The Changing Nature of Doing Business in Transition Economies

The Changing Nature of Doing Business in Transition Economies

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The Changing Nature of Doing Business in Transition Economies Edited by Marin Marinov and Svetla Marinova

Selection and editorial content Marin Marinov and Svetla Marinova 2011 Individual chapters the contributors 2011 Softcover reprint of the hardcover 1st edition 2011 978-0-230-51617-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-35438-2 ISBN 978-0-230-33701-5 (ebook) DOI 10.1057/9780230337015 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The changing nature of doing business in transition economies / edited by Marin Marinov and Svetla Marinova. p. cm. Includes index. 1. Investments, Foreign Developing countries. 2. Industrial management Developing countries. 3. Investments, Foreign Europe, Central. 4. Investments, Foreign Europe, Eastern. 5. Industrial management Europe, Central. 6. Industrial management Europe, Eastern. I. Marinov, Marin, 1948 II. Marinova, Svetla Trifonova. HG5993.C435 2011 338.8 8 dc23 2011018679 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 15 14 13 12 11

Contents List of Figures List of Tables Notes on Contributors x xi xiv 1 Introduction 1 Svetla Marinova and Marin Marinov 2 Grading Up or Fading Out?: The Elusive Destiny of Psychic Market Proximity-Seeking Subsidiaries in Central and Eastern Europe 9 Stefan Eckert and Frank Rossmeissl Foreign-owned subsidiaries as a driving force of transition and integration processes 9 European Union accession and the role of foreign subsidiaries 10 Theoretical considerations 12 Tasks of CEE subsidiaries 16 European integration and CEE markets 19 Consequences for the role of market-seeking CEE subsidiaries 21 (P&G) in Central Europe 23 Conclusions 25 3 EU Enlargement and Inward FDI in Central Europe: An Evolutionary Game Approach 30 Ken Morita Introduction 30 Inward FDI into Central Europe 31 The evolutionary game theoretical perspective 37 Interpretation: why has inward FDI in Central Europe increased? 40 Conclusions 41 Acknowledgements 43 v

vi Contents 4 Globalizing Brands?: Brand Strategies of Western Multinational Corporations in Central and Eastern Europe 47 Arnold Schuh Introduction 47 The strategy dilemma of Western consumer goods firms in CEE 48 Evidence of market globalization in the fast-moving consumer goods markets of CEE 54 Limitations of the study 59 Conclusions and discussion 59 Acknowledgments 64 5 Luxury Consumption in Emerging Markets 68 Melika Husić-Mehmedović, Nikolai Ostapenko and Muris Cicic Introduction 68 Defining luxury products 68 Motivational drivers for luxury consumption 69 Luxury industry composition and global fashion centers 71 Global luxury consumers and demand for luxury products 73 Drivers of regional luxury consumption in the Balkans 75 Luxury consumption and affluent behavior in European Russia 78 Conclusions 83 6 The Brewing Industry in CEE: Growth and Development 87 Jorma Larimo, Marin Marinov and Svetla Marinova Introduction 87 Trends in the development of the brewing industry 88 CEE brewing industry 89 Market entry and market servicing strategies in CEE 90 Investment and ownership strategies 94 Problems and performance in CEE markets 95 Conclusions 100

Contents vii 7 Special Economic Zones in Russia: Can They Lead to an Economic Boom Similar to the Chinese? 104 Kari Liuhto and Valtteri Kaartemo Introduction 104 Special economic zones 107 Policy lessons 114 Executive summary 116 Acknowledgments 119 8 The Changing Russian Economy: Export Channel Strategies of Japanese Companies 123 Eiko Tomiyama Introduction 123 Literature review 125 Problems facing companies entering transition countries 129 Research method 131 Results 132 Findings and analysis 139 Conclusions 141 Implications and recommendations 143 Acknowledgments 145 9 Investing in a Transition Economy: Motives and Modes of Foreign Direct Investment in Poland 148 Marian Gorynia, Jan Nowak and Radoslaw Wolniak Introduction 148 Motives and modes of FDI 149 Research methodology 160 Analysis of cases 162 Discussion of results and hypotheses 167 Implications and lessons 169 Conclusions and directions for future research 171 Appendix: FDI in Poland s transition process 171 10 Kissing the Frog: The Changing Nature of Doing Business in Romania 183 Liviu Voinea Dynamics of the economic reform 183 Objective of the analysis and research approach 187

