Success factors for market penetration in CIS countries

Table of Contents

Executive Summary

List of Figures

List of Abbreviations

1 Introduction
1.1 Objectives
1.2 Delimitations
1.3 Methodology

2 Target of Penetration

3 Investment Business

4 Deciding Which Markets to Penetrate
4.1 PEST Analysis of Basic Conditions of Foreign Markets
4.1.1 Political and Legal Conditions
4.1.2 Economical Conditions
4.1.3 Socio-Cultural Conditions
4.1.4 Technological Conditions
4.2 General and Detailed Analysis
4.3 PEST Analysis of Russia
4.3.1 Political and Legal Conditions
4.3.2 Economical Conditions
4.3.3 Socio-Cultural Conditions
4.3.4 Technological Conditions
4.4 Russia as a Bridge to the CIS Countries
4.5 PEST Analysis of the Ukraine
4.5.1 Political and Legal Conditions
4.5.2 Economical Conditions
4.5.3 Socio-Cultural Conditions
4.5.4 Technological Conditions
4.6 PEST Analysis of the Republic of Belarus
4.6.1 Political and Legal Conditions
4.6.2 Economical Conditions
4.6.3 Socio-Cultural Conditions
4.6.4 Technological Conditions
4.7 PEST Analysis of Moldavia
4.7.1 Political and Legal Conditions
4.7.2 Economical Conditions
4.7.3 Socio-Cultural Conditions
4.7.4 Technological Conditions
4.8 Conclusion

5 Timing of Market Penetration
5.1 International Timing Strategy
5.1.1 Waterfall Approach
5.1.2 Sprinkler Approach
5.2 Country specific Timing Strategy

6 Deciding How to Penetrate the Market
6.1 Exporting
6.2 Joint Venturing
6.3 Direct Investment
6.4 Methods of Internationalisation

7 Theoretical Explanation Approaches to Market Penetration
7.1 Johanson & Vahlne Theory
7.1.1 Model Demonstration
7.1.2 Critical Review
7.1.3 Model Application
7.2 Aharoni Theory
7.2.1 Model Demonstration
7.2.2 Critical Review
7.2.3 Model Application
7.3 Dunning Theory
7.3.1 Model Demonstration
7.3.2 Critical Review
7.3.3 Model Application

8 Empirical Study to Market Penetration Using the Investment Business Model
8.1 Survey design
8.1.1 Goals and Database of the Survey
8.1.2 Approach
8.2 Deliverables of the Empirical Study
8.2.1 Characteristics of German Investment Businesses, which have penetrated in CIS Countries
8.2.2 The Motives for Market Penetration of Investment Businesses
8.2.3 Goals of Internationalisation and How to achieve them
8.2.4 Problems Experienced by Investment Businesses during Market Penetration in CIS Countries
8.2.5 Strategies for Market Entry
8.2.6 Financing and facilitation of Market Penetration
8.2.7 Opportunities and Risks when Penetrating the Markets of CIS Countries
8.2.8 Factors Determining the Success and Failure of Medium-Sized Businesses in CIS Countries

9 Overview of Success Factors for Market Penetration in CIS Countries
9.1 Customer Loyalty, Innovation and Product Quality
9.2 Qualifications of Employees in the penetrated markets

10 Conclusion

11 Outlook

Bibliography

Books

Journal Articles

World Wide Web

Appendix A: PEST Analysis

Appendix B: What Behaviour-Patterns are Important in CIS Countries?

Appendix C: Questionnaire: Market Penetration of in CIS Countries

Integrated Total Management Checklist

Executive Summary

Today companies, regardless of their size, can no longer afford only to pay attention to their domestic market. Many industries are global industries, and those firms that operate globally achieve both lower costs and higher brand awareness. At the same time, global marketing is risky because of variable exchange rates, unstable governments, protectionist tariffs and trade barriers, and several other factors. Given the potential gains and risks of international marketing, companies need to adopt a systematic approach to making international marketing decisions. In deciding to go abroad, a company needs to define its international marketing objectives and policies. The company must determine whether to market in a few countries or many countries. It must decide which countries to consider. Once a company decide on a particular country, it must determine the best mode of entry. Its broad choices are exporting, joint venturing and direct investment. Each succeeding strategy involves more commitment, risk, control, and profit potential. The investing company must assess each foreign market’s economic, technical, political, legal and cultural characteristics. Next, the company must decide on the volume of international sales it wants, how many countries it wants to market in. Finally, the company has to decide how to penetrate each chosen market – whether through exporting, joint venturing or direct investment.

This paper looks closely at investment possibilities in Russia and in three of the CIS countries: the Ukraine, Moldavia and the Republic of Belarus. This study examines the experiences of 26 companies who have penetrated the markets in CIS countries.

