Estonia Bolsters Defense Capabilities with €100M Fund, Industrial Parks, and Record Budget Increase

Estonia Commits to Robust Defense Expansion

Estonia is making a significant strategic push to fortify its national defense capabilities, leveraging its reputation as a dynamic startup hub. The Baltic nation has announced the launch of a €100 million defense industry fund, plans for dedicated industrial parks for arms manufacturers, and a commitment to increase its defense budget to an average of 5.4% of its Gross Domestic Product (GDP) by 2029. These initiatives are designed to boost domestic production, foster innovation in defense technology, and enhance Estonia's overall security posture.

Historic Increase in Defense Spending

The Estonian government has approved a four-year defense investment plan, known as the 'supplementary defense investment programme' or 'Kilp' (Shield), which will see an additional €2.8 billion ($3.2 billion) allocated to defense over the next four years. This decision will raise Estonia's annual defense budget to an average of 5.4% of GDP from 2026 to 2029, a substantial increase from approximately 3.4% in 2024. Prime Minister Kristen Michal described this as 'the largest increase in defense spending in recent history,' emphasizing its role in developing air defense, increasing army firepower, and creating deep-warfare capabilities. Defense Minister Hanno Pevkur highlighted the historic nature of the decision, stating that 'a fundamental decision like this to increase defense spending has never been taken before.' The increased funding will prioritize areas such as air defense systems, long-range weapons, drone and electronic warfare capabilities, and ammunition stockpiles.

The €100 Million SmartCap Defence Fund

To stimulate its domestic defense industry, Estonia officially launched a €100 million Defence Fund in January 2025, managed by the national fund manager SmartCap. Initially announced in May 2024 as a €50 million vehicle, the fund's size was doubled to meet growing demand and expand its scope. The fund's primary objective is to strengthen Estonia's defense industry, foster innovation, and drive economic growth by investing in companies developing military or dual-use products and technologies. It will make direct investments in seed, early-stage, and growth-stage defense companies, and also invest in venture capital and private equity funds. While primarily focused on Estonian companies, the fund may also invest in firms from NATO member states if there is a clear strategic benefit for Estonia's defense ecosystem.

Developing Industrial Parks for Arms Manufacturing

Estonia is actively developing dedicated industrial parks to accommodate arms manufacturers. In April 2025, the Ministry of Defence announced that a 200-hectare industrial park would be established in the village of Ermistu, Pärnu County, with another potential site in Põhja-Kiviõli. The state has allocated up to €50 million for developing the basic infrastructure of these parks, including access roads, electricity, and testing areas. The parks are designed to support the production of critical defense materials such as ammunition, munitions, explosives, and explosive materials. The Estonian Centre for Defence Investments (ECDI) issued a call for proposals, with production potentially starting as early as 2027. Four companies, including Nitrotol OÜ, Thor Industries Ltd, Frankenburg Technologies OÜ, and Infinitum Strike OÜ, have already been selected to begin operations in the Ermistu park, focusing on products like mines, plastic explosives, short-range air defense missiles, and ammunition components.

Leveraging Estonia's Startup Ecosystem for DefenceTech

Estonia is strategically leveraging its vibrant startup ecosystem to become a hub for defense technology (DefenceTech). The country's DefenceTech sector has seen rapid growth, with sales by Estonian defense companies rising significantly. Events like the Estonian Startup Awards 2024 have highlighted the emergence of companies like Frankenburg Technologies and DefSecIntel Solutions, which are developing innovative solutions such as anti-drone missile systems and AI-powered surveillance. This focus on dual-use technologies and the agility of startups are seen as crucial for developing modern warfare solutions. The government's support, including the new defense fund, aims to channel more investment into this burgeoning sector, making it attractive for both domestic and international players.