Table of Contents

1 Abstract ...... 4 2 Acknowledgements ...... 5 3 Background ...... 6 3.1 Growth around the Globe and in the Baltic States ...... 6 3.2 Activities of Swedish Businesses in the Baltic States ...... 7 3.3 Research Problem and Questions Statement ...... 9 3.4 Research Purpose and Delimitations ...... 11 4 The Theoretical Framework ...... 13 4.1 Research Stages ...... 13 4.2 The External Environment ...... 15 4.3 Entry and Matching Strategy ...... 17 5 Methodology ...... 20 5.1 Research strategy ...... 20 5.2 Research design and approach ...... 21 5.3 Scientific Approach ...... 22 5.4 Data collection ...... 22 5.5 Quality of Research ...... 24 5.5.1 The Validity Concept ...... 24 5.5.2 Reliability ...... 26 5.6 Possible Types of Errors ...... 26 5.7 Research Model ...... 27 6 Country’s Empirical Data - Latvia ...... 30 6.1 Country Overview ...... 30 6.1.1 Geography and Infrastructure ...... 30 6.1.2 People ...... 30 6.1.3 History ...... 30 6.2 Societal Fields ...... 31 6.2.1 Country Culture and Business Culture ...... 31 6.2.2 Political System ...... 35 6.2.3 Legal System ...... 36 6.2.4 Education System ...... 37 6.3 Organizational Fields ...... 40 6.3.1 Labor Market ...... 40 6.3.2 Financial System ...... 43 6.3.3 Government ...... 44 6.3.4 R&D Institutions ...... 46 7 Country’s Empirical Data - Lithuania ...... 49 7.1 Country Overview ...... 49 7.1.1 Geography and Infrastructure ...... 49 7.1.2 People ...... 49 7.1.3 History ...... 49 7.2 Societal Fields ...... 50 7.2.1 Country Culture and Business Culture ...... 50 7.2.2 Political System ...... 54 7.2.3 Legal System ...... 54 7.2.4 Education System ...... 56 7.3 Organizational Fields ...... 58 7.3.1 Labor Market ...... 58 7.3.2 Financial system ...... 62 7.3.3 Government ...... 62 8 Country’s Empirical Data - Estonia ...... 66 8.1 Country Overview ...... 66 8.1.1 Geography and Infrastructure ...... 66 8.1.2 People ...... 66 8.1.3 History ...... 66 8.2 Societal Fields ...... 67 8.2.1 Country Culture and Business Culture ...... 67 8.2.2 Political System ...... 70 8.2.3 Legal System ...... 70 8.2.4 Education system ...... 71 8.3 Organizational Fields ...... 73 8.3.1 Labor market ...... 73 8.3.2 Financial system ...... 75 1

8.3.3 Government ...... 76 9 “Doing Business Attractiveness” – Analysis, Forecasts and Implications ...... 81 9.1 Societal Fields ...... 81 9.1.1 Country Culture and Business culture ...... 81 9.1.2 Country Culture Ranking ...... 84 9.1.3 Country Economic Stability ...... 84 9.1.4 Country Economy Stability Ranking ...... 88 9.1.5 Political System ...... 90 9.1.6 Country Political System Ranking ...... 90 9.1.7 Legal System ...... 90 9.1.8 Country Legal System Ranking ...... 91 9.1.9 Education System ...... 92 9.1.10 Country Education System Ranking ...... 94 9.2 Organizational Fields ...... 94 9.2.1 Labor Market ...... 94 9.2.2 Labor Market Ranking for Case Company as an Employer ...... 97 9.2.3 Financial Market ...... 98 9.2.4 Financial Market Ranking ...... 98 9.2.5 Government ...... 99 9.3 Aggregated Doing Business Attractiveness and Implications ...... 102 10 “Customer Potential Attractiveness” Analysis and Implications ...... 104 10.1 Case Company’s Customer Industries – Current State ...... 105 10.1.1 Foreign Direct Investment ...... 115 10.1.2 Customer Attractiveness Current State Ranking ...... 118 10.2 Future Market Influencers ...... 119 10.2.1 Labor market for Case Company’s Customer Industries ...... 119 10.2.2 Government: Support for the Industry ...... 119 10.2.3 R&D Institutions and Cooperation with the Industry ...... 120 10.2.4 Short-term impact ...... 122 10.2.5 Medium-term impact ...... 122 10.3 Aggregated Customer Potential Attractiveness and Implications ...... 123 10.4 Entry Strategy ...... 125 11 Conclusions ...... 130 2

11.1 Suggestions for Further Research ...... 131 12 References ...... 133 13 Appendix ...... 137 13.1 Interview Questions – Industry level ...... 139 13.2 Interview Questions – Country level ...... 141

3

1 Abstract Emerging country markets are becoming increasingly important in the operations of multinational corporations. On May 1, 2004, the EU welcomed 10 new member states, including the three Baltic States: Estonia, Latvia and Lithuania. As a result, many western multinational corporations have entered these new emerging markets. These countries have witnessed very fast growth and were lucrative to enter. The term “Baltic Tiger” is used to describe the economic boom of the Baltic States from 2000 to 2007. This term is adequate because during this time period the Baltic States had the highest growth rates in Europe. Swedish companies in particular started coming into the Baltic States in 1989 approximately. These companies were looking for and found low cost production. However, today with rising wages, low cost production is more difficult to find.

The purpose of our research is to investigate the current conditions and future predictions related to the external environment and high technology industries in the Baltic States. The investigation of the current state and future potential of the markets were analyzed from an institutional standpoint. We compared this to the institutional environment in Sweden and made predictions on the potential changes in these institutions. Given our analysis and evaluation of the most attractive market, we have devised an establishment and matching strategy for the case company. The case analysis is set against the background of a theoretical framework covering current literature over societal and organizational fields in Latvia, Lithuania and Estonia. Our primary and secondary research was examined in the context of well known theoretical models and our own models and upon analysis, we come to a conclusion and make recommendations for companies interested in doing business in the Baltic States. Our research will be useful for companies curious about the potential and necessary considerations they must take in the Baltic markets in general and within the high technology sector specifically.

Key Words:

Baltic States, Latvia, Lithuania, Estonia, Emerging market, Market entry, High technology company, Electronics industry, Institutional analysis, Swedish companies

4

2 Acknowledgements With these acknowledgements, we intend to express our gratitude and appreciation in thanking all of the people who contributed their time and effort to making this thesis possible.

We would like to thank our advisor, Dr. Hans Jansson at the Baltic Business School for providing us with the opportunity to collaborate with the case company. This collaboration has given us an insight and hands-on experience into the company, the relevant industries, as well as experience in international market research firsthand. His professional input and teachings throughout the masters program have imparted us with valuable knowledge that will be useful to us throughout our professional careers.

We are also thankful to all of our interviewees in Latvia: Erik Sprängare (Trade commissioner) at the Swedish Trade Council; Gunnar Ljungdahl (Chairman) at the Swedish Chamber of Commerce; Ieva Stukle (Investment Project Manager, Investment and trade promotion department, Investment promotion division) and Iveta Strupk āja (Project manager, Investment and trade promotion department, Export promotion division) at the Investment and Development Agency of Latvia and Inese Cvetkova at LETERA. We express great gratitude toward interviewees in Estonia: Henrik Avasalu (Project leader) and Fredrik Tammar (Consultant) of the Swedish Trade Council in Estonia; Marek Mägi (Deputy Director of the Investment and Trade Development Division) at Enterprise Estonia; Göran Broden (MCM, chairman) and Kristiina Sikk (Ombudsman) at the Swedish Chamber of Commerce in Estonia; and Aleksei Hõbemägi (Development Director) at the Federation Of Estonian Engineering Industry. In Lithuania we would like to thank: Vidas Korsakas (Project Leader) at the Swedish Trade Council in Lithuania; Gedeminas Raciukaitis (Head of Laboratory for Applied Research and Consultant on laser technology with Ekspla Ltd) at the Vilnius Institute of Physics; Carl Bernheim (Chairman) at the Swedish Chamber of Commerce in Lithuania; and Jonas Garjonis, (Project manager) at LINPRA, the Engineering Industries Asscocation of Lithuania. The time and insights of all of our interviewees helped make this thesis possible.

Finally, we would like to thank Dr. Hans Jansson, Dr. Joachim Timlon and Dr. Sigvald Harryson for their teachings throughout the program which has given us the context and relevant experiences by which to write this thesis.

Kalmar, May, 2008 5

3 Background

3.1 Growth around the Globe and in the Baltic States In 2008, many important economies around the world are experiencing a slowdown. This slowdown has been the greatest in the advanced economies. In the United States for example, the housing market exacerbated financial stress and its effects have spread broadly. So much so, that the effects on the rest of the world are likely to be significant. Growth in Western Europe has also decelerated. However, the emerging and developing economies have been so far less affected by negative developments in the financial market and have continued to grow at a rapid pace, lead by China and India, although activity is beginning to slow in some countries. (International Monetary Fund).

Emerging country markets are becoming increasingly important in the operations of multinational corporations. One of the driving forces behind a third wave of the internationalization has been the integration of the countries in Central and Eastern Europe into the European Union in 2004. As a result, the last years witnessed many Western MNCs (Multi-National Corporations) establishing their operations in the new EU member states. Already, multinational companies such as Volvo, Saab, Volkswagen, Siemens, Renault, Philips, Samsung, Ikea an Adidas have established themselves in these developing markets. (Lithuanian Development Agency).

An emerging market can be defined as a growing market and one that is being transformed from a pre-market economy stage to the market stage of the mature Western capitalistic economy. The means of this change is through structural reforms of markets, companies and societies. (Jansson, 16) Emerging markets are characterized by high degree of turbulence, uncertainty and risks as compared to the stable and mature Western markets. This, however, goes along with unprecedented growth, creates attractive opportunities and makes those markets very lucrative to enter. Especially companies entering the market earlier than the competition can enjoy a first mover advantage and reap the benefits of the highest profits. Luo defines an emerging market “as a country in which its national economy grows rapidly, its industry is structurally changing, its market is promising but volatile, its regulatory framework favors economic liberalization and the adoption of a free-market system, and its government is reducing bureaucratic and administrative control over business activities.” They are characterized by rapidly growing and structurally changing economies, shifting from a former centrally-planned system to a market-determined system. (Luo, 5)

6

Even though the Baltic States are influenced by global processes, it is still possible to identify tendencies that are more typical of this region. For instance, the Baltic States have experienced significant growth in GDP outpacing the growth in other EU countries. The year 2007 marked the sixth consecutive year during which emerging Europe grew substantially faster than Western Europe. The key factor stimulating the economic growth in the Baltic States is domestic demand, although it is quite strongly influenced by external demand as well. Lithuania exports 62% of its products to the EU, Latvia 75% and Estonia 64%.

Since the early 1990’s most people in the countries of the former USSR boosted their standards of living. Many companies adapted to market conditions or were started. Foreign direct investment (FDI) played an important role in the development of new products, productivity and for new fundamentals for exports. Foreign direct investors found – in general terms – a well-working and educated labor force and low labor costs. It is possible that the small economies of the Baltic States benefited from their sheer size and obvious flexibility (Fromlet, p.4).

Yet, the picture is not altogether rosy for emerging Europe. For example, today all EU8 countries apart from Slovenia and Czech Republic suffer from at least one serious economic imbalance. These imbalances are already – or may turn into – impediments to GDP growth (Fromlet, p.3). One such problem in the all three Baltic States is the situation in the labor market. The economic development of the countries depends on the additional involvement of employees in production, and these available resources are depleting. The lack of employees creates conditions for further growth in wages. However, the rise in wages outpacing the growth of labor productivity due to low technological level can not last forever. These tendencies will have a negative influence on further development: decreasing competiveness of local enterprises and increasing demand for technological modernization. Wages are increasing in the Baltic States due to a rapid economic growth and workforce emigration, while qualified workforce is becoming scarce. It is noteworthy that the national research infrastructure is technologically and morally worn out and outdated because of low investments. Another issue discussed in all three States is inflation. It has been fueled by an expanding loan market and increasing domestic demand. (e.g. technological, social changes, social reforms) (Foresight study, 2007, p.10-11)

3.2 Activities of Swedish Businesses in the Baltic States Sweden has been a major investor in the Baltic States (largest in Estonia and Latvia and number three in Lithuania) and thus played a major role in the development of the Baltic States. Therefore we 7 choose a Swedish company operating in the high-tech area as our case company. Partly Swedish involvement it is explained by the market proximity, but also by an investor confidence in the region. Especially strong presence of Swedish businesses is seen in the financial sector where SEB Bank and Swedbank play major role in the economies of all three Baltic countries and telecom with strong positions of TELE2 and TeliaSonera. Volvo, ICA AB, Scania, NCC, Skanska are just a few names present in the market. Currently the companies feel slow down in the growth of the markets, however no panic or rapid removal of business are visible, despite the fact that some of the companies moved to the Baltic States to enjoy low cost advantage that is disappearing quickly.

The beginning of the main wave of Swedish companies doing business in the Baltic States started in 1989 roughly. The Exportrådet in Latvia has tracked the development of Swedish companies in the Baltic and they categorize the activities of Swedish companies as falling into one of three time periods: the “Wild West” period, the “SME entrepreneurs” period, and the “product export” period. The “Wild West” describes a time period from 1989 to 1995 in which big enterprises entered the Baltic States looking for cheap production. Then, the time period from 1995 to 2003 describes the “SME entrepreneurs” period. This period was characterized by the entrance of SMEs looking for low cost production. Such SMEs included those in all types of manufacturing, i.e. of wood, metal, electronics, plastic and textile. From 1999-2003 describes the “product export” period. During this period, Swedish companies started to export their products to the Baltic States. And from 2004 onward, Swedish companies that are more service oriented like retail, IT and consultancy entered.

As seen in the figures below the trade turnover between Sweden and the Baltic States has been constantly growing since 2002.

8

Figure 1 Imports from Sweden, MEUR

Source: Eurostat

Figure 2 Exports to Sweden, MEUR

Source: Eurostat

3.3 Research Problem and Questions Statement Based on the background information we have formulated the major research problem of our paper:

9

MAIN PROBLEM How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

We have identified three research questions that need to be answered to solve the main problem statement. We will look at existing theory related to the problem to help us focus our study and upon conclusion solve the main research problem.

The first question concerns the attractiveness of doing business in the three Baltic States for a Swedish investor, identifying the differences and similarities between Latvia, Lithuania, Estonia and Sweden in the societal and organizational fields. It addresses both the current state and future perspectives.

RESEARCH QUESTION 1: What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

Based on our evaluation of the current state and future potential of the business environment in each of the Baltic States from the perspective of a Swedish company, we will be able to better decide what advantages and disadvantages each country has for the establishment and how it differs from Sweden. In order to understand the attractiveness of customer potential for the case company’s business activity in the Baltic States, we need to evaluate the current state and the future potential of the markets in the engineering industries on the example of electronics and electrotechnics where the case company’s customers can be found. The following question addresses this issue:

RESEARCH QUESTION 2: What are the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries?

10

Based on the analysis of the current state and future potential in the engineering industries within each country, we will assess the attractiveness of each Baltic State and assign market priorities which will help us make recommendations.

One more question remains:

RESEARCH QUESTION 3: Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States?

We will address two aspects of the market entry strategy for the case company. These are: where and how should the MNC establish its presence in the Baltic States and how should the MNC deal with various Swedish/Baltic differences based on different societal and organizational aspects?

Our investigation will probe into existing theory related to the problem to help us focus our study and upon conclusion solve the main research problem.

3.4 Research Purpose and Delimitations The intent of our research is to provide a basis for a multinational company to increase its operations in the Baltic States by increasing its market knowledge, providing an analysis of the market potential and a proposal of establishment alternatives in Estonia, Latvia and Lithuania.

• In our analysis of the business environment will concentrate on the needs of the case company mostly, as a Swedish business representative. Most of aspects that we touch would be relevant for the majority of Swedish investors, while some might be irrelevant or lacking because of the business specifics.

• Our research is limited to the level of countries and industries; it does not address specific companies within the industries. Due to this fact business marketing strategy dealing with pricing strategy is outside the scope as customer needs have to be identified that would require analysis on the company level for this specific industry. The recommendations are limited to choosing the form of establishment and matching strategy in the Baltic States. Entry strategy deals with entry mode,

11 node and role leaving process analysis for further research as it requires customer analysis on a company level.

• The case company’s customers are found in various industries. For the purpose of the research we have chosen two industries that are mostly represented in the Baltic States, where the case company’s customers can be met – metal industry and electronics. Mostly to describe the situation in the engineering industries like these, this paper will refer to electronics and electrotechnics industry as an example.

12

4 The Theoretical Framework For the company to make a proper decision about where, why and how to establish in the Baltic States, analysis has to be performed based on a theoretical platform. This section presents a theoretical background and models on which our research relies in order to answer the research questions and ultimately solve the main research problem.

Multinational companies must be aware that they are not alone in the business world and they are highly dependent on the environment in which they are operating. Therefore it is important that companies reflect on the environment as networks and institutions. This is called the Institutional network approach. Institutions within this approach are described as a kind of infrastructure that stablizes strategic behavior, thereby reducing uncertainty. This approach divides society into different social groupings, characterized by different regularities and rules, which are embedded into each other as a multi-layered system. (Jansson, 2007)

4.1 Research Stages In our paper we are performing a comparative analysis of the three Baltic States. In order to do that we have developed the following sequence of research in our paper: first the external environment is analysed in order to evaluate attractiveness of Doing Business in each of the Baltic States for a Swedish investor. This will be done using the Basic Institutions Model described below, identifying institutions important for a Swedish investor, alligning country data and thus making possible assigning ranks to each of the Baltic countries. The same model will be used to make a comparative analysis of country attractiveness regarding the current sate of the case company’s customer industries and their future development. Once again the institutions important for the development of the case company’s potential customer industries will be identified and country data alligned and compared allowing for attractiveness ranking. A combination of results of “Doing Business Attractiveness” and “Customer Potential Attractiveness”will help us in suggesting the entry and environment matching strategy. This approach is summarized and depicted in Figure 3.

13

External Environment Analysis of the Baltic States

Doing Business Attractiveness Customer Potential Attractiveness

Entry and Matching Strategy

Figure 3 Research Stages

Source: Own

Now we present theoretical framework underlying this research. The major analysis object in our research in order to solve the research problem is the external environment . When the external environment is viewed from an institutional perspective, the external institutional setting consists of two components: societal sectors and organizational fields. These are represented in the form of the Basic Institutions Model.

The second component of our model consists of the entry and matching strategy. In order to enter a local market network, these major factors need to be considered. They are the entry mode, the entry node and the entry role. In order to match values and norms of the home country with the foreign country entered we use the matching strategy that is based on the consideration regarding how companies manage to handle relationships towards the social external institutional framework to gain legitimacy. The legitimacy is very important and based on how the multinational companies handle and follow a number of different rules, regulations, values and norms. The reason for obtaining a legitimacy based business strategy is that the companies that will establish new businesses in emerging markets normally need to prove that the high efficiency doesn’t contradict basic social needs. (Jansson, 2007)

14

4.2 The External Environment There is a need to be able to cope with the complexity and volatility of emerging country markets, which are often quite different from the domestic market. Therefore, in order to diminish the risk of doing business in a new market, environmental factors are made transparent, and outlined beforehand. As stated in Jansson (2007) the institutional approach to environmental analysis is divided into four stages;

• The identification stage • The descriptive stage • The explanation stage • The prediction stage

As the basis for the analysis of the external environment, the Basic Institutions Model is chosen. According to it the institutional world is divided into three layers. Micro institutions – in our case we place Swedish investor in the center of the model. Moreover, at the same time we put potential case company’s customer industries, since the institutions influence their current state and future development. Meso institutions are represented by an organizational field and macro institutions in the societal field. (Jansson, 2007, 37) We will employ the outside-in approach for the analysis, starting with the outer rectangle of the Basic Institutions Model and will move towards the Swedish investor, multinational company. At the same time we will use outside in approach to reveal how forces in the organizational field influence future development of the case company’s potential customer industries.

15

Education Country Culture Political System System

Government: Corruption, Bureaucracy, Tax System, and Financial Support for Industries

Swedish Investor Labour Financial Market Market Case company’s Customer Industries

R&D Institutions

Country Economic Legal System Stability

Figure 4 The Basic Institutions Model

Source: Based on Jansson, 2007, 38, adjusted for the research

In the societal level of the institutional analysis institutions like country culture, educational/training system, political and legal systems and others presented in the Figure 4 above will be given attention, whereas the organizational field is represented by institutions that are in the most interaction with the company of our interest and the ones that influence the case company’s potential customer industries the most. These institutions include labour and financial market as well as interaction with governmental structures, etc.

In the identification stage, the environment will be scanned and monitored to find appropriate institutions that have the major influence on the company’s potential business activities in the region. In order to identify the institutions, the basic institutions model will be used. Then we will attempt to further describe the institutions and highlight the influence of the societal sector on the organizational fields and the company.

16

To conclude the analysis of the external environment, predictions will be made for the future developments of the various institutions influencing potential business of the company. One of the most important characteristics of the emerging markets is the dynamism and low degree of predictability. In order for the decision makers to reduce the risk and uncertainty, predictions of the future institutional developments are necessary.

The analysis of the external environments to the case company is performed in order to answer the first two research questions:

What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

What is the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries?

4.3 Entry and Matching Strategy After determining the Doing Business attractiveness and Customer Potential attractiveness based on the external analysis we will analyze and recommend the entry strategy for the company to the Baltic States. This will concern the entry mode (what kind of organization of the firm is appropriate), entry node (showing how the company should plug into the local network – either by dyad or a triad). The last factor is the entry role which describes the commercial role – whether the company would perform a function of a buyer, a seller or a manufacturer. The entry process, which has to be addressed as well, is outside the scope of the current paper.

The main strategic issue that the company faces when it comes to the social issues is similar to the economic aspect – finding a right trade-off between local adaptation and global integration. In order to solve this dilemma, the matching strategy has to be developed for the company. This is done by matching external environment with the internal environment and making those two compatible, which means that norms, values and beliefs of the case company and of the Swedish MNC have to be matched against norms, values and beliefs of the markets in the Baltic region. The matching will be done mostly on the societal level, including matching to both organizational fields and societal sectors.

17

When performing the matching the MNC can be in four major strategic change situations – either following the environment or making the environment follow the rules of the MNC. • If the adaptation takes place both in internal and external environments, such a case is called “the twin change” • The “MNC change” is an adaptation of MNC to the external environment by making changes in the company’s internal environment • The “external context change” is in place when the company forces the external environment to change in order to adapt to company’s internal environment • When the acceptable match is present, neither the company nor the external environment have to adapt which is called the “no change” case

Thus the company can choose either a proactive or a reactive approach when it comes to dealing with the external environment. According to Oliver, as presented in Jansson (89, 2007), the strategies might range from more proactive strategies such as to innovate, manipulate and defy the environment, to more compromising strategies as avoid or compromise to more passive strategies such as acquiesce .

18

Matching strategy Organiza tional routine Examples

Innovate Generate change Creating flexible capabilities and organizational controls Move fast

Manipulate Co -opt Shaping values and criteria

Influence

Control

Defy Dismiss Ignoring explicit norms and values

Challenge

Attack

Avoid Conceal Changing goals, activities or domains Buffer

Escape

Compromise Balance Balancing the expectations of multiple constituents Pacify

Bargain

Acquiesce Habit Following invisible, taken for granted norms Imitate

Comply

Figure 5 Matching Strategies

Source: Jansson based on Oliver, 89, 2007 Using the entry and matching strategies we can answer our third research question: Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States?

Using the theory and models developed above, we should be able to adequately answer our main problem which is:

How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

19

5 Methodology In this chapter we introduce the model and process of conducting our research. We start by describing and justifying the research strategy and the approach that we chose. Next, we describe the data collection methods for both primary and secondary data. We will proceed with the quality aspect of the research to explain how internal, external validity as well as reliability have been achieved. We will finish the chapter by presenting the reader with the research model on which we base this paper.

5.1 Research strategy According to Yin, there are several ways to conduct social science research. Those include case study, experiments, surveys, histories and archival studies. Each of those is a way to collect and analyze empirical evidence and has its own advantages and disadvantages. The choice of the research strategy is dependent on three major conditions – the type of research question, the control the investigator enjoys over the actual events and the focus which can be either contemporary or historical phenomena.

For our paper we have chosen the case study as a backbone for the research strategy. Yin defines the case study as an “empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident.” (Yin, 2003, 13) Case studies can be distinguished from other methods of doing social science research because they are the preferred strategy when “how” or “why” questions are being posed, when the investigator has little control over events and when the focus is on a contemporary phenomenon within some real-life context (Yin, 2003, 9).