viii Contents Findings 190 Lessons and conclusions 210 11 Celebrity Endorsement in Brand Management in Croatia 214 Durdana Ozretic-Dosen, Vatroslav Skare and Zoran Krupka Introduction 214 Literature review 214 Research design and methodology 216 Results and discussion of findings 217 Conclusions 223 12 An Institutional Perspective: The Changing Role of the State in Entrepreneurship Development in Post-Communist Albania 225 Mirela Xheneti Introduction 225 Institutional theories and entrepreneurship development 227 A brief overview of post-communist Albania 232 Institutional framework for entrepreneurship and SME development 235 Conclusions 249 13 E-marketing Strategies in Emerging Markets: Tourism Industry in Bosnia and Herzegovina 256 Almir Peştek and Muris Cicic Introduction 256 Impact of information and communication technologies on tourism 257 Use of e-marketing in tourism 260 Tourism in Bosnia and Herzegovina 262 E-marketing strategies in the tourism sector of Bosnia and Herzegovina 270 Concluding remarks 276 14 Transformation of the Estonian Banking System: From Uncertainty to Stability 280 Mart Sõrg Introduction 280 The first banking reconstruction period 1988 1992 281

Contents ix Banking transformation in the period 1993 1998 289 Banking since 1999 294 Conclusions 299 Index 303

List of Figures 2.1 Type of subsidiaries 11 2.2 Cultural change in CEECs 21 3.1 Number of Japan s manufacturing FDI in CEE 36 3.2 Equilibrium in the evolutionary game 39 3.3 Corner solution case 41 3.4 Change of norm case 42 6.1 Market share of the leading breweries in various CEE markets in 2001 99 10.1 Reform stages in the Romanian economy 184 10.2 The microeconomic business environment 190 10.3 Main obstacles to business, survey results (percentage of total) 191 10.4 FDI penetration (2001) and productivity dynamics (2001 compared with 1995) (percentage, by manufacturing sectors) 197 10.5 Performance and specialization in Romanian foreign trade by product group, SITC-2 classification, 2001 vis-à-vis 1993 199 12.1 Commonality of exploiting opportunities to cheat on formal regulations 243 12.2 Business services that are most needed in the Albanian context 246 12.3 Information related barriers by an enterprise perspective 246 12.4 Reasons for not using services by business support structures 247 12.5 Business support infrastructure barriers 248 13.1 www.sarajevo-travel.ba portal 271 14.1 The risk management framework in banking 288 x

List of Tables 2.1 Evaluation of the motives of MNE s subsidiaries in CEE 17 3.1 Flow of inward FDI in Central Europe (USD million) 32 3.2 Methods of privatization 32 3.3 GDP level (EU average = 100) 33 3.4 Structural reform index 33 3.5 Stock of inward FDI in transition countries (USD million) 34 3.6 Japan s outward FDI (USD million) 34 4.1 Value-based market shares (2001, 1999) by product category and country 56 4.2 Leading marketers of fast-moving consumer goods (FMCG) in CEE 57 4.3 Market shares of international brands by cultural grounding category 58 5.1 Strongest luxury brands, 2008 72 5.2 The conglomerates behind major luxury brands 72 5.3 Luxury consumers in the Balkan region 76 6.1 Beer production, imports, exports and consumption in CEE in 1991 (in thousands of litres) 89 6.2 Beer consumption in CEE countries in the period 1996 2001 91 6.3 Ownership strategies and form of investment in CEE brewing industry 96 7.1 Countries of origin for top companies in terms of turnover and R&D spending 105 7.2 Development of knowledge economy indicators in selected countries 105 7.3 Differences between Russian TI-SEZs and Chinese SEZs 106 8.1 Case study findings 133 9.1 Summary characteristics of cases 163 9.2 FDI inflow into Poland from 1990 to 2001 (in USD million and percentage change over previous year) 172 9.3 Per capita FDI and FDI percentage spread in Eastern Europe, in 2000 174 xi

