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Business Opportunities in Latvia
Mr. Juris Kanels, Director of Latvian Investment and Development Agency
Latvia has a unique geographical location on the shore of the Baltic Sea and in the centre of Baltic countries. For centuries, this has placed Latvia squarely at the crossroads of international commerce. Since the 14th century, Latvia has been a major commercial hub between west and east, and was at the centre of the Hanseatic League, the WorldâŔ™s first Free Trade Area.
Today Latvia belongs to the Baltic Sea region, which as a whole is one of the most dynamic world regions in terms of development of macroeconomics performance and development of knowledge-based society. Latvia is a gateway to large markets, which include: - 100 million consumers within a radius of 800 km;
- easy access to the major markets of the European Union other European countries with 450 million population,
- Russia and other members of CIS with 250 million population.
Latvia's recent accession to both the European Union (EU) and the NATO alliance has notably improved this Baltic countryâŔ™s already favourable business climate. As part of the EU market Latvia has become an even more attractive location for international businesses.
Membership in the EU provides to Latvia wider opportunities for reconstruction and modernization of the national economy, development of knowledge and technologies, improvement of the business environment. The assistance from the EU funds will facilitate structural economic changes and help to mitigate social and economic disparities.
Strong macroeconomic environment
Today Latvia has one of the fastest growing economies of the world. The key characteristic of the Latvian economy is a strong macroeconomic environment.
During the last three years Latvia has experienced the most rapid economic growth among the Central and Eastern European countries, and currently has one of the highest GDP growth rates of all the EU countries. Between 1998 and 2003, Latvia's GDP exceeded 6 % annually, and last year this figure was 7.5 %. Latvia's GDP growth was 8,2 % on the first half of this year and is estimated to remain at around 7,5 % in 2004.
We have strong monetary policy with stable exchange rate of the Latvian national currency - the Lats. It is expected that Latvia will join the Eurozone as early as 2008. Latvia's stable economic growth has created a secure environment for foreign business activity. This has been confirmed by the credit rating A- which has been awarded to Latvia by the international credit rating agencies Standard & Poor's and Fitch. MoodyâŔ™s rating in local currency - A2 is one of the highest ratings in the region.
EU - the main trade partner
Latvia has managed to reorient most of its trade towards the EU countries. At present, including also the new EU member states, already 80 % of LatviaâŔ™s trade is conducted with the EU. Trade with Germany (16% of the total turnover), Lithuania (9%), Sweden (8%), Russia (8%) and the United Kingdom (7%) accounted for the biggest share in foreign trade turnover in Latvia in 2003.
Traditionally, the largest contribution into the growth of exports to the EU countries falls on products of metal processing, machinery and wood processing products, as well as light industry commodities.
Foreign Direct Investment - a major driving force of our economy
Ever since Latvia regained independence, foreign direct investments have been showing steady growth with FDI stock doubling every 4-5 years. At the end of 2003 it reached a level of 2,8 billion EUR. Currently ranked 6th among the new EU states for FDI stock per capita, Latvia continues to enjoy high recognition among both regional and global FDI contributors.
The main sources of foreign direct investment in Latvia have been, and remain neighbouring countries in the Baltic Sea region, which have been active in Latvia from the very beginning of the 1990s. Currently investments from Sweden, Germany, Denmark, Finland, Norway and Estonia make up as much as 50% of the total FDI stock covering a variety of fields from finance, telecommunications and trade to fully export-oriented manufacturing. The high level of interest in Latvia has three basic reasons: - substantial differences in operational costs between the 'east' and 'west' coasts of the Baltic Sea;
- the standard rate of Corporate Income Tax is 15%;
- investors striving for presence in the fast growing Baltic market and looking at further strategic opportunities in Russia and the CIS.
The other group of more remote investing countries is led by the USA, the Netherlands and United Kingdom, who tend to choose Latvia both as a market base for the Baltic region and as a favourable manufacturing location. Countries to the east, mostly Russia, have chosen Latvia for transit/value-added logistics operations for their main export commodities - oil products, chemicals and metals.
