Competition for investment heats up

VILNIUS - International computer giant International Business Machines Corporation’s decision last week to open a Lithuanian research center may stoke concern that Estonia and Latvia are falling behind as the Baltic neighbors vie for foreign investment after Europe’s deepest recession, reports Bloomberg. Lithuania has attracted investments from at least five other international companies since the beginning of last year, led by Microsoft Corporation, the world’s biggest software maker, and Barclay’s, the U.K.’s third-biggest bank.

Lithuania is winning as Prime Minister Andrius Kubilius acts as “investment czar,” said Kitty Kubo, who heads the foresight division of the Estonian Development Fund in Tallinn, which advises the country’s government. Estonian lawmakers haven’t acted on the fund’s suggestion that they name a top official to head the country’s investment drive, she said. “The doors of companies such as IBM are open for a prime minister, even when it is difficult for an investment promotion agency to get its foot in the door,” Kubo said. “If Lithuania continues successfully, it has a good chance of grabbing the best investments in the region and the best talents with it.”

The competition is vital as the Baltic States try to revive growth after their economies shrank by 20-25 percent from peak levels during the global recession, according to an International Monetary Fund report released last week.
Estonia is the Baltic region’s traditional leader in foreign direct investment, with $16.2 billion of accumulated FDI, according to the World Investment Report 2010 by the United Nations Conference on Trade and Development. Lithuania is second at $13.8 billion, followed by Latvia’s $11.7 billion.

Lithuania narrowed the gap last year as the stock of foreign investment rose 7 percent, compared with Estonia’s 3 percent drop and Latvia’s 2 percent increase, the report shows.
Kubilius’ government plans to boost FDI to 20 billion euros within five years by focusing on computer services and energy as the country seeks to establish itself as a service hub for the Baltic and Nordic regions, Economy Minister Dainius Kreivys said in June.

While all three countries promote their European Union membership, central location and cheap, well-educated workers, Estonia leads its neighbors in the World Bank’s Ease of Doing Business rankings. Estonia placed 24th in the most recent survey, Lithuania 26th and Latvia 27th.

Estonia’s “slight edge” in business conditions may not be enough to ensure success, said Christian Ketels, a professor at Harvard Business School’s Institute for Strategy and Competitiveness. “Countries that market themselves by focusing on their capabilities in specific clusters of economic activities find it easier to communicate their specific advantages,” said Ketels, who is also a member of the Baltic Development Forum’s advisory board. “As far as the Lithuanian campaign fits that bill, I think it is a step in the right direction.”

Armonk, New York-based IBM, the world’s biggest computer-services company, said it will build a research and development center with the Lithuanian government in Vilnius. Each party will invest 42 million litas (12.1 million euros) annually and share in any patents they develop.

Estonia, the smallest of the three Baltic nations, “has not based its attraction of FDI on specially designed support schemes,” the Estonian Investment and Trade agency says on its Web site, listing Skype Technologies, Playtech and Swedbank among successful investors. “It is our favorable business environment that makes the difference.”
The country may gain an advantage in the competition next year when it adopts the euro, making it easier for companies to do business in the countries sharing Europe’s common currency. “Lithuania’s marketing efforts have been good, but they don’t really offset Estonia’s euro entry,” said James Oates, chief executive officer of Tallinn-based Cicero Capital, and a former head of east European equities at UBS. “Attracting investment is one thing, but keeping it in the country is another as we have seen a number of big investors enter a Baltic country and leave in a couple of years.”

Hilton Hotels Corporation in 2007 closed its Tallinn call center, which had more than 300 employees, citing growing costs and a lack of people who were fluent in other European languages. Hatfield, England-based International Greetings, Europe’s only publicly traded maker of wrapping paper and Christmas cards, closed its two manufacturing plants in Latvia in 2008.

Latvia, sandwiched between Estonia and Lithuania, also advertises itself as a business-friendly country that provides a gateway to the EU and Russia. Economy Minister Artis Kampars traveled to China in July to meet with business leaders and government officials about potential investment. Andris Ozols, director of the Latvian development agency, said after the visit that Chinese companies were interested in Latvia’s ports, cargo companies, the national airline and creating a logistics center in the country.

“Investments in Lithuania or Latvia are good for Estonia as we also depend on how their economies perform,” Estonian Economy Minister Juhan Parts said in an interview. “Promotion of investments needs to be systemic and consistent,” he said when asked if Estonia needed more high-level promotion.
The government needs to do more, Kubo said. “We cannot be complacent and passive in competition for capital and talent, and just hope that some general conditions will make us a winner in this contest,” she said.