Valtteri Kaartemo (Ed.) New Role of Russian Enterprises in International Business
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Valtteri Kaartemo (ed.) New role of Russian enterprises in international business Electronic Publications of Pan-European Institute 18/2007 ISSN 1795-5076 New role of Russian enterprises in international business1 Edited by Valtteri Kaartemo 1 The financial support from the Academy of Finland under the project “New role of Russian enterprises as actors in the international business arena” (no. 208135) is gratefully acknowledged. Opinions and views expressed in this report do not necessarily reflect those of the Pan-European Institute or its staff members. Foreword Russia’s economy and her external economic relations have rapidly increased since the disintegration of the USSR. The Russian exports have expanded by 4–5 times since the mid-1990s. The investment expansion has been even faster than the export growth, i.e. the Russian outward foreign direct investment stock has multiplied by some 30-fold during the past 12 years. The rapid internationalisation of the Russian enterprises has started a new era in international business, i.e. the capital expansion from emerging economies. It is obvious that the Chinese business expansion abroad will also gain momentum in a dragon scale sooner or later. The early signs are already visible. In order to better predict the consequences of this new epoch, the main objective of this research project was to analyse, what kind of role the Russian enterprises obtain through their internationalisation. This report also reveals the other side of the coin, i.e. the impact of the FDI inflows on Russia’s industrial restructuring, regional development and the competitiveness of the Russian firms. This publication is a tip of an intellectual iceberg, which has gained weight since the year 2004, when the project was begun. In other words, this report contains a selected contribution of each individual involved in the project. As it would have been impossible to include all the studies carried out, a list of publications conducted during this project has been attached in the end of the book. Unlike the real icebergs, this intellectual iceberg is not melting despite the fact that this project is finished by the end of this year. The research team aims at continuing research on the internationalisation from the emerging economies via other research projects of the Pan-European Institute (PEI). In order to guarantee the continuity of this project, the internationalisation from emerging economies has been selected as one of the core research areas of the PEI. Conducting academic research is a rather expensive exercise, and the results obtained in the framework of this project could not have been reached without the generous funding from the Academy of Finland. Therefore, I want to express my sincere gratitude on the behalf of the whole research team to the Academy. This is an appropriate moment to thank also the researchers involved in this four-year-exercise. Without their personal dedication to research we would not have witnessed the dawn of two new doctoral dissertations, the drafts of two doctoral theses, which will see light of day next year, and a great number of intellectually stimulating research papers. Turku, December 6, 2007 Kari Liuhto A responsible person of the project Contents Foreword Kari Liuhto Executive summary Valtteri Kaartemo Authors PART 1 – OVERALL VIEW ON THE NEW ROLE OF RUSSIAN ENTERPRISES A transnational challenge – integration and economic spaces: the Russian 12 connection Ilari Karppi A future role of foreign firms in Russia’s strategic sectors 40 Kari Liuhto Outward FDI of Russian enterprises: lessons and policy recommendations 75 Peter Zashev – Peeter Vahtra – Kari Liuhto PART 2 – SECTORAL/REGIONAL VIEW ON THE NEW ROLE OF RUSSIAN ENTERPRISES Modernisation of Russian pulp and paper industry: lessons from Finland 99 Anna Korppoo The transition of Russian mining industry 116 Veikko Kärnä Regions in Russia: between necessities and possibilities 133 Elina Rantalahti PART 3 – OPERATIONAL IMPLICATIONS OF THE NEW ROLE OF RUSSIAN ENTERPRISES Cultural spillovers of Russian outward FDI 149 Peter Zashev Foreign direct investment developing local industries in emerging economies? 