List of Figures

Figure 1: Turnover of industrial and consumer goods

Figure 2: Procedures for identifying countries with attractive markets

Figure 3: The largest German companies in Russia

Figure 4: Commonwealth of Independent States (CIS).

Figure 5: Waterfall approach

Figure 6: Sprinkler approach

Figure 7: Market entry strategies

Figure 8: Means of market entry strategies

Figure 9: Uppsala Penetration Model

Figure 10: The relationship between OLI-advantages and market penetration Strategies according to Dunning’s eclectic theory

Figure 11: Industry classification of the companies interviewed

Figure 12: Average number of employees in the companies discussed

Figure 13: Average turnover of the businesses interviewed

Figure 14: Companies that have achieved expansion into CIS countries

Figure 15: Motives for expansion into CIS countries

Figure 16: Expected advantages of future expansion into CIS countries

Figure 17: Goals of Internationalisation

Figure 18: Problems experienced during market penetration in CIS countries

Figure 19: Country-specific timing strategies used by investment businesses surveyed

Figure 20: Timing strategies spanning various countries as used by the investment businesses surveyed

Figure 21: Market penetration strategies

Figure 22: Relocation of activities to Eastern Europe

Figure 23: Methods of financing market penetration

Figure 24: Means of assistance in the process of internationalisation

Figure 25: Satisfaction with the available supportive measures

Figure 26: Expected opportunities in CIS countries

Figure 27: Risks in CIS countries

Figure 28: Assessment of success

Figure 29: Success criteria

Figure 30: Reasons for success

Figure 31: The main advantages and disadvantages of CIS market

List of Abbreviations

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1 Introduction

1.1 Objectives

The phenomenon of globalization has shrunk the world and made it increasingly interconnected and interdependent. Driven by technological and economic forces, globalization gathered momentum in the fifteenth century with Columbus' discovery of the New World. The globalisation of markets and the resultant competition has forced investment businesses to face new challenges. Globalisation does not only involve the strategic and operative behaviour of the large corporation, but also that of medium-sized businesses. Especially investment businesses have been faced with issues pertaining to globalisation, the saturation of traditional markets, growing cost risks in domestic and foreign markets, as well as the increasing technical complexity of industrial products which is connected to a parallel shortening of the innovation cycle and increasing competition.

Investment businesses are thus forced to secure and expand existing competitive advantages. Market penetration is a suitable means of achieving this. Investment businesses can profit from their presence in the larger market, from increased income or from the effects of synergy. The expansion of the EU as well as the political and economical stability in CIS countries offers investment businesses new possibilities. Market penetration in CIS countries is therefore the main focus of this study.

When investment businesses decide on pursuing a course of market penetration into CIS countries, there is unfortunately now prescribed way for them to follow. They have to plan and implement their entry into the international market according to criteria which they themselves have decided on. They have to ask themselves several questions. Why are we planning to invest in a foreign country? What are our motives and goals with regard to market penetration? In which country we will invest? Which countries should be penetrated first? When will this process begin? Which forms of market penetration should we chose?

The main objective of this study is to identify success factors for market penetration with regard to CIS countries. The model for investment businesses is used to define possible entry strategies into the CIS markets, and to analyse these theoretically and empirically.

1.2 Delimitations

This paper doesn’t address the decision concerning the choice of a global marketing programme, nor does it determine the organisation of global marketing.

This paper only examines market penetration into four CIS countries. Russia, the Ukraine, Belarus and Moldavia, rich in raw materials, are at present politically and economically stable and are therefore attractive markets for German investment businesses.

The methodology is based only on a PEST analysis which examines the external conditions which make market penetration possible. No SWOT analysis is done as this focused primarily on internal conditions.

The organisational structure of investment businesses is also not analysed.

1.3 Methodology

The structure of this study is determined by the goals set out above. The study is divided in to eleven main chapters. Chapter 1 defines the goals, the structure and the methodology of this study. Chapter 2 and 3 define the terms “target of penetration” and “investment business”. These terms are not uniformly defined in the literature. This is why it is important to define them in the context of this study.

Chapter 4 deals with theoretical approaches to market penetration. A PEST analyses is used to portray the political and legal, economical, socio-cultural and technological conditions of Russia, the Ukraine, Belarus and Moldavia.

In Chapters 5 and 6 possible entry strategies, as well as timing and expansion strategies are explored.

Chapter 7 compares theoretical approaches to market penetration with the practical experience of small investment businesses.

Chapter 8 depicts the methodology and results of the empirical study. The investment businesses which were part of this survey were given questionnaires regarding their experiences of market penetration. The evaluation of the individual results is an indication of their relevance for small investment businesses.

