Foreign Direct Investment

FDI flows to Latvia increased continuously upon its accession to the EU to peak at USD 2.32 billion in 2007, and have been generally on the decline since that date. Nevertheless, according to UNCTAD's 2022 World Investment Report, foreign investment flows reached a record-high level of USD 5.3 billion in 2021. In the same year, the total stock of FDI was estimated at USD 23.7 billion, around 60.9% of the country’s GDP. Prior to Latvia's transition to a full market economy, privatisation was the main source of FDI for the country. Today, a significant portion of FDI comes from re-investments and classic merger/acquisition operations. The bulk of foreign investments is allocated to professional, scientific and technical services (21.5%), financial and insurance activities (15.2%), wholesale and retail (14%), real estate (14.1%), and manufacturing (11%). The main foreign investors in Latvia are Sweden (28.8%), Estonia (12.2%), Russia (8.9%), and Lithuania (7.2% - source: Bank of Latvia). In 2022, Sweden-based Anodox announced that it will open one electric vehicle battery factory and another to produce lithium iron phosphate cells, for a total investment worth EUR 50 million. According to fDi Intelligence, a total of 13 new greenfield projects were announced in the first half of 2022 alone; while figures by OECD show that in the same period, the net inflow of FDI stood at USD 693 million.

Latvia can also count on a skilled and relatively inexpensive workforce and a strategic geographical location, between the EU and CIS countries. It also has a competitive tax system (ranked second in the 2022 International Tax Competitiveness Index Ranking) and the government has abolished taxes on reinvested profits. The country counts five special economic zones (SEZs): Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, Rezekne Special Economic Zone, and Latgale Special Economic Zone. The law does not discriminate between local and foreign investors, except for some sectors considered of national importance, which require governmental approval prior to transfers of significant ownership interests (these include the energy, telecommunications, and media sectors). The government recently approved the “Green Channel” initiative, which aims at reducing administrative burdens for high value-added investments in priority industries such as ICT, bio-economics, smart materials, photonics, biomedicine and smart energy, and global business services, as well as construction, transport and logistics if required to carry out projects in the above-mentioned industries. On the downside, the country has a small-sized market, and it has room for improvement in the protection of minority shareholders and in resolving insolvency. Furthermore, its proximity to Russia may hinder the expansion of FDIs in the short term in light of the Russian invasion of Ukraine. Overall, Latvia is considered a business-friendly jurisdiction, and the Economist ranks it 38th out of 82 in its Business Environment ranking.