Overview
Financing for IT in Latvia is in its infancy stage but is gaining ground through foreign direct investment. Estonia already receives substantial foreign direct investment from the United States, Finland, and Sweden. Actually, the United States is the third largest foreign direct investor with 6.9% next to Sweden with 22% and Finland with the lion's share of 33%. In 1997, there were 369 enterprises funded by U.S. capital. The U.S. has made the sharing of technology, know-how and experience as one very important component of its investment. The Estonian monetary system began a restructuring in early 1992 shortly after gaining political independence from the former Soviet Union. During that time, the economy showed signs of collapse. A radical approach was deployed to reform the financial and monetary system. The reformation of the system has certainly benefited the IT services sector by ensuring economic stability and providing capital investment in new technologies and infrastructure starting in the early 1990s. Let us remember that the explosion of the Internet and new technology was just under way in the mid 1990s on a global level. Estonia has been preparing for entrance into the EU and emphasizes the importance of deploying the latest technology to provide a reliable and compatible euro system.
Foreign Investment, Banking, and Other Tech Financing
Financial resources and the allocation of credit are allowed to flow freely in and out of the country. The Latvian government has strongly encouraged foreign direct investment and has been successful in doing so. In 1995, the banking system in the country had a crisis leaving banks reluctant to make domestic loans. Risky lending practices, insider trading, unsustainable deposit interest payments as well as inadequate banking laws and regulations led to the crisis. To stabilize the situation, the Bank of Latvia selected 12 banks to be eligible for accepting deposits. Banking has grown exponentially in Latvia since the first private banks were established in the late 1980's. However, loans for IT financing are not easy to come by domestically. In the summer of 1995, the Riga Stock Exchange was re-established. The U.S. Agency for International Development began to provide technical assistance for strengthening the regulatory structure of the stock exchange and related institutions shortly after the re-establishment of the exchange. In 1996, almost all restrictions on foreign direct investment were lifted. Latvia’s banking system is completely private with the exception of the Mortgage and Land Bank (The state Savings Bank, Krajbanka, system and Unibank are both being privatized).
Telecommunications
Telecommunications is the leading area of foreign investment in Latvia with the largest investors being Sonera and Telia. A consortium of Cable and Wireless (U.K.) and Finnish Telecom is a major foreign investor in Latvian telecommunications growth. The consortium obtained 49% of the share of the Latvian telecommunications company Lattelekom. U.S. based Metromedia which has joint ventures in cable TV, pager service, radio station and cellular phone networks have also invested in Latvia.
IT Services
The IT services sector is growing rapidly with the largest foreign investors from Germany, U.S. Ireland and Sweden. As mentioned in the IT Geography section of the report, almost all of the technology development thus far has been in Riga. All of the German, U.S., Ireland, and Sweden investment have been made into enterprises registered in Riga (up to 1998) (18).
Small companies make up the majority of this segmented IT services industry. Typically funding comes from founders and managers of companies and in rare cases from outside investors. Venture capital is not used widely and none of the companies have approached the stock market for financing. Investment funds that flow into the country are not focused significantly on the IT services sector. The industry encourages employee share ownership in the firm and in some limited cases use stock options and warrants to attract talent. From 1990 - 1996, foreign investment was on a healthy incline then began to level off slightly between 1996 and 1997. However, investement rebounded in 1998 and has continued to incline. Unfortunately, for the most part IT services lacks heavy capital growth at present.
For additional information on the future of the Latvian
Economy.
This site was created by MBA students at the American University in
Washington, DC.
Fall 1999
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