This chapter assesses key enabling conditions for FDI spillovers on SMEs in the Baltic states. It first examines the economic and structural characteristics of the Estonian, Latvian and Lithuanian economies, and then assesses the spillover potential of foreign direct investment and the capacities of Baltic small and medium-sized enterprises to benefit from knowledge and technology transfers. The chapter points to the Baltic’s strengths, challenges, and opportunities in these enabling conditions.
Strengthening FDI and SME Linkages in the Baltic States
Abstract
SMEs play an important role in the Baltic economies, accounting for a substantial share of employment and value added. The business landscape is dominated by microenterprises, especially in Lithuania and Latvia, while Estonia stands out with a dynamic start-up ecosystem. FDI has also been a central driver of growth in the region, particularly in manufacturing, ICT, financial services, and logistics, though spillovers to domestic SMEs remain limited.
FDI inflows into the Baltic states have remained robust over the past two decades, supporting growth, exports, and structural transformation. Estonia, Latvia, and Lithuania continue to attract significant investment despite annual fluctuations linked to global and regional dynamics. Sustained policy efforts to improve the investment environment, infrastructure, and SME linkages will be key to maximising the long-term benefits of FDI.
Productivity and firm dynamics highlight a persistent gap between SMEs and large firms, with smaller enterprises operating at around half the productivity of larger companies. This divide is particularly marked in knowledge-intensive sectors, reflecting limited access to advanced technology, skilled labour, and capital. At the same time, high firm churn rates, and strong business birth rates across the region, signal entrepreneurial dynamism, though high exit rates point to volatility and barriers to firm scaling across the Baltics.
Innovation performance differs across the Baltics. Estonia and Lithuania report higher levels of SME product and process innovation relative to the EU average, while Latvia shows more modest activity across innovation categories. Collaboration among innovative SMEs is relatively strong in Estonia, but weaker in Lithuania and Latvia, limiting knowledge diffusion and across-firm spillovers. Despite the dominance of SMEs in R&D expenditure, far above most EU peers, overall business R&D intensity remains low in international comparison, reducing absorptive capacity for foreign technology and knowledge transfers. Multinational enterprises represent an important potential source of innovation diffusion, but SMEs often lack the capacity to integrate into their ecosystems.
Across the Baltic states, tax frameworks are generally supportive of innovation, yet this has not translated into strong international patenting activity by foreign-owned firms. Evidence suggests that many multinationals centralise IP ownership and patenting in other jurisdictions, while local affiliates focus on adaptation or process improvements that are not patentable. This gap between R&D incentives and locally captured innovation outputs highlights the need to better align support measures with on-shore innovation outcomes and knowledge transfer to domestic firms, and to monitor participation by ownership type to ensure that public incentives strengthen national innovation capacity (OECD, 2023[1]).
Digitalisation and AI adoption are progressing but remain uneven. Estonia leads in SME digitalisation and AI uptake, with relatively smaller adoption gaps between SMEs and large firms. Latvia and Lithuania have made progress, especially in cloud adoption and AI diffusion, but still trail EU averages, particularly in advanced technologies and data analytics. Limited SME investment in digital skills and infrastructure, combined with affordability constraints, hampers their ability to integrate into high-value digital supply chains and benefit from technology transfer from multinationals.
Skills shortages are among the most pressing challenges. Across the three economies, firms report lack of skilled staff as the main barrier to investment. Shortages are most acute in STEM and ICT-related occupations, reflecting the pressures of digital and green transitions. Weak professional training systems, limited adult learning, and low provision of firm-based training, especially among SMEs, exacerbate the problem and restrict SMEs’ capacity to innovate, adopt new technologies, and collaborate with frontier firms.
SME access to finance has improved since COVID-19 but remains uneven: Estonian firms rely less on external funding, Lithuania depends on internal resources with growing peer-to-peer and state support, and Latvian SMEs remain bank-dependent with tighter lending. Venture capital is expanding in Estonia and Lithuania but remains limited, constraining scaling and innovation.
Overall, the Baltic SME ecosystems are dynamic but fragmented. High levels of entrepreneurship and digital readiness coexist with structural weaknesses in skills, finance, and innovation linkages. FDI has driven much of the region’s growth and productivity gains, but its benefits are not fully diffused to the domestic SME base. Targeted policies to strengthen skills development, broaden financing instruments, and foster SME collaboration in innovation networks will be crucial to unlock their potential and enhance resilience in an increasingly competitive and digital global economy.
Foreign direct investment (FDI) and linkages between multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs) offer strong potential for productivity and innovation spillovers. However, the extent of these spillovers depends on the host country’s economic, geographic, and structural context. Key factors include the macroeconomic environment, the technological capabilities and structure of the domestic economy, sectoral growth drivers, and the level of global integration. These elements shape MNEs’ investment decisions and affect the capacity of local SMEs to absorb and benefit from knowledge transferred through international production networks.
Before assessing the strengths, challenges, and opportunities related to key enabling factors for FDI-SME spillovers it is essential to first understand the broader economic context of the Baltic economies. This section examines: (1) recent macroeconomic trends, (2) Sectoral growth drivers and economic structure of Estonia, Latvia and Lithuania, and (3) their integration into the global economy through trade.
The Baltics achieved strong economic convergence with the EU, but recent external shocks slowed the momentum of growth
Foreign direct investment (FDI) has been a main driver of growth and convergence in the Baltics since EU accession. It brought capital, technology, and managerial know-how, integrated the three economies into European and global value chains (GVCs), and remains particularly concentrated in ICT, manufacturing, financial services, and real estate. While FDI has boosted productivity, GDP growth and exports, spillovers to domestic SMEs remain uneven.
The Baltics have achieved rapid convergence with Western Europe, with GDP per capita steadily rising since 2014. EU structural and cohesion funds complemented FDI by improving infrastructure, human capital, and the business environment, creating mutually reinforcing dynamics that supported competitiveness and trade integration. Between 2014 and 2024, GDP per capita more than doubled in all three countries (Figure 2.1). Exports of goods and services became a key engine of growth, with trade openness exceeding the OECD average (World Bank, 2024[2]).
At the same time, structural vulnerabilities persist. Demographic decline, skills shortages, and low investment in research and development weigh on long-term growth potential. These weaknesses limit SME upgrading and the diffusion of productivity benefits from foreign investment. The relationship between SMEs and R&D is mutually reinforcing: low R&D spending constrains SME productivity, but a high share of small, resource-constrained firms also limits overall investment in innovation. (OECD, 2024[3]), (OECD, 2024[4]), (OECD, 2024[5]).
Recent shocks have disrupted the strong convergence path. The COVID-19 pandemic and Russia’s war of aggression against Ukraine slowed growth, weakened trade prospects, and undermined business and consumer confidence, particularly through inflationary pressures and declining household incomes (Box 2.1). Although the region remains dynamic and open, these events exposed its structural fragilities.
Confidence indicators in the Baltic states reflect these economic dynamics and underline the volatility of recent years. Business and consumer sentiment rose strongly during the post-pandemic recovery but dropped sharply following Russia’s war of aggression against Ukraine, mirroring the deterioration in trade prospects, inflationary pressures, and weakening household purchasing power. While sentiment began to stabilise in late 2023, confidence levels remained well below EU averages, signalling continued caution among firms and consumers. The persistent weakness in expectations suggests that investment and consumption may take time to recover (Figure 2.2).
Russia’s full-scale invasion of Ukraine in 2022 had a considerable economic impact on the Baltic region, due to geographic proximity and trade and investment links with both Russia and Ukraine. The onset of the war swiftly disrupted economic activity, sharply slowing GDP growth in the region, from a strong post-pandemic rebound of 6.8% in 2021 to just 1.5% in 2022, reaching 0.7% in 2024.
The war and sanctions cut Baltic trade ties with Russia, driving a reorientation toward the Nordics. In Estonia, Russia and Belarus made up 10% of imports and 4% of exports in 2022, but Russian inputs, used in 40% of exports across sectors such as transport, wood, chemicals, and fuel re-exports, caused significant disruptions (OECD, 2024[4]). Latvia’s trade with Russia, Belarus, and Ukraine fell from 10% of exports and 13% of imports in 2021 to 9% and 5% in 2023, while Lithuania saw the steepest decline, with exports to Russia dropping from 20.3% in 2011 to 4.3% in 2023 and imports from 26.2% to just 0.8% (OECD, 2024[5]).
The Baltics, still partly reliant on Russian energy in 2022, faced a surge in fuel and electricity prices, driving inflation to 17-19%, the highest in Europe. In response, they phased out Russian gas imports, turned to LNG and renewables, and strengthened regional partnerships. Supported by the EU’s Recovery and Resilience Facility and REPowerEU Plan, these measures helped cushion war-induced shocks and reduce energy dependence, while ongoing reforms remain vital for the resilience of the energy market.
The Baltics have absorbed over 119 000 Ukrainian refugees, nearly 2% of their population, expanding the labour force. Employment rates vary, with Estonia at 69%, compared to 56% in Latvia and 53% in Lithuania, reflecting faster integration into the labour force in Estonia. While many have quickly entered local job markets, further efforts in language training, credential recognition, and social support are needed to fully address labour shortages and skills gaps.
The Baltic states combined fiscal and structural measures to cushion the economic impact of Russia’s war, including energy subsidies and refugee support. Policies to accelerate adjustment range from fast-tracking renewable energy projects and diversifying exports to retraining workers. Rising defence and security spending is also being channelled into local R&D and high-tech sectors, linking security needs with innovation, energy independence, and high-skilled job creation.
The EU has supported the Baltic countries in managing the war’s economic fallout by coordinating sanctions, facilitating trade and energy reorientation, and mobilising funds for refugees and recovery. Combined with national measures, this has helped cushion immediate shocks and build resilience, while advancing structural reforms to strengthen energy security, labour markets, and innovation.
Source: OECD Economic Surveys of Estonia, Latvia and Lithuania; EBRD Transition Report; UNHCR, OECD calculations based on World Bank data.
Source: OECD GDP and non-financial accounts, https://www.oecd.org/en/data/datasets/gdp-and-non-financial-accounts.html
Note: Confidence indicators summarise sectoral perceptions and expectations in a single index. For each of the sectors covered, they are computed as the simple arithmetic mean of the seasonally adjusted balances of responses to a subset of questions selected from the broader survey.
Source: European Commission Business and consumer surveys, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/business-and-consumer-surveys_en
The economies are highly diversified, but low-technology activities continue to dominate both the manufacturing and services sectors
The technological intensity of economic activity is a key factor in assessing the potential of FDI and SMEs to contribute to productivity and innovation. Sectors engaged in higher-technology manufacturing and services are typically better positioned to customise, upgrade, and differentiate their products, which can translate into stronger innovation performance and productivity gains (OECD, 2023[6]).
While the Baltic economies are relatively well-diversified, their sectoral composition still leans toward lower technology activities. Since regaining independence, Estonia, Latvia, and Lithuania initially shared similar levels of manufacturing as a share of total output. Over time, this share declined markedly in Estonia and Latvia, while remaining relatively higher in Lithuania. Although Lithuania has also seen a recent downturn, the three countries continue to exhibit distinct industrial profiles (IMF, 2025[7]). Across the region, manufacturing remains largely concentrated in lower-technology activities, though there are signs of gradual upgrading.
