Ott Pärna: A good time to change the league
Ott Pärna, CEO of the Estonian Development Fund, writes that Estonia is in a sufficiently good state to break free from the role of Scandinavia’s small brother. We could become an important international hub around the Baltic sea and Scandinavia and for that purpose we have to find our own growth areas like the film industry in Hollywood and the design industry in South Korea.
We are currently in an interesting situation in Estonia in regard to setting new meaningful objectives. On the one hand, we are located in the periphery of the European Union and next to Russia; on the other hand, we are part of the Nordic region, a region where most of the newest technologies in Europe are developed, where financial discipline is good and which is likely to become for example together with Germany and Holland a new growth hub in Europe. It is ours to decide how important a role Estonia will play in all this.
We have overcome the crisis but still remain as “South Finland”. Currently, the highest level of our economy is to be a good service provider for Scandinavia but not an equal partner. However, we do not want to remain Scandinavia’s little brother. There are several countries in the world where almost half of their population of working age earn their living abroad and where the local economy enlivens once a year during the time of year-end celebrations when they come home to visit.
We are like a three-pronged fork: we have ambitious economic and social objectives, and we have good macroeconomic and budgetary policies, strong institutions, low levels of corruption and a state functioning based on the rule of law; at the same time, the complexity, strategic role and internationality of our businesses is very low. For example, the productivity of our exporting electronics industry is ten per cent of that in Sweden, the monthly average wages in our processing industry is considerably – below one thousand euro – and the largest portion of our exports is generated by around one hundred companies of which two thirds are controlled by foreign investors. Although the latter is not a bad thing, the complexity of the work they perform here is not decided here and it depends on how good the people we have here are.
How we emerge from this situation is one of the most important future issues for Estonia. A universal model does not exist on what to apply. OECD has made a very appropriate proposal in connection with state governance in Estonia in this year’s report, saying that Estonia has to tailor its development solutions itself.
To become a partner that is taken seriously in Scandinavia, we have to become a place where interesting and globally important things happen. The synonym for characterising hubs is energy and the key word is a fostering social and physical infrastructure. It is easier to become a hub for historic trading centres (e.g. London, Amsterdam and Hong Kong) or culturally and enterprisingly active regions (San Francisco, Copenhagen and Mumbai).
Hubs are attractive to a wide range of ambitious doers and world citizens. They include students and professors, businessmen and investors, persons involved in culture, physicians and scientists, architects and developers, professionals and bankers, conference and business tourists, but also marathon runners, shoppers and back-packers. Surveys have shown that a majority of very mobile employees choose their place of employment by the location, not the organisation or company. This is why modern-wise businesses choose their location by the region where their future employees would like to live. So, the film industry is concentrated in Hollywood, the design industry of the East and Southeast Asia in South Korea, etc. In this way, Estonia in future should become a hub for its own growth areas.
Now then, the area around the Baltic Sea needs a much more global and differently thinking hub but this will not develop by itself. Tallinn is a unique city where the largest cruise ships land almost in the centre of the city bringing tens of thousands of affluent clients to us every week without any special invitation. Presently, the height of our capacity is to sell them amber in the harbour kiosks. In ten, but why not already in five years, tourists from faraway countries should disembark their ship to go straight into a musical theatre, opera theatre, conference centre, top hotel, department store or casino. We have the clients today but as a country or a city we do not make a good sale, if expressed in the words of a businessman.
There are five perspectives from which to develop more specific solutions that can be highlighted based on the world’s experience, expert opinions and foresight of the Estonian Development Fund.
Firstly, there is experimental economic policy where for example instead of following a precise recipe the private and public sectors learn and experiment together. In order to find solutions for the exports of financial intermediation services for Estonia, we have launched FinanceEstonia.eu as a cooperative effort together with the private sector. This is a cooperative and voluntary platform of the private and public sector with more than 20 members to date, the objective of which is to introduce Estonian financial services and related support services to the international arena, to attract more international headquarters into Estonia, etc. The financial intermediation sector in Estonia accounts for around four per cent of the GDP of domestic market, which is quite optimal. We have still enough space for growth in this relatively high added value sector in regard to export markets, i.e. supporting our own companies in their effort to go to the world and developing it as a separate economic sector. We are about to launch a similar initiative called MedicineEstonia with the aim of developing the export of medical services, products and technologies.
There are several business areas in Estonia where by combining the knowledge and ambitions of the private and public sectors new competitive advantages can be found and very specific things can be made happen. The mentioned sector may be green economy, international trade and logistics but also agriculture and processing industry, to mention more traditional sectors. No matter in which area we want to become an important doer in the Baltic Sea region, we need a circle of partners from more distant markets. We have to be able to bring new quality and cooperative relations into this area.
Secondly, strategic growth areas. The general business environment has been quite well tuned in Estonia, meaning that it is hard to offer new universal arguments. In this respect, an effort to help a small country to the top resembles the task of the clocksmith who has to deal with a whole system comprising small details that have to function together. I mainly consider these details to be human capital, education and science, negotiation time of countries top leaders and state’s cooperative relations.
