DigitalEntrepreneurshipMonitor

Tallinn:acityofthefuture

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Tallinn:acityofthefuture

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Like its neighbours Lithuania and Latvia, Estonia is referred as a “Baltic Tiger” given its rapid growth since itsindependence from the Soviet Union in 1991. Tallinn, where more than half of the Estonian population lives, hasmanaged to build a strong digital entrepreneurship culture throughout the years. It is home of many digital start-upsof which some turned out to be great, international success (e.g. Skype). Being a small and sparsely populatedcountry, Estonia has faced major difficulties in attracting foreign investments and talents. It has also witnessed thedeparture of many of its start-ups who were not able to find locally the support and infrastructure they needed tomove to the next stage of their development.

In October 2015, Tallinn was rankedranked 20th out of 35 Europeancities in the European Digital CitiesIndex (EDCI).¹ It was placed higherthan many other cities in SouthernEurope and Central and EasternEurope. Tallinn was also ranked firstfor its connections to the localmarket and fourth for a lifestyle thatpromotes entrepreneurship.²

Tallinnandentrepreneurship

Over the years, Tallinn hasdeveloped a strong digitalentrepreneurship culture. Skype wasdeveloped by a team of Estonians forexample, and since then the countryhas attracted investors’ attentionand inspired other entrepreneurs,especially in the field of technology.

Ericsson has also located its 4Gtechnology innovation and produc-tion operations, and is home toNATO’s Cyber Defence Centre ofExcellence.

However, because Estonia is acountry with a small population,nearly half of which live in Tallinn,the digital development of thecountry and its capital tend tocoincide.

Problemstatement

1The strategy has been built around aclear vision: by 2018, Tallinn aims tobecome an internationally open citythat fosters entrepreneurship andcreativity, while promotingcooperation among enterprisestakeholders and the development ofknowledge and skills.

The three objectives of the Strategy

In achieving this goal, three generalobjectives have been mapped out forthe strategy, which are expected tobe pursued by both the public andprivate sectors by 2018:

- The employment rate for 20 to 64year olds in Tallinn will be 82% (in2012 it was 78.1%), which will marka return to pre-crisis levels, and thisimplies an increase in citizens’engagement;

- Labour productivity per worker inTallinn companies based on netadded value is expected to be at least€30,800 (in 2011 it was €20,300).This means that both companyrevenues and cost effectiveness(excl. labour costs) must increase atthe given average rate, thereby alsoensuring a uniform sustainablecapability to keep the relative(percentage of) growth in wages at asimilar level to the Estonian average;

- Companies are expected to investat least €1.38 billion in fixed assets(€0.91 billion in 2011)

Nevertheless, many factors havecontributed towards making Estoniaand consequently Tallinn a clearmodel for a digital city.

According to many observers, theroots of Tallinn’s entrepreneurshipculture can be found in its history,particularly following itsindependence from the Soviet Union.

In 1991, Estonia started to face thechallenges of a modern societywithout the Eastern Bloc’s support,so it had no choice but to do this themost modern way, using ICT tools, aswell as modern technologies.

Enterprise and Innovation Strategy

Estonia’s technological transfor-mation has moved very quickly. Thisis demonstrated by the fact that inDecember 2013, Tallinn City Counciladopted the Enterprise andInnovation Strategy , which aims tocreate better opportunities for thedevelopment of enterprises andinnovation in Tallinn, andconsequently to increase Tallinn’scompetitiveness.³

In doing so, the strategy determinesthe developmental trends forenterprises and innovation,consolidates the activities of thevarious fields of activity into anintegrated base document, andcreates the preconditions for thelong-term planning of the city’spolicies and activities.

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Tallinn:acityofthefuture

Future opportunities for the city

According to the strategy adopted byTallinn City Council, newopportunities for the city shouldfollow two directions.

The first relates to service industries,which provide approximately 4/5 ofthe added value in Tallinn’s GDP, andits prioritisation requires furtherdevelopment of the city’s strengths.

The second direction concerns thedevelopment of future technologies,which include hardware andsoftware solutions and have greatpotential to improve quality of lifeand make everyday activities moreeffective.

