The CEO of Eften Capital, Viljar Arakas, provided an overview of Estonia's commercial real estate market in recent years:

"The transaction market between buyers and sellers has been frozen for years now. It all started with Covid, then came the Ukraine war, followed by rising energy prices and interest rates. These four years have presented strong headwinds for the commercial real estate market, though conditions are starting to improve now."

Then came the bombshell: Ericsson's new factory, planned for Ülemiste City with an investment of €155 million, was canceled. The company announced its decision to abandon the project.

Has foreign investment in Estonia entered a deep freeze?

Ericsson did not find time for an interview, only citing a challenging market and economic environment as the reasons behind its decision.

"Perhaps we shouldn't have announced Ericsson's plans before shovels hit the ground and binding commitments were made. Maybe we celebrated a little too early. The Estonian state should definitely investigate why this decision was made," said Oliver Väärtnõu, deputy head of the Estonian Chamber of Commerce and Industry.

The announcement of Ericsson's planned investment, widely celebrated last summer, was made by Enterprise Estonia's successor organization, the Estonian Business and Innovation Agency (EIS). EIS is tasked with attracting foreign investments and ensuring a favorable investment climate in Estonia.

"The decision wasn't a cold shower in that surprises are common in the world of investments, but it was certainly unexpected. Considering the economic situation in Europe, the global economy and geopolitical and economic policy factors, the decision makes sense," said Joonas Vänto, EIS' head of foreign investments.

"It's a great pity that this deal didn't materialize. For an economy the size of Estonia's, every major investment is invaluable. A few days earlier, I spoke with Ericsson's Estonian CEO, who hinted at this decision. He explained that the issue wasn't Estonia's internal situation but rather a broader consideration of global changes in the telecommunications market. As we know, Ericsson has factories here in Estonia and in the U.S.," said Minister of Economic Affairs and Industry Erkki Keldo (Reform)

Both the minister, EIS and the Chamber of Commerce and Industry pointed to the Ukraine war as a key factor negatively influencing foreign investment decisions.

"Russia is our direct neighbor, and we are seen as a frontline state. Understandably, investors are hesitant to make large investments in a frontline state, as worse-case scenarios could result in a complete write-off of their investment," explained Väärtnõu.

Arakas disagreed, at least regarding the commercial real estate sector, arguing that the reasons lie elsewhere.

"Since the eurozone has uniform interest rates, the issues are more domestic. If your home market is struggling, you pull funds from foreign operations to stabilize the domestic market. Today, capital is being repatriated to secure home markets, and once conditions improve, attention will turn outward again. Unfortunately, the Baltics are a region where foreign capital arrives last and leaves first," Arakas said.

What else is hindering foreign investments in Estonia?

"Rapid price increases in recent years. We've had very high inflation, at times the highest in Europe," noted Väärtnõu.

"Large manufacturers need long-term stability, guaranteed capacity and predictable pricing. Estonia needs to make more agreements to secure such conditions. This is likely one reason why Google chose Finland, where electricity is cheaper. Comparing Estonia's energy prices with our GDP or per capita GDP, the cost is extremely high," he added.

"For foreign investors, a stable tax environment is crucial, as is competitive energy pricing compared to the Nordic countries. Additionally, public understanding of the need for industrial jobs is important. For larger investments, community opposition often emerges before environmental impact analyses are even completed. The so-called NIMBY effect is very strong in Estonia," said Teet Kuusmik, head of the Ida-Viru Investment Agency.

Kuusmik also highlighted the importance of reducing bureaucracy for attracting investments.

"For foreign investors, preparation is critical. Plans and infrastructure need to be in place. When decisions are made to invest, companies prefer locations with minimal obstacles to launching production. Unfortunately, our planning processes are currently very lengthy," Kuusmik explained.

"Eighty percent of our economy relies on exports, and if free trade is replaced by tariffs and customs duties, this will undoubtedly hurt small countries in the long run. Europe needs to enhance the competitiveness of its enterprises. Overregulation alone won't work; we need to ensure global competitiveness," said Minister Keldo.

"We've already set a clear goal in government to reduce bureaucracy. Initial steps have been taken, and we aim for businesses to operate with a single reporting system within two years, with as much data as possible being automated. Standardized and digitalized data, including e-invoices, will be crucial," he added.

This week, the minister also introduced a new EIS measure to boost large-scale industrial investments, offering cheaper electricity as a potential improvement.

"The government has allocated a €160 million budget. This could translate into at least eight €100 million investment projects. We expect major developments in the coming years. Interest in this measure is already high, with the potential to generate €1.5 billion in investments for Estonia's economy, which will play a significant role in driving growth," Vänto said.

However, these funds come with conditions: investments must be at least €100 million and a significant number of jobs must be created. The Just Transition Fund for Ida-Viru County also aims to create numerous jobs, but this requirement has been criticized by industrial players.

"We invested in new equipment to make our processes more efficient, allowing us to produce more with the same workforce. Unfortunately, such investments aren't eligible for support if no new jobs are created. We would invest much more if we could also qualify," said Juhan Terasma, head of Hanza Mechanics' Narva factory.

Hanza Mechanics, which operates two factories in Estonia (one in Narva and one in Tartu), manufactures forklift components and mining equipment parts in Narva, while producing reverse vending machines in Tartu. Why did the Swedish-owned company choose Estonia for its operations?

"Our main market is Northern Europe – Sweden and Finland – and we have strong connections with these countries. But the greatest asset is the people, which is why we feel confident investing here," Terasma explained.

Despite not qualifying for subsidies, Hanza Mechanics plans to invest €1 million in its Narva operations next year.

Is Estonia becoming more or less competitive?

"In my view, Estonia's global competitiveness has declined due to the regional situation," admitted Väärtnõu.

"I would argue it's improving. Four or five foreign investors, possibly more, have shown interest. Additionally, two or three companies already operating in Estonia's smart industry are considering expansion. I believe we'll see positive developments in the first half of next year," Keldo concluded.

Foreign investments in Estonia

The United Nations Conference on Trade and Development (UNCTAD) tracks global foreign investment statistics.

According to UNCTAD's data, Estonia received approximately $4.6 billion (€4.3 billion) in foreign investments last year. This marked a record-breaking year following two years of decline.

Looking at trends over the years, investments have generally risen and remained at higher levels since 2003, just before Estonia's accession to the European Union and NATO.

Similar patterns can be observed in neighboring Latvia and Lithuania, though Estonia has consistently been the most successful in attracting foreign investments among the three Baltic states.

In Finland, foreign investment flows show much greater fluctuations, and the scale of investments is significantly larger.

UNCTAD's report also noted that global investment flows decreased by 2 percent last year compared to the previous year, citing geopolitical and trade tensions as the primary reasons.

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