J. Kalendien. The injection of a billion euros: will it smooth out the folds of Lithuanian business?

It is obvious that, becoming a developed high-income country, it is more and more difficult to find engines for further growth, and the fundamental factors of economic growth, technological progress and innovation, become more relevant.

Innovation needs a financial incentive

The data published by the State Data Agency (VDA) on innovative companies and business R&D expenses confirm that affordable financing is very important for such companies.

If the greater ability to find internal resources, the smaller innovative activity is closely related to the availability of external financing. For comparison, in companies with up to 250 employees, about 60% of R&D expenses are financed by their own funds, and in companies with more than 250 employees, about 90%. 20% of the companies performing innovative activities use EU funds, which are both limited in amount and limited in time.

At that time, 12% of companies financed innovative activities with borrowed or equity-raised shares. In general, in 20202022 during the period, the share of companies using borrowed money and innovating increased and reached about 35%. Seeing the trends in equity capital increase (the share of innovative companies that were attracted by increasing equity capital increased from 6.4% to 9.8%), it can be said that the external need for innovative companies is high.

And how do we manage to find a loan and get financing? The results of the annual survey of the European Investment Bank (EIB) show that although in 2023 The share of households facing financing restrictions in Lithuania decreased from 16.5% to 10.7%, but it still remains high (EU average 6.1%). In the last 8 years, only once, in 2018, did our oil rate drop below 10%.

Half of the companies were simply denied funding, and about a quarter of them received less than they asked for. However, the fact that a relatively large part of the Lithuanian population (up to 2%) does not even apply for funding (even though it was needed) seems especially worrying, because I think that they will not get it anyway. For comparison, the share of such money in the EU is less than 0.3%. Such disappointed people are much more in the service sector and among mothers.

A good injection for the economy

With rising wage rates and in the context of the EU and Lithuanian economies, the availability of external financing in the market for companies decreases even more, but the need to invest does not disappear. At a time when demand is becoming a key factor, increasing competitive advantage is extremely important.

According to VDA data, maintaining price and product competitiveness, together with high uncertainty regarding future demand, are the main drivers of Lithuanian companies’ innovative activity. This suggests that the starting incentive financial instrument Billion for business, financed by the funds of the Economic Revitalization and Resilience Enhancement Facility (RRF), will be a good injection for the growth of the Lithuanian economy.

Although there was no similar measure for business promotion in Lithuania before, it certainly exists. When evaluating the expected economic effect, you can refer to ESTEP 2021. the evaluation carried out, during which it was found that the economic effect of the state-financed business loan is 2.12 times greater during the financing period of the measure (45 years), and 4.2 times when evaluating the 10-year period.

Taking into account the sums allocated for loans and the IMF’s long-term growth forecasts of Lithuania’s GDP, it can be assumed that Lithuania’s GDP until 2027 on average, to grow about 0.6% faster every year, and by 2037 0.33% faster.

More receptive to innovation

Since billions will be allocated to the technological transformation of the company and investment in innovation, it is likely that the economic effect can be even greater. Money for investments has a greater stimulating effect than circulating losses, so it takes more time to feel the effect.

In order to achieve the maximum effect, it is important not to concentrate on several sectors. The projects to be promoted to increase energy efficiency are somewhat risky, so that investments do not go to only one specific sector.

The financing is also intended to promote biotechnology, defense and security industries, which have a small impact on the Lithuanian economy. However, industry is much more receptive to innovation than services, and there is a risk that these investments will be more directed to the manufacturing sector.

Is that bad? And yes and no. On the one hand, it is already widely believed that it is more difficult for service companies to obtain external financing than for industrial companies. On the other hand, the losses in the economy are redistributed, and the domestic consumer is stimulated by the rise in wages, the service sector moves to the manufacturing sector. So the effect should be felt by the entire oil economy.

The author of the commentary is Jon Kalendien, Chief Economist of INVEGA.

The opinion of the author does not necessarily coincide with the editorial position.