Small nation’s ICT sector intends to grow tenfold in the next ten years

This small nation’s ICT sector intends to grow tenfold in the next ten years

Based on earlier analysis, we can presume Estonia’s future prosperity will come from the tenfold growth of the ICT sector in the next ten years.

The ICT sector and its importance for Estonia is ever increasing. It has been the most important aspect of Estonia’s economic growth over the last decade. The ICT sector has brought an amazing 30% growth in added value to the total economy.

There were more than 6000 companies operating in the ICT sector in 2019. Estonia is Europe’s fastest growing nation when it comes to establishing technology companies. The growth of our startup companies has been stable at 20–30% for over five years, whether measured by revenue, the number of employees or investments.

Technology companies are providing the most significant increase

According to the data from the Estonian Founders Society, the total turnover of Estonian technology companies in 2020 is one billion dollars – equal to the size of the Estonian agricultural sector. That billion indicates the amount of money clients all over the world have paid for the goods and services provided by our companies.

“Both sectors are serious industries, but the noticeable difference comes from the speed of growth,” they said. “Agriculture was still as large as it is now a few years ago, but startup companies back then were less than half the current size.”

The second factor is the specific nature of the technology sector, where a few smart employees can create a huge amount of value. The 6300 employees or 1% of Estonia’s total workforce in the technology sector make up 2-3% of Estonia’s total economy. The Estonian Founders Society members state that this is the perfect model for a small nation where there is always a shortage of workers – the more prosperity we can cultivate with fewer workers, the better.

Estonian startup companies are world-renowned. In 2020, they were able to raise a record number of 450 million euros from both domestic and foreign investors.

The balance of trade is (meur) increasingly more positive

It is quite evident when looking at the export and import numbers how the ICT sector is beneficial for our economy and our country.

2014 2016 2018 2020

Export 514,7 612,1 916,5 1286,6

Import 292,1 316 469,3 585,9

Balance 222,6 296,2 447,2 700,8

Source: Statistics Estonia

The ICT sector’s significance has increased considerably

We can see considerable growth in three main indicators when compared to 2010. Only gross profit was lower in 2020 compared to 2010.

2010 2012 2014 2016 2018 2020

Average number of persons employed 15 585 18 858 21 356 21 635 25 727 31 561

Revenue, in thousands (euros) 2 082 736 3 303 465 3 685 956 3 458 874 3 519 520 4 193 434 Gross profit (-loss), in thousands (euros) 220 391 208 024 176 919 125 107 138 502 188 518 Net added value, in thousands (euros) 504 352 598 055 655 426 683 329 877 685 1 191 697

The movement is towards a higher added value

In the study entitled “Overview of the ICT sector economy, vocational and higher education and research and development activities, 2020” (IKT valdkonna majanduse, kutse- ja kõrghariduse ning teadus- ja arendustegevuse ülevaade, 2020) it shows that the sector has been on an upward trend for a while, but there has also been a decline in some parameters.

The Education and Youth Board of Estonia commissioned a study which stated that the subsector of programming still has the most positive development, where turnover, export capabilities, added value as well as revenue have all rapidly increased.

There are a few noticeable interesting developments in the ICT manufacturing subsector when compared to 2016 and 2017 – turnover has greatly decreased because there has been less foreign demand.

However, it is still noticeable that despite the decline in turnover, added value and revenue in the ICT manufacturing sector has increased greatly. It is an extremely interesting change and the conductors of this study are glad to report that we are moving in a positive direction – producing higher added value products should be the objective for every company.

Researchers have observed during their examined period that ICT sector companies have seen their added value grow. The growth has been significant when compared to 2012 – 64% in total, while the added value in programming has nearly doubled. Value added per employee has also grown (7% in 2018), as have the number of employees (5%) and overall wages (13%), which has brought along a situation where company profits have decelerated. The most qualified ICT sector companies are mostly large enterprises with between 100–249 employees and an average salary of 2578 euros a month, which is 31% higher than the average salary in that field.

• The ICT sector’s percentage in the number of people employed in business – 5.8% • Added value created in business – 8% and more • All taxes received from

Estonian businesses – 6.6% • Percentage of export – 10.1%

Should that same growth continue, then ...

The sector’s average growth will be 25%. Although it is difficult, keeping up the same pace would mean that more than 50,000 people will work in the technology sector ten years from now. The people working in the sector are hoping for that and working towards that future. That number would represent 10% of all working people in 2030.

The more impressive part of the sector’s plan is the part where IT companies would carry on with the current efficacy and contribute ten billion dollars to the Estonian economy every year. That would be around 30% of Estonia’s GDP.

“This is the long dreamed of knowledge-based economy and export of goods from Estonia’s best and brightest to the world,” says the Estonian Founders Society, which unites the strongest people in Estonia’s IT sector.

Europe has set certain digitalisation objectives

The European Commission must observe the state member countries have reached by creating a sustainable and inclusive digital society. There are eight total targets and the target date for those is 2030. The gauge shows the current situation and the difference that they hope to reach by 2030.

European Commission metric:

20 million ICT specialists Full coverage of populated areas with 5G Full coverage of homes with a gigabit network 75% take-up of cloud, big data and Al by enterprises At least 90% of SMEs with a basic level of digital.. At least 20% market share of EU semiconductors Doubling the number of EU unicorns 100% online provision of key public services Average Current performance Gap to 2030

How does Estonia benefit?

Different studies have shown that one high-paying and directly exporting job contributes to five different jobs in its vicinity. Which means that every programmer, designer, technologist or product manager creates other jobs in restaurants, barbershops, manufacturing, law firms and various other places. Moreover the additional revenue will aid in paying a higher wage to doctors, teachers, firefighters and police officers in the future. It also has a part to play in paying out pensions.

In the interest of developing Estonian science, economy and society as a whole, including information society, it is important to cultivate the capability of Estonian top level ICT research and development, apply it to the interests of Estonian society and economy, while emphasising the introduction of science-based and innovative solutions in all areas.

How will these developments influence jobs in Europe?

McKinsey & Company’s 2017 study “Digitally-enabled automation and artificial intelligence: Shaping the future of work in Europe’s digital front-runners” observed how automation and artificial intelligence are changing the labour needs in various sectors. It is rather likely that more jobs will be created in the fields of ICT, communications and health care service providers. Meanwhile, the construction, travel and tourism, industry and transportation fields require a smaller labour force. It is already evident now and digital technology only accelerates those processes. Therefore, digital innovations may keep the number of jobs in a sector at the same level or increase it. Jobs can mainly be replaced in areas where workers have been brought in from someplace else. Bringing them back to their home country will provide jobs for locals.

Automation will accelerate the change in sector structure

Sector

Share of total employment base, digital frontrunners, midpoint scenario (%)

Employ-

ment 2016

Employ-

ment 2030

Employment

growth yearly

Information and communicators technology (ICT) Education Human health and social services Public Professional services Financial services Other services Trade Utillies Manufacturing Primary Construction Transportation Holers and restaurants

3,7 6,8 5,9

8,8 9,5

16,1 6,6

17 6,9 13,1 13,5 2,9 2,9

5,1

4,9 13,9 13,2 1,1 11,2 2,3 6,2 1 9,8 2 5,4 0,6 0,5 0,5 0,3 0,2 -0,2 -0,3 -0,7 -0,8 -0,8 -0,9

4 4 4

-1,4 3,1 -1,5 Source McKinsey analysis