Our main problem is a “how” question: How can a multinational Swedish company, operating in the high technology sector, successfully establish their operations in the Baltic States? In our paper we analyze the major characteristics of institutions displaying how they influence the technological companies that wish to establish themselves in the region. For this purpose we had to evaluate quantitative but also qualitative indicators, which are multiple and complex. Since we are looking into understanding how these indicators are related and influence the company’s activity in the Baltic States and since we are considering unique internal characteristics of the company, the case study approach is the most suitable option. Our study mostly takes into consideration present phenomena in the Baltic States and in the industries in which our case company operates. Moreover, we as 20 investigators, have little control over these current phenomena and no means to manipulate the relevant behaviors, which again favor the case study as the form for our paper.

A case study can be inductive , deductive or abductive . An inductive case study is used when there are no theories yet on the specific topic and the researcher has to develop a new theory. When the researcher wants to find information that suits existing theories, the case study is called deductive . And finally, when a case study is built on new or developed theories as well as older theories, it is called an abductive case study. (Merriam, 1998)

It should be noted that some historical, for example statistical economic data is part of our analysis, which adds traits of archival analysis to our study. This strategy is necessary since part of our research is of a predictive nature about the region’s development based on the historical data. Moreover, interviews with experts in- appropriate fields helped us to deepen the understanding of the processes and key factors that either drive development or serve as stabilizers of the particular institutions.

5.2 Research design and approach According to Yin, the research design links the data to be collected with the initial question of the study. Each case study has a separate research strategy with its own research design. According to Yin, a research design is defined as a “plan that guides the investigator in the process of collecting, analyzing and interpreting observations.” (Yin, 2003, 21) The four types of the research design can be distinguished based on the single or multiple case design and holistic and embedded design characteristics. Yin first distinguishes between the single-case and the multiple-case design. He says that a single-case design is most appropriately used when the case represents a test of a well formulated theory, when the case represents a unique case, when a single case is the representative case, when the case fills a revelatory purpose, or when the case is the longitudinal case (studying the same single case at two or more different points in time. (Yin, 2003). The multiple-case design is most advantageous when one study contains more than one case. The second distinction that Yin makes is between a holistic and embedded case design. The embedded design is preferred when a single case study involves more than one unit of analysis. Yet, if only one unit of analysis is examined, the preferred option is the holistic design case study. (Yin, 2003)

21

Our paper exploits a holistic single case design. We chose the holistic case design because the relevant theory underlying the case study is itself of a holistic nature (Yin, 2003). We chose to have a single case design because we base it on a well-formulated theory and by using an abductive approach we partly confirm and partly extend the existing theory. Moreover, we consider the case company as a single unit in our analysis since there is no logical need to split the company into additional units. Our case company employs just several people and therefore there is no fear that some specific phenomenon in operational detail might be omitted.

5.3 Scientific Approach There are several different possible scientific approaches in the research process. An exploratory research approach is used when the researcher has limited knowledge about the research problem. This approach is common in the initial phase of the research process when the researcher defines the problem area and problem questions. A descriptive approach is preferred when the purpose is to explain different phenomena, make predictions or show connections between variables. It outlines the characteristics of a certain phenomena and tries to determine the frequency of its occurrence. Lastly, the causal research approach is preferred when trying to explain, generalize and determine causalities between different phenomena.

We start our research by using an exploratory approach when gathering the necessary data, both secondary and primary. When describing the current situation in the external and internal environment of the company we apply the descriptive approach . The case study moves to explanatory phase when we explain the environments and draw conclusions.

5.4 Data collection Data sources can be classified into roughly two forms: primary and secondary sources. Secondary data is data that already exists. Examples of this type of information include books, articles, journals, previous studies, Internet sources etc. The secondary data that we collected provided a basis for the interview questions. The other type of data is primary data . Primary data is data gathered for the first time and for the purpose of use in the study at hand. It may consist of observations, interviews or surveys. The interview is used when the purpose is to obtain in-depth information (Merriam, 1998). Interviews can be structured, non-structured or semi-structured. In structured interviews, the same

22 questions are asked of all interviewees. In semi-structured interviews the questions are unspecified and thus they are often formed and adapted during the interview. Lastly there are non-structured interviews during which there are no predetermined questions and the interviews are conducted for exploratory purposes.

Our interviews took the form of structured interviews in which we asked specific and similar questions to each interviewee. In the following three sections we will describe the sources of data we will use in order to answer our three research sub-problems and thus our main research problem.

The meso and macro institutions The meso and macro institutions refer to the organizational fields (meso) and societal institutions (macro) as found in the basic institutions model. Our research includes investigating the financial markets, the labor markets, the government, the legal system, the political system and country culture just to name a few institutions. The secondary sources include journals, newspapers, books, databases and materials from country development organizations. Our primary sources included interviews with representatives of country development organizations, chambers of commerce and trade councils for Swedish companies.

The Industry We have researched closely engineering industries, especially Electronics/Electrotechnics industry to the fullest extent possible in each of the Baltic States. We have addressed important issues such as the growth of the industry, investments in the industry, employment in the industry, the production levels and foreign trade within the industry and the share of the electronics industry within the industrial sector. We have researched the fund availability for the development of new technologies in the industry and researched professional and industry associations within each country.

Our research included the review of secondary sources from journals, newspapers, books, databases, pamphlets from professional and interest associations on the topic, websites etc. Our primary sources included interviews with representatives of industry associations with a good knowledge of the Baltic States and doing business there.

Establishment strategy As we have learned much about the countries on the industry and country levels, we can evaluate which market is most attractive currently for a Swedish MNC and for the case company and make a 23 suitable recommendation. Our country research has given us insight into cultural differences and establishment alternatives for companies. The research needed to answer our third question was given by secondary sources and interviews as described previously.

5.5 Quality of Research It has been said that the investigator has to be very careful when the case study is performed in order to overcome the traditional criticism of this research strategy. According to Yin, “perhaps the greatest concern has been over the lack of rigor of case study research” (21, 1984). The case studies are often accused of biased attitude of the author that influenced the direction of findings and conclusions. In our paper we have done the most to avoid getting trapped into such state, therefore various sources have been exploited to ensure objective presentations of data. Moreover, a substantial amount of primary data has been acquired to deepen the understanding of the reality.

Another critique of the approach is that the case study provides very little basis for scientific generalization. However, this paper does not state that the results can be generalized statistically; instead we strive for an analytical generalization and constantly move between the theoretical to empirical parts of the paper, as suggested by the abductive approach. This allows us to ensure that both theoretical and normative conclusions are sound.

Finally, the third complaint about the case studies is their complexity and lengthiness. We tried to cope with it by having a specific focus of our study to ensure that only the most relevant information is included.

In order to deal with the critique presented above, Yin states that “the case study investigator must maximize four aspects of the quality of any design and test the following aspects: construct validity, internal validity, external validity and reliability” (27,1984). The following chapter presents how we were able to cope with the possible problems of a case study to ensure a sound research.

5.5.1 The Validity Concept The concept of validity can be defined as whether a measuring device actually measures a concept within a theory. Validity concerns whether a developed framework is a relevant representation of

24 reality. There are three measures or tests that one can use to determine whether the research is valid. These are construct validity, internal validity and external validity.

Construct validity This aspect concerns “establishing correct operational measures for concepts being studied” (Yin, 34, 2003). It is said that test on the construct validity is especially problematic in case studies because subjective judgments are used when collecting data. In order to increase the construct validity we have used multiple sources of data collection to ensure that biases are lowered to a minimum and various viewpoints are presented.

Internal validity This aspect is “a concern for causal case studies, in which an investigator is trying to determine whether event x led to event y. if the investigator incorrectly concludes that there is a causal relationship between x and y without knowing that some third factor-z- may actually have caused y, the research design has failed to deal with some threat to internal validity.” (Yin, 36, 2003) In order to make sure that the research is objective when we show that certain conditions lead to other conditions, we have based our inferences on long term observations, involved the triangulation method and the paper has been checked by the supervisor throughout the whole process of the study. Moreover, the fact that two researchers were involved decreased possible biasness. We have performed multiple interviews and combined the findings with evidence we obtained from various secondary data sources.

External Validity This type of validity deals with how well the findings can be generalized beyond the single case study. Critics state that single case studies provide a poor basis for generalizing. However, the same critics make this comparison to survey research which relies on statistical generalization whereas case studies rely on analytical generalization. Analytical generalization is the process by which the investigator strives to generalize a particular set of results to some broader theory. Therefore the analogy is not valid. (Yin, 2003) In our specific paper we argue that the research can be generalized to the companies working in the high performance material segment since the study reveals factors that are major influencing forces on this type of companies. The theoretical conclusions can be generalized to a higher degree since the uniqueness of the company is not influencing it.

25

5.5.2 Reliability The last test checks if the investigator followed the same procedure as we did and conducted the same case study over again – if he or she would arrive to similar results. Thus, as stated in Yin, “the goal of reliability is to minimize the errors and biases in the study” (37, 2003). We believe that we have ensured high degree of reliability by strictly following the steps of the research and having precise guidelines for the interviews.

5.6 Possible Types of Errors In a case study, there may be many types of errors ranging from the collection of data to how it is interpreted. The institutional analysis of the external environment encompasses four stages of analysis: the identification of institutions, the description of institutions, the explanation of institutions and the prediction of institutions. In the identification of institutions, we had to select relevant data for the analysis. The process of selection involves some unavoidable bias. In the description of institutions, we might have misinterpreted the author’s words. In the explanation stage, there was subjectivity involved in explaining the relevance to companies. And prediction stages, one has to deal with uncertainty inherent in the data as well as reconciling different predictions. In the interviews, we faced the dilemma of talking to some interviewees in their foreign tongue. Whenever possible, we conducted the interviews in the language most preferable for the interviewee as to facilitate personal expression. We tried to formulate the questions in understandable language and verified answers of which we were unsure.

26

5.7 Research Model

MAIN PROBLEM

How can a multinational company from Sweden, operating in the high Main Problem technology sector, successfully establish their operations in the Baltic States?

What environment in the What is the current How should the Swedish societal and organizational state and the future MNC establish in the fields does a Swedish potential of the Baltic States? company encounter in the markets in the Baltic Baltic States and how is it States in terms of Research different from Sweden, development of the what are the potential case company’s Questions changes in that customer industries? environment?

Research Sub- Where and wh at k ind of entity How should the MNC deal with Questions should the MNC establish in the various Swedish/Baltic

Baltic States? differences? Secondary Sources Theoretical study: Market study, Environment al Analysis

Primary Sources Personal interviews and phone interviews

Analysis

Conclusions

27

Chapters 6, 7 and 8 are devoted to Latvia, Lithuania and Estonia respectively. These will cover empirical data of the societal and organizational fields and their interrelations in the Basic Institutions Model. The Institutions in the model were chosen on the basis of their essentiality for 1) doing business in the Baltic States from a Swedish business perspective and 2) for development of industries that can be potential case company’s customers.

Education Country Culture Political System System

Government: Corruption, Bureaucracy, Tax System, and Financial Support for Industries

Swedish Investor Labour Financial Market Market Case Company’s Customer Industries

R&D Institutions

Legal System Country Economic Stability

Figure 6 The Basic Institutions Model

Source: Based on Jansson, 2007, 38, adjusted for the research

As depicted in the figure above, in the heart of our research lie two major focus objects: Swedish investor in the Baltics and industries that are potential case company’s customers. The societal field is composed of the following institutions: Country culture, Country’s economic stability, Political and Legal systems, Education system. From organizational fields we address Labor market, Financial market, Government from corruption, bureaucracy, the tax system and financial support for industries 28 perspectives, and R&D institutions. This empirical chapter of this thesis describes and explains these institutions. In the analytical chapters, that will follow, this data will be used for analysis and forecast to determine the attractiveness level of doing business in each of the countries from the Swedish businesses standpoint and determine the market attractiveness level regarding the case company’s potential customer industries.

29

6 Country’s Empirical Data - Latvia

6.1 Country Overview

6.1.1 Geography and Infrastructure The Republic of Latvia borders with Lithuania, Estonia, Russia, Belarus, and the Baltic Sea. The country covers territory of 64,589 square kilometers. Latvia’s capital city is Riga. Latvia is a strategically important centre connecting the Baltic states as a large market, as it is only a few hours’ drive from Riga to Vilnius in Lithuania or Tallinn in Estonia, and at the same time it serves as a transport route connecting Russia with western Europe. Important transport infrastructure hubs for international logistics are the ports of Riga, Liepaja and Ventspils. Countries’ railway corridors are joining the large ports with important Russian markets, and providing access to Russia’s Far East region. Latvia's road network is well developed, but resources for improvement are required. Riga International airport that connects Latvia with major cities has the biggest passenger turnover volume in the Baltic region. Latvia lies in the East European Time Zone (one hour ahead of Swedish time).

6.1.2 People Based on the CIA World Fact Book data we present the information on Latvian inhabitants. The total population of Latvia is 2,294,590 people and it is declining at a rate of 0.67 %. The capital Riga with 727,578 inhabitants represents 32% of the population of the country, followed by Daugavpils with 109,482 inhabitants and Liepaja with 85,915. Looking at the composition of inhabitants, following ethnic groups are represented: Latvians are the majority with 59% of the population, followed by Russians (28.5%), and others. Latvian is the official language and it is spoken by 58.2% of the population; Russian language with 37.5% follows. The major religion group is Lutherans, though Roman Catholic and Russian Orthodox are strongly present as well.

6.1.3 History As said by Bernheim (Interview, 08.04.2008): “The soul of the country is in its history”. Historical developments influence the cultural aspect of the countries and therefore these are presented briefly in this section.

• 10 th century: Area that is today Latvia was inhabited by several Baltic tribes who had formed their own local governments • Year 1054: German sailors initiated a period of increasing Germanic influence • Year 1721: Russia took control over the Latvian territories as a result of its victory over Sweden 30

• The onset of World War I brought German occupation of the country’s western province • Year 1918: the Latvian People's Council declared Latvia's independence • The German-Soviet Nonaggression Pact forced Latvia under Soviet influence. After World War II, the USSR subjected the Latvian republic to a social and economic reorganization which rapidly changed the rural economy to one based on heavy industry and as a part of the goal to integrate Latvia into the Soviet Union, 42,000 Latvians were deported and the policy of encouraging Soviet immigration to Latvia was promoted • Year 1991: Latvia re-claimed independence. After regaining its independence, Latvia has rapidly moved away from the political-economic structures and socio-cultural patterns which underlay the Soviet Union • Already in the spring of 2004 the country joined both NATO and the European Union. Since 2008 Latvia is also a part of Schengen area

6.2 Societal Fields

6.2.1 Country Culture and Business Culture We find it the most appropriate to concentrate on the cultural aspects relevant to this paper and limit us to the discussion of the values and the thought styles of the people in the Baltic States. We argue that history and people are the major influencers in our case and therefore those were presented above. The history of Latvia is quite complex because it has often been a part of other countries. From the historical perspective, the colonization by Germans, Scandinavians and Russians has influenced the culture of Latvians very much. Scandinavian calmness, Russian emotionality, German preciseness and other characteristics are mixed in the inhabitants of Latvia.

When it comes to running business in Latvia, short-sightedness is said to be evident thought style when compared to Sweden – that the investors have to bear in mind when dealing with partners or hiring employees.

Swedish businessmen are more long term oriented. They tend to plan. They develop relations over time. In Latvia Latvians or Russians make money now or the next week – they are not interested to make money in a year. (Sprängare, Interview, 3.04.2008)

Thus it is very important to have good connections, relationships with people, partners that Swedish businesses can trust. 31

When management style is concerned, according to Sprängare (Interview, 3.04.2008), it is a lot more management by fear – but it is diminishing since people do not accept it any longer. Moreover, it mostly refers to how the blue collars are managed. Interestingly no major differences have been found between Russian managed and Latvian managed companies in Latvia.

In the study of business patterns of Latvian and Russians companies we found very little differences, though Latvians said we’re totally different from Russians and vice versa. (Ljungdahl, Interview, 01.04.2008)

But rather it is a question of generations – people who lived longer under Soviet regime were, of course, much stronger influenced by it.

In management it is a generation thing - elderly people are more hierarchical, controlling, with military discipline. Younger people are more European, delegating, they practice group work. (Sprängare, Interview, 3.04.2008)

Additionally since Latvia regained its independence there is a sense of proud of being small and independent country, and this sense can be felt also in the personal behavior – people became much more self-reliant and persistent after the break of the Soviet Union.

When looked at the values for people in Latvia, according to the materials provided by the Swedish Trade Council in Latvia based on the research by Berlin Centre of Social Studies and Dublin Institute of Economic and Social Studies there are following top three priorities for inhabitants of Latvia:

1. Job 2. Family 3. Education The results reveal that people in Latvia value work and education very high, family value is also important. Thus investors should expect real dedication when it comes to employees that they would hire and the same attitude from Latvian business partners. In business people are very goal-oriented and focused and do not want that their time is wasted:

When Swedish businessmen come to Latvia they do not expect such a pace. Get to the point in ten minutes! You want to sell something or you want to chat? (Sprängare, Interview, 3.04.2008)

32

As shown in the demographical composition Latvia has a big Russian minority share. In an attempt to preserve the Latvian language and prevent ethnic Latvians from becoming a minority in their own country, Latvia enacted language, education, and citizenship laws which require a working proficiency in the Latvian language in order to become a citizen. Such legislation has caused concern among many non-citizen resident Russians, thus the national issue is quite sensitive in Latvia . This also implies those local managers need the knowledge of both Russian and Latvian. Another implication that the two different audiences might need to be addressed differently – there are separate communications channels (like TV, newspapers, etc.) for Russians and Latvians. Moreover, for Swedish investors interested in a huge Russian market Latvia with big Russian speaking share can be a big advantage and a first step towards Russia. Employees or partners speaking Russian and understanding Russian culture can be found here quite easily.

For a company it is a good strategy to start in Latvia, get partners here that understand Russian language and culture, still being the EU citizen, obeying the EU laws. Swedes perceive Russian environment to be tough; it is often better that the business is managed by Latvian intermediary. (Sprängare, Interview, 3.04.2008)

To sum up, Latvian culture has been influenced strongly by country’s history. For Latvia German, Scandinavian and Russian influenced played the major role. Older generation of people in Latvia tend to be more hierarchy oriented, more controlling as managers and more expecting to be told what to do as employees. The younger generation is much more independent, proud, persistent and European values-oriented. The businesses tend to be more short-sighted than in Sweden and thus well trusted partners have to be found to ensure successful cooperation. Big Russian speaking share of inhabitants implies necessity to know both languages and address two separate groups. Advantage of Latvia is an ability to use it as a platform for further expansion eastwards.

6.2.1.1 Country Economic Stability The macroeconomic stability and growth of economies are important for the investor as it partly determines the attractiveness of doing business in Latvia. We will address the most important indicators of Latvian economy that are relevant for our study.

33

6.2.1.1.1 GDP Latvian economy has been booming during the recent years. In 2007 it has reached the Gross Domestic Product of 12.4 billion EUR, growing more than 7% since 2003 yearly ( according to Eurostat data – see Figure 7).

Figure 7 Growth rate of GDP over previous year in Latvia

Source: Eurostat

In order to cool down the economy, the government's in March 2007 accepted the anti-inflation plan that has helped to end the boom in the residential real estate market, a key factor behind the domestic demand overheating. As a result of it contrasting to such a fast growth pace, according to the Central Statistical Bureau in Latvia, the growth in the first quarter of 2008 has been just 3.6%, which is a radical drop as compared to the previous performance.

6.2.1.1.2 Inflation Since 2004 the side effect of the growth in Latvia has been high inflation. Latvia holds a negative record of the European Union of the highest inflation rate.

34

Figure 8 Annual average rate of inflation in Latvia

Source: Eurostat

The growth in the indicator can be attributable to growth of world commodity prices, skyrocketing internal demand fuelled by cheap loans and growing real estate bubble. As mentioned above, the domestic demand and real estate markets became almost paralyzed in the first half of 2008 due to the Anti-Inflation plan. As seen by the results economy growth drastically dropped, while the main goal of Anti-inflation plan – to defeat inflation – has not been achieved. According to the latest data in April 2008 there was a record high inflation level in Latvia – 17.5%.

6.2.2 Political System Latvia is a parliamentary republic. The legislature is represented by the 100-seat parliament - Saeima, which sits for a four-year term (last elections were held in 2006) and is elected by proportional representation. The president is elected by the Saeima for a period of four years (Last elections took place in 2007). The president is the head of state and appoints the prime minister - subject to approval by the Saeima (CIA Country FactBook).

Latvia's political scene since 1991 has been characterized by change and the frequent emergence of new political parties, especially before the elections. In Latvia the governments have tended to prove fractious and short-lived—Latvia has had 13 governments since independence - Such a frequent change of the political forces may lead the impression of instability in politics. However, the frequent changes in government, did not lead to major shifts in the course of the country - there has been a 35 commitment by successive governments to meeting the requirements first for EU membership and now for Euro zone entry.

As Ljungdahl (Interview, 01.04.2008) puts it:

Despite of the fact of yearly changes of government I do not see any crisis. The main thing that pulled together politicians in Latvia before was that everybody wanted to join NATO and EU and that made all other differences diminished. And I think now we have another thing that brings people together - the ambition to enter the Eurozone and that gives the strengths to forces willing to keep situation stable.

Thus, despite frequent changes on the political horizon, the overall economic course has been kept by Latvia throughout political reform process. We conclude that the country has a stable political environment from the perspective of doing business in Latvia.

6.2.3 Legal System For the purpose of the study we are mostly interested to understand how the investor is protected by the law. Moreover, we consider how difficult is to start business activities for foreign companies like our case company.

Since the restoration of Latvia’s independence, the legal system has been vastly reformed to meet the demands of modern open economy. According to the CIA World Fact Book, the legal system in Latvia is based on civil law system with traces of Socialist legal traditions and practices. There is a three level court system in Latvia – district regional and supreme courts. In general, it can be said that the foreign investors are treated equally with the local enterprises and are protected by the Latvian laws. Foreigners are allowed to carry out business in Latvia in the form of a limited liability company, a joint stock company or through a branch of a foreign company. It is also possible to set up a representative office, which has no rights to carry out entrepreneurial activities. Foreigners who consider commencing business in Latvia also frequently prefer limited liability company as a legal form of entrepreneurial activity. There are no restrictions on the ownership of Latvian companies by foreigners. The cost of establishing a Latvian company is relatively modest. Registration fee is 100 LVL for registration within 3 working days. The minimum requirements for the registered share capital in Limited Liability Company are set at LVL 2,000. Branches of foreign companies in Latvia have no legal personality. However a branch of a non-resident company is treated by the law as a separate Latvian taxpayer subject to the same reporting requirements as are applied in respect of local 36 companies. The branch structure may thus have an additional potential advantage. This structure can be useful for a new business where start-up losses are expected, provided that these losses can be set off for tax purposes against profits arising in the country of residence of the head office. No tax incentives are available to branches. The suggested advantages of having a subsidiary in Latvia are limited liability (the Latvian subsidiary's creditors may not have access to the foreign shareholder's funds) and possible requirements for greater disclosure of foreign operations in the branch structure.

Thus, we conclude that adequate legal remedies are available for the protection of the investor rights in Latvia and the laws concerning organizing the business activities without major restrictions on foreign activities are in place in Latvia. Therefore we do not expect any major difficulties for the case company when dealing with legal aspects of business in Latvia. It should be noted though, local knowledge is required to deal with the company registration procedures.

6.2.4 Education System As presented in the section on Country Culture, education plays a very important role for people in Latvia. The Literacy rate is 99.8%. With the first technical university having been established in 1862, Latvia currently boasts a three-level education system. According to Eurostat, Latvia has one of the biggest per capita ratios of students in the world. The picture is not so encouraging though when quality issues are addressed instead of quantity. ‘Getting into the European Union left swathes untouched, particularly bits run by the state. Schools and universities, vital for the economy driven by brainpower, remain state-run, rigid and mediocre’. The education system is ‘calcified and self- satisfied’ (The Economist, 2006, 381).

As a result of an underestimation of needs for commerce-oriented subjects, like business, law and communications, during the Soviet period, and the resulting scarcity of specialists, these subjects have now become the most popular with students, which cannot be said about the engineering subjects. As can be seen from the figure below 55% of the students study social sciences, business and law.

37

Figure 9 Breakdown of University/College Students by Fields of Studies, academic year 2006-07 in %

For the purpose of our study we are looking specifically to the education establishments that ensure education for engineering related professions. Analyzing the current state of engineering education enables us to understand how difficult would it be to find qualified workforce for investors like our case company. Moreover, the situation in the engineering education directly influences industries that are potential case company’s customers.

Compared to the Soviet times the number of students choosing engineering sciences has decreased drastically in Latvia. Previously Riga was the city that educated many the best technical specialists for the whole Soviet Union, but these days are history now. Moreover the youngsters are reluctant to choose the engineering directions due to need to study mathematics, chemistry and physics. On the other hand, the youngsters that deliberately choose engineering sciences are studying not for the sake of diploma but because they have a pure interest in the industry and willingness to achieve results. Engineering and technology students are 10% of the overall number of students in Latvia.

