Back to the Future II: These are the 3 things the Croatian government can do for the IT industry!
In the last article, I pointed out that we failed to take advantage of the potential offered by the second wave of Internet technologies – the Y2K virus was obviously not enough to push us, so is there a chance that this new virus, our cathartic digital transformer Sars-CoV-2, would be a stronger lever in rotating IT sentiment?
In Part 1, you will learn about the first and second wave of Internet technologies that led to the current situation and possible solutions, which we discuss in this article.
To the introductory question, the big blue IBM, consiglieri of world governments, even the hated ones, says – “YES”! In 365 pandemic days, we’ve got 5 years of IT adoption, open source developers are launching robots to Mars, eCommerce accounts for more than a third of total spending, and traffic lights are warning pedestrians not to walk with their eyes glued to their phones.
Welcome to…
The third wave of decentralized automatons
You can rest assured that I will not suddenly pull out artificial intelligence (AI) or blockchain (DLT) as the saving messiah of Croatian IT.
Fetish statements like “New oil is given” or “AI will rob us of all our jobs” are rarely constructive Deus Ex Machina. Historian David C. Brock calls these moments “Wishful Worries”, problems that people would like to have, instead of existing agonies. Politicians and LinkedIn pitchers adore such narratives since they smoothly divert attention from boringly ungrateful but important challenges.
Should we still encourage the creation of niche AI startups? Of course! McKinsey says AI is already used on over 50% of IT projects, and look at the efforts of CroAI or our Gideon, Mindsmiths, airt, Microblink or ExRey. Can Croatia become a safe haven for decentralized financial (DeFi) platforms? We’d be thrilled!
But “no one” lives in a vacuum – such strategies are present in all second-wave table countries, and the success of their implementation lies in operations and timing; this is when all the speakers begin to lose their breath as they elaborate. More experienced developers will always point out to this reality – human, time and money restrictions are the real topics that sink IT projects.
Neural networks are not waiting for Croats to agree with each other, Source: https://thispersondoesnotexist.com/, Stanford AI Index, Pubmed, StateOfAi, Elsevier
Don’t jump the gun right away, AI and DLT are potent third wave technologies, but as the former has shown, technology promotion also lies with decentralized entrepreneurs, associations, development centers and academia. It is up to governments to ensure a systematic and stimulating business climate, a “framework for success”, and this is not done through skirmishes with associations, which at the same time are accused of political coloration.
Simply put, the IT (including AI & DLT) will flourish in Croatia if the government, with a symbiotic discussion with industry, boldly steps on these three points:
- (A) A rise in net wages
- (B) The abolition of income taxes
- (C) Facilitating and accelerating regulations
A. Higher salaries for everyone, not just them!
While it does not align with the sensationalized reporting of the tabloids, the figures show that Croatian IT companies pay above-average gross2 salaries.
Below in the table, for example, you can see the GROSS/UP ratio – the percentage of income that goes to gross2 salaries is higher in Croatia than in the average EU country. Also, a more complete context on wages is obtained when gross2 intersects with the newly created value per employee factor, where Croatia is only at 43% of the EU average.
On the other hand, look at the “Net/Value” ratio, which shows the size of the net salary in relation to the added value (a higher ratio means a higher net for the same output) – only Hungary is behind us.
The elephant in the Croatian living room is actually a huge discrepancy between what it costs the employer (gross2 multiplied by the effectiveness rate) and what the employee gets as his salary (net).
The capital is a good example – the employer will have a total gross cost of HRK 17,600 for Zagreb’s employee net salary of 10,000 HRK (I took the average net amount from Tomislav Grubišić’s exhaustive analysis). We need to add the internal ratio of commercial and non-commercial activities to the cost, ie. output effectiveness. For example, service IT has a Billable Rate (BR), and production teams Team Velocity or Release Burndown as similar metrics of company analysis – you get the point – not all employees are effective 100% of the time.
For a BR of say 60%, an employee will have to earn for the company at least $30,000 to maintain their monthly cold drive. We haven’t even started talking about the company’s profit or investments, and the cost of doing business has already risen to 3 times the net salary. The generator of inefficiency is, as the Japanese proudly say, the management of the company, but also, among other things, the first-wave Shirky, which we will discuss in Section C.
Jelena Jelušić (starting around the 52nd minute) explains the researched wishes of Croatian developers. Processes (internal inefficiencies), culture and wages are the first three sources of frustration. Of course, 78% of respondents say that a better salary is the most important factor when changing jobs.
This does not bother the local digital because it is “remote” for any part of the world and it is a fascinating feature of the IT sector – a team raised in a culture of hedonistic individualism will take into account only the net amount and will not worry about econometrics or gross lamentations of local CEOs. This is quite understandable and clear to most entrepreneurs, which we were talking about recently on the employer branding days (video, view above).
And it is neither an idea nor a need for Minister Marić to be blown away – looking at the table above, it can be concluded that it would be enough to reduce total benefits from 76% to 65% to increase Net/Value above 0.395 (EU average).
Reducing expenditure on wages will open up greater opportunities for companies to equalize the salaries of all stakeholders in digital production – Croatia has proven to have excellent engineers, but the same goes for copywriters, project managers or UX designers, extremely important for the new wave DeFi projects.
The increase in the net salary will reflect on the retention of both the domestic, and foreign workforce (we have the highest expense on the Relocate tool) to whom a pleasant net payment climate means more than a digital visa. Such digital nomads will be crucial for riding the desired machine learning or DLT projects, given that we are already dangerously short of IT staff – both for the already shown IT flagships, and for the new startups.
B. Income tax? What is that?
Wage growth can be encouraged in another way – by abolishing the income tax. It is a classic (legitimate!) attraction for foreign investors anyway.
