Country review: the most cost effective access into the Schengen Zone and its vast market - Invest in Latvia

When we read economic news we are bombarded by events from the usual suspects: US, China, Russia, EU. The truth of the matter is that there are key geographical areas in the world that, although sometimes made up by small economies, offer instead very good attractive environments for investors that aspire to access a large markets in a very cost effective way.

One of these key countries is Latvia. Very interesting location among the Baltic countries I will provide a series of key competitive advantages that position this country as the natural gateway into Europe on one side and into Russia on the other side.

ACCESSIBILITY TO LARGE MARKETS: EU & Russia (and CIS Countries)

Latvia is uniquely positions in Norther Europe with equally good access to Europe as well as Russia and CIS countries.

Latvia in spite of his moderate dimensions has 3 large ice-free international ports: Riga, Leipaja and Ventspils. All the ports are closely linked to the country transportation infrastructure including: railway, pipeline system & highways.

Since Latvia is part of the European Union and a Schengen Zone member all custom regulation are based on free trade principles and are uniformed with the rest of Europe, although custom procedures have been standardised and simplified to make the movement of goods and cargo as effective as possible.

Further Latvian railway uses the same standards as Russia and CIS countries making it very easy to transport goods into Russia and Central Asia. As an example: NATO used Latvian ports to transport non-military goods to Afghanistan using the Russian railway systems. 

DEVELOPED INFRASTRUCTURE

Transportation & Logistics

All the global logistics and shipping companies are present and operate in Latvia (Schenker, BTL, Kuehne and Nagel, Maersk, etc.) and make wide use of the available intermodal infrastructure.

• Roads: Latvia is one of the only three EU countries with direct access to Russia making quite easy to move goods along an east-west route. The Russian highway M9 also known as the Baltic Highway connects Moscow directly with Riga (Capital of Latvia), this highway also crosses another important traffic artery for goods and people which is the Via Baltica highway which runs north to south and connects seamlessly Helsinki with Prague.
• Ports: Latvia is famous for its maritime routes and infrastructure, it features three international ice-free ports: Riga, Leipaja and Ventspils. All ports feature intermodal connections and Ventspils also features a free trade zone.
• Rail: the rail system is well developed and quite reliable with standards matching the typical one of Northern European countries. One important aspect of this system is that it matches the Russian rail track standards and therefore it is very suitable to move goods into Russia and other ex CIS countries adhering to the same technical standard. The system has been used by NATO for example to move non-military goods from the Latvian ports into Afghanistan to support the military effort in the country.
• Air: Riga airport (RIX) is the largest airport in the Baltic and offers direct flight to 80+ destinations and it is conveniently situated at the cross road between Via Baltica and the Baltic Highway.

Information & communication technologies

Latvia has one of the fasted telecommunication network in the world and this has favoured the development of the information system industry as well as contributed to one of the highest Internet literacy in Europe and the World.

• Latvia is 5th globally for the average measured internet connection speed (7 Mbps)
• 7th globally for broadband connectivity above 5 Mbps.

Source: State of the Internet 2011 Q4 Report, Akamai.

MACROECONOMIC STABILITY

Latvia is a member of major economic and political global organisations including but not limited to: WTO (World Trade Organization), NATO and the European Union (Schengen Zone).

As opposed to many European countries Latvia upon the 2008 economic crises has significantly reduced government expenses and immediately put in place a series of investor friendly laws that accelerated the quick economic recovery that is currently still in place.

Data shows that post crisis a healthy de-leveraging process truly took place in Latvia, as opposed to many countries in Europe such as Spain, Greece and Italy for example, and while painful at that very moment it gave way to the recovery and a new cycle of economic expansion.

Latvia has bilateral trade and tax agreements with more than 40 countries for the promotion and mutual respect of investments.

The country joined the EURO area on January 2014.

Intellectual Property Laws are well developed in full compliance with EU standards and the country is not part of the Special 301 Report maintained by Office of the United States Trade Representatives including all countries without adequate IP protection laws and IP enforcement. 

