VILNIUS - Despite the spectacular development of Lithuania's economy, the fastest growing in all Europe, the country is undergoing a severe drop in foreign direct investment.
In 2003 FDI decreased 23 percent, compared with 2002, to 0.2 percent of gross domestic product.
Experts claim that Lithuania is undergoing the same process that other East European countries did after the bulk of industrial assets were privatized. However, they stress that without a new injection of foreign inflows, further economic expansion will be complicated.
"If foreign investment continues to grow in such a small proportion, it will become difficult for Lithuania to compete with other EU members. Other countries will become more attractive," warns Ugnius Trumpa, director of the nongovernmental Lithuanian Free Market Institute.
Nevertheless, according to the Lithuanian Development Agency, the amount of foreign direct investments is expected to grow in 2004. The predicted growth is related to new opportunities for partial co-finance with EU funds after May 1.
A significant amount of investment is connected with mergers and acquisitions or new joint ventures, a process that eager and competitive Lithuanian businesses are just beginning.
Also, most foreign businesses invest for the purpose of export. For instance, there is a trend to concentrate production in Lithuania and marketing function on the home countries.
Tomas Andrejauskas, vice chairman of Hanza Bank board, stresses that one business development key to success is finding a local partner.
"The trends of foreign investment show that barely anyone starts a business without a local partner, and after it gets going, locals may leave," says Andrejauskas.
Otherwise, the banker praised Lithuania's relatively low profit tax – 15 percent – compared to other neighboring countries.
"Business conditions are good, and the social administration continues to improve, limiting previously well know bureaucracy," says Adrijauskas.
According to the Lithuanian Development Agency, labor costs are relatively low and the wage increase rate is lower than that of GDP, which rose by 9 percent in 2003. The average wage is eight times lower than that of the EU, or 80 percent lower than that of new members.
Other advantages of entrepreneurships in Lithuania include high levels of education, good infrastructure, and high potential of technologies. Research and development experts predict that in upcoming years, there will be good business opportunities in the small or medium sector, particularly in agriculture, where EU structural funds are within a reach.
For the government's part, one of the strategic priorities has been to encourage investment in the knowledge-based economy rather than labor-intensive industries. Among those sectors would be information technology and telecommunications, research and development, engineering or export services and design centers. Government policy is currently helping boost e-commerce and a digital "business-to-business" environment.
The one area where the government has been criticized, however, is in labor laws. Policy experts from the Lithuanian Free Market Institute say that the new labor code is unyielding in terms of defining overtime or weekend hours. Moreover, trade unions are provided with extensive powers that could also lead to rigidity in the labor market.