Foreign Direct Investment in Baltic countries

 VILNIUS GEDIMINAS TECHNICAL UNIVERSITY Department of Business Management Foreign Direct Investment In Baltic Countries Fulfilled by FVu-2gr.stud.Agnė Stalerūnaitė Evaluated by lect.A.Mažintienė Vilnius, 2005 Content Introduction………………………………………………………….…………………………………3 1. The meaning of “Foreign Direct Investment”………………………………………………………..3 2. Positive and negative aspects of Foreign Direct Investment…………………………………………5 2.1. Main Advantages of Foreign Direct Investment …………………………………………..5 2.2. Disadvantages of Foreign Direct Investment ………………………………………………6 3. Foreign Direct Investment in Baltic States ……………………………………………..…………….7 3.1. Foreign Direct Investment in Lithuania ..…………………………………………………..8 3.2. Foreign Direct Investment in Latvia ……………………………………………………...14 3.3. Foreign Direct Investment in Estonia …………………………………………………….17 Conclusions……………………………………………………………………………………………. 22 Information Source……………………………………………………………………………..………23 Appendices …………………………………………………………………………………….………25 Introduction The investment plays the main role in development in country’s economy. Given expensive and marginal resources of capital in the country very important role falls on foreign direct investment. It brings not only financial resources, but also technologies, experts and the experience of management. The result of this – well paid job places, steady revenues of budget and technological development of country. The local businessmen also wins, by using modern foreigners methods and knowledge about world markets, they can explore their business or create new one in similar or different field. But this is theoretical, how about reality practices? It can be so that rich countries just use poor ones, by bringing out excess profits, and so leaving only poverty and slippage. Besides, it is not a secret that a flow of cheats, looking for trustful and corrupt officers, goes to poor countries. Fast flood of FDI globally “talks” in favor of them. In many countries the liberalization of investment is observed, which merge into stimulation of investment. And the most interesting is that in developed countries foreign direct investment grows all the time. Foreign direct investment (FDI) has grown dramatically and is now the largest and most stable source of private capital for developing countries and economies in transition, accounting for nearly 50 percent of all those flows. Meanwhile, the growing role of FDI in host countries has been accompanied by a change of attitude, from critical wariness toward multinational corporations to sometimes-uncritical enthusiasm about their role in the development process. The goal of my course work was to exhibit the main points of foreign direct investment, its influence on countries’ economies and then try to understand why these investments are so important. In the beginning of my work I explained what does the Foreign Direct Investment mean by disclosing few definitions of it. I also included the advantages and disadvantages of my analyzed matter, as the impact of FDI was also interesting for me and I considered it as the important part while examining my topic. After that I was trying to explore the foreign direct investment context in Baltic States while presenting some statistical data of FDI inflows, target industries and major investors in Lithuania, Latvia and Estonia and my aim was to compare FDI in these countries. 1. The meaning of “Foreign Direct Investment” Foreign Direct Investment is the category of international investment in which a resident entity in one economy obtains a lasting interest in an enterprise resident in another. A lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise. The criterion used is that "a direct investment is established when a resident in one economy owns 10 per cent or more of the ordinary shares or voting power of an incorporated enterprise, or the equivalent for an unincorporated enterprise. All subsequent transactions between affiliated enterprises, both incorporated and unincorporated, are direct investment transactions". FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transactions between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI also can be defined an internalized investment flow which includes capital assets as well as intangible assets. The investor keeps control of the subsidiary that it has established and derives benefits from its investment through: - Increase in sales (either on local markets or through exports to third markets); - Reduction of costs of production; - Increase in production efficiency of the group as a whole. The foreign investor assumes the operational risks of its enterprise. FDI is firm- or sector-specific, that is, host countries cannot decide on the destination of these investments. Massive capital inflow through FDI can have an impact on the real exchange rate, it is often believed that FDI inflows are offset by imports of capital equipment and components necessary for the production of subsidiaries, thus reducing the impact on exchange rates. But outflows in the form of profit remittances (and transfer pricing) can exert strong balance-of-payments pressure. On