In order to completely evaluate the attitude of foreign investors in Estonia and the effectiveness of economic reforms and policies, it is important to analyse the role the banking sector plays in motivating and sustaining foreign direct investment. The Estonian banking sector is held in relatively high esteem internationally due to its swift reform and credibl monetary policy. For many businesses, especially smaller ones, the banking sector plays an integral role through providing finance, payments services, foreign exchange operations, and other services. Presented below are results from a recent survey of foreign investors in Estonia that concern the banking sector and other aspects of monetary policy[2] .

Foreign investors were asked how influential the Estonian banking sector was in their decision to invest in Estonia. In 1997, this received an average score of 3.18, indicating between a 'significant' and 'strong' influence[3] . The score from survey was higher in 1996 -- 3.30. In 1997, the banking sector was the third most influential resource factor, down from last year when it was tied for second with ports[4] . Looking at the entire list of sixteen motivating factors, the banking sector has declined in relative importance; in 1996, it ranked fifth overall, but in 1997, it was tenth. However, average scores of eleven factors did increase in 1997. It is also likely that newer investors are less concerned that the banking sector may be weak because the sector has continued to gain international recognition as being credible (see Table 1).

According to the survey, use of Estonian banks is extensive. Out of 71 respondents, 52% do hold deposits in Estonian commercial banks, and 25% of these hold foreign currency deposits. Most of the foreign currency deposits held are less than 50% of total deposits in Estonian banks (see Figure 1). Payments services are the most commonly-used from the banking sector followed by foreign exchange operations. Table 2 contains data on the use of Estonian banks for various operations.

According to foreign investors, the Estonian banking sector has improved since the time of their initial investment. The average score for this question was 3.65, which lies between 'unchanged' (3) and 'a change for the better' (4) [5] . Regarding the possible future policy changes, a devaluation of the kroon was considered to have more of a negative impact on business than a revaluation. These factors received average scores of 2.20 and 2.86, respectively, which lie between 'change for the worse' (2) and 'unchanged' (3).

According to the survey results, the availability of financial resources does not seem to be a great problem in Estonia now. Obtaining project finance was considered to be between a small and moderate problem (2.76), and for exporters, a shortage of financial resources was considered to be, on average, a slight hindrance to export activities (2.10) [6] . However, one difficulty with the interpretation of these results is that it is not clear whether project financing comes from Estonian banks or from other sources. If Finnish firms are removed from the sample under the assumption that project financing is relatively easier for them to obtain through the Tallinn branch of Merita Nordbanken (a large commercial bank with a Finnish partner), results are almost identical (2.77 and 2.22, respectively).

In conclusion, based on the use of the Estonian banking sector by over half of the respondents and the degree to which it was a foreign investment motivational factor, the banking sector is regarded favourably. The banking sector's strengths lie in payments services, foreign exchange services, and leasing services. One weakness of the system is the provision of financing services which are used by less than one third of respondents. Increased availability of local financing will enhance Estonia's appeal to foreign investors.

Terri L. Ziacik

[1] The author, Terri L. Ziacik is a PhD candidate in the Department of Economics at Indiana University, Bloomington, Indiana, USA. She spent ten months (September 1997 - July 1998) in the Central Bank Policy Department of Eesti Pank (the Bank of Estonia) on a Fulbright Grant.
[2] This data comes from the 'Foreign Investor 1997' survey conducted by the author and a group of researchers from University of Tartu led by Urmas Varblane. See 'Motivational Factors Behind Foreign Direct Investment in Estonia: A Comparison of Empirical Studies' by Terri L. Ziacik in this bulletin, on pp 11-23 .
[3] One indicates 'no influence' while five indicates 'a strong influence'. All factors were ranked on a scale of one to five in this survey.
[4] The following factors were listed as resource factors in the survey: workforce, availability of raw materials, the banking sector, system of communications, internal transportation network, and ports.
[5] Five indicates 'a significant change for the better'.
[6] In both instances, five denotes a large problem.