Located in the Baltic region of northeastern Europe, Latvia is a member of the European Union (EU), eurozone, North Atlantic Treaty Organization (NATO), Organization for Economic Cooperation and Development (OECD), and the World Trade Organization (WTO). The Latvian government recognizes that, as a small country, it must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a regional transportation hub. According to the latest World Bank’s Doing Business Report, Latvia is ranked 14th out of 190 countries in terms of ease of doing business. On July 1, 2016, Latvia became a full member of the OECD. As an EU member, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors possess the same rights and obligations as local investors with certain limited exclusions. Any foreign investor is entitled to establish and own a company in Latvia and has the opportunity to acquire a temporary residence permit.
There is a perceived lack of fairness and transparency in the public procurement process in Latvia. A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors. Nonetheless, Latvia provides several advantages to potential investors, including:
Regional Hub: Latvia bridges West and East, providing strategic access to both the EU market and to Russia and Central Asia to the east. Latvia’s three ice-free ports are connected to the country’s rail and road networks and to the largest international airport in the Baltic region. Latvia’s road network is connected to both European and Central Asian road networks. The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.
Workforce: Latvia's workforce is highly educated and multilingual, and its culture promotes hard work and dependability. Labor costs in Latvia are the 4th lowest in the EU.
Low Taxes: Latvia has one of the lowest corporate income tax rates in the EU at a flat rate of 15 percent, and personal income tax rate of 23 percent. To further boost its competitiveness, the Latvian government has established special incentives for both foreign and domestic investment. There are five special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone, which provide various tax benefits for investors. Latgale Special Economiz Zone covers a large part of Latgale, which is the most economically challenged region in Latvia, bordering Russia and Belarus.
In 2016, GDP growth in Latvia slowed down to 1.6 percent, which commentators attributed to the effects of the weak performance within the broader euro currency zone and a temporary delay in absorption of EU structural funds, as well as geopolitical tensions with Russia. The most competitive sectors in Latvia include woodworking, metalworking, transportation, IT, green tech, health care, life science, food processing, and finance. Recent reports suggest that some of the most significant challenges investors encounter in Latvia include shortage of labor, corruption, and non-transparent or non-responsive bureaucracy and judiciary.
The non-resident banking sector has come under increased regulatory scrutiny in recent years for inadequate compliance with anti-money laundering provisions. The government, the banking regulator, and key industry players have taken steps to improve compliance and to punish banks implicated in money-laundering schemes – e.g., Latvia’s Financial and Capital Markets Commission has cancelled one bank’s operating license and has levied heavy fines against others – and analysts are watching closely to assess whether improved compliance measures are effectively implemented.
The chart below shows Latvia's ranking on several prominent international measures of interest to potential investors.