This chapter focuses on the governance framework for promoting foreign direct investment (FDI) and the development of small and medium-sized enterprises (SMEs) across Latvia, Lithuania, and Estonia. It examines the institutional structures responsible for designing and implementing FDI, SME, innovation, and regional development policies. The chapter explores policy co-ordination mechanisms to ensure coherence across national, regional, and local government tiers and among key institutions. Additionally, it analyses the monitoring and evaluation framework for policy implementation, highlighting areas for improvement in stakeholder engagement to enhance the effectiveness of FDI-SME linkages in the three Baltic states.
Strengthening FDI and SME Linkages in the Baltic States
Abstract
Strengthening the impact of foreign direct investment (FDI) on small and medium sized enterprises (SMEs) in the Baltic states can benefit from public intervention across various policy domains, including investment promotion, SME internationalisation, innovation, and regional development. Governance frameworks across these policy domains needs robust coordination mechanism to ensure policy coherence across ministries and implementing bodies. The Baltic states display relatively integrated structures compared to peer economies. Estonia implements a highly integrated approach, with a single ministry overseeing a single consolidated agency. Lithuania and Latvia have partially integrated models, where responsibilities are shared across multiple agencies reporting to a lead ministry. In both the investment promotion agency and the SME agency report to the same ministry, facilitating cross-policy alignment. On the other hand, innovation and regional development policies often fall under the responsibility of separate ministries, introducing potential co-ordination challenges. Despite this, the governance models in the Baltics are less fragmented than in peer economies where multiple agencies report to different line ministries.
In the Baltics, investment promotion is administered by dedicated investment promotion agencies (IPAs) that also contribute to SME development. Estonian Business and Innovation Agency supports investor services aligned with national sector priorities, ensuring strong co-ordination with SME and innovation policies. In Latvia, Investment and Development Agency (LIAA) operates as a one-stop agency supporting investors, exports, and start-ups through dedicated programmes and targeted services. Meanwhile, Invest Lithuania provides advisory services to foreign firms and supports regional development through incentives and Special Economic Zones’ (SEZ) development. While regional development remains under the mandate of separate ministries across the Baltic states, the overall institutional structure could benefit from greater subnational presence of FDI-SME agencies. Notable regional presence exceptions include Estonia’s IVIA offices across the Ida-Viru County, LIAA’s subnational offices across 20 regions and Lithuania’s Innovation Centre’s regional offices in Kaunas, Klaipėda and Panevėžys.
To effectively administer FDI-SME policies, the Baltic states could better leverage both strong horizontal and vertical policy co-ordination mechanisms. Despite formal governance structures such as high-level councils, thematic working groups, and dedicated advisory bodies, inter-institutional collaboration remains limited. Fragmented responsibilities, overlapping mandates, and a reliance on informal coordination practices may limit coherence across investment, SME, innovation and regional development agendas.
In the Baltic states, several strategic documents have been adopted in recent years to articulate priorities related to strengthening FDI-SME linkages. National strategies and action plans play a key role in policy co-ordination given their cross-cutting nature, but their effective implementation often requires a whole-of-government approach.
The application of monitoring and evaluation (M&E) frameworks tools across the Baltic states remains limited. A large amount of policy initiatives lacks systematic evaluation mechanisms or clearly defined performance indicators. More broadly, ex post evaluation practices across the region tend to focus narrowly on administrative burdens, with limited assessment of policy effectiveness or impact. Strengthening M&E frameworks with clearer objectives, key performance indicators, and regular review cycles would enhance accountability and support evidence-based policy adjustments. Regulatory impact assessment (RIA) practices also show room for improvement, despite ongoing progress. While RIAs are mandatory for primary legislation in Latvia and Lithuania, implementation varies across subordinate regulations, and parliamentary initiatives are often exempt. Stakeholder engagement is relatively strong, particularly in Estonia.
Strengthen regional and cross-border co-ordination to improve the implementation of FDI-SME policies. National and subnational institutions in the Baltic states could reinforce co-operation both regionally and across borders to enhance the delivery and impact of FDI-SME policies. At the domestic level, strengthening co-ordination among regional branches, supported by adequate resources and capacity building, can help tailor national policies to local needs and ensure coherent implementation. At the pan-Baltic level, deeper collaboration through existing intergovernmental platforms such as the Baltic Assembly could further facilitate joint projects, knowledge exchange, and policy alignment in areas such as investment promotion, innovation, and SME development.
Strengthen co-ordination mechanisms for FDI-SME policy. Limited thematic co-ordination in SME and investment policy highlights the need to expand the mandate of the Centre of Government to enhance policy coherence, reduce duplication, and ensure better alignment across ministries and implementing bodies. Strengthening co-ordination mechanisms is key to bridge policy gaps and foster cross-institutional collaboration.
Strengthen monitoring and evaluation (M&E) frameworks. Further embed outcome-based M&E approaches across FDI-SME policies to assess their effectiveness and long-term impact. This could include the use of quantifiable indicators tailored to the Baltic context, such as measures of FDI contributions to SME productivity and innovation. Existing initiatives across the region could provide useful models for developing more systematic, comparable, and evidence-based evaluation practices across the Baltic states.
Strengthen the implementation and oversight of regulatory impact assessment (RIA). The Baltic states should ensure consistent implementation of RIAs across primary and subordinate regulations, aligning practices with EU standards. This can be done through the establishment of an oversight committee to ensure the quality of RIA reports, reduce regulatory burdens on SMEs, and align regulations with strategic goals of the Baltic states. Setting clear thresholds for full assessments and regulatory updating regulatory guidance can further improve the efficiency of RIA processes.
Policy recommendations for Estonia:
Strengthen the strategic role of investment promotion within the Estonian Business and Innovation Agency (EBIA). Enhance the visibility and operational capacity of the investment promotion function within EBIA to reinforce its ability to attract and facilitate investment. While Estonia’s integrated institutional framework promotes coherence and administrative efficiency, the broad mandate of EBIA may dilute focus on specialised investment functions. Ensuring clear strategic direction and sufficient operational flexibility for the investment promotion unit could further strengthen Estonia’s capacity to attract investment in priority sectors.
Improve cross-ministerial co-ordination and clarify strategic leadership to enhance policy coherence. In Estonia institutional silos can be reduced by assigning clear ministerial responsibility for the development and implementation of key strategies, particularly in areas currently split across multiple ministries. Strengthening cross-sectoral co-ordination mechanisms will further ensure more coherent and integrated policy responses across thematic areas, such as SME support and innovation.
Develop a comprehensive regional development strategy to strengthen regional competitiveness, by building on existing national frameworks such as Estonia 2035. Establishing a dedicated regional development strategy that is closely aligned with national investment and SME policies, will help set clearer objectives for regional growth, enhance coherence across initiatives, provide targeted investment support, and facilitate SME access to finance in rural areas.
Policy recommendations for Latvia:
Consider further formalising institutional co-ordination between ALTUM and other key government bodies. While strong co-ordination mechanisms are already in place, streamlining and clarifying co-ordination channels within strategic documents could strengthen policy coherence and operational efficiency. Enhanced collaboration with the Investment and Development Agency of Latvia (LIAA) could also support scalable project development and ensure ALTUM’s financial instruments remain aligned with national SME and innovation policy priorities.
Continue developing a comprehensive national investment strategy. Building on the ongoing efforts by the Investment and Development Agency of Latvia (LIAA), the strategy could further integrate domestic and foreign investment priorities within broader economic objectives. It could also strengthen alignment with the Latvian Smart Specialisation Strategy (RIS3), ensuring that priority sectors such as ICT, smart energy, and biomedicine attract quality investment. Moreover, the strategy could promote stronger linkages between foreign investors, domestic enterprises, and SMEs to enhance value chain integration and regional development.
