The Ict Cluster In Estonia

Published Date: 02 Nov 2017

E-Estonia is one of the successful stories in the world of Business and technology. Within 13 years, Estonia gained its reputation as a forward-thinker in technology development. Estonia, the country with only 1.29 million in population, is ranked today as the number one in the world of digital media and internet for the past three years. The ICT sector has become one of the most rapidly developing sectors and the IT sector in Estonia has withstood and survived during the Eurozone crisis better than other economic fields. The availability of integrated e-solutions has created an effective, convenient interface between citizens, businesses and governmental organizations. The continuous development of new convenient and internet-based services, not only saves time and expense for both the state and the citizen, it also makes the citizen feel more of a partner in the civic process.

Three main features that explain the success behind the ICT sector in Estonia are: having technical expertise coupled with Innovation, well-developed telecommunications and digital infrastructures and easy requirements for emerging startup opportunities. Nevertheless, it was revealed that there are three strategic issues facing the ICT sector which are: shortage in qualified workforce, huge risk of hacking online security, and protecting domestic market while exporting. In this article we would recommend different short-term and long-term plans that addressed these issues for a better future success.

Overview of Estonia

Introduction

Estonia is situated in the North of Europe and it is bordered by the Baltic Sea, Finland and Russia. It has a territory of 45,227 km2. The capital of Estonia is Tallinn and the official language is Estonian. Its population counts for 1.29 million and the majority of them are Estonian 68% and Russians 24.8% (Estonia - Wikipedia, the free encyclopedia, 2013).

Estonia became a member of the Europe Union in 2004 and joined Eurozone in 2011. It is also a member of the North Atlantic Treaty Organization since 2004 and of the Organization for Economic Co-operation and Development since 2010.

Political and Legal System

The political system of Estonia is a parliamentary representative democratic republic. The parliament, which counts 101 members, is elected by the citizens every four years. The parliament also elects the President of the Republic along with several high officials of the state. Moreover, the government [1] of Estonia has executive power which is pursuant to the Constitution of Estonia. In addition, it is formed by the Prime Minister and it is consisted of 12 [2] ministers. Finally, the Supreme Court is composed of 19 justices and it has supreme juridical power. The Chief justice is nominated by the President of Estonia every nine years.

Overall Economic Performance

Estonia has a market based economy which relies on the advanced IT sector. The openness and the flexibility of Estonia’s economic policy led to a favorable business climate which fosters cost advantages and growth perspectives (A Dynamic Economy - Estonia.eu, 2013). The electronics and the telecommunication sector boosts the economy and the strong trade relations with Finland, Sweden, Germany and Russia act as a catalytic factor for growth (Estonia Economy Profile 2013, 2013).

In the period of economic crisis in Europe, the government in Estonia followed firm fiscal policies which led to balanced budgets and low public debt. It is one of the few European members that show stable economic performance. In the period of 2011 the average growth was 8.3% while the European’s average was 1.5%. In 2012 Estonia’s growth stand for 3.2% while the European’s average is -0.2%. Moreover it is notable that the unemployment rate in Estonia in 2012 declined from 12.5% to 10.2% (Economy in Numbers - Estonia.eu, 2013) against the European’s one which increased from 10.5% to 11.3% (Eurostat, 2013). Furthermore the debt of Estonia’s government as percentage of the GDP in 2012 was 6% in comparison to the Germany’s which stood for 81% (Shostak, 2012).

Macro Performance

Estonia has an increasing GDP [3] since 2009. During that year it was 13.8b € while in 2010: 14.3b €, in 2011: 16.0b € and in 2012: 17.0b €. The real growth rate of GDP is respectively increasing from 3.3% in 2010, 8.3% in 2011 and 3.2% in 2012 (Economy in Numbers - Estonia.eu, 2013). More specifically the GDP per capita [4] in 2011 was 11,905 which ranks Estonia 24th in the European Ranking. It stands 35% below the European average (Eurostat, GDP per capita, 2013). Furthermore, the labor productivity [5] in 2012 reached the level of 11.1 while the European’s average stands for 32.2 (Labour productivity per hour worked - Statistics Estonia, 2013). The annual inflation [6] in Estonia has been declining for the last three years. In 2012 it was 3.73%, in 2011 it was 3.73%, while in 2012 it was 3.44% (Historic inflation Estonia – historic CPI inflation Estonia, 2013). Besides, the currency is Euro (€) since January 2011, when Estonia entered the Eurozone. In addition, fiscal stability or fiscal sustainability seems to be in a very good level as Estonia does not appear to face short term, medium term and long term sustainability challenges (Commission, 2013). This is proved by the low debt ratio which is analyzed in the previous paragraph. Finally, the unemployment rate in Estonia in 2012 was 10.2% [7] while the European’s average was 10.5% (European Commission - Eurostat, 2013). Remarkably in 2012 Estonia experienced the highest decrease in unemployment rate -2.3% throughout Europe.

