require governments to step in and either mitigate or take on risk that would—absent the market failure—normally be borne by the private sector. One way of mitigating risk is by using some form of risk guarantee, including compensating bidders for the cost of developing initial bids. (Otherwise potential suppliers might not express interest in the first place.) In return for taking on the risk, public procurers may collect a share of the benefits of the innovation. For example, suppliers may retain ownership of the intellectual property while procurers keep usage and licensing rights. Box 5.1. PCP with ‘Competitive Dialogue’ for Electric Ferries in Norway : Case study on the Ampere The world’s first all-electric car ferry, the Ampere, started its groundbreaking operations on a 5.7 km crossing of the Sogneford in western Norway in May 2015. The ferry makes more than thirty 20-minute trips a day. The vessel was built in Norway, though the German engineering firm Siemens provided the electric propulsion technology, energy management system, and battery charging infrastructure. The success of the Ampere has shown that all-electric ferries can be profitable on certain routes; since it started operating, fuel costs on the Sogneford crossing have fallen 80 percent, and emissions 95 percent. It is now estimated that electric ferries could operate profitably on more than 50 routes in Norway alone; the number of potentially profitable routes is even larger when electric-diesel hybrid engines and future technology developments are factored in. In fact, thanks to the Ampere’s successful ‘proof of concept’, many of these routes are already converting to cleaner propulsion systems; as of 2018 there have been 53 orders in Norway for the construction of electric ferries or the conversion of diesel ferries to electric ones. The Ampere was the outcome of a PCP with 'competitive dialogue'. In 2010, the Norwegian Directorate of Public Roads (which is responsible for ferry routes as well as roads) launched a tender for a ferry that could carry 120 cars and 360 passengers and that would cut both emissions and fuel consumption by 15 to 20 percent. The tender did not specify a preference for any technology. The Directorate carried out the procurement in two phases. First, qualified bidders were invited to take part in a so-called competitive dialogue, where the Directorate discussed potential solutions with interested ferry operators. An advisory group was formed to draw up the evaluation criteria and assess the project's technological requirements and feasibility. Ferry operators, having been consulted in the 'competitive dialogue' phase, then joined with engineering firms and shipyards to bid for the tender. To mitigate the commercial risk for ferry operators, the Norwegian government reimbursed all development costs and financed the extra cost of building the winning vessel. 59. While PCPs can be useful for driving the R&D of new products, PPIs are more suited for existing solutions that may just need a push toward mass-market deployment, or do not require technological innovation. A PPI can come directly on the heels of a PCP, or it can bring to market solutions that reflect existing innovations in process or organization. Sometimes, a good or service might be ready for market but lack the economies of scale needed to commercialize it. To create this scale, a PPI might bring together a consortium of procurers that would announce common technical, price and quality requirements and carry out a joint procurement. (This is the case with the use of Horizon 2020 funds to finance common procurements by public sector entities in multiple EU member states.) 60. A support scheme for innovation procurement would aim to raise the capacity of public bodies to design and carry out PCPs and PPIs. The scheme might start by holding training and awareness-raising events, and over time move into offering co-financing and technical support for Croatian procurers seeking to undertake innovation procurements. This support may also help Croatian procurers take part in regional PCPs and PPIs, where Croatian participation has been minimal. A scheme could be divided into two pillars: (a) Education about public procurement for innovation and (b) co-financing of PCP and PPI activities Figure 5.2. PCP and PPI Source: EC. 61. The first pillar of a support scheme would be to educate staff of relevant public agencies about procurement of innovative goods and services. Activities under this pillar might include: • Preparing a feasibility study to (a) evaluate the potential to use innovation procurement in Croatia, possibly with a focus on new segments in the areas outlined in the STPAs (with the proviso that PCPs should address market failures that are preventing solutions from being brought to market, and that PPIs should be used to provide a ‘final push’ on the commercialization of innovative solutions); (b) make policy recommendations, on strengthening the innovation procurement framework, that are specific to Croatian conditions; • Drafting an innovation procurement plan including these elements (and designating a government unit to set up and operate a co-financing scheme); • Ensuring that a monitoring and evaluation system is in place for innovation procurement; • Publishing a handbook to guide procurers through innovation procurements; • Holding training and awareness-raising workshops for public and private sector stakeholders;24 and • Disseminating tools and templates that can be used in PCPs and PPIs. 62. The second pillar on co-financing innovation procurements would have a proposed budget of EUR 10 million. This pillar would co-finance Croatian agencies that are procuring goods, services and solutions. This co-financing would cover activities related to the preparation and management of innovation procurements (for example, the hiring of a project manager by the procurer, legal support, and market analysis). Box 5.2. Case Study: Innovation Procurement and the S3 in Estonia Estonia has launched a new set of initiatives under its ‘public sector as smart customer’ strategy. A handbook on innovation procurement was published and a financial support scheme was set up that provides co-financing for Estonian public procurers to prepare and manage innovation procurements. The first call for Estonian procurers to apply for this funding ended on June 21, 2016. In 2014, the Estonian Ministry of Economics and Communications conducted a feasibility study on how to deploy innovation procurement in Estonia’s smart specialization areas (e-governance, health care, and smart construction). The study recommended, among other things, the design of a metric-driven procurement plan and the establishment of a competence center to offer training and tools. In 2015, the Ministry unveiled a 'Public Sector as a Smart Customer' policy that would be integrated into the country’s overall innovation policy framework. The Ministry then assigned to Enterprise Estonia (an entrepreneurship support institution) the task of setting up and running a EUR 20 million program to facilitate innovation procurement. Of this amount, EUR 2 million was earmarked for awareness raising and knowledge sharing activities, and EUR 18 million for co-financing of innovation procurements. (No financing was allocated for firms, to keep the emphasis on the demand side.) Co-financing was made available for up to 50 percent of project costs. At least 75 percent of the financing had to be used for the actual procurement of goods or services; a 25 percent ceiling was set on coverage of supporting activities. Applications in Croatia 63. Familiarity with innovation procurement remains limited in Croatia compared to other European countries. While the EC reports that both PCP and PPI are underutilized in the EU, this is perhaps especially true of Croatia. (EC, n.d.; see also Figure 5.3.) Only a few Croatian institutions have taken part in EC-supported multinational innovation procurements. These include Zagreb City Holding, the Ministry of Finance, the Croatian Institute of Emergency Medicine, the Teaching Institute of Emergency Medicine in the city of Zagreb, and the National Procurement and Rescue Directorate. 24Training opportunities are available in the short term. For example, the Conference on Innovation Procurement will be held under the Estonian EU presidency on October 17–18, 2017, in Tallinn, Estonia. The target audience for the two-day conference is policy makers, public procurers and innovators. A full-day workshop directed at the energy sector will take place on October 18, 2017. (see http://eafip.eu/events/conference_on_innovation_procurement/). 64. Croatian legal provisions on innovation procurement are relatively untested, though HAMAG-BICRO has been designated as a key agency, and awareness raising activities have taken place. Croatia’s Public Procurement Act, which came into effect in 2017, introduced an ‘Innovation Partnership’ instrument aimed at enabling government agencies to carry out public procurements for innovative goods, services or works. The Act’s innovation procurement provisions remain little used, but the MoEEC and HAMAG-BICRO are taking part in a regional project called PPI2Innovate that aims to build capacity for public procurement of innovative solutions in Central Europe. Figure 5.3. PCP Implementation in Europe, 2016 Source: EC. 65. In the context of the CRIs, efforts at raising government capacity for innovation procurement might zero in on procuring agencies with jurisdiction over the industry areas represented by the STPAs. Innovation market failures in many of the STPAs produce conditions that are ripe for the deployment of innovation procurements. Indeed, the ability to design and carry out such procedures can be an important enabler for the administration of other measures covered in this report, like testbed pilots and business competitions. For example, a city or county might use an innovation procurement as the platform for a regional mobility or ITS pilot, by inviting consortia of firms to submit bids for an integrated multimodal transport solution. For innovation procurement to serve this enabling role, it would be important to direct capacity-building efforts at key agencies whose procurements could open markets for innovative goods and services; these agencies may not all be at the national, regional or local level. STPAs where innovation procurement could play an important role include: • Environmental Transport. As already discussed, PCPs have been successful in driving the innovation and commercialization of alternative propulsion systems on public ferry routes. Similar PCPs could be deployed in Croatia, perhaps pushing emissions targets even farther. The key ministry here would be the Ministry of Maritime Affairs, Transport and Infrastructure (Ministarstvo pomorstva, prometa i infrastrukture Republike Hrvatske). • Energy. Due to geography, climate, and seasonal travel patterns, Croatian islands offer almost ideal conditions for setting up energy microgrids; reasons for doing so include increasing energy resilience and reliability (especially amidst seasonal load variations) and accelerating the shift to RES. Since microgrids, by and large, are technically viable projects for which business models are still emerging, they might be appropriate targets for PPIs. (Of course, PCPs could also be used to procure microgrid solutions that call for novel technological requirements.) Presumably, the agencies who might be involved in such a procurement—and that would need to build capacity in innovation procurement—would be municipalities, regional authorities, or the national power company, Hrvatska elektroprivreda (HEP). • Intelligent Transport. The City of Zadar has expressed interest in setting up an integrated ITS platform that could be used to improve the efficiency of transportation network around the city but also to enhance the travel experience of the thousands of visitors who travel the city’s and the surrounding region’s road, rail and ferry networks each tourist season. Key elements of the system might include smart phone and Internet of Things (IoT) applications, integration of sensors with traffic data, an open data initiative (see Section 5.9). Crucially, the platform would also set the conditions for future application of cutting-edge technologies like 5G (‘fifth generation’) telecommunications and V2X. PCPs could be used to drive innovation that would seamlessly integrate such technologies into the ITS platform. • Mine Action. Currently, advanced demand for preventative detection is limited in Croatia. To jump start demand, a public agency could issue a tender for Croatian companies to develop integrated technologies and response capacities for specified threats (e.g. fires in natural areas, or a bomb in stadiums/arenas). Payment would be issued on the ability of the company to develop a product that 1) detects the specified threat, and 2) responds to the threat – according to agreed performance indicators – in real life and drill/test scenarios. • DDU. To jump-start demand for SAR services, a public agency could issue a tender for Croatian companies to develop integrated technologies and response capacities for emergencies (e.g. tourists stranded on the Croatian coast). Payment would be issued on the ability of the company to responds to the emergency – according to agreed performance indicators – in real life and drill/test scenarios. • Wood. Public procurement can be utilized as a tool to jump-start the market for remanufactured25 and recycled furniture26. In the United States, remanufactured products now hold a 9 percent market share for all office furniture sales,27 although this is considerably less in Europe.28 While it is not a target segment identified by Croatian industry, there exist several market failures for such activities in the value chain and there is a public interest in ensuring that these activities are developed so as to contribute to the sustainability of the sector. Such 25 Remanufacturing efforts may involve dismantling the product, restoring and replacing components, and testing the individual parts and the whole product to ensure that it is within its original specifications. 26 There are some business models—such as Kentwood Office Furniture—showing how companies have turned this into a profitable activity. 27 “We expect a growth in demand for recycled office furniture made with medium density fiberboard (MDF) and particle board over the forecast period, as these are lightweight and less expensive than solid wood. Demand for recycled office furniture may increase from smaller companies and start-ups, as it is available at prices approximately 30%–50% lower than new products. Vendors are increasingly developing their operational efficiency to increase production and reduce costs. They are using wood waste for construction purposes and taking advantage of on-site and off-site recycling processes to increase production.” (Technavio 2016). 28 Reuse and remanufacture in the United Kingdom is known to be highly fragmented; operations can be as small as a few pieces a year—and are intended for individual consumers rather than institutions—and so the economies of scale can be quite small. However, these small economies of scale also underlie the lack of current demand for remanufactured items. Causes of low demand include perceptions of low quality; lack of awareness of reputable quality items; and limited number of large, high-profile organizations that can instill confidence. failures could be overcome if public procurement built private sector incentives to manage the network of recycled furniture for commercial buyers more broadly. Incentives for green public procurement of solid wood furniture can help jump-start these value chain activities (EC 2016). 5.3. Centers for Skills and Collaboration ‘Centers for Skills and Collaboration’ is a catch-all term for institutional frameworks that address innovation and coordination failures by providing a cluster with training, R&D business services, and a platform for collaboration. Within these parameters, such institutions can come in many shapes and sizes and be known variously as ‘technical centers’, ‘technology centers’ ‘development centers’, ‘national centers’ or simply ‘hubs’; for convenience this report will mostly refer to them as ‘te chnical centers’. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 66. Technical centers provide a cluster with a ‘one-stop shop’ that can house, under a single roof, any combination of research, training, and business service functions that the cluster deems necessary to help it compete. Such centers can significantly reduce transaction costs by providing a cluster—and especially SMEs—with the scale needed to access several types of resources: (a) research on industry-relevant themes, (b) training for the private sector and students, and (c) specialized business services that could be made available to individual firms on a fee basis. Working groups in several STPAs raised the need for a center that could deliver such a mix of skills, R&D support, and business services. The amalgamation of such resources in a single institution would benefit the whole cluster by developing a common pool of trained workers, making it easier for firms to partner on collaborations, and strengthening firms’ ability to compete. Specific activities in which a technical center might engage include: • Research. The center could conduct and contract R&D in areas that are key to competing in the strategic Figure 5.4. Functions Served by Institutional Infrastructure segments identified in each STPA. The center’s R&D functions could present an opportunity to strengthen ties between academia and firms by better aligning academic research activities so that they produce knowledge that is demanded by industry.29 • Training. The center could develop curricula that are relevant for firms in the industries targeted. Partnership with a university is imperative for delivering training not only for firms (and their employees) but also for students (university or vocational) who could use the institute as a practicum toward an educational qualification. • Business services. The center could provide specialized consulting and facilitation services. This could involve the organization of trade missions, conferences, and so on. 29A mechanism should be established by which affiliated professors could gain financial remuneration (for example, consulting fees or research funding) for work done for the center with an administration fee provided to the participating faculty. 67. Examples of technical centers in other countries include: • ASCAMM Foundation (Catalonia). (ASCAMM stands for Associació Catalana d'Empreses de Motlles i Matrius, the Catalan Association of Mould-Makers and Die- Makers.) The ASCAMM Foundation is a self-billed technology center that; commercializes R&D in the mould-making and die-making value chains, offers specialized technical and professional training, and facilitates technology transfer. The technology center has contributed to the growth of its cluster, which collectively had a turnover of EUR 166 million in 2013 (of which 40 percent was for export). More than 60 percent of ASCAMM’s revenues come directly from innovation services it provides to SMEs. • Penang Skill Development Center (PSDC) (Malaysia). The PSDC provides the local electronics cluster in Penang with training programs and a combination of R&D and business services. The center is run by local firms; the fact that the wider cluster has had a direct hand in designing the training curriculum helped resolve a local skills shortage.30 The role of the PSDC as an institutionalized collaboration mechanisms helped the Penang cluster sustain much higher growth rates than that in the neighboring Klang Valley (Mori 2009). 68. To be effective, technical centers should institutionalize strong links among the private sector, the public sector and academia—but it is crucial that the local cluster ultimately be in the driver’s seat.31 Technical centers may take on different forms with varying degrees of formality,32 but establishing a public-private partnership (PPP) can be an effective way to institutionalize collaboration among parties (Rankin et al. 2016).33 However, while a financial boost from the public sector might be needed at the beginning, and continued government policy support would be crucial as the center grows, it is the private sector that will need to steer the strategic direction for both the center and the cluster. If not, it will be difficult to ensure that the center serves the needs of the private sector. Figure 5.5 shows a schematic arrangement for how an institute may interact with stakeholders. 30 At the national level, Malaysia’s Human Resources Development Fund also operates a system that gives training grants to reimburse employer training costs (Mori 2009). 31 The aim of setting up this center is not to have a new building but to collocate partners in an existing space proximate to both industry and relevant university faculties. 32 Memorandums of Understanding and contracts can be used on a project basis with a limited time frame and finite objectives. 33 The World Economic Forum defines a public-private partnership (PPP) as “A formal or informal collaboration between the public (including donors) and private sectors (and their related partners) that entrails reciprocal obligations and mutual accountability, voluntary or contractual relationships, the sharing of investment and reputational risks, and joint responsibility for design and execution” (WEF 2005). Figure 5.5: Technical Mandate and Institutional Arrangements for Collaboration 69. Start-up financing arrangements should be designed with a goal that the technical center be able to support itself in the long run. Ultimately, technical centers should aim to finance their operating expenses from income from training and business services, perhaps supplemented by voluntary membership fees from firms. Nonetheless, unless a cluster is particularly strongly motivated, many technical centers may initially require public funding to get off the ground. In such situations, a PPP based on public and private co-financing can offer the best chance of success for long-term sustainability, with a plan to eventually phase out the public portion. But for such a PPP to work effectively, it would be important to carefully set out the technical center’s structure, governance, staffing, and technical mandate ahead of time. It would be especially important to specify the value of each partner’s financial contribution (both actual and in kind) and make sure that the level of contribution is commensurate with the decision-making power in the body (Rankin et al. 2016). 70. Corporate governance arrangements for technical centers should ensure that a center’s management is accountable to its boards of directors and shareholders (IFC 2010).34 Such accountability will reinforce firms’ ownership of, and voice in, the running of the center.35 While a center might be set up with several categories of membership, it is important to ensure that the center remain a non-excludable good that is a resource for the sector as a whole. Most importantly, it is necessary to give the private sector a substantial (and likely a majority) voice in the management of the center to strengthen the center’s accountability to its members. 71. The technical center would need dedicated full-time staff to carry out its mandate. If a technical center is to fulfill its intended role as a resource for an entire cluster, its activities cannot rely on ad hoc participation from stakeholder representatives. Typically, a center would need to hire (a) a director, (b) a (lean) secretarial team, and (c) technical staff for any full-time equivalent (FTE) positions that may be needed. Technical FTE staff should be specialists in key areas and value chain activities with deep knowledge of the latest technologies (for example, CNC, computer aided design [CAD], and robotics). 34 The governing board should have the authority to appoint and terminate management and the responsibility to direct the overall strategy of the center. 35 Voting rights membership in each of the categories could be gained by paying a regular membership fee. Upon payment, shareholders could be eligible to vote in the appointment of its designated board members. Staffing plans should maximize efficiency; for example, training could be contract to external providers, and R&D to university faculties. Applications in Croatia 72. Companies in the Wood, Auto/Rail, Environmental Transport, Intelligent Transport and Centers for Skills and Collaboration Cybersecurity STPAs specifically noted a need to strengthen or create new institutional structures that Description: An initiative to develop could provide their clusters with needed services and institutional infrastructure that can facilitate serve as platforms for collaboration.36 Such institutions skills development of the labor force and targeted R&D for industrial upgrading, could focus on developing the capacities needed to make especially where there is a critical need for firms more responsive to the needs of the target segments. collaboration between these two functions Technical centers in these industry areas could also help strengthen the alignment of academic research with Estimated Time frame: 10 years Estimated Budget: EUR 10 million industry needs, which was a failing that came up repeatedly in various sectors. For example, in the Responsible Agencies: Auto/Rail STPA it was proposed that a Technical Center • MoEEC for Mobility could initially develop as a collaborative • Various ministries, depending on the agreement between interested private companies, STPA supporting organizations and ministries; the center would eventually house faculty specialized in traffic management, mechanical engineering, information technology, and mechatronics. 73. Technical centers were seen as being particularly useful in steering clusters into new business segments that require a significant reorientation of firms, or that call for the widespread take-up of disruptive or transformative technologies. For example, working groups supported the setting up of technical centers in the Auto/Rail STPA (where the industry faces the challenge of adapting to autonomous vehicles), the Wood STPA (where a transition into the customization of wooden interiors rather than just wood products would represent a fundamental shift); the Intelligent Transport STPA (where the challenge is the onset of 5G wireless technology and C-ITS); the Environmental Transport STPA (facing the onset of alternative propulsion systems); and the Cybersecurity STPA (which sits at the forefront of developments in various cutting-edge technologies). 36 The Wood STPA has identified need for training and technology dissemination in the area of computer numerical control (CNC) machinery. Box 5.3. Case study on Cybersecurity A cybersecurity ‘Digital Innovation Hub’—a technical center for a cutting-edge industry Setting up a ‘Digital Innovation Hub’ (DIH) for cybersecurity in Croatia could provide a leg up for an industry that is at the leading edge of disruptive change. The DIH could house a variety of needed functions that were identified by the cluster. These include: Skills • Create educational programs for cybersecurity skills. The DIH could be the first mover in providing a comprehensive set of certified training courses and vocational programs in sub- fields of cybersecurity. The objective of this initiative would be to produce more skilled and specialized graduates. Eventually, more educational institutions could enter this field, and the DIH would become one of several educational institutions offering such courses. If appropriate, educational vouchers could be utilized to incentivize students to enter cybersecurity programs. • National Qualification Framework for cybersecurity. The DIH could act as the facilitator of inputs from industry to a National Qualifications Framework on cybersecurity. The NQF would define core information security skills and would encourage the development of qualification standards for digital and cybersecurity skills. Due to the speed of technological changes in the ICT sector, the framework would need to be continually updated with inputs from industry. RDI • Matchmakers/brokers on financing and partnerships. The DIH would provide firms and researchers with accurate, up-to-date guidance on potential funding sources and aim to connect potential collaborators around topics of mutual interest. This initiative would help solve the information asymmetry by which Croatian firms and researchers are not always aware of funding and partnership opportunities. DIH staff overseeing these activities would need to (i) be fully informed on all relevant EU, Croatian, and other funding opportunities; and (ii) work as ‘matchmakers’ to connect Croatian firms and researchers with each other and with potential partners in other countries. Part of this work should include setting up (or updating) a database of all Croatian companies and researchers active or interested in the cybersecurity sector. • The DIH would provide technical support to assist firms in commercializing innovative products in cybersecurity. These functions would resemble those of a Technology Transfer Office (TTO), but with a focus on cybersecurity and related fields. The goal of this initiative would be to reduce the transactions costs of moving through the various technological readiness levels (TRLs), from the initial idea through to a commercialized product. This could be especially helpful for entrepreneurs and start-ups that have an idea but have not previously brought new products onto the market. The DIH could also facilitate the participation of its members in public procurements of innovative goods and services. (See Section 5.2.) Box 5.4. Potential Thematic Coverage for a Technical Center for Customization of Wooden Interiors The center could handle training and R&D that enable the customization of production and installation. Specifically, firms need these training and R&D streams. Training It will be important to target training of the center to the proper beneficiaries. Sometimes, these will be employees (such as designers, architects, engineers, carpenters, and project managers). In other cases, it will be appropriate to target university and vocational school students. Training that the center could sponsor might include the following: Training Relevant Research Streams Beneficiary Firms • Training on project management and woodwork installation37 • Training on interior designs for commercial buyers • CNC machinery training38 • Training on wood standards for interior design39 Students • Architecture: Master of Fine Arts in Woodwork Design • Business: MBA in Interiors Management • Production Logistics: Project Management for Installation • Engineer: Master of Engineering in CNC Woodworking Machinery • Forestry: Master in Wood Quality Inspection for Interior Industries Research streams Potential research streams that could be commissioned and/or sponsored by the center could include the following: Relevant Relevant Research Streams Faculty Architecture • Best practices in designing luxury wooden interiors for commercial needs and Design Economics • Behavioral economics research on which consumer products (for example, jewelry, clothes, souvenirs) sell best on different solid wood displays Business • Firm organizational models for firms providing wooden interior solutions School • Market research in various demand channels and pricing strategies Law • Best business practices for contracting with commercial buyers Forestry • Researching differences in the quality of wood for standards on certification of appearance • Researching demand patterns in different varieties and cuts of wood Engineering • Computer modeling for integrating customized designs in automated production Production • Operations research for time/cost minimization in installation of wooden interior Logistics solutions 37To build the capacity of firms to deliver last-mile solutions (and therefore capture more value), the institute will develop a project management course adapted to wooden interior designs and/or constructions. The long-term output of this training would be a professional course (for example, ones run by the Architectural Woodwork Institute). 