Foreign Direct Investment in Lithuania By Simonas Šatūnas, Deputy Chief of Mission, Embassy of Lithuania in the U.S.

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1 I. Where is Lithuania? - geographically - in terms of business environment Foreign Direct Investment in Lithuania By Simonas Šatūnas, Deputy Chief of Mission, Embassy of Lithuania in the U.S. II. Means and instruments used to attract the FDI - tax incentives - special economic zones - sciences and business valleys - institutional arrangements - FDI attraction budgets III. What works: - Targeted value proposals - Track record - Targeting clients - Broader partner network 1

2 Where is Lithuania? Quest for the Center of Europe Facts and Figures Size: 25,212 mi 2 Population: Capital: Official language: Dominant foreign languages: Currency: Real GDP growth: 2012E 2011 Inflation: 2012E million Vilnius Lithuanian (One of the oldest languages in the world, originating from Sanskrit) English, Russian, German, Polish Lithuanian Litas (LTL) Pegged to the EUR at 3.45 LTL/1EUR since USD/0.81 EUR 1USD/2.79 LTL ( ) 3.4% 2 5.9% 2.7% 4.1% Source : Statistics Lithuania Source 2: European Commission,

3 Where is Lithuania? World Bank s map of doing business Rank Dealing with construction permits Registering property Enforcing contracts Paying taxes Lithuania Estonia Slov ak Republic Lithuania Sweden Latv ia Denmark Hungary Finland Belgium Portugal Latv ia Portugal Estonia Netherlands United Kingdom Austria Czech Republic Denmark Lithuania Hungary Netherlands Belgium Slov ak Republic Spain Hungary Spain Romania Sweden Lithuania Ireland Czech Republic Bulgaria United Kingdom Slov enia Poland Bulgaria Austria Romania Slov ak Republic Latv ia Cy prus Germany Ireland Czech Republic Belgium Portugal Slov enia Italy Slov enia Greece Estonia Poland Bulgaria Austria Greece Italy Portugal Germany Slov enia Netherlands Cy prus Latv ia Czech Republic Hungary Romania Cy prus Bulgaria Slov ak Republic Poland Luxembourg Italy France Greece Romania Poland Italy th place in the EU 200 Source: WB Doing Business 2012 Belgium 1st place in the EU 6th place in the EU 12th place in the EU 3

4 Essential Factors for Locating a Business Easy access to markets, customers and clients Availability of qualified staff The quality of telecommunications 55% 58% 61% Transport links 51% Value for money of office space Cost of staff Availability of office space 31% 33% 36% Government incentives Foreign languages spoken Ease of travelling around the city 27% 27% 26% The quality of life for employees Freedom from pollution 20% 19% Source: Cushman&Wakefield; survey of TOP 500 European companies (2010)

5 Export Markets of Investors in Lithuania Export of Services Export of commodities 26% 31% Nordic countries* United Kingdom 24% 25% Nordic countries* Germany USA United Kingdom 4% 4% 9% 9% 17% Baltic countries France Russia, CIS Other** 3% 3% 6% 6% 9% 9% 15% France USA Russia, CIS Baltic countries Poland Other** *Sweden, Denmark, Norway, Finland **Other European countries, Asia, Africa, Southern/Latin America, Australia Source: Invest Lithuania 5

6 Business-Friendly Environment Tax incentives corporate tax holidays in Free Economic Zones no withholding taxation on outgoing dividend payments non-withholdment of tax on interest payments no capital gains on the sale of shares after a holding period of two- years if holding is no less than 25% Financial Incentives for new Investments into infrastructure for hiring/retraining workers to shared-value investments Incentives for investment into new technologies and R&D 2 R&D and experimental expansion expenses are fully deductible three times very short depreciation periods and fast depreciation methods for equipment used for R&D activities depreciation expenses may be set-off against licensing income access to Interest and Royalties and Parent-Subsidiary directives access to extensive Lithuanian Double Taxation Agreement Network Tax Rate Snapshot¹ Corporate profit tax 15 % VAT 21 % Dividends* Up to 15% Personal income tax 15% Employee s social security tax 9% Social security tax paid by the employer Up to 31.18% Real estate tax Up to 1 % *Dividends may be exempt under certain conditions: 0% applies if investor holds at least 10% of voting shares in the company for at least 12 months 0% in Free Economic Zones Source 1: PricewaterhouseCoopers, Source 2: AmiCorp, Lithuanian Company as Intellectual Property Holding, January

7 Special Territories for Business Development Seven Free Economic Zones (+ five more to be established by the end of 2012): 0% corporate tax for the first 6 years 50% discount on corporate tax over the next 10 years 0% tax on dividends 0% tax on real estate Four industrial parks: ha of greenfield territory available All necessary physical infrastructure Tax incentives Source: Klaipeda FEZ, Kaunas FEZ, 7