the other hand, FDI can have a significant impact at the microeconomic level, shaping the productive structure of a host country. Foreign direct investment flows are made of three basic components: • Equity capital: comprising equity in branches, all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and are included under other direct investment capital) and other capital contributions such as provisions of machinery etc. • Reinvested earnings: consisting of the direct investor’s share (in proportion to direct equity participation) of earnings not distributed, as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor. • Other direct investment capital (or inter company debt transactions): covering the borrowing and lending of funds, including debt securities and trade credits, between direct investors and direct investment enterprises and between two direct investment enterprises that share the same direct investor. It is widely agreed that FDI takes place when three sets of determinant factors exist simultaneously: • The presence of ownership-specific competitive advantages (e.g., proprietary technology or advantages derived from common governance); • The presence of location advantages in a host country (e.g., large markets or lower costs of resources or superior infrastructure); • The presence of superior benefits in an intra-firm as against an arm’s-length relationship between investor and recipient. While the first and third conditions are firm-specific determinants of FDI, the second has a crucial influence on a host country’s inflows of FDI. The size of the stock of FDI is significantly related to labor productivity in most manufacturing sectors, although some sectors have clearly absorbed more benefits than others. Changes in labor productivity in the leather, transport equipment and 'other' manufacturing sectors do not appear to be strongly related to the stock of FDI. This might be explained by the fact that the model cannot capture changes in the quality of goods produced. Labor productivity in the former two sectors has, however, increased very rapidly over time, owing to factors exogenous to the model. In the food, textiles, chemicals and rubber sectors, on the other hand, there are no exogenous influences correlated with time that have significantly affected labor productivity once FDI is taken into account. 2. Positive and negative aspects of Foreign Direct Investment 2.1. Main Advantages of Foreign Direct Investment 1. It's good for emerging markets. Foreign direct investment by multinational companies in emerging markets is perhaps the most controversial form of globalization. Critics, who charge, that foreign companies exploit poor workers and flout labor laws, tend to focus on the reported abuses. Defenders, arguing that foreign investment bring new capital, technology, and jobs to countries that need them rely on macroeconomic data and econometric approaches that at best yield qualified answers. 2. Foreign direct investment raise productivity and output in the sectors involved, thereby raising national income while lowering prices and improving the quality and selection of services and products for consumers. Rather than being beneficial only in certain cases, foreign investment nearly always generated positive spillovers for the rest of the economy. 3. The standard of living improves. Perhaps the biggest benefit of foreign direct investment — and one seldom discussed — is its ability to raise local standards of living. Around 80 percent of foreign investments today are made by companies that enter local markets and sell goods there, not by companies that produce cheap goods for export. 4. Benefits for consumers. Local consumers are the biggest beneficiaries of market-seeking investment. They enjoyed lower prices or a better selection of goods and services — or both — after foreign companies arrived. Prices fall because foreign players improve a sector's efficiency and productivity by bringing in new capital, technology, and management skills and by forcing less efficient domestic companies either to improve their operations or to exit. Although some incumbents stand to lose market share, consumers benefit from lower prices, which in many cases lead to a boom in demand and to the creation of new wealth. 5. Good job places created. Globalization's most vocal critics often focus on another type of foreign direct investment, made by companies seeking to produce goods cheaply and to export them. We found, however, that such efficiency-seeking investments are even more unambiguously positive for the local economy because they create jobs and boost output without threatening domestic companies. Almost in every instance foreign companies, both export oriented and not, paid wages that were at least equivalent to, and in most cases higher than, the wages offered by their domestic competitors. Foreign companies pay premium wages to attract the best employees, raise their motivation, and reduce turnover while still enjoying significant labor savings. 