Heritage Foundation Survey 2013 results - Index Economic Freedom: Latvia 

COST EFFECTIVENESS

Latvia is one European country that allows for high productivity at low resource cost, especially what concerns human resources.

The main parameters that make Latvia a very investor friendly country are:

• very competitive and skilled workforce at low price;

• competitive tax rate.

Riga, the capital of Latvia, was ranked 7th best European City for Cost Effectiveness by FDI Magazine (European Cities and Regions of the Future 2012/2013), while Jelgava and Ventspils were ranked 6th and 9th respectively as Best Micro European Cities for Cost Effectiveness.

Latvian Labor productivity

Please note that Latvian workforce in addition to be very productive is also very versatile as the average Latvian speaks at least 2 languages and for the new generation it is common to speak 3 languages: Latvian, English and Russian making it an ideal place from which to conduct international business.

Labor expenses are also very reasonable as compared to the rest of Europe and the employment laws exceptionally liberal for a European country.

For example: Germany’s labor costs are approximately 4-5 times higher than Latvia.

Eurostat data available HERE

Latvian Tax rates

Latvia has one of the lowest corporate rates in Europe and one of the lowest in the world: flat rate 15%.

Personal income tax is also at a low flat rate of 25% according to a government decision such rate will be reduced by 5% in 2015. Dividends to EU citizen are not taxed.

Further note though that for re-export companies or manufacturing companies operating in the designated free zones there are significant tax benefits in place.

Latvia has 4 free economic zones (quite an anomaly in the European Union and something that the existing government negotiated hard to keep in spite of the entrance in the EURO zone this Jan 2014): Ventspils which has been ranked as 7th best free zone of the Future by fDi Intelligence. Riga and Rezekne - 49th and 50th respectively. Please note that Ventspils has also been named second best world port zone in the world.

Residence Program for Investors

Further to the various advantages above the country like few others countries in Europe has set up a residence program for investors with the exception that the entry costs are quite lower than respective programs in Cyprus, Spain or Greece for example.

Investors these days are choosing to buy a real estate property in Latvia that they can easily rent if necessary to be able to acquire a Schengen Area residency and unlock several privileges: unrestricted travel across the EU, access to resident only educational program at the European level, be eligible for European grants for business projects and so forth.

Many Russian and Chinese nationals have availed themselves of this program although recently we started noticing an increasing interest from Arab nationals, especially from the Arabian/Persian Gulf area. 

For additional information about the Schengen residence program please visit HERE.

Please inquire with me if you require additional data about Latvia, for reason of conciseness we avoided entering data about:

• Labor related incentives granted by the government to investors hiring Latvian personnel;

• Macroeconomic data about the different industrial sectors;

• List of investment opportunities in renewable energy and high value added sectors

• Quality of life data

All topics above are bound to be material for additional postings on this blog to further uncover opportunities in Latvia and neighbouring countries.

SMEs entering emerging markets, an example: Italian company sets up manufacturing facility in Sharjah, United Arab Emirates

This month I would like to focus my attention on the backbone of many economies: SMEs and I would like to share information about a real life example. SMEs often represent the large majority of a country GDP and in spite of the countless volumes written by governmental authorities with regards to their support to this sector, entrepreneurs often find themselves alone when facing new markets and tough choices.

Therefore this month I want to share with you the experience of a company that has been successful in setting up in the United Arab Emirates and has overcome all challenges brought about and it is now well on its way to be a leader in its industry.

As with some of my other postings I think that the experience that I am about to share is confirming the trends that I have been signaling all along in this blog:

1. Geopolitical balance of the world shifting east bound from Europe towards the Indo-Chinese part of the world;
2. Competitiveness loss of key European countries;
3. Subsequent delocalization of manufacturing from Europe towards emerging markets and know-how transfer along with it;
4. Rise of manufacturing quality standards from emerging markets, especially India & China to increase the competitive pressure in point (2).