Continue strengthening inter-agency co-ordination to enhance policy coherence. The Investment and Development Agency of Latvia (LIAA) already plays a central role in connecting priority project developers with government institutions and has expanded this role to include strategic co-ordination for semiconductor related, net-zero and dual-use projects. Building on this progress, LIAA could further enhance co-ordination through shared strategic planning, co-designed programmes, and integrated client support systems to more effectively align investment promotion with SME upgrading goals and enhance the impact of FDI-SME linkage policies.
Policy recommendations for Lithuania:
Enhance coherence between domestic and foreign investment priorities within existing strategic frameworks. When preparing the Invest Lithuania 2026-2030 Strategy, assess the interaction between domestic (including SME) and foreign investments as well as the potential for co-operation. Aligning this strategy more closely with key objectives of programmes such as the Economic Transformation and Competitiveness Development Programme and the Smart Specialisation Concept 2021-2027 could also foster a more integrated and coordinated approach to investment attraction and development.
Strengthen co-ordination between Invest Lithuania and Innovation Agency of Lithuania. Enhanced co-ordination between Invest Lithuania and Innovation Agency of Lithuania can help improve service efficiency and ensure coherent support for innovation, internationalisation and investment. Strengthening mechanisms for information sharing, co-ordination and client referral would help provide more integrated support to domestic and foreign investors.
Strengthen co-ordination mechanisms to support regional investment attraction. While the Regional Development Programme 2022-2030 identifies investment attractiveness as a policy objective, establishing clearer mechanisms to co-ordinate investment promotion across levels of government can be an important area of focus going forward. Stronger collaboration between national, regional and local institutions through the Regional Development Councils, Invest Lithuania and relevant ministries, can help further align investment attraction efforts with regional development priorities.
Strengthening FDI-SME linkages requires co-ordinated public policy approaches across investment, SME and entrepreneurship, innovation, and regional development. Governance frameworks underpinning these policies vary across the EU, ranging from highly integrated to more fragmented arrangements which involve multiple institutions leading to information asymmetries, higher transaction costs, and policy silos, requiring stronger coordination mechanisms (OECD, 2023[1]). In the Baltic states, institutional set-ups differ in their degree of integration. Estonia represents a highly integrated model, with a single lead ministry and a ‘mega-agency’ managing FDI-SME policy. In contrast, Lithuania and Latvia follow partially integrated models, with responsibilities shared across several agencies reporting to different ministries, while the primary responsibility of FDI-SME policy rests with a single lead ministry. Nonetheless, the Baltic states are generally less fragmented than peer comparator economies (see Figure 4.2 and Figure 4.3)
The majority of EU Member States tend to have partially integrated governance frameworks (OECD, 2023[1]). A common trend is for the IPA and the SME and entrepreneurship agency to report to the same ministry, which facilitates inter-institutional planning, co-ordination and decision-making across the investment and SME policy agendas, as seen in Latvia and Lithuania. Responsibilities for innovation policy, on the other hand, are often split between the ministries responsible for economic policy, science, and education. Although investment promotion, SME and innovation policies can be more or less integrated into the same ministry, regional development policy is usually entrusted to a separate dedicated ministry.
Across the Baltic states, the primary responsibility for investment, SME and entrepreneurship policy lies with the Ministry of Economic Affairs and Communications (Estonia), the Ministry of Economics (Latvia), Ministry of Economy and Innovation (Lithuania). In Estonia, the ministry’s focus is more narrowly concentrated on SME and entrepreneurship policy, along with trade and investment policy. In Latvia and Lithuania, ministerial mandates cover investment and export promotion, SME support, and innovation, alongside broader areas such as tourism. Approaches to FDI-SME linkages vary across the Baltic states, reflecting differences in institutional scope and coordination.
According to the 2024 EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages, policy implementation responsibilities in the Baltic states are concentrated among a few key institutions (Figure 4.1), though survey data may not fully capture the scale of certain individual initiatives. Across the Estonian policy framework, the Estonian Business and Innovation Agency (EBIA) is the main implementation agency of policies, responsible for 63% of initiatives. In Latvia, 50% and 22% of policy initiatives are implemented by the Investment and Development Agency of Latvia (LIAA) and ALTUM, respectively. While in Lithuania, the Ministry of Economy and Innovation (EIMIN) implements 22% of initiatives and the Lithuanian Innovation Agency delivers 50% of policy initiatives. The following implementing institutions play a prominent role in supporting the FDI-SME ecosystem across the Baltic states in administering investment, regional, SME and entrepreneurship policy.
% of mapped FDI-SME policy by implementing institutions, 2024
Note: % are calculated over a total of 32 policies mapped for Latvia, 50 policies mapped for Lithuania, and 46 policies mapped for Estonia.
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
The Baltic states have adopted different institutional arrangements to support SME development and innovation, reflecting varying levels of co-ordination and integration (Figure 4.2). In Latvia, policy design and coordination is within the purview of the Ministry of Economics, while policy implementation is led by LIAA, supported by ALTUM as its financial arm, a state-owned financial institution overseen by three state stakeholders (Figure 4.2, Panel B). ALTUM provides financial instruments to firms in priority sectors such as ICT and shares a similar structure with Portugal’s BPF (see Box 4.1). Lithuania shares a similar integrated structure to Latvia, with the Ministry of Economy and Innovation (EIMIN) co-ordinating policy across several agencies, with innovation support split between the Innovation Agency Lithuania and the Lithuanian Innovation Centre, and financial instruments administered by the National Development Bank (ILTE) (Figure 4.2, Panel C). Estonia, on the other hand has adopted a more integrated model, with the Ministry of Economic Affairs and Communications (MKM) overseeing the Estonian Business and Innovation Agency (EBIA), a “mega-agency” consolidating investment and enterprise support functions (Figure 4.2, Panel A). Such integrated institutional frameworks can enhance administrative efficiency, foster policy coherence, and facilitate strategic planning through economies of scale and informal coordination. However, broader mandates may risk minimising specialisation.
In 2020, the Portuguese Government established a National Promotional Bank (Banco Português de Fomento, BPF) to support SMEs, midcaps, and large companies in strategic sectors through targeted funding, equity, and hybrid instruments and guarantees.
BPF is a fully state-owned bank with shareholders including the Portuguese State; the Agency for Competitiveness and Innovation (IAPMEI); the National Tourism Agency (Turismo de Portugal); and the Agency for Investment and Foreign Trade (AICEP Portugal Global). BPF operates under a broad mandate to support investments aligned with sustainable development objectives, focusing on business financing, innovation for digital transformation, connectivity, emperorship, R&D, and infrastructure projects. The participation of key government agencies in BPF’s governance enhances co-ordination across investment, innovation, and entrepreneurship policies, while bridging the needs of foreign and domestic firms and expanding access to credit for innovative and low-carbon projects.
Source: Based on (OECD, 2023[2]) and (OECD, 2022[3]).
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
The institutional set-up in the Baltic states is more integrated compared to peer comparators. For instance, in Italy multiple implementing agencies operate across investment, entrepreneurship, and innovation, reporting to different line ministries (OECD, 2022[4]). The Ministry of Enterprises and Made in Italy leads SME and innovation policy, with INVITALIA covering investment, entrepreneurship, innovation, and regional development. (Figure 4.3). National trade policy is overseen by the Ministry of Foreign Affairs and the Italian Trade Agency, while the Ministry of Economy and Digital Transition supervises Cassa Depositi e Prestiti (CDP), which finances public infrastructure and supports innovation, competitiveness, and international development. Moreover, Estonia in particular shares a similar integrated institutional set-up with Finland, where the Ministry of Economic Affairs and Employment oversees Business Finland, responsible for investment, innovation, and SME policy (OECD, 2023[1]). (see Figure 4.3). Such integrated models as the ones in Finland and Estonia may limit the need for extensive inter-institutional coordination by consolidating responsibilities within a single agency (OECD, 2025[5]).