Micro performance

Estonia presents a deficit in the trade balance which has been increasing the last three years. In 2010 it was -525b €, in 2011 it was -707b € and in 2012 reached -1,212b €. This means that the exports are becoming lesser and lesser than the imports for the last years. However, the FDI position shows increasing numbers beginning with 12,495m € in 2010, becoming 12,928m € in 2011 and finally reaching 14,269m € in 2012 (Economy in Numbers - Estonia.eu, 2013). Besides, the total spending on education in Estonia counts for 4.6 % of the total GDP. Moreover, in Estonia, which is a member of WIPO, there were registered 1540 European patents in 2007 (Erawatch The Estonian Patent Office, 2013). In general Estonia is characterized as innovation follower and is ranked 14th in the European ranking of innovation, slightly lower from the European average (Memo, 2013). For research and development expenditures and patents, Estonia has a remarkable growth. Furthermore, in Estonia there are 6 clusters: Logistics, ICT, Wind Power, HealthTech, Export (of wooden houses) and Paldiski’s Entrepreneurs. The most powerful of the above is the ICT cluster which aims to increase the exports of Estonian ICT products and services. The logistics cluster is a driver for the economy of Estonia and aims to promote the country as a transit node. The wind cluster innovates in the era of the rapidly growing wind power sector. The HealthTech cluster aims to advance the wellbeing of people inside and outside Estonia by applying innovative health technology products and services (Estonian Export Directory, 2013). Finally in the Global Competitiveness Index, Estonia is ranked 34th with a score of 4.64.

Assessment of Overall Business Environment and Policy

The business environment and the government policy in Estonia are characterized as attractive and welcoming respectively. It was ranked 21st out of 185 countries in Doing Business 2013 (Doing Business in Estonia - World Bank Group, n.d.). It is aligned with the European practices of free trade and business. In the Wall Street Journal and Heritage Foundation Estonia ranks 13th out of 177 countries. Moreover its geographic location on the Baltic Sea boosts all economic activities and trade among the markets of Scandinavia, Russia and Europe. There are tight economic relations with Sweden and Finland which heavily invest in the bank system and the telecommunication sector of Estonia. Furthermore, Estonian infrastructure such as ports, airports, power stations, telecommunications and roads are competitive and constantly evolving. Especially in the telecommunication and IT sector it is highly developed. In terms of DSL [8] penetration per telephone line Estonia ranks 10th in the world (A Dynamic Economy - Estonia.eu, 2013).

Moreover Estonia has an excellent performance in the easiness of starting and operating business because of its favorable regulatory system. In the index of Ease of Doing Business in 2012, it is ranked in the 18th place out of 183 countries. Indeed, Estonia has more startups per capita than any other country in Europe (The Many Reasons Estonia Is a Tech Start-Up Nation - Tech Europe - WSJ, 2013). In addition, the economic and the fiscal policy that Estonian’s government conducted the last years aimed to long term economic growth. Their planning is so efficient that although there is a crisis in Europe their GDP continues to increase as it is shown in the preceding paragraph [9] . In addition, government policies were aiming to enhance the inflow of foreign capital and in parallel to support regional development. Besides, it is remarkable that Estonia ranks in the 32nd place out of 174 countries in the index of Transparency International.

Overall the business environment and policy are harmonious and inspire trust to international investors. Moody’s, Standard and Poor’s and Fitch characterize Estonia as outlook stable.

Legacy, Regional position and interaction

Estonia’s culture is a mix of indigenous heritage and incoming traditions of neighbor countries. It has influences from Russian, Swedish, Finnish, German, Baltic and Slavic cultures. The official spoken language is Estonian. The majority of people also speak Russian and English. A small percentage of the population knows German and Finnish. Moreover the majority of Estonian does not have a specific religion. The rest of them are divided to Lutheran and Christian Orthodox as well as Baptists, Roman Catholics and Jehovah’s Witnesses. Nowadays the Estonian society is characterized by its liberalism. Education is free and plays an important role. There are plenty of academic institutions in Estonia from public multidisciplinary or specialized universities to private institutions. Arengufond is an important institution that plays key role in the entrepreneurial spirit of Estonia. Its vision is to make Estonia a state that exploits the opportunities for a breakthrough in the changing and globalized world (Estonian Development Fund - Overview, 2013). Another important initiative is Startup Garage which is student-led and promotes technology-based entrepreneurship. It is transparent that one of the basic elements of Estonian’s culture is entrepreneurship and their strong willingness to succeed. This legacy combined with political leadership and successful stories of businesses like Skype, GrabCad, Transferwise and Fit’s me, results in a favorable environment for business incubation. It is also notable that in 2012 the eventual winner [10] and four of the twenty finalists of Seedcamp [11] were Estonians. Finally, the regional position of Estonia not only contributes to the cultural enhancement but also facilitates the economic interactions with the surrounding countries. Its location on the Baltic Sea, which is a trade cross road, strengthens Estonia’s economic relations with Scandinavia, Russia and Europe.