ICT, the fuel of Estonia’s growth

Information and communicationstechnology has proved to beEstonia’s most promising sector inthe last decade. This sector alreadyhas a strong entrepreneurial base, aswell as the know-how and readinessof universities to develop incooperation with businesses. It isconsidered vital for other activitiesas it is a cross-cutting sector thatcould trigger the development ofother fields.

Creative industries:

Another sector that requires newideas and innovations is the creativeindustries. It also supports otherentrepreneurial sectors and plays acrucial role in the creation ofinternationally competitive products.

Health technology and services

Demand for healthcare services isincreasing worldwide with the agingof the population. In Estonia inparticular, the first steps for thedevelopment of healthcare servicesinclude information technologysolutions.

Realised benefitsandnewopportunities

2In this area, Estonia has taken part inthe following international projects:Virtu (virtual elderly care servicesfor the Baltic Sea islands); Dreaming(monitoring of the medical statusand safety of the elderly in theirhomes); and Innocare (improvingquality of life for elderly peopleliving at home and increasing theirsafety with the help of technology).

Financial services

In the context of regional diversity,the European Union’s developmentaltrend for financial services is focusedon more uniform market regulationsand a more open market.

This would provide smaller Estoniancompanies with opportunities toenter the European market. In thisregard, Tallinn is Estonia’s financialcentre and can be further developedthanks to its strong IT base, withinitiatives such as FinanceEstonia.

Transport and logistics

Because of its geographical position,Estonia is an attractive transitcountry. This feature has positiveimpacts on the development of othersectors, such as construction, foodindustry and rolling stock. Currently,Estonia - and Tallinn in particular - isfocusing on the distribution ofpetroleum products, a sector thatcreates greater than average addedvalue.

Mechatronics

Mechatronics is a multi-disciplinarytechnical field that includesmechanical engineering, electronics,and information technology systems,and which has great potential forcreating solutions that improveoperating efficiency.

Opportunities exist in Tallinn for thedevelopment of sector-basedknowledge and skills and for thetesting of new solutions. Forexample, a fully-automated roboticmanufacturing system, which canindependently produce various high-tech components according toprogrammed software without anyhuman intervention, has beeninstalled at the MechatronicumInnovation Centre, located onTallinn’s Tehnopol campus.

Environmental technologies

Technologies in this sector arecurrently playing a crucial role, asTallinn aims to achieve the title ofEuropean Green Capital in 2018.Besides positive environmentalimpacts, the use of environmentaltechnology solutions also providesmonetary savings (e.g. passivehouses), and Estonia, as well asTallinn, could participate ininternational networks for theirdevelopment and play a leading rolein the coordination of these activities

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The City of Tallinn’s TallinnBusiness Incubator (set up in2006) is aimed at start-upentrepreneurs with ambitiousbusiness ideas and exportpotential. It offers advisory,training, networking andinformation services andopportunities to rent office spaceunder favourable conditions.

In addition, it provides help forstrengthening sales in foreignmarkets, helping support theglobalisation of creativeindividuals and companiesthroughout Estonia. The TallinnEnterprise Incubator is made upof three enterprise incubators inTallinn: the Creative Incubator,Ülemiste Business Incubator(specifically serving technology-based companies) and KopliBusiness Incubator.⁶

Tallinnbusinessincubator

Tallinn:acityofthefuture

Many factors have contributed tomaking Estonia and consequentlyTallinn a clear model for a digitalcity.

Firstly, the ICT sector in Estonia wasalready strong and developed in the1990s. In this regard, the fact thatthe country’s telecoms infrastructurewas privatised by the mid-1990s hasbeen considered a factor that hastriggered and further developed theICT businesses and infrastructuresthat are in place today.

Secondly, Estonia’s small scale (just1.3 million people), together with itsbusiness-friendly policymaking andlow levels of red tape, has resulted ina high level of efficiency and lowlevel of bureaucracy.

Driversandobstacles

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Tallinn already had a strongprivatised ICT sector in the 1990s,which has been identified as one ofthe main factors that has triggeredand further developed the ICTbusinesses and infrastructures thatare in place today. The deep financialsupport from the EU after becominga Member State in 2004 has enabledTallinn to strengthen itsdigitalisation process.

