Sweden's fdi in lithuania and latvia: political factors

Bachelor thesis “Sweden’s FDI in Lithuania and Latvia: Political Factors” compares the investment policy of Lithuania and Latvia and main political factors, that could explain different foreign direct investment flows from Sweden. Sweden is the main investor in Lithuania and Latvia. Even though both Baltic countries are very similar according to their economic, political situation, Sweden tends to invest more in Latvia than Lithuania. At the moment, there are 150 active Swedish companies located in Lithuania, while in Latvia there are nearly 400 Swedish companies. According to economic factors that attract FDI in countries like market size and GDP growth Lithuania has many advantages since Lithuania‘s market size is the biggest in Baltic countries and it has the fastest growing economy among Baltic states. However, the direct investment flows as % of GDP are the lowest in Lithuania among Baltic states. What is more, recent Business Sweden survey revealed that Sweden is going to invest 117 million Euro in Latvia while in Lithuania only 17 million Euro until 2018. It shows that in the near future Sweden is going to invest much more in Latvia than Lithuania even though Lithuania has more economic potential. The main object of this thesis is to define main political aspects that distinct Lithuania and Latvia in investment context and may explain why Sweden invests more in Latvia. Political risk theory says that investors invest less in countries where there is a bigger risk caused by investment policy, political regime, investment law and tax system. Matthias Busse and Carsten Hefeker made a research finding that main political factors that cause political risk which affect FDI flows are government stability, investment profile, law and democratic accountability (2005). On the basis of political risk theory the main hypothesis in this thesis is that different Sweden‘s FDI flows in Latvia and Lithuania are determined by political risk. In other to answer this hypothesis, 3 additional hypotheses were stated: 1. Investment strategy in Latvia and Lithuania determines political risk; 2. Latvia‘s investment profile is more attractive than Lithuania‘s and causes less political risk; 3. Investment promotion agencies work more effectively in Latvia than Lithuania reducing political risk. Finally fourth hypothesis in thesis says that Sweden‘s investment strategy is more related with Latvia than Lithuania and it determines Sweden‘s FDI. Findings suggest that two of additional hypotheses proved correct: Latvia‘s investment strategy and investment profile cause less political risk. So the main hypothesis that different Sweden‘s FDI flows in Latvia and Lithuania are determined by political risk is also approved. However political risk theory can only explain political factors that may contribute to bigger Sweden‘s FDI flows in Latvia than Lithuania but it cannot be the only reason of different FDI flows. In order to find all reasons of Sweden‘s investmennt further research on economic, political, socilogical factos is needed to get „full picture“