Foreign Investors in Estonia

Foreign Investors in Estonia 15 case studies

Editor: Scott Diel Articles by Scott Diel, Steven Roman, Scott Abel Designer: Einike Soosaar, Menu Kirjastus OÜ Photography by Kaupo Kikkas, Tom Tikenberg, Meeli Küttim, Toomas Tuul Project Manager: Ele-Merike Pärtel Publisher: Enterprise Estonia Printed by Tallinna Raamatutrükikoda Copyright 2010 Enterprise Estonia

Contents / Companies Wendre Trigon Capital Cargotec Balti Spoon ABB Skype Stoneridge Electronics Sorainen Eesti Telekom Bellus A. Le Coq JELD-WEN Ericsson Vopak EOS Swedbank

6 14 22 30 38 48 56 62 70 76 84 90 98 104 112

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Foreign Investors In Estonia | INTRODUCTION

hen a country, like a start-up company, looks for ways to interrupt business as usual, it is very interesting to me. Estonia has done just that—with its e-government, e-voting, and its emphasis on innovation on every level.

Just as a start-up company can thrive in an environment where there is a change, whether economic disruption, technological change that accelerates, or any number of other factors—deregulation or changes in laws—whenever the economic playing field changes, new entrants have a greater chance of rising.

In other words, at times of pure stability, predictability, and no technological disruption, only large old companies thrive, while small ones get crushed.

The same is true for countries.

Estonia went through the biggest changes during the 1990s.

But now, with the global economic crisis, which has affected the development of Estonia in very direct ways, slowing it down, there are new possibilities. In fact, these can be great times for small innovative countries such as Estonia.

What Estonians should surely avoid is thinking that they know all the answers, and that if they continue to march in the direction chosen two decades ago, they will arrive at prosperity. This would be a backward track. Now is the perfect time to explore new markets and ideas, turning challenges and threats into opportunities—whether in cyber-security (a field Estonia is taking very seriously) or in any new internet solution. This is the behavior you expect from a new company and from a new economy like Estonia’s.

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My hope is that Estonia will not follow the example of the United States, and much of the rest of the world, where people have false heroes who are basketball stars or pop idols. Estonia should take note of some countries— notably China—where math and science experts, and Nobel laureates, are children’s idols, not slick businessman, or the marketer or the sales person.

The inventor, the scientist and the engineer - they are the true heroes of any economic revival.

Of course, it is hard to say how a country can create such an environment. But it would obviously be a good thing if society found its true heroes, rather than following hyped up false models.

I have to admit to an idealistic streak for Estonia, where my parents were born.

But I truly hope it can be different from other countries.

Steve Jürvetson Managing Director Draper Fisher Jurvetson, California

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Foreign Investors In Estonia | WENDRE

Wendre’s Peter Hunt. Estonia’s highly flexible optimist.

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Full of Potential Wendre and its full-time optimist

If there is a secret to thriving in every economic climate, the manufacturing company Wendre may have it: In times of a tight employment market, automate until your labor costs are less than ten percent of turnover. In a recession economy, handle big volumes for big customers, provide great working conditions to create loyal employees, and be ready at a second’s notice to change what you were doing just a moment ago.

This seems to be the story, in a nutshell, of Peter Hunt, a Swede born of Estonian parents, whose Estonian company, Wendre, a manufacturer of quilts, foam products, and pillows, has grown its turnover from three million euros in 1997 to more than 65 million euros in 2008.

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Foreign Investors In Estonia | WENDRE

Modest Beginnings Ironically, Hunt, whose name means wolf in Estonian, did not succeed in Estonia because of having carefully stalked and studied market conditions. Nor was his success even serendipitously tied to romantic plans to return to his parents’ homeland. Rather, he visited in 1993, two years after Estonia’s independence, for a trade fair. “I sold the Estonians raw materials from Asia so that they could produce in their factories. It wasn’t until three years later that I started to invest here.” In 1996, Hunt bought 26 percent of Wendre, a former Soviet textile factory located 136 kilometers west of Tallinn, Estonia’s capital.

Hunt made the decision to invest because he could see the opportunity for growth, as well as the fact that Estonia was a logistical fit with his existing system. Hunt had connections in the east to bring in raw materials, and he had connections in the west to sell the finished product. Estonia’s labor cost was quite low, and Hunt saw its location as ideal for products for the northern European marketplace.

His first client was a Swedish mail-order company called Ellos and he soon added IKEA as a customer. “IKEA had a focus on the Baltic states at the time, and I had been providing them consulting services as well as working as an agent for them. But around 1996 they changed their rules and decided to work only directly with manufacturers. ‘Sorry, Peter,’ they said. ‘No more middlemen.’

‘Don’t worry,’ I replied, ‘I also own part of a factory.’ ” Hunt’s characterization of how he built his good relationship with IKEA is surely overly modest. IKEA has a reputation in the industry for being an uncompromising customer, insisting that all aspects of production—from use of the right materials to proper fire-safety requirements for factories—meet their critical standards. A full 60 percent of Wendre production goes directly to IKEA. But IKEA was not the reason Hunt had invested in Wendre nor was it the reason he wound up in Estonia. “I simply saw potential for growth,” he says.

Secrets And there was plenty of growth, so much that in 2002 Hunt bought 100 percent of Wendre and built its first modern factory in Estonia. Since 1997, turnover had increased by a factor of eight to over 24 million euros. Hunt’s strategy was to go after the industry’s biggest players. “We have always gone after the big clients like IKEA, Argus, Carrefour, and Tesco.That way, our cost increases can be matched by volume increases.”

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Hunt admits that the low cost of Estonian labor was an attraction in the beginning, but he also knew it would eventually catch up with the west.

“Our textile business is not labor intensive,” he emphasizes, noting that less than ten percent of Wendre’s turnover goes to cover wages.

In 2005, with turnover around 25 million euros annually, he built another factory in the Estonian city of Pärnu. “This one was state of the art in Europe and the world,” he says. “No one had better at the time.”

Now operating two factories, having seemingly sunk deep roots into both the business and the country, Hunt was still as flexible as ever. “I am not a fan of doing ten-year plans or whatever they say you should do in the industry,” Hunt says. “I believe that you need to be flexible and in a position to react quickly. Will the market want foam beds or spring beds next year? If you’ve invested a lot in one type of machine, and the market- or consumer preferences change, then you’re in trouble. As a testament to flexibility, Wendre advertises on its website that it is capable of producing sample products in as little as six hours.

Hunt is always looking to diversify. In November 2009, he opened a third factory in Pärnu, operating under the company name STRAM, which will produce 300,000 folding metal beds per year for use in homes or hotels. For the opening of production, Toomas Hendrik Ilves, Estonia’s President, arrived to cut the ribbon.

In a meeting before the ribbon cutting, the president was curious to learn how Wendre was able to aggressively expand when so many other companies were cutting back or shutting down. Hunt answered with a few sentences on automation. “But it’s also because of Peter Hunt himself,” an Estonian member of Hunt’s top management piped in. “He understands the foreign market, and he knows how to sell there. He knows how to get and keep clients like IKEA.”

Estonian Weaknesses Although he did not mention it to the President, Hunt will concede that Estonians are not yet the world’s greatest salesmen. “Estonians are not door-openers when it comes to sales,” he says. “In this business you really cannot sit around and wait for the phone to ring.”

Wendre has invested significantly in training Estonians in sales, though

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Foreign Investors In Estonia | WENDRE

it may take several generations before they are on par with foreign salesmen, and Hunt has learned the art of putting the natural strengths of a people into their optimal service area.“I have learned that if I try to import a complete western work culture into Estonia, it does not function well.” Hunt says that under the Soviet system Estonians were accustomed to what he terms “management by fear.”

“We try to do things here in a more western fashion. There are discussions. There is some democracy on the factory floor. At first it was difficult to implement and some people used the system for their own gain.” Hunt estimates it takes three to five years, depending on effort, to implement a western system. “Employees were so used to a dictatorship,” he says, “that they thought we were playing with them, that we were being nice but that they’d get a knife in the back sooner or later.”

Hunt admits he has not yet been fully successful with instituting a fully western culture into the production model. “We went from a piece-rate system to a fixed monthly salary for our employees, and our output decreased somewhat.”Today, Wendre operates on a hybrid system, with most of the salary being fixed, with one-third of the salary influenced by the employee’s efficiency.” Hunt characterizes Estonia as being in an “industrial development phase,” where all western practices will not yet necessarily work, and where flexibility in both the market and the workplace counts as a huge advantage.

What does he see as the major plus of this market? “Potential!” he says without a second’s hesitation. “My Swedish workers are still more productive than my Estonian workers, which gives an opportunity to improve the productivity here.” For Peter Hunt, the proverbial glass is always half full.

The Chinese Threat?

If the low cost of labor in Estonia was an attraction in the early 1990s, it is still so, though not to a degree which makes it the single selling-point for foreign investors. Hunt points out that the cost of labor in Estonia is still roughly onethird of his Swedish labor, but that is not the attraction. Even the low cost of labor in China, he believes, is overrated.

“What you have to understand is that China is really about 90 different countries, and it’s never really clear how the tax system is working.” He notes that if you strictly follow the tax regulations in China, then its competitive advantage is not so competitive. “Big western firms typically write contracts with Chinese employees where the employee promises to pay his own social taxes.” (The employee then does not honor the promise.) “If you’re a company

In Wendre’s Pärnu factory.

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Foreign Investors In Estonia | WENDRE

Estonian President Toomas Hendrik Ilves (second from right) with Wendre management

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which takes corporate social responsibility seriously, then it’s very hard to be competitive in China when you’re paying 40 percent social taxes. The net result is after transport costs are taken into account, we can produce quilts more cheaply in Estonia than in China.”

Whether in China, Sweden, or Estonia, Hunt is serious about corporate social responsibility. “There are two ways to look at corporate social responsibility,” Hunt says, “and many use it as a marketing tool. I have another approach.

I believe that it is important to the internal life of a company that you are following the rules.”

Accolades Hunt’s success in Estonia has not gone unnoticed. In the city of Pärnu, population 44,000, his three factories employ 650 people. He calls Pärnu home the one week a month he’s in Estonia (scaled back from three weeks per month in the early years). Over the years, he has also perfected his Estonian. “When I came to Estonia in 1993, I came speaking an Estonian language from the 1940s which my parents had brought with them to Norrköping, Sweden. My vocabulary and expressions gave people a good laugh.”

The laughter was all in good fun. Hunt is loved in Pärnu and has become something of a local hero. He was named Pärnu Man of the Year in 2005.

Choosing the right location figures prominently in the advice Hunt gives to foreign investors in the manufacturing business. “In Tallinn, it can be difficult to get people. But you can find a place where there are qualified workers ready to go,” he says. And once you’ve found the town, then you start to meet the people.

Key among them will be your local managers. “It’s a bit of trial and error,” he says, “but I like to get the younger, more open-minded people.”

With the leadership of Wendre’s young, open-minded managers supported by 650 factory workers, Wendre will produce five million quilts and seven million pillows in 2009, and its turnover will reach 80 million euros. And Peter Hunt will remain as flexible and as ready for change, as ever.

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Foreign Investors In Estonia | TRIGON

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Joakim Helenius, Merchant Banker The Finn at the Heart of Baltic Investment

It doesn’t take much prodding to get Joakim Helenius to share his upbeat views on Estonia. With his soft, Cambridge-accented English and contagious optimism, he’ll readily tell you how much he loves the Westernoriented business climate here, and how he admires the government’s low-tax strategy. He believes that, in just a few years time, this little country might even transform itself into an economic powerhouse along the lines of Luxembourg or Hong Kong.

Hang on... Estonia, an economic powerhouse?

If it were anyone else telling the story, you could just chuckle and keep walking. But this is definitely not a man whose opinions should be written off. There are plenty of good reasons to take Helenius seriously—a billion good reasons in fact.

Finnish-born Helenius is the founder and CEO of Trigon Capital, the most successful investment and

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Foreign Investors In Estonia | TRIGON

corporate advisory firm in the Baltic states. With around a billion US dollars in assets under management and eight offices stretching from Croatia to Kazakhstan, it’s also a star player on the wider Central and Eastern European field.

You’d be hard pressed to find any other foreigner who has played a bigger role in the Estonian economy since the country regained its independence from the USSR. Starting from the earliest days of the Estonian kroon, Helenius and Trigon have been shaping the DNA of the nation’s banking and investment sector.

Looking back at those stormy economic times, it’s easy to see how someone like Helenius, a former Executive Director of Merrill Lynch and VP of the fixed income division at Goldman Sachs, would be extremely handy to have around.

Helenius’ first real involvement with Estonia was connected with the restructuring of the troubled, state savings bank that the country inherited from its Soviet days. Soon afterward, in 1994, he co-founded Hansa Investments, which later became Trigon. That company launched the Baltic Republics Fund, the largest direct investment fund in the region. It also launched Estonia’s first initial public offerings (in fact most of the major IPOs the country), brokered the Swedish takeover of the Estonian commercial banking sector, helped countless foreign companies invest in the region... the list goes on.

Nowadays, though Trigon is still headquartered in Tallinn, the bulk of its activities are spread out over the CEE region. That means Helenius spends a lot of time on the move. In fact, he’s a hard man to catch, constantly jetting between Tallinn and his home in London, where his wife and children live, and going wherever else the needs of Trigon take him.

In Search of Eastern Roots Life as an international nomad is nothing new to Helenius. Born in the late 1950s to a diplomatic couple, he grew up in such exotic locales as China, Germany and Saudi Arabia. He considers himself Finnish, though he only lived in that country until he was six, and then briefly again when he returned to do his national service.

After studying economics at Cambridge University he was snapped up by Goldman Sachs and then later by Merrill Lynch, where he rose to Executive Director level. In all, he spent 11 years in the investment circles of New York and London.

So how did he end up in Estonia of all places? In short, it was a

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personal connection with the East. Namely, his mother’s family were Russian aristocrats and merchants who fled St. Petersburg during the 1917 revolution.

“I grew up in a family where I heard a lot of stories about what life had been like in the old days before the Revolution. I obviously grew up with a very anti-communist bias coming from my family,” he explains.

According to Helenius it was those stories, coupled with his interest in current affairs, that started him looking at opportunities in the East once the Iron Curtain started to crumble.

“I honestly didn’t expect the collapse of communism that suddenly came, but when it did come, I started to think that I really should be doing something with my life different than spending my entire career in a rat-race in the City or on Wall Street.”

After some initial investments in Prague, he settled on Estonia.

“When I started looking at this back in 1993, Estonia was very business friendly and it also had the advantage for me of being next door to Finland. Obviously I had friends and relatives in Finland, so it wasn’t like moving to somewhere totally different,” he says.

The real clincher came when he was asked to bid on a deal to manage Estonia’s state savings bank. He didn’t get the bid, but the relationships he made led to the establishment of Trigon.

Now thanks to Trigon’s success, including its substantial investments in Russia, Helenius is in a real sense returning to family tradition. Another way to look at it is that he’s taking back what’s his. In either case, he’s not likely to forget the roots that brought him here: In his office, nicely framed, are the old share certificates from companies that his St. Petersburg relatives owned in days gone by.

“It’s just a little reminder of continuity,” he says.

An Old-fashioned Merchant Bank So what’s Trigon’s vision? What makes it tick?

Right now, according to Helenius, the formula is simple: Pick certain focus areas where there’s potential for growth and develop businesses there.

For Trigon recently that has meant managing its own property development businesses, agricultural investments and retail investments. If that sounds like a far cry from traditional investment banking and corporate finance, it is. And that, says Helenius, has been the key to Trigon’s success.

“We used to be referred to as an investment bank. We’re not really an investment bank anymore,” he says.

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Foreign Investors In Estonia | TRIGON

That’s because during the financial crisis of the late 1990s, Trigon’s management took the key decision to move away from generalized advisory and to instead develop its own “sector-focused know-how”.

“In the 1990s we were the biggest arrangers of IPOs and share issues in the Baltics. In the end we decided not to do that because it was too volatile, too risky, but to focus instead on the things we’re doing today.”

“We needed some solid legs to stand on that were not dependent on the whims of the economy and the market.

That’s how we became significant players in agriculture and property development and hopefully, in the future, also retailing,” he says.

Then if it’s not an investment bank, what is it?

“The term I like is ‘merchant bank,’ ” he says. “We’re a merchant bank in the sense that we make investments, we use our own money, we manage other people’s money, and we provide advice.”

That diversification means that Trigon is now sitting on projects amounting to 1.2 million square meters of billable real estate in Ukraine, Russia, Estonia and on the Dalmatian coast of Croatia.

It’s also operating garden centers, a coffee shop chain in Russia, and developing an Estonian furniture retailing operation in association with a wood-processing company called Viisnurk.

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Black Earth, Green Farming Of the areas Trigon is operating, perhaps the most surprising is agriculture.

By reputation Estonian companies are associated with Skype and doing fancy things with mobile technology. Trigon is bucking that trend with its company Trigon Agri controlling nearly 173,000 hectares of farmland, mostly in Ukraine and Russia.

Left and right pages: Scenes from Trigon investments..

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Foreign Investors In Estonia | TRIGON

Helenius admits it’s unusual, but there’s solid reasoning behind the move.

“If you want to become big in business you want to find things where you’re, relatively speaking, an early mover. Agriculture has been around forever, as long as human civilization has been around, but the commercialization of agriculture in the former Soviet Union [is new].”

And, he points out, unlike in Western Europe, there is the potential to develop large, US-style agribusiness.

“It’s eminently feasible to commercialize as a result of the collective farming system that they adopted; you can actually acquire large, huge commercial farms or put them together over time by acquiring pieces.”

“We think that this is something that over time will be incredibly important for the world, because the world is clearly facing a potentially significant imbalance in the supply and demand for food.”

Helenius also cites the environmental benefits of bringing modern, Western-style practices into the East’s farming culture.

“We’re looking at bio-energy where we can use waste from farms, where we not only generate heat and electricity from the waste, but we also dramatically decrease the methane that is released from this waste.”

