Lithuania: an FDI success story in the making

According to data from UNCTAD (the United Nations Conference on Trade and Development), Lithuania has been receiving fluctuating flows of foreign direct investment (FDI) over the last decade. For example, while 2015 saw 749.3 million euros of FDI into Lithuania, the following year saw a drop to 227.4 million euros. Things picked up again in 2017, when 512.4 million euros poured into the country. According to provisional data provided by the Bank of Lithuania, cumulative FDI stock rose 5.2 per cent to 14.7 billion euros at the end of 2017. The fluctuation is mainly due to the global financial crisis, as well as the regional crisis involving Russia and Ukraine. Such trends can also be observed in neighbouring Baltic countries. The country improved its position and ranks 16th out of 190 economies in the World Bank’s 2018 Doing Business Report, up from 21st position in 2017. The annual Report rates 190 countries on their business environment. Lithuania now sits ahead of the likes of Ireland (ranked 17th) and Germany (ranked 20th). Furthermore, Lithuania is the only country in the Central and Eastern European region to have improved its position in the Doing Business index this year. Amongst the other Baltic states, Lithuania ranks in the middle: Latvia is 19th, whilst Estonia took 12th position in 2018. According to the same Report, Lithuania has undertaken 31 reforms to its business regulatory environment, six reforms to its business incorporation processes, five reforms to bankruptcy proceedings and four reforms to its taxation system. In the EU, Lithuania ranks fifth for investment attraction.

Moreover, Lithuania offers tax exemptions to foreign companies and conditions have made it easier for companies to set up their businesses. The country made positive reforms in four key areas: obtaining construction permits was facilitated, connecting to electricity networks was improved, minority investors were better protected, and the tax payment system became electronic. As such, Lithuania was second in the whole of Europe and Central Asia for the number of reforms leading to an improvement in the conditions for business. Whilst Lithuania’s corporate income tax is 15 per cent, entities with fewer than ten employees and less than 300,000 euros in gross annual revenues can benefit from a reduced corporate income tax rate of five per cent.

Strategic positioning

Emerging Europe got in touch with Simonas Petrulis, CEO of the Baltic Free Economic Zone and President of the Lithuanian Association of Free Economic Zones (LAFEZ). Mr Petrulis gave us a very detailed and comprehensive overview of the business climate in Lithuania, mentioning the country’s location as a key factor that is highly beneficial for foreign investors: “due to our bordering with Poland, Kaliningrad Oblast (Russia), Latvia, Belarus our region offers unparalleled logistical access to major markets (East-West).” This strategic positioning of the country has allowed it to develop good infrastructure: it takes 1-2 hours to reach airports and 2-3 hours to reach sea ports.

Lithuania’s six Free Economic Zones (FEZ), at Kaunas, Klaipėda, Šiauliai, Kėdainiai, Panevėžys and Marijampolė, have been key for attracting FDI to the country, due to the companies located there receiving special economic and legal operating conditions. Businesses choosing to locate to one of the FEZs enjoy zero per cent corporate income tax during their initial 10 years of operation, 7.5 per cent tax over the next six years, and no tax on dividends and real estate. Kaunas’s FEZ has shown particularly encouraging signs of economic development and increased attractiveness for foreign investors. Of the 661 million euros invested in Kaunas FEZ, 70 per cent has come as FDI, which creates an additional 2.5 working places outside the zone for every one working place created in it. Emerging Europe spoke to Invest Lithuania, the country’s investment promotion agency, who stated that “the latest investment trends in the [Kaunas] region show that smaller scale projects which are more human resource intensive are being developed,” which means that there is increasing demand for highly qualified employees. In addition, the Kaunas FEZ has been focused on attracting investors from the fields of manufacturing, medical technology, aviation and MRO (maintenance, repair and overhaul).

Government support

Emerging Europe also spoke with Kaunas FEZ’s Marketing Manager Ignas Juknevičius, who pointed out that “there were no legal hurdles that these companies had to overcome,” when setting up their businesses in Kaunas FEZ. Mr Juknevičius added that “the whole settlement was and still is supported by the government as there were numerous meetings with Lithuania’s prime minister and other high-level politicians to ensure best conditions possible in Lithuania.”

“The only requirement for company to settle in Kaunas FEZ or any of Lithuania’s free economic zones is to perform activities which are not prohibited by the law of fundamentals of FEZs,” added Mr Juknevičius. Mr Petrulis, however, pointed out that companies planning to invest in Lithuania require “more and wider developed local infrastructure from local municipalities,” construction permits and other such administrative formalities to be processed quicker, cheaper and greener energy and a greater abundance of qualified specialists.

One of the most well-known companies present in Kaunas FEZ is Continental, the leading German automotive manufacturing company. The company has chosen Kaunas as the site of its new plant, where electronic components for the European market will be manufactured from the second half of 2019. This 95 million-euro investment will span until 2023 and is expected to create around 1,000 new jobs. “The construction of our first plant in Lithuania is an important part of our growth strategy in Europe,” stated Helmut Matschi, a member of the Continental executive board and head of the interior division. “We are glad that with the modern industrial region here in Kaunas, the excellent infrastructure and the highly qualified workforce, we have found the ideal location.”

Continental specifically selected the site in Kaunas, explains Shayan Ali, managing director of Continental in Lithuania: “Kaunas is Lithuania’s industrial centre and the nation’s leading electronics and automation hub. At the same time, its population of students – around 10 per cent of whom are specialising in electronics manufacture – puts a wealth of technical know-how at our disposal, so we are expecting to gain some highly qualified employees. All in all, Kaunas is the perfect location for our new plant.”

Access to talent

With the biggest technological university in Baltic region, Kaunas University of Technology, the labour pool has been a decisive factor for giants like Continental, Hella and Hollister. The university boasts around 53,000 students, with a quarter studying technical programmes. In addition, a quarter of the population already works in the manufacturing industry, therefore, as Mr Juknevičius stated, “this concentration of engineers and other specialists doesn’t possess a challenge. Workers and society perceive international companies very well and look forward to working in these companies.”

According to 2016 census data, the demographics of Lithuania are broadly in favour of foreign investors: 84 per cent of young Lithuanian professionals are fluent in English and 2016 Eurostat data states that the country has second highest share of 25-29 year olds with tertiary education in the EU: 50.4 per cent. Mr Juknevičius adds that “Lithuania is still not saturated in terms of FDI investments (especially manufacturing): there are enough employees to work for new companies and investors.” Furthermore, Mr Petrulis also recognised the country’s talent potential: “[Lithuania] can deliver with a much higher speed of change management … than our much bigger neighbour countries, competitors and mature economies in the west of Europe.”

All in all, for a small country and economy in eastern Europe, Lithuania seems to be doing all the right things to be attracting foreign investors, both small and big. Government incentives, the Free Economic Zones and a reliable talent pool have proven to bring in companies from a variety of sectors to the country. The booming FinTech (financial technology) sector in Lithuania is undoubtedly promising, despite Estonia having established itself as a hub for technology not only in the Baltic region, but the entire EU. Success stories such as Revolut, the platform and app that allows its users to exchange currencies at interbank rates, are proving the desirability of Lithuania as a destination for such start-ups. Not only will foreign investors expect a warm welcome in the country, but also a climate that allows their businesses to prosper.