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You can read the executive summary here and download the full report below.

Executive Summary

1. Introduction: Main Recent Trends in the National Innovation System

Within the EIS framework, Croatia belongs to the group of 'catching-up countries' (alongside Malta, Lithuania, Hungary, Greece, Portugal, Slovakia, Poland, Bulgaria, Latvia and Romania). Its SII score has remained at 0.23 (it has been at this level since 2004). Its performance seems to be trailing. No catching-up effects have been observed, as the SII score of Croatia remains low and stable — i.e. it is not moving towards the EU average. The relative position has thus worsened since last year.
Currently, only Turkey, Latvia and Romania are behind, and Bulgaria has displayed the same SII score. However, it should be noted that the analysis is based on rather limited dataset. Namely, 11 indicators out of 25 are not available. The first Community Innovation Survey has only been conducted in late 2007 (the results of which are expected in 2008).
Results of other available research show improvements in innovation performance, such as the effects of knowledge transfer and increasing innovation capability of foreign-owned enterprises in the period between 2003 and 2006. It remains to be seen whether these improvements will also be reflected in the CIS results. On the other hand, the analysis of indicators of macroeconomic performance shows that some macroeconomic indicators in Croatia grow faster than in the EU. In 2007, GDP per capita reached 57.5 % of the EU-27 average, while the Croatian real GDP growth rate maintained its solid expansion with the overall growth rate reaching 5.6 % (compared with the EU-27 average of 2.0 %).
The growth was predominantly based on private consumption and investments, whereas the trade deficit has expanded. The unemployment rate has dropped by 2 percentage points to 9.1 %, but remained higher than the EU-27 average (7.1 %) in 2007. Labour productivity (GDP over total employment) showed a fast convergence towards the EU-27 productivity levels, reaching 71.1 % in 2007.
However, improvements are particularly required in the areas of employment creation and export competitiveness. It seems that the observed GDP growth is still weakly related to innovation capability and export competitiveness of Croatian enterprises. Innovation performance occasionally initiates a public debate, but that is rarely translated into action. Business R&D expenditures are still well below EU-27 levels (respectively 0.51 % and 1.17 % of GDP). Although R&D and innovation policies are reasonably well funded (government R&D expenditures are at 0.71 %) and surpass the EU-27 levels, their efficient utilisation remains an issue. Indicators of intellectual property and innovation drivers are rather low.

2. Major Innovation Challenges and Policy Responses

The innovation policy in Croatia is still largely underdeveloped, and burdened by the fact that systematic data collection has been introduced in 2007 (whereas evaluation is not performed at all).
Consequently, any choice of challenges may seem arbitrary and/or be influenced by examples of other countries. The following issues have thus been identified as relevant challenges that provoked a recent policy response (further elaboration can be found in the introduction to the section 1.3.).

Challenge 1: Increasing participation in lifelong learning
Innovation depends on a well-trained workforce capable of absorbing and developing technologies and products. Given the changes in skill requirements, lifelong learning becomes an important prerequisite of the innovative capability of enterprises. However, its introduction requires a paradigm change whereby the learning continues throughout one’s working life (and even further). Apart from on-the-job training and post-graduate qualifications (acquired by few), further learning has not been actively encouraged in Croatia in the past. At best, it has been viewed as a process of marginal importance; at worst, it has sometimes even been viewed as a distraction from more important tasks.
This is reflected in the low participation of working age citizens in lifelong learning, which has grown recently to 2.9 % in 2006, but is still low. The current education sector reform aims to change that situation. This particularly entails improvements in adult education, as the, arguably, least developed segment of the education system. The Adult Education Act was adopted in February 2007, which was complemented by adoption of the Act on State Aid to Education and Training later that year (e.g. providing tax deductions to employers financing such education). In addition to specifying the activities and objectives of the Adult Education Council and the Agency for Adult Education, the Adult Education Act defines the forms of adult education and regulates their provision. The CARDS 2004 Adult Learning project was also initiated in late 2007. Its focus is on improvements in adult education and training, adjustment and modernisation of the training programmes and training system, and an increase in public awareness of the importance of continuous training. This measure may not directly influence innovation performance in the short term, but is likely to facilitate adult learning — a precursor of innovation.