Apart from farming, Trigon is also building a large storage operation in Ukraine and Russia, and is now starting to look at port infrastructure, grain terminals and rail transportation. Eventually, it hopes to put more pieces of its agripuzzle together, and become a major name in world food production.

The Dubai of Europe?

Listening to Helenius talk about where he sees Estonia heading, it’s hard not to get caught up in his enthusiasm. He believes that, if Estonia stays on its course of lowering direct taxation and taxing spending rather than income, it could

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develop into something truly unique by European standards.

“I am an optimist by nature,” he admits, “Of course no guarantees are given, but what I feel is that if these current economic policies are pursued in the right way, Estonia could become an extremely exciting place.

“Imagine an environment where there was a 10 percent flat income tax and where corporate tax was kept at its current zero level unless paid out in dividends,” he says. That, he suggests, would attract Scandinavian start-ups in particular, who want to avoid the high taxes in their own countries.

“Scandinavia is a place full of all kinds of talented IT and other entrepreneurs and individuals. If Estonia could attract even a small part of these people to come and base their businesses here... then Estonia could become a real, Hong Kong-type story.”

“Small size, if anything, is a help if you want to become very successful rather than a disadvantage, but only if it’s used properly.”

The danger, he feels, is that a populist political force might come into power that tries to build a high-tax, Scandinavian-style welfare system on the back of the too-small Estonian economy. That would have the opposite effect, driving away business and lowering tax revenues.

“It’s like a nightmare scenario that most people don’t want to think about. I don’t think people are that worried right now. All I can say is that if it were to happen then maybe the politicians would not do the things they’re talking about doing now because, once they have the real power, they would realize that it would be a really stupid thing to do.”

Barring that situation, Helenius truly believes that Estonia can become another Luxembourg or Dubai.

“Look how many small countries there are that have found a niche for themselves and prospered. Estonia is definitely capable of doing something similar. You don’t have to attract a lot of business away from Scandinavia to make Estonia a really, really wealthy place.”

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Foreign Investors In Estonia | CARGOTEC

Going Local How an international Cargotec builds local businesses

“Think globally, act locally” may be one of the most abused business clichés of the last century, though Cargotec—without ever uttering the phrase a single time— is doing just that. Cargotec’s Harri Ojala, nominally Vice President of Product Supply, seems more tasked with traveling the world, setting up Cargotec factories, systems, and practices, and then handing over the factories to an expatriate-free, fully local management. And often he does it in what would seem (at least to outsiders) to be an extremely short amount of time.

“Expatriates are a temporary solution,” says Ojala, himself currently an expatriate based in Goleniów, Poland, which he will leave in several months when Cargotec’s new factory’s operations are up to speed. “We want to run business with local management. Local managers know the local habits; they know best how to manage people and they operate better.”

Even in major markets, Ojala is under no illusion that expatriates should run the show. “In China, for example, we have an American running our operation, but he’ll return sometime next year.

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He wears the ring (look closely) but not the cowboy boots– Harri Ojala and a souvenir from an international life.

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Foreign Investors In Estonia | CARGOTEC

Scenes from Cargotec’s operations.

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Thinking Globally What Cargotec does import to its local operations is a corporate culture. The Finnish company was formed in June of 2005 when the Kone Corporation was split into two companies, KONE, and Cargotec. Cargotec manufactures and sells cargo-handling machinery for ships, ports, and terminals. Local distribution is through its Hiab, Kalmar, and MacGregor product ranges. The Helsinki-based company employs over 11,000 people in more than 140 countries.

As early as 2002, the then Kone Corporation’s division of Kalmar was doing some business in Estonia, buying components such as steel frames for trucks and smaller welded components to augment their capacity in Finland.

(KONE had acquired Kalmar in 2002 as part of a bigger Partek acquisition.)

It was not until 2007 that Cargotec entered Estonia in a big way, purchasing a 22,000-square-meter production facility in Narva called Balti ES from the Danish group A.P. Moller Maersk. At the time, the economy was booming, and the factory employed 600 with an annual turnover of over 12 million euros.

But the economic crisis took its toll, and Cargotec was forced to reduce its staff by roughly half. At the same time, however, it began a modernization process with an investment of 15 million euros. Today, the Narva factory produces steel components for terminal tractors, straddle carriers, and spreaders (load-handling equipment) for its Hiab and Kalmer brands. Cargotec, slowly beginning to hire back those it let go, is using the lull in the economy to its advantage by training to improve productivity.

“We started a welding school,” says Ojala. “All our welders are certified even to NATO military standards, and last year we got an ISO 9001 certificate.”

In order to improve productivity, Ojala streamlined the work process using flow manufacturing to utilize excess work in process. “We are really running ERP [Enterprise Resource Planning]; it isn’t just something that only exists on paper.”

To incentivize individual productivity, Cargotec matches skills to salaries, and employees are tested as often as every six months with their pay upgraded or downgraded depending on exam results. “There are some skills that are lost without practice,” explains Ojala. Cargotec’s Finnish management long ago handed over control of the Narva factory to Estonian managers, but it is able to observe from afar using key performance indicators. “We manage via KPI weekly,” says Ojala. “If those numbers are okay, then generally everything else is fine, too.”There seems to be nothing that Cargotec doesn’t measure. “We have a laser cutter on the shop floor which cost around 800,000 euros,” says Ojala.

“We know exactly how many hours per day that laser is cutting.”

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Foreign Investors In Estonia | CARGOTEC

A visiting journalist interrupts at this point to inquire if this isn’t a productivity discussion which might occur anywhere in the world: that Ojala has not once raised the issue of individual productivity in what he refers to as New Europe. “Exactly,” he answers. “We could be having this discussion in the United States.The main thing is to have the tools and the whole thing organized so that people can achieve. One problem in New Europe is that people are sometimes afraid to ask for new tools or improvements. You have to involve shop-floor people in planning and be clear with people what you expect of them.”

Local Advantages If Ojala sees any clear differences in working in New Europe, it is that people in the region are willing to work harder. “In Eastern Europe people see the value of overtime. One hundred euros extra in Eastern Europe is much more meaningful than an extra hundred euros in Western Europe.” And Ojala doesn’t see the willingness to work declining anytime soon. “Maybe someday it will change,” he says, “when everyone owns his own house and has two cars. But people are eager to buy things and they are willing to work to get it.”

Estonia, in Ojala’s opinion, has been exceptionally practical in the way it has created an environment where people want to work. “The flat tax is great. It supports people who work harder. In Western Europe if people work harder they are often hit with a progressive tax system which, in my opinion, kills motivation.”

Ojala further praises Estonia’s decision to not tax profits until they are taken out as dividends. “This is great especially for small companies, because it makes it easier to reinvest in the company. The Estonian government doesn’t give subsidies, as far as I know, but this tax policy in itself is a subsidy. And it’s a long-term subsidy.”

While some foreign businessmen sometimes point out that Estonia’s overall taxes are not that much lower than in the rest of Europe, Ojala responds that New Europe is ideal for manufacturing. “Anybody who says it’s as expensive as Germany, well, that guy hasn’t run a manufacturing operation in Germany.” The way Estonia has made its decisions and created tax policy clearly translates to a superior manufacturing environment. “I believe the Estonian government is doing the right thing. I’m not talking about politics here; this is a businessman’s perspective.”

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President Ilves meets Cargotec executives

New Europe’s Eastern Border The city of Narva on Estonia’s border with Russia is the nation’s third largest with a population just over 65,000. While Cargotec’s decision to invest there was based exclusively on the availability of a suitable factory to purchase, the choice has proven to have additional, serendipitous benefits.

For products exported to Finland and Sweden, they are moved via

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Foreign Investors In Estonia | CARGOTEC

truck and trailer through one of Tallinn’s ports. For products needed in Central Europe, Poland is 36 hours away when two lorry drivers are in the cab. Further advantage has been gained by the fact that Russia imports vast quantities of goods yet exports relatively nothing. “There are lots of empty trucks coming out of Russia and returning to Western Europe.” The empty trucks mean that Cargotec is able to negotiate very favorable rates to have its cargo taken on in Narva, just as the empty trucks cross Estonia’s border with Russia. “And,” Ojala adds with a grin, “we are not making deals with guys in dirty leather jackets! We are using legitimate Estonian trucking companies who have their own subcontracting deals with the Russians.”

But Cargotec’s serendipity with Narva doesn’t stop with empty trucks. “What isn’t advertised much,” says Ojala, “is that Narva is closer to St. Petersburg than it is to Tallinn. And if you need highly skilled employees—top engineers, for example—and if these engineers truly don’t exist in Estonia, then you can bring them from St. Petersburg which is a huge labor market. Two or three years ago it was different, but now, if you really need Nikolai Alexei and if you follow all the regulations, then you can get him.” Ojala says Cargotec follows the regulations “one-hundred-and-ten percent according to Estonian law” as a matter of company strategy. “We don’t think it’s okay to get fined here and there. For us, we do not consider fines a cost of doing business.” The Estonian government seems to respect those who respect it, and Cargotec has not had trouble bringing in employees from abroad that it has been unable to find in Estonia.

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Put Strategy First What advice might Ojala offer to those in a like manufacturing business who are considering entering Estonia?

“I’d say put your strategy first. What do you need? What’s important to you?” Comparing five or six New European nations, Ojala rates Estonia and Hungary as the top two to do business in. “Don’t choose a market based on subsidies. Figure out where it’s going to be easiest for you to do business long term.” Ojala praises the ease of starting a business in Estonia, plus the lack of hindering bureaucracy. “Most of the paperwork you need in Estonia can be done in one office. The local legislative business and tax laws don’t change and are very stable. It’s easy to come and go through ferries and the airport. Almost everywhere in Europe is reachable within five hours.”

Ojala should know about coming and going, since he’s spent a good part of his life doing just that. An engineer from Tampere, Finland, he has spent much of his life abroad, including a long stint in Dallas, Texas. “See?” he shows the journalist an MBA class ring from the University of Texas at Dallas. “It’s kind of a redneck thing,” he laughs, “but I like it, and it’s probably one of a very few Texas University rings in Europe!”

The journalist notices, however, that some parts of Ojala have remained European. He does not wear cowboy boots with his business suit, and, instead of English with a Texas drawl, he speaks with a neutral, continental European accent. “However, my daughter,” he says of his 19-year-old, who studies at Texas A&M University, “she has the accent!”

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Foreign Investors In Estonia | BALTI SPOON

Venkata Iyer and Edmund Smolarek

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The Woodman is Blind Balti Spoon and Europe’s Finest Veneer

No one quite remembers exactly how Balti Spoon’s founder, Karl Heinz Möhring chose Kupu Village in Kuusalu Parish as the location for his veneer factory. The legend goes that parish elders somehow caught wind that Germany’s Grand Old Man of Veneer was visiting Estonia, and so they met him at the Tallinn airport.

“I think he remembered that and it made quite an impression,” says Edmund Smolarek, Vice President of Möhring Group. “They showed him 67 hectares in Kupu Village, 36 kilometers from Tallinn. He was the first foreigner to purchase land in Estonia.” Mr. Möhring liked the price, too: one Estonian kroon.

“Of course,” adds Smolarek, “that price came with a commitment to make a serious investment on Mr. Möhring’s part.”

Smolarek, a German wood technology engineer who traveled with Möhring in those early days, says the company certainly made good on the investment commitment: approximately 30 million euros to date. Balti Spoon (spoon means “veneer” in Estonian) employs 460 people, but by the company’s count, it supports roughly an additional 2,000 in the community through businesses peripherally related to its production. That is quite a statement when one considers the parish population is only 6,800.

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Foreign Investors In Estonia | BALTI SPOON

The Woodman is Blind The veneer manufacturing business requires a highly-skilled work force, and so employees must be carefully trained. “The woodman is blind,” says Smolarek, placing his hand flat on the burled-wood conference table to illustrate how a professional judges wood. But to be called a professional takes years.

On the warehouse floor we find a case in point: a well-dressed, gray-haired gentleman personally sorting a pallet load of veneer. “He’s a German,” Smolarek raises his voice to be heard over the warehouse din. “He’s been in the business thirty years and he knows exactly what his client will and won’t take. And he’s training an Estonian who has two years of experience.”

If Smolarek has his way, Balti Spoon will create a lot of thirty-year veterans of the wood business in Kupu Village. The company’s personnel recruitment operation is built to that end.

“Right here is where we make money or lose money,” says Venkata Iyer, Balti Spoon’s Financial Controller, who gestures to a laser cutter on the factory floor. “How that man cuts determines a lot about our business.” Iyer says Balti Spoon invests heavily in its machine operators, and a skilled operator can easily earn as much as a white-collar worker in the capital city of Tallinn.

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Balti Spoon’s state-of-the-art investment.

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Foreign Investors In Estonia | BALTI SPOON

“All those sayings about ‘people are capital,’ ” emphasizes Smolarek, “well, we’re living that.” Smolarek and Iyer say that if you have an experienced worker, you just don’t let him go. It may take dozens of years for a woodman to become blind, but it takes a minimum of three years for a machine operator to understand the nuances of his trade.

To keep its best employees, Balti Spoon has created a bonus system to reward the highly productive. It is built on a combination of volume of output (raw square-meter production), quality of output (no client complaints or problems), and yield (getting the optimal cut from the log). Since every log a woodman will ever encounter in his entire career is different, it the yield part of the equation which can’t easily be taught. Experience counts. And it’s acquired only by working with wood every day of your life.

Boom Time Troubles Ironically, it was the boom times in Estonia which wreaked havoc on those in the manufacturing industries. All companies experienced the hardship of staffing up at a time when men worked construction for twice the wages they might get elsewhere and when they were willing to swap learning a real trade for a quick buck. “In more developed countries you have a system of polytechnic schools and apprenticeship programs where you can get employees,” says Smolarek, reflecting back on the days when it was tough to recruit employees.

“Estonia still doesn’t have enough of these yet.”

“In 2007 and 2008, natural gas prices increased greatly. Over the past ten years log prices have increased four-and-a-half times. In 2007 and 2008 log prices were twice higher than they are today,” Smolarek recites the litany of troubles the boom years brought. “Our employee turnover was 3,000 to 4,000 workers to get the 460 we have now.” That’s quite a price to pay to get a woodman, which makes it no mystery why Balti Spoon is faithfully committed to making them want to stay.

“Black, white, green, yellow, I don’t see any difference,” says Smolarek of Balti Spoon’s philosophy for finding employees. “If somebody wants to work, will show up on time, wants to learn this business, then I’ll give him a chance.”

Or her. Approximately 60 percent of Balti Spoon’s workforce are women, and although men tend to gravitate toward more heavy machinery, there are no strict rules about who may do what. “If a woman wants to operate a heavy machine, then she’ll get the chance to try.”

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The Industrial Rainbow The wide variety of employees of Balti Spoon—men and women from Brazil, Germany, India, the Czech Republic, Poland, Austria, and more than 400 others from Estonia—are what Smolarek terms “the industrial rainbow.” And this meeting of national cultures at Balti Spoon, united and marching under the flag of Balti Spoon’s corporate culture, according to Smolarek, “is what makes you stable, what makes you strong. Even during a crisis.”

Just how strong Balti Spoon is Smolarek prefers not to say (the company is privately held), but he will say that this year Balti Spoon’s European operation will produce 34,000 cubic meters of wood, with 27,000 cubic meters of wood produced in Estonia. “I know of no bigger operation in Europe, and I know of no bigger one in the United States or Canada,” he says.

The Balti Spoon facility is not only big, it is state of the art. It has some of the world’s most modern veneer machinery, but its real innovation comes from the unique way it combines three processes in one plant: the peeling, slicing, and splicing of veneer.

Ninety-nine percent of Balti Spoon’s production is exported, all of it trucked to its top three markets of Germany, Poland, and Lithuania. It ships to its fourth top market, the United States, via ocean containers.

Transportation is key to the business, says Iyer, because of the Just In Time inventory systems employed by its clients. “This is a capital intensive business,” he says, “and for the 13 species of wood we deal with, we require six to seven months of stock of finished goods in the warehouse. You never know what order you’re going to get.”

Whatever orders they do get, they can pack as much as 60,000 square meters of veneer on a truck and ship it to their clients like Swedwood, the manufacturing unit of IKEA, in under three days.

Smolarek, who once worked for Mercedes Benz, relates an example of the importance of Just In Time inventory. “One supplier for Mercedes used to ship its electronic parts for car assembly with identical cargo in two different trucks. Both trucks would leave the supplier’s factory on a Friday, and travel on two different routes to the client’s factory in order to make sure one of them arrived safely and on time for Monday’s auto production. Now we’re not quite that crazy at Balti Spoon—we don’t dispatch two trucks with identical cargo— but it’s a good example to illustrate the importance of delivering the right product at the exact right time in our business, too.”

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Foreign Investors In Estonia | BALTI SPOON

Not the Business Möhring Imagined Karl Heinz Möhring would likely not recognize the factory in Kupu were he to see it today. It is not only much larger than his first operation—the current facility occupies 20,000 square meters spread over several buildings—but the current business model differs significantly as well.

“Möhring’s original business idea was to import white oak, red oak, and American cherry logs from the USA, make veneer here, and then export it,” says Smolarek. “This sounds crazy, I know, but Mr. Möhring actually already had a business model like that in Brazil.”

In fact, Estonia might consider itself lucky the factory in Kupu Village was built at all. At his advanced age, company legend says, many of Möhring’s closest associates cautioned against him taking on the burden of adding a new venture in Estonia. But Möhring would hear nothing of it.

It is said he listened patiently to their opinions before remarking: “For my money—I talk.”

But even after forming the company in Estonia in 1993, Möhring was not yet convinced Estonia was a stable enough environment for business. “As a foreigner, you see things quite differently than locals see things,” explains Smolarek. But by 1997, Möhring’s vision of Estonia and its role in world of wood had changed. Möhring saw not only a secure, stable future for Estonia, but he saw a European birch veneer market developing with IKEA emerging as a major player. Möhring, in order to be absolutely certain his new factory would work, imported his first building whole from the United States in 1997. Production began in May 1998.

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“After 1997, Mr. Möhring never visited Estonia again,” says Smolarek.

