This chapter reviews the mix of policies in place for fostering FDI spillovers on the productivity and innovation of Estonian, Latvian and Lithuanian SMEs. It discusses each country’s policy framework for FDI facilitation and promotion and SME development, identifying areas for possible policy reform. It also assesses the regulatory framework affecting the diffusion of knowledge from foreign to domestic firms.
Strengthening FDI and SME Linkages in the Baltic States
Abstract
The Baltic States have made important strides in attracting productivity-enhancing FDI and promoting SME competitiveness. Each country has developed distinct strategies to attract high-value investment, with efforts reflecting national priorities in digitalisation, sustainability, and innovation. These efforts have contributed to the growth of key sectors such as ICT, fintech, biotechnology, and advanced manufacturing, and laid the groundwork for stronger integration of Baltic SMEs into global value chains.
In this chapter we analyse the main policy instruments put in place by the Baltic States to strengthen the performance of FDI-SME ecosystems. The five typologies considered are the following: network and collaboration platforms and infrastructure; technical assistance, information and facilitation services; financial support schemes; regulatory measures; and governance frameworks (OECD, 2023[1]).
An important area of policy intervention relates to network and collaboration platforms. Special Economic Zones (SEZs), technology parks, and industrial clusters have become key tools for attracting investment and fostering innovation. Lithuania’s SEZs have generated some positive spillovers in biotech and fintech, while Estonia’s Ülemiste City and Tartu Science Park serve as dynamic hubs for digital and green technology investment. Latvia’s SEZs offer fiscal incentives but have weaker SME engagement due to fragmented support structures. Across the region, collaboration platforms provide a solid foundation for FDI–SME interaction, but more targeted policies and institutional coordination are needed to maximise their role.
Technical assistance, advisory services, and investment facilitation tools represent another pillar of FDI–SME linkage strategies. The Baltic States have developed a broad range of services, including supplier databases, investment facilitation portals, and business support tools, but these initiatives often operate in silos and lack strategic integration. Lithuania offers structured support through its Innovation Agency and Invest Lithuania, including matchmaking and diagnostics, though links to FDI attraction and targeting could be strengthened. Estonia’s services are digitally advanced but still focused more on investor needs than on enabling local supplier integration. Latvia provides business consulting and skills development through LIAA, but formal supplier development mechanisms are limited. While facilitation tools are expanding across the region, they would benefit from more targeted design and closer alignment with investment and innovation policies.
Financial support schemes play a central role in enhancing the absorptive capacity of SMEs and encouraging productive engagement with foreign investors. All three Baltic States provide financial instruments to support R&D, digitalisation, and internationalisation, though the scope and accessibility of these schemes vary. Lithuania offers a comprehensive toolkit, including tax incentives, vouchers, and co-financing grants for technology upgrading and collaboration. Estonia’s instruments are more focused, targeting cleantech and R&D. Latvia offers wage subsidies, export grants, and financial support through ALTUM, though few programmes are explicitly designed to link SMEs with foreign firms. Across the region, financial support is often geared toward firm-level upgrading rather than structured FDI–SME engagement.
Regulatory measures have also contributed to a more attractive investment climate in the Baltic States, particularly through digital permitting, streamlined licensing, and fast-track procedures for strategic investments. Estonia’s advanced e-governance system has been instrumental in facilitating investment, with regulatory processes designed to be simple and broadly applicable to all firms rather than tailored separately for SMEs. In Latvia and Lithuania, the Fast Track Initiative and the Green Corridor programmes have been introduced targeting large-scale investors; at the same time, regulatory frameworks for domestic SMEs are kept streamlined and general, reflecting a policy choice to minimise complexity and ensure equal treatment across firms. Labour mobility remains a challenge in all three countries, particularly for foreign service providers and third-country nationals, which may constrain cross-border collaboration. Overall, regulatory reforms have facilitated investment but remain insufficiently tailored to foster inclusive SME participation.
Governance frameworks across the Baltic States provide a strong strategic base for SME and FDI policy (see Chapter 4), but coordination between policy domains remains limited. All three have strategies for innovation, entrepreneurship, regional development, and internationalisation, but integration varies. Lithuania aligns its Smart Specialisation with FDI and embeds SME support; Estonia’s digital-first framework applies policies broadly; Latvia’s broad framework suffers from fragmented implementation and weak continuity. Across the region, FDI and SME policies run in parallel rather than as unified strategies - stronger cross-ministerial coordination and explicit FDI-SME linkage goals would improve coherence and long-term impact.
While the Baltic States have made substantial progress in attracting high-quality FDI and strengthening SME competitiveness, the impact of these efforts on broader productivity and innovation outcomes remains uneven. Key instruments, such as SEZs, innovation parks, financial support schemes, and facilitation services, are in place across the region, but are often not explicitly designed to foster structured linkages between foreign investors and local firms. Moreover, coordination between investment promotion and SME support bodies tends to be fragmented, and regulatory and strategic frameworks are not fully aligned to support inclusive, value chain-based spillovers. Addressing these gaps will require more deliberate, targeted policy action to translate the region’s favourable investment climate into deeper and more durable FDI–SME integration (Box 5.1).
Policy recommendations for the Baltic states:
Design and implement targeted supplier development programmes to strengthen linkages between foreign investors and local SMEs. Such programmes could focus on improving the capabilities of local firms to meet the quality, reliability, and compliance standards of MNEs, thereby fostering more durable commercial relationships. Drawing on international good practice, these initiatives can enhance SME competitiveness, facilitate technology and knowledge transfer, and indirectly support export readiness, employment, and wage growth, even when not explicitly export-oriented (Box 5.7). By addressing this gap, the Baltic states can better leverage FDI for broader and more inclusive economic development.
Promote broader enterprise participation in investment incentive schemes, particularly among SMEs, which make up the majority of firms, by tailoring support measures to their specific needs and capacities. This could include simplifying application procedures, aligning incentive design suitable for SME investment sizes, and providing targeted advisory services on sustainable technologies and business models. Such measures could reduce barriers to take up incentives for SMEs, which typically have less resources to navigate through complex eligibility requirements compared to larger firms. Considering SME-specific factors within broader green transition programmes, such as energy efficiency upgrades, circular economy initiatives, or renewable energy adoption, can further help to ensure that smaller firms are not left behind in the shift toward climate-resilient and low-carbon growth, while also strengthening their competitiveness and innovation potential.
Assess if investment incentives are best designed to support stated policy objectives. To enhance the development impact of investment, the Baltic States could benefit from further improvements in key aspects of the investment climate, such as promoting a more business-friendly regulatory environment and reducing tax administration and compliance burdens. To improve cost-effectiveness and development impact, Baltic countries could shift toward expenditure-based incentives (e.g. R&D tax relief or investment-linked deductions) that reward actual spending on qualifying activities. Incentives should be transparent and subject to regular, evidence-based reviews. Additionally, incentives could be better targeted to support national priorities, such as green innovation, regional development, or SME-FDI linkages, by conditioning eligibility on local supplier engagement, research partnerships, or workforce development. Establishing a mechanism for regular, evidence-based evaluation of incentive schemes would help ensure they deliver additionality, maintain fiscal discipline, and adapt to evolving policy needs (OECD, 2022[2]), (OECD, forthcoming[3]).
Explore the development of cross-border investment corridors. By leveraging geographic proximity, shared EU membership, and complementary economic profiles, Estonia, Latvia, and Lithuania could jointly attract high-value FDI through integrated infrastructure planning, coordinated investment promotion, and harmonised regulatory frameworks. A pan-Baltic approach, such as joint industrial zones or innovation corridors, could enhance participation in global value chains, support green and digital investment, and foster inclusive regional development in border regions. Collaborative governance structures, digital one-stop-shops, and sectoral clustering strategies would be essential to operationalise such initiatives while maintaining national policy autonomy.
Promote FDI-SME linkage strategies that actively target regional disparities within countries by ensuring that less-developed areas and second-tier cities are included in policy design and implementation. To ensure more geographically balanced economic development, the Baltic States could consider strengthening the local reach of FDI–SME linkage policies by explicitly targeting less-developed areas and second-tier cities. This could involve extending investment facilitation and supplier development programmes beyond capital regions, tailoring support schemes to local firm capabilities, and improving regional access to advisory services, innovation funding, and training. While some countries have already made efforts to do so by including premiums on investing in lesser developed regions, the access to support services and investment benefits remains uneven. Closer coordination between national agencies and municipal authorities can help address place-specific barriers and better align local infrastructure, skills, and business ecosystems with national investment priorities. Promoting inter-regional cooperation and cross-border clusters within the Baltic region could also help smaller firms in peripheral areas connect to global value chains and benefit more equally from FDI-driven growth.
Strengthen SME absorptive capacity with tailored support. This includes expanding instruments such as R&D tax incentives, innovation vouchers, and co-financing for upskilling, digitalisation, and green investment. Simplifying application procedures and increasing outreach can improve uptake, especially among smaller firms with limited resources. Involving research institutions and large firms in SME capability-building, through joint R&D projects, open innovation platforms, and university–industry partnerships, can help local firms access new technologies and expertise. Aligning these efforts with Smart Specialisation Strategies and FDI promotion priorities will ensure that SMEs are better positioned to connect with foreign investors and integrate into global value chains.
Enhance SME access to talent by aligning skills development with investor needs and easing foreign talent attraction. This should include developing targeted vocational education, reskilling, and upskilling programmes in sectors with high FDI potential, such as ICT, advanced manufacturing, and green technologies, based on systematic input from foreign investors and industry associations. At the same time, foreign talent attraction schemes, like Startup Visas across the region, should be broadened to support not only startups but also growth-oriented SMEs that seek to expand internationally, integrate into global value chains, or collaborate with multinational enterprises. Streamlined visa procedures, relocation support, and awareness campaigns can make it easier for SMEs to tap into global expertise and build the capabilities needed to fully benefit from FDI linkages.
Policy recommendations for Estonia:
Streamline labour mobility policies to support services trade and investment linkages. To support deeper integration into global value chains, Estonia could further ease restrictions on the movement of foreign service providers. Reviewing labour market tests and quotas for independent and contractual service suppliers would help align policies with labour market needs. Despite progress on intra-corporate transferees, remaining constraints can limit SME access to foreign expertise and investment, particularly in knowledge-intensive services. Easing these barriers would strengthen productivity, innovation, and FDI–SME linkages.
Strengthen structured collaboration between foreign investors and domestic SMEs by expanding co-financing instruments and fostering university–industry partnerships. This can be achieved by enhancing co-financing instruments that support R&D-intensive SMEs in scaling up their activities, addressing current funding gaps. Additionally, fostering stronger university–industry partnerships will facilitate knowledge transfer, joint research, and innovation diffusion. Such measures could improve Estonia’s absorptive capacity, enabling domestic firms to better integrate into global value chains and benefit from foreign direct investment.
Complement the regulatory and tax environment with a supportive framework that strengthens access for enterprises, particularly early-stage and resource-constrained, to innovation and sustainability initiatives. This could include targeted financial instruments, such as innovation seed grants, simplified co-financing schemes, or phased support models, for companies engaging in green or high-tech initiatives. While maintaining its unified tax structure, Estonia can introduce differentiated access points or fast-track mechanisms within existing programmes to ensure that smaller firms benefit proportionately from national innovation and sustainability agendas. In practice, this could mean differentiated access points for smaller “micro” windows and faster two-step applications and fast-track mechanisms such as published service-level targets for decisions, pre-filled forms using business-register data, and simplified, risk-based checks for smaller tickets with post-award verification.
Establish a dedicated inter-agency taskforce to strengthen coordination between investment facilitation and SME support services. This taskforce could include representatives from the Ministry of Economic Affairs and Communications, and the Estonian Business and Innovation Agency (EBIA), with a clear mandate to align outreach strategies, co-develop supplier databases, and streamline service delivery. Improved institutional coordination could foster stronger FDI–SME linkages, particularly in priority sectors such as manufacturing and digital technology.
Policy recommendations for Latvia:
Strengthen investment conditions by addressing skills gaps through targeted mobility measures. This could involve extending the maximum duration of stay for foreign students transitioning into the labour market or for independent service providers in sectors facing acute shortages. Such steps would provide greater flexibility and stability for foreign specialists contributing to the local economy, while supporting SMEs that often face greater challenges than larger firms in accessing specialised expertise.
Strengthen the absorptive capacity of domestic SMEs and the implementation of the Smart Specialisation Strategy by embedding structured mechanisms that link foreign investors with local firms, particularly in high-tech, R&D-intensive, and priority sectors such as green energy, smart materials, and ICT. This could include matchmaking platforms, supplier development and co-innovation programmes, and public–private technology initiatives, supported by stronger co-ordination between investment promotion and innovation agencies. Complementary measures to expand targeted workforce development, enhance labour market flexibility, and reduce bureaucratic inefficiencies would further improve policy execution, enabling greater knowledge spillovers, stronger innovation ecosystems, and more sustained local value creation from FDI.
Enhance the effectiveness of its R&D support system by simplifying access to innovation programmes and lowering administrative barriers that currently limit SME participation. Establishing structured mechanisms to foster collaboration between foreign investors and local firms, such as encouraging FDI-SME research partnerships in publicly funded projects, would strengthen knowledge diffusion and increase local value capture. Additionally, improving university-business cooperation and integrating SMEs more fully into sectoral innovation clusters, especially in biotech, logistics, and green energy, will bolster Latvia’s absorptive capacity and promote a more dynamic innovation ecosystem.
Strengthen the tax system to enhance efficiency and ensure that any investment-support measures are well-targeted, fiscally sustainable, and aligned with productivity and growth objectives.
Policy recommendations for Lithuania:
Strengthen the implementation of the one-stop shop policy to improve administrative efficiency and SME access to support measures. To reduce the regulatory burden on businesses and enhance the effectiveness of public service delivery, Lithuania should strengthen the implementation of the one-stop shop principle across all relevant administrative procedures, particularly those affecting SMEs. This includes ensuring that public authorities are limited to a single, comprehensive request for additional information or documentation, thereby improving procedural predictability and reducing delays.
Streamline the implementation of the R&D support framework by reducing grant approval times and introducing fast-track options tailored for SMEs. Simplifying access to financial instruments will encourage greater SME participation in innovation activities and strengthen collaboration with foreign investors. Continued alignment of the Smart Specialisation Strategy with sectoral FDI attraction priorities can further consolidate Lithuania’s position as a competitive hub for high-value innovation, particularly in biotech, fintech, and cybersecurity. These improvements could help maximise the impact of public support on business R&D and foster a dynamic, inclusive innovation ecosystem.
