The gentle allure of Estonia
The southern neighbour attracts Finnish companies, but the drawing powers of the small economy cannot continue indefinitely
By Janne Arola in Tallinn
Stockmann, Seppälä, Coffee House, Hesburger, Rosso...
The names of familiar Finnish companies are swimming before his eyes, as Harri Hakkarainen accelerates his Mercedes towards the Ülemiste shopping centre in Tallinn.
The Kuopio native, who imports massage chairs and children’s entertainment equipment into Estonia, is one of the thousands of Finns who have relocated or expanded their business operations across the Gulf of Finland to Estonia.
Hakkarainen continues to have a company in Kuopio, which pays taxes in Finland.
The expansion to the southern neighbouring country about a year ago was sensible mainly for cost-cutting reasons.
”Freight costs are so much lower. A container [from Southern Finland] to Kuopio costs more than EUR 1,000, but here it costs only a few hundred euros to transport a consignment to the warehouse”, he says.
Hakkarainen’s company imports goods mainly from China and Germany. And as the leasing of storage space in Helsinki is expensive, the transport of chairs and kids’ games equipment to buyers in Southern Finland is considerably cheaper from Tallinn than it is from Kuopio.
Hakkarainen's frustration over the Finnish tax authorities was the last straw that led to his decision to try his luck abroad.
For example he has still not managed to get a decision from the authorities on the rate of VAT levied on massage chairs in Finland.
A binding decision would cost hundreds of euros.
At the same time, in Estonia the bureaucratic hurdle has seemed to be low in many respects: setting up a firm took a few minutes, and electronic services are widespread, making everyday life easy.
Hakkarainen regards it as slightly alarming that within a few months he has received quite a lot of phone calls from Finnish entrepreneurs, who have been interested in his business experiences in Estonia.
”The state authorities should really start mulling over its taxation principles. In practice it is not possible in Finland to fund the growth of a company using cashflow financing”, Hakkarainen swears under his breath.
From the office of Sami Mykkänen, the President and CEO of Incap, there is a magnificent view over Tallinn.
An aircraft is taking off from a runway at Tallinn Airport, which is located just a few hundred metres away.
On the right is the Ülemiste Lake, which is coloured by the afternoon sun.
The Finnish listed company, which has been operating in Estonia for more than 10 years, last Monday opened a factory expansion in Kuressaare on the island of Saaremaa in southwestern Estonia.
This expansion doubled the Estonian production premises of the firm, which manufactures energy-efficient electronic products.
In Finland, the company’s production facilities in Sotkamo and Helsinki have been closed down for cost-cutting reasons.
Today, Incap has more employees in Estonia than in Finland.
The company’s office in Tallinn employs 13 people.
”The airport is right next door, and many other technology companies are located in the same building. We can in fact meet potential new customers in the corridors”, Mykkänen notes.
Mykkänen himself has moved to Tallinn at least for the rest of the year, even though Incap’s head office remains in Finland. Would it not be sensible to move the HQ to Estonia, too?
”We have a lot of operations in Finland, which is why our head office is also in Finland”, the CEO formulates vaguely.
Besides, in India, where Incap has hundreds of employees, being a Finnish company is a great advantage, he continues.
The faster Estonia grows and the more quickly foreign companies become established in the country, the more rapidly they will also face problems, for example a shortage of educated labour and the rapid upward trend in salaries.
”But today these issues do not as yet restrict growth”, Mykkänen says.
Sami Seppänen, the Chairman of the Finnish-Estonian Chamber of Commerce, is a busy man, but he nevertheless finds time to sit down for a short while on a terrace at the port of Tallinn.
Wearing a pink dress shirt, Seppänen regards it as a good thing that the attractiveness of Estonia has led to a debate in Finland on the problems of competitiveness.
”If there is no competitiveness, there is nothing”, Seppänen argues.
And if a company’s prerequisites for operating in Finland cease to exist, it is more sensible to transfer the operations to a less expensive neighbouring country than to shut things down entirely.
However, Seppänen does not believe that the next few years would see any mass escape of Finnish companies southwards across the Gulf of Finland.
”The absolute size of the labour force here [in Estonia] is so small that the free resources will soon have been exhausted”, Seppänen points out.
Finnish industries have long been worried about the fact that thousands of enterprises may move their operations to our southern neighbour, if Finland’s corporate taxation is not eased.
In Estonia, companies’ profits are not liable to taxation before they are paid as dividends to shareholders. In addition, the value added tax is slightly lower than that in Finland, while a flat rate tax of 21 per cent is imposed on earned income.
According to statistics, the transfer of Finnish companies to Estonia has accelerated.
Based on the trade register information, there were 4,069 100% Finnish-owned companies in Estonia at the beginning of the current year, while as recently as the beginning of 2009 the corresponding figure was slightly below 2,800.
”The transfer of Finnish companies poses a threat, but if they expand their operations to Estonia and become international, it will strengthen their competitiveness even in Finland”, says Kimmo Hyrsky, a senior adviser at the Confederation of Finnish Industries, EK.
For example the Finnish real estate company Technopolis, which specialises in leasing office premises, has almost 80,000 square metres of office space in the neighbourhood of Tallinn Airport. They provide premises for 120 enterprises.
At present, Technopolis is building almost 18,000 square metres of new office space. The company says that the aim is to attract as many of their Finnish customers as possible to Tallinn.
At the same time, Director Valdar Liive of Enterprise Estonia - promoting business opportunities in Estonia to Finnish companies - points out that it is not sensible to move across the Gulf of Finland just because of taxation.
”It does not work out so that once a company has been established in Estonia, it can automatically expect to get money flowing into its bank account. If there is no other reason than taxation, it is not worthwhile to move”, Liive argues.
Helsingin Sanomat / First published in print 3.9.2012
Previously in HS International Edition:
Kesko Corporation considers setting up logistics centre in Estonia (3.2.2012)
Estonia challenges Finland´s economic model (13.12.2011)
Finnish Trade Register
Finnish-Estonian Chamber of Commerce