Review of Economies in Transition Idäntalouksien katsauksia - PDF

Review of Economies in Transition Idäntalouksien katsauksia 1994 No Reprint in PDF format 02 Juhani Laurila Direct Investment from Finland to Russia, Baltic and Central Eastern European Countries:

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Review of Economies in Transition Idäntalouksien katsauksia 1994 No Reprint in PDF format 02 Juhani Laurila Direct Investment from Finland to Russia, Baltic and Central Eastern European Countries: Results of a Survey by the Bank of Finland Bank of Finland Institute for Economies in Transition, BOFIT ISSN Reprint in PDF format 02 Bank of Finland Institute for Economies in Transition (BOFIT) PO Box 160 FIN-001 Helsinki Phone: Fax: The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Bank of Finland. luhani Laurila Direct Investment from Finland to Russia, Baltic and Central Eastern European Countries: Results of a Survey by the Bank of Finland 1 Developments since the last survey The usefulness and significance of direct investments to Russia, Estonia and other eastern economies has been discussed and criticized from time to time from various angles. Finnish entrepreneurs have been blamed for being too slow to begin doing business in Russia in particular. Once they have done so, they have been blamed for investing too much in services instead of goods production, which is considered the more serious form of business. If nothing else, they are thought to bring in too little money to their respective host countries 1. To consider the validity of these allegations and to update the information content to the experiences of Finnish investors in Russia and the Baltic states, the Bank of Finland conducted a survey in April It was hoped that the data would enable us to check whether and how the intervening political events had changed the developments observed in the previous survey of April In the following, we analyze the results, focusing particularly on the data from Russia and Estonia. Data on firms with Finnish ownership henceforth (FFOs; the term covers both subsidiaries and associate companies) in the other Baltic and CEE (Central East European) countries was also obtained but it is used here only for reference purposes. Another reason for collecting data particularly on Finnish direct investment in Russia and Estonia is that Finland continues to be a major investor in these countries. In the period , Finland annually ranked from first to third (along with West Germany and Austria) in investment in the Soviet Union as measured by the number of registrations, excluding joint ventures with the CMEA countries. If measured by registered initial investments, Finland took fifth place. After the official separation of Estonia from the Soviet Union in August 1991, Finland became the number one investor country in Estonia as measured in numbers of firms, and second to Sweden as measured by the amount of initial investments. 1 About critical Russian views, see for instance Adrianov, Jakovleva, Lirov, Sadoshenko. See also the study on direct investment and public opinion in the FSU by Astapovich - Grigoriev, pp Inkeri Hirvensalo was consulted in planning the inquiry form and Arja Puukko processed the data. 3 Results of the previous survey are published in the Bulletin, Bank of Finland. March 1992, Vol. 66, No 3 (Laurila). 5 Table 1. Number of registrations of foreign owned firms in the Soviet Union (end-1989), Russia (mid-1993) and Estonia (end-1993), by country Soviet Union Russia Estonia end-1989, a mid-1993, b end 1993, c Finland 28 USA 1433 Finland 3365 Austria 26 Gennany 1141 Russia 850 West Gennany 26 UK 557 Sweden 730 Italy 14 Italy 511 Gennany 231 USA 13 Austria 475 USA 3 Switzerland Poland 438 Ukraine 75 UK 9 Finland 429 Denmark 62 Total Total Total - registered registered registered operating na - operating operating 2502 a PlanEconReport , Volume V, p. 14. b Jakovleva, Kuzmin c statistics received through Finland's Trade Center, Tallinn Even though international data was not available for comparisons, the increase of Finnish investment activity, as well as statistical data from other sources indicate that Finland is still one of the main investing countries in Russia and Estonia. According to the results of the 1991 survey, the most important receiver areas of the eastward direct investments were the Soviet Union and Estonia. The Soviet Union was dissolved in December 1991 and the process of fragmentation and decline of the economy of the area has continued ever since. Estonia declared her independence in August Since then, political and economic developments have been diverging both within the area of the former Soviet Union (FSU) and the eee countries. The Soviet Union welcomed joint ventures from abroad beginning in The new enterprise legislation of 1991 had a favourable effect, making organizational forms other than the joint venture - joint stock company, limited partnership cooperative, etc. - available for foreign investors and opening the