5.4. Testbed Pilots Testbed pilots bring together different firms and other participants for the coordinated testing of new technologies, products, and services. Testbed pilots address coordination failures by bringing the goods and services of several providers together into an integrated solution. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 74. A testbed pilot can be likened to a ‘sandbox’ (and are often referred to as such)—that is, a safe space where firms can ‘play’ and test how their different offerings might come together to produce an integrated solution. For example, while the Ampere electric ferry described in the previous section emerged out of an innovation procurement, it also had all the elements necessary for a pilot: Under slightly different circumstances, the ferry operator, shipyard and engineering firm might have formed a consortium to pilot the operation of a low-emissions ferry across the Sognefjord. One important difference between innovative procurements and testbed pilots is that, while pilots can and often are sponsored by government agencies, they can also be carried out by purely private consortium of firms that want to collaborate on a potential business opportunity. Thus, in the Intelligent Transport STPA, firms were motivated enough to suggest two pilots; one involving multimodal intelligent transport solutions that would require government stakeholder participation, and another—to test the interoperability of their technologies in a 5G network environment—that would likely function perfectly with minimal public involvement. 75. Testbed pilots provide a way for industry players to collaborate on the testing of new solutions that can help them—and the cluster as a whole—gain a foothold in new business segments. For many Croatian firms, moving into potentially more attractive business segments presents difficulties that are related to innovation failure, information asymmetry and/or coordination failure. The innovation failure and information asymmetry arise from the fact that new segments often involve novel technologies and business models that have not yet been market tested. Meanwhile, coordination failures may arise because firms that collectively have the capacity to produce integrated solutions are not coming together to do so. Testbed pilots can help address these failures by giving firms the opportunity to pool their comparative strengths to fine-tune innovative solutions. 38 Many companies in Croatia do not use advanced machinery in their production lines because they lack knowledge about how to use the hardware and software. Therefore, training should be developed and targeted for various agents —including woodwork production line workers, engineers, architects, and designers—that teaches them how to utilize advanced functions of the latest production machinery by integrating CAD and CNC functions together. 39 Imperfect information on various qualities of wood is causing a market failure for the interior design industry. The highest quality material is often used for suboptimal purposes. The aim of this training is to develop a program on standards (particularly those related to the appearance of wood) for actors in the upstream parts of the industry. The training program may focus on aspects of how to cut wood (rift, quarter, or plain sawn methods); how to plane wood; how to dry wood; and so on. It will also aim to disseminate market information on which species, colors of wood, and characteristics achieve the highest premiums. The training should be targeted to sawmilling, planing, and drying operations and would enable them to improve wood quality according to the standards demanded by the furniture/interior wood processing industry. Having greater information on the quality of wood demanded for interiors can help in reducing information mismatch for raw supply in the industry. 76. Pilots are well suited for evaluating how the various components that make up an integrated solution would work together in ‘real-world’ situations. Whereas trials of standalone products and services can run in isolation, pilots test (and stress test) the viability of how these come together as a comprehensive offering. Thus, testbed pilots are particularly useful for understanding the response of end users and customers to a new good or service. This feature is especially relevant where a new business segment revolves around unfamiliar technology or concerns new business models or types of consumer interfaces. In fact, evaluating the customer experience can be a core element of pilots; when the team working on the Energy STPA visited the EcoGrid 2.0 pilot operating a community microgrid on Denmark’s Bornholm Island, Danish representatives reported that they had engaged a behavioral scientist and a communications firm precisely to work on this issue. 77. While a consortium of firms might carry out a pilot funded solely by private backers, if public funds are used it may be appropriate for a government body to convene and coordinate the activity. The role that government might play in a pilot depends on the degree to which the prospective products and services will be a public good. Co-financing might be all that is needed if the solution to be tested will ultimately be offered to private buyers. But if—as was the case with some STPAs—the goods or services in question would ultimately be provided to or on behalf of a government agency, it may be appropriate for a public entity to play a lead or sponsoring role. This entity would likely be a line ministry or agency with responsibility over the subject of the pilot. (For example, in some microgrid pilots of the type described above, a transmission system operator has taken on the lead role.) Alternatively, the sponsor might be the municipal, county or regional authority in whose geographic jurisdiction the pilot is taking place. A government agency might also be called upon to step in as an ‘honest broker’; in at least one STPA, firms were enthusiastic about a pilot but wanted a public body to play a coordinating role. 78. At the outset, the responsible body should set the goals and targets of the pilot and identify in advance the technical and financial questions it seeks to address or solve. It may be necessary to commission a strategic market analysis to understand the available opportunities and decide upon a precise market objective. (See Section 0 on Market Intelligence.) The selection of firms for the pilot should then take place in accordance with Croatian and EU public procurement laws; the government body coordinating the pilot would invite bids that meet the pilot’s parameters and technical requirements. Criteria used to evaluate applications might include the following:40 • How well does the proposed solution achieve the goal of the testbed? • How readily available is the equipment or technology needed for the solution? • How market ready is the proposed solution, or how easily can it be commercialized? • How well does the proposed solution address the potential impact on users? • Can the proposed solution be adapted for a variety of services and applications? • Are there any technical or other factors that limit the application of the proposed solution? 40 See Drocella (2009). • Will the necessary technical support be provided to ensure performance of the equipment/solution during the pilot? • How original or creative is the solution? 79. While it would always be incumbent upon the agency in charge to coordinate with all relevant government stakeholders, this would be particularly important if operating the pilot requires special regulatory permissions or exceptions. For example, a pilot of a medical diagnostic system must comply with regulations on prescription and interpretation of tests and with restrictions on whether patients can order medication online versus going to a pharmacy. Similarly, a trial of a microgrid community energy system could come up against regulations on the ownership of energy producing assets and rights-of-way related to laying down energy infrastructure. And a pilot in the maritime industry (covered under the Environmental Transport STPA) would need to comply with regulations on marine transport. In all such cases, having the necessary regulatory agencies on board from the outset would be crucial to avoiding unnecessary delays and ensuring the success of the program. 80. The pilot should have a full-time project manager to oversee preparation, design, and implementation. The project manager would be accountable for achieving the goals and metrics of the pilot. Having a full-time person in this role rather than relying on ad hoc participation by representatives from various companies would help the pilot run more smoothly. To optimize resources and meet goals, the project manager would work closely with firms to ensure that all strategic, operational, and cultural alignments are stable. 81. A testbed pilot should involve all stakeholders, including government, the private sector, academia, and nongovernmental organizations (NGOs). Because the scale and scope of pilots vary widely, the range of stakeholders that must take part in the pilots also vary. The number of stakeholders should not be too unwieldy. For example, a pilot involving two or three private firm might not need to involve other parties in internal deliberations, aside from any periodic consultations with an advisory board. However, a public sector-sponsored pilot, or one where public agencies play a significant role, would need to involve more stakeholders. The governing structures of pilots are unique to each case, but roles might include the following:41 • Chairperson. Depending on the length of the pilot, the chair may be rotating, with officeholders elected to hold the position for a specific period. • Secretariat. The core group of decision-making stakeholders. • Project manager. The firm or individual responsible for the day-to-day administration and management of the pilot. • Committee. A wider group of stakeholders whose representatives would meet at set intervals (for example every three months) or if called together for emergency sessions. 41 Some roles reflect structures that would only be right for more complex pilots. • Advisory group. A consultative body that would meet infrequently (perhaps twice a year) to take part in high-level dialogue. 82. Contractual agreements would assign responsibilities and apportion specific benefits of taking part in the pilot. The agreements should define the relationships between the parties in the pilot— including the division of tasks and benefits among them—from the start. In this type of joint initiative, several parties would enter into a commitment to (a) reach a common goal by pooling resources or coordinating their activities and (b) equitably share the fruits of these activities. Joint ventures (a new legal entity pools resources and equity) were once common in R&D partnerships but now account for a small fraction (perhaps 10 percent) of total new R&D collaborations. Instead, non-equity contractual agreements are now more often used. The choice of structure would depend on the parties’ tax and accounting circumstances, business goals, and financial needs with Croatian and EU laws and regulations. 83. The agreement would need to include several key preconditions to an R&D initiative: • Resources. Allocation of staff, plant and equipment, cash and other capital, direct expenses, and management responsibility (including commitment of senior management). • Intellectual property. Only one partner in the collaboration may own the intellectual property (IP). A more complex but perhaps more likely scenario would be one where the partners would jointly own the IP and where there would be a distribution of portions to each partner. Partners wishing to use the results from portions they do not own would need to obtain licenses from the owners of those portions. The agreement may also include confidentiality (nondisclosure) agreements for knowledge obtained about partner firms during the R&D project. • Revenues. Allocation of financial revenues from commercial applications of the R&D project. • Renegotiation and termination. Ability to renegotiate certain clauses as the partnership matures and terms of partnership termination (for example, after a set period). 84. A risk matrix should name and mitigate risks. The matrix should describe each risk, its likelihood, its impact, actions to mitigate it, and the name of the responsible person. 85. Some typical challenges for a joint venture to overcome include the following: • Mismatched goals. The pilot may engage with a critical area of each partner’s business but not necessarily constitute their core business. The pilot would take place at a locus where each partner’s goals overlap. Not aligning goals risks the sustainability of the project. • Governance and control. Governance rules, decision-making power, management styles and rifts over contribution, and transfer and use of technology could endanger the smooth functioning of the project. The pilot should have a clear governance structure that covers matters that need voting or unanimity. • Monitoring and progress metrics. A pilot may take time to yield concrete results, so some interim metrics should be able to check progress until results are available. These might include sharing information and developing innovative ideas. Table 5.1: What a Pilot Might Look Like: Croatia Microgrid Testbed Location(s) The pilot could be located on a Croatian island and emphasize off-grid or single-connection microgrid systems that can be easily deployed and exported. Croatian islands are particularly suitable for a testbed as they are prone to seasonal load fluctuations and extreme weather events that tend to strain the resiliency and reliability of an energy system. Partners Local authority, utilities, energy firms, research institutions, ministries (regional development, energy, economy) Participants 100–500 households and businesses Budget EUR 10 million over 3 years (for island microgrid) Funding Sources National budget, Operational Programme Competitiveness and Cohesion (OPCC) Goal The ultimate goal of the Croatian Microgrid Testbed is to help Croatian firms attain a leading position in the commercial deployment and export of smart community energy systems. Specifically, the testbed aims to Components (1) Provide a launchpad to test and demonstrate the integration of new technologies (featuring a high penetration of renewable energy and energy storage); (2) Design and test financial and business models to advance the commercialization and export of energy systems; and (3) Build an energy system that features—to the greatest extent possible—resiliency, reliability, ease of deployment, low operating costs, and optimal energy efficiency/environmental impact. • Conventional and renewable energy sources (for example, solar photovoltaic (PV), biomass, waste-to-energy) • Energy management systems (including smart grids, demand-response systems, and behind-the-meter systems) • Energy storage • Data analytics Timeline (1) Design Phase • Project design (6 months) o Engagement of Ministry of Regional Development (Sector for Islands) o Identification and selection of potential sites • Project preparation (6 months) o Recruitment of participants o Setting up facilities and infrastructure (2) Demonstration Phase (2 years) • Demonstrating infrastructure and services • Preparation of technology for wider application and export Lead Local/regional authority/Ministry of Regional Development/Ministry of Energy Applications in Croatia 86. The conditions and market failures that would make a testbed pilot suitable exist in some of the topic areas (STPAs) covered by the S3. • Pharmaceuticals. The testbed pilot here would be a system for home-based patient care in remote locations. The pilot would provide an environment in which companies can consistently test and improve their own solutions. It could also offer the foundations for a consortium approach to develop an integrated solution. Also, in the pharmaceuticals, biopharmaceuticals, medical equipment, and devices sector, a testbed pilot would be appropriate for allowing a variety of stakeholders to develop a platform to engage consumers around OTC drugs and supplements. • Energy. In the energy technology, systems, and equipment and environment-friendly technology, systems, and equipment sectors, a testbed pilot could help put together and fine-tune a platform to which different Croatian companies would provide components of a complete microgrid system. Croatian firms could then export the integrated energy solution. • Nutrition. For its part, the working group of the nutrition sector identified a need for implementing a pilot to test nutritional delviery models in the new segment. This new business is particularly focused on outcomes. As such, a shift towards the prevention and treatment of several nutrition- related health issues, through integrated diagnosis, behavior change, and food treatments, is to be in the long-term horizon for these firms. A testbed would not only help firms to identify the potential challenges to such advanced delivery models but also would show the market viability of such innovative preventive healthcare programs. Moreover, the pilot represents an opportunity to create clinical evidence as a public good. Figure 5.6 describes the steps, actors, and schedule for the proposed testbed pilot in the nutrition sector. Figure 5.6: Testbed Pilot Scheme for the Nutrition Sector42 42The proposed potential indicator for the pilot’s outcome measures are: raised blood pressure, obesity, anemia, raised blood cholesterol, hypertension, and vitamin A deficiency. The financial awards should be positively correlated to the outcomes of the health targets established within the identified population. • Health. Similarly, the health services and new methods of preventive diagnostics sector faces challenges related to the shift into new models of healthcare focused on outcome-based payments. Given the sometimes-politicized nature of healthcare, some actors of the value chain – especially the critical private health insurers – could perceive the new system as untested and might not be willing to start the transition. Without the participation of health insurers in the new model, movement by health service providers would seem unlikely. Thus in the short term a testbed pilot that proves the concept and helps work out some of the operational modalities43 is needed in order to start the systemic transition. In a first stage, the pilot would be targeted to health firms specialized for chronic-condition patients, since this has been identified as a necessary and attractive market. Nonetheless, the aim is to give all healthcare private providers the opportunity to test and observe the results of outcome-based payment systems in Croatia. • Food and Wood. Similar pilots for the food and wood sector have also been proposed by the working groups, however given the structure of those industries, the pilots would be best run through the Innovation Competition instruments noted in section 4.1 87. In all cases, testbed pilots would allow a wide range of firms to overcome their coordination failures, which would further enable them to bring a complex, innovative product to market in the future. 43As noted by BCG and McKinsey consultancies, the likelihood of a successful transition into outcome-based systems bears in the ability to implement the system in a smooth manner, by learning from each phase of the transition and making corrections along the way. 5.5. Technology Scouting A co-financing scheme to support Croatian companies in the conduct of technology scouting activities could help domestic industries identify vital partners and technologies to help them stay competitive. Technology scouting seeks to address the market failures of incomplete markets, specifically failures related to innovation, complementary markets, and coordination. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 88. Technology scouting is a method by which companies in fast-changing sectors can find innovative goods and services to fill gaps in their offerings. To offer a product or solution that meets market demands, Croatian firms may need to partner with SMEs, multinational corporations (MNCs) or institutions that can provide specific components or services. Technology scouting is a systematic process of identifying potential providers of innovative technologies or services that can be integrated into a final offering. Firms can and often do carry out scouting activities by themselves, but a collective approach may be called for where the final product or solution itself is particularly complex and where a higher than usual degree of coordination or cooperation is needed to bring it to market. 89. The proposed activity would provide co-financing for consortia of Croatian firms to hire outside firms to conduct technology scouting. Groups of firms would apply for co-financing, and the resulting information on potential technologies and partners would be a club good for the firms taking part in the consortia. Because the purpose of this activity would be to spur collaboration among firms that must find technological solutions for collective initiatives (rather than fund the technology scouting activities of individual companies), a baseline requirement would be that at least two firms not belonging to a single conglomerate must partner on any application for co-financing. The co-financing terms would set out guidelines for the terms of reference for the outside firm. The terms of reference could include activities such as • Identifying the commercial requirements of the clients; • Conducting a comprehensive global patent search to identify potential technology holders; • Communicating with the TTOs of Croatian academic institutions to determine the compatibility of existing domestic R&D initiatives; • Evaluating potential technologies for technical merit and compatibility with client requirements; • Compiling a short list of technology owners to be approached; and • Negotiating license agreements or contracts. Figure 5.7. Scouting Process Model Source: growthscouting.eu. Note: USP = Unique selling proposition. Applications in Croatia 90.Technology scouting can be a useful tool in sectors or value Co-Financing for chain segments that are technology intensive and where firms Technology Scouting must move quickly to meet changing market demands. In the Description: A scheme to CRIs, examples of STPAs where technology scouting could apply provide co-financing for consortia include Auto/Rail, Cybersecurity, Defense-Dual Use, Energy, of Croatian companies to hire Environmental Transport, Intelligent Transport, Nutrition and outside firms to conduct technology scouting activities. Pharmaceuticals—indeed, any industry area where technology Co-financing would be set at a adoption is of key importance. For example, while there may be an predetermined ceiling of the total opportunity for Croatian companies to market and export an cost (for example, 50 percent). integrated community energy system, such a system is relatively Estimated Time frame: Co- complex and contains components and technologies for which the financing would be made best providers may not immediately be apparent. Technology available for a 3-year window. scouting aims to fill this knowledge gap and would be the start of a Estimated Budget: EUR 2 process to match innovative technologies with industry requirements. million Technology scouting would also help firms in the Pharmaceutical STPA that are transitioning into the newer segments (that is, Proposed Responsible Agency: integrated drug/device/services) find appropriate suppliers of new MoEEC or CCE medical devices. Technology scouting would help identify the best providers of these devices in the global market. As another example, as the urban mobility market evolves, the Added-Value Manufacturing of Road and Rail Vehicles, Parts, and Systems STPA will see an increasing number of innovative, high-tech suppliers, especially in software. Traditional electronic component suppliers will likely gradually expand their value chain coverage into Advanced Driver Assistance System/Automated Driving (ADAS/AD) component development. Meanwhile, urban mobility is driving a need for network integrators capable of capturing and analyzing big data for effective integrated traffic management and urban planning. The market will encounter new participants—mobility integrators, who will enable door-to-door travel, rather than station-to-station or point-to-point travel. Technology scouting would help find new firms in these areas that could partner with Croatian firms. 5.6. Workforce Skills and Training The creation of a comprehensive skills and training ecosystem would address skills shortages and gaps and help firms move into newer strategic segments in the STPAs. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 91. A comprehensive skills and training ecosystem would aim to address two market failures relevant to Croatia: • Information asymmetry. Accurate and up-to-date information about current and future skill requirements is important for ensuring that education and training systems are meeting the needs of firms. Keeping such information flows open is especially important given with the current trends in digitalization and automation (‘Industry 4.0’), where skills requirements are constantly changing. • Coordination failure. Skills that are relevant to employers can only be identified and developed in cooperation with employers themselves. The educational and training sector will need input from firms when designing curricula and course offerings and internship/apprenticeship arrangements. To be effective, this will require all parties to show a willingness to engage and call for enabling support by the government. 92. Public interventions to address the above market failures could focus on (a) linking firms and workers with suitable training programs, and (b) creating an enabling environment that supports effective collaboration to grow the talent that is needed in Croatia. 93. Finding the right training programs to meet current and future skills requirements may call for widening the scope of available training delivery options. For example, it may be necessary to first start by ‘training the trainers’ (and possibly select key employees) outside Croatia. It may also be necessary to partner with international academic and teaching institutions. For some skills, use of web-based/on-line training courses may be cost effective. Mechanisms like tax incentives, training credits, and matching funds, can encourage firms and workers to invest in skills development. Of course, incentive regimes should be designed with a view to long-term sustainability—for example through cost sharing with employers and training institutions. 94. Where private sector capacity is weak or where the industry is nascent, government can help a cluster set up partnerships and an effective collaboration framework for skills development. This support could be directed either at the private sector) or at academic institutions to improve the quality of their training programs and to increase the focus on employability. It could also be targeted at students or workers who are motivated to actively acquire skills that are in short supply. This support could be structured under the centers for skills and collaboration described in Section 5. 95. International experience suggests several good practices in the design and implementation of an effective skills and training ecosystem: • A clear and consistent legal framework that is in line with the needs of a modern, flexible training system. • Strong links between institutions providing technical and vocational education and training (TVET), on the one hand, with industry and firms, on the other, are critical to the success and sustainability of training programs. In Ireland, vocational schools collaborate closely with employers and their curricula are embedded in the national qualification framework (Quality and Qualifications Ireland (QQI) 2014). Collaboration between employers and TVET institutions could come in the form of equipment/labs, human resources, advice, and the offering of internships and apprenticeships. Funding of TVET institutions could be linked to quality and performance measures like post-completion employment rates of trainees. For example, the United Kingdom has set up a Teaching Excellence Framework (TEF) that recognizes teaching excellence in the higher education sector by measuring student satisfaction, retention and progression to employment. Institutions that participate in TEF are better able to attract students, and the UK government has allowed institutions recognized by TEF to increase their tuition fees in line with inflation. • Vocational education tracks should not be ignored. A large portion of STEM (science, technology, education and math) jobs require less than a four-year (university) degree (Andes, et al. 2017). Despite this, many countries’ systems exhibit a bias against vocational education; In Croatia, enrollment in vocational education stream has fallen (Cap4App (Capacity for Apprenticeship) 2017). The public sector can play a role in reversing this bias. For example, the Singaporean government launched an intensive campaign aimed at overcoming a deep- seated bias against vocational education (Chong 2014). • Automation, machine learning and other technological advances raise the premium on higher- order cognitive skills like complex problem solving, team work, reasoning, self-efficacy; critical thinking and advanced communications (World Bank Group 2018). Building these skills require educational foundations that start from early childhood. Incorporating soft skills and socioemotional skills into workforce training design has also shown promise. (World Bank Group 2018) • Apprenticeships and on-the-job training are important components of skills development systems around the world. For example, Germany’s public TVET system has established strong partnerships with employers through industry bodies and trade unions. Firms pay a large share of the training costs, including through the offering of apprenticeships. The legal framework should recognize the status of the apprentice as a learner and ensure his/her right to high-quality training that develops strong, transferable skills. 96. Workforce skills development initiatives are well suited to a cluster approach. New business models in several STPAs (notably Environmental Transport, Health and Nutrition) call for enhanced cooperation on skills development at the cluster level. Many countries have taken this approach. For example, the United States Chamber of Commerce’s Talent Pipeline Management initiative encourages the formation of employer ‘collaboratives’ to collectively address shared workforce needs, to share information on skill and talent requirements, and to manage the skills/talent supply chain (US Chamber of Commerce Foundation, 2018). In Korea, a high level of cluster collaboration has developed where larger, more established firms can partner with SMEs to design training programs to meet their collective needs (Saraf 2014). Another example of a cluster approach comes from Estonia which launched its cluster program in 2008. There the cluster defined common goals and executed joint activities ranging from conducting research to training and educating workforce and mapping workforce needs. Applications in Croatia Where appropriate, workforce skills and training programs could help clusters move into new business segments. The programs should reflect both short- and long-term skill needs; a program may be targeted at individual STPAs or—where certain cross-cutting technologies are in play—be designed to benefit multiple industry areas. With regard to the former, Croatian firms have noted a need for training in areas that are specific to each of the STPAs, as given in the table below. Table 5.2: Identified Themes for Skills Development STPA Training 1. Pharma - Training on market trends in remote health care delivery and enabling technologies 2. Health - Training on health outcome measurement 3. Nutrition - Training on dietary supplement standards (e.g. from USP, NSF or GMP) - Training on compounding methods and standards 4. Energy Tech - Training on energy storage 5. Envir. Tech - Training on emerging standards, requirements and certifications in smart microgrids and renewable energy sources (RES) 6. Auto & Rail - Training on development of software solutions in the automotive industry 7. EFTS - Training on electrical integration in ship systems. 