Policy choices

Macroeconomic policies

In Estonia the successive governments have set several goals to be achieved by 2020 (National Reform Programme "ESTONIA 2020", 2013). One of their main priorities is to upgrade the education system. Policies are taken to improve the quality of the educational system and adjust it to the demographics changes that have been observed during the last years. In addition, policies are conducted to adjust the labor qualification with the needs of the markets. Moreover, the policies have as a goal to boost the international competitiveness of companies. There is an aligned effort to create the right environment which will drive foreign direct investments to sectors that are competitive in exports and offer a higher added value than the traditional ones. Besides, the governments work on creating the right environment which will promote research and development, as well as, innovation in the private sector. In parallel, it is reassured that in the future there will be an adequate supply of specialists for the augmenting needs of the demanding sectors.

Estonian governments also move along with structural changes in the energy sector. Their target is to diminish the energy intensity of the economy. Furthermore, emphasis is given to achieve a positive balance in the governments’ sector budget and finally it is notable that policies are taken in order to reduce the labor’s taxation and profits.

Microeconomic policies

The economic policies of Estonian governments have resulted to big changes in the production structure. The policies were aiming to the creation of a stable environment which promotes the development of business and competitiveness. More specifically Estonia developed the appropriate legal framework and infrastructure to foster a business friendly climate. Nowadays, Estonia is well joined with the rest advanced economies of the European Union. Moreover, the entry or exit to markets in Estonia is smooth. Changes were not only made in the enterprise sector but also in agriculture, energy, financial, transportation and communication sector. Finally, privatization was almost completed by 1998 (Europa.eu).

The ICT Cluster in Estonia

History & Development

E-Estonia is one of the incredible successful stories in the world of Business and technology. "E-Estonia" is a term commonly used to describe Estonia's emergence as one of the most advanced e-societies in the world. Late in the 90’s, when Estonia was considered only as a small country with limited financial resources and population, the main concern for Estonian leaders was to look for ways to push the country forward. They made a smart decision by exploiting the invention of internet and connectivity to create an open e-society out of it.

The story started in 1996 when an Innovative project called Tiger Leap that was created to improve development of Information Technology infrastructure. The aim first was to increase the awareness of the concept of new digital world which allowed educational institutes to have access to computers. The main target of this project is to increase interest in science and technology and to provide help acquire the skills for using modern technology wisely. [12] At the beginning of 1997, 150 schools used e-mailing and had a dial-up connection and 10 schools had a permanent Internet connection. (Technology in Schools, 2013)

The Tiger Leap project is described as a sustainable and healthy lifecycle of IT industry and it is still active up to this date.

Meanwhile in the same decade, the private sector had built up huge interest for high-tech solutions. Many innovative electronic services started to emerge like M-Parking and location-based services.

Estonia is gaining its reputation as a forward-thinker in technology development. This trend continues to develop by creating more e-services and e-solutions (Table 1).

ICT is one of the key technologies that is currently leading the model that started in the beginning of the 1990s. The development of the ICT sector in Estonia has been stable over the last decade. Estonia has undergone large investments in the field of internet and data communications to develop its infrastructure by covering the whole country with fiber optic cables and direct undersea connections to Finland and Sweden and links to Russia and Latvia, guaranteeing high-standard communications.

Today Estonia is ranked, by Freedom House Campaign Group, as the number one in the world of digital media and internet for the past three years. Estonia has become one of the most advanced e-societies in the world. Estonians today are familiar with tens of e-services and use them in their daily routine: e-police, e-elections, e-banking, etc. Since almost all services provided for citizens and businesses are available online, there is no more need for the "e-Prefix" before the name of the service to define its nature. Having electronic services in all life aspects is something solid.

Value Chain

The development of Estonian ICT is described as low-valued to hardware production when compared to being highly-valued in software production. The main activities in ICT manufacturing operations include production of computers, electronic devices, communication devices, commodity devices, and magnetic and optic data carriers. The activities in the service line for the ICT sector are mostly wholesale of communication technology, software publishing, telecommunications, programming, consultation, data processing, web-hosting, website operations, and restoring computers and communication devices. The average annual growth of public funding in ICT R&D has been identified by the Estonian Ministry of Education and Research as 20.3% in the last 3 years. (European Commission, 2013) Funding resources include: targeted financing, grants of the Estonian Science Foundation, ICT Centers of Excellence in research and Estonian language technology program. Moreover, regarding distribution, 95% of the ICT exports are going to 2 main target countries: Sweden and Finland. The value chain is more explained in Figure 1.

Success

In 2012 there were 2600 active companies with 19,000 employees working in the ICT sector for Estonia. The average annual growth of number of ICT researchers in all sectors has been 2.6% in last 3 available years (2008-2010). (Estonia and Ministery of Education and Reserach, 2012) This sector contributes to 5% of total sales in business activities which is equivalent to 2.4 Billion EUR (Invest In Estonia, 2013). It is shared between few large companies, about eight large enterprises that count up to 80% of the ICT Estonian market.