I guess the IT sector is largely reinvesting its profits. The retained surplus would therefore spill over into polishing internal inefficiencies (which in turn helps developers and indirectly improves salaries); but we will not deal with assumptions here. Three dream scenarios are more interesting…
IBB has already written about creating new startups from the nests of existing companies, and it is a powerful tool. The increase in cash-cushion that follows the abolition of income tax, will enable more frequent seed investment of companies in the startups of their employees, ie. “Talent recycling”.
What figures can we expect here? To begin with, Atomico shows that three quarters of European seed investments take place locally – in 2019, the Croatian IT industry earned HRK 26.9 billion. The average profit margin is 8.1%, which brings us to an annual profit of HRK 2.178 billion. 10% income tax is HRK 217 million (or $ 8.65 per capita), which is the Olympic pool of seed investment funds.
HGK reports that 4,000 IT companies operate in Croatia. If only 5% of them decide to support one startup, we come to the number of 200 new technology companies that start with the help of healthy unencumbered capital. McKinsey, on the other hand, presents that 1% of startups invested in the seed phase become unicorns, which means that Croatia, with these (even shy) numbers, could potentially get 2 “Infobips”.
Take a look at the graph (especially the abscissa) if the idea of 200 new Croatian startups seems unrealistic. Croatia could have an additional $8.65 per capita based on this measure alone.
Atomico | State of European Tech 2020
Interesting (more realistic?) is also the effect of company spin-offs that arise as a result of retained earnings. Let’s say you have an IT company that has a profit of two million kunas. Under the current law, the company will pay HRK 200,000 of income tax, as well as an advance payment of future income tax. Such cumulative HRK 400,000 over a year is legitimate seed capital that the company happily allocates to creating SaaS spin-offs. An example is the team from the Osijek Prototype which needed approx. half a year for the launch of v.1.0 estimation SaaS Propos. Slavonian, but worldly!
Pivoting the company is an even bigger move than spin-offs, and if you think I’m typing fables, check out Basecamp or Mailchimp which is valued at $ 4.5 billion – they’re built just like that.
C. Regulate me gently
The birth of Mailchimp took place at the very beginning of the second wave, in a systematic, entrepreneurial-minded Atlanta. The US $2 trillion recovery document introduces us to this enterprise – the text clearly includes the IT vertical, electrification of vehicles or chargers, expanding optical Internet access, and a whopping $50 billion for a domestic chips development. And China is mentioned often.
Americans should not be copied, nor is it realistic, but we can learn something from them – for the industry to flourish, we need to symbiotically encourage discussion at the state-economy-academy-association level, as the first wave showed us. And what kind of discussions should we encourage? There are already some good examples!
Atomico | State of European Tech 2020
Ivan has already tweeted about Croatian visas for digital nomads and bureaucratic complications, and progress has been made. From 2021, there are no quotas for developers or UX designers, nor are special permits required for the employment of third-country nationals, which was worked on by HUP ICT and Hrvoje Balen. The Law on Foreigners better defines student visas and the possibility of foreign students working through the Student Center part-time.
Davor Runje (CISEx) described a potential change in the taxation of private investors. The idea, modeled on the British SEIS (Seed Enterprise Investment Scheme), is that 75% of the amount invested in qualified companies should be tax deductible, regardless of the success of the startup. We are currently working with HUP’s ICT section on a legal proposal for the introduction of such facilities.
Reducing bureaucracy and facilitating foreign investment is one of the goals of accessible regulation. An example of this is Estonia, a desirable investment destination.
UBIK/HANFA dynamics is also following the same footsteps, which Vlatko Hrdalo described on his blog. Namely, Croatia was among the first EU countries to introduce the 5th revision of the AML (Anti-money laundering) directive into its anti-money laundering law. It went into effect in January 2020, but one thing remained unclear – should crypto-to-crypto transactions, such as decentralized exchanges like Uniswap, be checked for money laundering? HANFA says that they are not required to, thus opening Croatia to a possible flood of DeFi startups and various decentralized applications, ie. it could become DeFi heaven.
OK, I promised at the beginning that DLT or AI technologies would not be a specific topic for this article, and that is true, except for one thing – timing!
The beginning of the third wave draws the same patterns of behavior, but also opportunities, similar to earlier waves.
The same idealism and destabilization of the established system is emerging – especially through the impact of DLT on the financial sector. The first “intoxicated” charge of AI dev energy is also current, and it is accompanied by a set of underexposed pioneers who are putting together some new algorithms. The current EU non-refundable funds for NPOOs are also the icing on the cake, which, by all accounts, will be the most allocated for Croatia (Croatia ranks first in terms of allocated funds as a percentage of GDP).
Neuralab
Where will we be in 2031?
But for surfing on the third wave, it will not be enough for the government to play the startup world by releasing the FINA Frendi application or sticking “artificial intelligence” on the introduction of its NPOO document (true story).
The state needs to break away from the described behavior patterns and start solving fundamental problems. Because the leaders` birocratic (Shirky!) lethargy from the first wave may not have visibly affected the IT vertical, but the twenty years of avalanche of indolence in the second wave definitely vaccinated us from digital El Dorado.
And finally, part of the responsibility lies with us as an industry. The analytical considerations we expect from the government are also expected from any digital professional reading this text. Therefore, we should be clearer and louder if we want to take a positive approach at “Back to the Future III”. Because if we miss the third wave, it won’t matter what we think about later trends.
Ex QBASIC developer that ventured into a web world in 2007. Leading a team of like-minded Open Source aficionados that love design, code and a pinch of BBQ. Currently writing a book that explains why ‘coding is the easier part’ of our field.
