Business%20Environment%20Challenges%20on%20Eastern%20European%20Markets

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Business Environment Challenges on Eastern
European Markets
Alla Starostina, Head of the International
Economics and Marketing Dep. Natalia Kochkina,
Associate Prof. International Economics and
Marketing Dep. Volodymyr Kravchenko, Head of the
Economic Research Center Taras Shevchenko
National University of Kyiv (Ukraine)
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Geographical Position
Population 46.8 millionsGDP per capita 3621
Russian Federation
Source adopted from http//www3.weforum.org/docs/
WEF_GlobalCompetitivenessReport_2012-13.pdf
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Specific features of Ukrainian business
environment - 1

• Ukraine faced unique process of transformation
  from highly developed socioeconomic society to
  clan and oligarchic capitalism, period of initial
  accumulation of capital, highly monopolistic
  economic.
• Transition from power of one communist political
  party at all sphere of socioeconomic activity to
  multiparty system. Nowadays there are over 200
  political parties in Ukraine. 87 political
  parties participated in the last parliament
  elections in 2011 and 9 of them are now in
  parliament.
• Destruction of all cooperation links with former
  USSR and consequently loss of some serious
  branches on national economy such as textile
  industry, machine building and other.

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Specific features of Ukrainian business
environment - 2

• Destruction of highly developed system of social
  guarantees
• - gratuitous medical care
• - gratuitous apartments
• - free of charge kinder-gardens
• - free of charge vacation facilities
  sanatoriums, vacation houses, ets.
• Various groups of arts, singing, dancing, etc
  (now this services cost a lot)
• A huge gap between older, middle and young
  generations in terms of mentality, material, and
  social issues.

5

• International marketing research is a very
  complex part of the marketing activity. The role
  of international marketing in decision making
  process has tremendously increased over the
  recent years.
• It is caused by intensification of globalization
  processes in various forms
• Development and expansion of international trade
• Transnationalisation of economies
• Growing significance of small and medium business
  in global economy
• Intensification of international financial
  activity, capital flows

6
Forms of intensification of globalization
processes

• Intensification of regional integration processes
• Intensification of migration processes
• Aggravation of the global problems (ecology,
  food-stuffing, water, economic resources, wars.)
• Formation of the global markets
• Increase of instability within international
  business environment
• Existence of the specific cultural environment in
  every country

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Globalization

• Globalization is a irreversible process of
  disappearance of economic borders between the
  countries with a purpose to search more
  profitable capital reproduction opportunities on
  all forms of capital which results in mutual
  penetration, interlace, interdependence of
  national economic systems to form global markets
  and world economic system.

8
International marketing research

• International marketing research is a systematic
  process of data collection, data analysis, and
  selection of the objective marketing information
  to support marketing decisions regarding
  entering and implementing the business strategy,
  allocation of the resources in more than one
  foreign country based on comparative analysis of
  its attractiveness.

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Specific characteristics of international
marketing research

• Decisions are made more than for one country
• International marketing research forms a base for
  resource allocations in foreign countries
• Existence of a complex problem in international
  research regarding data comparison for more than
  one country to choose the mode of entry and
  strategy of activities

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The steps to analyse the international business
environment

• 1. Choice of countries to enter and perform
  business activity
• 2. Definition of the common factors to analyse
  the markets of different countries
• 3. Preliminary classification of the factors as
  threats or opportunities
• 4. Expert assessment of the impact of each of the
  group of factors
• 5. Analysis of the factors within each group
  (political, economic, demographic, cultural,
  environmental, technological)
• 6. Comparative analysis of the factors and their
  impact in different countries
• 7. Conclusions

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Cultural Factors
Source adopted from
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The role of culture factors

• Culture plays a mayor role in influencing human
  behavior
• Cultural factors play key role in international
  business
• Cultural differences are the most stable barrier
  for spreading of globalization process

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Gteert Hofstede cultural dimensions theory

• Describes influence of the society's culture on
  the values of its members, how these values
  relate to behavior, international management

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The theory proposed six dimensions which cultural
values could be analyzed

• individualism versus collectivism
• uncertainty avoidance
• power distance (strength of social hierarchy)
• masculinity versus femininity (task orientation
  versus person-orientation
• long-term orientation
• Indulgence versus self-restraint.

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Power distance

• Power distance is the extent to which less
  powerful members of society accept and expect
  that power is distributed unequally.
• Cultures that endorse low power distance accept
  and expect power relations that are more
  consultative or democratic.

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Power distance - facts

• Ukraine-78 (authoritarian mode of decision
  making, centralized structure of management,
  difficulties with conducting marketing research)
• Italy-50
• Russia-85
• USA-40
• Average-55.

