CHAPTER 3

Challenges for Entering CIS Markets

Overview

As the advanced Western economies still try to recover fully from the global financial crisis, the CIS, a part of the world often neglected by investors and business leaders, has been showing impressive growth and maturity, both economically and politically. The International Monetary Fund (IMF) in its World Economic Outlook (2017) has improved the forecast for economic growth in the CIS countries up to 0.6 percent and 1.5 percent, in 2016 and 2017, respectively. IMF analysts also argue that many commodity exporters within the CIS still confront the need for sizable fiscal adjustments, and that these economies more broadly need to be alert to financial stability risks. Risks of noneconomic origin also remain salient, as political divisions within advanced economies, particularly between the United States and Russia at the starting of a new administration in the United States, may hamper efforts to tackle long-standing structural challenges and the refugee problem; and a shift toward protectionist policies is a distinct threat.

Recent political unrest in some countries of the region, however, threatens to stymie economic progress and has reminded investors of the inherent risk that such high-return opportunities tend to carry, along with other factors discussed in this chapter, which should be seriously considered.

Even when bound by the ideology and strong embrace of the Soviet Union, the CIS’s countries differ widely, both economically and culturally. Hence, the CIS region has provided several new developments in information controls. The region witnessed two cyberwars. The first was a campaign by pro-Russian (and allegedly state-sponsored) hackers, which paralyzed the Estonian Internet in May 2007. The second was a similar campaign (also allegedly organized by nationalist pro-government Russian hackers) that occurred at the same time as major combat operations in Georgia (August 2008). The latter campaign targeting Georgian online media and government websites led Georgian authorities to filter access to Russian Internet sites (allegedly as a means of self-defense against Russian cyber propaganda) and resulted in an information vacuum in Tbilisi during the critical days where it was unclear whether Russian troops would stop their advance into Georgia.

Another important factor is the historical and cultural perspective that each country and its people possess. An investor would be well advised to seek trusted, and if possible local, advisers with a keen understanding of each country’s culture and history. Failure to grasp local customs can be a pitfall when investing in any part of the world, but one would be hard pressed to find a place where such knowledge is more important than the CIS.

What helps promote international cooperation, particularly at a regional level? There is, of course, a broad literature on this topic, some of which is reviewed in more details throughout the book. Explanations tend to fall into four different categories: the importance of the structure of the international system; instrumental approaches often rooted in interdependence; state-level factors; and cultural-constructivist perspectives that emphasize development not so much of formal institutions but of a sense of region and regional identity.¹

On the political side, newly elevated activists supported by democracy-hungry populations, along with some freshly repainted old-regime politicians, dominated the initial scrambles for power in these countries. After the early victories by the new but inexperienced leaders, however, the former communist figures, well-groomed for political survival through the decades, have emerged as major players in many of these countries.

In addition, the global financial crisis that started in 2007 continues to ripple through these countries, and their ongoing struggle to adapt to new ways of doing business still bears watching, as does the potential for renewed political turmoil. In our experience teaching this topic, consulting for several multinational corporations around the world, and being a practitioner ourselves, we find that the CIS markets are not easy to enter. Hence, entering these markets can be a complex endeavor, but the rewards can be immense as well.

In some countries, government interference, backward infrastructure, political instability, works’ skill mismatch, and even lack of skilled workers, requires a lot of patience, perseverance, and specialized assistance. Opportunities in the CIS markets, therefore, come with their own set of challenges.

Geopolitical Factors

Emerging economies, in particular the CIS economies have also experienced large-scale structural change. Neo-realism emphasizes international structure—commonly defined by the number of great powers in the global or, in this case, regional system—as crucial to explain both conflict and cooperation. Neo-realists tend to view regionalism as akin to alliance formation. One basic idea is that of balance of power—that states will form alliances and cooperative arrangements if they perceive some sort of threat. This threat can be from outside the region, so states may create regional arrangements to augment their own power. Examples would include the Gulf Cooperation Council (against Iran), ASEAN (against Vietnam), and MERCOSUR (against the United States). The threat, however, may also come from within the region itself, meaning that states might try to use multilateral institutions or regional integration to lock a regionally powerful state into a structure that can contain it. Arguably, the European Union (EU) has done so with respect to Germany,² and this notion could be of great utility in the CIS, over which Russia casts a long shadow.

