Foreign direct investment (FDI) in Estonia

FDI in Figures

Estonia is open to foreign direct investments. According to UNCTAD's 2022 World Investment Report, net FDI inflows dropped to USD 989 million in 2021, from almost 3.4 billion one year earlier. In the same period, the total stock of FDI was estimated at USD 34.8 billion, around 96.1% of the country’s GDP. According to OECD data, most of the FDI stock is concentrated in the financial and insurance, real estate and manufacturing sectors. The main investor countries are Sweden, Finland, the Netherlands and Lithuania. The latest figures from OECD show that in the first semester of 2022, FDI inflows to Estonia totalled USD 1 billion, in line with the level recorded in the same period one year earlier. The main projects launched over the year included the Neo Performance Materials magnet factory, a EUR 100 million facility to be built in the city of Narva by the rare earth producer Silmet; Norwegian manufacturer of ice-breakers Bifrost Tug setting up an R&D centre; the upgrade of the German company Kühne+Nagel’s IT Centre; and the Finnish electronic manufacturer Incap Electronics’s factory.

As with other small-scale open economies, Estonia requires a constant flow of foreign investment in order to maintain its economic expansion. Estonia is among the leading countries in Eastern and Central Europe regarding FDI per capita. The country has a very pro-business legislative framework and, more broadly, the Estonian society has a business-friendly attitude which is the expression of the country's perfect integration into the northern circuit of production, in which the Estonian subsidiaries often function as outsourcing sites for Scandinavian parent companies. Estonia is highly developed in the FDI-attractive fields of IT, biotechnologies and green industries. A balanced budget (constitutionally protected), a free trade regime, a fully convertible currency, a competitive banking sector and an investment-favourable environment have all contributed to the success of the country, which ranks 24th out of 82 in the Economist Business Environment ranking, as well as 18th out of 132 in the 2022 Global Innovation Index, 14th out of 180 in the Corruption Perception Index. Finally, in January 2023, the Estonian Parliament passed a law establishing a foreign direct investment screening mechanism which will come into effect from September 2023. A foreign investor should therefore make an FDI notification to the Consumer Protection and Technical Regulatory Authority before the respective foreign investment is completed, with the review process - which is mandatory and suspensory – taking place normally within 30 calendar days. The sectors involved include electricity supply, natural gas supply, liquid fuel supply, ensuring the operability of national and local roads, phone and mobile phone service, data transmission service, digital identification and signing, payment services, cash circulation, district heating, water supply and sewerage, companies in which the state has a qualified holding, certain companies in the media and telecommunications sector, certain infrastructure companies, certain companies producing, supplying or providing technical services regarding military and dual-use goods.

What to consider if you invest in Estonia

Strong Points

The main advantages of the country are:

• One of the most liberal economies in the world (it ranked 18th out of 190 in the Doing Business report in 2020).
• Public accounts at equilibrium with a very low level of indebtedness
• A very favourable business environment enriched by independent and stable institutions
• All reinvested corporate profits are exempt from income tax
• A geographical position that places it at the crossroads of Europe and Russia
• Effective international relations strengthened by the country's membership in the European Union.

Weak Points

The main weaknesses of the country are:

• The small size of its domestic market makes it particularly sensitive to external shocks
• High energy dependency on Russia and its imports from Finland and Sweden
• Lower purchasing power than in other countries in the region
• Declining workforce and lack of skilled workers
• Limited ground connections with the rest of the European Union

Government Measures to Motivate or Restrict FDI

In terms of investment, trade, government intervention and property rights, Estonia has developed policies that are amongst the most liberal in Europe. The company tax rate is relatively low compared to other Nordic countries, a fact which is one of the country's strong points. In order to encourage companies and attract foreign direct investment, all reinvested corporate profits are exempt from income tax. In addition, the government has decided for the period 2015-2020 to focus particularly on entrepreneurship and seeks to create a highly competitive environment where it is easy to create and develop its businesses.

According to the World Bank, Estonia is considered one of the most liberal countries in the world. Its 18th place in the Doing Business report in 2020 attests to this.