Latvia in the international economy: Historical dimensions

This article examines the historical roots of foreign trade and investment in Latvia and analyses foreign trade and investment in the interwar period. The relationship between foreign investment and foreign trade is complex. Giuseppe Nicoletti et al. (2003) point out that [world] trends and patterns in foreign investment and trade offer prima facie evidence that the two phenomena are closely linked: both increased sharply over the past decade; both seem to be at least partly affected by factors related to distance, location and size of the economy; and in some cases trade openness seems to go hand in hand with high foreign investment and foreign affiliate activity. In essence, the amount of investments between two countries should be related to the amount oftrade between them. The ratio of Latvian trade to the foreign investment stock of main and regional trading partners in the interwar period varies greatly, with investments from the Baltic States and the Nordic countries far exceeding either imports ftom or exports to these states. In terms of the theory of international trade and factor mobility, it would appear that for Latvia for the interwar period foreign investment inflows worked as both a complement and a substitute for imports.