Foreign investment

There are several reasons why foreign investors have invested into Estonia and continue to do so.

  • Their investments have earned quite a nice profit in Estonia – even during the economic crisis, overall foreign investments were profitable, although many companies and sectors suffered great losses.
  • The Estonian business environment is that of a developed country, with modest bureaucratic barriers and low corruption. The business culture is Europe-friendly, too.
  • The fact that Estonia is a member of the EU makes the idea of investing more attractive, especially because Estonia's economic growth has been one of the fastest in the EU. Adoption of the euro decreased investors’ fears even more and Estonia’s joining the OECD indicated that Estonia's business and economic environment was among the best in the world.
  • Estonian labor costs are relatively cheap compared to other European countries, but the quality of the work is sufficiently high. Salaries have risen, the skills of local workers have improved, and there are opportunities for further growth in efficiency. The difference in salaries, compared with well-off European countries, is greater than the difference in skills.
  • Relatively low taxes for companies (e.g. the lack of capital improvement taxes) make Estonia attractive to businesses.
  • Low transportation costs make Estonia comparable to many cheap manufacturing areas in Asia and Africa.
  • It is not possible to introduce large plants and factories in Estonia but small enterprises enable a flexible production process and it is possible to quickly change the range of the manufactured goods should the need arise. This is especially important in the case of some consumer goods (e.g. clothing articles, interior design products etc).

Estonia is among the leading countries in the Eastern and Central Europe regarding foreign direct investments per capita. Initially a large part of the investments were made through privatisation but gradually the emphasis shifted on investments into other enterprises and establishing new companies. During the last decade, foreigners have bought more and more successful local companies.

At first only the state could get foreign loans but this was done moderately and that is why the state loan burden has remained small (about 950 million euros, or a little more than 6% of GDP for central and local governments). Little by little loans started coming to private enterprises and banks as well. Larger local entities have also borrowed from abroad (e.g. Eesti Energia and Tallink). But the main bulk of loans came into Estonia through local banks that belong to Scandinavian banks. In the first decade of the century, the inflow of loan money was extremely high, causing too fast growth in the economy and real estate prices in 2005-2008. Although Estonia's gross debt has decreased compared to 2009, the level of debt is still high: 110% of GDP. Still, Estonia has provided many foreign loans, so net debt is considerably smaller, a bit over 20% of GDP.

Foreign investors
Recently the position of Swedish and Finnish enterprises in Estonia has slightly weakened but the majority of the investments still come from those countries. Sweden occupies the first place (1/3 of the direct investments) through the ownership of Estonia's largest banks, and Swedish investments can also be seen in the telecommunications sector and numerous other projects.

Finland holds the second place among the investors (24%), there are investments into banking as well as into other areas (e.g. trade and industry).

The remaining foreign investments are distributed between other EU countries (Norway, Great Britain, Germany, Cypress, Holland, Luxembourg), mention should also be made of the investments from the USA. Russian investors have been quite modest in Estonia – less than 3.4% of the overall investment in Estonia originates from Russia. Of course it is possible that some of the funds originating from Russia have been invested through the so-called off-shore scheme or under the canopy of other countries' investments but even in that case their share cannot be relevant.

The majority of the foreign investment has gone to the financial sector (29%), especially to banking. Quite a notable amount of foreign capital has been invested into processing industries (16.5%), trade (14%), real estate (14%) and various business services.

Investment into Estonia has been popular for several reasons. Initially the foreign investors were lured by local low production costs, whereas the work was of relatively high quality. Low production costs have now become an irrelevant factor as the salaries in Estonia have risen quite quickly. At the same time the workforce in Estonia is still quite cheap – taking into account the quality, salaries, and the increase in productivity, Estonia has maintained its attraction for the investors, especially in comparison with the developed countries. This is the reason for active investment into the processing industry and the transport and communication sector.

More and more investments come to Estonia due to the growing interest in the local market – people have become wealthier and are able to spend more; the need for investments is also acute – thus the foreign investors hope to profit from that. Initially the investment was most active in the financial sector but gradually more and more investments are made into trade and services.

Estonia's investments abroad
Estonia is among the most active investors into foreign countries among the transitional economies. But a large part of those investments are actually the investments of Western investors to Latvia and Lithuania through their Estonian subsidiaries. As Estonia's economic development in the 1990s was faster, foreign investors dared to invest here more and at an earlier stage. Their Estonian-based subsidiaries then started to invest in Latvia and Lithuania, sometimes also to Russia. Such investments, primarily into the financial sector, were especially popular with Scandinavian companies. That’s why 43% of Estonian foreign investments were in the finance sector. After restructuring in companies, vocational, scientific and technological activities now form the main areas of investment, but investments in the finance sector, transport, commerce and real estate are not too far behind.

However, recently Estonia's native companies have expanded their activity within their southern neighbours’ economies as Estonia's narrow market becomes uninspiring for the quickly growing companies. Now, almost half of Estonian foreign investments are in Latvia or Lithuania (Lithuania’s percentage is a little bigger). Meanwhile, of course, the more successful Latvian and Lithuanian companies are attempting to enter the Estonian market. Important investment areas for Estonian entrepreneurs are Russia, Ukraine and, especially, Finland.

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