Skype, Estonia, and the secret sauce to prosperity
Estonia’s investment in market-creating innovation has paid off.
During the past few months, many of our lives have undergone an online migration. We’ve learned to shift conferences, team meetings, family gatherings, and even weddings online. Many of our personal and professional lives now hinge on our capability to hold virtual meetings via the internet.
Our ability to remain connected over internet video calls is in large part due to a group of young innovators in Estonia at the turn of the century. Leading up to this time, Estonia had been among the poorest countries in Europe. When it was liberated from Soviet occupation about a decade earlier, its GDP per capita was one-tenth that of nearby countries like Germany. With a small population, it needed to connect with people and businesses in neighbouring countries for its economy to grow, but phone companies charged exorbitant fees for international calls, making it impossible for most Estonians to make them on a regular basis.
That’s when a group of software developers recognized the struggle and began building a service that would enable users to call each other for free using a computer. Investors were initially hesitant about the venture. As common as it is today, at the time, using computers to make phone calls was an unproven idea, and investors felt doubtful many people would use the service. It seemed like a stretch to imagine people in front of a computer with a headset like an air traffic controller. Investors urged the young entrepreneurs to pivot to something more familiar, like e-commerce, but the team didn’t yield. They knew how regular people in Estonia struggled with expensive phone calls, and they felt certain the vast untapped demand for a more affordable solution would transform into a profitable new market if they could just build the product. Despite the lack of support from investors, they managed to launch anyway. Their new company, called Skype, attracted a million users in its first month.
The secret sauce of prosperity
Market-creating innovations, like Skype, transform previously expensive, inaccessible products (pricey phone calls in Skype’s case) into ones that are simple and affordable, enabling new populations of people to access them. Market-creating innovations have a special ability to bring prosperity to the communities and countries where they operate. This is because, rather than simply competing with other companies in an established market for existing consumers, they have to build a new market to serve new populations of consumers. This requires creating many jobs that didn’t previously exist. The result is economic growth, with profits returning to the local economy. Skype needed to hire hundreds of Estonian employees to develop, market, sell, and implement its product. Even today, although Skype is now owned by Microsoft, almost half of its employees remain in Estonia, ensuring profits continue to flow into the local economy.
Additionally, successful market-creating innovations create a culture of innovation and entrepreneurship that extends and amplifies their effects. When Skype succeeded, it inspired a new generation of aspiring Estonian entrepreneurs to create innovative solutions to common problems. Less than 30 years since its emergence from impoverishment under communist rule, Estonia now has more unicorns (private startup companies valued above $1 billion) per capita than any country on earth, and it has established itself as an innovation hub for Europe. In fact, it was Skype’s first employee, Taavet Hinrikus, who went on to found TransferWise, another Estonian unicorn, when he recognized the costly struggle he and other Estonians faced when attempting to transfer money between different currencies.
Skype’s success may have helped initiate a culture of entrepreneurship, but the Estonian government has done much to foster it. In the last decade, the government has injected hundreds of millions of dollars directly into programmes that assist entrepreneurs and their ventures. To support the profitable and rapidly growing tech sector created by Skype and other entrepreneurs, it has also invested in internet infrastructure, establishing free Wi-Fi zones and moving many government-related tasks, such as voting and taxes, online, consequently reducing corruption by allowing citizens to interact directly with their government without middlemen. To fuel the tech sector with a needed labour force, state education programmes have begun teaching coding to elementary school students.
Estonia’s investment in market-creating innovation has paid off. It is not only home to many valuable companies, but the quality of life for its citizens has improved significantly. Since its independence three decades ago, Estonia’s GDP per capita has increased tenfold, life expectancy has increased by more than 10 years, and it now ranks among the top 20 least corrupt countries in the world, ahead of countries like France and the United States. While it’s important to note that market-creating innovations often succeed in places without government support, there’s no doubt that Estonia’s journey to prosperity has a lot to do with the way its government created an enabling environment for innovations to flourish.
In the wake of the economic devastation caused by the pandemic, Estonia offers important lessons, both in regard to the power of market-creating innovation as well as the positive role governments can play in removing barriers to entrepreneurship. Estonia’s approach to creating a vibrant culture of innovation following decades of economic depression can be a roadmap for emerging economies recovering from their own economic crises today.
Lincoln Wilcox is a research associate at the Christensen Institute, where he researches ways in which individuals, businesses, governments, and nonprofits can leverage innovation to create prosperity in low-income countries and communities.
The article is published under the editorial partnership between Financial Nigeria and the Clayton Christensen Institute, to promote market innovation.
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