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Estonia’s success story: how to gain and maintain leadership

Estonian entrepreneurship ecosystem for future generations…

After regaining independence, not many believed that Estonia, the smallest of the Baltic States, would soon outperform other European economies in such areas as entrepreneurship and innovation. Based on GEM (2016), Estonia with GDP per capita of $ 17,288 (2015) joins the club of the best performing countries worldwide in terms of GEM Expert Ratings of the Entrepreneurial Eco-system.

It is ranked among top 3 best performing countries worldwide, based on such criteria as entrepreneurship education at school level, physical infrastructure and internal market burdens or entry regulation; it is among top 5 countries, based on such factors as Government policies, taxes and bureaucracy and Cultural and social norms; among top 10 globally best performing countries, according to such criteria as entrepreneurship education at post school stage, commercial & legal infrastructure, and R&D transfer.

Relying on GEM experts’ rankings Estonia still needs improvement in the areas of government entrepreneurship programs (ranked 13/66), government policies, support and relevance (16/66), and entrepreneurial finance, which downgrade the overall internal market dynamics (35th among 66 countries).

While focusing on early-stage education, cultural and social norms as well as R&D transfer, Estonia becomes a new leader of innovation processes in the EU, where knowledge transfer from education organizations to companies is emphasized, intrapreneurship rate is high (ranked 10th), business people are driven by opportunities (ranked 21st) and are capable to identify niche for their innovative products or services (ranked 13th).

To maintain its leadership, Estonia should also focus on enhancement of female entrepreneurship (ranked 44th, based on female/male total early stage entrepreneurship activities ratio), strengthening confidence in entrepreneurial capabilities, as well as improving social image of entrepreneurship (ranked 49th, based on valuation of entrepreneurship as a career choice).

According to GEM (2016), capabilities perception may reveal not only people’s skills, but also confidence in their ability to start a business as such; they are likely to play a significant role in the transition from potential to intentional entrepreneur.

So is Estonia an attractive economy for investment? GILE Experts believe that competitiveness of a country, which is driven by human capital as a core strategic resource, depends on the capability to ensure labour supply in high-tech industries. According to the European Commission Report (2017), in 2015, Estonia gained competitiveness towards Finland, Latvia, Lithuania, the Netherlands and Denmark, but it lost competitiveness towards Sweden and Norway.

Based on the European Commission Report on Estonia (2017), rapid growth in wages (in 2015, the average salary increased by 6 % y-o-y) has limited impact on export growth: Estonia’s economy is rather an international price-taker. Based on the European Commission Report (2017), Estonian companies mostly internalize rapid wage increases, either by reducing profits, especially in the manufacturing sector, or by substituting capital for expensive labour; however, such investment is not followed by commensurate productivity growth.

Driven by labour market tightening (as working-age population swiftly shrinks in Estonia), nominal wage growth in Estonia is higher than productivity growth. Moreover, larger expenditure is necessary in higher productivity areas of the economy. Entrepreneurship climate significantly improved in Estonia via ‘Zero bureaucracy’ reforms (In the World Bank ‘Doing business’ report 2017, Estonia ranks 12th out of 190 economies); however, while protecting minority investors (rank 53) and resolving insolvency (rank 42), Estonia can significantly improve its business climate.

To improve its entrepreneurship dynamics and strengthen productivity, Estonia focuses on private investment in R&D, stronger cooperation between businesses and academia, higher efficiency of public R&D spending, and upgrading R&D skills. Notwithstanding its efforts to boost R&D performance, business investment in R&D remains low, mainly due to a low share of high technology and knowledge-intensive companies (In 2015, R&D intensity increased marginally to 1.50 % of GDP, from 1.45 % in 2014; business enterprise expenditure in R&D reached 0.69 %, from 0.63 in 2014). Having more than 600 million euros allocated for R&D during the years 2015-2020 this Baltic Tiger is on the right track to improve its productivity as well as high-low- tech combination. We can expect further positive transformation of Estonia, followed by other Baltic states.

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