Doing Business in Estonia:
A Country Commercial Guide for U.S. Companies

Chapter 1:
Doing Business In Estonia

Market Overview

Market Challenges

Market Opportunities

Market Entry Strategy

Market Overview

Since regaining independence in 1991, Estonia has transformed itself into a highly motivated and dynamic center of commerce. The business environment has blossomed, thanks mainly to the stability of the political situation and the sound economic policies of the government. Estonia achieved its overriding foreign policy goals of the past decade when it acceded to NATO in March 2004 and the European Union in May 2004.

After enjoying double digit growth in recent years, 2007 GDP growth slowed to 7.3% and is expected to be around 4.3% in 2008 (Bank of Estonia estimate from October 2007). Prices are decreasing in the real estate sector, and there are signs of a slowdown in private consumption growth. Rising prices of non-domestic goods, especially food, both from the EU and imported from third countries, have pushed inflation to 6.3%. If the economy develops according to forecasts underlying the state budget, the government's 2008 budget should remain in a surplus of at least 2% of GDP.

Being a small country of 1.4 million, Estonia relies for commercial success, on its greatest natural asset -- location. Estonia lies just south of Finland and across the Baltic Sea from Sweden. To the east is the huge potential market of northwest Russia. After Estonia regained its independence in 1991, Russia imposed a non-favorable tariff regime for Estonian imports, which caused most local businesses to shift their export markets to European countries. This situation began to change after May 1, 2004, when Estonia joined the EU, and Russia lifted its double-tariff regime on Estonian products. This has increased considerably the level of Estonian business interest toward the Russian market. Estonia's membership in the EU has increased Russian business interest in Estonia as well. Sound, liberal economic policies and an excellent business climate have ensured high levels of foreign direct investment (FDI) in Estonia. Companies partly or wholly owned by foreigners account for one-third of Estonian GDP and over 50 percent of the country's exports. Scandinavian countries are the largest foreign direct investors in Estonia. Sweden has 40% of the total, followed by Finland with 25%, and the Netherlands with 5%. The United States accounts for 1.7% of foreign direct investment stock. (10th overall)

According to the U.S. Census, in 2007 the principal imports from the United States were mineral fuel, electric apparatus, measuring and testing instruments, audio-visual equipment, passenger cars, , and medical equipment. Estonian membership in the EU has not had major bilateral trade implications for the United States, although this membership is disadvantageous for some U.S. exports. Estonia's main trading partners are Finland, Sweden, Germany and Russia. The U.S. share in trade is around 1%.

Market Challenges

Estonia has a small domestic market - 1.36 million people.

The primary competition for American companies in the Estonian marketplace are European, especially Finnish and Swedish companies.

Estonia's dynamic and rapidly expanding economy is quickly exhausting the ability of the country's small population to provide labor. The signs of a tight labor market are already present - low unemployment, rapidly rising wages, increased worker turnover and shortages in public and service sectors.

Market Opportunities

Estonia's business attitude towards the United States is positive and business relations between the United States and Estonia are increasingly significant. Over the next several years, major growth is likely in services, especially in the telecommunications, financial, transportation and energy sectors.

Market Entry Strategy

All market entry strategies are applicable.

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