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Cablegate: Innovation: The Search for Estonia's Nokia

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RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTL #0359/01 2951309
ZNR UUUUU ZZH
R 211309Z OCT 08
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0861
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHHE/AMEMBASSY HELSINKI 5296
RUCPDOC/DEPT OF COMMERCE WASHDC

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

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