This dissertation examined the impact of changes in cost competitiveness on the exports of manufacturing firms in the Republic of Croatia in the period 2002- 2022. Competitiveness is closely linked to living standards, with more competitive economies generally achieving higher levels of well-being for their citizens. As Croatia is a small open economy with a liberalized balance of payments, the competitiveness of the tradable goods sector reflects the competitiveness of the economy as a whole. The low competitiveness of Croatian goods exports is reflected in the fact that Croatia's share of goods exports in global and EU goods imports is the lowest among the comparable new EU member states (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia). Although this share has risen slightly in recent years, it has not been enough to push Croatia out of last place in the rankings. This means that there is still much room for improvement that could accelerate economic growth and income convergence towards the EU average. Among the comparable new EU member states, Croatia is also significantly less focused on the manufacturing sector. The export structure of the manufacturing sector is relatively unfavorable and is dominated by products of lower technological complexity. The technological intensity of Croatian manufacturing is not developing over time towards a greater share of sectors with higher technological levels, where value added is generally higher and spillover effects are stronger. Compared to other comparable countries, Croatian goods exports are characterized by a higher share of primary products and products with a lower technological base. Such an export structure implies the importance of price and cost for export performance, which is the main reason why this dissertation investigated the relationship between cost competitiveness and exports of Croatian manufacturing firms. The research focused on manufacturing companies, as over 80% of the value of the country's goods exports is generated in this macro sector. Moreover, manufacturing is the main source of technological progress and has significant spillover effects on other sectors. It is an important macro sector of the economy due to its interconnectedness with other sectors in the form of "forward and backward linkages" and its ability to employ workers and generate rising incomes. A review of the domestic literature reveals a considerable number of studies focusing on the study of Croatian exports. The literature is quite rich in studies at both aggregate and sectoral levels, with the latter regularly focusing on the manufacturing sector. However, fewer studies have been conducted using microeconomic data at the firm level. Research on the relationship between price and cost competitiveness and Croatian exports has led to contradictory conclusions, with a limited number of studies conducted at the microeconomic (firm) level, especially those examining the relationship between unit labor costs as a measure of cost competitiveness and exports. In this dissertation, cost competitiveness is mainly examined on the basis of unit labor costs. The empirical part of the dissertation represents the main scientific contribution by demonstrating a statistically significant relationship between cost competitiveness and exports and export shares of Croatian manufacturing companies. This is done through a panel analysis using the first difference ordinary least squares (OLS) estimator. Cost competitiveness, relative cost competitiveness and labor productivity are significantly associated with firms' exports and export shares in all specifications, while unit material costs are significant in most specifications. Considering these results and the fact that the structure of Croatian goods exports is still relatively unfavorable compared to the new EU Member States (it is dominated by sectors with a low technological base), while the level of development and quality of exports have not improved significantly, it can be concluded that most exporters compete on prices and costs rather than on product quality. Cost control is extremely important in such an export structure because exports react relatively strongly to a deterioration in cost competitiveness, and their decline can have undesirable macroeconomic consequences such as rising unemployment, lower incomes and a decline in living standards. Since ULC and labor productivity are significant predictors of firms' exports, but compensation per employee is not, it can be concluded that productivity and the ratio of labor costs to sales are important for exporters' competitiveness, while compensation per employee (gross wages) is not significantly related to exports. The weak relationship between exports and compensation per employee suggests that there is scope for wage increases that will not significantly affect exporters' competitiveness. This suggests that competitiveness should be driven by productivity growth and not by a reduction in labor costs. The weak relationship between compensation per employee and exports implies that competitiveness will not be significantly increased by a reduction in wages and consequently neither will exports. Internal devaluation measures could therefore only have a limited impact on manufacturing exports. The empirical analysis confirms that the relationship between ULC and company exports is non-linear, but not asymmetrical. The negative effect of ULC on exports increases with increasing speed, i.e. as the ULC level rises, the sensitivity of exports to ULC increases. When ULC is low, the product price can be relatively low (competitive), so that an increase in costs does not significantly affect competitiveness and does not reduce exports (the sensitivity of exports to costs is low). If ULC is relatively low, the pass-through effect of ULC to prices may also be low – in such a situation, labour costs are relatively low in relation to sales, so the company can absorb rising costs through margins, resulting in a weaker price response to cost increases and thus a weaker response (sensitivity) of