In Estonia, manufacturing is anchored in electronics, food processing, and wood products, with growing activity in electrical equipment and machinery. These sectors have attracted significant FDI strengthening Estonia’s integration into Nordic and EU value chains (OECD, 2024[3]). Latvia’s industrial base is similarly shaped by wood and food processing, as well as chemicals and basic metals. Foreign investment has supported the modernisation and export orientation of these industries, particularly in wood processing and chemicals, with manufacturing accounting for around 11% of GDP, with approximately 70% of output destined for export, mostly within the EU (OECD, 2024). In Lithuania, manufacturing plays a comparatively larger role, contributing over 20% of GDP. The country’s strengths lie in food products, furniture, refined petroleum, and chemicals, with increasing investment in pharmaceuticals, machinery, and electronics. These developments reflect a gradual shift toward more knowledge-intensive production, supported by FDI into industrial parks and free economic zones (OECD, 2024[5]).
High-tech manufacturing, including automotive, electronics, and pharmaceuticals, remains a relatively modest share of the manufacturing sector, ranging from 2% in Latvia, 1% in Estonia and 1% in Lithuania. They remain below the shares seen some peer economies such as Italy (6%) and Portugal (3%), and Germany and Czechia (both 13%). This suggests continued potential for upgrading the technological intensity of manufacturing to enhance productivity and competitiveness across the Baltic economies
Services dominate the economic landscape, accounting for approximately 86% of total value added in Estonia and in Latvia, and 83% in Lithuania, broadly in line with EU peers such as Italy and Portugal. Higher-technology services, including ICT and knowledge-intensive business services, are expanding steadily, now representing 50% of value added in Estonia, 45% in Latvia, and 41% in Lithuania, pointing to a gradual structural shift toward more innovation-driven activities. This transition reflects growing potential for productivity gains and value creation through digitalisation and service-sector upgrading (Figure 2.3)
% of total value added by key sectoral groups, 2024
Note: Data for Latvia is from 2023. The sectors were categorised using the high-tech aggregation by NACE Rev.2
Source: Eurostat, 2024, Gross value added and income by detailed industry (NACE Rev.2)
The conceptual framework described in Annex A explains that FDI’s local embeddedness and absorptive capacities of SMEs are key determinants for FDI spillovers on SME productivity and innovation to take place. They depend, among other things, on the economic sectors and activities in which investment takes place and SMEs are operating. Given the focus on productivity and innovation spillovers, the sectoral analysis in this and the following chapters is based on technology- or R&D-intensity. As such, most analysis based on sectors (e.g. regarding economic structure, including of SMEs; GVC integration both through trade and FDI; and FDI-SME diffusion channels) focuses on four main sectoral groupings based on R&D-intensity, which are adapted from Galindo-Rueda and Verger (Galindo-Rueda and Verger, 2016[8]): higher technology manufacturing, lower technology manufacturing, higher technology services and lower technology services. Table 2.1 provides an overview of the industries covered in these groupings. R&D-intensity is measured by the ratio of business R&D expenditure relative to gross value added in each industry covered in a given group. It is important to note that sectoral classifications may vary across data sources covered in this report. Table 2.2 lists industries based on ISIC Rev. 4 two-digit sectors, which is the classification applied for most of the data used (e.g. OECD and Eurostat data). Commercial datasets like Financial Times’ fDi Markets and Refinitiv have their own classification of sectors but for the purpose of this report they were also classified according to the four groupings described above.
The classification has the caveat that R&D-intensity is an imperfect measure of innovation and innovation potential across industries. Not all firms that are successful at developing or implementing innovation are necessarily R&D performers. Many of these firms are successful adopters of technology which they have not developed. Measuring R&D intensity or embedded R&D in their purchases may not effectively characterise the innovative performance of firms or industries. Other OECD indicators measure skill intensity, patenting activities and innovation by industries that facilitate a more refined description of the overall knowledge intensity in different economic activities, although these measures are not always widely available across a majority of OECD countries and partner economies (OECD, 2015[9]). Another caveat of this classification is related to the fact that it is not entire sectors that involve either higher or lower technologies, but it is specific activities or segments within these sectors that involve different technology intensities. This caveat needs to be considered for any conclusions made in this report.
Note: A number of industries are not classified into these four groupings as the analysis in this report deliberately avoids focusing on these industries. They include Mining and extraction (Mining and quarrying; Coke and refined petroleum products); Infrastructure (Electricity, gas, water supply, sewerage, waste and remediation services; Telecommunications); Other services (Accommodation and food services; Public administration and defence; Compulsory social security; Education; Human health and social work; Arts, entertainment, repair of household goods and other service activities). These industries are either highly specialised and would require a more focused analysis, or their role/potential for FDI-SME linkages and spillover is limited.
Productivity growth has been strong, but limited investment is limiting further growth
Labour productivity growth in the Baltic states has shown strong convergence since 2000, with Estonia, Latvia, and Lithuania significantly outperforming the EU average during the early 2000s. Latvia and Lithuania in particular recorded double-digit growth in some years, driven by structural reforms, FDI inflows, and rapid capital accumulation. FDI not only provided capital but also facilitated technology transfer and integration into global value chains, reinforcing productivity gains. However, productivity growth became more volatile following the 2008 financial crisis and again after the COVID-19 pandemic. Since 2020, Estonia has experienced especially sharp declines, while Latvia and Lithuania have shown slightly more resilience. Overall, productivity growth has slowed across the region, highlighting the need to address emerging structural bottlenecks (Figure 2.4)
GDP per hour worked, growth rate over 1 year, % per annum, constant prices
Source: OECD Productivity Database, https://data-explorer.oecd.org/
Labour productivity growth across the Baltic states has slowed, impacted by recent external shocks such as the pandemic and Russia’s invasion of Ukraine. However, signs of deceleration, marked by weakening competitiveness and a broader slowdown in the convergence process, were already evident prior to these crises, with notable variation across countries (IMF, 2025[7]). Manufacturing productivity is below the EU average, meaning Baltic firms required more than twice as much labour to produce the same output as their EU counterparts. Despite Estonia’s strong performance in ICT, productivity across sectors has slowed significantly. Traditional industries continue to lag in both productivity growth and the adoption of digital technologies, highlighting a widening gap between sectors (OECD, 2024[3]). In Lithuania, the ICT as well as the financial and insurance sectors have performed relatively well, particularly following a strong rebound in 2021. These sectors have outperformed both EU and Baltic peers in recent years, primarily driven by productivity gains within industries rather than structural shifts across sectors, indicating rising efficiency and innovation (OECD, 2024[5]). Latvia’s manufacturing sector demonstrates stronger productivity growth than both its Baltic and EU peers (Figure 2.5). However, overall productivity levels, particularly among smaller firms, remain constrained by challenges such as limited access to finance, lower digital adoption, fewer innovation activities, and gaps in managerial capacity and workforce training. Addressing these barriers could unlock significant untapped productivity gains (OECD, 2024[4])
Annual growth rate of gross value added per hour worked, by sector
Note: Peer EU countries are: Denmark, Finland, Italy, the Netherlands and Sweden.
Source: OECD, National Accounts, https://data-explorer.oecd.org
While investment flows in the Baltic states are relatively strong, exceeding the EU average in all three countries, private sector investment remains a constraint to long-term growth, particularly among SMEs. Lithuania recorded a total investment-to-GDP1 ratio of 23.7% in 2023, slightly above the EU average of 22.4%, supported by EU funds, growing FDI in high-tech sectors, and strong public investment. Estonia stood out with an even higher ratio of 28%, driven by its favourable digital ecosystem and supportive tax environment. Latvia also performed well at 24.9%, benefiting from infrastructure projects and EU financing (Eurostat, 2024[10]). Nevertheless, across the region, high borrowing costs, geopolitical uncertainty, and skill shortages continue to weigh on private investment, especially among smaller firms. Enhancing investment readiness and targeting digital, green, and productivity-enhancing investments will be essential to sustain long-term growth.
Export-led growth continues in the Baltics, with rising trade openness but uneven technological upgrading across countries
Foreign trade has been a key engine of growth and convergence in the Baltic states, with exports steadily increasing as a share of GDP over the past decades. In 2024, they constituted 76.3% in Estonia, 74.1% in Lithuania and 64.6% of GDP in Latvia. Although exports declined in 2023 compared to 2022 by 10.4 percentage points in Estonia, 12.9 in Latvia, and 12.7 in Lithuania - the long-term upward trend remains consistent (UNECE, 2024[11]). Export growth has been particularly strong in Lithuania, driven by rapid expansion in services exports since 2010. Yet, despite its larger manufacturing base, Lithuania’s exports are of lower technological content compared with those of Estonia and Latvia, reflecting continued reliance on traditional manufacturing, a narrower product mix, and limited integration into global value chains. Trade openness has steadily increased across the Baltic states, reaching 154.9% in Estonia, 149% in Lithuania, and 138% in Latvia in 2023, well above the EU average of around 100%. The three economies conduct the majority of their trade with each other and with other European countries, underscoring their deep integration into the EU single market (IMF, 2025[7]).
The data highlight clear structural differences between trade in services and goods across the Baltic economies, reflecting variations in value-added intensity. In services trade, high-value-added sectors such as information and communication, professional and scientific activities, and financial services contribute significantly, especially in Estonia and Lithuania, where information and communication alone accounts for about 30% and 19% of total services trade, respectively. These sectors suggest a growing specialization in knowledge-intensive and digital services. Conversely, in Latvia, services trade remains more reliant on transportation, a relatively lower value-added activity, which makes up nearly one-third of total services exports. In contrast, goods trade is heavily concentrated in manufacturing, which accounts for 55–59% of total exports in Estonia and Lithuania and 43% in Latvia, indicating a strong industrial base but with varying degrees of sophistication. Wholesale trade also plays a substantial role, particularly in Latvia, though it tends to generate lower domestic value added. Overall, Estonia and Lithuania show stronger integration into higher value-added activities in both goods and services trade, while Latvia’s export structure is more concentrated in lower value-added segments such as transport and trade. (Figure 2.6).
Note : Full sector names according to the NACE Rev.2 activities: Agriculture, forestry and fishing; mining and quarrying, Manufacturing, Electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities, Construction, Wholesale and retail trade; repair of motor vehicles and motorcycles, Transportation and storage, Accommodation and food service activities; real estate activities; public administration, defence; compulsory social security; education; human health and social work activities; other services, Information and communication, Financial and insurance activities, Professional, scientific and technical activities, Administrative and support service activities, Unknown NACE activity
Source: Eurostat, 2023, Services trade by enterprise characteristics (STEC) by NACE Rev.2 activities and enterprise size class, Trade by NACE Rev. 2 activity and enterprise size class
The Baltics are strongly integrated into GVCs, but scope to strengthen local linkages remains
Participation in GVCs is a key driver of industrial development and productivity growth, as it facilitates the transfer of capital, technology, and know-how from foreign firms. While domestic firms and subsidiaries often begin by performing lower-value-added tasks such as assembly, sustained exposure to foreign partners and competitive pressures can support upgrading into more knowledge- and technology-intensive segments, ultimately boosting productivity and wages (Rigo, 2021[12]). The Baltic economies are strongly integrated into GVCs, with GVC-related exports accounting for 57% of total exports in Estonia, 54% in Lithuania, and 47% in Latvia as of 2020. These shares exceed the OECD average and surpass most peer EU countries (Figure 2.7).