168 – the influence of Fazer Bakeries’ investment in St. Petersburg bakery market Elina Pelto Exploring the contact points of internationalisation and supply chain 193 management in emerging markets – the case of Finnish firms in the Russian market Harri Lorentz PART 4 – CONCLUDING REMARKS ON THE NEW ROLE OF RUSSIAN ENTERPRISES Future role of Russian enterprises as actors in the international business arena 218 Valtteri Kaartemo APPENDIX A list of publications published during the Academy of Finland-funded project 225 “New role of Russian enterprises as actors in the international business arena” Valtteri Kaartemo (ed.) PEI Electronic Publications 18/2007 www.tse.fi/pei Executive summary by Valtteri Kaartemo This publication combines articles on the impact of outward and inward internationalisation on macro- and microeconomic transformation in Russia. Moreover, the articles focus on the consequences of transformation in shaping the new role of Russian enterprises in international business. Thus, the publication aims at providing a thorough analysis for decision-makers and the representatives of business and academia how the current economic (and political) development in Russia shapes the international business arena. The Russian economy has expanded with exceptional speed during the past eight years. The average annual GDP growth during these years has been around six percent, and private consumption has reached double-digit figures annually, which in addition to other factors has started a boom in foreign investments. The FDI inflow in 2006 ($29 billion) alone was more than the total inward FDI during the period 1990–2000 ($26 billion), according to the UNCTAD data. The UNCTAD data shows also in outward activity greater figures ($18 billion) for the year 2006 alone than the figure ($17 billion) for the whole period of 1990–2000. According to the latest Russian (preliminary) balance-of-payment data the first nine months of 2007 have showed more than 40 % growth y-o-y. When the project, financed by the Academy of Finland, was started in 2004, Russia’s FDI stocks were far from today’s figures. Since then, the topic has become increasingly important, and analysing the impact of outward and inward internationalisation of Russia’s enterprise sector is an utmost acute theme with continuously record-breaking FDI flows to and from Russia. Furthermore, Russia’s possible WTO membership, forth-coming elections in 2008 and other major changes in the economy stress the need of the business, decision-makers and the academia to have better understanding on the development in Russia’s enterprise sector and its impact on the international business. In order to participate in this vast information collection process, a group of scholars have contributed articles on internationalisation, spillover effects, and sectoral and regional transition. The report is organised so that the first three articles deal with an overall view on the new role of Russian enterprises. The second three articles go deeper into the subject by analysing the development from sectoral and regional perspective. The final three papers give more specific, operational-level view on the development in Russia and its effects on enterprises in Russia and in the international business arena. In part 4, conclusions are given reflecting the views given in the independent studies. The article by Ilari Karppi starts the series of the papers by focusing on the challenges faced with economic spaces, which aim at enterprise level co-operation on the two sides of the EU-Russian boundary. In the article it is imagined that corporate Russia would have a genuine interest of being attached to transnational actors’ evolutionary networks on an egalitarian basis, or equitably. In this instance the prerequisites for development of a knowledge-based economy will be particularly reflected as a mechanism to redesign and rejuvenate the Russian economy. Karppi argues that mutual sense of otherness between Russia and the West stems from a much deeper historical root than that of the 20th century, and the key transnational challenge for further European East-West integration lies in the macro-institutional developments. Valtteri Kaartemo (ed.) PEI Electronic Publications 18/2007 www.tse.fi/pei Kari Liuhto continues the discussion on the macro-level development in Russia by positioning its key industries in a strategic governance matrix in order to analyse the growing risks created by the expanding political economy in Russia from a perspective of a foreign investor. In his typology, the Russian economy is divided into four sectors, namely: militarily sensitive, economically sensitive, top sensitive, and non-sensitive sector. He argues that sensitive sectors contain an extremely high political risk for foreign firms, as the state control has been increasing within these key industries, such as oil and gas, strategic metals and logistical infrastructure. In the third article, Peter Zashev, Peeter Vahtra and Kari Liuhto change the scope of international role of Russian enterprises by focusing on Russia’s outward foreign direct investments (OFDI). Their article demonstrates the growth of the Russian OFDI, highlights the industries that are characteristically more active in the Russian OFDI, and analyses the presence of geographic patterns in the direction of the Russian OFDI. In addition