Leverage and strengthen existing regional coordination mechanisms to enhance rural investment facilitation. Rather than creating new formal structures, efforts could focus on reinforcing the capacity and effectiveness of established platforms. This includes (i) Regional Development Councils, by further enhancing their strategic coordination role, (ii) regional and city development agencies where present, by supporting their function as local competence hubs for investors and SMEs, and (iii) the Innovation Agency’s “Spiečius” entrepreneurship network, by continuing to scale its role as a local business support and advisory touchpoint across rural municipalities.
Through their policy mix, the Baltic States aim to boost SME competitiveness and attract knowledge-intensive FDI
The overall orientation of the FDI-SME policy mix in EU countries reflects the strategic direction of policy actions, based on identified market, system, or governance failures. It draws on diagnostics of the FDI-SME ecosystem and a vision for its future across investment, SME, innovation, and regional development policies (OECD, 2023[1]).
In the Baltic states, support for FDI-SME linkages varies in approach. Estonia focuses primarily on governance frameworks (80% of initiatives), emphasising policy coordination and regulatory support. Latvia leans more toward building collaborative ecosystems, with 29% of measures centred on networks and platforms that foster SME–investor connections. Lithuania, by contrast, concentrates heavily on technical assistance, with 92% of support measures offering advisory services, matchmaking, and training. While the approaches differ, all three countries recognise the importance of facilitation services in fostering strategic partnerships between SMEs and foreign investors. However, the number of policy initiatives that target these policy objectives is only a partial measure of policy focus in a given area. One policy could rely on more resources (e.g. higher budget) for its implementation, and therefore have greater impact, while several policies in another case could be underfunded and not sufficiently effective to achieve the pursued outcomes. For this reason, the policy mix analysis conducted in the following sections takes into account other aspects relating to policy design and implementation, including the sectoral and value chain targeting of implemented measures, the uptake of public support schemes, the number of beneficiaries, the quality of the regulatory environment, and the type of policy instruments used to achieve specific policy objectives, amongst others (Box 5.2).
The policy mix concept refers to the set of policy rationales, arrangements and instruments implemented to deliver one or several policy goals, as well as the interactions that can possibly take place between these elements. In the context of knowledge and technology diffusion from FDI to domestic SMEs, these policies often span multiple institutions and policy domains such as innovation, investment, entrepreneurship, science and technology, and regional development. These policies operate within intricate "policy systems," supporting various channels through which FDI spillovers occur, such as value chain relationships, labour mobility, competition, and imitation. Moreover, they also influence enabling factors such as FDI characteristics, SME absorptive capacity, and economic geography (Meissner and Kergroach, 2019[4]).
This chapter largely builds on a mapping of the policy mix supporting FDI-SME ecosystems in EU countries, conducted as part of a multi-year project jointly undertaken by the OECD and the European Commission (EC) in 2019. In this research, a comprehensive mapping of institutional environments, governance frameworks, and policy initiatives related to FDI, and SMEs was conducted. The process involved utilising keywords, concept searches, and text analysis to identify national and subnational institutions, categorise EU Member States based on institutional complexity, and understand the roles of different institutions (OECD, 2021[5]).
Official sources such as national strategies, action plans, and relevant ministry websites, along with OECD and EU reports, provided policy information on FDI-SME initiatives. Data collection occurred at both national and institutional levels through desk research and an online survey. This research builds upon previous OECD efforts, drawing on methodologies from projects like the “OECD Surveys of Investment Promotion Agencies” and the EC/OECD project on “Unleashing SME potential to scale up”.
Typically, a first challenge in policy mapping consists in defining the scope and identifying the relevant initiatives and policy mix components under analysis. How the exercise is designed can determine its outputs about the strategic orientations of the mix, its instrumentalisation, its governance, and shifts over time. Potential distortions are higher when the number of measures identified are small. In addition, the number of initiatives in place can be highly variable across countries, depending on the size of the country and the capacity of its public administration, the intensity of the policy interest given, or the maturity of the policy field and the likelihood of initiatives having piled up over time.
A second challenge for policy mapping and impact assessment arises from the question of quantifying policy initiatives. A simple counting presents the advantage to be easy to understand – albeit not necessarily easy to implement or to interpret – and the counting could be discriminated by policy area, instrument, target population, sectors, etc. Policy initiatives could also be accounted in terms of input (e.g. public budget allocated), output (e.g. new strategic partnerships between foreign affiliates and local SMEs) and outcome (e.g. net job creation). The lack of data at disaggregated level, i.e. at the level of the policy initiative, is a clear limitation in this statistical approach. The number of FDI-SME policy initiatives in place is therefore a partial measure of the intensity of a country’s effort in a given area, and other parameters matter.
Source: Based on (Meissner and Kergroach, 2019[4]; OECD, 2023[1]; OECD, 2022[6]).
The Baltic States’ FDI-SME policy mix centres on strengthening SME competitiveness and positioning the region as a hub for knowledge-intensive investment. Across Estonia, Latvia, and Lithuania, most policy initiatives aim to enhance firms’ absorptive capacity through digitalisation, innovation, and skills development. Lithuania has made progress in aligning its SME and FDI policy objectives by embedding R&D tax incentives, innovation vouchers, and supplier matchmaking platforms, such as B2Lithuania, within its broader smart specialisation framework (OECD, 2022[7]). Estonia’s strategy emphasises ICT, fintech, and smart manufacturing, supported by a digital-first business environment. However, it could strengthen its integrated framework to link SME upgrading with FDI facilitation. Latvia’s policies prioritise export-led growth and offer targeted support for large-scale investments, such as through the Green Corridor programme. Nonetheless, policies to integrate SMEs into FDI-backed sectors remain limited (OECD, 2024[8]). Despite country-specific approaches, only Latvia provides incentives to foreign investors to engage with domestic SMEs or condition incentives on local linkages. The country’s defence procurement regulations warrant 30% of the investment contract value involves local businesses, however this requirement is limited to the defence industry. Without explicit incentives or requirements, foreign investors may be less inclined to seek out local SME partners, reducing opportunities for collaboration and weakening the impact of FDI on the broader domestic enterprise ecosystem. Introducing such measures, carefully designed to align with broader investment promotion goals, could help maximise the benefits of FDI.
Governments can draw on a wide range of policy instruments to support FDI-SME ecosystems. A single policy initiative may deploy multiple instruments in a complementary and mutually reinforcing manner to advance strategic objectives (Box 5.3). In the Baltic States, policy mixes tend to rely more heavily on governance frameworks, coordination mechanisms, and facilitation services, such as advisory support, matchmaking platforms, and stakeholder engagement, while placing comparatively less emphasis on direct financial instruments. For example, Estonia and Lithuania focus on digital tools and institutional coordination to connect SMEs with investors, while Latvia supports ecosystem-building through export and innovation hubs. In contrast, Poland’s policy mix is more finance-intensive, with 51% of initiatives relying on financial instruments and 43% on facilitation tools (OECD, 2025[9]). The Baltic States’ reliance on strategic frameworks and non-financial tools may reflect different administrative traditions or a stronger emphasis on long-term capacity-building over short-term subsidies. These differences underline the importance of context in shaping how countries choose and combine policy instruments to foster FDI–SME linkages.
% of mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
% of mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
% of mapped policy measures
Note: Shares are calculated as a % of the total of national initiatives in place. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Governments have a diverse set of policy instruments at their disposal to support FDI-SME ecosystems. A policy initiative can make simultaneous use or various policy instruments, using them in complementary and mutually reinforcing ways to achieve the desired strategic objective.
Based on the type of instrument used, policies can be classified into:
Network and collaboration platforms and infrastructure, which refers to platforms, facilities and infrastructures that enable spatial and network-related knowledge diffusion.
Technical assistance, information and facilitation services, which aim to encourage the uptake of knowledge and facilitate interactions between foreign and domestic firms (e.g. matchmaking services and networking events).
Financial support schemes, in direct (e.g. grants, loans) or indirect forms (e.g. tax relief) to encourage (or discourage) certain types of business activities (e.g. investment tax incentives, R&D vouchers, wage subsidies for skilled workers).
Regulatory measures, which define the framework within which foreign and domestic firms operate and often use legal rules to encourage or discourage different types of business activities (e.g. lighter administrative and licensing regimes for certain types of investments, local content requirements for foreign firms and eased labour mobility rules).
Governance frameworks, such as national strategies and action plans that lay out policy priorities and define the framework within which policy action on FDI, SMEs and innovation is organised. Some guiding instruments have co-ordination functions and ensure overarching policy governance (e.g. national strategies or action plans)
Based on this typology, the present Chapter presents key findings on the instrumentalisation of the FDI‑SME policy mix in Estonia, Latvia and Lithuania and the selected benchmarking countries.
Note: This typology of policy instruments reflects the framework developed in the OECD FDI Qualities Policy Toolkit (OECD, 2022[10]) and the OECD SME and Entrepreneurship Outlook (OECD, 2021[11]; OECD, 2023[12]; OECD, 2019[13]). It was used in the country assessments of FDI-SMEs linkages in Portugal (OECD, 2022[14]) and the Slovak Republic (OECD, 2022[6]). It will also be used in the SME&E data lake knowledge infrastructure. This typology is aligned with converging classifications of policy instruments formerly used in environmental and innovation policy literature (Meissner and Kergroach, 2019[4]); (Rogge and K., 2016[15]); (Edler, 2013[16]); (Borras and Edquist, 2013[17]); (Flanagan, 2011[18]); (OECD, 2007[19]) (OECD, 2010[20]); (Eliadis, 2005[21]); (Smits, 2004[22]); (Bemelmans-Videc and Rist, 1998[23]).
Source: (OECD, 2023[1]), OECD elaboration based on analytical framework and literature review.
Source: Based on (Meissner and Kergroach, 2019[4]; OECD, 2023[1]; OECD, 2023[1]).
Most Baltic FDI-SME policies align with strategic goals but risk excluding broader SME participation
Estonia, Latvia and Lithuania demonstrate a strong policy orientation toward targeting, with the majority of mapped instruments directed at specific firm types, sectors, or domiciliation characteristics (domestic or foreign). Latvia stands out with 90% of its policies designed with at least one targeting criterion, followed by Estonia at 76% and Lithuania at 88%. These figures reflect each country’s commitment to strategic resource allocation, particularly in attracting productivity-enhancing FDI and supporting SMEs.
Most of these policies are targeted by firm domiciliation, by ownership or registration characteristics, suggesting efforts to influence firm behaviour through eligibility rules or programme design. Sectoral targeting is also a significant feature of Lithuania’s policy mix (19 instruments), consistent with its Smart Specialisation Strategy and focus on high-tech FDI. In contrast, Latvia and Estonia make more limited use of sectoral targeting (3 and 5 policies, respectively), relying instead on broader firm-level eligibility criteria.
Across all three countries, population targeting (e.g., by firm size or type) is an important dimension, indicating efforts to channel resources toward SMEs and innovation-driven firms. Although only a small share of mapped policies is geographically targeted to specific regions or localities, this is consistent with the centralised delivery of most national support schemes. Compared to larger countries such as Poland or Czechia, where regional disparities are more pronounced, the relatively small geographic scale of the Baltic States may explain the more limited place-based differentiation in policy targeting (OECD, 2024[24]), (OECD, 2025[9]).
The Baltic States’ targeted policy approach supports the alignment of investment support with strategic objectives, whether through prioritisation of SMEs, digitalisation, or specific high-potential sectors. However, a more balanced mix could help broaden the base of beneficiaries and facilitate wider spillovers from FDI. For example, Estonia and Latvia could strengthen sectoral and SME-specific dimensions in their targeting frameworks, while Lithuania may benefit from ensuring that narrowly defined targeting does not unintentionally exclude firms with scale-up potential. Complementing targeted programmes with more generic, horizontal instruments, especially in areas such as digital transformation, business support services, or green transition, could foster more inclusive growth and enhance the competitiveness of the broader SME population.
Note: Panel A: Shares of generic and targeted policies as a percentage of the total 64 policies mapped. Panel B: Shares of policies by target type, as percentage of total targeted initiatives (55). As policies can be directed at more than one type of target, the sum is above 100%. Panel C: Shares of policies by type of population targeted, as percentage of total population-targeted policies (44). SMEs-targeted policies include initiatives applying to SMEs only or providing preferential conditions to them. Other non-corporate entities include investors (business angels, venture capitalists or VC funds, banks, financing institutions, etc.); universities; research organisations; entrepreneurs; individuals with specific roles or skillsets (e.g. managers, highly-skilled, researchers); government institutions and sub-national governments (e.g. municipalities); and others. Panel D: Shares of policies by type of domiciliation targeted, as percentage of total domiciliation-targeted policies (30). It demonstrates distribution of policies specifically targeting domestic or foreign firms.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
The sectoral targeting of policies enabling FDI-SME diffusion in the Baltic States reflects each country’s economic orientation, institutional frameworks, and strategic investment priorities. Estonia maintains a largely horizontal policy framework, with national institutions such as Estonian Business and Innovation Agency (EBIA) and the Ministry of Economic Affairs and Communications (MKM) favouring broad-based instruments that apply across all sectors. For example, EBIA implements 17 general-purpose policies, with only a small number excluding or focusing on specific industries. This approach is consistent with Estonia’s emphasis on digital governance and innovation ecosystems, supporting competitiveness in areas like ICT and the green economy without prescribing sector-specific eligibility criteria. While this “light-touch” model enables flexibility, it may result in weaker coordination around sectoral upgrading.
Latvia adopts a more differentiated approach to sectoral targeting, blending general-purpose policies with a number of instruments that exclude or focus on specific industries. LIAA, ALTUM, and the Chamber of Commerce (LCCI) operate 16 universal policies, alongside 11 that exclude certain sectors, suggesting a more refined and selective policy application. Latvia’s strategic investment priorities, such as ICT, bioeconomy, biomedicine, smart materials, energy and mobility, are supported by targeted tools like the Fast Track Initiative, which accelerates administrative approvals for qualifying investments. In contrast, Lithuania shows a more structured and balanced approach to sectoral targeting. Agencies including Invest Lithuania (IL) and the Innovation Agency (IA) combine 12 general-purpose policies with 10 that are sector-specific. This dual model supports Lithuania’s smart specialisation strategy and investment roadmap, which prioritise high-value industries such as life sciences, renewable energy, fintech, and advanced manufacturing. While all three countries maintain strategic coherence between their sectoral policy instruments and FDI goals, Lithuania’s more targeted orientation may help drive deeper innovation diffusion and industrial upgrading.
