1. An analysis of the political, economic, technological and legal factors that may have an impact on your firm.
According to the CIA Factbook (14 November 2006), Latvia came around after a brief period of independence between the two World Wars as it was annexed by the USSR in 1940. In 1991, it reestablished its independence following the breakup of the Soviet Union. Latvia lies along the shores of the Baltic Sea and the Gulf of Riga and borders Estonia in the north, Russia in the east, and Lithuania in the south. The capital and chief city is Riga and the nation sprawls an area of 24,900 square miles (64,500 square kilometres).
In an article, Elerts (June 2002) revealed that the Latvian government has recognized that in fostering an attractive investment climate it is necessary simultaneously to improve the general business environment for all companies doing business in Latvia. Growth of investment is an essential indicator of the national economic potential, and, over recent years, Latvia has received substantial foreign investment (FDI). The stock of FDI during the last decade increased from virtually nil in 1990 to LVL 1205.3 million (US$2.009 billion) at the end of September 2000. By the end of June 2000, foreign direct investment per capita was LVL 484 (or US$807), and in terms of accumulated FDI per capita, Latvia ranks among the top five Central and East European countries. During the past years, FDI as a percentage of GDP was above 5%, with a peak of 9.3% of GDP in 1997. Also, Latvia garnered 24% of total gross fixed capital formation was constituted by FDI. Reinvestment by foreign companies established in Latvia is becoming an increasing source of FDI. The share of reinvested earnings in FDI shows a strong rising trend from zero in 1995 to about 25% in 1999.
Moreover, the Economist Intelligence Unit (30 August 2006) reported that the Latvian economy continued to grow very rapidly in 2006, with GDP expanding by an estimated 10.8% in real terms. Real GDP growth is forecast to slow gradually over the forecast period, to 5.8% in 2011. There is also a seen robust growth in private consumption and investment will continue to pull in imports, but export growth should remain solid, and the current-account deficit, after widening in 2006 as oil prices rise further, will decline gradually thereafter. The deficit will primarily be financed by banks’ foreign borrowing. Despite the rosy picture that the economic boom that Latvia is experiencing, it is only right to dig deeper into the analyzing the political, economic, technological and legal factors to successfully assess the viability of investing in Latvia.
The Encyclopædia Britannica (2006) reported that in the 1990s, Latvia has a center-right government that implements its domestic policy that prioritizes to reduce the budget deficit, increase foreign investment, and continue privatization of state-owned enterprises. In addition, the government aimed to continue harmonizing Latvia’s laws with European Union (EU) standards as accession negotiations proceed. Successfully joining the EU, joining the North Atlantic Treaty Organization (NATO), and normalizing relations with Russia are Latvia’s top foreign policy priorities. By the end of 2001, The Latvian government announced it had completed 22 of the 31 chapters for EU entrance.
While Latvia has taken measures to battle domestic corruption, the matter remains an impediment for full economic growth and plans to join NATO and the EU. To gain more credibility in the eyes of NATO and EU members, in mid-2002, the Latvian government set up a Corruption Prevention Bureau. Moreover, two other important pieces of legislation were passed in 2002 — both concerning language. However, Latvia came under international criticism for what was considered its discriminatory laws that required elected officials to be fluent in the Latvian language. Latvian lawmakers have been keen on strengthening the national language. For a number of years legislators have tried to pass laws that would require not just elected officials to be fluent in the Latvian language, but also to regulate the time minority languages have in the media. They have also tried to dictate employment into certain professions by the prospective employee’s proficiency in the language. Thus, in late mid-2002, lawmakers abolished the controversial language electoral law. However, days before the law changed, the parliament amended the constitution to strengthen the status of the Latvian language as the national language. The amendments require newly-elected officials to say an oath in the Latvian language before taking office while strengthening the role of Latvian as the official language in parliament (Barany, 2003, p. 23).
Despite the bad image painted by the Latvian language policy, good news came in November 2002 when a NATO summit in Prague (Czech Republic) declared Latvia to be included on list of countries formally invited to join the alliance. A month later in December 2002, at the EU summit in Copenhagen (Denmark), Latvia was formally invited to join the European body in 2004.
