FDI and structural reforms in the Baltic States

Foreign direct investment (FDI) inflows to the Baltic countries were driven by different factors. Initially the process of privatisation and low labour costs attracted investment into public utilities and manufacturing. Later, taking advantage of the Baltic geographical location, further FDI went to the sectors of trade and logistics. Since the beginning of the new millennium, the bulk of foreign investment was channelled to financial services.

In line with FDI literature, the econometric results based on a sample of ten CEE countries confirm that competitive labour costs, favourable business taxation and the presence of foreign investors are important determinants of FDI inflows to this region. In the case of the Baltic countries progress with structural reforms and control of corruption are also important determinants of FDI inflows. Interestingly, the timing of market-oriented reforms matters as much as their typology. The experience of Estonia in the banking sector suggests the possibility of a competitive advantage for the first mover.