INDUSTRY AND SUPPORT FOR INDUSTRIAL DEVELOPMENT IN ESTONIA. FEASIBILITY OF THE SCHEME “SUPPORT FOR INDUSTRIAL INFRASTRUCTURE DEVELOPMENT”

Jussi S. Jauhiainen

30 September, 2002

CONTENTS

Abstract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1

1. Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3

1.1. Aim of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
1.2. Development of industry in the OECD countries and Estonia . . . . . . . . . . .	5
1.3. Contemporary aspects of industrial development and location . . . . . . . . . .	9

2. Industry and industrial areas in Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	12

2.1. Regional development and industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
2.2. Regional specialisation of industry in Estonia and industrial regions . . . . . .	14

3. Industrial policy in Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24

3.1. Harmonisation of the Estonian industrial policy with the European Union . .	23
3.2. National policy for industry . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . .	23

4. Need for industrial parks and support for industrial infrastructure in Estonia . .	27

4.1. Industrial parks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
4.2. Gaps in industrial parks and industrial infrastructure in Estonia . . . . . . . . . .	27
4.3. Case of Tapa industrial park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	34

5. Feasibility of the Grant Scheme “Support for Industrial Infrastructure 
Development”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .	36

5.1. Scheme objectives, funding, timetable and expected outcomes . . . . . . . . .	36
5.2. Project organisation, beneficiaries, and asset owners . . . . . . . . . . . . . . . . . .	39
5.3. Scheme budget, project financial and implementation organisation . . . . . . .	39

6.  Conclusions and proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41

7.  References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42

ABSTRACT

Title: INDUSTRY AND SUPPORT FOR INDUSTRIAL DEVELOPMENT IN ESTONIA. FEASIBILITY OF THE SCHEME “SUPPORT FOR INDUSTRIAL INFRASTRUCTURE DEVELOPMENT”

Author: Jussi S. Jauhiainen
Date: 30 September, 2002

The first chapter presents the aims of the report and the contemporary industrial trends in the OECD countries and Estonia. The second chapter analyses the Estonian regional industrial dynamics. The third chapter presents the links between European Union industrial policies and Estonian strategies and results for industrial infrastructure development. The fourth chapter is a detailed gap analysis of industrial parks and industrial infrastructure in Estonia and of their needs. Fifth chapter studies the feasibility the Phare scheme “Support for Industrial Infrastructure Development”. The sixth chapter is the conclusions and proposals.

The share of industry in the Estonian GDP is 23% and 26% of employment with significant regional differences. Estonian industrial productivity is under 40% of the EU average due to large amount of traditional labour-intensive and/or low-technology industries (food products and beverages, textile wood, paper and paper products, furniture). Estonia follows the industrial development of the OECD countries with certain time gap: the share of employed in industry decreases; the share of labour intensive industrial production decreases (incl. manufacture of textile and wearing apparel); R&D and high-technology in industry increases; the share of manufacture of machinery increases (incl. metal products and equipment).

Estonia’s policy towards industry is by and large in conformity with the principles of EC industrial policy, i.e. market-based, stable and predictable. However, there is need for a comprehensive industrial policy and better definition and implementation of specific measures taking into account the needs of the business community. The sufficiency of financial resources for the implementation of industrial policy documents and plans and the specific implementation resources for Enterprise Estonia is of concern.

Regional development in Estonia is polarised. Strong concentration of investments and development in Tallinn metropolitan region, serious industrial decline in the north-east Estonia and mono-functional industrial settlements, and lack of appropriate regional industrial infrastructure are examples of unequal industrial development. Downgraded infrastructure is problem for balanced regional development in Estonia. Former studies indicate that up-graded infrastructure improves labour and capital productivity, enhances competitiveness in labour market and diversifies economy. Improved financing and quality of infrastructure increases the efficient water, land and energy use and the quality of life. 

The Phare scheme of the Support for Industrial Infrastructure Development (SIID) is connected to the Estonia’s enterprise policy and Single Programming Document 2003-2006. The finance consists of the Phare (1,500,000 euros) and national co-financing (500,000 euros). The objectives are: “support upgrading and establishing industrial infrastructure” in less developed regions (not necessarily excluding Tallinn) and “to raise the competitiveness of Estonian enterprises by facilitating the entrepreneurial abilities and creation of new jobs, following the principle of balanced regional development”. The objectively verifiable indicators are “growth in the number of enterprises and sole proprietors, at least 5 new”, “growth of employment, at least 500 new jobs in less developed regions” and “3 million euro of new investments by private companies attracted to less developed regions” by 2005. 

The SIID scheme is aimed at the contribution of the “development of industrial areas and parks” by “construction, reconstruction and renovation of technical infrastructure and roads”. There will be “at least 10 industrial infrastructure projects implemented” with grant contributions between 100,000-300,000 euros. The beneficiaries are local governments and public agencies and indirectly enterprises.

The feasibility study approves the proposed SIID scheme. Implemented successfully, the scheme facilitates the implementation of the National Development Plan of Estonia and Estonian enterprise policy tackling low economic competitiveness and diverging regionally unbalanced economic structure. The financing, organisation, implementation and monitoring schemes are within the Phare regulations. The scheme supports industrial infrastructure.

Balanced regional development requires support for industrial infrastructure distributed regionally. Industrial areas and parks can be used as key strategic instruments for industrial development in Estonia. Possibilities to expand already existing or recently initiated sites should be considered. If public support is allocated for industrial infrastructure in Tallinn, the economically and industrially most developed region, it should be of high-tech and/or capital intensive industries with clear and verifiable long-term economic impacts. 

A strategic concentration into fewer industrial parks and areas can improve the economy of scale of the projects and raise the competitive advantage of the improved sites. The future-oriented industrial activities should be promoted to guarantee the sustainability of employment and added value. This is not always possible in the industrially declining areas and industries with low technological input. The support for low-tech and traditional industries should be limited into simple improvements of communication system (roads, telenetworks) or renovation of physical structure (water system etc.) with verifiable costs and benefits. Furthermore, pros and cons of relocating existing low-tech and labour-intensive industries from developed areas to improved sites in periphery should be analysed. 

The minimum grant (100,000 euro) is in the limits to create real impact for physical infrastructure improvement except in existing industrial sites or parks. The project fiche grants at least 10 projects, so the maximum grant contribution (300,000 euro) can be used for five or fewer projects. Despite the direct beneficiaries are public agents and local authorities, the public-private co-operation should be promoted to enhance the long-term sustainability of the projects. Management of the public-led industrial parks and organisation of specific non-profit strategic institutional arrangements should be considered.

The proposed goals (at least 5 new enterprises, at least 500 new jobs by 2005) can be achieved with strict selection and careful implementation of the supported projects. The quality of proposals should be clear: all proposals should directly and verifiably indicate the costs (what is invested where, detailed development calculations, competitive bidding) and benefits (how many new enterprises and jobs created by 2005). The management of proposed industrial parks or areas should be clearly indicated as well as public-private partnership and long-term economic viability. The proposals should contain clear strategies how supported projects enhance innovation potential and technological capacities. The support should go especially to projects that have industrial activities with future perspective and that create synergetic industrial districts within urban regions with appropriate labour force.

1. INTRODUCTION

1.1. Aim of the report 

The report presents necessary background for the ex-ante assessment and the feasibility study for the PHARE support programme “Support for Industrial Infrastructure Development” (SIID). The material can be used also in latter phases when selecting, implementing, assessing and monitoring the projects funded through the proposed support scheme SIID.

The report “Industry and Support for Industrial Development in Estonia. Feasibility of the Scheme Support for Industrial Infrastructure Development” is divided into six chapters. The first chapter presents the aims of the report and the contemporary industrial trends in the OECD countries and Estonia. The second chapter analyses the Estonian regional industrial dynamics. The third chapter presents the links between European Union industrial policies and Estonian strategies and results for industrial infrastructure development. The fourth chapter is detailed gap analysis of industrial parks and industrial infrastructure in Estonia and of their development needs. Fifth chapter is the feasibility the Phare scheme “Support for Industrial Infrastructure Development”. The sixth chapter is the conclusions and proposals.

As an analytical background, there is conducted a comparative study of the most recent trends in industrial development in Estonia and the OECD countries based on secondary, cross-sectional and time series data. This illustrates the position of Estonian industry compared to industries of advanced economies. Furthermore, there is presented the major findings of recent academic literature concerning the role of infrastructure in economic and industrial development, and trends in industry, and location of industrial activities. This is based on existing Estonian and foreign reference material. Furthermore, expert interviews were made about innovation capacity and needs within Estonian industry.

The development of Estonian industry is also presented from regional perspective. The current situation of Estonian regions is analysed with the use of official material from regional and national databases. Furthermore, a study is used to illustrate the industrial situation and development possibilities of twelve functional urban regions in Estonia.

The recent development of industrial policy in Estonia is discussed, especially its connection to the European Union industrial policies. The information was gathered mainly from the National Plan for the Acquisition of the Acquis 2002-2003, Estonia’s Progress Reports for the European Commission, and of the recent draft of the Estonian National Development Plan for the use of Structural Funds – Single Planning Document 2003-2006. 

One aspect was to indicate possible investment needs for new industrial infrastructure development, especially regarding the proposed SIID support scheme. For this purpose, the current support scheme for industry in Estonia is presented and analysed. Furthermore, the gaps encountered by enterprises in industrial infrastructure were presented and analysed the additional needs in this area. However, since most of industrial parks are still in the beginning, most detailed analysis was conducted about Tapa industrial park that was initiated as a pilot project in 1999 with the help of Phare support. The empirical background and theoretical aspects were used as setting to evaluate the feasibility of SIID in general and in detail. In the conclusions, there are indicated the main conclusions and proposals for the benefit of the industrial support scheme.

1.2. Development of industry in the OECD countries and Estonia

In Europe, there have been major changes in the development of industry during the last decades. The modern industrial society is gradually being replaced by the late modern society, and according to some observations, a postmodern post-industrial society will emerge. Despite the claims of the rise of information society during the 1990s, industrial activities are crucial for the socio-economic development, wealth creation and employment of every European country. Manufacturing industries remain significant sources of dynamism throughout the economy and are vital to productivity increases (Hayter 1997, 71).

Generally, the more advanced is the country the less significance has the primary sector (agriculture) in the economy. Large amount of employed in agriculture indicates less developed country and lower incomes. Today, in all advanced economies, it is the tertiary sector that generates the most wealth, often around 65-75% in GDP and employment. The higher is the relative amount of employed in finance, security, real estate and business as well as in social and personal services, the more economically advanced the country is and with higher incomes (Randveer 2002, 22). In the beginning of the 21st century, in most countries the role of industrial sector is between 20-25% of employment and of GDP.

The early 21st century industrial development is affected by rapid changes. The move towards the late modern industrial society is evident in the continuous diminishing of employed in the industrial sector. In the OECD countries, in 1980, the share of employed in mining and manufacturing industry was 25.7%, in 1990 it was 22.0%, and by 1998 it had fell into 19.4% (Table 1). In Estonia, the share of employed in mining and manufacturing was in 1990 27.1%, in 1998 23.0% and by 2001 it rose to 24.3%. Nevertheless, the reduction of employment has been dramatic in mining and manufacturing: 85,100 jobs have been lost in 1990-2001 that is almost two jobs out of five. Despite this rapid reduction, today the relative amount of employed in industry in Estonia is still about 5 percent units above the average of the OECD countries. It is expected that this gap will be smaller when Estonia joins in the European Union. The role of industry in Estonian economy diminishes further. It should be remembered that employment is just one measure of the importance of manufacturing. Actually, the reduction of employment has been even larger in Estonia in the primary sector, e.g. 125,400 jobs lost in 1990-2001. Only retailing (+20,200 jobs) and finance (+2,900) have generated jobs. 

Table 1. Employment dynamics in the OECD countries, 1980-1998 (%).
------------------------------------------------------------------------------------------------------------
OECD (%)	1980	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	1990/98
------------------------------------------------------------------------------------------------------------
agriculture	13.6	10.5	10.2	9.6	10.0	9.7	9.5	9.1	8.8	8.5	..	..	–19%
mining	1.0	0.6	0.6	0.6	0.6	0.6	0.6	0.6	0.6	0.5	..	..  	–17%
manufacturing	24.7	21.4	20.7	20.5	19.9	19.6	19.4	19.1	18.9	18.9	..	..	–12%
electric, gas, water	1.0	1.0	0.9	1.0	1.0	1.0	1.0	0.9	0.9	0.9	..	..	–10%
construction	7.9	7.5	7.3	7.1	7.1	7.1	7.1	7.2	7.4	7.5	..	..	+0%
retailing	16.4	18.6	18.8	19.0	19.0	19.2	19.5	19.6	19.7	19.6	..	..	+5%
logistics	6.4	6.2	6.3	6.4	6.4	6.3	6.3	6.2	6.2	6.3	..	..	+2%
finance	5.8	8.6	8.8	8.9	8.9	9.3	9.4	9.8	10.1	10.3	..	..	+20%
social services	23.3	25.6	26.4	26.9	27.1	27.1	27.3	27.4	27.4	27.4	..	..	+7%
------------------------------------------------------------------------------------------------------------
total	100	100	100	100	100	100	100	100	100	100
------------------------------------------------------------------------------------------------------------
Source: Randveer (2002).