“He gave us space to develop something very different, to use new machinery.

In 2000, we added the most modern dryer in the world. Our second building had a completely different layout which reflects a completely different way of thinking. All of this was possible because Mr. Möhring gave us freedom to do it, and success proved us right.”

The Time is Over for Cheap Labor Karl Heinz Möhring is no longer with us to tell his story of what he learned in Estonia (he died in the autumn of 2003), but his new generation of managers are not short of advice, looking back with 20/20 hindsight. Asked by a visiting journalist what they might say to potential future investors in Estonia, both Smolarek and Iyer pause a moment to think.

“The time is over for a cheap work force,” says Smolarek. “You must bring the international standard of technology with you.” While a German worker, at twice the price of Estonian labor, may be still more productive per euro spent, Balti Spoon is able to win by combining highly-trained, dedicated employees with the finest veneer technology in the world.

“The key,” sums up Iyer, “is to find the right balance between technology and the number of people you employ.”

“And don’t be afraid to bring people from abroad,” says Smolarek, mentioning his industrial rainbow of employees and the wide variety of clients from around the globe who regularly visit the factory 27 kilometers east of Tallinn. “The whole world is coming to Kupu Village!”

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Foreign Investors In Estonia | ABB

ABB’s Bo Henriksson

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Local Heroes ABB’s Steady Investment in Estonia

After seventeen years of living and working in Estonia, ABB’s Bo Henriksson has a few stories to tell.

One is set in pre-independence years when Finns from ABB were negotiating with a group of potential Estonian business partners. Because television broadcasts from Finland were not jammed during the Soviet occupation of Estonia, many Estonians speak fluent Finnish. But despite the similarities between the two Finno-Ugric tongues, it’s still a rare Finn who speaks Estonian.

During the negotiations, Estonians spoke Finnish with the Finns, but would caucus amongst themselves in their own language, inadvertently confusing the Finns who were listening in from the other side of the table. “The two languages share many words in common,” notes Henriksson, “but often the meanings are completely different.”

And so it happened that when the Estonians called something huvitav, or “interesting,” the Finns likened it to their huvittava, a thinly veiled insult with a meaning something closer to “ridiculous.”

“At one point I had to stop the negotiations,” laughs Henriksson, “and get everybody to step away and cool down.”

But that was one awkward moment in an otherwise great relationship. Since that time, ABB has invested more than sixty million euros in a very “huvitav” Estonian market.

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Foreign Investors In Estonia | ABB

Step by Step Given ABB’s position as one of the world’s leading engineering companies with 35 billion dollars in annual revenue, 100,000 employees in over 100 countries, and a listing on the New York, Swiss, and Stockholm Stock Exchanges, it would be tempting to conclude that one day after Estonian independence the financial skies opened and ABB money rained over Estonia. But reality is much less dramatic. As ABB Baltics Country Manager Bo Henriksson is quick to point out, his company’s billion-kroon investment (over 60 million euros) in Estonia did not materialize overnight. It has been a steady, well-thought-out, even organic process, which has proceeded step by step since the late 1980s.

“ABB had been watching this region since the 1980s, investigating possibilities,” says Henriksson. “We believed in the maxim, ‘Think Global, Act Local,’ and the ABB CEO at the time concluded it was the time to go East.” Henriksson himself was ABB’s first employee in Estonia, stepping off the plane in April 1992 with two small bags.

Acting Local Early expectations were modest. At the time, no one could envision today’s operation of four factories and over a thousand employees. “We started at the beginning,” says Henriksson. “Local market share was the goal.” This meant a place for ABB’s electrical transmission distribution as well as taking part in the modernization of local industry. ABB’s mission was an Estonian one, and it entered the Estonian market for its own sake, not viewing the country as a gateway to Russia or a closer outpost to the East.

The Estonian market meant a place to offer ABB’s range of low voltage products and systems for buildings, industries, and Original Equipment Manufacturers (OEMs). The sound of construction was everywhere in Estonia, everything from single family homes to construction and renovation of major factories.The market was strong for circuit breakers, plugs and sockets, switches and fusegear, among the other dozens of products ABB manufactured.

Surprising Growth ABB’s first major investment was a factory in Keila to make low-voltage products which found markets in banks, hospitals, other businesses, and private homes.

ABB followed with its grids and systems unit—operational within a

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year—which designs, sets up, and installs medium and high-voltage substations and cable lines. Its main customer: Eesti Energia, Estonia’s partially state-owned energy monopoly.

In 2000, world demand was such that three new plants were built.

Near the village of Jüri, located nine kilometers south of Tallinn, a plant began manufacturing stators and rotors in 2003. In 2007, wind business was added to produce generators & frequency convertors.

ABB’s newest facility, a unit substation plant, is located near Tallinn in Maardu.

There both metal-enclosed and concrete-enclosed unit substations are made.

ABB also entered Latvia and Lithuania when it entered Estonia, and while there are no production facilities there, Henriksson oversees ABB’s participation in the energy markets in those countries and service to its clients, the partially state-owned energy companies.

Today, ABB’s customers in the Baltic include utility companies and industries, primarily energy companies, power plants, mills, wind parks, treatment plants, and wholesalers of electrical devices.

Living Local Since the 1980s, Bo Henriksson had been part of ABB’s efforts to monitor developments in the east. Henriksson had visited Estonia as early as 1989, but his first on-the-ground work experience in eastern markets was acquired in Russia in the late 1980s. “In 1989 it was a very hot summer in Moscow,” recalls Henriksson. “The Kremlin’s air-conditioning system broke. You can only imagine how hot it was in there.” ABB’s team handled the bid to replace and modernize the Kremlin’s entire climate-control system.The bid was made in October and his team was on the job

by February. Henriksson got a taste for how fast something could be done in the East when the right people were interested. “I have never seen any bid and jobawarding process go so fast in the former Soviet Union since then!”

The post-EU, modern e-stonia, as it’s often referred to, has come a long way since 1992, and Henriksson has been personally involved with it at every step. He perhaps thought globally, but in the ultimate sense he acted locally, and soon mastered the Estonian language, something extremely rare among foreign business leaders. A Swedish-speaking Finn from the archipelago near Turku, Finnish was Henriksson’s second language, and so it was not too difficult to learn Estonian. “I had picked some up over the years when I visited,” he says, “but for the first week we spoke Finnish in the office. After that, I insisted on Estonian and it’s been Estonian ever since.”

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Foreign Investors In Estonia | ABB

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Why Estonia?

Given its success in Estonia, ABB is frequently the subject of stories in the local press, including a recent one titled “Why ABB Loves Estonia.” Titles of the stories vary, but the reasons for the love are consistent from article to article: The government doesn’t meddle. “The climate for operating a business in Estonia is very easy,” says Henriksson. “There is very little bureaucracy.”

Business leaders invariably praise Estonia’s zero tax on corporate earnings, but Henriksson’s comment refers to the general legal and economic environment created by the government: laws are simple and straightforward and are easy for businesses to follow. Unlike in other former Soviet Republics, a box of chocolates or bottle of brandy will win you nothing with an Estonian public official. The rules, like them or not, apply to everyone equally.

An ample supply of specialists. Over time, the labor supply in any country is subject to peaks and troughs, but even when the labor market has been at its tightest, ABB has been able to recruit and train the specialists it needs. When ABB could not find the specialists it needed to produce wind generators, it created programs and trained them itself. The company regularly cooperates with Tallinn Technical University, as well as with trade schools like Tallinn Polytechnic and the Tallinn Industrial Education Center. “You can create classes,” says Henriksson, “which impart the specific skills you need for your workers.”

A good work ethic. At the level of the assembly line workers, the local labor is consistently praised as honest and hardworking. Eighty percent of ABB’s employees speak Russian as a mother tongue, though the company offers Estonian-language lessons for any employee who wants them. “We do everything in two languages,” says Henriksson, “but as a multinational company we look at everybody as just a human being.”

At the managerial level, Estonians also rate praise. “Estonians are very active and immediately start to work with an idea,” is Henriksson’s evaluation of how Estonians differ from Swedes or Finns. “With Estonians, there isn’t a lot of effort put into planning and strategy.” A visiting journalist asks if that’s a strength or weakness. “That’s a strength, actually,” he says after a moment’s pause.

Versus other Baltic work cultures, Henriksson praises the Estonians. “In Lithuania, for example, sometimes talk can turn a mosquito into a horse. But in Estonia, Estonians don’t talk that much; they just do.”

Geography. Frequently ABB will cite the advantages of the Sweden-Finland-Estonian triangle. Since as much as 100 percent of some of ABB Estonia’s production is slated for other ABB factories, the geographic proximity to Scan-

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Foreign Investors In Estonia | ABB

dinavia is critical. This is true of wind generator production at the Jüri factory: although 30 percent of the world’s wind parks use its products, every generator must journey to another ABB facility before it meets its final user, though major production today is hand-tested for final use.

The trend in manufacturing to move to China has its downside, too, according to Henriksson. “Some factories have moved back to Europe from Asia. Cheap labor there creates another problem in that transporting a wind generator from Asia to Europe is extremely ineffective.”

Passenger connections to Sweden and Finland are also rated highly.

“Other than the bay, it’s like there’s no obstacle between Helsinki and Tallinn.”

Fast boats run virtually every hour and make the crossing in an hour and a half.

There are also good connections to Sweden by air.

Room to grow. ABB is engaged in lobbying work with ABB Corporate to expand production in Estonia. There are case studies which illustrate success in moving entire operations to Estonia, such as in 2006 when ABB moved the compact substation manufacturing facility from Denmark. “It’s profitable in Estonia,” says Henriksson. “For a variety of reasons, it wasn’t ever profitable in Denmark.”

While in Finland there isn’t the room for expansion, ABB sees the eastern and southern regions of Estonia (Narva and Tartu, respectively) as areas where labor supply is ample, and it doesn’t rule out the possibility of setting up future factories there.

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Local Heroes Having invested over a billion Estonian kroons and employed more than one thousand people, ABB was surprisingly still below the radar of most Estonians until a few years ago. The company quietly went about its business, rarely making appearances in the press.

In 2006, in the midst of an abnormally tight labor market, the company needed to recruit personnel for expansion, and the first step in their recruiting program was to become better known in the community. “We invited government ministers to our Jüri factory and pointed out the size of the investments we’d made,” says Henriksson. “I asked the Minister of Economics and the President if they knew about four-thousand megawatt green energy. They weren’t aware of it. Now, wherever they travel, they talk about it. It’s very positive for Estonia, and it gives ABB a greater voice. It’s a small community here, so our voice carries weight.”

As soon as Estonia began to hear about ABB, the company began to win awards. For the past three years running, ABB has been honored as Estonia’s Foreign Investor of the Year.

20/20 Hindsight Asked what advice he would give to foreign investors considering expanding their operations to Estonia, Henriksson is quick to suggest finding a partner you

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Foreign Investors In Estonia | ABB

can trust to help navigate local waters. “When we built our first factories, it was as if we had three big letters tattooed on our foreheads,” Henriksson says of the ABB name. “If we were looking at land, the price could suddenly increase 30 percent. You also need people you can trust to help you find reliable builders. But we’ve been here long enough now that we don’t experience those problems anymore.”

“I advise you really put effort into finding the right local partners in the beginning,” adds Henriksson. “If you fail in this regard, then the entire process will get longer and more expensive. But the good news is that there are more honest people in the market today than there were fifteen years ago.”

Part of ABB’s success is surely the way it has chosen to treat its employees. Although its factories are in Estonia, it has been careful to foster a very Scandinavian work culture. As a result, ABB employees show remarkable loyalty to the company. In addition to bonuses for productivity, workers mention good training, opportunities for international work, and stability as reasons they remain loyal to ABB. “I’m a father of two,” says a factory worker. “This is a place where I can provide for my family and not have to worry about tomorrow.”

Biggest Investor, Biggest Critic It is perhaps ironic that as one of Estonia’s biggest investors, Bo Henriksson is also one of its biggest critics. He is sometimes put off by the political discord which can exist in a nation with a population as little as 1.3 million. “This is a small country,” says Henriksson. “Everybody should blow in the same direction.

But sadly that isn’t always possible.”

Henriksson also spends time actively lobbying for change inside the system he praises. He would like to see Estonia’s fringe benefits tax revised so that he can provide more training and education for his employees without taxation. He also frequently reminds government leaders that not everyone can hold a PhD, and he pushes for the expansion of programs which train highly-skilled labor. Henriksson may not win every argument, but he has the benefit of knowing that the government is at least listening.

Henriksson himself is sold enough on Estonia’s future that his plans may be to stay. He is married to an Estonian, and they have one school-age child.

And of course he’s made himself at home with the Estonian language, which he uses fluently to conduct print and television interviews, as well as to offer another cup of coffee to a visiting journalist. “Here, take another cup,” he says. “You know it’s almost required to drink a lot of coffee in this part of the world.”

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Foreign Investors In Estonia | SKYPE

Skype’s Chief Evangelist Sten Tamkivi

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Four Guys in a Room How Skype is Changing our World

There is an anecdote about the military which may be borrowed to explain Skype’s approach to the IT business: A team of American Navy SEAL divers has arrived in Russia for joint exercises with Russia’s Special Forces divers, Spetsnaz. With his divers at parade rest behind him, an American Navy Commander explains a long list of rigorous preparatory and safety procedures. “And when every item on this list may be checked in the affirmative,” the stentorian commander wraps up his presentation, “only then does the Navy Diver enter the water.”

A Spetsnaz officer, having listened with great interest to his American colleague, puts out his cigarette and rises from his crouched position. “It’s truly remarkable,” he says, clapping the American on the back. “We Russian divers have the exact same list. And when any item on that list is checked, the Spetsnaz diver will enter the water.”

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Foreign Investors In Estonia | SKYPE

The same get-it-done practicality exists with Estonian IT professionals.

Skype’s Chief Evangelist and General Manager of the Tallinn office, Sten Tamkivi, is fond of relating the simple equation of Skype’s original success: “Four guys in a room for six months and the result was one million users two months after launch.” The strength of Skype—and perhaps the strength of Estonian IT—is that its hallmark is simple efficiency. It is not burdened with layers of cumbersome management or formalities. “Before I came to Skype,” says Tamkivi, “I used to bid against a lot of western European companies for jobs. They would offer a three-layer project organization with complicated reporting structures. We’d put four guys in a room and get the job done.”

Tamkivi credits Estonia’s small population and limited personnel resource as the main factor behind this unexpected advantage. “Because of the constant lack of people you develop a mindset of ultimate efficiency: How do you do this in a no-bullshit way?”

Skype’s “mindset of ultimate efficiency” has paid off. As of October 2009, Skype boasts 520 million users worldwide. According to Michael Arrington of the tech blog, TechCrunch, Skype accounts for eight percent of all international long distance phone time today. And according to Josh Silverman, Skype’s London-based CEO, Skype’s iPhone application was downloaded and installed on ten percent of all iPhone and iPod touch devices as early as six months after its launch.

With numbers like that, it could just be true that Skype will achieve its greater mission, as a Vanity Fair writer once put it, “to hijack the way the world communicates.”

Skype Me? Despite Skype’s market penetration, there are some in the world who have not yet heard of it. Skype is a Voice over Internet Protocol (VoIP) application, a buzzword which describes any calling application over the internet. While the term “VoIP” has not replaced “call” in the vernacular, “Skype” certainly has.

To Skype customers, the company name has become a verb, as in “Skype me tomorrow” or “Let’s Skype.”

VoIP is a technology which breaks the human voice into tiny pieces, packages it for a real-time transfer and then reassembles the tiny pieces on the other end (something akin to the way a YouTube video works). First-time users often remark that there is no perceptible difference in audio quality between a Skype call and your trusty old landline. In fact, with good network

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connections, Skype produces measurably superior audio quality than landlines, what Tamkivi terms the “we’re in the same room” feeling. Skype uses wideband audio, whereas landlines rely on narrowband, making Skype versus landlines the equivalent of a CD introduced in a land of cassette tapes.

And Skype can one-up a landline yet again, as it enables high-quality video calls without any disruption in audio. And at the same time you may be using Skype to negotiate your business deal (or chat with grandparents on another continent), you may shoot contract drafts (or photos) back and forth over Skype with secure encrypted file transfers.

Grandparents in the equation are no accident. “We believe that Skype has to pass the ‘grandmother test,’ ” says Tamkivi. “Can your eighty-year-old grandma install it and make it work in ten minutes?”

Skype is also completely portable. It may be installed on a desktop computer, a laptop, or an iPhone (and hundreds of other mobile phones).

And anywhere WiFi may be found, anywhere in the world, Skype enables communication. If Skype could deliver pizza, there’d be little reason to leave your home. (Skype’s staff is still working on that one.)

But the main difference between Skype and your landline—and what is Skype’s ultimate trump card— is this: Skype is absolutely free.

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Foreign Investors In Estonia | SKYPE

When “Free” is Profitable Although Skype is free, the company has not mastered alchemy, nor have they defied the popular aphorism, “There ain’t no such thing as a free lunch.” With Skype, the free lunch is more a free appetizer, with cost-free calls limited to Skype-to-Skype (computer-to-computer) connections.

Many Skype users become so accustomed—or addicted—to its ease of use and quality, that they use SkypeOut, a service which enables computerto-anywhere (landlines, cellular phones) connections at rates a fraction of what the telcos offer. Users pay for the service on a pay-as-you-go plan or, for slightly under 13 dollars per month, unlimited world landline access.

Skype reported 27.7 billion free Skype-to-Skype minutes in its third quarter 2009 earnings. SkypeOut minutes—plus other paid-for services like voice mail—totaled 3.1 billion minutes and translated to 185 million dollars in revenue. If Skype maintains this pace, predicts TechCrunch, it will exceed one billion dollars in revenue by 2011. Not bad for four guys in a room.

The Four Amigos The famous “four guys” often referred to at Skype are the four Estonian cofounding engineers, Jaan Tallinn, Ahti Heinla, Toivo Annus, and Priit Kasesalu. Add the company’s cofounders, Niklas Zennström, a Swede, and Janus Friis, a Dane, and you have the original Skype team. All six had worked together in 2000 on Kazaa, the file-sharing software which achieved notoriety after the fall of Napster.

