Publication: Monitor Volume: 7 Issue: 43

The telecommunications sector is often seen as a success story in transition economies. Local mobile phone companies typically benefit from rapid growth in telecommunications markets, and this growth often helps convince foreign investors to make large investments in the sector. Estonia is no exception: In addition to improving the country’s telecommunications network, foreign investment in mobile telephony–chiefly by the Finnish electronics subcontractor Elcoteq, which operates a factory near Tallinn–has boosted industrial and export growth. The Elcoteq plant’s output–about three-quarters of which consists of mobile phone handsets for Ericsson and Nokia (BNS, January 26)–singlehandedly accounts for a quarter of Estonia’s exports. Construction is nearly complete on a second Elcoteq factory near Tallinn which is to produce mobile phone substations and network installations (BNS, January 31). Estonians were therefore shocked when, in late January, Ericsson unexpectedly announced that it was discontinuing production of mobile phones, and would sell off its production facilities to the U.S.-based Flextronic International. Elcoteq also announced that it would stop production of Ericsson phones at its Estonian plants by mid-year.

Ericsson’s announcement stunned Estonian officials, who like to cite Elcoteq as a shining example of their successful FDI policies, which feature a liberal tax structure, an open business environment, favorable geographic location, preferential access to EU markets and–especially–low-paid but highly skilled workers. Still, Ericsson’s decision is unlikely to be a crippling blow to Estonia’s economy. A few days after Ericsson’s original announcement, Elcoteq announced that its cooperation with Ericsson would continue, with a shift in emphasis from mobile phones to mobile systems (BNS, January 31). Elcoteq said that, in the long term, cooperation between Elcoteq and Ericsson would in fact grow and that Elcoteq would take a larger role in providing electronics manufacturing services for Ericsson’s mobile systems products.

Moreover, Finland’s mobile phone components maker PMJ announced that it still planned to open a new US$1.6 million factory in Tallinn in April. PMJ lists Flextronic among its clients (BNS, January 29). And in late January, Sweden’s Autoliv, owner of the Estonian auto safety equipment maker Norma, announced that it was shifting more of its production to Estonia in order to slash wage costs by three-quarters (BNS, January 25). Thanks to these investments, the growth in Estonia’s foreign direct investment (FDI) stock, which reached US$1,500 (in per-capita terms) last year–the highest among Soviet successor states–seems set to continue.