xii List of Tables 9.4 Stock of FDI in Poland by countries of origin as of 30 June 2002 175 9.5 Stock of FDI in Poland by sectors and industries as of 30 June 2002 176 9.6 Largest foreign investors in Poland by 31 December 2001 177 10.1 Chronology of major reforms 186 10.2 Key macroeconomic indicators for Romania, 1990 2004 188 10.3 Extent of state capture 194 10.4 Exports classification by price quality ranges (percentage of total exports) 201 10.5 Business indicators (2002) 205 10.6 Business indicators (2004) 206 10.7 State aid characteristics, comparison between Romania and the EU 208 10.8 Microeconomic business environment a scoreboard 208 11.1 Mean scores of criteria and differences in attitudes regarding gender 218 11.2 Differences in attitudes regarding occupation 221 11.3 Differences in attitudes regarding education 222 12.1 Active enterprises by size and year of creation 234 12.2 Government business information flow 239 12.3 Additional payments 240 12.4 Difficulties in dealing with government officials by the year of start-up 241 12.5 Attitude towards formal institutions 243 13.1 Share of online travel in Europe and USA, 1999 2007 (percentage of the total market) 259 13.2 Trends in the European online tourism market 259 13.3 Critical success factors 263 13.4 Expected characteristics of tourism websites that lead to repeated visit 263 13.5 Number of tourists in Bosnia and Herzegovina, 1997 2008 265 13.6 Accommodation capacities in Bosnia and Herzegovina per types of facility, 2009 266 13.7 Top ten countries tourists come from 266 13.8 Average tourists stay in Bosnia and Herzegovina (in days) 266

List of Tables xiii 13.9 Travel and tourism index of Bosnia and Herzegovina s competitiveness, 2009 267 13.10 Details of travel and tourism Bosnia and Herzegovina competitiveness indices, 2009 268 13.11 Descriptive statistics parameters for the observed samples 273 14.1 GDP and inflation in the Baltic states 282 14.2 Income and expenses of Estonian commercial banks in 1992 (EEK million) 285 14.3 Minimum capital requirements for Estonian commercial banks (EEK million) 290 14.4 Growth of assets of the commercial banks in Estonia, 1994 1998 291 14.5 Bank share price dynamics on Tallinn Stock Exchange 1997 (EEK) 293 14.6 Estonian commercial banks profit account (EEK million) 293 14.7 Laws guiding the activities of the Financial Supervisory Authority 296 14.8 Growth indicators of commercial banks in Estonia, 1998 2003 296 14.9 Some indicators of the Estonian financial sector development 297 14.10 EBRD rating of banking sector reform 298 14.11 Key efficiency ratios in Estonian banking (percentage) 298

Notes on Contributors Muris Cicic is Professor at the Department of Marketing of the University of Sarajevo in Bosnia and Herzegovina, and Visiting Professor at the University of Podgorica in Montenegro and the University of Shkoder in Albania. His research interests and experience are in marketing in general and consumer behavior in particular with a focus on transition economies. Stefan Eckert is Professor of International Management at the International Graduate School Zittau in Germany. He conducted research at the Strasbourg Graduate School of Management (IECS). In 2003, Dr Eckert was granted the post-doctoral lecture qualification by the Department of Social and Economic Sciences of the University of Bamberg. Marian Gorynia is Rector and Professor of Economics of Poznan University of Economics in Poland. He has conducted many research projects and has a number of publications as books, chapters in books and papers in academic journals. His areas of expertise include corporate strategy, internationalization of Polish firms and foreign direct investment strategies in Poland. Melika Husić-Mehmedović is Assistant Professor and Vice-Dean for Academic Affairs at the School of Economics and Business at the University of Sarajevo in Bosnia and Herzegovina. Areas of professional interest consumer behavior, luxury consumption, fashion marketing, public and media relations. Valtteri Kaartemo is Lecturer of International Business at the Turku School of Economics, Finland. His research interests are in the areas of internationalization, more specifically in international demand and innovation. Zoran Krupka is Research Assistant at the Faculty of Economics and Business, University of Zagreb in Croatia. He teaches brand management xiv

