Laurynas Kuzavas. The middle-income trap: Why Lithuania needs strategic decisions

We all welcome Lithuania’s growth and its efforts to catch up with developed Europe. But are we in danger of falling into the middle-income trap? Economists warn that we may soon become too expensive without ever achieving high quality. The fuel that once drove Lithuania’s economy is running out. Strategic decisions are urgently needed.

Before investing in Lithuania, every investor asks hundreds of questions: Is it safe? Is it sustainable? Can this country compete globally and deliver a profitable investment package? For us, as a business that invests here, these questions are just as relevant. The motivation is simple: to grow, we need Lithuania’s economy to grow as well. Developers strengthen alongside the economy - when businesses expand, we grow too.

Unfortunately, the reality is sobering. According to the Bank of Lithuania, in the first quarter of 2025, inflows of foreign direct investment (FDI) fell by a third (30.1%) compared to the same period last year, amounting to €352 million. In the second quarter, investments grew by 4.8%, but the half-year result still lags behind 2024. As geopolitical tensions persist and competition intensifies, Lithuania’s economy remains hungry, awaiting new strategic solutions. Investors today are looking not only for returns, but also for safety, reliable infrastructure, secure energy supply, and a qualified workforce.

Same returns – higher risk

Investor logic is simple: capital flows where returns are stable and safe. In Lithuania, the average annual return on investment is around 15% - similar to Poland. That’s a level acceptable to many international investors. Promises of 20% annual returns do exist, but they remain rare exceptions.

As of January 1, 2025, Lithuania introduced a new corporate income tax rate of 16% (up from 15%). According to Ernst & Young, the Ministry of Finance, and KPMG, this rate still appears competitive, but it is no longer distinctive. Latvia’s corporate tax is 20%, Estonia’s effective rate is around 22% (profits are taxed only when distributed), and Poland’s stands at 19%. Ireland provides an even starker contrast with a 12.5% rate, where various exemptions can reduce the effective burden to as low as 2–4%. Romania, with the same 16% rate as Lithuania, leverages its strategic logistics position near Germany and Turkey to attract more investors.

These figures show that Lithuania is far from a “tax haven.” A favorable tax rate alone is no longer enough to guarantee attractiveness. Geopolitical tensions push our country into the “higher-risk market” category. We are on the border, in the frontline region; taxes shift, governments resign. As a result, investors choosing between Lithuania and other countries now demand an additional “risk premium.”

This means that the competition for capital takes place not only globally, but also regionally - within the Baltics. Latvia, Estonia, and especially Poland all offer competitive frameworks, while investors gravitate toward markets with lower risk or higher premiums supported by strong infrastructure. For Lithuania to remain attractive, it must guarantee safety, energy availability, efficient logistics, and a skilled workforce. Because while we debate tax rates, new challenges are already forming on the horizon - from global competition to hostile drones.

Five proven strategies from Europe

1. Encouraging investors – from incentives to ecosystems
We may not lower taxes, but we must apply targeted incentives. Lithuania would benefit from building strong, clearly defined investment packages: R&D and innovation credits, public–private partnership programs, and specialized schemes for manufacturing, data centers, drone factories, and more. A good example is Ireland, which until 2023 offered a 25% tax credit on all R&D spending, later increased to 30% in 2024.

Regional success also requires thinking in terms of ecosystems. Too often we assume that free economic zones (FEZs) can succeed with just land and tax breaks. This is not true - land without infrastructure, roads, electricity, and transport hubs is only suitable for agriculture. Investors analyze every ecosystem component—logistics, energy, sustainability. That’s why Poland and Romania have created specialized FEZs for cooperation with countries like Germany, Turkey, and the Czech Republic, strengthening integration and synergies.

2. Improving connectivity and logistics
Lithuania has always been a crossroads between East and West, North and South. Today, we still have the opportunity to become a vital bridge linking Poland, Germany, and the Nordic countries - Finland, Sweden, and Norway. Yet we are still lagging behind.

