Written by exchange student at CBS Viesturs Silis
Copenhagen April 29, 2000
Index
1. The
short description of nature of investments and statistics…………3
2. The
overall amount of accumulated investments in Latvia……………..5
3. Reasons to invest in
Latvia………………………………………………………...6
4. Obstacles in investments in the
country………………………………………7
5. Foreign Investors Council in
Latvia………………………………………………8
6. The Baltic States investment
program…………………………………………8
7. Conclusions………………………………………………………………………………9
8. Bibliography………………………………………………………………………………10
1. The Characteristics and the Main Areas of
Investments in Latvia.
From
the Latin the verb “to invest” means to input. In reality it means to
input in order to maintain the capital and insure its growth.
What
we consider to be the investment is the purchase or production (for personal
use) of vehicles, equipment, long-term intangible assets, bank accounts or
investments in other company’s securities.
There
is not a unique opinion about the description of investments in media, neither
there is one among the economists.
The
money gained for the sales of the shares abroad is also considered to be an
investment.
The
majority of Western economists consider an investment the amount of money in
fixed assets (including long-term intangible assets) and investments in order
to increase the amount of assets, but what economists do not consider to be the
investment is purchase of securities, because, as they explain, it does not
increase the production means in the economical system.
On
the level of an enterprise as a single equity the purchase of equipment
(mechanisms, vehicles, etc.) and purchase of other company’s bounds can be
considered as investment, because this is the way to earn the capital or to
increase the already existing.
The
cash flow between the different countries also exists. For example, Latvian
banks invest money in stocks and securities abroad. In this case Latvian
enterprise’s (bank’s) money works outside the country and initially gains
profit there, but can this be considered an investment within the country?
In
Latvia the situation is rather complex and different from Western countries and
is described as the sale or the handing over of fixed assets from one
enterprise to another as the result of change of the form of ownership.
The
formation of the market economy favors the establishment of new transactions
that may affect investment processes.
The
real investments from the point of view of the state are only when Latvian
enterprises purchase fixed assets or the assets that are used abroad.
From
the state’s standpoint one enterprise’s investment into another is not the real
investment, because thus the second enterprise gains means for further purchase
of fixed assets, securities or to discharge its own debts.
Foreign investments in Latvian enterprises are
firstly a cash flow from abroad and as a source of non-financial (real) or
financial investments in the country.
Foreign
investments from economical point of view are also means fixed to investments.
From
the facts that I have mentioned previously, we can discriminate between
following notions:
Firstly:
Investments
as input into financial and non-financial assets and also as means of investments
Secondly:
Investments
from the pint of view of enterprise.
Investments
from the point of view of the state.
Depending on the assets in which the cash is invested we can separate:
Financial
investments
Non-financial investments.
Currently new economic categories are emerging in Latvia,
such as foreign investments, investment portfolio, etc. The core of these
economic categories is connected capital movements and cash flow, not the real
cash invested in any assets.
Currently the
issue of attracting foreign investments as the means for the economic growth
has been raised. In Latvia external investments are the cash attracted by
Latvian enterprises or foreign enterprise investments in Latvia, because these
figures are reflected in their assets. Often when talking about foreign
investment, we do not talk about their usage (the way they are channeled and
utilized) because the cash is used either to recreate or increase the fixed
assets. External investments (are the only cash) that can be used to achieve aims
mentioned above or used to increase fixed assets. They can also not be used in
the nearest future or at all. It is impossible to predict whether this cash
will be or not used in financial assets.
Recent statistics
include non – financial investments generally or in detail, as well as non –
financial investments made in foreign currencies. The latest figures show
implemented (invested) external investments (cash from abroad) in Latvian
enterprises tangible assets. For example in 1997 external investments accounted
for 154.2 million lats (Ls), but non – financial only 49.6 million Ls. For what
were used 104.6 million? Apparently to increase fixed assets including purchase
of foreign companies securities, to discharge of debts, etc. For example the
volume of external investments in chemical industry was 46.5 million Ls, but
all non – financial investments accounted poor 3.6 million Ls.
