Estonia's Investment Frontier
01.10.2008 | Juhan Parts | English news
Words: Juhan Parts, Minister of Economic Affairs and Communications of Estonia
Walking down the streets of Tallinn is like seeing a modern medieval age. Strolling through old Tallinn, the stone streets feel slightly uneven below you as you navigate through a throng of tourists. Passing by a cafe you notice a businessman typing away at a laptop while sipping a latte. High castle walls tower over you like stone giants while colorful garments, displayed in nooks along the street, beckon you. The flavors of restaurants dance through the air and wet your appetite. Cell phone chatter, the calls of street vendors, and the chirping of birds fill the air with life. Turning a corner, you stumble upon a gallery of fresh flowers, vibrant with color and intoxicating with fragrance. This is Tallinn, the cultural capital of Europe for 2011.
Still shrouded by the history of the Soviet occupation, Estonia's revolutionary transformation is relatively unknown but significant. Over the last 17 years of independence, Estonia has gone from an economically stressed Soviet republic to an emerging high-tech and financial
center of the wider Baltic Sea Region.With a population of 1.4 million people, Estonia is a small but dynamic community. Situated as the center of the Baltic Sea Region, Estonia is an access point to 93 million sophisticated customers - the most dynamic market in Europe, ranging from Scandinavia to Russia to Poland to Germany.While being in a pivotal position regionally, Estonia attracts around three million foreign tourists per year, which is considerable considering its population size.
Like many other countries, Estonia boasts itself as an oasis for foreign investment. Unlike many other countries, Estonia is more walk than talk and able to demonstrate many necessary qualities for this claim. Recently ranked by Forbes as the number 10 country to do business,
Estonia is clearly a focal point in the Baltic Sea Region.With high rankings in economic freedoms (#12 by the Heritage Foundation), world competitiveness (#23 by IMD), and network readiness (#10 by the NRI institute), Estonia is outpacing its Baltic neighbors in both growth and potential.
The Estonian success story is based on a firm political commitment to stable and liberal economic policies. Some simple but important facets of our macroeconomic policy include: a fixed exchange rate system, balanced budget of the central government, unrestricted free movement of capital, a simple tax system, and liberal trade and price policy. These basic tenants create the positive investment climate that so many countries strive to achieve but rarely can. The success in Estonia can be partly attributed to our small, but efficient and determined population.
There are many reasons why Estonia is well regarded. The foreign investment code is transparent and treats all investments equally, whether foreign or domestic. Opening new businesses is easy and clearly defined, fastest time being 9 minutes and 25 seconds when application was filed online. Partly due to our ICT investments, Tallinn was named one of the top seven most intelligent regions of the world by the Intelligent Community Forum for the second consecutive year in 2008.
Logistics in Estonia are well developed. Our ice-free port allows for the continuous movement of goods by ship. Container traffic going through Estonian ports is growing steadily towards creating a regional hub, especially with direct container ship lines to coastal China being planned. A highly developed logistics system enables Estonia to host companies that are part of global supply chains, taking advantage of the global division of labor. We are good at working on more complicated phases of production, which need speed and proximity to the market. The past focus for Estonian manufacturing was based on putting together products from imported goods, such as cell phones by Elcoteq. This is shifting toward more advanced and skilled manufacturing as Estonia is more competitive on fulfilling smaller, high quality and just-in-time orders than on simple operations requiring only cheap labor. Manufacturing saw significant growth in 2007 with 24 percent growth in apparatus industry and 19 percent growth in machinery and metal processing.
Now, Estonia's relatively inexpensive labor compared to the rest of Europe (€10.000 avg. per year in Estonia vs. €30.000 avg. per year in Germany) and ability to produce more advanced and complicated goods is a foundation for great growth. The high quality of Estonian labor is based on a competitive education system producing results that ranked Estonian schoolchildren as 5th highest in sciences in the world by a PISA study in 2006.
Estonia is a highly digitized and modern country. It is a place where cell phones can buy lunch or purchase parking. The government has adopted online voting on local and national elections and over 90 percent of bank transactions occur over the Internet. Interaction with the government is very easy with this focus; over 80% of citizens file taxes online. Innovations such as Kazaa and Skype can claim Estonia as their birthplace.
As a demonstration of how important e-business is to Estonia, one only needs to look at the cyber attacks on Estonia that occurred in April and May of 2007. Estonia successfully thwarted an all out attack on Estonia's cyber-infrastructure. This attack which targeted Estonian government, banking, and media websites was the first of its kind. One result of this event was the creation of NATO's Cooperative Cyber Defence Centre of Excellence, which is situated in Tallinn. Also, cyber security is rapidly emerging in Estonia as a new IT sector, with companies like GuardTime creating internet security solutions.
One advantage of Estonia's small size is its ability to act as a test market for new products. Estonians are very open to new ideas and technologies. Entering into the rest of the region and Europe is very easy from Estonia as well. Although Estonia is an energy-independent country, alternative energy sources are constantly considered. We aim at working out new technologies to make our oil shale based energy production cleaner while increasing the share of renewable energy is also a firm priority. In order to help support new markets, the government has specific R&D grants for technology programs in sectors like ICT, biotech, and energy technology.
After a few years of double digit GDP growth, Estonia is facing a cool-down due to the global economic downturn and the end of the domestic boom. Yet, it is now a great time to invest in the next expansion and positive business cycle of Estonia. Along with our recent growth, EU funds are also available to make this transition the next growth cycle much smoother. The increased specialization of sectors only expands the opportunities for investors to choose areas that most suit them.
The Estonian people are experts in adapting to new conditions. From the Soviet era, to the tumultuous 90's, to the tech-oriented situation today, Estonians are always adapting and reinventing themselves. While going through a new phase in transformation, Estonia is poised to enter a second blooming. This time, dominated by our IT and manufacturing sector. There is no better time than now to take part in this opportunity and reap the rewards that will come. See what we have to offer and don't wonder what could have been.
Source: New European Economy / Autumn 2008