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Uncertainty avoidance

• High uncertainty avoidance cultures try to
  minimize the occurrence of unknown or unusual
  circumstances and to proceed with careful changes
  by planning and by implementing rules, laws and
  regulation people are more emotional.
• Low uncertainty avoidance cultures accept and
  feel comfortable in unstructured situation or
  changeable environments people are more
  pragmatic.

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Uncertainty avoidance - facts

• Ukraine 93 (low readiness for risk for medium
  and old generation).
• Italy 75
• USA 42
• Russia 70
• Average 64.

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Long-term Orientation

• Long- term orientation societies attach more
  importance to the future placed a lot of
  importance on characteristics like persistence,
  saving, respect for status and position in
  society sense of shame.
• Short-term societies focus on instant
  gratification and pursuit of material pleasures.

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Long-term Orientation - facts

• Ukraine 40
• Italy 34
• USA 28
• Average- 45

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Masculinity versus Femininity

• The distribution of emotional roles between the
  genders.
• Masculinity cultures values are competitiveness,
  assertiveness, materialism, ambition and power.
• Feminine culture place more value on
  relationships and quality of life.

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Masculinity versus Femininity - facts

• Ukraine 54 (high latent women influence on
  social life, but low participation in the
  government and municipal bodies).
• Italy 70
• USA 62
• Average for world 50.

23
Individualism versus collectivism

• The degree to which individuals are integrated
  into groups.
• In individualistic societies, the stress is hut
  on personal achievement and individual rights.
• In collectivist societies, individuals act
  predominantly as the firm group or organization.

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Individualism versus collectivism - facts

• Ukraine 30 (high level of conformism, little
  distinction between private and professional
  life)
• Italy 76
• USA 90
• Russia 37
• Average for world - 43.

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Indulgence versus self-restraint

• The extent to which member in society try to
  control their desires and impulses.
• Indulgence society have a tendency to allow free
  gratification of basic and natural human desires
  related to enjoying life and having fun.
• Restrained society have a conviction that such
  gratification needs to be regulated by strict
  norms.

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Indulgence versus self-restraint - facts

• Ukraine - 30-35,
• Italy - ?

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Political Factors
? Basic factors Characteristic Opportunity (), Threat (-)
1 Political situation Permanent instability
2 Social situation Multi divided society
3 Democracy All for our guys, law for others
4 Corruption Widespread
5 Integration vector Not yet definitely decided
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Political situation

• Political situation in Ukraine has 2 components
  observable (formal) and concealed (real)
• Formal political situation permanent and sharp
  opposition between (and insert) main political
  parties and key political figures

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Parliament parties

• Party of Region (Yanukovich)
• Batkivshina (Timoshenko, Yatcenyk)
• UDAR (Klichko)
• Svoboda (Tyagnibok)
• Communist party (Simonenko)

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Real political situation

• Real political situation is defined by the next
  characteristics
• Real politicians values personal power, not
  ideas.
• Strong tribalism tendency
• Weak position in a world economy
• Economic crisis

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Political situation

• A. Personal power, not ideas.
• Ukrainian politics struggle for ideas and values
  before election and express much more tolerance
  to their opponents after.
• Politics in Ukraine are about personal power and
  personal ambitions and streaming assets
  (financial and institutional) to their
  supporters.

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B. Strong tribalism tendency

• Donetskie people are origin from Donetsk
  district motherland of President Yanukovich
  and Party of Region.
• They possessed key positions in all spheres of
  Ukrainian politic system and business.

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Composition of the Cabinet of Ministers of
Ukraine as of 1 October, 2013
Source adopted from Political Risks and
Political Stability in Ukraine
http//www.ucipr.kiev.ua/userfiles/Political_risks
10_Oct2013e.pdf
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Political situation
?. Ukrainian policy extremely depends on its
surroundings, Ukraine is not independent
actor. European Union, Russia, Turkey main
actors in the nearest future
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Political situation

• D. Economic situation is very tense.
• Any political party which ?an win future
  President and Parliament elections has to solve
  the same problems and use the same instruments.

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Social Situation

• Multi divided society
• A. Spatial divided society
• B. Property divided society
• C. Income divided society
• D.  Person divided society

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A. Spatial divided society

• Party-leaders in multi-member districts by oblast
  
• (Parliamentary election 2012)

Source adopted from Political Risks and
Political Stability in Ukraine
http//www.ucipr.kiev.ua/userfiles/Political_risks
10_Oct2013e.pdf
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B. Property divided society

• Ukraine summary assets of the 100 top-rich
  Ukrainians 61 GDP
• Russia summary assets of the 100 top-rich
  Russians 33 GDP

Source adopted from http//www.bbc.co.uk/ukrainia
n/ukraine_in_russian/2012/02/120210_ru_inequality_
usa_uk_ukraine_yg.shtml
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C. Income divided society

• Formal measure - Gini index
• The Gini index is a measure of statistical
  dispersion intended to represent the income
  distribution of a nation's residents (Corrado
  Gini, 1912).
• A Gini index of zero expresses perfect
  equality, where all values are the same (for
  example, where everyone has an exactly equal
  income). A Gini index of 100 expresses maximal
  inequality among values (for example where only
  one person has all the income).

