Baltic superpower

Over the past two years Latvia has experienced robust growth and sustainable foreign investment. There are lessons to be learned from its experience

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Latvia is something of a powerhouse in the Baltic region. Its close ties with Russia and Western Europe mean it is ideally located to serve as a trade hub connecting the two regions. And as the country prepares to ascend as a fully fledged member of the eurozone in early 2014, its position will become even stronger.

Despite the deep issues afflicting the single-currency zone, Latvia sees ITS accession as an invaluable business opportunity; Europe is already its main trade partner. The single-currency will certainly help Latvia attract foreign investment, a key aspect of its growth and development strategy. Its low corporate tax tariffs and welcoming policies really do make the case for Latvia as an attractive foreign investment destination.

But Latvia itself is recovering from a severe crisis; between 2008 and 2010 it lost almost a fifth of its economic wealth. Since that time, Latvia has aligned itself with Europe and undertaken a severe austerity regime, which has helped the country reduce its debt burden from ten percent of the GDP to a low 1.4 percent. In 2011 and 2012 Latvia managed to grow 5.5 percent each year, enviable levels for its European neighbours, and its attractive corporate policies are likely to continue attracting investment and generating growth.

Andris Ozols, Director at the Investment and Development Agency of Latvia (LIAA), speaks to European CEO about how Latvia overcame the challenges of a crisis and emerged stronger on the other side.

Historically, what sectors has Latvia performed well in?
Woodworking is one of Latvia’s most important export industries and plays 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 a cost-efficient labour force. Additionally, government policies aimed at achieving sustainable forestry development have supported the industry’s success.

Metal processing and engineering is another leading industrial sector in Latvia, as the country was one of the high-tech manufacturing centres for the Soviet military and aerospace industries. Key advantages of the sector are a skilled and cost-efficient workforce, strong research and development (R&D) capability and access to metal supplies from Russia and markets in the west.

The transport and logistics sector’s success is based on Latvia’s favourable combination of an excellent geographical location, competitive labour force and excellent infrastructure with three ice-free ports, the best railway connection to Russia and a fast-growing air transport sector.

In addition to these historically strong sectors, we have also identified a number of other priority sectors based on Latvia’s comparative advantages. These are IT, life sciences, healthcare, greentech, and food processing, each of which offers excellent investment and collaboration opportunities for foreign investors.

How have Latvian relations with the eurozone helped economic growth over the last few years?
Latvia has seen stunning growth since the end of the financial crisis, with GDP growth rates hitting 5.5 percent for the last two years running. This impressive increase has largely come about thanks to a rapid rise in diversified exports and solid inflows of foreign direct investment (FDI).

Over 70 percent of our FDI comes from our neighbours in the EU, who are also our main export partners. Being part of the EU has certainly extended our sphere of business opportunities. It is also a source of strength and stability, which is important for potential investors. The Latvian lat has been pegged to the euro since 2005, and as of next year we will officially join the eurozone. Estonia has already joined the euro and seen an equally strong rise in GDP since joining the common European currency.

The common economic zone is a platform on which Latvia can build successful business relationships, and we will certainly continue to do so in the future as the EU continues to expand. However, Latvia is certainly looking to other high-growth markets, such as China and India, for collaboration opportunities.

What type of R&D facilities does Latvia have?
Latvian research institutes and R&D facilities provide a key driving force for the Latvian economy. Contributing an additional source of expertise, research institutes collaborate with the private sector to advance technology and working methods.

Latvia is home to 136 scientific institutions, 12 of which are state funded. The highest number of inventions in Latvia, patented both nationwide and abroad, are made in medical chemistry. These patents mainly protect inventions in the field of new medicine.

In addition, research institutes in Latvia have extensive expertise in multiple other strategic sectors, with several institutions available for each target sector. They are specialised in fields as diverse as radio astronomy, life sciences, solid state physics, and logistics and telematics.

R&D is a key area for government support from EU Structural Funds, which are administered by LIAA. A number of EU Structural Funds programmes available to businesses are specifically targeted to help companies strengthen R&D. Supported activities include industrial research necessary for the development of a new product or technology, experimental design, industrial design, enforcement of industrial property rights, new product or technology certification services.

Ministry of Education and Science of the Republic of Latvia also administers different EU structural funds for R&D, including support for science and research as well as for the development of research infrastructure.

How easy is it for a foreign company to set up in Latvia?
Latvia takes pride in its business friendly environment. We have been internationally recognised in the World Bank’s ‘Ease of Doing Business’ ranking, where we placed 25th this year, and we have the tenth lowest tax rate among EU and EFTA countries.

We have eliminated red tape and streamlined bureaucracy to ensure that companies can be established in just one day, with a capital requirement of just one lat. Once established, companies enjoy one of the lowest corporate tax rates in Europe – only 15 percent. Foreign investors can also join the Foreign Investors Council in Latvia, where they are engaged in an active dialogue with top government officials. More than 90 percent of their recommendations have been implemented by the government.

LIAA has developed innovative approach to facilitate investments – the POLARIS Process. Can you describe this strategy?
Yes, the POLARIS process is an investment strategy aiming to promote investment in Latvia and facilitate the growth of the Latvian economy. The strategy focuses on an alliance between several stakeholders: the public sector, including national and local governments; the private sector, covering national and international companies; foreign investors who have invested in Latvia; and Latvian academic institutions, incorporating the main universities and research institutions. The POLARIS process integrates high-level state institutions, municipalities, universities, LIAA representatives, industrial associations, and private companies into a harmonised system.

Our methodology guarantees that whenever a firm wants to invest in Latvia’s key sectors, it can easily become an active part of the POLARIS process and use all the benefits provided. The POLARIS process does not end once the investment is made; LIAA and its partners provide support and knowledge throughout the project.

What competitive advantages does Latvia offer?
Latvia offers myriad incentives for potential investors. Many of them come about thanks to our strategic geographic location, historically strong sectors, and innovative, hardworking citizens. But other advantages are guaranteed by the government, which has set forth the attraction of investment as a national priority.

It is a centre for R&D and innovation and a leader in biotech equipment development. The country boasts the fourth fastest internet connection speeds in the world and the lowest CO2 emissions per capita in Europe. The Environmental Performance Index has rated Latvia the second greenest country in the world.

It is a geographic hotspot with a well-developed and fully integrated transport and logistics infrastructure. It is also ideally located as a strategic gateway between Europe and Commonwealth of Independent States.