exports to costs. On the other hand, if the ULC is relatively high (labour costs are high relative to sales), the product price could be relatively high, profit margins could be lower, and cost increases could be passed on to rising prices to a greater extent, making exports more responsive to cost changes (the elasticity of exports with respect to costs increases). In this situation, a small increase in ULC and the subsequent price increase could be more significant for exports and have a greater impact on competitiveness and sales than a low ULC. In companies and sectors where the ULC is high, it must therefore be controlled, as an additional increase in the ULC, especially a higher one, could significantly affect the competitiveness of exports. The next important result of the empirical analysis is the confirmation of the importance of heterogeneity between firms, which influences the sensitivity of exports to ULC. ULC is a significant predictor of exports in all manufacturing sectors, while unit material cost are significant in less than half of the activities. The elasticity of exports to ULC varies across sectors, which is to be expected as they differ in numerous characteristics, including productivity, demand, production technology, capital intensity of labor, share of labor costs in total production costs, export intensity, concentration, etc. The analysis further shows that ULC is a significant predictor of exports in all sectors, regardless of the level of technological intensity of production, and that there is some evidence of differences in elasticities with respect to technological intensity of production, although the results are not robust. The sensitivity of exports to ULC increases with increasing levels of ULC and the share of labor costs in total operating costs, except in high-technology sectors. This does not mean that costs in these firms are unrelated to exports, but rather that a higher level of ULC and a higher share of labor costs in these firms does not indicate low competitiveness, but could signal a higher level of human capital and skills, and thus product quality and export capability. The results also show that total factor productivity (TFP) and export intensity have a significant influence on the relationship between exports and ULC. As export intensity increases, the sensitivity of exports to ULC increases, while the opposite is true for productivity measured by TFP. For example, companies in the last decile of the TFP distribution (the most productive) have an elasticity of exports with respect to ULC that is almost half as high as firms in the first decile of the distribution (the least productive). This result can be explained by the fact that more productive firms absorb cost increases through profit margins to a greater extent than less productive firms, which affects the relationship between exports and ULC. Therefore, part of the variation in the export elasticity of a given sector can be explained by differences in productivity. The study shows that ULC is a significant predictor of exports for firms of all sizes and that the sensitivity of exports increases with the size of the firm, but only in the period before Croatia's accession to the EU. Moreover, the elasticity of exports increased in the post-EU accession period, which means that cost competitiveness, measured by ULC, has become a relatively more important factor in the export performance of the average manufacturing firm in Croatia. The increasing sensitivity of exports is present in the entire sample and results from the increased sensitivity in the group of small firms. Since export elasticity increased in the group of small firms, while it decreased in the group of large companies, it cannot be conclusively determined whether export sensitivity has changed overall after Croatia's accession to the EU. Future studies could identify the reasons for the decrease in export sensitivity among large firms and the increase in sensitivity among small firms. The latter could be due, among other things, to the fact that companies sell in more competitive markets, are more exposed to international competition, the export structure has changed and market information and transparency have improved (stronger price signalling). Additional specifications have shown that the export elasticity of the average manufacturing firm has increased in the post-2020 period compared to the previous period (from 2013 to 2020), indicating a stronger relationship between costs and exports over time. This further emphasizes the importance of maintaining cost competitiveness. The research conducted in this dissertation contributes to the understanding of the relationship between cost competitiveness and exports of manufacturing firms in Croatia, as well as to the literature on heterogeneous firms, and trade elasticities. Trade elasticities are crucial for assessing the impact of trade liberalization on economic welfare, the models of central banks and international economic institutions, the literature on global vector autoregressive models, economic imbalances, and the resilience of foreign trade to shocks. It also enriches the literature on heterogeneous firms, an area that has grown considerably in the number of studies over the last thirty years and which, is an important contribution to the formulation of policies that promote industry and exports. The dissertation also contributes by identifying areas where there is a lack of knowledge and research that could contribute to understanding the relationship between cost competitiveness and exports. These include examining the response of exports to various shocks, such as supply and demand shocks, and assessing the pass-through effect of costs on prices, which plays an important role in the relationship between costs and exports. This would provide additional insights into the dynamic adjustment process of firms to economic shocks and deepen the understanding of the link between competitiveness and exports. Surveys that examine firms' responses to shocks, including how they adjust their