We’ll present the situation in engineering education on the example of electronics and electrotechnics industry in Latvia. According to Cvetkova (Interview, 03.04.2008) there are three educational establishments preparing graduates in this field in Latvia – Riga Technical University, Technical College, Institute of Physics. 5% of students choosing the engineering education are specialized in electronics and automation. According to Cvetkova (Interview, 03.04.2008) – companies in the industry are very critical about both quantity and quality of the graduates. When looking at the explanation of the current situation, firstly, the industry and engineering professions have not been 38 attractive for youngsters since regaining independence. Secondly, Stukle, Strupk āja (Interview, 01.04.2008) see the root of the problem already in the primary education – mathematics and physics are not obligatory subjects or if those are obligatory, then the examination is not compulsory. Cvetkova agrees:

Few students choose to pass the physics examination – if Technical University will start requiring passing exam on physics to be admitted – there will not be people to study at all. (Interview, 03.04.2008)

Another issue is cooperation between educational institutions and the industry. Stukle, Strupk āja, (Interview, 01.04.2008) admit, that it could have been better – the internships essential to prepare high-skilled graduates are insufficient. Cvetkova (Interview, 03.04.2008) tells that small companies are unable to take students for internships, while the large ones practice it. The last but not least aspect is deteriorating quality of the education programs and issues with academic personnel at universities. The industry representatives start to participate more actively in the examinations for graduates as labor issues become more apparent.

It can be said that the LETERA association is being active trying to promote the sector to the future students. Promotion DVD was created and distributed for school pupils encouraging them to study subjects like mathematics and physics and choose engineering field in the future. Robotics and educational competitions are supported. In 2006 there was a project for industry specialist cooperation with Ventspils High School and Riga Technical University to improve the bachelor level program. Moreover, association requires certain profession standards that have to be delivered by the education institutions.

Overall, the society of Latvia is highly literate and it places strong emphasis upon education. However, the education is not highly specialized and since engineering subjects have not been attractive for youngsters since regaining independence the scarcity of labor is evident now. Moreover, the quality of graduates is questioned. Thus, for the case company finding appropriate employees might be an issue in Latvia. However, it should not be big problem since there is no need for many employees. Industries that are potential case company’s customers feel both quantity and quality problems with high-skilled graduates in Latvia. The education-industry cooperation is not sufficient and the quality of academic staff is deteriorating. 39

6.3 Organizational Fields

6.3.1 Labor Market Since 2002 the rate of unemployment has been steadily decreasing in Latvia from 12.2%. With the culmination of overheating on the labor market in 2007, unemployment decreased to 6% same year (See Figure 10).

Figure 10 Unemployed persons as a share of the total active population in Latvia

Source: Eurostat

Certain sectors of the economy experienced labour force shortages. One of the reasons has been immigration. Since the opening of the geographical borders, countries like Ireland, the United Kingdom, Finland, Spain and others completely removed the labour movement restrictions for the labour force of Latvia and other new member-states of the European Union. As a consequence, looking for better living conditions tens of thousands of Latvians have gone to work abroad. These are mostly youngsters, but also older people, who used to be an active part of the Latvian labour market.

40

Figure 11 Average Monthly Labor Costs, EUR

Source: Eurostat

As a result of tightening labour market ‘salaries have been growing at a cosmic speed,’ Ex - Prime Minister Aigars Kalvitis told a public private council in August, 2007 referring to the 33% annual rise in gross salaries. If pay rises continue at the same rate, we will simply blow up this country,’ he said (The Baltic Tines, 28.06.2007). Wages in the country have been spiralling due to a development boom in industries such as construction, retail and tourism. In 2006 the average monthly labour costs stood at 531.8 EUR according to Eurostat data (Figure 11). Sprängare (Interview, 3.04.2008) says: “Salary levels picking up very quickly last year overall 30.9% and in Riga it’s awful it is a big problem, but growth has diminished since December 2007”. One of the reasons for rapid salary growth is lack of strong labor unions.

When u talk to the employers’ association here one of their great regrets is lack of strong trade unions – in companies u have to talk to each and everyone, which makes it very difficult. (Ljungdahl, Interview, 01.04.2008)

The major concern is that productivity has not been able to keep up with the speed of salary rise (as visible in Figure 12).

41

Figure 12 Labor productivity per person employed in Latvia

Source: Eurostat

In order to observe the situation in the industries that are potential case company’s customers, we choose electronics and electrotechnics industry and present the developments in it below.

The employment rate in the high-tech sector is low. It is only around 3.5% of the total employment in manufacturing sector. (Development Strategy of E&E sector in Latvia, 33). The size of the workforce in the electronics and electrotechnics sector in Latvia decreased from 1991 to 1999, going from 64,000 employees to only 5,300 employees. In 2002 the workforce in the electronics and electrotechnics sector reached 5,700 (Development Strategy of E&E sector in Latvia, 33). Cvetkova, (Interview, 03.04.2008) tells that till 2005 there was a myth in the industry that due to large number of employees historically, it was believed that there are big reserves of employees. However the reality was that in this sector people lose their qualification very fast and majority of them would not be potentially qualified to be employed now. However, based on the company survey, the situation with employment is tough, but it is not true to say that there are no workers at all. Now there is also financial program available providing possibility to receive EU financing to attract foreign employees.

42

The salary rise is actually the major problem for the companies in the industry. According to the LETERA survey conducted in 2007 comparing to 2006 companies had to raise wages for employees by 30% on average.

Work productivity and added value per employee in electronics and electrical engineering industry in Latvia is much lower than on average in EU countries. In order to increase added value per employee, the level of knowledge of employees has to be increased. By improved knowledge, it is possible to work with more up-to-date technologies that make new competitive products that can be offered in the world market possible. To ensure more knowledge-driven manufacturing there should be made investments in technology and an increase of number of involved engineers that can help with product development. Lastly, there needs to be greater cooperation among entrepreneurs, scientists, and students in order for effective implementation of new products in industry. (Development Strategy of E&E sector in Latvia, 41-42)

Thus, from the labor market perspective, for the case company finding appropriate employees might be an issue in Latvia. However, it should not be big problem since there is no need for many employees. For industries that are potential case company’s customers, rapid wage raises is a serious issue; however when it comes to the employment, here the situation is tight but not critical.

6.3.2 Financial System Overall the banking system in Latvia is stable, well-regulated and conforms to EU standards. The number of commercial banks operating in Latvia exceeds twenty (at the end of 2006 21 banks and 3 branches of foreign banks (Nordea Bank Finland Plc, SEB AB and GE Money Bank AB), and 35 credit unions were registered), which ensures a good choice in banking services. Since the Swedish banks play a major role in the Latvian market, therefore no major difficulties for the Swedish investor when dealing with the financial system of the country are expected. Moreover, fund transfer between the same bank in Sweden and Latvia should not be a problem.

Latvian currency is Lat (LVL), which is pegged to the Euro at the rate of 0.702804 LVL/EUR (Latvian Business Guide, p.41). Currently Latvia does not qualify for the Maastricht’s criteria for the euro introduction. The expectations of joining to Euro zone are around year 2012 earliest.

43

6.3.3 Government

6.3.3.1 Corruption and Bureaucracy One of the investor’s concerns is often level of corruption in the country and the interaction between politics and businesses. When it comes to big projects, especially related to the public procurement, Ljungdahl (Interview, 01.04.2008) characterizes the issue in Latvia:

In Sweden we complain that politicians have no experience in business, here you can complain that politicians are so involved in the business that it’s not good for the politics. I think is a Soviet heritage that has decreased dramatically, but still there is more corruption than in Sweden. There are traditions like payments in envelopes, which is very difficult for a foreign investor to deal with. But matter of corruption is a matter perception – it is not at all as bad as people say.

Even though Latvian politics has long been dominated by vested business interests, the increasing professionalism of the country's institutions is creating pressures for greater transparency. The general society has high demands to see Latvia as a country where the rule of law is respected and obeyed. According to Sprängare (Interview, 3.04.2008) ‘corruption is remarkably seldom mentioned by Swedish businessmen’. Thus it can be concluded that corruption issues can be found mostly in businesses that have to deal with government procurement and related to big projects mostly. Smaller businesses like our case company should not face any unpleasant issues related to corruption in the country. For smaller businesses, the red tape would rather be a problem to be aware of.

6.3.3.2 Taxation One of the most important issues for the investor is the taxation question. We present briefly the most important taxes the case company would face if establishing its business in Latvia.

Latvian corporate income tax is charged at a rate of 15%.The taxable base of resident companies is their worldwide income and capital gains. A permanent establishment (branch) of a non-resident company is treated as a separate Latvian taxpayer. The profits of a Latvian branch of a non-resident company are taxed on a normal basis at the same rate as the profits of a resident company. However, internal charges between the Branch and its Head Office such as interest, management fees, etc. are not deductible. Head office costs attributable to the branch may be deducted. Regardless of the level of ownership, dividends received from Latvian companies are tax exempt. The standard VAT rate is 18%.

44

The profits of a Latvian branch of a non-resident company are taxed on a normal assessment basis at the same rate as the profits of a resident company. There is no withholding tax on the remittance of taxed branch profits to the head office, whilst under the law in general a 10% withholding tax is imposed on the remittance of dividends out of taxed profits from a Latvian subsidiary. The taxable base of a branch is determined when a deduction has been made for allowable expenses as allowed pursuant to specific regulations. The list of deductible expenses as applied to branches is smaller in comparison with those permitted in respect of subsidiaries.

Ljungdahl (Interview, 01.04.2008 ) says: The tax regime plays a role - it is not a tax heaven for individuals in Latvia, but for companies it certainly is. Flat taxation rate – is very straightforward.

6.3.3.3 Financial Support for Industries For the development of the industries the amount of funds available can considerably determine industry’s growth for the upcoming years. Therefore in order to forecast the development of engineering industries that potentially could become case company’s customers we analyze in this chapter the availability of resources for these industries, especially in the light of the EU Structural Funds support during the years 2007 -2013.

There are several programs of EU funds available for Latvia for the period of 2007 – 2013. Latvia will receive 4.5 billion EUR of financing. The programs will support enterprises that wish to develop new products, develop new technologies, attract highly qualified work force and special focus will be on value added industries and help in exploring new foreign markets. Moreover, program for employee education is already functioning. Especially important from the perspective of engineering industries is the competence center program and technology transfer and cluster programs which would ensure close cooperation of the businesses, education establishments and research institutions. Currently one of the problems mentioned about the use of EU funds is a lack of reporting on the money allocated. Therefore there is no confidence of fund usage for the goals stated previously (DELFI 07.05.2008)

When we confront the good intentions expressed in the official sources with the reality presented by the industry the picture becomes less bright. Despite the authorities were encouraged to support one of the projects by LETERA, the support was only “verbal”. In the end the association members had to

45 cover the investment by themselves. Thus the willingness to support is declared – the real support from the state is not felt much. Cvetkova explains:

At the moment the support programs are supposedly there, but again the government is unable to concentrate and create Minister Cabinet rules related to the programs. Physically it is not possible to apply for the programs. Competence centers are planned – legislation is not there, for the cluster program – silence again. Administration, document preparation for programs is cumbersome”. (Interview, 03.04.2008)

She mentions a successful cooperation project between the industry and the educational institution in establishing a modern center for measuring electromagnetic field compliance.

As a successful example of utilizing EU funds Cvetkova (Interview, 03.04.2008) and Stukle, Strupk āja (Interview, 01.04.2008) mention education courses for employees in the industry. The project was organized by LETERA and sponsored from EU Structural Funds, thus there was no need for every single company to prepare documents, apply for the courses and then provide reports.

Thus we can conclude that in Latvia there is a potential for the engineering industries since major share of the funds planned till the year 2013 are directed to support high value added industries, export-oriented industries, introduce new technologies and increase knowledge level of employees. The outcome however depends largely on how efficiently these funds will be used. As it was discovered in Latvia bureaucratic issues are impeding successful acquisition of the funds by the companies.

6.3.4 R&D Institutions Currently science in Latvia is in a transition phase from fundamental science with strong ties to the former USSR to more market oriented, applied research orientated to European science standards. This transition is reflected in the increasing participation of Latvia science institutes and universities in joint programs and projects financed by the European Union. However, the current development of science is rather slow, as it is developing more in qualitative way through setting priorities, legislation, and defining cooperation partners and less in quantitative way such as specific financing as share of GDP, increasing the number of researchers, publications and patents.

As stated by the Ministry of Economics of the Republic of Latvia, it has in recent years implemented numerous measures to promote the transfer of knowledge and technology and to strengthen the links 46 between education, science and entrepreneurship. As part of Latvia’s National Development Plan, which sets the objectives of balanced and sustainable development for the country and increasing its competitiveness toward other countries, the government has planned to increase the amount of money contributed to R&D programs. The plan also aims to improve education and increase the knowledge base of workers to facilitate economic growth and technological excellence. For example, the public financing allocated to science and development is being increased annually by 0.15% of GDP with the goal of becoming 2% of GDP by 2013. In addition to the direct national financing envisaged in the financial support measures developed for 2007-2013, around EUR 860 million will be available for the development of innovations, of which about EUR 600 million would be the public contribution to R&D as such. The expenditure on R&D is predicted to follow similar trends as in the past and it will increase. The forecast for public spending on R&D is that it will increase substantially until 2013 to reach 2% of GDP. The percentage of GDP that businesses spend on R&D is expected to increase minutely and remain at a level of around 0.6% of GDP. On the other hand, foreign expenditure on R&D will remain at 0.1% of GDP by 2013.

Research institutions in Latvia receive financing from three basic sources: the government (through Latvia Council of Science (LCS) grants), the private sector (through market oriented research) and participation in international research projects, e.g. Framework Programs. Joint projects are financed by the Latvia Council of Science, but only couple of LCS financed projects are of a large scale. (58)

We will turn to the electronics and electrotechnics industry to demonstrate the situation within a potential case company’s customer industry. In 2002 companies in the Electronics and Electrical engineering sector spent approximately 5 million EUR on R&D. This is a much larger amount than the financing from the government (about 200 000 EUR).

Stukle and Strupk āja (Interview, 01.04.2008) express the personal viewpoint that in Latvia there is no specific sector priorities assigned. The research and development has to be supported but it is not possible to support everything at once and as a result no one really gets a support that can be really felt. They say that within electronics and electrotechnics it is a feeling that the industry and R&D institutions are communicating in different languages.

47

As a positive sign we can mention that among LETERA association members not only industry representatives are found but also educational and research institutions. The association has created a strategy for the competence centers and cluster program that are based on a close cooperation of the industry and research institutions. As Cvetkova, (Interview, 03.04.2008) puts it:”We communicated when developing a strategy, because of the joint financing; it is a good “carrot”, a reason to gather around the table”. This was considered as a good sign since previous cooperation trials in 2002 failed. At the same time the strategy developed is now being delayed by the government due to unprepared legislation. Cvetkova (Interview, 03.04.2008) says that it is possible that when the government will finally solve the problems, it is possible that the strategy will not be up-to-date, because the environment changes so quickly.

Overall it can be concluded that officially there is willingness to support and develop research and development institutions in Latvia. The EU financing for the upcoming five years is quite sufficient to ensure that improvements in the fields would have an impact on the industry competiveness. Currently however lack of focus for the science development is evident and cooperation between the researchers and the industry is not on a high level. The optimism comes from the fact that the available financing for example for cluster program will force the industry to communicate with R&D institutions much closer.

48

7 Country’s Empirical Data - Lithuania

7.1 Country Overview

7.1.1 Geography and Infrastructure The Republic of Lithuania borders with Latvia, Russia, Belarus, Poland and the Baltic Sea. Country’s capital city is Vilnius. The country covers territory of 65,200 square kilometers according to CIA World Factbook. The country is recognized as the transport centre in the region linking Scandinavian, Baltic, CIS and West European markets. Lithuania has a wide network of roads and highways - the best in the Baltic States. For the businesses involving transportation by sea it is convenient to use biggest in the region Lithuania’s ice-free seaport, which is the transport hub, connecting sea, land and railway routes. Lithuania’s international airports provide direct flights to major European cities. Lithuania lies in the East European Time Zone (one hour ahead of Swedish time).

7.1.2 People In this section we present the data on Lithuanian inhabitants based on the CIA World Factbook. The total population of Lithuania is 3,565,205 people and it is declining at a rate of 0.284%. Lithuania’s capital city is Vilnius with approximately 554,000 inhabitants, followed by Kaunas with 358,000 inhabitants and Klaipeda with 186,000. Looking at the composition of inhabitants, following ethnic groups are represented: Lithuanians are the majority with 83.4% of the population, followed by Polish (6.7%), Russians (6.3%), and others. Lithuanian is the official language and it is spoken by 82% of the population; the language is closely related to the old Sanskrit and belongs to the Baltic family of Indo-European languages. Russian language with 8% follows; Polish is spoken by 5.6% of population. The major religion group is Roman Catholic - 79% of Lithuanians belong to it, followed by Russian Orthodox with 4.1% and Protestants 1.9%.

7.1.3 History • Years 1236-1263: The establishment of the state of Lithuania, when Duke Mindaugas united Baltic tribes • 14 th century: After the Duke of Lithuania was crowned as the King of Poland; Lithuania became the largest country in Europe, stretching from the Baltic Sea to the Black Sea • Year 1795: Over 90% of Lithuania was incorporated into the Russian Empire and the remainder into Prussia • During World War I, the German Army occupied Lithuania

49

• Year 1918: The council declared Lithuania's independence. The interwar period of independence gave birth to the development of Lithuanian press, literature, music, arts, and theater as well as a comprehensive system of education with Lithuanian as the language of instruction • Year 1939: German-Soviet Nonaggression Pact pulled Lithuania into the German sphere of influence • 1940, Lithuania was proclaimed a Soviet Republic. Totalitarian rule was established and Sovietization of the economy and culture began. Soviet authorities encouraged the immigration to Lithuania of other Soviet workers, especially Russians, as a way of integrating Lithuania into the USSR. During the mass deportation campaign in 1941, about 12,600 people were deported to Siberia without investigation or trial, 3,600 people were imprisoned, and more than 1,000 were killed. • In the late 1980s communist rule eroded, and Lithuania, the first Soviet republic proclaimed its independence in 1990. • Already in the spring of 2004 the country joined both NATO and the European Union. Since 2008 Lithuania is also a part of Schengen area. (Based on the US Department of State information)

7.2 Societal Fields

7.2.1 Country Culture and Business Culture From the historical perspective, the union with Poland and the colonization by Germans and Russians has influenced the culture of Lithuania the most.

Lithuanians are often characterized as emotional, spontaneous, open and flexible. They are quick decision makers which are often based on emotions. Moreover the people are said to be mostly optimistic – this we also felt during the interviews – which might sometimes lead to underestimating of problems. On the other hand this optimism might help to overcome hard times easier.

Lithuanians are quite optimistic nation. Everyone says – we will make it! (Korsakas, Interview, 07.04.2008)

Many Swedish managers admit that Lithuania in terms of mentality and way of doing business is very close to Sweden and Swedes do not experience major differences culture-wise. However, also in Lithuania we discover that “Scandinavian culture is more long term and here it is more short term 50 goals and spontaneous decisions - and sometimes it does not match”. (Korsakas, Interview, 07.04.2008)

Moreover, “There’s something that remains from the Soviet times. Often explanation is that if the person has not done anything means that person has not done anything bad. There are some signs of shyness in the Lithuanian culture. If there is something the person did not understand, he will not ask it openly in order not to look stupid” (Svenskt Naringsliv, p.12).

Another proof of some thought styles that originate in the Soviet past is the following description of employee behavior: “They don’t want to tell if something went wrong or ‘I made a mistake’. If you made a mistake in the Soviet system, it would cost you a lot. They are still hiding the truth and protecting each other from the boss. Lithuanians take criticism very strongly” (Bernheim, Interview, 08.04.2008). These issues however are more relevant to older generation and lower positions in the career ladder.

However, the fact of regaining independence, gives the sense of proud to Lithuanians. Even more so, since Lithuania has been the largest country in Europe, it gives the special feeling of importance to its inhabitants.

If something is adopted by Latvia and Estonia, Lithuania would resist and wait for two years and when it would be persuaded by the success in the other countries, it would do the same. They have “own way” of doing thing in Lithuania, always skeptical that things applicable in other countries will suit Lithuania as well. (Broden, Sikk, Interview, 10.04.2008)

When looked at the current values for people in Lithuania, then there are following top three priorities for inhabitants:

1. Job 2. Education 3. Family The results reveal that people in Lithuania value work and education very high and family value is also important. Thus investors should expect real dedication when it comes to employees that they would hire and the same attitude from Lithuanian business partners.

51

Lithuania is quite a homogenous country when it comes to the demographic composition. Majorities are Lithuanians, speaking Lithuanian language and are Catholics. Thus the knowledge of Lithuanian language is essential for working there. Still, after many years in the Soviet Union, many Lithuanians speak Russian language as well.

To conclude, Lithuanian culture has been influenced strongly by country’s history. For Lithuania Poland, Germany and Russia played the major role. Lithuania can be advantageous to Swedish businesses expecting cooperation with Poland. Older generation of employees tend to be more hierarchy oriented, and lower level employees would not reveal their mistakes and protect each other from the management. The businesses tend to be more short-sighted than in Sweden and thus well trusted partners have to be found to ensure successful cooperation.

Swedes are not part of the family, you need to have local contacts and get to know Lithuanians very well in order to do business there, especially as a smaller company. You need local managers and local staff. Find someone to work as a mentor for the managers you hire. Help them to do their job. I think this is the best model. (Bernheim, Interview, 08.04.2008)

7.2.1.1 Country Economic Stability

7.2.1.1.1 GDP Lithuania, the largest by the territory also exhibits the largest GDP volume. In 2007 it amounted to 28.05 billion EUR. Being one of the “Baltic Tigers” the country displayed amazing growth of more than 7% yearly since 2003 towards converging with the EU level of living. However, in Lithuania data for the last quarter of 2007 already showed signs of slowdown (European Commission Report, p.84).

52

Figure 13 Growth rate of GDP over previous year in Lithuania

Source: Eurostat

7.2.1.1.2 Inflation As seen from Eurostat data (Figure 14), inflation has been a problem in Lithuania along with its abnormal growth. Annual average inflation rose from 3.8% in 2006 to 5.8% in 2007 fuelled by economy overheating and higher energy and food prices following global trends. According to the latest data in April 2008 there was a record high inflation level at 11.7% in Lithuania (DELFI).

Figure 14 Annual average rate of inflation in Lithuania

Source: Eurostat

53

Inflation together with the other economic imbalance – current account deficit is a deterrent for Lithuania’s European Monetary Union membership.

7.2.2 Political System According to the information in the ‘Doing Business in Lithuania’ leaflet, the Republic of Lithuania is an independent democratic state. The legislative power is vested in the Parliament (Seimas), which is elected by citizens for a four-year term. The current Seimas was elected in 2004 and next elections are to be held in October 2008. The President, the head of the state, is also elected by citizens, but for a five-year term. The current President was elected in 2004 and the next elections will take place in 2009. The supreme executive power is vested in the Government, comprised of Prime Minister and ministers. The present Government is made up of a coalition of Social Democratic, Social Liberal and Labor parties as well as union of Peasants’ and the New Democratic parties.

According to the information of the US Department of State in the elections of 1992 and 1996, ‘the two major parties were voted in and out, consecutively. In 2000 and 2004, newly created populist parties won the most votes. However, these parties had no clear program, were undisciplined, and splintered into small factions or aligned themselves with the Social Democratic Party’.

As Korsakas, (Interview, 07.04.2008) characterizes Lithuanian elections: “Sometimes elections in Lithuania is choosing between bad and worse. Often it is voting against something”.

The frequent changes in government, did not lead to major shifts in the course of the country however. The economic policy has been directed towards creating a market economy. This included aligning Lithuania's basic taxation structure, welfare and labor policies, and government regulation to ensure entry into the European Union and most essential reforms had the support of all the major political parties. It can be concluded that despite frequent changes on the political horizon, the overall business course has been kept. Lithuania has a stable political environment from the perspective of doing business since Lithuania has not witnessed any incidents involving politically-motivated damage and there is no politically-motivated violence.

7.2.3 Legal System In recent years, the central priority in the legal sphere in Lithuania has been the harmonization of Lithuanian law in line with the EU legislation, which has become a part of the Lithuanian legal

54 system since 1 May 2004. According to Lithuanian Development agency, at the beginning of 2007 European Commission announced that in Lithuania EU inner market directives are best implemented into national laws among all EU members.

