INNOVATION: THE SEARCH FOR ESTONIA'S NOKIA

UNCLAS SECTION 01 OF 03 TALLINN 000359 DEPARTMENT FOR EEB/CBA, EEB/CIP AND EUR/NB COMMERCE FOR ITA LEAH MARKOWITZ HELSINKI FOR SCO BRIAN MCCLEARY SIPDIS E.O. 12958: N/A TAGS: PGOV ECON EINV EN SUBJECT: INNOVATION: THE SEARCH FOR ESTONIA'S NOKIA REF: 07 Tallinn 754 ¶1. (U) SUMMARY: Estonia's government, science parks and private firms are searching for a global brand for Estonia to rival Finland's Nokia. For years a booming economy allowed Estonian companies to coast along, with little incentive to innovate. The recent economic downturn, however, may jolt some entrepreneurs out of complacency. Current obstacles to increased productivity include finding the right mix of incentives to attract global talent, and keeping high-performing math and science students in Estonia. Post has supported events such as the 2008 Baltic Dynamics conference to bring together U.S. and Estonian companies, and help rising stars in the fields of telecomms and biomedical engineering reach a global market. END SUMMARY. ¶2. (U) "Looking for Estonia's Nokia", a challenge issued by then President Meri in 1999, is still a common mantra when talking about the need for innovation. In the past decade, there have been some notable success stories, but surprisingly enough, the forcasted lean economic times ahead may provide even more incentive for innovation. GOOD TIMES FOR ECONOMY = BAD TIMES FOR INNOVATION ¶3. (U) Since 2000, Estonia has enjoyed annual GDP growth over 8 percent. That fact, plus lower labor costs relative to the EU15 countries, has seemingly diminished the motivation for businesses and government to adopt innovative ideas and products. Projections of 1 percent growth for 2008 are forcing a change in strategy now. Inflation is currently more than 10 percent and wage increases have averaged about 17 percent a year since 2006. This has made both the public and private sector think more about reducing wage-related costs and boosting productivity. (NOTE: Estonia has experienced a sharp labor shortage due primarily to negative population growth and some outward migration, which is not expected to abate in the near future. END NOTE) ¶4. (U) Minister of Economy Juhan Parts signed a measure in September to provide EUR 13.4 million to Estonian businesses over the next five years. This money will help to recruit and hire highly skilled staff to research and development positions, thereby raising Estonia's competitiveness. This will add financial backing to what was only a plan on paper in the Ministry's "Knowledge-based Estonia 2007-2013" released last year. (Reftel) Companies can receive the funds for three years to cover up to 50 percent of the salary of newly hired development staff. (Money cannot be used to compensate existing employees.) The European Union is supporting the project. WILL LOOMING RECESSION = A KICK IN THE PANTS? ¶5. (U) President of the American Chamber of Commerce in Estonia (ACCE),Yrjo Ojassar, believes that lean economic times ahead could be good for Estonia's long- term competitiveness. He estimates that the global financial crisis will hit Estonia hardest in summer 2009, but notes it may turn out to be the best thing for spurring Estonian innovation. Likening the sagging GDP figures in Estonia to Finland's slump in the early 1990s, Ojassar noted that Finland was forced to drive productivity through innovation and came out more competitive on the other end. Referring to Tallinn's now-burst real estate bubble, Ojassar observed: "If anybody with capital to invest could put it in real estate and six months later flip it for a 50 percent profit, why would they bother create a new product?" "If a worker could make the same salary in construction as a cabinet minister in government, why get special training and education?" he added. ESTONIA IN THE GLOBAL WAR FOR TALENT ¶6. (U) A key question for Estonian policymakers is how big a role the state should play to promote innovation - especially when the economically liberal GOE has traditionally been reluctant to intervene in the free market. Providing money for highly skilled employees will certainly help, but is that enough? In remarks TALLINN 00000359 002 OF 003 to the 2008 Baltic Dynamics Conference in Tartu last month, President Ilves noted that three necessities to innovation are labor mobility, high level of education and an attractive quality of life. For years, Estonian entrepreneurs have criticized immigration regulations which make it difficult to employ highly- skilled workers from