I have been often asked whether Estonia should set black and white sector focuses. My general opinion is still that it should not. Estonia is too small and the number of companies involved in one sector is too small to set very important educational and other priorities.
I also doubt the wisdom of prioritising the development of a narrow selection of basic technologies because it is very unlikely that we are able, according to the probability theory, to surpass countries that are 10, 100 and 1,000 times larger than we are in that our solution would make a scientific and business breakthrough in the world. This does not mean that we should not deal with basic technologies because this is the basis of world level science and higher education, and there are also some technologies witch are cross-disciplinary like ICT.
The growth areas in this respect are a symbiosis of the global demand and megatrends, the technological capacity of the country, the economic realities and ambitions at individual, company and state level. One example from the world is the clean tech and sustainable energy that have become one of the main investment targets of venture capitalists. The green industry offers growth opportunities for the processing industry, service industry and IT business in Estonia.
Similar opportunities are born from the wellness and health care economy that offer challenges that call for solutions in almost every sector of the economy. In principle, more than a half of Europeans are presently ready to consume health care services in a foreign country whereas only four per cent have actually done so. By 2050, more than half of the population of Finland and Sweden will be older than 65 years who in addition to medical services are active participants in the employment market and are sufficiently prosperous to use wellness and health care services. Why should Estonia not become a regional health care centre, or so-called HUB, which was one of the most ambitious visions that was developed from the export foresight projects of health care services by the Estonian Development Fund.
The third perspective involves the structural changes policy, which is in essence a set of different steps serving a common objective of updating the economy and moving towards business areas and functions that produce higher added value. The structural changes policy has four facets that all need attention: firstly, modern businesses are becoming more complex in the value chain; secondly, modern businesses move into more intricate sectors based on their experience (e.g. from oil shale to oil shale chemistry, from wood to forest machinery and forest chemistry); thirdly, the import of business areas and companies that provide higher added value through foreign investments; fourthly, the development of new and globally ambitious start-up companies from scratch, which is the function of the Development Fund today as a venture capital fund and in which Estonia has quite good success stories from all over the world to tell.
In the latter case the key issue for us is to figure out what to do to provide an environment where such companies could grow in Estonia and to ensure that their number is five or ten times larger than today. To that end, on the one hand, we need more business angles and capitalised venture capital funds; on the other hand, our smallness causes us to take a look abroad and attract strong start-up companies from there. Estonia already has a set of arguments to become the Start-Up Nation in this region but this requires at least ten years of continuous work – it has taken more than 50 years to build Silicon Valley.
The above introduces the fourth important topic, which is the cross-sectorial talent policy. The development trends in the world force us to believe that the global competition for quality employees – the war for talents – will become even more intensive. In such a situation, the educational system is not the sole place where one can seek solutions for the lack of labour force because faster and more flexible ways, such as the application of selective immigration policy, must be found.
The Estonian Development Fund came to similar conclusions in connection with the foresight of the usage of IT in increasing the competitiveness of the economy. We lack about 20,000 IT specialists on the employment market compared to the Nordic countries if we want to have a similar proportion to them in each sector of economy as in the Nordic countries. However fact is that less than four hundred students of IT specialities graduate every year.
We have to increase the volume, internalization and in certain areas the quality of IT education. Secondly, international interdisciplinary programmes must be initiated in the most important application areas of IT, such as energy, healthcare, logistics, etc., where around half of the students and professors participating are from outside Estonia. In the name of the new academic generations, we have to send our best students to the world’s leading IT universities and programmes to study. Fourthly, we have to find a way to solve the lack of IT specialists with selective immigration.
In order for our companies to develop and to ensure that we do not lose in the global talent rally, we need an integrated talent policy across policies areas and better-targeted talent pool management. We promise that the talent foresight launched by the Estonian Development Fund will prove necessary background information for Estonian national talent policy.
The fifth important topic is the understanding of the world’s development trends. Our success in the world directly depends on how much we know about the world. How well we understand the inevitable processes taking place in the world. I dare say that regardless of the bleak backdrop of the world economy and the future of the euro area there are many bright colours or trends in the world that are both challenges and great opportunities for fast companies and smart countries. In order to offer all Estonians a more structured overview of the plethora of opportunities in the world, the foresight team of the Estonian Development Fund leads the trends blog www.fututuba.ee. The blog introduces fresh surveys and stories on future workplaces, sprouting business opportunities, the future of energy sector, green economy, aging, distant markets, urbanisation, novel governance methods, foreign investments, consumption, migration, and more.
Now, the moment for Estonia has arrived and we just have to seize it. The world and Europe are experiencing several systemic crises and have to resolve many erroneous calculations and mistakes made in the past. Estonia on the contrary is in a quite good state to make a determined change of the league in the vortex of the changing world.
Article was published in newspaper "Postimees" (in Estonian) on 23-rd of September, 2011 and it is based on the speech given by Ott Pärna to the Estonian Parliament (22-nd of September, 2011).