In contrast to the idea of balancing or being entrapped within regional institutions, some would emphasize the role of global or regional powers or hegemons in fostering cooperation. In addition to possessing resources that might overcome collective action problems, regional hegemons may see the growth of regional institutions, which they would dominate, as a means for furthering their own agenda, either within the region itself or with respect to the broader world. Other states would then bandwagon with the hegemon in the hope of receiving some benefits from the more powerful state or from regional structures themselves. The United States, for example, has helped foster many regional organizations, including NAFTA, the EU, the Gulf Cooperation Council, and ASEAN, all of which serve(d) both American and local interests.³ The key, however, is that the willingness of other states to go along with the hegemon will be conditioned upon this commonality of interest. With respect to the CIS, the obvious hegemonic power is Russia. Thus, to the extent that Russia sees regionalism to its own advantage and other states see some benefit to attracting themselves to Russia, one might imagine that Russian-led regionalism would develop.⁴

When Vladimir Putin became President of Russia in 2000, he fully recognized Russia’s diminishing role, both on the global stage and in the post-Soviet space. He pledged that relations with CIS states would be the high priority and took several steps to bolster Russia’s role in the region. In the energy sphere, Putin pushed for more Russian investment in Caspian littoral states. He reached agreements with both Kazakhstan and Azerbaijan in 2001 to 2002 to resolve the legal status of drilling rights in the Caspian. Putin also proposed increasing oil and gas shipments from the region through Russian pipelines to prevent construction of alternative pipelines. This bore fruit, particularly with respect to Kazakhstan, which helped undercut Western efforts to get Kazakh oil to hook up to the BTC and flow westward. The planned export of Kazakh oil through Russian pipelines may, in the words of one report, give Russia an “unbreakable stranglehold over Central Asia’s energy reserves” and spell the end of United States and European-backed plans to build a trans-Caspian oil pipeline.⁵ In addition, Russian concluded long-term contracts for the purchase of Turkmen gas, agreed in 2007 to upgrade gas pipelines flowing from Turkmenistan northward through Kazakhstan and Russia, and stepped up investments in energy fields in Uzbekistan.

In the security area, Russia has recovered from some of the setbacks it suffered after the United States stepped up its involvement after 9/11. It has maintained many of its bases in Central Asia whereas the Americans were kicked out of Uzbekistan in 2006 and have an uncertain future with basing rights in Kyrgyzstan. In 2002, six states—Russia, Belarus, Armenia, Kyrgyzstan, Tajikistan, and Kazakhstan—formed the Collective Security Treaty Organization (CSTO), an outgrowth of the 1992 CIS Collective Security Treaty. Uzbekistan joined in 2006. The CSTO has conducted joint military exercises and cooperates with the SCO, which has been increasingly visible in Central Asia and is viewed by both Russian and Chinese elites as a vehicle to balance American intrusions into both major powers’ backyard. In 2003, for example, SCO members agreed to conduct military exercises and to set up a Secretariat for the organization in Beijing and an anti-terrorism center in Bishkek, Kyrgyzstan.

On economic questions, the EAEC has become the preeminent regional organization on the post-Soviet space. That may not be saying much, as many of its goals are more declaratory than implemented. What is interesting, however, is that much of its stated agenda is similar to original goals of the CIS, including creation of a customs union, general rules on trade in goods and services, a unified energy market, standardized currency regulation, joint programs of social and economic development, harmonization of national legislation, and rights of individuals to obtain services for example educational, medical) in any state. Like the CIS, it has its own Secretariat, Inter-State Parliamentary Assembly, and State Councils. The Chinese, driven both by export markets and the need to diversify their energy supply, are also eager to give more of an economic component to the SCO.

