Foreign Direct Investment in Lithuania

Foreign Direct Investment (FDI) occurs when a firm invests its resources in business activities outside its country (Hill, 2002, pp. 8). This essay will critically evaluate the impact of inward FDI in an emerging economy of Lithuania. First it will be looked at the impact of FDI on technological development and its importance for a country, particularly in Lithuania.

Further discussion will be carried to effects on competition and its development, some negative side effects will be mentioned. Later it will be looked at what effect FDI has on Lithuanian national sovereignty and autonomy. Finally conclusions will be provided.

Technological diffusion plays central role in the process of economic development (Borensztein, 1995). Emerging economies domestic growth rates are highly dependent on the growth rates of the rest of the world. Therefore, economic growth rates of emerging economies such as Lithuania depends on the extent of a “catch-up” process in level of technology by adopting and implementing it from leading countries such as for example United States. The main reason is that developing countries lack their own resources in developing own indigenous product and process technology.

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Such countries must rely on FDI by advanced industrialized nations and multinational corporations (MNCs) for much of technology required to stimulate economic growth. Findlay (1978) claims that FDI increases the rate of technical progress in the host country. Lets look at the example of Mazeikiu Nafta - the largest oil refinery complex in the Baltic region. Lithuania was not able to keep up with technological advances, therefore from early 1980 it had to trust on FDI from other countries. Back then with help of Soviet Union it was one of most modern oil refineries.

Later on after the collision of Soviet Union Lithuania was unable to keep up with technological changes so it started inviting foreign investors. One of them was US based MNC Williams International, which promised reconstructing the refinery. However due to legal reasons acquisition was stopped and new investor from Russia came.

Yukos promised to modernize and bring Mazeikiu Nafta’s production to western markets. One of the biggest project’s with Yukos was the completion of Bugtine Terminal for crude oil export and import. One of other positive contributions of FDI to a host economy is the upply of capital, management techniques and skills. MNCs have world vide access to individuals with more advanced skills and knowledge. Local employees can easily transfer knowledge and skills from more advanced companies to local firms or even set their own firms.

New organizational practices and management techniques are also brought to country with FDI. Local firms copy them in no time. This happened in Lithuania. Latvian company “Double-Coffee” opened their restaurant in Lithuania, because there was a good market opportunity as there were no other coffee shops.

Pretty soon there were other local coffee restaurants and coffee shops that opened for instance “Coffee Inn”. This was a clear result of knowledge transfer by FDI. FDI by Latvian company had an effect on competition and economic growth of the industry. Adequate level of competition leads to efficient functioning of a market. With different coffee shop brands in Lithuania consumer choice has increased, therefore prices have been driven down this way the economic welfare of consumers was increased.

Increased competition tend to stimulate capital investments by firms in plants, equipment, and R&D as they struggle to gain an edge over their rivals (Hill, 2002, p217). FDI in coffee shop industry had a positive impact on service quality, because here export was not an option so it had to be produced where it is delivered. Despite all the positive effects FDI had some negative ones too. In grocery store market some foreign MNCs came into the country which have greater economic power than some local ones. Swedish “Rimi Baltic” was one of the first big MNCs to come into this sector, then “IKI” followed.

They have “crowded out” local grocery store “Lenstata”. “Lenstata” was unable to reach maturity for full competitiveness against foreign competition, the maturig process also didn’t take that long so that the discounted preset social costs could outweigh the social benefits. Other small town local shops were also crowded out because they simply couldn’t offer same variety of goods. Crowding out in this sector in Lithuania can impose a long-term cost on its economy it if holds back the development capabilities or retards the growth of local innovative base. FDI in Lithuania has some negative impacts on national sovereignty and autonomy.

FDI from Yukos, “Rimi Baltic” or other MNCs can cause some loss of economic independence. Key decisions that may affect economy are now made by MNCs controlling such important sectors as for example oil refinery or grocery store industry. The concern is that the governments has no real influence over this. For such as small economy a Lithuania’s this is a threat, because foreign MNCs have no real commitment to the country, however very real impact on its economy. To conclude, this essay has looked at what impact does FDI have on Lithuanian emerging economy.

Using various sources evidence was provided to support statement that technological development has an effect on countries overall development. The case of “Mazeikiu nafta” was mentioned, evidence on what impact foreign MNCs on company’s technological development have was provided. Further discussion was brought to economic impact, example of what positive impact did FDI from Latvian MNC have on Lithuanian coffee market was given. Negative impacts on the economy of Lithuania were also mentioned and the example of grocery stores was provided.

References

1. Borensztein, E. & De Gregorio, J. Lee, J-W. , (1998). "How Does Foreign Direct Investment Affect Economic Growth? " Journal of International Economics, vol. 45(1), pages 115-135
2. Hill, Charles W. L. (2009) International Business: Competing in the Global Marketplace, 7/E, McGraw-Hill Irwin. Lideika, Petrauskas and Valiunas, Doing business in Lithuania (http://www. lexmundi. com/images/lexmundi/PDF/guide_lithuania. pdf) [Accessed: 30/11/2009]
3. Mazeikiu nafta AB annual report, (http://www. orlenlietuva. lt/repository/pdf/reports/Annual99. pdf) [Accessed: 07/12/2009]
4. Mazeikiu Nafta (http://www. randburg. com/li/maznafta. html) [Accessed: 07/12/2009] New Nations, (http://www. newnations. com/Archive/2002/November/lt. html) [Accessed: 07/12/2009]
5. OECD, Reviews of Foreign Direct Investment, Volume 13, Lithuania RIMI Lietuva, (http://www. rimi. lt/apie-rimi/rimi-lietuva/rimi-istorija/199) [Accessed: 05/12/2009]
6. UAB “IKI” (http://www. iki. lt/lt. php/apie/dabar) [Accessed: 05/12/2009] World Investment Report (1999), UNCTAD.

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