8. ITS - Training on the market trends in intelligent transport systems. 9. Cyber - Training on new methods in machine learning and artificial intelligence. 10. DDU - Training on the market trends in integrated security solutions 11. Mine - Training on the market trends in preventive detection - Training on the market trends in land remediation (contaminated land cleanup and reuse) 12. Food - Training on BRC/IFS standards for food safety, packaging, storage and distribution - Training on logistics (especially perishable/live logistics) 13. Wood - Training on project management - Woodwork installation standards 97. Skills development in these areas could encompass a range of activities from training, consulting services, and mentoring among other activities. The recipient of such support will be firms (that is, at a corporate level), workers (that is, at an individual level) and training institutions. This overlap can be embraced, since it demonstrates that the training has an immediate commercial application. 98. Examples of possible short-term actions are: • Sourcing specialist training from abroad on international standards regimes. There is a broad need to sensitize firms about the private standards regimes that exist. For example, in the food sector, the most relevant regimes are managed by the British Retail Consortium (BRC) 44 and the International Featured Standards (IFS); however, a number of other regimes also exist for primary production (for example, GLOBALG.A.P.) and for specific subsectors.45 In the nutrition sector, training on standards from the USP, NSF, and the GMP for dietary supplement standards could help the industry keep abreast of the latest trends. A modular training could be developed to expose firms to the various certification regimes available on the market and to identify the value that they respectively add to the business model for advanced consumer segments. Separate modules of the training will then sensitize firms as to the specific standards, which must be obtained to get certifications from the BRC and IFS (food) and the USP and NSP (nutrition). • Sourcing specialist training from abroad on training on product development. After identifying consumer preferences, a training program could be developed to assist firms in developing products to meet these needs. The training would be developed by specialists from target markets familiar with advanced consumer requirements and with the targeted consumer research already conducted. The training should include (a) best practices in product development for advanced consumers and (b) product development strategies to suit consumer tastes in the target export markets. Such a training will also help participants understand how to test products with consumers before marketing. • Upgrading the necessary data science skills by developing ‘conversion courses’ for unemployed graduates with the potential to switch and upgrade. Data science skills have been identified across a number of industries (for example, cybersecurity, advanced nutrition). An example of a conversion program comes from the UK and supported by the UK’s Higher Education Funding Council. Graduates from other subjects are provided opportunities to convert to engineering and computer science subjects, while undertaking study delivered in a variety of different models. Globally, there has also been an expansion of online offerings of relatively low- cost, self-paced courses (for example see Udemy). Bootcamps—both in-person and virtual—are other types of training programs offering certificate training on a range of data and digital topics. 99. Examples of possible longer-term actions are: • Introduction of financial incentives that encourage participation in training and other services to support the competitiveness of Croatian firms in specific business segments. Incentive regimes should encourage cost sharing and funding diversification, as this will help ensure that training programs are relevant to private-sector needs (since firms will support only programs that add value). Firms should be kept involved in designing the training curricula. Incentives should also be designed to encourage state-of-the-art technology and processes that are needed to help Croatian firms: • Integrate their processing methods and packaging solutions with advanced consumer demands. Mechanization in product processing, preservation, and packaging solutions are 44 The BRC regime checks for management commitment and competence, HACCP procedures, site standards, product and process control, and personnel. All standards are process standards which help users in implementing legal provisions regarding food and product safety, and provide uniform guidelines on food, product safety and quality issues. 45 The Aquaculture Stewardship Council and the Marine Stewardship Council are two competing certification regimes in the fisheries sector. becoming increasingly important to maintain competitiveness. However, the method of agro- processing must be adapted to fit the consumer demands. Agro-processing methods could be categorized as follows: state-of-the-art processing activities like high pressure processing or pulsed-electric processing; necessary processing activities like cleaning, grading, and storage; labor-intensive activities like milling, cutting, mixing, pressing, and so on; regular processing activities like cooking, pasteurization, canning, dehydration, freezing, and so on; and traditional activities like chemical alteration and texturization. New consumer segments are increasingly requiring state-of-the-art processing methods, which necessitate knowledge-intensive inputs. • Improve their familiarity with remote care technologies for chronic conditions. Specific training and education for health care personnel could be subsidized for companies seeking to advance within the value chain. This would be an up-front investment in knowledge for innovation in these newer segments. It can be coordinated with the industry workshops on new export opportunities. • Operate efficient cold chain networks that meet international standards. Many logistic service providers and warehouses in Croatia do not know how to operate an efficient cold chain network nor do they know how to meet the international standards (for example, IFS/BRC) required by advanced grocery retailers. To facilitate cold chain logistics, a training program could be developed on best practices, standards, and certifications needed for international food transport. Specific topics could include (a) distribution center management for cold chains, (b) palleting and packaging best practices for cold chains, (c) implementing systems for traceability of food, (d) how to meet the standards for certification against the IFS and BRC regimes, (e) compartmentalized transport for Less than Truck Load (LTL) cold chains, and (f) methods for live handling and transportation of fish (for example, oysters) or other highly sensitive produce46 and so on. Such trainings will help Croatian food producers, processors, and logistics/storage providers to understand the complexity of cold chain logistics operations since efficient and modern transport solutions are crucial for perishable produce. • Rebalance, through a mix of incentives and awareness raising campaigns, secondary school, TVET and Higher Education provision in Croatia. During interactions with firms, it was noted that there are some deficiencies in the academic curricula in Croatia’s workforce education system. For example, pharmaceutical education reportedly emphasizes chemistry, yet the industry is moving away from chemistry foundations for drugs and toward biologics. The education system will also need to ensure that there is a sufficient supply of STEM graduates who can work across the economy and develop the specialist data science skills the sector needs. A precondition for this would be a national consultative body charged with determining and addressing—in consultation with firms, educational institutions, and expert consultants/intermediaries—Croatia’s skills and talent needs for the S3 and the competitiveness of Croatian firms. 46The lack of knowledge on the application of logistics for some sub-sectors (for example, live logistics for oysters) prohibits the development of these industries. 5.7. Certification Schemes to encourage private investment in enhancing quality in products and process can help firms conform to the highest international standards and acquire the certifications they need to compete. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 100. Standards can be either public or codified by private industry. Governments may require firms to abide by certain prescribed standards when their imposition is deemed to be in the public interest —for example, in the case of public safety. On the other hand, private standards are not mandatory by law, but are imposed by a buyer or by a firm itself. Such private standards help buyers quickly differentiate between varying grades of product quality, thus saving them transaction costs and reducing information and coordination failures along the value chain. Firms that meet such standards may enjoy greater success in attracting international buyers and earning higher profits. Although supporting firms in complying with such private standards would seem to create a private good, public investment may be called for when there is a systemic, compounded, industry-wide market failure concerning standards. 101. To use public funds efficiently, it would be Certification important to identify certification regimes that add the most value and to develop activities that reward Description: A scheme to encourage private firms that attain such standards. Global standards investment in enhancing quality in products exist within many industries. In some cases, firms must and processes through conforming to the be certified for compliance with these standards before highest international standards they can enter into GVCs. For any given standard, Estimated Time frame: 6 years however, there may be different certification regimes; identifying the regime that provides the optimal level of Estimated Budget: EUR 10 million recognition is therefore critical. In the Food STPA, for Responsible Agency: MoEEC example, the grocery retail industry in many countries has outsourced quality control of suppliers to outside certification regimes; notable among these is the BRC’s Global Food Safety Standards.47 From the early 2000s, the Berlin-based IFS certification regime has also emerged as a competitor standard maker and is now more popular in German and Eastern European 47 The BRC was founded in 1996 by a group of retailers who wanted to harmonize food safety standards across the food industry to build consumer confidence in the supply chain throughout its dispersed set of production, packaging, distribution, and retailing activities. Today, over 23,000 certificated suppliers in 123 countries use the BRC’s standards program. The BRC oper ates a certification regime and conducts activities related to improving product safety, enabling manufacturers to meet demands of retailers, facilitating improvements on efficiency in manufacturing, and allowing certification agents to provide part due diligence on behalf of the supermarkets. BRC’s standards cover senior management commitment; HACCP, safety, and quality management system; site standards; product control; process control; and personnel. In 2015, the BRC introduced more detailed certification system for fresh food with more focus on health and microbiological safety. markets. Certification from these private regimes is often a prerequisite for any food producer or processor who wants to access high-value markets in northern and western Europe.48 Applications in Croatia • Wood. The installation of wooden interiors has taken on critical importance in more advanced segments of the industry. Because installation costs are significant—and because installation is essentially permanent—the industry has placed increasing emphasis on the quality of installation. Commercial buyers often rely on certification regimes that certify a firm’s competence in installation and—once installation has taken place—compliance with published standards,49 as verified by third-party inspectors. The Architectural Woodwork Standards and the British Furniture Industry Research Association (FIRA) provide such Project Compliance Inspections to validate contract delivery for installation.50 • Pharmaceuticals. Active pharmaceutical ingredients derived from botanical products could be produced in Croatia from crops such as chamomile. However, pharmaceutical manufacturers do not consider ingredients from Croatia viable because of a lack of reliably certified producers. Addressing this situation would likely require giving assistance to producers to attain international or European Certificates of Suitability (CEP) for pharmacopoeia standards, among others (McMath n.d.).51 • Energy. Because smart grids and microgrids are a relatively recent technology, certification standards are still emerging. In the United States, the National Electric Contractor’s Association has drawn up energy storage installation certifications for microgrids. In the EU, the European Union Agency for Network and Information Security (ENISA) has recommended the promulgation of similar smart grid security certifications in Europe. Firms will need to comply with such certification standards as they become more widespread,. • Defense Dual-Use. Certification may be relevant in several areas related to DDU, which is a broad area spanning several often tangentially related sectors. In the EU, Directive 89/686/EEC requires that Conformité Européene (CE) marking be affixed to certain types of PPE and outlines the certification process for these products. Besides well-established sectors, certification could be introduced in innovative areas such as autonomous vehicles, for which no universal method of certification yet exists. 48 Eligible beneficiaries of this could include food production, food processing, and cold chain logistics/warehousing firms. 49 “The Architectural Woodwork Standards (AWS) is the guide for the specification, construction, and installation of interior architectural woodwork. The AWS is a definitive reference manual designed to simplify and clarify guidelines, information and principles required for fabrication, and finishing and installation of architectural woodwork. It provides design professionals with a logical and facile means to comprehensively specify woodwork elements. The AWS includes compliance criteria to ensure that all millwork manufacturers are competing equally when bidding on projects and they are obligated to perform work of equal quality.” (The Architectural Woodwork Institute 2009) 50 Many buyers have attempted to build in contractual provisions that provide for third-party quality inspection after delivery. Such compliance inspections are a risk management tool often used by buyers that contract firms to deliver costly projects. Such mechanisms provide a method of recourse for buyers in case the work fails to meet specifications. To participate in the tender for such large contracts, it will be necessary for Croatian companies to be able to meet such inspection standards. 51 Other international certification regimes for product and processes —such as those for agricultural production of the raw materials—may also be needed. • Auto/Rail. The automotive and rail value chains rely heavily on a multitude of suppliers that contribute individual components to an original equipment manufacturer (OEM). In such a dispersed supply chain, certifications play an important role in signaling a supplier’s quality and compliance with accepted standards. Important certification regimes in these industries include: Conformity of Production (COP) for manufacturing processes; ISO/TS 16949 and ISO 9001; the Whole Vehicle Type Approval certification for auto parts, the Oeko-Tex certification for textile parts, CE certification for electronic equipment; and the Worldwide Harmonized Light Vehicle Test Procedure for pollutants and efficiency (CBI 2017). • Nutrition. Scandals in the nutritional supplements industry—such as cases where firms have made false claims or sold potentially harmful products—have, along with the relatively unregulated nature of the sector, created a need for private certification regimes. Several industry standards (and training regimes) have been developed to ensure the contents and quality of the products as well as of the processes by which they are made. Some of the more advanced certification regimes for the industry include the: US Pharmacopeia (USP) dietary supplements compendium, NSF for Dietary Supplements, and Good Manufacturing Practices (GMP) for Dietary Supplements. USP also runs trainings on certified methods for compounding supplements and drugs, which is particularly necessary in the personalized nutrition segments. Moreover, certifications for professional competence of dieticians are also carried out by the constituent organizations of the European Federation of the Association of Dieticians. Such certifications are needed for service exports within the EU. • Cybersecurity. Croatian companies that are recruiting their workforce – along with international investors considering Croatia – need to rely on a predictable quality of workforce. The emerging technical requirements for workers in the Cybersecurity industry rely on a combination of various disciplines (software engineering, cryptography, mathematics, and others). As such, standard academic qualifications are not a very good indicator of workforce skills for the industry. To mitigate this problem, Croatia could develop a national qualification framework for cybersecurity professions, which will provide a standard set of professional competencies for information security skills. This will allow Croatian universities and vocational schools to adjust their curricula to provide a harmonized supply of Cybersecurity workers. Due to the speed of technological changes in the IT sector, the framework would need to be continually updated, using inputs from industry. 102. Because obtaining certifications, while critical, can be expensive for many SMEs, Croatia could take steps to help firms obtain internationally recognized certifications. Instruments for providing this support include group trainings and matching grants. • Training on international standards regimes. There is a broad need to educate firms about standards regimes within their respective sectors. Training programs could be developed to expose firms to the certification regimes, the value they add, and specific standards that must be achieved before obtaining certification. • Matching grant for certification. Firms may need assistance to conform their processes and practices to international standards. The auditing process of such certification regimes is often quite costly, and many domestic firms may be uncertain of the return on investment. A government-sponsored matching grant scheme that finances the cost of consultants and auditing could improve the rate of compliance with standards demanded by export markets. While there are different ways of designing matching grants, good practice generally provides for a 50/50 cost-sharing basis (Hristova and Coste 2016). • Matching grant for accreditation. While the laboratory system in Croatia is quite advanced (Lapres and Mandic, 2016a), labs offering testing services may need accreditation for new certification regimes in emerging segments. A matching grant scheme could also be used to support the accreditation of laboratories, if industry analysis identifies a critical demand. 5.8. Business Mentoring A business mentoring initiative would provide expert-level support for firms looking to move into new business segments. The scheme would provide expert-level mentoring on marketing, operational management, strategy, and risk challenges related to supporting Croatian firms to enter GVCs. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 103. According to some indicators, Croatian entrepreneurs trail their regional counterparts in basic entrepreneurial skills. Key indicators from the Global Entrepreneurship Index show that entrepreneurs in neighboring countries like Slovenia, Poland, Romania, and Austria surpass their Croatian peers in terms of the ability to seize on innovations and commercialize them (Data is not yet available on the separate category of managerial skills.) This gap in entrepreneurial skills was raised in several STPAs, especially during the initial firm interviews. Areas that were identified as ripe for improvement include: • Consolidation of product range around the best market opportunities; • Business process reengineering to improve quality and lower production costs; • Operational support to commercialize innovations; and • Success in obtaining innovation financing. 104. Successful programs in Central and Eastern Europe show the value of business mentorship programs. For example, the Enterprise Growth Program of the European Bank for Reconstruction and Development (EBRD) matches an adviser with a firm for a mentoring relationship lasting 12–18 months, including a one-week long visit to the company every two months. An evaluation has found that participation by firms in this program has increased company revenue by 50 percent on average. The advisers have at least 15 years senior management experience in the same industry as the company, to ensure the support is relevant. Table 5.2. Relevant Indicators from the Global Entrepreneurship Index Croatia Slovenia Poland Romania Austria (Indicator based on) % of TEA businesses offering Product 0.154 0.584 0.605 0.298 0.739 products that are new to at least innovation some of their customers % of population, ages 18–64, Opportunity 0.169 0.296 0.389 0.295 0.815 recognizing good conditions to start recognition a business in the next 6 months % of population, ages 18–64, stating Risk 0.102 0.793 0.391 0.238 0.692 that fear of failure would not prevent perception starting a business % of TEA businesses initiated Education of 0.180 0.510 0.512 0.451 0.530 because of opportunity startup entrepreneurs motive % of population, ages 18–64, Know 0.220 0.332 0.369 0.192 0.574 knowing someone who started a entrepreneurs business in the past 2 years Source: https://thegedi.org/global-entrepreneurship-and-development-index/. Note: TEA = total early-stage entrepreneurial activity. 105. This activity would provide independent advisers to companies through a mentoring program. The program would provide a technical adviser to firms that apply for such support, for a mentoring relationship lasting up to 12 months. The adviser should be contracted to support the firm in overcoming a specific challenge related to entering a GVC. 106. Key success factors for a mentoring scheme include Business Mentoring to Enter • A critical mass of mentors, to ensure a good match GVCs between the adviser and the company (based Description: A scheme to provide particularly on sector experience); expert-level mentoring on marketing, operational management, • A record of success in international business, strategy, and risk challenges related preferably in different countries, and specifically in to entering GVCs. the branch of industry of interest to the applicant Estimated Time frame: Under the company; programming period of the Operational Programme, 2014–2020 • Commitment to a medium-term relationship (12–18 Estimated Budget: EUR 3 million months including a one-week site visit every two months, concluding with an action plan for follow- Proposed Responsible Agency: up before the next visit); and MoEEC or CCE • Financial contribution from the advisee company. Applications in Croatia 107. A business mentoring program would be particularly valuable in industries with a high degree of crossover between academia and business, or where the cluster is trying to adopt new business models. During the CRIs, the need for a mentoring program was deemed to be particularly acute in industries where academics often stepped into the role of entrepreneurs—as is the case in the Pharmaceutical STPA. Likewise, in the Health STPA, the complexity of the transition to a VBHC system could test firms’ capacity of to navigate new business models in coordination with various stakeholders (health providers, ICT firms, HZZO). A mentoring program for the Health STPA could ease the transition of Croatian firms into the new segments by providing support for (a) consultancy services to help firms define and implement outcome-based business models; (b) expert mentoring from health services and advanced insurance companies that have already implemented the new model; and (c) advice related to adoption of technology needed for remote care or data management. 108. The need to have a critical mass of mentors suggests the wisdom of leveraging an existing program, such as that of EBRD. Financial resources for the public contribution might come from the OPCC, with EBRD (or a similar organization) conducting implementation. (Due to limited donor funding, the number of EGP projects in Croatia has been declining.) The cost of mentorship could be co-financed by public funds, with the firm paying in an amount that is both reasonable to the firm but also large enough to give the company a stake in the mentoring. 109. The budget for the scheme would be approximately EUR 3 million. This assumes a cost for mentoring of approximately EUR 60,000 per firm over a 12-month period, including site visits, travel expenses, and wages of the mentor. A scheme covering 50 firms would cost EUR 3 million; requiring firms to co-finance 20 percent of expenses would bring the cost down to EUR 2.4 million. A program management and publicity budget for the scheme would bring the final figure to EUR 3 million. 110. In the context of the CRIs, a business mentoring program would supplement the AID. The AID (Component 4 of the RAS) aims to increase firms’ skillsets in key areas like corporate strategy, procurement, sales, alliances, patents, and trademarks. These will provide some of the essential skills firms need to move into new segments. A mentor would then help firms interpret this material in their own specific context and provide active and real-time support to overcoming problems in implementation. 5.9. Big Data Initiatives Proposal: Consider developing public institutions and laws that enable the collection and utilization of big data sets, which can be commercialized by the private sector. This discussion is informed by the working group discussions that were held in Phase 3 of the CRIs, with stakeholders from the private sector, government and academia. The proposal is not a recommendation of the World Bank and does not represent the outcome of an independent World Bank analysis. 111. The advent of ‘big data’ presents an opportunity to use new technology to address systemic information failure. Communications technology—especially the proliferation of the IoT—has advanced to the point where networked devices and equipment are constantly generating enormous volumes of data about every aspect of human activity. “Big Data” refers to the use of advanced statistical techniques (especially artificially intelligence, or ‘AI’) to uncover insights from these vast volumes of data and predict patterns and behavior that could not easily come to light otherwise52. Insights and predictions obtained from big data analyses can often be commercialized in the form of new goods and services. The potential of big data to open new markets through the analysis of huge amounts of previously unavailable data presents an intriguing solution to market failures caused by information asymmetry—the situation where a party lacks the information it needs to confidently price a transaction or structure a new product or service. Many of the segments identified by the CRI analyses would stand to benefit from the collection and commercialization of big data, notably in the Health, Cybersecurity and Intelligent Transport STPAs. 112. However, big data presents challenges related to the collection and governance of information. Unfortunately, raw data does not always come in convenient, easily readable packages. Data is generated constantly from a wide variety of not necessarily interoperable sources. Collected data can be structured, semi-structured, or unstructured and be of varying quality—often needing to be ‘cleaned’ to produce usable information. Since these difficulties can hinder the operationalization of big data, it is important to develop as many standardized methods of collection as possible. However, standardization efforts must balance the need for structure in data collection with the need to have rules loose enough to encourage continued innovation in data analytics. At the very least, data collection must be based on interoperable underlying infrastructure, in a way that would allow for analysis of data from disparate sources53. 113. Governance of big data is of concern because of issues about data ownership and privacy54. The recent adoption of the new General Data Protection Regulation [GDPR] in the EU established a set of 52Such Big Data can also serve a variety of public good interests as well. 53 “Big Data applications must deal with data from multiple sources that may be heterogeneous in a variety of ways, such as th e syntax and semantics of the data, the quality of the data, and the policy regime under which the data was produced and by which it can be used. Core technical infrastructure to enable representation of semantic information is a key next-generation capability for Big Data” (Big Data Senior Steering Group 2016). 54 “Many Big Data applications entail integration of data from multiple sources, each created under different policy regimes. Th e data may be associated with individual policies, protections, and rules of use that need to be enforced even when the data is integrated. For example, a health insurance company may partner with a social media company to combine datasets, but the two sets of data were created under very different rules of use and regulations. Handling the merger of such previously separate datasets while remaining sensitive to access and privacy needs is a critical research objective. When dealing with dynamic environments, principles for data regulation that is showing signs that it is emerging as a global standard. The GDPR framework governs the storage, usage and sharing of personal and confidential data. Individual sectors— notably health—may also be subject to additional, stricter policy regimes due to the sensitivity of particular types of information. As companies combine different datasets, the rules applicable to the originals will still apply55. Thus, the legal and facilitation services associated with data sharing could be quite complex. Such services may need to be supplied by public authorities to give legitimacy and security to the transactions. 