Estonia is regarded as one of the most tech-oriented and digital-friendly countries. Beyond an extensive startup list, it can back those claims with more rigorous data. Future оf IT report, produced by Emerging Europe, a social enterprise and a growth hub focused on Central and Eastern Europe, considered the Estonian IT sector the most competitive out of 28 countries.
Estonia scored 64.43 points out of 100, leading the region in 13 of 47 parameters. It also was at the top in one of the specialized sectors covering the business environment.
Simply speaking, this translates to the status of a perfect destination for ICT business. Estonia has a favourable business environment, regulations, and a broad implementation of online services. It also offers a lot of talent proportionally to the total employment, concludes the report.
Strong foundation
Estonia has almost tripled its GDP since 2000 and reached the €20,435 per capita mark, leaving behind most of its neighbours observed in the study. It’s also a favourite destination for international capital, with €2.7 billion in foreign direct investment registered in 2020.
A strong macroeconomic foundation combines with a long-standing history of producing innovations. Mentioning the Skype phenomena, the Future оf IT report fully acknowledges recent developments in the local startup sector. At more than 1,450 startups, Estonia enjoys Europe’s highest number of startups per capita – and has produced 10 unicorns.
“Estonia has not only had extremely good results in producing unicorns but also in keeping the successful operators active in the community. Many founders or early employees have gone on to start new ventures, have becaome active angel investors, or helped the community in other ways,” says Theodor Kaljo, investment manager at Spring Capital, a Tallinn-based venture capital firm.
Pointing to a recent Dealroom report, Kaljo argues that besides Skype, whose former employees have founded 40 new startups, there are now also stories of Wise, Pipedrive, and other successful technology startups. This has created a virtuous cycle where these new companies have higher knowledge about the startup building playbook and better funding opportunities.
“A unique aspect about Estonian startups is that since the local market is very small, companies are looking at bigger markets from day one. Orienting the company this way and learning from bigger markets has made many Estonian early-stage startups stand out compared to competitors in other markets”, Kaljo notes.
Behind those impressive numbers are years of efforts to digitalize and simplify the regulatory environment. It takes 15 minutes to establish a company in Estonia, and you don’t need to be physically present in the country, thanks to the E-Residency program. In the first half of 2022 alone, Estonia collected €24 million in tax revenue from e-residents. The number, impressive by itself, beats last year’s record by 85%.
Why talent matters
Having a relatively small population, those results can be achieved only by utilizing human capital to the fullest extent. With 91% of the citizens using the internet, most of them also scoring high in computer literacy, Estonia succeeded in luring talent into the ICT sector.
The number of IT students and graduates in Estonia has risen steadily in the last few years, with almost 5,000 people studying computer science and related fields in the universities. Estonia has the highest percentage of ICT graduates in the EU, concluded Digital Economy and Society Index (DESI).
There are indicators that enrollment will only increase as Estonia scores first out of European countries in PISA mathematics tests. PISA measures 15-year-olds’ ability to use reading, mathematics, and science skills to meet real-life challenges. It’s a proxy indicator of later success in the tech industry.
For Estonia, in particular, qualifications translate to high compensation numbers in the ICT sector, beating all the competitors. According to Future оf IT, the average ICT monthly compensation will reach the €2,910 gross mark in 2022, or around 182% of the national average.
Estonia’s leading position in international competitiveness is more than justified and will lure even more foreign investors, argues Joonas Vänto, Director of the Estonian Investment Agency.
“Estonia is strengthening its position as the leading IT destination in Europe, building a robust system of benefits and competitive advantages. The Emerging Europe report proves that we’re on the right track, combining an effective tax system with achievement in education and business cooperation,” Vänto says. “Estonia’s international image is very important for attracting foreign investment, and it’s always great to see the efforts put into building a competitive tech ecosystem being recognized,” he notes.
Joonas Vänto, Director of Invest Estonia
The ICT impact on the economy
With a steady flow of domestic and international talent, the tech industry now employs almost 5% of the total workforce and generates nearly 7% of the country’s GDP.
It reveals another critical stat. GDP contribution numbers consist of exports and domestic spending. The first number indirectly translates to the international competitiveness of the country. Estonia’s ICT exports have been consistently rising for years, seeing a 108% increase between 2015 and 2020.
This growth metric is essential as Estonia focuses on businesses and startups selling their own products instead of taking outsourcing. It allows Estonians to lure more venture capital and grow their companies faster.
“We are also glad to see increased competition from neighbouring countries, as it shows how much emphasis is put on the digital economy nowadays. Despite the global challenges brought by 2022, investment activity in Estonia remains high this year, with new deals announced across all sectors,” Vänto adds.
Emerging Europe’s report says that the number of ICT businesses will only rise with a strong performance in the business environment category. Estonia is leading the region in the fields of intellectual property and cyber security, provides enough support for industry development, and is unmatched in economic competitiveness. The latter claim can also be backed by International Tax Competitiveness Index, where Estonia ranks 1st overall in 2021 for the eighth consecutive year.
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