However, the city has faced manychallenges in developing its digitalstrategy: as a small country with asmall population and small market,many local start-ups have had noother choice but to move abroadafter reaching their growth stage.

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Drivers

Financial support

Since Estonia joined the EU in May2004, Tallinn and other Estoniancities have received investment andfunding from the EU. Together withan increase in national investmentsand business angels (i.e. EstonianBusiness Angels Network), they havecontributed to the creation of manydigital projects and various kinds oftechnology-related infrastructuresacross Estonia, including its capitalTallinn.

Although most of the opportunitiesand initiatives providing fundingtake place at national level (i.e.Enterprise Estonia and Eesti.ee), themain initiative at local level isPrototon, a fund (set up by TallinnScience Park Tehnopol, Swedbankand Tallinn University).⁴ Its aim is tofinance the development ofprototype products.

Start-ups or private companies canapply to this programme, puttingforward ideas in the field ofelectronics, mechatronics,information and communicationtechnology. This programme hasbeen mentioned as one of the mostsignificant initiatives in the processfor stimulating digitalentrepreneurship by the EuropeanCommission.

Key stakeholders

Garage 48 HUB

Garage 48 HUB is a community-ledco-working space in central Tallinnfor start-ups, creative, tech andentrepreneurial people from Tallinn,Estonia and beyond. Garage48 HUBis the "start-up house" for Estonia’stech and start-up community. Itsmain goal is to facilitate interactionamong the community and offer aplace to meet up, work, learn andrelax, in addition to organisinghackathons.⁵

Start-Up Wise Guys

Start-Up Wise Guys is one of theleading accelerators in Europe. Fromits hub in Tallinn, they connectinnovative and ambitious start-upsfrom around the world to expertsfrom Europe and the US. Founded in2012, it has run five programmesand over 40 companies have beenaccelerated.⁷

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Tallinn:acityofthefuture

Guide for start-up entrepreneurs

To promote and foster localentrepreneurship and encourage anentrepreneurship culture to developin Tallinn, its City EnterpriseDepartment compiled and publisheda “Guide for start-upentrepreneurs.¹⁰

The guide aimed at providinginterested people with all theinformation required on businessdevelopment and access tofundraising, both public and private.

Helped by grants from the city ofTallinn, three start-ups havemanaged to successfully developtheir business: SäästvadEhituslahendused OÜ, ProfessionalWear Group OÜ, Tolm OÜ (companyproviding animation and visualcommunications services).

BerkeleyUniversity4-weekprogramme

A good example of Tallinn’srecognition as a digital-friendlyentrepreneurship context is theBerkeley University 4-week program“Berkeley Startup Bootcamp ”, whichtook place in Tallinn in 2015. Itprovided an intensive, fast-pacedlearning environment, incollaboration with innovationexperts from Microsoft andSamsung, a top UC Berkeleyinstructor, business mentors andserial entrepreneurs.¹¹

Keyinitiatives

In Tallinn, many initiatives have hadsignificant impacts on thedevelopment of its digital strategy.The main ones, driven at nationallevel, concern e-Governmentservices on the one hand and publictransport on the other.

Helsinki-Tallinn:CollaboratingAcrossBorders

The capitals of Estonia and Finlandhave historically had a closerelationship. Estonia’s entry into theEU in 2004 and the development of afast two-hour ferry service have bothfacilitated flows of people andmerchandise between the cities.

Differences, in terms of infra-structures and labour market issues,and similarities, such as ICTstrengths, start-up environment andtechnologically sophisticated publicservices, between the two cities havecreated the basis for cross-bordercollaboration between Helsinki andTallinn.

This cooperation is developing thearea as not only a well-connectedand strategic transport hub, but alsoan entrepreneur-driven hotspot forinnovation. A series of ongoingcross-border initiatives are takingplace.