Below is the experience of a company of Italian DNA that has made the strategic decision to manufacture its products in Sharjah, United Arab Emirates to take advantage of the favorable business environment its key location  enabling efficient flow of goods in and out of a high-growth geographical area.

Company Name: Floor System Company
Website: http://www.fsco.ae
Location: Hamriyah Free Zone - Sharjah (http://www.hfza.ae)

Floor System Company is a manufacturing enterprise of raised access floor intentionally wanted and placed in what today is considered the world?s hub and the focal point of International commerce.
The Company is new born but with roots that all the way back to the late 70?s when the concept was bravely introduced in Italy.
The whole concept allows all the commercial buildings to adapt to a fast turnover of tenancy and therefore seen as a flexible space layout where the raised floor is a plenum for all power distribution and underfloor air conditioning today seen as a very GREEN concept.

Following is an interview with Mr. Augusto Di Pietro, managing director and shareholder of Floor System Company that has been an integral part of the project of creating and commercializing his company in the Middle East.
This adventure presented him with new challenges and problems that he overcame with a lot of hard work and patience.

I am sharing Mr. Di Pietro's experience on this blog so that additional companies can benefit from it. In fact, regardless of industry, many of the problems faced by start-ups are common to all.

1. Mr. Di Pietro, when did you mature the idea of setting up a business in the Middle East? And what were the drivers of your decision?
The problem arose when NESITE (the mother Company) was loosing market share to it?s competitors who had already delocalized in China, therefore the need to make a strategic choice on behalf of the Holding. Why the choice of the UAE? Well , I was acquainted with the area and the Emarati community and furthermore today we sit in the middle between the two major manufacturers of  raised Access Floor (China & Europe), this gives us a great advantage of lead time with the upcoming projects in the whole of the middle east being able to supply a product on a Just On Time basis .

2. Did you find good support and knowledge of the emerging markets in your country of origin?
We have had no support or help whatsoever from Italian Governmental institutions: neither in Italy nor in the UAE.  I am ashamed of it because I love my country but it is not a surprise that we are the first manufacturing Italian company in the UAE.

3. What challenges did you face at the beginning?
The fear of not knowing the local legislations , the rules, the regulations and the way of doing business in this area.

4. Are there any challenges that came your way that you really didn't expect?
Most of them because it was a discovery everyday and having to adapt and align the to the system.

5. Now that the start up phase is over are you planning to expand your presence here? Are there plans that you can share with us?
Yes we do have expansion projects and very ambitious ones but we have to take it one step at a time. I would love to here that more businessmen in Italy would have the courage to delocalize production because the difficulties are now known and can easily be overcome.

6. What surprised you the most throughout your experience?
The friendship and the availability shown on behalf of the Hamriyah Authorities, the Sharjah Chamber of Commerce and various other Government Institutes who are proud to have us in their Emirate and have taken us under their umbrella.

7. Having made the move yourself and living now in a new country, what do you recommend to the companies that are considering entering the emerging market economies?
To hurry up or they will be latecomers.

8. If you had to redo this experience all over again, what would you change or do differently?
It was a hard experience but taught me many other aspects of life so I wouldn't change absolutely anything.

9. Given your on the ground experience and the macro economic changes in place: how do you see the future for this region?
I always want to think that what will give us the leading edge for the next ten years will be the fact that we were not here when the economy was booming but arrived in the midst of the crisis therefore we know how to deal with the survival mode. The way of doing business is changing and only the Companies that readapt will survive.

10. During my trips in Europe I often get the vision from European companies that the technology gap between the old Continent and the rest of the world remains far and wide, vice versa my on the ground experience tells me that Indian and Chinese companies are leapfrogging very fast. What is your experience in this matter?
I'm not back in Europe sitting and waiting for them to take over, I'm fighting back and succeeding because we can do better. This is the centre of the world and we have to be here.