Chapter 9 provides an overview of success factors for market penetration in CIS countries.

2 Target of Penetration

The formulation of concrete targets forms the basis of strategic planning in international marketing. The target of penetration is limited, and thus concerns itself with the specific situation of the company and the market. The target of penetration is the individual company’s personal concern (Meffert et al. 1998, p. 97).

Which target is the most important when the company is considering entry into a foreign market: target of purchase; production or distribution? This question plays a great role in the selection of a specific objective (Pues 1994, p. 35).

The target of purchase is connected to the protection of raw material sources. The target of production is connected to low cost production and low labour costs in the foreign countries. The opening of new markets is the basis for the target of distribution. Mostly, several targets play a role in the decision-making process.

A set of motives which include the internationalization of the company’s operations can also be part of the targets of market penetration into foreign markets (Meffert et al. 1998, p. 97):

- Profit oriented motives for internationalisation: This is about the absorption of consumers in the foreign markets and also about the stabilization of the total business turnover.
- The security of the company as motive for internationalisation: The goal here is to increase the company’s profit margin by absorbing the consumers in the foreign market and so stabilising the total business turnover. The goal is further to secure the market against the other competitors and so secures the company’s profit margin.
- Growth oriented motives for internationalisation: The goal here is to increase the profits through sales in the foreign markets.

3 Investment Business

Before one can speak about the characteristics of investment business, it is necessary to define industrial goods marketing and to differentiate this from consumer goods marketing.

Industrial goods markets does not always refer to investment businesses, but to markets concerned with raw materials and supplies, and especially to the provision of services. Industrial goods marketing is an important part of the marketing of supplies and services to organisations and institutions. It increases competitiveness and meets worldwide achievement potential. There are however important differences between industrial goods marketing and the marketing of consumer goods. The main differences are to be found in the structure of the market, in the products being marketed, and in consumer behaviour. It is also apparent in the price politics which guide the investment business, sales channels, prices and communication.

illustration not visible in this excerpt

Source: Statistisches Bundesamt, cited in Backhaus et al. 2007a, p. 3, own design.

Investment businesses can be differentiated by the services which the various suppliers offer, not only by their systems- and product-businesses.

Whereas the product business is concerned with the sale of individual components, the systems business deals with the sale of complex service packages. Investment and systems businesses are concerned with the sale of complex service packages. In contrast to the other two forms of business, investment businesses focus on individual customers. It provides customised hardware- or hardware-/software-packages for the production and assembly of other goods and services (usually highly industrialised complexes, e.g. refineries and steel-mills). Thus the marketing process precedes the production process. In contrast to the systems business, the investment business does not insist on a connection between the temporary sales contract and other services (cf. Backhaus et al. 2007a, pp. 305-306).

Backhaus et al. (2007a, pp. 307-309) identifies the following characteristics of an investment business:

- Customised, one time fulfilment of an order.
- The individual nature and high quality of the project leads to corresponding rise in financing.
- Long-term acquisition- and back office-processes lead to complex differences in hardware-software combinations. In the process the software constantly appreciates.
- Customer influence contributes to the further development of the project.
- Cooperation between several suppliers and supplier-cooperatives.
- Cooperation with third parties.
- Stability of relationships between market partners – both within a supplier-cooperative and between buyers and sellers. The appreciation of references giving by investment businesses.

4 Deciding Which Markets to Penetrate

One needs profound knowledge of the basic conditions of the foreign country, if one plans to systematically open up and work these markets. An analysis can be structured according to economic, technological, cultural, legal and political aspects. The important basic conditions are established in a PEST analysis.

4.1 PEST Analysis of Basic Conditions of Foreign Markets

The PEST analysis has proven to be an understandable and flexible tool in the context of strategic planning. As with all tools, however, the actual use of the PEST analysis depends on a concrete course of action during the process of implementation. The content of this tool is thus not of importance. More significant are the possibilities it presents for utilisation and performance.

A PEST analysis is a meaningful point of departure for the analysis of a business’s external environment and the impetus which guides it.

PEST is an acronym for the analysis of political and legal, economical, socio-cultural, and technological conditions. The literature provides different perceptions concerning the inclusion of legal and ecological factors. Their significance varies in the different sectors. For an investment business it is important that only direct influences over which the company has no control are taken into account (PEST Analysis 2008. Retrieved: June 22, 2008, from http://www.12manage.com/methods_PEST_
analysis.html).

The typical contents of a PEST analysis are summed up here. These examples are not all-inclusive, but are adapted to the situation of those seeking to penetrate a foreign market.

4.1.1 Political and Legal Conditions

The political situation of a country is especially relevant for marketing (Berndt et al. 2005, p. 24; Berekoven 1985, pp. 109-115). Instability evident in frequently changing governments, the entanglement of the country in wars or revolutions, and frequent strikes, for example, present enormous risks.

