The Role of Government in Promoting International Businesses in Russia - Term Paper Example

Introduction In the highly competitive business environment, the role of government is increasingly becoming critical to the socio-economic development of the states across the world. The rapid globalization has transformed the dynamics of the market and necessitates government initiatives to create congenial environment for foreign businesses. The paper would be discussing the role of government in promoting international businesses and entry of foreign businesses like multinational corporations in Russia. Literature review would be used to emphasize the ways and means the governments help the international businesses to flourish and help local and national economy. It would also show why the Russia has become an attractive destination for the foreign firms. Four case studies would also be evaluated and analyzed for their success or failure in the foreign soil. Literature review Globalization has been one of the most portent forces that have compelled the global community to cross border restrictions for the wider welfare of the people. Social scientists assert that globalization has broadly brought together goods, services, capital, technology and people across national borders to evolve new global market with common goals (Hill, 2009; Sirgy et al., 2004; Black, 2002). Indeed, the nations have increasingly become interdependent for their socio-economic development. The globalization has reduced the geographical boundaries and has brought regional and local interests on the world map (Croucher, 2004; Tiplady, 2003; Held et al., 1999). Thus, the role and responsibilities of states have become more pronounced vis-à-vis creating a conducive environment for foreign investment. Globalization has also greatly opened new avenues of exploiting competencies and resources for businesses across nations. Through foreign direct investment or FDI, cross border mergers, partnership, export and import of goods and services, the process of international business are expedited. But the policies and legal paradigms of the government become key elements that inculcate trust amongst the foreign firms. Indeed, the political, legal, economic and technological environment created by government initiatives through policies and plans are important criteria for international businesses. Zonis (2000) asserts that the political risks generate an environment of uncertainty primarily through the exercise of power by the government and non government agencies. Thus, non democratic states or states that are transitional economies are prone to exhibit controls which adversely impact the market and make them less attractive for international businesses. Various features of political risks like taxation, currency fluctuation, inflation, national law etc also influence the decision power of the international businesses. Restrictions in trade, foreign ownership, environment, exit etc. become the stumbling blocks that the governments need to overcome through liberalization of economic policies. Wall, Minocha and Rees (2010) consider that to succeed in foreign locale, the international businesses need to integrate with local economy so that it becomes part of the host nation’s business. New agendas like environment, corporate social responsibility, intellectual property rights etc. have also become essential in multilateral trade agreements between countries. Globalization also highlights the liberalization of economic policies and opening of domestic market for global agencies. Today, the world economy has become market driven. The neo-liberal policies encourage deregulation of industries, privatization, incentive for foreign investment etc. that are distinct in their content. The reduced role of central banks has become major propellant for changes in market based economy that favours dominant states like America (Harvey, 2005). The government initiatives in promoting bilateral trade, regional trading agreements for growth and globally disbursed value chain become key factors for expanding international business. Kublin (1995) declares that globalization has forced the businesses to include the modules of business negotiations as intrinsic part of the corporate policy. Thus, lack of knowledge regarding culture and cultural competencies have continued to be the biggest impediment to successful international business negotiation. Hofstede (1989, 1984) claims that business partners, from different nations but having similar professional culture, find it easier to conduct business deals whereas, business negotiation with people from diverse cultural background is highly complicated. But some also think that in global environment, the negotiations are being influenced by distinct culture of professionalism rather than national culture (Lang, 1993; Kale, 1996). International businesses thrive on business operations that are spread across nations. Heckscher-Ohlin (HO) theory (Leamer, 1995) suggests that trade between countries are primarily decided on the basis of endowment factor. Resources in terms of capital, produce, people and knowledge become the agents of exploitation by the businesses that want to expand across nations. In such a scenario, trans-national laws become important elements of promoting trust amongst business entities and various stakeholders. The roles of various international agencies World Trade Organization, GATT, International Monetary Fund, International Commercial Arbitration etc. are important elements of international businesses that provide support and help create better conditions for fair play. Drahozal (2000) claims that international tribunals are necessary because local laws and legal system could be more biased towards the local agents and business enterprises. Market environment in Russia After the disintegration of USSR in 1991, Russia as a sovereign state had faced huge challenges vis-à-vis its changing political status, deteriorating economy and reduced influence with its former Russian Federation comprising of independent states. The political ideology of the state was also inclined towards communism which had promoted command economy. Thus, the control mechanisms of the market were closely guided by the government. After the disintegration, the transition of the state from communism to neo-democracy was fettered with huge problems. The domestic businesses were less prepared for the highly competitive environment of global market system primarily because they had worked within the constraints of closed market where competition was negligible. Market liberalization had become essential for growth. But at the same time, opening the market for foreign firms meant that competition could wipe out local industries and businesses. Carter & Turnock (2005) assert that joint ventures and alliances became the major compulsions for new Russian economy because they were designed towards protecting domestic business and local interests. With huge internal resources that could be expertly exploited through joint ventures, the neo liberal markets of Russia were poised for higher productivity and performance. The influx of foreign goods and foreign investment became major