Overview: In the competitive and troubled economic times being faced globally, Latvia has an even greater need to excel in order to gain advantages over its neighboring nations.  The Informatics Program sets out a pathway to develop Latvia's information systems sectors, yet this is a difficult battle as they face very limited resources.  Foreign direct investment has offered a significant boost to the Latvian economy during its 10+ years since independence, while Latvians also struggle to maintain their cultural identity amidst the globalizing world.

 

 

In the Informatics Program, it is pointed out that a shortage of useful minerals and energy resources forces Latvia to orient itself toward sectors that require a high intellectual capacity, especially to the development of information systems.  Development is being hindered by the fact that there is a lack of local national and private financial resources, and that large investments are necessary for the development of an ITT infrastructure.  The small size of Latvia's domestic market and the low purchasing power of society have also been hindrances.   Meanwhile, it has been said that¹⁶ the Latvian government loses an estimated 10 million lats annually in lost tax revenues due to piracy.  

With the great expenditures necessary for the establishment of an IT infrastructure, the State’s limited investment possibilities are concentrated in projects from which a maximally quick return is expected.  One example is the information systems projects of the State Revenue Service, which significantly improved the collection of taxes.  

Numerous newly-independent states are competing for foreign direct investment and have to offer significant returns and advantages than other countries with similar conditions to attract the investment.  The government has recently approved the increase of tax incentives for FDI. There is a reduction of income tax for companies that produce high-tech goods effective from January 1, 2001 (the requirement for ISO 9000 certificate restricts the number of such companies to around 30). The usage of certified local suppliers gives 70% tax credit on initial investment. Initially, the plan was similar to the Estonian plan—no corporate income tax on reinvested or retained earnings—but it was considered to be a too heavy burden on the state budget. Latvia has almost no dialogue with Estonia and Lithuania when it comes to the promotion and development of the Baltic countries as a region. Since January 1, 2001 there should be common transit procedures in the three countries.²

The Latvian economy is recovering from the economic stagnation induced by the crisis in Russia. Inflation is under control and the exchange-rate peg of the lat towards the Special Drawing Rights (SDR) is considered stable. The competitiveness of the Latvian economy is improving. Besides privatization, this is due to pension reform and banking consolidation. Affected by the Russian crisis, the stability of banks has in the meantime strengthened and the supply of credit to the private sector has improved.  Banking regulation is practically in line with EU regulations.⁴

Nevertheless, the banking crisis in the mid-1990s left many people with a grave distrust of banking systems.   With those amount of people have bank accounts, hindering advanced billing, and m-banking solutions).

There is also a lack of venture capital for developing new business ideas, lack of well-functioning government funding systems and an uncooperative business environment (from a culture characterized by a need for a lack of trust in order to survive, where information is considered either confidential or a source of power, etc).²

A rapid increase in foreign direct investments in the 1990s significantly boosted Latvia's economic development.  Generally, companies and sectors that have received funding form foreign investors make use of modern technology and are characterized by a highly professional level of management.  Approximately 75% of all FDI is concentrated in Riga and the Riga region, so the internal disparities continues to grow.  Approximately 30% of FDI in Latvia go to the "transportation, warehousing and communications" sector, yet interestingly, the largest foreign investor in Latvia in 1999 was Finish Telecom/Cable and Wireless¹².    

  Last updated December 13, 2001