If one counts all the aforementioned as evidence of successful regionalism, it is notable that none of this includes the CIS in its entirety. Regional integration has gone furthest between Russia and Belarus—which have flirted with the idea of unifying—and between Russia and Central Asian states. The latter is hardly surprising, rooted both in economic and security interdependence and common concerns about the West’s democratization agenda, which included support for the 2003 Rose Revolution in Georgia, the 2004 Orange Revolution in Ukraine, in which the official CIS election monitoring team affirmed the victory of the pro-Russia candidate, and the more inconclusive 2005 Tulip Revolution in Kyrgyzstan. China, which is a major player it both security and economic questions in Central Asia, is, in contrast, relatively welcomed as it does not care about democratic shortcomings and can act as a balancer against Russia. Some, however, would maintain that would should not make too much of Russian-led “regionalism” in Central Asia, which is little more than a “thin layer of multilateralism still cloaked by bilateral agreements.”⁶

Nonetheless, the CIS countries performed particularly well in the World Bank’s “Doing Business 2016” survey, with nearly all countries within the region enjoying an increase in their ranking. As depicted in Figure 3.1, when indexed against 2010 scores, CIS countries, along with the CEE economies, have far outperformed the EU in terms of improvements in the distance to frontier (DTF) value from 0 to 100. Germany, on the other hand, got worse.

Russia missed out on entering the world’s top 50 economies in the World Bank’s “Doing Business 2016” survey, ranking 51st out of 189 countries. While President Vladimir Putin had targeted 50th slot this year, the position still marks an improvement on last year’s assessment, which put Russia in 62nd place. In 2012, Putin promised that Russia would reach 20th in the World Bank’s report by 2018. While this year’s place is still some distance away, it is a vast improvement on previous years. In 2011 Russia sat all the way down in 120th place.

Figure 3.1 Change in DTF score for CIS countries, 2010–2014

Source: World Bank “Doing Business 2016.”

The strides being made are a vindication of Putin’s efforts, and the breakdown by the World Bank of the reforms made by Moscow show that real efforts are being made to improve the business climate in the CEE and CIS’s biggest economy. Russia this year improved in five key areas: Starting a business; getting electricity; registering property; and getting credit and paying taxes. These improvements, the report says, “were most successful in regions with greater government transparency” and “greater fiscal autonomy.”

Kazakhstan also impressed in this year’s report, climbing 12 places to 41st. Along with Russia, it was one of only 12 economies to implement 4 or more reforms since the last “Doing Business” report, at 7 and 5 reforms, respectively. Meanwhile, Ukraine jumped 13 places to 83rd slot, fulfilling President Petro Poroshenko’s earlier pledge of a rise of “at least 10 places” in the ranking as a result of reforms carried out under his watch. Belarus also significantly improved its position, ranking 44th among the 189 countries, compared with 57th place the previous year.

Several are the challenges affecting the CIS economies. Aside from geo-political factors, the following are some important aspects to consider when entering these markets.

Skill Mismatches

Skill mismatches and skill shortages have become a priority concern for policy makers in many countries, especially since the onset of the global economic crisis and its intensification through the crisis in the Eurozone. Endogenous growth models emphasize that human capital is a key resource for growth.⁷ In fact, skill mismatch has an adverse effect on the efficiency of labor markets, particularly in transition economies, raising unemployment above the levels that could potentially be achieved given the level of aggregate demand. Efficient matching would reduce frictional and structural unemployment and ensure that vacancies are matched to workers with appropriate qualifications and skills.⁸

For instance, often lack of specialized education of the workforce translates into thwarted growth being curbed lack of a skilled workforce. Per models of endogenous growth,⁹ the skill levels of the workforce, particularly in transition economies, are an important driver of economic development. This is partly due to different patterns of structural change and partly associated with demographic factors. Countries with high population growth rates may experience over—supply of educated school leavers; countries with falling populations may experience under-supply of both skilled and unskilled workers. There is also evidence of gender-biased mismatch in these markets. Among the main challenges to the development of effective skill matching systems and corresponding policy design in transition countries are weak capacities of government institutions including the employment services, underfunding of state provided training services, slow reforms of the education systems and low level of in-house training by employers.¹⁰

Figure 3.2 Unemployment rates for CIS countries and the region

Source: Eurostat and CIS-STAT.

Most of the CIS countries have experienced volatile labor markets for many years. For 2015, the share of employment in the primary sector in the CIS countries was larger than the EU-28 average by 9.9 percentage points (14.9 and 5.0 percent, respectively), while the share of employment in the tertiary (services) sector was smaller in the CIS countries (60.4 percent against 70.3 percent in the EU-28), as depicted in Figure 3.2.