Currently 77% of the total population use internet. The goal is to provide good quality internet access to a 100 Mbps fiber optical network to all Estonian households, enterprises and institutions by 2015. (Table 2) Estonians have an easy access to internet, there are more than 1130 free Wi-Fi Internet all over the country. Rapid Wi-Fi internet connection is available in nearly 1200 public places and also in trains and long distance busses and mostly is free of charge. Estonia is completely covered by 3G digital mobile phone networks. 4G networks cover major city and town areas and are rapidly spreading. (E-Estonia, 2013) Total turnover of the ICT sector has increased rapidly over the past four years. In 2009 the sales totaled 1.6 billion EUR, in 2010 2.0 billion EUR, in 2011 3.0 billion EUR and in 2012 Q1-Q3 2.4 billion EUR (Invest In Estonia, 2013).

Estonia ICT Export Cluster

Estonian ICT Export Cluster is a three-year project (2010-2013) to foster the export of groundbreaking e-solutions that have been developed and implemented in Estonia. The cluster activities are funded by European Structural Funds and Tallinn Enterprise Board. The ICT member’s cluster are listed in figure 3.

Key Activities:

Increase researches and analyses

Focusing on the education sector: improving the current curriculum, creating and increasing foreign interest

Cooperating between marketing and communication activities

Organizing business events and workshops

Providing companies with aggregated data from economic analyses and benchmarking

Arranging study trips and participating in conferences that are relevant for the field

Strengths of the ICT sector in Estonia

The following are some of the main strengths in the structure of ICT cluster in Estonia; which helped in providing profitable business opportunities to the sector specifically and the country in general.

Skilled Labor

Estonia has an international reputation for having technical expertise coupled with innovation. One of the main advantages that qualifies the ICT sector is having highly educated labor being graduated from strong universities and colleges. The labor has the knowledge of different language skills: English, Russian and Finnish. The number of IT-field graduates during the last four years has been ranged from 750-850 annually, which indicates an increasing concentration and interest in this field. (Invest In Estonia, 2013)Second, there is a remarkable ongoing research & development (R&D) projects which makes them the leaders in providing innovative solution, for instance Skype was developed in Estonia. Also, there are several solutions that are only present in Estonia and not yet internationally exported especially in the finance-banking sector.

Well-developed telecommunications and digital infrastructures

Started in the 2000s, investments in the infrastructure of telecommunications grow by far and reached a significant level of 126M invested in 2008. The Estonian country is fully covered by fiber optic cables. In 2012, 66% of all Estonian households leased high-speed broadband Internet services and almost 77% of entities had Internet access. (Invest In Estonia, 2013)Today every citizen has opportunities to employ e-Services and to participate in all aspects of the modern economy and society. Moreover, there has been constantly high productivity in the telecommunications sector. Constant technological improvements through innovation have caused a strong expansion of the ICT sector with a notable increase in international competitiveness.

X-ROAD: The backbone of Estonia

X-Road is a data exchange technical and organizational tool. X-Road is considered as the backbone of E-Estonia for various reasons. First it includes various databases in one location, it allows writing multiple databases, transmitting large data sets and performing searches across multiple databases.

Moreover, X-Road is considered a data exchange layer that provides a secure exchange of Internet-based of the state’s information systems. (Life in E-Estonia) All of the Estonian e-solutions that use multiple databases rely on X-Road. In 2011, X-Road services were used 240,000,000 times. Currently, the X-road provides access to 67 different databases and 687 services. The X-Road's services are used by 392 institutions and companies. (Estonian Information System Authority, 2013)

The secure online environment provided by the X-Road has helped in increasing number of services it provides.

Easy start-up opportunities and low running costs

What differentiates Estonia from other countries is that, it has easy and accessible conditions to build a business: first, it has low running costs which are characterized by the ability to establish and register a starting business for anyone using e-trade solution within few hours. Second, being a country with a strong ICT sector that have a competitive labor costs with an average monthly salary equals to 1,425 EUR, much less than in Sweden and Finland, makes it a highly attractive location for foreign companies. Moreover, Estonia has simple and low taxes. The system of taxation is direct and designed to encourage investors to increase their profits. For instance, the income tax rate is 21% and only applied on profit. (Invest in Estonia, 2013) One of the main features of such a system, is that all these accessible solution are not only designed for Estonians, but also this attracts foreign investors to enter the market through merger or acquisition of a smaller ICT company in Estonia, which has established a knowledge and customer portfolio of e-Services solutions. On the other hand, Estonia is a limited domestic Market, a total population of 1.3 Million makes the market flexible to any sudden changes or new transformation in terms of costs and accessibility.