Based on the information by the law firm Petrauskas, Vali ūnas ir partneriai LAWIN, Lithuanian legal system stems from the legal traditions of continental Europe. General jurisdiction courts (the Supreme Court, the Court of Appeals, district courts, and local courts) dealing with civil and criminal matters, are the core of the Lithuanian court system. A system of administrative courts is established to adjudicate administrative cases. The Constitutional Court of Lithuania is a separate body that determines whether laws and legal acts conform to the Constitution. The supreme legislative power is exercised by the Seimas.

According to Ernst&Young study “Doing Business in Lithuania”, the legal system of Lithuania recognizes generally accepted principles of the legal regulations of investments. The principle of equal treatment means that both Lithuanian and foreign investors are subject to equal business conditions. The principle of equal protection means that the laws of Lithuania protect right and law- full interests of both local and foreign investors. Republic of Lithuania applies the principle of free access to all sectors of economy, with certain exceptions in areas of state security and defense and acquisition of land into ownership. The laws of Lithuania provide investor with the right to manage, use and dispose of the object of investment and, upon payment of taxes, to convert profit owned by him into foreign currency and transfer it abroad without any restrictions (Doing Business in Lithuania, p.9). As to the enforcement of contracts, it can be said that the judicial system is generally effective at it.

For the purpose of the study we are considering an establishment of local company for conducting case company’s activities. The most appropriate alternatives are either establishment of a separate private limited liability company (UAB) or a branch of foreign company. In the first case, the minimum share capital is LTL 10,000 (approx. EUR 2,900) (Investment in the Baltic States, p. 34). Business set up costs and time is up to EUR 1500 up to 30 days for a private limited liability company.

Another possibility is to establish a branch of a foreign company that does not have the status of a legal person. The branch may carry out business activities, enter into contracts and assume obligations within the scope of the powers granted by the foreign company. The difference from the

55 limited liability company is that the foreign company must be fully liable for the obligations of its branch. At least one of the persons representing the branch shall reside in Lithuania. The branch must register for corporate income tax in Lithuania. There is no branch tax imposed on branch earnings paid to the head office of a foreign company (Investment in the Baltic States, p.35).

It can be concluded that the legal system in Lithuania is considered to be well developed to start business activities by foreign investors and adequate level of protection exists.

7.2.4 Education System According to the Lithuanian Ministry of Education and Science website, during the period of Lithuania as the independent state (1918 - 1940), the country education was built up on the foundations of the national culture, taking into consideration the Western European model of educational system and pedagogical thought with the first University of the independent Lithuania founded in Kaunas, in 1922.

The period when Lithuanian schools became incorporated into the Soviet educational system and were ruled in centralized way from Moscow according to current official viewpoint presented by the Ministry is mostly presented in the negative light. “The heyday of education was brutally interrupted by the ongoing Soviet occupation. At that time, a university education developed in isolation from science in other countries, developing outside the USSR borders, and was highly affected by the Soviet ideology”. Nevertheless, Lithuania still maintained its right to teach in schools and universities in the native language. Moreover, despite of all deficiencies of the Soviet education system, it is admitted that the system produced very strong professionals when it comes to the technology and sciences. University education in Lithuania is obtained in universities and colleges. The number of people with higher education in Lithuania is twice higher than the EU average and the According to the Lithuanian Department of Statistics, its proportion of graduates is the highest in Central and Eastern Europe, with 4.3 university graduates per year per 1000 inhabitants.

For the purpose of our study we are looking specifically to the education establishments that ensure education for engineering related professions on the example of electronics industry. In Lithuania we also specifically look at the education for professionals in laser production industry as this industry is a potential customer for the case company and developments in the educational field directly influence the case company’s customer industries development.

56

According to the data of Lithuanian Development Agency, Kaunas University of Technology is the largest technical university in the Baltic States, which gives the advantage to this Baltic State. Moreover, 20% of all tertiary graduates in Lithuania are in engineering. “Students increasingly choose to study ITT, biotechnologies as well as laser technologies” (The Investors Guide to Knowledge Economy in Vilnius-Kaunas Dipole, p.9).

However, the industry representatives are less optimistic about situation with education. Mr. Mykolaitis, the director of the Engineering Industries Association of Lithuania LINPRA is convinced that the higher education reform is needed, because the engineering industry in Lithuania is incurring many problems due to problems related to the human resources issue. Besides the 56,000 occupied working places in the engineering sector there are not less than 5,000 vacant working places and 1,500–2,000 of them are planned for the employees with higher education. He stresses that the knowledge and skills of the technology studies graduates, as far as modern business and production technology are concerned, do not satisfy the employers (Verslo žinios, Nr. 87).

According to Bernheim, (Interview, 08.04.2008), Lithuania has many more engineers and university graduates than Sweden statistically speaking, but when you look at what that really means, the graduates do not necessarily know what the title says they know. The education system is not that good.

“Most Lithuanian companies operating in knowledge economy sectors actively cooperate with leading technology universities of Lithuania: higher education schools provide scientific research services to companies, while companies contribute to the development of curricula and offer specialized study and work programs to students. This helps the companies attract required specialists, while higher education schools benefit by being able to train qualified employees that meet labor market requirements” (The Investors Guide to Knowledge Economy in Vilnius-Kaunas Dipole, p.9). The official standpoint is once again confronted with the industry experience: “How the education institutions cooperate with companies – now the situation is not that good. We want to prepare and change the practice to ensure that companies will help students to finance the studies”. (Garjonis, Interview, 08.04.2008)

For many years the Vilnius University Department of Quantum Physics has been training experts in laser physics and technology - in 2001 there were 10 Bachelor and 6 Master graduates in the field of laser technology. “The high level of this training is demonstrated by the fact that the university’s

57 graduates are eagerly invited to work at foreign scientific research centers” (The Investors Guide to Knowledge economy in Vilnius-Kaunas Dipole, p.23). Raciukaitis (Interview, 07.04.2008) confirms that when it comes to lasers, the level of education is good due to availability of experienced professors and new teaching programs on laser technologies.

Overall, the society of Lithuania is highly literate and it places strong emphasis upon education, which is free and compulsory until age 16. Even though with certain problems, Lithuania has a favorable educational environment for production of laser equipment. It is to a high degree determined by the availability of educational platform specializing in this area and providing knowledgeable specialists. Thus the case company might encounter problems finding highly qualified specialists for their business. However, potential case company’s customers, laser production industry have a good level of education provided.

7.3 Organizational Fields

7.3.1 Labor Market

7.3.1.1 Employment In the past years the unemployment has been rapidly decreasing in Lithuania (See Figure 15). According to data of Ministry of Economics of Lithuania, in 2007 the annual percentage share of job- seeking individuals made up 4.3% of the total number of individuals of working age.

58

Figure 15 Unemployed persons as a share of the total active population

Source: Eurostat

However, individual sectors of the economy are faced with the problem of shortage of workforce, and highly qualified employees in particular. Partly decline in unemployment can be explained by employment enhancement, partly it can be attributed to the increasing number of employed persons in urban areas and explained by labor force reduction and emigration might be partially responsible for this reduction. Membership in the EU, and the consequent ability of Lithuanians to work legally in several EU countries, has generated a sizable outflow of labor. Business leaders claim that government regulations make it difficult to hire foreigners, especially citizens of the former Soviet Union, to compensate for the lack of local labor. In order to bring back the labor force an income tax rate cut from 27% to 24% was undertaken by the Government.

Lithuanian labor in general is still inexpensive compared with Western Europe, but a shrinking labor force has pushed the salaries up. Average monthly gross salary in the 3 rd quarter of 2007 has been EUR 565 (Lithuanian Development Agency leaflet). On the other hand wages of highly qualified employees are below EU average and thus prompt “brain drain” (Foresight study, 2007, p.7). Growing demand for qualified specialists and scientists in Europe and the world will increase the migration of qualified and gifted specialists, entailing increased migration from Lithuania (Foresight study, 2007, p.20). Labor shortages, especially as regards skilled labor, have put upward pressure on labor costs.

59

Because there are no official numbers the estimates of experts have to be considered: I believe number of people leaving the country has started to decrease or stabilized. Those people who were planning to leave are already abroad and this is potential is decreasing. In Lithuania government does some steps to bring back the ones who left. Some solutions have been found - already Chinese working in construction sector as welders and so on. (Korsakas, Interview, 07.04.2008)

Figure 16 Average Monthly Labor Costs in Lithuania, in EUR

Source: Eurostat

Efficiency is not going up as much as salary increases, competitiveness is going down (Bernheim, Interview, 08.04.2008)

60

Figure 17 Labor productivity per person employed in Lithuania

Source: Eurostat

When engineering industries are concerned, according to Garjonis, (Interview, 08.04.2008), “it is a fact that companies have problem with rising wages, but not so very big, workers want bigger salaries, but for companies more important issue is the need to find markets to increase sales and subsequently salaries”. Moreover, it is also possible to find qualified employees abroad, attracting EU financing for that. Raciukaitis (Interview, 07.04.2008) confirms that there are enough experienced people in Lithuania in the laser production segment. He tells that the main stream that goes abroad to work is not highly educated people which are required for the industry. Raciukaitis, Interview, 07.04.2008) sees no problems because high skilled labor is not leaving the country.

In the engineering industries the salary range has been from 500 to 700 or even 800 EUR per month depending on the qualification of the employees. One of the major issues is that in the recent years the growth of labor productivity has been considerably outpaced by the overall economic growth.

Thus, from the labor market perspective, for the case company finding appropriate employees might be an issue in Lithuania. However, it should not be big problem since there is no need for many employees. For industries that are potential case company’s customers, rapid wage raises is a serious issue; however when it comes to the employment, here the situation is tight but not critical, especially because high skilled labor is not leaving the country.

61

7.3.2 Financial system Overall the banking system in Lithuania is stable, well-regulated and conforms to EU standards. Lithuania ensures free movement of capital and does not plan to impose any restrictions. There are no restrictions on non-residents opening accounts with commercial banks. “Currently 9 commercial banks hold licenses from the central bank - Bank of Lithuania, there are 3 foreign bank branches and 4 representative offices of foreign banks” (Doing Business in Lithuania p.6). The Swedish banks, Swedbank and SEB play a major role in the Lithuanian market, therefore no major difficulties for the Swedish investor when dealing with the financial system of the country are expected.

Lithuanian currency is Litas (LTL), which is pegged to the Euro at the rate of 3.4528 LTL/EUR (Advantage Lithuania, p.5). Currently Lithuania does not qualify for the Maastricht’s criteria for the euro introduction. The expectations of joining to Euro zone are around year 2010 earliest.

7.3.3 Government

7.3.3.1 Corruption and Bureaucracy Paying or accepting a bribe is a criminal act in Lithuania. There is a general perception in Lithuanian society that corruption is common. Mostly businesses and private individuals complain of corruption in the process of awarding government contracts and the granting of licenses and permits. However in general, foreign investors say that corruption is not a significant obstacle to doing business in Lithuania and describe most of the bureaucrats they deal with in Lithuania as reasonable and fair. Some businesses are directly related and dependant on political aspects– for example construction of bridges, roads, public utilities – there corruption is more probable. When viewed from the perspective of which spheres are mostly affected by corruption – these are political parties and parliament, while the other areas are affected with lesser effect (Based on the data in the Report on the Transparency International Global Corruption Barometer, 2007, p.22).

Korsakas says:

Usually politicians try to separate business from politics, but sometimes politicians are running businesses, there are conflicts of interests and so on. But to what level I don’t think anyone can tell the exact figure. It could and should be less. (Interview, 07.04.2008)

Bernheim is more critical:

62

Many Swedes are frustrated because it is corrupt. You need to know where to pay and how to pay. Business is not possible unless you play by the rules here. (Interview, 08.04.2008)

Red tape remains a problem. Local business leaders complain that bureaucratic procedures often are not user-friendly and that the interpretation of regulations is too often inconsistent and unclear. SMEs often complain that excessive red tape virtually requires the payment to obtain permits promptly.

7.3.3.2 Taxation One of the most important issues for the investor is the taxation question. We present briefly the most important taxes the case company would face if establishing its business in Lithuania. Overall tax burden in Lithuania is one of the smallest in EU, with one of the lowest corporate tax rates in EU of 15% and tax incentives in two free economic zones (Lithuanian Development Agency leaflet).

Income tax is one of the major taxes the investor has to consider. The general tax rate is 15% in Lithuania, however “an enterprise with gross income below LTL 500,000 (EUR 144,810) during a tax year and with an average number of employees not exceeding 10 has the right to apply 13%” (Doing Business in Lithuania, p.16). Dividends are not taxed if the recipient owned not less than 10% of shares in Lithuania for at least 12 months (Doing Business in Lithuania p.21). The standard VAT rate is 18% in Lithuania with a 0 rate is applicable to export of goods. As to the social taxation, the employer deducts 3% from employee’s gross salary as the social contribution paid by employee and pays around 31% of the gross salary as social contribution as paid by employer. As to the personal income tax, 15% is applied for income from distributed profit, but income received as a salary is taxed at 24% from 1 st of January 2008.

7.3.3.3 Financial Support for Industries In Lithuania EU Structural Funds – 7 billion Euros are assigned for 2007 – 2013. Both local and foreign businesses can apply for EU Structural Funds support. The following programs are available: Program for the Development of Human Resources (13.8% of Funds), Program for Economic Growth (45.72%), 39.08% will be directed to the Program for the Promotion of Cohesion and 1.4% to Program of Technical assistance. Moreover, “financial support is available for businesses to train and educate employees, promote lifelong learning, develop innovations in companies by the European Social Fund in Lithuania” (Advantage Lithuania, p.15). Thus important funds are available for

63 training of employees, whose qualification has to grow much due to the current demands of the high technology industries.

According to the Secretary of the Ministry of Education and Science Lina Domarkene 1.5 billion Litas will be directed to the development of infrastructure of scientific research and 0.5 billion Litas towards development of the research skills. Within the scientific-technology field three ministry programs will be financed: scientific career (500 million Litas), general national complex program (800 million Litas) and general national program for cooperation of research, science and business (700 million Litas). (Lietuvos žinios, 01.04.2008).

Looking at the example of potential case company’s customer industry – laser production within electronics field in Lithuania, it is expected that this industry would benefit greatly from the funds available for the five upcoming years. “The locomotive role in the acquiring the funds most probably will be performed by laser technology industry – one of the most developed Lithuanian high-tech industries”. (Business & The Baltics, 08.04.2008) Raciukaitis, (Interview, 07.04.2008) confirms that his research center has been successful in attracting both national and EU financing. Lithuania sponsors program on laser technologies. Moreover, the research center applied for European money in order to sponsor PhD students. “There are lots of funds: 8-10 programs for different fields. There are programs for discovering products, purchasing technologies, education” - says Garjonis, (Interview, 08.04.2008) from the engineering association in Lithuania.

It can be concluded that substantial funds are available for the engineering industries in Lithuania for both the development of the employees’ qualifications in the existing companies. Moreover, the extensive funds are available for ensuring close cooperation of businesses, research and development and education institutions, which ensure competitive strength and development of engineering industries in Lithuania in the long-term. We expect that support from the EU Structural Funds will enable further expansion of the laser industry sector, which already now demonstrates ability to attract the funds and benefit from them and so do other engineering industries.

7.3.3.4 R&D Institutions In Lithuania there are 17 state-run scientific institutes, 18 scientific institutes at universities and 8 other state science institutions. The strongest research centers for laser physics, laser technologies, and laser optical electronics are at Vilnius University, the Institute of Physics, and the Semiconductor

64

Physics Institute. Some potential is also concentrated at Kaunas University of Technology. Moreover, there are plans to establish a laser innovation center in Lithuania in 2008.

Engineering scientific research and technological development work, besides being performed at these, mainly publicly funded research centers, is also successfully carried out in private companies, such as Eksma, Sviesos Konversija, etc. The employees of these companies are the authors of many works in prestigious scientific publications and have participated in most of the important specialized international conferences. The laser manufacturing companies devote 5-7% of the sales volume for applied research every year, thereby remaining competitive on the dynamic basic research market (Investor’s guide p. 14).

However, not so bright picture was revealed by the Foresight Study in 2007. According to the results study, the financing of R&D in Lithuania, like in the other Baltic States, was insufficient throughout the years of independence. Hence, the R&D infrastructure is outdated, scientific stuff is getting old; the number of scientists is declining, and their activity decreasing. Moreover, “due to weak relationship between scientific research institutions and business, knowledge exchange is not efficient within the innovation system” (Foresight study, 2007, p.14).

Garjonis, (Interview, 08.04.2008) says: “This year we have 10 new laboratories. Now it is time for companies to integrate and cooperate”. Moreover the EU funds (400 million Litas) will be directed for creation of the integrated centers of science, education and business. Thus, in a five year time there should be established big research centers surrounded by business environment. (Lietuvos žinios, 01.04.2008).

Overall it can be concluded that in Lithuania R&D related environment, even though facing problems, still can be evaluated as satisfactory, especially when it comes to the laser production industry. We argue that availability of an appropriate R&D platform for laser product development played a huge role of making laser production industry in Lithuania a national success. The role of associations is crucial to help companies with the EU financing.

65

8 Country’s Empirical Data - Estonia

8.1 Country Overview

8.1.1 Geography and Infrastructure Estonia is a relatively small country that lies on the Baltic Sea, just below Finland. Sweden is Estonia’s western neighbor across the Baltic Sea, Russia is to the east and Latvia is to the south. Estonia covers 45,226 square kilometers. Its capital city is Tallinn. Estonia’s location is ideal for companies to create efficient transport links and distribution chains of goods and services from East to West. The road infrastructure has been rapidly improving. The Port of Tallinn is one of the fastest developing ports in the Baltic Sea and administers the four biggest cargo harbors in Estonia. Tallinn International Airport is open to international and domestic flights. International air links with most Scandinavian and European cities have been established over the past decade (Guide to doing business in Estonia, 2005). Estonia lies in the East European Time Zone (one hour ahead of Swedish time).

8.1.2 People As estimated in July 2007, the population of Estonia was 1,315,912 people. In keeping with low birthrate, the population of Estonia is decreasing. According to the year 2000 national census, 68% of the population is native Estonian, 26% is Russian, 2% is Ukrainian and 4% other (Minifacts about Estonia, 12). According to the census, 13.6% of the population is Evangelical Lutheran, 12.8% is Orthodox, 6.1% does not belong to a religion, and 1.4% is other (CIA World Factbook). The major languages spoken in Estonia are Estonian, spoken by 67.3% of the population, and Russian, spoken by 29.7% of the population.

8.1.3 History • The Estonians were an independent nation until the 13th century A.D. The country was then subsequently conquered by Denmark, Germany, Poland, Sweden, and finally Russia, whose defeat of Sweden in 1721 resulted in the Peace Treaty, granting Russia rule over what became modern Estonia • Year 1918: The Republic of Estonia was proclaimed • Year 1939: The Soviet-German Non-Aggression Pact was signed in Moscow which resulted in the division of Eastern Europe into spheres of special interest between Germany and Russia. • Year 1940: Estonia was forcibly incorporated into the USSR

66

• Year 1941: The first mass deportation from Estonia to Russia was carried out. During this time, nearly one percent of population was deported from Estonia to Siberia during one night. • Year 1941: German troops arrived in Tallinn and the German occupation of Estonia lasted for three years. The Estonian civilian population suffered great losses in battles and bombings, and the Jewish and Gypsy population of Estonia were exterminated • Year 1944: Red Army invaded Tallinn • Year 1949: Mass deportation from Estonia to distant regions of the Soviet Union started. A large number of evacuated people were killed in the bombings at sea before reaching the destination, a lot of evacuated people died in Russia because of inhuman conditions • Year 1991: The country regained its freedom with the collapse of the Soviet Union • Year 2004: Estonia joined both NATO and the European Union (PKF, 9) • Since 2008 Estonia is also a part of Schengen area

8.2 Societal Fields

8.2.1 Country Culture and Business Culture By nature, Estonians are reserved and shy rather than open. They have always been very much influenced by closeness with Finland, but also Soviet times have played a major role. The large about of skepticism, distrustfulness and cautiousness in them perhaps comes from their heritage of having a harsh history. Therefore, in Estonia, rushing through negotiations is uncommon as the Estonian mentality is combined with skepticism. In negotiating, it is well respected to be honest and forthright.

According to an interview by the Swedish Trade Council in Estonia by Project leader, Henrick Avasalu and Consultant, Fredrik Tammar: Doing business in Estonia is very similar to doing business in Scandinavia, especially as compared with Finland. However, according to the same expert opinion in Estonia from Soviet time there is an expectation from the workers that they will be told what to do instead of taking the initiative, moreover would not speak about the problems and “cover” each other. Broden, Sikk, (Interview, 10.04.2008) Management tend to be more hierarchical than in Sweden, however, it differs when it comes to different generations. Moreover, according to Avasalu, Tammar, I(nterview, 10.04.2008) in Estonia

67 businessmen want you to be specific; they get tired of talking, whereas Swedish businessmen like to talk around and take longer time to make decisions.

Moreover, according to Avasalu, Tammar, (Interview, 10.04.2008) it is a tendency that businesses tend to use more contracts than typically in Sweden.

Estonians are generally hard-working people. This quality has been necessary to survive in such a harsh climate (Estonian Statistical Collection). Moreover, when looked at the current values for people in Estonia, results reveal that people here value work and education very high. 1. Job 2. Recreation 3. Education Thus investors should expect real dedication when it comes to employees that they would hire and the same attitude from Estonian business partners.

We can conclude that doing business is in some ways similar to Scandinavian business culture. But “Some Soviet influences remain when it regards the older generation. However, people are very hard working and dedicated. It is important that the company has very good contacts if it decides to establish in Estonia, and the partner or local employees need to know local circumstances very well, because connections are very important in the Baltics”. (Broden, Sikk, Interview, 10.04.2008). Proximity to Finland might be an advantage for Swedish companies that intend to have their Estonian business connected to Finland in some way.

8.2.1.1 Country Economic Stability

8.2.1.1.1 GDP As the two other Baltic States Estonia has been growing fast and since 2002 its growth level has not been lower than 7% (as seen in Figure 18). However, the beginning of 2008 already revealed the signs of the slowdown that turned out to be much stronger than forecasted by the officials. In 2007 Estonian Gross Domestic Product stood at 18.7 billion EUR.

68

Figure 18 Growth rate of GDP in Estonia

Source: Eurostat

8.2.1.1.2 Inflation The inflation problem has not been so severe in Estonia till 2007. However, since then the growth of economy is accompanied by high inflation due to local demand growth, changes in the prices for commodities in the market and global prices. According to the latest data in April 2008 inflation has reached 11.7% in Estonia.

Figure 19 Annual average rate of inflation in Estonia

Source: Eurostat 69

8.2.2 Political System In 1991, Estonia became a sovereign democratic republic. The legislative power is vested in the Parliament of the Republic (Riigikogu). Members of the Riigikogu are elected by the citizens of Estonia for a period of four years. There are more than ten political parties active in Estonia. The unicameral Estonian parliament has 101 members and is elected for four years. The President of the Republic is the head of state and the supreme commander of the Estonian defense forces. The President is elected by the Parliament. The executive power rests with the Government of the Republic, consisting of the Prime Minister and up to 15 ministers. The Government submits drafts of laws and the state budget to the Parliament, issues decrees and regulations. The judicial power is exercised by the courts. (Guide to doing business in Estonia, 2005)

Immediately after independence, Estonia saw an explosion in political parties, although there has been some rationalization through mergers since the mid-1990s. In the 2007 parliamentary election 11 parties contested the polls, compared with around 30 in 1995. Politics is largely based on personalities, rather than policy differences, and this has contributed both to the unstable nature of successive coalition governments and to the decline in popular interest in politics. However, despite such immaturity of the Estonian political system and related to it volatility, the country likewise its neighbors kept the course of market reforms and created a stable political environment for conducting businesses.

8.2.3 Legal System Since the re-establishment of independence in 1991, the national law has been undergoing a continuous reform. Models for new Estonian legislation enacted since 1991 have been mostly the national laws of the EU member states and EU legislation. When Estonia became a member of the EU, Estonian laws were harmonized with the acquis communautaire .

The Estonian legal system belongs to the Continental European legal tradition based on the Roman law and more specifically to the German legal family. Therefore the Estonian law distinguishes between public law (criminal law included) and private law. The Estonian legal system is uniform: there are no different legal systems within the country. The main source of law is statutory law. The role of case law is strictly supportive although the twelve decisions of the Supreme Court have an instructive character. 70

Foreign investors have equal rights and obligations with local entrepreneurs. All foreign investors may establish a company in Estonia in the same way as local investors, no special restrictions are made. Foreign investments are protected by internal law and international agreements. Estonia has concluded treaties for the protection of investments with several countries including Sweden.