Table 2. Employment dynamics in Estonia, 1990-2001 (thousands employed).
------------------------------------------------------------------------------------------------------------
OECD (%)	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	1990/98
------------------------------------------------------------------------------------------------------------
agriculture, fishing	164.5	153.3	137.7	111.8	95.6	66.5	60.2	56.5	53.4	46.7	40.9	39.1	–68%	
mining	12.3	12.1	12.5	11.4	11.1	9.2	8.8	7.1	7.5	7.9	7.2	5.8	–39%
manufacturing	212.1	202.3	183.1	151.1	140.5	157.7	148.4	136.0	131.3	122.4	128.9	133.5	–38%
electric, gas, water	19.0	18.7	18.3	18.3	19.2	15.4	15.7	16.6	17.2	16.4	14.7	11.4	–9%
construction	66.1	65.7	60.2	51.6	48.6	34.5	35.5	44.8	44.1	38.9	39.7	39.3	–33%
retailing 	63.2	65.6	71.9	80.0	85.9	80.1	82.5	86.0	85.4	81.5	79.0	83.4	+35%
logistics 	68.3	68.2	62.3	59.1	57.4	63.7	61.9	56.3	54.9	59.0	56.7	53.6	–20%
finance	4.2	4.8	5.8	6.5	7.7	6.9	6.3	7.0	8.1	8.6	7.7	7.1	+93%
social services	129.2	130.5	128.9	130.1	128.3	124.0	122.8	123.0	121.3	115.2	106.2	115.1	–6%
------------------------------------------------------------------------------------------------------------
total employed	825.8	806.6	761.4	698.9	675.4	633.4	619.3	613.0	602.5	575.3	568.3	572.2	–27%
------------------------------------------------------------------------------------------------------------
Source: Statistical Office of Estonia (2002).

Estonian industrial development was affected by the Soviet period (anormal large quantity and less diverse structure) as well as the demise of the Soviet Union (a rapid and profound decline and structural change in 1991-1994). The index of the industrial production (1990=100) fell by 1995 into a half (48%). Since 1995 the total industrial production exceeded the level of the previous years (Table 3). The exceptional years 1997 (+14%) and 1999 (-2%) and 2000 (+13%) are explainable due to the strong dependence of Estonian industry on the changing conditions of the foreign markets and export. The reduction in the number of employed and the rise of production increased the productivity in industry, almost by 50% in 1996-2000. Despite this rapid growth, by 2000 the level of industrial production is still only two-thirds (65.2%) compared to the situation in 1990. Over three-quarters of the industrial production is realised by private enterprises. A general conclusion can be made that the dynamics of the Estonian industry is following the development in the OECD countries, however, behind a certain time gap.

Table 3. Industry GDP dynamics in Estonia, 1996-2001.
------------------------------------------------------------------------------------------------------------
	1996		1997		1998		 1999	 	2000		2001	
	GDP	growth	GDP	growth	GDP	growth	GDP	growth 	GDP	growth 	GDP	growth
	share	%	share	%	share	%	share	%	share	%	share	%
------------------------------------------------------------------------------------------------------------
energy	4.1	12.3	3.5	-2.2	3.6	-8.0	3.6	-7.4	3.3	1.2	3.3	-0.7
------------------------------------------------------------------------------------------------------------
mining	1.6	7.4	1.5	13.4	1.2	-7.1	1.1	-10.5	1.0	0.9	1.0	10.0
------------------------------------------------------------------------------------------------------------
manufacturing	18.1	2.6	18.0	16.9	17.7	6.3	16.5	-1.0	18.1	16.7	18.4	8.2
------------------------------------------------------------------------------------------------------------
total industry	23.8	2.9	23.0	13.6	22.5	3.4	21.2	-2.3	22.3	13.3	22.7	7.0
------------------------------------------------------------------------------------------------------------
Source: Statistical Office of Estonia (2002).

During the 1990s there has been convergence in the employment structure and added value in industry between the OECD countries and Estonia. Despite this, the relative amount of employed in the Estonian industrial sector is still higher than in the OECD countries. The difference is explainable by the lower amount of employed in the service sector in Estonia. Following the trends, significant job losses are expected in Estonian industry in 2002-2010, however, not harmoniously through the industrial sector. In the industrial added value the differences between the OECD countries and Estonia are already small (Randveer 2002).

The recent years’ dynamics within the industrial sector are interesting in the OECD countries. During the 1990s, in terms of added value, manufacture of electrical and optical equipments has become the most important activity (15.4%), followed by food, beverages and cigarettes (13.6%); manufactured metals (11.7%); and chemicals and chemical products (10.7%) (Table 4). Despite this, Estonian structure is still based on traditional industries often linked to local natural resources, such as manufacture of food, dairy and beverages with small export possibilities and to low-tech labour-intensive mass-production, such as textiles.

Table 4. Dynamics within industrial sector in the OECD countries and Estonia.
-------------------------------------------------------------------------------------------------------------
industrial activity		OECD	OECD	Estonia 	OECD – 
			1995-98	1998 (%)	1998 (%)	Estonia
-------------------------------------------------------------------------------------------------------------manufacture of electric and optical equipments	+5.6	15.4	10.0	-5.4
manufacture of food, beverages and cigarettes 	-2.3	13.6	26.7	+13.1
manufactured metals 		+0.1	11.7	4.3	-7.4
manufacture of chemicals, chemical products 	+2.9	10.7	4.2	-6.5
manufactured paper, printing		-3.1	9.6	3.7	-5.9
manufacture of transport equipment 	+0.6	8.5	4.9	-3.6
manufacture of machines 		-3.5	8.4	3.1	-5.3
manufacture of other non-metals 	+0.4	4.4	6.3	+1.9
manufacture of textile 		-0.8	4.0	14.1	+10.1
manufacture of plastic 		+0.4	3.3	1.5	-1.8
manufacture of petroleum 		+0.5	3.3	0.0	-3.3
manufactured wood		-0.4	2.5	8.6	+6.1
manufacture of leather 		-0.3	0.6	2.8	+2.2
other 			-0.6	4.0	9.8	+5.8
-------------------------------------------------------------------------------------------------------------
Source: Randveer (2002, 20).

Between 1991-98 in the OECD countries, the fastest growth was in manufacture of electrical and optical equipments (+5.6 percent units), chemicals and chemical products (+2.9 percent units), transport equipment (+0.6 percent units). The most significant decline took place in manufacture of machines and equipments (-3.5 percent units); paper, paper products and printing (-3.0 percent units); and food, beverages and cigarettes (-2.3 percent units). In Estonia such development has also started, however, manufacture of food, dairy and beverages have more important role in Estonia than in the OECD countries. Their relative role in Estonia has decreased due to increasing production of machinery and equipment that, however, suffers from fluctuations in global markets. The steadiest increase has been in manufacture of wood.

The broader changes of economy are evident in the structural organisation of industry. The open and global economy increases the convergence of industrial activities. Generally, there has been increasing convergence of the employment structure in the OECD countries. The strongest convergence has taken place in those industrial activities that require high technological input, such as manufacture of machinery and equipments. On the contrary, the largest divergence exists in fields requiring significant amount of labour force and natural resources, such as mining, wood processing, textile industry and leather industry. Less convergence in industrial activities signify less prosperous income level of the country. In longer term, and taking into consideration the openness of economy, a minor convergence normally indicates less competitiveness of given industrial sector and its decline in the future. 

The direct investments for industry in Estonia have varied annually between 30 and 100 million euros. During the last years they have been relatively stable, between 70-99 million euros. The share of direct investments for industry has declined from 40% to 15% of total investments (Table 4). Finland and Sweden are the most important investors making about half of all investments in Estonia.

Table 4. Direct investments for industry in Estonia, 1995 - 2001 (in million euro). 
---------------------------------------------------------------------------------------------------------------
		1995	1996	1997	1998	1999	2000	2001
---------------------------------------------------------------------------------------------------------------
total amount of investments for industry 	60.0	31.7	79.1	98.8	73.2	70.4	87.3
share of industry of total investments (%)	40.5	27.3	33.5	19.1	25.7	16.6	14.6
---------------------------------------------------------------------------------------------------------------
Source: Eesti Pank (2002).

The opening of the economy – partly facilitated by the (foreign) direct investments – has influenced positively on the productivity of Estonian enterprises. The enterprises with foreign investment in Estonia own higher productivity levels than Estonian domestic enterprises (Table 5). The foreign share in Estonian manufacturing industry varies much. The rate of foreign penetration is higher in high-tech industries (on average 40-50% higher than in low tech industries). In the study about industrial development in Estonia in 1996-98, the high-technology industries developed faster (+32%) than the low-tech industries (+7%). The probability for technological spill-over is higher in those industrial enterprises in which the foreign ownership share is higher (Männik 2002, 137-138). This indicates stronger competitiveness in the long-term for industrial enterprises with foreign capital. 

The growth in industrial productivity in Estonia is mainly based on the structural changes because labour productivity has diminished in the last years. In 1998, the total Estonian labour productivity was only 37% of the EU average (Männik 2002, 139). This means that technological development is becoming more important in the competitiveness of Estonian industry. However, the expenditure of the Estonian enterprises on R&D was in 1998 only 0.19% of GDP when it was in the EU 1.25% on average. In developing new and existing industrial activities, much more attention must be paid on innovation and technology. Contemporary industrial production of goods and the processing of knowledge and information are not (anymore) two distinct segments of economy. Manufactured goods are becoming technology, design and knowledge intensive (Hayter 1997, 71). 

However, a study of 81 Estonian enterprises illustrates that there is no major relation between exports and new technologies. The enterprises with modern technology do not have higher share of export turnover than enterprises with out-of-date technology – maybe there is still a niche for old-fashioned mode of production in certain industrial activities. However, enterprises with high share of export have made more technological adaptations than the ones with lower share of export (Reiljan 2002, 561). This means that in the future the competitiveness of high export industries will rise.

According to a comprehensive study on the CEE countries (EC 2001), the main problems of the Estonian R&D and innovation are:
•	small awareness of the role of R&D and innovation in the long-term economic growth;
•	small awareness of patenting in the long-term economic growth;
•	insufficient start-up capital;
•	insufficient researcher and information technology experts;
•	non-existence of innovation management training;
•	concentration of basic research;
•	non-effective co-operation between enterprises and R&D institutions.

Table 5. Foreign share in Estonian manufacturing industry, 1998.
------------------------------------------------------------------------------------------------------------
			share (%)	 net sales (%)	 value added (%)	
------------------------------------------------------------------------------------------------------------
food products and tobacco	10		19.3		21.5 
textiles			56		70.5		55.7	
wearing apparel, dressing	14		9.8		12.5	
tanning and leather dressing	26		45.5		32.6	
wood and wood products	12		16.3		15.9	
paper and paper products	65		77.5		77.4	
publishing and printing		13		20.2		12.3	
rubber and plastics		14		26.3		32.3	
construction industry		38		61.0		65.5	
metals and metal products	14		10.6		14.9	
furniture			13		19.6		20.7	
recycling			4		15.1		13.9	
------------------------------------------------------------------------------------------------------------
total low-tech industry 		19		26.5		26.8	
------------------------------------------------------------------------------------------------------------
chemicals, coke, petroleum	27		44.4		48.0	
other machinery and equipment	8		20.3		21.2	
office and electrical machinery	50		42.7		50.3	
other transport equipment	20		23.7		16.3	
------------------------------------------------------------------------------------------------------------
total high-technology industry	29		35.4		34.6	
------------------------------------------------------------------------------------------------------------
total			21		28.3		28.4	
------------------------------------------------------------------------------------------------------------
Source: Männik (2002). 

Comparing Estonia with the OECD countries, Randveer (2002) found significant differences in industry. Industry in Estonia is specialised in:
•	manufacture of food products and beverages;
•	manufacture of textile and wearing apparel;
•	manufacture of wood, paper and paper products;
•	manufacture of furniture;
•	tanning and dressing of leather and footwear.

In 1998, these five industrial activities produced 62% of added value in Estonian industry whereas in the OECD countries the amount was 25%. In Estonia, the added value in manufacture of machinery and chemicals and chemical products is significantly lower than in the OECD countries. 

Deriving from the economic trends in the OECD countries (Randveer 2002), following changes will take place in the Estonian industry:
•	the share of employed in industry decreases and increases in services;
•	the share of employed in finance, security, business services increases as well as their share in the GDP; 
•	the share of labour intensive industrial production decreases (including manufacture of textile and wearing apparel);
•	the share of manufacture of machinery increases (including metal products and equipment) in both added value and employment.

