Problems in Estonia's entrepreneurial ecosystem identified by major report (6)
Commissioned by the Estonian Development Fund and facilitated by the Global Entrepreneurship and Development Institute (GEDI), a new comprehensive report “Towards a More Entrepreneurial Estonia, Call for Action” has been conducted. Estonia has achieved relatively high position in the index, but there are also many reasons to be concerned.
The positive news is that, according to the report, Estonia’s entrepreneurship ecosystem ranks 21st among 120 countries, a solid achievement. The globally leading entrepreneurship ecosystem is the United States, followed by Australia. All Scandinavian countries are ahead of Estonia, but the tiny country ranks ahead of its neighbours Latvia and Lithuania, as well as many old EU countries such as Greece, Italy, Spain, and Portugal.
Like all countries that have reached the innovation-driven stage, Estonia needs to nurture its entrepreneurial potential, the report suggests. It argues that to harness the potential of entrepreneurship and innovation, Estonia does not necessarily need more entrepreneurs: it needs better, innovative and growth-oriented entrepreneurs. To facilitate this goal, GEDI report suggests a national entrepreneurship policy framework for the country and is fairly critical on many current aspects.
The number of innovative start-ups not sufficient to produce a major impact on the economy
Although praising the start-up culture, the report clearly indicates that a wider approach to the national economy is required.
“While Estonia is known to produce a disproportionate number of innovative start-ups per capita, the majority of entrepreneurial businesses in Estonia are not very sophisticated and are stuck in subcontracting activities. Because of this imbalance, the number of innovative start-ups is not sufficient to produce a major impact on the economy. In order to enhance the sophistication of the Estonian industrial landscape, an ecosystem-wide approach is required,” it says.
“Estonia needs to develop a coherent set of ecosystem resources with distinct roles so as to be able to offer comprehensive support for innovative, growing businesses. Some of the ecosystem bottlenecks can be alleviated through quick action (e.g. training programs for entrepreneurs), while others require more time and strategic changes, for example, in Estonia’s education system (e.g., shaping positive attitudes towards entrepreneurship should start already at the primary school level),” it adds.
The key insights in the report
Estonia “punches above its weight”, relative to its GDP per capita, in terms of the performance of its entrepreneurship ecosystem: it ranks 21st in the global ranking of entrepreneurship ecosystems, ahead of countries such as Latvia and Lithuania, Spain, Portugal and Greece, and even ahead of countries such as South Korea and Japan.
Importantly, Estonia ranks high relative to its GDP per capita. The only countries ranking higher than Estonia in the GEDI ranking with a similar level of GDP per capita are Puerto Rico and Chile.
While Estonian performance is strong overall, its entrepreneurship ecosystem also exhibits softness – notably, in individual-level attitudes towards entrepreneurship. This bottleneck drives softness in entrepreneurial skills, which further drives softness in innovation and in entrepreneurial finance.
It brings out four key bottlenecks that hold back Estonian entrepreneurial performance: innovation; finance; attitudes towards entrepreneurship; and skills for entrepreneurship.
How does Estonia’s performance compare with its competitors?
Despite the global image of being a startup country and open for entrepreneurship, Estonia only ranks 111th among 120 countries in terms of how high a status an entrepreneurial career enjoys in Estonia. Similarly, the country only ranks 98th in terms of risk acceptance – or Estonians’ responses to the question of whether fear of failure would prevent them from starting new businesses. Estonia ranks 91st in terms of entrepreneurial skill perception, 71st in terms of how many people personally know entrepreneurs and 67th in terms of how many people believe there to be good opportunities for starting a new business in the area where they live.
“The poor attitudes toward an entrepreneurial career choice are bad news. When considering which career to choose, individuals consider not only money, but also, whether the career is valued by others. Poor attitudes towards entrepreneurship are therefore likely to deter people from choosing this career,” GEDI says.
Estonia performs relatively less well in comparison against EU countries than globally. The report confirms that Estonia underperforms in terms of career status (where it ranks 27th out of 29 EU countries), risk acceptance (18th) and skill perception (15th). In the EU comparison, Estonia’s weakest pillar overall in the entrepreneurial ecosystem is risk capital (27th), followed by cultural support (19th), quality of human resources (19th), start-up skills (16th), product innovation (16th), and process innovation (16th).