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
Across the Baltic states, dedicated departments and national banks play a key role in implementing SME policy
The integration of SME development into broader economic strategies is managed through dedicated departments within their respective ministries across Estonia, Latvia, and Lithuania. The institutional structures aim to align SME development with investment and innovation priorities, fostering ecosystems that are conducive to both domestic enterprise growth and foreign investment. Latvia and Lithuania feature a similar institutional set-up, with two main ministries adopting a holistic policy approach, whereas in Estonia a single ministry is responsible for FDI-SME policy (see Table 4.1).
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
Estonia’s institutional set-up fosters close co-ordination between SME development, investment promotion, and innovation. In Estonia, the MKM acts primarily as a policymaker and coordinator for investment, SME and entrepreneurship policy, including foreign trade promotion, innovation, and investment facilitation. While these functions are largely overseen by the Department of Business and Industry, their implementation is primarily carried out by the Estonian Business and Innovation Agency (EBIA). Estonia features a more integrated institutional model than its regional peers, with the Estonian Business and Innovation Agency (EBIA) playing a central role. Formed from the merger of KredEx and Enterprise Estonia, EBIA is responsible for investment promotion, industrial policy, entrepreneurship, and innovation support. It aligns enterprise policy with investment strategies and supports sustainable, innovation-driven growth. Flagship programmes such as Trade with Estonia and Start-up Estonia further enhance international competitiveness by supporting exports, attracting investment, and positioning Estonia as a leading start-up hub.
In the case of Latvia, dedicated departments within Latvia’s Ministry of Economics, such as the Department of Entrepreneurship Competitiveness, the Department of Business Support, the Department of Human Capital Development, and the Department of EU and Foreign Economic Relations, oversee SME policy, export promotion, sectoral development, and the implementation of EU-funded programmes, playing a central role in strengthening FDI-SME linkages. For instance, the Department of Human Capital Development carries out defined activities aimed at attracting highly qualified experts and enhancing overall attractiveness of Latvia, in order to address human resource shortages across sectors.
Similarly, Lithuania’s Ministry of Economy and Innovation (EIMIN) manages SME support, investment and export promotion, EU fund management, innovation, and industrial policy. Key departments on Enterprise Policy, EU Investment Coordination and Innovation play a central role in strengthening FDI-SME linkages, fostering business to science collaboration and supporting enterprise innovation. EIMIN also oversees Industrial Parks, Free Economic Zones, and the Green Corridor for large-scale investments. The Innovation Agency Lithuania (IA), under the EIMIN, supports the national innovation ecosystem across all business stages. The agency operates as a “mega-agency” similar to Estonia’s EBIA, serving as a central contact point for domestic SMEs and foreign firms engaged in innovative activities. It promotes innovation, digitalisation, and international cooperation, while offering financial support for start-ups and business growth and facilitating targeted networking opportunities. While Invest Lithuania leads investment attraction, IA’s mandate partially overlaps in this area as well, as IA also provides business partner searches for foreign companies and organises trade missions.
National development banks in Latvia and Lithuania also play a key role in improving access to finance for SMEs and start-ups, primarily through the administration of EU-funded instruments that promote innovation, business growth, and strategic investment. In Latvia, specifically, ALTUM is the state-owned development finance institution acting primarily as an implementing agency. It administers loans, guarantees, and venture capital to support business growth, innovation, and rural development. The institution is funded through the EU Funds along with national and international sources. The primary role of ALTUM is to administer EU funded innovation programmes, loan-based programmes, and support start-ups across all stages. Similarly, Lithuania’s ILTE supports strategic national goals by improving access to finance for businesses. It prioritises high value-added projects that promote innovation, competitiveness, and infrastructure modernisation, while seeking to attract private capital. ILTE also administers EU structural funds and collaborates with Invest Lithuania to facilitate market entry for foreign investors.
Dedicated IPAs are in charge of administering investment policy across the Baltic states
Select agencies and units across the Baltic states are in charge of investment promotion (Table 4.1). The Estonian Investment Agency (EIA), a unit of EBIA, offers tailored, one-stop services to foreign investors, supporting business growth, competitiveness, and sustainable development. EBIA’s investment promotion activities are closely aligned with strategic sector priorities set by the MKM, ensuring coherence between investment promotion and national policy goals. Such an integrated model enables EBIA to bridge investment attraction and SME policy effectively, fostering a coordinated framework that supports enterprise competitiveness, innovation, and economic growth.
Across Latvia, the Investment and Development Agency of Latvia (LIAA) is the lead institution for attracting foreign investment. It promotes priority sectors such as IT, life sciences and green technologies, aligning with national and municipal investment strategies and coordinating across public, private and research stakeholders. In close cooperation with the Ministry of Economics, LIAA operates as a one-stop shop for investors, offering support on market entry, partner identification, and export and innovation programmes. Since 2025, LIAA has been designated as a strategic partner of the Ministry of Defence and the main contact point for attracting investment in the defence industry. It facilitates partnerships between domestic entrepreneurs and foreign companies involved in military procurement and supports efforts to attract capital investment from foreign manufacturers of military goods. LIAA also strengthens Latvia’s start-up ecosystem and promotes foreign trade through trade missions, B2B events and export workshops. Its Innovation Motivation Programme fosters entrepreneurship through initiatives such as Deep Tech Atelier, Mini-MBA, hackathons and the “Labs of Latvia” portal. Similarly, Invest Lithuania serves as the national investment promotion agency, providing free advisory services to foreign companies on financial incentives, market entry and local partnerships. It also supports regional development by promoting FDI in underdeveloped areas through training funds and targeted incentives and oversees Lithuania’s Special Economic Zones (SEZs) through annual monitoring.
Designated ministries oversee implementing regional policy across the Baltic states
The co-ordination and implementation of regional development policies across the Baltic states is managed by designated ministries, with varying institutional arrangements across countries. In Estonia the Ministry of Regional Affairs and Agriculture (REM) co-ordinates regional development policy, rural policy, and carries out the EU Common Agricultural Policy. The Local Governments Department and the Regional Policy Department work on developing targeted support measures to foster regional innovation and to a limited extent SME competitiveness. REM sets the main objectives for regional development and identifies specific policy interventions needed to enhance regional competitiveness and cohesion. It closely works with the Ida-Viru Investment Agency (IVIA) which is a regional IPA of Ida-Viru County which promotes FDI in Eastern Estonia through the development of industrial parks in Jõhvi, Narva, Kohtla-Järve and Kiviõli. As a historically industrial region reliant on fossil fuel production, Ida-Viru county is seeking to attract modern manufacturing and technology investments to further leverage its skilled workforce transitioning from traditional energy sectors.
Similarly, in Latvia, the Ministry of Smart Administration and Regional Development (VARAM) leads regional policy implementation, as the ministry implements and evaluates regional policy at state level, provides methodological guidelines and supervises the territorial development planning processes, as well as ensures the development and supervision of local governments. It also oversees local government development and manages two out of five Latvia’s SEZs (Latgale SEZ and Rezekne SEZ). VARAM also supervises the State Digital Development Agency (SDDA), which supports regional development through investments in e-government infrastructure, electronic procurement, and regional analysis, alongside managing EU and nationally funded activities. Rural development efforts however fall under the direct responsibility of the Ministry of Agriculture, which manages EU-funded Community-Led Local Development (CLLD) programmes supporting business creation in rural areas, particularly in green innovation and entrepreneurship. In co-operation with relevant institutions and the Latvian Parliament, Latvia in 2025 reaffirmed the need to strengthen its eastern border and the Latgale region, as well as other EU eastern border areas (OECD, 2025[6]). Additional targeted EU funds have been allocated to reinforce defence capabilities and support SME development in the region. Meanwhile, in Lithuania, regional development is led by the Ministry of the Interior, which oversees local and regional policy and manages two cross-border INTERREG programmes with Poland and Estonia, supporting investment, innovation, and technological clusters in border regions.