1.3. Location of industry and the role of infrastructure

Economic geography and location of industries have become again interesting from development perspective. The Fordist linear industrial organisation of national economies is being replaced by more flexible post-Fordist mode of organisation fitted into the global economy. These broader socio-economic changes mean also changes in the spatial organisation of industry and industrial areas. The most significant aspects of the contemporary organisation of industry are:
•	globalisation (international mergers, alliances and competition in the production system);
•	vertical disintegration (subcontracting in the production);
•	flexible new technologies (innovative small batch production with an easy possibility to develop the final product);
•	just-in-time delivery (reducing the logistics stocks).

Recent theories of industrial development (neo-Marshallian nodes, new industrial districts, innovative networks etc.) have replaced the traditional ones (neoclassical, behavioural, institutional theories). New approaches indicate that the specific location of industry can be crucial for regional development. The synergetic effects of location are important in technological spill-over and innovation. This is evident also in the change of policy in developing industrial parks. From the 1950s to 1970s in the Western countries the main purpose was to provide the physical infrastructure to attract large-scale branch plants of already established firms. Today, increasingly attention is paid on industrial parks (or innovation centres and science parks) offering various services to work as incubators of new high-tech firms (Hayter 1997, 242-243). Nevertheless, in economically less developed countries both traditional and contemporary industrial parks can be used as instruments for regional development.

However, the role infrastructure is important starting point for any development everywhere. To enhance human resources is the key strategy for successful economic development in advanced economies. For this there is required access to economic overhead capital (roads, railways, port facilities, power lines, service facilities) and social overhead capital (schools, universities, hospitals, libraries). Infrastructure is enormously expensive to build and the existing stock of good infrastructure is vital for most industrial activities and limits the location possibilities of industrial enterprises (Hayter 1997, 92). The basic conditions for industrial location are summarised in Table 6. It illustrates how infrastructure is only one, but significant factor among several aspects influencing on the location of industries. The location within urban areas can increase the benefits deriving from the agglomeration economies of scale.

Table 6. Typology of industrial location conditions
--------------------------------------------------------------------------------------------------------------- 
Location condition 	Tangible feature	Non-tangible features
--------------------------------------------------------------------------------------------------------------- 
1. Transportation	freight rates		reliability, frequency, damage, availability
2. Materials		production & transport costs	security, quality 
3. Markets		transport & servicing costs	personal contacts, tastes, rivals
4. Labour		wages, benefits, hiring costs	skill, attitude, availability, unionization
5. External economies	-		positive / negative: labour skills, common 
(a) urbanisation & locality	-		services, information sharing, image
6. Energy		costs		reliability, diversity
7. Community infrastructure	capital costs, taxes	quality, diversity
8. Capital
(a) fixed		construction costs, rent	availability, lay-out age
(b) financial		borrowing cost		availability
9. Land / buildings	costs		size, shape, access, services, lay-out
10. Environment
(a) amenity		-		worker preferences
(b) policy		costs, taxes		local attitudes
11. Government policy	incentives, penalties, taxes	attitude, stability, business climate
--------------------------------------------------------------------------------------------------------------- 
Source: Hayter (1997, 84).
. 

There are two schools of thought regarding the role of infrastructure in economic development. One approach claims that economic growth is based on infrastructure, another that diversification of labour force and capital. Infrastructure influences on the productivity of labour and capital, increases competitiveness in labour market and diversifies economy due to increasing competition. Improved quality and financing of infrastructure decreases the inefficient use of water, land and energy and enhances the quality of life (Kessides 1993, cit. in Varblane et al. 1999, 182). A study from the 1990s (see Ingram & Fay, 1994) illustrates how the relative position of infrastructure changes when the economy is developing (Table 7) (Varblane et al. 1999, 182).

The requirements for infrastructure change when the country advances economically, as it has happened in Estonia. Several studies indicate that public sector investment on infrastructure have positive role of the growth of private investments. However, the public sector investments can also direct the private capital away. According to Hulten (1996), the more efficient use of infrastructure influences economic growth positively. The research of 46 countries concluded that the rise of efficiency in the use of infrastructure by 10% indicated about 8% growth in GDP per capita (Varblane et al. 1999, 183). It is also possible to achieve short-term gain by reducing the investment to infrastructure. Nevertheless, the long-term impacts of non-investment in infrastructure are very negative to economy, especially when neglecting physical (logistics) and virtual (telecommunication) communication infrastructure that are fundamental today for development of all economic activities.

Table 7. Structure of infrastructure in relation to country’s GDP/capita.
-------------------------------------------------------------------------------------------------------------
infrastructure	low GDP/capita	medium GDP/capita	high GDP/capita
-------------------------------------------------------------------------------------------------------------
roads		18		15		25
electric energy		21		35		47
telephone lines		2		6		9
railroads		16		6		9
sewage		23		12		7
water		10		8		4
sanitary 		10		12		6
-------------------------------------------------------------------------------------------------------------
Source: Ingram & Fay (1994), cit. in Varblane et al. 1999, 182.

Comparing the industrial trends and recent experiences of the OECD countries with Estonia, one has to pay attention to differences in the organisation of industrial areas. There are basically three types of industrial areas in the post-socialist Central and Eastern European countries (Ernits 2000, 266): 
•	multi-functional metropolises consisted of cities with suburban areas in which the economy is a mixture of industrial and service sector;
•	oligo-functional regions in which bigger industrial districts and agglomerations vary with rural and other areas;
•	mono-functional settlements consisted often of small towns and villages in which there is located only one branch of economy or one single enterprise.

The first (multi-functional localities) and the second (oligo-functional localities) types exist in both Western and Eastern Europe. The third type (mono-functional localities) was part of regional industrial policy in the West during the 1960s, but continued as important part of industrial policy in the Eastern European economies until the 1990s. The major difference between the West and the East in the formation of the mono-functional industrial settlements was that in the East these were located often to small localities of periphery and not to larger existing centres in periphery with economic and social functions like it happened in the West. 

For example, in Estonia, there were created 34 mono-functional industrial settlements in the Soviet period. These were distributed in several regions, but mostly concentrated in Ida-Virumaa in the north-east. Most of Estonian mono-functional settlements were created in the 1950-60s in small towns and villages of 500-10,000 inhabitants (Ernits 2000). The result was that production and production relations in the mono-functional settlements and industries were very hierarchic, fixed and the connection to the socio-economic surroundings was very particular. 

2. INDUSTRY AND INDUSTRIAL AREAS IN ESTONIA 

2.1. Regional development and industry

Regional development in Estonia is polarised: the capital Tallinn has an overwhelming role in the economy. There are also peripheral areas, especially in the eastern and southern border regions. Traditionally, Estonian regional development has been analysed by dividing Estonia in 15 counties. In the last years, a new statistical unit has been launched for the European Union context in which Estonia is divided into five regions: 
•	Northern Estonia (Harjumaa)
•	Eastern Estonia (Ida-Viru)
•	Central Estonia (Järva, Lääne-Viru, Rapla)
•	Western Estonia (Hiiu, Lääne, Pärnu, Saare)
•	Southern Estonia (Jõgeva, Põlva, Tartu, Valga, Viljandi, Võru)

Measuring with these statistical units, the current regional economic situation indicates that the Northern region has the highest GDP per capita (153% of the national average), followed by Western (75%), Central (72%), Southern (65%) and Eastern region (59%). The regional differenced within the regions are even larger.

Regarding industrial development, following regional statistical information can be given:

Northern Estonia (including Tallinn) has 77,400 (30.5%) employed in industry and its industrial input is 42% of total in Estonia. Industrially it is the most diverse region in Estonia. During the 1990s the absolute and relative specialisation in industry increased. According to Fainstein & Lubenets (2001, 279), the high level of investment and rapid development in Northern Estonia have induced the cost-minimising enterprises in Estonia to (re)locate production in Northern Estonia. However, the increasing demand for immobile production factors (labour, mortgage) has led into rising production costs. This is reason why several cost-sensitive enterprises have relocated their activities to more peripheral Estonian regions. 

Eastern Estonia (including Narva, Kohtla-Järve and Sillamäe) has 50,200 (50.2%) employed in industry and its industrial input is 23% of total in Estonia. It has specific industrial character due to many companies functioning as natural monopolies and depending on the economies of scale. According to Fainstein & Lubenets (2001, 280), the absolute specialisation has not varied significantly in the 1990s. This is partly due to modest FDI into the region. The relative specialisation has declined in the latter part of the 1990s due to substantial decline in largest industries connected to the Russian market. 

Central Estonia is the major agricultural region of Estonia with 34,000 (34.0%) employed in industry and 8% share of the Estonian industrial input. According to Fainstein & Lubenets (2001, 280), there is weak concentration of industries and the level of specialisation in manufacturing is higher than a norm. Both absolute and relative specialisation decreased in the 1990s. This is an outcome of the intensification in industrial activities, increasing FDI, and the use of local resources in manufacturing industries. 

Western Estonia (including Pärnu) has 25,400 (33.8%) employed in industry and 8% share of the Estonian industrial input and major role in agriculture. The specialisation in the 1990s has fluctuated without major trends (Fainstein & Lubenets 2001, 280).

Southern Estonia (including Tartu and Viljandi) has 41,900 (29.6%) employed in industry and its industrial input is 12 % of total in Estonia. According to Fainstein & Lubenets (2001, 280), absolute regional specialisation increased until 1997 and then it started to decrease moderately. In relative specialisation no significant increase or decrease has occurred.  

Fainstein & Lubenets (2001, 283) make following conclusions about regional industrial development in Estonia in the 1990s. Industrially most diverse regions have enjoyed the highest income levels. A high specialisation with small number of industries means lower income levels. The decrease in industrial specialisation in the peripheral regions is explainable by the relocation of industrial production closer to less expensive regional resources, increased FDI into these peripheral regions and development of regional infrastructure. 

Concerning the near future industrial development, Fainstein & Lubenets (2001, 283) argue that Estonian integration to the European Union will increase regional specialisation in manufacturing. Targeted foreign direct investments and regional investments can facilitate this specialisation. The development of regional infrastructure is the most effective stimulus for industrial companies to relocate their activities into the particular region. They also claim that regional transfers are the most effective instruments of regional industrial policy.

The amount of enterprises much between the Estonian regions. In 2000, there were about 31,000 enterprises in Estonia as well as 31,300 limited enterprises and almost 60,000 persons acting as individual entrepreneurs. Half of the enterprises are located in Tallinn (Table 8).

Table 8. Enterprise types by Estonian counties, 2000.
 
County	person	limited	micro	small	medium	large	undefined	
	enter-prises	company	enterprises	enterprises	enterprises	enter-prises	enterprises	
Harju	17 935	18 152	13 967	3 210	559	96	320	
Tallinn	14 055	15 852	12 313	2 711	459	86	283	
Hiiu	776	211	148	53	4	1	5	
Ida-Viru	4 215	1 754	1 227	381	101	33	12	
Jõgeva	2 568	470	318	120	26	0	6	
Järva	2 636	491	325	124	31	7	4	
Lääne	1 601	492	338	132	20	0	2	
Lääne-Viru	3 533	1 074	706	274	56	7	31	
Põlva	2 038	452	337	88	24	1	2	
Pärnu	5 298	1 991	1 476	419	74	5	17	
Rapla	2 473	607	432	140	26	2	7	
Saare	2 778	663	500	129	29	3	2	
Tartu	6 002	3 245	2 447	610	90	14	84	
 Tartu	3 650	2 457	1 883	426	58	14	76	
Valga	2 009	456	314	116	20	3	3	
Viljandi	3 814	764	519	194	42	3	6	
Võru	1 983	524	375	116	26	2	5	
TOTAL	59 659	31 346	23 429	6 106	1 128	177	506	
Source: Maksuamet

In 2000, the amount of industrial enterprises in Estonia was 4,449 which is less than 15% of all enterprises. Over nine out of ten industrial enterprises were in manufacturing (4,101) and the rest in electricity, gas, and water supply (287) and mining (61). Four-fifths (79.5%) of industrial enterprises had less than 20 employed, however their share was only one twelfth (8.1%) of total production. The amount of largest enterprises is less than one percent (0.7%) but their share of total production is almost one third (30%). One third (33.4%) is produced by enterprises with 100-499 employed (3.5% of all enterprises) and the rest 28.5% by enterprises with 20-99 workers (16.2%). This means that medium-sized and large enterprises are vital for industrial output (Ministry of Economic Affairs 2001).

2.2. Regional specialisation of industry in Estonia and industrial regions 

Large administrative units (five regions or 15 counties in the Estonian case) are normally not the best way to measure development stage and economic and industrial potential for localities. For this purpose, the concept of functional urban regions suits better. In the spring 2002, there were defined criteria for the selection of the most important functional urban regions in Estonia. The functional urban region is consisted of:
•	territory with urban centre;
•	intensive relation between the urban centre and its immediate periphery (at least 25% of employed work in the center);
•	at least 15,000 inhabitants in the urban area.

There were 12 Estonian urban regions meeting these criteria. (Figure 1). In total, these areas are consisted of 12 towns as centres for functional urban regions and as their hinterland there are 70 municipalities of which are 9 towns and 61 rural municipalities. The amount of local authorities in these urban regions is 82 that is one third of the total amount of Estonian municipalities. In these functional urban regions live about one million inhabitants (988,606 people), about 70% on total Estonian population.

