Estonia and CEE: Moving up the value chain

View this page in: Eesti keeles

December 2012


With investment from the Eurozone and respective export markets stalling, Estonia as well as the other countries in Central and Eastern Europe (CEE) with a similar starting position 20 years ago, are already shifting their focus of growth toward higher-value production and services.

Over the past two decades, EU investors and consumers have helped drive growth in CEE, leaving this region vulnerable to the protracted Eurozone crisis. In response to the crisis, governments in the region have been forced to reorient their growth strategies to focus on developing more resilient sectors and attracting investors outside of the EU. In recent months, a new trend has emerged: a move away from reliance on foreign direct investment (FDI) in low-cost labour production toward strategic FDI, emphasising high-quality labour forces, excellent infrastructure and technological support. On the surface, the shift may seem like a minor adjustment of policies that support export-orientated FDI, but it is in fact a strategic turn of the entire FDI framework toward high value-added production.

Opportunities are emerging in the region for investors seeking strategic assets crucial for high value-added sectors. As companies weigh various investment opportunities, fundamentals such as political stability and a sound regulatory framework will be crucial, as will the capacity of individual governments to implement the institutional and policy changes necessary to build a knowledge economy.

Evolving new FDI frameworks face a sizable challenge. Virtually all investment in CEE countries over the past two decades originated in the EU. While CEE governments tend to be the most comfortable with EU investors, the lingering Eurozone crisis is forcing CEE officials to look significantly further afield to capitalise on their newly developed strategies. So firms based outside of the EU may now find investing in CEE economies easier and more appealing, as they will enjoy the same benefits (political stability, quality infrastructure and favourable regulations) as do companies from the EU.

A highly educated workforce is perhaps one of the most important qualities of the CEE labour market, which boasts some of the highest tertiary enrolment rates and researcher headcounts in the world. In addition, the growth of labour productivity in the region has outperformed that of most of the rest of the world in the past two decades. And general political stability and reliable infrastructure provide basic preconditions for successful business operations.

Investors should also be aware of the strengths and weaknesses of various CEE countries with regard to different high value-added industries. For instance, Estonia, ranking No 19 in Global Innovation Index, is typically credited for fostering successful high value-added development in the region. The country deserves its high rankings for ICT services and software development. And Estonia’s internet connectivity and creativity in developing online content remain unrivalled in the CEE region.

Estonia also stands out with its developed business infrastructure and ease of doing business as well as relatively developed financial markets. Setting up companies and communication with the state is easy in Estonia – a wide variety of services have been created, ranging from the e-Business Register to filing taxes and annual reports. Services are facilitated by the central data exchange layer X-Road and ID card infrastructure, which create convenient business development opportunities for companies in Estonia.

ICT solutions help people organise their lives better, relieving them of routine time-consuming activities through provision of value-added digital content services. For example, 99% of bank transactions are made and 96% of personal income tax declarations are filed online. Estonia enjoys a unique position in the world by virtue of its electronic use of ID-cards, including the e-voting practice and its popularity. A good illustration of the efficiency of public services is also e-terviselugu (electronic health record).

The activity of the public sector in procuring innovative solutions, the contribution made by the banking and telecommunications sector to new technologies and the eagerness of people to use new opportunities provided by technology have been remarkable in the development of the information society. In respect of the public sector, the development of the state’s information system is noteworthy, following such principles as a distributed service-oriented architecture, high security of data and data exchange, web-based approach, orientation toward services and solid means of authentication. The state’s information system infrastructure has created an opportunity to support the development of public services through high-speed ICT solutions, laying a foundation for emergence of a common service space of the public and private sector. The distributed information system will create good preconditions for Estonia to cope with and potentially benefit from the trend where an increasing number of equipment and machinery are connected to the computer network, and where institutions and businesses exchange information primarily by linking data and services.

The Government of the Republic of Estonia promotes the development of an innovative business environment with its initiatives. The Ministry of Economic Affairs and Communications is currently in charge of developing a new Estonian Information Society Development Plan 2020, which also aims at improving productivity through use of ICT in business.

The electronic solutions of the Estonian public and private sector have helped shape Estonia’s image as a strong e-state, so that it is regarded as a serious cooperation partner and an opinion leader in various international cooperation formats while also helping Estonian companies market their services abroad.