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Problem with formal measure of the social
disparity

• Level of Gini index in Ukraine 26.44
  (represents picture which is typical to the
  social stable society (neighbors in WB ranking
  are Finland and Germany).
• Moreover we see downside tendency in Ukraine.

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GINI INDEX IN UKRAINE(WB data)
Source adopted from http//www.tradingeconomics.c
om/ukraine/gini-index-wb-data.html
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Real social disparity

• But real social disparity in Ukraine is higher
  than it demonstrates by the Gini index.
• Reasons
• shadow economy raise real income of
  SME
• offshore operation raise real income of
  Big Busines
• today's economic
• recession (2012 2013) reduce real
  income of employers

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D. Separation of people one from another

• Civil society in Ukraine is immature.
• In 2010 the part of the population which
  considered itself as
• members of religious organizations and church
  communities made up 4 of the population
• members of political parties, sports clubs and
  specialty-related associations - 3 per each
• student societies and youth organizations - 2
• the part of members of other public formations
  made up 1 and less 

Source adopted from http//i-soc.com.ua/institute
/smonit_2010.pdf?PHPSESSID15d6e4f810b62037c0f63d5
abb3fa287 
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Civil society

• Participation in the activity of political
  parties and public organizations remains among
  the least significant purposes and values for
  citizens of Ukraine till now (less than 3 points
  on the 5-point scale)
• However, this indicator has grown from 2,09
  points in 1994 to 2,46 points in 2011 

Source adopted from http//i-soc.com.ua/institute
/smonit_2010.pdf?PHPSESSID15d6e4f810b62037c0f63d5
abb3fa287
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Democracy

• The Democracy Index 
• Ukraine occupies 80th place in the world for
  democracy index.

Source adopted from https//www.eiu.com/public/to
pical_report.aspx?campaignidDemocracyIndex12
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The Democracy Index

The Democracy Index is an index compiled by
the Economist Intelligence Unit, that measures
the state of democracy in 167 countries. The
index is based on 60 indicators grouped in five
different categories electoral process and
pluralism, civil liberties, functioning of
government, political participation, and
political culture. The index categorizes
countries as one of four regime types full
democracies, flawed democracies, hybrid regimes,
and authoritarian regimes.
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The Democracy Index

• Ukraine topped the list of countries with hybrid
  regimes and ranked 80th on the list.

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Corruption

• The Corruption Perceptions Index ranks countries
  based on the perception of level of corruption of
  countrys public sector.
• It is a composite index, drawing on
  corruption-related data from expert and business
  surveys.
• Ukraine Rank 144 (from 176) Score 26 (from
  100)
• Italy - Rank 72 (from 176) Score 42
  (from 100)

Source adopted from http//www.transparency.org/w
hatwedo/pub/corruption_perceptions_index_2012
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Economic freedom

• Ukraines economic freedom score is 46.3, places
  its economy at the 161nd place in the 2013 Index.
  
• Its score is 0.2 point higher than last year,
  with modest gains in monetary freedom and
  business freedom and declines in labor freedom
  and freedom from corruption.
• Ukraine is ranked last out of 43 countries in
  the Europe, and its overall score is lower than
  the world average.

Source adopted from heritage.org/index
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Integration vector

• November 28-29, 2013 EU summit in Vilnius,
  Lithuania.
• Ukraine-EU association agreement
• If Ukraine will sign the pact toward potential
  EU membership then integration vector will be
  clearly defined.
• Otherwise debate within Ukraine about
  integration with Russia's controlled Custom Union
  will be continued.