We have to admit
that generally the volume of investments is not satisfying to increase economic
growth. The total investment volume in 1997 comparing to GDP was approximately
19%.
2.
The Overall Amount of Accumulated Investments in Latvia.
The total amount
of foreign investments for October 1, 1998 was 2333, million Ls (for July 1 it
reached 2339 million) according to information by Central Statistical Bureau.
The amount has
been generated mostly by all kinds of financial investments that our economy
received from abroad. The main parts of these investments were loans, deposits
in Latvia’s credit institutions as well as in fixed capital of enterprise
(Latvian). The economically most significant part of investments in Latvia are
direct investments that secure long – term interest in performance of the
enterprise and also gives great power in management of the enterprise.
The accumulated
stock of direct external investments for October 1, 1998 was 818 million Ls,
which is the average of 335 lats per capita (in July 817 million – 334 per
capita, in January 750 million – 305 per capita).
During the 3rd
quarter of 1998 the amount of direct investments reached 31 million, which is
less than 2nd quarter (52 million Ls) comparing to 1997 2nd
quarter (57 million) and 3rd quarter (117 million). In the 3rd
quarter of 1998 external investments accounted for 3.2% of GDP (2nd
quarter 5.3%). The notable figure the investments made by legal entities or
individuals that for October 1, 1998 totaled 597 million Ls (13 millions less
than in July). This is connected with revaluation of enterprise capitals. For
October 1, 1998 the greatest investment bulks were in fixed capitals of
following industries: transport, warehouses and communication (194 million Ls –
32% of the total), basic industries (212 million Ls – 20%), trade (95 million –
16%). During the 3rd quarter most significant investments were in
trade (7 million Ls), financial advising and transportation, warehouses and
communication (4 million each). In other branches investments were low or no at
all.
The highest amount
of accumulated foreign investment in fixed capital is from Denmark (100 million
Ls – 17% of the total), USA (65 million Ls – 11%), Russia (55 million – 9%),
Germany (52 million – 9%) and UK (45 million – 8%). Ireland, Sweden, Estonia,
Finland, Singapore, Switzerland, the Netherlands, Liberia and Norway also have
investments in Latvia.
|
Foreign
investments in Latvia (in millions Ls)
|
||||
|
|
1.01.98.
|
1.04.98.
|
1.07.98.
|
1.10.98.
|
|
Accumulated
external investments
|
2187
|
2263
|
2399
|
2333
|
|
Accumulated
direct external investments
|
750
|
778
|
817
|
818
|
|
Accumulated
external investments in fixed capitals of enterprises
|
552
|
577
|
610
|
597
|
3.
Reasons to Invest in Latvia
Latvia has
succeeded in attracting direct foreign investments, according to European
Reconstruction and Development Bank the highest ratio was in 1997 (6.7% of the
GDP). This means that Latvia out of all Eastern countries with transition
economy is the most favorable for investments. There is a big competition among
Eastern countries in attracting external investments that is why it is
important not to lose competitiveness and to improve investment climate.
International Financial Corporation (IFC) Foreign Investment Advisory Service’s
(FIAS) survey about administrative barriers for investments in Latvia carried
out in assistance with Latvia Development Agency will allow to identify the
areas needing improvements.
For more drastic
development and to improve competitiveness of all economy branches in Latvia it
is vital that the volume of investments increases. Moreover, it is important to
increase the volume of direct external investments, because the amount of
internal (domestic) investments is not satisfying. Thus, not only the capital
will grow, but the in – flow of modern technologies, know – how and approaches
towards the new markets will increase. On the contrary from financial investments,
direct investments are not so mobile and in case of crisis do not leave the
country as easily as financial investments. Many surveys support the opinion
that Latvia is favorable for investors. However, lower – level legislation and
regulations and their implementation are not always consistent, varying in use
depending on educational level of clerk and sometimes-personal benevolence
towards the investor. These are the problems met not only by foreign investors,
but also local. Thus, if Latvia wants to maintain its movement towards EU, the
political goodwill has to be found and legislation should be revised in favor
of external investors. At the same time Latvia Economic Development Fund (LEAF)
points out that among other Central European countries and Eastern European
countries Latvia has entrepreneurial environment encouraging investors.