Education System

Education systems in many CIS countries are still characterized by poor quality and irrelevance of much education provision in the region.¹¹ It is increasingly being recognized that curricula inherited from the previous communist system were unsuited to the development of a service-oriented post-Fordist¹² market economy and have not been upgraded sufficiently to reflect the new occupations that have emerged in the service sectors and in high technology industries. Skills that are taught in vocational education institutions tend to be too specialized in obsolete occupations. Education methods often outdated and dependent on rote learning, based on memorization techniques and repetition rather than problem solving. There is generally a deficit of education in transferable skills (so-called “soft skills”).

Skills produced by the education system are often no longer demanded in the labor market. A recent study of the development of skills mismatches in the CIS found that

Moreover, because of structural change, it seems that skill mismatch is a more permanent phenomenon in the CIS markets than in the advanced economies resulting in high levels of long-term unemployment, and that skills mismatch increases with the age of workers, rather than falling as it does in the developed economies.

With falling school enrolment rates, deteriorating education quality and school systems struggling to overcome the global financial crisis, education is a top priority. Despite ongoing reforms, the region’s under-resourced education systems are struggling to improve equity, quality, and governance. Children and adolescents face many barriers to school participation and learning.

Disparities in access persist for the hardest to reach groups, with policies and programs for minority groups showing little impact. Children with disabilities are almost entirely excluded from education, dropout rates are rising in many countries and, in some countries, primary school enrolment rates are declining. Families’ costs of educating children have increased, especially considering the current financial crisis, which exacerbates existing barriers to access.

School quality is also declining, with low levels of learning achievement, inadequate teacher preparation systems, outdated teaching methodologies, over-centralized school governance, and crumbling school infrastructure among the major concerns. Early childhood education services are scarce and often do not serve those who would benefit the most. Ability tracking and segregation of children to special schools persist. Youth unemployment is often double and triple that of the national unemployment rate, partly because young people leave school without the skills needed to participate in today’s knowledge economy.

Economic Restructuring

Skill shortages and surpluses of various types are a challenge for the CIS countries because of economic restructuring. We point out how in former Soviet-Countries structural changes in industrial organization are expected to afford directly the stability and functioning of the social fabric. Societal system is linked to production system through a specific network of linkages which substantially (qualitatively) differ from those we are acquainted with in the Western economies. The Soviet context is pivoted on the Soviet enterprises, an institution which keeps together linked State and Civil Society, Production and Reproduction, Economics and Policy, brief all those couples that in Western-Context a series of institutions try to keep rather separated.

In other words, the responsibility (commonwealth) that Soviet enterprises holds toward citizens is immediate and put under their own direct control: the enterprise provides them with everything they need for living, from cradle to the grave. The institutional framework has therefore remained extremely a simplified one: liability remains substantially concentrated in the hands of the enterprise, and is not split throughout a set of institutions. The main socio-economic guarantees were distributed through the Soviet enterprises and citizens enjoyed them through their belonging to the working communities who were entitled of enterprises operation management.

Accordingly, key functions concerning social citizenship where operated and channeled through the Soviet enterprises: from one side, the enterprise traditionally represented the main source of rights for citizens and, on the other one, citizens control and guarantees rested upon their property rights imbedded within the Soviet enterprises. In such a way, entrepreneurship in the Soviet context has maintained a striking association with social and moral responsibility. Within this oversimplified institutional framework, production could not emancipate from both its immediate social meaning and from related costs (sacrifices); and economic growth could not divorce from obligations related to social (community) development. Therefore, due to these specific features of the material constitution of the Soviet context, any changes occurring in production, organization of work, industrial organization, and so on, briefly, in the economic sphere, would affect immediately social life as a whole.

Legal Framework and Trading Policies

In the area of trade-related policies, the CIS countries will have to continue to make strategic decisions on policy objectives that have so far been avoided. Necessary adjustments to specific policy instruments will be limited and mostly technical in nature. Similarly, current plans for regional integration among CIS countries are fundamentally in compliance with WTO rules.

Negotiating strategies, however, will need to be carefully coordinated among CIS countries that are in a de facto, though not necessarily a de jure customs union. Systemic transformation, especially the imposition and further strengthening of financial discipline on formerly socialist enterprises through privatization and elimination of subsidies, will need to be carried forward vigorously. Benefits of WTO accession include the consolidation of recent improvements in market access and, above all else, greater credibility for market-oriented reform policies through the international commitments to be entered by CIS governments with respect to future trade-related policies.

