Top 11 Challenges of Doing Business in Slovenia | 2024

The eyes of some business owners gleam and grow wide with excitement at the prospects of going and growing globally. This is commendable, as they are ready to take on more risks. A word of caution here: the grass is not always greener on the other side. Yet, there is no harm in theoretically exploring the possibilities as an investment destination.

Here in this piece, we have done the hard work for you. Read ahead to understand the challenges of doing business in Slovenia.

Background

Slovenia, located in Central Europe, is a small but geographically diverse country with approximately 2.1 million people. Its history dates back to the 5th century BC, shaped by various invaders and settlements. The country gained independence from Yugoslavia in 1991 and has become a stable and economically progressive nation with a diverse export-focused economy. The government operates under a parliamentary system, with the prime minister as the head of the government.

The Most Common Types of Businesses

Slovenia's most common types of businesses are private entrepreneurs, private limited companies, and limited liability companies (LLCs). Other types include an unlimited liability company, a public limited company, a limited partnership, and a limited partnership with share capital. Slovenia's economy is small, open, and export-oriented, with investment services as the leading economic field, followed by industry and construction. The country has a highly skilled and educated workforce that has been attracting investment since the late 1970s.

Notable companies in Slovenia include individual companies such as Petrol, Krka, and Revoz. Companies of non-EU countries are permitted to conduct operations in Slovenia exclusively by establishing an affiliate, subject to obtaining a license from a relevant Slovenian or EU regulatory body.

Challenges of Doing Business in Slovenia

The top challenges of doing business in Slovenia include:

1. Starting a Business: Navigating the complex investment landscape in Slovenia can be challenging without local help, despite the country's skilled labour force and business-friendly environment. Initiating a legal entity in Slovenia poses challenges involving bureaucratic processes and regulatory hurdles. The economic landscape in Slovenia presents risks that businesses need to navigate for successful strategic investments.
2. Regulatory Burdens: Slovenian companies face heavy tax and regulatory burdens and opaque public tender processes, making it difficult to operate. Additionally, accessing credit facilities from Slovenian banks (the largest bank being the Bank of Slovenia) can be challenging, impacting business sectors' financial health and growth prospects.
3. Government Procedures: Time-consuming bureaucratic procedures by government entities pose significant challenges to potential investors (country of capital). Obtaining permits for construction projects can be a complex and time-consuming process for businesses in Slovenia. The property registration process presents challenges, potentially hindering smooth business operations by foreign companies.
4. Enforcing Contracts and Resolving Insolvency: Enforcing contracts in Slovenia takes over three and a half years on average, and insolvency cases are time-consuming with a relatively low recovery rate. This impacts investor protection and foreign investment attractiveness.
5. Transparency and Privatization: Potential investors in Slovenia face challenges due to a lack of transparency in economic and commercial decision-making processes and resistance to privatization and foreign acquisitions of state-owned firms among many Slovenians. This resistance persists despite the importance of foreign direct investment to economic growth by domestic investors.
6. Workforce Costs: While the workforce is highly skilled and educated, relatively high social welfare and income taxes can make it expensive to hire new workers.
7. Infrastructure and Trade: Cross-border business activities in Slovenia face challenges such as delays in shipments, significant paperwork requirements, and intricate trade regulations and compliance. These factors can impact the efficiency of cross-border trading despite the low cost. Internally, the newly formed industrial zones have direct access to highways and railways.
8. Judicial Backlogs: Judicial backlogs can prevent the timely resolution of legal disputes (regulated by the National Assembly), adding to the challenges of doing business in Slovenia. Some offences include money laundering.
9. Labour and Taxation Reforms: The slow pace of labour and taxation reforms in Slovenia is perceived as a challenge by many private sector contacts, impacting the business environment. The tax environment in Slovenia presents complexities and challenges for businesses, affecting effective competition.
10. Electricity and Construction Permits: Business associations in Slovenia can be affected by challenges related to obtaining electricity and dealing with construction permits. These challenges may lead to difficulty securing reliable and efficient electricity services, impacting operational stability.
11. Social Considerations: In Slovenia, foreign firms face the challenge of adapting to a polycentric culture and understanding the local investment fund culture. Ongoing political and social reforms in the country may introduce uncertainties and impact the business environment.