Highly educated, skilled, and motivated people - the key economic asset of Latvia
With the first technical university having been established in 1862, Latvia currently boasts a modern three-level education system, which has achieved international recognition through good average standards and outstanding results in international competitions for students.
Latvia having the second highest per capita ratio of students in Europe (after Finland) maintains the inflow and availability of new specialists in the labour and intellectual capacity markets of Latvia. As a result of an underestimation of needs for some social science subjects, like business and law, during the Soviet period, and the resulting shortages in specialists, these subjects have become the most popular with students in recent times. However, the natural sciences and technology, particularly IT and applied technologies, are currently experiencing increased demand, as a direct result of the need for these skills in the expanding industrial sector.
Latvia also 'exports' higher education services, especially within the areas of technology, transport and health sciences, as Latvian universities provide highly competent, but very cost-efficient education.
Excellent business environment for foreign direct investment in Latvia
As a small country with limited private capital resources, Latvia fully appreciates the crucial impact of foreign direct investment on its continuing economic development.
The foreign investor is assured of a real welcome to Latvia. Company registration procedures in Latvia are fast and streamlined, allowing for the establishment of a business in minimum three business days.
Welcome is also underpinned by laws and regulations, which provide a business climate which is truly conducive to success. For example: - by law, foreign investor has the same rights and duties as local investors;
- the foreign investor may be the sole founder and owner of a company in Latvia;
- no restricted sector activities;
- the foreign investor may freely repatriate after tax profits and investment capital;
- foreign companies registered in Latvia are entitled to buy land and property;
- active dialogue between Foreign InvestorsâŔ™ Council in Latvia (FICIL) and the Latvian Government.
The Foreign InvestorsâŔ™ Council in Latvia (FICIL) - a non-government organisation consists of the 24 chief executives of major foreign companies doing business in Latvia and 5 Foreign Chambers of Commerce. FICIL meets regularly with the government in High Council Meetings that are jointly chaired by the Latvian prime minister and the CEO of a FICIL memberâŔ™s parent company. The major focus areas in the dialogue between successive governments and FICIL have been increasing the effectiveness of the judicial system, achieving greater transparency, reduction of the grey economy, objective and transparent public procurement, improving tax collection, customs administration and the attractiveness of the overall investment climate.
As a result, in total 127 out of 132 recommendations of FICIL has been implemented between 1999 and 2004.
There are four special economic zones (SEZ) across the country, three of which are situated in the free ports of Ventspils, Riga and Liepaja, and the fourth being an inland zone in the city of Rezekne, eastern Latvia, close to the Russian and Belarus borders. The basic incentive package available for companies establishing within these zones includes the 80% rebate on real estate and corporate income taxes (25% rate applied), VAT at 0% for most goods and services supplied in within free zones and excise tax exemption on oil products.
Opportunities in key economic sectors in Latvia
Manufacturing in Latvia experienced stable growth, in the last three years average annual growth rate of manufacturing output reaching 9.4% what is considerably exceeding the average growth of the national economy. Growth of manufacturing output was mostly encouraged by expansion of exports and was observed in almost all sectors. The leading growth industries in this sector have been the chemical & pharmaceutical industry, metal production and metal working and wood processing. The leading sectors providing services are banking, IT&T, transit and logistics.
Forestry & Woodworking
The forestry sector is Latvia's most important export industry with as much as one third of export turnover and an essential role in rural and regional employment generation. The industry's success is based on Latvia's favourable combination of vast forest resources, strategic location and cost-efficient labour force.
As the timber supply market features a number of huge local and international players, investment opportunities within Latvia's wood industry exist mostly for: - more advanced and/or labour intensive manufacturing utilising locally manufactured sawn-wood or components;
- commercial utilisation of wood residues, such as manufacturing of pellets/briquettes or productions of wood-based chemicals like furfural.