For example, Start-Smart(cooperative cross-border projectaimed at supporting entrepreneurialattitudes in both countries andaccelerating the emergence ofinnovative enterprises) and theCross-Border Small BusinessEnvironment (project creating anetwork between southern Finnishand Estonian business incubatorswith a view to developing thebusiness activities andcompetitiveness of Finnish andEstonian companies).

e-Residency is a digital serviceprovided by the Estoniangovernment. It is a transnationaldigital identity available toanyone in the world interested inadministering a location-independent business online,enabling secure and convenientdigital services and facilitatecredibility and trust online.⁸

Source: e-Estonia

e-Residency,aworldleadingdigitalservice

X-Road

An interesting initiative is related toe-government and open data.Estonia has developed a specificmechanism, named X-Road, whichlinks public and private databasesinto the country’s digital services.This is what enables Estonia’svarious databases and registers,whether public or private, to link upand operate irrespective of whatindividual platform they use.

Public transport

In terms of public transport, Tallinnhas shown itself to be a digital andsmart city too. This has beenimportant for its cross-bordercooperation, especially with Finland.

Thanks also to the initial EU financialsupport linked to participation in the“MIMOSA” project, as part of theCIVITAS Plus initiative, Tallinn rolledout a new smartcard ticketingsolution in 2009 requiringpassengers to register their tripusing a personal contactless cardwhen entering vehicles.⁹

“Citieshavealottogainfromcross-bordercooperationandthecaseofTallinnisaclearexample”–Tarmo Kalvet,TallinnUniversityofTechnology

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Tallinn:acityofthefuture

Key infrastructures

The creation of many start-upincubators and accelerators, as wellas the presence of two technologicalparks within the city, has facilitatedand sparked the city’s digitaldevelopment.

This is reflected in the figures forstart-ups in the city: Tallinn is hometo more than 500 start-ups, witharound 200 set up every year. 70%of them are considered successful, asthey export to foreign markets, while10% are considered extremelysuccessfully, gaining high visibilityon the global market.

Tallinn Science Park Tehnopol

Tallinn Science Park Tehnopol is ascience and business campus thataims to advance technology-basedentrepreneurship in Estonia, bringscientists and entrepreneurstogether and provide suitableconditions and a suitableenvironment for developingbreakthrough business ideas. Today,there are nearly 200 companies(from start-ups to Skype) operatingon the Tehnopol campus.¹²

Ülemiste City

Tallinn’s digital mission is alsodemonstrated by the creation of asmart, digital city within Tallinn:Ülemiste City.

Launched in 2005, Ülemiste Cityaimed to create the largest centre inthe Baltic States for creativity,innovation and business, charac-terised by its international reach,making the city attractive as aknowledge-based environment forwork, development and living.

Today the city’s 36 hectares host81,000 sq.m of office space for 200companies and 6,000 employees. By2025, the city is expected to include200,000 sq.m of office spaces and125,000 sq.m of apartments, as wellas cultural centres, cafes and parks.

In relation to ICT, Ülemiste Cityoffers digital solutions throughpersonal development and trainingcourses, workshops and seminars ondigital issues and support for localstart-ups.¹³

Lackofasufficientnationalmarketforstart-ups

In becoming a digital city model,Tallinn has faced many obstacles.Since Estonia is a small country witha small population, this means thatits market and talent pool are alsosmall, forcing many start-ups createdin Estonia to move abroad once theyhave reached their growth stage.

Attracting FDI remains challenging

Tallinn has encountered difficultiesrelated to its capacity to attractforeign investment, as well as itsability to attract talents and highlyskilled workers.

In this regard, the Archimedesfoundation has been very active. Thefoundation coordinates nationalinitiatives aimed at improving thecompetitiveness of Estonian highereducation. This includes thecompatriots programme, a scholar-ship schemes for improving mobilityand marketing Estonian highereducation and research abroad.

Difficult access to capital and skills

Tallinn suffers from a low rate ofaccess to capital and competentskills (Tallinn ranks 20th out of 35European cities) as well asknowledge spillover (where Tallinnis ranked 25th). This negativelyaffects the development of start-upsand local enterprises.

For instance, most of the activitiesrelating to innovation are fundedthrough European TerritorialCooperation programmes; privatefunding for these activities remainslow.

Many start-ups created in Tallinnhave experienced problems relatedto its ambitions, which are often toolocal-focused, instead of beinginternational. In addition, weakintellectual property rights and alack of venture capital funding areother difficulties that many localbusinesses have reported.

