Enterprise support from the state has not increased Estonia’s competitive strength

Toomas Mattson | 8/25/2010 | 10:49 AM

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TALLINN, 25 August 2010 - The National Audit Office has found that the more than seven billion kroons allocated by the state as enterprise support has not made Estonia’s economy more competitive – the low productivity and export capacity of companies, which form the basis of an economy’s competitive advantages, have not improved significantly as a result of the state’s support.

This is a particularly serious problem in the current economic situation, because the standard of life of Estonian people and the extent of its decrease as well as increase depends on the competitive strength of Estonia's economy. The reason why enterprise support is so ineffective is the inflexible and fragmented support system, which has no focus. It tries to approach a myriad of problems at the same time and often fails to take account of the actual needs of companies.
The result of the audit confirms the earlier opinions of economic experts that the state’s enterprise support system has benefited only a few unrelated companies (whose integration with Estonia’s economy is weak), and there has been no noticeable improvement in economic indicators or cooperation between companies. Although the impact of the support may become evident in the longer term, companies have so far expressed a sceptical opinion of the expected impact of the support.

The main reason for the majority of the problems is that the state has no interest in assessing the impact of business policy. The Ministry of Economic Affairs and Communications has no idea whether or not the support, guarantees and loans granted via Enterprise Estonia and KredEx have had any impact on business or what that impact might be. This is compounded by the fact that policies are based on European Union funds (90% of the enterprise support in 2010 is money from the European Union), which for many years have focussed on the distribution of money and reporting on effective percentages of use rather than trying to ascertain whether or not the distributed funds have created any permanent benefits.

The responsibility for planning business policy currently rests with companies, whilst companies, business organisations and professional associations are essentially not included in the creation of business policy and it is well known that most representative organisations are unable to give any complete or quality input into policy creation. The feedback given by company managers shows that companies focus mainly on their own problems and have no comprehensive opinion of the state’s business policy – and they should not even have one, as this is a task of the Ministry of Economic Affairs and Communications.

The National Audit Office believes that Estonia’s business policy requires fundamental changes. Instead of merely distributing the money received from the European Union, the state should integrate the various and currently separate business promotion measures – education, research and development, taxation, business regulation and support – in order to increase the competitive strength of Estonia’s economy. Although it is difficult to imagine that any money other than EU funds will be allocated to business policy in the current economic situation, it is even more important to prepare for the next financial period of the EU, from 2014 to 2020.

Planning for the next business policy should start at the end of 2010 so that any amendments will enter force with the approval of the new business policy in 2013. As a result of the audit, the National Audit Office recommends a long-term action plan, and one of its premises is the launch of working groups based on the areas of activities of companies in the Ministry of Economic Affairs and Communications, which would include existing competencies from Enterprise Estonia, KredEx and professional associations and business associations.

Audit Director of the National Audit Office Tarmo Olgo says that in addition to strengthening its overall financial position, the state also has to pay attention to redesigning the structure of Estonia’s economy and improving its competitive strength so that the next period of recession does not result in employment as high as the current one. In the long run, the welfare of every person living in Estonia depends on the success of the state’s business policy.

The Ministry of Economic Affairs and Communications pledged to take most of the recommendations made by the National Audit Office on board and thanked the National Audit Office for its thorough analytical work, but disagreed with the main conclusions made by the auditors.

The Minister of Finance found that allocating additional funds to the field can only be considered once a comprehensive business policy has been developed on the basis of the proposals made by the National Audit Office, where other measures (taxes, regulative restrictions etc.) are considered for the achievement of business policy objectives in addition to support. The Minister’s opinion is that the fact that other countries support their companies cannot be used to justify the granting of support.

Background
According to the Ministry of Economic Affairs and Communications, the business policy of Estonia has had two main goals since 2004: to make companies more productive; and to increase their export capacity. The state has granted approximately 7.4 billion kroons in business support through Enterprise Estonia (EAS) and the Credit and Export Guarantee Fund (KredEx) for the purpose of increasing the competitive strength of Estonia’s economy.

The audit looked at companies who had received support from 2004 to 2009 to ascertain whether or not the productivity and added value of such companies had increased more quickly compared to companies who had not received any support and whether or not it had influenced the indicators of Estonia’s competitive strength on the whole. In order to give its opinion, the National Audit Office sought the assistance of Statistics Estonia and sent questionnaires to companies that operate in areas of activity of the most added value and export potential in Estonia (which comprise approximately 30% of Estonia’s economy on the basis of sales revenue earned in 2008). 1881 companies responded to the questionnaire. In their responses, they assessed the impact of the support they received on their economic activities, which the National Audit Office and Statistics Estonia compared with the actual economic indicators of the companies and indicators of the competitive strength of companies in the control group.

Situation of Estonia’s economy and observations
The development of the productivity of Estonia’s economy as a whole shows that a rapid increase occurred in the period from 2005 to 2007 (which, however, only comprised 65% of the average increase in the EU-27 at its highest level), but this was mainly caused by an explosive increase in the property market and domestic consumption, not an increase in competitive strength on foreign markets. The growth during the economic boom was nothing but an illusion, which is also confirmed by the fact that the productivity indicators of Estonia have deteriorated in comparison to the average of the EU-27.

Only one-fifth of the companies who received support from the state to increase their productivity noticed any significant impact on their productivity. The support has hardly any impact on the appearance of new exporters. The survey showed that companies did see some impact made by the support aimed at increasing import (16–57%, depending on the support), but the National Audit Office does not see this as sufficient, given that the support is aimed directly at increasing export capacity.

Weak export capacity was evident in Estonia’s economy during the boom and it has decreased even further during recession. The total value of exports in 2009 was lower than in 2006 – the increase reported at present is a result of the significant decrease in 2009 and the low basis for comparison. The few successful Estonian companies who also exported during the boom (e.g. in the processing industry) were the main ones affected by the shrinkage of foreign markets, and these companies are also the ones who are recovering fastest as foreign markets stabilise. In essence, this means that the recent balance in exports and imports is not the result of an increase in the competitive strength of Estonia’s economy, but caused by a drastic drop in domestic consumption.

Although entering large export markets would call for cooperation between companies in a small country, the survey conducted by the National Audit Office shows that Estonian companies see no development resources in cooperation and support has not succeeded in changing this understanding. A few companies operating in the areas of high technology, information and communication technology and bio- and material technology are the main companies who invest in development in Estonia.

The survey conducted by the National Audit Office ascertained that the problems in the different areas of activity in Estonia’s economy are not the same. Companies operating in different areas of activity see different obstacles to boosting their competitive strength, assess the impact of the support paid by the state differently and would like the state to support them in different ways. Knowing these differences is essential for the development of effective measures that guarantee an increase in competitive strength. Being aware of general economic problems is not sufficient to achieve the intended goals.

However, it is important for a small country with an open economy to try to increase exports with higher added value and to take the achievement of this goal seriously.

The auditors are prepared to give additional explanations if required.


Toomas Mattson
Head of the Communication Service of the National Audit Office
+372 51 34 900
+372 640 0777
toomas.mattson@riigikontroll.ee

  • Posted: 8/25/2010 10:49 AM
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