114. Depending on the sensitivity of the data, different mechanisms may be used to promote the exploitation and commercialization of big data. In developing these mechanisms, the main areas of focus should be: • Developing appropriate legal frameworks. Countries could start by developing a legal regime that can facilitate the secure sharing of proprietary or confidential data. Compliance with the GDPR is a minimum baseline that all Croatian firms must adhere to. Moreover, additional standards may be appropriate for the usage of specific types of data (for example, whether companies that manage self- driving cars have a duty to report on road and traffic issues). In addition, standards for interoperability of big data would be an important consideration. Countries are likely to need both overarching frameworks for big data governance as well as sector-specific approaches. • Building institutions for collecting & facilitating the use of big data. Governments may also need to invest in public institutions that can manage the collection and governance of big data. Such institutions could take different forms, including: (a) agencies that collect data as a public good (like the Swedish National Quality Registries that collects data on healthcare outcomes), or; (b) agencies that offer secure platforms and protocols for sharing sensitive information among public agencies (such as the Federal Risk and Authorization Management Program (FedRAMP). • Developing financial support programs for private-sector management of big data. While the public sector may sometimes be best placed to collect and manage large datasets, in other cases that role may fall to the private sector. Where the private sector has a comparative advantage in the gathering of big data—particularly when that data can be utilized as a public, common or even club good, the government could provide financial support to help the private sector fill this role effectively. For instance, a support scheme could help private firms develop blockchain technology that can instantly collect, combine, and securely distribute datasets originating from disparate sources (see example below on the health care sector). When designing such programs, guidelines should be put in place that promote the use of the data as a public or common good—for example, requiring where sources, users, applications, and data usage are continuously changing, the ability to design and evolve policies automatically and in real time will be essential to ensuring that data is readily available for use while guaranteeing data confidentiality. Research should provide technological and policy solutions for new environments and tools for managing policies dynamically; this is to ensure that the privacy of a particular dataset’s contents is protected as the context surrounding it varies.” (Big Data Senior Steering Group 2016). 55 “For example, a health insurance company may partner with a social media company to combine datasets, but the two sets of data were created under very different rules of use and regulations.” (Big Data Senior Steering Group 2016). that datasets are interoperable so that they can be further shared, combined, and used for other purposes. Grants for research on data analysis are another potential means of support.56 Applications in Croatia 115. The applicability of data driven solutions to Big Data Initiatives every TPA underlies how critical this element has become for the entire economy. As such, it is necessary Description: A scheme to encourage to develop the capacity of the private sector to collect development of data collection and and effectively utilize such data in a way that promotes utilization capacities through the the commercialization of new products and services. An development of laws, institutions and analysis of the STPAs has identified a priority set of first Innovations (R&D and new platforms) actions that may be required to enable the use of big data Estimated Time frame: 5 years at the sectorial level. Some details on how these could be applied in each STPA are given below: Estimated Budget: EUR 50 million Responsible Agency: MoEEC & Various 116. Entry into advanced segments in the health Other Agencies sector requires the collection and exploitation, on a massive scale, of data related to health outcomes. In recent years, increasing consensus has been reached on the types of indicators that provide a good measure of healthcare outcomes57; these indicators may derive from information provided by clinics, patients, medical monitoring devices, or public sources58. While such a wealth of disparate data has proved too unwieldy to effectively collect and analyze in the past, big data analytics has made possible many new outcome-based applications and business models in the health sector. Firms have begun to compete for customers (insurers or individuals) on the basis of the quality of the outcomes achieved. However, issues surrounding the privacy, confidentiality and management of patient data remain. Nevertheless, several innovative legal, institutional, and technological arrangements can be put in place to enable to promote the secure collection of health-related big data: • Legal framework. In the health sector, aside from the GDPR, it will be important to have in place regulations that protect patient confidentiality while enabling patient data to be fairly and productively used by insurers and healthcare providers. The law should also define standardized outcomes for treatment of medical conditions. To the extent possible, Croatia should adopt internationally recognized standards to ensure comparability of data between countries. Estonia and Denmark have created legal frameworks that enable secure and anonymized data sharing with analytical service providers (Lapres and Punda 2018). These legal frameworks could serve as examples for how Croatia can emulate high functioning health data systems59. • Developing institutions. The collection of data on healthcare outcomes is an activity appropriately left to the public sector. One country that is doing this is Sweden, which has developed a 56 “Research is needed on metadata frameworks to support trustworthiness of data, including recording the context and semantics of the data, which may evolve over time.” (Big Data Senior Steering Group 2016). 57 Moreover, the outcomes that need to be measured vary for every different disease group. 58 See (Porter, Measuring Health Outcomes: The Outcome Heirarchy 2010) and (Lapres and Punda 2018). 59 Enabling such data sharing is necessary to establish benchmarks for clinical performance and to ascertain why there are variations in outcomes across providers. Such data analytics can guide and accelerate the development of best practices. comprehensive set of ‘National Quality Registers’—semi-governmental and semi-independent institutions that collect health outcome data as a public good (Lapres and Punda 2018). Such publicly funded data repositories can be instrumental in promoting outcome-based business models. In Croatia, aside from some tracking of public health by the Croatian Institute of Public Health (Hrvatski zavod za javno zdravstvo, HZJZ) there is little systematic measurement of health outcomes. Registries generally do not need a substantial start-up investment, but they do require long-term funding60. • Financial Support. In a VHBC system, insurers will need to collect data in a way that is identifiable to both patients and the health network generally. Data collection and aggregation platforms may need to service several stakeholders firms (including insurers, providers, or industrial suppliers), thereby creating a club good that may be appropriate for public financing. Blockchain has been proposed as a technology that can help track patient health outcomes as they interact with different providers, thereby enabling smart contracts through secure sharing of patient data. (See Figure 5.8.) Since such blockchain solutions are exceptionally new, investment in private research may be needed.61 In the meantime, Croatia’s private sector can look to similar blockchains that have been created for the public health sector in Estonia at the national level (Lapres and Punda 2018).62 Figure 5.8. Blockchain Technology: Potential Uses for Enabling New Segments Source: (Naik 2017) 60 In Sweden, BCG estimated that a public investment in a single disease registry would cost approximately $500,000, which would amount to a $70 million annual investment for the full set of 100 quality registries. While considerable, this investment was also estimated to lead to a return of $7 billion over ten years (Larsson 2010). Such an investment was further expected to constrain the inflation in healthcare cost from an estimated 4.7 percent rise to 4.1 percent. Moreover, the Swedish National Quality Registers, while formerly publicly financed, will increasingly be self-financed through the commercialization of available data. The prospect of this commercialization, while likely controversial, will be the source of much future innovation in the health industry. 61 Beyond collecting data, it is important to develop the capacity to analyze, operationalize and commercialize such data. It will be necessary for providers, payers, and suppliers to all invest in the development of this activity albeit in different ways. In Sweden, public investments to support R&D around data analysis amount to about $25 million per annum (Larsson 2010). However, it is important to note that there is a difference between; (a) using such data for public R&D on epidemiology, which is a public good, and (b) using such data for analysis on outcome, risk, and case management, which is a private good. Insurance companies, providers and their jointly contracted data analysis firms must invest significant amounts in data management and analysis functions in order to identify gaps in individuals’ care (e.g. HealthAdvocate), to identify outcomes that need improvement (e.g. Martin i- Klinic), and to identify risk (e.g. Optum Labs). 62 While the GDPR’s restrictions on personal health data shared through blockchain are still to be sorted out, it appears that Estonia has been able to invest in a system that provides sufficient protection of individuals’ rights. 117. The Intelligent Transport STPA is another industry area where big data initiatives— especially open data initiatives—could play a catalytic role. Big data is transforming the way that the transport and mobility sector is creating new products and services; in the intelligent transport STPA, opportunities for firms lie in analyzing the volumes of data generated by the movement of people and goods across transportation networks, and designing applications and services that use these analyses to maximize the efficiency of the networks or of the travel experiences of individual customers. There are three main areas where potentially controversial issues of data ownership and privacy arise. The first is the sensitivity and privacy issues that arise when it is technically possible to track an individual's travel movements. The second is the question regarding the extent—if any—that urban transportation planners should have to useful data generated by private mobility firms like Uber or Lyft. These first two questions remain unsettled and would properly be the subject of a separate and detailed regulatory analysis and protracted public debate. The third question, however—of what to do with big data that is already in the public domain (and therefore readily packaged as a public or common good)—is one that is more amenable to short- to medium- term action. 118. Ensuring open access to publicly held mobility data is crucial to encouraging the innovation of new applications that can be derived from, and monetize, that data. Public transportation authorities are among the many sources of big data in the mobility sector. In Zagreb, for example, Zagrebački električni tramvaj (ZET), the city’s public transit authority, generates reams of data about the movement of passengers and general traffic conditions in the capital. But only if this data is made available to entrepreneurs can firms capitalize on this data to innovate and create value for the sector. Without sacrificing privacy concerns, it will be important to ensure that access to public traffic data is as open as possible. Good practice examples for open government data exist in other countries. For example, the Japanese government has sponsored an open data initiative to release public data in machine-readable formats and allow use of that data for commercial purposes (Government of Japan n.d.). In the EU, open big data policies have enabled enterprises to develop profitable new business models; one example is the Dutch application TopoGPS, which exploits publicly available data and is estimated to have created EUR 9 billion in value (DG CONNECT n.d.). 5.10. Note on Regulatory Reform 119. While this report does not highlight regulatory reforms because of the difficulty of drawing generalizations across 13 STPAs, at a sector level it would be important to address any laws or regulations that keep Croatian firms from being more competitive. Due to the CRI methodology’s focus on producing actions and investments where the private sector can play an active role in moving into more attractive business segments, the measures listed in this document emphasize items that tend not to rely on the uncertainty of regulatory change. However, this is not to downplay the importance of regulation, and the question of how to overcome regulatory or legal barriers to competitiveness would be an appropriate subject for sector-specific analysis. In firm interviews, public meetings, working groups and strategy groups, participants often cited regulatory issues that were especially relevant to the industry in question. Examples include: • Environmental Transport. A proper regulatory and policy framework is needed to drive change in the maritime industry, which is the focus of the Environmentally-Friendly Transport STPA, and where the transition to cleaner energy has been somewhat slower than in land transport. To incentivize this transition in Croatia, domestic policy will need to complement—and even go farther than—international conventions and standards such as the Paris COP 21 [Conference of the Parties] Agreement on climate change and the International Maritime Organization (IMO). For example, stringent environmental goals in Norway have helped position that country’s maritime cluster at the leading edge of innovation; the successful launch of the Ampere electric ferry is a case in point. A theoretical example of how domestic policy might buttress international standards would be the placing of limits—or even a ban—on certain types of emissions in coastal areas. The IMO has designated two ‘emissions control areas’ (ECAs) (one in the North Sea and Baltic, and another off the eastern coast of North America) where pollution-causing sulphur oxide emissions are tightly restricted. The EU has already unilaterally signaled its intention to match current ECA restrictions in all EU waters by 2020 (though by then the Baltic Sea ECA limits will have fallen even farther). Another area where setting strict domestic firms might give local firms a competitive advantage is the restriction of greenhouse gas emissions in coastal areas (which are not covered by ECAs). • Health Services. Regulations and government structures play a formative role in the health sector. On the regulatory side, there is strong justification for smart regulation of the industry to protect consumers. However, there is also a strong justification to focus on enabling the functioning of markets. The most critical regulations that would support the advancement of the sector relate to the functioning of insurance markets. In Croatia there are three categories for insurance markets, including compulsory insurance, supplementary insurance, and additional insurance. Many stakeholders in the insurance industry noted a need for the law to better define the scope and role of private insurance—both additional and supplementary insurance—in a way that better enables patient choice, integrated care networks, and which brings additionality of benefits to the existing compulsory insurance. Currently private insurance markets are limited in the level of care that they cover and in some respects lack additionality. As a result, this regulatory structure leads to limits in the sophistication in many of the insurance products63 and constrains their ability to deliver on outcomes. The government may consider policies which encourage additionality and competition for patients among private insurers64. Defining laws that enable competition on quality—not on cost—will be key to the success of private health providers.65 • Nutrition. On the regulatory side, there is strong justification for smart regulation of the industry to protect consumers66 and to increase consumer confidence in the solutions offered. The industry has a history of selling false claims and given the overuse of supplements (that have caused organ failure in some individuals in the past) there is a need for smart regulation. Industry trends toward personalized nutrition are already a step in the right direction given its focus on outcomes. 63 Private insurance companies may be interested in selling outcome-based contracts if they could demonstrate effectiveness in attracting customers or containing healthcare costs by preventative treatments. 64 Competition—as a key driver of product and process innovation —can provide incentive for improving outcomes. 65 Quick claims adjudication must be built into the legal structure by enabling providers and insurers to settle through arbitration, as opposed to courts. Exceptions to this rule should be made when arbitration can harm the interest of the patient or when court rulings could promote the public interest. 66 The EFSA was set up in 2002 following a series of food crises in the late 1990s to be a source of scientific advice and communication on risks associated with the food chain. The agency was legally established by the EU under the General Food Law - Regulation 178/2002. Fortunately, these business models would benefit from regulations protect consumers. Specifically, there may be scope to specify that any personalized nutrition diagnostic test —where a firm sells supplements as the solution—should be required to test for liver/kidney functions and report results to the consumers. Moreover, to maintain consumer confidence in the business model, any lab that runs diagnostics should be accredited and all laboratory tests and medical devices should be certified by the competent national (or international) authorities.67 However, the government must not overregulate the industry by posing administrative burdens that make cost structures uncompetitive.68 • Wood. Maintaining liberal competition policies will also be necessary for ensuring competitiveness of Croatia’s wood industry. Currently, de facto restrictions on the sale and procurement of raw wood create distortions in the market. This is a result of Hrvatske šume’s (the state-owned forestry company) local content policy and subsidy scheme that it operates through its tendering processes (Lapres, 2016b). While it is understandable why Croatia would want to ensure that such resources benefit the country,69 such rules likely stand in contrast to EU free market policies and may be counterproductive to achieving long-term competitiveness outcomes for Croatian industry. Among other effects, the Hrvatske šume tendering schemes force sawmilling activities into operating at a scale that is too small to be efficient. As a result, drying processes are poorly observed as the capital equipment for kilns is too expensive for small sawmilling operations. This leads much of the sector’s raw output to become damaged, leading to lower value, with less (environmentally) efficient resource use. Ultimately, much of the raw material is channeled into the industry with the lowest quality requirements. Thus, much of the high-quality Croatian roundwood is destined to be burned, turned into low-value composite woods, or sold as lumber to construction markets in the Middle East that have no building requirements on the durability of wood. With these examples, it is apparent that the government should therefore act to phase out this approach and implement a more liberal forestry tendering policy in tandem with the investments in competitiveness enhancement mentioned elsewhere in this report. • Cybersecurity. Croatia’s business environment can be improved in ways that encourage Croatian companies to transition towards new attractive opportunities in the cybersecurity sector. Top priorities would be: (i) Facilitate mobility between academic / private / public sector. Currently mobility is relatively low in Croatia compared to best practice cases internationally, especially because of administrative and taxation barriers to double-hatting and mobility of personnel. Mobility can be encouraged and facilitated through reforms to labor legislation and management practices of universities. 67 Incidents where diagnostic tests and technologies have not delivered accurate results, and which have been marketed as doing more than they actually can, have hurt the industry. The most notable recent case in point is the multimillion dollar startup Theranos (O'Brien 2016). 68 Currently, Croatia is subject to rather strict regulation which limits the ability of OTC manufacturers to educate their customers (Kilroy et al. 2016). This regulation could be examined in comparison with other European countries, to determine potential areas for reform. 69 Moreover, beyond the competitiveness implications of this inefficient policy, the system of Hrvatske šume’s procurement has many implications for how this national resource should be equitably distributed. Wood, as a nationalized resource should be a non-excludable common good, but instead the local content policy has turned this resource into an excludable club good. As a result, the benefits of this resource accrue to a select group of individuals—that have been earmarked for subsidy—rather than to Croatian public more broadly. (ii) Business environment constraints on IT and cybersecurity firms. Foremost among these would be reforms to double taxation avoidance treaties. (iii) Investment regulations and policy. New specialized foreign investors can help Croatia's ICT industry (including cybersecurity) cement a critical mass for the industry including a pool of specialized skills. In pusuit of this objective, Croatia could consider giving special attention to cybersecurity as a priority segment for investment promotion and policy efforts. To attract new investors, Croatia's investment policy framework may need to be reformed. Unfortunately at time of writing, the Croatian Agency for Investments and Competitiveness (AIK) was at risk of being abolished completely, which would further weaken Croatia's ability to attract new FDI: it would become the only country in the European Union without an investment promotion agency. • Mine Action. The regulatory framework for land remediation industries should be developed to create the right incentives for Croatian firms to move further into land remediation work. Despite having an Act on Environment Protection, Waste Management Plan and Regulation to protect agricultural land from pollution, Croatia does not have a comprehensive act on soil protection. There is also no comprehensive database on contaminated sites in Croatia, and no prescribed standardized criteria on contaminated land remediation. Measures that could improve the regulatory framework for mine action include: (i) The development of a unique database on all contaminated sites. The Croatian Environmental Protection Agency in 2008 developed a database on potentially contaminated and contaminated sites in the country.70 However, since there is no statutory obligation to monitor contaminated sites, and no upper limits for certain soil pollutants, there has been no basis for reviewing or updating the data. Moreover, the Spatial Development Strategy of the Republic of Croatia (Official Gazette No 106/2017) has identified the need to develop a 'brownfield registry' (that is, a registry of contaminated sites) in areas planned for urban development. (ii) The development and adoption of a soil protection act. There is a need to develop a national regulatory and technical framework which will protect and regularly monitor soil quality, determine tstandardized criteria on pollution and regulate land remediation processes. A soil protection act would provide a statutory means of dealing with unacceptable risks posed by land contamination to human health and the environment. The act would clarify the responsibilities of involved bodies, establish liability and cost- recovery mechanisms for contaminated land, and define key conditions that form the basis for the assessment and remediation of contaminated sites. The land remediation section of the act should cover: • conditions under which remediation action can be triggered for a particular site or operation; • liability for costs for remediating contaminated sites; and • technical requirements for carrying out remediation (for example, permitting and waste management requirements, and technical guidance). 70 The database on potentially contaminated and contaminated sites in Croatia (GEOL) has identified brownfield 2,264 sites. Several legislative examples from elsewhere in Europe can provide best practices on the details that a law should provide (NICOLE 2015). 6. Deliverable 14—Report on FDI Strategy 6.1. Introduction 120. FDI has the potential to be an important contributor to competitiveness enhancements at the sectoral level and a source for economic growth more broadly. In fact, FDI is one of the most common drivers for countries’ participation in GVCs,71 which often brings many benefits to host countries, including capital, jobs, skills, knowledge, and technologies. In this respect, foreign investors can bring specialized knowledge and technologies that can help Croatian industry adapt to the new and emerging segments summarized in Section 2.2. In this way FDI can be a powerful mechanism for helping capture more value for Croatian industry. 121. It will be important to take a considered view of how the domestic economy can be linked with international investors and to what ends. Croatia attracted EUR 31.2 billion of FDI from 1993 to Q1 of 2017, with two-thirds coming from the advanced markets of Netherlands, Austria, Italy, Germany, Luxembourg, and Hungary72 (Croatian National Bank 2017). However, not all FDI brings the same benefits, and some of this FDI may even accelerate the decline of traditional Croatian industries. 122. A common mistake countries make is to create investment policies in reaction to the challenges posed by the investments they are already receiving. As a result, some countries attract lots of foreign investment but never move up the value chain. Before spending public resources on FDI attraction, it is therefore important to understand the different types of FDI. The literature categorizes four main drivers behind FDI decisions (Dunning 1993), as shown in Figure 6.1 and detailed below. Figure 6.1: FDI Motivation Typology 71 MNCs often shape these GVCs as they account for approximately 80 percent of global trade—the result of complex international production and procurement networks (UNCTAD 2013). As such, it is apparent that global trade and international investment flows are inextricably connected. In 2016, global flows of FDI amounted to US$1.75 trillion (UNCTAD 2017). 72 The main activities of FDIs included financial service activities, wholesale trade, real estate, telecommunications, retail trade, manufacture of refined petroleum products, construction of buildings, and manufacture of pharmaceutical products, among others (Croatian National Bank 2017). • Natural resource-seeking FDI. In this category, an investor seeks access to natural resources such as oil and gas, mining and minerals, water, wood, or land for agricultural production. Since this FDI is attracted by the quality or quantity or the natural resources in the host country, not all countries are equally attractive for this type of investment. • Market-seeking FDI. In this category, the foreign investor’s interest involves setting up facilities for delivering goods or services that satisfy demand in the local market or the surrounding region. The size or growth rate of the domestic market is the main magnet for this type of FDI. While this type of FDI is generally good for increasing efficiency of markets, for increasing competition, and for benefitting consumers, it has the ability to both harm and enhance Croatian industry in different circumstances. • Strategic asset-seeking FDI. In this category, the main motive for FDI occurs when an investor seeks to acquire or control a firm-specific asset, such as a brand, distribution system, managerial practice, or technology that may be available in a destination country, such as Croatia. For instance, one airline might buy another airline to gain access to slots in busy airports or to expand its routes. Similarly, a beautiful natural location might be key to generate a tourism cluster. Lastly, many regional food brands have been purchased by MNCs seeking to expand their control of an industry.73 • Efficiency-seeking FDI. In this category, the investor establishes operations in the host country to take advantage of a competitive factor endowment or business environment that will enable the industry to export somewhere else. Such competitive factors may include an efficient labor force (in cost, knowledge, or expertise) access to international markets (such as the EU), good infrastructure, and so on. The main motivating factor for this FDI is, therefore, the operational efficiency that the host country can provide to the investor in its pursuit of export markets. 123. This investment typology can serve as a basis for helping distinguish between the driving forces of different investors. It is also important to discern for whom the benefits/impacts accrue as there may be some divergent interests between foreign owners of capital, domestic consumers, and different factions in domestic industry. By discerning the motives behind such investors and understanding how these motives can be harnessed (or not) to increase the competitiveness of Croatian industry, a relevant policy framework can then be drawn up. A suitable investment policy framework is therefore needed since each type of investment has unique features and merits a different policy response. Such a macro- framework is outside the scope of this report, which instead focuses only on FDI promotion efforts in the thirteen STPAs. 124. Maintaining liberal investment policies will also be necessary for ensuring competitiveness of Croatian industry. It is necessary to recognize that one type of FDI may be key to enable a host country 73Strategic asset-seeking investments are particularly prevalent in the stockable foods segments, where a few MNCs have come to own a great number of regional brands, given the trends toward consolidation in these segments (Lapres and Bačić 2017a). to receive another.74 As a result, it will be important that this framework provide a broadly unrestrictive business environment for all types of FDI (International Finance Corporation 1997). Currently, de facto restrictions on FDI in the wood sector prohibit many resource-seeking investors from participating in the procurement schemes of Hrvatske šume (the state-owned forestry company), which operates a local content policy and subsidy scheme through its tendering processes. While it is understandable why Croatia would want to ensure that such resources benefit the country,75 such rules likely stand in contrast to EU free market policies and may be counterproductive to achieving long-term competitiveness outcomes for Croatian industry.76 With these examples, it is apparent that the government should therefore act to phase out this approach and implement a more liberal investment policy in tandem with the investments in competitiveness enhancement mentioned elsewhere in this report. 74 For instance, to compete internationally and lure efficiency-seeking FDI, host countries often must have excellent infrastructure, telecommunications, financial services, and logistics. Often, world-class providers of these services are market-seeking investors who are important to have in place to provide services to efficiency-seeking investors that are looking to serve a wider market from the host country. 75 Moreover, beyond the competitiveness implications of this inefficient policy, the system of Hrvatske šume’s procurement has many implications for how this national resource should be equitably distributed. Wood, as a nationalized resource should be a non-excludable common good, but instead the local content policy has turned this resource into an excludable club good. As a result, the benefits of this resource accrue to a select group of individuals—that have been earmarked for subsidy—rather than to Croatian public more broadly. 