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DE RUEHTL #0754/01 3271252
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R 231252Z NOV 07
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0346
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 TALLINN 000754 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/NB AND EEB/CBA 
 
E.O. 12958: N/A 
TAGS: ECON BEXP EN
SUBJECT: PUSHING THE ENVELOPE: ESTONIA TRIES TO SPUR INNOVATION 
 
Ref: Tallinn 621 
 
¶1.  (U) SUMMARY: Estonia's relatively lean and dynamic economy 
can still make progress in a number of areas towards spurring 
greater innovation and productivity gains.  Both will be 
necessary to meet labor shortages and move the economy up the 
value chain to a position where it can move out of competition 
with lower-wage markets to be on par with EU-15 economies.  The 
GOE is trying to re-start a series of strategic efforts to meet 
Lisbon Agenda goals by 2014, primarily by supporting more 
research and development in ICT, bio- and nanotechnologies.  Its 
plans to do so, while detailed, are largely on paper so far. 
Real change may ultimately come only in the areas where market 
forces make it inevitable.  Post will look for opportunities to 
support this important goal.  END SUMMARY. 
 
Strong in some areas, stagnant in others... 
------------------------------------------- 
 
¶2.  (U) Estonia is a well-know leader in the IT sector, and sits 
at the forefront of e-commerce and e-government, with nationwide 
wi-fi as well as Europe's highest level of internet usage and 
the first-ever instance of online voting in a national election. 
The country has gotten substantial mileage out of its role in 
developing the internet telephony giant, Skype, and its pro- 
business, free-market tax and investment policies.  However, 
with a tight labor market and rapidly rising wages (20 percent 
growth in 2006), there is significant pressure on the economy to 
increase productivity through innovation and new technologies. 
(Note: Unemployment in Estonia was 4.2 percent as of Q3 2007, 
and lower in the capital, as compared to the EU27 average of 8.2 
percent for 2006.  End Note)  Prime Minister Andrus Ansip and 
numerous business leaders have frequently cited potential gains 
in productivity and innovation as ways to address the labor 
shortage issue (reftel).  Innovative new procedures, in 
particular, would allow the economy to continue growing without 
the politically unpalatable measure of importing large numbers 
of workers from Russia or other non-EU countries, something that 
all leaders of the country have said is not a viable option. 
Estonia's December 23 accession to the EU's Schengen visa area 
may alleviate some of this problem, by eliminating the need for 
foreign workers to obtain a separate Estonian visa. 
Additionally, politicians see innovation as key to shifting 
Estonia's economic footing from a manufacturing and lower value- 
added basis to one of higher-end services and information 
technology.  Estonia recognizes that with wage levels now at 65 
percent of those in the older EU member states, it is no longer 
competitive with China and India in electronics assembly, 
textiles, and other manufacturing jobs even after accounting for 
its geographic proximity to the EU market.  (Note: The 
International Labor Organization's 2006 Key Indicators in the 
Labor Market ranked Estonian labor productivity ahead of Germany 
and Switzerland, and at 67 percent of the U.S. level.  End Note) 
 
Among New EU Members: In the Middle of the Pack 
--------------------------------------------- - 
 
¶3.  (U) Estonia's standing with respect to other EU Member 
States on innovation performance was evaluated in the 2006 
European Innovation Scoreboard (EIS).  While Estonia ranked 
relatively well against the nine other new Member States, it 
fell into the 'Trailing' category overall, ranked below the 
Czech Republic and Slovenia among other new members.  Of the 
five broad areas of innovation performance measured, Estonia did 
best on "Innovation and Entrepreneurship," leading the EU in 
expenditures per capita on Information and Communications 
Technology (ICT).  Estonia was ranked third best in the EU in 
its support for Tertiary Education as one of the "Innovation 
Drivers."  Weak points were on "Applications" such as sales of 
new-to-market products and high-tech exports, reflecting 
comments we have heard locally that recent innovations in 
Estonian business have been more "process" innovations in the 
service sector than "product" innovations in manufacturing. 
 
¶4.  (U) Another major deficiency cited in the 2006 EIS was in 
the area of intellectual property (IP).  The number of Estonia's 
new patents, trademarks and designs lagged far behind the older 
EU states, but roughly in the middle among its peer group the 
ten new members that joined in 2004.  The Estonian Patent Office 
announced July 9th that applications during the first half of the 
year for the international registration of trademarks and 
patents were both higher than for the same period in 2006. 
Nevertheless, some GOE contacts speculate that the overall poor 
showing in the IP category may reflect licensing agreements 
which ultimately give the credit for research done by Estonian 
subsidiaries to their foreign parent companies, instead of to 
Estonia. 
 
A Plan for Action, or just a Plan? 
 
