Foreign Direct Investment Attraction in the Baltic States

This paper considers the importance of macroeconomic factors as well as investment climate for foreign direct invest­ ment attraction in the Baltic states. It reviews some of the indicators for measuring the investment climate and their usefulness as indicators of strength of FDI attraction and uses the results of econometric analysis to consider relative importance of various macroeconomic factors. The results suggest that perceptions of corruption and fiscal policy are some of the more important drivers of FDI attraction. The paper also considers several measures that could improve foreign direct investment attraction in the Baltic States such as expanding the protection of property rights and improving the quality of infrastructure

PIE statutory audit market concentration: evidence from Latvia

The reform of EU audit legislation was adopted by the Council of the EU in April 2014. The legislation consists of an audit Directive and an audit Regulation. The Directive applies to all statutory audits; the Regulation contains specific requirements for the statutory audits of public-interest entities (PIEs). The Regulation aims both at enhancing audit quality and at promoting competition in the audit market. Mandatory rotation, together with the incentives for joint audit and tendering, as well as the prohibition of certain non-audit services to audit clients - requiring de facto that another audit firm provides these services - are examples of measures that should make the market more dynamic and ultimately less concentrated. The purpose of this study is to assess the concentration levels in the market for statutory audits of PIEs in Latvia. The methods of the research are systematic, logical and comparative analysis, analysis of secondary data, as well as expert method. Data on market shares is analyzed using the four firm concentration indicators. The principle results of the study provide evidences about the high level of Latvia's PIE audit firms/networks market concentration, the dominant share of non-audit revenue in total revenue for the 6 biggest market players, the auditing oligopoly in the PIE market, the impact of the EU audit reform on the auditor-client relationships in the banking sector. Based on the findings and results of the study, the authors propose a set of recommendations aimed to make the Latvian audit market more transparent and less concentrated

Evaluation of internal audit activity effectiveness in risk assessment of anti-money laundering area: a case of “Latvian Bank N"

Due to recent AML violation cases occurred in financial institutions within Baltic States (Estonian Danske Bank, ABLV Bank AS and Versobank AS) and expressed concerns on Banks’ Internal Audit activity within AML area, the author sees the necessity for assessment of Internal Audit activity within AML area in order to determine the level of adequacy of AML regulatory changes within the risk assessment and potential gaps in risk assessment of AML area. The research focuses on AML compliance with the constantly evolving and increasingly more complicated regulatory requirements and evaluation of organizational part of IA activity using an example of a Latvian Bank N. The aim of this research is to investigate completeness of Internal Audit risk assessment in accordance with recent AML regulatory changes. This research also compares the IA organizational process that affects all banking areas between a Latvian Bank N and an Estonian practice. This research relies on qualitative methods. Qualitative methods include face-to-face interviews with Board Members of Latvian Bank N, AML Internal Auditor of Latvian Bank N and telephone interviews with Estonian IA Experts. Also, involves documentary analysis of Latvian Bank N internal audit risk assessment conducted in 2017 for the implementation in 2018. The conducted investigation showed that IA activity has certain deficiencies and shortcomings in relation to AML regulatory changes reflection in IA risk assessment for AML area, and for overall IA organizational process organization that is crucial for audits organization and conduction not only in AML area, but for all Latvian Bank N and other Latvian Banks’ activities areas. Elimination of these deficiencies will help to achieve full reflection of AML regulatory changes and thereby mitigate the risks that bank processes which are affected by these regulation changes are not sufficiently assessed within the Internal Audit Risk Assessment. In addition, elimination of the deficiencies identified in relation to IA organizational processes will lead to increase of conformance in accordance with International Standards for the Professional Practice of Internal Auditing (pub. the Institute of Internal Auditors, 2017) and, as a result, will strengthen and improve the IA activity effectiveness that is within Internal Audit department and Bank’s interest. Many of these results are likely to apply not only in the particular bank on which the research is focused, but also to other banks in Latvia. Thus, the research has practical implications in formulating common risk management tactics and methods that could be applied across the banking sector

Fintech as financial innovation – the possibilities and problems of implementation

There is a growing competition between banks and fintech not only in advanced economies, but also in the emerging markets. However, it is yet to be observed in Latvia to the same extent. This paper aims to evaluate fintech’s level of development in Latvia compared to Europe. The paper identifies financial services using innovative technologies offered by fintech companies, analyses the advantages and disadvantages of these services in comparison with services offered by the traditional financial sector companies (banks, insurance companies, institutions involved in asset management and investment, etc.), and evaluates how prepared are consumers to use fintech services. This paper documents the results of the survey aiming to clarify how well-informed consumers in Latvia are about fintech services, their convenience, speed and safety, as well as the consumers' current satisfaction with banking services. The hypothesis of this paper is that Latvian society is not ready to use services provided by fintech, but prefers banking services instead. Survey results provide some evidence in favour of this hypothesis: they show that respondents are generally unaware about fintech services in Latvia and their associated innovations and new financial products. This paper makes several recommendations for managers of fintech enterprises, association of start-up enterprises and risk capital funds as well as state institutions.peer-reviewe

The analysis of company's capital and evaluation of factors, which influence creation of the optimal capital structure