In February 2004, the language issue took center stage once again. In response to the passage of legislation that restricted the use of the Russian language in educational institutions, there were mass protests by ethnic Russians. The legislation stipulates that all public school classes must generally teach in the Latvian language. Indeed, the law quantifies the degree of Latvian language uses by stipulating that at least 60 percent of classes, including those geared toward ethnic Russians, must be taught in Latvian. The government of Latvia has said that the legislation is intended to facilitate the integration of minority groups while oppositions groups, predominantly led by ethnic Russians, counter that it is a dubious state-craft mechanism. Regardless, the legislation was passed by a large majority — 71 votes to 25 votes with four abstentions in the Saeima or lower chamber (Schmid, Zepa & Snipe, 2004).
Also in February 2004, the political landscape was rocked by disagreement and challenge. Indeed, the governing coalition of Prime Minister Einars Repse collapsed resulting in the prime minister’s resignation. The situation emerged as a consequence of the withdrawal of one party from the governing coalition as well as charges of mismanagement and a number of disputes. A new coalition was formed as a result with Indulis Emsis of Greens and Farmers Union becoming the new prime minister.
Meanwhile, in regard to regional issues, in September 2003, the Latvian referendum vote won decisive support for EU membership. Despite the strong support, there have been some questions about what the implications of EU enlargement would be for the people of Latvia. By early 2004, some Latvians began to express concern about the prospect of increased immigration and the prospects for their livelihoods. Indeed, the local Latvian press has highlighted the increasing trend by farmers from Denmark, Finland and the Netherlands to purchase farmland in Latvia with the purpose of benefiting from EU subsidies. Laws which have been implemented to limit the sale of property and land in Latvia have come into being rather late in the game, according to the press, and there is some degree of fear that they will be unable to deter the mass purchase of desirable farmland by foreigners.
Latvia was admitted to NATO in March 2004 and on May 1, 2004, Latvia was one of the countries that entered the enlarged European Union. Over a year later in June 2005, the Latvian parliament ratified the proposed EU constitution. In October 2006, Latvia’s governing centrist coalition was re-elected to power. In so doing, Prime Minister Aigars Kalvitis’ centrist coalition gained the distinction of being the first administration to win re-election since achieving independence from the former Soviet Union in 1991.
Risks in investing in Latvia lie in its history of shaky and short-lived governments. In 2004, the country installed its twelfth government in 13 years. Corruption is part of the problem, with foreign businesses, in particular, complaining of local and state bureaucracies demanding bribes for the myriad permits needed to carry on business. Private and business interests also have too strong a grip on Latvian politics, and their rivalries sometimes lead to erratic policies. Latvia’s unproductive and relatively large agricultural sector will cause problems now that the country has joined the EU. Latvia’s many small farmers will not be able to compete with the big, modern producers in Western Europe (Anderson, 1998).
According to the Economist Intelligence Unit (22 February 2006), Latvia has recorded impressive economic growth in recent years, supported by a sound policy framework and far-reaching structural reforms such as a prudent fiscal policy. From 2001 to 2004, annual GDP growth averaged 7.6 percent, with increasing domestic demand and strong export performance. Aided by the implementation of a prudent fiscal policy and sound macroeconomic policies, the fiscal deficit fell to 1.1 percent of GDP in 2004 from 1.6 percent of GDP in 2003, mostly due to strong revenue performance and lower spending.
Economic activity picked up sharply in 2004 with GDP expanding 8.5 percent compared with 7.5 percent in 2003. The increase was attributable to very strong domestic investment and consumption buoyed by expectations of sustained income convergence and a declining real interest rate. At the same time, consumer price inflation rose sharply to 6.2 percent in 2004 from 2.9 percent in 2003, reflecting rising world energy prices and re-pegging from SDR to the euro. However, the robust domestic demand also contributed to the increase of inflation, as companies passed on rising costs through price increases while preserving profit margins.
However, Latvia’s balance of payments in recent years has been characterized by large current account deficits financed by robust inflows of foreign investment and smaller, but regular official aid transfers. The merchandise trade balance has been in deficit, averaging over US$1 billion per year in recent years. In 2004 the current account deficit widened sharply to 12.3 percent of GDP from 8.2 percent of GDP in 2003, due to robust growth of exports together with a favorable terms of trade. However, rising import demand driven by strong domestic investment and consumption also contributed to the widening of the current account deficit.
