Rural Businesses in Croatia and EU Accession: Lagging or Leading?

The assumption that rural economies lag behind urban ones, as far as the provision of business infrastructure is concerned, underlies many development debates in East and Southeast Europe², as well as in other transition economies. A casual analysis of the provision of business development services such as business centres, incubators, and information centres suggests that the availability of these services is greater in urban than in rural areas–suggesting prima facie needs to improve the business environment in rural areas.

The Business Information Needs Survey is the largest recent survey of businesses carried out in Croatia (see www.bizimpact.hr). This telephone survey, consisting of 65 questions, was conducted during February-April 2008, and focused specifically on the challenges associated with accession to the European Union. The target population comprised both small and medium-sized enterprises (SMEs) with under 250 employees, and larger crafts (more than five employees). Some 2,000 respondents were sampled, out of a population of 57,600 SMEs and 2,700 larger crafts. The survey focused on companies in six different regions, the gender of the owner/director, and the area of economic activity, as well as the urban/rural dimension (in Croatia, settlements with 2,000 inhabitants or less are defined as rural, while those with more than 2,000 inhabitants are urban). Whilst recognizing that this is an imperfect definition of what comprises a ‘rural’ enterprise (the EU has no common definition of rural areas and most member states have developed their own definitions, often based on population density), it does provide a basis for analyzing the urban/rural dichotomy.

Rural versus urban business environments

A number of important differences about rural versus urban business environments are suggested by the data.

Benefits of EU accession: Croatia’s anticipated EU accession is likely to offer new business opportunities to all firms. While no significant differences were reported between rural and urban enterprises concerning perceived advantages and disadvantages of EU accession, urban enterprises are slightly more optimistic about accession (51 percent of urban enterprises regard it positively compared with 44 percent of rural enterprises). However, the survey data suggest significant differences in perceptions of preparation for accession, in terms of compliance with the laws, regulations, and standards associated with the acquis communautaire. Urban enterprises (32 percent) feel that they are fully prepared compared to rural companies (22 percent). This is likely, in due course, to translate into competitive advantages for those enterprises that have prepared for accession.

Use of business infrastructure: Perhaps surprisingly, the survey data suggest that use of business development services (BDS)³ by urban and rural firms is rather infrequent. Whilst acknowledging the important roles of BDS providers in assisting start-ups, business planning, marketing, and training, 80-90 percent of survey respondents stated that they do not use services provided by such institutions as regional development agencies, local government economic development offices, business centres, or private business consultants, in order to keep themselves abreast of important legal and regulatory developments. Urban and rural companies differed only with regard to their use of county economic development departments (there are 21 counties in Croatia). Whereas 23 percent of the rural companies surveyed tended to use them at least sometimes, fewer (18 percent) of urban counties reported ever using these institutions.

Unlike in many Southeast European countries, there is significant BDS provision in Croatia. However, the survey data show that neither rural nor urban enterprises use it intensively in terms of preparing for EU accession. Instead, the survey data indicate that the main sources of such information for businesses are not the BDS providers but rather accountants and lawyers. In reality, therefore, Croatian businesses get their support from outside the BDS system. Not only did 59 percent of the survey respondents use accountants and 24 percent use lawyers (often or sometimes) as sources of such information; they also assessed the usefulness of these services as quite high (the mean score for the usefulness of accountants was 4 on a zero to five scale). This situation did not vary between urban and rural enterprises.

Legal and regulatory preparation: In seven of the eight fields of legal harmonization investigated,⁴ neither rural nor urban enterprises are undertaking significant steps to prepare for the adoption of the acquis communautaire (see Table 1 above). This is rather surprising, given that Croatia’s EU accession is expected in the short to medium term. Reasons for this apparent lack of urgency include a lack of time and knowledge of where to obtain information about these changes, and inadequate human resources. Instead, companies stated that they largely acquire information ‘incidentally’ through the media.


Table 1: Companies that have taken preparatory steps for legal harmonization, by thematic area

Somewhat surprisingly, rural respondents report better preparation in the area of environmental protection than urban enterprises (56 percent versus 44 percent, respectively). However, rural companies are far less likely to participate in public procurement in Croatia (only 27 percent have taken part in public tenders, compared with 40 percent of urban enterprises). This is a concern, since public procurement in Croatia amounts to some €6 billion annually (15 percent of GDP in 2007), representing significant business opportunities.⁵ The sheer complexity of the relevant public procurement legislation, combined with a lack of transparency in the tendering procedures, contribute to this outcome.

Use of Information and Communication Technology (ICT): The survey data do not reveal significant rural/urban differences in the use of TV, newspapers, and magazines to keep informed about business matters. However, significant differences in internet use are apparent. Rural companies are less likely than urban companies to use the internet to obtain business information (9 percent compared with 16 percent); and whereas 64 percent of urban enterprises report frequent internet use, only 46 percent of rural companies report such use. Since Croatia enjoys near-universal internet access, this difference reflects varying business practices rather than insufficient internet service provision in rural areas. Likewise, whereas 70 percent of urban enterprises report frequent email usage, 41 percent of rural enterprises indicate no or infrequent email use. Whereas 56 percent of urban companies report use of corporate websites, this share dropped to 44 percent for rural companies, suggesting that rural enterprises are making limited use of e-business and e-commerce potential. Inadequate ICT and e-business skills would therefore seem to be a notable weaknesses of Croatia’s rural business environment.

Spinning their wheels? Rural enterprises in Croatia are not preparing
for the adoption of the EU’s acquis communautaire. © Renaude Hatsedakis

Conclusions and policy recommendations

Does access to business infrastructure lag in rural areas? There is little evidence to support the view that rural enterprises in Croatia are systematically and consistently disadvantaged compared with urban businesses in this respect. However, there are some important gaps that should be addressed in order to improve the business environment in rural areas. Key recommendations include the following:

Use of ICT: Rural enterprises are systematically under-utilizing the potential for e-business and e-commerce. This suggests a need to raise ICT awareness and skills for small businesses in order to improve market access and competitiveness.

Legal and regulatory preparedness: Legal and regulatory requirements pertaining to such topics as standards for agricultural products, environmental protection, and public procurement are extremely important for rural enterprises. Further awareness-raising is needed in these areas if rural companies are to make full use of the business opportunities offered therein.

Business development services: Neither rural nor urban enterprises in Croatia appear to use these services intensively; nor do they find them particularly useful–in sharp contrast to services provided by accountants or lawyers. Some of the current support for BDS providers should be shifted to efforts to make better use of accountants and lawyers in rural areas.

Ricardo Pinto is an international development consultant at Stratagem Consulting International (www.stratagem-consulting.biz) and is Team Leader of the EC-funded BIZimpact project. Alexander von Brühl-Pohl is completing an International Business Administration degree at the Vienna University of Economics and Business Administration.