In 2005, eBay purchased Skype for 2.6 billion dollars, making the engineers wor th around 45 million dollars each. Since the sale, two of the four Estonian engineers have left the company, but they’ve become something of a legend, if only because they did not take the money and run. Rather than move to Marbella, the world’s most popular playground for wealthy Estonians, they turned their investment arm called Ambient Sound Investments into a venture capital fund and began looking for the next great tech innovation. They found many of their investments within the narrow confines of Estonia.

And the rest is history. In four shor t years, Skype’s user base has grown from 54 million users to 520 million. Skype has offices in Tallinn, London, Luxembourg, Stockholm, Prague, San Jose, Sao Paulo, Hong Kong, Tokyo, and Tar tu, a university town of 100,000 in Southern Estonia. Still, the

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majority of Skype’s staff is Tallinn-based.

On November 6, 2009, eBay announced that it would sell a 56-percent stake in Skype to an investor group led by Silver Lake, with other investors including Andreessen Horowitz and the Canada Pension Plan Investment Board.

The group also includes Skype’s founders Zenström and Friis, who will take a 14 percent ownership stake of Skype for contributing Joltid (the peer-to-peer software key to Skype’s product) and making a “significant capital investment.”

The deal values Skype at 2.75 billion dollars and is expected to close in the fourth quarter of 2009.

Next Stop: the World To fuel the growth the Skype team is accustomed to, the company is almost constantly recruiting new employees with ads that read, Are your dreams in binary code and 32-bit color? Do you know the difference between pointer and char?

But even with aggressive talent searches and a Google-esque office (Tamkivi argues that the Google office is Skype-esque) in Tallinn complete with a pool table and free food, Skype seems always to be looking for an additional 25 or so employees for its Tallinn office.

Hiring internationally has proved to be one solution. Among Skype’s slightly over 300 Tallinn employees, 24 different nationalities are represented.

But prevailing over any national culture is Skype’s own—the pursuit of Tamkivi’s “no-bullshit” solutions and getting the job done without a lot of formality or corporate structure to bog things down. This means, in addition to the fourguys-in-a-room productivity, hiring employees who are capable of seeing beyond their own roles with insights into the greater game.

“It’s hard to find a pure technology guy in Estonia,” says Tamkivi. “Most have a sense of business, as well. Ours isn’t a culture where you push detailed specifications of an assignment under the door and the engineer pushes the code in an envelope back out with the solution. An Estonian engineer will ask ‘Why are we doing this?’ He’s interested in the bigger picture, the greater business goal.”

Curious engineers can be disorienting to visitors from other tech cultures like Silicon Valley. “Our engineers’ persistent questions can sometimes appear rude to a visiting American,” laughs Tamkivi. “But the Estonian engineer has the need to understand the goals before he writes the code. It’s not about questioning the business, but rather asking questions about it.”

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Foreign Investors In Estonia | SKYPE

The Business Market?

So far, Skype’s growth has come from primarily individual users. The business market has been elusive by design. One-third of Skype’s users report that they do use the product for business, “but this means they operate a small business or are part of a progressive team in a bigger company,” says Tamkivi. “Skype was not designed with big enterprises in mind. IT staff is obsessed with controlling everything, but we’ve always placed the ‘just works’ principle in front—which can sometimes mean harder manageability.”

The business market is not being completely ignored at Skype, however.

Last year, the company started a dedicated Skype-for-Business team to build solutions like business control panels that enable the automatic recharging—on the corporate tab—of the SkypeOut accounts of individual users inside companies.

Skype has also developed a product which allows users to connect to Skype over

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the Session Initiation Protocol (SIP), which allows bigger companies to connect to the world of Skype from their existing corporate phone systems.

Even without the business market it never intended to attract, Skype’s growth is staggering, and to continue it Skype must be involved both on international as well as local stages.

In the international arena, Skype continually fights for the “open internet” (“net neutrality” in American parlance), the idea that the internet should be, except for a monthly access fee, free for its users. Proponents of the open internet sometimes liken it to other basic freedoms, and believe telecom companies seek to control the “last mile” pipeline, allowing them to create artificial scarcity.

On a national level, Tamkivi was recently appointed technical advisor to Estonia’s President Toomas Hendrik Ilves. “The president wanted a sparring partner around technology and IT,” says Tamkivi. “There’s a saying that a kid can’t become a great genetic scientist if he didn’t think the double helix was really cool when he was in the eighth grade. So what I talk about with the President ranges from how to get more Estonian kids to find mathematics and the hard sciences exciting to topics related to the existing IT industry in the country.”

Changing the World The first two sentences of Sten Tamkivi’s blog on Skype’s Estonian-language website reads “I joined Skype to change the world. Every day.” When engaged in conversation, he will inevitably return to the fact that this belief is shared by his fellow Skype employees. “Every survey we do asking people why they work at Skype, employees first say because of a naïve belief that they can change the world.” Given Skype’s success, is it naïve?

“We’re really lucky at Skype,” he says. “Millions of companies have been established with the idea of changing the world. What they do is end up changing the world in a small niche. Maybe thanks to a better shoe people will break fewer legs. But we’re enabling conversations.That’s the real impact of our software.”

Tamkivi likes to tell the stories about being out in the world among his 520 million users. He talks of traveling while wearing a Skype tshirt, and the people who approach him to share their stories of conversations which may never have happened without Skype. “Somebody will tell me about being able to say goodbye to his dying father. Or I’ll hear a story of how an old man could reach out to his grandchild who lives thousands of miles away. We’re making conversations happen that couldn’t have happened any other way. That’s the real benefit. And when it happens, it’s not naïve. It’s very, very real.”

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Foreign Investors In Estonia | STONERIDGE

Toomas Papstel and Per Lindberg

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Adding Value Stoneridge Electronics’ Estonian R&D

“We are not seen as an arm of a Swedish company,” says Toomas Papstel, Operations Manager of Stoneridge Electronics. “For oneand-a-half years now we’ve added value with design and development.” For Estonia’s Stoneridge, added value means going well beyond being a satellite manufacturing facility for an international concern—it means product development and testing, starting production from scratch, shipping directly to customers, taking full responsibility for the product, and running a state-of-the-art laboratory with unique technological capabilities in the Nordic region.

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Foreign Investors In Estonia | STONERIDGE

Global Reach Beyond Stoneridge Electronics in Tallinn is Stoneridge Electronics AB, itself a par t of the Stoneridge Group, a New York Stock Exchange-listed designer and manufacturer of engineered electrical components for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

The Stoneridge Group makes highly-engineered par ts such as electrical distribution systems (primarily wiring harnesses), telematic systems, instrument clusters, tachographs, electronic and electromechanical switches, as well as sensors for familiar names such as Scania, Volvo, Daimler, John Deere, Ford, and GM. Headquartered in Warren, Ohio, in the United States, the group consists of 20 manufacturing and design centers in eight countries around the world.The group employs over 6,000 workers and its annual turnover regularly exceeds 700 million dollars.

Local Capability Stoneridge Electronics in Estonia got its start in 1998 under the name of Berifors, a company formed from a management buyout in Ericsson’s automotive division. Due to a crowded factory in Sweden and cost pressure from its customers, Berifors needed to immediately expand. At the time, the company was torn between setting up new operations in Poland or Estonia. “For a variety of reasons Estonia prevailed,” says Per Lindberg, a member of the board and a Swede with a management background who is, via a stint with Stoneridge Scotland, working for Stoneridge Estonia for the second time in his career. “First and foremost, Estonia was just a good fit.”

“In those days we were a small company in Sweden with 300 people,” says Lindberg. “The small country of Estonia just seemed to be a natural fit and had the necessary experience in electronics—a small country for a small company.” As Berifors looked more closely at Estonia, Lindberg says Poland became less attractive. “Poland was farther away and did not have the ferry connections and geographic advantage that Estonia had. Also, Estonia had just started the EU membership process, and the government was quite welcoming. Enterprise Estonia was active in helping us find a location to manufacture.”

Lindberg notes that Estonia’s Prime Minister has even visited the Berifors headquarters in Stockholm. “The attention was very welcome and not something the company probably would have received elsewhere. In Poland,” says Lindberg, “we would have just been one of many.”

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In 1997, Stoneridge acquired Berifors and since 2001 the Estonian plant has been a part of Stoneridge Electronics.

Berifors’ first step was to move a package of products for manufacture from its plants in Sweden and Scotland. The process was begun at the end of 1998 and production began in the spring of 1999.

Eleven years later, Stoneridge’s Estonia facility employs 206 people, including 11 design and development engineers dedicated to the part of Stoneridge Estonia which has received the most attention locally: product research and development.

Engineers Often a popular topic in business circles in Estonia is the supply of available engineers. In a nation of 1.3 million citizens with only a few universities producing engineers, foreign investors (and journalists, as well) sometimes question whether the labor pool is sufficiently large to supply industry needs.

“This question,” says Toomas Papstel, a mechanical engineer himself with a masters degree in industrial engineering and management, “is too often treated as black and white, as if it should be either easy or hard to get engineers.

I think looking at it this way is a lazy approach. We have always managed well getting the engineers we need.”

Per Lindberg is quick to add that he believes where many Scandinavian companies fall short in Estonia is in not having a long-term recruiting strategy.

“Some Swedish companies have come here and said ‘we needed 20 engineers and couldn’t find them.’ Well, of course you couldn’t find them.You didn’t have a plan!”

“Our ambition was to do product development from scratch,” says Papstel. “Our vision was 25 engineers within three years with a goal to start with 12 and to train them all in Sweden for one year. Twelve design engineers!

This sounded quite big.”

“And I would emphasize,” interjects Lindberg to call attention to additional complexity, “since nobody comes ready for automotive engineering right out of school, each engineer needs additional training. We needed 12 engineers who could leave their home country and go to Sweden for a full year.”

For his part, Papstel believes fresh Estonian engineers are often underestimated. “Their education is solid, but what most companies hiring engineers tend to overlook is how young and hungry Estonian engineers are. That’s extremely important, too.”

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Foreign Investors In Estonia | STONERIDGE

To realize their plan, Papstel visited Tallinn Technical University to recruit and shared his vision of a product-development facility full of Estonian engineers. “When I went to student fairs at TTU, they thought I was a dreamer.”

“But,” interrupts Lindberg, “we had consistency in our plan and it worked. We did it.”

Whether Papstel and Lindberg hired bachelor engineers or engineers with very understanding wives and families is a trade secret. But they had a plan, and so far, with 11 engineers, they are on track to meet their goals.

Beyond recruitment, Papstel and Lindberg consider their most outstanding achievement to be the ramp-up and learning speed of the local R&D team.

“From the point of having an ambitious vision, we have quite quickly come to having a fully functional team of bright young engineers working integrated with the overall R&D team at Stoneridge Electronics,” says Papstel. “This is a very good new base line to continue from.”

Not a Swedish Arm Stoneridge’s Estonian operations may be broken down into 37 production groups which make hundreds of articles for a host of automotive manufacturers. Signs throughout the factory denote the clients for the various assembly lines and include Volvo, Scania, Ford, Land Rover, and MAN. Produced are power distribution centers, electronic control modules, switches, telematics and tachographs.

Digital tachographs may be the product Stoneridge is most proud of, and management clearly gets excited about it. “Although, if you ask a truck driver,” says Per Lindberg, “he won’t have any idea who makes the instrument panels in his truck.” Lindberg says tachographs, as well, do not always carry the

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Stoneridge brand name, nor will truck drivers have heard of it. “Normally, products are owned by the clients we manufacture for, and we can’t even sell you one.” Tachographs, including digital tachographs, however, are another matter since they are fully owned by Stoneridge.

“Open this up,” says Lindberg, taking hold of an analog tachograph, “and there’s a wax chart inside which records how the driver’s been driving—distances, hours, etc. It’s a tool to monitor the driver, which drivers don’t like. So they sometimes tamper with it!” Stoneridge’s digital tachograph, however, is tamper proof.

Lindberg says EU legislation now requires a tamper-proof digital tachograph on vehicles such as buses which carry more than eight or nine passengers or on trucks over three-and-a-half tons. “Drivers must insert a digital ID card and everything is recorded and monitored. In Estonia, we make the tool with which one can download the digital information.”

Industrialization What separates Stoneridge from other manufacturing facilities in Estonia, say Lindberg and Papstel, is its “from scratch” capability in production. “We focus on different products than Sweden, and we can do it all from the beginning,” says Lindberg. “There is no longer a need to start production abroad and then move it to Estonia.”

“Key,” adds Papstel, is “the function of industrialization which is to ensure the producibility of the product. We may have to live off what we develop for several years—sometimes even longer, if it goes to aftermarket.” (Stoneridge’s spare-parts manufacturing exists as a separate business area, since a commitment of up to fifteen years is required with lower and lower volumes demanded as time progresses.) “Production also has to support changes over the course of time, either changes initiated by the client or by us.”

Working hand in hand with product development is Stoneridge’s laboratory. The lab is staffed by three (“make that three-and-a-half,” notes Lindberg, referring to half the time of a factory engineer), and since the automotive industry demands yearly validation work on all products, the lab is largely occupied validating its annual production as well as prototypes.

“As far as we’re aware,” says Lindberg, “this lab is unique in the Baltics.”

In the future, Lindberg envisions selling the lab’s services to other companies in the region. More than 12 machines fill the lab, one of which simulates “road, load, environment, shakes and shocks,” says Lindberg. “You’d probably have to go to Sweden to find another one of these.”

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Foreign Investors In Estonia | SORAINEN

The Family-friendly Firm Aku Sorainen’s Baltic Legal Adventure

“…it seems high time for the Baltic authorities to begin studying the benefits of cooperation,” wrote a young Aku Sorainen in his thesis for a law degree at the University of Lapland. The year was 1993, and the then 28-year-old Sorainen had just completed more than a year touring the three Baltic states studying the legal and business environments in the freshly post-Soviet environment.

Estonia, along with Latvia and Lithuania, had achieved independence in 1991, and Sorainen’s legal exploration, from a western point of view, might then have been likened to Lewis and Clark in the American West. “At that time, not much had been written on civil law in the Baltics and business law in particular,” Sorainen says. “There just wasn’t much information available.” And so he set out to get it. After a while, it became clear he would need some sponsors in order to help finance his exploration of the Baltic legal and business environments.

“So I approached some big Finnish companies, and they agreed, requesting I investigate specific areas of business law which were of interest to them.” The result became Sorainen’s thesis, and despite being a law thesis by a student, the document attracted extraordinary interest. In early 1993, it was published in English by the Finnish Lawyers’ Publishing Company under the title, A Foreign Investor in the Baltics.

Having completed his law degree, Sorainen felt his major effort would be wasted if he did not move to the Baltics, and so he searched Finland for a law firm who might be looking for a man in Tallinn. In spring 1993, he opened the office in Tallinn for a mid-sized law firm Hedman, which he managed for two years before opening his own office.

Now, sixteen years later, he oversees one hundred attorneys in Tallinn, Riga, Vilnius, and Minsk. And Aku Sorainen is here to stay.

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Aku Sorainen at work.

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Foreign Investors In Estonia | SORAINEN

Today’s Sorainen After fourteen years of working under his own banner in the Baltic states, the firm employs over 150 people (including 18 partners), and has seen its turnover grow from 50,000 euros in 1995 to over 12 million euros in 2008. Today, Sorainen is a leader in its field and the only truly integrated large law firm in the Baltic region.

In recognition of the firm’s success, the Financial Times and Mergermarket, the independent M&A intelligence service, named Sorainen the Baltic Legal Advisor of the Year 2008. In 2009, the International Financial Law Review named the firm Baltic Law Firm of the Year.

Today’s Sorainen is a full-service business law firm framed around ten legal groups, the largest of which are the teams dealing with corporate and mergers and acquisitions (this includes M&A, private equity, and joint ventures).

The firm’s corporate and M&A client list includes names like Coca-Cola, Bayer HealthCare Pharmaceuticals, Citigroup Venture Capital, Siemens, Skype, Toyota, and hundreds of other international and regional companies.

In the past ten years, Sorainen has handled more than 500 M&A trans-

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actions, but 2009 has seen very little activity. “I think we’ve reached the bottom,” he says of the M&A market and notes that it will rebound naturally with the economy and when the Baltic states are closer to “the certainty of euro accession.”

While the M&A business may be on the decline, the litigation and restructuring teams are seeing growth in their business, and the competition and regulatory team is expanding due to an ever-more-complicated regulatory environment in the region. And given the economic turmoil in the region, it is also no surprise that employment law is a growing part of the portfolio.

Geographically-speaking, Sorainen’s newest source of growth is the Republic of Belarus, where the firm employs ten attorneys under the leadership of Estonian partner Toomas Prangli and local partner Maksim Salahub. The Belarussian government is taking an increasingly friendly posture toward foreign investment from Europe. In December 2008, there were 600 state businesses slated for privatization in Belarus. “Currently,” says Sorainen, “70 percent of all businesses are still state-owned. But as long as the trend to privatize continues upward, then things are to improve. At some point for Belarus, there will be no turning back from the free market system.”

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Foreign Investors In Estonia | SORAINEN

A Pioneer of Law Firm Marketing Discounting the brand-sharing structures of his competitors and ranking only truly integrated law firms, Sorainen is very likely the biggest firm in the region.

What is more certain is that it is the best-known firm among foreign businessmen. Partly, this may be attributed to Aku Sorainen and his partners’ higherprofile role in the foreign business community, but it is also due to the fact that his company does not fear marketing. His attorneys are encouraged to author articles in local and international publications about Baltic legal issues, and to regularly give presentations in conferences and seminars.

“We were among the last major law firms to start in the Baltics,” he notes.

“Most other large firms started three to four years before we did, and the market was divided as early as 1995. So as a newcomer, we had to be more visible.”

A Unique Structure “The Baltic states…cooperated well in the beginning. However, during the past two years it seems as if they have become competitors and have little will to work together any longer,” is another passage from Sorainen’s 1993 thesis. He took to heart the dissonance he observed in his Baltic tour, and when he set up his own company, he did it in a way that his Baltic peers would be unlikely to match.

