Estonia's FDI Attraction and Success Factors

The assignment explores Estonia's strong developed status, internal talent, and available resources contributing to its unique position in the European and global economies. It also examines the political economy, legal framework, and risk factors that attract foreign direct investments, highlighting effective rules and regulations that increase growth rates.

Running Head: Globalization
Globalization

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Table of Contents
Introduction......................................................................................................................................2
Political economy in Estonia...........................................................................................................2
Political........................................................................................................................................2
Economic.....................................................................................................................................4
Legal and interdependence...........................................................................................................6
Types of Risks..............................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The Republic of Estonia is a sovereign state situated in Northern Europe. Gulf of Finland and
Finland are neighbour countries for Estonia. Apart from these two countries, Baltic Sea, Latvia,
and Russia also share their borders with Estonia. It is a developed country and in 2011, it was
ranked on top position in terms of fastest growing economy across Europe. Along with this,
Estonia stands on very high position in Human Development Index of United Nations. Estonia
also contributes towards civil liberties, economic freedom and press freedom. In terms of
political economy, Estonia ranks as the high-income economy across Europe in terms of World
Bank (World Bank, 2018). According to International Monetary Fund, per capita of Estonia in
2016 was $29,312. Euro is the official currency for Estonia since January, 2011. Foreign Direct
Investment plays crucial role in the success and growth of Estonia. FDI inflows are high for
Estonia and this is the major factor through which country is maintaining the same rate of
economic development and expansion (Taagepera, 2018).
The report will include certain measures in relation with the country’s economic conditions.
Along with this, political economy in relation with the factors such as legal, political, economic
and interdependence will be discussed. The last part of the report will focus over sundry risks
faced by the country in relation with Foreign Direct Investment.

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Political economy in Estonia
Political
Rate of Foreign Direct Investment in Estonia is high in relation with other European countries
and the same is required to be maintained in order to keep on growing economically. In 2015,
Foreign Direct Investments in Estonia were USD $ 208 million (World Bank, 2018). Estonia
plays effective role as a crucial outsourcer for various multinationals. This has increased the per
capita income, purchasing power of individual and economic conditions of the country. There is
vast number of Estonian subsidiaries who acts as the crucial outsourcing unit for Scandinavian
parent companies (Oatley, 2015). Country is highly developed, its citizens are highly educated as
well as the conditions over there are favourable for business enterprises. This is the major reason
of high foreign direct investments in the country. IT sector, green industries and biotechnological
sector of country acts as the crucial segments through which country has developed vital place in
the Global Competitive Index (Cohn, 2015).
(Source: Trading Economics, 2018).

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Legislative power is being vested in Estonia and the commands of these executive powers are
with prime minister of the country. With the great and effective legislations, country plays
crucial role as being the member of United Nations, being the member of the European Union
and being as the member of NATO (Howarth & Quaglia, 2015). Government of Estonia was
convinced towards the country’s development from its independence, thus, policies of the
government of Estonia are favourable for foreign investments, attracting multinational
corporations and the like factors. Political economy of Estonia is favourable and due to this,
relevancy of the global factors such as trade, production, law, custom and government are
concerned for the national income as well as towards the wealth of citizens (Innes, 2014).
(Source: Trading Economics, 2018).
Economic
Economic condition of Estonia is influenced with the developments of its neighbouring countries
i.e. Finland and Sweden. Before the Second World War, Estonian economy was majorly
dependent over agricultural sector. The same condition was with Finland, per capita income of

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both the countries was almost similar. In late 1980s, Estonia enthused from communism and
formed as the independent capitalist economy in the 1991. After this, country adopted the flat tax
rate system in order to grow and develop its unique position in the global economy. Initially,
26% was the tax rate in Estonia which was reduced to 21% in-between 2005-2008 in some steps.
It was observed that the country gained highest foreign investments per capita in late 1990s in
relation with any country in the Easter and Central Europe. Along with huge investments from
big multinationals and from other foreign countries, country termed as the most emerging
economy across the whole Europe. World Bank rated Estonia as the high-income country and
this was due to good indicators of health, wealth and other aspects. When all was going in the
favour for the country, suddenly country faced the vast financial crisis in 2008 which affected the
Estonian economy in negative manner (Marangos, 2017). In this period, Estonia faced various
negative situations such as increase in the unemployment rate, decrease in the per capita income
of the country and the like. Estonia had the worst year under which unemployment rate rose to
15.6% in May 2009 from 3.9% which was in May 2008.