An indisputable prerequisite is the political stability and the dependability of the government for the investing company to make a largely risk-free commitment. However, it is possible that high yields can be achieved even in politically unstable regions. In such situations the decision makers decide on the nature of the risk that should be taken.

The legal system (Berndt et al. 2005, p. 27; Meffert et al. 1998, pp. 45-49; Hünerberg 1994, pp. 57-59) of a country is furthermore of particular importance for marketing. On an international level, it is essential to take note of the differences between foreign legal systems and domestic legal system. The peculiarities of international law are equally relevant.

The following areas are important in a market analysis (Hünerberg 1994, p. 58):

- Contract law
- Corporate law and business law
- Labour law and social law
- Competition law
- Consumer rights
- Environmental law
- Tax law

In addition, a multiplicity of local rules and laws, which influence marketing instruments exist in each country.

4.1.2 Economical Conditions

The raw material supplies, the energy supply as well as the traffic - and transportation systems are counted among the basic economic prerequisites in any country. The raw materials play a special role, because they influence the political position of the country to be opened up. An example of this are gold and petroleum resources. Other relevant aspects are whether an economic and commercial infrastructure is present.

Several authors discuss the economic conditions necessary to penetration a foreign market (Berndt et al. 2005, pp. 16-23; Meffert et al. 1998, pp. 49-52; Hünerberg 1994, pp. 49-57). Two important areas can be distinguished. The first area involves the environment of competitors already in the market to be entered. The second area refers to the macroeconomic data of the target market.

a) The analysis of the environment of competitors means that when an international company plans to enter a foreign national market, it has to compare the activities of competitors in both the target market and in the surrounding markets. So, a German crane manufacturer, for example, who wants to offer its products in China, must consider not only the Asian competition, but for example also the activities of the North American competitors in this foreign market.
b) Important for international marketing is the macroeconomic data of a country: the gross national product, the gross national product per head, the income distribution, the inflation rate and the monetary system. The analysis of these data is used to assess the attractiveness of a country’s market. For example, a quickly growing gross national product per head and a stable inflation rate indicates a high level of attractiveness of a foreign market.

4.1.3 Socio-Cultural Conditions

The socio-cultural conditions (Berndt et al. 2005, pp. 28-32; Meffert et al. 1998, pp. 42-44; Hünerberg 1994, pp. 42-44) of any country are important in assessing the target market. They influence the behaviour of the people, the organizations and the institutions.

There are some central aspects, which are very important for marketing:

- The language of a country is the elementary communication method. The mastery of this communication instrument by personnel of the company wishing to penetrate this market is a basic prerequisite for successful marketing.
- The religion strongly influences the life style and attitudes in a country. In extreme cases, it can even be about which form of religion dominates the state, and therefore also economic conditions. Conflicts between religious communities can essentially determine events in individual countries.
- Socialisation is the process, where people learn their basic behaviours that shape them for the rest of their lives. Knowledge of these basic behaviour patterns allows the investing company to assess what holds the people in this country back, and to predict the future political situation.
- Values and attitudes are often shaped by religious influences. Country-specific prejudices belong to these attitudes that must be considered. It is especially important for the investing company to influence the target society’s aesthetic perceptions. The marketing strategy has the task of influencing the aesthetic perceptions of the potential customers.

4.1.4 Technological Conditions

The technological conditions (Hünerberg 1994, pp. 66-69) of any country are important for international marketing. The differences in technical standards can be both hidden opportunities and risks for a company.

The general technological level of a country – its communication systems, its economic infrastructure, and the technological education of employees - marks the technological knowledge that is available to that country and constitutes the economic wealth of the country. Opportunities for investing companies can emerge for example if the foreign country’s technological knowledge is inferior to that of the company contemplating market penetration. Then, it is worthwhile for the company to offer its technologically more progressive products.

4.2 General and Detailed Analysis

The selection of the country to invest in represents an important strategic decision – (repetition – cf. above) Due to the complexity of market selection a systematic approach is required.

In the literature on international marketing, market selection is subdivided usually into a general and a detailed analysis (Meffert et al. 1998, pp. 116-121; Berekoven 1985, p. 120).

When one uses a general analysis, the entire world represents a possible market. First those countries that are susceptible to considerable political risks are excluded. During the second stage of a general analysis a deeper analysis appear reasonable. The politically stable countries are assessed on the basis of an economic evaluation (e.g. market attractiveness and market barriers).

These politically and economically attractive countries will require a detailed analysis. Then in a strategic evaluation of individual countries a corporate vision can be formulated. The completion of this selection results in choice of the most appropriate country for market penetration. The content of the detailed analysis is therefore an opportunity evaluation of several countries.