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Economic Factors
? Basic factors Characteristic Opportunity (), Threat (-)
1 Macroeconomic situation Unstable with deterioration tendency
2 Business situation Unstable with deterioration tendency
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Main macroeconomic indicators
Indicator 2007 2008 2009 2010 2011 2012
Nominal GDP, USA mln 142720 179897 117245 136344 163374 176331
Rate of exchange UAH/USD (average) 5,05 5,27 7,79 7,94 7,97 7,99
Actual GDP (Index, year to year) 107,9 102,3 85,2 104,1 105,2 100,2
Inflation, CPI Index (annual. average) 112,8 125,2 115,9 109,4 108,0 100,6
Export (Index, year to year) 103,3 105,7 78,0 103,9 104,3 92,3
Import (Index, year to year) 121,5 117,0 61,1 111,3 117,7 101,9
Foreign-exchange reserves (USD mln, end of year) 47880,0 42630,0 26505,0 34576,0 31794,6 24546,2
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Economic Factors
Modern economic history

• Periods
• 1. 1991-1999 - deep system economic crisis after
  USSR-crash. 
• 2. 2000 2008 rapid economic growth.
• 3. 2009 economic crisis
• 4. 2010 2011 post-crisis economic recovery
• 5. 2012-2013 economic recession

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Economic Factors
GDP real growth rate Ukraine
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Ukraine in recession (2012 2013)
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Economic Factors
Macroeconomic challenges
Monetary policy has two primary goals price
stability and economic growth. Up to now NBU
has achieved one goal low inflation. Formal
Ukraine has stable foreign exchange rate.
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Negative consequences of the fixed-rate policy

• 1) extremely high interest rates (around 20
  percent a year )

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Economic Factors
Negative consequences of the fixed-rate policy
2) Due to high interest rates non-performing
loan ratio also is high (40 percent of all
loans) 3) Small and medium-size enterprises in
Ukraine have minimal access to bank financing
(due to high credit interest rate)
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From the statement by  Prime Minister of Ukraine
Mykola Azarov at a session of the Government on
October 23, 2013
Consumer" model of participation of banks in
the economy supports the short term demand, but
does not create promising jobs and new revenue,
which in turn become a new resource of the
banking system. No business, except speculative,
can not normally develop when financial resources
are in excess of 20 per year. 

Source adopted from http//www.kmu.gov.ua/control
/en/publish/article?art_id246787672cat_id244851
734
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Macroeconomic challenges

• Possible IMF credit could
• play role of supportive spring of financial
  resources to the Ukrainian economy
• give clear positive signal to other international
  financial organizations and private investors.

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Problems with IMF credit

• IMF demands
• 1) liberalization of the consumer gas price,
• 2) introducing floating FX rate,
• 3) reducing of the budget deficit
• In the loom of the Presidential election (2015)
  all of them are unacceptable to Ukrainian
  government.

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Business situation

1. Investment climate.
2. Tax climate.
3. Customs climate.

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European Business Association Indiceshttp//indi
ces.eba.com.ua/
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• Investment climate

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• Tax climate

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Customs climate
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• Customs climate

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Demographic Factors
? Basic factors Characteristic Opportunity (), Threat (-)
1 Population Decreasing
2 Education Increasing
3 Labor migration High level
4 Religion Tolerance
5 Ethnic Tolerance
6 Health care Decreasing
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• Population

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Main demographic characteristics
Population 45,547,800  (1 January 2013)
Birth rate 11.4  births/1,000 population (2012)
Death rate 14.5  deaths/1,000 population (2012)
Life expectancy 71.15 years  (2012)
 male  66.11  years
 female  76.02  years
81
Ukraine, age structure (2012)
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Education
Literacy 99,7
Students per 10 000 popul. 578 (2012) 310 (1990)
Total institutions and universities 334 (2012)
Total students, thsd 1824,9
83
Labor migration

• 1.2 million, or 3.4 of the Ukrainian population
  aged 15-70 were identified as labour migrants
  (2012)
• Almost half of these (48.5) are short-term
  labour migrants.
• The rural populations rate of participation in
  labour migrations is 2.9 times higher than the
  urban populations 6.3 of rural residents aged
  15-70 are involved in labour migrations, whereas
  the figure for urban residents is 2.2.

84
The largest recipient countries for the Ukrainian
labour force

• Russian Federation (43.2),
• Poland (14.3),
• Italy (13.2),
• Czech Republic (12.9)
• Spain (4.5),
• Germany (2.4),
• Hungary (1.9),
• Portugal and Belarus (1.8 each).

85
Religion

• Ukrainian Orthodox - Kyiv Patriarchate 50.4
• Ukrainian Orthodox - Moscow Patriarchate 26.1
• Ukrainian Greek Catholic 8
• Ukrainian Autocephalous Orthodox 7.2
• Roman Catholic 2.2
• Protestant 2.2
• Jewish 0.6
• other 3.2

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Ethnic groups

• Ukrainian 77.8
• Russian 17.3
• Belarusian 0.6
• Moldovan 0.5
• Crimean Tatar 0.5
• Bulgarian 0.4
• Hungarian 0.3
• Romanian 0.3
• Polish 0.3
• Jewish 0.2
• other 1.8 (2001 census)

87
Health care
Total expenditure on health per capita (Intl , 2011) 528
Total expenditure on health as of GDP (2011) 7.2