Successfully investing in Estonia

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last updated on 19 September 2022 | reading time approx. 6 minutes

 

 

How do you assess the current economic situation in Estonia?

"2021 was the year of recovery for the global economy, which was strongly influenced by the aftermath of the spread of the coronavirus. There was strong demand throughout the year, which allowed manufacturers to increase sales and profits. At the same time, supply disruptions and delivery difficulties emerged in the raw material and supply market, disrupting the rhythm of the global value chain and causing much confusion in international trade. This was accompanied by price increases in the global commodity and supply market, which later affected producer and consumer prices. Despite the turbulence caused in global trade by the pandemic crisis, the previous year was successful for Estonian export companies. Demand was at a high level throughout the year and despite the price increases for raw materials and transport as well as delivery difficulties, the export of goods and services recovered quickly after the crisis and supported economic growth throughout the year. The share of exported goods and services in GDP increased by 4 percentage points compared to 2019 and averaged 77 per cent of GDP in the first three quarters of 2021. 
 
The Estonian economy grew by 4.3 per cent year-on-year in the first quarter and by 0.1 per cent compared to the IV quarter. The impact of the Russian war is not yet visible in economic growth, but is clearly reflected in the structure of demand. 
 
Among the industrial sectors, value growth has surprisingly declined sharply in the energy and mining sectors. Higher energy prices have increased the competitiveness of the Estonian oil shale industry, and in addition, production volumes in these sectors have increased in the first quarter. The construction industry has grown by 14 per cent year-on-year, but the value share of the construction industry in GDP has decreased. The decline in trade by about 5 per cent of GDP also does not seem credible against the backdrop of very rapid growth in private consumption. 
 
Estonian economic growth is expected to slow down in 2022 as a result of a standstill at the beginning of the year. Estonian economic growth would have been much slower this year even without the crisis, because full utilisation of production resources had already been reached by the end of the previous year and the increase in supply constraints began to impede rapid growth. The Russian-Ukrainian war that broke out in February, as well as its various effects, are additionally slowing down the prospects of the Estonian economy, both through the elimination of export markets, disruption of supply channels and price increases of raw materials."
 
Kaspar Oja, economic analyst at Eesti Pank
Monetary Policy and the Economy, 2022/2

 

How would you describe the investment climate in Estonia? Which sectors offer the largest potential?

Estonia is a country whose economic policy is liberal, whose tax regime is investment-friendly, and whose legislation is transparent, well-functioning and harmonised with the EU laws. No tax is levied on retained profits, interest or dividends, and Estonia has a double taxation agreement with 61 countries, which facilitates efficient transactions and enables long-term business planning.

With 75 points according to the Corruption Perceptions Index in 2020, Estonia is one of only 20 countries in the world whose total points have statistically improved significantly since 2012. Compared to the previous year, Estonia improved its result by 1 point, now sharing 17th place out of 180 places with Iceland (2020 – Transparency International). Estonia’s national debt rose by 9.5 per cent in 2020 compared to the third quarter of 2019 but remained at the same level if we compare quarter to quarter. At the end of the third quarter of 2020, Estonia’s national debt accounted for 18.5 per cent of its GDP, which is still the lowest in the EU.

Estonia’s investment climate is friendly to foreign investors, with no differentiation being made between domestic and foreign investors. European structural funds are available to domestic and foreign companies in equal measure. Foreign investments are protected by laws and international treaties, and to ensure investment protection, Estonia has concluded treaties with many countries, including Germany and Switzerland.

In addition, Estonia offers a very progressive business environment with an efficient and compatible infrastructure. It is a perfect country for companies to test and implement their ideas. For projects involving new technological solutions, the small Estonian society is an excellent testing ground for innovative businesses who need to quickly obtain direct feedback. As regards new technologies, Estonian people are very flexible, and keen to adopt new solutions. According to data from the Enterprise Estonia Foreign Investment Centre, a total of 173 million was invested in Estonian business in 2021.

Estonia has qualified specialists who boast strong language, finance, and IT skills. Estonians are also known for being committed employees. In 2021, 1000 new jobs were created with foreign investment in Estonia.

Sectors with a favourable outlook:

  • ICT;
  • Wood and paper industries;
  • Financial and insurance;
  • Start-ups;
  • Manufacture of electronic and electrical equipment.


Estonia's main exports include:

  • Machinery and equipment;
  • Mineral products;
  • Wood and wood products;
  • Furniture, wooden houses etc.;
  • Metals and metal products;
  • Means of transportation.