Metal Processing & Engineering
Metal processing and engineering have historically been one of the leading industrial sectors in Latvia, as the country was one of the high-tech manufacturing centres for the Soviet military and aerospace industries. Currently the sector is mainly based on export-oriented contract manufacturing activities, however, with the development of the domestic construction market; metal processing is also rapidly evolving in this direction.
Key advantages of the sector are skilled and cost-efficient workforce, strong R&D capability, access to metal supplies from Russia and markets in the west.
Textiles
The textile industry is another traditionally highly export-oriented (81.9%) manufacturing sector, which was historically based on a small number of giant enterprises, now 'clustered' with newly emerged flexible and specialised SMEs. The major market for Latvian textile goods are the EU member states (74%), where, in countries such as Sweden, Denmark and Germany, quality product is a must. In these markets local Latvian enterprises, along with a number of foreign-owned companies, act mostly as CMT producers, a good example being a number of contracts with major brands and retail chains. On the other hand, high productivity and competitive design also ensure remarkable success in the price-sensitive regional and eastern (Russia and CIS) markets. Cotton and wool garments, knitted garments, linen, and other goods make up two thirds of Latvian textile export goods. Textile companies also produce semi-finished goods - fabrics, synthetic fibres, threads and others.
Chemical & Pharmaceutical
Latvia's chemical industry comprises of two main segments - export production of pharmaceuticals, and raw materials and part-processed products (e.g. casein, glass fibre and its products), and manufacturing of paints, industrial and household chemicals for the domestic and regional markets. As a result, exports 'only' make up 53.7% of manufacturing volumes.
Another traditional sub-sector within the industry now seeing resurgence is R&D in areas such as the life sciences, wood chemistry and the development of new materials for the aerospace, automotive and construction industries
IT & Telecommunications
Latvia's fastest growing economic sector is IT&T industry with a yearly growth by 20 - 30 % during the last decade. Exports of the sector are rapidly rising in the last years, annually growing by approximately 15%. The industry's main asset is highly qualified human resources with more than 8000 graduated IT specialists and an additional 6000 in universities and colleges. Support for IT throughout the education system is key to further development. That this has been understood is shown by the doubling of software engineering students in Latvian universities/colleges over the last 3 years, and the increasing popularity of the IT profession among the brightest school-leavers.
The key competence areas of the Latvian IT industry include customised IT solutions, financial applications, localisation, implementation of large-scale projects and application services.
Logistics, Transit & Value Added Services
Having been a transport and trade gateway between the east and west since Hanseatic League times, Latvia has managed to successfully revitalise the role of its location as part of its economic success since regaining independence. With the main component being the handling of Russian/CIS crude material exports, transport and communications made a contribution of 15.5% to the country's GDP in 2003. Total income in the transport and communications sector has gone up by 70% in the last 5 years. The backbone of Latvia's multi-modal transport corridor is the developed east-west railway and pipeline systems concluding at three ice-free ports, with highly developed oil, metals and chemicals transit handling operations. Conversely, value-added handling of freight for regional markets (Baltic States, Russia, Belarus) show increased growth. The most common value added-operations include re-packaging, assembling and testing/sorting of goods.
One-Stop-Shop for Foreign Investors
LIDA provides assistance in investment location selection and implementation of investment projects, including following services: - provision of relevant information on business opportunities and investment incentives;
- identification of the best real estate options for manufacturing facilities, offices and land;
- assistance in establishing and developing contacts with Latvian business partners;
- legal assistance with start-up procedures.
LIDA also provides assistance in finding appropriate Latvian suppliers and follow-up service and support after the implementation of investment or sub-contracting projects.
To those who have not yet had the opportunity to discover Latvia, I invite you to visit our country - to enjoy its beauties, to explore new business opportunities and to create partnerships for further common business expansion. You will always be warmly welcomed!
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