High-tech can be highly lucrative for Baltics

TALLINN – The future of foreign direct investment in the Baltics is in the information technology sector, but government red tape and outsiders' perception of corruption are keeping the business from making a boom, or a buck, according to Estonian Investment Agency statistics.

The top two reasons foreigners shy away from investing in the Baltic region are bureaucracy and corruption, the statistics say. However, investors cite the quality of the labor force and the sophisticated communications systems as the main reasons to invest in the three countries.

For the Baltic governments, then, the job is to reduce the red tape and accelerate the state's fight against corruption. And for businesspeople in the region, the task is to concentrate more resources, human and capital, in the technologies industries.

"Information technology is the fastest growing industry in the world, on average," Joakim Helenius, council chairman at Hansa Investments, said at an Organization for Economic Cooperation and Development conference. "The industry here is unable to stand on its own. It needs investment."

The technology industry has not been successfully tapped here because, so far, the mentality of Baltic business people is to keep the industry contained within boundaries, Helenius suggested.

"It cannot stand on its own feet. It is too small. But, if we plug it into a larger market, there is additional growth," Helenius said.

To facilitate the growth of foreign direct investment in the region, the OECD held a conference here last week where Helenius, among other representatives of 16 countries, discussed the past and the future of the Baltic Sea economies.

One of the conclusions of the meeting was that the future of foreign direct investment in the Baltic region is in the information technologies sector, due in large part to the strength of that sector in the Baltic states' Nordic neighbors.

The Scandinavian countries and Finland are considered the Silicon Valley of Europe boasting such industry giants as Nokia and Ericsson. Moreover, Sweden has the second most advanced IT infrastructure in the world, according to a 1999 Forbes survey.

"The industry is heavily taxed and regulated [in Nordic countries,] and in spite of the state, the industry flourishes." Helenius said during a panel discussion. "[The Baltic states] can offer new production bases, lower tax rates and regulate red tape to be less extensive."

The 1998 turnover in the electronics sector in Estonia was about $100 million, according to the Estonian Investment Agency, a relatively small figure compared to the rest of Europe, despite Estonia's high percentage of Internet users and mobile phone subscribers.

More than 15 percent of the Estonian population uses the Internet. Around the same percentage has a cell phone, according to BMF Gallup statistics.

Electronics enterprises employing less than 50 people are the majority in Estonia, accounting for more than half of the industry's total. Large enterprises, more than 300 employees, amount to 28 percent of total turnover in the electronics sector, according to the EIA.

Helenius suggested a controversial view that foreign investors buy out the larger firms in order to update financial management skills and increase export activity.

"You need to bring in know-how and ease restrictive policies in order to allow industry to grow," he said.

Along with easing restrictive policies, for example, visa requirements, border crossings and import tariffs, the state needs to take practical steps to decrease bureaucracy and increase educational opportunities for the labor force.

"We need to make foreign investors feel welcome," said Clyde Kull, deputy under-secretary at the Ministry of Foreign Affairs in Estonia. "Work done for many years to open the door can be spoiled very quickly."

A negative effect of boosting the tech-saviness of Estonian, Latvian and Lithuanian residents, however, is the export of such human resources, or "brain drain," participants said.

"The driving force for development is the human capital here? Skilled labor is an advantage, lack of skilled labor is a constraint," said Vytenis Junevicius, head of the enterprise Bankruptcy Management Department at Lithuania's Ministry of Economic Affairs.

But, Junevicius warned that without proper infrastructure in place in the three countries, the most highly skilled Balts will leave to the more highly paid countries next door.

"The best are leaving," he said. "Why? Fundamentals are not in place. The challenge is to develop human capital and then to develop economic structures to keep them in our countries."

Each of the three Baltic states are pursuing administrative and judicial reform programs as part of their respective paths toward European Union membership.

"The issue is to maintain a positive reputation and to foster it," said Rolf Alter, counselor at the Directorate for Financial, Fiscal and Enterprises affairs at the OECD. "The best government policies will not do if the investor doesn't make the decision to come here."