Market Entry Strategies for Russia (PDF)

of the Soviet Union and the subsequent political, economical and social unrest in Russia had an extensive impact on the country’s entire educational system. Governmental spending on education plummeted dramatically. In 1997, state spending per student dropped to one third of the 1989 level. In 1998, the state owned more than 15.8 Mio roubles to instructors, who then partially received outstanding salaries in vodka and toilet paper.As a result of permanent under-funding in the 1990 s, corruption was widespread in academic institutions. The quality of students and graduates dropped dramatically while once feared entrance examinations became merely symbolic and university diplomas could be achieved easily through bribery. However, private institutes for „management”, „accounting” or foreign languages mushroomed in Russia in response to the tremendous hunger for fashionable courses. For most of these new institutes the educational standard was at best mediocre, due to the absence of effective accreditation procedures and control mechanisms. The condition of Russia’s educational system has greatly improved under President Vladimir Putin. Since 2005, education has become one of four `National Projects” (others being health, housing and agriculture) that are aimed at developing the social welfare by heavily increased governmental funding. The educational system is now undergoing structural reforms in order to improve the compliance with economical environment and the labor market.Labor Market:Current situation in Russia: In the wake of a booming economy and a declining population, which is a result of decreasing births rates and high mortality, human labor has become a scarce resource in the Russian economy. The official unemployment rate is at 2%, which means almost full employment In response to the shortage on the labor market, the average wage has risen sharply in the last years. According to the German VDW, the average wage increased by nearly 100% nominally in the period 2003-2006 and is currently (2006) at 10102 roubles or approximately 280 Euro (Table 11. Average monthly salaries in Russia).This development is even more apparent in bigger cities, Moscow in the first place, and for highly skilled professions. The German respondents in the survey frequently referred to Moscow’s `over-heated labor market. Generally, Russia is not seen as a cheap-labor-country and the gap between Russian and German wages is constantly declining, currently reaching almost parity in Moscow (Table 12. Average net wages (Euro) for selected professions in Moscow).Expatriates and local employees: A German company entering the Russian market by direct investment will initially require higher and medium skilled employees like executive managers, sales representatives, accountants, lawyers and secretaries. When the company starts investing in Russia the first employee will be most likely the executive manager (CEO) who will subsequently hire the other staff members. For certain positions, only Russian nationals from Russia are suitable, either because of special training requirements (accountants for Russian accounting standards, lawyers) or on account of financial restraints for positions where employing expatriate staff members would be too costly (secretaries, sales representative, drivers).For the executive management staff, especially the CEO or head of RO, the company has basically four options: 1. An ethnic German from Germany as expatriate, 2. A Russian, Jewish or ethnic German („Aussiedler”) migrant from the Soviet Union, as expatriate from Germany, 3. A Russian (citizenship, not nationality) from Russia, 4. A third country national as expatriate.Sometimes, the choice is made accidentally, but under normal circumstances, it will take into consideration four leading points: 1. Occupational qualification, 2. Russian language skills, knowledge about country, culture and people’s mentality, 3. Control of investment, information, 4. Total costs.Third country national from outside the organization are not to be found among German companies operating in Russia, but employment of other East European nationals from either the German parent company or foreign affiliates was a choice of internationally (Europe-wide) operating retailers, such as X and MEDIA MARKT-SATURN.However, for most German companies, the choice is between hiring expatriates and locals of either Russian or German ethnic origin. This choice presents a dilemma: -Ethnic German could have the highest professional skills and an understanding of western business-style. They would have no problems communicating with the parent company and would be less susceptible to fraud and nepotism in Russia. However, expatriates are the most costly employees for any company. Russia has actually become even more costly, since, according to CNN, Moscow ranks nowadays as the most expensive city worldwide. Additionally, the whole country still has a reputation as being somehow `wild and underdeveloped, therefore demanding an extra incentive to work there.Furthermore, it would be difficult to find an ethnic German with high professional abilities, with a good command of Russian and an understanding of Russian mentality and culture. Without speaking Russian fluently, it would be difficult to build long-term personal relationships with Russians and to create a individual social network. Also, it would be almost impossible to pick up the nuances of conversation in business negotiations. Furthermore, being dependant of multilingual Russian employees will boost labor costs while control and management of these employees will be challenging. -An ethnic Russian will be less costly than an ethnic German. For residents of Germany with Russian background, the task of working in Russia is perceived to be as less daunting and uncomfortable, hence requesting a lower extra incentive. Russians may initially work alone and with minimal investment. Two of the survey respondents employed Russians the such a manner: One sent an employee to Russia who worked as a sales representative („one-man-show”) the other company had a female student working from home and providing her apartment with telephone as representative office. Conducted as a method of cost reduction, both solutions were seen as successful by the companies. Apart from relocation related expenses for expatriates, local Russian nationals still have a cost advantage in salaries but this is likely to abate steadily as living costs are increasing.Generally, German companies used Russian employees for customer relations and service while German staff members were commissioned with management and control. Respondents frequently stated that Russian investments need constant supervision and controlling (like V.I. Lenis famous statement: „trust is good, but control is better”). To sum it up a respondent stated: „When a German company enters the Russian market, the business should anyway remain in German hands, because Germans act in place of the Germans and Russians act in place of the Russians.” (Translation M.S.). However, `structures of trust` can be built and maintained in a variety of ways. One respondent mentioned that the CEO of a foreign affiliate should be a local. Control can be achieved from other managerial positions like CFO or Controller. With respect to customer relations, all respondents generally stressed the importance of networking and trust-building. Russian sales representatives can open doors which would normally remain closed for Germans. Russians trust Russians more than foreigners and are therefore more suitable for customer relations. However, from a certain level or frequency of contact with key account customers, the involvement of Germans is seen as necessary. One female area sales manager stated that she is the „face of the brand” and the first contact person for their customers. Another area sales executive described how he and his Russian sales representative visit their biggest customers frequently in order to `socialize` with them.