Open, business-friendly liberal economies, stable democratic systems, a flexible taxation policy and relatively cheap, but well-qualified workforces are the assets of the Baltic beauties that catch the eye of the investment world. FDI played an important role in the rise of the Baltic Tiger. During the boom years period 1994-2008 FDI inflow equalled 8.6% of GDP in Estonia (3rd in the EU), 5.4% in Latvia (5th) and 3.6% in Lithuania. But the financial crisis in 2009 caused a backlash.
Let’s look at the current status of inward investments. FDI is coming back, but still leaving space for more. Most FDI inflow came from Scandinavian countries, the US, Netherlands, Germany and Russia.
In 2013, Enterprise Estonia helped establish 26 FDI projects and those created about 500 jobs and we know of another 19 projects (without EE assistance), an FDI inflow of €663.2m.
The accumulated FDI stock in Estonia reached €15.5bn by the end of 2013. A total of €1.18bn of accumulated FDI in 2012 was a good sign, but still far from the €1.9bn it attracted in 2007. The biggest share of FDI came from Sweden, Finland and the Netherlands. Software, finance, insurance and manufacturing were the main fields of investment, followed by real estate and wholesale & retail.
In 2013 Investment and Development Agency of Latvia (LIAA) endorsed 33 projects which are planning to create 1,601 jobs. Latvia’s FDI inflow is still behind that of its neighbours.
The accumulated foreign direct investments to Latvia were about€€11.3bn to the end of the third quarter of 2013, with a 14% annual growth in 2011 followed by another 10% in 2012 and 14% in the first nine months 0f 2013 helping employ more than 48 000 people. Sweden, the Netherlands and Cyprus were the biggest investors in Latvia, with the biggest investments being made in finance and insurance, service and real estate.
The largest registered singular foreign investor is Swedbank with €943m. The Greater Riga area drew more than 80% of foreign investments. 22 projects with 1,550 new jobs in 2013 have been the best result for Invest Lithuania so far and know of another 16 projects (creating 1,450 jobs). A total of €12.2 bn in accumulated FDI stock was made in Lithuania at the end of quarter of 2013. Sweden, Poland and Germany were the largest investors.
Lithuanian FDI has created 48,300 jobs, and 47% of the investments were made in financial and manufacturing sectors and service.
Efforts to attract FDI
All three Baltic countries have introduced attractive incentives for foreign investors.
Latvia and Lithuania encourage inflows of investment with their Free Economic Zones (FEZs). The corporation tax rate of 15% – already the fourth lowest in the EU – is being reduced further.
In Latvia the FEZs are the ice-free Baltic ports of Liepaja, Ventspils (with a focus on High Technology), the free port of Riga, plus Rezekne, the centre of Latgalia.
The tax incentives are attractive: Up to 80% rebate on real estate tax (1.5% in Latvia), low corporate income tax, a rebate on withholding tax for dividends, management fees and payments for usage of intellectual property for non-residents. There is also no VAT to pay on most goods and services provided to or from free zones. Other attractions are workforce assistance and training, R&D programmes, including special green technology and micro-enterprise promotion funds, plus easy money in the form of loans and venture capital.
The POLARIS Process brings together all main stakeholders – public, private and academic sector – and helps them to profit as much as possible and ensuring an individual approach to each investor.
Latvia is the best gateway to business in the CIS and Russia. And for investors from outside of the EU (Russians for example) to bigger EU markets like Germany. Most Latvian people have Russian language knowledge that sets them apart from their Baltic neighbours.
Latvia invented an incentive-package for non-EU investors. Depending on the region, they get the Latvian (and by that the EU) residency permit for real estate investments of €71,000 or €142,000 and for investment of around €35,000 of shares in Latvian enterprises.
Non-EU-residents don’t have to pay taxes on dividends, interest payments and intellectual property. The scheme has drawn already more than 7,000 investors (most of them Russians), although it has been criticised by some Latvian politicians as being vulnerable to abuse by money-launderers.
“By setting up operations in Latvia, companies can benefit from a Northern European work ethic, and business experience with Russia and other CIS countries. The Latvian labour force is multi-lingual, well educated, and highly motivated, besides Latvia is a leader among other EU countries with regard to wage-adjusted labour productivity,” summarizes Agnese Busa, head of the investment promotion division at LIAA.
In Lithuania, the FEZs are Kaunas and Klaipeda, with more to come soon. The offer is as follows: a six-year exemption from corporate income tax and 50% discount for the following 10 years for long term investments of at least €1m. Very good infrastructure and good transportation opportunities on the crossroads between Scandinavia, the CIS and Western Europe.