Note: The following value chain activities are considered: i) Pre-production services: R&D, concept development, design, patents; ii) Low and medium-technology manufacturing: production of simple, relatively unsophisticated goods such as basic metals, plastic products, food, textiles, etc.; iii) High-technology manufacturing: production of highly specialised, technologically sophisticated goods such as computer and electronic products, pharmaceuticals, chemicals, medical products, etc.; iv) Post-production services: marketing, sales, logistics, brand management, distribution and customer services. Peer EU is for the following economies: Denmark, Finland, Italy, Netherlands, Sweden.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
The quality of the wider regulatory framework shapes the spillover potential of FDI and the capacities of local SMEs to absorb new knowledge and technology. Factors such as openness to foreign investment, fair competition rules, the protection of intellectual property rights, and a labour market policy regime that facilitates the mobility of skilled workers are essential prerequisites for economies to realise the benefits of FDI. In the Baltic States, policies to connect SMEs with investors focus on creating an enabling environment through strategic governance and facilitation tools. Estonia and Lithuania use digital platforms and institutional collaboration to link SMEs with foreign investors, while Latvia promotes connections through export and innovation hubs. This approach reflects a broader emphasis on long-term ecosystem development and capacity-building, highlighting the region’s preference for strengthening institutional frameworks.
Baltic States offer strong investment openness, but regulatory complexity and weak worker mobility limit FDI spillovers to SMEs.
The Baltic states are among the most open economies in the OECD in terms of equal treatment of foreign and domestic investors, though regulatory burdens and sector-specific disparities continue to pose challenges. Estonia has a low administrative burdens and extensive digital governance services, making it one of the easiest places in the OECD to start and operate a business. Lithuania’s regulatory framework is complex, particularly in areas such as tax administration and SME access to financial incentives, which can deter smaller firms from fully engaging with support schemes. Recent efforts to simplify VAT procedures for small businesses, such as easing cross-border registration requirements and raising turnover thresholds, represent a step toward reducing these barriers, but broader streamlining is still needed. While Latvia’s FDI policies focus heavily on export-driven investment, they offer limited mechanisms to involve SMEs directly, potentially constraining the broader diffusion of benefits and reducing the scope for domestic value creation and spillovers. While competition policies are relatively robust across the Baltics, SMEs continue to face structural disadvantages when competing with foreign firms in high-value industries. Their weaker position is shaped by three interlinked challenges: limited access to growth financing, underdeveloped supplier networks, and the absence of targeted incentives to foster linkages with foreign investors. This combination often results in foreign multinationals dominating high-value segments, while local SMEs remain confined to lower-value activities, reducing the potential for knowledge transfer and productivity spillovers (OECD, 2024[8]) (OECD, 2022[7]) (OECD, 2024[25]). Baltic SMEs could strengthen their position in high-value industries by broadening access to diverse financing instruments, building stronger supplier networks with multinationals through regional clusters and certification support, and introducing targeted FDI-SME linkage incentives such as collaborative R&D and joint innovation projects. Co-ordinated regional strategies and cross-border cooperation would further amplify SME integration into global value chains and maximise productivity spillovers from FDI.
Attracting and facilitating knowledge-intensive and productivity-enhancing FDI
Investment promotion and facilitation are key in supporting the transfer of knowledge and technology from foreign firms to local SMEs. These policies aim to attract FDI into sectors that are more productive, innovative, and possess strong absorptive capabilities, enhancing the potential for spillovers. The quality of the broader regulatory environment can also determine the extent to which foreign affiliates gain access to specific sectors and create linkages with domestic firms.
The Baltic States are among the most open OECD economies for FDI
The Baltic States maintain some of the least restrictive environments for FDI in the OECD, according to the OECD FDI Regulatory Restrictiveness Index (FDIRRI). The FDIRRI measures statutory barriers such as equity limitations, screening procedures, restrictions on key foreign personnel, and other operational constraints. In 2023, Latvia recorded one of the lowest scores globally, with Estonia and Lithuania also performing well below the OECD average (Figure 5.6). These scores reflect a strong commitment to investment openness across the region and position the Baltic States as among the most open OECD economies (OECD, 2024[26]).
OECD FDI Regulatory Restrictiveness Index, 2023 (open=0, closed=1)
Note: Measures statutory restrictions on foreign direct investment in 22 sectors, across four policy areas: 1) foreign equity limits; 2) screening and approval; 3) restrictions on key foreign personnel; and 4) other operational restrictions. It excludes broader aspects of the investment climate, such as regulatory implementation, preferential treatment, and measures implemented for protecting the public order and essential security interests. For details about the methodological changes please see OECD (2024[9]).The FDIRRI measures statutory restrictions discriminating against foreign investors (e.g. foreign equity limits, screening & approval procedures, restriction on key foreign personnel, and other restrictions). Other important aspects of the investment climate (e.g., regulatory transparency, state monopolies, and any preferential treatment for selected investors, such as treaty-covered investors or those in special economic zones), as well as measures implemented for protecting the public order and essential security interests are not considered. Data are collected annually and reflect regulatory restrictions as of end December of the indicated year.
Across all sectors, Estonia, Latvia, and Lithuania exhibit lower FDI restrictiveness than the OECD average, underscoring their generally open investment climate. While sectoral barriers vary, foreign investors encounter minimal restrictions in key industries such as agriculture, forestry, fishing, mining, and manufacturing, making these sectors particularly attractive for FDI (Figure 5.7). Estonia imposes no restrictions on food and beverage manufacturing, while Latvia and Lithuania maintain only minor limitations, ensuring a highly open investment climate for foreign firms. However, certain sectors remain more restrictive, particularly transport services (air, maritime, rail, and road), where Lithuania enforces slightly stricter regulations than Estonia and Lithuania. Real estate and land ownership also remain subject to restrictions across all three countries, especially for foreign acquisitions, though these policies align with broader EU norms on land use and sovereignty considerations. (OECD, 2021[27]). In telecommunications and media, some limitations persist, but they are generally less restrictive than the OECD average. While higher restrictions in transport, media, and real estate may moderately deter foreign investment in these sectors, their overall impact on FDI-driven technology diffusion and skill development is likely limited, given that these industries do not typically drive high-value knowledge spillovers in the same way as innovation-intensive sectors.
Source: OECD FDI Regulatory Restrictiveness Index database, 2023.
Aside from FDI restrictions, complementary regulations affecting the investment climate, such as trade policy, competition frameworks, and public procurement rules, which influence post-establishment conditions– in different sectors and industries may influence the degree of FDI local embeddedness (OECD, 2024[24]; OECD, 2022[6]). According to the OECD Services Trade Restrictiveness Index (STRI), the Baltic States maintain relatively open services trade regimes, with restrictions below the OECD average (Figure 5.8). Unlike other OECD economies such as Poland, where public procurement rules favour regional trade partners, the Baltic States' procurement policies are relatively open, facilitating foreign participation. However, ensuring a competitive and transparent procurement environment will be key to attracting high-tech investment and supporting FDI-driven digitalisation in service industries (OECD, Forthcoming[28]).
The OECD STRI 2024 shows that Estonia maintains a relatively open services trade regime, with an STRI score below the OECD average and one of the lower levels of restrictiveness among the countries in the STRI sample. The most open sector in Estonia is insurance, which has fewer foreign entry restrictions than in any other country in the STRI database, benefiting from the absence of commercial presence requirements and local availability tests on cross-border trade. Conversely, architecture is the most restricted sector, primarily due to significant barriers on the movement of professionals, including limited recognition of foreign qualifications for non-EEA professionals and restrictive licensing conditions. Despite Estonia’s favourable regulatory environment, some cross-sectoral constraints remain, particularly related to labour mobility. Quotas and labour market tests apply to foreign professionals entering the country as intra-corporate transferees, contractual service providers, or independent service suppliers. Additionally, non-EEA companies must appoint a fiscal representative who is jointly liable for Estonian VAT, and public procurement processes favour European Economic Area (EEA) members and WTO Government Procurement Agreement participants. While Estonia’s STRI scores remained unchanged from 2023, historical reforms, such as the lifting of mutual insurance restrictions in 2019 and the easing of trade conditions in computer services, insurance, and telecommunications, reflect a gradual liberalisation trend (OECD, 2025[29]).
The OECD STRI 2024 indicates that Latvia maintains a relatively open services trade environment, with an STRI score below the OECD average and one of the lower levels of restrictiveness among the countries in the STRI sample. The most open sector in Latvia is legal services, which has fewer restrictions on the movement of professionals and minimal regulatory barriers, making it the least restrictive among all European countries in the STRI sample. In contrast, air transport is the most restricted sector, due to foreign equity limitations on airline ownership (capped at 49% for non-EU investors) and regulatory conditions for leasing foreign aircraft. Despite Latvia’s favourable regulatory environment, some cross-sectoral restrictions persist, particularly regarding the movement of people. Foreign services suppliers face limits on the duration of stay (12 months for independent service providers on their first permit), and wage parity requirements apply to intra-corporate transferees. Additionally, foreign entities from non-EU countries face restrictions on acquiring land in border areas, and Latvia's mandatory publication period for new laws remains below best-practice standards, affecting regulatory transparency. While Latvia's STRI has remained unchanged from 2023, its long-term trend shows slight increases in restrictiveness across telecommunications, audiovisual services, and logistics, partly due to new economic needs tests in logistics-related services (OECD, 2025[30]).
The OECD STRI 2024 indicates that Lithuania maintains a relatively open services trade regime, with an STRI score below the OECD average and one of the lowest levels of restrictiveness among the countries in the STRI sample. The most open sector in Lithuania is accounting, benefiting from low restrictions on the movement of professionals and recognition of foreign qualifications, while legal services remain the most restricted sector, largely due to burdensome foreign entry requirements and trade-restrictive competition measures. Despite Lithuania’s favourable regulatory environment, some cross-sectoral barriers persist, including foreign equity restrictions in air transport, limitations on real estate acquisition by non-EEA investors, and wage parity requirements for foreign intra-corporate transferees. Additionally, the mandatory publication period for new laws remains shorter than international best practices, affecting regulatory transparency. While Lithuania's STRI scores remained unchanged from 2023, historical policy changes, such as reducing the duration of stay for contractual service suppliers from 36 to 12 months, reflect a moderate tightening of services trade openness over recent years (OECD, 2025[31]).
Furthermore, the OECD Digital Services Trade Restrictiveness Index (DSTRI) which assesses the openness of digitally enabled services trade, evaluating barriers related to electronic transactions, e-payment systems, and intellectual property rights protection, indicates that the Baltic States generally rank among the least restrictive OECD economies in digital trade. This reflects strong digital infrastructure, streamlined regulations, and policies that support e-commerce and cross-border data flows. Estonia, in particular, has gained recognition for its advanced e-governance system and digital economy policies, while Latvia and Lithuania have also made significant strides in enhancing cybersecurity frameworks and modernising digital trade regulations (OECD, 2025[32]).
The low levels of digital trade restrictiveness in the Baltic States create a favourable environment for foreign firms in technology-driven industries, reinforcing their integration into global digital value chains. This openness to digital investment has established Estonia, Latvia, and Lithuania as key players in sectors such as fintech, artificial intelligence, and software development, attracting high-value foreign investment. However, with cybersecurity and data sovereignty concerns becoming increasingly prominent, ensuring policy coherence between investment openness and digital security will be crucial to maintaining their long-term competitiveness in the digital economy. Balancing regulatory safeguards with an attractive investment climate will determine their ability to sustain leadership in digitally enabled trade and innovation (OECD, 2025[32]) (OECD, 2024[33]).
OECD Services Trade Restrictiveness Index 2024 (open=0, closed=1)
Note: The STRI indices take values between zero and one, one being the most restrictive. The STRI database records measures on a Most Favoured Nation basis. Air transport and road freight cover only commercial establishment (with accompanying movement of people). The indices are based on laws and regulations in force on 31 October 2023. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Source: OECD STRI database, 2024
Baltic investment promotion policies target high-value sectors with differing levels of structure, selectivity, and institutional coordination.
The Baltic States prioritise investment in high-value sectors, aligning with national development strategies and regional economic objectives. Lithuania has a structured approach, targeting biotechnology, fintech, cybersecurity, and advanced manufacturing, with detailed sectoral roadmaps and investment criteria linked to R&D and high-skilled job creation. Latvia’s investment promotion approach has a focus on logistics, renewable energy, ICT, and defence-related industries, but lacks explicit SME integration mechanisms in FDI projects. Estonia, known for its digital-first economy, prioritises ICT, smart manufacturing, and green energy, attracting knowledge-intensive investments but with limited structured linkages with local SMEs.
Across all three countries, investment promotion and facilitation are guided by national agencies, Invest Lithuania, LIAA (Latvia), and EBIA, which assess FDI proposals based on capital intensity, job creation, technological spillovers, and alignment with smart specialisation strategies. While having a clear list of priority activities can be helpful, it should be the result of consultations with key stakeholders in the business community and specialised bodies that have thorough knowledge of challenges and opportunities in specific industries. It is important that the elaboration of the priority list be given due attention and subject to regular reviews, especially as it can translate into special treatment such as in the form of faster replies to inquiries and tailored investment facilitation solutions (OECD, 2023[34]). Sector targeting is common among OECD investment promotion agencies, most of which focus on at least two priority industries. IPAs dedicate more resources to these sectors, offering tailored tools and support to attract and facilitate investment (OECD, 2024[35])
While the Baltic States actively compete for high-value FDI, their strategies focus largely on sectoral competitiveness. Estonia’s ICT and cybersecurity ecosystem thrives due to its digital-first investment approach, but structured SME-FDI integration mechanisms remain limited. Lithuania, has built a comprehensive FDI attraction framework, including sector-specific investment roadmaps, financial incentives, and matchmaking services between foreign investors and local suppliers. Latvia prioritises export-driven investment in logistics, green energy, and ICT, yet lacks systematic policies to ensure SMEs benefit from these FDI inflows. Across all three economies, financial incentives for foreign investors rarely include provisions for SME engagement, potentially limiting knowledge spillovers and technology transfers to the domestic business ecosystem. Introducing targeted policies to foster linkages between foreign firms and local SMEs could enhance supply chain integration, enabling broader economic gains. Some countries have already taken steps in this direction - for example, Ireland’s Global Sourcing initiative connects multinationals with domestic SMEs, facilitating new supplier contracts, while the state of Querétaro in Mexico links inward investment in aerospace and automotive industries with programmes that help local SMEs upgrade and participate in GVCs.