In 2020, the Baltic states displayed a relatively high level of backward integration into GVCs with foreign value added accounting for 37% of Estonia’s exports, 31% in Lithuania, and 24% in Latvia, mostly exceeding the OECD average of 26%, and comparable to more GVC-integrated economies like the Netherlands and Finland, indicating that a significant share of exported goods and services relies on imported inputsI . In contrast, forward integration measures the extent to which domestic value added is embodied in other countries’ exports, stood at 23% in Lithuania, 23% in Latvia, and 20% in Estonia, broadly aligned with EU peers. The stronger backward than forward integration across the region indicates that foreign firms in the Baltics tend to rely more on imported parts and materials than on inputs sourced from local companies. While this shows that the Baltics are well integrated into global production networks, it also means that local supply chains remain less developed. For smaller domestic firms, this can translate into fewer chances to become suppliers to multinationals and, as a result, fewer opportunities to gain new knowledge, adopt advanced technologies, and move up the value chain. (Figure 2.7).
Backward and forward participation (%) and total participation (%), 2020 and 2000
Note: Backward participation in GVCs is foreign value added embodied in a country’s gross exports, as a percentage of the country’s total gross exports; forward participation is domestic value added embodied in other countries’ gross exports, as a percentage of the country’s total gross exports. Data refer to 2020.
Source: OECD TiVA Indicators, https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm
The evolution of overall GVC participation from 2000 to 2020 shows notable divergence among the Baltic states. Lithuania experienced the most substantial increase, with overall GVC participation rising by 14 percentage points, reflecting deeper integration into global production networks. Estonia saw a more moderate increase of 4 percentage points, while Latvia’s participation rose only slightly by 1 percentage point. Across the region, the increase has been primarily driven by stronger backward participation. However, in both Estonia and Latvia, forward participation, the extent to which domestic value added is used in the exports of other countries, has declined, suggesting a reduced role in the upstream stages of global supply chains. Estonia’s low forward integration, despite its strength in demand-driven high-tech services, suggests scope to diversify into re-exportable services like cloud infrastructure or AI tools, with FDI playing a supportive role.
While participation in GVCs and foreign investment inflows have boosted export growth in the Baltics, these alone are not sufficient to ensure economic upgrading. In many cases, foreign firms continue to rely heavily on imported intermediates, limiting opportunities for domestic value creation. Maximising the benefits of GVC participation requires strengthening local capabilities, such as skills, innovation, and supplier readiness, and promoting stronger linkages between foreign investors and domestic firms. Upgrading depends not just on integration, but on the ability of local firms to move into higher value-added roles within the chain (Klimek, 2024[13]).
This section explores the potential for FDI-driven spillovers in the Baltic states by analysing several key dimensions. It first reviews the scale and main trends of inward FDI to establish the overall investment landscape. It then assesses the productivity gap between foreign affiliates and domestic firms, a key indicator of the scope for knowledge and technology transfer. Lastly, it examines the extent to which FDI is embedded in the domestic economies of Estonia, Latvia, and Lithuania, focusing on the nature of investments, investor motivations, and the regional and sectoral patterns of FDI.
Sustained FDI inflows have supported growth, exports, and structural transformation in the Baltic economies
FDI inflows into the Baltic states have remained relatively strong over the past two decades, playing a key role in supporting economic growth, export capacity, and structural transformation. The Baltic states have experienced varying but generally positive trends in FDI inflows over the past two decades. Estonia recorded inflows of USD 4.6 billion in 2023 and USD 915 million in 2024, following a period of moderate growth and recovery from earlier fluctuations. Sound monetary and fiscal policies have contributed to stability, supporting investor confidence and encouraging substantial foreign direct investment, particularly in sectors like telecommunications and finance, despite the recent drop in FDI inflows (OECD, 2024[3]). Lithuania attracted USD 3.3 billion in FDI in 2024, up from USD 2.5 billion in 2023, reflecting strong investor interest in sectors like ICT and business services. This growth is supported by macroeconomic stability and structural reforms aimed at boosting productivity, deepening capital markets, and improving public sector transparency (OECD, 2024[5]). Latvia’s inflows reached USD 1.2 billion in 2024, maintaining a stable level following similar figures in 2023, supported by EU market access, low taxes, and an efficient administrative framework (OECD, 2024[4]) (Figure 2.8 Panel A). While annual fluctuations are visible across all three countries, reflecting global cycles, geopolitical uncertainty, and sector-specific dynamics, the overall trend points to sustained engagement from foreign investors. Continued policy focus on improving the investment environment, upgrading infrastructure, and fostering local linkages will be important to strengthen the long-term impact of FDI.
FDI stock has grown steadily across Estonia, Latvia, and Lithuania over the past two decades, reflecting the increasing role of foreign investment in their economies. In all three countries, FDI as a share of GDP has expanded significantly, with Estonia reaching 95.4% in 2023, Latvia 63.4%, and Lithuania 49.2% (Figure 2.8 Panel B). This growth points to sustained investor confidence and deeper integration into international investment flows. Foreign-owned firms have become more embedded in the region's economies, particularly in sectors such as services, manufacturing, and digital technologies.
Source: OECD International Direct Investment Statistics, http://www.oecd.org/investment/statistics.htm
Expanding the geographic diversity of FDI origins could enhance spillover benefits.
Between 2013 and 2023, the composition of FDI stock in the Baltic states has shifted notably, reflecting evolving investment patterns and growing regional integration. In Estonia, the share of FDI from Sweden declined sharply, while Finland maintained a strong position and Luxembourg emerged as a significant investor, rising to over 24% of immediate FDI stock, likely due to its role as a financial conduit. Data by ultimate origin show a more diversified investor base, with increased shares from Germany and the United States, alongside steady engagement from Nordic countries. Similarly, Lithuania’s FDI profile has broadened, with growing contributions from Germany, the Netherlands, and Estonia, while traditional sources like Sweden have declined. Ultimate ownership data point to strong ties with transatlantic and Northern European investors, including the US., UK, and Sweden, reflecting a shift toward more strategic and high-value-added investment. In Latvia2, FDI has increasingly come from regional partners. Sweden’s share grew from 21% to 30%, while inflows from Estonia and Lithuania also expanded. At the same time, declining shares from countries like Norway, Finland, and the U.K. suggest a reorientation of capital flows toward closer, regional sources, highlighting the Baltics’ increasing integration within the EU and neighbouring economies (OECD, 2023[14])
During the 2000s, and particularly in the aftermath of the 2008-2009 economic and financial crises, economic ties among the Baltic countries deepened. Analysis of inward FDI stocks in the Baltic states reveals that a notable share of immediate FDI originates from neighbouring Baltic countries, reflecting close regional economic integration. Estonia, Latvia, and Lithuania often report substantial investments from each other, a pattern particularly pronounced in the financial sector. However, when tracing ultimate investors, most capital comes from outside the Baltics, predominantly Sweden, Finland, Germany, the Netherlands, and the United States, indicating that some intra-Baltic flows are re-routed foreign investment rather than genuinely domestic regional capital (Figure 2.9).
Over the years, intra-Baltic FDI stocks have steadily increased, demonstrating growing regional linkages, yet the ultimate investor perspective underscores the Baltics’ continued reliance on Western European and Nordic capital as a primary source of foreign investment. A substantial share of outward FDI within the Baltic region has reflected capital movements between the Baltic subsidiaries of Nordic banks. Since the outward FDI of Estonia, Latvia, and Lithuania has primarily targeted other Baltic states, with the financial sector accounting for the largest share, this channel has remained a significant component of Baltic outward FDI well into recent years (Purju, 2025[15]).
Source: (OECD, 2024[16])
The origin of foreign investors plays a significant role in shaping the potential for FDI-driven spillovers to domestic firms, including SMEs. Investors from geographically and culturally proximate countries, such as neighbouring EU economies, are more likely to integrate closely with local suppliers and service providers. This proximity can facilitate smoother communication, greater trust, and better alignment of business practices, which in turn can enhance the depth of collaboration within regional value chains. Such conditions support stronger knowledge diffusion, skills transfer, and the development of local business networks, ultimately increasing the likelihood that domestic firms benefit from productivity-enhancing spillovers (OECD, 2023[17]). At the same time, evidence also suggests that a greater geographic distance between the home and host countries of multinational affiliates can, in some cases, lead to larger productivity spillovers. This is because distant investors often face higher transaction and coordination costs when relying on suppliers from their home country, thereby increasing the likelihood that they engage domestic suppliers and build local linkages, an important channel for transferring know-how and improving SME capabilities. (World Bank, 2020[18]).
Foreign firms are concentrated in export-oriented manufacturing activities.
Between 2013 and 2023, Estonia’s sectoral FDI stock distribution shifted towards higher-value services. Financial and insurance activities saw the most significant rise, increasing from 26% to 43% of total FDI stock, underscoring Estonia’s growing role as a regional financial hub, supported by investments from Nordic banks and other regional financial institution. FDI in professional, scientific, and technical activities also expanded, reaching 7%, while ICT rose to 7%, more than doubling its previous share. By contrast, manufacturing declined slightly as a share of total FDI, from 16% to 12%, despite modest growth in absolute terms. Sectors such as wholesale and retail trade and real estate maintained stable shares, while transport and construction saw declines, with transport registering a net negative stock (Figure 2.10 Panel A). Overall, these changes reflect a maturing investment landscape increasingly oriented towards knowledge-based and high-skill services, highlighting Estonia’s progress in attracting more innovation-driven foreign capital. Further efforts to boost investment in ICT and R&D-intensive sectors could enhance productivity spillovers and support long-term economic upgrading.
A similar trend was observed in Latvia’s FDI stock composition shifted decisively toward higher-value and knowledge-intensive sectors. The most notable change occurred in professional, scientific, and technical activities, which grew from 3% to 41% of total FDI stock, reflecting rising investor interest in services linked to innovation, R&D, and specialised business services. This can be partially attributed to improving research infrastructure and successful policy initiatives, such as the Fast Track Initiative. Real estate and ICT also saw increases, though more modest, with ICT rising from 4% to 6%. At the same time, the share of FDI in manufacturing dropped from 14% to 7%, while traditional sectors like wholesale and retail and finance declined in relative importance despite absolute increases in stock. Some sectors, like accommodation and food services, even registered negative FDI values in 2023 (Figure 2.10 Panel C). This transition indicates that Latvia is becoming more attractive to investors in high-skill service industries, yet further diversification and policies to strengthen productive linkages could help ensure more balanced and sustainable benefits from inward investment.
Between 2013 and 2023, Lithuania’s FDI stock more than tripled, rising from EUR 1.2 billion to EUR 4.3 billion, with significant structural changes in sectoral distribution. The most notable shift occurred in manufacturing, which grew from 10% to 28% of total FDI stock, reflecting Lithuania’s success in attracting investment into higher-value-added industrial segments, such as electronics and pharmaceuticals. Financial and insurance activities, while still the largest sector at 31%, saw a relative decline in share compared to 2013 (41%). Other areas such as wholesale and retail trade, ICT, and professional, scientific and technical activities also expanded their shares, while mining, transport, and agriculture either declined or remained flat. The rising FDI in manufacturing and knowledge-intensive services underscores Lithuania’s appeal as a hub for productive, innovation-driven investment, creating stronger prospects for domestic spillovers and advancing value chain upgrading.