2.2. Disadvantages of Foreign Direct Investment The negative aspects of FDI are: • possible breaches of environment protection • the ignorance of health requirements • the ignorance of country’s accredited laws and negative influence to the economic growth • indetermination of national autonomy • leads to backwardness and poverty. This is note for a FDI, which falls to imperfect competition industry, from imperfect competition industry. Foreign companies work in areas, where the barriers of entrance are high, when a big competition exists. Instead of reducing the gap between saving and investment, having preferential access to the capital markets, the foreign investment might reduce savings and investments, by taking the states capital. Foreign investments might hustle out of the market domestic firms and replace them by foreign suppliers. Multinational companies can reinvest to the same branches of industry, by that expanding their own market power. 3. Foreign Direct Investment in Baltic States Firs of all let us briefly look through the main general facts, pointed out by the Latvian analyst, of foreign direct investment in Baltic States. Following the accession the EU, all three Baltic States have experienced a significant increase in foreign direct investment (FDI). It was estimated that the amount of FDI in 2004 should have exceeded the combined result of 2002 and 2003, said the Head of the market and Sector Analysis Department of Latvijas Unibanka, Andris Vilks, in a press conference on 19 January. "It is a proof of the potential of Baltic industry in the EU, as well as the favorable conditions for investment," Vilks said, voicing a forecast that the amount of FDI will keep increasing in 2005 and 2006 in separate countries. Vilks noted that last year, the amount of FDI in Latvia could amount to 540 million euros, and this level is likely to be maintained in 2005, too. In 2006, the forecasted amount of FDI in Latvia is 570 million euros or 400.14 million lats. The amount of FDI grew in Lithuania as well, reaching 670 million euros in 2004, while in 2005, it is forecasted that the FDI will reach 870 million euros. In 2006, Lithuania can look forward to FDI worth 1.07 billion, Vilks added and noted that Lithuania's plans are truly ambitious in comparison with Latvia and Estonia. In Estonia, it was forecasted that the FDI figures for 2004 should have been smaller than in 2003 and will amount to 730 million euros. Also this year, the FDI level in Estonia is set to decrease, reaching 640 million euros, while in 2006, Estonia can look forward to the same amount of FDI, namely 640 million euros. In 2003, Latvia received foreign direct investment worth 270 million euros, while Lithuania received 420 million euros and Estonia - 800 million euros. BNS (19.01.2005) 3.1.Foreign Direct Investment in Lithuania To maintain its high rate of growth, Lithuania needs more foreign investment. The government affords foreign investors equal protection to domestic investors, and sets few limitations on their activities. Foreign investors have the right to repatriate or reinvest profits without restriction, and can bring disputes to the International Center for the Settlement of Investment Disputes. Lithuania automatically extended protections to European Community trademarks and designs when it acceded to the EU on May 1, and has stepped up seizures of pirated goods. However, it remains on the Special 301 Watch List, because piracy rates remain high. The government harmonized national company law with EU requirements, offers special incentives, such as tax concessions, to strategic investors, and has nearly completed major privatizations. Labor shortages, the result of increased emigration to the EU, affect a few sectors. (The United States is the sixth largest investor in Lithuania, with investments totaling $481 million (8.5 percent of total FDI)). Openness To Foreign Investment Lithuania has been actively encouraging foreign companies and investors to explore the investment opportunities in Lithuania. The basic principles of the foreign investment policy are as follows: • Equality: The law provides that equal protection is afforded to both foreign and domestic investors. No special permit is required from governmental authorities to invest foreign capital in Lithuania and there are no prohibitions or limitations provided the investor carries on business in accordance with Lithuanian law. • Investment forms: The law permits the incorporation of a business organization wholly or partially owned; or the acquisition of shares in an existing company. In accordance with the Lithuanian law, a foreign investor can sell, donate, mortgage or otherwise dispose of fully paid shares. • Concept of origin of foreign capital: Only foreign capital, i.e. capital created or obtained legally outside the territory of the Republic of Lithuania, and owned by foreign nationals, may be invested in Lithuania from abroad. Foreign investors can contribute capital in the form of money, movable or immovable assets or intellectual or industrial property. Lithuania has one of the fastest growing economies in Europe, with GDP growth of nine percent in 2003, and 6.7 percent during the first three-quarters of 2004. Domestic consumption and investment drove Lithuania's rapid growth in 