The main national agencies supporting the FDI-SME ecosystem in the Baltic states have strong regional presence, however most policy implementation is concentrated at the central level. For instance, Estonia’s IVIA has offices across the Ida-Viru County, Lithuania’s Innovation Centre’s has regional offices in Kaunas, Klaipėda and Panevėžys, and LIAA has subnational offices in 20 Latvian regions. In 2024, LIAA underwent reforms to strengthen its capacity to attract investment and promote exports. Since 2025, its regional offices have adopted a more proactive approach, with staff acting as the first point of contact for local companies and co-ordinating as needed with LIAA’s headquarters in Riga and its foreign representations. Notably, Estonia’s Ministry of Regional Affairs and Agriculture (REM) has well-established regional sub-units of the Department of Local Government Policy. Local initiatives and associations can also foster dialogue between regional authorities and the national government. Across Latvia, associations such as LALRG and LLPA play a key role in ensuring that collaboration and knowledge exchange continues between regional governments, cities, and the national government (see Box 4.3). Nevertheless, limited formal and informal engagement with regional offices may hinder policy co-ordination and implementation. In order to improve the effectiveness of collaboration, it is key to bridge the gap between national policy-making and regional policy implementation. Strengthening regional policy implementation requires enhanced capacity building and co-ordination among local offices. Tailoring national policies to regional needs should be complemented by regular co-ordination efforts among national agencies operating locally. Establishing regional offices or departmental sub-units can strengthen links between national ministries and local governments. Strengthening multi-level governance mechanisms, such as joint strategies, co-financing arrangements, and structured consultations with municipalities, can further enhance coordination between national ministries and local governments, improving information flows and addressing any communication gaps. Moreover, enhancing cross-border co-operation and knowledge exchange across the Baltic region can also strengthen policy coherence and implementation. Leveraging existing mechanisms such as the Baltic Assembly and the Baltic Council of Ministers can facilitate the exchange of good practices among the Baltic states (see Box 4.2). In addition, establishing thematic committees within key ministries on strategically important sectors or projects could further promote cross-border collaboration. Leveraging cross-country synergies with a coordinated governance approach can further enhance FDI spillovers and cross-border co-operation (see Chapter 5 for more information).
The Baltic Assembly is an international organisation fostering parliamentary co-operation among Estonia, Latvia and Lithuania. It was established in 1990 and serves as a platform to co-ordinate policy discussions, promote shared interests, and strengthen regional collaboration among the three Baltic states.
The Assembly engages with regional, international and inter-parliamentary organisations to advance common priorities. The Assembly’s Presidency rotates annually among member states, and its Secretariat ensures the regular conduct of activities. The Assembly is composed of national delegations of 12-16 parliamentarians from each state, reflecting proportional political representation and committee diversity. Its main governing body is the annual Session, supported by the Presidium, standing committees, and the Secretariat.
Committees within the Assembly examine issues of mutual interest and prepare joint recommendations for national governments, while the Assembly may also adopt resolutions, recommendations or statements directed to other international and regional institutions. For instance, the Economics, Energy and Innovation Committee promotes regional co-operation on economic development, energy security and innovation across the Baltic States. In 2025, the Committee aims to focus on strengthening logistics networks, advancing the Baltic energy strategy, and accelerating progress towards a single digital market. Moreover, interest groups may be established to address specific topics of shared concern, fostering deeper co-operation across parliamentary committees and national delegations.
Source: Based on (Baltic Assembly, 2025[7])
Latvian Association of Local and Regional Governments
The Latvian Association of Local and Regional Governments (LALRG) represents 41 municipalities across Latvia serving as the main platform for dialogue between local authorities and the national government. LALRG advocates for local governments’ interests in policymaking, promotes inter-municipal co-operation, and supports capacity building through training and information services. Moreover, it engages in international representation, including at the EU and Council of Europe, and contributes to shaping national government policy based on local government’s input.
Two key initiatives stand out: the Latvian Municipal Training Centre and the programme supporting municipal co-operation and good governance. The Latvian Municipal Training Centre offers financial consultations, develops investment project financing models, advises on EU structural funds, and prepares feasibility studies and business plans. It also supports project development, conducts economic impact assessments, and assists with loan documentation and business evaluations.
Meanwhile the initiative to promote Latvian municipal co-operation and strengthen good governance aims to enhance the quality and efficiency of public service delivery through improved inter-municipal collaboration and management practices. Implemented under the EEA Financial Instrument (2014-2021), the project includes research, regional seminars, and pilot activities to support new and existing co-operation models. It also develops governance tools such as guidelines and self-assessment instruments and provides training seminars. Study visits to Norway, Poland, and Finland further support knowledge exchanges, while an operational strategy for Latvian national cities and a dedicated expert platform is being established to sustain impact.
Association of Major Cities of Latvia
Association of Major Cities of Latvia (LLPA) brings together ten major cities (Daugavpils, Jelgava, Jēkabpils, Jūrmala, Liepāja, Ogre, Rēzekne, Riga, Valmiera and Ventspils) to foster economic, social, and cultural cooperation. The LLPA advocates for urban interests at the local and national level. Moreover, the association actively engages in policy discussions on urban development, municipal finance, education, social and health services, public safety and governance, and implements joint projects to support city development.
A key initiative in cooperation with LALRG is the Facilitation of Inter-Municipal Cooperation and Enhancement of Good Governance Principles in Latvian Local Governments. The project analyses inter-municipal and intra-municipal cooperation practices across Latvia and identifies areas of improvement through research and regional workshops, along with developing actionable recommendations. The initiative supports good governance practices and aims to develop an operational strategy for state cities until 2027 along with establishing an AMCL discussion platform and expert network.
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024), (LALRG, 2021[8]), and (LLPA, 2024[9]).
Effective public support for FDI-SME ecosystems requires clear alignment of objectives across policy areas. This often calls for co-ordination among a number of government institutions responsible for FDI promotion, SME development, innovation, and regional development. Such coordination can be pursued through various institutional mechanisms, but it often faces challenges related to overlapping mandates, fragmented responsibilities, and differing policy priorities. (see Box 4.4).
Instruments of co-ordination can be based on regulation, incentives, norms, and information sharing. They can be top-down and rely upon the authority of a lead actor or bottom-up and emergent (Peters, 2018[10]) They include (OECD, 2012[11]):
National strategies and action plans typically involve wide consultation and deliberation, provide diagnostic overviews of what the strengths, weaknesses, opportunities, and threats of an SME, innovation, and local ecosystem could be, and set a shared vision of the goals pursued.
Closely related, policy evaluations and reviews are a source of strategic intelligence, and a means for promoting greater co-ordination.
Dedicated agencies or ministries assume the leadership of the national policy agenda in some policy domains (e.g., FDI/SME/innovation/regional) and often have responsibility of coordination. At the same time, inter-agency joint programming can facilitate co-ordination and other aspects of governance as agencies share agenda and action.
The centre of government (CoG), e.g., the President's or Prime Minister's Office, can bridge interests and bureaucratic boundaries. High-level policy councils can also deal with aspects of policy coordination although they often have variable roles and composition across countries.
Finally, informal channels of communication between officials or job circulation (of civil servants, but also experts and stakeholders) can play a role and suggest a relatively well-developed culture of inter-agency trust and communication.