Manufacturing remains a key pillar of the Baltic economies, particularly in Lithuania, and serves as a major driver of exports, employment, and FDI. Sub-sectors like food processing, wood, machinery, electronics, and pharmaceuticals show strong potential for productivity and innovation spillovers. These can be amplified through deeper supply chain linkages, targeted SME support, and skills development, helping domestic firms absorb foreign technologies and move up the value chain. Evidence also shows that local manufacturing firms benefit not only from foreign presence in downstream manufacturing but also from upstream knowledge-intensive services, underscoring the importance of cross-sectoral integration in maximising spillover potential (Orlic, Hashi and Hisarciklilar, 2018[19]). However, recent trends in FDI stock across manufacturing sub-sectors reveal uneven dynamics.
In Estonia, modest increases were recorded in areas such as food and textiles, while FDI in motor vehicles declined sharply. Latvia saw broad-based gains across sub-sectors, except for a notable drop in textiles. In Lithuania, FDI stock contracted in nearly all sub-sectors, except for petroleum, chemicals, pharmaceuticals, rubber, and plastics (Figure 2.10 Panel E, Panel F). This divergence may reflect shifts in global value chains, evolving investor priorities toward higher-value-added segments, and rising input costs, which could be reshaping the Baltic manufacturing landscape.
Note: FDI stock by manufacturing industry is calculated as % of total FDI stock in manufacturing. Electricity includes gas, steam and air conditioning supply. Water supply includes sewerage, waste management and remediation activities. Wholesale and resale trade includes repair of motor vehicles and motorcycles. Food products include beverages and tobacco. Textiles include wearing apparel, wood and paper products; printing and reproduction. Petroleum, chemical, pharmaceutical products include rubber and plastic.
Source: (OECD, 2023[14])
Foreign firms drive exports, value, and jobs in the Baltics, with further gains possible via stronger domestic links
Foreign-owned firms are key drivers of export activity in the Baltic economies, accounting for 49% of total exports in Estonia, 44% in Lithuania, and 41% in Latvia in 2023. These shares are significantly higher than in several peer EU economies such as Denmark (29%) and Italy (31%), highlighting the strong role of FDI in supporting international competitiveness. However, they remain below countries with deeply embedded internationalised sectors, such as Sweden (58%) and the Netherlands (65%). This suggests scope for further integration of foreign firms into regional supply chains. (Figure 2.11).
The data reveal notable differences in the ownership structure of firms engaged in trade in goods across the Baltic states. In Estonia, trade activity is almost evenly split between domestic (51%) and foreign-owned enterprises (49%), highlighting a strong presence of multinational firms in the country’s export and import base. This reflects Estonia’s high degree of openness and integration into global value chains, where foreign firms play a significant role in both production and trade. In Latvia, domestic firms maintain a somewhat larger share of trade (59% domestic vs. 41% foreign), suggesting a more locally anchored trading sector but still with substantial foreign participation. Lithuania presents a similar pattern to Finland, with 56% of trade conducted by domestic firms and 44% by foreign-owned enterprises, indicating a balanced but slightly more domestically driven trade structure. Overall, compared with their Nordic and Western European peers, the Baltic states show relatively strong involvement of foreign-owned firms in goods trade, an indication of their openness to foreign investment and their integration into regional and global production networks (Figure 2.11). These foreign affiliates often outperform domestic firms in terms of productivity and innovation and highlight the important role of FDI in driving efficiency and technological upgrading across key sectors of the Baltic economies (Ashyrov et al., 2025[20]).
Trade in goods by ownership type, 2023
Source: (Eurostat, 2023[21])
While FDI has strengthened export capacity across the Baltic states, its composition closely mirrors each country’s industrial and export structure (Runevic, 2006[22]). In Latvia, FDI has largely targeted traditional and resource-based, reflecting the dominance of these industries in its export basket and the relatively limited presence of high-tech production. In comparison, Estonia and Lithuania have attracted greater investment in technology-intensive and knowledge-based activities, including ICT, electronics, and business services, supported by more developed innovation ecosystems and proactive investment promotion strategies.
Evidence indicates that FDI can generate positive productivity spillovers to domestic firms in Estonia, Latvia, and Lithuania, particularly through vertical linkages in supply chains. In Estonia, spillovers are more pronounced in services, notably ICT, where integration with EU economies has supported knowledge diffusion (OECD, 2024[3]). In Latvia, both the number and value of cross-border mergers and acquisitions remain modest, which constrains the country's ability to deepen its vertical integration into GVCs (OECD, 2024[4]). Sectors with weaker GVC participation tend to see fewer cross-border acquisitions, Latvia’s less developed vertical linkages and lower backward input integration could potentially further discourage cross-border M&A flows (Cianni, 2022[23]). Lithuania, with a comparatively larger and more export-oriented manufacturing base, is seeing increasing productivity gains in sectors such as electronics and pharmaceuticals, supported by positive productivity spillovers from FDI taking place through contacts between foreign affiliates and their local suppliers in upstream sectors (OECD, 2024[5]). However, the scale of these benefits is strongly influenced by the absorptive capacity of domestic firms. Factors such as limited firm size, managerial quality, and low innovation intensity often constrain the scope of spillovers. Strengthening these internal capabilities and fostering greater linkages between foreign and domestic firms, particularly SMEs, remains essential for maximising the development impact of FDI (Javorcik, 2004[24]).
The value added by foreign-owned firms in Estonia, Latvia, and Lithuania is spread across a wide range of sectors, though patterns differ by country. In Lithuania, foreign firms generate notably high value added in manufacturing, wholesale trade, transportation, information and communication, and professional services, reflecting the country’s strong industrial base and export orientation. Estonia shows similar diversification, with significant contributions in manufacturing, information services, and finance, underscoring its integration into digital and service-oriented value chains. Latvia’s foreign value added is also relatively balanced, though slightly lower across sectors, with strengths in transport, information services, and wholesale trade (Figure 2.12). These trends suggest that efforts to deepen domestic linkages, particularly in services and high-tech manufacturing, could further enhance the spillover potential of FDI. Tailored strategies that build on existing sectoral strengths could help each country better leverage foreign investment for productivity growth and innovation.
Foreign-owned enterprises in the Baltic states contribute substantially to employment, particularly in manufacturing and services. In Estonia, 21% of employment in foreign firms is concentrated in manufacturing, followed by 19% in wholesale and retail trade. Latvia shows a similar pattern, with 18% of foreign enterprise employment in manufacturing and 22% in wholesale and retail. Lithuania maintains strong foreign firm presence in manufacturing (19%) and wholesale trade (20%), but also shows higher employment shares in transport and storage (14%). While knowledge-intensive sectors such as ICT and professional services account for smaller shares, ranging from 4% to 8% across the countries, they remain important growth areas. These patterns highlight the role of foreign firms in supporting both traditional industry and emerging service sectors, with Lithuania showing relatively broader diversification in employment across sectors.
Source: (Eurostat, 2022[25])
The concentration of greenfield FDI in higher technology manufacturing may facilitate spillovers.
Greenfield FDI, encompassing new establishments or expansions of existing subsidiaries by multinationals, shows distinct patterns across the Baltic states. In Estonia, inflows are primarily concentrated in services, particularly ICT and related digital sectors, reflecting its innovation-driven economy and strong digital infrastructure. The large increase in the “Other” category is mainly driven by renewable energy. Greenfield investment in Latvia’s services sector has fluctuated over time, reflecting shifts in investor confidence and global market conditions. While services continue to attract a substantial share of new foreign investment, particularly in business services, ICT, and transport, activity tends to be cyclical rather than sustained. The real estate sector is driving the spike in the “Other” category. This pattern suggests that investment is driven more by short-term opportunities linked to cost and location advantages than by deeper integration into high value-added or knowledge-intensive segments. (Figure 2.13). In Lithuania, by contrast, greenfield FDI is more strongly directed toward manufacturing, including electronics, machinery, and pharmaceuticals, positioning the country as a regional hub for high-value industrial production.
Note: Manufacturing activities refer to ISIC section C, Services activities to ISIC sections G-U, and other activities include sections A, B, D, E
Source: Based on fDi Markets database
The sectoral distribution of greenfield FDI by technology intensity shows distinct trajectories across the Baltic countries. In the years following EU accession, inflows were largely concentrated in low-tech activities, reflecting limited market size and lower economic sophistication, which made the region less attractive for high-tech or export-oriented manufacturing. Since the 2010s, however, low-tech investment has steadily declined, giving way to more technology-intensive activities. Lithuania has consistently attracted more greenfield FDI in both high-tech and low-tech manufacturing, especially since 2015, reflecting its stronger industrial base and targeted investment promotion. Importantly, in Lithuania this shift appears to reflect a substitution effect from low- to high-tech manufacturing, complemented by sizeable inflows in high-tech services, which peaked in 2022 and suggest growing investor confidence in its digital economy. Estonia shows more volatility in both high-tech manufacturing and services, with visible but fluctuating inflows that align with its small market size and innovation-driven service sector. In Estonia and Latvia, the overall decline in low-tech inflows points instead to a gradual adjustment toward more knowledge- and technology-intensive services. Latvia, while receiving fewer high-tech manufacturing investments overall, saw a notable increase in high-tech services in 2023–2024. Overall, while Lithuania demonstrates sustained momentum across both tech-intensive manufacturing and services, Estonia and Latvia show more episodic but emerging strengths in high-tech services. This structural shift matters for FDI-SME linkages, as the move toward higher-tech investment creates greater potential for knowledge transfer, supply-chain integration, and upgrading opportunities for local firms (Figure 2.14).
The growing share of greenfield FDI in high-tech services and the recent increase in manufacturing FDI might enable technology and knowledge spillovers in the FDI-SME ecosystem. Greenfield FDI, particularly through investment expansions, facilitates the transfer of knowledge and technology from parent companies to new affiliates (OECD, 2023[6]). The Baltic states’ growing startup ecosystems plays a vital role and further enhance this potential by creating partnerships between agile SMEs and foreign investors, particularly in digital and high-tech sectors, supporting collaboration, innovation diffusion, and entrepreneurial growth. Notably, the Baltics’ deep tech sector is among the fastest growing in Europe, with the combined enterprise value of Deep Tech startups more than tripling since 2019. outpacing the EU and the Nordics (StartUp Estonia, 2024[26]).