Invest Estonia, the national investment promotion agency under Estonian Innovation and Business Agency, plays a central role in attracting and facilitating knowledge-intensive and high-value FDI. The agency applies a number of measures as part of its investment promotion strategy, including facilitating partnerships between SMEs and investors, e-consulting, virtual investors visits and facilitating contacts. Estonia’s digital-first approach has positioned it as a leading destination for technology-driven investment, bolstered by its e-governance infrastructure and strong regulatory environment for digital trade (OECD, 2024[25]). Recent policy initiatives have focused on regional investment diversification, with a large-scale FDI support mechanism implemented in 2025 to encourage foreign firms to expand beyond Tallinn. However, SME-FDI linkages could be further developed, with currently few structured mechanisms to integrate local firms into foreign investment projects. To strengthen knowledge transfer and spillovers, the government is expanding innovation incentives and digitalisation support schemes, while improving inter-agency coordination to align investment promotion with economic policy priorities (OECD, 2025)
The Investment and Development Agency of Latvia (LIAA) leads national investment promotion and facilitation efforts, targeting export-driven and knowledge-intensive FDI. Investment promotion and aftercare have been designated as top national priorities, with an expanded team at LIAA dedicated to proactive investor servicing. Latvia has prioritised high-tech manufacturing, smart energy, and ICT, aligning with national economic strategies to enhance digitalisation and green innovation OECD, 2024). The agency operates the Fast Track Initiative - a mechanism designed to prioritise and accelerate the provision of public services for businesses making significant investments in Latvia’s economy or contributing substantially to export volumes as well as defense manufacturing projects and large-scale FDI projects in areas such as smart energy, mobility, and ICT Additionally, Latvia is actively expanding its dual-use investment strategy, integrating defence-related industries with commercial R&D to boost high-value investment However, Latvia faces challenges in retaining high-value functions of foreign firms, as much of the R&D activity remains within parent companies abroad (OECD, 2024[8]). To align promotion with national objectives, the government holds bi-weekly coordination meetings between LIAA, the Ministry of Economics and industry representatives, and has established a Prime Minister–chaired Coordination Council plus an Operational Working Group for Large and Strategically Significant Investment Projects.
Invest Lithuania, the national investment promotion agency, has developed a structured and targeted FDI attraction frameworks in the Baltic region, with a strong focus on biotech, fintech, ICT, and advanced manufacturing. The agency uses sector-specific investment roadmaps and a Green Corridor Initiative, launched in 2021, to streamline permitting and approvals for strategic investment projects exceeding EUR 30 million in Vilnius and EUR 20 million in other regions (OECD, 2022[7])(OECD, 2024). Lithuania also provides generous R&D tax incentives and employee training grants, encouraging foreign firms to engage in local knowledge-sharing and collaboration with SMEs and research institutions. However, skill mismatches and administrative complexity remain barriers to maximising FDI spillovers. To address this, the government is expanding regulatory sandboxes for fintech and AI, facilitating innovation-friendly investment frameworks (OECD, 2025[31]). Additionally, Lithuania is enhancing its investment attraction strategies in high-tech sectors, reinforcing its role as a key hub for technology-driven and knowledge-intensive FDI.
Baltic States use different mixes of incentives to attract FDI, but stronger links to SME integration could enhance productivity spillovers and long-term impact
Incentives can be used to complement, but not replace, a sound business environment. They should be carefully designed to attract additional investment, for instance, by using typically more cost-effective, expenditure-based measures that provide tax relief in proportion to qualifying investment, thereby enhancing impact, though their effectiveness ultimately depends on careful targeting and implementation to ensure additionality and contain fiscal costs. Incentives may also be targeted to support specific policy goals through well-defined eligibility conditions (OECD, 2024[35]).
Baltic States use distinct mixes of financial and non-financial tools to attract FDI and actively deploy financial and non-financial instruments to attract productivity-enhancing FDI, though their approaches differ markedly in intensity, scope, and strategic orientation. Lithuania demonstrates a comprehensive use of financial support schemes, including a triple deduction of R&D expenses, accelerated depreciation of R&D assets, and a reduced 5% tax rate on profits from commercialised inventions. These are complemented by EU and national funds that support innovation projects and employee training. Moreover, the Green Corridor Initiative, which accelerates permitting for strategic projects exceeding EUR 30 million in Vilnius and EUR 20 million elsewhere (OECD, 2022[7]). Lithuania leverages fiscal tools to attract high-value investment, particularly in biotech, fintech, ICT, and renewable energy. This approach prioritises capital attraction and innovation diffusion, positioning Lithuania as a regional leader in financial support for knowledge-intensive sectors.
Estonia, by contrast, adopts a more governance-driven model. It employs only two financial instruments, relying instead on three strategic frameworks and two technical assistance tools. This reflects Estonia’s emphasis on strategic coordination, digital public infrastructure, and regulatory streamlining (OECD, 2024[25]). Estonia’s investment support includes targeted R&D grants and cleantech subsidies, alongside a large-scale FDI support mechanism in development to boost regional diversification. While this streamlined approach complements its digital-first economic model, the relatively limited use of financial incentives may constrain its ability to deepen FDI spillovers in sectors beyond ICT and fintech.
Latvia presents a more modest and diffused approach. With only one financial support scheme and a balanced use of regulatory measures, governance framework, and technical assistance instruments. Latvia’s FDI policy toolkit appears less intensive but strategically anchored. Key instruments include Fast Track initiative, which accelerates the provision of public services to entrepreneurs and generous tax rebates in Special Economic Zones that can reduce corporate tax rates to as low as 4% for qualifying investors (OECD, 2024[8]). However, the lower number of instruments overall may reflect capacity constraints or a more cautious fiscal policy stance, and there is scope to strengthen the connection between incentives and broader development objectives, particularly by embedding SME linkage criteria. Enterprises in Latvia continue to prioritise growth; however, limited access to financial resources remains a significant constraint. To strengthen the business ecosystem and mobilise additional funding for companies, the government is considering a mechanism to automatically grant tax rebates to enterprises meeting specified performance criteria in areas such as productivity and digitalisation, with the stated objective of strengthening the future development of companies that have already reached a certain level of maturity. Tax incentives need to be targeted, address clearly identified market failures, be time-limited, transparent, and undergo regular evaluation.
Compared to peer countries, the Baltic States illustrate divergent investment promotion strategies. Lithuania’s use of 13 financial policy tools surpasses that of most comparator economies in the database, such as Italy (7) and the Netherlands (5), while Denmark and Finland rely more heavily on technical and network-based support instruments (13 each). Estonia’s model is consistent with its high-trust digital infrastructure, whereas Latvia’s more neutral mix lacks concentrated use of any single instrument type. However, across all three countries, financial support schemes rarely include conditionality related to SME integration or local supply chain development, limiting their potential to drive widespread productivity spillovers. Encouraging the use of performance-based incentives related to local sourcing, innovation, or workforce development could contribute to supporting the long-term benefits of FDI in the region.
% of all mapped policies supporting productivity enhancing FDI
Note: Shares are calculated as a % of the total of national initiatives aimed at attracting and facilitating productivity enhancing FDI. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Green investment policies have emerged as a growing dimension of the FDI attraction strategies in the Baltic States, complementing existing financial and facilitative instruments. As detailed in Box 5.4, Lithuania and Latvia have introduced Green Corridor and Fast Track initiatives targeting large-scale investment projects including those in priority sectors such as renewable energy, sustainable mobility, and biotechnology. Estonia, while lacking a formal corridor programme, has focused on enabling digital permitting and grid integration for green energy projects under its Energy Development Plan 2035. These mechanisms reflect a shared policy emphasis on sustainability-driven FDI, though they remain primarily geared toward large investors, with limited provisions for SME engagement. Strengthening FDI-SME linkages, through supplier development programmes, or co-innovation platforms, could help SMEs absorb advanced sustainability and digitalisation practices, supporting broader green transition goals.
However, realising this potential requires overcoming persistent barriers to SME participation in green FDI. Few structured mechanisms currently exist to integrate local suppliers into foreign-led sustainability initiatives, and SMEs face limited access to financing in the renewable energy sector (OECD, 2023[12]). To enhance long-term spillovers, the Baltic States could expand support schemes tailored to SMEs, align green investment promotion with national climate strategies, and strengthen regional cooperation on renewable infrastructure and cross-border electricity markets. These efforts would help ensure that green FDI contributes not only to decarbonisation but also to inclusive and innovation-driven growth (OECD, 2024[35]).
Estonia, Latvia, and Lithuania have all introduced a range of policies to promote green investment and support the twin transition towards a more sustainable and digitally advanced economy. These include “Green Corridor” and Fast Track programmes, tax incentives, regulatory streamlining, and targeted investment promotion strategies focused on renewable energy, energy efficiency, and sustainable industry development. While these initiatives vary in scope and maturity, they demonstrate a growing policy focus on attracting sustainability-oriented FDI and scaling green innovation.
Lithuania
Lithuania has established one of the most structured Green Corridor initiatives in the region. In this context, Green Corridor refers not only to green energy but to a fast track for strategic investment across a broad range of sectors. The Green Corridor for Strategic Investment (2021) provides fast-track permitting and administrative support for strategic investment projects exceeding EUR 30 million in Vilnius and EUR 20 million in other regions. Eligible sectors include renewable energy, biotech, electric mobility, and the circular economy. The initiative complements Lithuania’s Smart Specialisation Strategy and is supported by generous R&D tax incentives (allowing deducting 300% of eligible R&D expenses) and training grants for workforce development. However, SME participation in Green Corridor projects remains limited, and no binding requirements exist for local sourcing or innovation partnerships with domestic firms (OECD, 2022[7]) (OECD, 2024[26]).
Latvia
Latvia has also prioritised green investment through its Fast track initiative, designed to prioritize and accelerate the provision of public services for businesses making significant investments in Latvia’s economy or contributing substantially to export volumes as well as defense manufacturing projects and large-scale FDI projects in areas such as It offers reduced bureaucracy and accelerated procedures, although fiscal incentives are limited. Latvia additionally launched a EUR 600 million Green Energy Fund in 2023 to support industrial decarbonisation, with a focus on wind and hydrogen energy infrastructure. However, as in Lithuania, these mechanisms rarely mandate SME participation, and limited coordination between agencies can delay project timelines (OECD, 2024[8]).
Estonia
Estonia, while not operating a formal Green Corridor programme, has positioned itself as a frontrunner in renewable energy policy, particularly in offshore wind development. The country’s Energy Development Plan 2035, pending government approval, outlines ambitious goals for wind and solar power, backed by digital permitting systems and advanced grid management tools. Estonia has attracted strong FDI interest in cleantech and green hydrogen, especially through its Innovation Clusters and Smart Specialisation focus on green energy and smart materials. A large-scale FDI support mechanism has been introduced in March 2025 to decentralise investment beyond Tallinn and support regional sustainability goals (OECD, 2024[25]).
While these initiatives demonstrate progress, green investment schemes in the Baltic States could be further strengthened by introducing performance-based incentives linked to sustainability outcomes and explicit SME inclusion mechanisms. For example, Portugal’s Mobilising Agendas for Business Innovation require consortia of foreign and domestic firms (including SMEs) to collaborate on climate and digital transformation goals, with funding tied to specific R&D and decarbonisation milestones. Similarly, Ireland’s IDA Green Transition Fund includes tailored support for firms investing in energy efficiency and low-carbon technologies, with dedicated advisory services to link FDI with local innovation ecosystems.
Source: Based on stakeholder meetings
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2023).
Targeted reforms and regional coordination needed to strengthen SME linkages and territorial impact of FDI in Baltic SEZs and smart specialisation strategies.
The Baltic States have developed SEZs and industrial parks to attract FDI. Latvia operates five SEZs - Riga Freeport, Ventspils Freeport, Liepāja SEZ, Rēzekne SEZ, and Latgale SEZ, which offer corporate income tax rebates of up to 80%, real estate tax reductions, and VAT exemptions to investors (OECD, 2024[8]). However, SME participation in SEZ-linked supply chains remains limited, and there are few structured linkages between foreign firms and local suppliers. Lithuania's industrial park model is more decentralised, with major hubs in Kaunas, Klaipėda, and Vilnius attracting FDI in life sciences, fintech, and precision manufacturing. These Free Economic Zones (FEZ) provide tax exemptions for up to 10 years and fast-track business licensing. These zones have successfully attracted automotive, fintech, and high-value manufacturing investments, with strong spillover effects for local SMEs. Estonia focuses on technology-oriented industrial clusters such as Ülemiste City and Tartu Science Park, integrating digital and green tech investments with a high level of automation. Estonia’s e-Residency programme has also positioned the country as a hub for digital business, offering streamlined company registration for international entrepreneurs. The Ülemiste Smart City initiative in Tallinn supports innovation and business incubation, linking startups with MNEs (OECD, 2024[25]; OECD, 2025[32]) Despite these efforts, SEZ policies across the region lack SME-specific incentives, and targeted reforms could better facilitate knowledge transfer between foreign investors and local businesses (OECD, 2023[12]). Lessons from international examples, such as the Johor–Singapore SEZ, which leverages cross-border complementarities and coordinated governance, could inspire more integrated regional approaches in the Baltics to enhance FDI spillovers and cross-border cooperation (Box 5.5).
Attracting FDI to specific regions within the Baltic States remains a key priority to promote balanced territorial development and reduce regional disparities. Less-developed areas such as Latgale in Latvia, Eastern Lithuania, and South Estonia face persistent structural challenges including limited infrastructure, lower education attainment, shrinking labour pools, and distance from key urban hubs, that hinder their appeal to high-value investors. Recent OECD analysis highlights that targeted FDI-SME linkage policies, when aligned with green and strategic investment priorities, can play a catalytic role in repositioning these regions within national and global value chains (Box 5.6).
Smart Specialisation Strategies (S3) guide FDI attraction and industrial policy in the Baltic States, but implementation varies by country. Lithuania has one of the most structured S3 frameworks in the region, focusing on biotechnology, ICT, fintech, and renewable energy, with financial and tax incentives for R&D collaborations between SMEs and research institutions. The B2Lithuania platform facilitates SME-FDI matchmaking, although financial incentives remain limited (Invest Lithuania, 2024). Latvia’s S3 strategy is centred on green energy, smart materials, and information technology, but lacks structured SME-FDI integration mechanisms (OECD, 2024[8]). Meanwhile, Estonia takes a digital-first approach, prioritising ICT, cybersecurity, and artificial intelligence, leveraging its e-Governance model to attract high-tech foreign investment (OECD, 2025[32]). While all three countries have prioritised digitalisation and sustainability in their smart specialisation strategies, Estonia and Lithuania have been more effective in aligning SME innovation programs with sectoral FDI priorities, whereas Latvia's fragmented approach poses challenges for effective policy execution (OECD, 2024[8]).
The Johor–Singapore Special Economic Zone (JS-SEZ) is a flagship cross-border cooperation initiative between Malaysia and Singapore, launched in 2023 to deepen bilateral economic integration and attract high-value foreign investment. The initiative reflects a new model of transnational Special Economic Zones, where complementary strengths across borders are leveraged to enhance regional competitiveness.
Located between the Malaysian state of Johor and the island nation of Singapore, the JS-SEZ aims to integrate infrastructure, logistics, and investment facilitation across the two territories. Singapore contributes advanced services, capital, and connectivity to global value chains, while Johor offers cost-competitive land, labour, and manufacturing capabilities. The zone targets sectors such as semiconductors, renewable energy, digital trade, and advanced manufacturing, with a strong emphasis on green and digital transitions.