Although co-ordination is a fundamental and longstanding problem for public administration and policy, there is still no standardised method for approaching related issues, and much of the success or failure of attempts to coordinate appears to depend upon the context (Peters, 2018[10]). Co-ordination approaches and instruments need to be matched to circumstances, so does the need to coordinate across countries and policy areas. Some policy domains may work well with minimal attempts to coordinate with others, but others may require substantial policy integration and coordination. Likewise, some political systems may emphasise co-ordination and governance more strongly than others (Hayward and Wright, 2002[12]).
The approach to policy co-ordination presents a mixed picture across the Baltic states
FDI-SME policy in the Baltic states involves a wide range of actors, underscoring the importance of effective coordination mechanisms. The multi-actor landscape can result in fragmented efforts, overlapping mandates, and duplication of business support services underscoring the need for stronger co-ordination mechanisms to bridge policy gaps and enhance cross-institutional collaboration.
Insights from the EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs reveals that collaboration among institutions in the design and implementation of FDI-SME policies remains limited across the Baltic states. Only 24% of FDI-SME diffusion policies in Estonia, 19% in Latvia, and 32% in Lithuania involve an element of inter-institutional collaboration (Figure 4.4). This includes initiatives and programmes jointly designed and implemented by agencies and ministries, as well as strategies and action plans requiring a whole-of-government approach (OECD, 2024[13]). The implementation of business support tools is fragmented across ministries, national agencies, and regional counterparts with oversight across various areas. Such insights highlight the need for policy co-ordination between national and subnational governments in the design of policies.
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
The Baltic states should enhance their horizontal policy coordination when it comes to FDI-SME policy
The Centre of Government plays an important role in policy co-ordination across the Baltic states, with varying institutional arrangements shaping the degree of strategic oversight. The Baltic states performance in inter-institutional co-ordination is comparable according to the Sustainable Governance Indications (SGI) 2024. In Estonia, co-ordination efforts are supported by the Government Office and the Prime Minister’s Office, which provide technical expertise and advisory support. Recent reforms have strengthened the Prime Minister’s role in strategic planning and inter-ministerial initiatives (SGI, 2024[14]). Similarly, in Latvia, the State Chancellery ensures policy coherence, while the Prime Minister’s Office facilitates inter-ministerial co-ordination through thematic committees (SGI, 2024[15]). In both countries, formal co-ordination mechanisms are complemented by informal practices. However, consultations carried out as part of this Review highlight limited thematic co-ordination in areas such as SME and investment policy, particularly between ministries and implementing bodies. Strengthening the strategic role of the Centre of Government, including through high-level councils or expanded mandates, could help improve coherence, avoid duplication, and facilitate whole-of-government approaches in support of FDI-SME linkages.
Across the Baltic states high-level councils bring together line ministries and implementing agencies for investment, SME, innovation and regional development policy. These councils can help identify priority areas requiring cross-ministerial policy planning and decision-making. In many countries, such councils are also responsible for the overall co-ordination, monitoring and evaluation of national strategies while others have been given broader mandates to foster policy dialogue, convene stakeholders and issue opinions on policy and legislative initiatives (OECD, 2023[1]).
Highly formalised high-level co-ordination councils across Lithuania and Latvia facilitate inter-ministerial and inter-agency alignment to ensure a coherent and systematic approach to FDI-SME policy. Lithuania’s Science, Technology and Innovation Council is an example of a high-level advisory body that supports the Lithuanian Government in the strategic co-ordination of science, technology and innovation policy and ensures that national innovation priorities are harmonised (Republic of Lithuania, 2018[16]). The Council reviews and endorses strategic directions, priorities and implementation frameworks across technology and innovation policy domains, including smart specialisation. Moreover, the Council is composed of institutional representatives appointed by the Government and individual members approved by the Prime Minister (see Box 4.5). In a similar manner, the Regional Development Council serves as an advisory body under the Ministry of the Interior, supporting the coordination of regional policy planning and implementing and promoting balanced social and economic development across the country.
Lithuania’s Council for Science, Technology and Innovation is a strategic advisory body chaired by the Prime Minister of Lithuania. It is comprised of representatives from ministries, the Research Council of Lithuania, the Agency for Science, Innovation and Technology, higher education representatives, business associations, and independent experts. The Council is an example of horizontal policy co-ordination as it fosters collaboration between government, academia, and the private sector in areas that touch upon innovation policy.
Meeting quarterly, the Council advises the Government on strategic RDI issues, along with regional R&D trends that may affect the implementation of Lithuania’s Smart Specialisation strategy. Moreover, the Council oversees the strategic management of research, science, technology, and innovation policies. The activities of the Council directly benefit SMEs at the intersection of innovation policy, as the Council brings together higher education institutions, government stakeholders, SMEs, and innovation intermediaries. Recently, a long-term programme for science, technology, and innovation development was endorsed which aims to strengthen policy coherence, enhance inter-institutional collaboration and reinforce Lithuania’s innovation environment.
Source: (OECD, 2023[17])
In Latvia, high-level co-ordination councils are utilised specifically for large and strategically significant investment projects. The Coordination Council for Large and Strategically Significant Investment Projects facilitates and expedites major investment projects that are pivotal to the country’s economic development. Chaired by the Prime Minister and composed of Ministry of Economics, Ministry of Finance, Ministry of Transport, Ministry of Foreign Affairs, and VARAM, the Council meets every two months to address regulatory barriers, evaluate infrastructure needs, and ensure effective implementation of large-scale projects. Operational working groups were also set up by the Ministry of Economics to further enhance decision-making and execution of investment policy, with the Investment and Development Agency of Latvia (LIAA) functioning as the secretariat for the Council (LIAA, 2024[18]). While the Council primarily examines issues raised by large investment projects, its efforts to address these challenges contributes to broader improvements in the business environment, with potential spillover benefits for SMEs. Some SME related issues are also addressed at earlier stages by the Operational Working Group for Large and Strategically Significant Investment Projects. The Ministry of Economics holds biweekly meetings with the Chamber of Commerce to discuss SME concerns, while the Competitiveness and Growth Thematic Committee, a sub-committee under the Cooperation Council led by the Prime Minister, brings together relevant ministers to oversee entrepreneurship-related matters. These efforts, spearheaded by the Ministry of Economy in close collaboration with unions and employer organisations, complement the work of the investment-focused Council and provide a structured framework to ensure that SME interests are addressed in parallel to major investment priorities.
In Estonia, high-level coordination councils are established through national strategies. For overarching strategies, a management board is established, comprising representatives from relevant stakeholders and ministries. Each ministry designates a head of strategy, fostering informal yet structured co-ordination across sectors. The Estonian Research and Development, Innovation and Entrepreneurship Strategy 2021-2035 highlights efforts aimed at enhancing inter-ministerial co-ordination through the establishment of steering committees and high-level co-ordination councils (HM, MKM, 2021[19]). The strategy provides a comprehensive framework to strengthen research, development, innovation and entrepreneurship in Estonia, with the aim of enhancing economic productivity. To facilitate effective co-ordination, the strategy outlines the establishment of the Steering Committee for RDIE which oversees the implementation of the Sectoral Strategy and brings together representatives from academia, industry, ministries, and independent experts. Co-ordination of national R&D activities is further managed by the RDI Coordination Council, a high-level council composed of ministry appointed advisers (i.e., MKM) and representatives from key agencies such as Enterprise Estonia, which support programme preparation, budget planning, and provide inputs to the Steering Committee (HM, MKM, 2021[19]). The Steering Committee meets annually before submitting performance reports to review strategy implementation, evaluate progress, and provide recommendations for further action or adjustments. Across the Baltic states, expanding existing mandates and establishing more high-level strategic councils for FDI-SME policy could strengthen dialogue among policymakers, industry, and regional actors, enhancing policy coherence and the exchange of good practices.