Cluster Diamond

First of all, factor conditions describe nation’s position in factors of production, such as skilled labor or quality of infrastructure that are necessary for competing in a specific industry. (Figure 4) In context of Estonian ICT cluster, Main production factors are summarized by the high primarily concern in IT skills and substantial foreign direct investments. The high quality information infrastructure with an emerging cooperation between telecommunications operators and universities helped in creating innovative methods and developing new e-solutions. However on the other sides, this cluster is limited with venture capital and seed funding. Moreover, due to the small number of population, there exists only limited number of skilled labor, which limits the expectations of potential investments. (Year Book Estonia, 2010)

The second broad determinant of national competitive advantage is home demand conditions for the industry’s product or service. According to Porter, more demanding local market leads to national advantage. The ICT cluster is characterized by having open-minded domestic users and foreign subcontractors. 73% of the total demand is coming from abroad and not within the country. (Year book Estonia, 2010)

The third determinant, related and supporting industries which is summarized by having significant related industries and clients are banking and telecommunications, governmental structures and manufacturing

Finally, firm strategy, structure and rivalry is the context in which firms are created, organized and managed as well as the nature of domestic rivalry. The cluster is considered to be relatively consolidated ICT industry because the 8 largest firms account for 80% of the sector's turnover. (E-business, 2008) one of the main issues that the cluster is facing is the lack of a viable long term vision and weak strategic planning. For instance, all projects related to this cluster are limited with 2-4 years plans. The cluster is reaching a point of saturation.

E-Services

Siim Sikkut, Information Society adviser to the Government Office of the Republic of Estonia, explains the country’s ICT’s policy: "Successive governments of Estonia have had one basic tenet in their ICT policy: creating the enabling conditions for the information society and developing the ICT sector. The aim has been to reduce the barriers for e-Estonia to advance, empower and stimulate both users and developers at the same time," Sikkut concludes. E-services in Estonia are made to help the citizens, government and the business sector.

Government: Electronic ID

The development e-services in Estonia had shifted the economy for applying E-governance in 2010. The implementation of this course of action is funded from the European Union Structural Funds program "Raising Public Awareness about the Information Society," implemented by the Estonian Informatics Centre. In 2010, the first e-democracy public procurement of this program was carried out. Estonia is known as an open electronic society with best connected national government in the world. In 2012, 51% of population aged between 16 and 74 were using the internet for interaction with public authorities. (Euro state 2012, Exhibit1) to compare this number with other European countries, Estonia is ranked as number 7, after Sweden, Norway, Iceland, Finland, Luxembourg, and France. The implementation of e-Elections: In 2007 Estonia held its and the world's first general Internet election and in 2011 parliamentary elections 24% of all participating voters gave their votes electronically. This e-service was called I-voting. I-Voting is proving highly popular with the Estonian electorate. In the 2011 parliamentary elections, 24.3 percent of voters cast their ballots in this way. Internet voting allows voters to cast their ballots from any internet connected computer, anywhere in the world. The solution is simple, elegant and secure. During a designated prevoting period, the voter logs onto the system using an ID card or Mobile-ID and casts their ballot. The voter’s identity is removed from the ballot before it reaches the National Electoral.

Estonian ID national card system card is the most highly developed system in the world. It is not only any a simple ID that recognizes its holder, it plays as a digital access for all e-services provided by Estonia from business to governmental to personal. It is an electronic proof for an electronic world. This e-service was introduced in 2002.

Business: e-tax, business register

There are currently hundreds of different Estonians e-stores. To create a new e-store is simple, quick and efficient procedure. New traders can now within minutes register a business, pay its taxes online (e-tax service), thanks to the electronic ID card. Using an e-tax, an enterprise can declare its for income tax, social tax, unemployment insurance and contributions to mandatory funded pension. However, according to Eurostat, buying from e-stores is used by 17% of the residents of Estonia. (table1) this percentage is considered very low compared to other European countries. According to Eurostat, approximately 70% of residents or 90% of Internet users make at least one purchase from an e-store per year

E-Banking

Estonians are known for the e-banking services. For ten years now, Estonians have not been required to visit the bank in its physical location. Banks being open online for 24 hours giving them all the service they wish for. A user will log in into his account and make an order with the service he likes. Citizens accustomed to the e-state also demand paperless solutions from the private sector. Currently, 98% of banking transactions are conducted via the internet. Internet banking is safe, since identity is verified via an ID card or a mobile ID system. Both of these are many times more secure than the popular password card system, which Estonia still has in parallel use.

Citizens: e-schools, e-health

E-School

As of 2003, it is possible for all Estonian schools to use the web-based school-home communication environment e-School. The purpose of e-School is to engage parents more actively in the study process, make information on subjects more available to children as well as to parents, and to facilitate the work of teachers and the school management. For example, via e-School one can follow the marks given to students, their absence from classes, the content of lessons, and homework and assessments given to students by teachers at the end of the study period.

E-Health

Estonia provides a global e-citizenship with personalized customer service. All relevant public sector services are available via Internet to citizens and enterprises. All public sector organizations can act and interact without any paper use. Two important e-services provided are the e-school and e-health. As of 2003, all Estonian schools had their own web-based environment that links the school administration with parents at home. The purpose is to engage parents more in the study process; this eventually facilitates the work of teachers and the school management. Moreover the e-health system has improved in different aspects. Registration, test results, appointments, and even a health advice from a doctor are available online.