“See this,” he said, standing to remove a brochure from a rack which shows the firm’s international structure around ten legal teams, beginning with M&A and ending with a tax team. “Girts Ruda”—Sorainen points to the man in charge of the firm’s restructuring and insolvency team—“is based in Riga, but he’s got to know what Kiryl Apanasevich and Toomas Prangli know and do within this field in Minsk.” Sorainen’s structure does more than facilitate the sharing of information. Profits are shared, as well. “As far as I know, we are the only law firm in the region which shares profits within the firm at large, which in turn ensures that our partners are naturally thinking in terms of how to share knowledge and increase cross-border competence.”

Sorainen’s structure, which bridges Baltic boundaries, is a competitive advantage beyond simply motivating employees. “The fact that we are completely integrated geographically means we can react to client requests and needs very fast and in a uniform manner.”

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Employee- and Family-friendly Environment Companies the world over routinely boast of being family- and employeefriendly, but in Sorainen’s case the honor was bestowed on them by a coalition of Estonian magazines and the business daily, Äripäev. In 2009, Sorainen was named both Estonia’s “most family-friendly” and “most employee-friendly” firm, titles that in many countries routinely go to Microsoft. Aku Sorainen likes to point to a locally-familiar photo of his lawyers dressed like can-can dancers and making a great show during the firm’s summer days gathering as an illustration of the firm’s esprit de corps.

The company, as well as Aku Sorainen himself, seems to exhibit a sense of humor not universally found in the region. A drinks menu sits on the table in the conference room where guests are received, offering sparking wine (“For Closures Only”) and beer and wine (for “After the Deal”). When a visiting journalist asks whether a closure is really a condition for getting sparkling wine, Sorainen laughs and admits “there are always a few bottles in the fridge.” (The journalist took coffee.)

Sorainen says he treats his employees well because he demands a lot from them. “For those who work hard and produce great quality,” he says, “we do everything to keep them.” “Everything” includes non-monetary benefits like spor ts allowances, the “Sorainen Academy” training programs, as well as many employee and family events. And the firm takes family friendliness seriously: there is a playroom for children on the office’s seventh floor where employees bring their children when they need to get work done at odd hours.

The walls of the firm’s Tallinn office are also lined with employees’ artwork, one painting completed by each employee under the guidance of a professional artist at a company gathering. “The paintings were great,” says Sorainen, “and so I thought why not put them on the wall. It also turns out,” he chuckles to let a visiting journalist know he’s at least half joking, “it’s also cheaper than actually buying art for your walls.”

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Foreign Investors In Estonia | SORAINEN

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Advice to Potential Foreign Investors Sorainen takes his employee-centric approach beyond building playrooms for his attorneys’ children. He also uses it as the core for business expansion, which runs directly opposite to how most foreigners have built their businesses in the Baltic states. “Many foreign companies make a strategic decision to go to the Baltics when the process should really be the other way around,” he says.

“Whenever we have expanded, we have opened new offices only when we have found a local person we could really trust. We first looked for people, then we discussed should we open the office.”

His foray into Belarus is case in point. “I had visited Minsk a couple of times, and I finally met someone I thought shared the same values,” he says of his first Belarussian partner, Maksim Salahub. “Then we spent a year and a half getting to know each other.”

New Role 2010 In November of 2009, the firm announced that beginning 2010, Aku Sorainen would move to the position of Senior Partner and Pekka Puolakka, Managing Partner of Sorainen Latvia, would take over as Managing Partner for the entire organization. Aku Sorainen, however, is not being put out to pasture by any means. He will step back from the day-to-day duties in order to once again play visionary.

But, perhaps appropriately, Sorainen doesn’t describe his visionary role as one of gazing out windows and pondering strategic questions. “I’m thinking that if we can maintain the best standards and create conditions to hire and retain the very best people, then we will always be in the picture. I will focus on the counseling and mentoring of the partners but will participate less in the everyday issues.” If Aku Sorainen is right, and that the environment one creates for employees is the key factor for ruling the market, then Sorainen will not only be in the picture, it will continue to control a good share of it.

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Foreign Investors In Estonia | EESTI TELEKOM

Indispensible How Eesti Telekom is Building an Information Society

The inspiration of Alexander Graham Bell took awhile to reach its full potential in the Republic of Estonia.

The telephone, first patented by Bell in 1876, was considered a luxury item in the country as recently in 1991. Only the elite of the country could afford—or were allowed—to have telephones when the country regained its independence from the Soviet Union. Most of the public had to rely on telephone exchanges where phone calls, particularly international ones, could be monitored by the KGB. Only three Estonians in 10 had access to their own telephone in the early 1990s. Estonia has now made up for lost time, becoming one of the countries with the highest penetration rates of mobile phone technology and internet connectivity in the world—some estimates place mobile phone subscribers per 100 Estonian inhabitants as high as 134. The Estonian telecommunications company, Eesti Telekom, has been pushing that development.

Eesti Telekom’s Valdo Kalm

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Foreign Investors In Estonia | EESTI TELEKOM

In on the Ground Floor Valdo Kalm, the CEO of Eesti Telekom, was there at the start. He started in the business by installing phones and hard lines to homes during the Soviet era.

“The difference is huge,” Kalm says. “I did installations starting back in 1986. We didn’t have decent salaries to speak of, or even basic tools. We were told to go and figure it out how to do it yourself. Today, you go out in the field, you get a car, a laptop, and a mobile phone.”

The transformation of his company has been almost as dramatic.The forerunner of Eesti Telekom, launched as a venture with investment from the Swedish company, TeliaSonera (which today holds nearly 98 percent ownership of Eesti Telekom, with roughly two percent composed of private investors), has turned from a telecommunications company to something more akin to a public utility— almost as indispensible as a power or water company in this small nation.

Estonians can vote in their elections online—roughly 10 percent of the country took advantage of this in the municipal elections held in November 2009. Locals can also file their tax returns, do their banking, buy food and pay for parking; all via the e- and mobile services available through Eesti Telekom.

An E-vision “The vision for the Eesti Telekom group is that we are the builders of an infosociety,” Kalm says. “It’s our mission not only to build the infrastructure, but to build the services on both the mobile side and on the fixed side.”

“We gave Estonians the possibility to interconnect. And that’s what they have done.”

And if Eesti Telekom has a motivating mission statement, it’s to develop the technical possibilities out as far as they can, and see what results come from pushing the envelope.

Lauri Läheb, leader of the product and services area for the development and technology division of Eesti Telekom, says that pushing the technology, and reaping the benefits in application, have been a core strategy for Eesti Telekom for years.

“We have innovation in our company’s culture,” Läheb says. “It provides us with new challenges, but new opportunities, as well.”

The Estonian government has jumped on those opportunities with both feet in the last 15 years, ever since the World Wide Web became a household name.

The technology really changed in 1994 and ’95,” Läheb says. “New things

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were suddenly less expensive, and it changed the way that people interacted.”

Eesti Telekom offers e-signature services, which matched with the personal identification number of a user’s mobile phone chip and a PIN code, is as valid as a signature for official documents. Estonia has developed public databases easily accessible to the public, and businesses can be set up using the country’s e-services. The country of Estonia thinks of itself in terms of an e-government, putting as many access points online as possible, and Eesti Telekom’s technology is driving much of that.

“We’re really a test bed for a lot of these applications,” Läheb says. “We have the potential to take some of these ideas and export to other markets.”

Not Just Business One of Kalm’s favorite outgrowths of the digital services that his company offers is the ability to check on student grades. Through the Estonian “e-school” program, he has instant access to the marks his son and daughter are receiving for even individual assignments, and he delights in navigating the comments on his Apple i-Phone.

Although he says he rarely uses it, just the threat of his e-surveillance is enough. “It gives them discipline,” he laughs. “Otherwise, it’s oh—‘I forgot my diary. I will show it to you later.’ Not now. I know what the remarks are on their performance. I know what their timetables (for assignments) are.”

Three Legs Eesti Telekom is composed of three main groups. The Estonian Mobile Telephone (EMT) composes Eesti Telekom’s mobile side, while Elion offers customers fixed-line phone services as well as internet access. Microlink is the third leg, which offers IT services and file server space.

EMT, and the mobile phone minutes spent by customers, is Eesti Telekom’s money-maker. But its internet and mobile services have been increasingly important, and this is the direction that the company envisions itself moving.

Estonia has always been one of the world leaders in the adoption and penetration of mobile phone and internet services. Its high adoption rates reached saturation points in both areas years ago. Eesti Telekom has launched a learning program to bring in some of the technology laggards, but essentially, everyone who is not of retirement age in the country is online or accessing information from a mobile phone or personal data device.

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Foreign Investors In Estonia | EESTI TELEKOM

Roughly 10 percent of the country voted online during the municipal elections in November 2009.

About 90 percent of banking transactions in the country are also performed online, and Eesti Telekom has licensed SIM card technology, such as for mobile parking, to its local competitors.

100 Megabits per Second!

Lauri Läheb and the next generation SIM card

At present, the standard home internet speed is on the top side of 10 megabits of data per second. Eesti Telekom launched a 24 megabits-persecond service in November 2009 to several thousand homes. Kalm expects that most of the country will be able to access 100 megabits per second by 2015. At that rate of download, users could theoretically stream several channels of high-definition television-quality video to their computer.

“One film, one minute!” Kalm laughs, when talking about the coming internet speeds.

On the mobile phone side, 4G technology is coming, which will allow similar speed to personal data appliances. Eesti Telekom has been making huge expenditures in infrastructure to make such things happen.

The cutting-edge upgrade in technology pioneered by Eesti Tele-

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kom is so mind-boggling, that even its shepherds can’t see all the future applications.

“The potential is huge,” Läheb says. “We’ve taken a lot of risks in the past, and been successful with many of them. But for Eesti Telekom, the challenge is to develop the structure, and work to develop the applications and relations with companies that can produce them.”

The company currently has contracts or relations with more than 100 companies to produce content or services for it. With the future capabilities of its internet and mobile network, the possibilities for expansion, particularly in software and mobile phone applications, seem almost unlimited. The company is betting that entertainment and information content will be at the forefront, tied strongly to mobile personal data devices. But in the end, the user will decide what the uses will be.

“Estonians are very technologically adapted,” Kalm says. “We took a broader view with our services. Estonians, after so many years of not having anything, were quick to adopt and adapt to new ideas. We would like to see our country very advanced. And this is feeding into the idea of an info society.”

“The applications and uses are coming. We’re already there to a great extent. We have real, new tools to offer for a democracy, for a democratic system, and I think this is one of the megatrends that we will see in the near future.

I like to see and execute that change. That’s what motivates me.”

Estonia’s Competitive Advantage Kalm believes that Eesti Telekom, and the country, have three great competitive advantages when it comes to the current business climate, even though the company has seen a 15 percent drop in revenues during the 2009 recession.

“We have excellent telecommunications infrastructure in Estonia,” he says.

“Most of the infrastructure was installed after 1991, so the whole infrastructure is in good shape. “We have a lot of educated people. I personally studied in Tallinn Technical University, and they work closely with Swedes and Finns. The students there are very strong. There is no gap (between Estonians and the Scandinavians).

Skype (the internet telephone service) was invented here.”

“Our taxation is very transparent and honest, as well as the banking side.

It is easy to start a company here, and there is little corruption within society.”

“We have innovation at the heart of our companies’ culture,” Kalm says. “There are all sorts of new challenges and new opportunities right around the corner.”

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Foreign Investors In Estonia | BELLUS

Bellus: the Future of Furniture Turning 15 Finnish Marks into 300 million EEK

There are plenty of tales about a boy who built a business empire starting with only two hamsters. These stories are likely apocryphal. But Rolf and Rikard Relander started a furniture company which today does over 330 million kroons (about 20 million euros) per year in turnover from capital accumulated by the youngest brother saving 15 Finnish marks per week from his parents. This story is not apocryphal; it’s not even an exaggeration.

“My parents had given me 15 marks per week for a long time,” says Rolf Relander, “and I saved every bit of it. I asked my father if buying stock was a good idea, and he replied that maybe it was, but that I should also be prepared to lose everything.” Knowing the risks, Relander decided to buy, and he spent his entire savings on Sonera. “Then it went public and its price went through the roof. I sold it all at its peak and had about 40,000 Finnish marks.” Relander invested the marks (less than 7,000 euros) in their furniture enterprise, “and,” he notes with a smile, “that’s all the capital we ever put into the company.”

Bellus’ Rolf Relander

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Foreign Investors In Estonia | BELLUS

The brothers Relander.

The First Hamster Rolf and Rikard never planned on a future in furniture; they rather happened upon it. In the 1990s, Rikard had a retail furniture shop in Stockholm and was toying with the idea of building some sofas himself to sell alongside established brands. He set up a three-person production facility in Stockholm but quickly found that both labor and material were enormously expensive. Production lasted no longer than six months. But Rikard still believed in the idea, and so he moved his production facility to the brothers’ hometown of Hyvinkää, about fifty kilometers north of Helsinki. There the business grew, but the cost side

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again played its role, and Rikard approached his brother, who was working for the Kone Corporation, about possibly doing something together.

“How much do you think we could sell?” asked Rolf.

“As much as we can produce,” replied Rikard.

And that was enough to convince Rolf.

To name their venture, the brothers took a Latin dictionary from the shelf and started with the letter “A.” “Luckily,” says Rolf, “we found something as early as ‘B’.” Bellus—meaning beautiful or charming—was born.

Rolf Relander set out for Estonia, a place the brothers knew had plenty of labor at a lower cost than Finland. In addition to purchasing tools for assembly, Rolf ’s 40,000 Finnish marks went to rent a 300-square-meter former livestock barn in Rakvere, a city of 17,000 located 100 kilometers east of Tallinn.

The operation consisted of Rolf and a few workers who upholstered fabric on ready-to-assemble plywood frames from Finland. “It sounds ridiculous,” Rolf says, “but we couldn’t get the frames locally. Estonians at the time wanted to make sexier things with greater perceived value like tables or chairs.”

The Second Hamster After two years, the brothers were able to persuade an Estonian to consider building the plywood frames. “It was 1998,” says Rolf, “and the Russian economy had collapsed. We found a guy who had a fish-canning business which had gone under. ‘How big could this be?’ the guy asked. We had to exaggerate just a little bit to get him interested, so we told him we thought we could sell 100 sofas per month.” The man agreed to go into business, and today the brothers are making and selling roughly 10,000 sofas per month. “The guy now knows we lied to him a little bit,” Rolf laughs. “But he’s gotten over it.”

Soon they outgrew the livestock barn and were offered an unfinished building which had been intended as a tractor remodeling facility for a collective farm in Haljala, a village of 3,000 people located 92 kilometers due east of Tallinn along the St. Petersburg highway. Over the next eight years, the Haljala facility would grow to become an 8,000-square-meter Bellus operation consisting of a showroom, new model production, plus fabric and leather cutting.

Growing Pains There is no growth without growing pains, and Bellus experienced its troubles at what might have been the most difficult time in the Estonian market—the boom era of the mid-2000s.

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“We weren’t so much worried about the rising cost of labor as we were about finding people at all,” recalls Rolf. “To account for absenteeism, we hired 15 to 20 percent more people than we needed to run production, and we also had to cope with very high employee turnover. Sometimes, people would quit and not tell us.” It was typical during those days for men to call in ill in order to collect government benefits but then work construction to earn “black cash” on the side. To combat that problem, the company found itself hiring women whenever it could.

Things reached their worst at a point when Bellus ran a full-page newspaper advertisement for seamstresses and upholsterers. “We had two people respond to the ad,” laughs Rolf in restrospect. “One didn’t show up for her interview. We hired the other one, but then she never showed up for work.”

The brothers decided to expand outside the Rakvere area, and they placed two factories in Räpina (sewing, gluing, upholstery), another in Kose to perform similar work, and a sewing facility in the town of Narva along the Russian border. Because they were running shifts at hours public transport did not operate, Bellus rented private busses to carry workers to and from their various factories.

At one point, Rolf traveled to Belarus and Ukraine in search of places where they might move production. But, as sure as there is gravity, Estonia’s boom economy pulled back into a more natural orbit, and the labor problems were solved. “At one point, we suddenly had everyone showing up for work.

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We had 12 guys showing up to operate ten machines,” Rolf says. “Efficiency went up, too. Everything got better.” Bellus has since ceased to look for opportunities in the east. “In the nearest five years I see no reason why we should look outside Estonia,” he concludes.

Flyweight Flexibility Like many others with a manufacturing base in Estonia, Rolf Relander does not see China as attractive. “China just doesn’t suit my business model,” he says.

“And I could not be competitive if I were manufacturing there.” Critical to Bellus’ business model is flexibility. “In a Bellus showroom you’ll find ten sofas with two hundred fabrics. We’re filling custom orders. Every sofa being assembled on the floor of our factory already has a family’s name on it.”

And the advantages of Bellus’ business model don’t stop with flexibility. Bellus is able to improve its clients’ cash flow situations, as well. “If you’re ordering from China, you wait 12 weeks for the delivery of a container. This means that a small shop has to order three containers to stay stocked: one container leaving the factory, another on the ocean, and the third arriving at your shop. And you have to pay for them all before they’re shipped.” Bellus can deliver in four to six weeks from Estonia, which means less of the retailer’s cash is locked up in orders in transit.

This business model more and more appeals to big retailers, as well. “If

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a big shop orders from China, it can’t mix the container with blue and red sofas.

If the shop orders blue and the customer wants red, the only way to sell him a blue one is to discount it, and so the retailer makes less money,” Rolf explains.

“But I can ship a custom container of product in any color which the retailer can sell at full price. Add the cash flow advantage, and that’s a pretty good argument for large customers, too.”

Currently, Bellus supplies major Nordic retailers like Isku and Masku, and they deliver to Finland, Sweden, Norway, Denmark, plus the Baltic and Benelux countries. They currently offer 100 models of sofas in 200 standard fabrics.