Key features include:
Fast-track customs and immigration procedures, including a single-entry document for goods and business professionals.
Integrated digital platforms for investment application, licensing, and tax services.
Joint marketing efforts and promotion of the zone to global investors as a single investment destination.
Sectoral clustering, including plans for green energy parks, data centres, and industrial R&D campuses on the Malaysian side, connected to financial and digital services in Singapore.
The JS-SEZ is designed to serve as a high-tech and sustainable hub, facilitating knowledge and capital flow while reducing regulatory frictions. It is supported by both countries’ investment promotion agencies (Invest Johor and the Economic Development Board of Singapore), and underpinned by bilateral governance mechanisms and private-sector engagement.
Relevance for the Baltic States
The JS-SEZ offers a compelling model for cross-border investment attraction and regional development. For Estonia, Latvia, and Lithuania, three countries with shared EU membership, geographic proximity, and complementary economic strengths, the creation of joint industrial zones or innovation corridors could attract pan-Baltic FDI projects by pooling resources and offering regional economies of scale; strengthen participation in global value chains by linking logistics hubs, ports, and high-tech clusters; facilitate green and digital investment through coordinated incentives, infrastructure, and regulation; promote inclusive regional development, especially in less-developed areas near national borders.
Developing a Baltic Cross-Border Investment Corridor, for instance between southern Estonia and northern Latvia or in areas surrounding Klaipėda and Riga, could help replicate the benefits of the JS-SEZ by creating a unified investment area, while respecting national priorities and institutional autonomy.
Source: Ministry of Investment, Trade and Industry (Malaysia), Singapore Economic Development Board (EDB), ASEAN Investment Report 2023.
Less-developed regions in the Baltic States, such as Latgale in Latvia, Eastern Lithuania, or South Estonia, face persistent structural challenges that hinder their attractiveness to high-value foreign direct investment. These include limited infrastructure, lower education attainment, shrinking labour pools, and distance from key urban hubs. However, recent OECD analysis highlights that targeted FDI-SME linkage policies, when aligned with green and strategic investment priorities, can play a catalytic role in repositioning these lagging regions within national and global value chains (OECD, 2025[36]) (OECD, 2024[37]).
Within the Baltic States, Latgale provides a compelling case for rethinking the regional FDI-SME strategy. Despite economic headwinds and border-related challenges, the region has demonstrated pockets of industrial potential, particularly in electrical equipment manufacturing. Its strong cultural capital, green energy potential, and higher education institutions (e.g. Daugavpils University) can be further leveraged to attract mission-oriented investment. Building cross-border value chain collaboration with neighbouring Lithuanian regions, aligning higher education with local industrial needs, and designing SEZ programmes with embedded SME linkage criteria could help reposition such regions as competitive investment locations (OECD, 2024[37]).
As noted in recent OECD work, the key to unlocking regional attractiveness is to align place-based industrial and investment policies with broader innovation and SME strategies. This requires stronger multi-level governance, more robust supplier development frameworks, and clearer incentives for foreign investors to engage local actors. Without this, large-scale FDI risks remaining disconnected from the local economy, particularly in rural or economically disadvantaged regions.
Source: (OECD, 2025[36]) (OECD, 2024[37]).
Strengthening the absorptive capacities of Baltic SMEs
Policies that aim to enhance the absorptive capacities of local firms take on different forms, such as subsidies, grants, loans, tax relief, knowledge exchange infrastructure, and training programmes. These capacities are affected by a wide range of internal factors within the business environment.
Baltic States are expanding SME support tools, but greater focus on regional inclusion and coordination can strengthen absorptive capacity.
Figure 5.10 shows that the Baltic States deploy a range of policy tools in this area, but with notable differences in intensity and focus. Lithuania stands out for its comparatively diversified and active policy mix, employing 18 instruments that provide technical assistance, alongside 7 policies supporting collaborative networks and innovation platforms. This reflects a coordinated national effort to scale up firm-level capabilities in line with smart specialisation priorities, including programmes such as InoConnect, Competence LT, and the innovation voucher scheme. Lithuania’s balanced approach mirrors the practices of innovation-oriented economies such as the Netherlands and Finland, where both financial and non-financial supports are widely used to build firm readiness for innovation and internationalisation (Figure 5.10).
Estonia and Latvia, by contrast, exhibit more limited use of policy instruments to strengthen SME absorptive capacity. Estonia has implemented six initiatives centred on technical assistance, but lacks mapped policies that use financial support or formal collaborative platforms to connect SMEs with research institutions or foreign firms. While Estonia’s digital-first model and streamlined governance environment support overall business dynamism, the absence of more targeted absorptive capacity programmes may restrict SME participation in FDI-driven innovation diffusion, particularly outside the ICT sector. Latvia, meanwhile, shows the most limited engagement, with only two technical assistance measures mapped and no policies supporting financial or network-based capacity-building. This limited policy effort contrasts with peer countries like Denmark and Italy, which actively use both financial instruments and innovation networks to support SME upgrading.
As described in Box 5.6, recent OECD work highlights that strengthening absorptive capacities is particularly crucial in less-developed and remote regions, where limited access to knowledge infrastructure and weak firm capabilities reduce the benefits of FDI spillovers (OECD, 2024[37]). For instance, in Latvia’s Latgale region, fragmented support services and low participation of local firms in innovation networks have constrained productivity growth. This underscores the importance of place-sensitive policies that combine SME upgrading with regional investment strategies. Drawing from examples such as Portugal’s Mobilising Agendas, the Baltic States could further align absorptive capacity programmes with regional development goals, linking SMEs in underserved areas with research institutions, foreign investors, and national innovation platforms (OECD, 2024[37]).
% of all mapped policies supporting SME absorptive capacity
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting SME absorptive capacities. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
Varying institutional models shape SME support across the Baltics, with opportunities to better connect firms to innovation ecosystems.
The Baltic States have adopted varied institutional approaches to enhance the absorptive capacity of domestic SMEs, reflecting differences in policy priorities and administrative structures. In Lithuania, a relatively centralised model is evident, with the Innovation Agency (IA) and Invest Lithuania (IL) responsible for the majority of policies aimed at SME upgrading. Approximately 35% of policies target SMEs directly, while a further 13% apply to all firms but include preferential treatment for SMEs. This approach supports Lithuania’s broader smart specialisation and innovation strategies, which are designed to integrate SMEs into high-value sectors such as life sciences and ICT. In contrast, Estonia exhibits a more decentralised governance structure, with Estonian Business and Innovation Agency (EBIA) and the Ministry of Economic Affairs and Communications (MKM) jointly responsible for policies in this domain. Around 41% of policies in Estonia target all firms, and 18% specifically focus on SMEs. While this allows for flexibility and adaptability, it also suggests a need for stronger inter-agency coordination to maximise the impact of SME upgrading programmes.
Latvia shows a narrower institutional footprint, with LIAA (Investment and Development Agency of Latvia) and ALTUM responsible for the bulk of SME-related policies. Only 20% of policies in Latvia explicitly target SMEs, and a relatively high proportion (50%) target all firms regardless of size or ownership. This may reflect limited institutional mandates or capacity constraints in delivering tailored support to SMEs. Furthermore, across the Baltic States, policies targeting non-corporate entities - such as universities, research institutions, or clusters remain underdeveloped, accounting for less than 15% of the overall policy mix. Strengthening support for knowledge intermediaries and expanding the role of domestic firms and research centres in policy delivery could help increase SME access to innovation networks, research collaborations, and international value chains.
Note: Peer EU average is for the following economies: Czechia, Germany, Finland, Italy, Slovak Republic, Portugal, and Lithuania.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2023)
In the Baltic States, a combination of financial and technical support measures is used to enhance the absorptive capacity and innovation performance of SMEs, although the intensity and structure of these efforts vary across countries. Lithuania has developed a comprehensive suite of financial instruments - such as InoCentras, InoInternship, and innovation vouchers that support R&D collaboration, employee upskilling, and internationalisation of SMEs. These programmes, often implemented by the Innovation Agency and co-financed with EU funds, aim to enable diversification into high-value sectors like biotech, cybersecurity, and green energy (OECD, 2022[7]). Estonia, while relying less on direct financial subsidies, offers targeted support through EBIA, including digital innovation grants and access to mentorship networks. Estonia’s approach prioritises digital readiness and e-governance infrastructure, though gaps remain in structured collaboration between SMEs and foreign investors (OECD, 2024[25]). Latvia offers fewer SME-targeted innovation instruments but has recently scaled up sector-specific financing through ALTUM and LIAA to support green and dual-use technology adoption (OECD, 2024[8]). However, across all three countries, policies remain primarily focused on financial support schemes, with 64% of measures falling into this category, while fewer instruments facilitate knowledge exchange or long-term supplier development (Figure 5.10).
Complementary technical support services such as matchmaking platforms, export consulting, and sectoral innovation hubs are more prevalent in Lithuania and Estonia, helping SMEs build internal capabilities and engage in international R&D partnerships. Initiatives such as Lithuania’s B2Lithuania portal and Estonia’s Startup Visa and e-Residency programmes play an important role in linking domestic SMEs to global networks. Nevertheless, the dispersion of SME support across multiple institutions - Invest Lithuania and the Innovation Agency in Lithuania, LIAA and ALTUM in Latvia, and EBIA in Estonia - can result in overlapping mandates and complex navigation for SMEs. Enhancing inter-agency coordination and simplifying access procedures would improve the effectiveness of these instruments, particularly for smaller firms lacking internal administrative capacity. Raising awareness of existing support schemes and embedding SME engagement criteria within broader FDI and innovation policies would also help address persistent gaps in absorptive capacity across the region.
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2023).
Efforts to simplify and facilitate access to R&D support for SMEs should continue
Government support for business R&D in Estonia remains below the OECD average, with a strong emphasis on digitalisation and e-governance but fewer direct incentives for SME R&D investment. Estonia offers a simple and transparent tax system, yet R&D tax incentives are not as extensive as in some OECD peers. According to Figure 5.12, Estonia’s direct government support to business R&D stood at approximately 4% of GDP in 2021, well below the EU and OECD averages. Estonia relies more on EU structural funds, targeted grants, and programmes such as the Digital Innovation Hubs (DIHs) and Startup Estonia to support SME innovation. While these initiatives are helpful, structured R&D partnerships between foreign investors and domestic SMEs remain limited. Despite Estonia’s well-developed venture capital ecosystem, many R&D-intensive SMEs struggle to scale due to a lack of co-financing instruments. Expanding tax-based R&D incentives, potentially including super-deductions or refundable credits, and strengthening university-industry linkages could enhance Estonia’s absorptive capacity and maximise the potential of foreign knowledge inflows (OECD, 2025[32]) (OECD, 2024[25]).
Latvia’s R&D support system faces persistent challenges, with limited SME participation in national innovation programmes and a lack of structured mechanisms linking foreign investors to local firms. Figure 5.12 shows that Latvia’s government support for business R&D is the lowest among the three Baltic States, below 2% of GDP, indicating a constrained fiscal commitment to innovation. While R&D tax deductions exist, they are modest and underutilised by SMEs due to administrative hurdles. ALTUM’s Innovation Loan Programme and LIAA’s Digital Innovation Grants provide some direct support, yet high eligibility thresholds and complex procedures limit access. Latvia’s sector-specific support in biotech, logistics, and green energy remains underdeveloped in terms of local supplier engagement. Weak university-business cooperation and limited SME participation in R&D clusters further constrain absorptive capacity (OECD, 2025[32]) (OECD, 2024[8]). Strengthening fiscal incentives for SME innovation, simplifying application processes, and mandating FDI-SME research collaboration in publicly funded projects could improve knowledge diffusion and local value capture.
Lithuania has developed the most comprehensive and structured R&D support framework in the Baltic region. It provides both generous tax-based incentives, which allows firms to deduct up to 300% of eligible R&D expenses, and targeted financial instruments like Innovation Vouchers and co-financing schemes through the Innovation Agency. As shown in Figure 5.12, Lithuania’s public support for business R&D was approximately 11% of GDP in 2021, placing it above Estonia and Latvia, and close to the EU average. The Smart Specialisation Strategy ensures alignment between national innovation priorities and sector-specific FDI attraction efforts, fostering collaboration between foreign firms and domestic SMEs, particularly in biotech, fintech, and cybersecurity. However, despite the robustness of the policy framework, Lithuania faces challenges in the implementation phase, namely, long grant approval times and a lack of fast-track options for SMEs. Simplifying R&D incentive access and improving co-investment mechanisms could increase SME engagement in high-value innovation ecosystems (OECD, 2025[32]) (OECD, 2024[8]).
As % of GDP
Note: Data on subnational tax support not available.
Source: OECD R&D Tax Incentive Database, April 2024.
None of the three Baltic States currently apply preferential R&D tax treatment specifically for SMEs, meaning smaller firms often struggle to fully benefit from available incentives due to administrative burdens. SME-focused innovation incentives have become common across OECD economies and adopting deduction rates, simplified claim procedures, or partial reimbursements for loss-making firms, could improve innovation financing and absorptive capacity. However, in the Baltic context, R&D tax incentives are intentionally designed to apply equally to all enterprises. This approach maintains a simple and transparent system, while avoiding differentiated treatment across firm sizes in economies where SMEs represent the vast majority of businesses.
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2023).
Ongoing reforms across the Baltic States are enhancing the regulatory environment, with opportunities to further streamline procedures and tailor support for SMEs.
The Baltic States vary significantly in their regulatory frameworks for start-ups and insolvency procedures, with Estonia standing out as the most business-friendly due to its advanced e-government services and simplified business registration processes. Estonia ranks among the top performers in the Business Ready 2024 Regulatory Framework pillar, scoring 72.84, well above the OECD average, and is classified in the top quintile globally (World Bank, 2024[38]). Estonia’s digital-first model enables firms to register a business online in minutes and file taxes through fully automated systems, significantly reducing compliance costs. By contrast, Lithuania and Latvia have made notable progress in simplifying regulation and improving digital public services but still face administrative bottlenecks that weigh on SMEs. Lithuania’s Smart Regulation reforms and one-stop service improvements have streamlined permitting and tax filing, yet OECD analysis notes that regulatory and insolvency frameworks could be further aligned with best performers to foster productivity growth (OECD, 2025[32]). In Latvia, regulatory procedures remain comparatively complex, and the average insolvency duration, about 2.1 years, is relatively long by OECD standards (OECD, 2024[8])These factors can discourage entrepreneurial risk-taking and delay the efficient reallocation of resources.