Figure 2 graphically illustrates the gradual approach in the context of market selection:

illustration not visible in this excerpt

Source: With reference to Meffert et al. (1998, pp. 119-121), own design.

The general analysis does not use detailed analytical procedures. The detailed analysis depends on analytical methods with greater demands on information gathering (Meffert et al. 1998, p. 119).

In the general selection the authors Berekoven (1985, pp. 120-122) and Meffert et al. (1998, pp. 118-121) suggest including the following procedures: checklist procedures, point assessment procedures, risk procedures. Thus checklist procedure, for example, is limited to assessing countries in terms of environmental factors such as the foreign market and the supply and demand situation.

By contrast the methods of the detailed analysis include a theoretical analysis (Meffert et al. 1998, p. 121). All these procedures are aimed at filtering out those countries chosen in the general analysis, and identifying countries where economic criteria provide a market worth penetrating. The portfolio analysis has a special place in this context (Kotler et al. 2007, p. 96). The most well-known of these are from the Boston Consulting Group (BCG) and from General Electric (GE). These methods connect the country environment criteria (general analysis) with the country's prospects of success (detailed analysis).

Only the detailed analysis is relevant to this study. The PEST analysis is the most appropriate instrument in completing detailed analysis.

4.3 PEST Analysis of Russia

4.3.1 Political and Legal Conditions

Russia is a democratic, federative Republic, established by the 1993 constitution. The government has three branches: executive, legislative, and judicial (Auswärtiges Amt 2007. Retrieved: August 3, 2008, from http://www.auswaertiges-amt.de/diplo/de/Laenderinformationen/01-Laender/RussischeFoederation.html).

The president is elected for a four year term by universal suffrage. Russia consists of 89 regions (“federal subjects” as they are frequently called in Russia). This regional structure broadly reflects the Soviet administrative division. Most of the regions are called “Oblasts” but some are called “Republics,” “Krays” or “Autonomous Okrugs.” Moscow and St. Petersburg, the two largest cities, are administratively separate federal subjects, which means that regional legislation and enforcement practices differ in the city of Moscow and its suburbs (Bogaschewsky 2005, p. 47).

Regional administrations have substantial influence on the way business is conducted in the regions, both through local legislation and their formal and informal influence over agents responsible for enforcement of federal legislation (courts, tax and fire inspectorates, police, and army). The Land Code gives local authorities substantial influence over land decisions (Russia Country Report 2007. Retrieved: August 3, 2008, from http://www.bertelsmann-transformation-index.de/159.0.html).

The administrations of President Putin and current President Medwedew have undertaken significant efforts to reduce the influence of regional governors. In 2004, a major step taken in this direction was to shift from direct election of regional governors to a system whereby the governors are nominated by the president and approved by the regional legislature (Deutsche Bank Research 2007. Retrieved: August 3, 2008, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000218226.pdf).

While networking between the investing company and the regional administration is vital, the political direction given by the central administration determines the course of economic development. Foreign investors should carefully consider the business practices in their specific region of operation and how they are affected by regional administrations and by the central government.

The political stability of the last four years makes Russia an attractive investment proposition. However, the weakness of the financial system has to be taken into account.

In May 2004, the Central Bank of Russia (CBR) published a list of ten banks which didn’t comply with CBR guidelines and would therefore have their banking licence revoked. This announcement led to a real banking crisis. At the same time the CBR withdrew the banking licences of the Sodbusinessbank and Kredittrast. Although these were not the largest Russian banks, this approach had a fatal impact (Dokuchayev 2006, Retrieved: August 3, 2008, from http://img.rg.ru/files/trendline4.pdf). Private clients, who were plunged into the economic crises of 1994 and 1998, now distrusted the Russian banking system; they tried to disband their savings plans. Almost all Russian banks in the private sector had enormous liquidity problems. Guta-Bank, the second largest bank in Russia, sold its shares to Wneshtorgbank. Another bank, Dialog Optim, had to declare bankruptcy. This example from the year 2004 illustrates the weakness and instability of the Russian banking system (Valiullin et al. 2006, p. 97).

Currently, in Russia there are 1217 registered banks. Most banks are very small and work in a limited field of banking, for example, in foreign exchange. It is generally assumed that the small banks do not even have the statutory minimum capital of 1 million Euros, and some major banks exert a strong influence on Financial Industry Groups (FIG) thus causing a state of confusion (Center for Economic Research MFPA 2006. Retrieved: August 3, 2008, from http://www.bankir.ru/news/newsline/ 18.09.2006/61937).

When foreign companies have financial problems in Russia, they must establish financing from Western financial organisation. For large investments few Russian banks can serve as a financial source. Even if such a Credit Institute is found the conditions offered by Russian banks is in general much less attractive than in Western Europe.