prices, output, factors and profit margins, would help to understand the impact of specific shocks on firms and sectors within manufacturing. This would provide valuable input for research and serve as a prerequisite for the implementation of effective export promotion policies. Surveys and research on the determinants of export prices would also help to understand the relationship between competitiveness and exports. Furthermore, it would be beneficial to design a study that also includes manufacturing firms from comparable new EU Member States which also act as competitors for domestic firms. This approach would broaden the scope of the study and allow it to examine issues such as the impact of competition on the relationship between exports and cost competitiveness as well as the general impact of competition on domestic exports. It would be desirable to have access to import data at the firm level, which would make it possible to examine the relationship between exports and cost competitiveness while controlling for the share of imports. For example, the literature on heterogeneous firms shows that firms that import are more productive, and the dissertation demonstrated a relationship between productivity and the sensitivity of exports to changes in ULC. Data on export destinations would also be helpful for further research. Higher quality products may be exported to more developed countries, which could lead to a different sensitivity of exports in different markets. Compared to previous research, this dissertation examines the relationship between firms' cost competitiveness and exports in much greater detail and assesses the impact of variables not considered in the earlier literature. This includes examining the role of firm size, total factor productivity, labor productivity, the share of labor costs in total firm expenditures, the capital-labor ratio, export intensity, whether the firm belongs to certain manufacturing sectors, and the level of technology intensity of production. In addition, the previous literature does not examine the non-linearities and asymmetries in the relationship between cost competitiveness and exports, which are addressed in this dissertation. Moreover, all conclusions are drawn from a more recent sample, over a longer period of time and using microeconomic data which allow us to examine the role of heterogeneity between firms in the relationship between cost competitiveness and exports. This approach shows that differences between firms shape the relationship between cost competitiveness and exports and reveal important non-linearities in this relationship. The existing literature does not examine how heterogeneity between firms affects the relationship between cost competitiveness and exports, with the exception of one foreign study. Moreover, the asymmetry and non-linearity in the response of exports to changes in cost competitiveness are not addressed in either the domestic or international literature. The study shows a significant relationship between cost competitiveness and exports for firms of all sizes, in all manufacturing sectors and at all levels of technology intensity of production, which has not been considered in previous literature. Moreover, the existing literature does not confirm the importance of price competitiveness for exports of firms with medium and high technological intensity of production. However, the results of this dissertation emphasize the importance of maintaining cost competitiveness regardless of the level of technological intensity of production. Previous studies have found either an unchanged or an increasing sensitivity of exports to relative prices. However, the results of this dissertation indicate an increasing sensitivity of exports to the ULC for the average manufacturing firm and confirm an increase in elasticity among small firms, which are the most numerous and whose change in sensitivity has influenced the overall increase in export sensitivity of the average firm. The research also shows that export elasticity has continued to increased in the post-2020 period and argues why this trend may continue, suggesting a future strengthening of the relationship between costs and exports. Finally, the study shows that all results are valid for a sample of firms with an average of less than 20 employees. This is valuable information, as the number of such companies has increased significantly over the last decade and their importance for Croatian manufacturing exports has grown. This confirms the robustness of the results of the analysis, which further supports the validity of the conclusions drawn in the dissertation. The dissertation provides important information and recommendations for economic policy makers. The empirical analysis shows a significant relationship between cost competitiveness, as measured by ULC, and exports of firms from all sectors of Croatian manufacturing industry, including small, medium and large firms, as well as firms from different sectors with different technological production intensity. The results clearly underline the importance of maintaining cost competitiveness and indicate that a deterioration of this competitiveness would have negative economic consequences. The study shows that the sensitivity of exports of an average manufacturing company increases over time. In this context, Croatia's accession to the Schengen area and the European Monetary Union in 2023 could be important, as it should have a positive impact on trade and exports, but also increase the cost sensitivity of exports. The member states of a monetary union lack the flexibility to adjust their exchange rates. This inflexibility means that changes in cost, such as fluctuations in the ULC, directly affect competitiveness. When costs rise, the negative impact on exports is more pronounced because there is no mechanism to weaken the domestic currency to offset the higher costs. This channel is unlikely to be significant given the nature of the exchange rate system in place prior to the introduction of the euro. On the other hand, joining the Schengen area