Under Estonian law, foreign companies that wish to permanently offer goods and services in their own name in the territory of Estonia might establish a branch office in Estonia or register a separate limited company (the minimum share capital is EEK 40 thousand for a private limited company). This branch office must be registered with the Estonian Commercial Register through the submission of an application and required documentation. The foreign enterprise is liable for any obligations arising out of the activities of the branch. The foreign enterprise is also responsible for appointing one or more directors who will be accountable to the foreign enterprise. At least one director must be resident in Estonia. Directors are charged with directing and representing the branch and with conducting accounting procedures in accordance with Estonian regulations. Where required by law, branch directors must submit a copy of the audited and approved annual report as well as a report on the activities of the branch to the local office of the Commercial Register. (EED, 19)

8.2.4 Education system The current level of education among Estonians is high. For example, according to the 2000 population census, the proportion of people with tertiary education (beyond secondary) is the third highest in Europe after Cyprus and Sweden. Estonia belongs to the group of countries which has the highest number of students per heard of population. There are six state universities in Estonia. There are about 20 private institutes of higher education. The number of university students has doubled over the past ten years. (IT CD)

Asked about the education system Enterprise Estonia Deputy Director of the Investment and Trade Development Division, Marek Mägi told:

The educational system in Estonia is quite good, but we have the problem of a lack of skilled workers and have no engineers at all. Everyone went into professions in Economics and Law because they thought it was the best way to earn money. To be an engineer was not a popular profession to chose

71 and today it is one of the biggest reasons why manufacturing companies are not going to Estonia (Interview, April, 11, 2008)

This problem that for youngsters engineering professions have not been attractive admit also Broden, Sikk, (Interview, 10.04.2008) and Hõbemägi, (Interview, 09.05.2008). Retail. Law and Economics attract young people more than the engineering does.

Tallinn Technical University is the only university of technology in Estonia and it is committed to high level research and development in the broad fields of engineering, technology, science and management. TTU plays an important role in educational provision on the undergraduate and graduate level and conducts research and development project for the benefit of Estonia’s economy and community. The TTU offers a variety of services to the private and public sector, constantly strengthening ties with industry and society. TTU is open to international cooperation in the fields of education, research and development. Its core areas include IT, innovative industrial technologies, chemical and material technologies, biotechnologies and gene engineering, environmental and energy saving techniques and socio-economic research and policy analysis. (IT CD)

According to Hõbemägi, (Interview, 09.05.2008) good equipment is now installed in the education establishments. The enterprises are generally satisfied with quality of master students (around five years), but not with bachelor (three years). Many students choose to work during studies or even decide to drop studies. In Estonia engineering companies need three more times qualified students than are at the moment. Our experts agree that the study programs have to be aligned with enterprise needs, much more internships and cooperation during diploma works have to be in place.

In general, the level of education among Estonians is very high. However, the engineering subjects are less attractive in the eyes of university applicants in comparison to law or economic studies. There is a problem with both quantity and quality of graduates in engineering field. Thus, both case company might have difficulties having a qualified employee right after the university and for the industries that are potential case company’s customers feel this is definitely the issue as manufacturing becomes much more knowledge intense.

72

8.3 Organizational Fields

8.3.1 Labor market From 2001 to 2006, the employment rate in Estonia has steadily increased and the unemployment rate decreased. Unemployment continued to decrease in 2007 as well reaching just 4.7% according to Eurostat (Figure 20).

Figure 20 Unemployed persons as a share of the total active population in Estonia

Source: Eurostat

Similar to the other two Baltic States the scarcity of labor and inflationary expectations forced the salaries to increase almost in all sectors of economy. In 2006 the average monthly labour costs stood at EUR 840.

Figure 21 Average monthly labor costs in Estonia, in EUR

Source: Eurostat 73

At the same time productivity growth has been an issue. Despite improvement since 2002, it has grown to slowly in respect to salary growth.

Figure 22 Labor productivity per person employed in Estonia

Source: Eurostat

Now we present the situation in the labor market on the example of electronics industry. When Estonia acceded to the EU many Nordic companies brought their production over to Estonia. This resulted in a significant growth of employment in the Electronics industry. Among the individual branches in the industry, employment showed rapid growth (17%) in the manufacture of electrical appliances and apparatuses. During this time, several companies expanded their production capacities and therefore additional labor was required.

In this industry, wages grew by 17% during 2006. This exceeded the growth of labor productivity by close to half. The shortage of labor contributed to upward pressure on wages. Total productivity based on added value did increase in 2006 by 1%. However, labor costs productivity based on added value showed a small decline due to lowered profitability and increase in labor costs.

There are approximately 13000 people are employed in the electronics industry in Estonia currently. Although the number of employees has changed little in the past years, the output has risen remarkably. For example, in 2005, the production in the electronics industry was 42% higher than in

74

2004. In addition, the total production in the industry has grown almost 15 times during the past ten years. (Invest in Estonia)

Industry sub-sectors Number of employees in 2004

Office machinery, computers 297

Electro -machinery and equipment 4308

Telecommunications apparatus 6198

Measurement and other precision instruments 2465

Figure 23 Employees in E&E sector in Estonia, 2004

Source: Federation of Estonian Engineering Industry

The number of people employed in the sector of manufacturing of electrical appliances and optical instruments has increased from 2000-2006. The average wage has also increased slightly during this time period. The amount of value added, that is the additional value created at a particular stage of production or through marketing has nearly doubled from 2000-2006 and the labor costs have nearly doubled as well during this period.

8.3.2 Financial system The Estonian financial sector is quite bank-centered – the majority of insurance, leasing and investment companies and funds belong to banks. Most of the banks in their turn are owned by foreign capital, which is largely of Scandinavian origin (Swedish and Finnish). There are six registered banks, three branches of a foreign bank and 5 representations of foreign banks operate in Estonia. Before its accession to the EU, Estonia dramatically reformed its financial system. Foreign financial institutions are welcome, and insurance is dominated by foreign firms. Credit is allocated on market terms, and foreign investors may obtain credit freely. The small but active stock exchange is part of a network of Scandinavian and Baltic exchanges.

75

8.3.3 Government

8.3.3.1 Corruption and Bureaucracy According to the Index of Economic Freedom in 2008, Estonia received a score of 67% as its Freedom from Corruption score. This indicates that corruption is perceived as being somewhat present in the country. However, Estonia has law, regulations, and penalties to combat corruption. In addition, the corruption that does exist is generally not targeted at foreign investors.

According to an interview by the Swedish Trade Council in Estonia by Project leader, Henrick Avasalu and Consultant, Fredrik Tammar, they say:

On the whole, there is good trust between Swedish and Estonian companies. Swedes say that it is easy to work with Estonian companies. Swedes say that level of corruption is similar to Sweden. Maybe managers experienced it in 1990s but not any longer. In this case, large companies rather than small were most likely to experience it. (Interview, April, 10, 2008)

As to the bureaucratic issues Mägi, (Interview, 11.04.2008) says that Doing business in Estonia is much easier than in Sweden much less bureaucracy and the regulations are still not very strict. Not everything is yet regulated. There are still many grey areas, sometimes it is good, sometimes bad, but usually better to have grey areas then regulate everything very strictly .

We can conclude that corruption exists in Estonia, but on a very low level. Swedish companies in the high tech sector are not expected to encounter it on a regular basis.

8.3.3.2 Taxation For foreign companies, Estonia has the advantage of low, flat rate taxes. Notably, foreign companies are guaranteed a level playing field with local firms, including unrestricted repatriation of profits and capital and the right to own land. (Estoniantrade.ee).

From January 1, 2000, all companies residing in Estonia are subject to pay income tax only in respect to the distribution of profits. This may include dividends and other profit distributions, fringe benefits, gifts, donations and representation expenses and expenses and payments not related to

76 business. However, there is no corporate income tax on all reinvested profits or profits retained within the company. The approach is not to pay income tax for the period of income generation, but rather on the distribution of profits. That is to say that the accrued profit is not taxable. However the distribution of profits, i.e. the payment of dividends is taxable. For the distributed profit, the corporate income tax rates are 21/79 for the year 2008 and 20/80 from the year 2009 (PKF, 20). In addition, if dividends are paid to a non-resident legal person, then additionally 22% is withheld on the amount of dividends, unless the non-resident is a legal person with a share of over 15% in the profit-distributing entity or a bilateral tax treaty between Estonia and the treaty partner specifies for a lower rate.

Value added tax is a compulsory 18% supplement to nearly all goods and services sold in Estonia with a few exemptions 5% and 0 % enumerated in Value Added Tax Act. Employers registered in Estonia must pay social tax on all payments made to employees. Social tax is 33% and contains the social security tax 20% and medical insurance 13%. Excise tax is implied on production and import of tobacco, alcohol, motor vehicles, motor fuel etc. Land tax is based on the market value of land and ranges between 0.1 to 2.5 percent of market value of land annually (0.1 to 2.0 for arable land and natural grassland). (Invest In Estonia)

It is required by Estonian law, that a foreign company maintains separate accounts concerning its Estonian branch and that this is maintained pursuant to the requirements of the Accounting Act. According to the Accounting Act, which has been in force since 2003, commercial undertakings can choose whether to prepare their annual financial statements according to Estonian Accounting Standards (RTJ) or IFRSs. (Investment in the Baltics, KMPG)

As far as taxation goes, Swedish companies have an advantage in Estonia because Estonia has effective tax treaties with Sweden. The employer must pay an unemployment insurance premium. This is withheld at a rate of 0.6% of the gross salary of the employee. In addition to this, employers pay the unemployment insurance premium at a rate of 0.3% of the sum of gross salaries monthly. (PKF, 24)

Swedish companies have the right to own land and repatriate profits and capital. In addition, Estonia has effective double tax treaties with Sweden. This means that there exists a significant reduction of withholding taxes on various payments for non-residents.

77

8.3.3.3 Financial Support for Industries Through the European Union Structural Funds, Estonia has the opportunity to take part in the regional policy of the Community and to receive financial assistance from the EU budget. (16, PKF)

The government’s 2007-2013 National Strategy for the Use of Structural Funds sets out Estonia’s approach to the use of the EU funding during the block’s next budgetary period. The EU funds are divided between three implementation plans setting out their use. These are the human resources development implementation plan, drawn up under the guidance of the Ministry of Education and Research; the economic environment development implementation plan, drawn up under the guidance of the Ministry of Economic Affairs and Communications; and the living environment development implementation plan, drawn up under the guidance of the Ministry of the Environment. (PKF, 15-16)

We asked Enterprise Estonia Deputy Director of the Investment and Trade Development Division, Marek Mägi, about Estonia’s usage of the EU funds and this was his reply:

When it comes to the EU funds, the legislation is ready but bureaucracy is not at the needed capacity. If we compare Estonia to our neighbors we feel that we are implementing the programs a bit better, but still there is bureaucracy behind and companies are sometimes not very keen to use the funds. You need somebody who implements the program. It takes time and money, not all companies are ready for that. (Interview, April, 11, 2008)

His attitude was skeptical and cautious toward the Funds implementation. However, he seemed positive that the use of the funds was coming further in Estonia as compared to the other Baltic States.

Upon joining the EU, Estonia will receive EU structural funds for industry development and the Estonian government has formulated a National Strategy for the use of the EU funds from 2007-2013. This indicates that for Swedish companies in the high tech sector, that this increase in and organized use of funding will foster development in the high tech industry that will ultimately be beneficial for them in the long-term.

78

The Structural Funds of EU are an impulse for the development and introduction of modern technologies in the Baltic States. They offer funding for renewal of the equipment at research institutes as well as in high-tech companies (Industrial laser solutions article)

The Estonian eVikings is a project which intends to integrate leading Estonian information systems technology research and development labs and companies with the European academia and industry through collaborating on research projects. Other goals of the project are to facilitate the exploitation of RTD results developed abroad in Estonia as well as helping Estonian research labs in disseminating their solutions more effectively within Europe as well as worldwide. The program intends to strengthen the links between the Estonian and European information systems technology research and development communities with other countries’ R&D communities. (Estonia-your source for IT solutions, 2002)

The engineering industries confirm that the support can be really felt. “We feel good support to the industry from the ministries, Enterprise Estonia. Many projects are financed by the country budget; cooperation with Tallinn municipality is also very successful’. Hõbemägi, (Interview, 09.05.2008) He adds that EU funds are extensively used, the federation had several projects, among them cooperation with Germany and the other two Baltic States. (Hõbemägi, Interview, 09.05.2008)

8.3.3.4 R&D Institutions The expenditure on R&D in Estonia as percentage of GDP has been the highest within the Baltic States, however it is still three times less than in Sweden if Eurostat data for 2006 is compared. Our industry expert from Estonian Engineering Federation confirms that the cooperation could be better in the R&D field. “Due to changes in the 90s the network of research institutes was destroyed and many people left to enterprises”. Now companies perform the R&D activities on their own. Some companies even perform R&D activities in cooperation with Sweden or Finland (Hõbemägi, Interview, 09.05.2008).

Mägi, (Interview, 11.04.2008) agrees: Cooperation between R&D organizations and companies can be better. Actually the salaries for professors are less than for mechanics. And it also represents that there is a very weak connection between companies and educational institutions but it will definitely change in the future.

79

So far we have empirically described and explained most important institutions for our case separately for Latvia, Estonia and Lithuania. In the next three analytical chapters we will turn to comparative analysis of all three countries, forecasts and finally conclusions.

Chapter 9 will address institutions that will reveal the “Doing Business Attractiveness” perspective. It will address the advantages/disadvantages of doing business in each of the Baltic States from the general Swedish investor perspective and the case company in particular. The result will be country ranking according to their “Doing Business Attractiveness”.

Chapter 10 will address the comparative analysis of the three Baltic States from the perspective of assessing potential case company’s customer industry attractiveness. There we will specifically evaluate cross-country current state of industries that are potential case compamy’s customers and forecast the future of these industries. The result will be country ranking according to their “Customer Potential Attractiveness”.

Chapter 11 will address the need to combine the “Customer Potential Attractiveness” findings with the “Doing Business Attractiveness” findings in order to ensure that the potential customers are reached and the case company establishes its presence in the Baltic the most effective way from “Doing Business” perspective. The entrance characteristics will be discussed there. Moreover, the chapter discusses how the gap between Swedish and Baltic markets should be overcome, suggesting the matching strategy.

80

9 “Doing Business Attractiveness” – Analysis, Forecasts and Implications

Country Culture

Government: Corruption, Bureaucracy, Tax System Education Political System Swedish Investor System

Labour Financial Market Market

Legal System Country Economic Stability

Figure 24 Basic Institutions Model with Institutions to evaluate Doing Business Attractiveness

Source: Based on Jansson, adjusted for analysis

We’ll start from the societal field and evaluate Country culture, Country’s economic stability, Political and Legal systems, Education system, Labor market, Financial market and Government from the corruption, bureaucracy and taxation perspective. Each section will compare the institutions in all three States, rank the States according to attractiveness to Swedish investor. The last section in this chapter will present an aggregated view of the “Doing Business Attractiveness” in Latvia, Estonia and Lithuania.

9.1 Societal Fields

9.1.1 Country Culture and Business culture This section summarizes the cultural aspects we discovered in the Baltic States and presents implication for Swedish businesses and the case company in particular. Overall many Swedish managers admit that in terms of mentality and way of doing business the Baltic States are very close

81 to Sweden and Swedes do not experience major differences culture-wise. Most of our experts admit that many Swedish businessmen regard Baltics as a one market.

There are rear examples when Baltics can be treated as a single market, but in most cases these are three different markets. (Korsakas, Interview, 07.04.2008)

However there are implications that have to be considered and these are presented below. Korsakas, (Interview, 07.04.2008) provides an interesting comparison of the three Baltic nations:

Estonians like to be perceived and like to be called as Baltic Scandinavians – they are more Nordic type people, rather keep quite; Latvians are always something in the middle – difficult to name them exactly and Lithuanians are called by foreigners as Baltic Italians, they can speak a lot.

(Avasalu, Tammar, Interview, 10.04.2008) make the comparison even more specific:

Estonians are called Baltic Fins, Latvians are called Baltic Swedes and Lithuanians are called Baltic Italians.

If the Swedish investor were to consider choosing employee in one of the three states depending on the requirements he might consider choosing more emotional people like in Lithuania, more calm and analytical as in Estonia or a mix that can be found in Latvia.

Language is the obvious issue to consider. Swedish language is not widely spoken in the Baltics. The countries value and protect their language. In Estonia and Lithuania Estonian and Lithuanian languages have to be used respectively. In Latvia apart from Latvian majority, Russian minority is much stronger represented than in the neighboring Baltic States. In Latvia, if Russian auditorium has to be approached, the language has to be Russian and communication channels have to be selected due to different communication channels for Latvians and Russians. However, it should be noted that in specific cases of business that does not require involvement of mass audiences, social groups, etc. English and Russian could serve as an appropriate means for communication. Many people in the Baltics speak Russian since the countries have been under Soviet influence for quite a while.

Due to geographical and cultural proximity Estonia is a more advantageous market for the companies intending to cooperate with Finland, Lithuania is more attractive in case of cooperation with Poland. Latvia is currently the best platform for the companies planning to expand to Russia, Ukraine and Belarus because it has the biggest share of Russian population in the Baltics and a border with Russia.

82

If compared to Estonia, where share of Russians is also fair, Latvia now has better relationships with Russia, which would play an important role in the business as well. As commented by Ljungdahl, (Interview, 01.04.2008) in Latvia, referring to movement of the World War II related monument “Bronze Soldier” in Tallinn a year ago, that drastically worsened Estonian-Russian relationships:

Now we are “the good guys” in the Baltics for Russia after the “Bronze Soldier” events in Tallinn.

Thus Swedish companies intending to move east are in the most beneficial position to do it from Latvia.

Since the countries were strongly influenced by a Soviet Union for a long period we discovered that several thought styles typical for the Former Soviet Union, According to Jansson (2007, p.53) and based on Edfors and Hagman (1998), are found in the Baltic States. These are: short term orientation (little planning for the future), high power distance (obedience to power or authority, hierarchical structure, withholding of information), high uncertainty avoidance (reliant on directives from above), femininity (solidarity, emotions), masculinity (emphasis on education, economic growth). However, the generations matter, the young generation is much more “European” admit Swedish Trade Council’s representatives in Latvia and Estonia.

Moreover, stamps and contracts were found to be important here. Because of fraud during the transition time the companies developed the tradition to sign contracts. Our experts admit that for every tiny detail you sign a contract in this part of the world.

When it comes to the priorities in people’s lives it was concluded that work and education play the most important role for the people in the Baltics. This can be compared to the three most important things in people’s life in Sweden, Norway and Finland:

Sweden Norway Finland

1. Spare time 1. Charity 1. Recreation 2. Recreation 2. Education 2. Home 3. Entertainment 3. Spare time 3. Charity

As seen from the top-three priority lists, people in the Baltics are more education and work-focused than in the Nordic countries. They are also persistent and dedicated, respect themselves and have their own opinion. All three countries are proud of their independence. Lithuania has probably the most

83 extensive “we know better” approach to doing things because it used to be a powerful state. It would be a wrong approach to come and impose ways to do things. When it comes to management positions (no low skilled workers) people expect to be partners rather than blindly following foreigner’s directions. Overall conclusion is that local knowledge, good contacts and relationships are essential to operate in the Baltics.

9.1.2 Country Culture Ranking Since none of the three Baltic States revealed any substantial advantages for the case company in regards to cultural aspects, all the countries are ranked with the same rank.

Doing Business Latvia Lithuania Estonia Attractiveness Indicator Country Culture and 1 1 1 Business Culture Cultural advantage if Cultural advantage if Cultural advantage if attractiveness to the country is cooperation with cooperation with Swedish investor perceived as a Poland is intended or Finland is intended or platform to Russia, more emotional more calm Belarus and Ukraine employees are employees are required required Figure 25 Country Culture Attractiveness ranking

Source: Own

9.1.3 Country Economic Stability In this chapter we are comparing and forecasting the major economic performance indicators of Latvia, Lithuania and Estonia. Whenever possible we compare the data to Sweden to highlight the differences for the Swedish investor. The macroeconomic stability and growth of economies are important for the investor as it partly determines the attractiveness of doing business in the country.

The last years have been good for the Baltics. However, the emphasis in macroeconomic reviews on overheating of the Baltic economies and discussions about two scenarios, “soft-landing” and “hard landing”, show that the future developments depend upon the countries’ ability to react to the happenings adequately.

Now we consider the major economic aspects for the Baltic economies – GDP and inflation.

84

9.1.3.1 GDP In absolute numbers, in 2007 the GDP of Lithuania it was 28.05 billion EUR, reflecting its largest size among the Baltic States. Estonia followed with 18.7 billion EUR and economy of Latvia was the smallest – GDP there amounted to 12.4 billion EUR.

Figure 26 Growth rate of GDP

Source: Eurostat

According to Eurostat data, the economic catching up process of the Baltics has been impressive (see Figure 26). Starting 2003 all three countries displayed a growth of more than 7% every year, exhibiting much faster pace if compared to the growth of the whole EU, its old members and Sweden in particular. It can be seen that during the period Latvia grew slightly faster than the other two neighboring countries. In 2007 the growth in Estonia was 7.1%; Latvia had a growth of 10.3% and Lithuania of 8.8%, whereas Sweden stood at mere 2.6%. However, when looked at the reasons for such a fast speed it can be seen that the region’s strong performance has been mainly supported by large capital inflows mostly by Scandinavian banks in all three countries. Already in the 1 st quarter of 2008 GDP growth in Estonia was just 0.1%, 3.3% in Latvia and 6.9% in Lithuania.

85

Figure 27 Growth rate of GDP comparison

Source: European Commission and International Monetary Fund

According to the latest European Commission report of April 2008 forecasted growth for Estonia is 2.7% in 2008 and 4.3% in 2009; for Latvia 3.8% for 2008 and 2.5% for 2009 and for Lithuania 6.1% and 3.7% accordingly. The International Monetary Fund predicts slightly better growth for Lithuania, slightly worse for Estonia, but noteworthy only 0.5% of growth for Latvia in 2009 – which means almost no growth. Overall, it is clear that in the upcoming years growth of Baltic economies would ease closer to sustainable growth numbers. In the long term, continued high economic growth depends on further ability of countries to improve the business environment and to use the opportunities presented by EU membership. It should be noted though that these countries would be vulnerable in case of problems in Scandinavian parent banks due to financial situation in the world (IMF Report, p. 87).

To conclude, it is clear that currently the slowdown of the economies is under way and no longer can growth above 10% be expected. However, even 3-4% growth is higher than in EU on average and the countries are still attractive for investors.

9.1.3.2 Inflation Another issue discussed in all three States is inflation. It has been fueled by world commodity price growth, an expanding loan market and increasing domestic demand as well as wages that are increasing in the Baltic States due to a rapid economic growth and workforce emigration.

86

Figure 28 Annual average rate of inflation

Source: Eurostat

As seen in the Figure 28, Latvia has performed worst regarding inflation indicator. In 2007 inflation rate in Latvia was 10.1%, in Estonia 6.7% and in Lithuania 5.8% as compared to EU average of 2.3% and Sweden’s 1.7%. In May 2008 against the previous year the inflation in Latvia stood at 17.7%, 12.3% in Lithuania and 11.4% in Estonia. Inflation (together with the other economic imbalance - current account deficit – in Latvia and Estonia) is a deterrent for the Baltic States for European Monetary Union membership. According to forecasts, the countries are unlikely to be able to join the euro zone before 2012, and there is a significant risk of a delay even beyond that date.

87

Figure 29 Annual average rate of inflation comparison

Source: European Commission and International Monetary Fund

Overall in 2008 annual average inflation is expected to have a peak in all three countries and exceed 10% in Lithuania, 9% in Estonia and 15% in Latvia due to growth of earnings , food price growth, possibly higher electricity and heating prices for households (See Figure 29). Moreover, in Estonia inflation rate will be influenced by one-off tax policy measures scheduled for 2008. But in 2009 inflation will start to decelerate because of more moderate inflationary pressures arising from domestic demand and should return to a more balanced development path. However, the inflation rate will be still high if compared to the EU average level. According to the European Commission, in 2009 inflation rate will be 5.10% for Estonia (4.70% according to IMF), 8.50% in Latvia (9.20% according to IMF) and 7.20 in Lithuania (6.1 according to IMF).

Thus it can be concluded that even though the inflation rate would not influence directly the business of the case company (the common use of EUR enables to avoid losses due to high inflation), but it creates social tension in the country and thus might influence the company indirectly by influencing its customers’ employees for example. From this perspective the countries will still face high inflation in 2008 and 2009 at least and once again Latvia is in the most vulnerable position while Estonia being the most stable followed by Lithuania.

9.1.4 Country Economy Stability Ranking It can be concluded that Lithuania has the biggest economy and thus on a high level can be more attractive than the other countries for investors that are interested in bigger markets. From the GDP 88 growth perspective Estonia and Lithuania seem to be on a similar level; Latvia, however, poses greater risks of “hard landing”. The inflationary expectations put countries in the following sequence: Estonia with the lowest inflation forecasted, followed by Lithuania and Latvia the most vulnerable on to this criteria as well.

