It’s all about Value
An interview with Remigijus Kabečius, director general of the Lithuanian Development Agency
According to the rate of growth of GDP, Lithuania is the leading economy in Europe, a fact which has been widely recognised and commented on. The most important result is that this has highlighted the country’s greater competitiveness, especially in important branches of the economy such as foreign direct investment and exports.
“Our development in the last decade has been marked by rapid economic reforms and macroeconomic and political stability,” says Remigijus Kabečius, director general of the Lithuanian Development Agency.
Kabečius graduated with honours from Moscow’s International Relations Institute in 1984. He abandoned his career as a Soviet diplomat after Lithuania regained its independence.
Since 1991, he has worked as an advisor on international relations to the prime minister, held positions at the former Ministry for International Economic Relations and a bank, and had a private economic consulting practice, before his appointment as director general of the LDA in 2002.
What advantages does Lithuania have over other countries in Central and Eastern Europe as a foreign investment destination?
When I asked an American marketing professor who has visited Lithuania on more than one occasion what phrase he would use to describe Lithuania to mark it out from other countries, he said: “Lithuania is about value.”
I believe this is the precise phrase to describe the key advantage that our country offers to investors, that is, a high level of return on investment.
Lithuania has many competitive advantages that make it attractive to foreign investment. It has been the fastest growing economy in Central and Eastern Europe since 2002 (GDP growth reached 8.9 per cent in 2003), while inflation has been the lowest in the region. We fulfil all the Maastricht criteria for joining the euro, even while some of the older EU countries do not.
Among many factors that make Lithuania an attractive investment destination, I would highlight the following:
A High Education Level
Data from Unesco and Eurostat shows that the population is among the most educated in Europe in all age groups between 30 and 59. Our education level is considerably higher than that of Latvia and Estonia, and is double the EU average.
Lithuania, a country of 3.5 million, has 43 higher schools, including 19 universities and 24 colleges. Vilnius University, founded in 1579, is one of the oldest in Eastern Europe. Kaunas Technological University is the largest technical university in the Baltic countries. This all helps to develop activities with high value added in Lithuania.
Relatively Low Business Costs
Lithuania’s labour costs are low, and wages are growing at a slower rate than GDP. The average hourly wage is eight times below the EU average, and 1.2 times below the average wage level in new EU countries. In addition to the relatively low labour costs, Lithuania can also offer competitive production, communication, construction, transport and other service costs.
A Good Infrastructure
Lithuania’s infrastructure projects have attracted massive investment both from the government and from European and other international funds since 1990. The country has one of the best road networks in the region between Warsaw and Tallinn, four international airports, the ice-free seaport of Klaipėda and a free economic zone adjacent to it, well-developed fixed-line and mobile telecommunications, oil and gas pipeline networks, and an offshore oil terminal. It has a modern banking system, with foreign investors owning 90 per cent of the banks’ capital.
Its good geographical position, coupled with its well-developed transport infrastructure, ensures that cargoes such as raw materials, components and manufactured products are shipped to Europe and the former Soviet countries in a short period of time.
A High Technological and R&D Potential
Lithuania has a technology-orientated education system covering the electronics and IT sectors, biotechnology and pharmaceuticals, and equipment and machinery production. Advanced biotechnology and state-of-the-art technologies in the fields of electronics, electro-mechanics and textiles are used.
Business-Friendly Tax Environment
The tax system is ranked by Forbes and Ernst & Young as one of the most liberal in Europe. The corporate profit tax rate is only 15 per cent. The overall tax burden is among the lowest in Europe as well.
Let’s talk about the dynamics of foreign direct investment. FDI inflows in 2003 declined to 25 per cent of the 2002 level. What caused this fall?
Investment in Lithuania started to grow at a stable rate back in 2000 as the country recovered from the after-effects of Russia’s economic crisis of 1998 and 1999 and opened membership negotiations with the EU. Foreign investors, and particularly those from Western Europe, saw good investment opportunities and invested here. The year 2002 was very successful, with FDI inflows rising by 24 per cent and exceeding aggregate FDI inflows into Latvia and Estonia.
No new large foreign investment projects were launched in 2003, but the number of small and medium-size foreign investment projects rose. Many companies that had already established a presence in Lithuania expanded their business here as well.
In 2003 we saw the increased participation of Lithuanian capital in the privatisation process. The growing financial strength of local businesses is a welcome phenomenon, and will help encourage foreign capital investment in the long run too.
Are there any signs that FDI inflows will grow this year?
I am certain they will. Lithuania is joining both the EU and Nato, which will help boost confidence among those who have doubts and those willing to take full advantage of the free movement of goods and services in the Common Market. I believe that we will see new investors come, from EU member states and the US, and from Asian countries, Russia and other countries.