Latvia’s business environment still entails significant administrative burdens for SMEs, including detailed licensing, reporting, and tax-compliance requirements. There are persistent gaps in coordination among public bodies and relatively high costs of insolvency procedures (OECD, 2024[8]). To address these, several initiatives are underway. LIAA, acting as secretariat to the Coordination Council for Large and Strategically Significant Investment Projects, is tasked with identifying and investigating problem areas. Remedies to the identified barriers are then developed and resolved at the inter-institutional level by the Ministry of Economics’ Operational Working Group for Large and Strategically Significant Investment Projects. Although overall regulatory restrictiveness is below the OECD average, scope remains to simplify procedures and strengthen policy coherence to better support small-business development. Continued efforts to expand digital public services, reduce compliance time, and shorten insolvency proceedings would further align Latvia’s regulatory framework with the OECD benchmark. (OECD, 2024[39]).
Lithuania has made substantial progress in improving the regulatory environment, especially via digital government, yet SMEs still report meaningful compliance frictions. Lithuania ranks highly on EU digital public services for business and places 6th in the 2024 European eGovernment Benchmark, reflecting strong online tools for starting and running a firm (European Commission, 2023[40]). However, administrative burden and uneven implementation persist, including complex rules, coordination gaps, and unpredictability that hinder businesses’ access to support and add to ongoing compliance costs (e.g., tax filings, grants, legal interpretations) (European Commission, 2025[41]). Starting a business is inexpensive by international standards (very low official cost as a share of income per capita), but the recurring compliance burden remains the bigger obstacle for small firms with limited internal capacity (OECD, 2025[32]).
Estonia ranks among the least bureaucratic countries in the OECD, owing to its integrated digital platforms for business operations, licensing, and taxation. According to the OECD SME and Entrepreneurship Outlook 2023, Estonia’s simplified regulatory procedures and minimal compliance costs make it one of the easiest places in the OECD to start and operate a business (OECD, 2023[12]). Due to the size of the economies and prevalence of SMEs across the country small businesses often receive the same treatment as larger firms. While Estonia’s transparent tax system and simplified regulatory procedures reduce legal ambiguity and compliance costs overall, some SMEs may still face challenges in accessing broader innovation-focused or green economy initiatives due to limited financial flexibility.
To enhance the business environment for SMEs, the Baltic States should prioritise regulatory simplification, digitalisation, and tailored support mechanisms. Latvia could build on its e-government platform for business services, further centralising business support procedures. Lithuania could introduce a tiered tax compliance system, drawing on best practices from Ireland and the Netherlands, which have used such frameworks to promote SME formalisation and reduce compliance friction. Estonia, already strong on administrative efficiency, could further support SMEs by improving take-up of existing horizontal innovation grants (simpler entry points, lighter documentation and clearer guidance). Across the region, integrating SME-focused tools into digital business ecosystems and harmonising insolvency procedures would strengthen resilience, support entrepreneurship, and increase the overall competitiveness of Baltic SMEs.
Promoting value chain linkages and strategic partnerships
Investment facilitation and aftercare services play a key role in encouraging the deeper integration of foreign affiliates into local economies and strengthening linkages with domestic SMEs. These services typically support investors throughout the project lifecycle, from initial project definition and identifying potential local suppliers and clients, to ongoing assistance post-establishment, including support for expansion and reinvestment. In the Baltic states, however, the frameworks for promoting value chain linkages differ across countries, reflecting varying institutional approaches and policy priorities.
In Estonia, 80% of initiatives supporting SME–FDI linkages fall under governance frameworks, including strategic policy coordination, institutional support, and targeted regulations to foster a conducive environmentIn Latvia, the focus is more on building collaborative ecosystems - around 29% of support measures are delivered through networks and collaboration platforms. These initiatives aim to enhance connectivity between SMEs and foreign investors by promoting partnerships, information exchange, and shared resources. Meanwhile, in Lithuania, the majority of support, accounting for 92%, is provided through technical assistance, information dissemination, and facilitation services. This includes advisory support, matchmaking services, training, and access to relevant market and investment information to help SMEs engage more effectively with foreign firms.
For strategic partnerships, all three countries place emphasis on technical assistance, information and facilitation services: 100% of mapped policies in Lithuania, 30% in Latvia and 25% in Estonia support strategic partnerships through technical assistance
% of all mapped policies supporting the objectives
Note: Shares are calculated as a % of the total of national initiatives aimed at supporting SME absorptive capacities. Shares may be higher than 100% when policy initiatives respond to several policy objectives at the same time.
Source: Experimental indicators based on EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2025)
In all three Baltic states, the investment promotion agencies are the main contact points for large-scale investment projects, and they all organise meetings with representatives of local business support organisations and compile lists of potential domestic suppliers.
Investment promotion agencies play a crucial role in facilitating linkages between domestic suppliers and foreign investors, including through matchmaking efforts like business fairs, targeted missions, and direct negotiation support. However, such initiatives are far more effective when embedded in broader supplier development programmes. Without targeted support to help SMEs upgrade skills, meet quality standards, and scale production, local firms often struggle to meet investor needs, limiting the potential for lasting linkages and FDI spillovers.
Evidence shows that well-designed supplier development programmes strengthen commercial relationships, improve SME capabilities, boost sales for both suppliers and their clients, and enhance business survival (Arráiz, Henríquez and Stucchi, 2011[42]). Even when not focused on exports, these programmes can support export readiness, job creation, and higher wages. Despite these benefits, no active supplier development programmes currently exist in the Baltic states, highlighting a key gap in efforts to maximise the development impact of FDI.
Supplier Development Programmes are public, private or private-public initiatives established to enhance SMEs capabilities and support their integration into the local and international value chains, generally as suppliers to large enterprises. The initiatives tackle quality gaps, productivity, compliance and procurement readiness that limit SMEs ability to effectively compete.
To this end, SDPs provide combination of financial incentives, technical assistance and market facilitation, often developed in very close collaboration with anchor firms or major public-sector buyers, whose involvement connects the programme to real market demands. Such models are already in use in various countries, where collaboration between large firms and SMEs is supported through structured, project-based initiatives.
Chile’s Programa de Desarrollo de Provedores (PDP) was established in 1998 by the national development agency in Chile, Corporación de Fomento de la Producción (CORFO). With this programme, large firms can work together with groups of SMEs in a project-oriented approach to upgrade their production capabilities. CORFO then supplements this with matching grants covering up to 50% of the eligible cost of the project to encourage SME participation and, at the same time, engage the private sector. Evaluations of the programme have shown tangible benefits for participating SMEs, including securing new contracts, accessing export opportunities, and streamlining operational processes. The PDP has also helped shape the design of similar initiatives in Colombia, El Salvador, Mexico, and Uruguay.
In Scotland, the Supplier Development Programme aims to help small businesses access public procurement by offering training and workshops to become tender-ready, along with events that connect suppliers with public buyers. The programme is actively promoted by all 32 local authorities and has proven highly relevant, with strong potential for further growth. It has emerged as a valuable tool for enhancing SME participation in public procurement.
The Leverandørutviklingsprogrammet (LUP) is Norway's National Programme for Supplier Development. The programme promotes innovation in public procurement. It has provided legal guidance and neutral facilitation to both public agencies and SMEs in order to build innovative structures of procurement processes. The programme has recorded number of hundreds of procurements and has been much credited for low barriers of entry for SMEs with the use of public savings and positive environmental impacts.
SC21 is the supplier programme on the UK side and is targeted primarily at the aerospace and defence industries. It is industry-led and underpinned by major firms such as Airbus and BAE Systems. SC21 coordinates supply chain operational improvements and compliance of SMEs with exacting industry standards. Participants have reported performance gains and long-term contracts, illustrating the potential of sector-specific SDPs.
Developing robust supplier development programmes could be particularly valuable in the Baltic context, where SMEs often face challenges related to international standards, skills gaps, and readiness for the digital and green transitions. Well-designed SDPs can help strengthen the domestic supplier base and foster more productive linkages with multinational enterprises, supporting broader competitiveness and innovation goals in the region.
Tailored programmes may be needed in FDI-intensive sectors where foreign MNEs are concentrated, and linkage potential is high. These sectors differ between the Baltic states: In Estonia, FDI is heavily concentrated in manufacturing, especially high-tech electronics, offering strong potential for productivity and technology spillovers (Invest Estonia, 2024[43]). In Latvia and Lithuania, FDI is most prominent in services, financial operations, and manufacturing sectors, all of which present opportunities for strengthening FDI-SME linkages (Invest in Latvia, 2024[44]), (Official Statistics Portal - Lithuania, 2024[45]). To maximise the impact of supplier development efforts in these sectors, it is essential to involve investment promotion, SME, and innovation agencies in programme design and implementation. This helps ensure alignment with FDI strategies and enhances coordination with investment facilitation and aftercare services (OECD, 2023[1]). However, the effectiveness of such coordination is currently limited by institutional gaps in some areas. While dedicated SME agencies are absent in the Baltic countries, existing bodies, such as the Estonian Business and Innovation Agency, LIAA and Innovation Agency Lithuania, play a central role in SME policy and support. Rather than suggesting a specific structural solution, the focus should be on enhancing the effectiveness and coordination of existing institutions to ensure they are well equipped to help local firms build meaningful linkages with foreign investors.
The investment facilitation services offered by national investment promotion agencies and relevant ministries could be more effectively leveraged to support FDI–SME linkages. In Estonia, the Ministry of Economic Affairs and Communications has established a national contact point for investment, with a strong focus on the priority sector of manufacturing. The EBIA functions as the primary interface for foreign investors, providing guidance, information, and support during the investment process. Meanwhile, domestic SMEs typically interact with specific departments within the Estonian Business and Innovation Agency, which focus on SME development, innovation, and competitiveness. While this arrangement enables targeted communication, it also highlights the absence of a fully integrated system for coordinated service delivery, limiting the potential to foster seamless collaboration between foreign investors and local suppliers. Establishing a dedicated inter-agency taskforce could help bridge this gap by improving coordination across institutions, aligning outreach strategies, and streamlining support services for both investors and SMEs.
In Lithuania, efforts were made to streamline and consolidate investment facilitation services and SME support. Enterprise Lithuania, Agency for Science, Innovation and Technology (MITA) and the Lithuanian Business Support Agency were merged to create the Innovation Agency in 2022. The agency serves as a one-stop shop for business promotion and an entry point for businesses in Lithuania, supporting partnerships, joint initiatives, and cooperation with international associations and institutions. The agency complements Invest Lithuania by focusing on business development, whereas the investment promotion agency primarily targets investors. Services offered by the innovation agency include subsidies, mainly for innovation and digitalisation, along with consultations, training programmes, and mentorship support. The agency offers a range of services to support business development, including free consultations and matchmaking support. It facilitates access to financial incentives and plays an active role in promoting and monitoring Special Economic Zones (SEZs). Despite the coordination and collaborate between the Innovation Agency and Invest Lithuania, one of the key challenges lies in the absence of a sustainable governance structure for SME and investment-related initiatives. Strategic direction and long-term policy continuity should be anchored at the governmental level rather than left to the discretion of implementing agencies. Establishing a more coherent and institutionalised governance framework would help ensure better coordination, accountability, and policy impact across all levels of engagement.
Latvia’s Investment and Development Agency (LIAA) is the key implementation agency of the Ministry of Economics. The agency beyond financial support to offer hands-on assistance. In addition to providing grants, the agency actively organises trade missions and export promotion activities, helping companies expand into international markets. This approach also extends to startup support, where the LIAA not only provides funding but also directly coordinates initiatives and networking opportunities. The agency’s work in FDI attraction and export promotion, together comprising around two-thirds of its activities, operates in a complementary manner with ALTUM, which serves as the main source of SME funding. LIAA’s broad mandate, spanning FDI attraction, export promotion, startup support, trade missions, and grant administration, while also serving as the main point of contact for both foreign investors and SMEs, risks overstretching its resources and diluting strategic focus. Without adequate staffing, budget, or specialised expertise, the agency may face challenges in maintaining high-quality, sector-specific support across its diverse portfolio.
While coordination mechanisms, such as inter-ministerial councils, public consultations, or thematic committees, exist in each country, they tend to focus on high-level policy issues and rarely translate into operational alignment at the agency level. For example, there are limited structured processes for sharing investor or SME data across agencies, which constrains the ability to identify and act on potential supply chain linkages. Moreover, the lack of joint planning and programme co-design between investment promotion agencies, innovation bodies, and financing institutions, the scope for comprehensive supplier development efforts. Introducing formal coordination frameworks, such as shared client tracking systems, inter-agency task forces, or co-branded support programmes, could significantly improve service integration and enhance the impact of FDI-SME linkage strategies across the region, particularly in sectors where spillover potential is highest.
Regional investment facilitation in the Baltic states highlights the need for stronger coordination and tailored institutional support
Investment facilitation services on a regional level are varied across the Baltic states. EBIA delivers investment facilitation services through a coordinated team structure. The Tallinn Team leads efforts to attract high-priority foreign investments with a proactive and targeted approach. The Regional Team focuses on aftercare and brownfield projects, supporting the retention and expansion of existing investments. The Foreign Representative Team extends Estonia’s global reach by promoting the country in key markets and guiding potential investors through their decision-making. The agency collaborates closely with the EBIA and IDA Viru, a regional investment promotion agency. EBIA acts as a central coordinator, linking industrial park owners with prospective investors to ensure a smooth and efficient investment process. Through these multi-level partnerships and integrated service delivery, Estonia offers a coherent and investor-friendly ecosystem that supports both new investments and the growth of existing operations. Nevertheless, coordination across multiple specialised teams and agencies carries a risk of fragmentation or overlap, particularly if communication mechanisms are not robust. While Tallinn leads high-priority FDI attraction, regional areas may lack the same outreach capacity or resources, resulting in potentially uneven service provision and underrepresentation of certain regions. The centralised, top-down structure, though consistent, may limit local responsiveness and bottom-up input. Moreover, maintaining a high level of expertise across teams, particularly in regions, presents ongoing talent retention and resourcing challenges.
In Latvia, the LIAA is the primary agency responsible for investment promotion and facilitation. However, it lacks a dedicated regional focus, which falls under the mandate of the Ministry of Smart Administration and Regional Development. While the Ministry is not directly involved in investment policy design, it maintains informal coordination with LIAA on regional investment matters. The Ministry also leads capacity-building initiatives for entrepreneurs, working in coordination with various institutions, including close collaboration with LIAA. These initiatives are guided by needs-based analyses and involve consultations with regional stakeholders to ensure their relevance and effectiveness. However, investment attraction is not currently among the areas targeted by these programmes, as focus areas are determined by the specific needs identified in each region. Each region hosts an entrepreneurship center, several of which have developed informal coordination mechanisms with LIAA to support local investment activities. Nonetheless, the absence of formal thematic groups limits the ability to systematically address specialised investment-related topics. Establishing such groups at the national level could enhance coordination and enable more targeted, effective collaboration among institutions involved in investment facilitation. This follows a general trend among the OECD countries, where IPAs typically rely on low-cost, informal mechanisms like information exchange and coordination meetings, while more formal approaches, such as budgetary contributions and board memberships, are much less common (OECD, 2022[46]).