Generally, regionalism, as opposed to multilateralism, is a centripetal process that involves the movement of two or more economies toward greater integration with one another. This process is driven either by political forces that are motivated by security, economic or other concerns or by microeconomic forces (such as firms, banks, people) often spurred by the pressure of competition. Whenever the first objectives dominate or are exclusive “de jure, regionalism” might occur. De jure regionalism takes a variety of institutional forms ranging from “free” or preferential trade agreements to customs unions or common markets and economic unions. These institutional arrangements have in common the exercise of extra-economic powers of state to lower barriers, especially policy barriers, to intra-regional economic activities. “De facto regionalism,” in contrast, necessitates both the political will and the support from an economic constituency. It takes the form of significant cross-border trade and investment flows due to geographical and/or cultural proximity leading to growing regional integration. Whether either form of regionalism reinforces or jeopardizes the multilateral trading system remains an open question but it is likely that to some effects the balance of benefits may depend on the institutional form of agreements.

As for most industrialized countries trade volumes increased significantly in the period after World War II, trade has been identified as one potential culprit for the worsened position of low skilled workers.¹⁴ Trade is thought to have affected the demand for low-skilled workers in two ways. It is thought to have reduced the relative demand for low-skilled labor and to have made the demand more responsive to changes in the price of low-skilled labor. Both effects would reduce the relative wages of low skilled workers in economies with flexible labor markets. In economies where labor market rigidities prevent wages from falling an increased relative unemployment rate of low-skilled labor may result. Country-specific labor market characteristics would thus have an important effect on whether and to which extent relative wages and trade affects relative unemployment rates.

Does all this mean that foreign investors should avoid trading with or investing in the CIS markets? On the contrary, however, any organized program of opening to the CIS markets must include specialized expertise, on-the-ground knowledge, local partnerships and, most of all, patience.

Why Multinationals Fail in the CIS Markets?

Pacek and Thorniley¹⁵ identified an exhaustive range of factors contributing to the failure of companies from advanced economies into the CIS markets. These factors may be divided into external and internal factors and almost all are related to strategic and leadership issues:

The failure factors are numerous and diverse but as Pacek and Thorniley noted it all boils down to a lack of adequate market entry preparation. Preparation requires companies to continuously research the external environment and know how to use internal resources to take advantage of opportunities. Hence, a preliminary audit that focuses on external and internal factors is essential. The external factors may be examined by posing questions concerning the market, the political environment, the economic environment, and the business environment, as depicted in Table 3.1.

By the same token, the internal factors must inquire about resources, products, organization, and risks, as depicted in Table 3.2.

Having done a preliminary external and internal audit, managers need to prepare a business proposal describing what to do, how to do it, by when, and resources required. Business must then ask themselves whether there are similar or better opportunities available in other CIS markets. How then, can we compare the potential of different CIS markets?

Table 3.1 External factors and sample questions

Understanding the market
Market potential	• How large and wealthy is the market? • Is there unsatisfied demand for the product/service?
Understanding local consumers/customers	• Who are the consumers/customers? What are their characteristics? • How do consumers make their decisions?
Reaching the consumer/customer	• How difficult/easy is it to reach potential consumers/ customers? • How do competitors and noncompetitors reach their customers?
Competition	• Which competitors are already operating in the market? • How strong are these competitors?
Lessons learned by noncompetitors	• What do noncompetitors say about the business environment in the country? • What have been the largest obstacles to successful operations?
Local culture	• What aspects of local culture are relevant to running a successful local business?
Understanding the political and economic environment
Economic outlook	• How sustainable is economic growth? • What is driving economic growth?
Political outlook	• What is the level of political risk and how will or might affect the business?
Government policies	• Does the government allow a level-playing field? • Is the government in the hands of local lobbies?
Understanding the business environment
Finance	• Is it possible to finance operations locally? • What access do customers/consumers have to finance?
Labor market	• What are the wage/salary rates for the employees who will be needed? • What are the most effective ways of recruiting local employees?
Taxation	• What are the current levels of taxation? • What is the outlook for tax incentives?
Legal environment	• How effective and efficient is the local judiciary? • Is there any hope that the legal system will improve?
Bureaucratic obstacles to business	• What are the most common bureaucratic obstacles for business? • How easy or difficult it is to set up business in the country?
Crime and corruption	• Is crime a problem for business? • What is the level of corruption?
Infrastructure	• What is the quality of local transport infrastructure? • And telecommunications?
Foreign trade environment	• Is the country a WTO member? • Does it belong to any trading blocs or regional free-trade areas?
Cost of building a business and brand	• How expensive is it to build a brand? • How much time will it take to do what is necessary to get the business off the ground?