Many foreign-owned companies that are operating here are already planning to increase their investment as well. Among the factors that will encourage further investment will be the possibility of applying for co-financing of projects from EU funds once we join the EU on 1 May 2004. Privatisation projects are set to continue as well. The Lithuanian Development Agency itself has many of potential FDI projects in its “portfolio”, of which two or three are major projects.
You mentioned that Lithuanian capital is playing a growing role in the privatisation of state-owned assets. How would you assess the competition between domestic and foreign investors in the privatisation process, and the impact this has on FDI?
I see this competition in privatisation as a positive factor for the economy. In 2002 and 2003, foreign investors’ share of privatisation transactions, excluding the privatisation of municipal assets, was around 17 per cent. This percentage has varied significantly over the last decade, depending on the number of acquisitions of large companies. For example, it doubled in 1998 when a consortium of the Nordic companies Telia and Sonera purchased Lietuvos Telekomas. Foreign investors’ share of total acquisitions of state-owned assets was only 2.4 per cent in 2003, when local businesses dominated in the privatisation process.
Privatisation has a direct and positive impact on FDI inflows. However, it is not the only way to attract FDI. Most FDI into Lithuania has been in the form of green-field investment, private mergers and acquisitions and new private joint ventures. Statistics show this to be true as well. FDI inflows into Lithuania totalled around 670 million euros in 2002, of which only 55 million euros, or about 8 per cent, was through the privatisation of state-owned assets.
How are exports performing?
Exports have been growing rapidly. In absolute terms, Lithu-ania’s total exports soared by 83 per cent in the period between 1999 and 2003. Another good sign is that they rose at a faster rate than GDP. Exports’ share of GDP increased from 28 per cent in 1999 to around 52 per cent in 2003.
This shows that Lithuanian industries are export-orientated.
Exports accounted for almost 59 per cent of total industrial sales in 2001 and 2002. A large part of the Lithuanian industrial sector, such as furniture, textiles and chemicals, export at least 70 per cent of their output.
In general, the qualitative structure of exports has been improving. The proportion of raw materials in total exports has been declining, while the proportion of higher value-added goods and services has been rising.
Exports of manufactured products dominate the export structure, with their share of the total reaching 94.7 per cent in 2002. Petroleum products are also an important export commodity, accounting for over 20 per cent of the total value in 2001, and for 16.5 per cent in 2002. The proportion of textiles and clothing in the total fell to 15.5 per cent in 2002. The proportion of chemical products stood at 6.6 per cent in 2001 and 6.7 per cent in 2002.
The foodstuffs and beverage industries have an almost equal share of total exports, at almost 10 per cent. I think that food product exports will rise markedly in a few years after Lithuania’s accession to the EU. Wood product and furniture exports increased at a faster rate than total manufacturing exports.
The share of motor vehicles and other transport equipment, including car parts, in the overall export structure has been increasing at an impressive rate. The combined percentage of these two areas increased to 16.3 per cent in 2002, from just over 5 per cent in 1999.
As for the export destinations, EU markets account for 50 per cent of the total, and this is expected to rise to approximately two-thirds of overall exports when the EU accepts new members this year.
The United Kingdom used to be Lithuania’s key export partner for years, with its share of the total rising from 3.5 per cent in 1998 to 13.8 per cent in 2001. However, Switzerland moved into top position among the export partners after Ma˛eikių Nafta, the country’s crude oil refinery, started marketing its products in Europe via a Swiss company. As a result of this, the UK’s share of the total shrank to 5.8 per cent in 2002.
Large companies dominate among exporters. Twelve companies account for nearly 38 per cent of the total, while 61 account for 56 per cent of overall exports. Some 1.6 per cent of exporters generated almost two-thirds of the country’s total export revenue in the years 2000 to 2002. Exports and export growth are heavily dependent on between 120 and 140 enterprises.
I would like to emphasise that the LDA maintains contacts with some 600 exporters. The further growth of exports depends on how many succeed in gaining a foothold in foreign markets and integrating themselves into international production and service chains.
What is the LDA?
The Lithuanian Development Agency (www.lda.lt) is a business information and marketing organisation providing support under the “one-stop shop” concept.
• It promotes exports by assisting local companies not only in finding markets abroad for their products, but also in integrating them into international production chains and improving their competitive position;
• It promotes foreign investment by providing potential investors with information on the business climate and specific investment projects in Lithuania, and offering organisational assistance;
• It initiates and participates in various events aimed at presenting information on the Lithuanian economy and business (promotional material in the foreign media, the production and distribution of printed publications, etc).
The LDA provides information to foreigners in English, German, French, Italian, Spanish and Russian. It has two representative offices in Germany, in Hamburg and Frankfurt, and one in Italy, in Milan.
In 2003 the LDA contributed to the launch or completion of 11 small and medium-size FDI projects intended to create 380 new jobs. The total value of FDI attracted by the LDA reached 90 million euros in 2003. Lithuanian companies have signed, or are expecting to sign, export contracts worth 30 million euros.
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