4/2002 Laura Ehrlich, Ülo Kaasik and Anu Randveer. The impact of Scandinavian economies on Estonia via foreign trade and direct investments

Working Papers of Eesti Pank. No 4, 2002

The paper focuses on the benefits, challenges and risks of the Estonian economy stemming from close relations with its main foreign partners Finland and Sweden, through foreign direct investments and foreign trade. The paper gives a short overview of Finnish and Swedish economies to provide a background for the analysis of the characteristics of FDI and trade flows between Estonia and these countries. As Estonia is a very small and open economy main benefits and challenges are related to it. The authors find that FDI from Finland and Sweden increase the credibility of Estonian economy, but as foreign investment flows are subject to push factors they have the potential of destabilising capital flows, because these two countries make over 70% of FDI into Estonia. The authors also find that the dynamics of Estonian exports to Finland and Sweden (which make more than half of total exports) is generally determined by the demand factors of those countries.

Author's e-mail addresses: lehrlich [at] epbe.ee, ykaasik [at] epbe.ee, Anu.Randveer [at] vpk.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

The authors would like to thank Olivier Basdevant and colleagues from ETLA, whose suggestions were most helpful in improving the paper. Usual disclaimer applies.

Table of Contents

1. Finnish and Swedish Economies
1.1. The Basic Structure of Economy and Industry
1.2. Some Reasons for High-tech Specialisation
1.3. The Effects of Closer Integration with EU Applicant Countries
2. Foreign Direct Investments
2.1. Determinants of Foreign Direct Investments
2.2. Foreign Direct Investment Flows into Estonia
2.2.1. The Structure of Foreign Direct Investment Flows
2.2.2. Geographical Distribution of Foreign Direct Investment Stock
2.3. Foreign Direct Investment flows from Finland
2.4. Foreign direct Investment flows from Sweden
2.5. The Structure of Foreign Direct Investments from Finland and Sweden
3. Foreign Trade
3.1. Sources of International Trade
3.2. The Developments and Determinants of Estonian Foreign Trade with Finland and Sweden

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