Just how sexy is Estonia for foreign investors?

TALLINN - Most companies with foreign capital operating in Estonia admit they are still attracted by low production costs here, according to a recently released Tartu University survey.

Out of 81 companies questioned during the survey, conducted this spring and released on June 29, most were based in Tallinn and made their first investment in Estonia between 1992 and 1995. Two-thirds of the companies represent either Swedish or Finnish capital.

Urmas Varblane, a professor of international entrepreneurship who helped conduct the survey, said all foreign companies coming into a new market can be divided into four groups.

"The first are those simply looking for a new market for their products or services. There were plenty of these before the Russian crisis of 1998," he said.

Companies looking for various raw materials such as wood and oil make up the second group. Large international corporations that can afford to compete on a global scale and search for suitable conditions to set or move business anywhere represent the third group. Buyers of strategic resources or infrastructure like the Estonian railway make up the fourth.

Piret Karmo, acting head of the Estonian Foreign Investment Agency, said now that a major project like the Estonian railway privatization is winding down, the agency is looking for other projects to attract more money to Estonia.

Karmo mentioned that the lack of a qualified labor force is affecting the decisions of foreign companies wishing to locate production work here. "The survey showed that while IT-related firms are somehow satisfied with local specialists (probably because of the successful work of the IT college), the food and textile companies are not," she said.

Varblane agreed that even if there are vocational schools training carpenters in Estonia, the equipment and knowledge they get is outdated.

"And professional courses for adults that would let them acquire contemporary skills virtually don't exist in Estonia," said Varblane.

That is why many of the foreign companies train key personnel abroad, he added.

The situation may become even worse when the labor force here gets more expensive and will therefore be totally uncompetitive due to a lack of educated labor available at the right price, said Varblane.

The positive aspects of the Estonian business climate at the moment are a cheap labor force and relatively developed infrastructure and communications, according to the survey.

Karmo suggested that the end of Eesti Telefon's fixed-lined market monopoly looked positive to foreign investors.

In a similar survey arranged last year, the respondents said the tax system of the Estonian government was the key factor for bringing money here. Political stability and banking reform were praised in the survey, while bureaucracy still remains a negative feature of business in Estonia.

As of March 31, 2001, Sweden led the top five direct investment sources with 37.6 percent of the total foreign investments in Estonia. Finland, with 28.7 percent, was in second place.

The Italians are trying to pick up, though. Ernesto Preatoni, an Italian businessman living in Tallinn, president of Preatoni Bank and a major shareholder of Pro Kapital Group, brought 179 Italian businessmen to Tallinn on June 29. Half of them, who are shareholders in the Pro Kapital Group, were attending its annual meeting. The tour, however, was designed to introduce the rest to Estonia's business climate.