Functional urban regions are best sites for industrial development due to concentration of human (labour force) and physical (infrastructure) resources. This is indicated by the fact that 92% (460) of the 500 largest enterprises in Estonia are located in these 12 urban regions. In the territory of remaining two-thirds of Estonian local authorities (165 municipalities) there are only 8% (40) of the largest enterprises and 30% of the population. The functional urban regions also offer possibilities to convert former and abandoned industrial sites into new use, expand existing industrial parks and, if necessary, develop new industrial areas. 

There are 123 industrial enterprises among the 500 largest enterprises in Estonia. In the 12 functional urban regions (in all except Paide), there are 101 large industrial enterprises (annual turnover at least 6 million euro). Outside these twelve regions there are three enterprises in Põlva and the remaining 19 enterprises are scattered in 19 different municipalities. The wide spatial distribution outside the functional urban regions is mostly due to two factors. First, many large enterprises in rural areas are related to dairying. Second, among these large enterprises there are some (former) mono-functional industrial settlements with varied industrial activities. Nevertheless, most of localities outside the functional urban regions are rural, agricultural and peripheral in terms of economy. 

Figure 1. Estonian urban regions.

Economic potential of Estonian urban regions is illustrated in Figure 2. It indicates the overwhelming role of the Tallinn metropolitan region regarding any other Estonian urban region or all urban regions – or even the rest of Estonia together. It should be mentioned that the figure is based on the turnover of the 500 largest enterprises in Estonia. Nevertheless, because large enterprises are often dealing with exports, they have been targeted by foreign direct investments and in most cases must be competitive in their activities. The Figure 2 illustrates the comparative economic potential of Estonian urban regions rather well.

Figure 2. Economic potential of Estonian urban regions. The size indicates the turnover of the 500 largest Estonian enterprises located in the region.

The human resources for industrial activities in urban regions are presented in Figure 3. The spatial distribution and the annual turnover of largest industrial enterprises in Estonia (annual turnover at least 6 million euro) are illustrated in the Table 9 and Figure 4. The 12 Estonian functional urban regions can be characterised as following (see Figure 1):

Tallinn functional urban region (501,124 inhabitants)
•	main urban centre Tallinn; other towns: Kehra, Keila, Maardu, Saue; rural municipalities: Aegviidu, Anija, Harku, Jõelähtme, Keila, Kernu, Kiili, Kose, Kõue, Raasiku, Rae, Saku, Saue, Viimsi.
•	inhabitants: 134,168 with university degree; 2,817 with doctoral degree; 29,061 students
•	44,348 of inhabitants employed in manufacturing (19.1% of total employed)
•	56 large industrial enterprises (total turnover 796 mill. euro): manufacture of fish, fish, food, milk, ice-cream, ice-cream, bread, bread, bread, coffee, beverages, beverages, beverages, beverages, textile, textile, textile, wearing, wearing, wood, wood, wood, paper, wood, paper, printing, chemicals, chemicals, pharmaceutics, furniture, metal, metal, cement, construction, metal, metal, metal, steel, metal, manufacturing, computers, telecommunications, cable, furniture, electronics, repair of ship, ship, car, car, electronics, metal, furniture, furniture, wearing, textile, metal

Tartu functional urban region (134,230 inhabitants)
•	main urban centre Tartu; other towns: Elva linn; rural municipalities: Haaslava, Luunja, Mäksa, Nõo, Puhja, Tabivere, Tartu, Tähtvere, Võnnu, Ülenurme.
•	inhabitants: 28,563 with university degree; 1,916 with doctoral degree; 21,532 students
•	10,048 of inhabitants employed in manufacturing (18.7% of total employed)
•	11 large industrial enterprises (total turnover 99 mill. euro); manufacture of bread, beverages, textiles, wood, printing, printing, plastic, glass, furniture 

Narva functional urban region (73,275 inhabitants)
•	main urban centre Narva; other towns: Narva-Jõesuu; rural municipalities: Vaivara.
•	inhabitants: 13,912 with university degree; 35 with doctoral degree; 760 students
•	9,219 of inhabitants employed in manufacturing (33.6% of total employed)
•	8 large industrial enterprises (total turnover 147 mill. euro); manufacture of textile, textile, textile, textile, textile, wearing, metals, machinery

Kohtla-Järve functional urban region (67,693 inhabitants)
•	main urban centre Kohtla-Järve; other towns Jõhvi; rural municipalities Illuka, Jõhvi, Kohtla, Kohtla-Nõmme, Toila. 
•	inhabitants: 12,122 with university degree; 65 with doctoral degree; 120 students
•	5,296 of inhabitants employed in manufacturing (22.1% of total employed)
•	9 large industrial enterprises (total turnover 115 mill. euro); manufacture of fish, milk, oil-shale, chemicals, chemical, chemicals, chemicals, oil, manufacturing

Pärnu functional urban region (64,697 inhabitants)
•	main urban centre Pärnu; other towns: Sindi; rural municipalities: Are, Audru, Koonga, Paikuse, Sauga.
•	inhabitants: 10,711 with university degree; 60 with doctoral degree; 689 students
•	6,919 of inhabitants employed in manufacturing (26.0% of total employed)
•	7 large industrial enterprises (total turnover 116 mill. euro); manufacture of fish, fish, textile, textile, wood, construction, wood

Rakvere functional urban region (37,123 inhabitants)
•	main urban centre Rakvere; other towns: -; rural municipalities Haljala, Kadrina, Rakvere, Sõmeru, Vinni.
•	inhabitants: 5,391 with university degree; 60 with doctoral degree; 400 students
•	4,168 of inhabitants employed in manufacturing (28.3% of total employed)
•	6 large industrial enterprises (total turnover 92 mill. euro); manufacture of plastic, furniture, wood, wood, dairy, meat

Viljandi functional urban region (33,411 inhabitants)
•	main urban centre Viljandi; other towns: -; rural municipalities Halliste, Paistu, Pärsti, Saarepeedi, Viiratsi.
•	inhabitants: 5,180 with university degree; 18 with doctoral degree; 535 students
•	3,166 of inhabitants employed in manufacturing (24.5% of total employed)
•	5 large industrial enterprises (total turnover 31 mill. euro); manufacture of textile, wood, metal, beverages, chemicals

Võru functional urban region (23,767 inhabitants)
•	main urban centre Võru; other towns: -; rural municipalities Lasva, Rõuge, Võru.
•	inhabitants: 3,124 with university degree; 12 with doctoral degree; 75 students
•	2,348 of inhabitants employed in manufacturing (27.8% of total employed)
•	4 large industrial enterprises (total turnover 115 mill. euro); manufacture of meat, cheese, wood, furniture

Kuressaare functional urban region (23,642 inhabitants)
•	main urban centre Kuressaare; other towns: -; rural municipalities Kaarma, Kärla, Pihtla, Valjala.
•	inhabitants: 3,056 with university degree; 19 with doctoral degree; 164 students
•	1,902 of inhabitants employed in manufacturing (20.2% of total employed)
•	2 large industrial enterprises (total turnover 21 mill. euro); manufacture of meat, dairy, beverages

Paide functional urban region (22,174 inhabitants)
•	main urban centre Paide; other towns Türi; rural municipalities: Paide, Türi, Väätsa. 
•	inhabitants: 3,125 with university degree; 12 with doctoral degree; 225 students
•	1,906 of inhabitants employed in manufacturing (21.6% of total employed)
•	no large industrial enterprises

Haapsalu functional urban region (19,015 inhabitants)
•	main urban centre Haapsalu; other towns: -; rural municipalities: Oru, Ridala, Taebla.
•	inhabitants: 2871 with university degree; 25 with doctoral degree; 172 students
•	2,016 of inhabitants employed in manufacturing (26.3% of total employed)
•	1 large industrial enterprise (total turnover 8 mill. euro); manufacture of fertilizers

Valga functional urban region (18,527 inhabitants)
•	main urban centre Valga; other towns: -; rural municipalities: Hummuli, Karula, Tõlliste.
•	inhabitants: 2,803 with university degree; 4 with doctoral degree; 14 students
•	1,565 of inhabitants employed in manufacturing (24.8% of total employed)
•	2 large industrial enterprises (total turnover 26 mill. euro): manufacture of furniture, meat 

Table 9. Large industrial enterprises in Estonia outside functional urban regions.
--------------------------------------------------------------------------------------------------------------
•	Imavere municipality 1 large industrial enterprise (total turnover 40 mill. euro): manufacture of wood 
•	Põlva municipality 3 large industrial enterprises (total turnover 32 mill. euro): manufacture of milk, food, pharmacy
•	Rapla 1 large industrial enterprise (total turnover 31 mill. euro): manufacture of dairy
•	Sillamäe 1 large industrial enterprise (total turnover 29 mill. euro): manufacture of metal and chemicals
•	Kunda 1 large industrial enterprise (total turnover 27 mill. euro): manufacture of cement
•	Maidla 1 large industrial enterprise (total turnover 24 mill. euro): manufacture of wood and furniture
•	Järvakandi 1 large industrial enterprise (total turnover 20 mill. euro): manufacture of glass
•	Kohila 1 large industrial enterprise (total turnover 16 mill. euro): manufacture of paper products 
•	Sõmerpalu 1 large industrial enterprise (total turnover 14 mill. euro): manufacture of wood 
•	Järva-Jaani 1 large industrial enterprise (total turnover 14 mill. euro): manufacture of milk 
•	Loksa 1 large industrial enterprise (total turnover 13 mill. euro); manufacture of metal
•	Kuusalu 1 large industrial enterprise (total turnover 12 mill. euro); manufacture of chemicals
•	Vändra 1 large industrial enterprise (total turnover 11 mill. euro) : manufacture of textile
•	Abja 1 large industrial enterprise (total turnover 11 mill. euro): manufacture of textile
•	Jõgeva 1 large industrial enterprise (total turnover 11 mill. euro): manufacture of food
•	Laeva 1 large industrial enterprise (total turnover 10 mill. euro): manufacture of milk
•	Haapsalu 1 large industrial enterprise (total turnover 8 mill. euro); manufacture of
•	Kiviõli 1 large industrial enterprise (total turnover 8 mill. euro): manufacture of oil
•	Salme 1 large industrial enterprise (total turnover 6 mill. euro): manufacture of fish
•	Kärdla large industrial enterprise 1 (total turnover 6 mill. euro): manufacture of fish
•	Põltsamaa 1 large industrial enterprise (total turnover 6 mill. euro); manufacture of agricultural products
--------------------------------------------------------------------------------------------------------------

EMPLOYED
INDUSTRY % 
OF ALL
EMPLOYED	Mining	Manu-facturing	Energy, electricity,
gas and water supply	Con-struction	Total
%	
Tallinn	0,1	19,1	1,5	6,9	27,6	
Tartu	0,3	18,7	1,4	6,6	27,1	
Narva	0,2	33,6	10,7	6,1	50,6	
Kohtla-Järve	14,3	22,1	4,4	5,1	45,9	
Pärnu	0,6	26,0	1,5	7,7	35,8	
Rakvere	0,1	28,3	1,7	6,7	36,8	
Viljandi	0,8	24,5	1,7	7,8	34,7	
Võru	0,6	27,8	2,1	5,9	36,4	
Kuressaare	0,3	20,2	2,4	10,3	33,2	
Paide	0,6	21,6	2,1	9,7	34,1	
Haapsalu	0,2	26,3	1,7	8,0	36,1	
Valga	0,0	24,8	2,2	5,4	32,4	

EMPLOYED
INDUSTRY
AMOUNT OF WORKERS	Mining	Manu-facturing	Energy, electricity,
gas and water supply	Con-struction	

Total	
					 	
Tallinn	222	44349	3469	15889	63929	
Tartu	185	10048	773	3544	14550	
Narva	45	9219	2947	1684	13895	
Kohtla-Järve	3444	5296	1066	1220	11026	
Pärnu	153	6919	408	2047	9527	
Rakvere	19	4168	250	979	5416	
Viljandi	97	3166	217	1005	4485	
Võru	47	2348	181	496	3072	
Kuressaare	28	1902	224	967	3121	
Paide	56	1906	185	860	3007	
Haapsalu	15	2016	127	615	2773	
Valga	3	1565	136	340	2044	

explanation						
good	  four best urban regions		
avergage	  four average urban regions		
bad	  four worse urban regions		

Figure 3. Human resources for industry in Estonian functional urban regions. The amount of employed in industry in 2000.

Figure 4. Location of largest Estonian industrial enterprises.  