Table 3.2 Internal factors and sample questions

Resources	• How much time and money will be required? • Is the CEO committed to support business development and provide necessary resources? And the senior managers? • What human resources are needed?
Products	• Is the product portfolio right for the market? • Will investment be available for developing new products?
Organization	• Could existing internal processes and operational practices help or hinder what is planned? • What existing capabilities can be drawn?
Risks	• Can the risks that have been identified be managed? • How would entry be financed?

Best Opportunities Fill in Institutional Voids

From an institutional viewpoint, the market is a transactional place embedded in information and property rights, and CIS markets are a place where one or both features are underdeveloped.¹⁶ Most definitions of CIS markets are descriptive based on poverty and growth indicators, and their economic stage. In contrast, a structural definition as proposed by Khanna and Palepu points to issues that are problematic therefore allowing an immediate identification of solutions. Moreover, a structural definition allows us not only to understand commonalities among CIS markets but also to understand what differentiates each of these markets. Finally, a structural approach provides a more precise understanding of the market dynamics that genuinely differentiates the CIS markets from advanced economies.

To illustrate, let us contrast the equity capital markets of South Korea and Chile. As per the International Finance Corporation (IFC) definition, South Korea is not an emerging market because it is an OECD member, however when we look at its equity capital market we notice that until recently it was not functioning well, in other words it has an institutional void. Chile on the other hand is considered an emerging market in Latin America but it has an efficient capital market, thus no institutional void appears in this sector. However, Chile has institutional voids in other markets such as the products market. Similar factors exist among CIS countries.

Strategy formulation in CIS markets, therefore, must begin with a map of institutional voids. What works in the headquarters of a multinational enterprise does not per se work in new locations with different institutional environments. The most common mistake companies do when entering CIS markets is to overestimate the importance of past experience.

This common error reflects a recency bias: a person assumes that recent successful experiences may be transferred to other places. A manager may incorrectly assume that the way people are motivated in one country would be the same in the new country (context). It may be assumed that everyone likes to be appreciated, but the way of expressing appreciation depends on the institutional environment. Khanna and Palepu point out that the human element is the cornerstone of operating in new contexts. Ultimately, human beings, who provide a mix of history, culture, and interactions, create institutions.

In short, based on Khanna and Palepu’s institutional approach to CIS markets it is necessary to answer several questions, including but not limited to:

Strategies for CIS Markets

The work of Khanna and Palepu indicate that there are four generic strategic choices for companies operating in emerging markets, which also applies for CIS markets:

The CIS markets attract two competing types of enterprises, the developed market-based multinationals and the emerging market-based companies. Both bring different advantages to fill institutional voids. MNEs bring brands, capital talent, and resources, such as the case of several ones based in Lithuania, whereas local companies contribute with local contacts and context knowledge. Because they have different strengths and resources, foreign and domestic firms will compete differently and must develop strategies accordingly. Table 3.3 summarizes the strategies and options for both MNCs and local companies.

Table 3.3 Responding to institutional voids

Strategic choice	Options for MNCs from developed countries	Options for the CISan market-based companies
Replicate or adapt?	• Replicate business model, exploiting relative advantage of global brand, credibility, know-how, talent, finance, and other factor inputs. • Adapt business models, products, or organizations to institutional voids.	• Copy business model from developed countries. • Exploit local knowledge, capabilities, and ability to navigate institutional voids to build tailored business models.
Compete alone or collaborate?	• Compete alone. • Acquire capabilities to navigate institutional voids through local partnerships or joint ventures (JVs).	• Compete alone. • Acquire capabilities from developed markets through partnerships or JVs with multinational companies to bypass institutional voids.
Accept or attempt to change market context?	• Take market context as given. • Fill institutional voids in service of own business.	• Take market context as given. • Fill institutional voids in service of own business.
Enter, wait, or exit?	• Enter or stay in market spite of institutional voids. • Emphasize opportunities elsewhere.	• Build business in home market in spite of institutional voids. • Exit home market early in corporate history if capabilities unrewarded at home.