At the policy implementation level, the establishment of thematic working groups can help policymakers pool resources from different parts of the government to effectively advance their policy (OECD, 2023[1]). In Latvia, formalised thematic working groups are established by the Prime Minister to support co-ordination on cross-cutting issues and ensure systemic work in a specific area. Multiple thematic committees are in place which focus on digital modernisation, EU Funds, along with strategy management (FICIL, 2024[20]). Such committees help deliberate agreed and non-agreed draft legislation and propose new drafts based on their discussions and decisions. Additionally, steering groups such as the RIS3 Steering Group (VG) bring together stakeholders from business, academic and the public sector to co-ordinate smart specialisation priorities, identify collaboration opportunities, and develop long-term research and innovation strategies and action plans. Meaningful collaboration is particularly important when it related to investment and SME policy, helping to align the diverse needs of stakeholders.
Informal co-ordination practices also play a key role in ensuring the co-ordination of different institutional actors. In Lithuania, the Innovation Agency relies on informal channels to align efforts, while in Estonia, the Ministry of Economic Affairs and Communications maintains similar informal coordination with the Ministry of Education. For example, regular informal meetings and working groups bring together representatives from various departments to discuss ongoing projects and policy adjustments. These interactions facilitate faster decision making and the exchange of good practices, contributing to a more responsive policy environment. Informal networks and personal relationships among officials also help bridge institutional gaps and promote a collaborative culture. Despite the benefits, being overly reliant on informal mechanisms of communication can lead to inconsistencies, a lack of accountability and weak monitoring and evaluation mechanisms. Enhancing inter-institutional collaboration requires formalising informal practices through structured coordination bodies and regular inter-agency meetings with clearly defined agendas and objectives (see Box 4.6).
Examples of high-level councils in the Netherlands
The Netherlands has a well-developed network of high-level councils to ensure horizontal coordination. The councils are responsible for the overall co-ordination, monitoring and evaluation of national strategies while others have been given broader mandates to foster policy dialogue, convene stakeholders and issue opinions on policy and legislative initiatives.
The Social and Economic Council (SER) of the Netherlands is an independent advisory body that brings together employers, employees and experts to advise the Dutch government and Parliament on socio-economic policy, comprised of 36 members. The Council’s core advisory function covers areas such as the labour market, sustainability, and inclusive growth. Moreover, the Council facilitates multi-stakeholder agreements, notably on International Corporate Social Responsibility (ICSR) and undertakes administrative tasks including promoting employee participation and supporting self-regulation. Guided by its 2024-2026 Work Agenda and long-term vision for broad-based prosperity by 2040, the Council fosters dialogue, builds societal consensus and proactively addresses key socio-economic challenges through an inclusive, consultative approach. The SER also collaborates extensively with a broad range of societal stakeholders in its committees to ensure inclusive and well-supported recommendations.
Inter-institutional collaboration in the Netherlands
The Netherlands Foreign Investment Agency (NFIA) effectively employs a collaborative and co-ordinated approach, as seen through managing the Invest in Holland Network, which comprises 14 organisations, including regional development agencies, city administrations, and other non-profit entities. This network provides comprehensive support to foreign investors, connecting them with appropriate public and private sector partners based on their investment type and location. The Invest in Holland Strategy 2020-2025 outlines the network’s joint operations, while allowing each partner to conduct additional investment promotion activities aligned with their priorities. From 2015-2019, the network facilitated around 1800 investment projects, totalling EUR 12 billion and creating or preserving about 57 000 jobs.
The Invest in Holland Network is co-ordinated through the National Acquisition Platform (NAP), which is chaired by the NFIA Commissioner, and includes representatives of each organisation. Quarterly meetings allow members to discuss joint short-term plans, assess progress towards achieving FDI targets, and evaluate the implementation of the Invest in Holland Strategy. Members also participate in networking and knowledge-sharing events throughout the year as well as brainstorming meetings on streamlining collaboration.
Investment prioritisation is handled by inter-agency Focus Teams, which promote investments in key sectors such as ICT, agrifood, life sciences and health, and sustainable energy. These teams regularly meet with industry companies and research institutions to identify new investment opportunities. They are also responsible for monitoring the business climate and bringing opportunities and threats to the attention of policymakers. In 2019, the Focus Team ICT, along with NFIA and 5 regional partners, attracted 8 high-quality ICT investment projects by developing various value propositions, preparing target lists, and visiting conferences and events to generate new investment leads. The Netherlands' success underscores the importance of a well-coordinated, inter-agency framework and prioritisation in enhancing the effectiveness of investment promotion strategies.
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024). (NFIA, 2020[21]) and (NFIA, 2020[22])
The proliferation of strategic documents may make their implementation and coherence more challenging if weak coordination mechanisms are in place
Across the Baltic states, several strategic documents have been adopted in recent years to articulate priorities related to strengthening investment and SME policy. National strategies and action plans can be important instruments for policy coordination as they are cross-cutting in nature, but they often require a whole of government approach to ensure their effective implementation (see Chapter 5).
The presence of numerous strategic documents may complicate policy co-ordination, potentially leading to overlapping initiatives, conflicting goals, and inefficient use of resources. Though it may also reflect a comprehensive approach to policymaking, with different documents addressing distinct aspects of the policy landscape. Latvia and Lithuania have the lowest shares of national strategies specifically related to investment and SME policy, accounting for just 5% and 2% of the policy mix respectively compared to other countries analysed (Figure 4.5). While the share may appear low, it should be interpreted with caution, as a smaller number of well-targeted and coherent strategies can be more effective than a larger volume of less targeted ones. On the other hand, Estonia has a relatively high share of national strategies and plans related to investment and SME policy, accounting for 24% of all mapped initiatives, with the majority of policies being high-level national strategies rather than concrete implementing programmes. While this may signal strong strategic ambitions and objectives, the large number of documents may increase the risk of fragmentation, reduced policy coherence across strategic objectives and complicate monitoring of their implementation (OECD, 2024[23]).
% of governance frameworks in total policies mapped per country, 2024
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
Latvia could benefit from adopting a dedicated investment strategy that aligns with broader national policy goals
A dedicated foreign investment strategy could enhance global competitiveness and enable more targeted investment promotion in priority sectors, provided policy coherence is ensured and fragmentation across priorities is minimised through effective coordination (see Box 4.7). In Estonia diverse strategic documents have been recently adopted in the areas of innovation, investment promotion, and regional development (see Table 4.2). Among the strategic frameworks, the Foreign Investment Strategy stands out as a national initiative to boost Estonia’s global competitiveness and enhance investment promotion into key industries. The strategy aims to attract high-value, knowledge and capital-intensive foreign investment that strengthens national value chains and boosts productivity. It targets seven strategic sectors, ICT, health tech, smart industry, and energy technologies which are closely aligned with Estonia’s digital, green, and innovation priorities. Moreover, the strategy promotes regional development and supports innovative domestic firms by fostering linkages with foreign investors. However, the strategy lacks co-ordination mechanisms across various agencies and ministries, which may complicate policy coherence across strategic objectives. The diverse strategic framework demonstrates ambition to target priority sectors, though implementation risks may persist if co-ordination relies on informal mechanisms such as ad-hoc working groups or personal networks, increasing the risk of fragmentation and weaking policy coherence. Most of the strategies across the Baltics states are designed for implementation through intergovernmental collaboration, therefore having clearly defined co-ordination mechanisms is key.