Challenge 2: Increasing business R&D expenditures
One of the key issues in the Croatian innovation system is the low level of business R&D expenditure, which is then reflected in insufficient innovation performance. Although innovation may be performed even with low R&D budgets (especially in the case of incremental and process innovations), this is often difficult to achieve as the data on innovation outputs (e.g. pilot CIS survey undertaken in 2004) demonstrate. Innovation often plays a secondary role in business strategies, and is more likely to be stimulated by competition rather than by internal resources and capabilities. The key policy measures in this field comprise tax incentives and the Technology-Related Research and Development Programme (HITRA – TEST), which is aimed at pre-commercial technological projects. Both of them underwent changes in 2007. Tax incentives were increased and incorporated into the state aid regulation compatible with the EU, whereas the project evaluation rules and institutional setting have been reformed

Challenge 3: Increasing innovation diffusion and providing support to enterprises with high growth potential
The insufficient innovation performance is reflected in two ways: (1) few innovations are developed and/or introduced, and (2) the innovation diffusion is relatively slow. The latter is due to insufficient infrastructure and inadequate skills (which are not adequately tackled through adult learning activities), as well as by the low propensity of enterprises to cooperate with other enterprises (suppliers, customers, competitors, etc) and academic institutions. This situation especially affects enterprises with high growth potential, which is not adequately realised due to unfavourable external conditions. This is a large and diffuse policy area where financial incentives may not be sufficient enough to bridge gaps. The policy measures focus on building interfaces and collaborative projects through the government agency BICRO (Business Innovation Centre of Croatia). Its programmes developed and/or introduced in 2007 include the development of technology infrastructure (TehCro), introduction of the first public-private private equity fund (VenCro), R&D services for SMEs (IRCro), and the
business competitiveness upgrading programme (KonCro).

Summary table: innovation challenges, policy responses and impact

3. Innovation Governance and Policy Trends

The government budget for science, technology and innovation activities is growing at a moderate pace. There are also funds available through international assistance (e.g. Science and Technology Project [STP] supported by the World Bank). These funds are partially spent on the reform of the existing institutions, and on the development of some new ones (e.g. Unity through Knowledge Fund).
However, the efficiency of spending remains an issue, as well as the level of achievement of policy objectives. Innovation policy in Croatia stems from both conscious design (which is often facilitated through policy transfer from abroad), and evolution of the existing measures in accordance with the observed needs. Innovation policy is still in development. It may still have too strong an internal focus, with an insufficient grasp of the needs and strategies of all its intended beneficiaries. Innovation policy should be analysed by means of independent evaluation, which has not been undertaken so far.
In 2007, several new steps in policy implementation had been undertaken. However, uncertainty related to the results of parliamentary elections (conducted in November 2007) and the election campaign prior to and parliamentary elections may have slowed down the pace of policy implementation — e.g. in the case of the adoption of the Action Plan for Increasing Investments into Science and Research. The policy focus was on the reform of government agencies — the Business Innovation Centre of Croatia (BICRO) and Croatian Institute of Technology (HIT).
BICRO has undertaken further steps in implementation of its projects related to subsidies to the technology infrastructure (TehCro), foundation of the first public-private equity fund (VenCro), provision of R&D services for SMEs (IRCro), and business competitiveness upgrading (KonCro). HIT has introduced new rules for evaluation of pre-commercial research and technology development.
Within the Unity through Knowledge Fund, which aims to link researchers and professionals in Croatia and Croatians living abroad, the Innovation Grant programme has been developed in order to assist both researchers from the Croatian diaspora (who want to continue research towards commercialisation in Croatia), and Croatian scientists who need to collaborate with the diaspora to reach the same goal. Furthermore, following several changes in the tax system, new tax incentives for R&D and innovation activities have been introduced. It remains to be seen to what extent these measures will contribute to effective policy implementation.

4. Conclusion: Future Actions and Opportunities for Innovation Policy

Innovation policy in Croatia is relatively comprehensive, but there are still gaps that need to be addressed. These gaps are often related to policy implementation mechanisms (which can be further developed and/or simplified for final beneficiaries), promotion and communication of policy measures, coordination between different bodies responsible for innovation policy, and planning and evaluation processes (which are still either underdeveloped or missing).
Consequently, future policy can make use of the following suggestions:
• implement the Action Plan for Increasing Investments into Science and Research and monitoring its implementation on an annual basis;
• perform regular evaluation of innovation policy (including the work of institutions which are responsible for policy implementation);
• develop regional innovation strategies;
• analyse and redefine mechanisms of coordination between different government bodies (ministries, agencies, regional authorities, etc.) responsible for socio-economic development in general and innovation policy in particular;
• develop a platform for dialogue among researchers, policy makers, business people, media, the general public, and others concerned by innovation development.