4.3.2 Economical Conditions

The Russian Federation is the world's largest country in terms of territory. With vast natural resources and a highly educated workforce, Russia is considered to have tremendous growth potential. Following the collapse of the Soviet Union in 1991, Russia launched reforms aimed at transforming its centrally planned economy into a free market system. Changes included extensive privatization, and now more than 75 percent of the Russian economy is in private hands. During the Soviet era, the centrally planned economy was dominated by defence and heavy industry, while the consumer goods sector suffered. At present, exports of raw materials, especially oil and gas, make up a significant portion of the economy, and the service sector has been revived (Wiegert 2003, p. 2).

Many of these planned reforms include efforts towards de-bureaucratization, a new labour code, corporate governance policies, judicial reform, and tax liberalization. These reforms, along with increased export earnings from the higher price of oil and gas, have brought about considerable improvements since 1999. As a result, despite regional influences, Russia has now passed through the first phase of an economic transformation process. Competitiveness in Russian domestic industries has improved, macroeconomic stability has been achieved, and a basic market environment has been created. Russia is on the way to becoming a market economy and a nearly democratic society, putting in place qualitative institutional reforms and, to a considerable extent, creating the necessary conditions for long term growth (Gunst 2007, p. 22). Recent indications, however, show that the current government intends to rein in privatization and international and Western investment in those areas of the economy, such as natural resources and defence, which are considered strategically critical to the stability of the country.

Accordingly, it is important that any potential foreign investors in Russia investigate any new regulatory constraints on their potential projects.

The Russian transition to a post industrial market economy was a painful one. Real economic output measured by gross domestic product (GDP) declined approximately 40 percent from 1990 to 1998. Living conditions deteriorated substantially. Since 1999, however, the average GDP growth rate has been approximately 6.4 percent per year in real terms. The dollar growth rate has been still more substantial as the ruble has strengthened steadily against the dollar. In 2007, Russia's GDP grew 8.1%, led by non-tradable services and goods for the domestic market, as opposed to oil or mineral extraction and exports. Overall the Russian economy has achieved macroeconomic and financial stability, the investment climate has improved, and the country's debt problem has been alleviated. The economy has grown at a rate that has far outstripped average international growth rates (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html).

But despite the past four years of growth, the state of the Russian economy is far from ideal. Russian GDP in 2004 was still lower than in 1990 in absolute output terms. More institutional and structural reforms need to be completed. Conflicts between different areas of economic policy signal the need to move to the next strategic phase by focusing on enhancing competition and social development. This will require the continuation of the reform drive, with the principle focus on the government administration sphere. (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html).

With a goal of “doubling the GDP”, Putin's administration set out accelerated economic growth as the strategic imperative for Russia for the mid term of his presidency. The Medwedew’s government intends to follow the same political and economic direction. In the economic program presented early in 2005, the Ministry of Economic Development and Trade drafted the following priorities of economic policy for 2005-2008 (Cateway to Russia (2004). Retrieved: August 3, 2008, from http://www.gateway2russia.com/st/art_249297.php):

- Developing human capital through reform of the health sector, education, and increasing mobility.
- Administrative reform of the government, reform of the budget system, continuing tax reform, and increased outsourcing of the public sector to private firms through private public partnership (PPP) models.
- Building trust in market institutions such as property rights, the arbitration court system, corporate disclosure, financial markets and companies.

It is hoped that these measures will contribute to a targeted 7 percent annual economic growth rate between 2005 and 2015.

It is generally believed that Russia's accession to the World Trade Organization (WTO) would be a positive step forward, confirming the country's adherence to a long term, market-centred economic policy that will enhance the predictability of government policy, lower risks for foreign investors, and better protect Russia's interests in global trade. However, Russian laws need to be brought into line with WTO regulations. This could be detrimental for local industry in the short term (Raketic 2005, p. 80).

The Russian legislative branch has protracted and intense work ahead of it, because implementing social and economic reform calls for the proactive development of the regulatory framework and for bringing it into line with international standards. A key problem for the Russian economy is weak law enforcement, it is essential to improve enforcement and judicial proceedings if investing companies are to feel secure.

The situation with corporate governance in Russia continues to make positive progress. As a result of the government's economic policy, funds from capital markets and international and Western strategic investors have become increasingly available. Management boards of domestic high-growth companies tackling the task of long term strategic development have realized the need for improving corporate governance practices (Ost-West Contact 2007, p. 8). This makes them more reliable trading partners for foreign investors.