2003. External factors, such as rising fuel costs, coupled with a shortage of qualified labor, slowed growth in 2004. The private sector now produces more than 80 percent of the country's GDP. The Lithuanian Development Agency's annual survey of foreign investors reports that 94 percent of investors are satisfied with their investment, up from 80 percent in 1997. Among the attractions of Lithuania's investment climate are a large and diversified economy, investment laws that conform to EU standards, a low corporate tax, a very well educated workforce, the region's best developed infrastructure, a stable democratic government and banking system, leading specialists in biotechnology, lasers, telecommunications and information technologies, and a strategic location between the EU and Russia. Lithuanian income levels still lag well behind the rest of the EU, with per capita GDP in 2004 at 46 percent of the EU average. The government needs to attract more greenfield investments, because Lithuania will likely lose its current competitive advantages of low interest rates and an inexpensive labor force in the future. Though there have been recent investments from Thailand, Austria and France, the overall investment flow is not impressive. Substantial inflows of capital from EU structural funds (over $ 1 billion over the next three years) should provide a boost to the economy. A level playing field for all investors: The government welcomes foreign investors and requires no special permit to invest in Lithuania. The law grants equal protection to foreign and domestic investors. Foreign investors have free access to all sectors of the economy, with some limited Free Trade Zones Lithuania has Free Economic Zones (FEZ) in the cities of Klaipeda, Kaunas and Siauliai. Klaipeda is the country's largest seaport, Kaunas is an air, road, and rail hub, and Šiauliai hosts the largest airport in the Baltics. Business conditions in the zones favor investment in manufacturing and exports. Companies operating within the zones enjoy: • 80% corporate tax reduction for the first five years of operation, and 50% for the next five years; • Exemption from customs taxes; • Exemption from Value Added Tax; and • A 50% discount on land leases. There are currently four businesses operating in the Klaipeda FEZ. This largest of Lithuania's zones, with 130 million euros ($174 million) in total foreign investment, has signed contracts with four more enterprises to begin operations in 2005. Companies operating in the FEZ receive the same legal guarantees as those operating elsewhere. Parliament approved a law on the fundamentals of free economic zones on June 28, 1995 that regulates conditions for the establishment of free trade zones and the legal status of firms operating in such zones. Lithuania's EU Accession agreement permits the indefinite operation of existing FEZs, but precludes the establishment of new ones. Lithuania is an attractive location for foreign investors, and a competitive center for product sourcing in the region. The country has: • A highly skilled, low-cost labor force, making it an attractive production alternative to the West; • Strong production potential to serve both the Russian and EU markets; and • Economic growth, a stable currency, and a favorable business environment. Current Situation of FDI Over the past few years, Lithuania has become a leading location for foreign investors and a competitive center for product sourcing in the region. The main reasons are a high-skilled, low cost alternative to production in the West, along with a stable and strong production springboard to the huge markets to the East. In addition, impressive economic growth, a stable currency and a great business environment all combine to make Lithuania the premier investment location in the region. Lithuania has the largest and most diversified economy of the Baltic States. During the last 50 years, intensive industrialization gave birth to enterprises specializing in electronics, chemicals, machine tools, metal processing, wood products, construction materials and food processing. The light industry sector includes the production of textiles, ready-to wear clothing, furniture and household appliances. Large-scale privatization of many of the larger formerly state-owned enterprises and the infrastructures create continued investment and modernization. Cumulative Foreign Direct Investment Source: Lithuanian Department of Statistics Cumulative FDI by Sector as of January 1, 2005 Sector Sum (€ million) % of total sum Manufacturing 1,594 34% Trade 748 16% Financial intermediation 677 14.4% Communication services 672 14.3% Real estate 399 8.5% Other 600 12.8% Source: Lithuanian Department of Statistics Source: Lithuanian Department of Statistics Lithuania‘s FDI abroad by economic activity 01 01 2005 07 01 2005 Million per cent Million per cent Total 1071.7 100 1534.9 100 Manufacturing 265.7 24,8 349.1 22,7 Electricity, gas and water supply 38392 0,3 38616 1,4 Construction 38486 1,4 38408 1,6 Wholesale and retail trade; repairs of personal and household equipment 570.9 53,3 719.3 46,9 Transport, storage and communications 30682 7,8 148.0 