Following the ABC framework for firm growth proposed in Grover, Medvedev and Olafsen (2019)<sup>21</sup> , we make the following recommendations for enhancing productivity and business dynamics in Croatia:

1. **A** llocative efficiency: The fact that management capabilities are negatively associated with firm age is an indication of a lack of learning and selection mechanism operating in Croatia, especially in the services sector. Comparison with peer countries reveals slow pace of business environment reforms in Croatia. The 2018 Global Competitiveness Report of the World Economic Forum ranks Croatia at 68th place, the lowest among EU Member States. Croatia also continues to lag Central, Eastern and Southeastern Europe (CESEE) countries in key Doing Business indicators, including those relating to starting a business, dealing with construction permits, access to credit and resolving insolvency. Croatia’s overall ranking on Doing Business 2019 is 58th, falling 7 places compared to last year. Firm entry is poorly ranked, at 123rd place, with 8 procedures that typically last 22.5 days and costs of 6.6 percent of income per capita. This is more burdensome than what is required in the ECA region and double the average of OECD countries. Relative to its CESEE peers, Croatia is not doing better on resolving insolvency matters either. The inefficient insolvency framework obstructs exit and re-entry of businesses into markets, which could potentially contribute to significant misallocation in Croatia. The Doing Business Report 2019 ranks Croatia at 59th place out of 190 economies on the ease of resolving insolvency. Policies to support healthy business dynamics need to establish the basic enabling conditions and facilitate reallocation of resources (e.g., labor, capital, land) across firms, for example, by easing the business environment for entry and exit of firms.  Such policies will increase competition and market will ensure that firms are motivated to upgrade and invest in their capabilities.

2. **B** usiness to Business linkages: Our paper finds that firms with foreign linkages, that is, exporters are more likely to be better managed. In this context, policies to connect firms to export markets can encourage learning and hence better management practices. Such firms are more likely to engage in quality upgrading, leading to higher productivity and firm growth.

**3. C** apabilities of firms: More critically, our work confirms the tight association of managerial capabilities with firm performance for firms in Croatia. Management matters not only for productivity but also for profits and innovation. Thus, firms in Croatia are more likely to benefit from training on structured management relating to these practices.

> 21 This framework proposes that policies for improving firm dynamism and supporting job creation should steer away from picking potential winners and focus on improving **A** llocative efficiency, strengthening **B** usiness-to-business spillovers, and building firm **C** apabilities. These policies rely on encouraging innovation, network and agglomeration economies, global linkages, worker skills and managerial capabilities, and financial development to rebalance growth/productivity policies.