Tamara Galkina and Sören Kock Editors Taking your Business to Russia A Guidebook and Historical Overview for Entrepreneurs Forskningsrapporter från Svenska handelshögskolan Hanken School of Economics Research Reports 73 Helsinki 2014 Taking your Business to Russia. A Guidebook and Historical Overview for Entrepreneurs Key words: international entrepreneurship, Russia, Finland, SMEs © Hanken School of Economics & Tamara Galkina, Sören Kock and contributors 2014 Tamara Galkina and Sören Kock Hanken School of Economics P.O. Box 287, 65101 Vaasa, Finland Hanken School of Economics ISBN 978-952-232-255-5 (printed) ISBN 978 952-232-256-2 (PDF) ISSN-L 0357-5764 ISSN 0357-5764 (printed) ISSN 2242-7007 (PDF) Edita Prima Ltd, Helsinki 2014 iii PREFACE AND ACKNOWLEDGEMENTS We are very pleased to introduce this book, which is the result of a long collaborative research project between the Hanken School of Economics, Finland, and St. Petersburg State University, Russia. The book is a response to two calls: one from Finnish business practitioners to develop practical guidelines on how to establish and operate small businesses in Russia and the other from the academe to conduct more research on Russia as a turbulent market with high potential for small entrepreneurial firms. What makes this book different from existing guide books on how to conduct business in Russia? First, it targets a very specific audience; namely, Finnish entrepreneurs and business practitioners who plan to establish their businesses in Russia or who already have companies operating there. Thus, this work differs from other books written mostly by North American authors. We believe our target audience will benefit from this narrow focus as it addresses concrete problems typical for Finnish business people in Russia. We also hope that the results of our research will be employed for teaching purposes in business schools across Finland as, nowadays, many of them offer special courses on Russian business. Second, our research team comprises scholars from both Finland and Russia, which offers a dual perspective on this phenomenon. Third, the empirical part of this research is based on qualitative case studies, not on broad statistical analyses. This approach enabled us to go deeply into specific business cases and to perceive the challenges of running businesses in Russia through the eyes of entrepreneurs and managers. We hope that readers will find this approach useful for understanding their own business situations. This book would not have been possible without our partners’ help. We want to express our deepest gratitude to the Scandinavian Institute for Administrative Research (SIAR) for providing the grant for this project; we specifically want to thank Christian Junnelius, the chairman of SIAR, whose endless help and enthusiasm have facilitated this research. We also wish to thank the Finnish Foundation for Economic Education (Liikesivistysrahasto) that provided financial support for this joint research project. In addition, we wish to thank our respondents for sharing their experiences with us and for their willing participation in the research project. Our thanks also go to Alex Frost from Comword for editing the manuscript’s language. Tamara Galkina and Sören Kock 10.4.2014, Helsinki iv CONTENTS INTRODUCTION ........................................................................................... 1 PART 1 ENTERING RUSSIA ........................................................................ 5 1 ENTREPRENEURIAL CLIMATE .............................................................. 6 1.1 Global Entrepreneurship Monitor ...........................................................................6 1.2 International comparisons ......................................................................................6 1.3 Longitudinal trends ................................................................................................ 8 1.4 Entrepreneurial personality .................................................................................... 9 1.5 Experts’ evaluations .............................................................................................. 10 1.6 Ease of doing business .......................................................................................... 11 1.7 Global VCPE Country Attractiveness Index .......................................................... 14 1.8 RSSP surveys ......................................................................................................... 17 1.9 Investment attractiveness ratings of Russian regions .......................................... 18 2 FINNISH COMPANIES IN THE RUSSIAN MARKET: CULTURAL AND SOCIAL CHALLENGES .......................................................................... 21 2.1 Cultural differences in business: theoretical overview ......................................... 21 Hofstede’s cultural dimensions theory ............................................................. 21 Trompenaars’s and Turner’s cultural dimensions theory ................................. 23 Schwartz’s cultural value orientation theory ....................................................24 2.2 Empirical evidence of cultural challenges when entering the Russian market .... 25 Differences in power system and power distance .............................................26 Differences in power distribution ..................................................................... 27 Different attitudes to formal rules and truth .................................................... 27 Cultural differences in communication............................................................ 28 Different attitudes to planning and decision-making ...................................... 30 Differences in human resource qualities and human resource management .. 31 Challenges and institutional barriers to developing a business in Russia ........ 33 2.3 Practical implications of research findings ..........................................................34 Personality issues ..............................................................................................34 Behavioural issues ............................................................................................. 35 Communication issues ...................................................................................... 35 3 BUSINESS NETWORKING IN RUSSIA ................................................. 36 3.1 Network approach to foreign market entry...........................................................36 v 3.2 Challenges of entering Russian business networks .............................................. 37 Informal side of business relations ................................................................... 37 Network closeness for outsiders........................................................................39 Different perceptions of trust ........................................................................... 40 Different perceptions of written contracts ........................................................ 41 Language barrier ............................................................................................... 41 3.3 Implications for successful business partnership in Russia .................................42 4 VOICES FROM EXPERTS ....................................................................... 45 4.1 Other organisations supporting Finnish-Russian business cooperation. ........... 64 5 CONCLUDING REMARKS (PT. 1) .......................................................... 67 PART 2 HISTORICAL OVERVIEW ........................................................... 70 1 UNDERSTANDING RUSSIA .................................................................... 71 1.1 Between Vikings and Mongols ............................................................................... 71 1.2 Autocracy: from Tsar to President ........................................................................ 72 1.3 “Great Russia” and National Pride ........................................................................ 74 1.4 Always Limited Rights .......................................................................................... 74 1.5 Bureaucracy and Its Principles .............................................................................. 76 1.6 Collectivism vs. Individualism .............................................................................. 78 1.7 Formal Laws vs. Informal Rules ............................................................................ 81 1.8 Russian Orthodox Church .................................................................................... 82 1.9 A National Character of Russians? ....................................................................... 83 2 NEW RUSSIAN CAPITALISM (1985-2012) ........................................... 85 2.1 Soviet Legacy .........................................................................................................85 2.2 Gorbachev and Perestroika .................................................................................. 86 2.3 Rebirth of Private Business.................................................................................. 86 2.4 Yeltsin and the Hard Years of Reform ................................................................. 88 2.5 Putin and New Russian Capitalism ..................................................................... 89 2.6 “Rule of law” .......................................................................................................