possibility for 0 per cent foreign ownership. Despite criticism and the rise of protectionism in Russia, a special governmental agency, RAMSIR 4, was established to promote and monitor foreign direct investment in Russia. To some extent yet in Estonia, and particularly in Russia, heavy bureaucratic procedures, as well as frequently changing and often controversial legislation with unpredictable enforcement continue to prevail. This, along with the political instability as manifested in the unsuccessful coup d'etats of August 1992 and October 1993, serve as a major disincentive to foreign investment in Russia. Meanwhile, changes have also taken place in Finland that have had an impact on direct investment. Foreign exchange controls related to clearing were removed 4 RAMSIR stands for Rossiiskoje Agenstvo Mezhdunarodnogo Sotrudnishestva i Rasvitija or The Russian Agency for International Cooperation and Development . It was set up in late 1992 and headed by Aleksandr Shokhin. 6 with the abolition of the clearing arrangement between Finland and the Soviet Union at the end of This accomplished the full liberalization of foreign payments and capital movements between Finland and all other countries. The economic recession in Finland and the collapse of Finnish-Soviet trade 5 2 certainly had an adverse effect on direct investment with Russia and Estonia. The impact of this collapse on direct investment is, however, not entirely unambiguous. There is some evidence that bankruptcies and an unforeseeably high rate of unemployment, particularly in the eastern parts of Finland, also brought pressure to look for business opportunities behind the eastern border. Successful implementation of economic reforms in Estonia has led to an increase of direct investment flows there. 5 Contrary to general belief, the collapse of the Soviet economy was only partially responsible for the present recession in Finland. The share of Soviet trade had fallen already to 15 per cent of Finland's foreign trade in 1989 from its peak of over 25 per cent in According to estimates, only two percentage points of the 6 per cent fall of Finland's GDP in 1991 can be attributed to the collapse of Finland's eastern trade; 7 2 Results of the survey Direct investment from Finland to Russia and other economies in transition has been increasing rapidly since the dissolution of the Soviet Union in The political uncertainties and risks have not reduced the willingness to invest. Indeed, direct investment can be considered a fairly important vehicle for coping with the problems that arise in operating in economies in transition. The reduction in the risk of loosing markets evidently exceeds the risk associated with local presence. Positive expectations with respect to the progress being made in economic reform in Russia, and particularly in Estonia, have contributed to this development. The Bank of Finland (BOF) mailed inquiry forms to 823 Finnish participants in FFOs in the FSU, Baltic countries and CEECs. Their names and addresses were obtained from the Bank of Finland's data bank and from a number of other sources. Information was received from 421 FFOs located in the FSU or OFSCs. Out of these, 280 were fully active, 5 were about to begin operations and 36 had closed down or withdrawn their operations. A few respondents informed us that they had not even planned to invest abroad and had been erroneously included in the mailing list. Once these were eliminated, the final number of FFO participants that responded or should have responded amounted to about 700 and the response rate was about 60 per cent. Table 2. Comparison of results of the 1991 and 1993 surveys Survey year Number of questionnaires sent out Response rate Number of operative FFOs in - Russia Moscow St. Petersburg Estonia Tallinn Baltic countries The 1991 survey covered the Soviet Union including the Baltic countries. The 1993 survey was extended to cover the central east European economies (CEECs). It should be emphasised in this context that the survey data is not comprehensive but covers only a part of the total population. The survey statistics are not exhaustive, as are statistics based on registrations that claim to cover all enterprises (like Table 1). Table 2 offers data from the two consecutive surveys for the purpose of comparison. The results of the present survey are summarized in Table 3. 