76 Among other effects, the Hrvatske šume tendering schemes force sawmilling activities into operating at a scale that is too small to be efficient. As a result, drying processes are poorly observed as the capital equipment for kilns is too expensive for small sawmilling operations. This leads much of the sector’s raw output to become damaged, leading to lower value, wi th less (environmentally) efficient resource use. Ultimately, much of the raw material is channeled into the industry with the lowest quality requirements. Thus, much of the high-quality Croatian roundwood is destined to be burned, turned into low-value composite woods, or sold as lumber to construction markets in the Middle East that have no building requirements on the durability of wood. Box 6.1. Differentiating Approaches for Market-Seeking Investors Beyond the motives of different investors, it will be important to understand how the investment can accrue benefits across the domestic economy. In Croatia, the example of Ikea—as a market-seeking investor—is a case in which public incentives resulted in an investment that has benefited the foreign company and Croatian consumers, albeit at the likely expense of the Croatian Wooden Furniture Manufacturing industry77 (Lapres 2016b; Lapres and Bačić 2017b). The FDI brought by Ikea has contributed to increases in the competitive pressures placed on the Croatian Wooden Furniture Manufacturing industry, which has hastened its decline. While the application of such global pressures is in some respects inevitable (and necessary), such examples underlie a need to consider when and how government should use its own resources to facilitate FDI. While there are benefits and drawbacks to this investment, it has not benefited domestic industry, nor has it provided a public good. Therefore, it is not necessary for government to intervene to facilitate this type of investment as it should happen as a matter of market incentive. Conversely, some other types of market-seeking FDI can assist in the competitiveness of Croatian industry if they serve an enabling function, especially if such market-seeking FDI brings new technologies to service industry (rather than consumers). Therefore, market-seeking FDI should be targeted in cases where there are 'missing markets' resulting from innovation failures. The most pertinent example of such an instance would be in the food sector, where Croatia lacks state-of-the-art High Pressure Processing (HPP) commercial service providers (see below). Active promotion of market-seeking FDI should therefore be differentiated based on the ability of that investor to serve either domestic consumers or domestic industry. The former should not be targeted for public incentives since these investments will eventuate in any case as a matter of market-based incentive. The latter should be targeted because these investments may not otherwise happen and because it could have positive externalities which make other domestic firms more efficient. 125. Active FDI promotion efforts should only be utilized to provide for the enhanced competitiveness of Croatian industry or for some public good. In this respect, a needs-driven FDI strategy must identify the types of keystone investment – that only foreign investors can adequately provide – in order to unlock new opportunities for Croatian firms in emerging segments. A state therefore must not only identify opportunities to receive greater benefits from existing investments but also consider what other types of investment the country needs to develop. For the purposes of increasing competitiveness of Croatian sectors, FDI outreach efforts should aim to attract investment from international companies aligned with the specific policies being proposed for the STPAs covered in this report. 6.2. Value Chain Gaps Identification of Niches and Markets to Attract FDI 126. Needs-based FDI attraction efforts that can increase Croatia’s competitiveness are more likely to succeed when they are highly targeted and a clear audience is identified for outreach 77At the time, it was falsely assumed that Croatian industry could serve as suppliers to Ikea. While a limited number of suppliers did manage this for a time, by and large, the sector was not able to meet the procurement specifications of Ikea given that it is an industry driven by volume, a factor which Croatian solid wood furniture manufacturers were not able to match. Therefore, the supposed benefits of this investment were not realized for the domestic furniture manufacturing industry. activities. Therefore, the analysis in earlier deliverables regarding value chain gaps and new segment opportunities is especially important because it helps to identify which STPAs have a need for FDI attraction. While there was no identified need for FDI in the Nutrition, DDU or Wood STPAs78, analysis has shown that STPAs where FDI attraction is needed include79; • Food; • Auto/Rail; • Health; • Environmental Transport; • ITS • Cybersecurity • Mine Action • Pharmaceuticals; and • Energy/Environment. 127. The CRIs in each of these STPAs have identified ‘niches’ for necessary FDI. These niches are given in the sections below, which describe typical companies that could be attracted for each STPA. Moreover, while FDI does not have 'markets' in the sense that a product/service has a 'market', the industry- focused trade shows in Annex C could represent a set of 'markets' or rather fora where FDI could be engaged. 128. The value chain mapping exercises conducted for these STPAs have identified a set of activities that are critical for participation in the more advanced segments of an industry. While it is not necessary for all activities to be present in Croatia (certain inputs and services can be procured internationally), those activities that necessitate high information exchange or just-in-time activities would often better serve the local cluster by being geographically proximate. The FDI identified below is for activities that require advanced technology or advanced levels of service support. Action Plan to Attract Investment in High-Technology Sectors and Emerging Industries 129. This section lists the types of activities that are missing in the Croatian economy and provides a rationale for why these activities will be critical for the success of Croatian industry. It then tries to identify some examples of companies that could be potential targets for outreach and the motivations, which would lie behind their considered investment. Understanding these motivations—and the value proposition 78 FDI in these sectors would not serve to advance the competitiveness of Croatian firms, but it would instead be likely to crowd out local beneficiary firms. 79 Analysis has shown that for some other STPAs, FDI attraction is not the most pressing issue, such as wood which has a greater need for skills and knowledge development. that Croatia holds for them—will be important for then determining the type of outreach that should be pursued and the type of incentives that will likely need to be applied to attract them. Food 130. FDI outreach efforts in this STPA might target providers of High Pressure Processing (HPP) or Pulsed Electric Processing (PEP) Services. Attracting this type of FDI is suggested to provide the necessary technology for an emerging segment. Particularly, investments in such methods of preservation can help facilitate increased competitiveness of Croatian firms in the fresh segments, especially given that just-in-time links to geographically proximate facilities are critical for perishable products. Given that state- of-the-art agro-processing technologies are often too expensive for any individual firm, it is imperative to develop a business model that commercializes such technologies at more reasonable costs. Viable commercial models have achieved this by outsourcing this activity to an independent HPP service provider that can service a large number of food processing firms. Examples of companies that offer such services are listed: • Hiperbaric80 offers HPP technology and processing capabilities to customers across Europe, in Italy, Germany, Spain, Holland, Switzerland, and the United Kingdom. It has offices in Spain and the United States, with the Spanish office being a logical first point of contact to communicate Croatia’s value proposition. • Avure HPP81 is headquartered in Ohio, United States, and has tolling centers in Italy, Greece, Germany, the Netherlands, Spain, and France. It also has agents throughout Europe; the agent for Croatia is based in Romania. Contact should be made with headquarters to gauge their interest in establishing a tolling center in Croatia. • NutrifreshServices82 has a relatively small operation based in New Jersey, United States, and does not have presence outside of the United States. Contact should be made to gauge the organization’s plans for any future expansion or interest in joint venture opportunities in new markets. This might be a long-term target for Croatia. 131. Investments by international fourth-party logistics (4PL) providers can also help facilitate increased competitiveness of Croatian food exports by providing advanced coordination functions that overcome a litany of constraints (Lapres and Bačić 2017a). Competitive food clusters often require logistical services that are facilitated by a range of information services, which can (a) track and trace a product from its origin to its destination and vice versa and (b) manage weekly spikes and drops in demand for production. Sophisticated 4PL providers can act as market intermediaries that coordinate purchase orders (and cancellation of purchase orders) with a dispersed set of food producers/processors. This service acts as an outsourced business process that proactively manages orders between retailers in various locations of destination markets and the producer/processors who often do not have the capacity to intensively exchange such information on their own.83 80 http://www.hiperbaric.com/en/hpp-toll-processing. 81 http://www.avure-hpp-foods.com/tolling-centers/about-tolling-centers. 82 http://www.nutrifreshservices.com. 83 Given the small size of firms in the fresh convenience segment, such 4PL services will be essential for enabling exports. 132. Moreover, the distribution network of the multinational 4PL providers is able to open a much greater catchment area for Croatian fresh products. Multinational firms cover not only much of Europe but also a range of other international markets. Having a 4PL provider located in Croatia can help serve as a hub for palleting and repackaging by export destination.84 The location of such facilities in Croatia is critical for making just-in-time deliveries to foreign markets. Examples of 4PL service providers that can be targeting for FDI outreach are listed: • Kuehne + Nagel85 is a global transport and logistics company based in Switzerland and with offices in every major logistics hub of Europe. The company specializes in perishable logistics and has a track record for being the best provider of cold chain logistic services. Kuehne + Nagel already has offices in Croatia, but it does not provide cold chain services for the country. • Hellmann Worldwide Logistics86 is another global logistics provider headquartered in Germany and with locations and partnership across Europe. It also has a division specialized in the cold chain and is one of the leading players in this service. Hellman already has offices in Croatia, but it does not provide cold chain services for the country. Representatives of Hellman in the Netherlands have noted that the minimum cold chain investment that they would make is only EUR 50,000. 133. Investment promotion efforts might target these and similar companies. The motive for such companies to locate in Croatia will be market-seeking—although the positive externalities of this self- interest will serve to enhance the competitiveness of Croatian food producers and processors—and so it will be important to define the value proposition of Croatia (and complimentary set of incentives) for these purposes. That said, the current value that Croatia can offer for such firms will be limited until primary production systems and firm business models are improved with greater focus on the fresh segments. Therefore, it may be necessary to provide some incentive programs to attract these keystone service operators, such as a program that effectively guarantees for minimum use of advanced coordination services (i.e. the set of services which separates a 3PL from a 4PL). Such instruments are detailed in the section 5.1 description of available instruments. 134. Note that Section 5 also details some interventions which aim to improve the capacity of domestic 2PL/3PL providers. A robust system of both international and domestic cold chain logistic providers is needed to ensure a competitive food production and processing industry. 84 Croatia underperforms on most logistics indicators. While some third-party logistics (3PL) cold chain capacity is present in Croatia, there is room for improvement on service and usage. Data from a variety of sources confirm underperformance of the logistics sector. In 2013, the percentage 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 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). Because of underinvestment by logistic service providers, one industry expert estimates that only 30 – 40 percent of Croatian companies are able to outsource this function compared to the EU average of 70 percent (Pavlovic 2015). Given the frequency of delivery needed to maintain fresh stocks, a competitive food cluster must have better logistics. 85 https://home.kuehne-nagel.com/. 86 http://www.hellmann.net/en/croatia/. Auto/Rail 135. FDI outreach efforts to the rail sector might target ‘smart mobility’ system integrators for Automated People Movers (APM). Croatian companies have a strong basis in engineering, which can serve as an attractive proposition for efficiency seeking FDI. This favorable factor endowment for skilled (and relatively cheap) labor can be partnered with international organizational competencies of advanced investors to create a competitive business model with tariff free access to European markets. Moreover, the activity that would be created by such an investment in Croatia—that of a small and flexible systems integrator87—could place Croatia in an ideal position in the value chain for the provision of smart mobility solutions in the APM space. Moreover, given the just-in-time links and high degree of information exchange needed in this segment, having them geographically proximate could benefit Croatia. 136. It is expected that this emerging segment will grow as it solves ‘the first and last mile’ of other transport solutions and will be an important element of urban multimodal transport. Examples of companies that fit this profile and which can be specifically targeting for FDI outreach are listed: • 2getthere B.V.88 realizes automated transit applications, ranging from APM to shared autonomous vehicles. The company is based in Utrecht, Netherlands, and has offices in California (United States); Abu Dhabi (United Arab Emirates); Singapore; and Taiwan, China. Contact should be made with headquarters in the Netherlands to understand their business model and promote/communicate Croatia’s value proposition. • Ultra Global PRT89 is based in London, the United Kingdom, and uses research and development to engineer personal rapid transit systems that provide environmentally sustainable advanced transport solutions. Contact should be made to understand their expansion plans and gauge the prospect for future collaboration initiatives in Croatia. • EasyMile90 is a high-tech startup, founded in Toulouse France in 2014, specialized in providing both software powered autonomous vehicles and last mile smart mobility solutions. The company has offices and affiliations in the Middle East, Asia and the USA. As a leader in this segment, contact should be made with this company to present Croatia’s value proposition with a view for them to consider Croatia in their expansion plans. 137. In addition to the above specialized companies, many of the world’s leading OEMs, such as Toyota, are developing integrated urban mobility solutions. It is suggested that research is undertaken to identify the activities of the OEMs in this space so they can be contacted regrading investment opportunities in Croatia. 87 It is particularly important that this segment is based on a high level of customization and product development that does not require economies of scale, as all other rail segments do. Therefore, incentives which attract such small but knowledgeable investments can be a cost-efficient means of utilizing government funds to increase industry competitiveness. 88 https://www.2getthere.eu/. 89 http://www.ultraglobalprt.com/. 90 http://easymile.com/. Health 138. FDI outreach efforts in this STPA should focus on attracting companies specialized in outcome measurement and intelligent payment. Outcome measurement and intelligent payments involve the collection of sensitive and personal health data from disparate sources. Therefore, companies occupying such functions need to be highly professionalized and capable of understanding health outcomes and accounting systems. Such companies are important because they can help set up the soft infrastructure and analytical capabilities associated with outcome-based contracts. Beyond the ability to collect data insurance companies often need help in being able to analyze data and learn how to restructure contracts based off the results arising. The capacity to do this is quite difficult as it requires building complex models and adapting them as more data and learning takes place. Examples of companies that offer such services are listed: • Ivbar91 is a high-tech, data-analytics startup that provides technical solutions to support health care organizations sustainably improve outcomes and reduce cost. • Heartbeat92 is a technology company that can enable health care providers to track patient outcomes and compare results across the globe. 139. Investment by such service providers can help facilitate transfer of knowledge on advanced measurement and accounting techniques. While some of these services may be procured from abroad, given the knowledge intensity of exchange between such firms and their potential clients (insurance companies and their network of providers) it would be beneficial if they were located within Croatia. Environment Friendly Transport Solutions. 140. FDI outreach efforts in this STPA might target the market for short-sea and inland waterway investors. Given the newness of the technologies and capacities necessary to operate in this market, it would be useful to have such an anchor investor, which could partner with Croatian suppliers. Moreover, it would be particularly important for foreign investors to bring specialized knowledge on the construction and operation of electric vessels. The investment by such specialized investors could be particularly useful for providing technology spillover externalities for Croatian companies. Examples of a keystone anchor investors could include: • Norled93 is one of Norway’s largest ferry and express boat operators. The company has 80 vessels and operates ferry and express boat services. Norled has invested significantly in new types of vessels and eco-friendly technology. The products developed by Norled solutions are used exclusively by the company. The company has over 1,000 employees and an annual turnover of NOK 2 billion. They are potentially looking to expand into accommodating new markets. 141. Moreover, other similar investors could be found at relevant industry trade fairs, where firms gather to exchange best practices and to find new business opportunities. The leading forums for companies in the EFTS market include: 91 http://ivbar.com/ 92 https://heartbeat-med.de/en/about/ 93 https://www.norled.no/en/ • WATTS UP is a leading industry-focused trade show for the maritime battery industry. This trade show could be a worthwhile market for connecting with investors that are seeking to initiate operations in Croatia for the construction or operation of electric vehicles. • E-Mobility World is another industry-focused trade show in the field of sustainable and electric mobility. While this event is broader in scope, it could also be another likely market for identifying new potential investors. Such trade fairs could be useful market places for finding potential partners for Croatian firms. Intelligent Transport Solutions. 142. FDI outreach efforts in this STPA might target the market for OEMs. An OEM – such as Renault, BMW, Volkswagen, Daimler, etc. – could be a valuable partner in the development of a 5G pilot. Their investment in Croatia could serve to unlock demand for the services of Croatia’s ITS firms through the development of interoperable software. OEMs that are interested in ITS technologies could be identified through relevant articles in the IEEE Intelligent Transportation Systems Magazine, where OEM investors typically market their brands and upcoming business directions. Given the segment being targeted by the domestic industry, Croatia may want to pitch itself as an investment destination for the establishment of ITS command centers and networks for these OEMs. Cybersecurity. 143. FDI outreach efforts in the IT sector might target the market for anchor investors engaged in Cybersecurity. Anchor investors specialized in cybersecurity can help create a concentration of specialized skills in Croatia, which would allow the industry to develop more fully. Globally the industry is driven by large players – such as Symantec, Checkpoint, McAfee, CyberArk – and their presence in Croatia can help catalyze the creation of a niche, by showcasing an anchor investor and generating a pool of specialized labor. To attract such investors, Croatia could be marketed as an investment destination for cybersecurity firms seeking specialized skills for machine learning, Artificial Intelligence (AI), and cryptography. Investment promotion will require specialized data and a targeted and strong offer for such discerning investors. Mine Action. 144. FDI outreach efforts in this STPA might target the market for land remediation services. Currently, Croatian firms have a large knowledge gap in land remediation services outside of landmine clearance. Given the knowledge intensity of this industry, it would be useful to attract the investment of a foreign specialist firm in order to bridge the knowledge, technology and skills gaps of the industry and to provide spillover effects for local firms. As such, this could be pitched as an investment destination for joint ventures and partnerships in land remediation, based on world-class capabilities in detection and intervention. Identification of foreign investors in this market could be facilitated by participation at the following investor forums: • Land Remediation Expo is an industry-focused trade fair designed to showcase the latest innovations in the diagnosis, management and remediation of contaminated land. • Rem Tech Expo is an industry-focused trade fair dedicated to reclamation of contaminated sites, environmental and natural hazards, safety, and upgrading of land. Such trade fairs could be useful market places for finding potential partners for FDI investments. Pharmaceuticals 145. FDI outreach efforts in this STPA might focus on Business Process Outsourcing (BPO) medical help centers and customer engagement. Integrated service provision often requires that medical advice be given to patients on an ongoing basis. Given the increasing use of home-based patient care, remote support services (via telephone, live chat, or other methods) will increasingly be needed, to provide patients with guidance in solving problems as well as health advice connected with their medical condition. It would be advantageous for this part of the value chain to be based in Croatia, since it requires high information exchange and close familiarity with the solutions on offer. Integrated drug & device solutions would then be able to be offered with remote product support included in the package. The lack of presence for such medical BPO’s is the result of an innovation failure or incomplete markets, wherein the newness of the segment may cause firms to hold back from designing products and services that the market might be demanding. 146. Experiences worldwide show that generic BPO services are relatively mobile (witness the move of banking and travel call centers from Europe and the United States to India, the Philippines, and elsewhere), but specific technical BPO services are stickier and thus more attractive as a long- term investment proposition (witness the way that Ireland has been able to retain specific BPOs despite rising labor costs). 147. Croatia is well-placed to compete in this area of the value chain, which is labor-intensive and requires multi-lingual populations. Croatia’s labor force is relatively inexpensive compared to its high level of education, and its multi-lingual workforce, with many proficient in English, German and Italian. However, this FDI effort would need to attract specialist firms that bring experience and specialist knowledge on medical BPO and customer support. Medical BPO is a broad and diverse industry, with several sub-branches: • Provider services (which deal with billing, coding, transcription, finance, and accounts) • Payer services (claims management, office operations, member management, analytics, fraud management, HR services) • Pharmaceutical services (R&D, manufacturing, nonclinical services) 148. The third of these might be of most interest to Croatia. Croatia already hosts contract research organizations and contract manufacturing organizations. The effort for FDI attraction here would focus on clinical remote support; nonclinical services such as logistics, sales, and marketing; and other types of customer engagement that can ensure uptake of Croatian-manufactured pharmaceuticals. Typical companies operating in this sphere include the following: • Cognizant,94 based in New Jersey, United States, and has offices all over the world including the United Kingdom, Germany, Italy, Hungary, and so on 94 https://www.cognizant.com/life-sciences/pharmaceutical-biotech-solutions. • Infosys,95 based in India and with a BPO health care practice that is serving clients globally 149. Investment promotion efforts should target these and similar companies. Such companies could invest in Croatia on the basis of efficiency-seeking motives, to take advantage of Croatia’s low labor costs, its multilingual workforce, and their relatively high level of education . The positive externalities of such investments will allow greater collaboration between product manufacturers and pharmaceutical service providers. Therefore, it will be important to define the value proposition of Croatia (and complementary set of incentives) for these purposes. Energy Technology, Systems, and Equipment. 150. FDI outreach efforts in this STPA might target microgrid-scale energy storage. Energy storage is a critical ingredient of microgrid solutions, yet is not well developed in Croatia. Unlike several other activities in a microgrid value chain, energy storage is unlikely to be developed by domestic Croatian firms owing to the large up-front investments required by modern energy storage technologies—particularly lithium battery plants (which are most cost-effective at extremely large scale). However, it will be important to have such a company located in Croatia due to the high information exchange needed to operate and monitor such systems. 151. A large investment is already being discussed by Varta and Vallis Solaris, to set up manufacturing facilities for lithium-ion batteries. If this comes to fruition, and even if it does not, other types of storage technologies investments would help make Croatia a hub for energy storage development. These technologies could include thermal storage, pumped hydro, compressed air technologies, or other novel technologies. Croatia offers some natural endowments for several of these technologies—such as a long coastline for compressed air technologies (they are installed under the sea) and water resources and topography lending itself to pumped hydro. 152. Microgrid energy storage is an emerging area, and as such there are few established ‘leaders’. However, established companies in energy storage technologies will be well placed to move into microgrid- scale versions of their technologies. Those companies should form the first long-list of FDI targets to be approached. Examples of such companies are listed: • Leclanche96 designs, develops, and manufactures customized energy storage solutions for electricity generation and transmission, mass transportation, heavy industrial machines, and specialty battery systems. The company is based in Switzerland and contact should be made to promote Croatia’s value proposition. • ABB97 is a Swedish-Swiss multinational corporation headquartered in Zürich, Switzerland, and is a global leader in industrial digitalization. Among its numerous business activities is the design and building of off-grid and on-grid microgrids. The company has several offices throughout Croatia, so as a first port of call it is suggested that contact be made with the 95 https://www.infosysbpo.com/offerings/industries/healthcare. 96 http://www.leclanche.com/. 97 http://new.abb.com/microgrids/our-offering/powerstore-battery. company’s main office in Zagreb to understand more about its Croatia operations and its plans for the microgrid side of the business. 153. Investment promotion efforts might target these and similar companies. Such companies would invest in Croatia on the basis of efficiency-seeking motives, to take advantage of Croatia’s infrastructure and natural endowments (coastline suitable for production of storage technologies). Therefore, it will be important to define the value proposition of Croatia (and complementary set of incentives) for these purposes. 