Air transport remains one of our weakest points. Neither Vilnius nor Kaunas airports have centralized cargo hubs, despite years of planning. Road infrastructure is another “elephant in the room.” While Poland and Latvia have shown remarkable progress in just a few years, Lithuania’s main highways still trail in quality.

There are positive examples. Kaunas FEZ, located next to the airport, highways, research centers, and universities, is becoming a hub for technological and human capital. Riga’s FEZ is also integrating rail, sea, and air transport within one zone. Comprehensive investments in road, sea, and air logistics would bring us closer to true competitiveness.

3. Energy infrastructure – needed now, not tomorrow
No industry can grow without stable, affordable electricity. In Lithuania, this is already a real business barrier. At Sirin Development, we face it firsthand: in Vilnius, it is difficult to secure even 100 kW of capacity for a new project. For a single facility requiring at least 1 MW, the connection timeline is mid-2027. This means investors in factories or tech parks must wait two years before operations can begin. Unsurprisingly, many instead choose Poland, where access to power is faster and less restricted.

Such bottlenecks show that energy policy cannot be delayed. Short-term, Lithuania must modernize its grid and deploy temporary capacity solutions to meet demand. Long-term, we must explore nuclear power, small modular reactors, and a clear national strategy for electricity pricing and availability. Without such a plan, Lithuania cannot hope to attract data centers, defense industries, or major manufacturing projects.

Energy scarcity today is not just an infrastructure issue, but a reputational one. Investors see that Lithuania cannot guarantee even basic needs.

4. Education – biotechnology, engineering, IT, and AI
Tax policy, logistics, and infrastructure are only part of the equation. Equally important for investors is the availability of skilled talent. And here Lithuania faces challenges. Only 4.8% of specialists in Lithuania work in biotechnology - the lowest share in the Baltics. This means we lack the critical mass to attract large international biotech firms to our labs, research centers, or factories.

The defense industry requires engineers, but their numbers are also limited. Ironically, in the age of AI, Lithuania still faces a shortage of IT specialists. Although computer science is the second most popular choice among students in 2025, demand is growing faster than supply. Engineering is not even among the top ten study choices. Young people increasingly favor medicine, law, or psychology, leaving technology fields under pressure to attract the “TikTok generation.”

Startup culture is maturing, but without stronger student flows into universities and vocational schools, it risks stalling. Education must be treated as a strategic issue - not only for economic growth, but also for national security. If Lithuania aspires to be a regional hub for defense, biotech, or IT, investments in talent development must be systematic and long-term, with results measured in decades, not years.

5. Defining long-term priorities
Lithuania cannot try to be a leader in every sector. Clear priorities are needed in industries where our advantages are strong and sustainable.

One obvious direction is the defense industry. It requires engineers, reliable electricity, and well-prepared FEZs in places like Šiauliai or Kaunas. Here, investment aligns with national security needs, giving the sector strategic weight. Data centers could also become a strength, but only if Lithuania guarantees cheap electricity and stable internet. Otherwise, competition with Scandinavia - renowned for both - will be lost at the starting line.

A second direction is light industry, which can generate high value while remaining less polluting. This requires reliable infrastructure and more flexible regulation. Without it, competing with Poland is unrealistic. Focus should be on industries that maximize added value, since we can no longer compete with cheap labor or low efficiency.

The third direction is high-tech, research, and innovation - chemistry, biotechnology, lasers, and semiconductor industries already show strong global results. Digitalization, automation, and new technologies go hand in hand with R&D. Success here depends on aligning the interests of business, investors, academia, and policymakers. EU support can help, but only skilled specialists can deliver results.

No time left to delay

Today, Lithuania no longer has the luxury of waiting. Investors decide quickly and pragmatically. They look for people, infrastructure, energy, internet, and a clear vision. If any of these elements are missing, momentum stalls. Tax incentives, energy, education, and strategic sector choices are interconnected links in one chain. If one link is weak, the whole chain fails.

It is time for Lithuania to choose - and to base decisions not on declarations, but on concrete projects.