Executives of foreign capital companies investing in Lithuania tend to have confidence in the country’s economy and its prospects. Compared to previous years, investors are much more positive about the country’s business environment. The growing gap between labor costs and productivity is seen as the biggest challenge by business representatives, while political changes and economic tensions are also a concern for the respondents.

The Lithuanian Investor Confidence Index calculated by Investors’ Forum, the association of the largest and most active investors in the country’s economy, stands at 1.04 out of 2 and is moderately positive this autumn. In comparison, the index was rather negative at the end of 2022, with a score of 0.96.

Although foreign capital companies operating in Lithuania tend to view the conditions for establishing and expanding their business here as favorable, investors are increasingly facing some challenges. In the respondents’ opinion, the biggest negative impact on the investment environment is currently caused by the growing gap between wages and productivity. 40% of survey respondents believe that wages are not in line with productivity, and this gap is set to widen further.

Investor confidence is also negatively affected by the efficiency of the tax system and business regulation. A fifth (20%) of respondents rate the efficiency of the tax system negatively or very negatively. Almost as many (18%) investors are critical of the legislation that regulates business.

“In recent days, we have all seen once again the administrative hurdles and government inflexibility that businesses investing here have to face. But these are far from the only systemic challenges for investors. For example, while wages in the country have been rising at an average annual rate of around a tenth for five years, there have been no significant changes in industrial and business productivity. This means that Lithuania is rapidly losing the significant advantage that has helped our country compete for foreign investment for many years until now. This is the talent available to international business. We must now pay special attention to improving their supply, business regulation, and tax environment”, comments Rolandas Valiūnas, Chairman of the Board of the Investors’ Forum Association and Managing Partner of Ellex Valiunas law firm.

He points out that two-thirds (64%) of the survey participants consider talent to be Lithuania’s main advantage in attracting foreign investment. However, almost as many (62%) of the investors surveyed say there is a shortage of skilled labor.

In addition, the widening gap between wages and productivity is having a significant impact on companies’ performance, leading investors to be more cautious about prospects. According to the survey, almost half (46%) of businesses predict that wages in the companies they own will increase shortly. Meanwhile, more than half (58%) do not expect their goods and services to rise soon. Nearly two out of three (62%) investors think that their companies’ export volumes will remain the same, and as many as 7 out of 10 believe their companies’ profits will stay the same.

Investors are also concerned about the country’s economic and political environment. More than half (55%) of respondents believe the country’s political environment will only become more unstable soon. Meanwhile, slowing and stagnating export markets, geopolitical tensions, and uncertainty make investors cautious about growth opportunities and future prospects. A quarter (24%) of respondents view the macroeconomic environment negatively.

“We surveyed in the autumn, as the Seimas elections were approaching, and investors’ concerns about the instability of the political environment were quite understandable, especially given that many election programs were full of ideas and unfavorable proposals for business. Although the elections are over, the process of forming the ruling coalition and the Government has so far been accompanied by considerable tension, which does not inspire confidence among businesses already working here or considering investment opportunities in Lithuania. The elected politicians are taking a test, which is being closely watched by the international business community, and the results of which will have a huge impact on the economic development of our country,” emphasizes Rūta Skyrienė, Executive Director of the Investors’ Forum.

Investors’ representatives note that there have been significant improvements in some areas over the last few years. For example, access to credit has long been one of the most pressing challenges for investors, and by the end of 2020, only 14% of business executives surveyed were positive about borrowing conditions and opportunities. However, half (48%) of the businesses surveyed now consider the country’s access to credit conditions to be good.

When asked to rank Lithuania’s main advantages when competing for foreign investment with other countries, entrepreneurs have traditionally focused on telecommunications and transport infrastructure. As many as 98% of the respondents assessed the level of the country’s telecommunication infrastructure favorably, while 73% of the respondents were satisfied with the development of transport infrastructure.

The views of foreign capital companies on the areas where the state should focus its attention in the near future remain unchanged. Education, talent migration and public sector efficiency are the top three priorities for the country. As many as 77% of respondents believe that the most important effort in the near future should be to create an efficient education system. Talent migration and public sector efficiency issues should receive attention, followed by 45% of investors.

For more information on the results of the LIPI 2024 Q4 survey, click here.