6.3. Outreach: FDI Promotional Activities 154. With the targets of the prior analysis considered, it will be important for Croatia to launch an outreach program that raises awareness of Croatia as an investment destination by communicating the country proposition, defining relevant platforms for information sharing, and fostering relationships with potential investors. This section details the most common marketing techniques that can be utilized by public agencies for these purposes. It then articulates the key elements of each STPA’s value proposition and suggests how to communicate the country’s selling points to potential investors. Description of Existing Institutional Arrangements 155. In assigning responsibility to ensure that such FDI outreach occurs, it is important to understand the existing FDI institutional framework. The Agency for Investment and Competitiveness (AIK) is the main body responsible for investment promotion when large foreign enterprises are concerned. In addition, the Croatian Agency for SMEs, Innovations and Investments (HAMAG-BICRO) aims to support the development of small and medium-sized enterprises and encourages investments.98 The Center for Monitoring Business Activities in the Energy Sector and Investments (CEI) focuses its activities in the energy sector and the Ministry of Foreign and European Affairs supports economic diplomacy in its network with the aid from AIK. Additionally, the Investment Promotion Division of HGK also engages in FDI attraction activities. Broadly speaking, when several bodies are involved in investment promotion and attraction, they rarely follow a coordinated approach, causing operational gaps and potential inconsistencies, particularly as the remit of the sectors noted in this report falls across both AIK and CEI. 156. Strengthening the overall strategy for investment attraction is needed to improve the FDI outcomes in Croatia. To adopt a more coordinated approach to FDI attraction, the Government of Croatia recently made AIK the central body responsible for FDI attraction. The operationalization of this change is ongoing. The aim is to improve cooperation and coordination between the public bodies involved in FDI attraction. However, even with these changes a clear FDI strategy, is still missing. Having a more cohesive FDI strategy will be needed for applying the government’s vision consistently and clearly, while enabling different public bodies to collaborate more cohesively in projecting the value proposition for the appropriate foreign investors. It is therefore recommended that a comprehensive organizational framework be 98 According to Annex I of Commission Regulation (EU) N°651/2014 of 17 June 2014 the category of micro, small and medium- sized enterprises (‘SMEs’) is made up of enterprises that employ fewer than 250 persons and have an annual turnover not excee ding EUR 50 million, or an annual balance sheet total not exceeding EUR 43 million. Accordingly, large enterprises employ more than 250 persons and have an annual turnover above EUR 50 million, or an annual balance sheet above EUR 43 million. developed to define and coordinate these actors and their approaches in the context of an overarching strategy that can lay out the approaches taken with regards to targeting, marketing and branding of FDI. Much of this is outside the scope of this report, which instead only aims to offer a targeting, marketing and branding strategy for the 7 STPAs defined in this report. Description of Marketing Plan and Branding Strategy 157. Branding of the Croatian value proposition should refer investors to its favorable factor endowments. Particularly, Croatia is an economy with an educated labor force, competitive labor costs, good infrastructure, and a strategic position situated within the European market and on the coast of the Mediterranean. However, to more effectively target the value of Croatia as an investment destination for each of the STPAs, branding should further refer to the strategic segments identified by the private sector through the public-private dialogue.99 The driving elements of each STPA cluster—for example, urban mobility—should therefore be brought into the branding plan. In summary, the value proposition for the following four STPAs could be branded with the following messages:100 • Sustainable Food Production and Processing. An emerging fresh convenience hub with abundant supply and easy access to European markets • Added-Value Manufacturing of Road and Rail Vehicles, Parts, and Systems. The specialist part providers for systems integrators of urban mobility solutions (especially APM OEMs) • Health Services and New Methods of Preventive Medicine and Diagnostics. An emerging market for outcome-based (private) insurance systems. • Pharmaceuticals, Biopharmaceuticals, Medical Equipment, and Devices. An investment destination for networked and intelligent health care innovators that connect remote populations and integrate pharmaceuticals with devices • Energy and Environment-Friendly Technology, Systems, and Equipment. A clean- energy hub for integrating RES into high-tech community microgrids and energy solutions • Environment Friendly Transport Systems. An investment destination for the construction and operation of electric vessels • Intelligent Transport Systems. An investment destination for the establishment of ITS command centers and networks 99 The change management process of the CRI for the respective STPAs has coordinated a set of domestic economic actors, which have indicated their desire to make complementary investments in the segment. 100 The value proposition for the wood sector, although not a target of FDI, is that it holds high-value natural resources, slow growth hardwood. Private sector representatives in the wooden furniture have further decided that they would like to brand themselves as the specialists in designing space for commercial buyers. • Cybersecurity. An investment destination for specialized solutions development – especially machine learning, Artificial Intelligence (AI), and cryptography – with strong engineering capabilities • Mine Action. An investment destination for joint ventures and partnerships in land remediation, based on world-class capabilities in detection and intervention. 158. Specialist firms can be hired to turn these value propositions into an attractive brand for the 101 sector. In branding the investment propositions in this way, foreign investors will begin to associate Croatia as the specialists (or an emerging investment destination) in the type of business that is being sought. Advertising such proclamations should serve as a signal to targeted efficiency- and market-seeking foreign investors. The branding should be tested and updated based on feedback of how the campaign is received. This branding then needs to be paired with a targeted marketing plan that can direct agents of the relevant public investment agencies. 159. These public investment agencies can (and do) use a range of marketing techniques for investment attraction efforts. However, sometimes these techniques should be more highly targeted to the FDI being sought. This section outlines the main techniques adopted by investment promotion agencies and the more specific targets of such marketing efforts are listed in Annexes A, B, and C. The value added of this section lies in the identification of targeted marketing outlets, which can yield more direct benefit for the niches identified earlier. Marketing techniques to be considered—or continued—by the relevant investment agencies include the following: • Targeted media advertising. A range of STPA-specific publications, business guides, and brochures should be developed to articulate Croatia’s value proposition for the sector and/or activity being targeted. The information and messages composed should then be targeted through various media channels, including websites,102 videos,103 social media,104 and targeted publications. Advertising through publications should be aimed at presenting messages through publications frequently viewed by foreign investors operating in the targeted sector. Annex A provides a list of the most relevant publications, which can achieve these aims for each STPA. • Targeted telemarketing. Telemarking efforts are often used by investment agencies to attract notable investors. While telemarketing is a commonly used marketing technique, it can take 101 Given the sources for much of the relevant FDI, the branding should be made in English and German language along with Italian and French if funding is available. 102 A website is the main platform that potential investors will use to gain information. It is important that professional-looking websites be updated daily with news, information, market data, images, and so on. Importantly, enquiries and requests for information should be directed to staff who will respond within a specified time. It is also good practice to send an automated response at once to acknowledge a query and indicate when a full response can be expected. 103 Producing a promotional film is an impactful way to highlight a country’s value proposition while raising awareness and build ing an image. Promotional films tell a story in ways static materials cannot. Promotional films also offer potential investors the opportunity to hear from investors who have invested in Croatia. The demonstration effect of such testimonials creates empathy among likeminded investors. 104 Social media are important platforms for increasing visibility, image building, providing real-time information, and engaging with investment promotion stakeholders, be it potential investors, other investment promotion agencies, and even for recruitment. The World Bank’s 2017 global survey of investment promotion agencies shows that best practice investment promotion agencie use social media more than weak performers, with LinkedIn being the social media platform most used. Therefore, AIK should adopt a social media strategy that includes extensive use of LinkedIn and Twitter. 700 to 1,000 telemarketing cold calls to generate just one investment.105 This highlights the extensive resources required to implement an FDI attraction plan.106 Therefore, if this method is to be utilized, it will be important to target efforts (based on the analysis above) to the selected sectors. Annex B provides a list of trade association contacts, which can be quickly referenced as a source for compiling relevant company contacts. • Overseas investment missions. The backbone of investment promotion work is achieved through face-to-face meetings with company decision makers. A company executive willing to invest resources on a visit to Croatia is more likely to consider investing there than one who has merely read a brochure. Investment promotion missions and one-on-one business presentations are excellent opportunities to create enthusiasm for country or site visits to Croatia. Again, Annex B can be utilized as a resource for identifying some relevant company and trade association contacts, which can then be approached for a meeting through official channels. • Targeted trade shows. Visiting or exhibiting at trade shows and industry conventions can be an effective means of establishing first contact since they serve as a gathering point for relevant industry actors. Annex C lists some relevant industry-focused trade shows (these are targeted for increasing networking among the industry), in addition to a few market-focused industry fairs (these are targeted for increasing networking between industry and buyers, which will be more relevant for export promotion efforts). It is recommended that select trade shows be targeted to pitch the value proposition of the Croatian STPAs to the relevant targets. 160. Companies will evaluate direct business presentations not just on the merits of Croatia’s value proposition but also on the representative’s style, professionalism,107 and most importantly the representative’s grasp of technical industry subject matters. It will therefore be important to offer trainings for investment agents in the sector being promoted and the market-driven value that the targeted firm can gain from participating in that business model within Croatia. Lastly, the marketing plan should be updated every year—in consultation with a review of industry needs—to reflect changing market and industry trends. 161. Where effective communication of the Croatian value proposition is not enough to affect the calculated decisions of foreign investors, it may be necessary to use public incentives to change that calculation. This may be justified where market failures are preventing investors from making a more favorable calculation. However, the use of incentive instruments—both horizontal tax breaks and vertical programmatic incentives—need to be carefully considered before they are applied. 105 The result of this estimate includes the following: 10 telemarketing calls generate one direct marketing presentation, 10 direct marketing presentations generate one visit, and 10 visits generate one investment project. 106 It also highlights the number of contacts that can be generated while implementing an FDI attraction plan and, therefore, the importance of a contact management system to keep track of investor communication and generate performance reports, such as contact/investment ratios, that reflect the marketing plan’s success. The contact management system should include an investor database and transactional details that track investor leads and dialogues for the institution. 107 Presentation and public speaking skills training is highly suggested before AIK’s direct marketing presentations. Description of Available Investment Instruments 162. Croatia should carefully develop financial scheme that utilizes institutional structures and incentives to boost investment for the identified sectors, activities, and investors in order to promote Croatia as an FDI destination. There are several financial instruments that can help catalyze private financial flows by mitigating risks that private financiers are reluctant to assume. As a first step, however, it will be important to take stock of existing incentive instruments. 163. The Act on Investment Promotion sets forth investment incentives that the Republic of Croatia offers (Official Gazette, No. 102/15). The investment incentives include profit tax deductions, employment grants, incentives for investments in development and innovation activities, incentives for labor-intensive projects, incentives for capital costs, incentives for education and training, and so on. Such incentives are available for a range of manufacturing and processing activities, development and innovation activities, business support activities, and high added-value services. This incentive utilizes a horizontal instrument108. 164. It is important to note that a recent revision of the law on investments now excludes incentives for foreign logistic companies if they are not also directly a part of an investment in a manufacturing or processing activity. The political economy surrounding this intervention is likely to reflect divergent interests between domestic 2PL/3PL logistic companies and the domestic food industry. While competition in the logistics sector was liberalized upon entry to the EU in 2013, gaps in investment and competition remain. Therefore, investment in this space will be necessary to improve economic performance across a variety of sectors. With the investment environment in flux, risk insurance schemes, such as those offered by the Multilateral Investment Guarantee Agency (MIGA), could be utilized to allay the investment concerns of foreign 4PL operators. 165. More broadly, Croatia could consider a range of other vertical or programmatic investment instruments described in the earlier chapters. Particularly, the financial instruments for commercial risk reduction could be a powerful incentive for necessary foreign service providers considering an investment in Croatia. Such financial mechanisms could fully or partially cover or share private debt (loans, bonds) in case of loss or against failure to meet agreed specific goals. Some international finance organizations, for example, often partner with central governments to offer partial risk guarantee schemes109 (World Bank Guarantees, 2018). 166. Beyond the set of instruments and strategies noted above, it will be critical for Croatia to set out a clearer framework for FDI, which is beyond the scope of this report. Such a strategy should establish parameters for the collaboration of Croatian public institutions, a strategy for structuring work programs, and a review on the use and efficacy of investment instruments. This strategy will be a valuable tool for applying an FDI vision consistently and clearly while enabling different public bodies to collaborate more cohesively. 108 The total aid is calculated as a prescribed percentage of the investment value (under Croatia’s regional aid map 2014–2020, approved by the EC), which is determined based on eligible investment cost. The incentives must not exceed the maximum aid level prescribed by Croatia’s regional aid map. 109 The aim in those programs is to attract foreign direct investment (FDI) to developing countries, where government performance could represent a risk (World Bank Guarantees, 2018). 7. Deliverable 15—Report on Export Strategy 7.1. Introduction 167. Export-oriented growth is an important driver of industrialization, job creation, and economic growth. The more integrated Croatian firms are in export markets, the better they can drive economic growth for the benefit of domestic stakeholders110 (Schaffer and Krikelas 2010). For an economy to be competitive in its export balance, it must have both efficient domestic production industries (McCombie and Thirlwall 1994) and the capacity to deliver a set of complementary services that cannot be replaced by competitor countries. The segments noted above are ideal opportunities for Croatian industry to enhance export competitiveness. The Report on Strategic Segmentation for each STPA, have identified a set of product, services and markets that could be prioritized for future export development111. The table below presents a summary of these segments for reference in this section. Table 7.1: List of Products, Services and Markets for Prioritization STPA Prioritized Product/Service Markets Source for more information on GVC Pharma Networked and intelligent healthcare in (Kilroy and Trpkov, Report on Strategic Segmentation: institutional markets Pharmaceuticals, Biopharmaceuticals, Medical Devices and Equipment 2017b) Health Outcome-based healthcare in insurance (Lapres and Bačić, Report on Strategic Segmentation: markets Sustainable Food Production and Processing 2017a) Nutrition Personalized nutrition in need-based (Lapres and Punda, Report on Strategic Segmentation: markets Nutrition 2017) Energy Energy islands (microgrid/minigrid) for (Kilroy, Trpkov and Punda, Report on Strategic community and building markets Segmentation: Energy Technology, Systems and Equipment 2017a) Environment Energy islands (microgrid/minigrid) for (Kilroy, Yap, et al., Report on Strategic Segmentation: community and building markets Environment-Friendly Technology, Systems, and Equipment 2017c) Auto & Rail Products and services for Urban mobility (Muhtaseb and Jajcevic, Report on Strategic Segmentation: markets (especially automated people Added-Value Manufacturing of Road and Rail Vehicles, movers) Parts, & Systems 2017) EFTS Short-sea movements for cargo and mass (Yap, Jajčević and Saric, et al., Report on Strategic numbers of people Segmentation: Environment-Friendly Transport Solutions 2018) ITS Integrated technology products and services (Yap, Jajčević and Šarić, et al.: Report on Strategic for Urban mobility markets Segmentation: Intelligent Transport Systems and Logistics 2018) Cybersecurity Integrated and customized cybersecurity (Mandić and Kilroy, Report on Strategic Segmentation: solutions for civilian markets Cybersecurity 2018) DDU Integrated security solutions for public and (Yap and Mandić , Report on Strategic Segmentation: private buyer markets Defense Dual Use 2017) Mine Action ‘Preventive Detection’ & ‘Remediation’ for (Bacic and Kilroy: Report on Strategic Segmentation: Mine inhabited and uninhabited markets Action 2018) Food Fresh food products for convenience (Lapres and Bacic, A Strategic Segmentation of the Food markets Sector: Food Production and Processing 2017) Wood Customized wooden interiors for (Lapres and Bačić, Report on Strategic Segmentation: institutional and commercial markets Sustainable Wood Production and Processing 2017b) 110 For government, export-led growth is also a known pathway for providing countries with needed foreign exchange earnings. 111 The list corresponds to the strategic segments that have been prioritized through the working groups. A strategic segmentation is necessarily a matrix that describes the different product/service combinations and consumer markets that exist in a given industry. 168. Governments often use export strategies to improve the integration of domestic firms into GVCs. However, such integration into GVCs is typically difficult—particularly for SMEs—due to several constraints and market failures: • Information failures are pronounced given the foreign nature of demand. Entry to these advanced and specialized markets requires specific technical information, which is not widely available. Croatian industry is missing critical knowledge about foreign markets. Together, these pose critical barriers for upgrading to higher-value segments. • Coordination failures also prohibit SMEs from engaging in export markets. SMEs are often subject to natural supply-volume constraints, which prohibit any individual producer from reaching foreign markets.112 • Risk aversion is a constraint for exporting SMEs due to costs imposed by political instability; exchange rate volatility; payment risk (owing to moral hazard, lack of legal recourse, and so on);113 and unknown customs or inspection regime standards. Materialization of such risks on a single purchase order often can make SMEs insolvent.114 169. A country aiming for economywide spillovers from its export-oriented sectors might target policy interventions to overcome these market failures and constraints. However, the range of instruments available for governments is limited by World Trade Organization (WTO) agreements, which prohibit the use of subsidies for export under the Agreement on Subsidies and Countervailing Measures (Art 3.1(a)).115 The role of the public sector must be appropriately defined in overcoming information asymmetries, resolving coordination failures, and providing for public services that make cross-border transactions less costly for export sectors.116 The rest of this chapter focuses on the following: • Market intelligence. Market and consumer research is needed to overcome information asymmetries and coordination failures. However, because there is often an underappreciation 112 Cooperation and coordination of SMEs is sometimes needed to (a) collectively meet the demands of buyers (including for demand for volume or integration of various product) or (b) make transport costs to export markets economically viable. 113 Capital constraints and requirements for export are generally higher than when selling to domestic markets, given the greater probability that international transactions take longer to settle and often involve more contract-based arrangements. This puts higher constraints on SMEs, which may not have such operating capital. 114 As a result, firms often use specialized financial instruments, particularly Trade Credit Insurance (Jones 2010), to manage that risk (Chauffour, Saborowski, and Soylemezoglu, n.d.). At the same time, such insurance on accounts receivable helps ease credit constraints by offering this as collateral for short-term operating loans. 115 Export insurance schemes are expressly included among the list of prohibited subsidies (Annex I (j)). While there used to be some exceptions allowing export subsidies for agricultural products under some conditions, those exceptions came to an end in 2015 and developing countries have until the end of 2018 to eliminate any remaining export subsidy on agricultural products. 116 While capital constraints and risk aversion are barriers, government cannot channel public funds specifically for exports. It can, however, support sales more broadly—through guarantees to banks and insurance companies—on the condition that it is not a de facto subsidy. for the value of such knowledge (or the uncertainty on its benefit for SMEs), there is a need to provide this as a public good to prove the concept and to socialize costs.117 • Action plan for promotion of exports. Government could take a more proactive role in promoting improved trade links by arranging trade missions, coordinating suppliers to jointly apply for foreign tenders, and facilitating export documentation for products and visas for workers to ensure that Croatian firms can deliver. Specifics on how these instruments can be utilized in each of the STPAs are detailed in the following sections. 7.2. Market Intelligence 170. Croatian firms moving into new markets will require a rigorous commercial appraisal of opportunities to make informed choices. These analyses are specific to each value chain, because they are determined by the particular conditions, opportunities, and costs associated with the target product in that market. The objective of the ‘market intelligence’ initiative is to increase Croatian firms’ access to commercially useful information about export markets, with specific focus on newer segments in each of the STPAs. The provision of this intelligence will help Croatian firms make informed choices about product innovations to pursue, investments to make, and commercial opportunities to target. While some public support for market intelligence services exists (for example, both CCE within Croatia and the Enterprise Europe Network (EEN) in the EU offer assistance in this area), many companies need localized expert knowledge about niche sectors that public agencies are not able to offer. Moreover, such assistance is often delivered in the form of a private good that is not available to the wider sector as a whole. Application to Croatia 171. Examples of market intelligence appraisals are given in the table below. It is estimated that commissioning new studies on these topics would cost at least 300,000 KN per report. However, for several STPAs – including Auto & Rail, EFTS, ITS, and Mine Action – there are pre-existing market studies which have already been produced by consultancies. Where such proprietary reports already exist, the intellectual property only needs to be procured through a group license so that the contents can be made available to specific project beneficiaries. Such studies can provide useful market intelligence for Croatian firms, which will allow them to make informed decisions for export. 117 Procuring such intelligence is usually too expensive for individual firms. Since SMEs are often too uncoordinated to procure this jointly, these services generally go underprovided altogether. Therefore, it is often necessary to commission public market and consumer research so that the private sector can make informed decisions and investments using this knowledge. The market research becomes precompetitive intelligence that informs all agents in the sector equally. Table 7.2: Identified Needs for Market Intelligence Reports by STPAs STPA Market Report Pharmaceuticals - Studies on Technical requirements in target markets (e.g. UK, Sweden) for remote home- based patient care and drug-device integration; Nutrition - Market studies on demand for personalized nutrition in Italy, France, and Germany and regulatory assessments that specify regulations of those markets. Energy - Market studies with a product segmentation (within the micro/smart grid segment) that gauges the market size for each component118 - Studies on emergent technical standards, requirements, and target markets of most interest (e.g. remote communities, low-income countries with unstable power networks, etc.). Auto & Rail - Market studies on the electric car market by Type (Battery, Hybrid, Plug-in Hybrid), by Technology (Sealed Lead Acid, Li-ion, Ni-MH), by Voltage (Low, Medium, High) and by Geography (Germany, U.K., France, Netherlands, Italy, Belgium)119 EFTS - Market studies on the electric boat and ship market, Segmented by Product Type, Battery Type, Boat Type, Ship Type, and Geography120 ITS - Market studies on the Intelligent Transportation System (ITS) Market Size, Share & Trends Analysis Report By Type (ATIS, ATMS, ATPS, APTS), By Application (Traffic Management, Road Safety, Freight Management), And Segment Forecasts121 DDU - Market studies in major yachting or other nautical hubs (e.g. Antibes, Parma, Barcelona) to gather intelligence on user demand (and willingness to pay for customized products and services related to safety, tracking, and Search & Rescue) Mine Action - Market studies on the prevention, detection and neutralization of threats in the EU 122 - Market studies on land remediation in Southeast Europe Food - Market Reports on Fresh Convenience demand in each Vienna, Budapest, Prague, Milan, Venice, Munich, Frankfurt, Berlin, London, and Amsterdam 123. Action Lines 172. Market intelligence would be commissioned and disseminated according to the following implementation plan. This proposal needs to be refined before implementation. • Contracting. Technical research papers should be commissioned from specialized technical consultants, according to terms of reference standardized for their scope, timeline, and approximate cost. For example, each paper may be produced on one-month turnaround, with expected budget of EUR 40,000, to generate specific answers to questions of commercial viability for a defined group of exportable products or services. The terms of reference would be used to issue a consultancy contract for each of the technical questions to be answered. 118 This should include a financial appraisal of upgrading costs for Croatian manufacturers; 119 https://www.psmarketresearch.com/market-analysis/europe-electric-car-market 120 https://www.mordorintelligence.com/industry-reports/electric-boat-and-ship-market 121 https://www.grandviewresearch.com/industry-analysis/intelligent-transportation-systems-industry 122 https://homelandsecurityresearch.com/reports/europe-counter-terror-public-safety-markets-industry/ 123 This should include market research to identify geographies where macro-indicators—such as income, female labor force participation, concentration of youth, food price indexes—could reveal demand for more advanced segments. It should also include research on buyer purchase criteria to understand retailer requirements for certification, labelling, and packaging in the target geographic market. Lastly, the study should focus on consumer research in the target geographic market to understand the local population’s particular preferences for types and qualities of food. • Topics. Decisions on the research papers to be Export Market Intelligence commissioned should be made based on the table above for Strategic Segments and the Report on Strategic Segmentation prepared by Description: A scheme to the World Bank for each STPA—which identifies increase access by Croatian firms strategic segments. Often these involve creating hybrid to relevant and commercially activities across industries necessary for the newer useful information export activities in the value chain (for example, markets, to help Croatian firms pharmaceuticals and logistics or energy technology and make informed choices about ICT). The administrator of this activity may further product innovations to pursue, investments to make, and consult members of the STPA but should adjust the commercial opportunities to topics only insofar that the revised topic outlines a target commercial opportunity viable for several companies; is connected with a new commercial opportunity in a GVC Estimated Time frame: 5 years in which Croatian companies can be competitive; and Estimated Budget: EUR 0.5 that the new opportunity follows the evolution of the million industry, focusing particularly on new and emergent Implementing Agency: CCE segments (that is, is not connected merely with sustaining a status quo of industry specialization). • Governance. CCE industry specialists or HUP may be conveners/administrators for the papers and dissemination events. • Financing. Consultancy contracts will be procured through an advance contribution from the government, most likely through MoEEC, sourced from the OPCC. Over time, this up-front subsidy to market intelligence should transition to a subscription-based service, paid by member companies of the STPA. For example, participants could pay up front for a series of papers. If a subscription is not viable, companies could pay a shared cost per research paper— having declared up front their interest in that paper. Commitment from the company up front ensures that the research will relate to their specific technical requirements. An initial budget could be estimated at EUR 40,000 for each of 10 market intelligence papers, plus a small budget for dissemination, perhaps EUR 500,000 in total. • Dissemination. Research papers would be disseminated at a networking event, to be hosted on a rotational basis by companies in the STPA. Invitees to the event should be a mix of public, private, and academic investors with interests in the STPA—so all stakeholders are present that would need to work together to develop a commercial solution in response to the research. The dissemination events will serve as catalysts for creating partnerships. They could be structured to be very targeted (for example, round table breakfasts) and may include meeting with particular kinds of investors, research hubs, and so on. Companies will volunteer to provide a meeting space, ideally at their offices or production facilities. This means that attendees gain from learning more about the host firm and learning from the material presented and discussed by the speaker. A tour of production facilities can be included in the program: this firm-to-firm visit can help build knowledge for collaboration. The organizer should be CCE or whichever administrator is chosen for the activity. Note on the Importance of Geographies for some STPA’s Exports 173. Beyond commissioning relevant market and consumer research, it is sometimes important to focus on specific geographies. It is natural that some Croatian industries will look to the geographically proximate EU market as their prime opportunity for expansion given that it is now a member of the common market. Several of the sectoral analyses have noted that macro trends such as urbanization (and the implied increase of commute times) have important implications for identifying markets.124 Consequently, it is useful to map population density to identify geographic markets that can be further explored for export opportunities. 