Another possibility is to analyse the regional distribution of industrial activities in Estonia is to look at the dynamics of small (under 50 employed), medium-sized (50-249 employed) and large (250 or more employed) industrial enterprises, their value added and turnover and their role in total employment of the regions. Due to problems in statistics, the most reliable regional level is still to study them at the level of counties. It is obvious that the distribution of industrial activities within counties is spatially uneven (Figure 4 gives an indicative view of it). Often the most significant production is concentrated in large towns and in some particular cases in mono-functional settlements.
. 
The structure of industrial production is diversified in Estonia in terms of quantity and quality of production as well as in employment. An overwhelming role in industrial production, as in all national economy, is played by the city of Tallinn and to a lesser extent by the county around Tallinn, Harjumaa. In absolute terms, the annual industrial turnover in Harjumaa (with Tallinn) is annually 1,247 million euro. This is more than the rest of Estonian counties together (excluding Ida-Virumaa county). The total amount of the six less significant counties in industrial turnover (Valga, Põlva, Saare, Lääne, Jõgeva, Hiiu) is annually around 200 million euros, i.e. one-sixth of Harjumaa (Table 10). 

Harjumaa with Tallinn produces almost two-fifths of Estonian industrial turnover (37.9%). The second most important industrial area is Ida-Virumaa county with one-fifth the industrial turnover divided equally between the town of Narva (9.0%) and the rest of the county (9.1%). These two counties with their capital cities produce 56% of total industrial output in Estonia (Table 10). The share of Tartu county (incl. the capital Tartu) is 5.7% and Lääne-Viru county 5.0%. 

The dynamics of industrial turnover in the recent years (1997-2000) indicates very large differences between counties (Table 10). As Estonia is advancing to the stage of late modern economy the most important site of industrial location, the city of Tallinn, has started to decline (-15 million euro). Tertiary activities become gradually more significant. Nevertheless, in absolute growth, Harjumaa county (+91 million euro) is still the second most important Estonian area in industrial turnover after the town of Narva (+170 million euro). The following turnover growth areas are Järvamaa county (+47 million euro), town of Tartu (+42 million euro), Raplamaa county (+41 million euro) and the town of Pärnu (+39 million euro). 

In the relative growth of industrial turnover, there are striking differences. The fastest growth (1997-2000) took place in the town of Narva (+57%), followed by Raplamaa (+54%) and Järvamaa (+47%). With Tallinn, the Põlvamaa county is the only absolutely and relatively declining industrial area in the production value. Decline took place in Põlvamaa (-15%) and the city of Tallinn (-2%) and only a modest growth in Hiiumaa (0%), Saaremaa (+5%) and Jõgevamaa (+11%).

Industry has also important role as the employment structure of Estonian counties. As noticed before, the amount of employed in the secondary sector in urban regions varied between 27-51% (Figure 3). In 2000, the amount of industrial workers in Estonia was about 190,800. The most significant concentration is Tallinn with 55,600 employed and 20,100 employed in rest of Harjumaa. Ida-Virumaa is also very significant in terms of industrial employment with 34,700 workers. Tartu county is significant (17,000 industrial workers) and to a lesser extent Pärnu county (12,500 industrial workers) as well. In nine out fifteen Estonian counties, there are less than 5,000 employed in industry. In four smallest functional urban regions there were less than 2,000 workers in manufacturing (Table 10).

The change from socialist command to post-socialist open economy in Estonia signified reduction in industrial employment. Generally, the reduction has continued in the last years and every tenth worker in industry lost employment in 1997-2001 (Table 8). In relative terms, the counties hit most seriously by the decline in industrial employment were Jõgeva (-28%), Põlva (-21%), Pärnu (-17%), Ida-Viru (-17%) and Järva (-16%). In absolute terms, the most significant recent (1997-2001) reduction in the amount of industrial workers has been in Ida-Viru (-7,600 workers), Harjumaa (-2,400 workers), Lääne (-1,100 workers), and Jõgeva (-1,000 workers).

There are three counties in which employment in industry has risen between 1997-2001 (Table 10). These are Tartu (+1,000 workers; +6% relative growth) Viljandi (+700 workers; +11% relative growth), and Saare (+100 workers; +2% relative growth). Only a modest absolute reduction has been in Hiiu (-100 workers, however, 10% relative reduction) and Võru (-100 workers, 2% relative reduction).

The efficiency of regional industrial output is difficult to measure due to different regional character of industrial production and unreliability of statistics. A rough estimation can be done counting the relation between industrial production turnover and the amount of industrial workers. The higher is the number, the more every person employed in industry produces that could be stated as an indicator of efficiency. Of course, just reducing the number of industrial workers is not enough for economic success, but often structural, organisational and managerial changes have meant the reduction of employment in industrial activities. In 1997, every worker in industrial activities in Estonia “produced” on average 12,600 euros. In 1998, this number had risen into 14,100, in 1999 it was 14,400 and in 2000 already 17,300. Industrial productivity has thus been continuously and significantly rising in the last years.

Table 10. Industrial development in Estonia, 1997 and 2000/2001
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county	production	production	growth	relative	employed	absolute	relative
county	total share 	mill. euro	mill. euro	dynamics	in industry	dynamics 	dynamics
	in 2000	in 2000	1997-2000	1997-2000	in 2001	1997-2001	1997-2000
------------------------------------------------------------------------------------------------------------------------------------
1. Harjumaa	37.9%	1257	+76	+6%	75,700	-3,200	-7%
Tallinn	29.2%	961	-15	-2%	55,600	-2,400	-10%
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2. Ida-Virumaa	18.1%	597	+197	+33%	34,700	-7,600	-17%
Narva	9.0%	296	+170	+57%
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3. Tartumaa	6.1%	201	+53	+26%	17,000	+1,000	+6%
Tartu	4.4%	145	+42	+29%
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4. Lääne-Viru	5.0%	163	+36	+14%	3,300	-700	-12%
------------------------------------------------------------------------------------------------------------------------------------
5. Pärnumaa	5.9%	189	+62	+33%	12,500	-600	-17%
Pärnu	3.8%	126	+39	+31%
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6. Järvamaa	3.1%	101	+47	+47%	4,900	-800	-16%
------------------------------------------------------------------------------------------------------------------------------------
7. Viljandimaa	2.9%	97	+20	+21%	8,300	+700	+11%
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8. Raplamaa	2.3%	76	+41	+54%	4,600	-300	-6%
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9. Võrumaa	2.1%	68	+18	+26%	5,200	-100	-2%
------------------------------------------------------------------------------------------------------------------------------------
10. Valgamaa	1.6%	52	+15	+29%	4,100	-300	-7%
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11. Põlvamaa	1.2%	40	-6	-15%	2,300	-600	-21%
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12. Saaremaa	1.2%	40	+2	+5%	5,200	+100	+2%
------------------------------------------------------------------------------------------------------------------------------------
13. Läänemaa	1.1%	35	+5	+14%	3,300	-1,100	-12%
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14. Jõgevamaa	0.8%	28	+3	+11%	2,400	-1,000	-28%
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15. Hiiumaa	0.3%	10	+0	+0%	1,400	-100	-10%
------------------------------------------------------------------------------------------------------------------------------------

Measured the efficiency in this way, the industries were most productive in Järva (24,700 euro / employed in industry / year), city of Tallinn (17,300), Põlva (17,300), Ida-Viru (17,200) and Harjumaa (16,500). In the medium level of productivity were industries in Raplamaa (15,600), Pärnumaa (15,500), Võrumaa (13,000), Valgamaa (12,900), Tartumaa (11,800), Viljandimaa (11,700), and Jõgevamaa (11,600). The less productive industries were found in Hiiu (7,100), Saare (7,600), Lääne (10,600), and Lääne-Viru (10,600). There can be vary many reasons for 3-4 times differences in industrial labour productivity, for example, lack of structural adjustment in enterprises, slow move towards capital intensive industries or large amount of employed in traditional labour intensive industrial activities. 

The recent dynamics and current situation in regional industrial development can be summarised indicating relative strength and weaknesses among Estonian counties (Table 11). The best performing areas for industrial activities are Harjumaa county (without Tallinn) (+5 points), town of Tartu (+5 points), city of Tallinn (+4 points), town of Narva (+4 points), Tartu county (without Tartu) (+4 points) and Viljandimaa (+3 points). The weakest performing Estonian areas in industrial activities are Jõgevamaa (-8 points), Põlvamaa (-8 points), Hiiumaa (-7 points), Läänemaa (-5 points) and Saaremaa (-4 points). This gives only a rough view of the situation and more detailed analysis of the industries within counties are required to make optimal decisions for industrial development. 

Nevertheless, it can be estimated that the role of the city of Tallinn will decline in industrial activities and Harjumaa and the surrounding counties will become more attractive as site of relocation for many activities today in Tallinn. Ida-Virumaa is facing significant social problems due to continuing restructuring of industrial activities, but it has a lot of human resources if these can be adapted into new modes of industrial production. Tartu and Tartu county are with good perspectives due to economy of scale in organising industrial activities. It is also possible that the availability of intellectual capacities can help to develop new industrial districts there. The rise of the land value in the central parts of Tallinn signifies that most of its industrial enterprises will move away before 2010. The relocation of these activities can substantially change the development possibilities for almost any Estonian locality. For relocation there is needed a suitable site (land and buildings), good logistics and skilled labour. From this perspective, the development of industrial parks in Harjumaa and in the surrounding counties can be a profitable investment for both the enterprise and the locality. The lower wage and availability of suitably skilled labour (depending of the type of production) can raise the position of more peripheral counties as well. To a smaller extent, this relocation will take place in all larger cities in coming years.

Table 11. Strength and weaknesses of Estonian counties for industrial activities.
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county	role in	absolute	production	production	employed	employed	employed
	industrial	industrial	dynamics	dynamics	in industry	dynamics	dynamics
	production	production	absolute	relative	absolute	absolute	relative	sum
------------------------------------------------------------------------------------------------------------------------------------
1. Harjumaa 	+	+	+	0	+	0	+	+5
(without Tallinn)
Tallinn: 	+ +	+ +	0	–	+ +	–	0	+4
------------------------------------------------------------------------------------------------------------------------------------
2. Ida-Virumaa 	+	+	0	0	0	..	..	-1
(without Narva)						– –	–
Narva	+	+	+ +	+ +	 +	..	..	+4
------------------------------------------------------------------------------------------------------------------------------------
3. Tartumaa 	0	0	0	0	..	..	..	+4
(without Tartu)					+	+ +	+
Tartu	0	0	+	0	..	..	..	+5
------------------------------------------------------------------------------------------------------------------------------------
4. Lääne-Viru	+	+	0	0	–	0	0	+1
------------------------------------------------------------------------------------------------------------------------------------
5. Pärnumaa	0	0	0	+	..	..	..	+1
(without Pärnu)					+		–
Pärnu	0	0	0	+	..	..	..	+1
------------------------------------------------------------------------------------------------------------------------------------
6. Järvamaa	0	0	+	+	0	–	–	0
------------------------------------------------------------------------------------------------------------------------------------
7. Viljandimaa	0	0	0	0	0	+	+ +	+3
------------------------------------------------------------------------------------------------------------------------------------
8. Raplamaa	0	0	+	+	0	0	0	+2
------------------------------------------------------------------------------------------------------------------------------------
9. Võrumaa	0	0	0	0	0	+	+	+2
------------------------------------------------------------------------------------------------------------------------------------
10. Valgamaa	0	0	0	0	0	0	0	0
------------------------------------------------------------------------------------------------------------------------------------
11. Põlvamaa	–	–	– –	– –	–	0	–	-8
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12. Saaremaa	– 	–	–	–	0	+	+	-4
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13. Läänemaa	–	–	–	0	–	–	0	-5
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14. Jõgevamaa	–	–	–	–	–	–	– –	-8
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15. Hiiumaa	– –	– –	–	–	– –	0	+	-7
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+ + = very important  + = important  0 = not particularly important  – = not significant  – – = not at all important
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3. INDUSTRIAL POLICY IN ESTONIA

3.1. Harmonisation of the Estonian industrial policy with the European Union

The integration negotiations between Estonia and the European Commission about Industrial Policy are concluded. Industrial policy in Estonia is being harmonised with the requirements of the European Union although no comprehensive industrial policy document has been adopted. In 2002, the Estonian Government approved the European Charter for Small Enterprises sharing the European Union objectives in business development and improving the business environment.

The Ministry of Economic Affairs is the central body for the formulation and co-ordination of Estonian industrial policy. The key approach is that the state intervention is kept as minimum. The major task is to create a favourable economic environment for private enterprises (Industrial policy… 2000, 64). Estonia’s business environment continues to be relatively stable and favourable to entrepreneurship. Nevertheless, one issue is the vulnerability of Estonian industry concerning the global market situation, especially in major industries (food, wood, furniture) and important growth sectors (telecommunications).

The assessment of Estonia’s policy towards industry states that it is “by and large in conformity with the principles of EC industrial policy, i.e. market-based, stable and predictable.” Main issues risen in the assessment report over industrial policy is that Estonia needs to develop a comprehensive industrial policy and better define and implement specific measures in this context. There should be clear priorities taking into account the need of the business community. Unequal industrial development (e.g. concentration of investments and development in Tallinn metropolitan region, serious decline in the north-east Estonia and some mono-functional industrial settlements) requires attention in the Estonian industrial and regional policy. Further issues concern the sufficiency of general financial resources for the implementation of industrial policy documents and plans and the specific implementation resources for Enterprise Estonia to carry out the promotion of entrepreneurship and investment (Industrial policy… 2000, 64).

