Startup nation

When an Estonian e-government transformation project won a Real Innovation Award from London Business School’s Institute of Innovation and Entrepreneurship (IIE) it raised a few eyebrows.

How could a national bureaucratic reform be likened to a startup? But amid the COVID-19 pandemic, the award looks prescient: Estonia now has a civil service platform that is as contactless as your average online shopping experience.

Estonia’s e-government transformation is a project designed to create an efficient paperless government within the Baltic nation and a borderless, virtual business services environment elsewhere.

Within Estonia, the system connects all parts of government on one platform, which is connected to each citizen through a chip ID card. The system works on the principle that information is entered once and shared across government; Estonians can use their cards to perform tasks like voting, proving identification and paying taxes.

Through the same platform, non-Estonians can also apply for e-Residency. This grants holders the right to start a business in ‘electronic Estonia’ and secure an internationally recognised online ID that enables individuals to transact, sign agreements virtually and other services needed to start and run a business

“As a nation, we aspire to be like an app,” explains Mats Kuuskemaa, Head of Business Strategy, e-Residency. “For about 50 years, we had a lot of unwanted bureaucracy from the Soviet Union that we didn't sign up for.

“We had a different kind of break with the Soviet Union, compared to a lot of countries, because almost everyone was sacked in Estonia when the whole civil service was let go.”

Soviets exit

In the 1990s, Estonia’s plans for building its government from scratch took inspiration from Silicon Valley rather than Whitehall or Washington.

“We tried to get things done very fast,” admits Kuuskemaa. “We let the whole communist system and its heavy industry go. We wanted to create the right environment for investment and a strong legal system. And it worked.”

During Kuuskemaa’s school years (1995 to 2007), Estonia’s economy grew at a tick a little below 8% a year. It was during this time that a deal to fix the creaking Soviet phone line to Finland was mooted, which then prompted a more profound change in infrastructure. Why lay a new cable when there was an opportunity for Estonia’s infrastructure to leapfrog more developed nations?

“The government was really eager to try out new ideas, and everything flowing out of Silicon Valley. So in 2000, we introduced a national ID card. This was very similar to the e-Residency card we have now with a smart chip, which they started to add services to.”

First, it was a population registry and then it was medical records; today, 350 interconnected databases are linked to the chip. The key early principle was to get the cards into people’s hands and to add services over time.

Digital nomads

If this sounds a little 1984, Estonians certainly didn’t feel that way.

“We didn't really know what was going to come out of it. We thought that maybe the card was going to be used for safe digital identification; we didn’t know it would become so popular for business. What we learned by opening it up to everyone through the e-Residency scheme is that people apply for it to start and run a company online. We thought there would be other, possibly easier, ways of launching a startup, especially among European entrepreneurs, but to our surprise, even among Europeans, it's been very popular.”

“Remote entrepreneurs and digital nomads who can work from a laptop anywhere find it very attractive. They’re often moving between jurisdictions, so they often don't have to pay a personal income tax in the country where they reside.”

Startups founded in this way are not necessarily liable for Estonian tax but pay tax where the value is created, as they would do within any jurisdiction. And if your startup does qualify to be taxed in Estonia, it offers among the lowest rate of corporate tax in Europe.

Why Estonia?

The vision for the e-Residency scheme is about more than just easing bureaucracy; it also makes a profit for Estonia and is a valuable way for a small country to brand itself. Open, entrepreneurial and interconnected: yes, but it’s crucially promoting Estonian digital culture – this is a project that extends beyond bureaucracy and efficiency to provide a new vision for national identity. The goal is to make e-Residency a tool that changes what’s achievable for entrepreneurs – an enabler for all.

The e-Estonia project raises questions what a nation is and perhaps should be, and what a company should be. By selecting it as an RIA winner, LBS judges set a new vision for the awards’ ambition that reflects the School’s desire ‘to change the way the world does business’. Estonia, inspired by start-up culture, is perhaps the culmination of entrepreneurialism: a nation behaving very much like an ambitious and forward-thinking startup.