9,6 Financial intermediation 13636 3,5 148.0 9,6 Real estate and other business activity 28703 7,4 104.4 6,8 Other activities 38428 1,5 19.0 1,4 Foreign Investment Guarantees Lithuania's investment laws conform to European Union standards, with a new Company Law and Civil Code taking effect in 2001. Bilateral agreements on the promotion and protection of investments are already in place with Austria, the Czech Republic, Spain, Italy, Denmark, Greece, Germany, Estonia, Israel, Kazakhstan, China, South Korea, Latvia, Poland, the Netherlands, Norway, France, Romania, Finland, Sweden, Switzerland, Turkey, UK, the Ukraine, Venezuela, Slovenia, Argentina, USA, Australia, Belarus, Belgium-Luxembourg Economic Union, Kuwait, Moldova, Portugal, Russia, Uzbekistan, Hungary, Iceland, Hashemite Kingdom of Jordan and Vietnam. The Agreement on use of Local Currency and the Agreement on Legal Protection for Guaranteed Foreign Investments between the Multilateral Investment Guarantee Agency (MIGA) and Lithuania are in force. Repatriation of profits derived from currency earnings (in both foreign and local currency) is not restricted. There are guaranteed rights to withdraw profits, royalties and interest in convertible currencies. Property is protected from expropriation - it can only be expropriated in extraordinary circumstances with prompt compensation at market value in convertible currency. To better understand the FDI situation in Lithuania, let us examine an article of “Lietuvos rytas” reporter Mantas Dubauskas: “ Actually, no steady input was done in the sphere of investnment – the government deputies only disguis their inactivity with the “laud phrases” about improving the economy of Lithuania. Only several investors come to our country, whereas nothing is done to attract foreign investment. The “NORD/LB Lietuva” analysts say that according the number of FDI falling on one citizen last year, the Lithuania is still in the last EU place. Analysts state, if there is no growth in investment, the slowdown in Lithuania’s economy development will be inevitable. First of all we need to have something to offer – not just promises and political declarations, but, for example, adequate number of qualified specialists. In order to make our country attractive for investors, we need to choose the particular economy branches, which we should pay the attention to. But… If the government chooses few underlying branches of economy, where investments are encouraged, the dissatisfaction of people working in other branches will arise – why their branch can not be chosen as the underlying? As country’s inefficiency in communicating with investors the example of cellulose factory can be considered. The status of public interest was vested to build the cellulose factory in 2002. But the government decided that after the construction of such a factory, the lack of wood can occur in Lithuania, so the investment was rejected. According the president of Lithuanian Free Market Institute, Ugnius Trumpa, encouraging one particular branch can be risky. If the country crisis occurs, whole economy will sense the shock. Practically, Lithuania really didn’t manage to grab the past opportunities to attract foreign investments. The promotion of Lithuania advantages (cheaper labor force, good facility, rapid growth in economy) was not active enough. Almost none of these advantages still exits – the growth of economy became slow, there is not enough of labor force in the country. Moreover, the labor force is notably getting expensive, that’s why future EU members – Bulgaria and Romania, will outrival Lithuania). We only start thinking about attracting the investments, while other countries are pretty forward in this sphere.” 3.2.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 government and local authorities, through cooperation with various business organizations, are committed to further improving the legal and administrative environment for foreign and local business ventures wishing to establish themselves in the country, by a number of methods and means. As an example, the standard rate of Corporate Income Tax from January 2004 will be reduced to 15%. With its open and rapidly growing economy, liberal trade and investor-friendly tax regime, Latvia has succeeded in attracting significant amounts of foreign direct investment (FDI) over the past ten years. As of September 2003 the stock of inward FDI amounted to US$3.1bn, equal to about 35% of GDP. The share of FDI inflows as a percentage of GDP has varied during the 1990s, peaking in 1997 at 9.3%, and remaining above 5% since then. With an FDI stock per head of US$1,330, Latvia is among the top five FDI recipients in the regions, according to this criterion. In recent years reinvested earnings have become an increasing share of FDI inflows. Origin and distribution As of June 2003, industry has been the most attractive destination for FDI. This sector received 21.9% of total FDI inflows into the country. Transport and communications obtained 16.1% of total FDI and the financial sector attracted 15.7%, mainly through privatization of a number of big banks. The EU countries have contributed