Studies Eastern European Markets
Eastern European Markets
Tauno Tiusanen - Jari Jumpponen
Western investors in Estonia, Latvia and Lithuania
Lappeenranta University of Technology. Studies in industrial engineering and management
2000 N:o 11


    The three Baltic states - Estonia, Latvia and Lithuania - had a difficult start in their respective transitional processes, because all of them were former Soviet republics. Fortunately, these small national economies were able to separate themselves from the ruble zone rather quickly after the collapse of the Soviet Union by creating national monetary units. All the three countries under review hava been able to find an economic growth path in the post-Soviet period. Inflation has been rather well brought under control. However, current account problems have emerged the hampering sustainable growth process.

    Economic transition has not taken an identical shape in all three Baltic states. Estonia has rather clearly a higher living-standard than Lithuania and Latvia. Also in economic growth Estonia shows a better record than two other national economies of the region.

    No detailed attention has been paid to these country-specific differences in the Baltic states. It can only be assumed that reletively high investment quota in Estonia (higher than in Latvia and Lithuania) is an important background factor in Estonias growth process. Estonian economy has been benefited from the strong demand of visitors - mainly from Finland - who appreciate the low price level in Tallinn. Tourism does not play a similar dominant role in Latvian and Lithuanian economies.

    In the TE competition linked with attracting FDIs, Estonia has been succesful. In per capita figures the Estonian FDI stock is one of the largest in the whole TE-region. Latvia and Lithuania are in this comparison not on Estonias level, but both of them show essentially better results than Bulgaria and Romania.

    The Baltic states have in the FDI race one very obvious disadvantage: all of them have small internal markets; the whole region has only some 8 million inhabitants. Poland alone has roughly five times more people within its borders.

    Nominal gross wages are reletively convenient in the Baltic states (roughly $ 250-300 per month). These figures mean that cost-push inflation has not been excessive in the region under review. Thus, in Nordic comparison, the Baltic states still offer cheap labour (much cheaper than in Scandinavian states). In this context it is important to notice that productivity levels are also widely different (with essentially higher productivity in Scandinavia than the Baltic states). However, it can be stated that the Baltic states offer rather well educated labour to convenient wage rates.

    It is obvious that the future inflow of FDIs in the Baltic states depends on their position in the pan-European integration. Multinational companies, especially non-European ones, invest in TEs in anticipation that EUs Eastern enlargement will advance. Likely EU-membership will enhance TEs chances to receive direct investment.

    Even if this enlargement scheme is rather confusing, there are some points which can be somehow predicted. It can be assumed that the "first wave" candidates (Estonia, Poland, Hungary, the Czech Republic, Slovenia) will be able to enter European Union before the second tier TEs (Latvia, Lithuania, Slovakia, Bulgaria, Romania). If this view is correct, Estonia will remain the favourite playing-ground of FDIs in the Baltic region. However, economic integration is not the only motive moving FDIs from one country to another.

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