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Obstacles

Many lessons can be drawn from thecase of Tallinn. The economic crisishas had many negativerepercussions on the city‘sdigitalisation process, which meansthat learning to spend less resourcesin a smarter way has been crucial.

Cooperation, not only between localentrepreneurs, but also on theinternational stage, can benefit acountry’s entire economy, as well asspecific university programmesaiming to create or enhanceentrepreneurial skills.

Internationalambitionsandcooperation

In a global economy that is becomingincreasingly integrated, limitedinternational competencies andentrepreneurs’ weak contactnetworks in foreign markets shouldbe avoided.

Conversely, higher internationalambitions, information exchange andcooperation with other stakeholdersin other countries (e.g. BerkeleyStartup Summer Bootcamp andHelsinki-Tallinn collaboration) areconsidered to be key success factors,particularly in the private sector.

Benefitsofentrepreneurialprogrammes

Implementing programmes aimed atcreating or enhancingentrepreneurial skills can bebeneficial for the country’s overalleconomy.

In the last few years, Tallinn hasfaced concerns about entrepreneurs’limited develop-mental capabilities,i.e. their knowledge and skills, whichare often insufficient forimplementing innovations.

This, together with little informationexchange and cooperation betweenentrepreneurs and enterprisesupport structures, has hinderedsome achievements with the digitaltransformation.

Lessonslearnt

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Tallinn:acityofthefuture

The case of Tallinn hasdemonstrated that the support of bigcompanies is crucial to localbusinesses and start-ups, especiallyin the international arena.

In this regard, the public sectorshould also be engaged in promotinglocal companies abroad, givingvisibility to local businesses, creatingthe conditions for future businessopportunities.

Cross-border cooperation can alsolead to business opportunities, asillustrated by the close collaborationbetween Tallinn and Helsinki.

Publicsectorshouldprovidevisibilityfornationalbusinessesontheinternationalstage

The third recommendation drawnfrom Tallinn’s experience concernsthe role of public administrations. Inbecoming digital, the public sectorshould support local businesses andespecially small and young start-upsas much as possible.

In addition, giving them morevisibility on the international stageand providing them with growingfunding opportunities could fosterthe activities of local businesses, aswell as benefiting the country’sentire economy.

KeyRecommendations

5Repercussionsoftheeconomiccrisisondigitalisation

As in the case of many othercountries, Estonia’s economy hasdeeply changed in the last few yearsas a result of the economic crisis.

Spending resources in a smarter wayis important for ensuring a growingand successful economy, but on theother hand it requires greater effortsto ensure continuing development,achieve a better position in theinternational value chain andincrease wellbeing.

Trustandprivacylaws

There have also been privacy issueslinked to having personal dataonline. While this is true on the onehand, on the other hand Estonianshave deeply embraced the concept ofkeeping data online, as the country’ssystems have seen few serioussecurity breaches that could testpeople’s faith.

Many residents say that onlineservices are more secure andconvenient than traditional methodsof dealing with the government. Forexample, around 98% of people filetheir income taxes online through anautomated system that takes roughlyfive minutes to complete. This hashad many positive repercussionssince it has increased overall taxcompliance, halved the agency’s staffand allowed the government to issuetax refunds within a week.

“Wehavetoprotecteveryone’sprivacy.Trustisabasicprinciple.Ifpeoplecan’ttruste-services,theywillneverusethem”–AndrusAnsip,formerEstonianPrimeMinister&EuropeanCommission’svicepresidentfortheDigitalSingleMarket

“Thepublicsectorshoulddomoretosupportstart-ups,becomingambas-sadors ontheinternationalstage”–MartinGoroško,HeadofStartupIncubator

Supportfrombigcompaniesiscrucialtosmallones

Tallinn’s digital experienceembraces several keyrecommendations, which go beyondthe city’s borders. As mentionedabove, Tallinn has many start-upslooking to conquer internationalmarkets.

In doing so, these businesses facecostly and risky activities.Attempting to export to foreignmarkets with support from bigcompanies or multinationals, ofwhich Estonia has many, couldenable start-ups, particularly smallones, to achieve more successfuloutcomes.