TALLINN 00000754  002 OF 003 
 
 
---------------------------------- 
 
¶5.  (SBU) The Ministry of Economic Affairs and Communication 
(MOE) coordinates the GOE's efforts to set thematic priorities 
and create a supportive environment for innovation.  In a 
conversation with Econoff, MOE's Technology and Innovation 
Policy Division chief, Marika Popp, explained the challenges 
ahead, and the Ministry's strategy for addressing them.  Over 
the next six years, 2007-2013, Estonia will receive more than 
EEK 53 billion (USD 4.5 billion) in EU structural funds.  It 
will be difficult to absorb these funds fully without more 
expertise and capacity in the sciences and engineering, as well 
as R&D.  In order to use this money in ways that both improve 
infrastructure and enhance the economy's competitiveness, 
Estonia will need to attract outside scientists and specialists 
in a range of fields and increase domestic spending on R&D.  By 
their own estimation, the GOE does not expect to meet the Lisbon 
Agenda goal of 3 percent of GDP spent on R&D by 2010, but rather 
by 2014.  (Note: In 2005, the level was 0.94 percent of GDP, 
which was double the 2001 level.  Private sector investment in 
R&D was another 0.42 percent of GDP and is growing quickly.  End 
Note.) 
 
¶6.  (SBU) MOE's Popp acknowledged that the government's first 
national innovation strategy, "Knowledge Based Estonia 2002- 
2006," lacked focus.  The new plan is focused on the three key 
areas of ICT, biotechnologies, and materials sciences; it also 
aims to nearly double the 2004 number of workers in R&D by 2014. 
While both MOE and the Ministry of Education and Research are 
considering measures to attract the necessary workers and 
specialists to Estonia, MOE's Popp admitted that "We have not 
yet outlined [this program's] terms and conditions to such a 
detailed extent."  However, a working group comprising the 
Ministries of Economy, Interior, Education and Foreign Affairs, 
as well as representatives from labor and management, proposed 
changes to the GOE which are expected to be passed into law soon 
(by mid-2008).  These changes would double the number of skilled 
workers that could be admitted to the country, cut the wait time 
by half for their visas, and ease restrictions on low-skilled 
workers - perhaps even those from Russia and Ukraine. 
 
¶7.  (SBU) While the GOE's new innovation strategy, "Knowledge 
Based Estonia 2007-2013" certainly seems focused on getting 
results, and the GOE placed innovation in its new Coalition 
Agreement priorities in April, some observers we spoke to have 
their doubts.  Marje Josing, Director of the Estonian Institute 
of Economic Research, noted that the GOE has been urging the 
private sector for years to move up the production value chain 
and pursue innovations that would reduce dependency on labor and 
increase productivity and competitiveness.  The plans, 
strategies and incentives are all well and good, but in the end 
it is market forces and external pressures that are forcing 
companies to make the hard adjustments, she noted.  Two cases of 
external pressure are the 1998 financial crisis in Russia and 
the 2004 "double tariffs" which Russia imposed after Estonia 
joined the EU, both of which forced Estonian firms to re-orient 
themselves away from the Russian market and towards the EU and 
other Western markets.  Furthermore, the current convergence of 
Estonian wages and production input costs with those of the EU 
will likely be another market-driven incentive to force 
companies to become more productive. 
 
Venture Capital to the Rescue? 
------------------------------ 
 
¶8. (SBU) Dr. Erik Terk of the private think tank, the Estonian 
Institute for Future Studies, feels the GOE needs to do a better 
job of coordinating the efforts of its ministries, citing 
Finland as a positive role model in this regard.  Dr. Terk is on 
the board of one such effort, the new Estonian Development Fund. 
This fund, established by Parliament in 2006, capitalized by the 
GOE with EEK 620 million ($53.7 million USD), and launched in 
April 2007, was modelled on a Finnish example, "Sitra".  The 
Fund aims "... to stimulate and support positive changes in the 
Estonian economy, contributing to modernization ... growth of 
exports, and creation of new jobs requiring high qualification. 
The Development Fund supports ... innovation, emergence of 
innovative business ideas and the growth of entrepreneurship in 
the whole society."  While ICT and biotech are two of the stated 
priorities of the Ministry of Economy, the head of MOE's lead 
investment promotion agency, Enterprise Estonia, recently told 
us that his priorities are bringing more tourism, manufacturing, 
shipping and banking to the country (reftel).  With Enterprise 
Estonia apparently focused on older, mainline industries, 
perhaps the new Estonian Development Fund or other private 
sources will seek out and identify innovative firms and 
individuals in the hi-tech economy. 
 
¶9. (SBU) Comment: While there is no doubt that the Estonian 
 
TALLINN 00000754  003 OF 003 
 
 
business and investment climate fosters innovation and 
entrepreneurship, the economy still faces serious challenges. 
Gaps in the labor force may make it difficult - if not 
impossible - for Estonia to absorb expected EU structural funds. 
Without a real commitment by the GOE to provide more than just 
plans on paper, Estonia will not be able to attract specialists 
in the fields of ICT, bio- and nanotechnology where the GOE 
wants to excel.  That would be a shame because Estonia is 
otherwise well-positioned to continue the remarkable 
transformation of its economy seen in recent years.  Post has 
been active sending Estonian officials for IP training to the 
U.S., but we will look for other areas where we can support 
MOE's goals through exchange programs, training, and sharing of 
expertise.  End Comment. 
 
DECKER