8 Table 3. Statistical data on operative enterprises with Finnish ownership in the FSU and CEE Countries from the BOF's survey of april 1993 Figures on sales and borrowing relate to the preceding accounting period Russia Baltic Estonia Rest of CEE countries the FSU countries Number of firms Number of employees Employees/firm Sales, mill. AM Sales/firm Sales/employee,thous.FIM Sales in mill. AM: to Finland to third countries to the host country Distr. of sales, %: to Finland to third countries to the host country Total investment(l) Founding capital(2) out of which paid, % Total investm./firm Borrowing mill. AM from Finland, % from third countries, % from the host country, % ) Share capital (accumulated) plus debt outstanding from subsidiary loans, mill. AM. 2) Share capital (accumulated), Finnish share only, mill. AM. The concentration of the Finnish direct investment on Estonia is explained by the geographical and cultural affinity and by each side's ease and willingness in making contacts. The small economy of Estonia can offer only relatively limited markets. Therefore, the size of enterprises is small and only a minor part of their production, 14 per cent, is sold to Estonia. About half the sales of the Estonian FFOs are directed at Finland, and one-third at Russia. Some of the FFOs in Estonia do subcontracting work for their Finnish parent companies thus taking advantage of lower labour costs in Estonia. This also partly explains their high level of exports to Finland. The FFOs in Russia differ greatly from those in Estonia with respect to their size and distribution of sales. Of the total sales revenue of FFOs in Russia, 60 per cent comes from sales to Russia, more than one-fifth from sales to Finland and less than one-fifth from sales to third countries. This bears evidence that the FFOs in Russia are there to maintain or increase their former market shares and/or to gain new markets in Russia. Sales per employee are larger in Russia than in Estonia. Russian firms also employ more personnel than Estonian firms (fable 2). In Estonia FFO production of services generated 211 FIM/employee and production of goods only 88 FIM/ employee. In Russia the opposite was the case: FFO sales of goods generated 178 9 FIM/employee whereas sales of services generated only 134 FIM/employee. The difference presumably lies in the fact that FFO sales are more locally oriented and output - particularly services - is sold at lower prices in Russia than in Estonia. In Estonia political 6 and economic developments were positive. They were reinforced by successful reforms such as the introduction and stabilization of its own currency. These developments induced FFOs to launch operations in Estonia. At the end of 1991, of the 215 FFOs that responded to the survey, 58 were already operating (see Chart 1). In 1992 there were 0 new FFO start-ups, some of which were firms that had been registered only to wait for the appropriate time to start operations. The figure for 1993 is lower but still fairly high. The number of FFO start-ups in Russia bears evidence of more moderate developments. Chart 1. Start of operations of FFOs in Russia and Estonia 1 0 II) 80 ~ +-' L Cl +' II) []la ~B A Russia B Estonia Less then per cent of respondents had decided to end their participation. In Estonia, out of 23 disbanded partnerships, 14 represented the service sector (mostly trade). The disbanded partnerships in Russia were divided evenly between goods production and services. The distributions of FFOs in Estonia and Russia by economic sector differ slightly from each other depending on whether they are measured by number of firms, personnel or sales revenue (Charts ). Firms that produce goods account for a major share of employment and sales, particularly in Russia. This contradicts the widely expressed opinion concerning concentration in the service sectors. 6 Estonia declared its independence on August The classification by economic sector conforms with ISle codes as follows: agriculture 01-09, manufacturing 11-29, construction 35-38, trade 41-45, transport (+ travel + communications) 47-58, technical & business 71-77, other services 61-67, 85-99, production of goods 01-38, production of services The number of finns and employees as well as sales revenue for 1992 is given in Charts 2-7 for FFOs in Estonia and Russia, by main economic sector. Chart 2. Number of FFOs in Estonia },)y economic. sectors Chart 3. Number of FFOs in Russia by economic sect~rs Trade (53) : UUIC UU 'j Agriculture (7) Other services (18) Trade (26) Agriculture (6) ~'r7~~ Other services (2) Transport (19) Transport (22) Chart 4. FFOs in Estonia Chart 5. FFOs in Russia persons employed, % by economic sectors persons employed, % by economic sectors Manufacturing (45) Construction (1) Agriculture (3) Other services (1) Technical & business (4) Construction (3) Agriculture (6) ~~~ Other services (4) Tecbnical& business (4) Chart 6. FFOs in Estonia sales in 1992, % by economic sectors Chart 7. FFOs in Russia sales in 1992, % 'by economic sectors Manufacturing (43) Construction (6) Agriculture (0) - ~~~~~ Otherser:vices (2) TechnicaI& business (2) Construction () 'AY.-.(IO(')(~ Agriculture (8) Other services (16) 11 The conclusion that there is a preference for services can be reached by looking at the number of firms with foreign participation. In Estonia 55 per cent and Russia 61 per cent of enterprises operate in the services sector. Still, the shares of the goods' production - 45 and 39 per cent respectively - are relatively high. If measured in terms of persons employed or annual sales, the picture changes: goods production turns out to employ more people and generate more sales revenue than the service sector. According to a recent study (Astapovich, p. 28) manufacturing is the main sector, involving more than per cent of all firms with foreign ownership in Russia in 1992 (in 1989 it was less than 30 per cent). 