Note: See Box 2.2 clarifying sectoral groupings used in this figure. Detailed sector/activity classifications from Financial Times’ fDi Markets and Refinitiv data underlying the analysis in this figure differ marginally from standard classifications based on ISIC Rev. 4 used in other figures in this report
Source: Based on fDi Markets database and Refinitiv
Brownfield FDI, primarily in the form of mergers and acquisitions (M&A) by foreign multinationals, follows a distinct pattern in the Baltic states. Since 2015, low technology intensity transactions have dominated the landscape, accounting for 51% of the total deal value across the region, with Lithuania alone making up 75% of this share. These deals have largely involved low-technology service industries, such as retail, transport, and administrative support. This pattern partly reflects structural factors: in high-tech sectors, there are relatively few competitive domestic firms of sufficient scale to be attractive acquisition targets, given the relatively young age of many Baltic start-ups and the limited depth of local capital markets. As a result, foreign investors seeking to enter these activities often establish greenfield projects instead. By contrast, in lower-tech services and industries, where a larger base of established local firms exists, acquisitions are more common (IMF, 2020[27]). M&A activity can provide foreign investors with immediate access to local knowledge, networks, and customer bases, and potentially foster longer-term technology and skill transfer. However, spillovers from brownfield investments tend to materialise more slowly compared to greenfield projects, as integration, restructuring, and alignment with acquiring company practices are lengthy. Additionally, foreign acquisitions often target the most productive domestic firms, which may widen the productivity and innovation gap between foreign and local enterprises in the short term, limiting the diffusion of benefits unless supported by targeted policies to foster linkages and absorptive capacity (OECD, 2023[6]). Similar dynamics appear across the Baltic region, though the scale and sectoral orientation of M&A vary. For instance, inbound deal flow in Estonia and Lithuania tends to concentrate in more knowledge-intensive or service sectors than in Latvia, which records smaller, more traditional-sector transactions (Ellex, 2025[28])
Source: Based on fDi Markets database
FDI misalignment and productivity gaps point to need for targeted investment.
Labour productivity across the Baltic states varies by sector, reflecting differing economic specialisations and efficiencies. Estonia has strong performance in knowledge-intensive services, particularly information and communication, as well as construction and professional services. Latvia shows relatively balanced productivity across manufacturing, trade, and business services, indicating a stable industrial and commercial base. Lithuania performs well in agriculture and financial services but shows relatively lower productivity in high-tech sectors, suggesting room for growth in digital transformation. These trends highlight the importance of continued investment in innovation, digital infrastructure, and skills to enhance productivity, especially in underperforming sectors.
The productivity patterns across the Baltic economies suggest that there is a case for more targeted resource allocation toward high-productivity sectors, particularly knowledge-intensive services and advanced manufacturing. Estonia’s lead in ICT and professional services highlights the potential gains from further investment in digital and high-tech industries. In contrast, Lithuania and Latvia show lower relative productivity in these sectors, suggesting that a gradual reallocation of labour and capital from lower-productivity areas, such as traditional retail or basic services, towards more productive activities could support overall growth and competitiveness (Bingjie and Ugur, 2025[29]).
Labour productivity, gross value added per hour worked, 2023, 2015 = 100
Note: Mining and quarrying includes Energy, water supply and waste management services, Industry also includes Construction, Business economy and services of the business economy exclude real estate. Wholesale and resale trade includes repair of motor vehicles and motorcycles; transportation and storage; accommodation and food service activities. Professional, scientific and technical activities include administrative and support service activities.
Source: (OECD, 2024[30])
FDI is not consistently aligned with the most productive sectors in the Baltics, potentially limiting its contribution to overall productivity growth. While some high-productivity sectors, such as ICT and professional, scientific, and technical services, have attracted significant FDI, particularly in Estonia and Latvia, a substantial portion of FDI is still concentrated in low- to medium-productivity sectors, such as wholesale and retail trade or low-tech services. For example, in Latvia, the financial and insurance sector (a relatively high-productivity sector) accounts for a significant share of FDI stock, but so does wholesale trade, which adds less value per hour worked. In Lithuania, manufacturing has seen a notable surge in FDI, especially in greenfield projects, which is promising given the sector’s role in exports and value chain upgrading, but it also includes sub-sectors with mixed productivity outcomes, such as food processing or basic materials. Moreover, sectors like ICT and professional services consistently outperform others in value added per hour worked, yet FDI remains unevenly spread. This distribution matters because FDI in lower-productivity sectors, while beneficial for firm-level performance, contributes less to aggregate productivity gains. In contrast, a greater share of investment in high-productivity and innovation-intensive activities could yield stronger economy-wide spillovers through technology diffusion, skill upgrading, and enhanced competition (Javorcik, 2004[24]). This misalignment may reduce the potential for FDI-induced productivity spillovers, unless targeted policy action supports redirection of investment toward high-value-added sectors.
Greenfield FDI in R&D operations remains modest across the Baltic states, lagging behind many Western and Nordic peers. Estonia and Latvia record low shares (2% and 1% respectively), while Lithuania fares slightly better at 4%, on par with Finland but still trailing Sweden (5%) and Denmark (6%) (). These figures reflect a broader challenge of the Baltics establishing themselves as destinations for R&D-intensive FDI. Structural constraints such as small domestic markets, limited pools of specialised talent, and the high fixed costs of R&D infrastructure likely discourage multinationals from locating innovation activities in the region (Burinskas et al., 2021[31]). The Baltics could benefit from coordinated regional efforts, including pooled investment in shared innovation infrastructure, integrated talent attraction policies and harmonised policy incentives, to position themselves as a competitive, high-value hub for foreign R&D investment.
The sectoral composition of greenfield FDI in R&D across the Baltics shows shifting priorities and varying degrees of diversification. Lithuania's R&D FDI has remained concentrated in biotechnology, while investments in medical devices and business services have declined. Latvia saw a sharp pivot post-2014 toward consumer electronics and software & IT services, indicating a late but focused entry into high-tech R&D. Estonia has undergone the most significant transformation, moving from earlier dominance in consumer electronics and biotechnology to more diversified R&D in pharmaceuticals, software, and electronic components. These trends reflect maturing ecosystems in Estonia and Latvia, while Lithuania remains more narrowly specialised.
% of total greenfield FDI
Source: Based on fDi Markets database
Source: Based on fDi Markets database
This section assesses the capacity of Baltic SMEs to absorb and apply external knowledge, specifically their ability to identify, assimilate, and leverage new ideas in innovative ways (OECD, 2023). . Stronger absorptive and innovation capabilities increase the likelihood that SMEs will benefit from FDI-driven spillovers. (OECD, 2023[6]). Younger or smaller firms may lack the managerial and financial capacity needed to engage with foreign multinationals, while more established or export-oriented SMEs often have stronger linkages and better access to global value chains.
This assessment considers firm-specific factors that shape absorptive capacity, such as productivity, sector, age, size, and location. Additionally, it evaluates SMEs' access to strategic resources like finance, skills, and innovation assets, using the framework of the OECD SME and Entrepreneurship Outlook (OECD, 2023[32]).
Micro and small firms dominate the Baltic economies, but scale limitations hinder productivity and FDI spillovers
All the Baltic economies are predominantly characterised by micro, small and medium enterprises (MSMEs)3, broadly in line with the EU average where SMEs account for 99% of all firms and around two-thirds of employment and value added. Baltic SMEs differ widely in age, size, sector, market orientation, and geographical reach, resulting in diverse growth trajectories that shape their ability to absorb and benefit from FDI.
In Estonia, SMEs made up 99.5% of all enterprises in 2023, with microenterprises representing over four-fifths of the total. They generated 40% of employment and one-third of value added, the highest SME contribution among EU member states (European Commission, 2024[33]). Estonia also stands out for its dynamic start-up ecosystem, with more than 1 500 start-ups and 10 unicorns, reflecting strong innovation capacity and the ability of young firms to scale rapidly (StartUp Estonia, 2025[34])..
In Latvia, SMEs accounted for 99% of enterprises, with micro firms representing 84%. Their contribution to employment (30.5%) and value added (23.7%) is lower than in Estonia, reflecting the relatively larger role of big firms in the Latvian economy (European Commission, 2024[35]).. This is partly due to foreign investment concentrated in capital-intensive industries such as chemicals, where scale economies favour larger players.
In Lithuania, SMEs similarly made up 99% of enterprises, with micro firms comprising 89% of that total. They accounted for about one-third of employment, with growing participation in sectors such as electronics and ICT where small firms are increasingly integrated into global value chains (European Commission, 2024[36]). This points to a dynamic SME landscape with potential for further productivity and innovation gains, particularly if supported by targeted policies to strengthen digital and technological capabilities.
Note: includes firms operating in the business economy, except financial and insurance activities
Source: OECD Structural business statistics by size class and economic activity (ISIC Rev. 4), https://data-explorer.oecd.org/
Compared to the EU peer countries, the enterprise landscape in the Baltic states is more heavily weighted toward micro and small enterprises (Figure 2.20). This concentration can reflect a combination of factors, including favourable conditions for small-scale entrepreneurship, flexible labour markets, and relatively low entry barriers. It can also point to difficulties in scaling up, due to limited access to growth finance, managerial capacity constraints, and difficulties in achieving economies of scale (Bingjie and Ugur, 2025[29]). While the predominance of microenterprises supports employment and local economic activity, it may also pose challenges for productivity growth and innovation due to resource constraints and limited economies of scale. Productivity gaps between SMEs and large enterprises remain significant across the EU, with micro and small firms operating at around half the productivity levels of their larger counterparts. However, selected ecosystems, such as digital technologies, retail, textiles, and energy-renewables, are expected to drive strong productivity growth among SMEs. These sectors align well with the Baltic countries’ structural priorities and areas of emerging competitiveness, offering promising pathways for scaling and innovation-led development (European Commission, 2024[37]).
% of firms in the economy, by size, 2023
Note: includes firms operating in the business economy, except financial and insurance activities
Source: OECD Structural business statistics by size class and economic activity (ISIC Rev. 4), https://data-explorer.oecd.org/
Despite robust digital infrastructure and well-developed public support systems, many SMEs, especially micro enterprise struggle with structural barriers such as limited managerial capacity, restricted access to finance, and skill shortages (European Commission, 2024[37]). Across the EU, SMEs face a range of barriers that constrain their ability to grow. Common challenges include difficulties in attracting and retaining skilled workers, high energy costs, regulatory burdens, and intense competition.
In Estonia and Latvia, the most frequently cited obstacle was competition from foreign enterprises. In contrast, Lithuanian SMEs most commonly reported challenges in hiring and retaining skilled staff, pointing to growing labour market constraints, especially in high-demand sectors such as ICT and manufacturing. These patterns suggest that while Baltic SMEs operate in a dynamic and open economic environment, targeted support is needed to address talent shortages and strengthen competitiveness amid foreign competition (European Commission, 2025[38]). Improving the scalability of micro firms through a more supportive regulatory environment and better access to strategic resources could unlock significant productivity gains. Moreover, fostering a more balanced firm size distribution would enhance economic resilience and deepen local linkages with foreign multinationals, as larger domestic firms are more likely to engage in supply chains and absorb knowledge spillovers from FDI.
SMEs are about half as productive as large firms, with some sectors show stronger performance.
Labour productivity across Estonia, Latvia, and Lithuania consistently rises with firm size, highlighting a persistent productivity gap between microenterprises and larger firms across almost all sectors. In Estonia, large firms demonstrate particularly strong productivity in sectors such as manufacturing, information and communication, and professional services, whereas micro firms lag considerably behind. Latvia shows similar patterns, with large firms outperforming smaller ones notably in financial services, ICT, and professional, scientific and technical activities. Lithuania mirrors these trends, with productivity differences most pronounced in finance and insurance, manufacturing, and wholesale trade.