Doing Business Latvia Lithuania Estonia Attractiveness Indicator GDP size 3 1 2 GDP growth 2 1 1 Inflation 3 2 1 Total Economic Stability 3 2 1 Figure 30 Doing Business Attractiveness Indicator: Economic Stability

Source: Own

Thus the combined total standings in Country Economic Stability ranking reveal the following sequence: Estonia is expected to be go through slowdown in economy the least affected, Lithuania is at larger risk and Latvia is the most vulnerable in the short term perspective. It has to be reminded that the forecast assumes stability of major banks in the system like subsidiaries of SEB Bank and Swedbank in the Baltics. If these get hit hard by the global crisis, the economic stability of the Baltics might be at high risks.

We check our conclusions against the global competiveness index on the macroeconomic stability. The lower the rank, the better country performs on this criterion. According to results, our conclusion on the total Economy Stability ranking is confirmed: Estonia is ranked the best, followed by Lithuania and Latvia.

Global Competitiveness Index Sweden Estonia Lithuania Latvia

Macroeconomic stability 17 14 38 44

Figure 31 Global Competitiveness Index: Macroeconomic Stability

Source: World Economic Forum

89

9.1.5 Political System Our conclusion is that compared to the old EU countries, the political systems of all three Baltic States are rather immature, which implies frequent changes on the political horizon. On the other hand, the most important for the investors is that the overall economic course has been kept by Latvia, Lithuania and Estonia throughout political reform process. By now all the countries have a stable political environment from the perspective of doing business there. It is expected that evolutionary changes will take place, as the laws become more harmonized with the EU legislation. No major changes, such as reforms are expected though, which means that the political stability will not put the business under risks in the upcoming several years.

As Mägi, (Interview, 11.04.2008) comments on the issue: “We had too many reforms, we are not very happy about reforms”.

Thus, overall there is no doubt that democratization and the implementation of the working market economy has been successful in all three Baltic countries – there is a consensus on that. And the new political systems can more or less been regarded as stable in democracy terms since the transition to democracy was never really questioned in any of the Baltic States.

9.1.6 Country Political System Ranking According to our analysis all three Baltic States have appropriate stability level of the political system with no upcoming changes that would have a strong impact on the business community. Since no major advantages or disadvantages are visible in any of the countries for the case company, all the countries are ranked with the same rank.

Doing Business Latvia Lithuania Estonia Attractiveness Indicator Political System 1 1 1 Figure 32 Doing Business Attractiveness Indicator: Political System

Source: Own

9.1.7 Legal System Since the re-establishment of independence the national laws of all three Baltic States has been undergoing a continuous reform, making the legal field harmonized with the European Union’s legal system. Adequate legal remedies are available for the protection of the investor rights in the Baltics.

90

Investors are treated and protected according to the principle of equal treatment implying equal approach to both local and foreign investors.

Forecasting development of the legal field it can be concluded that legislation will not be changed to such a level that it would somehow strongly influence Swedish investors in the future. No dramatic changes are expected in any of the countries, just further harmonization with the EU.

Figure 33 Doing Business 2008 selected indicators

Source: The World Bank

To be able to rank the countries according to the legal system attractiveness, we address the following indicators of the “Doing Business 2008” study relevant to our research: Starting a business, protecting investors and enforcing contracts. The lower the rank the more attractive is the country from the investor’s perspective (See Figure 33). Estonia does the best according to “Starting a business” indicator and it is doing even slightly better than Sweden according to that. Latvia performs poorer than Estonia, but better than Lithuania. The major difference can be found in the number of days needed to start business: In Estonia it is 7, in Latvia - 16 and 26 in Lithuania. The similar situation is with investor protection index with the difference that now Estonia scores much better than Sweden and Latvia scores same. Latvia changes places with Estonia on “Enforcing contracts” indicator reflecting court efficiency. It is followed by Lithuania and finally Estonia. All three countries are far ahead than Sweden according to this indicator. In Estonia the court process is much lengthier and has more procedures than in the other two Baltic States.

9.1.8 Country Legal System Ranking According to our analysis all three Baltic States have appropriate stability level of the legal system for the case company and other Swedish investors. Since Estonia scores the lowest among three

91 countries on the “Enforcing Contracts” indicator, it is given the same level of total attractiveness with Latvia. Lithuania comes last according to the legal system attractiveness ranking for investors.

Doing Business Latvia Lithuania Estonia Attractiveness Indicator Starting Business 2 3 1 Protecting Investors 2 3 1 Enforcing Contracts 1 2 3 Total Legal System 1 2 1 Attractiveness

Figure 34 Doing Business attractiveness rank, legal system

Source: Own

9.1.9 Education System The Baltic nations were found to be highly literate and its inhabitants place strong emphasis upon education. Some educational establishments of high class are established in the region, supplying well prepared managers and economists for example. However, we have discovered a common trend in all Baltic States that education is not very specialized, especially in engineering field. It is difficult to find university graduates who would be familiar with the processes they would have to do at work and be specially trained for that.

92

Figure 35 Tertiary graduates in science and technology per 1000 people aged 20-29 years

Source: Eurostat

The Figure 35 above shows the number of tertiary graduates in science and technology - those that have completed graduate and post graduate studies in these fields. Lithuania tops the EU average and Sweden in this area as well as the other Baltic countries. Estonia comes in second and Latvia third. However positive trend has to be pointed out – since 2002 percentage of science and technology students has been growing in all three Baltic States. The engineering subjects have not been popular in the Baltics, especially it is visible in Latvia and Estonia. As Ljungdahl, (Interview, 01.04.2008) says:”Whatever you say about an old Soviet system it created a very good educational base when it comes to natural sciences. A problem is that education is limited: there are a lot of economists, lawyers, business administrators, but lack of engineers”. In Lithuania the situation is slightly better - specific laser production industry seems to be able to attract youngsters. Moreover, the education- industry cooperation was found to be insufficient in the Baltics.

The future of the education system in the Baltic is difficult to forecast since it depends highly on the activity of the industry itself in attracting youngsters, cooperating with educational institutions and ensuring that students that graduate possess required skills. Industry associations in all three countries are seen as quite active. Companies will be forced to act more the tighter labor market will become and the worse the quality of graduates will be. The second force is the government that needs to take measures to develop engineering educations, like for example in Estonia, where number of state paid placements in the universities for engineering industries will be increased. The situation is seen as a

93 rather critical and it is the latest time for the governments to start acting. In Latvia, for example, the system has to be changed radically, insuring that mathematics, physics, chemistry, biology and other sciences are studied by a higher number of students. However, we forecast that even if the effort will be undertaken, for the industry no real effect would be felt earlier than in five years time, when current university applicants will graduate.

Thus, in none of the countries the state of education has been found to be on an adequate level for finding graduates that would be well qualified for the case company or engineering industries that are potential case company’s customers, like electronics or metal processing. Lithuania seems to be in the more beneficial position when it comes to laser production industry.

9.1.10 Country Education System Ranking Since in none of the countries the situation in the education field was found to be satisfactory overall, the rankings for the Attractiveness of the Education System are assigned based on the proportion of the technology and science graduates Lithuania performs best according to this indicator, followed by Estonia and Latvia is the last.

Doing Business Latvia Lithuania Estonia Attractiveness Indicator Education System 3 1 2 Attractiveness Figure 36 Doing Business Attractiveness, Education System

Source: Own

9.2 Organizational Fields

9.2.1 Labor Market From the labor market perspective all three Baltic States have been witnessing growth of employment since 2002 and subsequently decline of unemployment to 6.01% in Latvia, 4.3% in Lithuania and 4.7% in Estonia in 2007. It is possible that real numbers are even lower since some share of people register as unemployed while working to be able to cheat the state and receive social support. The same year unemployment in Sweden stood at 6.1%, which shows that labor markets in the Baltic is tighter. This was caused partly by employment enhancement, partly it can be attributed to the

94 increasing number of employed persons in urban areas and explained by labor force reduction and emigration.

Figure 37 Unemployed persons as a share of the total active workforce, 2007

Source: Eurostat

This has put a pressure on the salaries that have been growing in the Baltics almost by 30% during last years, thus depriving the countries of the “low-cost labor” status. However, it must be admitted that the salaries in the Baltics are still much lower than in the old Member States of the European Union. In 2006 Estonia had the highest average monthly labour costs of 840.2 EUR, followed by Lithuania with 646 EUR and Latvia with 531 EUR. This is still a fraction of the average monthly labour costs in Sweden of 4517 EUR.

95

Figure 38 Average Monthly Labor Costs in 2006, EUR

Source: Eurostat

At the same time the major concern has been the productivity of employees. Despite that it has grown since 2002, Estonia in 2007 stands at mere 67.6% of EU average, Lithuania 60.3% and Latvia at 53.7%, while Sweden is 113.1%.

Figure 39 Labor productivity per person employed

Source: Eurostat

96

Because of the unfavorable demographical situation and the fact that immigrants would suddenly return is highly improbable the labor market in the Baltic States is expected to remain tight and there will be pressures of wages at least throughout of 2008, however the growth rate is expected to decline in 2009 due to some return of immigrants and some release of employees to the market from bankrupting enterprises due to slow down of the economy.

9.2.2 Labor Market Ranking for Case Company as an Employer Specifically for the case company the employment of employees in the countries of operations would be a major concern in the from the Labor Market Attractiveness perspective, while for other type of investors other aspects might be more important. Therefore, we base the ranking on the “Employing Workers” index of the “Doing Business 2008” study.

Figure 40 Doing Business 2008 indicator, Employing Workers

Source: The World Bank

According to Doing Business 2008 study (See Figure 40, where the lower the score the more attractive the country is) Latvia scores the best for employment issues from the employer perspective among three Baltic States and much better than Sweden as well. According to Doing Business 2008 study Latvia is the easiest place, followed by Lithuania and finally Estonia. This is mainly because of higher wages in Estonia and employee firing conditions are unfavorable for employer. It is expected though that Estonia will undertake gradual changes in the legislation under the business pressure. Despite already business favorable employment conditions in Latvia, under the pressure of industries

97 the Government announced that it will decrease the number of days the employer have to pay for employee sick leave from 14 to 10 starting 2009.

Doing Business Attractiveness Latvia Lithuania Estonia Indicator Labor Market 1 2 3 Attractiveness Figure 41 Doing Business Attractiveness Indicator, Labor Market

Source: Own

9.2.3 Financial Market In all three Baltic States the financial system is well developed and stable. The Swedish banks, Swedbank and SEB play a major role in the markets of the Baltic States, therefore no major difficulties for the Swedish investor when dealing with the financial system of the country are expected to arise. However, in case of the problems of the mother companies, the Baltic financial system would be very vulnerable.

9.2.4 Financial Market Ranking We use the indicator of the “Doing Business 2008” study for all three Baltic States “Getting Credit” to measure attractiveness for investor of the financial markets.

Figure 42 Doing Business 2008 indicator, Getting Credit

98

Source: The World Bank

Thus the following ranks are assigned based on Figure 42, where the lower the rank the more attractive the country is:

Doing Business Attractiveness Latvia Lithuania Estonia Indicator Financial Market 1 2 3 Attractiveness Figure 43 Doing Business Attractiveness Indicator, Financial Market

Source: Own

9.2.5 Government

9.2.5.1 Corruption and Bureaucracy Issues of corruption and bureaucracy are still common in the markets. It can be partly regarded as a Soviet heritage. There was the concept of ‘blat’ in the Soviet Union referring to a system of personal connections which helped people overcome the shortages of goods. Blat was of great importance in many relationships, such as those with tax authorities, banks, and district administrations (Ledeneva, 1998). The nature of the ‘blat’ system has changed with the transition. It transformed from a positive ‘favor to favor’ system based on personal ties to becoming more materialistic and based on financial gain (Jansson, 119). However, the EU membership put strong pressures for transparency in institutions which resulted in declining corruption in the new EU member countries as Latvia, Estonia and Lithuania. We have discovered that the corruption is mostly found in businesses directly related to governmental organizations – like road, bridge building etc., and other public procurement. Smaller businesses however do not have to deal with this issue much, but red tape remains an issue in some instances. We forecast, that the situation will only improve in this field in all three Baltic States, which for the case company implies that corruption should not be an obstacle for company operations in the region.

9.2.5.2 Corruption Ranking To rank the countries according the corruption level we refer to the 2007 Corruption Perceptions Index developed by the Transparency International organization. The higher the Corruption

99

Perception Index score, the least corrupt the country is perceived to be. Sweden ranks very high in the European region being the third. The conclusion for the Baltics is that Estonia perceived to be the least corrupt, while Lithuania and Latvia are on the same level and according to the score the countries are almost two times more corrupt than Sweden.

Regional CPI Score Country Country /Territory 2007 Rank 3 Sweden 9.3 17 Estonia 6.5 25 Latvia 4.8 25 Lithuania 4.8 Figure 44 Corruption scores

Source: Transparency International

Therefore the ranks are assigned accordingly: Estonia is ranked highest and Latvia and Lithuania are on the same level.

Doing Business Attractiveness Latvia Lithuania Estonia Indicator Corruption Level 2 2 1 Attractiveness Figure 45 Corruption Level attractiveness

Source: Own

9.2.5.3 Tax System Tax system is a very important aspect for the investor. The Baltic States are an attractive place to do business due to their low and flat income taxes. This will be the major concern for the case company regardless of how the company decides to establish itself as an entity – a private liability company or a branch of foreign company. In Latvia companies pay income tax of 15%, the same in Lithuania with possibility to pay 13% for smaller companies. In Estonia the reinvested profits are tax exempt. However, distribution of profits from 2009 will be taxed at 20/80 rate. Despite the fact that EU is not

100 looking at a 0% income tax rate in Estonia very approvingly, local politicians insist the country will keep such taxation regime which proved to be very beneficial for industry development.

9.2.5.4 Tax System Ranking We rank the Baltic countries on the taxation attractiveness based on the data of the “Doing Business 2008” study in the section of “Paying Taxes” (See Figure 46, where the lower index is the more attractive the country is for the investor from taxation perspective).

Figure 46 “Doing Business 2008” indicator, paying taxes

Source: The World Bank

One of the major influencers within the index is the percentage of profits paid as various taxes in the country. In Estonia it is 49.2%, in Latvia 32.6% and in Lithuania 48.3% that is paid as taxes from profits. Therefore we rank the countries in the following sequence: Latvia is the most attractive for the case company, followed by Estonia and finally Lithuania.

Doing Business Attractiveness Latvia Lithuania Estonia Indicator Tax System 1 3 2 Attractiveness Figure 47 Doing Business Attractiveness Indicator, tax system attractiveness

Source: Own 101

9.3 Aggregated Doing Business Attractiveness and Implications Doing Business Attractiveness Indicator Latvia Lithuania Estonia Country Culture and Business 1 1 1 Total Economic Stability 3 2 1 Political System 1 1 1 Total Legal System Attractiveness 1 2 1 Education System Attractiveness 3 1 2 Labor Market Attractiveness 1 2 3 Financial Market Attractiveness 1 2 3 Corruption Level Attractiveness 2 2 1 Tax System Attractiveness 1 3 2 TOTAL “DOING BUSINESS” 1 (14) 3 (16) 2 (15) ATTRACTIVENESS Figure 48 Aggregated Doing Business Attractiveness Indicators

Source: Own

The table above summarizes the findings about three Baltic State attractiveness for the case company. Despite cultural differences that we discovered the differences in major indicators are not that big. Investor might choose the country on the importance of each indicator for each specific case. Since the countries are so close we believe that for specific case of the case company tax issues would be of a major importance – therefore if tax system attractiveness is given more weight it would strengthen our conclusion – it is most efficient to do business in Latvia, followed by Estonia and finally Lithuania.

As commented by Stukle, Strupk āja:

Differences in “hard factors” of the Baltic States are minimal, now “soft factors” become more important – things how investor or its employees feel in the country, if investor has good contacts or relatives in the country – these things play a role now. (Interview, 01.04.2008)

Our findings are supported by the study made on the Swedish enterprises operating in the Baltics. According to the results, 40% of enterprises considered the contacts with the authorities worse than in Sweden against 49% who said it is better or the same. Rules of law and bureaucracy issues were said

102 to be batter or same by 55% , workers competence – 72%, possibility to recruit needed workforce 38% considered to be better than in Sweden and 43% same, laws on employment 41% considered to be better than in Sweden and 32% same. The clearest advantages according to the report lied in taxes and duties – 64% of enterprises considered the system more attractive than in Sweden and 72% believed that possibility to grow is better in the Baltics than in Sweden.

Thus we have answered the first question put forward.

What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

103

10 “Customer Potential Attractiveness” Analysis and Implications This chapter addresses the comparative analysis of the three Baltic States from the perspective of assessing potential case company’s customer industry attractiveness based on its current state and future prospects. First, we’ll evaluate the current market attractiveness of all three Baltic countries analyzing the industries that are potential case company’s customers. Next, we consider factors that influence case company’s customers’ industries development - Labor market, Government from the financial support for industries perspective and R&D institutions that were described in the country description chapters. Next we’ll identify which of this factors drive or deter industry from developing. Using this analysis, future potential of industries that are case company’s potential customers will be forecasted. The last section compares the attractiveness of the case company’s customer industries in all Three Baltic States based on its current state and future prospects.

Government: Financial Support for Industries

R&D Case Company’s Institutions Customer Industries Labour Market

Figure 49 Basic Institutions Model: Selection of Institutions influencing case company’s customer industries

Source: Based on Jansson, adjusted for the study

104

10.1 Case Company’s Customer Industries – Current State The case company’s customers are found in the industrial market – therefore we are interested to analyze the size of the market looking at manufacturing sector in all three countries and comparing it to Sweden.

For centuries Baltic States used its geographic location as an important commercial and trading center. The Soviet years tended to integrate Baltic State economies into the USSR in order to serve empire's large industrial needs. After the collapse of the USSR the industrial sector had become inefficient in its utilization of resources, and incapable of manufacturing internationally competitive products. The need to reduce the inefficient industrial sector led to serious economic difficulties. The following section presents to what degree the countries were able to recover their industries and what major problems currently exist.

Overall, with the biggest economy, Lithuania also exhibits the biggest turnover in manufacturing sector in 2005 (this is still 15 times less if compared to Sweden). Respectively, Estonia with the 2 nd largest economy follows and Latvia with the smallest economy is the last, but very similar to Estonia.

Figure 50 Manufacturing turnovers, million EUR, 2005

Source: Eurostat

Looking at the GDP composition by economic sectors in Latvia in 2007, 21.3% are constituted by the industry. Services are a major share with 75.2%, 3.5% is agriculture (CIA World Factbook). Metalworking, machinery and tools, light electrical equipment and fittings, textiles and footwear,

105 technological instruments, construction materials, processed foods are important in Latvia’s economy. The following graph depicts the decomposition of gross value added of manufacturing in 2006.

Figure 51 Structure of manufacturing industries by value added

Source: Latvian Business Guide

Electrical and optical equipment, which is a focus of our research, constitutes 5% of the total industry pie (Latvian Business Guide, p. 21).

Apart from electronic industry, the metal processing might be a potential field for the case company. According to the Investment and Development Agency of Latvia, metal processing and engineering have historically been one of the leading industrial sectors in Latvia as the country was one of the high-tech manufacturing centers for the Soviet military and aerospace industries. Currently, the sector is mainly involved in export-oriented contract manufacturing activities. The major sub-sectors are the production of basic metals and manufacturing of fabricated metal products, transport vehicles such as ships, trailers, machines and machine tools, as well as electrical/ electromechanical machinery and equipment.

Looking at the gross value added of economic sectors in Lithuania in 2006, 24.9% are constituted by the industry. Services are a major share with 61.1%, 8.8% is construction and 5.2% is agriculture, hunting, forestry and fishing (Advantage Lithuania, p. 22).

106

During the last 50 years, intensive industrialization in Lithuania gave birth to enterprises specializing in electronics and metal processing, which are possible case company’s customers. Moreover, chemicals, machine tools, wood products, construction materials and food processing are essential in the country’s industry pie. Electrical and optical equipment, which is a focus of our research, constitutes 1.3% of the total industry pie (Advantage Lithuania, p. 22).

Figure 52 Gross value added of manufacturing, 2006

Source: Advantage Lithuania, p.22

The Lithuanian Development Agency claims the following industries to be the most attractive in Lithuania: ICT, with leading position among the Baltic States, lasers, where Lithuanian companies are global leaders in certain areas, biotech, plastics, machinery and electrical equipment, metal processing and transport equipment manufacture, furniture and wood processing, textile and apparel, food, services, real estate (LDA leaflet).

Metal processing and Transport equipment manufacture. The profitability of Lithuania’s metal processing industry (6.7%) is one and a half times greater than that of the entire manufacturing

107 industry. A key to sector’s success is supply of specific products to large foreign and local companies as well as active modernization of production. Lithuanian metal processing and transport equipment companies supply various transport parts to companies such as Volkswagen, Volvo, SAAB, Renault, and Yazaki, which are known to demand top quality and value.

Electrical and optical equipment, which is a focus of our research constitutes 1.3% of the total industry pie (Investors guide, p. 22). In 2003 the Government of Lithuania officially named the laser technology one of priority branches of Lithuanian high technology industry. A roadmap goal was set for all laser companies to increase their cumulative revenue tenfold in a decade, arriving at an impressive figure of 1 per cent of Lithuanian GDP in 2012.

Estonia is largely a service based economy. Roughly 68.2% of its total GDP is from services, 28.9% comes from industry and only 2.9% came from agriculture in 2007. The industrial sector is dominated by the sales from manufacturing.

Recent years show growth in industrial production. The best performing sectors within industrial manufacturing include the manufacturing of wood, then food and beverages and then the manufacturing of fabricated metal products. The figure below show the gross output of industry in the manufacturing sector in millions of Euros.

Figure 53 Manufacturing sectors in Estonia

Source: Minifacts about Estonia 108

The conclusion about potential industries is that for the most interest for the case company in the Baltic States are electronics and metal processing and industries.

One of the potential industries is manufacture of electronic and electrical equipment that we briefly present here in the three countries.

Since the 1920s, the electronics and electrical engineering sector has had a significant role in the Latvian economy. For example, during the period of Latvia’s independence, the electronics producing company VEF was world known for the production of radio receivers. In 1938, the first model of the miniature camera Minox was developed in Latvia and developed further in Germany, USA and Japan. During the period when Latvia was a part of the Soviet Union, the electronics sector became even stronger. During this time, many R&D centers were located in Latvia. As an example, the R&D institute of VEF and the Riga Research and Development Institute for Radio-Isotope Apparatus were both located in Latvia. In the beginning of the 1990s, there were around 65 thousand employees in this sector in Latvia. The share of the sector reached more than 25% of the total manufacturing production volume of Latvia. However, the weight of this sector has decreased. Yet since 2000, the industry is recovering and it is showing stable increases in the production volume and export intensity (Development Strategy of E&E sector in Lativa, 22). Currently the number of employees in the industry decreased to around 7 thousands and the majority of the production in the Electronics and Electrical engineering sector in Latvia is in Riga, where 77% of the total output comes from. The output of companies in the Electronics and Electrotechnics industry in Latvia reached almost 140 million LVL in 2006, out of which more than 90% were exported.

According to the director of the LETERA association, there is no specific focus product in the industry, however the competiveness of the companies is said to be found in the ability to deal with small orders that are not attractive for big producers and provide tailor-made solutions to each customer.

For decades Lithuania has been a center of high tech production for the military, space and consumer electronic industries. Today Lithuanian electronics companies have reestablished themselves on the world market. In the last three years, the volume of accrued FDI grew almost three times in the sector. More than 70% of the production is exported; exports, growing about 15% annually, cover more than 20 European countries. Lithuania is nr.1 in the refrigerator and freezer production and the

109 largest LCD-screen TV producer in the Baltic States. Lithuania’s machinery and electrical equipment sector has the following branches: electrical equipment and appliances; radio, television and communication equipment and appliances; medical, precision and optical equipment (Advantage Lithuania, p.25).

Specifically for Lithuania, where laser industry is rather developed it will be of a focus of our analysis and serve as a role industry. The start of laser technologies industry in Lithuania is associated with the establishment of the Experimental Laser and Electronics Factory under the Institute of Physics of the Lithuanian Academy of Sciences in 1983. The majority of Lithuanian light technology companies have developed out of the Institute of Physics. Spin-off laser companies Ekspla Ltd. and Light Conversion Ltd. formed in the 1990s captured up to 60 percent of the world market in scientific applications segments.

Lithuania has about 15 laser producers, employing about 300 laser specialists, half of whom are engineers and doctors of science. It grows about 15-20% annually, which is twice as fast as the whole economy of the country. Lithuania’s laser producers export laser technologies and devices to nearly 100 countries, including EU members, the US, Japan, Israel, and Switzerland; mostly for universities and corporate laboratories for scientific research purposes, aiming to further integrate lasers into machine tools and industrial equipment. Lithuania is the biggest exporter of femtosecond lasers in the world. The Lithuanian laser technologies producer UAB Sviesos Konversija alone holds 80% of the global market of femtosecond lasers.