2.3 Assessment of banking services The Finnish participants were asked to pass judgement on behalf their subsidiary or associate company abroad concerning the quality of banking services available. The numbers of the participants responding on behalf their respective FFOs in Estonia and Russia were classified according to their responses to each of the questions (Charts 8-15). The results differ between Estonia and Russia. In Estonia the number of enterprises with positive (excellent or satisfactory) responses is larger than in Russia. In the case of Russia all response distributions are clearly skewed to the bad end . This means that most FFOs in Russia have assessed the banking services to be poor both overall and for each particular class of service. The possibilities of opening an account with a bank were met with the least criticism even by the FFOs in Russia. Banks' ability to transfer payments domestically as well as to and from abroad are rated as poor by almost half the FFOs in Russia (Charts 11 and 13). About 2/3 of the FFOs in Russia rated as poor the ability of Russian banks to provide them financing. In Estonia the distribution is less negative than in the case of Russia (Charts and 12). As regards the availability of credits, even the Estonian FFOs rated the banks' performance as poor (Chart 14). 12 _: ~::::.... :!.:.:... :'.::.:..:I.:::.:I:':... = ':::.1.. :.:.1.:::.1::::':::.1.:::.'::::'::::'::::1:::.i'.::.i.:.::.I.:.:.I.:::i. :::. Banking services in Estonia and Russia assessed by firms with Finnish ownership (FFOs). Chart 8. FFOs in Estonia by experience of opening a bank account 60r , - I :i~:.:.: :~::: ::::r:::~ :i :1 :i::::.. :x:.:.:... :i::.:.. :t:... ::.:::... :1:.:.:.... :::: :::::i:::::::: :L.J==-- ,, =- ='- '=i:L...l III ~! IIII :.!II!IIII:III Poor NQutral Exc I lant Tolerable Satlsfactor Chart 9. FFOs in Russia by experience of opening a bank account :s0r , 3D :;::::w. I ~.~:.~::l.~r:~i.~r:~~.;.;.;~.~::~~.i::~i.~;;=i:lj Poor NQutral exca I I nt Tolerable Satrsfactor Chart. FFOs in Estonia by experience of transf. domestic payments 50r , Chart 11. FFOs in Russia by experience of transf. domestic payments 70r , :so 30 o Poor NQutral excq I I Qnt To I erob I e Sat. rsfoctor Poor NQutral excq I I Qnt. Toleroble Sat.rsfoctor Chart 12. FFOs in Estonia by experience of transf. foreign payments 50r , :so 30 Chart 13. FFOs in Russia by experience of transf. foreign payments 50~=== :so 30 o Poor NQutral excq I I Qnt. To I erob I e Sat. rsfoctor o Poor Noautra I G CQ I I Qnt To I erob I e Sat. rsfoctor Chart 14. FFOs in Estonia by experience of availability of credits BOr , 70 BO o Poor NQutral Exc I I ant Tolerable Sat.rsfactor Chart 15. FFOs in Russia by experience of availability of credits 70r , BO o Poor NQutral exca I lant Tolerable Sat.rsfactor 13 One would expect that the FFOs in the two largest Russian cities - Moscow and St. Petersburg - would be more satisfied with banking services than the FFOs elsewhere in Russia. The urban centres are usually in a better position than rural areas to provide banking services to enterprises. Somewhat unexpectedly, however, the results of the survey did not support this assumption. The FFOs outside the two largest cities seemed to be somewhat less dissatisfied with banking services than did the FTOs in Moscow and St. Petersburg. The survey data does not make it possible to state any reasons for this or even to determine whether the FFOs outside the cities are actually served better and/or have had lower expectation from the outset. The distributions of these groups by economic sector are nearly the same, as are the average firm sizes. The Moscow and St. Petersburg - based FFOs have borrowed somewhat more (FIM 4.1 mill./ffo), than the FFOs outside these cities (FIM 1.4 mill./ffo). One might assume that the FFOs in Moscow and St. Petersburg would have based their business strategies more on external financing than the FFOs outside these cities, only to be disappointed in their expectations. Table 4. Sources of FFO borrowing in 1992 Source of credit Total amount from from from borrowed Finland host third in 1992, FIM country country mill. per cent distribution Host country of FFO Russia Baltic countries Estonia CEEC Other (=other FSU) As shown in Table 4, a major part (60 per cent) of the credit financing in 1992 for the Russian FFOs originated from Finland or from the third countries. A minor part (6 per cent) was borrowed from Russian banks. The situation is even more biased in Estonia where more than 80 per cent of credit financing came from Finland and only 6 per cent from the local banking community. This supports the conclusion that the Estonian and particularly the Russian banking systems are unprepared to finan
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