Attracting FDI in Today's Europe
Call centers and cheap manufacturing were last decade's Estonia. With salaries on the rise, the new byword for attracting foreign investment is “higher value,” says Tiina-Maria Väravas. As director of Enterprise Estonia's London branch, she's tasked with convincing British companies to set up shop in Estonia or move part of their operations here. ERR News spoke to her about how she sells investors on Estonia and where she sees the country's new role in the European marketplace.
Potential direct investors have a lot of countries where they could do business, even within the EU. Why would they pick Estonia?
The things companies are looking at are labor costs, skills and utility costs, etc. But I've also recently started to hear companies say that they are not looking for the lowest-cost place to move to. The stability of the country, regulation and taxes are quite important as well.
At the moment I think that Estonia is in a very strong position with our public finances. That can be very important to a company when they don't know where to go and they don't know the country.
Where exactly are Estonia's strengths? What sorts of companies would it attract?
We've identified five key sectors: IT, business services, electronics manufacturing, metal working and logistics. That's where we see we have something to offer.
Of those five sectors, I have chosen business services and IT for the UK market because a lot of manufacturing has already moved out of the UK. There are some foreign manufacturers in Estonia as well, but not so many from UK.
What kind of business services are we talking about?
Back office functions like finance, accountancy, and IT. The tendency is for big corporations and big banks to take their services departments to lower-cost countries and just concentrate on their core businesses.
Is that where Estonia is heading? Away from manufacturing to support services?
My feeling is that the stronger our economy becomes, the more we develop, the more the investment projects will change. Their function and core will change.
We are moving in the direction of bringing higher value functions to Estonia. We have to start looking at the fact that salaries are rising and we are not going to be the low-cost place of doing things anymore.
In a way we will reach the same place that Western Europe has been, where a lot of manufacturing has moved out. Of course, the manufacturing we have here is Scandinavian. For the Scandinavians the most important thing is that we are close to their home market, so we might not see that much change as long as there is a competitive difference in the prices and tax. But from other countries' perspective, it might not make much sense to bring manufacturing to Estonia. They might look at different functions.
Can you explain what you mean by the “higher value functions” you mentioned?
I'm looking at business services and back office. We are starting to move away from the call center functions to doing accountancy, finance and IT. The call center functions, for example, are lower value on the chain than the finance functions.
In IT, Estonian companies might be the project managers, the leaders or even the consultants. The code writers might be in Belarus or Ukraine, but the project itself would be managed from Estonia.
Wherever we have core knowledge in specific areas, we can add value to the project, keep some functions here that are higher value while the lower value operations that need lower labor costs are done in another part of the world. So we are moving in the direction of the rest of Western Europe, which is a positive thing.
Apart from the old standbys of easy corporate tax terms and labor costs that are still relatively low compared to Western Europe, what are Estonia's unique selling points within the EU?
Location is one. The Estonian market itself is a small market, but we have a proximity to Scandinavia and you can access the St. Petersburg region, the Baltic region and Central and Eastern Europe as well. So you can actually cover a wide area from Estonia.
Another is good logistics. Because most of our foreign investors who are in Estonia are exporting their goods, logistics is important to them.
What Estonia can also offer is IT people who can think. That's quite important actually. We can't offer a lot of people, but we can offer very good skills. And these are usually in specific niches. For example one of the things that I'm promoting in the UK is cyber defense. The UK government is just starting to build up its cyber defense system and has set aside 650 million pounds to do it. Estonia is one of the few countries in the world who has gone through a cyber attack and who has learned from it, and we have a small cluster of companies that can offer their knowledge and expertise in this field.
It would be wonderful if Estonia could be a center for developing e-services or cyber defense software. These are quite niche things, but we have to consider that we have a working population of only 600,000.
So when we're talking about our unique selling points, they are usually these very particular niche areas, and the strength we have within these niches is that our knowledge is quite good.
What's your process? How do you go about finding companies to set up operations in Estonia or move part of their operations here?
In the past when Estonia was a growing market and needed a lot of investments, countries and companies found their way to Estonia. That's starting to change. Now we can't rely on the phone ringing all the time, we have to start targeting companies.
To be quite honest, knowledge about Estonia is still quite low in the UK. They might know where we are, but they don't know what kind of business they can do here.
So one way I help solve this is by holding seminars and inviting people to listen. That's for a broader audience, for raising awareness.
The other way is really targeting businesses. We have a list of the top 100 companies that we want to go and see. We try to establish contact with them, but it's not always easy to get in touch with the right person.
When companies decide to start expanding, what they do is they create a long list of potential countries, which might include the whole EU. For shared services they might pick some countries from Europe and look at other countries like India. So it's a case of first getting on that long list. Then they usually ask for a lot of information, and based on that they draw up a short list and come to visit.
What we try to do is act as a consultancy firm for them. We try to give them as much information as possible.
And I believe there's always a human element involved. Business people are human beings, after all. If they've heard about Estonia or know someone from here, it is easier for us to get on their list. And once we are considered, we see ourselves as the companies' business development advisers, and we help that company make an educated choice.
What's the scope of UK investment in Estonia today? Who are the biggest players?
There are approximately 500 partly or full owned companies in Estonia, which is a big number. When I look at the list, I can't point out one specific sector. It ranges from real estate to hotels to manufacturing to consultancy services.
At the moment the largest investment is in Tallinna Vesi [Tallinn's water utility, 35.3 percent owned by United Utilities – ed.]
Has joining the Eurozone made any difference in how investors see Estonia?
For my EU colleagues, yes. My colleague in Germany gets more inquiries, and Scandinavian companies are definitely more interested as well.
In the UK we have definitely got more media attention because of the euro, but they are not convinced that the euro is a good thing. The usual question is why somebody would, at this moment in time, choose to access the Eurozone.
What do you tell them?
For us it's definitely a good thing and it brings stability. They don't know that we have our finances in order. They think of us as part of this “New Europe,” this Eastern Europe, and they think about Greece and Ireland, and so on. I explain that our currency has always been pegged to the euro anyway, and that from an institutional perspective there has always been a currency risk, and with the euro there isn't one. It's just a matter of understanding.
Interview by Steve Roman