In Lithuania, Invest Lithuania does not have regional offices but maintains strong coordination with municipalities, particularly in the management of SEZs. In this context, Invest Lithuania facilitates interest, participates in discussions, and monitors results and performance. Companies operating within SEZs are privately owned and selected through competitive procedures, while municipalities are responsible for providing the necessary infrastructure. The Innovation Agency operates regional offices, which provide support to SMEs. Innovation Agency also focuses on regional investment facilitation, with most of its financial instruments aimed at supporting rural regions rather than the capital. This focus is driven by the requirements of structural funds, which prioritise rural development. Regional Development Councils could further reinforce strategic alignment between local investment priorities and national FDI and innovation goals. Regional and city development agencies can continue serving as local competence hubs to support project pipelines and business needs, while the Innovation Agency’s “Spiečius” network, present in 15 towns, provides an effective channel for SME engagement and investor support. Strengthening coordination and capacities across these platforms would support more responsive services and deeper alignment between rural development and national competitiveness strategies.
These country examples underscore a broader challenge: across OECD countries, subnational and regional agencies and local authorities play important roles in attracting and supporting foreign investors. However, without strong policy coherence and effective coordination, there is a risk of overlapping efforts, inefficient use of public resources, and inconsistent messaging to investors - outcomes that could ultimately reduce the number of FDI projects and their associated benefits (OECD, 2022[46]).
Export support for SMEs is strong across the Baltic states, yet efforts to develop domestic and regional supply chains are less prominent
In addition to investment facilitation, many policies prioritise enhancing SMEs’ international exposure and networking opportunities, while comparatively less attention is given to strengthening local supply chain development and regional supply chain in the Baltic states. All Baltic states have export promotion programmes, however with varying effectiveness. EBIA includes an export division focused on helping SMEs expand into international markets and complements these efforts by providing export loans to SMEs. These loans are intended to support foreign buyers in purchasing Estonian capital goods, thereby strengthening the global competitiveness of Estonian producers. However, most of the export financing currently targets traditional export markets, such as the Nordic countries, limiting the potential for diversification into new or emerging destinations.
In Latvia, LIAA has a dedicated department focused on export services, offering tailored support such as export action plans to strengthen export capacity, as well as facilitating participation in national exhibitions, trade missions, and official overseas visits. In parallel, ALTUM, a state-owned financial institution, supports the financial side of internationalisation. It provides investment-promoting instruments and export credit guarantees, particularly for EU markets, indicating an effort to reduce financial risks for Latvian exporters. ALTUM’s role is also embedded within broader innovation and SME support policies, aligning with the Ministry of Economy’s goals. Since 2016, ALTUM has also provided export credit guarantees, primarily targeting EU markets. This dual approach - strategic/export capacity-building through LIAA and financial de-risking via ALTUM - suggests a coordinated institutional ecosystem for SME export support.
In Lithuania, the Innovation Agency has developed a range of policies to support SME growth and expansion. Lithuania’s SME development policies encompass a broad set of initiatives aimed at enhancing export readiness and international competitiveness. Key measures include organising B2B events and providing a structured export programme that offers training and mentorship, with a particular focus on accessing the US market. Tools such as B2Lithuania and the Wings programme serve as practical platforms to support SMEs in navigating export processes. SMEs also benefit from participation in business missions, expos, and financial subsidies to attend these events. A one-stop shop delivers export diagnostics and tailored tools, with support targeted at priority sectors under the Smart Specialisation Strategy. Additionally, dedicated programmes promote high-tech exports, while ILTE’s export credit guarantees assist companies to internationalise and expand to new markets. Despite these efforts, Lithuanian SMEs still face significant internationalisation challenges, notably in traditional manufacturing sectors, where skill shortages and difficulty adapting to global market demands remain persistent barriers.
The following table outlines selected policies from Estonia, Latvia, and Lithuania that support value chain linkages and strategic partnerships between large enterprises and SMEs. While the specific focus of each programme varies, from export promotion to innovation funding and business matchmaking, they all contribute to creating conditions for stronger linkages between domestic firms and foreign enterprises in the Baltic region.
Source: EC/OECD Survey on Policies enabling FDI spillovers to domestic SMEs (2025).
Facilitating FDI-SME spillovers through worker mobility
Labour market regulations influence workforce mobility, which is crucial for enabling productivity spillovers when skilled employees transition from foreign MNEs to domestic SMEs. Striking a balance between job security and labour market flexibility is essential to encourage such mobility, particularly across sectors with high FDI presence. Targeted policy measures that facilitate the movement of skilled workers can help unlock the full potential of these spillovers, enhancing local economic benefits.
The Baltic States maintain employment laws that balance flexibility and job security
The three Baltic States maintain a legal framework for employment protection which is broadly in line with OECD standards. The current framework balances firm adaptability, labour market flexibility and job security. The OECD indicators of Employment Protection Legislation (EPL) show that each country’s regulations regarding individual and collective dismissals of regular workers, as well as rules for hiring temporary workers, while slightly deviating in either direction, are considered close to the OECD average (Figure 5.17). Lithuania and Latvia both have employment protection standards which are either on par or slightly below the OECD average across most indicators, thus maintaining accessible labour markets while preserving worker protections. Estonia’s framework is likewise on par with the OECD average, although it exhibits greater deviations in several areas, with some indicators falling below. While the Baltic States had already undertaken reforms to enhance the adaptability of their labour markets following changing economic conditions, notably post-2008, these recent findings suggest that they are continuing to uphold fundamental employment security provisions. These patterns reflect a shared regional approach shaped by historical labour market reforms, particularly those undertaken in the aftermath of the 2008 financial crisis to increase resilience and responsiveness. Despite their pro-flexibility orientation, the Baltic States have retained key elements of employment security, indicating a deliberate policy effort to preserve social stability while enhancing competitiveness in a dynamic global economy.
Note: The OECD indicators of employment protection are synthetic indicators of the strictness of regulation on dismissals and the use of temporary contracts. For each year, indicators refer to regulation in force on the 1 January. Range of indicator scores: from 0 (low regulators protection) to 6 (high regulatory protection).
Source: OECD Employment Protection Legislation Database, 2019
Estonia has undertaken several policy initiatives to promote permanent employment and regulate the use of temporary contracts. In 2022, amendments to the Employment Contracts Act were implemented to enhance transparency and predictability in working conditions. These changes granted employees the right to request a transition from fixed-term or part-time contracts to permanent or full-time positions. In 2024, the government introduced a provision enabling employers to enter into successive fixed-term contracts of up to eight days with registered unemployed individuals over a six-month period. This measure was designed to facilitate the reintegration of unemployed persons into the workforce while maintaining safeguards against the misuse of temporary contracts (Parliament of Estonia, 2022[47]). While Estonia is making tangible progress toward limiting the overuse of temporary contracts, sustained attention will be needed to ensure that flexibility does not undermine job stability or workers’ rights.
Similarly to Estonia, in an effort to transpose the EU Directive on transparent and predictable working conditions (Directive 2019/1152) (European Parliament, 2019[48]), Latvia also introduced amendments to the Labour Law to enhance transparency and predictability in working conditions. These changes included provisions for minimum predictability of work schedules, adjustments to probationary periods for fixed-term contracts, and flexible use of parental leave. Additionally, Latvia has taken steps to address the rights of platform workers and ensure equal pay. Employers are encouraged to review and adjust existing contracts to comply with directives that protect platform workers, promoting fair and transparent employment practices. Latvia’s recent reforms to improve transparency and predictability in working conditions mark a positive step toward strengthening employees’ protection. To build on this progress, Latvia could consider introducing moderate limits on the repeated use of fixed-term contracts and encouraging the transition to permanent roles, particularly for younger and platform-based workers. Complementing this with portable training entitlements would support skills development and help foster more stable, long-term employment relationships. Policies that promote permanent employment can encourage firms to invest more in employee training, thereby enhancing their absorptive capacity and overall innovative potential (Institute of Labor Economics, 2021[49]).
Lithuania has implemented several policy measures to encourage the uptake of permanent employment and limit the overuse of temporary contracts. The Labour Code stipulates that fixed-term contracts should not be used for permanent roles unless specifically provided by law or collective agreements. Additionally, the total duration of successive fixed-term contracts with the same employee for the same job function is limited to two years, and for different functions, up to five years. Exceeding these limits results in the contract being deemed indefinite. Furthermore, fixed-term contracts for permanent jobs may not exceed twenty percent of the total number of employment contracts concluded by the employer. These policies contribute to fairer labour practices and can support higher levels of workforce commitment, productivity, and investment in skills. Continued enforcement and monitoring will be essential to ensure these protections are effectively implemented in practice.
The labour market regimes in the Baltic states are generally conducive to fostering FDI-SME spillovers through labour mobility. However, the extent to which these benefits materialise depends largely on the absorptive capacity of local SMEs, particularly in regions and sectors with higher skill intensity. Evidence from EU countries suggests that labour markets with strong absorptive capacities are better positioned to mitigate potential downsides of FDI, such as talent poaching or wage inflation, by enabling domestic firms to retain and develop skilled workers (Becker, B. et al., 2020[50]). To fully harness the spillover potential of FDI, it is important to assess how labour market regulations interact with other enabling factors, including SME capabilities and the availability of skilled labour. While regulatory frameworks in the Baltic states have improved, labour mobility between foreign and domestic firms may remain limited unless structural barriers to knowledge diffusion and firm-level learning are effectively addressed.
All Baltic States actively implement targeted attraction policies, nevertheless talent shortages persist
Facilitating FDI-SME spillovers through worker mobility remains a challenge, as Baltic SMEs face difficulties in attracting and retaining highly skilled talent All three Baltic countries face persistent challenges in attracting and retaining skilled workers, compounded by increasing competition for talent from the Nordic countries, which often offer higher wages and more developed labour markets. In addition, structural mismatches between the skills acquired through university education and those demanded by employers continue to limit the availability of a suitably skilled workforce. These mismatches stem from gaps in curriculum relevance, insufficient practical training, and limited coordination between higher education institutions and industry. Together, these factors constrain the talent pool available to businesses, especially SMEs, particularly in high-growth and innovation-intensive sectors.
In response to growing skills shortages and increasing global competition for talent, particularly in high-growth and innovation-driven sectors, the Baltic countries have taken steps to attract foreign professionals through targeted policy initiatives. The Work in Estonia Programme aims to attract foreign talent by offering comprehensive support for relocating and working in Estonia, including job listings, relocation guides, and community integration (Work in Estonia, 2024[51]). Estonia has also simplified its immigration procedures, making it easier for high-skilled workers to obtain residence and work permits through streamlined processes and reduced bureaucracy (MMPL, 2024[52]). While Estonia applies an annual immigration quota for non-EU nationals, exemptions are made for startups (including founders and employees), IT professionals, and top-level specialists earning at least twice the national average gross salary. Estonia also offers a Startup Visa to help non-EU founders establish and grow innovative companies, as well as a Digital Nomad Visa, which allows remote workers employed abroad to live in Estonia while continuing to work for their foreign employers. However, they do not directly link foreign expertise with SME development.
Lithuania has structured worker mobility policies, offering structured upskilling programs (InoInternship, Competence LT) that connect SMEs with foreign investors. As part of its 2022-2030 Development Programme, Lithuania’s Ministry of Economy and Innovation aims to boost economic resilience and global competitiveness. A key measure targets skilled labour shortages by attracting, integrating, and retaining foreign talent through streamlined migration, talent promotion, and better alignment of education with labour market needs. In addition, the Startup Employee Visa, launched in 2021, is designed to attract high-skilled workers to join startups, offering a simplified application process and faster processing times (Startup Lithuania, 2024[53]). Lithuania also provides extensive relocation support, assisting foreign workers with housing, healthcare, and community integration, ensuring a smooth transition, and enhancing their overall experience in the country. The Work in Lithuania platform further supports this goal by connecting international professionals with job opportunities and assisting with relocation and integration. Furthermore, Lithuania offers an entry allowance for foreign-attracted workers, equivalent to 4.1 minimum monthly wages, approximately EUR 3 788, to help cover relocation expenses (Lithuanian Public Employment Service, 2024[54]; IOM Lithuania, 2024[55]). Highly skilled workers can receive the EU Blue Card, a renewable long-term residency permit for up to two years in Estonia and three years in Lithuania, reducing the need for short-term renewals and simplifying bureaucratic procedures (EU Immigration Portal, 2022[56]). Such favourable conditions encourage skilled workers to relocate, mitigating skills shortages in high-growth sectors where FDI may outcompete domestic companies struggling to retain talented staff (OECD, 2023[1]).
Latvia has implemented a multifaceted strategy to attract and retain talent, addressing challenges such as an ageing population, emigration of skilled workers, and evolving labour market demands. The Education Development Guidelines 2021-2027 serve as a cornerstone, aiming to enhance digital and STEM competencies, bolster adult learning, and improve the quality of education across all levels. To mitigate skills shortages, particularly in high-demand sectors like engineering and ICT, Latvia is focusing on improving working conditions and stimulating wage growth. Efforts are also underway to attract foreign talent and encourage the return of Latvian professionals from abroad and to modernise its public employment services, aiming to enhance job matching and career guidance through advanced digital tools (OECD, 2024[57]). These combined efforts reflect Latvia's commitment to creating a resilient and adaptable workforce. Nevertheless, Latvia is experiencing population decline, particularly in less developed regions like Latgale, where the population is projected to shrink by over 40% between 2023 and 2051, one of the steepest declines anticipated in the EU. Tackling this regional outmigration will require coordinated action, including collaboration with neighbouring regions facing comparable demographic challenges (OECD, 2024[58]).
Baltic states advance workforce readiness through targeted upskilling and reskilling initiatives
Estonia, Lithuania, and Latvia have each launched strategic upskilling and reskilling initiatives to address labour market shifts and support economic transformation. In Estonia, the government is investing heavily in green and digital skills development. This includes funding in-service training and retraining for adults with outdated or low-level qualifications, as well as updating vocational and higher education curricula to align with digitalisation and climate goals. The PRÕM+ programme (2023-2029) supports work-based learning and traineeships to better connect vocational education with labour market needs. Lithuania has introduced a National Reskilling and Upskilling Programme aimed at training 20 000 specialists in high-value sectors such as ICT, engineering, and life sciences. This EUR 80 million initiative is designed to meet the demands of automation and digitalisation in the economy. Additionally, the government is enhancing digital infrastructure and skills development through projects like the National Data Lake. In Latvia, the Education Development Guidelines 2021-2027 aim to increase adult learning participation to 8% by 2024 and 12% by 2027. Efforts include reducing reliance on EU funding for training and introducing new financing models to support lifelong learning. Furthermore, EUR 15 million from the European Social Fund Plus is allocated to develop structural upskilling and reskilling programmes and flexible learning pathways.
