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CASE STUDIES:

Estonia – European MI start-up tiger

Background and facts

   Estonia is a small country by the Baltic Sea, with a population of only about 1.3 million people. Over the last 20 years it has become one of the most advanced and successful information societies in the world. The roots of the Information Society's potential in Estonia can be traced quite deeply into the Soviet era, when the country was one of the scientific centres of the Soviet Empire. The Institute of Cybernetics along with a major centre for research into Artificial Intelligence were created in Estonia. The main focus of tech­nology at the time was naturally military development and manufacturing. This technological heritage is one of the factors that explain the Estonians' receptiveness to advanced technology.

   The whole country is very highly penetrated by high speed internet and mobile networks, including very remote rural areas, the vast of majority of citizens own and use ICT technologies. Estonians across all age groups are accustomed to using the Internet and mobile applications in their everyday lives in relation to public services (e-healthcare, e-banking, e-parking, e-elections, e-tax etc.). Most administrative communication amongst citizens and government is also implemented via the Internet or mobile applications. So Estonians, even the older generation, are a very ICT literate people.

Innovation climate

   The ICT friendly environment is just one of the key factors that in the last few years have generated a large number of successful start-ups of small and medium companies focused on the ICT sector, mainly in mobile appli­cations. Many of them currently cross the Estonian borders and are very successful on the global scene. Skype and Fortumo are just two of the best known brands.

   Estonia's story is a good example of how, little by little, through logical steps and systematic cooperation, the private and public sectors can work together to achieve the established visions successfully. The whole genesis of the Estonian information society development, from the very beginning to the present, including all its constraints, mistakes and problems, could be a great inspiration for other countries which are trying to reach success in implementing similar ICT technologies and services.

   Innovation activities in Estonia are concentrated in the two largest cities: Tallinn and Tartu. Where the engines of innovation are the technological parks: Tehnopol is closely linked to Tallinn University of Technology, and similarly, Tartu Science Park which has links to the University of Tartu. The technological parks provide a supportive environment for innovative business ideas and the interconnection of science and entrepreneurship; which has resulted in an increase of successful ICT companies and start-ups and contributed to an acceleration of their growth.

R & D foundation

   Advanced Research and Development and Innovations (RD&I) in ICT are essential for the permanent growth of the Information Society. Policies such as the "Research and Development and Innovation Strategy" are run by the Ministry of Education, and the Ministry of Economic Affairs and Communi­cations. Advanced RD&I, requires an appropriate amount of expenditure; as Estonian economics and industry relies on ICT, the government raised the total expenditure on Research and Development from 1,5% in 2008 to 1,9% of GDP in 2010. This will be increased to 3% of GDP (1,6% private sector) by 2014.

   The benefits of innovative entrepreneurship are long-term, and forecasts of profitability are not an exact science; therefore, the private sector was not always prepared to take the risk. Initially the state took a key role in sup-porting and motivating enterprises to invest in RD&I. Close and functional Public Private Partnerships in RD&I have developed over the period and now provide the basis of dynamic Estonian ICT development. Although the share of private investments is lower than in more developed countries, such as the USA or neighbouring Finland, it reflects the structure of Estonian economy, which is dominated by small and medium enterprises.

Co-working structure

   Estonia has a fast growing ICT start-up community consisting mainly of young creative and open-minded people (designers, developers, freelancers, start-up founders, entrepreneurs etc.). These people enjoy personal interaction, exchanging their experiences, making new contacts and networking. An example of one of these co-working spaces is the Garage 48 Hub that was opened in Tallinn in 2010 and offers a central place for informal independent co-working, and making new contacts, including from abroad, which is a valuable addition to the local scene.