Lithuania has over 50% of the world market for high-energy pico-second lasers, a device for measuring the thickness and profile of unfinished glass at the television screen factory, a non-contact laser measuring device to control the level of the mass of glass in a casting furnace, a medical laser scalpel etc., and is a leader in global production of ultra fast parametric light generators.

According to experts, faster expansion of laser technologies could be achieved through the newly developing segments of the market, like development of lasers and laser systems for science and diagnostics and development of laser technologies for environmental protection. Support from the EU Structural Funds should enable further expansion of the laser industry sector. It is expected that the sector will increase aggregate annual sales to EUR 145 million in 2017 and generate up to 1% of Lithuania’s GDP in 2015.

110

However, according to Mr. Mykolaitis, the director of the Engineering Industries Association of Lithuania LINPRA, the Lithuanian companies have competitiveness problems related to the equipment modernization, business management, production administration, and marketing.". (Verslo žinios“ Nr. 87)

In recent years in Estonia the manufacture of electrical appliances and optical instruments has developed very quickly. The sales in 2006 were three times higher than they were in the year 2000 and employment has increased more than a third from this period. Because many of the larger enterprises in this sector are based on foreign capital, the sales are mostly export oriented. There are almost 300 companies which engage in the manufacture of electrical appliances and optical instruments. However the five largest companies provide one third of the total turnover of the industry. (Economic Survey of Estonia 2006, 38)

According to country development agency, Invest in Estonia, the electronics industry in Estonia consists of about 315 companies. The largest company in the electronics industry is Elcoteq, which employs approximately 3500 people. The majority of the enterprises in this industry are small and medium sized enterprises which employ less than fifty people. Small and medium sized enterprises account for more than half of the industry's total turnover. On the other hand, large enterprises with more than 300 employees account for approximately one third of the total turnover. Within the sector of manufacturing of electrical appliances and optical instruments, the largest sub-branch by total sales in 2006 is the production of electrical equipment and devices, followed by the production of radio and communication equipment, then the production of medical and precision instrument and lastly, the production of office appliances and computers.

When we look to the engineering industries of our interest, it can be concluded that the industries are very much export oriented. The competiveness of the industries in their ability to provide very customized solutions, be much more flexible and quicker than Chinese companies. The future challenges are to provide complete systems, full product support, improve marketing.

In order to understand the role engineering industries, which the case company is interested in, play in the economies of the studied markets we examine the Eurostat data for 2005 (See Figure 54). The DL industries (Manufacture of electrical and optical equipment according to NACE classification) have the following statistics: The number of enterprises is the largest in Lithuania, where it is almost

111 double the number in Estonia or Latvia, as it was predicted by the overall size of Lithuanian economy. However, Estonia does much better when it comes to the turnover and the number of employees in the industry is similar to Lithuania of so it can be concluded that Estonian companies are bigger. Latvia lags behind the two countries according to this data. In Estonia the industry plays a more important role in the share of economy since it is almost the double the shares of industries in manufacturing in Latvia and Lithuania. Estonian case is the most similar to Sweden where industry’s share is 14.9% of manufacturing. For comparison it can be seen that industry in Sweden is almost 30 times bigger than the one in Estonia, where turnover is the highest.

DL Manufacture of electrical and Estonia Latvia Lithuania Sweden optical equipment 2005

Number of enterprises 329 304 602 4701

Turnover or gross premiums written (Mil. EUR) 720.5 234.1 654.9 21279.5

Number o f employees 14109 6382 18812 77894

Share of value added in manufacturing total 11,6 5,3 5,7 14,9

Figure 54 DL Manufacture of electrical and optical equipment, 2005

Source: Eurostat

Looking at the annual turnover index based on Eurostat data, enables us to see the development of the manufacture of electrical and optical equipment industry (Figure 55). The index shows the growth taking year 2000 as the base of 100. According to the data, the industry has been growing constantly in Estonia (almost four times), in Latvia (more than four times) and in Lithuania it grew 1.6 times since year 2000. In Lithuania years of growth and little declines were observed.

DL 2002 2003 2004 2005 2006 2007

Estonia 118.17 147.35 203.71 277.30 318.36 382.05

Latvia 164.03 211.91 254.02 294.49 360.00 433.96

Lithuania 111.80 140.87 167.32 162.10 166.77 160.90

Figure 55 Growth of DL industries, index

Source: Eurostat 112

Looking specifically at case company’s potential customers within the electronics industry - DL33industry (Manufacture of medical, precision and optical instruments, watches and clocks) where laser producers are found reveals the similar results: Number of companies in Lithuania almost twice Estonian, however the turnover is similar. In all countries the industry’s share in manufacturing is less than 2% as compared to 4% in Sweden and Sweden’s market is 45 times bigger than Estonia’s.

DL33 Manufacture of medical, Estonia Latvia Lithuania Sweden precision and optical instruments, watches and clocks, 2005

Number of enterprises 136 159 251 2206

Turnover or gross premiums written (mil. EUR) 110.1 40,7 102.3 4999,9

Number of employees 1851 1727 3662 23759

Share of value added in manufacturing total 1,9 1,3 1,8 4,1

Figure 56 DL 33 Manufacture of medical, precision and optical instruments, watches and clocks, 2005

Source: Eurostat

And in the case of this industry all countries have grown constantly since 2000 and by 2007 exhibited double growth which implies that industry is constantly developing.

DL33 2002 2003 2004 2005 2006 2007

Estonia 83.60 113.63 145.44 179.19 174.37 212.69

Latvia 92.53 162.03 198.54 229.32 232.08 287.30

Lithuania 116.05 124.77 142.35 160.49 188.39 245.25

Figure 57 Growth of DL 33 Industry, index

Source: Eurostat

It can be concluded that DL industry has been growing in all three countries since year 2000. According to the results of 2005 Lithuania is the leader in terms of number of companies. Estonia and Lithuania are on a similar level in terms of turnover, while Latvia is significantly lagging behind. Overall, the industry is approximately 30 times smaller than in Sweden.

113

Analyzing the DJ industries (Manufacture of basic metals and fabricated metal products according NACE classification) have similar statistics: The number of enterprises is the largest in Lithuania, where it is almost double the number in Estonia or Latvia. However, both Estonia and Latvia do better when it comes to the turnover. It must be noted that differences between the three countries are not so evident in this case. Both Latvia and Estonia reveal around 9% of industry’s share in manufacturing, Lithuania just 5.4% and Sweden 14.6%. Turnover of the industry in Sweden is approximately 40 times bigger than that in Estonia.

DJ Manufacture of basic metals Estonia Latvia Lithuania Sweden and fabricated metal products 2005

Number of enterprises 743 591 1262 11912

Turnover or gross premiums written (Mil. EUR) 613.1 580.8 484.6 25222.2

Number of employees 12091 12367 17191 110780

Share of value added in manufacturing total 9,3 9,6 5,4 14,6

Figure 58 Manufacture of basic metals and fabricated metal products, 2005

Source: Eurostat

It can be seen that this industry has been growing all the years in all three countries more than 3 times in Estonia, almost 4 times in Latvia and more than 5 times in Lithuania if compared to 2000.

DJ 2002 2003 2004 2005 2006 2007

DJ Estonia 132.40 170.41 189.38 240.66 303.83 341.81

DJ Latvia 96.40 158.88 216.14 250.49 314.62 392.25

DJ Lithuania 105.87 145.85 200.03 303.55 385.59 548.92

Figure 59 Growth of DJ industry, index

Source: Eurostat

Looking for more specific industries within DJ industry that might become case company’s customers the following is revealed: In Estonia and Latvia DJ2851 treatment and coating of metals and DJ2852 general mechanical engineering are most represented. In Lithuania DJ284 forging, pressing, stamping and roll forming of metal; powder metallurgy and DJ2851 treatment and coating 114 of metals are the industries to concentrate on. This split allows us to see Estonia’s advantage in terms of turnover in more specific sectors, followed by Lithuania and Latvia with significantly more modest results.

Turnover in 2005 (Mil. EUR) Estonia Latvia Lithuania Sweden

DJ2745 Other non-ferrous metal production 0.0 0.0 : 213.7

DJ284 Forging, pressing, stamping and roll forming of metal; powder metallurgy : : 20,6 404,0

DJ2851 Treatment and coating of metals 58,0 9,8 29,5 569,4

DJ2852 General mechanical engineering 82,0 11,9 6,9 3397,9

Figure 60 Turnover of DJ industries

Source: Eurostat

10.1.1 Foreign Direct Investment FDI is an important source of industry development. In this section we analyze which sectors of the Baltic economies have been invested the most to see how it contributed the development of industries that are potential case company’s customers.

As of 1 October 2007, the cumulative FDI in Latvia amounted to EUR 5.7 billion. At the same time the cumulative FDI in Lithuania amounted to EUR 9.92 billion. By the end of 2006, the cumulative stock of foreign direct investment in Estonia amounted to EUR 9.62 billion.

Ever since Latvia regained independence, foreign investment in Latvia remains high, as both Western and Eastern investors are trying to establish a foothold in the new EU member state as well as to take advantage of Latvia's stable macroeconomic environment, central location in the region. Many investors view Latvia as base for further expansion eastwards. Latvia's excellent location might be of consideration when there is a need to cover the whole Baltic region from a single production or distribution unit, or when establishing a representative office in this region.

115

The bulk of investment into Latvia came from Sweden (14%), Estonia (12%) and Germany (11%). Looking to the investment split by economic activity, the bulk of investment was in financial intermediation (24%), with manufacturing attracting just 10% of the FDI. In electronics industry the companies which receive foreign capital are modern and are able to work with up-to-date equipment and technologies.

In Lithuania the bulk of investment came from Russia (20.0%), Denmark (16.3%), Sweden (11.7%), and Germany (10.5%). Looking to the investment split by economic activity, the bulk of investment was in the manufacturing industry (34.5%). In order to understand the potential of engineering industries, which is our focus, we present the split of FDI into engineering industries. When it comes to the engineering industries, the amount has been 292 million EUR in 2006. It can be seen that the largest portion of investment went to “means of transport” and “machinery and equipment” categories. Potentially interesting for case company categories NACE 27 and 28 representing metal products attracted 10% of investment into engineering . Electrical engineering and electronics received 26% in total and NACE 33, with apparatus like lasers etc., which is a special interest for us received 7% of engineering investment. From key Swedish investors in Lithuania TeliaSonera in telecommunication (Sweden / Finland) and StoraEnso in wood processing industry (Sweden / Finland) can be named.

Numerous foreign companies have found Estonia to be a highly attractive location. Companies partly or wholly owned by foreigners account for one-third of Estonian GDP and over 50 percent of the country`s exports. As of March 31, 2007, the Scandinavian countries – Sweden with 53.1% and Finland with 20.8% are the biggest source of foreign direct investment in Estonia, followed by Norway with 2.3%. The major sectors of investment have been real estate and renting (29.8%), financial intermediation (28.1%) with manufacturing having 17.5%.

The following Figures display the FDI flows into the Baltic countries:

116

FDI in Estonia (Mil. EUR) 2002 2003 2004 2005 2006

Total 307 822 775 2254 1341

Manufacture of medical, precision and optical instruments, watches and clocks : 1 8 5 :

Total metal and mechanical products 43 -7 8 22 :

FDI in Latvia (Mil. EUR) 2002 2003 2004 2005 2006

Total 270 272 517 573 1339

Manufacture of medical, precision and optical instruments, watches and clocks 9 2 3 -3 :

Total metal and mechanical products 0 0 0 0 :

FDI in Lithuania (Mil. EUR) 2002 2003 2004 2005 2006

Total 771 160 623 826 1448

Manufacture of medical, precision and optical instruments, watches and clocks 1 11 11 2 24

Total metal and mechanical products : : 1 4 5

Figure 61 FDI into Estonia, Latvia and Lithuania

Source: Eurostat

Since the amount of FDI is almost double in Lithuania and Estonia the size of FDI in Latvia, the latter is clearly an outsider according to this criterion. However, since in Lithuania FDI has been more manufacturing-oriented, Lithuania seems to be more attractive from this perspective. As to the focus within countries from FDI perspective, we see that in recent years Estonia received more investment into metal industries, whereas Latvia and Lithuania more into electronics industry on the example of medical, precision and optical instruments.

117

10.1.2 Customer Attractiveness Current State Ranking To conclude, in Sweden industry takes part of 29% of the total value added. Estonia is the most similar with almost 29%, followed by Lithuania (25%) and finally Latvia (21%). The positive factor is that the case company’s potential customer industries have been developing and growing in all three countries which reflects their ability to restructure, find markets and customers as well as adopt new technologies and develop new products; still the industry in Sweden is approximately 30-40 times bigger.

The conclusion is that for the case company in the electronic (DL) industry Lithuania is the most attractive due to number of companies. Estonia is expected to have fewer but bigger companies. The same concerns more specific DL33 industry, but the number of companies is higher in Latvia this time.

In DJ industry Lithuania is the leader in terms of number of companies, but according to turnover all three countries show similar results. However, when looked in more detail, according to turnover Estonia seems to be more attractive, followed by Lithuania and Latvia. Thus Lithuania is given priority number one due to bigger number of companies, Estonia is given priority number two since it shows better financial results and Latvia is number three in the list.

The totals are assigned the following way: Lithuania clearly leads on all indicators. Since Estonia shows better results on DJ industry it is graded higher than Latvia. Because the industries were found to be 1/30 of the size in Sweden or even smaller, we assign the following country attractiveness labels: Moderate for Lithuania and Low for Estonia and Latvia.

Customer Potential Latvia Lithuania Estonia Attractiveness Indicator DL Industry 2 1 2 DJ Industry 3 1 2 FDI Level 2 1 3 Total Current Attractiveness 3 Low 1 Moderate 2 Low Figure 62 Customer Potential attractiveness ranking

Source: Own

118

10.2 Future Market Influencers In this section we consider factors from the organizational fields that surround industries that are potential case company’s customers in order to predict their future performance and thus reveal if major changes are expected in the next five years.

10.2.1 Labor market for Case Company’s Customer Industries In our country analysis we discovered that for industries that are potential case company’s customers, rapid wage raises is a serious issue. This especially concerns low skilled labor since highly qualified specialists receive much higher wages and do not grow at such a pace.

The influencer from the labor market perspective for industry development is growing salaries especially for low skilled employees.

The countries exhibited some scarcity when it comes to the employment, however the situation can be called tight but not critical. Instead a lack of highly qualified, educated university graduates is apparent.

The labor market is influenced by the education system. In none of the countries the state of education has been found to be on an adequate level for finding graduates that would be well qualified for engineering industries that are potential case company’s customers, like electronics or metal processing. Lithuania seems to be in the more beneficial position when it comes to laser production industry.

The influencer is the supply to the labor market graduates of poor quality of and insufficient quantities especially in Latvia and Estonia with situation somewhat better in Lithuania.

10.2.2 Government: Support for the Industry Our country analysis concludes that in the Baltics there is a potential for the engineering industries since major share of the funds planned till the year 2013 are directed to support high value added industries, export-oriented industries, introduce new technologies and increase knowledge level of employees.

The outcome however depends largely on how efficiently these funds will be used. In Latvia, for example, bureaucratic issues are impeding successful acquisition of the funds by the companies.

119

According to Foresight study (2007, p.10-11) a problem that is not extensively or exhaustively discussed is the use of EU funds. Lithuania, Latvia and Estonia receive the largest financial allocations from the EU budget per capita; however, these funds are usually used inefficiently: EU funds are allocated for solving short-term economic problems rather than addressing long-term problems (e.g. technological, social changes, social reforms). We, however find that in Lithuania potential case company’s customer industries are rather successful in acquiring funds and therefore probability that the funds will be used efficiently is higher for this country.

From the funding perspective the availability of EU Funds for developing technologies, products and educating workforce is an influencer for the development of the potential case company’s customer industries.

All three countries are experiencing a major slowdown in their economies. Therefore the governments will be forced to revive the economies and support export industries as the internal demand almost freezes. We forecast that favorable changes in the legislation regulating exports in the Baltic countries.

Support of export industries will be an influencer for the case company’s potential customer industries to develop.

10.2.3 R&D Institutions and Cooperation with the Industry Despite the fact that that expenditure on research and development in the countries have been increasing, we can conclude that current state of expenditure on R&D is insufficient. The situation is somewhat better in Estonia with GERD of 1.14% with other two countries being much lower. For comparison, In Sweden in 2006 the same indicator stood at 3.73% level.

120

Figure 63 Gross domestic expenditure on R&D (GERD)

Source: Eurostat

Overall from our country descriptions it can be concluded that the EU financing for the upcoming five years is quite sufficient to ensure that improvements in the R&D fields would have an impact on the industry competiveness. Latvia witnesses the lack of focus for the science development and cooperation between the researchers and the industry is not on a high level. The situation is a bit better in Estonia and Lithuania. However, it is expected that available financing will force the industry to communicate with R&D institutions much closer.

Developing R&D institutions and ensuring cooperation of industry with R&D institutions is the driving force for the industries to develop.

Now we separate the influencers based on their impact as regards the time span – short term (with an impact during the years 2008-2012) and medium term (after the year 2012) as depicted in the table:

Short Term Influencers Medium Term Influencers Wage growth Education system reform, Industry-Education Institutions Cooperation Support for Export Industries EU Fund Usage Development of R&D sector and Industry and Science Cooperation Figure 64 Industry influencers

Source: Own

121

10.2.4 Short-term impact

10.2.4.1 Wage growth and Export Support The growth of labor wages as well as other costs like energy costs for example will force companies to modernize their technologies and become more knowledge-intensive or quit due to loss of their competiveness. Thus part of low-tech companies unable to invest in development will be forced to stop operations or move to lower-cost countries. This, however, will not have a major effect since majority of companies in the industries have modern equipment already by now. This negative effect will be counterbalanced by the fact that exports will be stimulated by the government to “warm” the economies and since industries that are potential case company’s customers are extremely export- oriented it would have a positive impact on them. Moreover, the companies are expected to find new markets to succeed in the short term. As a result in the short term no major change of the potential of the industries is expected – the forecast for growth is neutral or weak growth.

10.2.5 Medium-term impact

10.2.5.1 Education System Reform, Development of R&D and Cooperation with Industry In five years the impacts of EU fund usage, R&D institution development and cooperation and education system reforms will reveal the results. Currently there is a strong drive for the positive scenario to happen – industries are in need of qualified graduates, new technologies and products and at the same time EU Funds are providing wide possibilities. We forecast that Education Ministries will be forced to reconsider current approach to engineering education and improve the situation, which will give its fruits no earlier than in five year time. The new technologies introduced, management information systems installed and products developed (like complete products, systems, instead of currently common spare parts) will enable strong growth for industries that are potential case company’s customers. We forecast with high probability positive development in all three countries. However Lithuania and Estonia are assigned with Strong Positive development forecast and Latvia Moderate Positive development forecast due to current signs of inefficiencies in EU fund usage, crisis in education and R&D institution sector that raise concerns that this country will be able to fully benefit from industry drivers identified.

122

10.3 Aggregated Customer Potential Attractiveness and Implications The following table summarizes the product market attractiveness factors.

Customer Potential Latvia Lithuania Estonia Attractiveness Indicator TOTAL Current Attractiveness 3 Low 1 Moderate 2 Low Expected Short Term Change Neutral to Weak Neutral to Weak Neutral to Weak Effect Positive Positive Positive Expected Medium Term Change Moderate Positive Strong Positive Strong Positive Effect TOTAL Customer Potential 3 Low 1 Moderate 2 Low Attractiveness Rank Figure 65 Total customer potential attractiveness ranking

Source: Own

The overall conclusion according to the table above is that the priority Nr. 1 is assigned to Lithuania, next the attention of the case company should be turned to Estonia (Nr. 2) and Latvia is a priority Nr. 3 when the countries are evaluated from the perspective of finding potential customers now and in the future.

Thus we have answered the second question put forward.

What are the current state and the future potential of the engineering industry markets in the Baltics and what forces will shape and influence it in the future?

123

11. The Case Company’s Establishment and Matching the Environment

This Chapter combines the “Customer Potential Attractiveness” findings with the “Doing Business Attractiveness” findings in order to ensure that the potential customers are reached and the case company establishes its presence in the Baltics in the most effective way from “Doing Business” perspective. The entrance characteristics are discussed here as well. Moreover, we recommend how the gap between Swedish and Baltic markets should be overcome, suggesting the matching strategy.

The following table summarizes the Customer Potential Attractiveness of the three countries.

Customer Potential Latvia Lithuania Estonia Attractiveness Indicator TOTAL Current Attractiveness 3 Low 1 Moderate 2 Low Expected Short Term Change Neutral to Weak Neutral to Weak Neutral to Weak Effect Positive Positive Positive Expected Medium Term Change Moderate Positive Strong Positive Strong Positive Effect TOTAL Customer Potential 3 Low 1 Moderate 2 Low Attractiveness Rank Figure 66 Total customer potential attractiveness ranking

Source: Own

124

And below are country rankings based on the Doing Business indicators for the case company.

Doing Business Attractiveness Indicator Latvia Lithuania Estonia Country Culture and Business 1 1 1 Total Economic Stability 3 2 1 Political System 1 1 1 Total Legal System Attractiveness 1 2 1 Education System Attractiveness 3 1 2 Labor Market Attractiveness 1 2 3 Financial Market Attractiveness 1 2 3 Corruption Level Attractiveness 2 2 1 Tax System Attractiveness 1 3 2 TOTAL “DOING BUSINESS” 1 (14) 3 (16) 2 (15) ATTRACTIVENESS Figure 67 Doing Business Attractiveness total ranking

Source: Own

10.4 Entry Strategy This section concerns the entry mode, entry node and the last factor is the entry role which describes the commercial role. The mode of entry we recommend for the case company is a subsidiary in the Baltic markets. The business that the case company is in requires a lot attention to the customer, interaction, providing very customized solutions. Even more so in the Baltic markets, where customers will have to be educated on the products of the case company. Along with cultural gap this would be difficult to manage from the Swedish office. Moreover, the industry of selling high performance material products is so specific that finding appropriate agent is rather unrealistic. Since the case company in the Baltic will be a subsidiary of a Swedish business we see relationship with the customers as a dyad. The company will play a role of seller (exporter) using its office in the sales markets.

According to our findings above, based on the markets current volume and potential, Lithuania would be the most attractive place to start case company’s activities. The second market in terms of customer potential attractiveness is Estonia and finally Latvia. The overall market attractiveness is 125 still moderate in Lithuania and Low in Estonia and Latvia (for example, there are just 10 companies in laser production in Lithuania, which is one of the most promising industries). Moreover in the next five years we do not forecast substantial changes in the market size (Neutral to Weak Positive growth is forecasted). Thus because of relatively low number of companies in all three countries the most beneficial for the case company would be to establish a regional office and cover all three Baltic States, devoting priority attention to Lithuania, followed by Estonia and Latvia.

After five years given positive developments in the markets breakthroughs can be expected and the level of market attractiveness might increase substantially for the case company. This issue will be dealt with the following way: if the case company establishes themselves during this five year term, then till the time when positive changes are expected in the markets, the local team will become experienced and prepared for further market growth attracting required resources to address the positive changes in the market.

However our suggestion of establishing a regional office might seem contradictory since cultural differences have been identified between the Baltic States. As Avasalu, Tammar, (Interview, 10.04.2008): say ”Swedish businessmen still see the Baltics as one market, which is a big mistake” and this view is supported by many of the experts we interviewed. We argue that this is a specific and not so common case when Baltics can be treated as a single market. Below we present a matching strategy the case company has to apply to deal not only with differences between Swedish and Baltic markets but also to deal with differences within the Baltic markets.

The key of matching strategy for the case company lies in the establishing a subsidiary. We recommend that the subsidiary manager is chosen according to following suggestions in order to overcome the gap. First local management will serve as a bridge between Swedish and Baltic business environments and cultures. The chosen person has to have technical background and good local market knowledge and contacts, preferably experience of working throughout the Baltics. Extensive training and communication with the Swedish office will ensure that Baltic manager understands and shares values and beliefs of the case company in Sweden. Moreover, Swedish office will have to educate and train the Baltic manager substantially since the quality of technical education was found to be inadequate in the Baltics and this type of business is still uncommon in the Baltics so the case company should not expect finding a completely prepared employee. At the same time it will have to be ensured that proper information transfer is in place from the Baltics to Sweden to ensure that Swedish office builds experience of working in the Baltics. Good command of English is 126 essential to ensure successful communication between the offices. Since the operations of the local office have to be ensured, the person has to have management skills and knowledge in running a company (dealing with tax authorities for example). Moreover, it is advised to employ a younger person to ensure that cultural issues stemming from the Soviet times discussed in our cultural analysis are minimized.