In Estonia, MSME productivity in 2022 was approximately 52% of that of large enterprises, while in Latvia and Lithuania, the figures stood at around 50% and 55%, respectively. Despite the overall productivity advantage of large firms, 2022 data reveal that micro, small, and medium enterprises outperformed larger firms in specific sectors across the Baltic states. In Estonia, they demonstrated higher productivity in wholesale and retail trade, information and communication technologies, and administrative and support service activities, sectors where agility, specialised knowledge, or client proximity can provide a competitive edge. In many of these sectors, however, microenterprises are often one-person firms, so the observed productivity advantage may reflect the structure of the sector rather than a true productivity gap. In Latvia, they also showed stronger productivity in wholesale and retail trade, as well as in transportation and storage, which may reflect localised logistics networks and more efficient service models among smaller operators. In Lithuania, financial and insurance activities stood out, with micro, small and medium companies outperforming larger firms in productivity terms, possibly due to the rise of specialised fintech startups. These sector-specific trends highlight opportunities to build on existing strengths within the SME segment by supporting their growth and innovation potential through targeted policy and investment (Figure 2.21).
In the Baltic economies, labour productivity growth has slowed over the past two decades, despite higher productivity among larger firms. A key factor behind this trend could be the declining allocative efficiency, meaning that resources are not flowing effectively to the most productive firms. Market frictions in capital, labour, and goods may be contributing to this misallocation, limiting the rise of fast-growing, high-productivity firms and widening productivity gaps across the business sector (Bingjie and Ugur, 2025[29]).
Notes: Industry does not include construction. Electricity includes gas, steam and air conditioning supply. Water supply includes sewerage, waste management and remediation activities. Wholesale and resale trade includes repair of motor vehicles and motorcycles.
Source: OECD Structural Demographics and Business Statistics (SDBS)
High business churn in the Baltics reflects strong entrepreneurship ecosystem but also challenges for firm survival
Business entry and exit dynamics in the Baltic states highlight both strong entrepreneurial activity and structural challenges. The churn rate, capturing firm births and deaths, shows that in 2022 Estonia recorded one of the highest rates in the EU (41%), reflecting a highly active business environment but also a notably high death rate (over 25%), which may indicate market volatility and barriers to firm survival. Lithuania also displayed elevated churn (31%) and the highest business birth rate in the EU, pointing to a vibrant start-up ecosystem and favourable conditions for new ventures. Latvia’s churn rate was lower at 22% yet still above the EU average, suggesting a somewhat more stable but less adaptive business environment. Business death rates in Latvia and Lithuania were closer to the EU average (8.7%), indicating a relatively balanced turnover of enterprises. While high churn can signal innovation and competitive pressure, it also raises concerns about firm resilience, whereas lower churn may reflect either stability or market entry barriers such as limited access to finance, skills, or regulatory complexity (Figure 2.22).
Enterprise birth rates provide valuable insight into economic dynamism, but their impact on employment is equally significant. New businesses are essential drivers of job creation, skills development, and economic diversification, particularly in high-growth sectors. While many start-ups begin with limited staffing, those with scalable business models can contribute substantially to labour market growth over time. In 2022, Estonia stood out with nearly 6% of employment in active enterprises generated by newly born firms, followed by Lithuania (3.5%) and Latvia (3%), all exceeding the EU average of 2.3% (Eurostat, 2025[39]), indicating high levels of market absorption.
Note: Birth, death and churn rates are given for all employer enterprises.
Source: (Eurostat, 2024[40])
Baltic SMEs show growing internationalisation, but scale and resource barriers limit broader expansion
SMEs in Estonia, Latvia, and Lithuania demonstrate increasing levels of internationalisation, driven by their small domestic markets and close integration with the EU economy. Many Baltic SMEs engage in cross-border trade, particularly within the Nordic and EU regions, and are active participants in global value chains. However, barriers such as limited scale, resource constraints, and regulatory complexity still hinder broader international expansion (Mueller‐Using, Urban and Wedemeier, 2020[41]). Across all three Baltic states, micro enterprises dominate the firm landscape, with their share gradually increasing over time, while small, medium, and large firms account for relatively stable and much smaller proportions of total enterprises (Figure 2.23).
Source: (OECD, 2023[42])
Export data reflects the contribution of enterprises of different sizes to total export values based on the number of employees In Estonia, although micro enterprises account for 70% of exporting firms, their contribution to the total export value is likely more limited, as larger firms typically dominate export volumes. A similar pattern is observed in Latvia and Lithuania, where micro firms make up two-thirds or more of exporting enterprises (65% and 60%, respectively), but the share of small and medium firms is relatively higher, especially in Lithuania, where SMEs (excluding micro) make up 39% of exporters. This suggests that while most exporting firms are micro in size, small and medium enterprises are more likely to contribute a greater share of export value. Overall, the data points to a broad base of SME export participation, especially among micro enterprises in the Baltics, but also underscores the need to improve the scalability and competitiveness of these firms, so they can move from more niche export activities toward more substantial roles in global value chains.
Nevertheless, the increasing number of exporting enterprises is increasing at a very slow pace. Recent survey data suggests a declining interest in international expansion among Estonian firms, with only 6% planning to enter entirely new export markets in 2024, down from 10% the previous year. This contrasts with Lithuanian firms, where the share targeting new markets is twice as high, indicating stronger outward momentum. Similarly, when it comes to deepening presence in existing foreign markets, around 20% of Latvian and Lithuanian companies express such intentions, compared to just 10% in Estonia. The inward focus may limit long-term growth potential, particularly in small economies like the Baltics that depend on external demand (SEB, 2025[43]).
Source: (Eurostat, 2023[44])
The export structure by enterprise size in Estonia, Latvia, and Lithuania reveals distinct patterns in the contribution of firms to total export values. In Estonia, medium-sized enterprises have consistently accounted for the largest share of exports, reaching nearly 50% in 2021, although this has declined slightly in recent years. The role of small and micro firms remains modest but has shown a slight upward trend, with micro firms contributing 18% in 2023. In Latvia, medium-sized firms also lead in export contributions, though their share has gradually declined from 39% in 2013 to 29% in 2023. Notably, the share of small enterprises has increased, reflecting a broader base of exporting firms. Micro firms, however, remain relatively marginal exporters. This partly reflects the growing export dominance of large, often foreign-owned enterprises, alongside slower productivity growth and scaling constraints among domestic medium firms. Lithuania’s export profile is distinct: large enterprises dominate, consistently contributing nearly half of total exports, with 49% in 2023. This points to a more concentrated export structure, where micro and small firms play a comparatively limited role. Overall, while Estonia and Latvia show greater SME participation in exports, Lithuania relies more heavily on large firms, suggesting differences in export diversification and SME internationalisation across the region.
In the Baltic states, there is a notable gap between the number of exporting firms and their contribution to total export value. Microenterprises dominate in terms of how many firms engage in export activity, reflecting a broad entrepreneurial base and openness to international markets. However, their role in terms of export value remains relatively modest. In contrast, medium-sized firms in Estonia and Latvia, and large firms in Lithuania, contribute a disproportionately high share of exports despite representing a much smaller share of exporting enterprises. This suggests that while many smaller firms are active internationally, few have scaled their operations to compete effectively in global markets.
In the Baltic states, recent inflation surges and rising nominal labour costs have increased the cost base for exporters, with Estonia and Latvia seeing a significant appreciation of their real effective exchange rate relative to trading partners in recent years. This has raised internationalisation costs for SMEs, which often lack the financial buffers of larger firms to absorb higher wages, utilities, and input prices, making it harder to compete on price in foreign markets (IMF, 2025[7]).
Only a small share of Baltic enterprises trade with more than 20 countries, reflecting a relatively limited geographical diversification in their international activities. In Estonia, just 1% of firms both export and import to over 20 markets, while in Latvia the share is slightly higher for exporters at 2%, and in Lithuania at 3%. Despite the small number of highly diversified traders, these firms account for a disproportionately large share of trade value, for example, Lithuanian exporters trading with more than 20 countries generate 55% of total exports, compared to 25% in Estonia and 32% in Latvia. A similar pattern holds for imports, where these few firms handle between a quarter and nearly half of total import value. This suggests that in all three countries, international trade is heavily concentrated among a small group of highly internationalised enterprises, which are likely to be larger, more competitive, and more integrated into global value chains (Figure 2.25).
Source: (OECD, 2023[45])
SMEs contribute strongly to innovation, but low and uneven investment limits their ability to scale and benefit from FDI spillovers
The Baltic SME ecosystem plays a central role in generating knowledge-based capital, with small and medium-sized enterprises accounting for a disproportionately high share of business R&D compared to most EU peers. While very large enterprises (over 500 employees) contribute on average 22% of business-sector R&D expenditure in the Baltics, and large firms around 7%, the majority of R&D investment originates from MSMEs. In Estonia, MSMEs account for 71% of total business R&D, 56% in Latvia, and 84% in Lithuania, averaging 70% across the three economies. This is far above the levels observed in several advanced EU economies, where SME contributions to business R&D are considerably lower (21% in Sweden, 27% in Denmark, 31% in the Netherlands, 30% in Italy, and 35% in Finland). This high SME share in R&D reflects both the structural characteristics of the Baltic business landscape, which is dominated by small firms, and the innovative orientation of many SMEs, particularly in high-tech services and manufacturing. However, the reliance on SMEs for such a large proportion of R&D also suggests potential vulnerabilities, as smaller firms often face constraints in scaling innovations and bringing them to market without strategic partnerships, including with foreign investors. (Figure 2.26).
The R&D expenditure of the Baltic business sector remains low by international standards, with notable differences across the three economies. In 2023, business-sector R&D spending per inhabitant amounted to EUR 514 in Estonia, EUR 172 in Latvia, and EUR 270 in Lithuania, well below the EU average of EUR 861. This gap reflects both structural and capacity-related factors, including the predominance of micro and small enterprises with limited financial and human resources for sustained R&D investment, as well as a comparatively narrow base of R&D-intensive industries. (Eurostat and OECD, 2024[46]).
Across the Baltic states, low and uneven R&D investment limits the capacity to fully leverage FDI for technology and knowledge spillovers. Estonia’s business R&D remains below the EU average and concentrated in ICT, while Latvia records the lowest business R&D expenditure in the EU. Lithuania is a moderate innovator with fast growth but stagnant R&D expenditure and a fragmented, underfunded public research system (European Commission, 2025[47]) (European Commission, 2025[48]) (European Commission, 2025[49]). These gaps constrain SME absorptive capacity, particularly outside high-tech sectors, reducing the potential benefits from foreign investment. Sustained national funding, stronger science-business linkages, and targeted support for SME digitalisation and advanced technology adoption are essential to maximise the productivity and innovation gains from FDI.
Note: Data for Denmark comes from the year 2020. No data is available for micro enterprises in Sweden and the Netherlands. Data for Lithuania for micro enterprises comes from the year 2020. Data for large and very large enterprises for Estonia comes from the year 2020.
Source: OECD Research and Development Statistics Database, 2021 (Accessed 6 August 2025).
