Conditions and incentive factors for attracting foreign direct investment to Lithuanian regions: comparative assessment


Project no.: 09.3.3-LMT-K-712-22-0005

Project description:

As a result of the research, a comparative assessment of the conditions and incentives for attracting FDI to Lithuanian regions was performed, by emphasizing what conditions are created for efficient use of investments in the regions, factors that encourage foreign investors to invest in smaller regions and factors limit FDI attraction in regions. The empirical research was performed using the quantitative method of comparative analysis and the qualitative method – the method of expert evaluation. Research has shown that the choice of foreign direct investors to invest in Lithuanian regions is determined not only by better economic indicators but also by regional incentives, the concentration of direct competitors, type of activity. In well-developed regions, FDI companies have established that need particularly the infrastructure for transportation, financial services and telecommunications. Although weaker regions attract FDI through the establishment of free economic zones, regional differentiation persists due to relatively limited investment in the creation of a social environment, with too few people of working age and skilled workers.

Project funding:

Project is funded by EU Structural Funds according to the 2014–2020 Operational Programme for the European Union Funds’ Investments priority “Development of scientific competence of researchers, other researchers, students through practical scientific activities” under Measure No. 09.3.3-LMT-K-712.

Project results:

The results of the research showed that changes in economic incentives of Lithuanian regions do not have a significant impact on FDI changes. Some regions with higher unemployment and lower wages still attract higher FDI flows compared to regions with similar attractiveness and slightly better economic situation. This means that the choice of foreign direct investors to invest in a certain region is determined not only by better economic indicators, but also by the incentives offered by the region, the concentration of direct competitors, and the type of activity. Meanwhile, companies are established in the largest and most attractive regions of the country and need well-developed transportation, financial services and telecommunications infrastructure and select highly qualified value-added professionals. However, although weaker regions attract FDI by creating free economic zones, regional differentiation remains.
For these reasons, foreign capital companies in less attractive regions are not able to reduce differentiation, but the added value they create can help to gradually improve regional infrastructure; to increase the social well-being of the population; create more new jobs; reduce internal migration of qualified professionals.
According to the experts, the insight that the importance of most of the analyzed factors does not differ significantly in the regions of Lithuania is also confirmed. The only difference is the importance of qualified labor force (contingency coefficient – 0.788; p = 0.004) and favorable tax system (contingency coefficient – 0.786; p = 0.004) and it is determined by the type of economic activity. Less attractive regions attract more manufacturing and construction companies, therefore the level of qualified workforce is not very important for such investors, and in the regions of big cities, such as Vilnius, Kaunas, Klaipėda, the largest number of information technology (IT), banking, professional, scientific, foreign capital companies engaged in the technological sectors, which pay attention to how many qualified specialists are educated in the region, what business competencies of employees, foreign language skills, cultural knowledge, etc.
The results of the research allow to formulate the following recommendations in order to solve the problem of differentiation of Lithuanian regions: 1) Weaker regions should better support young families by simplifying financial support for housing, paying more attention and support on social issues: social housing, social, health care, psychological services; 2) Increase investment in education, culture and leisure: create leisure areas, such as sports clubs, day centers, art and music activities, organize cultural events at national level; 3) Support start-ups by providing them with tax incentives and public services; 4) To improve the quality of telecommunications and transportation infrastructure and to create an ecological environment for the population, thus increasing the investment and social attractiveness of the region.

Period of project implementation: 2020-11-03 - 2021-04-30

Project coordinator: Kaunas University of Technology

Vaida Pilinkienė

2020 - 2021

Academic Centre of Economics, Business and Management, School of Economics and Business