Chapter 28. Latvia

Figure 28.1. Structure and performance of the SME sector in Latvia
Figure 28.1. Structure and performance of the SME sector in Latvia

Sources: Charts A, C, D: OECD Structural and Demographic Business Statistics Database 2018, http://dx.doi.org/10.1787/sdbs-data-en; Chart B: OECD Structural and Demographic Business Statistics Database 2018, Employer Business Demography dataset; Chart E: OECD Structural and Demographic Business Statistics Database 2018, Employer Business Demography dataset.

 StatLink http://dx.doi.org/10.1787/888933925331

SME business conditions and access to strategic resources

Institutional and regulatory framework

Latvia’s regulatory framework performances are in many respects on par, or above, OECD median. The 2017 Action Plan for Business Environment Improvement introduces improved online business registration, digitalisation of public services, monitoring of insolvency proceedings and a single account for all tax payments. A 2018 tax reform aims to increase tax predictability until 2021 with differential treatment for SMEs and start-ups. Latvia has engaged in reorganising the judicial map, through consolidated municipal courts for more rapid procedures, a training programme until 2022 and out-of-court arbitration settlements. This reform is part of a broader agenda to restore trust in government. The new Business Environment Improvement Plan (2019-21) foresees more customer-oriented services, a competitive tax system, opening the business environment and promoting innovation.

Market conditions

While difficult to estimate, the informal economy could account for 22% of GDP in Latvia, well above estimates for peer countries. Informal activities undermine fair competition and is an obstacle to foreign investment and firm expansion. The government has made considerable efforts to reduce informality by intensifying tax audits, labour controls, sanctions and fines. Co-ordination among tax authorities, labour inspectors and customs has also been strengthened and a better use of ICT for tax compliance is planned.

Infrastructure

The quality of Latvian infrastructure falls short as compared to other countries of the region. Latvia underperforms in particular in terms of the reliability of energy supply and the affordability of electricity for industry. The desynchronization of the Baltic states from the Russian power grid is to be completed by 2025 as well the Baltic Energy Market Interconnection Plan. EUR 32.5 million have been earmarked in 2017 in order to promote an efficient use of energy resources and the transition to renewable energy in the manufacturing sector. Measures include energy audits or the introduction of energy management systems.

Access to finance

In Latvia, SME lending declined sharply in the aftermath of the crisis and followed a lower level stable pattern in recent years, despite historically low interest rate. Equity and short-term non-bank liabilities (e.g. trade payables) are the primary source of funding for smaller firms. The government put priority on improving SME access to finance. ALTUM, the national development financing institution, introduced start-up and micro loans in 2016 and portfolio guarantees in 2017. Since 2017 as well, long-term export credit guarantees complement short-term guarantees. Seven venture capital funds backed by EU structural funds for a total EUR 75 million and a minimum EUR 30 million from private sources began operations in 2018.

Access to skills

Latvia’s adult literacy, access to training and student proficiency is below OECD median. Job mismatches are significant and the under-skilling level is among the highest in European countries. The government has engaged important reforms for improving the quality of vocational education and training (VET) and curricula have been upgraded. Students, often from lower-income background, receive stipends during their workplace-based learning. The regulation of Sectoral Expert Councils (2016) involves entrepreneurs more closely in VET. In parallel, SMEs receive financial support for training, with EUR 6.9 million granted for ICT and non-tech trainings or trainings for attracting foreign investments. The Plan of Adult Education Governance Model (2016-20) aims to upskill employed adults with a focus on older and low-skilled workers.

Access to innovation assets

Skills shortage holds back firms’ adoption of advanced technologies or management practices. Despite an integration into business and international innovation networks on par with the OECD median, there are few Latvian SMEs moving to new digital-enhanced processes. Among other initiatives, a new programme (2016-22) supports the introduction of new products and technologies into production. An integrated Business Incubator programme (2016-23) proposes funding solutions, consultations, trainings and technology acceleration services through incubators in regions. The Cluster programme (2016-22) promotes cooperation for new product development.

The full country profile is available at https://doi.org/10.1787/34907e9c-en

References

EC (2017), SBA Factsheet 2017 Latvia, European Commission, https://www.google.fr/search?q=sba+factsheet+2017+latvia&rlz=1C1GCEA_enFR817FR817&oq=sba+factsheet+2017+latvia&aqs=chrome..69i57j0l5.6366j0j4&sourceid=chrome&ie=UTF-8 (accessed on 08 December 2018).

Ministry of the Economy (2018), 2018 Progress Report on Implementation of Latvia’s National Reform Programme, https://www.em.gov.lv/en/latvia_in_the_eu/europe_2020_strategy/national_reform_programme_of_latvia/.

Ministry of the Economy (2018), Review on the Economic Development of Latvia 2018, https://www.em.gov.lv/files/tautsaimniecibas_attistiba/leap/leap_2018-en.pdf.

Ministry of the Economy (2018), Support Programmes Co-financed from EU Funds for Entrepreneurship and Energy Efficiency, https://em.gov.lv/resources/web/esfondi/2019.03.04.%20ES%20fondi%20ENG%20macins.jpg.

OECD (2017), OECD Economic Surveys: Latvia 2017, OECD Publishing, Paris, https://dx.doi.org/10.1787/eco_surveys-lva-2017-en.

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