Common Mistakes Made by Foreign Companies

Business enterprises aiming to thrive in Slovenia should be vigilant about avoiding common pitfalls:

1. Verbal Agreements: Legal documents must be appropriately signed and registered under Slovenian law, dispelling the assumption that verbal agreements suffice.
2. Language Barrier: To prevent misunderstandings, hiring a reliable translator or interpreter is crucial, especially in rural regions, when dealing with local authorities, savings banks, commercial banks, and partnerships.
3. Cultural Differences: Understanding Slovenia's polycentric culture is vital. Researching local customs beforehand and adapting establishment approaches accordingly is key to success.
4. Tax and Regulatory Burdens: Thoroughly reviewing Slovenia's tax and regulatory landscape is imperative. Organizations should plan operations with a clear understanding of these administrative tax burdens for the smooth operation of economic activities.
5. Bureaucratic Procedures: Efficiently navigating time-consuming government procedures is essential. Adequate preparation, resource allocation, and a proactive approach are necessary to overcome Slovenia's administrative challenges.

Foreign Countries' Investments

According to figures from the Bank of Slovenia, the most important sources of foreign direct investment in Slovenia in 2021 were Austria (24.9 percent), Luxembourg (11.9 percent), Switzerland (11.2 percent), Croatia (9.7 percent), and Germany (8.1 percent). U.S. companies represented 8.9 percent of total incoming foreign direct investment in 2021, with 96.1 million euros (105.5 million dollars) invested directly and 1.53 billion euros (1.68 billion dollars) invested through subsidiaries in other European countries. The combined investment of 1.63 billion euros (1.79 billion dollars) positioned the United States as Slovenia's sixth-largest foreign direct investment source.

As per economic indicators, in 2018, Slovenia witnessed a surge in foreign direct investment (FDI), as reported by the Bank of Slovenia, with total inward FDI reaching EUR 15.2 billion. This marked an 8.6 percent rise compared to the preceding year.

Navigating Economic Risks

The economic landscape in Slovenia presents challenges for private firms, including a small domestic market heavily reliant on exports, an ageing population affecting labour availability and consumer demand, and a high share of state-owned enterprises that can hinder competition. Organizations in Slovenia must address these challenges strategically by diversifying markets, adapting to demographic shifts, fostering innovation, and understanding the regulatory landscape while building resilience to economic fluctuations.

The investment screening mechanism in Slovenia mandates scrutiny for foreign investments holding a minimum of 10 percent of voting rights in Slovenian companies. This regulation applies to entities engaged in critical infrastructure, critical technologies, dual-use items, and those involved in the supply of critical inputs.

Conclusion

The challenges businesses face in the Slovenian market focus on issues such as lack of transparency in decision-making, bureaucratic procedures, opaque tender processes, and tax and regulatory burdens. Additionally, the challenges faced by investors and businesses must not be overlooked because of the high skill level of the workforce, modern infrastructure, and other attractive aspects of the Slovenian market.

Despite the challenges of doing business in Slovenia, the country is ranked 35th in the world for ease of doing business by the World Bank and International Finance Corporation (IFC).

FAQs

How does local knowledge contribute to overcoming challenges in Slovenia?

Local knowledge is essential for navigating challenges, as it provides insights into the regulatory landscape, business culture, and effective strategies for overcoming bureaucratic complexities.

What opportunities exist for businesses in Slovenia despite these challenges?

Despite facing challenges, Slovenia provides opportunities for business growth, such as its strategic location among European countries, the Slovenian government support programs, and prospects for innovation and collaboration.

What are the potential fines for restrictive agreements and abuses of dominant positions in Slovenia?

In cases of engaging in restrictive agreements and abusing dominant positions, the fines can amount to a maximum of 10 percent of the undertaking's annual turnover from the previous business year. This Competition Protection Agency (CPA) is responsible for enforcing competition rules and preventing restrictive agreements and abuses of dominant positions in the market.