Estonia awaits second wind from America

  • 2004-07-01
  • By Aleksei Gunter
TALLINN - Although investments from the United States have decreased in the last several years, businessmen expect Estonia's membership in Europe's economic and security blocs to provide it with a new burst of interest with overseas investors.

"I think there will be a positive effect on investment from the U.S.A. due to Estonia's joining the EU. This reduces risk in the eyes of investors, which always makes investing more attractive," says Edward A. Burkhardt, chairman of the council of Estonian Railways and CEO of Baltic Railway System, which owns 66 percent of Estonian Railways. "In particular, investors will see the EU as protecting Estonia against mischief on the part of the big neighbor to the east."
Burkhardt adds that although the rule of law was up and running in Estonia before the recent accessions, the perception of membership is important for investors.
In 2001 America was the third largest investor in Estonia, comprising 9 percent of total FDI inflow, which is traditionally dominated by Sweden and Finland. Though it remained third in 2003, the share of U.S. investments fell to 5.5 percent.
Andrus Viirg, senior adviser on foreign investments with Enterprise Estonia, a governmental business promotion agency, says that joining the EU will definitely have a positive effect on both existing projects with U.S. capital and on those yet to come.
"The American companies that are already here - such as Galvex, Velsicol, Stoneridge - now have the status of EU companies and can operate at the single EU market in a simpler way. That is the main plus," says Viirg.
"For U.S. companies thinking about coming to Estonia, the country's EU membership is one of the strongest guarantees," he adds.
Viirg says that the United States offers a number of benefits for entering its market into European companies based on U.S. capital, such as Galvex.
What's more, all other things being equal, the country's attractive tax regime will go far to lure investors away from other countries.
"The zero percent corporate income tax in reinvested profits is very attractive to investors, and I'm glad to see it retained," says Burkhardt. "Estonia and other business-friendly nations are going to have to guard against German-French proposals to unify taxation policy - which, if enacted, would create the same economic stagnation in the accession countries that has bedeviled much of Old Europe for many years."
In his opinion, Estonia and the other acceding countries could teach Germany a thing or two about job- and wealth-creation.
Daniel Bain, chairman of the board of Galvex, the galvanized steel manufacturer, stresses that the impact of accession will not be dramatically different for U.S. investors and other investors.
"EU accession is generally a positive step for all investors because Estonia's EU membership confers a level of legislative and regulatory stability that investors find comforting," says Bain. "Also, as a member of the European market, Estonia can potentially serve tens of millions of consumers rather than just the Estonian population."
Galvex's steel galvanization facility was the largest foreign investment in Estonia in 2001, costing a total of $205 million.
According to Bain, many investors previously did not consider Estonia because their perception was that the country was very small and without a major potential consumer market to serve. Still, the country has been consistently ranked among the most economically open countries by the Heritage Foundation/WSJ.
"Unfortunately, most U.S. investors have never heard of Estonia, and EU accession should raise Estonia's visibility for all investors," says Bain.
He admits, however, that EU membership does confer additional bureaucracy and regulations on businesses, and that the government should work with businesses both to help the transition to the EU regulatory environment and, where possible, to keep the red tape to a minimum.
According to George Lumm, director of the International School of Estonia, which offers education in English to children aged three to 18, schools serve as a barometer of a country's general economic growth.
The International School of Estonia has experienced 8 percent - 10 percent annual-turnover growth in the recent years, which ultimately means that some capital is trickling into Estonia. Once an expert or manager from abroad moves to Estonia, his kids usually join the school.
Burkhardt says that American money, or any money for that matter, will continue to come into Estonia as long as investors feel welcome.
"The only time I have doubted Estonia's commitment to free enterprise and private investment was when [Estonian Railways] was attacked by the Center Party and its allies on political grounds, which was a disgraceful misuse of government power. Thankfully, that government is now history," says Burkhardt.