As Latvia was acceded to the European Union in May 2004, the country’s focus on EU integration has had a strong positive effect on domestic policy through political, economic and social reforms. Looking ahead, EU membership is expected to provide more opportunities in terms of Latvia’s future economic development. Since the country’s growth has largely been fueled by domestic investment demand in recent years and not as much by export growth, it is well placed to benefit from further regional economic cooperation, especially from trade liberalization. Since its accession to the EU, Latvia’s trade policy is governed by the common policy of EU. It terminated all bilateral preferential trade agreements and adopted the EU’s common customs tariff and preferential agreements. However, the elimination of WTO quotas on textile imports at the beginning of 2005 will be detrimental to Latvia’s textile exports to the EU, which accounted for about 80 percent of Latvia’s domestic production. In this regard, further improvements in productivity, competitiveness and in the business environment overall will be crucial in order for Latvia to maintain sustainable high economic growth (U.S. Department of State. 2001).
As realized with its accession to the EU, Latvia had ironed out its “technological readiness” for membership of the European Union because of its commitments that have been made must also be implemented in practice. In particular, there is a need to improve administrators’ ability to apply European Union regulations. There is already close cooperation between Finnish and Latvian authorities, and Finland is willing to continue supporting Latvia in her efforts to fulfil the criteria for European Union membership. In fact, Information Technology has been made a new priority in Latvia. It even hosted the Baltic Sea region’s first ministerial-level meeting to discuss the information society and communications technology. Representatives of companies in the sector and of the Commission have been invited. The Northern e-Dimension has the aim of complementing the European Union’s e-European programs from a regional perspective. The goal is to promote effective use of the region’s competences and human resources as well as to narrow existing digital gaps (Halonen, 2001, p. 21).
In the communications section, the CIA Factbook (14 November 2006) reported that Latvia had recent efforts focused on bringing competition to the telecommunications sector, beginning in 2003; the number of fixed lines is decreasing as wireless telephony expanded. It has two wireless service providers in addition to Lattelekom, the incumbent monopoly.
One of the major contributors of Latvia’s technological advantage is its education, where the Technology Counts 2004, an Education Week’s annual report on school technology that examines computer availability and use among schools and students throughout the world, concluded that Latvia has a strong foundation with regards to innovations in education. In terms of student-to-computer ratios, the United States, Australia, and Latvia tie for first with ratios of 5:1. New Zealand and Norway are next at 6:1, and Austria’s ratio is 7:1. Denmark, Finland, Singapore, Sweden, and the United Kingdom have 8:1 average ratios (Reading Today, June July 2004).
The Latvian government actively encourages foreign direct investment, and has taken significant steps to improve the country’s business climate. One of Latvia’s strategic national goals is to accelerate integration into Euro-Atlantic organizations, and more broadly, into the global economy. To this end, the government has been striving to bring Latvian economic institutions, laws and regulations into conformity with EU directives. In particular, Latvia made broad changes to its legislation prior to its accession to the World Trade Organization in February 1999.
Under the 1991 Foreign Investment Law, the laws of the republic of Latvia apply equally to domestic and foreign investors. Amendments to the investment law passed in 1996 removed virtually all restrictions on foreign investment. However, there are several exceptions:
· Foreign investors are prohibited from controlling companies that are involved in security services (the law on security activities, 29/10/98),
· Air transport (the regulations on licensing of air transport, 6/9/99),
· Lotteries and gambling (the law on lotteries and gambling, 6/16/ 94), although the said provision does not refer to investors from EU and associated countries.
In addition, the law on insurance restricts representative offices or branches of foreign insurance companies to reinsurance operations. However a foreign insurance company is eligible to set up a 100 percent foreign-owned insurance company in Latvia. According to the 1995 laws on credit institutions and on the Bank of Latvia, a foreign bank opening a representative office, bank branch, or merging with a local bank must receive approval from the Bank of Latvia.