Lithuania also provides several incentives for smaller and mid-sized companies and for investment in R&D. “Lithuania stands out in the region as a dynamic economy with well-educated and multilingual talent, a business-friendly environment where companies can benefit from leading IT and hard infrastructure, competitive costs and tax-breaks.
Foreign companies describe Lithuanian employees as being self-starters, a raw talent with forward-thinking mindset” advertises Justinas Pagirys, director of the investment promotion department at inward investment agency Invest Lithuania.
Estonia’s flat income tax is 21%, but reinvested corporate profit is tax free, unless dividends are paid out. Estonia has introduced four Free Zones at Muuga Harbour (part of the Port of Tallinn), Sillamäe Port, Paldiski and Valga. No VAT has to be paid there on goods designed to be re-exported. Enterprise Estonia offers several start-up and development grants additional to the EU programmes. Investors can profit from Estonia’s business and cultural links to Finland. A world-leading “e-government” infrastructure makes administrative procedures easy and fast. “You can register a business in 20-30 minutes online,” says Riina Leminsky, head of Enterprise Estonia in Germany, who also points to the clear and transparent tax system and no property tax. She adds “Estonia is an excellent gateway between Northern, Western and Eastern Europe and Russia. An impressive infrastructure includes five key international ports, block trains to Moscow and Beijing, and the shortest EU flight time to China. Estonia offers a dynamic, internationally focused mechanical engineering ecosystem, excellent accessibility, a sustainable, high-quality skills base and competitive, low-inflation costs. The country also has one of the highest non-native English proficiency levels in the world.”
Estonia, Kuehne+Nagel. Bob Mihok Eastern Europe president at Swiss Logistics giant Kuehne+Nagel, says: “We entered the Estonian market in 2006 and have since continuously expanded our business. We are represented in all three Baltic countries and via Estonia we can provide our customers transportation services in the Nordic countries such as Finland but also Russia.
Due to the high qualification of IT sources and the economic environment we have additionally decided to also place one of our global IT Centres in Tallinn where the talented current workforce of 120 employees will contribute to our global IT leadership in the logistics sector. Last year we won the Estonian Enterprise Award 2013 which is motivation for us to further strengthen our engagement in Estonia.”
Lithuania. Bernard Stitfall, group finance director at British Sofa Brands International Ltd, Vilnius, says: “We established a new company, UAB Sofa Brands in Lithuania in 2005, and invested in a complete re-furbishment of a factory in Alytus, Lithuania. We now employ almost 300 people who manufacture over 1,000 suites of cut and sewn covers for the G Plan and Parker Knoll brand every week.
We are continuing to invest in equipment and people in Lithuania and are in the process of transferring more work from the UK which requires specialist skills. The workforce is very flexible and adaptable to changing requirements and is also receptive to new skills training. We’ve also been very fortunate in finding excellent management. The calibre of people and their attitude is impressive. The business is a key and integral part of our group of companies. We have no regrets about our decision to invest in Lithuania.”
German Bauplan Nord came to Latvia in 2004. BPN plans and implements real estate projects. It became another FDI success story in Latvia. BPN chairman Jan Brink says: “We chose to invest in Riga in 2004, because of its central location in the Baltics and because Riga is the biggest Baltic city. And Riga had a backlog of real estate development at that time. Basically, we only invested in the kind of projects that we would promote in Germany as well, even in the boom years, when it seemed easy to make fast money with lower quality standards. Now, that the economy is slowly growing again, our sustainable, long-term strategy pays off. The jurisdiction and mentality is similar to that in Germany, which helped us to orient ourselves. The workforce is extremely motivated. The level of professional skill couldn’t always meet our expectations, but further training helped. I’m quite confident, that finally we’ll consider our investment in Latvia a success.”
Economic, legal considerations
All three countries have a liberal, business-friendly economic system. The financial crisis struck them hard in 2009. Estonia first, Latvia the hardest and Lithuania later and less.
Latvia’s economy shrank by 25% over two years. The unhealthy growth rates between 2000 and 2008, an overheated real estate market and too easy access to cheap money offered by the banks intensified the problem.
Hard austerity measures with painful salary and social cuts, and an “internal devaluation” to secure the nominal value of the currencies, were ultimately effective. But it wouldn’t have succeeded without an export boost by between 40% (LV) and 80% (LT), between 2009 and 2013 and the compliance of the Baltic people. Only Latvia had to ask for a rescue package from IMF- which they repaid ahead of time. Maybe the most painful effect for all three countries was the large-scale emigration. Today, Latvia has the biggest growth rate in the EU with 5.2% in 2012 and approximately 4% in 2013.