The rapid and strong growth of the Russian economy is spread across many relatively new industries. For example, retailing, communications services, automotive sales and maintenance services, insurance, production of construction materials, branded consumer durables, value-added foods and beverages, hospitality services and personal care and fitness services are all sectors where significant growth has been visible and is projected for several more years. Official statistics significantly underestimate the size of the retail market in Russia (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/
geos/rs.html). Thus market penetration presents attractive possibilities for foreign investors.

In early October 2007, the Russian rating agency, Expert RA, gave their current rating of the 400 largest companies in the country. While commodity groups still dominated with regard to economic activity, the construction industry, banks, the telecom sector and the retail industry were clearly picking up. Seven subsidiaries of German companies are among the largest companies in the country (Ost-West Contact 2007, p. 11):

illustration not visible in this excerpt

Source: With reference to Ost-West Contact (2007), p. 11, own design.

The success of those companies could be a model for other potential foreign investors.

4.3.3 Socio-Cultural Conditions

Russia's large population (140,702,094 (July 2008 est.)) is very diverse. The Slavs, who originated in Russia, the Ukraine, and Belarus, constitute the largest ethnic group, and people of Turkish descent, originating from Central Asian regions, constitute the second largest. Other groups include Armenians, Georgians, Germans, people of Iranian origin, and nationalities within the Finno-Ugrian group. Russian minorities include the Tatars, the Bashkir, a closely related Turkic nationality, and the Mordvins. All three inhabit the Volga valley, along with other ethnic groups such as the Udmurts, the Mari, and the Chuvash. Population growth rate: -0.474% (2008 est.) (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications
/the-world-factbook/geos/rs.html). As it’s important to be aware of cultural and regional differences and also preferable to appoint members of similar linguistic and cultural backgrounds in subsidiary companies, taking note of Russia’s diverse population is vital if companies wish to be successful in their market penetration.

Russian is the official language in the territory of the Russian Federation. English, however, is taught widely and is the principal foreign language of the country. It is spoken by many senior officials and business people. German may also be useful in specialized fields such as engineering.

The largest religious community is the Russian Orthodox Church (15-20%) but this doesn’t influence state policy (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html). Post-Soviet communism still shapes the values and attitudes of the Russian people. Investing companies have to take note of company structures in Russia. Thus for example management structures are much more authoritarian than in capitalist economies. Consequently market research is more difficult than in many other countries and subsidiaries have to take note of the attitudes of the population when appointing management personnel. Before entering into employment relationships in Russia, it is advisable that newcomers to Russian business obtain professional advice on current market practice.

As foreign companies are dependant on informal networks and recommendations through third parties (Leitl 2007, p. 8), and competition for good employees is very high, whoever wants to do business in Russia needs personal contacts and experience in dealing with the authorities. Furthermore, an analysis of the highest yield projects showed that expatriates and local employees should work in tandem in the same positions in a company. Thus, expatriates understand decisions concerning the products and processes of the company, while Russian colleagues are familiar with local practices. Go-getter qualities with a touch of pragmatism are demanded in the Russian market. Russian employees should know the domestic market very well and also provide contacts and intercultural skills.

4.3.4 Technological Conditions

Russia has a large and well-educated labour force that remains generally inexpensive by international standards, although certain categories of sought-after (typically, internationally trained) employees command a significant premium. The cost of labour varies significantly by region, with cities such as Moscow or Yuzhno-Sakhalinsk also commanding a significant premium relative to other parts of the country.

As there are many well-trained engineers in Russia, the Russian market is especially attractive for investors who need employees with technical know-how.

The communication systems in Russia (Internet access, telephone, road and rail infrastructure) are generally good. The best of these are found in the urban areas surrounding Moscow and St. Petersburg (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html). Investors offering technologically advanced products will find a receptive market in Russia.

4.4 Russia as a Bridge to the CIS Countries

A PEST Analysis of Russia gives an indication of market penetration possibilities in CIS countries. Geographically Russia lies between the other former USSR countries in Eastern Europe, the Caucasian countries and Central Asia. The collapse of the former Soviet Union also brought about the collapse of Moscow’s economic control of the fifteen states. The CIS countries each started to develop their economies according to their specific cultural and economic characteristics. Despite this new independence, however, Russia still plays a key role in the economic relations between members of the CIS countries. Today many markets can still be successfully penetrated from Russia (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html). Because of the existing infrastructure and communication networks between Russia and the former Soviet states, market penetration in these states is relatively uncomplicated when a company has already established a base in Russia.

Most of the former USSR states have declared their intention to work towards democratisation and the Ukraine and Armenia wish to apply for membership in the European Union. Armenia, Georgia, Kyrgyzstan and Moldavia are already members of the World Trade Organisation.

In 2003 the Ukraine, Russia, the Republic of Belarus and Kazakhstan united to form a single economic area (Friedrich-Ebert-Stiftung 2007, pp. 8-9. Retrieved: July 9, 2008, from http://library.fes.de/pdf-files/id/04688.pdf).

