Foreign investment

There are several reasons why foreign investors have invested into Estonia and continue to do so. They have made a nice profit in Estonia. Estonia's economic climate has become similar to that of the developed countries and thus the fears of the foreign entrepreneurs have diminished. Belonging to the EU has made investing here even more attractive, the more so that the economic growth here is one of the swiftest in the EU.

Quite recently Estonia's workforce was cheap but the work was of reasonably high quality. By now the salaries have risen considerably but the skills of the local workers have developed accordingly and the prospects of productivity continue to be good.

Relatively low income tax for enterprises and the possibility not to pay income tax on the invested profits are undoubtedly tempting as well.

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; presently a notable part of the new direct investments are created through reinvesting the profits to expand the production.

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 (altogether 5 billion EEK or slightly over 3% of GDP for central and local governments). Little by little loans started coming to private enterprises and banks as well, a large part of the loans were obtained through the enterprises owned by foreign companies. However, the majority of the loans have come to Estonia through banks that have lent out the money they borrowed. Some bigger enterprises have also taken loans from abroad (e.g. Eesti Energia).

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 (54.5% of the direct investments) through the ownership of Estonia's largest banks (Hansapank and Ühispank), and Swedish investments can also be seen in the telecommunications sector and numerous other projects.

Finland holds the second place among the investors (20%), there are investments into banking (Sampo pank, Nordea pank) as well as into other areas (e.g. trade), including the electronics industry (Elcoteq).

The remaining foreign investments are distributed between other EU countries (Denmark, Great Britain, Germany, Italy, Holland, Austria), mention should also be made of the investments from Norway and the USA. Russian investors have been quite modest in Estonia – less than 1.6% 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, especially to banking. Quite a notable amount of foreign capital has been invested into the transport and communication sector, processing industries, trade, 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.

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. At the same time some successful Latvian and Lithuanian companies are striving for the Estonian market.

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