The national debt is clearly below the Eurozone’s 60% ceiling (at 40%), the budget deficit is a mere 1.2%. Estonia meanwhile is the only Eurozone country with a budget surplus. Only Lithuania’s budget deficit is still slightly over the 3% rule. Thanks to smart economical and financial reforms, the new growth became more sustainable, helping it to fulfil its plans finally to enter the eurozone. A perception still exists that Lithuania and Latvia have to get a grip on corruption. In the World Bank’s Ease of Doing Business Report 2014, Lithuania reached 17th place, up eight places from 2013. Estonia is 22nd, Latvia follows only two places behind on 24th position.
The World Economic Forum’s GCR rates burden of government regulations in Estonia is among the 11 lowest in the world and the burden of customs procedures is the 14th lowest. Estonia is second in the internet freedom in the world according to Freedom House and its labour market efficiency is ranked very high. Latvia is leading the Legal Rights Index in the section Financial Market Development of the World Economic Forum GCR and has the world’s highest Degree of legal protection of borrowers’ and lenders’ rights. Attorney Theis Klauberg of bnt Plauberg Krauklis ZAB praises Latvia’s “very consistant tax law“. “After a broad reform of the economy and tax law, Latvia offers a very liberal and investor-friendly law system,“ he says.
Toomas Pikamäe, partner at the leading international law firm Eversheds Tallinn branch says: “Estonia has created different funds and organisations to help bring great ideas to life. Many student start-ups have grown to international enterprises. Most of the start-ups are established in the IT sector. In addition Estonia’s tax rate favours enterprise. Nevertheless Estonia has been criticised of forcing companies to bear many tax obligations, especially in the labour market.“
Rimtis Puisys of Eversheds Saladžius, the legal giant’s Lithuanian branch says: “Lithuania has improved regulations related to the commencement of business and creditor protection systems and is just about to improve the labour and migration law. Migration policies and practices are equally important to both – local and foreign businesses. Both the recently declared vision of bringing back Lithuanian emigrants and reduction of the procedures for hiring highly skilled employees from third countries would be welcome.
Territorial planning laws have been modified to ease the implementation of real estate development projects. Certain areas, that foreign investors have to deal with, such as obtaining a licence for specific activities, obtaining construction permits, dealing with data protection regulations or intellectual property rights require specialist knowledge and individual approach.”
The workforce is very investor-friendly in the Baltic countries. Labour unions work closely with management and are not excessively influential. Wages are flexible and salaries are still relatively low. The average income in Lithuania, is €615 a month, the fourth lowest in the EU. Estonia is about to lose its status as a “cheap labour” country with an expected average gross income of €937 a month for 2014. Salaries are rising as well in Latvia, expected to be at €751 in 2014.
The education system is good. According to the UNDP, Estonia is second only to Finland in the EU in terms of the science mean score. Lithuania has twice as many people with higher education than the EU-15. The quality of maths and science education is the 16th best worldwide. The majority of people in all the three countries speak at least two languages, many three or four. The workers are highly motivated. But there is a challenge to find skilled workers.
The unemployment rate is (at the end of 2013) still between 11.4% (Lithuania) and 9.3% (in Estonia), but the available workforce isn’t always the best qualified. Many qualified workers have left the countries over the past five years. The population shrank in Estonia at 3.5%, Latvia at 5.5 % (some sources say 10%) and Lithuania at 6.5%. But still, all three countries are among the 20 best in the world in the ratio between pay and productivity, according to the World Economy Forum (Estonia eighth, Latvia 14th, Lithuania 20th).
Vytenis Šidlauskas, Partner in the Alliance for Recruitment, Vilnius sees a lot of potential for Lithuania besides the IT sector “in the finance/ multilingual/ administrative jobs market.”
Of the Baltic HR market he says:“The radar that has previously been targeting Poland, Slovakia and the Czech Republic for a less expensive and highly educated labour pool now has shifted towards the Baltics. Recent successful investment examples of Danske Bank, Western Union, Barclays Bank and many other well-known employers have fostered the growing interest in this market.” It appears that the Baltic Tiger has done most of its homework. What it needs now is more food - in the form of FDI. The domestic markets are limited, while the three countries strongly rely on investments from abroad.
The opportunities are better than ever. Estonia and Lithuania are the most attractive European countries for foreign investments, according to the Baseline Profitability Index 2013, with Latvia at a strong sixth place