Comparative analysis of foreign direct investment climate in the Baltic countries

Straipsnyje analizuojama investicinė aplinka Baltijos šalyse ir pateikiami kai kurie siūlymai dėl tiesioginių užsienio investicijų skatinimo. Tiesioginių užsienio investicijų situacija Lietuvoje, Latvijoje ir Estijoje analizuojama per makroekonominių ir mikroekonominių veiksnių prizmę. Atskleisti pagrindiniai veiksniai, kurie skatina arba stabdo užsienio investicijas. Atlikta trijų šalių infrastruktūrinės, socialinės, teisinės, ekonominės ir finansinės aplinkos analizė. Pabaigoje pateiktas pagrindinių tiesioginio užsienio investavimo Lietuvoje, Latvijoje ir Estijoje problemų palyginimas.Foreign direct investment (FDI) has been often viewed as catalysis for the economic growth of transition economics. Despite of benefits from FDI, the success of countries in attracting FDI has been mixed. Whereas the amounts of FDI received by Hungary and the Czech Republic are substantial, many other economics have attracted very little FDI. FDI stock per capita in Lithuania is lower not only than that in Hungary and the Czech Republic, but also than in Latvia and Estonia. In order to explain uneven distribution of FDI in the Baltic countries, the factors that determine foreign investment climate have been analysed. The priorities regarding foreign direct investment are underlined in the state FDI policies. General trends in the Baltic States favour liberalisation of FDI policies. Equal rights for foreign and domestic agents in Lithuania, however, were adopted some years later than in Estonia and Latvia. That explains why the initial FDI flows have been significantly lower in Lithuania than in the neighbour countries. FDI policies are often co-ordinated with the trade policies. Liberalisation of trade policies in all Baltic States generated more foreign investment, because foreign investors are often engaged in export related projects. Since Lithuania has been the most dependent on the exports to the CIS markets compared to the other Baltic countries, Russian crisis had stronger effect to domestic and foreign economic agents in Lithuania. Furthermore the competitiveness of Lithuanian exports was undermined by the situation of litas appreciating against euro. As a consequence of Russian crisis and diminished competitiveness Lithuanian GDP decreased down to -4.1% in 1999. Diminished exports led to deterioration of current account balance. With restricted access to international capital markets, financing a persistent current account deficit might become increasingly expensive and exposes a country to an exchange rate risk. Lithuanian government attempts to dampen the negative shock of Russian crisis consequenced a serious deterioration of the fiscal balances. Fiscal deficit further led to the increase of Lithuanian foreign debt. Due to those inadequate policy responses towards Russian crisis, macroeconomic stability is perceived as more vulnerable in Lithuania than in Latvia and Estonia. Privatisation is often viewed as a tool to attract more foreign direct investment. However Lithuanian government excluded foreign investors from privatisation process in its initial stage. The approach towards foreign investors has changed, however privatisation process remains not transparent. In some cases government attempts to attract foreign investors undermine competition rules. State aid is not sufficiently controlled. While a number of criteria have been negative, labour indicators favour Lithuania: average monthly earnings and labour unit costs still are the lowest compared to the other Baltic countries. Legal business environment is very important for both domestic and foreign agents. According to the results of survey completed by Lithuanian development agency the most problems foreign investors encounter dealing with Lithuanian tax system, local bureaucracy, documentary requirements and customs. Lithuania occupies 8 position compared to the other Central and Eastern European countries according to the foreign investment climate. The situation in Lithuania has been deteriorating while in Estonia and Latvia - improving. To sum up negative factors of foreign investment climate in Lithuania, compared to Latvia and Estonia are: dependence on CIS markets, weak competitiveness, difficult liquidity situation, legal and administrative barriers to business, unfavourable tax system and some other. Empirical findings demonstrate that Estonia and Latvia have been a step forward in reforms and therefore more successful in attracting FDI. Recent favourable changes in legal environment in Lithuania and Lithuania's integration process to the EU suggest that foreign investment climate will improve in the future