Strategic issues

Education system

Overview

As the ICT sector keeps developing and growing with the help and support of the ICT cluster, the number of companies will increase as will the workforce needed. Working in the ICT sector requires specific skills and know-how that is acquired through learning.

The ICT sector has become one of the most rapidly developing sectors and the IT sector in Estonia has withstood and survived during the Eurozone crisis better than other economic fields. By the opinion of OECD, the IT sector will be the frontrunner to recover the global economy – both as a sector by itself but also as a supporting tool to other sectors. The growth of the ICT sector and the cluster was possible because firms started to look ICT solutions to improve productivity and efficiency (Arengufond, 2013).

As the ICT sector and cluster keep growing the number of talented and educated people grows as well but the problem is that there are not enough qualified people to answer those needs. The lack of workforce is not only a long-term problem but it is also a current problem as there are more than 1000 specialists missing in the ICT sector. This indicates that the ICT related higher education does not satisfy the needs of the market as already 1000 specialists could be hired on the spot. Nevertheless, the level of the education is good and the students who manage to graduate are well-educated and have a good know-how of the subject, there just are not enough of them.

Middle and high school level

Not having enough workforce because of the higher education system starts from the middle and high schools. Over the years the methods and classes to teach the critical thinking that is fundamental to ICT related fields of study has been the same – mathematics and algebra classes are mostly taught still the same way they were taught 20-30 years ago. Even though the formulas have remained fixed and constant, the world has changed a lot and the ways how people use the learnt knowledge has changed vastly.

During a workday, most of the work is done with the help of computers, as the human’s task is to define the problem or issue for the computer and the calculations and analysis will be done by the computer. This means that students are taught at school how to do the calculations that they will never or will rarely use in their everyday life – leads to lack of motivation to study the mathematics as the subject itself is already hard enough.

The lack of motivation has been deepened by the fact that by the end of high school the students are not required to take a mathematics exam as they can choose the exams by their own preference. In 2012 there were 18233 students taking their final exams for high school and only 4032 chose the mathematics exam as one of the 4 exams that must be taken in order to graduate successfully. It is 22% of all the students – not even every fourth student did pick mathematics exam. This indicates very clearly where the gap in the need and offer of qualified workforce starts (Rudi, 2013).

University level

High dropout level despite of high wages

At the university level one of the biggest problems is the high dropout rate among students in the computer sciences. Even if there were enough students starting with their degree studies by graduation due to the dropout rate there would not be enough students that will be needed by the ICT sector.

Even though after graduation there are great wages waiting for the students in the ICT sector it does not give enough motivation to finish studies. Out of all the workers, 4% are employed in the ICT sector and their wages make up 7% of all of the total wages paid for workers. The wages in ICT sector are higher than the average wage with 1448 Euros being the wage before taxes and the average wage in Estonia is 916 Euros. The 1448 Euros before taxes is even higher than in the financial sector. In terms of competitive wages in the local Estonian market there are no problems and it is even the opposite – there are very attractive wages waiting for the graduates (Statistikaamet, 2013).

Still with the good wages the dropout rate among students who are studying in ICT related fields is remarkably high. Half of the students in computer sciences doing their Bachelor’s studies will not finish their university studies. The dropout rate is more than 50% among Bachelor students which means that the education is not attractive enough. Furthermore, 1/3 of the students who manage to finish their Bachelor studies do not finish their Master level studies on time and 2/3 of the students doing their doctoral studies do not finish on time (Arengufond, Lühiülevaade Eesti IT alasest kõrgharidusest, 2009).

Working during studies

Another problem that contributes to the high dropout rate is the fact that many students are working during their studies. Many students are left with no other choice other than to work as they need the extra income to make ends meet during their study period at the university.

62% of the students in the computer sciences are forced to work to earn money and make their ends meet. This means that the structure and system for social guarantees, scholarships and other financial benefits for students is not working which leads to that the students currently cannot fully focus on studying, but they are forced to work alongside their studies to manage their budget (Liit, 2013).

Popularity and competition

Due to the small number of high school graduates who have chosen to do the mathematics exam there are few applicants for the computer sciences positions as mathematics exam is a prerequisite to applying. Until the year 2000 the number of applicants for computer sciences was rising but after that it has leveled out while the need has been growing constantly. As there are not more students applying for the positions it makes even maintaining the level of higher education hard and improving it harder.

The popularity of ICT related fields of study is below average among university students. For example in 2010, the average number of applications per one position was 3,84 for TUT- Tallinn University of Technology, while the average for ICT related fields of study was only 2,05. Compared to the most popular fields of study such as public economy and business management where there are 16 applications per position the gap is huge- more than 7 times. As there is no competition to start studying in the ICT related fields, it means that there is no way to be able to select the more talented students (Tallinn University of Technology, 2013).

Generational issues – less students

During the beginning of 1990, when Estonia was regaining its independence it triggered a baby boom. Those babies born in the beginning of 1990 have already graduated from university or are in the universities.