The Latvian Investment and Development Agency has begun work on developing a formal national investment strategy, though an operational framework is already in place that prioritises investment into key sectors such as ICT and digital. Investment considerations are outlined in Ministry of Economy’s Action Plan for Attracting Investment and Improving Access to Finance in the National Economy. Specifically, the action plan aims to enhance early-stage business support. Creating a unified foreign investment strategy that integrates domestic and foreign investment priorities with broader economic goals can strengthen linkages between foreign investors, domestic enterprises, and SMEs, while enhancing value chain integration and regional development.
On the other hand, Lithuania’s action plan, Invest Lithuania Activity Strategy 2026-2030, sets out Invest Lithuania’s vision and priorities for a five-year period covering investment attraction, inter-institutional co-operation, and organisational development. The 2026-2030 action plan aims to promote both foreign and domestic investments, with a focus on life sciences, engineering, the green and defence industries, business and financial services, and digital technologies. Moreover, investment policy considerations are incorporated in broader strategic documents. Strategic investment goals are partially imbedded in EIMIN’s “Investment Highway” initiative which targets investment into infrastructure, technology, and industrial sectors with Invest Lithuania serving as the main coordinator for large-scale projects. This includes managing the investment promotion aspects within the Free Economic Zones across Lithuania.
Croatia’s National Investment Promotion Plan (NIPP) positions FDI as a key driver of sustainable growth, in particular when it comes to job creation, regional development, and economic resilience. The plan sets out a clear structure, detailed analysis, and prioritisation, followed by measurable policy actions supported by stakeholder engagement and continuous monitoring and evaluation of outcomes.
The NIPP aims to foster policy coherence, avoid fragmented initiatives, and ensures that investment promotion is effectively leveraged to advance broader national priorities. The strategy does this through linking its investment promotion framework to the national targets set out in Croatia’s National Energy and Climate Plan (NECP) as well as in other sectoral strategies, such as the Digital Croatia Strategy until 2032, the National Plan for Employment, and the Smart Specialisation Strategy until 2029.
The plan prioritises four specific categories of investments which it deems key to advancing Croatia’s sustainable and inclusive growth objectives. The priority areas are: i) Sustainable Investments, ii) Investments supporting Climate and Energy Goals, iii) Investments driving Digital Transformation, and iv) Investments contributing to Balanced Regional Development. The strategy outlines a clear framework to steer FDI towards priority sectors, recognising that investment impact varieties by type and focus. Croatia’s approach combines targeted promotion, tailored incentives, regulatory facilitation, and co-ordination across both national and regional levels.
Various co-ordination mechanisms are being put in place by Croatia’s Ministry of Economy. For instance, the Ministry is establishing the digital CRM platform which aims to enhance co-ordination among national and regional institutions supporting investors, as well as embassies and business associations. The platform will streamline investment promotion, support collaborative investor services, facilitate post-investment monitoring, and enable real-time data sharing to strengthen strategic decision-making.
The NIPP also includes targeted measures to promote investment into regional development. The plan highlights the need to address disparities in regional investment attractiveness through tailored strategies and stronger mandates across regional and local institutions, such as development agencies and business centres. These actors are well placed to provide location-specific information to investors and promote regional strengths. By aligning investment promotion with regional assets and needs, the NIPP aims to maximise FDI’s contribution to long-term, inclusive growth across all Croatian regions.
Source: Based on Evaluation Report of Croatia’s Strategic Framework for Investment Promotion and Facilitation (OECD, 2025[24])
Diverse national frameworks for innovation policy are established across the Baltic States
The Latvian Smart Specialisation Strategy (RIS3) serves as national framework for innovation policy and economic transformation, aiming to boost productivity and resource efficiency (Ministry of Economics, 2023[25]). The strategy focuses on key priority areas, such as knowledge-intensive bioeconomy, biomedicine, smart technologies, smart energy, and ICT. To support implementation and co-ordination, the Innovation and Research Management Council was established alongside the RIS3 management groups which bring together enterprises, academia, and public stakeholders to set priority areas. The Latvian Investment and Development Agency also utilises RIS3 as the main framework for engaging with potential investors, targeting projects aligned with its priority areas. While RIS3 outlines objectives to enhance SME innovation and absorptive capacity, it lacks a clear long-term vision for the SME&E ecosystem and does not fully define institutional responsibilities across the delivery system. Similarly, the Estonian Research and Development, Innovation and Entrepreneurship Strategy 2021-2035 promotes technology and development-intensive investments to support regional cohesion along with strengthening SME’s access to finance, especially in more rural areas. Key priorities include increasing FDI into technology-intensive activities, boosting R&D investment through targeted initiatives, and improving the alignment of SME and start-up financing with Estonia’s RDIE priorities.
Lithuania’s Smart Specialisation Concept 2022-2030 targets SME innovation capacity, business R&D investment, and internationalisation capacity of enterprises (Government of Lithuania, 2022[26]). Key knowledge-intensive sectors are targeted such as health technologies, biotechnologies, advanced manufacturing and materials, and ICT. The concept aims to strengthen science to business collaboration and enhance Lithuania’s innovative competitiveness. Clear co-ordination mechanisms are established to ensure effective implementation, with the Ministry of Economy and Innovation being the lead authority responsible for overall co-ordination and policy alignment, while the Ministry of Education, Science and Sport provides expertise and supports implementation in research and human capital development. Each priority area is supported by facilitators who coordinate ecosystems, foster collaboration between businesses, academia, and public institutions, and ensure alignment with strategic objectives.
While strategies such as Latvia’s RIS3 support innovation and investment in knowledge-intensive sectors, their scope remains tied to the EU cohesion framework. To further foster innovation and strengthen FDI-SME linkages, the Baltic countries and in particular Latvia would benefit from a broader, dedicated national innovation strategy. Such a strategy could help consolidate efforts across government, improve policy coherence, and enable more targeted support by defining clear priorities, measurable targets, and robust governance arrangements. Embedding FDI-SME spillovers into national frameworks across the different Baltic states through dedicated objectives, indicators and a short-term action plan may also help ensure that the role of institutions are clearly defined and aligned with broader innovation and SME development goals.
Creation of a stand-alone regional development strategy can support regional growth and enhance policy coherence
Regional development strategies are scarce across the Baltic region, with only Latvia having a dedicated high-level strategy on the promotion of municipal co-operation and strengthening of good governance and a strategy on Regional Policy Guidelines. In Estonia, the regional specialisation is part of a general strategy, specifically the Research and Development, Innovation and Entrepreneurship (TAIE) Development Plan, overseen by MKM. The plan outlines targeted investment support measures to achieve more coherent regional development and enable better access for SMEs to public support and loan capital, particularly in rural areas. Moreover, regional elements are present in the Estonia 2035 Strategy which aims to enhance regional growth and targets enterprise development (see Box 4.8). Estonia could benefit from creating a regional development strategy that aligns with national priorities, sets clear objectives for regional development, and identifies specific interventions needed to enhance regional competitiveness. In contrast, Lithuania has already established a comprehensive framework through the Regional Development Programme 2022-2030 (RDP), which is based on the strategic objectives set out in the National Progress Plan. The programme defines the implementation directions for which Regional Development Councils and municipalities are responsible, in line with their respective mandates (OECD, 2023[27]). Lithuania has ten Regional Development Councils, one in each region, with the main responsibilities focusing on planning and co-ordinating the implementation of national regional development policy within their respective territories (OECD, 2023[27]). Investment considerations are limited throughout the Programme. Therefore, Lithuania could benefit from strengthening collaboration between the regional government, Invest Lithuania, and relevant ministries to ensure a more coherent approach to investment promotion across levels of government.
