ABSTRACTLatvia has entered the European Union as its poorest member. It is widely hoped that economic integration into the EU will benefit Latvia’s economy through increased investment flows and new expansion opportunities for existing businesses. This study will address the question of what public policies can do to help Latvian domestic enterprises to internationalise, what benefits can be expected from foreign direct investment and how they can be maximised.

General recommendations for government policies aimed at developing an efficient and competitive industry structure as outlined in the draft of the Integrated Economic Strategy (Latvijas Tautsaimniecibas vienota strategija) and underlying policy documents are:

First, economic policy should tie economic development goals to specific policy initiatives to make it clear what the government intends to do and how the results can be measured. Currently, economic policies for industrial development fail to establish this link. For example, the number of small and medium enterprises (SMEs) per 1,000 residents is not an adequate indicator for the success of policies aimed at improving the business environment and fostering entrepreneurship. It does not include the measures needed to reach this objective nor does it allow the evaluation of specific policies.

Second, the Integrated Economic Strategy discusses subsidies as a policy tool, but does not make it clear that the government cannot support specific (target) industries through domestic and export subsidies. The government should not attempt to attract investment (foreign or domestic) only to specific industries. Why? First, the government has no superior capacity to predict the path of economic development. Second, it is recognised by the EU that policies targeting only specific sectors of the economy are inefficient because they artificially distort incentives of economic agents. Third, any public discretion opens up possibilities for corruption. The strategy of building competitiveness of the European Union called the Lisbon Strategy prescribes continuing efforts to reduce the overall level of government aid, whilst reorienting aid towards horizontal objectives.

This study argues that government economic policy should clearly focus on the so-called push policies, which universally reduce the costs of doing any business for economic agents, rather than pull policies, which prescribed a certain course of action for economic agents via specific incentives or subsidies. Benefits from joining the EU can be maximised through a policy framework that focuses on improving business conditions for both domestic and international enterprises, particularly small and medium enterprises, while avoiding distorting measures.

Internationalisation of Latvian Manufacturing Companies: Impact of Policies and Foreign Investment

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