The authors discuss whether a small country with shrinking population should apply public enterprises to improve its economic situation for purposes of external economic relations policy. The study refers to Estonia as an example. Estonia has developed public enterprises of the central state and of the municipalities since the reestablishment of the Estonian Republic. As public enterprise use private forms of law, some management problems occur because public firms are legally obliged to practice the management by objectives. The operationalization of welfare maximisation or achievement of sustainability of society to formulate goals for public enterprises was yet not successful. However, public firms should increase income, avoid monopoly positions of private firms, provide special public services, and should realize public goals. The activities of Estonian public enterprises and their goals show that Estonian enterprises can be used as instruments for foreign trade.
The authors formulate a simple two-country model comprising a small and a big country. They introduce a public interest function referring to production, demand and employment, which allows the authors to argue that under conditions of shrinking population, the small country’s public interests, becomes reduced. They show that employing public enterprises diminishes negative effects on public interests. Even some types of inefficient public firms may lead to improvements.