The Estonia 2035 Development Strategy is long-term framework to enhance Estonia’s productivity, innovation, and regional growth. The strategy tackles regional disparities across Estonia in productivity, entrepreneurial activity, and the integration of digital technologies. Regional development is supported through investment in skills and the creation of regional education centres that connect general, vocational, higher, and non-formal learning to better align with workforce and business needs. Targeted measures to support the labour market of North-East and South-East Estonia are also established to ensure regional balance across the country. Proposed legislative changes aim to support new business models, including platform economies and social entrepreneurship, and strengthen R&D and innovation across all stages of business and technology development, while accounting for regional differences. Strengthening the administrative and development capacity of local governments is also central to reducing regional inequalities and ensuring that opportunities for innovation, investment, and growth are accessible across the Estonian region.
Source: (Ministry of Finance, 2020[28])
Source: Based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2024).
Evaluating the impact of public policy interventions on the economy can help governments identify gaps and take corrective action to enhance their effectiveness. The adoption of monitoring and evaluation (M&E) frameworks by government institutions is particularly important for policy initiatives targeting FDI-SME diffusion, which often requires public action from across different policy areas and therefore enhanced scrutiny to ensure that policy action achieves the expected results. Collecting data on investment trends and business conditions can support the design of comprehensive investment promotion activities and help tailor SME support programmes to actual business needs.
The monitoring and evaluation (M&E) framework of policies across the Baltic states show scope for improvement. Evaluating the impact of public policy interventions is key for governments to improve their effectiveness, particularly for initiatives supporting FDI-SME diffusion. This requires robust M&E frameworks to be applied throughout the policy cycle (ex-ante, mid-term, ex post) to assess specific programmes and policies. Evidence from the EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs suggests that the use of M&E tools by institutions in the Baltic states is not systematic, with most FDI-SME policies lacking available information on evaluation practices (OECD, 2024[13]). Across the Baltics a variety of KPI’s are in place, for instance Latvia’s ALTUM tracks loan volumes and EU structural funds usage, Lithuanian’s Ministry of Economy and Innovation monitors beneficiary outcomes post-project completion, and Estonia applies KPIs at the departmental level, though enforcement is limited. Moreover, Estonia’s Industrial Policy 2025 includes general references to periodic reviews but does not establish or outline a formalised M&E framework or specify what key performance indicators (KPI’s) (MKM, 2023[29]). Establishing a robust M&E framework across all FDI-SME policies is key to measure impacts on SME productivity and innovation, using outcome-based indicators tailored to the Baltic context.
Despite conducting regulatory impact assessments (RIA), the Baltic states still lag behind the EU average in terms of comprehensive implementation across primary and subordinate regulations. RIA is systemic process used to assess the potential positive and negative impacts of proposed or existing regulatory measures (OECD, 2023[30]). The Baltic states consistently perform below the EU average, as indicated by the OECD Indicators for Regulatory Policy and Governance (Figure 4.6). Estonia and Lithuania perform above the OECD average in implementing RIAs for primary laws, while only Estonia exceeds the OECD average for subordinate regulations. RIAs are a key tool for evaluating the potential effects of regulatory measures and is essential for ensuring that regulations are transparent, evidence-based, and support SME productivity and innovation (OECD, 2023[30]; OECD, 2021[31]). Well-designed regulations can enhance productivity, innovation, and overall performance of SMEs, while fostering a business environment conducive to FDI. Moreover, this can provide SMEs with access to advanced technologies, knowledge, and global markets. However, poorly designed regulations may create administrative burdens, reduce investor confidence, and limit SME opportunities to leverage FDI for growth and innovation. This underscores the importance for regulations to be transparent and evidence based.
Ex ante RIA is mandatory for all legislative acts in Latvia (see Box 4.9). The government has updated RIA requirements and issued guidance to support implementation, requiring assessments early in the policy process and subject to public consultation (OECD, 2025[32]). Given limited administrative capacity, improved prioritisation, such as setting thresholds for full RIAs and updating regulatory rules, could further enhance efficiency (OECD, 2024[33]). In Lithuania, RIA is required for all primary laws, with a 2022 amendment introducing additional assessments related to climate and equal opportunities along with reinforcing the use of data (OECD, 2025[32]). While consultation is systematically required once a regulation is drafted, RIAs are not mandatory for draft laws initiated by parliament, although the parliament may choose to publish draft laws for consultation (OECD, 2025[32]).
Ex post evaluations in the Baltic states could be made more systematic and expanded beyond the focus on administrative burdens to better assess the overall effectiveness and efficiency of regulations. While these evaluations are essential to determine whether regulations meet their intended objectives, avoid unnecessary burdens, and continue to deliver public value, current practices often focus narrowly on administrative burdens (OECD, 2023[30]). According to the Indicators of Regulatory Policy and Governance (iREG) survey, Estonia and Lithuania perform above the OECD average for primary laws, but all three Baltic states fall below the OECD average for ex post evaluations in subordinate regulations (Figure 4.6). In Estonia, ex post evaluations have been mandatory for certain regulations since 2012, conducted every 3-5 years and covering areas such as competition, administrative burden, and regulatory overlap (OECD, 2025[32]).
OECD Indicators of Regulatory Policy and Governance, 2025
Note: The more regulatory practices as advocated in the OECD Recommendation on Regulatory Policy and Governance a country has implemented, the higher the iREG score.
Source: (OECD, 2025[34])
The Baltic states demonstrate strong stakeholder engagement in regulatory development, performing above the EU average. Stakeholder engagement is essential for ensuring that regulations are practical, effective, and aligned with the needs of those affected. It can enhance compliance, particularly when stakeholders feel their views are considered (OECD, 2021[31]; OECD, 2025[32]). This is especially relevant for FDI-SME linkages, where input from SMEs, clusters, associations, and MNEs can strengthen the quality of regulation. Robust engagement also helps identify opportunities to streamline regulations, reduce burdens, and optimise policy outcomes. For instance, Estonia’s Digital Society Development Plan includes a dedicated annex outlining its stakeholder consultation processes, which involves thematic workshops, roundtables, public consultations, and bilateral exchanges with representatives from government ministries, local authorities, enterprises, research institutions, and civil society (MKM, 2021[35]). The feedback provided was then utilised to adjust strategy priorities, targets, and define governance arrangements. Similarly, Estonia’s Foreign Investment Strategy was developed in close collaboration with a set of stakeholders such as sectoral associations in manufacturing and services, the start-up ecosystem, sub-units of the Enterprise and Innovation Foundation (EIS), and experts from the Ministry of Economic Affairs and Communications. Engagement extended to local authorities and regional centres, with ongoing dialogue with enterprises and foreign investors operating in Estonia informing recommendations to improve the investment climate (MKM, 2022[36]).
In recent years, Latvia has made notable progress in strengthening evidence-informed policymaking through enhancements to regulatory impact assessment (RIA), the development of online consultation tools, and new mechanisms to support the use of research in policy processes (OECD, 2024[33]). Mechanisms have also been established to co-ordinate evidence needs across public entities, improve transparency through a user-friendly database of commissioned research, and promote evidence use in key policy processes. Despite these advances, challenges remain in systematically generating and applying evidence in a timely and accessible manner to inform policymaking effectively.
The Government Modernisation Plan 2023–2027 further aims to improve policy quality by introducing a methodology for ex post evaluation. This marks a significant step forward, as ex post assessments are currently applied on an ad hoc basis and primarily limited to subordinate regulations.
Latvia is also advancing efforts to make RIA more holistic, particularly by improving stakeholder engagement and transparency. However, further improvements are needed to enhance impact quantification, strengthen cost–benefit analysis, and adopt a proportionate approach while maintaining transparency. To ensure regulatory quality over time, Latvia should also move forward with plans to institutionalise ex post evaluations, supported by clear methodologies that assess whether regulations meet their intended objectives and deliver value relative to their costs.
Source: (OECD, 2025[32]) and (OECD, 2024[33])
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