The Baltic States share a strong commitment to upskilling and reskilling, with each country tailoring its approach to national priorities and institutional context. Estonia and Lithuania are integrating digital and green transitions into their reskilling agendas, aligning workforce development with broader economic goals. Latvia is placing particular emphasis on expanding lifelong learning and developing sustainable financing models to support adult education and training. Across the region, these efforts reflect a growing recognition of the need to equip workers with future-ready skills, and their success will depend on effective coordination across sectors, engagement with employers, and strong systems for monitoring and adapting policies over time.
Despite strong political commitment and innovative programmes, the Baltic States face ongoing challenges in aligning training with labour market needs, engaging low-skilled adults, and ensuring sustainable financing. To strengthen the impact of upskilling and reskilling efforts, governments should prioritise deeper collaboration with industry, expand flexible and modular learning opportunities, and build robust systems for tracking outcomes and adapting programmes. Increasing investment in capacity-building for education providers and promoting cross-country learning within the region could also enhance programme effectiveness and resilience, as is the case in Finland, which introduced a robust programme to attract and retain talent, which leverages the collaboration between national and regional actors (Box 5.8)
All three Baltic countries, particularly Latvia, continue to face challenges related to brain drain and population decline, as workers migrate to neighbouring countries offering more competitive wages. As of 2025, Estonia, Latvia, and Lithuania are part of the Ukraine Regional Refugee Response Plan1 and, relative to their populations, have received a substantial number of refugees. Estonia reports the highest employment rate among Ukrainian refugees at 69%, followed by Latvia at 56% and Lithuania at 53%. Nevertheless, a significant share of refugees faces de-skilling, working in roles that do not match their qualifications (UNHCR, 2025[59]), highlighting a broader gap in skills matching and career development support. To address this, targeted reskilling and upskilling initiatives should be expanded and tailored to the needs of refugees - focusing on language acquisition, recognition of prior qualifications, and access to vocational training in sectors aligned with national labour market demand. Strengthening partnerships between public employment services, education providers, and employers will be essential to ensure that refugees can transition into roles that reflect their skills and contribute meaningfully to the local economy.
To address growing labour shortages and maintain its global competitiveness, Finland has launched a comprehensive national strategy to attract and retain skilled foreign workers. The Talent Boost programme, jointly coordinated by the Ministry of Economic Affairs and Employment and the Ministry of Education and Culture, brings together a broad set of initiatives to promote both work-based and education-based immigration. It is implemented in close collaboration with a network of national and regional actors, including municipalities, universities, employers, and training providers.
The Talent Boost programme for 2023-2027 builds on previous efforts and aims to attract workers not only from other EU countries but also: the Philippines, Brazil, India, and Vietnam. It focuses on improving Finland’s international visibility and appeal among global talent, strengthening support services to help retain foreign professionals, and tackling the risk of labour exploitation. Plans to streamline immigration procedures include accelerating residence permit processing through increased automation, with a target of issuing permits within one week for experts and within 30 days for other categories of workers. At the same time, safeguards are being reinforced to prevent misuse of the system and ensure compliance with regulatory requirements.
The programme is designed to reinforce Finland’s innovation potential, stimulate investment, and contribute to the vitality of local communities. It also seeks to create more inclusive workplaces and support the integration of immigrants already residing in Finland. Efforts to build a more international work environment are helping to retain foreign students and researchers after graduation, thereby reducing the risk of brain drain. By enabling smoother pathways for foreign experts to live and work in Finland, the programme plays a vital role in supporting long-term growth and sustainable employment.
Creating market conditions for fair competition and knowledge exchange between foreign and domestic firms
Supportive regulatory frameworks that promote fair competition and facilitate knowledge exchange between foreign and domestic firms are essential for boosting productivity and innovation. Clear and enforceable competition rules help ensure a level playing field, encouraging foreign investment while motivating domestic firms to enhance product quality, adopt new technologies, and innovate. Equally important is the protection of intellectual property rights (IPR), which underpins these innovation incentives. Facilitating innovation spillovers from FDI requires targeted policy interventions to promote the protection and use of intellectual property rights. Robust IPR frameworks not only enable SMEs to safeguard their innovations and compete more effectively with larger firms but also increase the willingness of foreign multinationals to share technology and expertise through partnerships such as joint ventures or licensing agreements. Strong product market regulation performance positions the Baltic states ahead of the OECD average
Overall, the Baltic countries perform better than most OECD economies in terms of regulatory barriers to competition. According to the OECD Product Market Regulation (PMR) indicators, which measure the degree to which laws and policies promote or inhibit competition, regulatory barriers are below the OECD average and have significantly decreased over the past decade (Figure 5.15).
The Baltic states generally perform well compared to the OECD average across key dimensions of product market regulation (PMR), reflecting open and pro-competitive market environments. All three countries score below the OECD average on the overall PMR index, indicating relatively low regulatory barriers to competition. Lithuania stands out for its particularly low administrative burden on start-ups and a relatively open service and network sector, which are conducive to entrepreneurship and innovation. However, it shows slightly higher levels of state involvement in business operations, suggesting room for further liberalisation in this area. Estonia consistently performs well across the board, with the lowest levels of public ownership, minimal state interference in business operations, and the most open regime for trade and investment among the three. Latvia, while still performing better than the OECD average overall, faces relatively higher regulatory complexity, especially in the area of regulatory simplification and evaluation, and maintains more pronounced barriers in service sectors. Despite these differences, all three countries exhibit lower barriers to trade and investment than the OECD average, supporting a broadly open and competitive regional business environment.
To build on this strong foundation, Lithuania should focus on reducing state involvement in business operations and continue streamlining its regulatory framework, particularly through the use of digital tools and data-driven evaluations. Latvia would benefit from prioritising improvements in regulatory quality by strengthening impact assessment mechanisms and enhancing transparency through stakeholder engagement. It should also work to liberalise its service and network sectors further and improve regulatory oversight. Estonia, while already a regional frontrunner, could reinforce its review mechanisms to ensure continued regulatory agility and explore opportunities for further liberalisation in network industries. Across all three countries, sustained efforts to reduce barriers to trade and investment, improve regulatory transparency, and enhance cross-border regulatory coherence, particularly within the EU framework, will be essential for attracting investment, supporting SME growth, and boosting productivity and innovation.
OECD Product Market Regulation index, 2023 (most competitive = 0, least competitive = 6)
Note: The indicators refer to economy-wide regulation and are composed of the simple average of the sub-indicators on state involvement and barriers to entry. The indicators range between 0 (most competitive) and 6 (least competitive environment).
Source: OECD PMR Database, 2023.
Estonia demonstrates a generally liberal and open regulatory environment, with below-average restrictions across many sectors. In energy, both electricity and natural gas markets are less regulated than the OECD average, particularly electricity. Rail and water transport are also relatively open, although road transport remains slightly more restricted. In electronic communications, Estonia has a liberalised fixed-line market and a more regulated mobile market compared to peers. In professional services, Estonia maintains high regulatory barriers for lawyers and notaries, well above the OECD average. However, accountants and estate agents operate in a fully liberalised environment, and restrictions for architects and civil engineers are significantly lower than average. Retail trade is very open, with no regulatory barriers in distribution or estate agency, though the sale of medicines remains highly regulated. To strengthen competition and innovation, Estonia could focus on reducing barriers in professional services, especially for notaries and lawyers, where regulatory intensity is among the highest. In transport, lowering entry barriers in road and air segments could further improve connectivity and market efficiency. Estonia’s open stance in retail and energy should be preserved, while periodic regulatory reviews can help ensure that rules in more restrictive sectors, such as mobile telecoms and pharmacy retail, remain proportionate and up to date.
Lithuania shows a mixed performance across network sectors and regulated professions. It performs well in natural gas and rail transport, with significantly lower regulatory barriers than the OECD average. Electronic communications are also highly liberalised, particularly in mobile and fixed-line markets. However, air transport remains heavily restricted, and electricity regulation is slightly above average. In professional services, Lithuania is more restrictive than average for lawyers and notaries, but has fully liberalised accountancy and estate agency services. Retail trade is largely open, with no barriers in distribution or estate agency, though some regulation remains in the sale of medicines. To enhance competition and efficiency, Lithuania should reduce restrictions in air transport and review regulations on legal professions, especially for notaries. Maintaining low barriers in telecommunications and retail is essential to preserve market openness. Broader use of regulatory reviews and impact assessments can help ensure that regulation remains proportionate and supports productivity, innovation, and consumer choice.
Latvia shows a relatively open regulatory environment in some sectors, though significant restrictions persist in others. The energy sector is moderately liberalised, with electricity close to the OECD average and natural gas more regulated. Rail transport is considerably less restricted than the OECD average, while air, road, and water transport are in line with or slightly more restrictive. In e-communications, Latvia performs well, with lower-than-average barriers in both fixed and mobile markets. Professional services are a mixed case: while accountancy is lightly regulated, lawyers and notaries face higher-than-average restrictions, especially notaries. The architecture and engineering professions are somewhat less regulated than the OECD average. Retail trade is relatively open in areas such as distribution and estate agency, but regulation of retail sales of medicines remains stringent. To foster greater competition and market efficiency, Latvia could focus on reducing regulatory barriers in natural gas, notarial services, and the sale of medicines. Streamlining regulation in these areas would support lower costs, innovation, and service quality. At the same time, Latvia should preserve its relative openness in communications, accountancy, and retail distribution, while applying periodic regulatory reviews to ensure proportionality and international competitiveness.
OECD Product Market Regulation, 2023 (most competitive = 0, least competitive = 6)
Note: The indicators refer to economy-wide regulation and are composed of the simple average of the sub-indicators on state involvement and barriers to entry. The indicators range between 0 (most competitive) and 6 (least competitive environment).
Source: OECD PMR Database, 2018.
Despite having a governance framework similar to other European countries, further action is needed to increase the IPR protection among SMEs
All three Baltic states have robust IP protection systems that comply with EU standards and international obligations, providing a secure environment for creators and investors. Enforcement of IP rights in Estonia, Latvia, and Lithuania is grounded in national legislation aligned with European Union directives2 and supported by participation in key international treaties such as the TRIPS Agreement and the Berne Convention. In Estonia, enforcement mechanisms are set out in the Code of Civil Procedure and relevant IP laws, with civil, administrative, and criminal remedies available. The Estonian Tax and Customs Board plays a role in border enforcement, while civil courts handle infringement disputes, including granting injunctions and damages. In Latvia, enforcement is overseen by the Industrial Property Board of Appeal and national courts. The Customs Administration has authority to seize counterfeit goods, and rightsholders can seek civil remedies, including injunctions, damages, and destruction of infringing goods. Latvia also enforces criminal penalties for intentional IP violations under the Criminal Law. In Lithuania, enforcement is handled by civil and administrative courts, with the State Patent Bureau and Customs Department involved in monitoring and border control. Infringers can face civil liability, fines, or imprisonment under the Criminal Code. Lithuania has implemented fast-track civil procedures for clear-cut infringement cases and follows the EU’s proportionality principle in IP enforcement. Across the Baltics, challenges remain in ensuring consistent judicial expertise, deterring online piracy, and promoting awareness among SMEs, but the enforcement frameworks offer a solid legal basis for protecting IP rights.
IP is a critical asset for SMEs in particular, enabling them to protect innovations, differentiate their products, and build brand value in competitive markets. By securing rights over trademarks, patents, designs, or copyrights, SMEs can enhance their market position, attract investment, and create opportunities for licensing or collaboration. Strong IP protection also helps SMEs safeguard against imitation and unfair competition, particularly when expanding into foreign markets or participating in global value chains (WIPO, 2024[61]).
A joint study by the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO) found that only about 9% of European SMEs have registered IP rights, such as patents, trademarks, or designs, compared 40% of large enterprises. However, those that do are significantly more likely to experience growth and higher revenue per employee (European Patent Office, 2019[62]) . This reflects not only limited innovation across key sectors, but also a lack of awareness among businesses, particularly SMEs, regarding the strategic value of intellectual property protection in boosting competitiveness and supporting commercialisation and expansion. These challenges are reflected in the 2024 Global Innovation Index published by the World Intellectual Property Organization (WIPO), where Latvia and Lithuania rank 42nd and 35th respectively, while Estonia performs notably well at 16th, highlighting varying levels of innovation performance across the Baltic states.
Universities and research institutions in Estonia, Latvia, and Lithuania have made notable strides in enhancing intellectual property management and technology transfer capabilities. Initiatives such as the establishment of the Baltic Technology Transfer Office (TTO) Network have fostered regional collaboration, aiming to streamline knowledge and technology transfer between academia, industry, and the public sector (Box 5.9). Programmes supported by the WIPO have further bolstered these efforts by providing training in IP management and spin-off development to participants from various universities and research institutions across the Baltic states. Despite these advancements, challenges persist in fully capitalising on research outputs. Limited incentives for academic researchers to commercialise or license their inventions, coupled with insufficient collaboration between academia and the private sector, hinder the effective utilisation of IP. High costs associated with IP protection, including application fees and legal expenses, pose additional barriers, particularly for SMEs and academic researchers. Addressing these challenges is crucial for the Baltic states to harness IP as a key driver of innovation and economic growth and to enable innovation spillovers.
The Baltic Technology Transfer Office (TTO) Network is a collaborative initiative among universities and research institutions in Estonia, Latvia, and Lithuania, aimed at enhancing knowledge and technology transfer across the region. Established through a cooperation agreement signed in March 2022, the network seeks to promote the commercialisation of research outputs, foster collaboration between academia and industry, and strengthen the innovation ecosystem in the Baltic states. The WIPO has supported its development by providing capacity-building programmes and facilitating the exchange of best practices among member institutions.
One of the network’s flagship initiatives is the Spin-offs Mentoring Program, launched with support from WIPO and national patent offices, which trains technology transfer professionals to support the creation and development of university spin-offs. By enhancing the competencies of TTO staff, the program contributes to the commercialisation of research and the growth of science-based enterprises. The network also hosts events and conferences, such as the high-level international conference held in Vilnius in October 2022, which brought together representatives from Baltic universities, patent offices, and WIPO to discuss strategies for strengthening innovation ecosystems and technology transfer practices.
The Baltic TTO Network also contributes to strengthening FDI-SME linkages by improving the local innovation environment and facilitating partnerships between foreign investors, research institutions, and local firms. Enhanced technology transfer capabilities help attract multinational enterprises seeking collaborative innovation opportunities, while local SMEs benefit from greater access to research, know-how, and international markets. Through its cross-border cooperation and focus on IP valorisation, the network supports the integration of FDI into local economies and promotes sustainable, innovation-driven growth across the Baltic states.
Source: Based on (WIPO, 2022[63]) (WIPO, 2024[64])
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