The Baltic states' agility, strong cooperation and business environment aimed at internationalization could give the region an advantage to be a testing ground for future technologies in Europe.
Countries with small domestic markets, like Estonia, Latvia, and Lithuania, face several economic challenges that can affect their growth and development. These challenges arise due to limited market size, lower domestic demand, and reliance on external factors. For example, in a small domestic market, companies often struggle to achieve economies of scale, meaning they can’t produce goods or services at a large enough volume to reduce costs per unit.
To minimize this effect, companies often rely heavily on exporting to larger markets to scale their operations, but this exposes them to external risks, such as fluctuating global demand and trade policies. And this brings out another risk - high dependence on exports. Countries with small domestic markets are highly dependent on exports to fuel economic growth, making them vulnerable to global economic fluctuations, trade barriers, or economic downturns in key trading partners.
To illustrate all of this, let’s peek into the 2008-2009 financial crisis, when the Baltic states were hit hard because of their reliance on external trade and foreign investment. The crisis led to deep recessions in all three countries, with significant drops in GDP and spikes in unemployment.
The fact that the Baltic states are inherently small domestic markets not only poses challenges. But it also offers us plenty of opportunities that could give the region here an important technological and economic success story.
Smallness has advantages
The Baltic states benefit from their agility, digitalization, favorable business environments, and export-oriented economies. We leverage these advantages to remain competitive on the global stage, especially in sectors like tech, manufacturing, and financial services.
Compared to larger EU economies, we excel in digital transformation, efficient governance, and cost-competitiveness, making us attractive destinations for businesses and foreign investors.
The region's international success has been significantly enhanced by the Cross-Border Data Exchange Infrastructure, known as X-Road, which provides a secure framework for data exchange between public and private sector organizations across borders. For countries with smaller domestic markets, a cross-border data bridge could serve as a crucial platform for boosting technological and economic competitiveness. However, the current utilization of this opportunity remains limited. Put simply, the potential benefits of this cross-border infrastructure could be fully realized if its use were maximized.
In terms of cross-border cooperation, which has a substantial impact on both the public sector and international business in this region, real-time, paperless logistics solutions provide a prime example. The digitalization of logistics processes enables real-time tracking and paperless transactions, leading to faster, more efficient, and transparent transportation.
Increased operational efficiency not only drives cost savings for businesses but also enhances the performance of public sector institutions. These institutions are responsible for ensuring the legality and oversight of trade, and digitized processes streamline this oversight while ensuring transparency at every stage. Given that the Baltic countries are key trading partners, the flow of cross-border logistics data unlocks numerous economic benefits for the region. The challenge now is to leverage these successful cross-border projects, transforming them from regional achievements into pan-European benchmarks for innovation and efficiency.
The EU has championed cross-border collaboration with initiatives like the Single Digital Market and X-Road, which promote the seamless exchange of services and data across member states. One of the major barriers to effective cross-border collaboration is the lack of harmonized regulations across different EU countries. For example, data protection laws may differ in interpretation or enforcement despite the GDPR framework, leading to inconsistent implementation and barriers for businesses trying to operate in multiple countries. These regulatory differences can stifle the ease of doing business across borders.
This is where the small size, agility, innovation, and strong collaboration of the Baltic States can offer a significant advantage in testing new technologies and driving pan-European adoption.
Testing cross-border solutions
As I’m involved daily with prototyping, I see a growing interest year after year in testing products and services cross-border. This is one of the key advantages for businesses in our region—entrepreneurs here must consider internationalization from the outset if they want to remain competitive and achieve sustainable growth.
It's no secret that technology evolves faster than the public sector can keep pace. The more we support and develop the private sector internationally, the more receptive the public sector becomes in managing the risks and opportunities that come with technological innovation. This is where the advantage of small countries comes into play: agility and adaptability. These traits make our region an attractive destination for testing future technologies.
While Europe has several cross-border collaboration projects, they tend to be niche-specific and relatively short-term. This opens the door for us to consider whether Lithuania, Latvia, and Estonia could position themselves as testing grounds for international projects that require public-private sector collaboration. Our region’s strengths—data exchange bridges, strong intergovernmental cooperation, and the agility stemming from our size—are key factors that could give us this competitive edge.
The author, Brait Pilvik, is CEO of Prototron, a prototyping fund operating in Estonia.