There is a recent progress in the development towards Estonian industrial policy. The basic concept Estonian Economic Development Strategy was concluded by the end 2001. This creates the framework for industrial development strategy, however, going beyond the traditional industrial policy (NPAA 2002). The key areas of the strategy are:
•	development of export, the image and competitiveness of Estonian products and services in foreign markets;
•	raising the competitiveness of companies through technological development and innovation;
•	development of human resources;
•	regulative and institutional framework of entrepreneurship, quality of public sector services;
•	support to fair competition;
•	access to capital.

The strategy proposes a common and coordinated framework concept for many sectoral development plans, such as Education Strategy, Vocational Training Development Action Plan, R&D and Technology Strategy, Export Policy, Enterprise Policy, etc. Innovation capacity and technological development are the key aspects for future industrial policy in Estonia. Introduction of new technologies is planned to increase the competitiveness of the traditional industry. The key decision is to concentrate on the development of human resources in order to manage technological change and improve innovative capacities incl. merchandising and innovation, knowledge and technology, quality and design) (NPAA 2002, Chapter 21). 

This policy direction is a key issue in Estonia because technological development and qualified labour resources are the keys to support long-term growth. Still today, R&D and innovation in Estonia are characterised by low intensity and orientation to basic research. According to Männik (2002), in Estonia there has been an increase in the importance of foreign investment enterprises in the technological development in the 1990s. The higher the foreign penetration is in the manufacturing industry the bigger is the technological impact on the enterprises. Technological spill-over has taken place from technologically more advanced foreign industrial enterprises into less developed Estonian enterprises. Innovation capacity is a key factor for long-term success of Estonian industry.

A weakness of Estonian industrial development has been the lack of integrated industrial policy and lack of conceptual understanding of contemporary economic geography of enterprises. In practice, this has resulted as a pragmatic approach in which the Ministry of Economic Affairs has continued to carry out industrial policy with relatively little intervention. However, the Estonian integrated industrial policy is currently in the preparation phase. The policy is consisted of two main aspects. First, the document Enterprising Estonia (adopted in January 2002) contains proposals for measures to support businesses. The second part is the Estonian Export Policy and Research and Development Strategy. In the national support strategy for 2001-06 (Knowledge based Estonia) significant fields are biotechnology, information and communication technologies and materials technologies. The policies are implemented through the Estonian Technology Agency (ESTAG). Another field of recent interest is design. The Industrial Design Working Group has been appointed by the Minister of Economics (Supplement… 2002, 57-59). 

3.2. National policy for industry

National policy for industry has been mainly carried out through the implementation of regional policy support scheme for industrial areas, including Ida-Virumaa county as a whole and several declined industrial localities and mono-functional industrial settlements in different part of Estonia, namely Tapa, Lavassaare, Tootsi, Järvakandi, Võhma and Mõisaküla. 

Between 1996-99, 24 million EEK was allocated for North-Eastern Estonia but it had relatively little impact on entrepreneurship. In 2000, the budget for the programme for Industrial Areas was 8 million EEK. The estimated outcomes of this support programme for industrial areas by 2003 are 250 new jobs, 50 new jobs in mono-functional settlements and 50 million EEK from private sources (Tööstuspiirkondade programm 2001). There has been also support for (industrial) enterprises, including industrial infrastructure, by the Enterprise Estonia.  

One aspect of developing Estonian industrial policy is the design of multi-annual (2001-2005) programme for small- and medium-sized enterprises and entrepreneurship. This includes the selection of Best Procedure Projects. The Quality Promotion Strategy is aimed to promote the reputation of Estonian enterprises. Estonian Quality Award aims to increase the competitiveness of Estonian undertaking and public sector organisations (NPAA 2002). Industrial development policies will have in near future a more institutionalised form. By the end of 2002 there will be launched Competence Centre Programme and by 2003 there will be created Estonian Centre for Excellence (Supplement… 2002, 57-59). 

Several European Union related programmes are used to improve Estonian industrial development. In 1999, Phare contributed to the design of the industrial park pilot projects for Tapa and Paldiski. The Phare 2000 North-East Estonia and South-Estonia economic and social cohesion projects enhance innovation creation through the development of incubation and development centres. The Phare 2001 has an emphasis on the preparation to start to use the European Union structural funds. The implementation for projects in Phare 2002 starts in the second half of 2002 (NPAA 2002). Furthermore, the implementation of ISPA and SAPARD projects and the preparation of the Community Initiatives programmes are linked to industrial development by supporting the creation of necessary physical and human resources to enhance Estonian industrial capacities (NPAA 2002). 

Furthermore, the appropriate statistical system and database is being developed. Currently, the Statistical Office of Estonia provides material in the internet that can be used for making overview of industrial development in Estonia (see Chapter 1.2. “Development of industry in the OECD countries and Estonia”). Completed the development it can be used for detailed analysis of trends in industry. Furthermore, studies concerning the most important industrial sectors have been conducted. These include the analysis of competitiveness of the Estonian food, wood and furniture industries (see Chapter 1.2. “Development of industry in the OECD countries and Estonia” and Chapter 2.1. “Regional development and industry”). The proposals for national (industrial) innovation schemes have been evaluated as well (see Chapter 1.2. “Development of industry in the OECD countries and Estonia”). 

4. NEED FOR INDUSTRIAL PARKS AND SUPPORT FOR INDUSTRIAL INFRASTRUCTURE IN ESTONIA

4.1. Industrial parks

The development of modern industrial parks in Estonia is relatively recent phenomenon. However, industrial parks have become a common method in Western and Eastern Europe to facilitate the development of new industrial activities or expanding existing industrial activities in areas of limited size. As mentioned in Chapter 1.3., in the early stages of the development of industrial parks the main purpose was to provide the physical infrastructure to attract large-scale branch plants of already established firms. Today, increasingly attention is paid on industrial parks (or innovation centres and science parks) offering various services to work as incubators of new high-tech firms (Hayter 1997, 242-243). Nevertheless, in economically less developed countries both traditional and contemporary industrial parks can be used as instruments for regional development.
 
The development of the site (industrial park) is organised through an integrated planning process to accommodate industrial activities that support each other. Especial attention is paid on the design and management of the site. Normally, an industrial park offers modern facilities for lease or for sale that meet the requirements of different industries (up-grading physical resources), and help in marketing and training of the personnel (up-grading human resources). A successful development of an industrial park leads into synergetic effects of an industrial district and contributes to innovation capacities and spill-over of technological improvement. Innovation and technological development are vital for local and regional economy.

There are many aspects to take into account when developing industrial parks in Estonia (see Chapter 1.3., Table 6. Typology of industrial location conditions). In some cases there is needed the privatisation of land and infrastructure for enterprises. More common is the need to develop and improve basic infrastructure (new buildings, renovation of existing buildings, energy, water, communication and telecommunication networks). More complicated, but necessary tasks are dealing with the management capacities and marketing of industrial parks as well as enhancement of human resources in industrial parks in general. Overall, the development potential of industrial parks and estates should be analysed in the context of the economic overhead capital (roads, railways, port facilities, power lines, service facilities) and social overhead capital (schools, universities, hospitals, libraries) of given locality.

Industrial parks have become important element for future industrial development in Estonia. It is an evidence of more concrete initiatives towards comprehensive Estonian industrial policy, especially to support local level initiatives. 

4.2. Gaps in industrial parks and industrial infrastructure in Estonia

At the moment, there are only few industrial parks existing in Estonia but many are in planning or preparation phase. As it was discussed at length in the Chapter 1.3., infrastructure is enormously expensive to build and the existing stock of viable infrastructure is vital for most industrial activities. Infrastructure also limits the location possibilities of industrial activities. The location of industrial parks within Estonian functional urban regions signifies that the benefits deriving from the agglomeration economies of scale can be acclaimed.

A brief survey over existing industrial parks and needs for industrial infrastructure in Estonia was conducted in late September 2002. Expert interviews (mostly telephone interviews with different Estonian authorities, mostly at country level) were used as the method to gather material as well as statistics and material provided by the Internet sites. Furthermore, two interviews were conducted over the role of innovation and technology in Estonian industry at the Estonian Institute for Futures Studies. In the following, Estonian counties are presented in order of importance concerning industrial development and industrial infrastructure. A SWOT-analysis was conducted and indicated major gaps, needs and recommendations for industrial infrastructure. Furthermore, a brief and intensive case study was conducted over the most advanced industrial park of Estonia, the Tapa Industrial Park.

Unfortunately, due to the lack of systematic financial or material overview of industrial infrastructure by local or regional authorities - not to mention detailed cost-benefit analysis of the investment needs for industrial infrastructure, only a rough picture of the current situation can be given. Nevertheless, the main trends of Estonian industrial development in 1990-2001 and major perspectives for 2002-2010 were discussed in Chapter 1.2. “Development of industry in the OECD countries and Estonia”. The main regional trends in of Estonian industrial development in 1990-2001 were presented in Chapter 2.1. “Regional development and industry”. The perspective areas for future industrial investments (functional urban regions) were indicated in Chapter 2.2. “Regional specialisation of industry in Estonia and industrial regions”. These help to estimate which kinds of industrial activities and industrial infrastructure have the best potential, which regions are suffering particularly and which objects should be then supported.

Harjumaa 
•	most important industrial region in Estonia; most significant industrial site Tallinn; research and development potential
•	75,700 employed in industry: 3,200 industrial jobs reduced (1997-2001); industrial production growth 76 MEURO (1997-2000); 56 large industrial enterprises in functional urban region
•	several sites for industrial development, the development of industrial park of Paldiski failed
•	STRENGTHS: most significant industrial area with good infrastructure and skilled labour
•	WEAKNESSES: expanding cost for land and basic facilities; slow development of locally embedded high-tech industries and science park
•	OPPORTUNITIES: co-operation with foreign enterprises; possibilities to rise private capital
•	THREADS: rapidly increasing local cost leading into relocation of industries outside the region, vulnerability due to many industries position in the end of the production chain
•	GAPS: not enough attention to enhancement of innovation in enterprises 
•	NEEDS: science park with more planned innovative industrial clusters 
•	RECOMMENDATIONS: 0-1 support projects for industrial infrastructure; if supported then for high-tech and/or capital intensive industries with verified long-term impact, for example, enhancing the clustering of the science park

Ida-Virumaa (information provided by Ivar Rooks, Ida-Viru County government)
•	second important industrial region in Estonia, including as most important industry sites Narva, Kohtla-Järve, Sillamäe, Kiviõli and several mono-functional industrial settlements; tradition of heavy industry; private development of infrastructure is taking place selectively
•	34,700 employed in industry: 7,600 industrial jobs reduced (1997-2001); industrial production growth 197 MEURO (1997-2000); 17 large industrial enterprises in two functional urban regions 
•	no specific industrial parks
•	STRENGTHS: industrial tradition; several active industrial enterprises restructuring and developing their estates in Narva
•	WEAKNESSES: local economic overhead infrastructure is often unsatisfactory (accommodation, quality services); dependence of global economic trends
•	OPPORTUNITIES: several large-scale territories used (and unused) for industrial activities in different locations; large amount of industrial labour-force; in Kohtla-Järve, Sillamäe and Kiviõli basic infrastructure (power lines, gas, heating, water) exists in several underused industrial estates
•	THREADS: large and expanding industrial unemployment leading into out-dated skills and motivation
•	GAPS: no industrial parks
•	NEEDS: “financial contributions and investment”. For example, in Sillamäe there is a large former electronic industry estate fully unused. Possible target for industrial park.
•	RECOMMENDATIONS: 1-2 support projects for industrial infrastructure

Tartumaa (information provided by Taivo Tali, Tartu County government)
•	third most important industrial region in Estonia; most important industry site Tartu; research and development potential
•	17,000 employed in industry: 1,000 industrial jobs increased (1997-2001); industrial production growth 53 MEURO (1997-2000); 11 large industrial enterprises in functional urban region  
•	industrial parks / estates / concentrations: Tartu Science Park (34 enterprises); Tõrvandi-Reola (manufacturing of food – over 20 enterprises); Nõo (manufacturing of food); Vana-Kastre (manufacturing of wood and construction material – 3 enterprises)
•	several industrial parks under preparation (in Tartu: Raadi district, Ropka-Emäjõgi
•	STRENGTHS: university and potential for high-tech and innovative development
•	WEAKNESSES: lack of major input from the university in applied R&D; development of the science park rather modest
•	OPPORTUNITIES: potential for high-tech and innovative development
•	THREADS: not realised the intellectual potential
•	GAPS: lack of attractive setting for high-end science park; 
•	NEEDS: in Raadi need for expensive basic infrastructure redevelopment (roads, sewage); specific needs of science park not known
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; if funded: improvement of science park and innovative high-tech industrial activities