Despite the presence of innovative SMEs in the Baltics and a strong start-up ecosystem built on the premise of innovation, a significant share of SMEs in Estonia, Latvia, and Lithuania have yet to introduce any innovative processes into their operations. The reasons vary across countries and firm sizes but often point to structural and perception-based barriers. In Estonia, the most commonly cited reason among SMEs is the perceived lack of need for innovation, suggesting that many firms may operate in stable market niches or have limited competitive pressure to innovate. In Latvia, medium-sized enterprises most frequently report lack of resources, including financial, human, and technical capacities, as the main constraint, while smaller firms echo Estonia’s pattern of citing no perceived need. In Lithuania, SMEs similarly emphasise the absence of a perceived need for innovation, which may indicate a gap in awareness about potential productivity and competitiveness gains (European Commission, 2022[50]). These findings point to the importance of not only improving SMEs’ access to resources for innovation but also raising awareness of the tangible benefits of adopting new processes, technologies, and business models. (Figure 2.27).
Percentage of innovative firms by reason, 2022
Note: Large, medium and small: % of innovative firms in innovation core activities (Com. Reg. 995/2012) rating the importance of a barrier as “high”, by size class. Small firms = from 10 to 49 employees. Medium-sized = from 50 to 249 employees. Large = 250 employees or more. Micro firms with less than 10 employees are not included.
Source: Eurostat Community Innovation Survey (CIS), 2020 (accessed 6 June 2024).
In the Baltic states, SMEs play an important role in driving innovation, though their performance varies across countries and innovation types. In Estonia, SMEs introducing product innovations outperform the EU average, while business process innovation remains closer to the EU average. Collaboration among innovative SMEs is strong, reflecting the country’s well-developed digital infrastructure and integration in cross-border value chains. Latvia lags behind the EU average in both product and business process innovation among SMEs, with lower levels of collaboration, pointing to structural challenges in fostering innovation networks and knowledge exchange. Lithuania, meanwhile, performs well above the EU average in business process innovation and slightly above in product innovation, yet SME collaboration rates remain modest. Across the Baltics, these patterns suggest that while individual innovation performance is improving, especially in Estonia’s product innovation and Lithuania’s process innovation, there is considerable untapped potential in fostering greater cooperation among SMEs, research institutions, and foreign investors to enhance knowledge spillovers and integration into global innovation networks (Figure 2.28).
Note: Underlying data relate to share of SMEs who introduced product/process, marketing/organisational innovations or that engage in innovation cooperation activities with other firms (EIS 2023 Methodology Report.docx (europa.eu).
Source: Based on Eurostat, 2025 (European innovation scoreboard (europa.eu).
Baltic SMEs are making steady progress in digitalisation and AI adoption
The digitalisation of the Baltic business sector has improved in recent years, but progress remains uneven across countries. In Estonia, 71.2% of SMEs have at least a basic level of digital intensity, slightly below the EU average of 72.9%. While adoption of cloud computing is strong (52.6% vs 38.9% EU average), data analytics use lags behind (25.6% vs 33.2%), slowing alignment with EU Digital Decade targets. Lithuania faces greater challenges, with only 66.3% of SMEs reaching a basic digital intensity level. Uptake of advanced technologies is hindered by procedural complexity and limited awareness, resulting in a lag both in SME digitalisation and in broader adoption of advanced tools. Latvia has made notable gains, particularly in SME digitalisation, where the share of firms with basic digital skills rose by 12.5% to 48.2%, and cloud adoption increased by 14.3%. Nonetheless, Latvia still trails the EU average, and all three Baltic states face the common challenge of boosting SME adoption of advanced digital technologies to enhance competitiveness (European Commission, 2025[51]). Stronger SME digitalisation is a prerequisite for maximising the benefits of foreign direct investment, as digital capabilities are increasingly essential for engaging in cross-border supply chains, collaborating with foreign multinationals, and absorbing technology spillovers. Without targeted measures to address these gaps, SMEs risk missing opportunities in high-value, digitally driven markets.
Across the Baltic states, AI adoption has accelerated sharply across all enterprise sizes, reflecting a rapid shift toward digital transformation. In 2024, Estonian firms slightly outpaced the EU average in AI uptake (13.9% vs 13.5%), marking a notable milestone in digital competitiveness. Latvia saw the fastest growth, with the share of businesses using AI almost doubling to 8.8%, although still falling short of the EU average. Lithuania experienced a similar leap, from 4.9% in 2023 to 8.8% in 2024, yet remains among the lower adopters in the EU. In all three countries, large enterprises continue to lead AI integration, benefiting from greater access to financial resources, skilled talent, and technological infrastructure. The adoption gap between small and large firms is less pronounced in Estonia, suggesting more inclusive digital diffusion, while in Latvia and Lithuania disparities remain wider (Figure 2.29). For SMEs, the costs of acquiring AI-ready infrastructure, coupled with shortages of specialised skills, remain significant barriers. Without targeted support to ease these constraints, through skills development, accessible financing, and collaborative innovation platforms, many SMEs risk being left behind in AI-enabled value chains, limiting their ability to capture productivity gains and participate in high-tech FDI spillovers.
Note: Data for micro enterprises is unavailable. All activities (except agriculture, forestry and fishing, and mining and quarrying), without financial sector are included.
Source: Based on Eurostat, 2025
The types of AI technologies adopted vary considerably across the Baltic states, reflecting differences in firm size, resources, and strategic priorities. Text mining emerges as the most widely used AI application across all three countries and enterprise sizes, in line with EU-wide patterns. Among large enterprises, machine learning for data analysis is particularly prevalent, leveraging greater technical capacity and data resources. By contrast, smaller firms, constrained by limited budgets and in-house expertise and skills, tend to gravitate towards more accessible and cost-efficient solutions such as natural language generation tools and AI-driven robotic process automation to streamline administrative tasks and customer interactions. While the adoption gap between SMEs and large enterprises persists across the region, mirroring the EU average, it is notably narrower in Estonia, possibly reflecting its more mature digital ecosystem and stronger SME digital readiness. These patterns suggest that while SMEs are engaging with AI, their uptake is affected by affordability, ease of integration, and immediate operational benefits, rather than by more resource-intensive applications (Figure 2.30).
Note: Data for micro enterprises is unavailable. All activities (except agriculture, forestry and fishing, and mining and quarrying), without financial sector are included.
Source: Based on Eurostat, 2025
SMEs frequently lack the expertise and capabilities to evaluate their technological readiness and identify suitable AI and other digital solutions. Closing this knowledge gap is essential to enable informed investment decisions and effective adoption. Providing tailored guidance, skills development, and targeted financial support for AI-driven and other digital upgrades could help narrow the adoption gap between smaller and larger firms. For SMEs, leveraging AI and digital tools is increasingly critical for scaling operations, expanding buyer networks, and entering new markets without incurring the high costs associated with physical expansion or additional distribution infrastructure (OECD, 2025[52]).
Strengthening training systems, particularly in ICT, can help Baltic SMEs overcome skills shortages
The Baltic states face persistent skills shortages, particularly in high-skilled, technical, and STEM-related occupations. Employers across the region report difficulties in filling vacancies in ICT, engineering, and skilled trades, with shortages especially acute among SMEs. These constraints are driven by demographic ageing, rapid technological change, and limited participation in adult learning and vocational training. While Estonia has introduced strong skills forecasting mechanisms to better align training with labour market needs, and Lithuania and Latvia are expanding efforts to improve training provision, gaps remain in the scale, quality, and accessibility of upskilling opportunities. Addressing these shortages will require coordinated efforts to strengthen vocational education, promote lifelong learning, and better link education systems with private sector needs (European Centre for the Development of Vocational Training, 2024[53]), (OECD, 2020[54]) (OECD, 2021[55]).
Skills shortages affect SMEs more acutely than larger firms. Smaller firms often lack the networks and market visibility to identify suitable talent and face financial constraints that limit their ability to offer competitive remuneration to high-skilled employees. Unlike large enterprises, which typically maintain dedicated HR departments and structured training programmes, SMEs have limited capacity to invest in workforce development, hindering their ability to upgrade skills and knowledge internally. Yet, access to the right skills is critical for competitiveness, enabling innovation, accelerating technology adoption, fostering cooperation with frontier firms, and moving towards more sophisticated, higher-value activities. (OECD, 2023[6]).
Skills shortages and mismatches remain a major barrier to investment and productivity growth across the Baltic states. In Estonia, 32% of businesses cite the lack of skilled workers as their main investment obstacle, with gaps in ICT, engineering, and software. In Latvia, 83% of firms, well above the EU average of 77%, report skills shortages as a key constraint, with sectors like textiles and those central to the green and digital transitions especially affected. In Lithuania, 76% of firms identify skills availability as a barrier to long-term investment, with challenges most acute for smaller firms and high-skill industries. Across the region, limited vocational training appeal, low adult learning uptake, and misalignment between education outputs and labour market needs risk deepening shortages as the green and digital transitions accelerate (EIB, 2024[56]).
According to the OECD Skills for Jobs Database, all three of the Baltic states face persistent shortages in education and training skills, also observed across most comparable EU economies, highlighting constraints in the capacity to develop and upgrade workforce competencies. Estonia and Lithuania additionally report shortages in business process skills, while Estonia and Latvia face deficits in digital skills, which are increasingly important for competitiveness in technology-driven sectors. Surpluses, by contrast, vary widely: Estonia shows a surplus only in production and technology knowledge; Latvia records its largest surplus in resource management, with smaller surpluses in business processes and production/technology knowledge and Lithuania reports surpluses in both digital skills and production/technology knowledge. These mismatches suggest that while certain skills are underutilised, structural gaps in high-demand competencies, particularly in digital and business process areas, pose ongoing challenges to innovation and productivity growth (Figure 2.31).
Note: Business processes includes skills on the following: clerical, customer and personal service, sales and marketing. Digital skills include skills on the following: computer programming, digital content creation, digital data processing, ICT safety, networks and servers, office tools and collaboration software, web development and cloud technologies. Production and technology knowledge includes skills on the following: building and construction, design, engineering, mechanics and technology, food production, installation and maintenance, production and processing, quality control analysis, telecommunications, transportation. Resource management includes skills on the following: administration and management, management of financial resources, management of material resources, management of personnel resources, time management.
Source: OECD database on Skills for Jobs, OECD Skills For Jobs (oecdskillsforjobsdatabase.org).
Skills shortages in SMEs are also driven by the lack of a well-developed system of professional training (OECD, 2019[57]). On average Baltic SMEs perform relatively low in staff training. Disparities emerge between Baltic countries and firm sizes regarding the level of constraint in the availability of an adequately educated workforce (Figure 2.32 Panel C). Large-sized firms in Estonia are on par with Sweden, Finland and Denmark at around 15%, with large Lithuanian firms standing at 25%. Comparatively, that figure is significantly higher for large Latvian firms which face the biggest constraints in all comparator countries at 40%.
In terms of firm-based training provision (Panel A), SMEs in the Baltic states are largely comparable, with Latvian and Estonian firms slightly ahead of their Lithuanian counterparts. Around 60% of medium-sized firms in Latvia provide training, compared to approximately 50% in Estonia and 40% in Lithuania. (Figure 2.32 Panel B) presents an uneven picture. Estonian medium and large firms report relatively high employee participation rates, with medium firms approaching 55% and large firms exceeding 60%. Lithuania shows relatively high participation among medium-sized firms but lower levels among large firms. Latvia displays more moderate participation across both medium-sized and large firms4.
Note: Panel A shows the share of enterprises that have provided continuing vocational training (CVT) to their employees; Panel B the share of employees that have participated in CVT courses; and Panel C the share of enterprises that identify inadequately educated workforce as a major constraint for their business operations. The data cover the following years for each country: Denmark (2020), Finland (2020), Italy (2024), Lithuania (2019), Latvia (2024), and Sweden (2024).
