Bipolar approach to investment

  • 2009-07-02
  • By Adam Mullett

STRUGGLING: Lithuania is rated third from bottom based on the following criteria in descending order of importance – Employment costs multinational, market labor costs, taxation, labor productivity, graduate availability, education level, availability of flexible workforce, labor market regulations, socio-political criteria and ICT infrastructure.

VILNIUS - Lithuania is falling behind its neighbors in new Europe in terms of foreign direct investment 's the country needs to find a way to become more competitive. Yet decision makers seem to be at odds and moving in different directions in strategies for attracting FDI.
Poland, for instance, recently snatched some major investment projects from Lithuania and has also pegged itself as the food basket of northern Europe. Latvia has positioned itself as the hub of the Baltics with Riga Airport, but Lithuania is somewhat on the sidelines.
The question for the government is whether to focus on a long-term strategy or to try to take shortcuts. A study comparing 10 new EU members in Eastern Europe placed Lithuania as the third least attractive country for investment.

"I see this business and investing culture as part of our overall culture of taking short cuts 's that is, we make shortcuts with everything 's food, transport, infrastructure, business," one Lithuanian observer noted.
The minister of economy wants to make it easier to start up new businesses and wants entrepreneurs to take center stage, but others who are in charge of attracting investment are looking for the quick buck of a massive factory investment.

Meanwhile, other countries are attracting direct investment in many forms.
Investment experts working in Switzerland, speaking at the recent World Forum for Direct Investment 2009, have pointed to Western Europe's recent example of focusing on Small and Medium Enterprises (SMEs). They said the sum of many smaller investments would be worth more than one large Greenfield (previously undeveloped) venture.
Dutchman Peter Storm, Founder and Managing Partner of Swiss company GlobalArena, a think tank on the best locations for investment, told The Baltic Times that politicians often want to create a big show and grab headlines with a multimillion euro deal attracting a new factory to the country.
However, this can be a costly and ultimately detrimental route to take with large corporations who know no loyalty to countries.

"The government has to see that big projects will cost a lot of taxpayer money because these companies have very high demands in a very competitive market so they will negotiate like mad to get as much incentives as they can 's typically these will be taxpayer money incentives," he said.
"You throw in a large bucket of money into a multinational that will not show any loyalty to you 's three or five years down the road they move along."
Instead of trying to attract massive companies for potential short-term gains, the investment market analyst suggested creating an "incubator of entrepreneurialism" where young people with bright ideas could flourish.

"If you have a group of smaller companies resulting from very good ideas, innovative ideas, innovating business models, talented people, then there is little to bargain and negotiate when they are going into the market, so it creates a system with a balance," Storm said.
Statistically, the most common way for a company to move into a new market is by partnering with or buying an existing company that has previously existing market share. Following the initial investment, the company will decide whether or not to scale up their operations in the country.

"The question that a government must ask is 'what do we have to do be successful in the long term?' My thesis would be that it would be more successful to have an incubator environment or an entrepreneurial environment of young people being supported and encouraged and having financial backing commercializing their ideas and starting their ideas," Storm said.
"These companies would typically be bought in their early life cycle when they have shown their ability to survive and have paying customers 's a basic commerciality."

NEW IDEAS

Minister of Economy Dainius Kreivys told TBT that making it easy for start ups to get off the ground is one of his priorities. Presently his ministry is pushing a bill through Parliament that would see business registration fees drop significantly.
"We are working on that case 's two weeks ago, we had a decision in our government to reduce the starting capital from 10,000 (2,898 euros) to 1,000 litas and we will pass this in Parliament in the coming month. The second thing 's we are going to create some sort of micro-enterprise and the cost of this will be one litas," Kreivys said mid-June.

"Our biggest concern is reducing the amount of accounting that is needed. It really needs to be changed. Now we have a U.K. initiative for SMEs 's in the council we already have a proposal that for SMEs the level of paper work would be reduced."
The minister said to encourage new entrepreneurs they had allocated "significant" EU funds to angel capital 's funding for bright idea start-ups.
The price of registering a limited liability company in Lithuania is about 750 litas. By way of comparison, Estonia is slightly more at 4,900 kroons (313 euros) and Latvia is less at 137 lats (195 euros).

In some situations, especially for young business people, high fees could be daunting.
"It's clearly easy if you have some back up financially 's its much more difficult when you start in your 20s because you don't have the network to approach, you don't have the capital to spend," Estonian entrepreneur Mark Kofman and CEO of Programeter told TBT.
On the other hand, Kofman spoke in favor of high starting capital benchmarks to ensure that only serious companies are registered.

"It should be something tangible that you have to put into the business so you just don't go open the company 's if you start something and you believe in that and it's 1,000 or 2,000 or 10,000 kroner to put that into the business."
Storm said Kreivys was on the right track and that excessive start up fees would be "lethal" to the vitality of new businesses, especially from inexperienced entrepreneurs.
"Rather than paying money to the government, you should be getting support from the government."
Mantas Nocius, the head of Lithuanian Development Agency, the government body tasked with attracting investors to the country, said the ease of start-ups isn't an issue at the moment. Nocius said the image of the country to major investors is more important.

"So far we haven't seen significant interest in Lithuanian start ups just because it is relatively easy to set up a company here and so far Lithuanians weren't successful in selling their own ideas from start ups 's it will take time and development for this to happen," he told TBT.
"Some companies are interesting, but these are well-established companies. There is interest in large companies with an established market and we haven't noticed interest in startups or small companies."
Nocius blames this on the fact that people don't know much about the country.
"The main issue is that Lithuania is still relatively [not well] known. If a decision maker has a blank spot about Lithuania, there is little chance that it will get included."

"[When people come here] the impression is quite good 's people generally expect less from Lithuania, but they see the reality. So I think we should work on image more and then we could think of the possibility of selling 's also Lithuanian entrepreneurs should be more inventive," he said.

BREAD AND BUTTER

The GlobalArena research from 2007 showed that Lithuania was not as competitive as its neighbors in a number of arenas. However, the country was in fact placed number one for tax incentives, an important factor for companies.
Other areas of comparison 's like Western European language proficiency, labor flexibility and productivity 's let the country down.

"I was actually surprised to find Lithuania in the 10th position [for labor productivity]. This is something that as a policy maker 's as a government 's you have to ask yourself 'do we understand why we are not at least in the middle of this table?' Whatever way you look at it, this is not the right outcome 's this is not a competitive country," Storm said.

"Education in general [is] not good enough. This study wanted to look at people at university learning languages English, French and German, foreign languages learned per student, percentage of students who had completed secondary education. That is a very broad measure, but a meaningful measure," he added.
Companies that come to the country often have to train their staff before they are ready.
Lindorff, an accounting company that nearshores specialized labor to Lithuania, has to train its staff in Norwegian for eight months and said one of the only advantages Lithuania has specifically is its location, being close to Norway.

"I think that in general, the investment climate here is nothing special 's there is no especially competitive edge. Any competitive edge that we have in Lithuania, we have created ourselves," said Per Andreas Vogts, director of international business development at Lindorff and Managing Director of Lindorff support services in Vilnius.
"Lithuania has to be aware that the competition is moving as aggressively as they are 's it's not that you are moving and the rest are looking around 's no, they are trying to beat you in an increasingly competitive market," Storm said.
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