Pärnumaa
•	fourth most important industrial region in Estonia; Pärnu most important industrial location
•	12,500 employed in industry: 600 industrial jobs reduced (1997-2001); industrial production growth 62 MEURO (1997-2000); 7 large industrial enterprises in functional urban region
•	industrial parks / estates / concentrations: Pärnu (food, wood, electronics, textile); Reldori technocentre (expanding) ; Sindi (former large textile factory divided into smaller units) ; Paikuse (specific planning for development ; wood industry); Vändra (textile, electrotechnology, wood processing)
•	STRENGTHS: industrial tradition; engagement of industries in Pärnu town in high-tech activities, growing industrial activities in several locations
•	WEAKNESSES: many activities in shrinking industrial branches
•	OPPORTUNITIES: clustering of activities into modern industrial parks
•	THREADS: ceasing of activities in low-tech and labour-intensive industries
•	GAPS: need to expand activities into modern industrial cluster
•	NEEDS: particular needs not known
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project

Viljandimaa (information provided by Urmas Tuuleveski, Viljandi County government)
•	significant recent growth in industrial employment
•	8,300	employed in industry: 700 industrial jobs increased (1997-2001); production growth 20 MEURO (1997-2000); 5 large industrial enterprises in functional urban region
•	no industrial parks
•	STRENGTHS: growing industrial region with possible niche for cultural industries
•	WEAKNESSES: not yet developed modern industrial park
•	OPPORTUNITIES: increase of R&D and cultural industries related activities
•	THREADS: dependence on declining industrial activities
•	GAPS: lack of proper future-oriented industrial park
•	NEEDS:
•	RECOMMENDATIONS: 1-2 projects for industrial infrastructure funded from the support project

Lääne-Viru (information provided by Vahur Leemets, Tapa Industrial Park)
•	few industrial employment, substantial recent growth in industrial production
•	3,300 employed in industry: 700 industrial jobs reduced (1997-2001); industrial production growth 36 MEURO (1997-2000); 6 large industrial enterprises in functional urban region  
•	Tapa industrial park (6 enterprises, 100 employed); existence of other parks unknown
•	STRENGTHS: experience of developing an industrial park; good logistical position
•	WEAKNESSES: small amount of industrial activities
•	OPPORTUNITIES: relocating industrial activities from Tallinn area; location foreign enterprises
•	THREADS: low-tech and labour-intensive profile in industry
•	GAPS: improvement of power line for Tapa industrial park (5 million EEK); more intensive marketing and development strategy for Tapa industrial park
•	NEEDS: further development of Tapa industrial park; possibilities to create co-operation with other industrial estate in the area
•	RECOMMENDATIONS: 1-2 projects for industrial infrastructure funded from the support project

Raplamaa (information provided by Kalle Moor, Rapla County government)
•	few industrial employment, no functional urban region; substantial recent growth in industrial production
•	4,600 employed in industry: 300 industrial jobs reduced (1997-2001); production growth 41 MEURO (1997-2000)  
•	No industrial parks. There is one important mono-functional settlement.
•	STRENGTHS: location close to Tallinn
•	WEAKNESSES: no functional urban region; location close to Tallinn
•	OPPORTUNITIES: location close to Tallinn; relocation of industrial activities from Tallinn
•	THREADS: closing of the mono-functional industrial settlement in Järvakandi (manufacture of glass) 
•	GAPS: sites for development?
•	NEEDS: strategy for developing possible industrial sites (industrial parks?) for relocating industrial activities from Tallinn
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project

Järvamaa (information provided by Toomas Tipi, Järvamaa County government)
•	rapidly decreasing industrial employment, substantial recent growth in industrial production
•	4,900 employed in industry: 800 industrial jobs reduced (1997-2001); production growth 47 MEURO (1997-2000); no large industrial enterprises in functional urban region  
•	no real industrial parks, however, five developing industrial areas with at least one new enterprise: Amavere (construction, metal, wood); Imavere (3 wood processing enterprises; Koeru (metal and electronics); Mäo (wood, glass, metal); Türi (metal)
•	STRENGTHS: active industry with possible wood manufacturing cluster; plans for enhancement of existing five industrial areas
•	WEAKNESSES: rapid decline in industrial employment
•	OPPORTUNITIES: improvement of one area into industrial park; possibilities to relocate industries from Tallinn
•	THREADS: dependence on global market in manufacturing of wood 
•	GAPS: Koeru: investment in basic infrastructure (water and sewage system; roads); Mäo: investment in sewage system, security cameras)
•	NEEDS: investment in basic infrastructure
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project

Valgamaa (information provided by Valga County government)
•	few industrial employment
•	4,100 employed in industry: 300 industrial jobs reduced (1997-2001); production growth 15 MEURO (1997-2000); 1 large industrial enterprises in functional urban region  
•	no industrial parks (possibility of free enterprise zone)
•	STRENGTHS: experience and labour force in logistics
•	WEAKNESSES: peripheral and declined area with degraded industrial sites
•	OPPORTUNITIES: according to Valga county economic development office, the area with best perspective is to develop the existing Valga free enterprise zone; possibilities for cross-border logistical centre 
•	THREADS: increasing peripherality, slow development of enterprise zone
•	GAPS: know-how on modern industrial parks
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project

Võrumaa (information provided by Tiina Hallimäe Võru County government)
•	5,200 employed in industry: 100 industrial jobs reduced (1997-2001); production growth 18 MEURO (1997-2000); 4 large industrial enterprises in functional urban region
•	Vastseliina industrial park (24 ha; 3 enterprises; 76 employed); several industrial parks planned (Varese in Sõmerpalu, Parksepa and another in Võru vald; one in Võru town)
•	STRENGTHS: manufacturing of wood and furniture (54 enterprises); existing concrete strategy and plans for industrial infrastructure development
•	WEAKNESSES: lack of infrastructure and sites for industrial parks
•	OPPORTUNITIES: expansion industrial cluster in manufacturing of wood and furniture to attract foreign and domestic enterprises
•	THREADS: no further development in industrial infrastructure 
•	GAPS: lack of infrastructure and sites for industrial parks, many simultaneous projects
•	NEEDS: 8 million EEK for further development of Vastseliina industrial park; unknown amount for planned industrial parks
•	RECOMMENDATIONS: 1-2 projects for industrial infrastructure funded from the support project

Saaremaa
•	low impact on Estonian industry
•	5,200 employed in industry: 100 industrial jobs increased (1997-2001); production growth 2 MEURO (1997-2000); 2 large industrial enterprises in functional urban region
•	no industrial parks
•	STRENGTHS: industry connected to local resources 
•	WEAKNESSES: insular location; higher transport costs
•	OPPORTUNITIES: higher-end designed production (tourism, etc.)
•	THREADS: lack of industrial clustering
•	GAPS: not known
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; possibilities to impact Estonian industry are very limited

Läänemaa 
•	low impact on Estonian industry
•	3,300 employed in industry: 1,100 industrial jobs reduced (1997-2001); production growth 5 MEURO (1997-2000); 1 large industrial enterprise in functional urban region
•	STRENGTHS: connection to Tallinn
•	WEAKNESSES: rapid decline in employment and low production growth
•	OPPORTUNITIES: co-operation with surrounding regions and islands; possibilities for low-cost high-quality environment for industrial park
•	THREADS: ceasing of most industrial activities
•	GAPS: not known
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; possibilities to impact Estonian industry are very limited

Hiiumaa 
•	low impact on Estonian industry, no functional urban region
•	1,400 employed in industry: 100 industrial jobs reduced (1997-2001); no production growth (1997-2000)  
•	STRENGTHS: industry based on local resources
•	WEAKNESSES: higher transport costs; low impact of industry, no production growth
•	OPPORTUNITIES: maintenance of locally significant industrial production
•	THREADS: ceasing of most industrial activities
•	GAPS: not known
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; possibilities to impact Estonian industry are very limited

Põlvamaa (information provided by Haimar Sokk, Põlva County government)
•	low impact on Estonian industry, no functional urban region
•	2,300 employed in industry: 600 industrial jobs reduced (1997-2001); production decline 6 MEURO (1997-2000) 
•	no industrial parks 
•	STRENGTHS:
•	WEAKNESSES: weak and shrinking industrial activities
•	OPPORTUNITIES: relocating specific industrial activities from Tallinn or from Tartu
•	THREADS: decline of most industry
•	GAPS: power lines in peripheral areas of the country, however, no clear connection to major industrial activities
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; possibilities to impact Estonian industry are very limited; however, to tackle employment problems funding can be considered

Jõgevamaa 
•	low impact on Estonian industry, no functional urban region
•	2,400 employed in industry: 1,000 industrial jobs reduced (1997-2001); production growth 3 MEURO (1997-2000)  
•	STRENGTHS: region not strongly dependent on industry
•	WEAKNESSES: industrial decline; small and peripheral locality
•	OPPORTUNITIES: relocation of some low-tech and labour-intensive industries
•	THREADS: ceasing of industrial activities
•	GAPS: not known
•	NEEDS: no immediate and evident market need or demand
•	RECOMMENDATIONS: 0-1 projects for industrial infrastructure funded from the support project; possibilities to impact Estonian industry are very limited

4.3. Case of Tapa industrial park

There are only few industrial parks in Estonia. One is located in Tapa (low-tech industries), another in Vastleliina (developing) and third in Tartu (mainly high-tech industries). Tartu Science Park was established already in 1992 and in 1997 it was converted into a foundation. Currently there are located 34 enterprises with over 300 employed. The Tallinn Technology Park is being developed at the moment, supported by a Steering Committee consisted of the representatives of the Ministry of Economic Affairs, Ministry of Education, Foundation Enterprise Estonia, Tallinn City and Tallinn Technological University. Furthermore, there are plans to convert former mono-functional settlements into broader industrial areas (for example, Kunda) and develop several poly-functional logistical centres (for example, Kadrina) and use business incubation centres as platforms for supportive industrial development.

Tapa industrial park has been developed since 1997 by the local authorities. As mentioned, its creation was facilitated by PHARE support scheme in 1999 (Tapa 2002). Part of the Phare Estonia Regional Development Project in 1999 was the pilot project for Tapa and Paldiski with the aim to reconvert former military sites into industrial parks. The aim of the creation of such industrial parks was to contribute to (Phare 1999, 13):
•	creation of conditions favouring business activities in the Estonian regions;
•	support for local initiatives;
•	reduction of regional disparities;
•	promotion of a sustainable economy through recycling of previously used land;
•	improving efficiency by reducing ineffective allocation of resources between regions;
•	reducing concentration of congestion and similar costs in Tallinn.

The project for Tapa industrial park was based on the idea to develop small- and medium sized industries (10-100 employed) that would have characters (Phare 1999, 34):
•	light industries with a mixture of not highly sophisticated labour and capital intensive technologies appropriating the lower wage level; 
•	focus on processing of raw material at early stages;
•	management and ownership external to the locality at the early stages;
•	industries with low environmental impact.

According to the feasibility study for the Tapa industrial park (Phare 1999, 36-37), the gross land area requirement for industrial parks varies between different industries. The average size of industrial plots in the European Union is 4,000 sq. m and two-thirds of all industrial plots are smaller than 5,000 sq. m. The gross land requirement per employee is for wood and paper industry 250 sq. m / employee, 200 sq. m / employee for light metal industry, 188 sq. m / employee for food processing and 63 sq. m / employee for textile industry.

The main costs for the development of industrial parks are:
•	external (road connection, fresh and waste water system, green areas);
•	internal (land acquisition for the site; planning and construction supervising costs of the site; building of roads, pavements, and water system; development of green areas with tree planting; energy supply system; telecommunications).

Estimated costs of developing such site are 45,000 – 54,000 euro / hectare (incl. roads). One industrial park can be located into a territory of one hectare (10,000 sq. m of which about 40-50% is office space). However, if a storm water drainage and collection basin is needed, it would increase the construction costs by 40,000 euro. The planning of the site is about 1-1.5% of the total costs and marketing costs around 10% of the project. This means that the development of a small industrial park (around 4,000 sq. m.) is possible within the limits of 100,000 euro. Existing conditions in Estonia can vary between the possible industrial parks so the costs can be slightly smaller or much bigger.

The major task of the owner of an industrial park (e.g. public authority in the case of this project) is to provide facilities for the (re)locating industrial enterprises. This is an immediate cost that requires public support. However, the benefits rise from the lease or sold of office space, direct taxation and increasing local and regional consumption possibilities due to employment. The cost-benefit analyse of an industrial park normally indicates a balance after 10-20 years. The social impacts of improved employment and imago are difficult to count in economic terms.

At the moment, the Tapa industrial park has 6 enterprises with 100 employed. Main industrial fields are wood processing, metal industry and potentially in 2003 plastic industry. The largest enterprises are Tapa Mill and Fenix. There are currently on sale planned and partly developed sites for possible industrial enterprises. The surrounding localities of Tapa are involved in the development activities of Tapa industrial park in which several holdings are on sale. The development of Tapa industrial park is supported by public sources, most recently in the spring 2002 with 1.05 million EEK by Enterprise Estonia. 

5. FEASIBILITY OF THE GRANT SCHEME “SUPPORT FOR INDUSTRIAL INFRASTRUCTURE DEVELOPMENT” 

The ex-ante feasibility of the Support for Industrial Infrastructure Development is based on the information given in the Standard Summary Project Fiche. As the evaluating tool there is used simplified cost-benefit analysis for judging the advantages of the intervention from the point of the view of the groups concerned. Attention is paid also on the monetary value attributed to all the positive and negative consequences of the intervention (European Commission 1999, 112). 