4.Obstacles In Investments in the Country.
Unclear and inconsistent implementation of
legislation and resolutions, the lack of possibilities for entrepreneurs to
defend themselves vis – a – vis decisions of state institutions, problems with
settlement of immigration documents, different inspections and verifications
and small problems with customs are the most important administrative
impediments that hinder the in – flow of foreign investments in Latvia. Many of
these problems occur not due to objective reasons, but due to psychological
problems of the clerks, i.e. entrepreneurs (not only foreign also local) are
not perceived as clients or taxpayers but as obstacles in the work of clerks.
The main administrative problem in Latvia recognized by external investors is
unclear or inconsistent implementation of legislation. Enterprise registration
in Latvia is usually clear and quick; the problem of “inconsistent attitude”
appears after the registration, after visit of different inspectors (tax,
language, etc.). The same concerns customs. One of the most time – consuming
processes for foreigners is purchase of real estate and the receiving of
building permission. There are also other obstacles for investment in Latvia
such as crime rate, corruption, weak transport infrastructure, clerks lacking
competence, complex system of crediting (loans), unfinished privatization.
Foreigners have also specific problems with residence, work permits.
Due to the global financial crisis the
capital is returning from markets of developing countries to the markets of
more stable (USA, Western Europe) economies and during the past few years the
capital flow to developing countries has decreased 4 times.
5.
Foreign Investors Council in Latvia.
January 28, 1999 is the date of establishment of Foreign Investors Council in Latvia (FICIL) that is responsible for the matters concerning foreign investors problems. The meetings are held monthly and they encounter representatives of foreign companies branches in Latvia (their managing directors) on one side and government on the other.
The enterprises encountered in FICIL have promised to organize summits between higher management of their companies and the government. At the moment FICIL include representatives of such companies as Coca Cola, Ericsson, Statoil and others. The council is also supported by all kinds of chambers of commerce and trade organizations. Juka Hermele (Stora Enso) is the chairman representing investors and Vilis Kristopans (former Prime Minister) represents the state. Representatives of private sector In FICIL have obliged to deal with the problem of impediments, except ones concerning state or municipalities created (crime, corruption, transport infrastructure, lack of educated and experienced managers, difficulties with loans, delays in privatization, etc.).
6.The
Baltic States investment program.
This year is the closing for the investment program in
Baltic States. Primary objectives of this program were the stimulation private
sector development, the support of small and medium – size enterprises. The
program is carried out in accordance with mutual agreement by Nordic countries
and Baltic States. The assignments of 8.25 million ECU as technical assistance,
60 million ECU as loans to medium – size and small enterprises, investment
Baltic banks fixed capitals (7.5 million ECU) are enlisted in program’s agenda.
Until October 31, 1998 Latvia received technical assistance of 7.6 million ECU,
which was used to establish investment banks in all three countries.
Latvia total investments account 35.7 million Ls. Latvia
has also established long-term co – operation with Nordic Investment Bank,
granting loans and assisting (advisory assistance) in Latvia’s investment
activities.
7.Conclusions.
There is a controversial opinion about Latvia’s economical
state at the moment. Western entrepreneurs consider Latvia as Russia’s crisis
affected country with risky economy, but there are not many local businessmen
that could admit that they are experiencing a decline.
The continuation
of reforms and the stability of development can be in danger if equal
opportunities fail to be provided. The frequent changes in government may occur
both the activities of foreign investors and the overall development of economy
in Latvia.
Bibliography.
3. Statistical
Bureau of Latvia (http://www.csb.lv/)
4.
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