Lack of innovation a serious concern
The reports also highlights serious attitude problems when it comes to innovation and lack of networking when it comes to collaboration in the name of common aims.
“Risk aversion inhibits innovation, as individuals and entrepreneurs prefer operating in a safe comfort zone and run lifestyle ventures. In consequence, there is little growth ambition and internationalization orientation, reinforced by risk averse and short-termist shareholders. Attitude problems also inhibit networking, thereby inhibiting collaboration crucial for innovation. As a result, there are too few innovation role models for entrepreneurs to follow,” the GEDI says.
“Collaboration is poor between small and large firms due to lack of trust and legitimacy, as the poor innovation track record of entrepreneurial businesses in Estonia undermines their credibility as innovation partners,” it adds.
To overcome some of the shortcomings, it suggests that Estonia needs to invest more in facilitating networking between large and small firms, and also, among new firms and SMEs. In order to strengthen Estonian innovation culture, the report advises among other things to increase efforts for international brain gain.
“Estonia should actively seek to attract post-graduate students globally to increase its pool of talent. Today there already are some bachelor’s and master’s students who come to study in Estonia for a short period of time, but this flow of talent should be substantially increased and upgraded also to include PhDs.”
According to GEDI, another issue is that Estonia’s incentive structure does not effectively support innovation.
“The high labour tax inhibits the ability of entrepreneurial firms to hire skilled personnel, thereby hampering their innovation capability. There are few tax incentives for R&D and innovation – an issue associated with Estonia’s tax structure. A partly attitude-driven issue is that talented individuals are not inclined to become entrepreneurs and have few incentives of doing so.”
Suggestions on how to overcome the shortcomings and nurture the entrepreneurship in Estonia
In the most intriguing part, the GEDI report calls for a concrete action on how to nurture the entrepreneurship – something that would probably provide local politicians with an interesting evening read, four months before the national elections. The report has identified various bottlenecks probably better than any other institution before, and offers clear solutions how to overcome the shortcomings.
- Increase the participation of start-ups in research funding and public procurement. Top up research funding for projects with start-up and industry involvement with additional funding. Upgrade public procurement policies to engage with start-ups and expand the role of the public sector as a lead customer for new technologies.
- Create a soft landing package for foreign talent. Offer support to foreign talent and their families to settle into the Estonian society; this involves building new international schools and childcare facilities.
- Create an action plan to attract postgraduate students (including doctoral level students) to Estonia.
- Introduce scholarships and internships for university students and student teams in Estonian start-ups (also in foreign offices) and nearby start-up hotspots (e.g., the Aalto University ecosystem in Espoo, Finland).
- Introduce industrial companies to lean start-up methodologies. Create a programme for established companies to learn effective customer and market validation approaches that they can use when creating new-to-market products.
Skills and Attitudes
- Launch an ’Entrepreneur at School’ initiative. A detailed action plan needs to be drafted in cooperation with local municipalities, entrepreneurs, schools and government.
- Create a dedicated Executive MBA programme for entrepreneurs in cooperation with a strong foreign university.
- Launch a programme that helps start-up teams grow innovative global start-up companies from conception into start-up phase.
- Create a bank of teaching case studies of Estonian entrepreneurial
- Draft and launch spin-out programme for people with industry backgrounds and for university spin-outs.
- Create an employment tax honeymoon for new businesses.
- Create a legal framework for crowdfunding and related syndication activity.
- Create tax incentives to encourage business angels and crowdfunding investors.
- Allow tax exceptions for in-moving global talent. Propose changes in current legislation to make it easier for start-ups to attract and employ foreign talent.
- “In entrepreneurship, quality matters more than quantity.
"Therefore, to be entrepreneurial, a country does not have to have the most entrepreneurs: it suffices if it has the most innovative and growth-oriented ones,” GEDI points out, adding that “To prosper, innovative and high-growth start-ups need skilled employees. They need external sources of technologies, such as universities. They need a well-functioning infrastructure. They need specialised advise and support in, e.g., marketing, legal matters, and financing. They need access to appropriate forms of finance."