catalyst for higher growth both for the domestic and international businesses. Kaynak & Ghauri (1994) claim that the United States became the key beneficiary of Russia’s liberalized policies because US and Russian joint ventures increased by 700 percent after the disintegration of USSR. The reforms in the Russian economy are also seen as an important shift in the socio-political and cultural ideologies. The restructuring of economy was focused on monetary stabilization and curb on rising inflationary trends through opening up the market. Government initiatives allowed development of new institutions for guidelines and enforcement of new contract rights, anti-trust regulations, securities, rules and policies for conflict of interest paradigms etc. Thus, demands of the transition of Russian command economy to mixed economy was largely fulfilled through new policy parameters. Some scholars also believe that opening of the market to the West was designed towards expanding Russian language and culture to the outside world and at the same time, incorporate the changes within it socio-cultural dynamics (Ayios, 2004; Kusluvan, 2003; Segal, 1992). But the overall impact of changes to Russian market was a significant factor for increasing joint ventures from across the globe. Case studies The four case studies discussed here show the role of government initiatives in creating facilitating environment for foreign entry in Russia. While two of joint ventures show successful growth, the third withdraws from the market and the fourth is evaluating and analysing the environment for its entry in Russia (Tesco). BP: After disintegration and as a sovereign state, the early reforms in Russia were not very successful because many of its sectors had remained non accessible to the foreign investment. But 2001 onwards, Russia made concerted efforts to open its market for outsiders allowing significant stake in the partnership. It has large oil and gas reserves. Thus, increased FDI activities were seen in sectors like oil, gas, energy, power generation etc where government controls were reduced. BP or British Petroleum teamed up with Alfa Access Renova or AAR to form TNK-BP on September 1, 2003. BP and AAR both have 50% stake in TNK-BP. AAR is the fourth largest producer of oil in Russia. It has contributed its holding in TNK International, Onaco and Sidanco, its shares of RUSIA Petroleum and Rospen gas field in Siberia. BP, one of the largest international oil companies has contributed its holdings in Sidanco and stake in RUSIA petroleum and BP Moscow retail network (Sokhatskaya, 2006). While both the companies have well defined areas of work and functions, there was a recent controversy in Kovykta gas field, which is being developed by BP through TNK-BP. The company was warned with ‘crippling sanctions’ or even the withdrawal of Kovykta license if it ‘fulfil a commitment to ramp up the fields oil output’ (ibid). The matter was settled when the company agreed to sell 62.5% of its share in RUSIA petroleum to Gazprom, the company that holds the license of Kovytka. Indeed, in the recent times, corruption within the bureaucracy has made things very challenging for the international business partners (Johansson, 2008). The role of government comes under suspicion and distrust is developed which aversely impacts the international businesses. Tesco: Tesco is third largest supermarket chain of the world with 4811 stores across 14 nations employing around 472000 workers (tesco). Tesco has successfully opened its stores in countries like China, Poland, Slovakia, Czech Republic etc. where the market still shows signs of its communist heritage vis-à-vis market control. The major elements of the success of Tesco’s offshore success are its adaptability to new environment and incorporate the local flavour in all its operations. In all its overseas outlets, Tesco promotes local employment and using local produce that greatly benefit the local community. Tesco’s business is market driven and thrives on meeting the demands of its customers from varies culture and nationality. Looking at its success in Slovakia and Czech Republic, it is now interested in opening its stores in Russia. The Russian retail market has been one of the fastest developing industries and most sought after areas that international businesses are keen to exploit. The recent reforms in Russian economy have been a very positive step that has seen a turnaround in its economic growth. Thus, Tesco’s intention to expand its business in Russia is understandable. In 2007, media had reported that the retail food market would grow by 16% in the next three years (Osborn, 2007). It was also mentioned that Tesco is looking for appropriate sites for its outlets and holding informal talks with country’s biggest retail store X5. Tesco has yet to disclose its future plans of opening stores in Russia. But it is also true that its experiences in Slovakia, Poland etc have given Tesco confidence that it could also succeed in Russia as and when it does open its outlets there. Nestle: Nestle is a multinational food company that is headquartered at Vevey in Switzerland. It was founded in 1860 by Henri Nestle who had had developed milk for babies whose mothers were not able to breastfeed. It later diversified into other food items and chocolates. In 1994, it entered Russia via imports but soon acquired confectionary company, Rossia and thus was born, Nestle Russia LLC. In the next ten years, the company has significantly expanded into pet food packaging, culinary production, local coffee, mineral water, while at the same time, it had also brought its brands like Nescafe, Nestlé, Maggi etc. (Corsten, 2008) The major hurdle faced by Nestle in Russia was the access to credit. The quick payments demanded by suppliers was a huge problem which the company resolved by making a contract with Citi Bank that would provide the suppliers with the finances, once the goods are delivered (ibid). The company has remained one of the most successful and resilient international businesses in Russia. Carrefour: The French giants, Carrefour, the hypermarket chain had come to Russia in June, 2009 and after merely four months, they opted out as they were unable to sustain business against their competitors, Metro Cash & Carry, Aushan which had established their businesses in 2001 and 2002 respectively. Carrefour has chain of 15600 hypermarkets across 35 countries (Kolchevnikova, 2009). It had opened two stores in Russia and before the third could be opened, in October, 2009, they announced the sale of their business in Russia. Lenta, O’Key, Aushan and X5 Retail Group might be the prospective buyers. The main reasons cited by the company are: lack of opportunities for acquisitions and inadequate growth prospects. But their failed negotiations with Seventh Continent, 140 strong chain of outlets, could be the major decisive factor for their withdrawal from Russia (ibid). Conclusion One can therefore conclude that Russia has become a major economy with huge scope of opportunities. The reforms in the economic policies of the government have been indicative of their sincere intention to allow foreign businesses. 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