A Future so Bright…

In interviews with journalists, Rolf Relander is fond of saying that it is a lot easier to double the size of a company with ten million kroons in turnover than it is to take turnover from 100 million to 200 million kroons. It may not be easy, but Bellus has done both. Now, with 330 million kroons in turnover, the company is looking to grow its product lines. Bellus has recently begun to produce beds.

“For any other manufacturer, to go into the bed business would be more difficult. But since we already have a brand which is on the furniture shop floor, we make the argument that this really is just one more product.” Even with beds in the product line, Rolf sees doubling sales again as unlikely. “Our market share is quite big in Sweden and Finland. We can only sell to one or two chains. We can’t sell to everybody or we’ll be competing against ourselves.”

The answer to expansion may lie in new markets rather than expanded market share. Bellus is testing the waters in the east. “The popular belief is that Russian tariffs and customs barriers are too protectionist for western furniture companies to do business there,” says Rolf. “I’ve heard the same thing about the Ukraine. But we’re now selling some small quantities in the Ukraine, and I think this is a wake-up call that shows the obstacle doesn’t exist. Getting started in any market has to do with finding the right people.”

“I worry for Sweden” Rolf Relander’s advice for foreign investors entering the Estonian market has very much to do with people. He counts himself fortunate that Bellus has had the same Estonian CEO since it first entered the market. But what he sees as a mistake other foreign investors often make when moving to this market is

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absentee management. “If you move a factory from southern Finland to western Finland, you don’t do it by telephone,” he says. “What foreigners need to understand is that if you want to do business here you cannot do it with your left hand. If you want to do something serious, then you need to live here.”

Rolf lives full time in the city of Rakvere and sees his future in Estonia.

Given his company’s manufacturing experience abroad, he has an unconventional set of worries. “There’s a lot of talk about producing hi-tech in Finland,” he says. “But look how much Nokia produces in its Salo factory versus what it produces in China. When you examine Estonia, I wonder why would you produce anything in Scandinavia? Long term, I don’t worry for Estonia. I worry for Sweden and Finland.”

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Foreign Investors In Estonia | A. LE COQ / OLVI

A. Le Coq’s Tarmo Noop

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Small Market Strategy How Olvi and A. Le Coq Make Good in a Tough Local Market

While most of the foreign investors profiled in this book came to Estonia to build export opportunities, there are the rare few who viewed the Estonian market as an opportunity in itself. It is no doubt small—1.3 million citizens with a working population of roughly 700,000—but in a few cases it has provided opportunities for growth and expansion for companies with a particular expertise who have chosen the right time and place to enter the market. Finland’s Olvi Oyj and its portfolio of brands developed and managed under the A. Le Coq flag is surely one of the best known success stories in Estonia, if not the entire Nordic region.

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Some Good Advice “I will never forget what Heikki Hortling told me when he hired me as CEO,” says Tarmo Noop of Olvi’s Chairman who gave the new Estonian CEO the job.

“He said to me: ‘Tarmo, I don’t employ you to make good beer. We have plenty of good beer in Finland. I employ you to make money.’ ” The year was 1998, and Noop had just taken control of Estonia’s most esteemed and historic brewery, Tartu Õlletehas, in the southern Estonian university town of Tartu (population 100,000).The Estonians, who legend says were taught to brew during the almost 700-year Baltic-German rule of their land, are rightly proud of their beer. Records show beer was first brewed in Tartu as early as the year 1461. But beer, as both Tarmo Noop and Heikki Hortling knew, was a shrinking market. Beer was not to be eliminated from the portfolio of A. Le Coq, as the brewery would be renamed in 2006, but it was Noop’s job to end its dominance—beer constituted roughly 80 percent of the brewery’s beverage portfolio—and make the company’s dependency on it a thing of the past. Some brewery traditions were also to soon become a thing of the past.

“Those were different times,” smiles Noop as he recalls some of the old brewers’ traditions that pre-dated his arrival. “On my first day of work a woman in a white lab coat entered my office and put two strong beers—about seven percent alcohol content—on my desk. The woman said absolutely nothing. I had no idea why she gave me this beer, since I don’t even like strong beer. But I didn’t want to hurt her feelings, so I waited for her to leave and then I got up and asked the secretary why I was getting two beers from a silent woman in a white lab coat. The secretary informed me that it was one of the two days per week that we were operating the filling line, and by tradition each worker got two free beers on those days to celebrate it!”

Noop says other traditions have changed. Employees no longer get free beer (or any beer) with lunch, and sales meetings no longer begin by everyone opening a bottle. “We stopped those traditions since they weren’t really conducive to doing business,” laughs Noop. “Our culture has changed over the years.”

The Decline of Beer Even in current times, the Olvi annual report from 2006 still carries cautionary words about the need to reduce dependence on beer. Reasons for the slowdown in beer sales are a subject of some debate even in the industry, but most agree it is due to a combination of factors including increased government

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excise taxes, a poor economy, smoking bans, and tougher laws against drinking and driving. Estonia has certainly suffered at the hands of these changes. Last year, beer excise taxes were raised more than 40 percent, and Estonia is one of two EU countries with a zero-tolerance drinking and driving law. The law does not even allow even a single beer with lunch or dinner.

Despite these factors, the results of Noop’s twelve-year tenure with Olvi have been remarkable. While he has been unable to singlehandedly reverse the downward trend of international beer consumption, he has been able to lead his team into new segments in the beverage market. Today, the share of beer in the A. Le Coq portfolio stands at around 47 percent. “But,” he is quick to add, “you have to factor into that that we increased volume by a factor of more than ten, so it’s not a question of simply examining proportions.”

Nor does the number reveal the remarkable success in market share: In 1998, A. Le Coq held roughly eight percent of the beer market.Today, it holds 40 percent. Other products in the portfolio also gained share, cider rose from zero to 60 percent, and soft drinks from eight to 30 percent, over the same period of time. (A. Le Coq is a strong number two—a 30 percent share—in the soft drink market, with Coca-Cola holding the number one position with a 45 percent share.)

New categories were entered, and currently A. Le Coq produces products in nine categories: beer, cider, soft drinks, water, energy drinks, sports drinks, juices, long drinks, and kvass, sometimes called a “bread drink” in English.

(Kvass was originally made by fermenting the crust of black rye bread—foreigners often remark it tastes like Coca-Cola).

With few exceptions (bag-in-box drinks failed and were withdrawn), every product category has been a success in itself for A. Le Coq. The company created the cider category and now holds a 60 percent market share in it. And in some SKUs (two-liter lemonade, for example), A. Le Coq dominates Coca-Cola. Investment-wise, Noop has overseen Olvi’s original 22 million euro investment made in 1998, plus additional investments totalling over 40 million euros. In terms of profit, A. Le Coq has been the biggest annual profit-maker in the Olvi Group on seven different occasions.

So where to go from here? By law, if you hold more than a 40 percent market share, acquisitions are off limits in that particular category. Give it all up and join an ashram? Noop isn’t ready to quit yet, and he has a few ideas. “Hanging on to the market share we’ve got is a job in itself,” he says. “And then there is always international expansion.”

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Strategically speaking, Noop is interested in markets where certain categories lack a strong local heritage, which rules out beer. “However,” he says, “ciders, long drinks, and energy drinks are all possibilities. There are not really any dominant worldwide players.”

Small is Beautiful Just as competing internationally will be a different sort of game for A. Le Coq, so will be entering the Estonian market for foreign players. Small may be beautiful, but it’s certainly not for everyone. Just as conquering a big market takes a certain mindset, so does doing well in a small market, a fact that many foreign businessmen often fail to notice.

“In a small market like Estonia,” says Noop, “there is no sense in being number three. The market is just too small.” He explains the logic of small markets this way: “Number one is loved. Number two is nice, and nobody is against you. But number three frightens people. It’s the loser’s position, and we believe it isn’t a business.”

It’s a fact he believes many foreign investors ignore when analyzing the market. “If you want to enter a small market, then first look at the market size and competition. If two strong competitors already exist, then it’s very difficult to be successful. If there are a variety of players each with ten to 15 percent shares, then it’s possible. In some categories in small markets, even 100 percent doesn’t necessarily mean success.”

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Local Guidance To navigate local waters, few foreign investors would disagree that qualified local management is essential to success. But in the local branded market, where local traditions are an extremely important, local guidance becomes even more critical.

The simple fact that Tarmo Noop has had a fruitful relationship with Olvi for more than twelve years is indicative of a lot: A. Le Coq’s biggest competitor in the market has gone through five CEOs in five years. But Noop insists there is no secret to a good relationship. “From day one, back in 1998, I was given a clear mission: to be the leader in total beverages.This clear directive gave us an advantage.”

Despite clear instructions, there were of course rough spots to overcome. In the beginning, instructions came from Finland about how to achieve the goals, instructions with which Noop didn’t always agree. “But how much freedom I had in the how of things grew over time. Trust is something you earn, and I of course had to earn the right to have freedom in my decisions.”

Currently, Noop and his bosses at Olvi work together to agree upon worthy targets—“market share, value, whatever”—and then Noop and his team in Estonia determines the best way how. “That’s what you’re really paying a local CEO for,” says Noop, “and I see it’s a mistake that a lot of foreign owners make with their companies in Estonia.”

Fortunately, it’s a mistake Olvi and A. Le Coq haven’t made. They’re on top of the market holding strong in nine categories. It’s an enviable position. Where to go from the top? It’s a problem a lot of people would very much like to have.

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Foreign Investors In Estonia | JELD-WEN

“Right process, right people.” Keijo Erkheikki, Priit Koha, Martti Pernanen in their Rakvere plant

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In the Middle of the Forest JELD-WEN Makes Solutions in Rakvere

Estonia might be one of the world’s Grand Central Stations of wood products. “We’re in the middle of the forest,” JELD-WEN’s Martti Pernanen raises his arms, gesturing to the forests which surround the conference room.

Pernanen is Managing Director of JELD-WEN Finland and the man who oversees all Finnish, Russian, and Baltic operations, and he quickly states why he likes doing business here: “From Rakvere we can source wood from just about anywhere, and the cost of labor is one-third of Finland’s and one-fourth of Sweden’s. And there is very high competency here in wood processing.” From the point of view of JELDWEN’s management, Rakvere is a paradise for wood production.

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A Rich History Rakvere has always been someone’s paradise for production. The town of 17,000 located just off the St. Petersburg highway about 100 kilometers from Tallinn is known locally for meat production—the town boasts a slaughterhouse and meat packing plant which once supplied much of the Soviet Union—but dozens of foreign investors have selected it as a location for wood-based production, as well. The factory space JELD-WEN now occupies produced wood products before the company acquired it, and it originally served to manufacture metal shelving systems for supermarkets and shops, which were exported all over the Soviet Union. Now, the same building is home to JELD-WEN Estonia which produces and export tens of thousands of door frames per week, interior- and exterior doors, plus a variety of other solid wood components.

Although JELD-WEN didn’t officially come to Rakvere until 2006, there is a good deal of management continuity intact from Vest-Wood Europe, the firm JELD-WEN acquired which gave it a Rakvere presence. JELD-WEN currently employs 660, most of whom who live within a 25-kilometer radius of the plant and over half of whom JELD-WEN busses in for the three shifts it runs.

A Modest Legend Although the JELD-WEN name is a relatively new name in the Estonian market, the company is something of a legend on the worldwide stage—it is, ironically, possibly best known for its quiet approach to business. Based in Klamath Falls, Oregon, JELD-WEN is a privately held company, taking its rather odd name from the first initials of family members, plus a shortened version of their surname. The co-founder and first CEO Dick Wendt (Rod Wendt is the current CEO) had a reputation for being a modest man who held his company close, and it has been written in American publications that for many years the company’s Klamath Falls office had no sign on its front door. It is said that, historically, mill owners could excel in business only by beating their competition at forecasting supply and demand, which naturally led to an industry culture where information was not disclosed on a voluntary basis. According to a Forbes article in 2000, Dick Wendt, who then owned 39 percent of the company, lived so far from the public eye that he could wander the streets of Klamath Falls unrecognized. The story continues that he had been “kicked out of [his own] mills… because security didn’t know who he was.” That is certainly a striking degree of modesty for the CEO of what Forbes estimated in 2009 to be the 153rd largest private company in America with estimated revenue of 2.9 billion dollars.

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Well-versed in JELD-WEN’s reputation for reservedness and preference for anonymity, a visiting journalist was a bit surprised when Keijo Erkheikki, Country Manager for the Baltic Countries, put a slide on the screen showing his Estonia operation’s turnover at close to 42 million euros in 2009 with a net income of 3.4 million. “But it will be less in 2010,” added Martti Pernanen. “The economy has bitten us just like it has everyone else.” As few as seven years ago, in 2003, turnover was 21 million euros with profit of slightly over a million. The poor economy may have bitten JELD-WEN, but their medium-term growth in Estonia has been phenomenal.

Solid Wood Competency JELD-WEN management attributes its success in Estonia to what it terms “solid wood competency.” Rakvere has a history of Scandinavian investors who have come specifically to produce wood-based products, and so JELD-WEN is able to find employees who are “pre-educated” in the craft before they ever set foot in the factory. “The international advantage” is how the Rakvere plant’s General Manager Priit Koha terms it. “A lot of companies around here have been run by Danes or other foreign investors, and the kind of employees we have aren’t necessarily what you’ll find in small, local woodworking companies.

Our employees have motivation and the right attitude already ingrown.” The company also credits the local vocational school with an important role in educating local specialists.

“What we bring,” says Pernanen, “is the ability to take local skills and management and augment it with the right specialists, technicians, and machinery.”

But JELD-WEN also brings something else, which is a sense of stability to workers in the region. Not only does it offer free bus transportation to get its workers to the plant, it offers subsidized meals in the cafeteria, and even free swim passes to its employees. While a free swim pass may seem a trivial item, it is indicative of a larger commitment to its employees in Estonia, whose government taxes such benefits given to employees with a fringe benefits tax equal to its flat-rate income tax. (This tax is a bone of contention among some foreign investors, and many regularly lobby to change the law through their chambers of commerce.) In addition, JELD-WEN sponsors team-building exercises with all its employees, one part of the company’s greater recipe to elicit loyalty and commitment from its team. As proof, one employee, who might be the poster child for JELD-WEN corporate loyalty, commutes 70 kilometers from the city

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of Kohtla-Järve, traveling half of the distance by car to a point where he is able ride the company bus. In Estonia, a country small enough to drive across in a single morning, a 140-kilometer daily commute is no small gesture.

Priit Koha has lived and worked in Denmark, and says he admires the basic commitment shown by Estonian workers. “If the bell rings in Denmark, then the workday is over. In Estonia, I see the employee spend a few additional minutes to clean the workplace.”

“If that’s true,” interjects Martti Pernanen, whose position doesn’t enable him to see Estonian workers in action on a daily basis, “then that’s exactly what gives us space to be more competitive.”

“Solutions” Beyond building committed employees, JELD-WEN attempts to take advantage of its geographic position in Estonia by exploiting the local competency in solid wood products. “Solutions” is part of JELD-WEN’s slogan, and what it means, says management, is that while it offers doors (solutions) for many purposes— children’s doors, for example, made with lower windows and padded areas where small fingers may roam—it also does not attempt to manufacture all of them in one place and each of its factories is highly specialized. Virtually all of Estonia’s specialized production is for export, and the plant produces enough volume to supply all of the Nordic countries, plus part of France and the UK. What the market needs that Estonia doesn’t make is manufactured at JELDWEN facilities in fifteen other countries.

Due to its geographical location, the raw materials Estonia is ideally suited to receive, says Pernanen, are pine- and spruce-based.The company therefore combines that type of manufacturing with the local tradition in solid wood.

“There’s a limit in this business as to what you can automate,” says Priit Koha. “So that makes labor extremely important.”

Management, having previously remarked about the low cost of labor, is asked by the journalist whether low-cost labor is really a sustainable competitive advantage outside the short term. “Well, even if wage prices rise five percent a year,” interjects Pernanen, “we’ll still have an advantage here for the next ten years.”

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JELD-WEN’s modern factory floor.

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Mistakes Other Make Martti Pernanen is quick to point out that low cost labor in itself isn’t the key attraction, though when you combine it with the existing skill set, a highly-educated work force, and political and economic stability, it is a potent combination. “If you go to the Ukraine,” Pernanen offers an example, “you can find cheap labor, but there are more risks.The Estonian currency is stable, but in Russia it can devalue every day. That’s why we’re not there yet.” JELD-WEN sells in Russia—it has a sales office in St. Petersburg—but it does not yet manufacture there.

“What I’ve seen after spending four years working in a variety of countries in the region,” adds Keijo Erkheikki, “is that there is an interest here in being a little better each day. I have had difficulties finding that in other countries.”

“True,” adds Pernanen. “I think Estonia is better than Latvia in this regard.” Pernanen quickly catches himself and asks the journalist not to write that, though the journalist leaves it in, allowing that in a book about Latvia, Mr. Pernanen is free to reverse the order.

But Pernanen isn’t ready to attribute JELD-WEN’s success in the re-

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gion completely to a pre-defined recipe and the JELD-WEN modesty creeps in.

“Yes, we have the right process. We have the right people. But we’ve also been quite lucky. The previous management of this factory were Danes, and they created this international background. Our local managers are great sparring partners.”

The top local management sparring partner, Priit Koha, asked what advice he might give foreign investors in a like industry who were looking at Estonia, says to take things step by step. “When I see foreign companies in the region, I notice they proceed cautiously. They start modestly, control the process, and add value. A local company will often take a huge bank loan based on a business plan and then fail. Foreigners generally have a more conservative approach. They avoid bottlenecks. They don’t overinvest.”

“Right process, right people,” emphasizes Martti Pernanen one more time. “Measure your performance—every day,” adds Keijo Erkheikki. “And celebrate the success.”

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Foreign Investors In Estonia | ERICSSON

Veiko Sepp and Seth Lackman

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Myth Busters Ericsson Finds Success in a Small Nation and a Hand-picked Workforce

“It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasizes this predictability,” wrote John Kenneth Galbraith in his 1958 book, The Affluent Society. “I shall refer to these ideas henceforth as the conventional wisdom.”

