The extent of the tax-based competition for mobile foreign investment in the expanded EU is clearly shown by the policies being followed in Estonia.

The country's zero per cent corporate profit tax rate has received some attention. However, Estonia also plans to slash income tax, promising a 20 per cent rate on all income by 2007.

"We are not resting on our laurels," said Mr Meelis Atonen, minister for economic affairs and communications. To further underpin the low tax position of Estonia, the current income tax rate of 26 per cent will be cut by 2 percentage points per annum to 20 per cent by 2007. This is designed to attract both businesses and investors to put their money into Estonian enterprise.

Ireland has long been marketed to multinational companies partly on the basis of low corporation tax, which was zero per cent for a period for many inward investors, but is now being brought to 12.5 per cent for all companies.

Estonia has studied the example of its neighbour Finland, which has a strong record of innovation and technological development, and also Ireland's strong growth record, according to Mr Atonen, speaking to the Irish Times after a recent meeting of EU industry ministers in Dromoland.

As a small economy, with just 1.4 million people, the strategy was to develop as open an economy as possible - enlargement and joining the EU would actually lead to some tightening up on border procedures, he said.

This open policy is part of an overall liberal economic approach. Estonia, he said, has "the most conservative budget policy in the EU", including a commitment to hold down spending and the use of private sector partnerships to provide services and fund investment. Social spending in pensions and healthcare is also funded by a social security charge under which companies pay a hefty one third of employee salaries into a central fund.

The small size of its home market was a key issue, he said, and meant that business had to be focused on the export market. So far the main success has been in attracting investment from Scandinavian neighbours such as Sweden and Finland.

Investment has come in sectors such as biotechnology and ICT - including significant investments in areas such as mobile phones.

Swedish and Finnish timber companies have also invested in Estonia and there is also an inward flow in the banking sector, particularly from Sweden. US companies, who have been the mainstay of Irish inward investment, are also a target, but for the moment the main investment is coming from Estonia's neighbours.

Growth has been buoyant in recent years, with GDP increasing by 5 per cent plus per annum.

However, Estonian GDP per capita is less than half the average of the 15 states who were in the EU before accession. Inward investment has grown tenfold from very small beginnings when the zero per cent rate was introduced in the late 1990s. And Estonia is focused on increasing its innovative capacity trying, for example, to set a lead in the ICT area in areas such as e-Government. Benefiting from its Scandinavian links, for example, its population is a high user of mobile phone and internet services - almost half the population bank online.

Estonia looked at Ireland's experience and asked whether it could develop a "Nordic Tiger" economy, Mr Atonen said. As one of the smallest of the new entrants, its progress will be closely watched.