Foreign direct investment (FDI) in Latvia

FDI in Figures

FDI flows to Latvia increased continuously upon its accession to the EU to peak at USD 2.32 billion in 2007, and have been generally on the decline since that date. Nevertheless, according to UNCTAD's 2022 World Investment Report, foreign investment flows reached a record-high level of USD 5.3 billion in 2021. In the same year, the total stock of FDI was estimated at USD 23.7 billion, around 60.9% of the country’s GDP. Prior to Latvia's transition to a full market economy, privatisation was the main source of FDI for the country. Today, a significant portion of FDI comes from re-investments and classic merger/acquisition operations. The bulk of foreign investments is allocated to professional, scientific and technical services (21.5%), financial and insurance activities (15.2%), wholesale and retail (14%), real estate (14.1%), and manufacturing (11%). The main foreign investors in Latvia are Sweden (28.8%), Estonia (12.2%), Russia (8.9%), and Lithuania (7.2% - source: Bank of Latvia). In 2022, Sweden-based Anodox announced that it will open one electric vehicle battery factory and another to produce lithium iron phosphate cells, for a total investment worth EUR 50 million. According to fDi Intelligence, a total of 13 new greenfield projects were announced in the first half of 2022 alone; while figures by OECD show that in the same period, the net inflow of FDI stood at USD 693 million.

Latvia can also count on a skilled and relatively inexpensive workforce and a strategic geographical location, between the EU and CIS countries. It also has a competitive tax system (ranked second in the 2022 International Tax Competitiveness Index Ranking) and the government has abolished taxes on reinvested profits. The country counts five special economic zones (SEZs): Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone. The law does not discriminate between local and foreign investors, except for some sectors considered of national importance, which require governmental approval prior to transfers of significant ownership interests (these include the energy, telecommunications, and media sectors). The government recently approved the “Green Channel” initiative, which aims at reducing administrative burdens for high value-added investments in priority industries such as ICT, bio-economics, smart materials, photonics, biomedicine and smart energy, and global business services, as well as construction, transport and logistics if required to carry out projects in the above-mentioned industries. On the downside, the country has a small-sized market, and it has room for improvement in the protection of minority shareholders and in resolving insolvency. Furthermore, its proximity to Russia may hinder the expansion of FDIs in the short term in light of the Russian invasion of Ukraine. Overall, Latvia is considered a business-friendly jurisdiction, and the Economist ranks it 38th out of 82 in its Business Environment ranking.

What to consider if you invest in Latvia

Strong Points

The main assets of the country are:

• Political stability
• Healthy public accounts
• Skilled and inexpensive labour and overall high productivity
• A competitive business environment with a simple and attractive tax system and a low level of taxation (Latvia's tax system ranked 2nd most competitive in the world - International Tax Competitiveness Index 2020). Legislation harmonised with that of the European Union is also favourable for investment
• A strategic geographical location making the country a transit point between the European Union and Russia and the former Soviet republics
• Historically strong international relations, reinforced by the country's accession to the European Union in 2004, giving it good access to international markets
• The Latvian government is particularly interested and willing to promote the development of its start-up sector.

Weak Points

Some of the obstacles to FDI in Latvia include:

• The small size of its domestic market, which is dominated by Scandinavian companies
• A weak industrial base
• Export activities highly dependent on the Russian economy and bordering countries
• Low investments in research and development (just 0.64% of GDP in 2019 - OECD, latest data available) generating technological delays
• A fragile banking sector dependent on bank deposits of non-residents
• High risk of corruption
• Insufficient land connections with the rest of the European Union

Government Measures to Motivate or Restrict FDI

Following its independence, Latvia decided to launch itself into the market economy and acquire the capital it was lacking. It progressively opened itself up to direct foreign investments. In order to attract foreign companies, the Latvian government offers financial assistance. Its strategy is especially to promote the high technology industrial sector. A loan and a semi-loan plan have also been launched to promote SMEs.

Foreign investors have the same rights and responsibilities as local investors. Any company can be established with 100% foreign capital and all business sectors are open to foreign investors. Foreign entrepreneurs are also eligible to receive funds from the EU and the Latvian government. Foreign investors in Latvia are represented by a special council, the Foreign Investors Council in Latvia (FICIL), which holds regular meetings with the government to improve the business climate.

Five special economic zones (SEZ) have been established in Latvia (in Liepaja, Rezekne and Latgale). Each SEZ has its own specific rules (such as exemptions from indirect taxes, customs duties or VAT). These SEZs are planned to be in operation until 2035.