The feasibility of the implementation of the support scheme is analysed based on the information presented earlier chapters of this report. For the preparation of that material there was used secondary, cross sectional, time series, and longitudinal data. Furthermore, individual interviews (in situ and ex situ) of selected experts were conducted. A brief case study of Tapa industrial park was realised. The suggestions regarding the feasibility are also based on the reflection of that data of industrial development in the OECD countries and Estonia.

5.1. Scheme objectives, funding, timetable and expected outcomes 

The Support for Industrial Infrastructure Development (SIID) scheme is connected to Chapter Entrepreneurship Development (3.2.2.) of the National Development Plan Single Programming Document 2003-2006 as well as to the enterprise policy of Estonia. 

The draft (13.09.2002) Single Programming Document 2003-2006 of Estonia indicates the problems of low level economic competitiveness created by regionally unbalanced business development (regionally unbalanced modern business infrastructure, not appropriately used potential of human, environmental and cultural resources in many regions) and by slow development pace and small number of enterprises (Eesti 2002). 

The SIID scheme starts with the call for proposals in March 2003 that will be selected by October 2003. The start for the project activity is planned for October 2003 and concluded by March 2005 (SIID 2002, 9).

 Assessed feasibility: Approved. The successfully implemented scheme contributes to the implementation of the National Development Plan and enterprise policy tackling the problems of low economic competitiveness and diverging regionally unbalanced structure.

The SIID scheme is based on Phare investment supports (1,500,000 euros; 75% of the total costs) and national co-financing (500,000 euros; 75% of the total costs). The national financing will be provided by the beneficiaries in 2003-2004. The funding by the private sector is supplementary to the total budget. 

 Assessed feasibility: Approved. The scheme is within the Phare rules and regulations. 

The SIID scheme has as general objectives to “support upgrading and establishing industrial infrastructure”. The scheme is expected to have results that will be verified by en-ante, ex-nunc and ex-post evaluations and regular reports (SIID 2002; Annex 1). 

 Assessed feasibility: Approved. Project is clearly targeted to support industrial infrastructure. The implementation requires clearly targeted monitoring.

The wider objectives of the SIID are “to raise the competitiveness of Estonian enterprises by facilitating the entrepreneurial abilities and creation of new jobs, following the principle of balanced regional development”. The objectively verifiable indicators are:
•	“growth in the number of enterprises and sole proprietors, at least 5 new”
•	“growth of employment, at least 500 new jobs in less developed regions” by 2005. 

 Assessed feasibility: Approved with consideration. The targeted cost is 4,000 euro (or less) per one new job and 500,000 euro (or less) per new enterprise. Balanced regional development requires the regional distribution of supported projects. For feasible rate of return for investment future-oriented industrial activities should be promoted to guarantee the sustainability of employment. This is not always possible in the industrially declining areas and industries with low technological input. Furthermore, attention should be paid on the possibilities and problems concerning the relocation of existing industrial activities to newly established areas. This may cause difficulties in verifying the objective outcomes of the project (new jobs, new enterprises). However, the support of a relocation of industrial activities from Tallinn area to peripheral area could be considered if it increases immediately the employment of new site and if the relocated industry has long-term perspectives. In this case, attention should be paid on EC Competition rules and regulations. 

The more precise project purposes are the “improvement of business infrastructure in less developed regions” (SIID 2002, 3). However, the most important and developed industrial locality Tallinn is not excluded from the scheme but its possible share is limited to 25% of the total Phare grant. The objectively verifiable indicators are: 
•	“3 million euro of new investments by private companies attracted to less developed regions”. 

 Assessed feasibility: Approved with consideration. The public support scheme for industrial development in Tallinn, the already economically and industrially most developed region, can be (max.) 500,000 euro. If a project will be funded in Tallinn area, it should be of high-tech and/or capital intensive industries with verified long-term impact. However, more attention should be based on the possibilities to rise private sector funding in Tallinn area. It should be considered that public funding should be allocated for projects that include a scheme of public-private partnership and/or clear long-term economic viability. 

The SIID scheme will contribute to the “development of industrial areas and parks” by promoting several activities, namely (SIID 2002, 4):
•	“construction, reconstruction and renovation of technical infrastructure (electricity, communications, heating systems etc.”
•	“construction and reconstruction of roads”

 Assessed feasibility: Approved. Industrial areas and parks can be key strategic instruments for contemporary industrial development. Also possibilities for expanding existing sites of already existing or recently initiated sites should be considered. An emphasis should be to select projects addressing ideas of new economic geography, enhancement of innovation potential and improvement of technological capacities.

The SIID scheme is expected to have functioning Industrial Infrastructure Grant and at least 10 projects within a grant scheme implemented properly by 2005. The objectively verifiable indicators are: 
•	“at least 10 industrial infrastructure projects implemented by the end of 2005”

 Assessed feasibility: Approved with consideration. The total public funding is only 2 million euro and divided between (at least) 10 industrial infrastructure projects mean the allocation of 200,000 euro or less per project. The minimum costs for a new industrial park can be estimated to be 100,000 euro or even several times more. A strategic concentration into fewer industrial parks and areas can improve the economy of scale of the projects and raise the competitive advantage of the improved sites. The support for low-tech and traditional industries should be limited into simple improvements such as improvement of communication system (roads, telenetworks) or renovation of water system that require relatively small amount of investments and have clear and immediate positive impact on employment or increase the maintenance of employment in long-term perspective.

The financial limits of the projects provided by the SIID scheme are:
•	“minimum grant contribution per project  / grant agreement: 100,000 euro.”
•	“maximum grant contribution per project / grant agreement: 300,000 euro.”
•	“minimum contribution of beneficiaries / applicants: 25% of total project costs.”

 Assessed feasibility: Approved. The minimum grant is in the limits to create real impact for physical infrastructure improvement except in the case of existing industrial site or park. Since in the project fiche has been granted at least 10 projects, the use of maximum grant contribution can be used for 5 or fewer projects.

The beneficiaries of the SIID scheme supported projects are public sector organisations. However, public-private partnerships are encouraged but private sector enterprises cannot be the lead project partners or owners of project assets after completion. Major beneficiaries are:
•	“local governments and public agencies”
•	“enterprises (indirect)”

 Assessed feasibility: Approved. Falls within the Phare regulations. However, public-private co-operation should be promoted to enhance the long-term sustainability of the investment. Key attention should be paid on the management capacity of the public-led industrial parks and specific more autonomous non-profit institutional arrangements should be considered.

4.2. Project organisation, beneficiaries, and asset owners

The SIID scheme is organised hierarchically. The CFCU will be the implementing agency for the project with the right to delegate certain functions and bears responsibility of contracting. The Ministry of Economic Affairs delegates the tasks of management of the project to the Enterprise Estonia who acts as the technical implementation unit of the project on the basis of the standard summary project fiche. It is responsible for the project eligibility and feasibility check. The project selection takes place in the Estonian Regional Development Agency. Within the Enterprise Estonia there is the Phare Unit in which one person will work full-time and a procurement specialist will work part-time (SIID 2002, 7-8).

The beneficiaries for the scheme are local governments and public agencies related to development of entrepreneurship in Estonian regions. Enterprises are indirect beneficiaries and eligible as project partners. The owners of the investments of the scheme will be local governments or public agencies (SIID 2002, 8).

 Assessed feasibility: Approved. Falls within the Phare regulations.

4.3. Scheme budget, project financial and implementation organisation

The scheme is based on Phare investment supports (1,500,000 euros; 75% of the total costs) and national co-financing (500,000 euros; 75% of the total costs). The funding by the private sector is supplementary to the total budget. Up to 6% (120,000 euros) of the total funding will be used by the Estonian Enterprise for management of the grant scheme. The activities include: trainings, meetings and workshops for beneficiaries in project implementation; evaluation of results and impact of the support scheme; assistance for preparation of procurement documentation and for selected projects; audit and expertise costs, construction inspection costs, etc. (SIID 2002, 8).

The implementation agency is the CFCU responsible for tendering, contracting and payments. Estonian Enterprise is responsible for the technical implementation. The steering and monitoring of the project is the responsibility of the Ministry of Economic Affairs. The steering committee is consisted of partners involved in the scheme (SIID 2002, 9). Equal opportunity, sustainability and environmental concerns are part of the project (SIID 2002, 10-11).

There will be strict project selection criteria to ensure that only projects with a very good business plan will receive funding. All necessary technical studies are completed by the beneficiaries before starting the investment. The beneficiaries will assure future maintenance and operating costs for industrial investment projects. 

As major catalytic affects is the increase in the absorption capacity of Structural Funds in Estonia. The amplifying effect of Phare on national business support measures multiplies the development affect in priority areas. Regionalisation of business support measures provides an input to balanced regional development in Estonia. The co-financing (at least 25% by the beneficiaries) and additionality of the project is measured strictly. 

The scheme is part of the multi-annual programming approach for support to structures and mechanisms for implementation of business support measures (SIID 2002, 10). The SIID scheme is linked to several activities Phare activities in Estonia, such as:
•	South-Eastern Estonian Logistic centre (pilot)
•	Improve entrepreneurial spirit in Peipsi region (pilot)
•	Tapa/Paldiski re-conversion of former military sites into industrial park (pilot)
•	Development of regional co-operation networks for innovative entrepreneurship
•	Phare 1999 Project Preparation Facility
•	Phare 2000 ESC project Economic and human resources development of Ida Viru 
•	Phare 2000 ESC project Economic and human resources development of South-Estonia
•	Phare 2001 ESC project Structures and instruments for management of business support measures
•	Phare CBC Small Project Facility for various business supporting measures

The scheme also contributes to the implementation of the sub-measure of the ERDF Business development (Establishment and development of modern infrastructure for enterprises in less developed regions) (SIID 2002, 11). 

 Assessed feasibility: Approved. The budget falls with the Phare criteria. The project selection criteria could tale into account, for example, industrial development trends of the OECD countries, long-term viability of labour-intensive industries at given industrial location, aspects of low and high technology within the project, planned technology transfer within the project, long-term innovation strategy of the project, links to immediate external environment (availability of skilled labour, possibilities to continuing education and training of employed, promotion of equal opportunities). In the selected projects, especial emphasis should be targeted on the management training of the supported industrial parks and areas. The interaction between public, private, NGOs and inhabitants should be promoted to enhance local commitment to the project. Image creation, marketing and media coverage should be part of the project implementation.

6.  CONCLUSIONS AND PROPOSALS

The share of industry in Estonian GDP is 23% and 26% in total employment with significant regional differences. Estonian industrial productivity is under 40% of the EU average due to large amount of traditional labour-intensive and/or low-technology industries (food products and beverages, textile wood, paper and paper products, furniture). Estonia follows the industrial development of the OECD countries with certain time gap. The share of employed in industry decreases, the share of labour intensive industrial production decreases (incl. manufacture of textile and wearing apparel). The impact of R&D and high-technology in industry increases and the share of manufacture of machinery increases (incl. metal products and equipment).

Estonia’s policy towards industry is by and large in conformity with the principles of EC industrial policy, i.e. market-based, stable and predictable. However, there is need for a comprehensive industrial policy and better definition and implementation of specific measures taking into account the needs of the business community. 

Generally, regional development in Estonia is polarised. Unequal industrial development (e.g. concentration of investments and development in Tallinn metropolitan region, serious industrial decline in the north-east Estonia and some mono-functional industrial settlements, lack of appropriate regional industrial infrastructure) requires attention. The sufficiency of general financial resources for the implementation of industrial policy documents and plans and the specific implementation resources for Enterprise Estonia is of concern.

The ex-ante feasibility of the Support for Industrial Infrastructure Development was conducted over 11 different aspects of the proposed support scheme. As the evaluating tool there was used simplified cost-benefit analysis for judging the advantages of the intervention from the point of the view of the groups concerned. Attention was paid also on the monetary value attributed to all the positive and negative consequences of the intervention. Eight criteria were approved without consideration and three with consideration.  

It is recommended that the Phare “Support for Industrial Infrastructure Development” scheme will be launched. Careful attention should be paid on the selection of the industrial infrastructure projects to guarantee that by 2005 will take place the growth in the number of enterprises and sole proprietors, at least five new, and growth of employment, at least 500 new jobs in less developed regions, as well as three million euro of new investments there by private companies. 

Supporting industrial infrastructure and the creation of interactive and innovative industrial parks can make a difference in regional development. The synergetic effects of location are important in technological spill-over and innovation. The development of such synergetic industrial parks is mostly at initial stage in Estonia. These should be located in functional urban regions or very close to them to guarantee the availability of skilled labour and development potential. Some industrial parks will be for low-tech and labour-intensive industries, however, high-tech and capital intensive activities have better long-term perspective. The funding provided by improvement of basic industrial infrastructure is crucial in the initial phase of development, especially in countries experience rapid transformation such as Estonia. However, very soon the role of human resources will be more important for successful development.

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