Estonia's main imports include:

  • Machinery and equipment;
  • Mineral products;
  • Means of transportation;
  • Metals and metal products;
  • Chemical products;
  • Foodstuffs and beverages.


What challenges do German companies face during their business ventures into Estonia?

English is the main language of business in Estonia. As a result, it can be challenging to find a German-speaking workforce. Most official proceedings are conducted electronically in Estonia. If you do not hold an Estonian ID number or card, you will not be able to sign documents digitally. For the handling of matters in the Estonian (or e-Estonian) digital environment, the e-resident number granted as part of the e-Residency platform also offers foreigners who do not live in Estonia equal access to Estonian services. Thus, to be able to do business in Estonia, you do not have to live in Estonia – digital residency will suffice. As a small country, Estonia is not suitable for labour-intensive ventures.
 

Estonia has a pioneering role in the Baltic States in terms of digitisation. How does this affect the economy?

Estonia has long been known for the leading role it is playing in digitisation. The country offers its citizens and companies hundreds of e-services. The handling of a wide range of services online using IT solutions is commonplace. The internet in Estonia has a high penetration rate and is free, and the country also boasts widespread e-commerce and e-government services, including e-Residency, making it one of the leading nations in the world in this respect.

Internet access is regarded as a fundamental human right. Thanks to e-services, you can save time, money, and energy. You only need the Estonian ID card, a card reader and Internet access. The Estonian ID card offers access to all national e-applications. At the same time, it is a valid travel document in Europe. E-mail correspondence and the digital signing of documents are commonplace in daily business life. In such a paperless society, many transactions can be handled quickly. Estonia is famous for being a country with one of the largest number of start-ups per capita. A company can be formed and entered in the e-register in 20 minutes, and since 2011 it has been possible to register a company online. The e-Residency programme also offers non-residents access to the register and the digital services.

In addition, Estonia offers e-government, e-health, e-school, e-election, and many other services. E-Tax is an electronic filing system through which 95 per cent of all tax returns are filed. The Estonian banking system is based on IT solutions and is quick and flexible. In Estonia, 99 per cent of banking transactions are handled electronically. Voting online offers an alternative to the traditional voting system, giving voters the opportunity to exercise their democratic duty without having to leave the house. If an Estonian needs medication, they go to the pharmacy, show there their ID card, and the pharmacist hands out the medication based on a digital prescription added by the GP to the database directly through the internet.

Furthermore, well over 80 per cent of schools are currently participating in the e-School programme. Parents have online access to their children's grades and homework as well as their teacher comments; additionally, a lot of learning materials can be accessed online. E-solutions are proving to be practical, especially in times of Covid-19. Even those companies that already offer the ability to work from home are more intensively exploring the potential of the digital society, with e-mails, Skype, various databases, clouds, and remote desktops now becoming a central part of everyday work.

Ordering groceries and consumer goods at home and in the office has become a new consumer norm. Online sale offers companies, among others e.g. hardware stores, consumer goods suppliers or other entrepreneurs, an opportunity to generate turnover. During the Covid-19 period, e-commerce has more than doubled. In a year, more than 40,000 mobile workers have been added. Not to mention the packstations, which are experiencing 70 per cent more use than before the pandemic. It can be said that selling online has become the new normal for business. In some cases, not having an e-shop can even seriously hamper a business’s potential for profit and growth. However, it is also worth drawing attention to the fact that the more entrepreneurs do business in e-channels, the greater the competition will be. It is important to be aware of changes in the market and to continuously develop existing solutions to keep up with such trends.

 

In your opinion, how will Estonia develop?

It is important for Estonia to maintain relations with allies and partner states, as well as to ensure the operation of joint organisations. Civil protection and crisis preparedness should be developed with international partners, because crises, like other dangers, do not recognise national borders. The Centre of Development Monitoring has listed the goals of Estonian regional policy and the important technological renewals of the regional economy are related to: Automation and robotisation of the economy; smart energy systems with decentralised production. One of the main axes of the scenarios is the change of economic model and way of life due to sustainable development - will a pragmatic approach be prioritised or will an ecological breakthrough take place. The other main axis is the technological impact on the economy - will this increase concentration or support decentralised economic activity. 
 
Our population is no longer growing at the same rate as before. Therefore, society's productive activity must improve to accelerate economic growth. This is important because there have been major changes in the economy that have made it more difficult for us to stabilise prices. For example, people are living longer and also saving more to enjoy retirement. The economy is no longer growing at the same pace as it used to. This makes companies less optimistic and they invest less. Therefore, it is important to invest in the growth of labour efficiency and productivity through innovative ideas and new technologies.
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