Finnish investors attracted to Baltic States by cost competitiveness

Lithuania following Estonia in direct investments from Finland with low wage levels, small taxes and a hungry workforce.

Currently, the Baltic countries are seeking economic growth by attracting foreign investors from Finland, among others. Latvia recently marketed itself in Helsinki as an excellent investment destination.

– In terms of direct investments from Finland, Lithuania has been overshadowed by Estonia, admits Rubina Haapamäki, the general manager of the Finnish-Lithuanian Chamber of Commerce.

However, Finish companies have found setting up in Lithuania brings numerous benefits. Rock wool producer Paroc established a service center in Vilnius three years ago. Its 42 employees are responsible for a range of services, including handling the company’s payment transactions.

– We wanted to bring expenses down and increase productivity, says the leader of the service center, Mikael Ljungberg.

Labour costs per person are around 21,000 euros per year, less than half the level in Finland.

– Everyone here is ready to be flexible if, for example, one needs to prolong the working day, Ljungberg notes.

Between 2003 and 2014, investments by Finnish companies have generated over 25,000 jobs in the Baltic Countries, according to data from fDi Markets.

The combined value of these investments is approximately 4.2 billion euros, of which about 2 billion has been directed to Estonia. Lithuania has received investments of 1.1 billion, as has Latvia. These figures cover only new establishments.

The investors have generally been retail companies – such as Kesko and SOK-, finance and insurance companies, and firms in the manufacturing industries.

Last year wages in Lithuania rose by 4.5 percent. And a further increase of five percent is predicted for this year by the chief economist of Swedbank Lithuania, Nerijus Maciulis,

According to Invest Lithuania, a government agency that promotes foreign investment, the yearly gross salary for a storage worker was 5,300-6,800 euros a year and for a java-specialist in the ICT-sector it was 22,900-34,000 euros. Income tax is the same for all, at 15 percent. On top of that, a 9 percent social security fee needs to be paid.

Mr Maciulis believes these trends will shift the focus of international investors away from low wages and towards the high skills countries like Lithuania have to offer – “Lithuania cannot count on small wages to be enough as an element of attraction. One needs to emphasize know-how. The level of higher-education in Lithuania is good.”

Aside from wages, the Baltic Countries are using other methods to provide cost-competitiveness. For example, corporation taxation in the Baltic States is the lowest in the EU.

Moreover, investors are being attracted with special economic zones. In Lithuania there are five of them.

In Lithuania’s special economic zones the dividend tax is zero, there is no real estate tax, and corporate tax is zero for the first six years, after which they get a 50 percent discount for the following 10 years.

– Enough is enough, states Jussi Järventaus, the general manager of Suomen Yrittäjät, a Finnish organization of enterprises. Tax haven thinking doesn’t suit the internal market of the EU, as it leads to unequal statuses between countries. Jobs have been generated overseas instead of in Finland. On the other hand, foreign investments have given support to continuing businesses in Finland.

The organization thinks the new government should look carefully at Estonia’s model, in which profit is taxed only when it is taken out of the company.

– This model would encourage investments in Finland, Mr Järventaus commented.

Lithuanians adapting quickly to euro

Lithuanians are learning to use a new currency. The country adopted the euro at the start of this year.

Prices are still presented in the old currency, Lithuanian litas, and euros, to ease this adaptation. In an uptown restaurant the price for a pork steak is 36 litas or 10.42 euros.

The average monthly salary in Lithuania is approximately 700 euros.

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Last week 95-octane gasoline cost 0.99-1.09 euros per liter, while half a liter of beer in a restaurant cost two euros.

Prisma supermarket in Vilnius sells a 500 gram block of Valio’s butter for 3.18 euros and a loaf of dark bread baked in Fazer’s bakery in Kaunas for 0.89 euros.

– The bread market is getting smaller, notes Mindaugas Snarskis, head of the Fazer bakery. Fresh bread isn’t being bought as much as before, whilst demand for pre-packed bread is growing. Consumer habits change.

Fazer has been able to increase its market share in Lithuania to 15 percent, whilst Vaasan holds the top spot with 35 percent.

Property prices also rose last year, by around 10 percent.

– Before the euro adoption, people bought apartments. Money was being secured, as one didn’t know how the euro would behave, says the chief economist of Swedbank Lithuania Nerijus Maciulis.

But he is confident that the move into the eurozone will not stimulate inflation in Lithuania.

Read the full article in Finnish at Aamulehti issue of 9th February, 2015