Foreign direct investment, local conditions and development: Crossing from dependency to progress in peripheral Kuressaare, Estonia

Abstract

The article discusses the dynamic relationship between foreign direct investment (FDI) and local conditions in a peripheral area by introducing the Jakobsen model for how outcomes of FDI on local economies differ according to contextual interplays between local conditions and the content of a given FDI. The dynamics are demonstrated in the case of Kuressaare on the island of Saaremaa, Estonia. The authors show how FDI has played a significant role in Estonian economic development since reindependence in 1991 but that the majority of FDIs, with the exception of some resource-motivated FDIs, have either bypassed the peripheries of Estonia or just passed through them. In Kuressaare, however, the community has attracted several foreign investors, resulting in the location of vital manufacturing industry in this remote corner of Estonia. The motives and characteristics of the investments play a significant role in explaining this. In addition, a local entrepreneurial culture seems to be decisive. The Kuressaare manufacturing industry represents a path-dependent but successful FDI case, driven by local capabilities in terms of an entrepreneurial spirit and by knowledge spillovers from the external investors. Returning to the Jakobsen model, the case of Kuressaare demonstrates how a peripheral community can change from an FDI situation marked by dependency to a situation of progress.

Keywords:

• FDI
• Estonia
• local outcome
• progress and dependency