outside the EU. Ilves highlighted U.S. openness to talent from abroad as one of the reasons the U.S. maintains a lead over Europe on innovation. On education, Ilves pointed to the high level of foreign- born math and science PhDs working in the U.S. as an indicator of the importance of maintaining strong primary and secondary education in those fields. Estonia ranked second in Europe and fifth in the world on the OECD test (Pisa) in quantitative and logical reasoning, he added. The challenge policymakers face is how to get students to stay in Estonia. While the GOE can address labor mobility and education, quality of life is trickier. President Ilves acknowledged: "If you were a bright young software developers from say, India, Pakistan or Turkey and could choose between Tartu and Boston - assuming comparable job offers, salary and equally dismal weather - where would you go?" This is the real challenge Estonia faces in the global war for talent. FINDING THE NEXT SKYPE, AND PROMOTING U.S.- ESTONIAN HI TECH COOPERATION ¶7. (SBU) In a sense, Estonia has already found one answer to Nokia - the global voice over internet protocol (VOIP) leader, Skype. The four Estonian software engineers who developed Skype proved Estonia can compete in the world market. To cultivate the next Skype, Enterprise Estonia (EAS),(a GOE-funded organization which allocates EU structural funds for the Ministry of Economy, and promotes Estonian exports) opened an office in Silicon Valley in March ¶2007. However, some Estonian companies are finding it difficult to compete. EAS Director of the San Jose office, Andrus Viirg, told us that Estonian companies have unrealistic expectations about opportunities in Silicon Valley, and their employees have few marketing skills. For example, "Yoga Intelligence", an Estonian developer of innovative office solutions, went bankrupt after failing to find investors in Silicon Valley, and having no alternate business plan. ¶8. (U) Two candidates for the next Estonian success story are "Myoton" and "Now! Innovations". Myoton produces a medical diagnostic device that provides numeric values of muscle tone, elasticity and stiffness. Developed at Tartu University, Myoton has patents in the United States, Japan, and is patented and licensed for use in the European Union. The company's non-invasive muscle injury detection system laboratory was set up prior to the 2008 Olympics at Beijing Sport University, the first laboratory to use the technology in China. The Chinese National Kickboxing, Diving and Gymnastics teams, as well as Estonia's gold-medal discus thrower Gert Kanter have used Myoton's technology. ¶9. (U) Now! Innovations is one of Europe's leading digital permit and mobile payment providers, and responsible in part for Tallinn's role leading 'e- Stonia' in mobile-phone parking payments. The firm's expansion has been rapid. In July, the Belgian telecom company Belgacom bought Mobile-for, which is 28 percent owned by Now! Innovations, and will introduce mobile parking in eight Belgian cities. The company is actively working with private and public partners in Europe, the United States, Latin America and Africa. Their efforts are paying off with U.S. contracts as well. The company recently announced that on October 20, they should start offering their mobile parking service together with the U.S. company Streetsmart Technology in Decatur, GA, outside of Atlanta. They will start in roughly 100 parking lots in Decatur. (NOTE: rather than using mobile-phone SMS for payment, the system will use voice commands. The parking lot management can then monitor payments online. END NOTE) ¶10. (U) COMMENT: A key goal of Embassy Tallinn's MSP is the promotion of economic growth and prosperity - TALLINN 00000359 003 OF 003 with particular emphasis on the high tech sector. We have good contacts with the Enterprise Estonia office in Silicon Valley, and Estonia's major science parks. With 2008 Business Facilitation Investment Funds (BFIF),we brought the CEO of Research Triangle, NC and two experts from the San Jose, CA Market Access Center to give local start-ups insight into how they can move beyond the Baltic region and onto the world stage. They also addressed the 2008 Baltic Dynamics Conference which also had attendees from Russia, Latvia, Lithuania, and Finland. Post will continue to strengthen contacts with government, science and industry groups and employ exchanges with Estonian institutions to encourage innovation and promote bilateral trade and investment. END COMMENT. PHILLIPS