Notes on Contributors xv and international marketing courses. His research interests are international marketing and internationalization. Jorma Larimo is Professor of Marketing and Head of the Department of Marketing at the University of Vaasa in Finland. His areas of research include the internationalization of small- and medium-sized enterprises, international investments, alliance strategies and performance, and entry and marketing strategies in transition economies. Kari Liuhto is Professor and Director of the Pan-European Institute at the University of Turku in Finland. His research interests are in economic and business development in the Baltic region and Russia with a special focus on foreign direct investment and cross-border cooperation. He directs the publication of Baltic Rim Economies Review. Marin Marinov is Professor of International Business and Management at the Business School of the University of Gloucestershire in the UK. His research interests are in internationalization, foreign direct investment and international management mostly in the context of emerging market economies. Svetla Marinova holds a PhD in international business from Copenhagen Business School in Denmark. Her research interests are in international marketing, internationalization of firms, country and firm-specific advantages and outward foreign direct investment of companies from emerging markets. Ken Morita is Professor at the Faculty of Economics at Hiroshima University, Japan. He has conducted extensive interdisciplinary research, particularly focusing upon commodity futures market and foreign direct investment predominately in transition economies. Jan Nowak is Professor of Marketing at the Central European University Business School, Hungary. He has conducted research and published in the areas of marketing and international business. Dr Nowak has collaborated with scholars from all over the world and has conducted studies applied to a variety of countries in Europe, North America, Asia and the South Pacific. Nikolai Ostapenko is Associate Professor at the School of Business and Public Administration of the University of the District of Columbia in

xvi Notes on Contributors the USA. His research focuses on market transformation of the East European economies, changing consumption models, new patterns of consumer behavior, branding strategies, customer education and related issues. Durdana Ozretic-Dosen is Professor of Marketing at the Faculty of Economics and Business of the University of Zagreb in Croatia. She is national representative at the European Marketing Academy. Her research interests are in marketing in an intercultural cross-border environment in particular in emerging market countries. Almir Peştek is Doctoral candidate at the Faculty of Economics at the University of Sarajevo in Bosnia and Herzegovina. His research interests are in marketing, marketing research, consumer behavior and management. Frank Rossmeissl is Head of Strategic Management and Innovation Practice. He holds a Doctoral Degree from the International Graduate School Zittau in Germany. His research focuses on restructuring the competencies of network organizations and the role dynamics of German subsidiaries in Central and Eastern Europe. Arnold Schuh is Director of the Competence Center for Central and Eastern Europe at Vienna University of Economics and Business Administration in Austria. His primary research areas are marketing and strategic management. Current research and publications focus on international business strategies, marketing in Central and Eastern Europe and the influence of globalization/europeanization on strategies and structures of multinational corporations. Vatroslav Skare is a Teaching and Research Assistant at the Faculty of Economics and Business of the University of Zagreb in Croatia. His areas of research interest are product development, service marketing and internet marketing. Mart Sõrg is Professor of Money and Banking and Head of the Institute of Finance and Accounting at the University of Tartu in Estonia. His research interests and publications are in monetary systems and monetary policies of transition countries, banking system reconstruction and developing and economic education in economies in transition.

Notes on Contributors xvii Eiko Tomiyama has Masters and Doctoral degrees in Economics from Niigata University in Japan. Her research is focused on emerging market economies investigating strategic marketing issues and the internationalization of small- and medium-sized enterprises. She provides a consulting service for Japanese companies formulating strategies for entering the Russian market. Liviu Voinea is Senior Lecturer at the National School for Political and Administrative Studies in Bucharest, Romania. He is also Executive Director of the Group of Applied Economics in Bucharest. His research interests are in emerging market economies and changes in the business environment of economies in transition. Radoslaw Wolniak is Senior Lecturer at the Faculty of Economics of Warsaw University in Poland. His research is in the area of inward and outward foreign direct investment and national competitiveness in the context of Central and Eastern Europe. Mirela Xheneti is Researcher at the Small Business Research Centre at Kingston University in London in the UK. Her research interests are in entrepreneurship and small business development in post-communist countries and especially the role of institutions and policies in creating a framework for productive entrepreneurial activities.