Following Latvia’s accession to the EU, FDI swiftly increased, reaching a high of EUR 20.9 billion in 2021. The favorable geographic location of Latvia between the EU and the CIS countries, its sound monetary policy, the emergence of new market opportunities for foreign investors, and its well-developed infrastructure were the main drivers of FDI inflow. After suffering the effects of the global financial crisis, Latvia adopted major austerity measures. As a result, the Latvian economy is strengthening along with the confidence of international investors and FDI inflows.
Source of Latvia’s FDI
The majority of Latvia’s foreign direct investment comes from countries within the European Union. By the end of the year 2021, EU member states will have contributed 80 percentage points of the total FDI. At the end of the year 2021, Sweden, which had made the most investment, accounted for 29 percent of the total foreign direct investment (FDI) in the economy of Latvia. Other countries such as Estonia, the Netherlands, Cyprus, Lithuania, Germany, Luxembourg, Denmark, and Finland have also contributed significant sums of money in the form of investment. According to data on foreign direct investment broken down by industry, the field of professional, scientific, and technological services is attracting the greatest amount of capital. Major international investments have been made in the following types of companies: financial enterprises (15 percent), real estate operations (14 percent), commercial businesses (14 percent), and manufacturing businesses (11 percent).
The Green Channel initiative
The “Green Channel” initiative was approved by the national government in February 2021 to reduce administrative burdens for high-value investments in priority industries such as ICT, bio-economics, smart materials, photonics, biomedicine, and smart energy, as well as global business services, as well as construction, transport, and logistics, if necessary to carry out projects in the above-mentioned industries.
Latvia’s advantages that encourage FDI
The nation’s key resources are:
- Political harmony
- Wholesome public accounts
- High productivity overall and access to skilled and affordable labor
- A competitive corporate climate
- A straightforward and appealing tax structure and fewer overall taxes
- Taking use of its advantageous geographic position as a transit nation for the following:
- former Soviet republics
- Russia
- The European Union
- Historically solid diplomatic ties were strengthened by the nation’s 2004 EU membership
- Excellent access to foreign markets
Latvia’s weak spots that restrict FDI
The following are a few of the barriers to FDI in Latvia:
- The relatively tiny home market, which is dominated by Scandinavian businesses
- Inadequate industrial foundation
- Exports are heavily reliant on the economies of neighboring nations, especially Russia
- Technological delays are caused by inadequate research and development spending
- A flimsy financial industry depending on foreigners’ bank deposits
- Elevated corruption risk
- A lack of adequate land connectivity to the rest of the European Union
Government initiatives to encourage FDI
To obtain the finances it required after achieving its independence, Latvia decided to take part in the market economy. Foreign direct investment was increasingly made more available. To attract foreign companies, the Latvian government offers financial assistance. Its strategy specifically calls for the promotion of the high-technology industrial sector. There are now loan and semi-credit plans available to help SMEs. In the same way, as local investors have the same rights and responsibilities, so do international investors. International investors have access to all business areas, and any company may be started with just foreign capital. Foreign business owners are also qualified for financing from the EU and the government of Latvia. The International Investors Body in Latvia (FICIL) is a special council that represents foreign investors in Latvia and often meets with the government to improve the business climate. The cities of Liepaja, Rezekne, and Latgale each have one special economic zone (SEZ). Unique rules apply to each SEZ (such as exemptions from indirect taxes, customs duties, or VAT). These SEZs will presumably be operational till 2035.
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