Global developments influence the productivity of Estonian businesses

The Foresight Centre is proposing four development scenarios of productivity, based on a relevant study. The scenarios take into account the global trends and their impact on Estonian businesses and economic indicators.

Mari Rell, expert of the Foresight Centre, describes Estonia’s economy as open and sensitive to global events, which is why the productivity development scenarios were projected with an eye on the impact of different global trends on Estonia’s economic indicators, international cooperation, as well as the business models and decisions of local businesses. Every scenario also takes into account the main risks and opportunities.

Rell says that developing scenarios could be viewed as the public sector equivalent to the market research conducted by businesses – a way to prepare itself for long-term changes. “The scenarios provide a basis for shaping policies that support the growth of economy and productivity, which alleviates the possible risks and takes on board the challenges that emerge depending on the chosen path,” the expert of the Foresight Centre explained.

The scenario “The World as a Global Marketplace” expects the global economy to continue its trend towards free trade, with long global value chains dominating. “This allows the Estonian businesses to invest in increasing productivity volumes and improve efficiency. When businesses come together in global supply chains, cost-efficiency is crucial because we have to compete with businesses of developing markets as well, and the demand is mostly dictated by the growing middle classes of the developing countries who prefer mass production,” Rell commented.

She sees the current Estonian business and economic policy mainly geared towards the continuation of globalisation and the current consumption patterns; however, protectionism has already gained momentum on the global market, and this must be taken into account when shaping business policy. “The key issue is whether and how we can support Estonian businesses on distant markets if these developments should intensify. Or how can we help the businesses to become aware of new up-and-coming consumer segments who represent a shift in demand,” Rell said.

Another productivity development scenario “Global Economy for a Smart Consumer” expects free trade and changing demand to hand the competitive edge to those countries where economy is more innovative and technology-intensive. “Ageing societies, new generations and changing lifestyles dictate changes in demand. Products and services are more personal and functional, with a smaller footprint – the so-called tailored solutions,” Rell explained. Production technologies also change, production moves closer to consumers, and the supply chains where the parts are produced in Asia, assembled in Eastern Europe and sold in the West will gradually disappear.

The scenario “European Encapsulation, or “A Thicker Glass Ceiling”” predicts the spreading of protectionism in world economy; regions would form blocks and value chains would become regional. Markets are reshuffled, units of manufacturing companies move from USA to Europe and Asia, and leading businesses must change their delivery policies and practices. The main risk is the creation of a so-called “thicker glass ceiling”, or the restoration of the cost advantage of the Estonian sub-contracting producers in a situation where there is no access to cheaper Asian producers; this might cause the partial return of the sub-contracts that have moved out of Eastern Europe or Estonia.

“Although such developments appear to allow the Estonian economy to catch its breath, investments into product development and new technologies will be postponed, which hinders the growth of productivity,” Rell stressed, referring to the results of the study.

The fourth scenario “European Wild West” describes the possible deterioration of the situation in international trade governed by protectionism, trade barriers, and regionalisation of value chains. At the same time, a so-called new type of demand will briskly develop in Europe and particularly in Scandinavia, with new technologies, demographic changes, increased consumer awareness, and change in attitudes supporting its growth. The supply chains that have fed the businesses so far are disintegrating and new ones form according to the dictates of the changed demand environment. If business strategies are not changed, there is a high risk of falling behind the competition; a possible way out is orientation towards the Nordic and Western European markets thanks to the advantage of geographic vicinity which is accentuated by the fragmentation of the international market.

The purpose of the Foresight Centre study project on developments in productivity was to assess the outlooks of the growth of added value over the next 10–15 years, in view of possible developments outside Estonia and the related risks and opportunities.

Full text of the study report and summaries can be read here (in Estonian):

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