over 50% of all FDI into Latvia, among which the Scandinavian countries have invested the greatest share. Denmark, Sweden and Finland together have invested nearly 30% of the total, and Germany accounted for 10.6% of total FDI. The US ranked fourth, with an 7.5% share, and Russia fifth, with 5.6% of total FDI. Determinants Latvia has been one of the most attractive transition economies for foreign investors, owing to its dynamic economic growth and progress in structural reforms. Successive governments have actively encouraged FDI and have launched several initiatives to improve the investment climate. Since 1996 virtually all restrictions on foreign investment have been removed; foreign investors enjoy equal treatment and protection under the law. Latvia’s strategic location in the Baltic basin, in the proximity of three large economic zones: the Baltic Sea region, the EU and the Commonwealth of Independent States (CIS), has been an additional factor attracting foreign capital over the past decade. Advanced transport and telecommunications infrastructure, as well as a highly skilled and relatively cheap labour force, has added to the overall positive business environment. Latvia offers one of the lowest corporate income taxes in Europe, as well as several tax discounts and allowances for which foreign-owned companies are eligible; additional tax breaks are being planned by the current government. Large incentives also exist for Latvia’s special economic zones. Bureaucratic obstacles include poor availability of information on government procedures, problems with the functionality of appeal mechanisms, lack of transparency in government actions and the insufficient professionalism of many civil servants. Impact FDI into the country has contributed substantially to GDP growth and has played an important role in financing the balance of payments. According to the Latvian Development Agency (LDA), companies with foreign capital have had a substantial share in total sales and total exports over the past ten years. The share of these companies in employment, however, has been more modest. Companies with foreign capital were more competitive and better at overcoming obstacles in generating exports; they had higher labor productivity and were more capital intensive. Foreign companies on the whole were also more efficient in the use of capital, generating more output per unit of capital than local companies. Ever since Latvia regained independence, foreign direct investments have been a major driving force of its transitional economy, showing steady growth with FDI stock doubling every 4–5 years. Currently ranked 5th among Central and Eastern European Countries for FDI stock per capita, Latvia continues to enjoy high recognition among both regional and global FDI contributors. Sources and Destinations The main sources of foreign direct investment in Latvia have been, and remain neighboring 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 and Norway 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 two basic reasons: • substantial differences in operational costs between the 'east' and 'west' coasts of the Baltic Sea; • Investors striving for presence in the fast growing Baltic market and looking at further strategic opportunities in Russia and the CIS. FDI Stock by Country of Origin, end of June 2003 Source: Bank of Latvia, 2003 The other group of more remote investing countries is led by the USA, the Netherlands and Great Britain, who tend to choose Latvia both as a market base for the Baltic region and as a favorable 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. FDI Stock by Sector, end of June 2003 Source: Bank of Latvia, 2003 To better wise the detailed situation of FDI in Latvia, see the “Appendix 2” 3.3. Foreign Direct Investment in Estonia Estonia's government maintains a highly favorable attitude toward foreign direct investment. Foreign investment in Estonia is governed by the law on foreign investments, enacted in 1991 shortly after regaining independence. The law's intent is to affirm the liberal treatment of foreign investments in Estonia and to provide potential investors with detailed information on investing in Estonia. The government has sought to maintain liberal policies and establish free trade agreements in order to attract investments that could produce exports directed to the European Union, the developing markets of central and Eastern Europe and the newly independent states of the former Soviet Union. In 1998 as part of the "first tranche," Estonia began discussions with the European Union on EU accession. In its efforts to harmonize with the EU, Estonia is adjusting its laws and regulations in line with EU practices, and has opened negotiation talks with the EU in all the chapters including agriculture. Estonia's government does not screen foreign investments. It does, however, establish requirements for certain sectors. These are not intended to restrict foreign ownership but only to regulate it and clearly establish ownership responsibilities. Licenses are required for a foreign investor to become involved in: mining, energy, gas and water supply, railroad and