Prior to Columbus, conventional wisdom held that the earth was flat.

Prior to John Stapp’s 46G-ride in a rocket, conventional wisdom held that 18 Gs in a spacecraft would kill a man. And prior to Ericsson’s success in Estonia, there were plenty of other conventional business wisdoms awaiting their dismissal. Among them: Small nations’ manpower resources are too limited.

Estonia cannot supply enough skilled labor.

Factories are better built in rural areas.

Estonians are bad at sales.

Estonians are slow.

The service mentality in Estonia is not good.

Since Ericsson entered the Estonian market in the 1990s, it has proven every one of these statements to be myth. Those and other myths too. And its turnover growth is proof of the pudding: from roughly six million euros in 1996 to an expected turnover of nearly 100 million euros in 2009.

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Engineers and Salespeople Despite Estonia’s reputation for cheap labor which existed immediately after its independence in 1991, Ericsson’s leaders say labor cost was never a prime motivator for doing business in Estonia. “Cost competitiveness based on lowcost labor is simply not sustainable,” says Ericsson’s Veiko Sepp.

Ericsson’s plan, from the beginning, was to enter the Estonian market slowly and step by step. In 1991, the Finnish office of Ericsson took the first step of visiting Tallinn Technical University and offering a young engineer named Veiko Sepp the chance to come to work in Finland. Sepp might have had visions of one day returning to his homeland, but he surely had no way of knowing he would do it to build and run a regional operation which would grow to employ almost two thousand people. Today, Sepp serves as Ericsson’s Vice President of the Nordic and Baltic states Market Unit.

Seth Lackman was also around for the early days of Ericsson Estonia.

A Swedish-speaking Finn, Lackman came initially in the capacity of finance director with Baltimore, a 40-person local distributor Ericsson used in the Baltics. In 1996, Ericsson bought the company, giving it full daughter company status, and Ericsson soon grew to employ 140. In 2000, Lackman moved into a sales capacity and today runs the sales side of the Estonian operation.

“But even in the beginning when we were handling Estonia’s sales from Finland,” says Lackman, “we always planned that, step by step, the whole operation would be transferred from Finland. We chose our salesmen, looking for the profile of an active person with the right mindset—not necessarily a technical background—and we raised them with us as we grew the company.”

Currently, Ericsson employs 1400 people in Estonia, approximately one-third of them engineers, and the company still plays a very active role in creating a favorable environment for hand-picking its employees. “We work with Tallinn Technical University to direct the courses they offer toward our specific needs,” says Veiko Sepp. “And we handpick our engineers through this cooperation.” This careful attention to building a workforce has paid off for Ericsson, and it has disproven the myth that the Estonian personality cannot produce a good salesperson. “Our people from the Estonian office work all over the world,” says Sepp, who says a majority of those who come to work in the Tallinn office will be sent abroad to work on international projects. “When our team gets praised in Tokyo by our Japanese clients, then we know our people are tops. Not tops in Estonia. Tops in the world.”

And quality is far more important to Ericsson than price. Ericsson recognizes that even when the day comes that Estonian salaries match those

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in Sweden, it will still be more efficient to do business in Estonia. “It takes only simple math to conclude this is a great place to do business,” says Seth Lackman.

“In Sweden, one employee has roughly 1,400 workable hours. In Estonia, the same employee has 1,750 hours.” Given the natural work ethic of the population, unless Estonia adds a lot more holidays and social benefits, it will hold a clear advantage over Scandinavia.

Abroad with Big Brother To go abroad with Ericsson, one doesn’t necessarily have to be on Ericsson’s payroll.The company constantly keeps an eye out for customer-based solutions which it can carry abroad under its international umbrella.

A good example is Regio. Partnering with Ericsson, EMT, and the Estonian Rescue Board, this Tartu-based mapping company built the world’s first mobile positioning system. Essentially, the technology allows for a person in an emergency situation to dial 112 (the Estonian equivalent of emergency number 911) and be located via their mobile transmission.

“We demonstrated this technology in Barcelona in an exhibit called ‘Friend Finder.’ People were amazed by the technology, of course, and it shows how working with us a small Estonian IT company can get exposure in a major venue like the Barcelona show,” says Sepp.

Regio is not the only one. Ericsson is working with other partners for customer-based solutions through Tallinn Technical University, the IT College, Tehnopol, and the Ülemiste IT Park. Ericsson does not play the role of venture capitalist, however, and they do not invest in the companies themselves. They rather provides the umbrella for smaller companies to develop their technology according to Ericsson platforms, and then the two go abroad together.

The Service Myth “And there’s another myth I’d like to smash,” says Seth Lackman. “The service myth. This is part of the bigger Soviet myth which needs broken.” Estonians, according to Lackman, are perhaps a bit hesitant to show themselves as good service personnel, but when encouraged they are as good as anyone. “We operate a global call center here with 20 people working 24/7. To do this job well you have to handle stress extremely well. Our Estonian people handle it extremely well and are highly service minded.”

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It is perhaps no coincidence that some of the world’s top rally and Formula One drivers have traditionally come from Estonia and Finland. The personality and disposition required to remain calm, cool, and collected at speeds in excess of 300 kilometers per hour probably do transfer well to dealing with a large number of customers who expect immediate attention in a variety of languages.

The Myth of Rural Factories Conventional wisdom also suggests that factories should be placed in rural areas where labor is plentiful and cheap and unionization is less of a risk. But Ericsson has always operated inside Tallinn proper.

“For us,” says Lackman, “there is no cost benefit of being in a rural area.

We’re close to harbors and the airport, we have a great working setup.” Both Lackman and Sepp consider Tallinn an ideal location. “Logistically,” says Sepp, “Estonia is really well placed. This was no small thing in making the decision to come here.”

In 2009, Ericsson made the decision to purchase the Elcoteq factory which had over the years produced mobile phones and network equipment for Ericsson. Located in Tallinn, the factory fit well with Ericsson’s regional strategy of supply. One-hundred percent of its production would go to Sweden. It also had a track record and history of producing quality. But it also had capacity and potential. Today, the factory runs at seventy percent of capacity and, according to Lackman, “there will surely be more manufacturing there.” Today, the factory produces modules for broadband equipment for both fixed and mobile networks, which are vital for the rapid development of the mobile broadband and internet services throughout the world.

The Myth of Slowness and the World’s Fastest Acquisition While a certain number of jokes do exist about the slowness of all Nordic peoples, Estonia’s reality tends toward the more progressive side of things.

According to Veiko Sepp, the world record for setting up a new company is

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approximately four minutes, and it was done in Estonia using the country’s high-tech ID card system. “You don’t even have to have an Estonian ID card to set up a company in Estonia,” says Sepp. “You can use an ID card from many European countries.”

Ericsson regularly benefits from Estonia’s e-technology and openmindedness toward getting business transactions done with minimal bureaucracy and maximum speed. “When we bought the Elcoteq factory,” says Sepp, “we signed the contract on June 17th, and on August 1st we started production.

Everything was smooth and transparent. Inside the Ericsson company, that is a world acquisition record.”

“And it’s not just setting up a company that’s fast,” adds Seth Lackman. “If you have a concern and want to meet with a minister, it would take six months to get an appointment in Finland. In Estonia, sometimes you can get into see them the next day. And they listen, too!”

Advice from the Myth Busters For an international company like Ericsson business does not seem to be discussed with labels of “Ericsson Estonia”—there is only Ericsson, which happens to have an office in Estonia, as it does in 123 other nations and territories around the world.

“For the last fifteen years I have met at least one to two new people each week visiting our office from abroad who is in Estonia for the very first time.” It seems all of Ericsson—its employees and its clients—are step-by-step working their way through Estonia. And with 82,500 employees worldwide, there is a lot of Ericsson still left to visit Estonia.

Even for a company that handles 40 percent of the world’s mobile telephone calls and whose market capitalization is close to 29 billion dollars, the myth busters advise a planned approach to business. “Don’t take a big bite in the beginning,” says Lackman about speed of entry. “If you want to go immediately from zero to one thousand engineers, then that is not realistic. But if you properly plan you can get very solid growth.”

Veiko Sepp agrees. “You’ve got to have your own goals, of course, but in general the infrastructure in Estonia is great, the laws are simple and straightforward. What could I say to a foreign investor? I’d say ‘Welcome to Estonia.’ ”

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Foreign Investors In Estonia | VOPAK EOS

Russia’s Global Hub in Estonia International Reliance on Estonia’s Vopak EOS

In Estonia, there are many sorts of relationships with Russia.

There is the political relationship, shadowed by its neverending trail of participants, pundits, and commentators.

There is the personal relationship, and few of any nationality who have visited Russia would say they left without finding a friend. And there is the business relationship—or rather a wide variety of business relationships—which are often overshadowed by perception. Conventional wisdom, at least as many interpret it, might suggest doing business with Russia from Estonia is prohibitively complicated. But reality is often what one chooses to see, or perhaps what type relationship one chooses to create. This is the story of what Vopak EOS has chosen to create.

Businessmen in Estonia who have embraced the Russia that is, as opposed to the Russia they would like, have often prospered. One of those is Vopak EOS. In fact, Vopak EOS might be the poster child and casebook example of how to successfully do business with Russia. But saying Estonia-based Vopak EOS “does business” with Russia would be an understatement: Vopak EOS has literally become the global marketing hub for the international marketing of Russian oil.

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Arnout Lugtmeijer

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Foreign Investors In Estonia | VOPAK EOS

“Most Russian refineries are forty years old or older,” says Arnout Lugtmeijer, Chairman of the Board of Estonia-based Vopak EOS, which operates the largest fuel oil terminal business on the Baltic Sea rim. “Existing technologies often do not allow deep refining of crude resulting in thirty percent of their production being residue stream fuel oil.” Since it begins to solidify at temperatures cooler than 25 degrees Celsius, fuel oil cannot be transported in pipelines. It may be put on barges in summer, but since many of Russia’s refineries are inland and her rivers frozen six months of the year, Estonia-based Vopak EOS is one of the few options available.

Vopak EOS’s Estonian terminals have a total capacity of 951,000 cubic meters with a total throughput capacity of 25 million metric tons per year, the vast majority of its business coming from Russia. (However, the CIS countries are contributing more all the time.)

To build a modern oil refinery, Lugtmeijer says, requires a five-year commitment and over two billion US dollars. “It’s saying ‘Commit two billion dollars now to have a refinery in five years.’ With Russia’s current financial situ-

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ation and with highly predictable refining margins, that is just not realistic right now.” “If it’s unclear how things will look in two years,” says Lugtmeijer, “you certainly don’t invest for five years.”

Some have suggested that Russia will still build hyrdocrackers and catalytic crackers—equipment used in second-stage refineries that convert high-boiling, high-molecular weight hydrocarbon fractions of petroleum crude oils to more valuable gasoline, olefinic gases and other products. But this has hot happened in Russia. “There is more fuel oil now than there was fifteen years ago,” says Lugtmeijer.

“There is more fuel oil now than there was three years ago.”

But while for many, investing in Russia may seem impractical, the investment climate of Estonia is more appealing. And Vopak EOS continues to invest in its Baltic Rim operations with Tallinn as its headquarters.

Continuity The son of a globe-trotting engineer, Arnout Lugtmeijer, was born in Belgium.

He has lived in Rome, Switzerland, the UK, Australia, Nigeria, Hong Kong, as well as a host of other places, and, although Dutch, never lived in Holland until he was eighteen years old. He studied mining and petroleum engineering at the Delft University of Technology and soon resumed the globetrotting life. In 1994, he came to Estonia to work for a private investor in what was then the business EOS, or Estonian Oil Services. Although the name of the business and ownership structure have changed since those days, Lugtmeijer has been a source of continuity in the company. He has overseen the expansion of the terminal business, including movement into storage, which enables more flexibility for Vopak EOS clients, especially traders who may wish to hold the product for periods of time while awaiting market movements.

Lugtmeijer was also present for the forming of the joint partnership with N-Trans in 2008.Today, half of Vopak EOS is owned by Global Ports which belongs to Russian transport holding N-Trans, a private operator in the Russian transportation services market, as well as territories of the former Soviet Union, including the Baltic states. Prior to 2008, the group operated under the brand Severstaltrans.

Bridging the Gap If there is a secret to making money by bridging the gap between East and West, part of it surely lies in the service you provide and the sector you operate.

According to the US Energy Information Administration, Russia pro-

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Foreign Investors In Estonia | VOPAK EOS

duced close to 10,000 barrels of oil per day in 2009. Considering that the country’s production capacity is roughly four times its consumption,Vopak EOS is in a good position to benefit from the huge quantities of oil being exported.

“We are rendering an essential service for the Russian oil industry overall,” says Lugtmeijer when asked if Vopak EOS might possess some great secret for doing business in the East.

“We are striving to provide an excellent service level. We hope that our performance, reliability, predictability, and transparency are ahead of our competitors North and South of the Baltic and Russia.”

In terms of performance, Vopak EOS is able to unload more than 1,000 railcars per day. “When it comes to unloading rail tank cars,” says Lugtmeijer, “we can even impress the Chinese.”

Clarity and Transparency Royal Vopak does not officially release investment figures for its subsidiaries, but it has been estimated that the asset value of its Estonian investment is over three billion Estonian kroons (190 million euros). When the investment is of that magnitude, a natural “partner” in any venture is the government of the country in which you’re operating.

“What you’re looking for when you enter a country,” says Lugtmeijer regarding government, “is clarity and transparency. I think Estonia has chosen the best parts from a European system and brought in the best legislation and technology.” Lugtmeijer notes that Estonia chose not to build a big, bureaucratic web, but chose instead a straightforward approach, which has paid off in the form of a stable currency.

In terms of Estonian workers, a company which handles fuel oil in the millions of tons per year employs fewer than one might expect. Two-hundredand-sixty-six workers are employed at the terminals, and visiting the terminal facilities what one is most struck by is the silence.An additional 219 workers are employed with Vopak EOS’ subsidiary, ERS, the largest private railway company in Estonia, which owns 36 kilometers of its own track accommodating 2,300 rail cars, and is automated to the degree that the workers can unload 12 kilometers of rail tank cars in a day. ERS is known for having the fastest rail tank car turnaround time in the Baltic: it is able to bring a full block-train from the border, discharge the cargo, and return it to Estonia’s border within 24 hours.

When it comes to Vopak EOS employees, Lugtmeijer finds the theoretical knowledge and dedication of his colleagues impressive. “We’ve kept all

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Vopak EOS’ extensive Estonia operations.

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Foreign Investors In Estonia | VOPAK EOS

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of our senior staff from the very beginning,” he says, noting that motivation and team-spirit were key to the success in retaining people during a market period when other employers were losing management on a daily basis due to better financial offers in a tight marketplace.

One manifestation of the company’s spirit has been the participation in an annual company calendar, the brainchild of Vopak EOS’ Communications Director, Olga van Kampen. Crossing motivational posters with Hollywood action film advertisements, van Kampen turned to the employees to provide the creativity. Trust and Commitment is the headline for January, and it stars Aleksandr Lebedev and Natalja Kornilova. A Mel Gibson-svelte Aleksandr (loading master) and Naltalja (dispatcher), embrace wearing white muscle shirts, their bodies glistening with sweat and covered with grease marks having just moments ago saved the world from disaster, most likely eliminating evil in the process. Or take the month of September, Flexible and Innovative Solutions, where Garry Matvienko (logistics-sales-marketing), Teet Nurmeoja (technical and development), and Julia Fedosejeva (stock-keeping) resemble live video-game characters with ample supplies of “power, armor, skills, magic, and life.” To the management of Vopak EOS, it is not a coincidence that the Estonian daily Äripäev named them the Most Successful Enterprise in Estonia in 2006 and 2007.

The spirit of openness and open contribution now visible in van Kampen’s calendar, however, were not always present in the beginning, says Lugtmeijer. “If you put ten Dutch people around a table, they’ll say whatever they want,” not worrying so much about the presence of the boss. “But in the very early days in Estonia, I got most of the information after the meeting.” Employees were sometimes not keen on sharing ideas with others present and would talk only with the boss directly. “If they had strong cards, they would only show them to the boss privately,” Lugtmeijer laughs, “so I learned to schedule very short meetings.” But that was the past. “That’s all changed,” he says.“Now, we all realize there’s only one stack of cards we all have to share.”

With the cards Estonia offers—a solid, dependable work force, a yearround ice-free port, railway access to Russia—combined with its Russian and Dutch cards, Vopak EOS is in an excellent position to expand. It sees growth in volumes through construction of additional storage capacity in the territory of the Muuga Port, with land owned by Vopak EOS which would allow another one million cubic meters of storage. There are also plans to expand their range of services for fuel oils from various refineries in Belarus, Russia and Kazakhstan, as well as other services for their customers. And all of this with Estonia as a base of operations, standing at the gateway to Russia.

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Foreign Investors In Estonia | SWEDBANK

Swedbank’s Priit Perens

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A Subcontractor’s Paradise Swedbank Imagines Estonia’s Future

In February 2009, in the midst of one of the greatest crises in banking’s history, Priit Perens, Swedbank’s Managing Director in Estonia, told Estonia’s largest daily that the bank’s goal for 2009 would be “for the bank and its clients to suffer least.”

The full extent to which Swedbank suffered in 2009 is not yet known at the time of this writing, but it is certainly fair to say that Swedbank has suffered less than many.

In 2008, its profits were 180 million euros in Estonia, though this was down 20 percent versus 2007. Despite the signs of stabilization in the economy, Swedbank Estonia’s 2009 third quarter results were affected by the recession: operational profit was approximately 37 million euros before provisions, and its thirdquarter loss approximately 20 million euros.

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Foreign Investors In Estonia | SWEDBANK

“Demand smaller than availability” While it may be true that in difficult times it is harder for foreign investors to get money from a bank, in terms of commercial loans, according to Perens, “demand is certainly smaller than the actual availability.”

A major reason, says Perens, for the lack of demand by foreign investors is the impending euro transition. Before investors in Estonia begin loading up on debt, they want to make sure there will actually be a move to the euro and no devaluation of the Estonian currency. Despite Prime Minister Ansip’s repeated assurances that Estonia will qualify to adopt the euro, some businessmen are waiting to see it actually happen. “At the moment, there simply is not a reason to invest,” says Perens.