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(Source: Trading Economics, 2018).
Apart from these obstacles, country overcome from this negative situation and emerged as the
most promising country in Europe. According to a research by CEPII, Estonian economy was
8.0% in 2011 and by the end of 2025; country will match the GDP rate of Finland, Sweden,
Norway and Denmark. In the same research, it has also bene observed that by the end of 2050;
Estonia will be the most productive nation amongst the whole Europe after Luxembourg. This
will help the nation to come and stand in the top five nations across the globe in terms of high
productivity (World Bank, 2018).
Legal and interdependence
Legal system of Estonia is influenced with Germany and it is based on Continental European
civil law model (Tõugu, Tulviste, Kasearu, Talves & Albert, 2018). Legal system of Estonia has
been divided into two parts i.e. private and public. Public law includes international law, criminal
law, and the like. Private law consists of civil and commercial law. Estonian legal framework
supports entrepreneurship and other entrepreneurial projects and ideas. Local entrepreneurs and
foreign investors share same rights and obligations and this helps the investors to earn
satisfactory rate of return. There are no restrictions for foreign investors in relevance with
opening and setting up a business in Estonia. Legal frameworks are same for local as well as for
foreign investors (Verdier & Versteeg, 2015).
Types of Risks
In order to protect the rights of local investors and for protecting investments made in the
country, Estonian government has signed agreements with 31 countries. USA, Germany,
Sweden, Finland, Switzerland and Norway are some of those countries. Estonian government has

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also made agreement over avoiding double taxation with 53 countries and EU is one of them.
With the help of these agreements, certain types of risk factors in relation with economy and
foreign direct investment could easily be avoided (Hauschildt, Gwosc, Netz & Mishra, 2017).
Conclusion
From the aforesaid discussion, it can be concluded that Estonia is a strong developed country.
With the internal talent and available resources, country has made its unique position in the
European economy as well as in the global economy. Apart from this, it can also be concluded
that legal frameworks, political economy, and all other factors have contributed in terms of
attracting foreign direct investments. Country has developed several effective rules and
regulations in relevance with increasing foreign direct investments as well as for increasing the
growth rate of the country. Under this report, several aspects in relation with the Foreign Direct
Investment in Estonia have been discussed. Political economy and several other aspects have
also been discussed in this report with regards to analyse the success factors through which FDI
rate of Estonia is high in comparison to other countries.

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References
Cohn, T. (2015). Global political economy. Routledge.
Hauschildt, K., Gwosc, C., Netz, N., & Mishra, S. (2017). Social and Economic Conditions of
Student Life in Europe: Synopsis of indicators. Eurostudent V 2012-2015. W.
Bertelsmann Verlag.
Howarth, D., & Quaglia, L. (2015). The political economy of the euro area's sovereign debt
crisis: introduction to the special issue of the Review of International Political
Economy. Review of International Political Economy, 22(3), 457-484.
Innes, A. (2014). The political economy of state capture in Central Europe. JCMS: Journal of
Common Market Studies, 52(1), 88-104.
Marangos, J. (Ed.). (2017). Alternative Political Economy Models of Transition: The Russian
and East European Perspective. Routledge.
Oatley, T. (2015). International political economy. Routledge.
Taagepera, R. (2018). Estonia: Return to independence. Routledge.
Tõugu, P., Tulviste, T., Kasearu, K., Talves, K., & Albert, I. (2018). Independence and
Interdependence Values in Changing Societies: A Three-Generation Comparative Study
in Estonia, Germany, and Russia. Studies of Transition States and Societies, 9(2).
Verdier, P. H., & Versteeg, M. (2015). International Law in National Legal Systems: An
Empirical Investigation. American Journal of International Law, 109(3), 514-533.

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World Bank. (2018). GDP of Estonia. Accessed on 3rd March 2018 from
https://data.worldbank.org/country/Estonia