Free trade areas between the Russian Federation and these other countries facilitate trade especially with the Republic of Belarus and provide exciting opportunities for investors who wish to enter Low-Cost Economies.

Because of their territorial and psychological affinity to Russia, only the Ukraine, Moldavia and the Republic of Belarus will be considered here.

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Source: With reference to Picture of CIS. Retrieved: July 9, 2008, from http://images.google.de/imgres?imgurl=http://www.ukraineinfo.co.kr/img/cis_map.jpg&imgrefurl=http://www.ukraineinfo.co.kr/sub.php%3Fid%3Dmap_main&h= 1023&w=1460&sz=238&hl=de&start=7&um=1&tbnid=xgZbC3-YeveZYM:&tbnh=105&tbnw=150&prev=/images%3Fq%3DCIS%2Bmap %26ndsp%3D21%26um%3D1%26hl%3Dde%26lr%3Dlang_de%26sa%3DN.

The eastward expansion of the EU and Rumania’s entry into the EU brought the EU countries several new neighbours: the Ukraine, the Republic of Belarus and Moldavia. Despite these geo-political developments, the economical and political development of these countries continues to be directed by Russia and by strong Russian minorities within these countries. The transformation after 1991 which took place simultaneously in the Russian Federation, in the Ukraine, in the Republic of Belarus and in Moldavia, led to greater price – and trade – stabilisation. However, the inflation rate in the three CIS states under discussion remained higher than that in Russia, and the influence, especially in Moldavia and in the Republic of Belarus, of the Communist Party remains stronger than in Russia. Nevertheless, these three countries continue to maintain a higher economic growth-rate than the whole of the remaining Eastern Europe trading area (Friedrich-Ebert-Stiftung 2007, pp. 38-42. Retrieved: July 9, 2008, from http://library.fes.de/pdf-files/id/04688.pdf).

4.5 PEST Analysis of the Ukraine

4.5.1 Political and Legal Conditions

After Russia, the Ukraine is the most important economic country of CIS group. The Ukraine, the second largest country in Europe (603,700 sq km), gained its independence in 1991 and is officially characterised as a parliamentary democracy. The close ties with Russia have deep historical roots in a country which for centuries was known as Kiewer Rusj. Today Ukrainians make up 77.8 % of the population, and Russians, with 17.3 %, are the strongest national minority (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/up.html).

When President Victor Yushchenko came to power at the end of January 2005, the so-called “Orange Revolution” brought an end to the previous corrupt regime. Yushchenko promised to bring and end to all government corruption. Now the new government in Kiew seeks to continue the path towards greater modernisation of the Ukrainian society and its economy as it works towards full membership of the EU and NATO (Mittel- und Osteuropa. Perspektiven 2005/2006, p. 212).

The tax laws with their many exceptions and privileges for Insiders continue to lack transparency. The “Rule of Law” is not sufficiently implemented and justice in the courts and from the authorities is dependent on the favour of individual judges. The same is true for members of an underpaid and often corrupt administration (Mittel- und Osteuropa. Perspektiven 2005/2006, p. 214).

The banking system is fragmented and under-capitalised. Banks are either state-owned (OschadBank, UkrExlmBank), or serve merely as currency conversion centres. Numerous restrictions in the finance sector make investment by foreign banks unattractive. The most important foreign banks are Raiffeisenbank Ukraine (a subsidiary of Raiffeisenbank Zentralbank Austria), ING Bank, Citibank Ukraine and HVB Ukraine (Valiullin et al. 2005, pp. 49-50).

4.5.2 Economical Conditions

In the process of privatisation the former oligarchies have frequently become the new owners of the country’s metal, raw material extraction and energy supply companies. The new government has announced that it will scrutinise all privatisation agreements and in the event of irregularities will nullify them (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/up.html).

Traditionally agriculture, commerce and logistics are the most important branches of the country’s economy. Today petro-chemical, textile and high-tech industries such as ship and airplane construction companies determine the country’s economical structure (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/up.html).

In 2007 the Ukrainian GNP increased by 7.3%. The economy benefited both from the relatively favourable foreign trade conditions – in particular the high prices of exports, especially metal, and the strong growth of the export market – as well as from strong domestic demand (Central Intelligence Agency 2008. Retrieved: July 23, 2008, from https://www.cia.gov/library/publications/the-world-factbook/geos/up.html).

Yet, in spite of greater economical liberalisation, the Ukrainian economy is still dependent on Russia. This is primarily due to traditional transportation and communication networks, and to the dependence of the energy supply companies on the Russian energy sector.

The import of technologically-developed products from the West remains problematical.

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