Lithuania is doing well on the FDI front. Its success is due in part to its location on the eastern frontier of the EU, and in part to a balanced recognition and development of its strengths, ranging from education, especially in science and technology, to infrastructure.

Foreign investment has been a significant element of Lithuania’s economic boom since the re-establishment of independence in 1991. Cumulative FDI increased by 17.4bn litas ($6.4bn) in the past decade, and at the beginning of 2006 amounted to 18.8bn litas. This comes within the framework of an economy that has grown 6%-10% yearly since 1998.

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“Research carried out recently by Nordea Bank and Estonia’s Turku School of Economics and Business Administration reveals that Lithuania’s economic growth is sustainable, and that the further economic development of the country can be expected to continue in this fashion. This is important, because Lithuania currently accounts for half of the gross domestic product of the Baltic states,” says Renata Dromantaite, director-general of the Lithuanian Development Agency (LDA).

Joining the EU and NATO has secured Lithuania’s political position in Europe and has changed the economic landscape. As the country reintegrated with Europe, its focus changed. About 70% of its schoolchildren go on to study at university, and a highly educated employee base needs to find jobs. In response, the government’s intention has been to develop medium and high-tech industries in the country. That has been a cornerstone of Lithuania’s general development policy and the core of its FDI strategy.

Foreign investment

Foreign investors can be seen as a threat to domestic industries, but Lina Domarkiene, undersecretary at the ministry of economy, credits them with raising the bar for Lithuanian business.

“The entry of foreign investors into our market has challenged our local businessmen. This is a natural phenomenon in a global economy and we see that it creates a better, more competitive environment in the country,” she says. “This becomes a competitiveness driver for national companies and an incentive for their growth.

Lithuania also prides itself on its sense of economic fair play. With the experience gained in creating modern legislation from scratch, changing the law to meet EU requirements is taken seriously. Three pieces of national legislation have been amended following complaints received from EU companies and citizens. And Lithuania has only four open cases regarding infringement of EU law, the second best performance among the EU25.

Engagement rules

There is frequent interaction between business and government in Lithuania, ensuring an adequate level of communication between the two. According to Ms Dromantaite, organisations such as Investors Forum are active in giving input relevant to the creation and amendment of laws.

Ruta Skyriene, executive director at Investors Forum, says that since forming in 1993, the agency has been able to give the government advice and a perspective from local and foreign businessmen. “We have considerable expertise among our members on matters ranging from taxation to corporate responsibility. Our working groups have close ties with the government, and we have seen those ties change over time. For instance, our customs group has effectively closed up since legislation was changed to meet EU norms,” she says.

Joining the EU has also affected conditions for businesses. Free economic zones (FEZs) that existed before EU accession have stayed open but new ones are prohibited. Also, preferential treatment is limited. As a result, domestic and foreign companies are allowed to take advantage of benefits such as lowered tax rates.

While private organisations such as Investors Forum give a voice to businesses already in the country, the LDA, which is part of the ministry of economy, aids foreign companies that are moving in. The agency helps incoming firms in their relations with Lithuanian government organs and domestic businesses. “We help them with everything from site selection to finding local partners to government relations,” says Ms Dromantaite. “Investors have found our assistance throughout the investment process to be useful.”

In 2005, the LDA completed nine foreign investment projects totalling €72m, including three projects in the metals processing industry, two in textiles, and one each in furniture manufacturing, IT, plastics and electronics. “We’re not limited to these industries, by any means. We have experience in sectors as diverse as transport, agriculture, chemicals and shared services,” Ms Dromantaite adds.

The ministry of economy is targeting several groups of industries for attracting investment. These clusters match the country’s existing areas of expertise and expand upon them. To foster interaction between foreign companies and domestic firms that may be useful partners and suppliers, the ministry promotes clustering, both in the form of networking and by working toward the creation of technology and industry parks.

“Our aim is the increasingly active and effective integration of our enterprises into the international chains of value generation and involvement in activities generating high value additions,” says Ms Dromantaite.

Scientists return

Science and technology have been selected as foci for investment for several reasons. First, Lithuania has long been a world-recognised leader in high-powered laser research and production, and its molecular biotechnology segment features co-operation between the country’s Institute of Biotechnology and firms such as Fermantas. Electronics was a priority development area in Soviet times, and the television manufacture segment has kept in step with changes in technology, leading to a Korean firm setting up a production facility in the country.

Co-operation between education and research institutions and business is envisioned as being centred at several science and technology parks spread throughout the country. Vilnius’s Sunrise Valley park is intended to commercialise IT innovation from local universities, and the Kaunas High-Tech and IT Park is already one of the fastest-growing facilities of its type in Europe. With five of the top 10 IT companies in the Baltic states headquartered in Lithuania, increasingly specialised application development can be expected.

Despite regular mass-media reports of a workforce drain, skilled labour is available. “We’re seeing people coming back, especially in knowledge-intensive industries, such as biotechnology, and our construction industry has started matching salaries found elsewhere,” says Ms Skyriene.

Mapping FDI

Industries attracting FDI vary across the country, and the prospective investor will find relatively mature patterns. Ms Dromantaite says that Vilnius is traditionally the country’s centre for investment into services and sciences and, as befits a European capital, property development. The Kaunas area is home to most of the metals processing as well as agricultural production. Klaipeda’s FEZ hosts a concentration of plastics and packaging manufacturers, among others. “With these plants, Klaipeda FEZ has become a regional leader in plastics production,” she says.

Transport and logistics are a national priority, with several centres already established around the country, taking advantage of a well-developed sea and road infrastructure (see box, page 36). Klaipeda’s ice-free port handles the largest volume of containers in the Baltics. The goods that land there can end up in Vilnius’s thriving retail stores or in Kaunas, which is at the intersection of two important European routes, for further movement along the eastern border of the EU or into other countries of the former Soviet Union.

Textiles manufacturing, which has long been a Lithuanian strong suit, has remained flexible in the face of competition from Asia. Christopher Butler, partner in charge for Lithuania at consultants PricewaterhouseCoopers, says that the industry has developed to produce higher-value goods and now serves niche markets. “The southern city of Alytus is the centre of the textiles industry, while the northern hub of Siauliai focuses on other industries, such as bicycles and nets. There is still some potential for finding the people needed for worker-intensive projects in the second-tier cities,” he notes.

Euro on the horizon

Lithuania’s failed bid to join the eurozone this year paradoxically highlighted its economic strengths. With the only failing indicator being an inflation rate 0.1% over the limit, the general consensus is that the country will be invited to adopt the euro in the near future. Euro adoption is expected to bring advantages related to currency risk and, more important, is expected to reduce cross-border transaction costs, especially for smaller companies.

Medium-term GDP growth is expected to remain at more than 5% through to 2009 as rises in fuel and energy costs are offset by reductions in the tax burden. The long-term strategy is expected to be updated, and EU structural funds are an integral part of ensuring growth throughout the country.

Foreign investment remains key to Lithuania’s development. “Investments, in particular FDI, into the development of the production of medium and high technologies are required to maintain the national economy at its high pace [of growth],” says Ms Domarkiene.

At the same time, incoming investors need more information about what Lithuania has to offer and the LDA is working to meet this need.