LATVIA TOWARDS KNOWLEDGE INTENSIVE ECONOMY

Ralfs Klavins Pavia, 06.03.2003Latvian Development Agency ESTER kick-off meeting

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CONTENT

• Macroeconomic outlook and current industry structure

• Challenge of developing knowledge based economy

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INTERNATIONAL MEMBERSHIP

• Concluded accession negotiations to the EU in December 2002, accessions date is set at 1 May 2004 after ratification procedure

Latvia’s current membership:

• Invited country to join NATO since November 2002

- United Nations Organisation, - Council of Europe, - World Trade Organisation, - International Monetary Fund,- Euro-Atlantic Partnership Council, - European Bank for Reconstruction and Development, - NATO Partnership for Peace,- World Bank,- UN Educational Scientific and Cultural Organisation- Organisation for Security & Cooperation in Europe

UN

WTOIMF

EBRD

WBUNESCO

EDSO

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between western Europe and Russian marketSTABLE MACROECONOMIC ENVIRONMENT

Currency (Lats) pegged to SDR since 1994

The lowest inflation among Central European Countries(1999: 3.2 %; 2000: 1.8 %; 2001: 2.5 %; 2002 :

1.9%)

Rapid GDP growth rates(1999: 1.1%; 2000: 6.6 %; 2001: 7.5 %; 2002F: 6 %)

Conservative fiscal policy resulting in low cumulativeforeign debt

(10 % 2002)

Latvia rated as investment safe and stable country by: Moody`s: A/A2, S&P: BBB+/Baa1, Fitch IBCA: BBB/Baa2

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EXCELLENT BUSINESS ENVIRONMENT

Corporate income tax 19% from 2003down to 15% till 31.12.2003

Corporate income tax credit - 40% of investment

High-tech manufacturers - reduction by 30%

Depreciation rate for high-tech equipment 70%

Real estate tax 1.5%, from 2004 1%

Low tax rates: the government is committed to reducing them even more

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Annual GDP Growth

ECONOMIC OVERVIEW

6,0%

7,6%6,6%

1,1%

3,9%

8,6%

-0,8%

3,3%2,9%

1,6%2,6%

2,2%3,0%2,6%2,5%

1,7%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

1995 1996 1997 1998 1999 2000 2001 2002*

* forecast Latvia EU Average

Source: Business Central Europe, Central Bureau of Statistics, Eurostat

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Export 2002 I-IX

Textiles13,0%

Wood33,5%

Others7,3%

Metals13,1%

Miscellaneous manufactured

articles5,8%

Transport vehicles

1,9%

Machinery6,5%

Prepared foodstuffs

7,3%Pulp of wood

2,7%

Chemical products

5,8%

Mineral products1,9%Vegetable

products1,2%

FOREIGN TRADE STRUCTURE

Import 2002 I-IX

Vegetable products

3,5%

Mineral products9,4%

Chemical products

10,4%

Wood1,7%

Textiles6,8%

Machinery21,0%

Miscellaneous manufactured

articles2,8%

Pulp of wood4,4%

Prepared foodstuffs

6,9%Others15,1%

Transport vehicles

9,8%

Metals8,2%

Source: Central Bureau of Statistics

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Export 2002 I-IX

Poland2%

Italy2%

Belarus2%

France2%

Finland2%

Russia6%

Netherlands4%

Denmark6%

United Kingdom

15%

Germany16%

Sweden10%

Lithuania8%

Estonia6%

Others19%

Import 2002 I-IX

Russia9%

Netherlands3%

Denmark3%

Estonia6%

Lithuania10%

Finland8%

Italy4%

Poland5%

Belarus3% France

3%Others

20%

United Kingdom

2%

Sweden6%

Germany18%

Source: Central Bureau of Statistics

FOREIGN TRADE STRUCTURE

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504 675927 1107 1277 1431 1580

1093,2111261

345398

512674

635

443,2

0

500

1000

1500

2000

2500

1995 1996 1997 1998 1999 2000 2001 2002 I-III

Equity capital Other capital

(end of period, million USD)CUMULATIVE FOREIGN DIRECT INVESTMENT

Source: Central Bureau of Statistics

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CUMULATIVE EQUITY FOREIGN DIRECT INVESTMENTS IN LATVIA BY COUNTRY, 2002 I-III

(structure, %)

More than 50% of the FDI in Latvia came from the EU countries.

12,30%1,10%

1,70%1,50%1,60%

2,10%2,20%

3,30%5,40%5,30%

4,30%5,60%

6,10%8,20%

11,40%12,50%

13,30%

0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00% 14,00%

Others

Liechtenstein

Liberia

Isle of Man

Singapore

Switzerland

Ireland

Netherlands

Finland

Norway

United Kingdom

Estonia

Russian Federation

United States

Denmark

Germany

Sweden

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CUMULATIVE FDI IN LATVIA BY SECTOR(END OF PERIOD, MILLION USD)

• In 2002 three quarters sectors receiving the highest share of investment weremanufacturing, transport, communications, financial sector, wholesale and retail trade.

• By September 2002, the highest share of foreign investment is held by transport and telecommunications sector (19 %), financial sector (18 %), followed by the industry (17 %) and trade (15%).

