Back in 2016, government officials gathered in the Lithuanian capital Vilnius to plan their investment strategy. Top of the agenda were the opportunities and challenges of the UK’s decision to leave the EU.

Following several discussions, fintech was identified as presenting a potentially lucrative opportunity, kickstarting a coordinated effort to attract companies into the sector. Today, Lithuania is one of the EU’s foremost fintech hubs and ranks fourth globally in Findexable’s Global Fintech Index 2020.

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Joint effort

“We had a national strategy for this sector, which means that all institutions involved made a common effort by providing information [and] inviting new participants,” says Vitas Vasiliauskas, chairman of the board at the Bank of Lithuania.

“I think Brexit helped us a lot,” he adds, referencing the several fintechs that have decided to relocate or expand into Lithuania, either to attain EU banking licences or utilise the country’s fintech regulatory sandbox.

In 2019, Lithuania boasted 210 operating fintech companies and 102 issued licences, according to national investment promotion agency (IPA) Invest Lithuania. The number rose by 24% compared with 2018, while the number of people employed in the sector rose by 30% to 3400. 

UK-based digital bank Revolut is one such example. It opened an office in Vilnius in 2017, acquired its European banking licence in 2018 and (as of December 2019) has 77 full-time staff in the city.

Lithuania’s financial services sector has attracted 95 announced greenfield FDI projects since 2003, according to greenfield investment monitor fDi Markets. Some 23 projects have been announced since the UK’s referendum in June 2016 on leaving the EU, with Vilnius attracting almost 90% of these. These investments feature both fintechs and larger incumbent players, such as US global payments provider Western Union and rating agency Moody’s.

Vilnius’s success

Vilnius’s recent success has not gone unnoticed. Go Vilnius, its IPA, won fDi’s Strategy Awards 2019 for its well-coordinated, innovative approach. Initiatives include its municipality open data policy, an online foreign talent relocation guide, and its co-operation with its laser industry in urban development. 

Greenfield FDI project announcements in Vilnius climbed continuously from 2014 to reach a record 45 projects in 2018, according to fDi Markets. The city attracted a further 39 projects in 2019. 

Vilnius has also gained notoriety for its humorous tourism marketing campaigns. Its controversial 2018 campaign: 'The G spot of Europe: nobody knows where it is but when you find it – it’s amazing', helped boost overall visitors to the city by 12.5% in 2018. Its February 2020 campaign 'Do you know where Vilnius is?' aims to build upon this tourism triumph.

“We understand that for many readers [Lithuania] is still a new country in the east. However, [Vilnius] in fact is a city with a very rich history and future,” says Vilnius’s mayor Remigijus Simasius (see interview on page 48).

The city also topped fDi’s Tech Start-up FDI Attraction Index 2019, attracting the most start-up FDI projects per capita in software and IT services of any city worldwide between 2016 and 2018. The IT sector accounted for 66% of Vilnius’s GDP in 2019.

“We are trying to focus on disruptive technologies, not the established ones. That brought us a very good result,” says Mantas Katinas, general manager of Invest Lithuania. Between 2015 and 2019, about 80 greenfield FDI projects were announced across Lithuania’s software and IT services sector, according to fDi Markets. Baltic neighbours Estonia and Latvia attracted just 14 and 9 equivalent FDI projects, respectively, in this time.

Scaling up talent

The cost and quality of Lithuania’s talent pool has bolstered its attractiveness. In 2018, the country had the highest share of 30- to 34-year-olds with tertiary education in the EU (57.6%), according to Eurostat. 

The rapid growth in tech company investments has presented challenges to the talent pool, however. Lithuania’s unemployment rate fell every year from a peak of 17.8% in 2010 to a decade low of 6.2% in 2018, according to OECD data.

“Lithuania and Vilnius are already a mature location to pick up specific tech talent existing in the market. However, I have stressed to the government that we need to scale [up] the talent pool because if we grow at the same rate in the next five years we will have a lack of IT talent,” says Mr Katinas.

This problem is not unique to Lithuania: many countries across central and eastern Europe (CEE) have benefited from the expansion of tech companies, but have had their talent pool put under pressure. Lithuania and other CEE countries also encountered brain drain following EU accession in 2003, with many highly trained workers leaving for western Europe in search of work opportunities.

However, the talent tide appears to be turning. In 2019, Lithuania reported a positive migration balance for the first time since its independence from the Soviet Union in 1990. “If such a tendency continues, then we can expect to have a better situation in the labour market in the medium term,” says Bank of Lithuania’s Mr Vasiliauskas. 

FDI spread

Foreign investment into Lithuania’s second city, Kaunas, has also picked up in recent years. Some 56 greenfield FDI projects have been announced in Kaunas since 2014, according to fDi Markets, beating the 49 projects announced in the city in the preceding 11 years.

Other parts of Lithuania have also drawn in foreign investment. In November 2019, Danish renewables developer European Energy announced plans to invest €500m to build 500 megawatt-capacity wind energy projects. These will span three sites in the north-west of the country.

Klaipeda, Lithuania’s main port, which boasts an economic zone, has also attracted FDI. Since 2017, the city has accumulated 11 manufacturing FDI projects, matching the total for the preceding nine years.

“Lithuania’s industry is very resilient,” says Zygimantas Mauricias, chief economist at Luminor Bank, noting that Lithuania had the third largest increase in industrial production across Europe in the fourth quarter of 2019.

Bolstered by these foreign manufacturers, Lithuania’s GDP growth beat Ministry of Finance projections every year between 2017 and 2019. However, this has reversed in the face of the Covid-19 pandemic. The Bank of Lithuania recently revised its baseline expectation for 2020, projecting GDP to fall by 11.4%.

An upside?

As the coronavirus has spread globally, many countries have implemented mitigation measures, including enforced lockdowns and closures of non-essential businesses. The Lithuanian government has also implemented quarantine measures, which at time of publication were in place until April 13.

There could be one positive for Lithuania and the surrounding region, however. The coronavirus crisis has highlighted the overreliance of supply chains on particular countries, especially China, and pushed companies to take measures to contain costs to weather the storm.

With 78 global business services companies and 17,000 workers across Lithuania, the Baltic country of 2.8 million people could benefit from US firms needing to reduce cost-cutting investments. “This crisis could create opportunities for the CEE region and the Baltics. [This is] because if US companies have a huge pressure on a cost level, the CEE region could provide a very good cost and quality ratio,” says Invest Lithuania’s Mr Katinas.

This article first appeared in the April-June edition of fDi Magazine. The full digital version of the magazine is available here