The differences are huge compared to different years: in 1988 there were 25060 babies born in Estonia while ten years later 1998 there were 12167 babies born (Küttis, 2012). The difference is more than twofold. This will lead to the fact that in 2015 there will be 50% less students graduating than in 2003.

To further highlight the differences in generations, the current situation is that there is just below 25% young people between the ages of 7-26 making up the whole population in Estonia. By 2017, there will be 45000 youngsters less belonging to that population segment (Postimees, 2013).

This demographic trend exists and has to be taken into consideration. Without the big dropout rate there would already be a shortage of qualified graduates but the demographic trend reinforces the shortage. Currently there are only 500 students graduating each year and the number will decrease in the following years. In 2014 there will be 3 times less students than will be needed by the ICT companies and cluster (Arengufond, Lühiülevaade Eesti IT alasest kõrgharidusest, 2009).

Foreign students and professors

Part of the problem with the education is the lack of foreign students, with more foreign students it will further increase the overall level of education but also with that it will increase the completion among Estonian students who are applying to universities.

The low number of foreign students is due to the low number of curriculums offered in English. There are only 6 curriculums that are completely in English. This does not attract any foreign students and therefore there are only 17 students from foreign countries studying in Estonia in the field of computer sciences. The 17 students make up less than 0,5% of all the students who are doing their studies in the ICT related fields. The Estonian education system just lacks the competitive advantage to attract foreign students as there is low competition and few well established and recognized professors (Estonian Development Fund, 2013).

Even though on the local level the offered education is good and considered high-level, but to compete in the international environment the education has to be diverse – with international students as well as professors. A high proportion of international students and professors will ensure a high standard of the education system in the international markets as well. The low and non-competitive wages are the main reason behind that as the average Estonian professor earns 3-4 times less as their foreign counterparts. On average the Estonian professor earns 2000 euros per month while the counterparts earn 6000-9000 euros (Estonian Development Fund, 2013).

Scientists

To further attract more students to the field of ICT, the number of active scientists needs to grow. The problem is that the number of scientists who are active and are contributing to the field of ICT is very small. Between the years 1979-2004, more than 80% of all the publications and references made were from 10 persons. This means that there are not enough highly educated and capable scientists in the field if computer sciences who would contribute to developing the ICT field and with that attract more students (Postimees, 2013).

Having well-known and recognized scientists is also a factor to be a more attractive country for fellow scientists and also professors. With that a critical mass can be established in order to provide internationally high level of education and produce enough specialists for the ICT cluster.

Conclusion

To sum up, weak competition between students to get into university to study in the ICT related fields, the big dropout rate among them and a small number of foreign students indicate that the ICT related study fields are not attractive enough. Furthermore, this means that the education system currently is not answering the needs of the market.

The level of the ICT education has to be upgraded to a level that is internationally competitive. Having not enough qualified workforce also inhibits the flow of foreign investments into the ICT sector and cluster. According to the statistical office, one job in the ICT sector will produce more than 40000 euros of added value for Estonia. This is more than double than the average of other economic sectors, which clearly indicates the importance of ICT and producing enough workforce for it (Postimees, 2013).

Graph: Overview of the problems leading to lack of workforce

Security

When talking about a topic such as ICT, one main issue comes up: security. Having everything connected and online, isn’t it dangerous?

In 2007, Estonia underwent cyber-attacks from Russia. The Estonian Banks, the national newspapers, the parliament, ministries, all of them were targeted and hacked. Already in 2007 there were cyber-attacks by Russian hackers on the Estonian banks, newspapers, parliament, ministries and broadcasters. (Wikipedia, 2013) In only a few days, the hackers managed to shut down all the strategic websites and software. Even the ATM machine could not work. Using only one botnet, the hackers managed to threaten the National Security of an entire nation.

The only solution found at this moment to stop the attacks was to block every request that were coming from outside the country. As a result, Estonia did not exist online anymore but the bandwidth was safe and the websites were working for Estonian people. The attacks last 2 weeks and there are still a lot of questions regarding who was behind this.

Obviously, this put into questions Estonian cyber-security. They might manage to protect their physical borders, but the virtual border was staying unsafe.

Yet this helped Estonia a lot since now, the country is known for its expertise in cyber-security. After the attacks, a lot of investments were made, aiming at completely secure the country. The first step was to create in 2008 jointly with the NATO (and more particularly with Latvia, Germany, Lithuania, Slovakia, Spain and Italy), the NATO Cooperative Cyber Defence Center of Excellence that is now located in Tallinn. Consisting in one of the Centers of Excellence of the NATO, its agenda is to:

Improve cyber defence interoperability within the NATO Network Enable Capability

Design the doctrine and concept development and their validation,

Enhance information security and cyber defence education, awareness, and training,

Provide cyber defence support for experimentation (including on-site) for experimentation,

Analyze the legal aspects of cyber defence. (Wikipedia, Cooperative Cyber Defence Center of Excellence, 2013)

Recent improvements have also been made among the country. In 2011, the Estonia Informatics Centre became the Estonia Information System’s Authority [13] . Its main goal is to help both private and public sectors to strengthen and to maintain their online security. It acts as an advisor but it is also in charge of handling the security incidents that could happen on the national network.

