Eastern Europe’s internet is great – but does this matter for digital startups?

Feb 22, 2016

Former Soviet states have leapfrogged their Western European counterparts in providing ultrafast fibre internet and world class digital infrastructure. So why don’t they have a booming digital startup culture?  

In October 2015, Nesta launched the European Digital City Index (EDCi) an online tool which ranks 35 European cities on how well they support digital entrepreneurship. The cities were assessed on various ‘themes’, such as access to capital, entrepreneurial culture and digital infrastructure.

Great Digital Infrastructure ≠ Proliferation of Digital Startups

The digital infrastructure theme reflects how digital startups rely on being able to connect to a fast internet service (see p.24). When assessing a city’s digital infrastructure, we measured four variables: 1) widespread availability of fibre internet; 2) broadband download/upload speeds; 3) mobile internet speed; and 4) cost of monthly broadband subscriptions.

The Index revealed some interesting insights – Brussels, for example, ranked in the top ten cities for digital startups, proving its allure for more than just Eurocrats. A second equally startling revelation was that cities with the best digital infrastructure are predominantly in Central and Eastern Europe (CEE). Seven CEE cities make up the top ten for digital infrastructure, with Bucharest in first place. Interestingly, these cities rank near the bottom overall (see table below), despite their excellent digital infrastructure.

EDCi digital Infrastructure top ten (overall ranking)
1. Bucharest (30)
2. Riga (32)
3. Vilnius (29)
4. Bratislava (25)
5. Budapest (22)
6. Tallinn (20)
7. Helsinki (4)
8. Prague (19)
9. Lisbon (17)
10. Paris (6)

Soviet Legacies

The impressive performance of many CEE cities can be attributed to a widespread availability of fibre internet, which is much faster than internet delivered via copper cables.

Soviet era legacies explain why fibre prevails in CEE. The Soviet bloc wasn’t renowned for its world class telecommunications infrastructure – indeed the infrastructure that the CEE states inherited in the early 1990s was dismal. As a result, these states built their digital infrastructure from scratch. This enabled Internet service providers (ISPs) to ‘leapfrog’ older technologies, such as copper, and install fibre infrastructure from the offset.

For companies and governments in Western Europe, where the existing telephone infrastructure was more developed, using and upgrading existing copper cables was (and often, still is) much cheaper and easier than installing new fibre optic cables.

Developing countries bypassing old technologies, while developed countries are hindered by their existing infrastructure, is no new phenomenon. For example, the London Underground, built by pioneering engineers in the 1800s, requires perpetual upgrades and engineering work – navigating it is certainly more stressful than travelling on Hong Kong’s slick MTR, which opened in 1979.

Corporate investment complemented by ‘neighbourhood networks’

In the Baltics, it would have made little sense for the incumbent telco companies to spend millions of euros installing outdated infrastructure. Instead they have all made large-scale investments in fibre (see pp. 32-26) infrastructure. As a result, the vast majority of the region has access to fibre internet. In the latest European rankings of fibre penetration levels, Lithuania is first (for the sixth year running!), with Latvia coming in third.

Although an important factor, the fast internet in Romania and Bulgaria is not solely the result of investment by large telcos. The Romanian incumbent, Romtelecom, was slow to offer customers broadband. To meet the demand, savvy entrepreneurs set up ‘neighbourhood networks’: small-scale networks which delivered fast internet to people in the local area. A lack of regulation – another Soviet legacy – meant that entrepreneurs could install aesthetically dubious overhead fibre optic cables across the cities. A similar situation arose in Bulgaria, where citizens were not well served by their incumbent telco, Vivacom.

A proliferation of these neighbourhood networks has led to a situation in which the cities of Romania and Bulgaria have very fast internet. However, overall levels of internet coverage in these two countries is extremely low by EU standards a problem which plagues rural parts of Eastern Europe.

It should be noted that costs of broadband tend to be cheaper in Eastern Europe than Western and Northern Europe, which is also beneficial for startups. A combination of these factors explains why CEE capitals, such as Bucharest and Riga, fare so well on our digital infrastructure ranking.

Digital infrastructure isn’t enough

Nonetheless, having an excellent digital infrastructure is no silver bullet for startup success. Just look at the EDCi rankings – Bucharest, Riga and Vilnius, the top three cities for digital infrastructure, come 30th, 32nd and 29th overall – a far from stellar performance.

Many other factors are important for digital startups to thrive. Although entrepreneurs need fast, reliable internet, they also need talented employees, willing investors and ways to enjoy the weekend!  Policymakers need to focus on a range of areas if they want to create an environment where digital startups can prosper.

This is not true just for startups, but for societies more generally. Digital technologies can spur growth, create jobs and improve public services. However, as the World Bank recently noted, merely using digital technologies and connecting people to the internet isn’t going to bridge the global digital divide. Societies need to complement digital technology adoption with appropriate regulation, a digitally literate population and accountable and legitimate institutions. Similarly, policymakers in CEE need to complement their first rate digital infrastructure by encouraging risk-taking, cutting red tape, and ensuring that people have the skills necessary for the digital age.