I will be happy to provide additional information to any reader interested in knowing more about Mr. Augusto's experience or settling in the emerging markets.

Emerging markets - SME confidence higher than in developed economies

Emerging markets have been making headlines in all publications globally. The global recovery is led by emerging economies and this is a fundamental fact bound to stay long term.


I receive an average of 3-4 business delegations a month here in Ras Al Khaimah. Delegations come from all corner of the worlds since our free zone has investors from 120 different countries. While meeting businessmen part of a delegation may not be a statistically viable sample to determine the trends in a specific country, it is nonetheless a good viewpoint to develop a perspective about so many different economies. Over time, over many delegations, consistent trends tend to set in.


I was therefore very happy when on February 2nd, HSBC has published the results of the its most recent research on SME Confidence (20 markets were surveyed). The primary data was gathered last October and November 2009.
I have now the statistical confirmation of the trends I have been collecting over the past year: not only emerging markets are leading the economic recovery but SMEs are going to play a leading role in the recovery.

The report also confirmed a wide differential in confidence levels between the so called highly industrialized economies (G7++) and the emerging markets.
Emerging markets are significantly more confident than developed markets. With an index of 100 as neutral emerging markets have scored an aggregate of 121 and developed markets an aggregate of 106 (France registers below 100 at 96).


Nicholas Levitt, Regional Head of Business Banking at HSBC said: "Confidence levels appear to be back to pre-financial crisis level. The Middle East outlook correlates strongly to the global emerging market outlook, and as a major international trading hub, the region is well-placed for future growth."


From the survey we learn that the Middle East is the second most optimistic area after India.
I can related personally to this finding since every month I receive one or two business delegations from India. During my presentation on emerging markets with them I always ask: "How is business during these challenging times?", invariably I receive feedback about how the impact goes from mild to negligible.


In the Middle East the SME survey confirms:

• 47% plans to increase capital expenditures;
• 41% commits to current levels of capital expense;
• 11% are planning capital expense reductions;
• 36% is committed to increase staffing;
• 58% will keep the same staffing levels;

SMEs were also asked about their propensity to engage more in international business and the survey has confirmed the role of the Middle East as an international trading hub.

• 72% of the SMEs in Qatar planned to grow their business internationally within the next 2 years;
• 28% in Egypt;
• 19% in Saudi Arabia;

The top international locations for business for the Middle East are China, South East Asia and Europe.

While this research presents gaps[1] in its approach to define the geographical footprint, it highlights something that is at the core of the economic global shift currently underway. 

In order to validate the aspirations for internationalization of many SMEs both in the Middle East and other emerging markets it is necessary for local governments to support the development of a solid and more sophisticated banking system specifically tailored to support trade and investment.
As Dr. Butcha, vice president and managing director at A.T. Kearney Middle East, said in a recent article “A.T. Kearney has worked with governments across the world to improve the SME sector. SMEs are the backbone of any successful and sustainable economy, they are the blood cells behind successfully diversified economies and large corporations. Successful long term economic growth plans for the GCC can only succeed with strong support to SMEs...”. A.T. Kearney research in emerging markets shows that successful SMEs create jobs at a rate which is four times faster than the rate of larger corporations and create revenues and GDP at a rate which is six times faster than large corporations. This is largely due to the fact that successful SMEs tend to grow more exponentially than large blue chip and established business (more at: http://www.eyeofdubai.com/v1/news/newsdetail-38845.htm)

It is because of the essential role of SMEs in the global economy that we at Ras Al Khaimah Free Trade Zone have created a business environment specically designed to facilitate SME business. Especially the newly created "valued added services" for RAK FTZ clients are focused on reducing the "incubation" period of new companies and to put them in the condition to generate successful business in the region in the fastest and most cost effective way.

[1] the survey did not include the United Arab Emirates in the emerging markets, developed markets surveyed included only US, Canada, UK & France, results in confidence in the developed economies would have been slightly different if Spain, Greece, Italy would be included.