174. When looking at population centers, take note of functional urban areas (FUA) because they better represent population density than administrative units or city governments.125 Figure 7.1 is a map of both metropolitan and large metropolitan FUAs in Europe, and Figure 7.2 shows the density of populations across Europe. Analyzing these FUAs can identify geographic markets for further research in STPAs where urbanization is one of the key driving trends. This is true for the Auto and Food STPAs, where the private sector has expressed interest in segments where population density figures into demand. Figure 7.1: Map of Metropolitan and Large Figure 7.2: Map of Population Density in Europe Metropolitan FUAs in Europe Source: World Bank 175. In the auto sector, the private sector has expressed an interest in the urban mobility segment, which can be identified by mapping densely populated geographies. Urban mobility markets are defined 124 Conversely, sparsely populated and remote locations also serve as an opportunity for remote delivery of scarce resources, such as in the health sector. 125 FUAs are defined by both population densities that identify urban cores and commuting areas that identify suburbs whose labor market is highly integrated with that core (OECD 2013). The definition then differentiates between small (<200,000), medium (200,000–500,000), metropolitan (500,000–1,500,000), and large metropolitan (>1,500,000) areas. by the need for auto parts and constant service and maintenance for those parts. However, the set of auto parts demanded in these markets is often particular to an OEM. Therefore, in targeting, it is useful to understand the companies operating in large and dense European markets to find OEMs that Croatian parts manufacturers could target. After finding the OEMs in these markets and the demands stemming from them, it could then create a Supplier Development Program (SDP) that suits the specific needs of these buyers. Such programs could not only overcome the information asymmetry between Croatian producers and foreign markets but also help resolve coordination failures and links between large buyers and small Croatian suppliers. Population centers of over 1 million inhabitants are viable markets for investment in the shared driving economy, which presents potential opportunities for low batch Croatian suppliers. 176. In the food sector, the private sector has expressed an interest in the fresh convenience segment. The rise in demand for convenience foods often correlates with macroeconomic trends, including population density and hours of commute.126 With these indicators in mind it is important to identify large urban centers that may serve as sources of demand. However, given the perishability constraints on food (certain foods must be delivered every day), it is also important to identify which markets are within a feasible catchment area if trucking is the assumed mode of transportation.127 We can combine a 9–10-hour catchment area with a map of large metropolitan areas to identify potential markets for further study. With these criteria, several urban centers in high-income countries are apparent targets. They include Vienna, Milan, Munich, and Frankfurt. Participation in logistics centers in Frankfurt could serve as a launching point for Croatian products across Europe more broadly because it is one of the top fresh logistics hubs in Europe.128 However, beyond the identification of the geographic market, specific consumer research is needed to validate these hypotheses and to identify the scale of demand and consumer preferences, especially because the latter vary greatly across cities within the convenience segments. 7.3. Action Plan for Promotion of Exports 177. For Croatian industry to increase its exports it must take a more activist and global perspective in its business strategy. This is often inherently difficult for firms—especially SMEs—that have had limited engagements in cross-border or multilingual transactions. Even if perfect market intelligence is provided on the opportunities abroad, it is critical that firms make the right contacts within those markets. Often, it is beneficial to have experienced, non-market agents to facilitate access to platforms on which firms can then compete. The public sector can play a coordinating and facilitating role by arranging interactions that bring foreign buyers and domestic suppliers together. 126 The demand for fresh convenience also correlates with income, labor hours, employment rates, increased female labor force participation (Barbosa-Cánovas, Altunakar and Mejía-Lorío 2005), and so on. Conversely, low marriage rates and a concentration of youth (ages 16–30) may also be indicators of demand for convenience. 127 Trucking is the most cost-efficient method of cold chain logistics. In determining the catchment area, it would be wise to account for cost structures involved in these logistic operations. EU Regulation (EC) No. 561/2006 allows truck drivers to drive two four and a half hour shifts with a half hour break in between. Twice a week these same drivers can drive 10 hours. Limiting the catchment area to these time boundaries keeps logistics costs more reasonable because companies do not then have to pay for two drivers. Zagreb could be chosen as a starting point for this catchment area because it is the geographic and economic center of Croatia, and such a center is necessary to generate volumes sufficient to serve as an export hub for this destination. Zagreb International Airport was the point of initiation. 128 Participation in Frankfurt’s distribution n etworks could be a launching point for Croatian products more broadly across Europe; 190 million people can be reached within a 9-hour road freight drive from Frankfurt—a catchment area with a GDP amounting to over EUR 6,000 billion (Colliers International 2013). Action Lines Action Plan for Promotion of 178. To reduce the transaction costs related to foreign sales and Exports to improve the ability of firms to participate in international markets, several related interventions can be undertaken, namely the Description: A scheme to organization of thematic trade missions to targeted markets/buyers, encourage exports by providing an enabling environment for firms the organization of platforms on which Croatian SMEs can jointly to engage in GVCs, by providing make foreign bids, and the support of visa services that enable coordination services and Croatian firms to deliver services in foreign (non-EU) markets. Each guarantees for firms wishing to of these are detailed in this section. engage in foreign markets Estimated Time frame: 5 years Trade Missions 179. Many governments often organize trade missions that Estimated Budget: EUR 20 million facilitate contacts with commercial buyers in export markets and to help their country’s firms better understand the needs of Responsible Agency: potential buyers. The U.S. Department of Commerce often MoEEC undertakes similar activities by regularly organizing trade missions to bring representatives of American companies into contact with Ministry of Foreign and European Affairs potential buyers, distributors, joint venture partners, licensees, and government contacts. The role of the public sector in organizing such trade missions relates to the organization of the itinerary and the provision of interpreters, briefings on regulatory issues in the target market, and arrangements for joint receptions and one-on-one business appointments. However, to be effective, such trade missions must target not only the industry but the segment and even theme within that segment (US Department of Commerce 2010). For Croatia, the identification of such segments and themes can be provided for in the analysis conducted under Component 2 of the RAS, namely, • Sustainable Wood Production and Processing. Trade missions for the Wood STPA should aim to (a) start a connection between procurement departments of the targeted commercial buyers129 and (b) show the capabilities of Croatian companies in the interior furnishing segments. The public sector could also organize a delegation of Croatian companies to several international trade fairs, which are specialized in outfitting commercial interiors. The ‘Workspace’ conference in Dubai130 or ‘Hotel Plus + Total Solution’ in Shanghai131 are two well-known annual industry fairs, whereas the Retail Design Institute also organizes semi- regular networking events in various locations where contact with buyers could be facilitated. • DDU. If companies in the DDU sector were to collaborate to provide a customizable SAR solution for recreational yachters, once market parameters have been established, a trade mission could be organized to users and marina officials in boating hubs in other Mediterranean countries to obtain input and feedback for solutions under development. 129 Many international hospitality firms and luxury retail chains have departments in charge of outfitting the interiors of their rooms or stores. Such commercial buyers are concentrated in several large European cities (such as London, Paris, Milan, and Berlin). 130 http://www.workspace-index.com/exhibit/. 131 http://www.commercial-expo.com/cn/exhibition/about. • Energy and Environment. Similar precompetitive missions could be appropriate for target markets where Croatian firms are seeking to establish commercial relationships for the provision of community energy solutions. Trade missions could target buyers in remote locations not geographically proximate to any other populated area. In Europe, such remotely populated areas might be identified by examining pockets of populations such as in Spain, parts of Scandinavia, and islands of the Mediterranean and Atlantic. (See Figure 7.1.) 180. Developing such trade missions would require dedicated staff who could arrange such trips on an opportunistic basis, when the demand of the Croatian private sector and the foreign markets could be aligned. While government is often not flexible enough to staff such projects on continual basis (or on short turnaround), such functions could be outsourced on performance-based132 management contracts133 to qualified service providers. A list of relevant industry fairs that could be targeted for such trips is found in the table below and in Annex C. Table 7.3: Targets of Trade Missions for Export Promotion STPA Organize Trade Mission: Buyer-focused industry fair Nutrition - European Federation of the Association of Dieticians (EFAD) Conference - Corporate Wellness Conference Energy Tech - Microgrid Global Innovation Forum Envir. Tech - Microgrid Global Innovation Forum Auto & Rail - E-Mobility World - E Move 360° Europe EFTS - WATTS UP - E-Mobility World - E Move 360° Europe ITS - eMove360° DDU - Sicur - DSEI Mine - Land Remediation Expo - Rem Tech Expo - International Security Expo - Milipol Food - Fruit Logistica - Anuga Food Tec Wood - Workspace - HotelPlus - HD Expo 132 Such contracts also need to be properly modeled with performance requirements, payment mechanism, adjustment mechanism, dispute resolution mechanism, and termination provisions (World Bank 2014). 133 “Establishing the contract management structures means defining responsibilities for contract management within government, and how the relationship with the private party will be managed. This includes designating a PPP contract manager (or management team) within the implementing agency, as well as defining the roles of other entities within government in managing the PPP. The government will need to be clear on where the contract manager has autonomy, and can act with discretion, and where it needs to consult or gain approval from someone else—a higher level officer, or another entity such as a Finance Ministry. It also requires establishing communication and contract management protocols for the relationship with the private party.” (World Bank 2014) Foreign Tenders 181. There are often cases where incomplete markets constrain Croatian firms from competing for contracts even if they could supply the good or service cheaper than other providers. The reasons for this often rest in the fact that complementary markets134 have not been organized or bundled in such a way that they can provide the desired solution for the buyers being targeted.135 Where foreign public buyers demand an integrated solution, it may be necessary for Croatian firms to form a joint consortium to bid on that tender. Therefore, when a foreign tender is found in an attractive segment, a mechanism for cooperation could be constructed to put forward a unified bid that meets all specifications of the tender. Two instruments are needed, partial guarantees and organizing entities. Partial guarantees for foreign public tenders not won can help reduce the investment risk of commercializing a new product or service—especially where a coordination or innovation failure hobbles an incomplete market or by information asymmetry. A partial guarantee for the costs of preparing a foreign tender might be extended to a consortium of Croatian firms. The consortium could be organized either (a) by an agreement of firms themselves or (b) by a contracting firm or commercial organization (for example, CIRAZ-CCE) that could take ownership of organizing the tender. The arrangement and target of such consortia may differ according to sector. • Energy. Private sector actors in the energy STPA have identified community microgrid solutions as a promising export opportunity. Targeted foreign buyers could be districts or communities in remote locations that are not easily connected to the grid. The organization of firms is often needed to participate in such tenders because such solutions rely on complementary markets and the products or services of many suppliers. However, because putting forward a unified proposal takes time and resources, it is often necessary to provide security to encourage Croatian firms to begin the development of an innovative export product not yet commercialized. • Automotive. The tender-based nature of the rail sector is still challenging due to (a) the need to invest significant amounts in pre-execution planning136 and (b) a need to invest in developing strong relationships with stakeholders in the target market (that is, local governments, rail service operators, private buyers, and construction companies).137 Both public and private buyers of rail systems expect to reduce their tendering, transaction, and operating costs by contracting a single firm to undertake (a) a market study of the suitable solution (sometimes, not always); (b) conceptual design; (c) detailed design; (d) implementation; (e) testing and commissioning; and (f) support and system optimization. Therefore, to participate in such bids, firms must generally commit significant resources before knowing if they have won the contract. Providing a partial guarantee to cover the costs 134 Conversely, the individual good or service holds little or no value when offered alone. 135 When a market is incomplete, market prices are not able to perform the coordination function needed to ensure that the complementary goods and services are provided. The failure of parties to act together to offer the combined good or service is an example of a coordination failure in complementary markets. 136 When considering the Personal Rapid Transit (PRT) application in the personal urban mobility segment, buyers can be public or corporate, depending on the application of the PRT. Public buyers are usually developed cities with high level of urban planning that would like to expand and enhance public transit network to solve ‘the first and last mile’ problem. Private buyers are usually airports, universities, and business campuses. 137 To win international tenders, companies are often required to have a successful track record in implementing similar projects. of organizing Croatian suppliers can help in increasing the participation of firms in these procurement networks. • Pharmaceuticals. Firms in the STPA report several issues in winning foreign tenders, including in the EU, where Croatian producers should, in principle, not face regulatory barriers when bidding. Some problems stem from the application of national health organizations’ rules to favor domestic incumbents rather than those from other EU countries. Such perceptions often act as a deterrent to bidding for tenders. Potentially, this problem can be reduced by giving Croatian firms information on frequent issues or problems faced by prior bidders in certain EU countries. This collective information is expensive for individual firms to obtain but mutually beneficial when shared. Such costs could be covered by a guarantee for tenders not won, which would reduce the firm-level risk of application. • Nutrition. It is important to keep abreast of the regulatory changes in the targeted EU market as well as select foreign markets. This is especially true for the ‘need’ segment where many supplements must be prescribed. While the main market of focus should be the Europe—EU regulations on compounding of pharmaceuticals can provide some basic guidance on how the supplement manufacturing industry should adapt its procedures (Minghettia et al., n.d.) — there is considerable variation in how nutraceuticals and pharmaceutical grade supplements are sold in different member countries. Hence, there is a need for a regulatory assessment of target markets in the EU.138 Croatia may have to start with one large market—likely Italy, France, or Germany—and develop the ability to meet the specific regulations of those markets. Market intelligence on demand in these economies should thus be combined with regulatory studies in these markets. • Wood. In business models where manufacturing firms sell interior solutions to commercial buyers, there is often a period—before contract signing—where the supplier firm engages in an intensive design dialog (involving designers, architects, and engineers) with the buyer to help them visualize a solution and build trust in the firm’s ability to execute the contract. The costs associated with this phase of the customer engagement are often large, and there is a risk that the engagement may not convert to a sale. Given (a) the risk that these efforts do not materialize, and (b) incomplete markets in Croatia have limited the development of an interior manufacturing industry, Croatian firms are wary of paying the labor costs associated with developing this line of business. A carefully structured guarantee conditioned on costs invested and contracts not won could help motivate firms to enter this segment. Croatian industry could be motivated to improve its capacity by hiring skilled designers, architects, and industrial engineers that enhance the capacity to respond to client demands. 182. Using such instruments could help Croatian firms secure large contracts from public and institutional buyers. 138 Croatia’s NQI—public labs, certification, and accreditation regimes—are recognized for market access to the EU already. Visa Facilitation 183. In some STPAs, last-mile service delivery on contracts may require that Croatian workers travel abroad. In such service-driven GVCs, it is often necessary that employees obtain temporary foreign work visas to deliver the last-mile solution for the client (for example, for installation or SAR). While Croatia’s membership in the EU gives it easy access to high-value markets, it is often important to target clients in countries outside of the EU. Yet, obtaining such temporary work permits is often time consuming and expensive and involves many delays. 184. It is often beneficial to have reciprocal visa arrangements with countries found through market intelligence reports. While the processing of work visas for Croatian passports is often an exogenous variable, there are steps that the public sector can take139 to reduce transaction costs and delays related to visas. A centralized Visa Application Processing Service can be contracted to help Croatian firms obtain temporary work permits for their employees. Firms such as American Express often provide such services contractually with fixed and variable costs. Public funds could be used to set up such a service and to pay for fixed costs of the contract. Management of the contract and access to its services can then be coordinated through existing institutions (such as CCE or CIRAZ), which could manage firm payment of the variable costs. 139Market intelligence reports can then inform where the Ministry of Foreign Affairs should target efforts to initiate reciprocal visa arrangements, although agreement on such visa recognition is often an exogenous factor. 8. Deliverable 16—Report on Territorial and Product Branding Strategy 8.1. Introduction 185. Territorial branding can differentiate a set of similar products produced in a delimited area. Territorial brands have been established all over the world for many products—Cuban cigars, Gruyère cheese, Champagne wine, and Italian leather. Territorial branding is used to promote both services (particularly tourism) and goods. ‘Croatia: The Mediterranean as it once was’ is one instance of this practice, which aims to enhance the individual product and service offers of tourism companies in Croatia by providing an overarching brand. 186. The goal of territorial branding is to increase the ability of individual producers to differentiate their products as a group. This increased differentiation helps producers compete on quality and charge higher prices for their products compared to substitute products outside this group. The territorial brand offers a superordinate means to differentiate the products. 187. ‘Territorial branding’ may be used at several scales of territory. Territorial brands may be set up at the level of a place or destination (for example, Murano glass); a subnational area (for example, Bufala Compana mozzarella cheese); a country (for example, Danish bacon); or a multicountry region (for example, EU). These scales overlap (Figure 8.1) and may create confusion if there are several territorial brands in operation simultaneously. Individual product brands may also overlap while being partially outside the territorial brand. Figure 8.1: ‘Territoriality’ in Branding National Brand Place/ Destination Territorial Brand Brand Regional Brand (for example, EU) Preconditions for a Territorial Brand 188. Several preconditions are necessary for a territorial brand to succeed: • One or more distinctive features of goods or services must exist. The features could be based on, for example, quality, taste, culture, history, geography, resilience, or sustainability—that is, various qualitative aspects of the goods or services (Charters et al. 2013). This feature should either already be shared by individual producers, or must be built and improved as part of the branding process (European Parliament 2013). • These special features must be emphasized to create the brand. A territorial brand—like any brand—must exhibit a consistent position, a clear identity and a defined personality of the product/service (Aaker 1996). Literature on territorial branding highlights several ‘key success factors’ in accomplishing this objective (Table 8.1). These are an effective brand manager (to control quality, protect the brand, promote the brand, and sometimes prompt R&D to innovate the goods and services); cooperation among the individual companies that are members of the territorial brand; and local engagement in the community. Table 8.1: Key Success Factors in Territorial Branding Prerequisites Key Activities for Success Control of production Basic quality guarantees • Effective brand Protection of the brand manager Promotional activity R&D Brand-place association Clustering • Cooperation and Quality recognition common values Internal: cohesion Hiding/minimizing dissent External: symbolic meaning Mutual local acceptance of the value of the brand • Local engagement Mutual economic engagement Community involvement Source: Modified from Charters and Spielmann (2014). • Meanwhile, several macroeconomic and microeconomic conditions may underpin these key success factors, by providing an economic and legal framework to position the brand in the global market. These are the conditions necessary to sustain the brand—as summarized in Table 8.2. Usually these need the cooperation of public and private actors, that is, beyond the participants in the territorial brand. The EU has set up several schemes to assist this process: protected designation of origin (PDO), protected geographical indication (PGI), and traditional specialties guaranteed (TSG). These systems build on the appellation systems that have grown in many places in the world, such as the French appellation d’origine contrôlée (AOC) and the Italian denominazione di origine controllata (DOC) system. Table 8.2: Preconditions for Territorial Branding at the Macro and Micro Levels Macroeconomic Conditions Microeconomic Conditions • Trade agreements, international • Elaboration of the marketing strategy recognition/certifications, access (normally developed by an external to international markets consultancy): A clear action plan that • National policies and strategies includes various single efforts to create to support the economic activities distinguishable features, based on (food production, tourism, and so specific local assets, for example, quality on) labels, certifications, recognitions, and so • Advanced on regionalization/decentralization • The creation of ‘collectives’ and other plan (to give autonomy to the product-based organizations and unions local government) Risks in Territorial Branding 189. Several risks must be managed to achieve a successful territorial brand. Three of the most common risks are reviewed here. Misaligned Cooperation Incentives 190. Territorial branding works only if the incentives are configured so that individual producers are willing to coordinate. Producers must cooperate on some issues even while they compete on other issues (sometimes termed ‘coopetition’). This cooperation will occur only if producers in the territory have a clear image of the value that the territorial brand will add for their product: they should be convinced that they gain more from membership and cooperation than they lose by surrendering autonomy over individual branding. 191. Fostering cooperation depends on several factors: • Involving a sizeable proportion of producers in the territory • Agreeing on a single territorial brand, with common goals • Subsuming individual brands within the territorial brand • Communicating well with producers • Avoiding opportunistic behavior by individual firms (for example, ‘free riding’, capture of the brand by a few firms) 192. Among these factors, two of the biggest dangers are divergent product brands and ‘free riding’. • Divergent product brands. A single territorial brand must be cohesive, with common goals. Territorial brands are easiest to establish for products that are most similar to each other — where commonalities are strongest. That is one reason territorial branding is most often used for foods and beverages (wine, cheese, meats, fruits, and so on). Conversely, when individual products in the territory are too different from each other (for example, ‘Croatian software’), a territorial brand will be harder to achieve. • ‘Free riding’. For example, champagne is branded as the best sparkling wine in the world and a marker for success and celebration (Beverland 2004), so the success of that brand can be sustained only if the quality of all champagne is reliably high. That means all producers in the official Champagne region must adhere to quality standards, without diluting the strength of the brand. If some producers in the Champagne region market their product as champagne but have a lower quality standard or are unreliable in quality, all other producers may suffer. This happened in Australia, where wine producers became successful internationally in marketing their wines as interesting and different, and quality and consistency were built up. However, several producers started selling large volumes of wine, where discounting and margin-shaving became more important than strong long-term branding. Australian wine lost its premium image, and its reputation became ‘safe but boring’. This further locked wine producers into relationships with large retail chains, in which they had to discount even further to secure distribution outlets. ‘Free riding’ is notoriously hard to police. In the Champagne region, the enduring quality of the territorial brand may be attributable to the work of the brand manager and the adherence to the brand by the largest producers. Lack of Autonomy and Authority of the Brand Manager 193. Brand management must be effective. The role of brand manager is essential to a territorial brand. The brand manager catalyzes the marketing and promotional activities under the brand, regulates production to ensure a common quality standard, and provides the framework for reinforcing ‘competition’ between the firms (Capitello 2017). 194. A public or private entity can play this role. There is no clear advantage for one structure over the other. 195. The main hazard for brand managers is not having autonomy and authority to perform their role. The brand manager must be free to implement branding activities and enforce standards. This function requires a delicate balance, given that the territorial brand incurs costs on producers, not only benefits. For example, the brand manager must accept that sometimes the ‘success of the many’ depends on disciplining a few who do not comply (see next risk on ‘cooperation’). Examples of brand management that negotiated this complex path are listed: • The Comité Interprofessionel du Vin de Champagne (CIVC) was founded in 1898, and now manages the champagne brand for 15,000 small producers with an average of 2 hectares of vineyard (Smith 2011). The many producers and small volumes mean that it is hard to impose volume quotas among the producers and, further, to charge fees when they do not follow the norms. To solve this problem, the CIVC was transformed over time from a private association into a quasi-governmental entity, with the instruments to legally enforce agreements and ensure the effective management of the brand. • In Chefchaouen, Morocco, a public institution directly manages the destination brand. However, the brand manager has lacked autonomy, and several issues have arisen. After the first five years of implementation, surveys of local firms detected there was neither consensus nor confidence in the role played by the manager (Mechthild Donner 2015). Insufficient decision-making power and financial autonomy of the manager diminished the results. Unrealistic Expectations about the Time-Costs-Results Relationship 196. Substantial investments of time and finances are necessary to build a territorial brand. For example, the champagne brand has built its worldwide reputation over 350 years, and progress has been gradual. The CIVC was established in 1898. The territory was then delimited in 1927, quality norms/requirements were established in 1935, and the AOC mark was obtained in 1936 (Comité Interprofessionnel du Vin de Champagne 2017). What implications does this have for territorial branding now? • Time. Knowledge and insights from the experience of long-standing territorial brands can speed implementation of unique brands. The planning and implementation phases of territorial brands have shortened, due to the expertise that has accumulated and been documented. But it is important that all the stakeholders, public and private, understand that results will not be immediate. • Finances. Territorial branding requires substantial, sustained investments in branding. For example, in recent years the Parma region alone has invested EUR 15 million to maintain the brand for their cheese products (Scarci 2016). Decades of even larger investments preceded this to build the brand. The barriers to entry for branding alone are high and often outside the reach of producers. 