Cross-bordercooperationbenefitsnationaleconomies

Cross-border cooperation can bringpositive results, and this is true forboth the private and public sectors.Tallinn is cooperating closely withthe city of Helsinki and through thiscooperation it has been able toachieve many successes in the fieldof energy, transport and smart citiesintegrated solutions for example.

This is demonstrated by the fact thattravelling between the two regionsis increasingly easy with constantlydecreasing transport costs. Studieshave shown that the Uusimaa(Helsinki) and Harju (Tallinn)regions already form an lyintegrated economic area, withstrong synergies in various sectors.

Thinking about the scalability ofsolutions implemented elsewhereand how they could be replicated issomething that cities and start-upsshould consider, and this has beentrue in the case of Tallinn,particularly with its digitaltransformation path.

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Tallinn:acityofthefuture

KeyRecommendations5Category Role of the stakeholder

Localgovernment

· Invest further in projects aiming to attract international investment· Open up access to public infrastructure for technology and develop projects· Invest more in key infrastructures for a business-friendly environment, such as transport

infrastructures, business offices, university buildings· Give more visibility on the international stage for Estonian start-ups

Universities/Researchcentres

· Attract more students, researchers and talents in the digital field from the rest of Europe andbeyond

· Create the conditions to stimulate an entrepreneurial mind-set in the university· Assess digital skills requirements· Align curricula with industry requirements· Strengthen the digital competence of the university

Businesses · Collaborate with other stakeholders from the digital ecosystem· Traditional companies should seek support for the application of digital opportunities· Experiment in a cooperative environment (e.g. Tehnopol, Garage 48)· Tech companies should support traditional companies with their digitalisation efforts

Incubators/Accelerators

· Connect businesses with relevant stakeholders to enable their digital transformation· Ensure the existence of good digital infrastructures· Act as an advocate to voice the concerns of local firms· Interact and support young entrepreneurs in their entrepreneurial ventures

References¹EuropeanCityDigitalIndex,2015,availableat:https://digitalcityindex.eu/²TallinnHomeforBusiness,2016,availableat:http://www.tallinn.ee/eng/investor/Uudis-Tallinn-placed-20th-in-the-ranking-of-European-digital-cities3 TallinnEnterpriseandInnovation Strategy 2014-2018,availableat:http://www.tallinn.ee/eng/investor/Tallinn-Enterprise-and-Innovation-Strategy-2014-20184 Prototon officialwebpage,availableat:http://prototron.ee/avaleht5 Garage48Hubofficialwebpage,Availableat:http://hub.garage48.org/tallinn6 TallinnBusinessIncubatorofficialwebpage,Availableat:http://inkubaator.tallinn.ee/eng/

7 Start-upWiseGuysofficialwebpage,Availableat:http://startupwiseguys.com/8 E-Estonia,Thedigitalsociety,2016,Availableat:http://e-estonia.com/9Civitas EU,PublictransportticketingsysteminCityofTallinnandHarjucounty,2014,Availableat:http://www.civitas.eu/sites/default/files/tiit_laiksoo_pt_ticketing_system.pdf10 GuideforStart-upentrepreneurs,Tallinnenterpriseboard,Availableathttp://www.tallinn.ee/est/ettevotjale/g4184s6939011 Start-up@Berkeley,BerkeleyStart-upBootCamp,2016,Available at:http://startup.berkeley.edu/12ScienceParkTehnopol officialwebpage,2016,Availableat:http://www.tehnopol.ee/?lang=en13 Ülemiste Cityofficialwebpage,2016,Availableat:http://www.ulemistecity.com/

ThisreportwaspreparedwiththesupportofPwC,CARSA,IDATEandESNaspartoftheDigitalEntrepreneurshipMonitorprojectfortheEuropeanCommission,Directorate-GeneralforInternalMarket,Industry,EntrepreneurshipandSMEs.Editors:LaurentProbst,BertrandPedersen&Olivia-KellyLonkeu,GiovannaGalasso,EnricoGaspari &FionaArnone PwC©- 2016– EuropeanUnion.Allrightsreserved.CertainpartsarelicensedunderconditionstotheEU.ThispublicationisfundedundertheCOSMEprogramme oftheEuropeanUnion.