Fiscal policy and regional development: an empirical analysis of the war-affected regions in Croatia


The paper analyses the effectiveness of the current Croatian regional fiscal policy in terms of its potential effects on stimulating economic growth in the war-affected regions. It is investigated whether sector (production vs. services), firm size, and the after-tax profit affect the investment behaviour in terms of the profit share re-investment. We estimate single and multigroup structural equation models treating firm size and re-investment behaviour as latent variables. The result suggest significant differences between production and service sector firms, and also some differences between firms of different sizes in respect to their re-investment tendencies. Namely, we find the relationship between the latent size normalised to net profit and re-investment share most pronounced among small and medium production firms, while such effect was not found for service sector and large firms. The results suggest that the enterprise size and sector do affect profit-share re-investment and that a more efficient fiscal policy could be designed by differently treating firms of different sectors and sizes.