Origins of Foreign Direct Investment in Croatia: Application of an Expanded Gravity Model

This paper examines the national origins of foreign direct investment (FDI) into the Republic of Croatia on the eve of its 2013 accession to the European Union. Using an expanded gravity approach, six models analyze FDI inflows with regard to cumulative FDI value from 2000-2009, FDI during the global recession (2008-09), and FDI measured by the number of transactions. Results show that Croatia fits a distinctive transition economy scenario that favors follow-the-leader firms from nearby (especially EU) origins. The analysis also unveils the role of shared history and culture with other successor states of the Austro-Hungarian Empire and Yugoslavia that favors firms from those origins. Other aspects of FDI are also addressed, including the spatial distribution within Croatia with reference to economic sector of activities. Policy implications of the results include a call for government action to enhance FDI facilitation for foreign firms.