facilitates trade by reducing friction and encourages cross-border transactions. Greater trade integration can lead to greater export elasticity to costs due to improved market integration, increased competition and the strengthening of the price signaling function. In any case, the results of the dissertation underline the importance of maintaining cost control and price stability, which applies not only to monetary policy but also to fiscal policy. Cost control is particularly important for large exporters and firms that derive a significant portion of their revenues from exports, as idiosyncratic shocks in these firms could significantly disrupt overall exports and harm the domestic economy. In the event of future energy price crises, it is also important to provide support in order to avoid a significant impact on competitiveness. When designing these measures, it is important to apply them selectively, as exports react differently to costs depending on the company and sector. Sectors and companies that are more affected by shocks should receive more help. For example, the analysis has shown that companies with a higher share of labor costs in total business costs and a higher level of non-wage labor costs have a higher export sensitivity to non-wage labor costs. As companies differ in these characteristics, some are more vulnerable to cost distortions, making targeted assistance more necessary for these companies in the event of a sudden increase in costs. In the long term, it is advisable to increase the quality of production in the manufacturing industry in the direction of high-tech products and products with higher added value, as the sale of such products is generally less cost-sensitive than that of products with lower technological complexity. In this context, thoughtful industrial policies are needed, including attracting significant foreign direct investment, greater integration into global value chains and importing foreign technology and knowledge. In addition, it is advisable to build more resilient global value chains that can withstand shocks such as the COVID-19 pandemic and to rely more on domestic energy sources. This includes the energy transition, diversifying energy sources and reducing dependence on other countries. One way to reduce the dependence of exports on costs is to reallocate factors to more productive firms. As the analysis has shown, more productive companies react less sensitively to changes in export costs. Reallocating labor and other factors to more productive firms could not only reduce the cost sensitivity of exports, but also improve the dynamic efficiency of the economy and raise the overall level of productivity. It is recommended that additional measures be developed to direct scarce factors to more productive firms. This is particularly important as most manufacturing firms have a lower level of productivity and only a small proportion of them are highly productive. In addition to reallocation, it is important to promote labor productivity and exports in other ways and to strive to increase the labor force participation. The quantity of labor is a significant predictor of exports in all specifications of the empirical analysis. Given labor shortages in certain sectors, exports could be boosted by filling vacancies. It is also worth mentioning the importance of material capital in most specifications of empirical analysis. Since changes in physical capital embody technological changes, it is important to promote both and thus ensure a favourable environment for investment. The literature shows that the social returns to innovation and investment are generally much higher than their costs. Therefore, fostering an environment that is conducive to both is crucial to increasing productivity and competitiveness. The study also showed that a higher level of ULC and labor costs does not increase the sensitivity of exports to changes in ULC for firms in high-tech sectors. This is related to the higher level of human capital, knowledge and skills in these sectors. In such companies, high wages do not necessarily mean low competitiveness. These sectors tend to be more innovation-oriented, so the policy should be favorable to them. They usually generate higher value added per employee and can contribute to the economic convergence of the country. This is supported by the fact that competition based on prices and costs has limited potential for creating income growth, while competition based on innovation and product quality offers greater opportunities.. To summarize, this research confirms the important role of cost competitiveness in the export performance of Croatian manufacturing companies and provides the most detailed insight into this relationship to date. The results highlight the previously unrecognized and unexplored role of non-linearity and the way in which firm characteristics (heterogeneity between firms) shape the relationship between cost competitiveness and exports, which significantly changes the understanding of this relationship. Against the background of Croatia's increasing integration into foreign trade flows and the growing importance of foreign trade for domestic income, maintaining cost competitiveness becomes imperative, especially given the structure of manufacturing exports (significant dependence on low-tech products) and the increased sensitivity of exports to costs. In the short term, it is extremely important to control costs and support the economy in the event of cost shocks. However, a long-term strategy should not be based on cost control alone, but must also include the promotion of productivity, innovation and the export of higher value-added products. These findings provide valuable guidance for economic policy makers to design measures that will not only maintain Croatia's export competitiveness in the short term, but also lay the foundation for sustainable economic growth in the future. The successful implementation of these recommendations is crucial for the country's macroeconomic stability and could accelerate Croatia's economic convergence.