At the meeting of September 8, the Cabinet of Ministers took note of the information report prepared by the Ministry of Economics regarding the final assessment of the Guidelines for Promoting Latvian Exports of Goods and Services and Attracting Foreign Investments for 2013-2019 (hereinafter referred to as the guidelines). In general, it can be concluded that the measures selected in the guidelines have been appropriate and have had an impact on the achievement of the objectives and that part of the measures should be continued in the next period.
Promotion of exports
Latvia’s economic growth is significantly dependent on export profitability and trends in recent years indicate that Latvia’s exports are increasing and are a major driver of economic growth in our country. Between 2015 and 2019, exports of goods and services grew annually by 4% on average. Although export volumes of goods and services increased at slower rates since 2018, exports have a stable positive dynamic in the long term.
The value of goods exports increased nearly 1.2 times since 2015. The largest export group – wood and wood products – contributed most to the development of exports during this period. Exports of alcoholic and non-alcoholic beverages, pharmaceutical products and vehicles also contributed significantly.
On the other hand, the share of information and communication technology exports increased significantly in services exports from 8.3% in 2015 to 14.8% in 2019. In recent years, the share of high-tech products has been growing – from 2015 to 2019, the value of exports in the high-tech sector increased by nearly 24% (from 1201 million EUR to 1489 million EUR). With existing trends remaining, the share of exports of high-tech goods will continue to increase beyond the target of 11% in 2020.
Export growth is affected by the competitiveness effect, and Latvian entrepreneurs are increasing their competitiveness and entering new markets. This is confirmed by the increase in Latvia’s export share on the global market. In the future, the possibility of achieving the export growth rate target (5% per year on average) will also be mainly determined by strengthening productivity-based competitiveness. This should be based on technological factors, improving production efficiency and innovation, reducing the importance of cheap labour and low resource price factors. It is therefore essential to foster an increase in the share of exports of high-tech goods and knowledge-intensive services in total exports, thereby promoting the innovation-based development of sectors and the transformation of traditional industries to higher added value in the production of goods and services.
Priority export support services should be focused on the sectors which make the largest contribution to GDP in the Latvian economy and have the highest share of total exports of Latvian goods and services, while focusing on supporting more export promotion activities in favour of products with higher added value.
Attraction of Foreign Direct Investment
According to the Bank of Latvia, the accumulated foreign direct investment (hereinafter referred to as FDI) in the Latvian economy reached almost 16.1 billion euro (53% of GDP) at the end of March 2020 increasing by 30% compared to the end of 2014. The largest investment country in Latvia’s economy is Sweden, which mainly invests in financial intermediation. Investments by entrepreneurs from Estonia, Russia, the Netherlands, Cyprus, Lithuania and Germany are also high.
FDI is growing in Latvia’s economy, but their flows are characterised by high volatility, although overall the activity of foreign investors in the Baltic States is increasing. In the coming years, FDI flows, both in Latvia and the Baltic region as a whole, are expected to remain moderate and Latvia’s FDI indicator is expected to be slightly below the set target.
FDI flows will be largely influenced by external factors. Overall, a weakening of cross-border investment flows caused by increasing geopolitical risks and uncertainty in economic development due to the COVID-19 crisis is observed in the world. The effects of structural changes caused by technological progress (such as automation, digitalisation, etc.) on business, including FDI models and FDI cross-border flows, are also increasing.
The main challenges in attracting FDI to Latvia are related to the availability of a skilled workforce with adequate knowledge and skills in the IT sector, metalworking and mechanical engineering, as well as knowledge of Scandinavian languages. Support for training of employees for undertakings is therefore vital.
Similarly, in order to develop the business of new manufacturing facilities, logistics centres warehouses and distribution in Latvia, it is necessary to improve the quality of the infrastructure available to businesses. On the other hand, the financial sector and the related challenges, including bank account opening procedures, closing existing customer accounts and other, play an increasingly important role in ensuring high-quality service of foreign investments.
As regards the profile of the preferred foreign investors, the focus should be on attracting customers with a sound financial position, based in the EU, NATO and OECD Member States with no reputational risks identified in the past. Priority should be given to investment projects/investments related to innovation, export of goods and services, investment in infrastructure, as well as development potential of outlets and sales channels, impact on Latvia’s external trade balance and product/service sites in global supply chains.
In order to move towards the vision, the Latvian Investment and Development Agency (IDAL) has set the target of attracting foreign direct investment of at least 432 million euro (with at least 250 million euro in RIS 3 areas) over the period from 2020 to 2023, with a total of at least 4500 jobs (with at least 600 in the fields of the Smart Specialisation Strategy RIS 3).
About the Guidelines
The guidelines set the main goals, principles and action lines for the export and foreign direct investment attraction promotion policy. The guidelines aim to improve competitiveness of the economy of Latvia in the open product markets fostering the increase in high and medium-high technology branch products in Latvian exports and focusing on foreign demand-oriented sectors when attracting FDI.
No new guidelines are expected to be developed for the next stage, as work is ongoing on the National Industrial Policy Guidelines for 2021-2027 (hereinafter referred to as NIPG), which will combine a number of policy planning documents, including the guidelines for promoting exports of Latvian goods and services and attracting foreign investment and the guidelines for the development of Latvian Tourism, in which exports will the defined as the overarching goal. All measures in the Guidelines plan that need to be continued in the next period will be included in the NIPG.
On the other hand, the “Strategy for Latvia for Mitigation of the Consequences of the Crisis Caused by Covid-19” has been developed due to Covid-19, in which exports have also been identified as the overarching goal. In Latvia, it is important to provide aid not only to already exporting companies, but also to create opportunities for new exporters by supporting companies in the internationally competitive industry and the promotion of their products on export markets. There are plans to create a “Green Corridor” to reduce bureaucracy and administrative processes for effective attraction of local and foreign investors. At the same time, measures will be developed, in cooperation with economic operators to reduce business costs to maintain export capacity.