Another important authority that stands for cyber-security in Estonia is the Department of Critical Information Infrastructure Protection [14] . It is in charge of evaluating the security of Estonian’s IT and to assess the risks related to it. It acts as an adviser since people providing these services are responsible of the security. The authority stands for helping and providing them with the most relevant advices on how to protect efficiently.

Finally, in 2006, was established the Computer Emergency Response Team Estonia [15] . It is in charge of every single incident that could happen in the .ee domain. They play a key role in case of cyber—attacks.

One finally entity to point out here is the result of a close collaboration between the public and the privates sectors. The Cyber Defence League is part of Estonian Ministry of Defence and consists of a volunteer organization. The volunteers are all related to the IT fields but with different levels and fields of expertize: lawyers and managers from the IT companies of the country, banks, IT security experts etc.

Last but not least even the Estonian Police and Border Guard dedicated a whole department to cyber-criminality in order to prevent online criminal activities.

Having everything online and connected can lead to major breakdown if something was to crash or if the country was being attacked. It was proven by the attacks in 2007. These attacks were really strong but the main purpose was to stop these websites from working and to block the country. Yet this also leads to the question about personal information. What about if these attacks had also targeted personal data? Since everything is connected, since you can pay with your ID, since you can vote online etc. what could be the limit? Someone might even end up stealing your identity.

Related to this, managing the personal data is an issue since limits are unclear. Until which limit other people are allowed to access your personal information? Who is allowed to access it? To what extent is your employer/future employer allowed to access it?

All these questions remain. Also one important thing to mention is that most of the entities described here already existed during the attacks. Even if in the end it was handled, it took time and this attack was a small one compared to what could really happen. According to our findings, these attacks were not even that much coordinated and were just apparently coming from individuals (Davis, 2007). It means that if these attacks reached a significant level and were ordered by a government, the end result could be much worse.

Export

Being a small country has advantages and disadvantages. As the territory is small, building the infrastructures, connecting everyone and managing the network is much easier than if we were talking about a country such as China or Russia. Yet nowadays, the ICT sector has reached a critical phase and the local market is not enough anymore. There is a need to export.

Yet when it comes to talk about exporting, one cannot avoid mentioning the issues related to it:

How to protect the domestic market while exporting the ICT cluster? Just as a simple example, talks were hold recently between the minister in charge of ICT of Egypt and the Estonian Ambassador in Egypt about a possible partnership between the two countries related to cyber-criminality; a collaboration that would consist in sharing expertize. (BiztechAfrica, 2013)

Also we already mentioned that Estonia is a small country and so are the companies that could export the ICT cluster. In comparison to other international companies it might be hard to struggle since Estonian companies also lack experience. Related to the size of the company, the lack of human resources for these specific tasks might be an issue too. Moreover, they don’t have any experience in the field of international marketing.

Finally, the lack of financial resources also constitutes a problem since it requires a lot to export the cluster.

As we can see here, these are general issues that need to be addressed at a higher level than at a company level. As already implemented for security issues, partnerships between private and public sectors could be the solution to solve the problem. There is a clear lack of cooperation between the Estonian companies. Aiming at reinforcing them, a demo center [16] has been created. It is directed to support export and to create a Network that will strengthen Estonian ICT companies and that will facilitate the exporting.

Yet there are risks or barriers related to exporting the cluster:

The first one is related to the crisis. Because of it, most countries prefer to rely on themselves and on their own resources rather than taking them from abroad. Local enterprises will be favored. That constitutes a high risk.

More generally and even without the crisis, foreign countries might adopt a protectionist behavior which would prevent the ICT cluster to enter these new markets. Yet as not all the countries are so closed, we could consider the risk as medium.

One small risk that still remains is also the fact that maybe the targeted countries don’t have the right salespeople.

Estonian state-owned ICT solutions intellectual property cannot be used for export of goods and services.

Microsoft and Ericsson’s local offices are not motivated to assist the activities of the cluster.

Conclusion

The strategic issues Estonia is facing or will face in the future are partly caused by the small size of Estonian country. The local markets are small and everything is small scaled. This leads to little available resources in terms of finances and workforce.

The central issue is the lack of talented workforce with the qualified skills to work in the companies and organizations belonging to the ICT cluster. The problem is caused by the education system which is not producing enough graduates. It is not attractive enough to drive the competition between students and with that the overall level is low. Not only the education system is not competitive enough but the lack of workforce will be enhanced by the generational differences as in near future there will be much less students.

As the ICT cluster has developed throughout the years, the previously set long-term strategies and goals have been already reached or are just being completed. As the entire infrastructure has almost been developed, now it is time to focus on the development of services in different fields: e-healthcare, e-education, e-transportation and e-energy. The issue now is to develop a long-term strategy making the focus points these features in the ICT cluster. (E-Estonia, 2013)

For the ICT cluster to continue to be successful these issues must be faced in order to ensure sustainable competitive advantage.

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