transport, waterways, ports, dams and other water- related structures, and telecommunications and communication networks. The Estonian Central Bank issues licenses for foreign interests seeking to invest in or establish a bank. Government review and licensing have proven to be routine and non-discriminatory. Estonia's openness to foreign direct investment has extended to its nearly complete privatization program. As of mid-2000, only a handful of state-owned enterprises – mainly the railroad and two power plants – have yet to be privatized by the national government. Additional enterprises owned by municipalities and local governments remain to be privatized but they are few in numbers and account for only a small percentage of economic activity. All of the infrastructure enterprises slated for privatization are being vigorously pursued by foreign investors. Estonia has mutual investment promotion and protection agreements with the United States, Greece, Italy, Spain, Turkey, Ukraine, Austria, the Czech Republic, Great Britain, Germany and Switzerland. Established in 1994, the Estonian Investment and Trade Development Foundation (originally called the Estonian Investment Agency) is a publicly funded agency under the administration of the Ministry of Economic Affairs. The aim of the foundation is to develop the Estonian economy by promoting foreign direct investment and trade development. Foreign Trade Zones There is no free port in Estonia. However, there are eighty public bonded warehouses and eighteen private bonded warehouses. The free storage areas, which are run either by municipal or private corporations, are available to all companies, both domestic and foreign- owned. In addition to these warehouses there are three foreign trade zones in which warehousing, processing and assembly are allowed. FDI Trends Sound and liberal economic policies and excellent business climate has ensured a continuous growth of foreign direct investment (FDI) in Estonia. During the years Estonia has been one of the leading countries in Central and Eastern Europe in terms of inward investment per capita. Numerous foreign companies have found Estonia to be a highly attractive location. Companies partly or wholly owned by foreigners account for one-third of Estonian GDP and over 50 percent of the country’s exports. The general trends in foreign direct investment inflows can be summarized as follows: • during 1995-1996 the majority of the foreign direct investments were privatization-related; • there is an increase in terms of reinvested earnings since 1996 which was already around 65% of the total annual inflow of FDI in 2002; • there is a trend towards increasing share of cross-border acquisitions; • the share of greenfield investments has grown slowly as well. FDI in Estonia 2002 - 2005 QII (million EUR) 2003 2004 2005 Q II Foreign direct investment in Estonia 822.2 838.0 1,997.7 Equity capital 340.6 296.5 1,767.9 Inflow 573.1 676.5 1,992.6 Outflow -232.5 -380.1 -224.7 Reinvested earnings 409.5 573.0 254.8 Decrease -425.3 -452.0 -351.4 Increase 835.0 1,025.0 606.1 Loans (net) 50.0 -21.9 -37.4 Claims -87.9 -93.3 -84.3 Liabilities 137.9 71.4 47 Other capital 22.2 -9.5 12.4 Source: Bank of Estonia FDI by activities and countries By the end of Q2 2005, the cumulative stock of foreign direct investment amounted to EUR 10.14 billion. 47.4 percent of FDI has been invested in financial intermediation. This sector is followed by real estate, renting and business activities and manufacturing with 15.7 and 13.1 percent of the total. Wholesale and retail trade has attracted 8.4 percent of the foreign direct investment stock. FDI Stock by Activities as of 30 June 2005 Source: Bank of Estonia The Scandinavian countries are the biggest source of foreign direct investment in Estonia. Sweden tops the list of donor countries with 57.5 percent of the total, followed by Finland with 18.6 percent and USA with 3.5 percent. The Netherlands have 2.5 percent share of the foreign direct investment stock. FDI Stock by Countries as of 30 June 2005 Source: Bank of Estonia Regional Distribution of FDI Tallinn and counties surrounding the capital continue to be the most favoured area for foreign direct investment in Estonia. However, a number of other regions have experienced increasing interest with major investments being made in Kunda Nordic Cement and Rakvere Meat Factory (Lääne-Virumaa), Horizon Pulp and Paper (Harjumaa). The regions and towns that have attracted most of FDI: City or region stock % (end 2004) Tallinn 75.8 Harju county 6.5 Lääne-Viru county 2.9 Tartu 1.7 Pärnu 0.8 Pärnu county 0.5 Järva county 0.4 Other regions 11,4 Source: Bank of Estonia Legal Framework Estonia has no exchange controls or restrictions on foreign investment. The amount of foreign capital invested in Estonian business enterprise is unlimited and companies can be in full foreign ownership. Foreign companies enjoy equal rights with local ones, including unrestricted repatriation of profits and the right to own a land. To encourage companies to expand their business all corporate investments are exempted of corporate income tax from Jan 1, 2000. However, any distributed