As Bernheim, (Interview, 08.04.2008) says: There is a big difference in the generations. Everyone will say, don’t hire anyone above 35.

Finally, regarding the Swedish – Baltic office cooperation, we suggest that the Baltic manager is treated as a partner, which sometimes is an issue as confirmed by majority of our experts

Sprängare, (Interview, 3.04.2008) states: Swedish businessmen act arrogantly and tend to overestimate Sweden’s importance. They see Baltic people as smaller and poorer cousins, as a back yard. People here do not accept being told what to do; they expect being treated as partners.

In return, we expect that the case company will be satisfied with the operations of the Baltic office since the people in the Baltics were found to be dedicated and hard working. Moreover, the operations in the region might well bring new perspectives and suggestions to the case company’s business.

We organized about a year ago a seminar for Crown Princess of Sweden about economic situation in the Baltics and we brought experienced investors Kenneth Bengtsson from ICA and Kenneth Karlberg from TeliaSonera. They told that when they started in the Baltics they brought know-how and all technologies. Now new developments do not happen in Sweden, they happen in the Baltic States, so all the changes they have – those came from Latvia, Lithuania and Estonia, from the way businesses are run here. That shows that there’s a tremendous potential. (Ljungdahl, Interview, 01.04.2008)

When it comes to dealing with the differences within the Baltic countries, the main suggestion is to employ a Russian speaking person. In such a specific industry where the case company finds itself, most contacts would be possible without knowledge of the local languages. Majority of people speak Russian or English in the Baltics. The specifics of the business do not involve any language sensitive issues since it is not a mass industry. Moreover, to achieve the best results, the Baltic manager should have good understanding of the cultural issues that we identified in the paper.

127

Despite the fact that not so many substantial differences between doing Business in the Baltics were found, with the identified ones in most cases there will be no change matching strategy or the case company will have to comply. It is so because political and legal institutions as well as financial markets were found to be of satisfactory level for the company. Not so favorable situation in the labor market or education field cannot be influenced by the case company since it will be a rather small company, so it will have to comply with it. The local office will enable overcoming the cultural gaps and other local specifics.

The question remains to be answered where to establish the regional office geographically. The Doing Business attractiveness analysis suggests us that the best place to establish the company for the case company in the Baltics is Latvia, followed by Estonia and finally Lithuania, however we discovered that the differences are really minimal between the countries and often “soft factors” play more important role when choosing between them. Therefore we suggest two alternative strategies for the case company as our conclusion of the two attractiveness analysis and recommendation to establish a single regional Baltic office as a subsidiary.

1) The first alternative would we as close as possible to the most promising market and establish a company in Lithuania, where customer potential was found to be the most promising. Depending on the outcome of Lithuanian operations, the Vilnius office would gradually turn their attention to Estonia and finally Latvia. The fact that Lithuania has a better situation with technical education than the other two Baltic States, finding appropriate employees might be simpler in Lithuania. The office should be established in Vilnius since many potential customer industries are found around the city and the flight connections to Stockholm, Riga and Tallinn are available there. In the beginning phase when the training would take place and the efforts will be concentrated on Lithuania the Baltic manager can work from the Swedish office to ensure the information sharing is at maximum level in the beginning especially. Transportation issues should not be so important at that period since there will be just several customers at that time.

2) The second alternative would be follow suggestion of Doing Business attractiveness and establish the office in Latvia. However from the activity point of view start with Lithuanian companies and then Estonian and finally Latvian. From the infrastructure point of view it might be easier since Riga is in the middle, Riga airport is the most developed and it is just several hour drive by car to Vilnius and Tallinn. Since Latvia has the biggest percentage of Russians, it would be easier to 128

find an employee from the language perspective, though a bit more difficult from technical education perspective than in Lithuania. Additional plus of establishing in Riga is that if in the future the case company has plans to start activities in Russia, Ukraine and Belarus, Latvia would be considered as the best starting point due to higher proportion of Russian speaking people as compared to Lithuania and Estonia and better relationships between Russia and Latvia as compared to relationship between Russia and Estonia.

The case company can choose between the strategies presented above depending on which of the presented factors are more appealing to the company. Thus we have answered the last question put forward in this paper.

Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States?

Addressing all three research questions we have managed to solve the main problem of the current study:

How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

129

11 Conclusions Our research addressed the following problem: How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States? We based our research on the particular case company in high technology sector.. In order to solve the research problem we had to answer three research problems.

By performing the environmental analysis in Latvia, Lithuania and Estonia we were able to identify the attractiveness of establishing a business in each of the countries which addressed our first research question: What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment? As a result of this analysis we have created country ranks to reflect attractiveness of doing business in each of the countries. The major differences with Sweden were found as regards the country culture as well as some indicators as corruption turned out to be worse than in Sweden; however majority of indicators important for a Swedish investor were found to be on an adequate level and mo major differences between the countries on Doing Business attractiveness were exhibited. Latvia scored slightly better on indicators such as Labor market attractiveness and Tax system attractiveness among the Baltic States; therefore it was ranked highest, followed by Estonia and Lithuania.

Second part of our analysis addressed analysis of the potential for the case company in the Baltics from the perspective of current state of potential markets and their development perspectives. We have been answering the following question: What is the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries? We discovered that industries of Manufacture of electrical and optical equipment and Manufacture of basic metals and fabricated metal products are the most promising in the Baltic markets. The most activity was found in Lithuania, followed by Estonia and finally Latvia. However, due to small size of the industries relative to Sweden Lithuania was marked as Moderate attractiveness country and Estonia and Latvia as Low attractiveness. Wage growth and support of export industries were found to be influencing forces on the industries in the short term. Their impact was found to be neutral or weak positive in the next five years. The following long term influencers were discovered: Education system reform, Industry-Education Institutions Cooperation, EU Fund Usage, Development of R&D

130 sector and Industry and Science Cooperation. The long term effect is forecasted as a Strong Positive for Lithuania and Estonia and Moderate Positive for Latvia.

Our last part of analysis addressed the last research question: Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States? The suggested entry mode for the company is subsidiary to ensure direct contact with customers. Due to the size of the markets it is suggested that the case company cover all three states using one regional office. Combining this fact with attractiveness of the markets from the perspective of doing business with the perspective of potential case company’s customer industry attractiveness two establishment alternatives were proposed. One is to establish the office in Lithuania to start in the market with the biggest potential and move to the other two markets later. The other alternative would be to establish the office in Latvia due to convenience in geographical position and a possible strategic base for future eastern expansion. The local management would play a major role in dealing with cultural differences and other local peculiarities identified. The paper suggested requirements to the manager of the Baltic branch one of those being knowledge of Russian that would enable communication in all Baltic States. To ensure efficient operations tight relationship should be kept between Latvian and Swedish offices to ensure mutually beneficial knowledge exchange.

11.1 Suggestions for Further Research Our research focused on the country and industry levels. At the request of the case company we did not interview potential customers, i.e. companies in the industry. However, one could embark on research at the company level. Such research could include individual companies’ perspectives on the organizational fields and societal sectors. For example, the research could address the company perspective on industry development, government support, R&D in industry, corruption etc. The company perspective on the country development could be useful as well. Company level analysis would enable the case company to create for example pricing strategy in the region and decide on the entry process that is left outside of this paper’s scope.

Another suggestion for further research includes a continuation of the prediction stage of the analysis to include a more long term analysis, since our paper concentrates on the short to medium term analysis. 131

The scope of the research could also include an internal company analysis in which one analyzes the internal resources and capabilities of the company. The internal analysis and the external analysis in collaboration are used to form the business marketing strategy leading to a competitive advantage and societal advantage for the company. We look forward to additional research that our work has inspired.

132

12 References

Literature

Grant, R.M. (2008) Contemporary Strategy Analysis: Sixth Edition . Malden, MA: Blackwell Publishing Limited.

Jansson, H. (2007) International Business Marketing in Emerging Country Markets: The Third Wave of Internationalization of Firms. Cheltenham, UK: Edward Elgar Publishing Limited.

Jansson, H. (2007) International Business Strategy in Emerging Country Markets: The Institutional Network Approach. Cheltenham, UK: Edward Elgar Publishing Limited.

Merriam, S. B. (1998) Qualitative Research and Case Study Applications in Education. San Fransisco: Jossey-Bass Inc.

Yin, R.K (1984) Case Study Research : Designs and Methods. Beverly Hills, CA: Sage Publications, Inc.

Yin, R.K. (2003) Case Study Research : Third Edition. Thousand Oaks, CA: Sage Publications, Inc.

Young S., Hamill, J., Wheeler, C., and Davies, J.R. (1989) International Market Entry and Development: Strategies and Management . Englewood Cliffs, NJ: Prentice Hall.

Journals/articles

Ghauri, P. and Holstius, K. (1996) ‘The role of matching in the foreign market entry process in the Baltic States’ European Journal of Marketing , Vol. 30 No.2, pp. 75-88.

Hudson, M. (2008) ‘Fading Baltic Miracle’ International Economy ,Winter 2008, pp. 74-78.

Jansson, H., Johanson, M., and Ramström, J. (2007) ‘Institutions and business networks: A comparative analysis of the Chinese, Russian and West European markets.’ Industrial Marketing Management , vol. 36, pp. 955-967.

Lankhuizen, M. (2000) ‘Shifts in foreign trade, competiveness and growth potential: from Baltics to ‘Bal-techs’?’, Research Policy , vol. 29, pp. 9-29.

Širaliova, J. and Angelis, J. (2006) ‘Marketing strategy in the Baltics: standardize or adapt?’ Baltic Journal of Management , Vol. 1 No. 2, pp. 169-187.

133

Internet sources

Invest in Estonia www.investinestonia.com

Lithuanian Development Agency http://www.lda.lt/en/index.html

Investment and Development Agency of Lithuania http://www.liaa.gov.lv/?object_id=789

LINPRA-Engineering Industries Assoc. of Lithuania http://www.linpra.org/index.php/en/

Latvian Electrical Engineering and Electronics IA http://www.letera.lv/info.html?l=3

The Association of Computer Technologies of LV http://www.itnet.lv/

Federation of Estonian Engineering Industry www.emliit.ee

World Factbook https://www.cia.gov/library/publications/the-world-factbook/

Other sources

Doing Business Project. (2007) ‘Doing Business Estonia 2008.’ Washington D.C.: World Bank Group.

Doing Business Project. (2007) ‘Doing Business Latvia 2008.’ Washington D.C.: World Bank Group.

Doing Business Project. (2007) ‘Doing Business Lithuania 2008.’ Washington D.C.: World Bank Group.

‘Electro-technical and Electronics Industry’ (2004) Tallinn: Federation of the Estonian Engineering Industry.

‘Estonia-Your New Source of IT Solutions.’ (2002) Tallinn: Discover Estonia.

European Commission Directorate-General for Economic and Financial Affairs. (2008) ‘Economic Forecast Spring 2008.’

The Heritage Organization. (2008) ‘2008 Index of Economic Freedom.’

International Bank for Reconstruction and Development. (2007) ‘Doing Business 2008 Latvia.’ World Bank Group: Washington DC.

International Monetary Fund. (2008) ‘World Economic Outlook: Housing and the Business Cycle’ Washington DC: The International Monetary Fund.

Investment and Development Agency of Latvia. (2007) ‘High Technology in Latvia’ Riga.

Kaarli, R. and Laasberg Tiit. (2001) Research and Development in Estonia 1996-1999: Structure and Trends. Tallinn: Research and Development Council of Estonia. 134

Klemm, H. (2007) ‘Estland, Lettland, Litauen, Konjunkturumfrage-Lage und Erwartungen der Unternehmen mit deutscher Beteiligung in den baltischen Staaten.’ Deutsch-Baltische Handelskammer in Estland, Lettland, Litauen (AHK).

Klavins and Slaidins Lawn. (2005) ‘Doing Business in Latvia.’ Riga.

KMPG in the Baltics (2005) ‘Investment in the Baltics.’

Laming, M. (2007) ‘Economic Survey of Estonia, 2006.’ Tallin: Ministry of Economic Affairs and Communications, Ministry of Finance.

Latvian Electrical Engineering and Electronics Industry Association. (2004) ‘Development Strategy of Electronics and Electrical Engineering Sector in Latvia.’

Lepik & Luhaäär Lawin. (2005) ‘Guide to Doing Business in Estonia.’

Ministry of Economics of the Republic of Latvia. (2007) ‘The Economy of Latvia: A Macroeconomic Review.’ Riga.

Ministry of Finance of Estonia. (2008) ‘Summary of the Spring 2008 Forecast.’

Ministry of Foreign Affairs and Statistics Estonia. (2007) ‘Minifacts about Estonia.’

Ministry of Regional Development and Local Government of the Republic of Latvia. (2006) ‘Latvian National Development Plan 2007-2013.’ Riga.

PKF Accountants and business advisers. (2007) ‘Doing Business in Estonia.’

Republic of Estonia. (2007) ‘Updated Convergence Programme’ Tallinn.

Riives, J. (2006) ‘Metnet: Network of Estonian Machine-building, metal-working, apparatus building and electronics companies.’ Tallinn: Federation of Estonian Engineering Industry.

Statistics Estonia. (2008) ‘Aegamööda Asi Kaunis.’ Tallinn.

Transparency International. ‘Corruption Perceptions Index Regional Highlights: EU and Western Europe.’ Berlin.

World Economic Forum. (2007) The Global Competitiveness Report 2007-2008.

Interviews

Estonia:

Enterprise Estonia, 11 th of April 2008, Marek Mägi, Deputy Director, Investment and Trade Development Division

135

Federation of Estonian Engineering Industry, 9 th of May 2008, Aleksei Hõbemägi, Development Director

Swedish Chamber of Commerce in Estonia, 10 th of April 2008, Göran Broden, Chairman, MCM and Kristiina Sikk, Ombudsman

Swedish Trade Council in Estonia, 10 th of April 2008, Henrik Avasalu (Project Leader) and Fredrik Tammar (Consultant)

Latvia:

Investment and Development Agency of Latvia, 1 st of April 2008, Ieva Stukle, Investment Project Manager, Investment and trade promotion department, Investment promotion division and Iveta Strupkaja, Project Manager, Investment and trade promotion department, Export promotion division

Latvian Electrical Engineering and Electronics Industry Association, 3 rd of April 2008, Inese Cvetkova, Managing Director

Swedish Chamber of Commerce in Latvia, 1 st of April 2008, Gunnar Ljungdahl, Chairman

Swedish Trade Council in Latvia, 3 rd of April 2008, Erik Sprängare, Trade Commissioner

Lithuania:

Engineering Industries Association of Lithuania, 8 th of April 2008, Jonas Garjonis, Project Manager

Vilnius Institute of Physics, 7 th of April 2008, Gedeminas Raciukaitis, Head of Laboratory for Applied Research, Consultant on laser technology with Ekspla Ltd.

Swedish Chamber of Commerce in Lithuania, 8 th of April 2008, Carl Bernheim, Chairman

Swedish Trade Council in Lithuania, 7 th of April 2008, Vidas Korsakas, Project Leader

136

13 Appendix

Table of Figures

Figure 1 Imports from Sweden, MEUR ...... 9 Figure 2 Exports to Sweden, MEUR ...... 9 Figure 3 Research Stages ...... 14 Figure 4 The Basic Institutions Model ...... 16 Figure 5 Matching Strategies ...... 19 Figure 6 The Basic Institutions Model ...... 28 Figure 7 Growth rate of GDP over previous year in Latvia ...... 34 Figure 8 Annual average rate of inflation in Latvia ...... 35 Figure 9 Breakdown of University/College Students by Fields of Studies, academic year 2006-07 in % ...... 38 Figure 10 Unemployed persons as a share of the total active population in Latvia ...... 40 Figure 11 Average Monthly Labor Costs, EUR ...... 41 Figure 12 Labor productivity per person employed in Latvia ...... 42 Figure 13 Growth rate of GDP over previous year in Lithuania ...... 53 Figure 14 Annual average rate of inflation in Lithuania ...... 53 Figure 15 Unemployed persons as a share of the total active population ...... 59 Figure 16 Average Monthly Labor Costs in Lithuania, in EUR...... 60 Figure 17 Labor productivity per person employed in Lithuania...... 61 Figure 18 Growth rate of GDP in Estonia ...... 69 Figure 19 Annual average rate of inflation in Estonia ...... 69 Figure 20 Unemployed persons as a share of the total active population in Estonia ...... 73 Figure 21 Average monthly labor costs in Estonia, in EUR ...... 73 Figure 22 Labor productivity per person employed in Estonia...... 74 Figure 23 Employees in E&E sector in Estonia, 2004 ...... 75 Figure 24 Basic Institutions Model with Institutions to evaluate Doing Business Attractiveness ...... 81 Figure 25 Country Culture Attractiveness ranking ...... 84 Figure 26 Growth rate of GDP ...... 85 Figure 27 Growth rate of GDP comparison ...... 86 Figure 28 Annual average rate of inflation ...... 87 Figure 29 Annual average rate of inflation comparison ...... 88 Figure 30 Doing Business Attractiveness Indicator: Economic Stability...... 89 Figure 31 Global Competitiveness Index: Macroeconomic Stability ...... 89 Figure 32 Doing Business Attractiveness Indicator: Political System ...... 90 Figure 33 Doing Business 2008 selected indicators ...... 91 Figure 34 Doing Business attractiveness rank, legal system ...... 92 Figure 35 Tertiary graduates in science and technology per 1000 people aged 20-29 years ...... 93 Figure 36 Doing Business Attractiveness, Education System ...... 94 Figure 37 Unemployed persons as a share of the total active workforce, 2007 ...... 95 Figure 38 Average Monthly Labor Costs in 2006, EUR ...... 96

137

Figure 39 Labor productivity per person employed ...... 96 Figure 40 Doing Business 2008 indicator, Employing Workers ...... 97 Figure 41 Doing Business Attractiveness Indicator, Labor Market ...... 98 Figure 42 Doing Business 2008 indicator, Getting Credit ...... 98 Figure 43 Doing Business Attractiveness Indicator, Financial Market ...... 99 Figure 44 Corruption scores ...... 100 Figure 45 Corruption Level attractiveness ...... 100 Figure 46 “Doing Business 2008” indicator, paying taxes ...... 101 Figure 47 Doing Business Attractiveness Indicator, tax system attractiveness ...... 101 Figure 48 Aggregated Doing Business Attractiveness Indicators ...... 102 Figure 49 Basic Institutions Model: Selection of Institutions influencing case company’s customer industries ...... 104 Figure 50 Manufacturing turnovers, million EUR, 2005 ...... 105 Figure 51 Structure of manufacturing industries by value added ...... 106 Figure 52 Gross value added of manufacturing, 2006 ...... 107 Figure 53 Manufacturing sectors in Estonia ...... 108 Figure 54 DL Manufacture of electrical and optical equipment, 2005 ...... 112 Figure 55 Growth of DL industries, index ...... 112 Figure 56 DL 33 Manufacture of medical, precision and optical instruments, watches and clocks, 2005 ...... 113 Figure 57 Growth of DL 33 Industry, index ...... 113 Figure 58 Manufacture of basic metals and fabricated metal products, 2005 ...... 114 Figure 59 Growth of DJ industry, index ...... 114 Figure 60 Turnover of DJ industries ...... 115 Figure 63 FDI into Estonia, Latvia and Lithuania ...... 117 Figure 64 Customer Potential attractiveness ranking ...... 118 Figure 65 Gross domestic expenditure on R&D (GERD) ...... 121 Figure 66 Industry influencers ...... 121 Figure 67 Total customer potential attractiveness ranking ...... 123 Figure 68 Total customer potential attractiveness ranking ...... 124 Figure 69 Doing Business Attractiveness total ranking ...... 125

138

13.1 Interview Questions – Industry level A. History and current state 1. How has the industry developed over the past 5 years? What were the major factors that shaped industry development over that time? 2. How has the industry performed over last 5 years (for ex. turnover)? What are the financial performance results for the industry in 2007? 3. If the industry has a long history - how well was the industry able to adapt to market economy? 4. What is competitive advantage of the industry? Is competitive advantage sustainable? 5. How many companies are active in the industry? Are those local / foreign owned? What are the trends – is number of companies growing / decreasing? Are the contact details available? Are major financial results of the companies available? 6. How many employees are employed in the industry? What has been the trend over 5 last years? 7. What is situation in the labor market in the industry? 8. Does education system provide adequate level of knowledge and enough employees for the industry? 9. What are the industry’s main customers? 10. What percentage of the industry’s production is exported? What are the main markets (both local and export markets)? 11. What are the major factors that deter industry development? What have been the major problems of the companies in the industry? 12. How do companies see support from the state and governmental authorities? Doesn’t it hinder development? 13. How strong is corruption in the industry? How do companies deal with it? 14. How well is legislation developed for the industry? 15. Does the industry use funds available from international and local organizations? 16. Is the industry satisfied with the level of R&D in the country? 17. Is the industry satisfied with the innovation level of the country? 18. What are the specifics of business culture in the industry? 19. Whom would you name as success stories in the industry? What are their success determinants?

139

20. Question for LT: Lithuania aims to be a “Knowledge Economy” – does experience of the industry support it? 21. What is the overall mood in the industry now? Especially in the light of slowing of growth and increasing inflation? – What are the most recent trends? 22. Is this a good time for a foreign company to enter this industry?

B. Future developments 23. What is your vision of industry’s future for the upcoming 5 years? What major developments are expected? 24. What are the most important factors that WILL influence industry development during next 5 years? 25. What is expected industry growth rate? What is expected industry size in 5 years? 26. How is demand expected to change for the products of the industry in the local / foreign markets? 27. Are any important changes expected in the political arena that might influence the activity of the industry? 28. What are the forecasts for development in labor market for the industry? 29. What are the forecasts about availability of funds and other support in the 5 coming years? 30. What are the forecasts about the R&D activity in the 5 coming years?

140

13.2 Interview Questions – Country level

C. History and current state 1. Are statistics available for the period 2002 – 2007 about Swedish companies’ activity in the country? Is there split by type of activities like exporting, opening subsidiary or joint venture etc? 2. In which sectors is most of the Swedish companies’ activity taking place? 3. What are the major reasons Swedish companies choose this country among three Baltic States? What are advantages of the country? What are the disadvantages? 4. Are leaflets / other materials available about the attractiveness of the country for investors? 5. What similarities / differences Swedish companies see compared with doing business in the homeland? 6. Has there been a research made about satisfaction of Swedish companies with their business in the country, there problems, needs and future forecasts? 7. What have been the biggest problems of Swedish companies in the country? 8. What are said to be the major risks of working in this country? 9. What issues in the business culture have to be taken in mind if Swedish company decides to start doing business in the country? 10. What have been the major reasons for the Swedish companies to leave the country? 11. How do Swedish companies see support from the state and governmental authorities? Doesn’t it hinder development? 12. What is the attitude to the corruption in the country by Swedish companies? How do they deal with it? 13. How do Swedish companies see the legal system in the country? 14. Do Swedish companies feel protected by the state? 15. How do Swedish companies see support non-governmental organizations? Don’t they hinder development? 16. How do the Swedish companies perceive situation in the labor market? 17. How do Swedish companies see level of education of employees? 18. Are there success stories of Swedish companies that entered the production of high technology market? What is their experience, what determines their success?

141

19. Question for LT: Lithuania aims to be a “Knowledge Economy” – does experience of Swedish companies support it? 20. Do Swedish companies use the funds available from international and local organizations? 21. Are Swedish companies satisfied with the level of R&D in the country? 22. Are Swedish companies satisfied with the innovation level of the country? 23. What is the overall mood of the Swedish enterprises now? Especially in the light of slowing of growth and increasing inflation? – What are the most recent trends in entering/leaving the country?

D. Future developments 24. What is the forecast for the 5 years to come about Swedish company activity in the country? 25. What are the major factors that will determine the activity of the Swedish companies in the five coming years? 26. What major economic developments are expected in the 5 upcoming years? 27. Are any important changes expected in the political arena that might influence the activity of Swedish companies? 28. What are the forecasts for development in labor market? 29. Are any other reforms expected that might influence the activity of Swedish companies?

142

The University of Kalmar

The University of Kalmar has more than 9000 students. We offer education and research in natural sciences, technology, the maritime field, social science, languages and humanities, teacher training, caring sciences and social service.

Our profile areas in research are: biomedicine/biotechnology, environmental sciences, marine ecology, automation, business administration and informatics, but we have research proceeding in most subject areas of the University.

Since 1999, the University of Kalmar has the right to accept students in postgraduate studies and to examine doctors within the subject area natural sciences.

Baltic Business School, at the university of Kalmar Visiting address: Kalmar Nyckel, Gröndalsvägen 19 SE-391 82 Kalmar, Sweden Tel: +46 (0)480 - 49 71 00 www.bbs.hik.se

143