Companies registered in Latvia and owned by foreigners, as well as foreign individuals, can purchase land freely if the majority of investors represent countries with which Latvia has entered into international agreements on mutual protection of foreign investments. Land can also be purchased by companies in which citizens of Latvia own a controlling share. In addition, foreign investors can lease land for up to 99 years.
Foreign investors appear to have fair access to most enterprises that are eligible for privatization. Even though blocks of shares can be reserved for employees and management, there have been no reports of a serious foreign investor having been excluded from a privatization due to this practice.
In keeping with European Union and World Trade Organization requirements, there is no screening of foreign investment. On special occasions, when the government is prepared to offer considerable tax exemptions, grants or other concessions, strategic investors for greenfield projects are selected through international tenders. So far, there was one such tender for the right to develop and operate a cellular phone network; in addition, preliminary negotiations with potential investors in a large pulp mill project are underway. The investor selection process for these projects appears to be non-discriminatory. Tender regulations for greenfield projects are prepared on a case-by-case basis.
The process of completing privatization of some of the biggest, and potentially most lucrative, state enterprises is politically sensitive. Relatively large, politically well connected domestic business groups are lobbying for broader participation in the privatization of attractive state firms such as the energy monopoly – Latvenergo; Latvia’s largest oil terminal – Ventspils Nafta; the Latvian Shipping Company and several others. Political stalemate delayed privatization of these enterprises in 1999. Despite the government’s commitment, complete privatization of all the foregoing state-owned enterprises is unlikely. Currently, the embassy is aware of several commercial disputes involving U.S. companies in Latvia. The disputes range from the telecom sector to the energy sector, equipment supply to advertising, and mainly concern different interpretations of a contract (U.S. Department of State. 2001).
2. In an appropriate academic framework, an analysis of the cultural issues that you feel should be addressed, with recommendations on how any cultural problems can be minimized.
SWOT analysis could help Latvia identify the strategy-related factors in these four cells that can have a major effect on the firm, its Strengths, Weaknesses, Opportunities and Threats. The ultimate goal is to identify the critical factors affecting the country and then build on vital strengths, correct glaring weaknesses, exploit significant opportunities, and avoid disaster-laden threats. That is a big order. The ultimate goal is not simply to develop the SWOT analysis but to translate the results of the analysis into specific actions to help the country grow and succeed.
Although the SWOT analysis is a shorthand look at the situation analysis, it is based on an exhaustive study of the four areas of the planning phase of the strategic marketing process in that are the foundation on which the country builds its cultural issues:
* Identifying trends in the country’s industry.
* Analyzing the country’s competitors.
* Assessing the country itself.
* Researching the country’s present and prospective sources of growth (Kerin, 2003).
Strength – Culturally, Latvians are reserved, professional, and formal. Among friends and family members, they are warm, inviting, and trusting. People often make new acquaintances through networking with mutual friends. After decades of avoiding public debate, Latvians are enjoying a new era of expression. They have become comfortable with vocalizing personal convictions and ideals, and they engage in lively discussions about politics, culture, sports, and a number of other topics. Like others who suffered under Soviet occupation, Latvians are proud that their culture has persevered. They fondly recall the days when Riga was called the Paris of the North (for its architecture and social life) and had an economy to rival those of larger European nations. Nostalgia for that era kindled hope in Latvian hearts throughout the Soviet years. Children were taught at home to have pride in Latvian culture. This patriotism and focus of purpose are helping Latvians rebuild their society today.
Weakness – The most striking social situation in Latvia is its healthcare. Their healthcare provision is problematic and the country faces several problems. Firstly, the number of doctors and nurses is decreasing annually and from 1990-2003 decreased by 37% and 43%, respectively. Healthcare attracted lot of attention recently, as representatives of several professions warned the government about possible strikes.
The number of doctors and nurses per 10,000 inhabitants in Latvia in 2002 was one of the lowest in EU countries. In addition, the number of older doctors and nurses is significantly higher than young ones and this is expected to indicate problems in the future. High workforce migration hinders numbers, as low wages in healthcare forces people, especially nurses, to work on more than one shift to sustain family expenditure.
In 2003, there were two nurses for each doctor. This ratio is significantly lower than in most EU countries, where there are approximately five nurses per doctor, and negatively impacts on the quality of healthcare. A shortage of specialists is also common elsewhere in healthcare, with a lack of emergency healthcare staff, maternity nurses and pharmacists. The problem of aging specialists is observable also in these areas.