Strong national ICT policy

   Estonia has built its growth within the mobile application sector on a very strong public ICT agenda including:

• The establishment of an Information Society as a key policy of the new democratic government. This visionary policy is mainly connected with Prime minister Mart Laar (1992-2002), who nurtured the e-society visions through its early years, and current president Toomas Hendrik Ilves (elected in 2006), who is known for his passion for modern technologies.
• the development of the information society in Estonia is a strategic choice with the public sector leading the way in pursuing its principles.
• the information society is developed in a co-ordinated manner in co-operation between the public, private and third sector.
• the public sector is a smart customer, ensuring that in public procurements as much freedom as possible is left for innovative solutions.
• the information society is created for all Estonian residents, whereas particular attention is paid to the integration of social groups with special needs, to regional development and to the strengthening of local self-initiative
• the consistency of the Estonian language and culture is ensured
• the interests of both the creators and the users of intellectual property are taken into account
• the protection of basic rights, personal data and identity must be ensured, and mitigation of non-acceptable risks in information systems must be guaranteed
• activities aimed at the development of the information society are linked to the R&D efforts in Estonia
• the public sector employs the already existing technological solutions (i.e. the ID card, the data exchange layer X-Road) and avoids duplication of IT solutions.

Public infrastructure

   The basic element for the realisation of the Information Society policy in Estonia was to build a digital infrastructure as densely as possible, including in remote rural areas. Wi-Fi is widespread in urban areas. Rapid Wi-Fi con-nection is available from about 1,200 public places. 100% of schools and government organisations, and 75% of homes have a broadband connection. Estonia is completely covered by the 3G mobile network, and the 4G mobi­le network currently covers major cities and is rapidly spreading across the country. The EstWin project was launched in 2011, this aims to bring high speed Internet to rural areas. All major cities are now covered by fibre optic cables, and by 2015 Estonia should have a fully developed fibre-optic trunk network. The vision is that by 2015, 100 Mbps Internet will be in every home.

ICT Education, Awareness and literacy background

   A precondition for the successful implementation of the Information Society vision is to ensure that the public awareness of ICT and ICT literacy should keep up with technological progress. "No users, no Information society". It could be said that the young generation of users is general strongly ICT literate, because they have grown up with these technologies.  ICT use and following current trends in ICT are a natural part of their everyday lives. It does not mean that there is no need for a systematic ICT education for the young. Most ICT educational programs for pupils were initiated by the Tiger Leap foundation. The Tiger Leap programme was started in 1997; it rebuilt the educational system to be compatible with the Information Society. The Proge Tiger project was launched in 2012, which teaches pupils as young as the first grade; coding for mobile and web apps, and website creation. This is done through schools, and hobby clubs. The aim of this project is to support logical and creative thinking, and mathematical skills through practical acti-vity. The potential of this project will only be fully realised when this genera-tion become adults.

   ICT literacy among the older generation is far lower. The rapid developments in ICT and the lack of access to technology, especially in rural areas with no Internet affect them most. In 2001 ten major Estonian companies created the Look@World Foundation in order to increase the number of Internet users. One of their aims was to provide basic computer training for 100,000 persons, and the opening of more than 500 public internet access points (http://www.id.ee). In 2009 the Foundation launched another project called Come Along! Through this program 100,000 people got help and advice for using the Internet and e-services. 35 Computer Clubs across Estonia with were opened following a Microsoft grant. Around 300 instructors and organi-sations took part in the Come Along project, holding free training sessions all over Estonia.

Access to capital

   The Estonian Development Fund and Enterprise Estonia are responsible for Government information and financial support for Entrepreneurs and start-ups in Estonia. However, the main source of investments in the ICT sector is in the private sector. Estonian private investment activity can be dated back to the sale of Skype to eBay in 2005. This created a group of investors who had made millions on their shareholdings and were willing to utilize their experiences and invest their money back into ICT start-up businesses in Es­tonia. However, at that point, Skype was regarded as a one-off and the Estonian ICT market was still disregarded by European and American investors. International capital on a larger scale only started to become available after there had been several waves of successful startups to inspire confidence. During 2012 more than €17 million was invested in Estonian start- ups (Estonian capital contributed €2 million to that total). In the first two months of 2013 alone, over €8 million were invested. This indicates the increased ability of Estonian start-ups to raise capital in this sector. "Estonia is emerging as a centre for start-ups, where people come to from all over the world" (Króót Kilvet, board member of Enterprise Estonia )

Key elements for growth

   Estonia's growth into a nation with an emerging sector within mobile is basically built on two key elements:

Strong national agenda

   The government policy that was introduced in the 90's has played a significant role in building a modern information society but also the fact that the public sector has been acting as a competent buyer of advanced mobile solutions has played a role. The agenda has included:

• Government policy focused on ICT sector
• E-government (M-government)
• Education system focused on ICT literacy
• Widespread of high speed internet and mobile network penetration
• Creation of a well defined innovation system
• Public private partnerships as a way to boost SME:s
• Public private partnerships as a way to boost SME:s

Access to capital

   On an early stage the Estonian government realised that access to capital was a key issue when creating a strong environment for startups within the mobile sector. In the early phase government focused on the emergence of strong domestic investors, but after success stories like Skype the internatio­nal investors have also entered the Estonian market.

Strengths and weaknesses

Strengths

   The strong internal environment for R&D within the field of mobile technolo­gy comes directly from the governmental policy around ICT and the fact that Estonia has ICT development as a key priority. Also, due to success stories, the international reputation of Estonia is very good when it comes to ICT.

   Another strength is that, since Estonia is a small country, it is easier to create links between individual actors, which creates greater dynamics. This is also reflected by the fact that there are a limited number of local players, which makes them forced to link with the global innovation networks.

Weaknesses

   The rapid economic growth of Estonia led by foreign capital is still not sustainable, which is one of the nation's most obvious weaknesses. The rapid growth of foreign capital has also lead to a very rapid development within the ICT sector, which has lead to a shortage of qualified people. This problem is also closely connected with the fact that there is a net migration problem in Estonia; since 2004 the country has lost 5 % of its population. Compared to other regions, that has been studied for this book, the brand Estonia is not strong enough to easily attract workforce to move to the country.

   Even though Estonia has a strong R & D history, the level is still low. The country does not have enough technology management skills in order to both remain the position in the international networks or to develop the bu­siness models of the ICT companies since they are still on a very basic level. This is also connected to the fact that Estonia is a small country and therefor the critical mass of research will be on a lower level compared to countries with larger population.

Challenges

   Estonia is facing a lack of trained IT specialists, most people in the industry have entrepreneurial or management training but no IT training. The edu­cation system and ICT Association have reacted to this by providing courses with a high emphasis on combined IT and management training. The new courses will cover topics like: gaming and mobile broadcasting, which are currently unavailable, and are needed to continue the development of the mobile services industry. In the short term IT companies use IT specialists from Belorussia and Ukraine to bridge this gap.

   The mobile services industry in Estonia has several well-publicised success stories; they along with the shooting stars and the very high number of small start-ups, benefit from the well-developed infrastructure and a very simple administrative system.

   The low living costs in Estonia allow small micro companies of young students and freelancers to start a business with extremely low hurdles. This is a good way for the founder to get into work, but they tend to remain inde­pendent of institutional support and do not look for export opportunities.

   Still, the main challenge for Estonia is how to handle the migration problem. The population of Estonia is decreasing and many of those who move away from the country are highly educated. With the increasing needs from the ICT sector (about 50 000 persons are expected to work in that sector in 2020, compared to about 17 000 today), the main challenge will be to provide the industry with relevant people. This must probably be solved with a refined educational system, but also with labour import from for instance other former east-block countries.

Sustainability and future

   As mentioned before the financial system in Estonia is still not on a sustainable level, leaving the mobile technology and service sector in a vulnerable situation. But with more strong influence from international capital and also with new public incentives this can most probably be solved, also since Estonia is a very small country with the advantages that this means when it comes to implementing public policies.

   Also the migration problem can affect the sustainability of the mobile sector in Estonia, if start-ups discover that there is a lack of talent they will most probably move to other places where access to talent is easier. We can also see a number of Estonian companies moving to the US, but also to for in­stance Berlin, London or Stockholm.

   If the Estonian government can handle these two challenges in a good way, the future for the mobile technology and service sector in Estonia is very bright. The start-up culture is in place, there are working public-private-partnership solutions and the general infrastructure is good. But in order to remain amongst the top regions in Europe, governmental policies needs to be refined and migration issues needs to be solved.

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