Estonia swiftly established a modern market economy. Today, the country is considered to have one of the most open and competitive economies in the world. The dynamism of the business environment is reflected in higher rates of firm and job creation than in other European emerging market economies, as well as in large foreign direct investment inflows. Estonia is particularly well regarded in ICT network readiness and well-functioning e-government. However, the share of production in high tech and knowledge intensive sectors is relatively low, and the growth of high technology products in exports slowed down even before the recession. For Estonia to become a knowledge-based economy, its production must shift to knowledge-intensive sectors, and productivity gains from innovation will need to drive future growth. The 2007 PMR indicator confirms Estonia’s overall progress with competitionfriendly regulatory reforms. Remaining challenges should be addressed to increase the scope for competition in network industries, in particular electricity.