profits, for example dividends, are taxed at 24%. Estonia has investment promotion and protection agreements with Austria, Belgium-Luxembourg Economic Union, China, Czech Republic, Denmark, Finland, France, Germany, Greece, Israel, Italy, Latvia, Lithuania, Netherlands, Norway, Poland, Spain, Sweden, Switzerland, Turkey, Ukraine, UK and USA. Conclusions • Foreign direct investment raise productivity and output in the sectors involved, thereby raising national income while lowering prices and improving the quality and selection of services and products for consumers. Biggest benefit of foreign direct investment — and one seldom discussed — is its ability to raise local standards of living, but instead of reducing the gap between saving and investment, having preferential access to the capital markets, the foreign investment might reduce savings and investments, by taking the states capital. • Following the accession the EU, all three Baltic States have experienced a significant increase in foreign direct investment (FDI). • Over the past few years, Lithuania has become a leading location for foreign investors and a competitive center for product sourcing in the region. The main reasons are a high-skilled, low cost alternative to production in the West, along with a stable and strong production springboard to the huge markets to the East. In addition, impressive economic growth, a stable currency and a great business environment all combine to make Lithuania the premier investment location in the region. • Latvia fully appreciates the crucial impact of foreign direct investment on its continuing economic development • Estonia's government maintains a highly favorable attitude toward foreign direct investment. Estonia's openness to foreign direct investment has extended to its nearly complete privatization program. The amount of foreign capital invested in Estonian business enterprise is unlimited and companies can be in full foreign ownership. What really matters? To get the most from foreign direct investment, developing nations should abandon their incentives and regulations and concentrate instead on strengthening their economic foundations — in particular, stabilizing the economy and promoting competitive markets. Macroeconomic instability discourages long-term investment by making demand, prices, and interest rates difficult to forecast. Competition is essential to diffuse the impact of foreign investment, for without competitive markets, the entry of foreign players has little effect on inefficient domestic incumbents and their productivity. Foreign direct investment had the most dramatic positive impact when domestic incumbents — such as companies in food-retailing industry, consumer electronics industry, etc. — weren't shielded from foreign rivals. To promote competitive markets, developing nations must reduce restrictions on foreign investment: • lower import tariffs, • streamline the requirements for starting new businesses, and • encourage new market entrants. Another important way of promoting fair competition is to crack down on companies in the informal economy (or "gray" market), which don't pay taxes or obey regulatory requirements. These dodges give such companies an unearned cost advantage, allowing them to stay in business despite their small scale and inefficiency. This lack of compliance not only robs government coffers but also allows informal players to maintain subscale and inefficient operations and thus impedes the transition to a more productive economy and a higher standard of living. Finally, developing countries must continue to build a strong infrastructure, including roads, power supplies, and ports — particularly if they want to attract export-oriented foreign investment. Rather than holding foreign direct investment at arm's length, developing nations should embrace it. Information Source • http://www.vtu.lt/biblioteka/prenum_db.htm • http://www.opic.gov/links/countryInfo.asp?country=Estonia&region=euro • http://www.opic.gov/links/countryInfo.asp?country=Latvia&region=euro • http://www.lda.gov.lv/eng/inner/le/fdi/ • www.countrywatch.com • www.lda.lt/invest.bic.directforeigninvestment.html • http://www.unctad.org/sections/dite_dir/docs/wir05_fs_lv_en.pdf • http://www.ipanet.com/ • www.std.lt • http://www.usemb.se/baltic_investment/speeches.html • http://www.worldbank.lt/docs/Lithuania%20Full%20KEA%20Report.pdf • http://www.lem.gov.lv/files/Macroeconomic_Review_No-15.pdf. • www.imf.org • www.worldbank.com • www.business-int.com • www.nse.lt • www.freema.org • www.csdl.lt • www.lda.lt/invest.bic.banking.html • www.lb.lt • www.wto.org • www.state.gov • www.invesinestonia.com Appendices Appendix 1 Major investors of Lithuania

Daugiau informacijos...

★ Klientai rekomenduoja

Šį rašto darbą rekomenduoja mūsų klientai. Ką tai reiškia?

Mūsų svetainėje pateikiama dešimtys tūkstančių skirtingų rašto darbų, kuriuos įkėlė daugybė moksleivių ir studentų su skirtingais gabumais. Būtent šis rašto darbas yra patikrintas specialistų ir rekomenduojamas kitų klientų, kurie po atsisiuntimo įvertino šį mokslo darbą teigiamai. Todėl galite būti tikri, kad šis pasirinkimas geriausias!