Baltic debates collection Episode II: Latvia’s future as investment and growth region

By Triinu Viires

On Tuesday May 2nd, SME Europe of the EPP in cooperation with European Foundation of Mittelstand organized a webinar “Latvia’s future as investment and growth region”.

The panel was moderated by Dr. Florian HARTLEB; Political Scientist, Consultant and Expert; Co-founder of the European Foundation of Mittelstand; and saw the participation of Valdis ZATLERS
Former President of Latvia and Vilis ZINKEVICS, Deputy Head of Investment, Promotion Division at Investment and Development Agency of Latvia (LIAA); together with Māris VAINOVSKIS,
Senior Partner, Head of Banking and Finance and Corporate and Commercial practice group; Eversheds Sutherland Bitans;  Board Member of Foreign Investors’ Council in Latvia (FICIL); Olegs KRASNOPJOROVS, Chief Economist of the Monetary Policy Department, Bank of Latvia; Guntars KROLS,
Investment Group Lead of American Chamber of Commerce in Latvia; Partner at Ernst & Young Baltic.

Dr. Florian Hartleb opened the webinar by acknowledging that inflation and consumer prices are of concern in Latvia, as in many other countries. However, the focus in this webinar will be on the positive aspects of investing in Latvia, particularly the country’s achievements in technology and implementation of a liberal economic policy.

Former Latvian President Valdis Zatlers pointed out that the investment environment can be viewed from two perspectives. On the one hand, countries aim to improve their economies and promote the well-being of their citizens. On the other hand, investors seek to maximize profits while minimizing risk. In essence, this creates a delicate balance between profits and welfare. To create a favourable environment for businesses, investors require better taxation policies, access to quality education, skilled labour force, and raw materials.

However, political factors can hinder progress on the state side. Political positions change frequently, which leads to slow and irrational decision-making, especially at the presidential and municipal levels. To facilitate business growth, governments should maintain low and predictable taxes, future-oriented education systems, meet business needs, and provide an adequate supply of high-quality labour.

Developing countries offer lower expenses but are often less predictable and poorly governed, leading to increased risk for investors.
Developed countries tend to attract more significant investment flows due to their business-friendly environments.

Vilis Zinkevics continued the debate by acknowledging the challenges and opportunities due to the pandemic and Russian attack on Ukraine, which have created economic risks and uncertainties in the world and in Latvia.

However, Latvia has taken steps to enhance its energy security and diversify its energy sources, which will contribute to economic stability. For example, LIAA has improved investments in Latvia, with green energy being the most attractive sector for foreign investment, as evidenced by the 14 new projects in the pipeline, totaling an expected 2 billion euros for the first four months of this year.

Competitiveness is crucial for a small and open economy like Latvia, and we see that foreign and domestic investment is becoming more innovative and friendly in Latvia, especially in sectors like smart energy, biomedicine, and photonics, which attract smart investments and provide sustainable growth.

The state can promote research and development investment and improve regulation to further enhance Latvia’s competitiveness. Latvia’s strong ties with neighbouring countries like Estonia and Lithuania, and joint projects like Rail Baltic, make us more attractive and visible for investments. Zinkevics urged to work together to create a conducive environment for businesses to thrive and flourish in our countries.

Māris Vainovskis emphasized the importance of confidence in the investor decision-making process. This confidence ensures that their investment is protected and well taken care of. On the other hand, the Russian war in Ukraine has caused significant geopolitical tensions and global concern.

However, there is positive news for Latvia’s investment potential. According to a survey conducted by the Foreign Investors’ Council in Latvia (FICIL), 79% of existing investors in Latvia are considering increasing their investment in the country. The Latvian government has made significant efforts to improve investment security and protection regulations through reforms. For instance, insolvency administrators have been turned into state officers, and they are now under state supervision with all their obligations to report their income.

Furthermore, smaller countries like Latvia have the advantage of being able to adapt quickly to changes and challenges. The country has also implemented compliance measures to ensure the stability and integrity of its banking system, providing additional security for investors.

According to Vainovskis, investors consider the state a significant client, but the public procurement system still has room for improvement. The lowest price is often the deciding factor, but if the state wants to procure sustainable goods, it should call for sustainable bids.

However, the adoption of EU funds has led to overregulation, particularly for small and medium-sized enterprises (SMEs). Compliance thresholds of 50,000 require significant effort and resources, posing a challenge for SMEs. Despite this, Latvia remains an attractive destination for foreign investors looking to participate in the country’s economic growth and development.

According to Olegs Krasnopjorovs, investing in regions with strong raw fundamentals and untapped economic potential is the most profitable. Latvia is a prime example of such a region. Over the past 30 years, the country has seen an increase in productivity and employment growth, resulting in a 74% increase in GDP per capita.

However, Krasnopjorovs stresses that to increase investments, it is crucial to focus on the quality of the labour force rather than the quantity. Highly skilled, productive individuals are needed to drive economic growth in every country. He also acknowledges that Riga cannot be New York and should strive to be the best version of itself. Fortunately, smaller cities like Riga often provide a better quality of life, attracting skilled individuals who can bring in investments and entrepreneurship.

Latvia’s growth fundamentals and income conversions are strong, but they are not fully implemented. For instance, real estate prices in Latvia are still lower than in Estonia and Lithuania, presenting an opportunity for investment. This makes it the perfect time to invest in the country and help it reach its full economic potential.

Guntars Krols points out that Latvia is currently underinvested in terms of the capital needed for the country’s growth. He highlights that historically, the country lacks the accumulated capital that many other countries have had over multiple generations, compounded in various ways. Additionally, private, and foreign capital is lacking, and although foreign capital has been flowing in since the 1990s, it has not filled the gap.

Krols emphasizes that Latvia is one of the least leveraged countries in terms of borrowing for households, mortgages, and SMEs and companies. However, some growth services are not yet captured.

Krols urges the government to prioritize investment attraction and spend more money to improve Latvia’s image as an investment destination. He points out that the country’s perception as an investment destination is lower than the reality. Although Latvians tend to vocalize their opinions about how things are currently, Krols believes that the investment decision is a complex puzzle that includes a market, labour force, infrastructure, and an attractive tax regime.

Fortunately, Latvia already has all the necessary pieces of the puzzle in place, including one of the best infrastructure in Europe, technical solutions, and a skilled labour force. The biggest missing piece is on the PR side, where the government can improve.

The publication of this document received financial support from the European Parliament. Sole liability rests with the author. The European Parliament is not responsible for any use that may be made of the information contained therein.