8 Science and Business Valleys Five integrated science, study and business valleys: ICT & Life Sciences - laser- and light- technologies - materials science and nanotechnologies - semi-conductor physics and electronics Physical and Technological Sciences - civil engineering - sustainable chemistry - mechatronics and related technologies - future energy technologies (incl. environmental engineering) - information and telecommunication technologies Sustainable Pharmacy - biotechnology - innovative medical technologies - molecular medicine and biopharmacy - ecosystems and sustainable development Agricultural Sciences - agrobiotechnology, bioenergy and forestry - food technology, safety and health Marine Sciences and Technologies 8

9 What Works: Best Practices at Invest Lithuania - Targeted value propositions, tailored proposals, well-defined competitive edge - Utilizing existing track record (both network and as a proof of concept) - Targeting clients that are seeking efficiency, resources or strategic assets - Broadest possible networking (partners, intermediaries, service providers, existing investors) - Comprehensive package of services 9

10 What Works I: Targeted Value Propositions Targeted value propositions, tailored proposals, well-defined competitive edge - Ability to tailor the solution (legal / financial, other) - Eliminating potential risks (reducing red tape, investing into infrastructure) - Targeting specific companies with a tailored proposal (including acquisition opportunities) 10

11 What Works II: Track Record Utilizing existing track record (both network and as a proof of concept) - Networking with existing executives of foreign companies - Taking part and inviting into various events - List of best speakers (executives) that show the Lithuanian track record - Showing the track record during site visits Illustration IT Support center, headcount 800 supplier Proof of concept sizeable service center possible in Vilnius IT support center, 200 FTEs Global Operations Center of Excellence, 600 FTEs 11

12 What Works III: Targeting Clients Targeting clients that are seeking efficiency, resources or strategic assets - Seeking efficiency attracted major investors in the field of services, increasing presence from Nordic investors (both services and manufacturing) - Strategic resources (for instance, specific accumulated knowledge or critical regional capacity) led to attraction of major global players usually through M&A followed by expansion 12

13 What Works IV: Broad Partner Network Proactive networking with site selectors and other intermediaries - Lasting connections with site selectors & corporate real estate advisors - Events and talking opportunities - Visits, information, business opportunities - Orchestrated effort with other institutions and various partners (HR, Real Estate, Law Firms ) 13

14 Priority Sector 1: Shared Services/Outsourcing/IT centers 140 Service Sector FDI Projects in the Baltics, Barclays Technology Centre: Established in 2009 Number of IT employees increased from 250 to /7 service operations globally: - Global Network Services - Windows Platform Group - Global Storage - Unix Infrastructure - Global Z/os - End-User Services and Technology, and etc. Corporate profile Barclays Global Retail and Commercial Banking (UK) is a major global financial services provider engaged in retail banking, provision of credit cards, corporate and investment banking and wealth management with an extensive international presence in Europe, the USA, Africa, and Asia Country Lithuania Latvia Estonia No. of projects Capex, bill $ Average Capex, m $ Lithuania Latvia Estonia TOTAL No of investors Source: fdi markets 14

15 European citizens attitude towards the euro, in % Survey conducted by the European Commission, replies in % Nov./Dec. 2011: 2004: Romania Hungary Bulgaria Lithuania Latvia Poland Czech Republic In favor Against Don't Don't know know 15 Source: European Commission, UBS, 12 September

16 CEE and EU: Key takeaways according to UBS (dr. Dr. Kilian Reber, UBS Emerging markets research, 2012 September 19) The fundamental outlook for Central and Eastern European (CEE) economies has improved, on the whole, particularly also for Lithuania, as external imbalances have been reduced significantly. The external environment will remain a difficult one, due to weak growth from the Eurozone, as well as noise on financial markets from the Eurozone debt crisis. An improving growth outlook for 2013 should provide a better economic backdrop for CEE economies, given the larger export dependency. Joining the Eurozone has become less of a priority for CEE economies since the Eurozone debt crisis. Nonetheless, the Baltic economies likely have a higher incentive to join, given that they already suffer from the negative effects of not having their own currency - without being an actual Eurozone member. Ultimately, the outlook for CEE economies will not depend on whether they are members of the Eurozone or not. Rather, it depends on their ability to maintain prudent fiscal policies, as well as a balanced economy

17 Activities of Invest Lithuania Advisory services for investors: not competing with local consulting companies, but easing the administrative burden and providing all necessary information. Active marketing in targeted countries: improving Lithuania s visibility and likelihood of inclusion on the long list of potential investment locations. Data collection, analysis and research: making Lithuania s value proposition more competitive and convincing. Coordinating initiatives to attract FDI by state and private parties. Improve the investment environment: coordinate initiatives with investors and other interested parties to boost skills, provide incentives to study foreign languages, optimize labor laws, resolve immigration issues, etc. Coordinate the programs and incentives of other government institutions: Ministry of Education, Labor Exchange, Ministry of Transportation, etc.