Foreign direct investment (FDI) in Estonia

FDI in Figures

Estonia is open to foreign direct investments. According to UNCTAD's 2021 World Investment Report, net FDI inflows stood at USD 3.2 billion in 2020, representing a slight increase from the previous year (USD 3.1 billion), despite the global economic crisis triggered by the Covid-19 pandemic. The total stock of FDI was estimated at USD 34.5 billion in 2020. 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. According to the latest figures from OECD, in the first semester of 2021 FDI inflows to Estonia reached USD 2.26 billion, up by125 % compared to the same period one year earlier.

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, that ranks 18th out of 190 economies in World Bank’s latest Doing Business report (losing two positions compared to the previous edition). Finally, the national government is developing a screening mechanism to adhere to EU Foreign Investment Screening Regulation (n. 2019/452): FDIs by investors from non-EU countries or controlled by them, acquiring a shareholding of 10% or more of the voting rights in the target company, would be assessed.

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.