In this article, the author will outline several stages of the process of determining optimal capital structure and will concentrate in particular on the first two stages of this process – analysis of company's borrowed capital and equity as well as the evaluation of the main factors, which influence capital structure. It is important to stress these preparatory stages, because successful operation of the company is built on properly understanding the relationship between risk and potential reward that is inherent in different alternatives of capital structure. These stages stress the importance of gathering reliable financial information about the company (enabling calculation of the ratios mentioned in the article) and performing risk analysis (relying in part on the external and internal factors described in the article) in order to decide on the optimal capital structure. The author cautions that rapid economics growth in Latvia will at least slow down over time. Managers need to take that into account, when planning capital structure and therefore avoid increasing their leverage to dangerous levels. Firstd Published Online: 14 Oct 201

Small business in a small country and the role of government (the case of Georgia)

Problem statement: The value of small and medium-sized enterprises (SMEs) for a national economy is recognized all over the world. Georgia is not an exception. Georgian government has declared the importance of the creation of a strong private sector in strategic documents - “Socio-Economic Development Strategy of Georgia – Georgia 2020” (2014) and “For a Strong, Democratic and United Georgia” (2015), first of all. In line with country’s general strategy - to achieve economic growth through private sector development - more proactive reforms to develop entrepreneurship, start-ups and build a competitive SME sector have been developed and special program -“SME Development Strategy 2016-2020”- was adopted. Nevertheless, some challenging tasks still remain. The aims of the article are twofold. Firstly, to analyze Georgian SMEs contribution to the national economy in order to reveal the role of this sector, and following this reasoning, critically assess government policy towards SMEs after signing in 2014 the Association Agreement with the European Union. Research methods applied in the paper are quantitative and qualitative based upon a bottom-up approach that combines desk research and statistical data analysis provided by the National Statistics Office of Georgia, national researches and international organizations. Desk research consists of analysis of academic literature related to the topic. Media reports and interviews are used as additional sources. Main results/ Findings are as follows: nowadays Georgian SMEs contribution to the country’s economy is difficult to be assessed due to the new classification methodology applied by the National Statistics Office of Georgia, Georgian government policy toward SME is changing, Entrepreneurial education still remains a challenge, Neither educational programs are fully successful nor government provided effective training programs. Practical implication of the work: Recommendations for the policy decision-makers were developed in order to provide guidance to policy makers for formulating and adjusting policies and programs

Business valuation: classical and advanced methods

The topic chosen by the authors implies a qualitative rather than quantitative research approach. The aim of this paper is having assessed the value of a particular company using classical and advanced approaches to analyse the evaluation results obtained using different approaches and give recommendations to company managers. To achieve the aim, the following objectives were set: explore different views on the interpretation of the company as a subject of evaluation; analyse the major methods of assessing the value of companies; having gathered empirical data, assess the value of the particular company using classical and advanced methods; conduct a sensitivity analysis by considering factors that influence the valuation of the company. In the framework of this research, we used the key methods of assessing the value of company’s business, based both on classical approaches, such as income approach and comparative approach (market approach), and on more advanced and less studied methods, such as EVA and ROV. As a result, the possibility of using advanced methods based on economic added value and real options was demonstrated. The results obtained in the framework of various methods are comparable, and the differences indicate the need for further research in this field

FDI attraction : comparative analysis of the Baltic States and Georgia

The attraction of foreign direct investment (FDI) is usually an economic policy priority due to its positive effects on economic growth because of new capital and technology, higher employment, new management practices, improvements in the quality of services, as well as innovation and lower production costs. This paper aims to assess the investment climate in the Baltic states and Georgia and evaluate what are the appropriate FDI policy objectives and approaches there. It considers three international indices as measures of investment climate: Index of Economic Freedom, Corruption Perceptions Index, and Ease of Doing Business Index. The results suggest that all three international indices are useful in assessing investment liberalization, promotion and facilitation. This paper argues that FDI policy needs to consider country-specific characteristics: for countries above a certain threshold FDI attraction depends mostly on macroeconomic and external factors, while other countries need to focus on specific reforms to improve investment climate.peer-reviewe

Assessment of bank financial health in Latvia

Financially strong, trustworthy and reliable banks form the basis of every economy and are a vital precondition for the stable economic development of every country. The financial health of banks is important for different stakeholders, including bank clients, correspondent banks, state and others. Therefore, lack of appropriate measures for bank financial health can cause a number of risks for the bank stakeholders. Traditionally the assessment of bank financial health and reliability is done by the international rating agencies as Standard & Poor’s, Moody’s and Fitch. These ratings are widely recognized worldwide; however, due to different reasons ratings assigned by the international rating agencies historically are not available for the majority of European banks. Besides, after the global financial crisis of 2008 the number of banks with a rating by an international rating agency has substantially decreased. Therefore, the aim of the paper is to design a model allowing to assess bank financial health using publicly available information. The proposed model is based on the analysis of financial statements data of Latvian commercial banks in the period from 2003 till 2017, key macroeconomic indicators, and aggregate statistical data of Latvian commercial banks managed by the Financial and Capital Market Commission (FCMC). The methodology is based on the design of multiple choice model ordered logit using eViews 7.0. The paper determines the main factors affecting the bank financial health based on the Moody`s Investors Service Long Term Bank Deposit Ratings. According to the developed model, the main factors involve bank assets structure, level of credit risk, profitability, bank capitalization, stability of resource base as well as macroeconomic factors, including investment and unemployment