197. For this reason, territorial brands are usually supported initially by governments and public organizations but should be viable from private subscriptions in the longer term. The EU, for example, has supported territorial branding through various funds, including the European Agricultural Fund for Rural Development (EAFRD), the ERDF, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development, and the European Maritime and Fisheries Fund. This kind of support normally covers 20 to 40 percent of the costs of opening a territorial brand and is usually limited to 5 years—after which private subscriptions will be vital. For example, parmigiano reggiano cheese was supported initially by federal funding, but in 2016 alone, the consortium (brand manager) invested EUR 15 million for promotion and protection (Parmigiano Reggiano 2017). Private sector producers must be willing and able to allocate sufficient funds to sustain the common brand. 198. In Chefchaouen, Morocco, reliance on external financial support caused the brand to fail. When public financial support stopped, the private sector was neither willing nor able to finance ongoing activities. Unfortunately, the external support itself was one reason: a multiplicity of initiatives by government and international NGOs created a sense of expectation among private firms that other development projects would follow, so they limited their own involvement in such initiatives (Mechthild Donner 2015). 8.2. List of Croatian Brands and Territorial and Products Brands in GVCs 199. The preceding section established preconditions and risks for successful territorial brands . How would this conceptual framework help filter the potential territorial brands in Croatia? In brief, candidates for territorial brands must have: • Strong common elements between products which can form a single brand; • Willingness to cooperate among individual producers; • An effective brand manager, who can enforce common standards and engage in other elements of territorial brand implementation; and • Budget and time available (whether from public or private sources) to sustain the brand. 200. With these preconditions in mind, several goods and services in the STPAs considered may be candidates for territorial branding. However, not all STPAs have a need for branding. For instance, the prior analysis has revealed that there would not be any added value for the public to develop territorial or product branding in the Health, Nutrition, Auto/Rail, EFTS, ITS, Cybersecurity or Mine Action STPAs. Moreover, while there could be some use for the public to develop a territorial or product branding strategy in the Pharma, Food, Energy/Environment, DDU and Wood STPAs, the private sector working group participants did not choose to pursue that path at this time. Nonetheless, the government could still choose to develop brands in these STPAs, even if they were not pursued through the CRIs140. Table 8.3. provides a draft list that can be a basis for further consultation in cases where territorial or public branding could potentially make sense. It would not be advised to develop this area further unless another CRI was held at the sub- national level with the stakeholders that could benefit from a territorial brand. Only at that point in time, should the proposed brands be developed further. 201. However, a further caveat is necessary: the benefits from territorial branding should not be overstated compared to the need to build sustainable underlying competitive products. Territorial branding could be a strategic approach to increase differentiation of goods and services that are impossible to include in the larger strategy of advanced segments within each STPA. For example, if the Food STPA focuses on the fresh convenience segment, territorial brands may provide a temporary way to increase value in other segments, even where they are not part of a longer-term competitiveness strategy. Territorial branding offers one route to increase differentiation and value if the preconditions above can be met. However, in the long term, producers in Croatia will increasingly aggregate in the competitive segments where value can be captured sustainably. The strategic diagnostics and analysis summarized at the beginning of this document show there are many other determinants of competitiveness beyond branding: global trends in demand, underlying market structure and power relationships, and technological change. 140For example, in the Food STPA, the working groups had identified the ‘fresh convenience’ segment as the desired target. Yet, there is no example of territorial branding occurring or adding value in this segment in any other country. Therefore, this action was not prioritized by the stakeholders. However, territorial branding could add value in the ‘indulgence’ segments, where regional brands could be developed as they have been in other countries (e.g. Parmesan Reggiano cheese, Champagne wine, etc.). If another CRI process was held to convene Croatian stakeholders in indulgent product segments (e.g. Slavonian Kulen producers, Ston Oyster producers, etc.), then a branding program may be justified if the stakeholders would verify the need. Even highly branded products and services can fail over time, owing to exogenous changes in their industries. Cases of profound decline such as British stainless-steel cutlery, West African textiles, or American automobile manufacturing—all illustrate that even strong territorial brands will fail if underlying competitiveness of their products evaporates compared to competitors elsewhere in the world. These changes can eclipse the value added by a territorial brand. Table 8.3: Draft List of Potential Territorial Brands STPA National Subnational (Croatian brand) (place within Croatia) STPA 1 • Wellness generics and/or OTC • Dalmatian and Istrian botanical • Botanical extracts extracts STPAs 4 and 5 — • Island microgrids (for example, Vis, Krk, Hvar, t.b.d.) STPA 10 • Tracking and SAR system for — recreational boating and yachting • Tracking and SAR system for national parks • An EU training center for SAR STPA 12 • Fresh foods Indulgence Segment Foods141: • Specialty foods • Fresh oysters from Ston • Istrian Fresh truffles • Slavonian Kulen • Dalmatian Prosciutto • Dalmatian Olive Oil • Istrian Olive Oil • Dalmatian Anchovies & Sardines • Istrian Anchovies & Sardines • Dalmatian Wine • Istrian Wine • Slavonian Wine STPA 13 • Wooden interior design specialists for • Slavonian oak for customized interior the retail and hospitality industries design 141All food products would be the subject of indulgence segment considerations noted in (Lapres and Bačić, Report on Strategic Segmentation: Sustainable Food Production and Processing 2017a) 8.3. Action Plan for Territorial and Product Branding 202. An action plan for territorial branding would need to be Territorial and Product developed iteratively, according to progress. The previous section Branding for GVCs gives a draft list of potential brands from each relevant STPA. In Description: A scheme to this section, these are considered against the preconditions for promote selected groups of success in territorial branding—some of which are not yet certain. products either at national The willingness of firms to cooperate and coordinate under a single Croatian level, or at subnational territorial brand can be tested only in practice. The action plan would territorial level, in international need to be tested and revised. Where territorial brands are not well markets—through brand received, resources would to be reallocated to areas where firms are management and promoting brand awareness more receptive. Estimated Time frame: 5 years 203. Where the preconditions for territorial brands are agreed, this process could establish the brand: Estimated Budget: EUR 12 million • Establishment of a cooperation platform for a large Responsible Agency: MoEEC proportion of producers in the territory, for the intended products. A brand manager would be recruited with clear terms of reference to manage and administer this process and the later steps. A CRI-type process should be utilized to engage stakeholders and to gather buy-in for the branding if it is deemed necessary for their businesses. • Agreement among the producers on: o A single territorial brand with common goals142; o Standards and methods of enforcement for the brand143; and o Budget and contributions from all members. • Support from brand manager to producers to reach standards required by the territorial brand; and • Public launch and implementation of the brand, focusing on target markets. 204. In Croatia, Slavonski kulen is a salutary reminder that this process will not be easy.144 Slavonski kulen is a traditional and popular gourmet pork product. The kulen market has experienced rapid expansion—with industrial production more than doubling between 2004 and 2013. Slavonski kulen differs in perception from Baranjski kulen: the former is produced by many individual manufacturers (35 producers account for most production) and is sold mostly through direct sales rather than retail channels, while the 142 The territorial brand should be developed by hiring a consultancy specialized in marketing and advertising. The consultancy would develop the branding materials – including logos, slogans, visual identities, and other associated media (videos, paper ads, etc.) – for outside buyers. The branding materials should be developed in coordination with the producers. 143 Standards for participation in the brand would have to be developed in parallel with advanced buyer demands. These should be set at a reasonably high level in order to ensure that the brand is developed in tandem with a uniformly quality product. 144 This paragraph is summarized from Aprahamian and Correa (2015, 142–145). latter is around 10 times larger by market volume, is produced almost exclusively by a single company, and is more highly commercialized. There is an enormous potential for growth of Slavonski kulen—it is already perceived as a high-quality product, yet its supply has been constrained in recent years by restrictions on the number of pigs that kulen producers can have on their farms. However, territorial branding of Slavonski kulen is hindered by several factors: • Weak veterinary and safety regulations for producers • Scarcity of financial capital (local banks rarely accept agricultural land as collateral), which discourages expansion and increased production by producers • Absence of cooperation between producers (especially because of negative associations with cooperatives in earlier eras) • Poor marketing and promotion 205. Efforts to solve these issues began in 2001 with projects by the Ministry of Agriculture and Forestry, Agricultural Faculty of the University of Zagreb, and the HITRA-TEST program. These selected the most suitable genotype of pig, benchmarked quality control systems for fresh meat, and stipulated production methods. However, government support also subsidized production, which kept alive even unproductive activities, and some farmers became dependent on subsidies by the mid-2000s. Any signal that the subsidies might be reduced or limited led to strong protests—after which the government further increased subsidies. Production stagnated, and the objectives to grow Slavonski kulen production achieved little. These difficulties can be overcome, but require carefully managing many risks. 206. Overall, it may be wise to consider territorial branding a secondary intervention rather than a primary program of activities. Because of the large budgets required for territorial branding, the complex preconditions for a branding strategy to be effective, and the many other priorities outlined in these reports, territorial branding may be considered for a secondary or subsidiary phase of implementing the smart specialization strategy. 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Washington, D.C.: The World Bank Group. Yap, Justin. 2016a. Assessment of the Global Value Chain (GVC) in Croatia: Environment-Friendly Technologies, Systems & Equipment. Washington, D.C.: The World Bank Group. Yap, Justin, and Stjepan Mandić . 2017. Report on Strategic Segmentation: Defense Dual Use. Washington DC: The World Bank. Yap, Justin, Ružica Jajčević , Domagoj Šarić, Christian Springer, and Ivana Šarić. 2018. Report on Strategic Segmentation: Intelligent Transport Systems and Logistics. Zagreb: The World Bank. Yap, Justin, Ružica Jajčević , Domagoj Saric, Katerina Malenica, and Helena Ɖerek . 2018. Report on Strategic Segmentation: Environment-Friendly Transport Solutions (Maritime Industry). Zagreb: The World Bank. Annex A: Table of Publication Advertising Opportunities Publication STPA Description Website Name Provides location investment guides and other news and information for companies looking for alternative locations for their operations. Readership includes real General Site Selection estate departments of large corporations and senior http://siteselection.com management of small to medium-size companies. Circulation: 45,000—worldwide, but primarily in the United States. A monthly trade magazine in its 17th year of publication. More than 50,000 readers, connected with Processed Food the food processing industry. The magazine is also http://www.pfionline.com/about-us/profile Industry displayed in all connected events, exhibitions, and seminars. Sixty percent of its readership consists of MDs, GMs, CEOs, and Senior Management personnel. Sustainable Food Food processing covers every food category (snacks, Production and beverages, frozen foods, and so on), as well as Processing reaching every job title (R&D, Plant Operations, Food Corporate Management, Marketing, and so on). http://www.foodprocessing.com/?link=topnav Processing Through its magazine, website, e-newsletters, lead generation, and other media, explores the latest in ideation, R&D, processing technologies and packaging, and marketing. Publication STPA Description Website Name Food and Drink Technology is an editorially led journal featuring the best in technical and business news, analysis, comment, plant profiles, interviews, Food and and product developments. It also has regular Drink geographic and industry sector reviews, giving a high- http://www.foodanddrinktechnology.com/magazine/ Technology quality, comprehensive view of the European food industry. The magazine has a readership of over 28,000, comprising mainly senior and middle managers. Automobile offers a rich examination of the automotive industry in all its forms. Automobile Automobile http://www.automobilemag.com/ delivers the latest automotive news and offers insights into emerging trends. Eurotransport magazine covers new technologies and Added-Value developments in the industry and includes features on Manufacturing of intelligent transport systems, ticketing, real-time Road and Rail passenger information, bus and coach, metro, security, Vehicles, Parts, and trams and trolleybuses, light railways, Systems Eurotransport communications, financing, and legislation. https://www.eurotransportmagazine.com/magazine/ Eurotransport magazine is distributed six times a year to over 9,799 key decision makers across Europe. Passed down through the management chain, it is estimated that the total readership of Eurotransport is 30,000 for each issue. Being the dissemination periodical of the IEEE Intelligent Transportation Systems (ITS) Society, the IEEE - ITS Magazine is aimed at innovative research Intelligent ITS Magazine ideas and their application results, raising awareness https://www.ieee-itss.org/its-magazine Transport Systems and application challenges in all areas of Intelligent Transportation Systems. ITS magazine is published quarterly, in January, April, July, and October. Publication STPA Description Website Name PharmaTimes is the U.K.'s leading pharmaceutical magazine, tracking the trends and issues that affect the industry here in the United Kingdom, in Europe, and PharmaTimes across the world. PharmaTimes print and digital http://www.pharmatimes.com/magazine Magazine versions have a total circulation of 23,184, reaching right across the industry into every company and every function. Pharmaceuticals, European Pharmaceutical Manufacturer is a highly Biopharmaceuticals, European regarded brand covering the pharma/biopharma Medical Equipment, Pharmaceutical manufacturing supply chain, from formulation to and Devices http://www.epmmagazine.com/about Manufacturer distribution, keeping readers informed of the latest Magazine news, opinions, developments, and breakthroughs in this innovative and technologically advanced sector. Future Medicine addresses information needs in Future clinical and translational medicine and the biosciences. https://www.futuremedicine.com/ Medicine It takes a concise and forward-looking perspective of the developments in modern health care. Microgrid Microgrid Knowledge leads the way in providing https://microgridknowledge.com/ Knowledge news on microgrids and distributed energy resources. SmartGrid Today delivers unbiased, comprehensive, SmartGrid and original reporting on emerging trends, Energy Technology, https://www.smartgridtoday.com/?ref=smartgridobserver Today applications, and policies driving the modern utility Systems, and industry. Equipment The Smart Grid Observer is an online information portal and weekly e-newsletter serving the global smart grid industry. Smart Grid Observer delivers the The Smart latest news and information, on a daily basis, http://smartgridobserver.com/ Grid Observer concerning key technology developments, deployment updates, standards work, business issues, and market trends driving the smart grid industry worldwide. Publication STPA Description Website Name The EU Digital Innovation Hubs is a platform for Digital finding technology based market agents. While the http://s3platform.jrc.ec.europa.eu/digital-innovation- Cybersecurity Innovation Hubs platform is for all IT related fields, cybersecurity hubs-tool actors are included in this platform. Annex B: Trade Association Contacts: Sources for Industry Research and Company Contact Database STPA Trade Association Name Association and Site Description Website Freshfel Europe incorporates around 200 companies and national associations of producers, importers, shippers and exporters, distributors, wholesalers, retailers and their service Freshfel Europe http://freshfel.org providers. Members and associated members are both from within the EU and in countries with an interest in the Sustainable Food European fruit and vegetables market. Production and European Chilled Food Federation is the umbrella Processing organization for national chilled food organizations and European Chilled Food individual European chilled food manufacturers where no http://www.ecff.net/aboutus.html Federation national association exists. Its members come from Belgium, Finland, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, and the United Kingdom. Japan Auto Parts Organization that develops the auto parts manufacturing www.japia.or.jp Industry Association industry. Site contains member list. Added-Value Motor and Equipment Provides global intelligence on motor vehicle supplier Manufacturing of Road Manufacturers industry, market research, government representation, and www.mema.org and Rail Vehicles, Parts, Association, US international opportunities for members. and Systems CLEPA (European CLEPA represents more than 3,000 companies and covers all Association of products and services within the European automotive supply http://clepa.eu/ Automotive Suppliers) chain. Pharmaceuticals, HIMMSS (Healthcare Biopharmaceuticals, Information and HIMSS positively transforms health and health care through http://www.himss.org/ Medical Equipment, and Management Systems the best use of information technology. Devices Society) STPA Trade Association Name Association and Site Description Website Microgrid Institute is a collaborative organization supporting Microgrid Institute development of microgrids and distributed energy assets http://www.microgridinstitute.org/ around the world. The Alliance for Rural Electrification (ARE) is an international business association representing the Alliance for Rural decentralized energy sector working toward the integration of http://ruralelec.org/ Electrification renewables into rural electrification markets in developing Energy Technology, and emerging countries. Systems, and Equipment EUROBAT (Association EUROBAT acts as a unified voice in promoting the interests of European Automotive of the European special battery industries, automotive and http://www.eurobat.org/ and Industrial Battery industrial industries to the EU institutions, national Manufacturers) governments, customers, and the media. EUREC (The EUREC, created in 1991, is the leading association Association of European representing research centers and university departments http://www.eurec.be/en/ Renewable Energy active in the area of renewable energy. Research Centres) Nutrition European Federation of EFAD is the European wide association for professional http://www.efad.org/en-us/home/ the Association of dieticians. The aims of EFAD are to: (i) Promote the Dietitians (EFAD) development of the dietetic profession, (ii) Develop dietetics on a scientific and professional level in the common interest of the member associations, (iii) Facilitate communication between national dietetic associations and other organisations – professional, educational, and governmental, and (iv) Encourage a better nutrition situation for the population of the member countries of Europe. Annex C: International Trade Fairs and Industry Fairs Note that the table below identifies a set of ‘buyer-focused industry fairs’ and ‘industry-focused trade shows’ that are applicable to the STPAs. Buyer-focused industry fairs present a list of markets where export promotion efforts could be targeted. Similarly, the Industry-focused trade shows represents a set of markets where FDI could be engaged. STPA Name Description Website Type Around 3,077 exhibitors and 76,000 visitors attend Fruit Logistica every year. Companies from across the entire fresh produce sector attend—from global Fruit Logistica players to small and medium-size Berlin, Germany, Buyer-focused companies and organizations from all http://www.fruitlogistica.de/en/ February 7–9, industry fair over the world. Covers every single 2018 sector of the fresh produce business and provides a complete picture of the latest innovations, products and services across the value chain. Globally recognized as one of the leading food technology trade fairs Sustainable Food globally and is the only trade fair in the Production and world that covers all aspects of food Processing Anuga Food production. Covers a full range of food Tec technology, from processing, filling, and Cologne, Buyer-focused packaging technology to packaging http://www.anugafoodtec.com/aft/index-4.php Germany, industry fair materials, ingredients, food safety, and March 20– the entire range of innovations from all 23,2018 the areas associated with food production. Takes place every 3 years. In 2015, there were 1,479 exhibitors and 46,000 visitors. Interpack Covers the food packaging sector and Industry- Dusseldorf, related industries. Takes place every 3 https://www.interpack.com/ focused trade Germany, years. In 2017, there were 2,865 show May 7–13, 2020 exhibitors and 170,500 visitors. STPA Name Description Website Type International special event for intelligent Hypermotion transport systems. Digitalization Frankfurt, Industry- covering all modes of transport. Product Germany, http://hypermotion-frankfurt.com/ focused trade close-ups, infrastructure solutions, November 20– show equipment, services and applications in 22, 2017 live, practice-oriented demonstrations. Autonomy is an annual international Industry- Autonomy event on the future of urban mobility. It focused trade Paris, France, offers an innovative and collaborative Added-Value http://www.autonomy.paris/en/ show; Buyer- October 19–21, platform for thought leaders, innovators, Manufacturing of focused 2017 policy makers, and the public to meet Road and Rail industry fair and change the way we move in cities. Vehicles, Parts, eMove360° eMove360° Europe is the international and Systems Munich, trade fair for Mobility 4.0. It presents the Buyer-focused Germany, complete range of next generation and http://www.emove360.com/trade-fair/ industry fair October 17–19, sustainable mobility solutions for 2017 connected and autonomous driving E-Mobility E-Mobility World is another industry- Industry- World, focused trade show in the field of focused trade https://www.ibo-messe.de/aussteller/emobility- show / Buyer- Berlin, Germany sustainable and electric mobility. As world/ focused trade 20-24 March such, this is an optimal market for new 2019 investors. show HIMMS The HIMSS Conference and Exhibition Industry- Las Vegas, brings together 40,000+ health care IT http://www.himssconference.org/ focused trade United States, professionals, clinicians, executives, and show March 5–9, 2018 vendors from around the world. Outsourced Pharma focuses on Outsourced innovation and forms small, elite Pharma Industry- Pharmaceuticals, communities affording the opportunity Boston, United http://outsourcedpharmaevents.com/ focused trade Biopharmaceuticals, for everyone to network with everyone States, show Medical Equipment, and to learn about the trends in the TBA 2018 and Devices industry. This congress provides a platform for Health cost-effective improvement for health Economics and Industry- outcomes. It deals with the worldwide Patient Safety http://healtheconomics.global-summit.com/ focused trade health care including the areas of Amsterdam, show research & policies improving the health Netherlands, care system. STPA Name Description Website Type April 13–14, 2018 Energy Storage World Forum Energy Storage World Forum is Europe’s Industry- Berlin, Germany, first conference dedicated solely to http://energystorageforum.com/tag/microgrid focused trade May 14–15, energy storage. show 2018 Energy Technology, Microgrid Systems, and, Global Microgrid Global Innovation Forum is Equipment Innovation supporting the optimization of the Industry- Forum business model, performance, and http://www.microgridinnovation.com/EMEA/index. focused trade Barcelona, integration of hybrid renewable energy htm show Spain, microgrids in off-grid and grid-tied September 4–6, environments. 2017 Workspace brands itself as the largest Buyer-focused forum for commercial interior design industry fair (including retail, healthcare and educational sectors) in the Middle East. Workspace In 2016, workspace welcomed over Dubai, UAE http://www.workspace-index.com/exhibit/ 14,400 designers, interior professionals 26-29 March and procurement specialists for 4 days of 2018 networking and product sourcing. It Sustainable Wood claims that US$1,436,695,000 of new Production and business was generated as a result of Processing workspace at INDEX 2016 show edition. This conference is presented as a one- Industry- stop purchasing solutions for buyers of focused trade hotel interiors, including those searching show HotelPlus for clean, green, and smart solutions for http://www.commercial- Shanghai, China leisure spaces and furnishings. This expo.com/cn/exhibition/about 26-29 April 2018 conference may be a significant trade platform for hotel and other commercial spaces. STPA Name Description Website Type HD Expo is a hospitality conference and trade show organized by Hospitality Design magazine. The expo presents a https://www.hdexpo.com/ HD Expo forum for new products, services and Buyer-focused Las Vegas, USA networking between hoteliers, industry fair 2-4 May 2018 commercial designers, architects, developers, purchasing firms, and product suppliers. Health Services and ICHOM The world-leading event for providers, Industry- New Methods of Conference, life sciences firms and industry actors on https://www.ichom.org/events/conference-2019/ focused trade Preventive Medicine Amsterdam, NL value based healthcare. show & Diagnostics 2-3 May, 2019 WATTS UP is a leading industry-focused Industry- trade show on the maritime battery focused trade WATTS UP, industry. As such this could be a show Bergen, Norway http://maritimebatteryforum.com/news/watts-up- worthwhile market for connecting with 6-7 March, 2019 2019 investors looking to open businesses in Croatia for the construction and operation of electric vehicles. E-Mobility E-Mobility World is another industry- Industry- World, focused trade show in the field of focused trade sustainable and electric mobility. As such, https://www.ibo-messe.de/aussteller/emobility- show / Buyer- Berlin, Germany world/ focused trade 20-24 March this is an optimal market for new show 2019 investors. eMove360° eMove360° Europe is the international Munich, trade fair for Mobility 4.0. It presents the complete range of next generation and Buyer-focused Environment Germany, http://www.emove360.com/trade-fair/ industry fair Friendly Transport October 17–19, sustainable mobility solutions for Solutions 2017 connected and autonomous driving Land Land Remediation Expo is an industry- Industry- Remediation focused trade fair designed to showcase focused trade Expo, the latest innovations in the diagnosis, show / Buyer- http://www.landremediationexpo.com/ focused Birmingham, UK management and remediation of 11-13 September industry fair contaminated land. Mine Action 2019 STPA Name Description Website Type Rem Tech Expo Rem Tech Expo is an industry-focused Industry- Bologna, IT trade fair dedicated to reclamation of focused trade 18-20 September contaminated sites, environmental and http://remtechexpo.com/index.php/en/ show / Buyer- 2019 focused natural hazards, safety, maintenance and industry fair upgrading of the territory. International International Security Expo showcases Buyer-focused Security Expo, over 1,000 of the latest innovative security industry fair London, UK products and is a prime location to meet https://www.internationalsecurityexpo.com/ 3-4 December new buyers. 2019 Milipol Milipol Paris is the leading event Buyer-focused Paris, France dedicated to security and safety. In 2017, industry fair 19-22 November the event attracted no fewer than 1,005 2019 https://en.milipol.com/ exhibitors from 53 countries, 29,939 visitors from 151 countries and 161 official delegations from 77 countries. European EFAD is the European wide conference Buyer-focused Federation of for professional dieticians. It brings industry fair the Association together useful actors in the healthcare of Dieticians sector focused on nutrition. Participation (EFAD) in this conference could provide useful https://efadconference.com/ Conference, links to buyers such as hospitals or Berlin, Germany insurance systems. 1-2 November 2019 Corporate The Corporate Wellness Conference is Buyer-focused Wellness the source for latest trends, best practices industry fair Conference and innovations in employee wellness Orlando, FL and population health management. The https://www.corporatewellnessconference.com/ 28-30 October conference touts its ability to make B2B 2018 connections. Nutrition STPA Name Description Website Type eMove360° eMove360° Europe is the international Munich, trade fair for Mobility 4.0. It presents the complete range of next generation and Buyer-focused Germany, http://www.emove360.com/trade-fair/ industry fair Intelligent Transport October 17–19, sustainable mobility solutions for Systems 2017 connected and autonomous driving Sicur, Sicur is an international Security, Safety Buyer-focused Madrid, Spain and Fire Exhibition. industry fair http://www.ifema.es/sicur_06/ 25-28 February 2020 DSEI DSEI is an event that connects Buyer-focused London, UK governments, industry thought leaders industry fair 10-13 September and the global defence & security supply 2019 chain. With a range of valuable opportunities for networking, a platform for business, access to relevant content & https://www.dsei.co.uk/ live-action demonstrations, the DSEI community can innovate, share knowledge, discover & experience the latest capabilities across the Aerospace, Defense Dual Use Land, Naval, Security & Joint domains.