118

231 229

270

299

369

63

123

188211

233

315

353

307 317340

329 328

257

291

114

189

277251

295 301

115

293

78 77

120

234

90

142

322334 340

264

0

50

100

150

200

250

300

350

400

1996 1997 1998 1999 2000 2001 2002 I-IX

Manufacturing Transport and communications Trade Financial services Real estate Others

MAJOR INVESTORS

Foreign investor Country Company in Latvia Activity Total investment in M USD

Sonera Finland Lattelekom Telecommunications 305Tele2 Sweden Baltcom GSM Telecommunications 277Transneteprodukt Russia Latrostrans Transit of oil products 61,8Varner Gruppen, ICA/Hakon Gruppen, Linstow ASA

Norway Linstow Varner Real estate 56

New Century Holding USA New Century Holding Real estate, insurance 45,3Ernesto Preatoni Group Italy Pro Kapital Latvija Real estate 41Den Norske Stats Oljeselskap Norway Latvija Statoil Port services, trade 40SE-Banken Sweden Unibanka Finance 38Vereinsbank und Westbank Vereinsbank Riga A./s Finance 24Noord Natie Belgium Noord Natie Bentspils

TerminālsPort services 20

Neste OY Finland Neste Oil Terminal Riga / Neste Oil Latvia

Port services, trade 20

Preussen Electra & Ruhrgas Germany Latvijas Gāze Gas supply 19,3Gazprom Russia Latvijas Gāze Gas supply 19,3Hebeda TRA AB (consotium: AB Karl Hedin, Axel Bergkvist AB, Daniels Trovaru AB) & Thomesto Sverige AB

Sweden Vika Wood, Ltd. Wood processing 15

Telia AB Sweden SIA Telia Latvia Communications 13Swedwood (IKEA group) Sweden Incukans Timbers Wood processing 13Enso Group (Pakenso OY) Finland Pakenso Baltica Production of packaging 12Rhodia France Rhodia Yarns Textiles 9Codan Denmark Balta AS Insurance 8,6

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DevelopmentStrengthslocation in active regionliberal market economyhighly skilled labour forceinterest of the society in educationstrong banking sector

Opportunitiesintegration in European societyknowledge-based productsdevelopment of infrastructureemergence of a middle-class in the

society

Weaknessesmodest economic potentiala lack of raw materialsgrey economy, bureaucracyeducational system not oriented

towards industry needs

Threatsinsufficient growth ratesmall capacity of the countrya lack of investmentsenlargement of EU does not occur

Stagnation

LONG TERM PROSPECTS

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LONG TERM ECONOMIC STRATEGY OF LATVIA

Restructuring of traditional sectors of the economy

Based on principles of comparative advantages of traditional industrial sectors;

Introduction of new technologies and increasing competitiveness

Creating new knowledge based sectors of industry using already existing science base in

Information TechnologiesBiotechnologies and pharmaceuticalsNew materials

INCREASING NUMBER OF STUDENTS

Source: LU, RTU, and IT&C, 2000

Number of IT students, 2001Computer sciences 4717Communication technology

and electrical engineering 3207

High enrolment rates inHigher educationalinstitutions and colleges: 47.1 students per 1000 population

of those, 10% Engineering and technologyand 51% Business Administration and Social Sciences

New enrolles: 15.9 students per 1000 population

of those, 10% Engineering and technologyand 53% Business Administration

Number of students (thsd)

39,046,2

55,464,2

76,689,5

101,3110,5

0,0

20,0

40,0

60,0

80,0

100,0

120,0

1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

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SOLID BASE OF FUNDAMENTAL RESEARCH

5th FP projects success rate, 1999-2001 27.5%5th FP programme “Innovation & SMEs” projects success rate,

1999-2001 52%5th FP financing from EC funds as % of Latvia’s contribution fee,

1999-2001 187%

Internationally acknowledged potential of Latvian fundamental and applied research e.g. MHD team, EUROATOM initiative etc.

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One of the leading teams in the world in R&D andmanufacturing of short distance optic cables

Diversified portfolio of products:•Multimode Silica Optical Fibers•Silica Fiber Bundles•Medical Laser Delivery Lightguides•Side - Glowing Fibers

Solid customer base: ‘’Bayer’’ and ‘’AGFA’’ in Germany, ‘’Bio Tek’’, ‘’LT Industries’’ and NASAin the USA, ‘’USHIO’’ in Japan and ‘’Laser Industries’’ in Israel.

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SIDRABE

Former military experimental plantStrategic partnership with Sheldahl(US)Investments from NCH (VC company)

ITO coated filmsBarrier coatingsHard coatingsPatterned ITO

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Established in 1999 as a JV of Proditron AB (Sweden), investment 1 MUSD, partly from VC company

EMS and design services forScandinavian clients

PCB SMD assembly on soldering paste orglue, pin paste technology, soldering, assembly, testing and design services

HANSA ELECTRONICS

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SOME CONCERNS

• Existing VC industry– Low amount

• Institutional pan-Baltic players• Few business angels

– Lack of start-up financing

• Potential VC industry– Critical mass– Political risk– Smartness– Exit!!!

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Pērses iela 2, Rīga, LV 1442, LatviaPhone: +371 7039400Fax: +371 7039401 E-mail: INVEST@LDA.GOV.LVHTTP://WWW.LDA.GOV.LV

THE LATVIAN DEVELOPMENT AGENCY