Currently, as Nobel Prize-winning economist Paul Krugman and others have described, Perens notes we are experiencing a historic cycle of boom, deficits, inflation, lowered exports, with Krugman predicting natural progression to currency devaluation. “Right now Estonia is an exception to this pattern,” says Perens, mainly due to the fact that Estonian state has cut spending so heavily and wage levels have declined which, in effect, resulted in something similar to devaluation. “The adoption of the euro would allow Estonia to clearly step out of this cycle and would boost investor confidence.”

But even before Estonia joins the eurozone, the pundits are beginning to see the light. Paul Krugman may be convinced that Estonia will follow in Argentina’s footsteps with a currency devaluation, but others are not so sure. As Financial Times columnist Paul Dizard wrote on January 31st, 2010: “Apparently the packet boat carrying Estonia’s statistics to Princeton University’s Department of Economics did not make it through the Baltic ice floes, or not in time, anyway, to inform Professor Krugman’s remarks.” Internal devaluations, as the industry calls them, or the voluntary reduction of wage levels, can and do work according to Dizard. And Dizard is placing his bets with Estonia. “Now…we have the example of an internal devaluation that seems to have been successful,” Dizard wrote.

Others standing behind Estonia are Harvey Sawikin, the portfolio manager of Firebird Republics Fund in New York, who increased his commitment to the Estonian market in the recession’s depths last year. Sawikin’s reasoning, as per Dizard: “A lot of the people commenting on the Baltics, such as Krugman and Nouriel Roubini, didn’t really know much about Estonia. Comparisons to Argentina were really inapposite.”

Of course the euro transition is one factor which influences how

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eager investors are to borrow, but there is plenty of ongoing debate in the financial press about how truly eager banks are to lend. From a borrower’s perspective, accusations fly that banks, in order to preserve liquidity, will sit on cash in order to ride out tough times. But, according to Perens, given the right conditions, Swedbank is ready to lend.

Obtaining Financing Foreign investors, even when they bring their own financing to Estonia, have a variety of needs from local banks. One key reason they turn to Swedbank is cash management services, and Perens says Swedbank’s products are “equal or better than those outside the region.”

When a subcontractor—a term defined by the bank to mean those who do not produce and sell products under their own, independent brand name—is after a loan to finance a factory structure or equipment, or an acquisition, Swedbank is looking for one or both of two key criteria: Either the foreign investor’s business has the right ratios, or it is a proven successful investor in other markets (preferably Swedbank markets) and a subsidiary of another company who can offer a parental guarantee. As far as financing a company strictly on its own merit, Swedbank is looking for a company which can invest around 30 percent of the factory’s equity, have a Debt/EBITA ratio of less than four, and a product which can be sold in a few months so as not to tie the company up with inventory. But that rather rigid explanation, according to Perens, is not the true reality. Cash flow is far more important.

“In reality, explains Perens, “requirements are not so easily defined, and they depend greatly on the type of business. What matters most is cash flow over a five- to seven year period. We’re looking for contracts over that period that are adequate to service the debt and potential investment need. Cash flow is most important. Ratios and equity are less so.”The purpose of the equity, says Perens, “is to keep the investor motivated.”

While a parental guarantee may be a plus, the case is always stronger with good cash flow generated from the Estonian product. What type of product, then, should that be? And what type of foreign investor does Swedbank believe can be successful in Estonia?

“It’s easier to say who should not invest in Estonia,” says Perens. “The Estonian economy cannot depend on one single company. Say, as an example, you want to build an auto factory which employs five to ten thousand workers,

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Foreign Investors In Estonia | SWEDBANK

which produces one single product. This type of investment makes absolutely no sense for Estonia. Such a factory would have been surely closed for a half year or completely shut down by now due to the poor situation in the world automotive industry.” Perens believes businesses producing a “mono product” requiring a work force numbering in the thousands make little sense in a country with a population of only 1.4 million.

What does make sense? If Swedbank could create ideal customers, who would they be?

“Let’s imagine a sub-contracting factory which employs 100 to 500 people, somehow connected to technology and its development.” Perens cites Ericsson (profiled elsewhere in this book) as an ideal case. “Estonia can supply the workforce for factories of that size. We have a logistical advantage. We don’t compete with China. Estonia is in the right time and place in Europe.”The ability to be flexible, producing small orders quickly and shipping them to European countries, may indeed be Estonia’s trump card.

There is surely no coincidence that Perens vision of an ideal business for Estonia very closely resembles the foreign investors and their operations profiled in this book. To listen to Perens is to hear the echo of foreign investors as they describe Estonia as a subcontractor’s paradise: low-cost labor, a sufficient supply of engineers, an ideal geographic location, and a stable business environment created by government.

The Crystal Ball Were Perens to peer into a crystal ball and imagine Estonia’s longer-term foreign investment future, he estimates two-thirds of the investment would come from companies subcontracting for larger firms in the Nordic region, and onethird connected to IT and the sciences. “With a few exceptions,” says Perens, “Estonia is not yet in the position where it can take its own brands to the world.” He names exceptions as Baltika Group (marketers of clothing in Eastern markets), BLRT (shipyards, ship repair),Tiki (a variety of trailers), noting that these companies, one way or another, have managed the investment required to carry their original brands beyond their borders.

Being able to go beyond ones own borders, according to Perens, is as much a way of thinking as it is having deep pockets to finance a venture. “It has also a lot to do with education.” Despite Estonians’ reputation for being highly educated, Perens thinks the system can be improved upon. “I think Estonia’s basic educational system is good, but there are lots of simply average schools

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too, where students just sit there and information is thrown at them.” Also, in Perens’ opinion, the profession of teacher has not been held in as high esteem as it should be. Swedbank is working to correct that.

In 2007, the bank created the non-profit organization, Noored Kooli, modeled upon the British program, Teach First. Its mission: to bring bright and energetic individuals from a variety of fields into Estonia’s educational system. In its first year, 115 candidates vied for 12 positions. Among those chosen for the program were a Princeton University graduate, a Tartu University cum laude graduate in physics, a journalist, a financial analyst, and one of Kofi Annan’s university associates. In exchange for a two-year commitment to teach in Estonian schools, the new teachers are offered little more than the ability to influence the future of around 150 young Estonians.

Participants earn only 320 euros per year more than an average Estonian teacher’s salary of 7,596 euros—both figures per annum—so most must be drawn to the promise of a “trial by fire” and the “ability to bring positive changes to Estonian education,” promises which are highlighted on the Noored Kooli website.

Currently, 33 Noored Kooli program members are working in Estonian classrooms, and the program is heavily supported by not only Swedbank, but firms like Ragn Sells, Elion,

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Foreign Investors In Estonia | SWEDBANK

Estonian Air, Pärnu Conferences, and PricewaterhouseCoopers.

Swedbank, in addition to being Estonia’s biggest bank, is also possibly Estonia’s biggest investor. The financial institution employs around 1,800 people in Estonia, and its assets total in the neighborhood of ten billion euros. In terms of raw investment in Estonia, the bank has invested 2.2 billion euros in all of the Baltic through the doorway of Estonia. So when one single entity employs so much of a nation, if not the entire region, and when in its vaults are much of the national savings, it perhaps comes naturally to worry about the nation as a whole and to consider your office door beginning at the borders of Estonia.

A Focus on Service When asked to put aside national concerns and list Swedbank Estonia’s business priorities for the nearest-term future, Perens names customer service without a second’s hesitation. The necessity to focus on service comes from living in a market which has experienced rocket-like growth since the nation regained its independence in 1991.

“Up until about the end of 2007, when selling products, we didn’t always take into consideration the buyers’ needs,” says Perens. “People simply bought what we offered.” Perens likens the consumer in those days to a naked man.

“It didn’t matter what you sold—coats, hats, pants—he’d buy it.” But now the consumer has his clothing. He, in fact, has more than he requires. “We may even have sold him some clothes he didn’t need, and now it’s time to take back some of the unnecessary items.” Like credit cards, for example.

“Some people,” says Perens, “have three credit cards, all from our bank.

But often the person only uses one or two of those cards, and it’s to our advantage and the consumer’s to take back the card they don’t use, since both the bank and consumer have expenses associated with this card.” Perens describes the shift with his sartorial simile. “But today we’re like tailors. We’ve got to get the consumer the clothing he actually needs and make sure it fits him right. In a word, there is now a new client-focused policy in all our offices.”

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And the battles for consumers in the future, Perens believes, will be fought in the arena of service.“Products are easy to copy,” he says.“But service is very hard to copy.” Perens says Swedbank is now investing heavily in training with the intention to be on the “front line when it comes to professional service.”

Past, Present, Future Concerning the future, a visiting journalist suggests Perens may be privy to a overall market view individual investors lack, and asks if he would be willing to list sectors where he thinks opportunity may lie for foreign investors. Perens list: “Infrastructure providers. Water. Electricity. Garbage removal.” There is natural demand in these sectors, he says, “but the question is whether anybody wants or is able to compete with local monopolies.” But he seems to believe it’s possible, especially in the area of energy, as the world takes a turn toward green alternatives.

And Swedbank certainly has an investment in that world. Internationally, Swedbank boasts 1,815 billion Swedish krona in assets (177 billion euros), 20,000 employees, 9.5 million retail customers served in 842 branches in five countries, and a history beginning in the year 1820. It has a presence not only in Sweden and the Baltic States, but also in Copenhagen, Helsinki, Kaliningrad, Luxembourg, Marbella, Moscow, New York, Oslo, Shanghai, St. Petersburg, and Tokyo.

Locally, Swedbank began operating as a branch of Tartu Commercial Bank in 1991 and grew, with a local and regional history which would take an entire book to document, to finally exchange the name Hansabank for Swedbank in 2008. Despite a number of name changes, Swedbank is as recognizable to Estonians as the fabrics and patterns of their national costumes.

As the largest of four major banking players in the market, with 550,000 corporate and 9.5 million retail customers worldwide, Swedbank is also not an unfamiliar brand to foreign investors. And the two seem natural partners who can together shape—if not architect—the future of Estonia.

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Foreign Investors In Estonia | FDI IN ESTONIA

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Foreign Direct Investment in Estonia

by Urmas Varblane, Professor of International Business, Tartu University

After regaining independence in 1991, rapid reforms were launched in the Estonian economy: prices were liberalized early, foreign trade was opened without barriers, and privatization was quickly begun. It all created a favorable investment climate and brought to Estonia the first wave of foreign investors.

In the period 1993-1996, the main reason for investing in Estonia by foreign investors was privatization. From 1997 onwards, the acquisition of Estonian-capital-owned firms by foreign entities started to play a major role. The biggest acquisitions occurred in the Estonian banking system in 1998 (SEB and Swedbank acquired the Union Bank of Estonia and Hansapank, respectively) and telecommunications (Telia Sonera acquired shares in Eesti Telecom in 1999). Also during the period new investments started to occur—Elcotec, JOT Automation, UPM Kymmene, and others.

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Foreign Investors In Estonia | FDI IN ESTONIA

The majority of foreign investors originated from neighboring Scandinavian countries, first from Finland and Sweden, but later investors from Germany, Denmark, the Netherlands, the US and other countries followed. Today, the share of Scandinavian investors is around 80 percent of all foreign direct investment into Estonia. Finnish firms, in particular, realized earlier than multinationals outside the region that complementarities combined with geographical proximity existed in countries around the Finnish Gulf. Many Finnish firms succeeded in creating subsidiary networks, which covered Estonia, Russia and often the other two Baltic states.Those networks created very good bases to reap benefits of complementarities from the Finnish Gulf region. Finnish companies used investments in this region to increase competitiveness and support adjustments at home.

In the year 2000, Estonia introduced a unique taxation system, according to which reinvested profits of enterprises were exempt from tax. The EU enlargement in 2004 further increased interest of foreign investors to enter Estonia and the other Baltic states.The importance of foreign direct investment in the Estonian economy reached one-third of total employment and over 60 percent of manufacturing exports (see Table 1 for detailed information).

During the economic boom between 2004 and 2008, foreign investors heavily reinvested their earned profits back to Estonia, but the amount of new investments stagnated mainly due to the lack of available labor. During the recent economic crisis, foreign investors reduced investment intensity in Estonia, given uncertainty about the future economic development of the whole Baltic region. But since the end of 2009, the situation has rapidly improved, following positive news about Estonia fulfilling all Maastricht criteria concerning joining the Euro-zone and its very good prospects for launching the euro in January 2011. Foreign investors’ decisions about expanding further in Estonia have been supported by the pool of labor available again on the local market. The growing interest of investors toward the Baltic Sea region, however, could not be explained only by a pool of labor available again after an economic crisis.

According to the World Bank study, “Doing Business in 2010,” the Baltic Sea region offers some of the best regulatory environments in the world in which to do business. Finland (ranked 16), Estonia (24), Lithuania (26) and Latvia (27) are all among the top 30 economies in the world in terms of the report’s easeof-doing-business index. 1 1

Doing Business 2010.Reforming through Difficult Times. Comparing regulations in 183 countries, IFC and World Bank Group, 2010 http://www.doingbusiness.org/EconomyRankings/

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Along with the region’s procedural simplicity comes relative speed and reduced expense. The Baltic Sea region as a whole grants its employers great flexibility in hiring and firing a workforce. Only firms in East Asian and Pacific countries enjoy greater ease in expanding, reducing and managing the workflow of their employees.

Foreign direct investment has become an essential factor in the facilitation of economic growth in Central and Eastern Europe. Therefore, strong competition among the transition economies to attract FDI into their economies has begun. The governments considered FDI an important tool in overcoming the problem of insufficient local capital. In the competition for FDI, Estonia has proved itself rather efficient and has succeeded in attracting a significant amount of FDI. The following (Figure 1) presents data about the total stock of foreign direct investment per capita in Estonia compared with several other EU new-member states, as well Ireland, Finland and Sweden.

39185

1998 2008

Czech

Hungary

Latvia

Poland

458 3826

2019 6343

Estonia

581 4234

1396

5000

1314

10000

3193

5762

15000

646

11906

20000

16535

25000

16820

30000

10971

35000

5051

27496

40000

0 Ireland

Sweden

Finland

Lithuania

Figure 1. Inward foreign direct investment stock per capita in 1998 and 2008 in Estonia compared with some EU new- and old members (in USD, World Investment Report 2009).

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Foreign Investors In Estonia | FDI IN ESTONIA

In order to provide dynamics, comparative data are presented from 1998 and 2008. At the end of 2008, Estonia had a total FDI stock of 11,906 USD per capita, which is the highest among the EU new members, followed by the Czech Republic and Hungary. The neighboring Baltic country Latvia had 5,051 USD and Lithuania 3,826 USD per capita. Still, Estonian FDI stock per capita is clearly smaller than in neighboring Finland or Sweden. Figure 1 reveals also that inward FDI stock per capita of Estonia increased nine times during the period 1998 through 2008.

EU enlargement has positively influenced the competitiveness of Estonia and the whole Gulf of Finland region by growing the liberalization of trade between par tners. On the other hand, it has strongly suppor ted the growth of attractiveness of the region to foreign investors. The future task in the development of the region is to suppor t structural adjustments particularly in the Estonian and Russian economies. The role of foreign direct investment in knowledge transfer has been impor tant, but alone it is not sufficient in order to build the Gulf of Finland as a knowledge-intensive production region. First of all, the governments of Estonia and Russia should put more emphasis on the role of investment into human capital building and suppor t the creation of knowledge-absorption capabilities in the private sector by facilitating cluster cooperation and other forms of cooperation between firms.

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ECONOMIC SECTORS

EMPLOYEES

NET SALES

EXPORTS

FIXED ASSETS

Manufacturing industry

38.5

47.3

61.6

46.8

Electricity, gas, water supply

14.0

24.6

10.1

17.7

Construction

7.3

11.1

14.7

7.3

Wholesale, retail trade

22.5

36.4

45.2

31.9

Hotels, restaurants

19.5

24.9

47.7

38.4

Transportation, communication

16.9

29.8

25.6

28.6

incl. Land transportation

7.8

16.7

45.9

16.9

Supportive services, travel agencies

25.5

25.1

23.9

24.2

Post, telecommunication

31.3

82.0

67.4

82.9

Real estate, renting, business services

27.6

24.9

51.3

17.5

incl. Real estate

10.5

9.8

14.1

16.4

Renting of machinery, equipment

26.0

40.2

63.4

49.0

Computers and related services

44.0

48.5

80.5

21.5

Other services

30.2

28.8

42.1

15.6

Table 1. The importance of foreign direct investment in the Estonian economy (share of foreign-owned ďŹ rms of total, in %, as of the end of 2007 )

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Foreign Investors In Estonia | ESTONIAN TRADE AND INVESTMENT AGENCY

The Estonian Investment and Trade Agency is a division within Enterprise Estonia, the country´s largest business support institution. We offer information and services to new and existing investors and trading partners. We aim to be the preferred partner in Estonia for international companies.

Our objectives as an agency are to ensure a competitive business environment, to raise the profile of Estonia, and to develop business relationships with international companies.

EITA is headquartered in Tallinn and has offices in Finland, Sweden, Germany, the United Kingdom, the United States, Japan, China, Russia and Ukraine.

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Services Investment Tours We invite you to come and visit Estonia to see the exceptional investment climate firsthand. The Estonian Investment and Trade Agency organizes investment tours for prospective investors, including on-site contacts and meetings with potential partners, sector representatives, R&D institutions, and government organizations. We will help you understand Estonia so that you can make an informed investment decision. Please contact us for more information.

Investment Consulting and Assistance Services The agency’s specialists provide free, personalized advice and strictly confidential assistance to help you to perform better in establishing your business in Estonia, including: • General information about the Estonian business environment • Identifying investment opportunities in Estonia • Investment project management (recruitment, site selection) • Advice about financing options in Estonia • Negotiations with relevant government authorities PLEASE CONTACT US THROUGH www.investinestonia.com OR EMAIL invest@eas.ee.

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