German business gives top ratings for the Baltic States

The positive trend shown in investment plans and business growth in previous years is continuing. Companies are expecting positive results in this financial year and the next, especially in terms of turnover and exports. The scores for the fight against corruption, predictability of economic policy and availability of skilled workers slightly dampen the positive mood. Estonia is among the best-rated countries in the survey with an average rating of 2.3.

“Eight out of ten companies would opt for their investment locations again. And, out of the 16 countries rated from Central and Eastern Europe, Estonia, Latvia and Lithuania have come out on top,” commented Chief Executive Officer of the AHK, Florian Schröder. “However, we are especially anxious about the situation in Estonia, where the new taxes announced by the government have rather dampened the mood.”

Economic situation

This year, an average of 73 per cent of companies in Estonia, Latvia and Lithuania are expecting a revenue increase of 8 to 14 per cent compared to last year. The number of those expecting turnover to decrease was 11 per cent lower in Estonia than in 2015, and 15 per cent lower in Latvia. The trend continues for exports predictions. In Estonia, 98 per cent of companies expect exports to increase or remain the same. This can also be said for 96 per cent of Latvian companies and 100 per cent of businesses in Lithuania, more than half of which predict that exports will increase.

A total of 48 per cent of companies surveyed in Latvia and 49 per cent in Lithuania anticipate a growing need for staff, and Lithuania’s result is particularly striking with a 16 per cent increase compared with 2016. However, in view of local conditions in the three countries, the number of skilled workers available was lower overall than in the previous year. This is a trend that needs to be reversed.

The positive attitude of companies towards investment plans is clear and these suggest that we should feel optimistic about the future. In Latvia, 44 per cent of companies want to invest more, compared with 35 per cent in 2016 (31 per cent in 2015). In Lithuania, almost half (49 per cent) want to invest more (40 per cent in 2016). The figure for Estonia is slightly lower compared with the previous year. Foreign investors are also following the example of local businesses. As recently as April, HELLA, a world-leading German supplier to the automotive industry, announced plans to build a new plant for manufacturing electrical components in Lithuania. The plant, with an initial investment of EUR 30 million, is due to open in the middle of next year and will initially generate 250 new jobs. In 2016, the proportion of direct investments made by German companies was 10.1 per cent in Lithuania, 4.33 per cent in Latvia and 1.4 per cent in Estonia.

Digitisation within industry (Industry 4.0) is important for one in two companies taking part, of which 71 per cent (Lithuania) and 87 per cent (Estonia) would invest in this area.

Location factors

There have been some interesting developments in the three countries regarding the location factor ratings.

In Estonia, the scores for the predictability of economic policy, labour costs and taxes have worsened. However, the majority of these values are above the Central and Eastern Europe average. The government’s announcement regarding new taxes might explain the subdued mood. Estonia, which has stood out until now for its transparent and business-friendly tax system, could therefore lose its momentum.

With 3.69, which is worse than last year’s result, Latvia’s efforts to combat corruption and criminality received the most negative score. The standard of public administration and the availability of skilled workers also fared worse compared with last year. More positive scores were given for transparency of procurement, productivity/performance levels and especially the quality/availability of local suppliers.

The situation for Lithuania looks positive as certain factors relating to company awareness have improved. This may have something to do with the new government and its reform projects. The scores for transparency of procurement and the fight against corruption and criminality as well as labour costs and academic training were worse than last year. The rating for access to public funding and the quality of local suppliers was more positive.

The vocational training system in the three countries received an average rating of 3.0 and, although better than the Central and Eastern European (CEE) average, there is still some room for improvement. Over 85 per cent of companies, and as many as 91 per cent in Latvia, believe that the practical component of vocational training could do with increasing. The majority of those asked therefore favour the German model of 70 per cent practical and 30 per cent theory. This is where VETnet – a project being implemented by the German-Baltic Chamber of Commerce in Latvia on behalf of the German Federal Ministry of Education and Research – has a role to play. VETnet is set to introduce elements of the dual training scheme, based on the German model, into the countries’ vocational training systems. The AHK plans to expand the activities to Lithuania and Estonia too.

The AHK annual survey in Estonia, Latvia and Lithuania is part of the international economic survey of chambers of commerce abroad located in Central and Eastern Europe (CEE). The survey was conducted in Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Kosovo, Latvia, Lithuania, Macedonia, Poland, Romania, Serbia, Slovakia and Slovenia from 1 February to 1 March 2017.

The rating for the situation in each country and a mutual assessment of the location criteria were taken in these countries and compared to other countries. A total of 1,734 companies took part in the survey, of which 170 were in the Baltic States.