However, the government is taking steps to improve the situation in public healthcare, mainly focusing on the salary problem. A long-term action plan to increase salaries and solve the staffing problems in healthcare was created. Low salaries also create corruption problems, where patients often need to pay bribes in order to receive faster or better treatment (Euromonitor International. 26 June 2006).
Opportunities – Latvia has a good resource base and transport system but investors are hesitating between many rival projects in Estonia, Lithuania, Poland and Germany. In the longer term, the government believes that banking, information technology, tourism and other services will provide plenty of opportunities for growth.
Latvia’s current account deficit has been consistently large, but foreign direct investment has provided significant coverage. These developments are an indication of Latvia’s strong investment and catch-up potential in view of the country’s low per capita income and low labor costs. Indeed, external competitiveness gauged in terms of relative labor costs has improved strongly in recent years. With this, labor market bottlenecks need to be addressed to ensure that wage growth does not run ahead of productivity improvements. Overheating, emigration of low-skilled workers, and a deficiency of graduates over the past decade with scientific and technical skills are contributing to shortages.
Threats – Although the technology and education sectors of Latvia are founded strongly, Latvian lawmakers should be keen on strengthening the country’s language policies. For a number of years legislators have tried to pass laws that would require not just elected officials to be fluent in the Latvian language, but also to regulate the time minority languages have in the media. They have also tried to dictate employment into certain professions by the prospective employee’s proficiency in the language. This language barrier could be detrimental to foreign investors who want to venture in their country.
3. A description of the lifestyle you expect to encounter in the capital city, together with practical issues that may affect you. How you believe you should prepare yourself, personally and professionally, for this experience?
It is expected that Riga, the Latvian capital, is a modernized city. Culturally, Riga is an exciting city. According to Euromonitor International (27 June 2005), there are eight theatres in Latvia that receive government aid. Most theatres are located in Riga. In the 2003/2004 season the number of theatre visitors was 538,000 people. The number of theatre visitors constantly decreased during recent years, however. Theatres are changing their repertoire in order to encourage more visitors. Shows are becoming more modern, popular actors are attracted to promote particular shows and shows contain more erotic elements.
Moreover, opera is a popular cultural activity that is becoming more popular among Latvian people. In 2003, 145,000 visitors visited the Latvian National Opera, a very high number compared to the number of visitors in the late-1990s. The number of visitors even overtook levels in Soviet times, when the number of visitors to cultural establishments was traditionally high.
According to research by The Central Statistical Bureau of Latvia in 2005 (“Time VSE of the Population of Latvia”), in 2003 Latvian citizens spent on average 41 minutes a week on entertainment and culture in the form of visits to cinemas, theatres and concerts, art exhibitions and museums, libraries and sports events. However, only 3% of the population stated that they spend their leisure time on one or several of the abovementioned activities. These respondents spend on average 20 hours a week on culture and entertainment. The most popular places for eating out are restaurants of various ethnic cuisines: Chinese, Japanese, Italian, Caucasian and traditional Latvian restaurants. The most popular food chain is LIDO, which serves traditional Latvian food and attracts people with its distinct interior, traditional music and wide choice of home-made food. Among young people, the most popular foodservice outlets are pizzerias and fast food chains (Euromonitor International, 27 June 2006)..
The only risk in Latvia lies in its history of shaky and short-lived governments. In 2004, the country installed its twelfth government in 13 years. Corruption had been part of the problem, with foreign businesses, in particular, complaining of local and state bureaucracies demanding bribes for the myriad permits needed to carry on business. Private and business interests also have too strong a grip on Latvian politics, and their rivalries sometimes lead to erratic policies. Latvia’s unproductive and relatively large agricultural sector will cause problems now that the country has joined the EU. Latvia’s many small farmers will not be able to compete with the big, modern producers in Western Europe.
It is recommended that before venturing in Latvia, an investor should learn the language to avoid the language barrier. Apart from some problems in the healthcare and unemployment, living in Latvia could be a fruitful endeavour because its economy is currently in the doing good.
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