Source: Eurostat (2020[58]), Continuing Vocational Training in Enterprises Survey, https://ec.europa.eu/eurostat, and World Bank Enterprise Surveys (2022), www.enterprisesurveys.org
Upskilling and reskilling are crucial for strengthening SMEs’ competitiveness and enabling the adoption of new technologies, which in turn can enhance their participation in MNE networks and global value chains (OECD, 2020[59]) . Offering financial and technical support to SMEs to develop on-the-job training programs can help close the training gap between small and large firms, promote the diffusion of new technologies within smaller enterprises, and boost their productivity and overall competitiveness.
Enterprise-provided training to develop ICT skills is a critical enabler for SMEs to benefit from FDI spillovers. When SMEs upgrade their workforce’s digital capabilities, they become better equipped to adopt advanced technologies, integrate into global value chains, and meet the standards required by foreign investors (Lester and Charles, 2024[60]). Strong ICT skills facilitate more effective collaboration with multinational enterprises, enhance absorptive capacity, and support the transfer of knowledge and technology. Without targeted and accessible training, SMEs risk falling behind in digital readiness, limiting their ability to capitalise on the innovation, productivity, and market access opportunities that FDI can bring (World Bank, 2020[61]).
In the Baltic states, the share of enterprises offering ICT skills training to their personnel generally lags behind the EU average across all firm size categories, underscoring a structural gap in workforce upskilling. The only exception is large enterprises in Latvia, where 72% provide ICT training compared to the EU average of 69%. Lower training rates among SMEs across the region risk slowing digital adoption, weakening SMEs’ ability to integrate advanced technologies, and reducing their capacity to absorb knowledge and technology spillovers from FDI. Closing this gap through targeted skills development initiatives could significantly enhance the competitiveness and innovation potential of Baltic SMEs in increasingly digitalised markets (Figure 2.33).
Source: (Eurostat, 2025[62])
SME access to finance remains constrained in the Baltic states.
SMEs in the Baltic region are facing an increasingly restrictive financing environment. Following surging inflation and higher interest rates, both debt and equity financing have come under pressure. Banks have tightened lending criteria, reducing the availability of SME loans, while venture capital and leasing activities have also declined, even though factoring shows some resilience (OECD, 2024[63]).
Since 2021, SME lending in Estonia has rebounded following a COVID-19 related decline. This recovery has been supported by higher interest rates, non-debt support measures, and tax incentives for reinvestment, which reduced overall borrowing needs. However, inflation has prompted SMEs to take larger loans, weakening the relevance of the under EUR 1 million loan category as a proxy. Interest rates rose to 4.08% in 2022, while venture capital activity surged, driven by a strong start-up ecosystem, and leasing rebounded sharply after its 2020 slump (OECD, 2024[64]).
In Latvia, limited access to finance remains a major barrier to business investment. Following the global financial crisis, the economy underwent deep deleveraging, shaped by strong risk aversion in the banking sector. Weak competition in finance has kept lending rates high and collateral requirements strict, particularly constraining smaller firms. Additionally, shallow equity and bond markets and a lack of institutional investors further restrict non-bank financing options (OECD, 2024[65]).
In 2022, Lithuanian SMEs increased borrowing to meet higher working capital needs caused by rising input prices, though overall indebtedness remains low, with internal funds still the primary financing source. The SME loan share rose to nearly 59%, supported by narrowing interest rate spreads with larger loans, despite slightly tighter lending standards. Peer-to-peer lending expanded sharply, while state aid via INVEGA and EU funds remained important. Venture capital continued to grow steadily, though demand for other alternative financing remained limited (OECD, 2024[63]).
Between 2018 and 2025, venture capital expenditures as a share of GDP in the Baltic States evolved in different directions. Estonia recorded a sharp increase, more than doubling from 118.89 in 2018 to 392.33 in 2025, reflecting its strong start-up ecosystem and growing attractiveness to investors. Lithuania saw even faster growth, more than tripling from 46.77 to 201.27, signalling a rapidly maturing venture capital market and improved investor confidence. Latvia, by contrast, recorded a decrease of around -87%, from 270.67 in 2018 to 35.11 in 2025, which may reflect cyclical factors, shifts in the composition of investments, or changes in the availability of high-growth projects (Figure 2.34 Panel A).
Access to finance in the Baltic states remains uneven, with SMEs consistently facing greater constraints than larger firms. A notable financing gap persists between SMEs and larger firms in Estonia. In 2023, only 27% of investing firms relied on external finance, below the EU average, with micro and small enterprises (34%) more dependent than medium and large firms (23%), indicating structural barriers in credit access. Bank lending remains the dominant source of external finance, broadly in line with the EU average. However, access is uneven: while 93% of medium and large firms using external finance obtained bank loans, the share falls to just 67% for micro and small firms. Financing constraints have more than doubled since 2023, largely due to higher rejection rates or perceptions of prohibitively high costs. The burden is particularly acute in services (7.9% rejection rate) and infrastructure (9.6%), underscoring the structural challenges SMEs face in securing affordable credit (European Investment Bank, 2024[66]).
In the past financial year, 47% of Latvian firms reported relying on external finance, a share that has remained largely stable compared to 2023. Among these firms, medium and large enterprises accounted for 53%, while micro and small firms represented 33%. For firms seeking external finance, bank loans remain the primary source of funding, although Latvian firms rely on them slightly less than their counterparts across the EU. The disparity in access to bank financing between large and small firms is relatively modest, with 76% of large firms and 66% of small firms using bank credit. The proportion of financially constrained firms in Latvia has shown a slight decline since the previous year. Nevertheless, Latvian firms continue to face higher financial constraints than the EU average, largely due to a greater share of rejected funding applications. This issue is particularly pronounced among micro and small enterprises, which experienced a rejection rate of 12.8%, more than twice that of larger firms (European Investment Bank, 2024[67]).
In 2023, 49% of Lithuanian firms that made investments reported relying on external finance, a share largely unchanged from 2024. The disparity in access to external finance between medium and large enterprises and micro and small firms is substantial, with 59% of larger firms compared to only 25% of smaller ones. For Lithuanian firms using external finance, bank loans are a less dominant source compared with the EU average, with 54% of firms relying on banks versus 81% across the EU, suggesting SMEs turn to alternative financing sources. Unlike in many other countries, the difference in bank financing between small and large firms in Lithuania is relatively minor. The proportion of financially constrained firms in Lithuania exceeds the EU average, standing at 14% compared to 7% for the EU overall. This share has increased slightly from the previous year, primarily driven by a rise in rejected financing applications. Rejections are particularly concentrated in the manufacturing sector, where 10.3% of firms experienced unsuccessful applications (European Investment Bank, 2024[68]).
Policy action in the Baltic states should prioritise strengthening SME access to finance, recognizing the persistent disparities between small and large firms across Estonia, Latvia, and Lithuania. Expanding SME-targeted credit guarantee schemes can mitigate the high rejection rates that disproportionately affect smaller enterprises, particularly in sectors such as services, infrastructure, and manufacturing. Diversifying funding channels, through greater development of venture capital, trade credit, and alternative financing instruments, would reduce overreliance on traditional bank lending, which remains unevenly accessible across the region. Improving lending transparency and efficiency, including clearer application processes and more predictable credit assessments, can help lower the perceived costs and barriers for SMEs seeking finance.
The interest rate spread between small and large firms in the Baltic states highlights notable differences in borrowing costs and credit accessibility. In Estonia, the spread decreased from 0.93 in 2021 to 0.64 in 2022, indicating a modest narrowing of the cost gap between SMEs and larger enterprises, though smaller firms still face higher borrowing costs. Latvia shows a sharper decline, from 1.5 in 2021 to 0.9 in 2022, suggesting some improvement in the relative affordability of credit for SMEs, yet the spread remains significant compared with Estonia and Lithuania. Lithuania exhibits the lowest interest rate spread in the region, falling from 0.29 in 2021 to 0.1 in 2022, indicating that small and large firms face nearly equal borrowing costs and that financing conditions for SMEs are comparatively more favourable. Overall, while Estonia and Latvia still show a considerable differential in financing costs for smaller firms, Lithuania’s narrow spread points to a more inclusive credit environment, highlighting regional disparities in SME access to affordable finance (OECD, 2024[64]).
The data on access to finance for R&D and innovation highlights distinct patterns among the Baltic states. In Estonia, large firms rely more heavily on debt finance (23%) than equity finance (4.6%), while medium and small firms also show a strong preference for debt (16.6% and 11%, respectively) with very limited recourse to equity. Latvia exhibits a similar pattern, with debt finance usage at 12.2% for large firms, 13.8% for medium firms, and 10% for small firms, while equity financing is nearly absent, particularly for large firms. Lithuania presents the lowest overall reliance on both debt and equity finance, with large firms at 10% (debt) and 1.5% (equity), medium firms at 9.1% and 3.2%, and small firms at 8.9% and 3.1%, indicating limited financial support for innovation activities across firm sizes (Figure 2.34 Panel B). These figures suggest that in all three Baltic states, SMEs predominantly rely on debt rather than equity for innovation funding, with Lithuania showing the most constrained financing environment, highlighting the need for targeted policy measures to expand access to both debt and equity sources for R&D-intensive smaller firms.
In Estonia, Latvia, and Lithuania, the private sector still relies predominantly on commercial bank lending, despite some recent shifts toward alternative financing. However, the small scale of domestic capital markets, combined with low liquidity and a narrow base of active transactions, discourages deeper participation from investors. This structural weakness limits firms’ ability to diversify their financing sources, reduces the attractiveness of the markets for domestic and international investors, and constrains broader capital market development in the region. For SMEs in particular, insufficient access to diverse financing options hampers their capacity to scale innovative activities, undermines economic resilience, and holds back productivity growth. While capital markets remain underdeveloped and private sector funding options scarce, bank-based financing is also on a gradual decline, further highlighting the financing gap. Against this backdrop, current efforts to develop a pan-Baltic capital market are encouraging, as they seek to deepen financial integration and expand access to equity and debt instruments. The introduction of new products, such as a unified regional index classification and harmonized listing rulescould broaden the investor base, especially by attracting more international investors, while also fostering a stronger ecosystem for venture capital, private equity, and institutional investment in SMEs. Strengthening these alternative financing channels will be critical to unlocking the innovation potential of Baltic SMEs and reducing their dependence on traditional bank financing. (EBRD, 2022[69]).
Note: Underlying data for Panel A relates to venture capital expenditures which is defined as private equity being raised for investment in companies. Management buyouts, management buy-ins, and venture purchase of quoted shares are excluded. Venture capital includes early-stage (seed + start-up) and expansion and replacement capital. (EIS 2023 Methodology Report.docx (europa.eu)).
Source: European Innovation Scoreboard
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← 1. Total investment includes business, government and household investment.
← 2. Data for Latvia is available only for FDI from immediate countries of origin.
← 3. MSMEs, businesses with fewer than 250 employees, are dominated by microenterprises. However, this category may include solo business activities linked to non-traditional work arrangements, which can blur the picture of true microenterprise dynamics.
← 4. For Latvia and Estonia, no data is available for small firms.