Source: Khanna and Palepu (2010).

Anand P. Arkalgud¹⁷ provides a good example of how companies fill institutional voids. Take the example of India, where road infrastructure is still underdeveloped in terms of quality and connectivity. Traditionally Tata Motors has been the dominant player in the auto industry but when it started to receive competition from Volvo in the truck segment and by Japanese auto makers in the car segment Tata responded. It created a mini-truck that not only provided more capacity and safety than the two- and three-wheeled pollutant vehicles used to access market areas but also an environmentally sound vehicle, one that could easily maneuver U-turns in such narrow streets.

Another case in India involved Coca Cola, who discovered that their beverages were being sold “warm.” Coca Cola realized that it needed a solution to sell its product “chilled.” The reason for the warm bottles was that electricity supplies in these remote locations were unstable especially in summer periods, not allowing the bottles to remain chilled. Thus the company developed a solar-powered cooler and partnered with a local refrigeration company.

Tarun Khanna and Krishna Palepu propose the following five contexts as a framework in assessing the institutional environment of any country. The five contexts include the markets needed to acquire input (product, labor, and capital), and markets needed to sell output. This is referred to as the products and services market. In addition to these three dimensions the framework includes a broader sociopolitical context defined by political and social systems and degrees of openness. When applying the framework, managers need to ask a set of questions in each dimension. An example of these questions is indicated in Table 3.4 below.

Table 3.4 Framework to assess institutional voids

Institutional dimension	Questions
Product markets	1. Can companies easily obtain reliable data on customer tastes and purchase behaviors? Are there cultural barriers to market research? Do world-class market research firms operate in the country? 2. Can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer organizations and publications that provide such information? 3. Can company’s access raw materials and components of good quality? Is there a deep network of suppliers? Are there firms that assess suppliers’ quality and reliability? Can companies enforce contracts with suppliers? 4. How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations? 5. Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities? Do they reach all consumers or only wealthy ones? 6. Are there other types of distribution channels, such as direct-to-consumer channels and discount retail channels that deliver products to customers?
	7. Is it difficult for multinationals to collect receivables from local retailers? 8. Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases? Are data on customer creditworthiness available? 9. What recourse do consumers have against false claims by companies or defective products and services? 10. How do companies deliver after-sales service to consumers? Is it possible to set up a nationwide service network? Are third-party service providers reliable? 11. Are consumers willing to try new products and services? Do they trust goods from local companies? How about from foreign companies? 12. What kind of product-related environmental and safety regulations are in place? How do the authorities enforce those regulations?
Labor markets	1. How strong is the country’s education infrastructure, especially for technical and management training? Does it have a good elementary and secondary education system as well? 2. Do people study and do business in English or in another international language, or do they mainly speak a local language? 3. Are data available to help sort out the quality of the country’s educational institutions? 4. Can employees move easily from one company to another? Does the local culture support that movement? Do recruitment agencies facilitate executive mobility? 5. What are the major post recruitment-training needs of the people that multinationals hire locally? 6. Is pay for performance a standard practice? How much weight do executives give seniority, as opposed to merit, in making promotion decisions?
	7. Would a company be able to enforce employment contracts with senior executives? Could it protect itself against executives who leave the firm and then compete against it? Could it stop employees from stealing trade secrets and intellectual property? 8. Does the local culture accept foreign managers? Do the laws allow a firm to transfer locally hired people to another country? Do managers want to stay or leave the nation? 9. How are the rights of workers protected? How strong are the country’s trade unions? Do they defend workers’ interests or only advance a political agenda? 10. Can companies use stock options and stock-based compensation schemes to motivate employees? 11. Do the laws and regulations limit a firm’s ability to restructure, downsize, or shut down? 12. If a company were to adopt its local rivals’ or suppliers’ business practices, such as the use of child labor, would that tarnish its image overseas?
Capital markets	1. How effective are the country’s banks, insurance companies, and mutual funds at collecting savings and channeling them into investments? 2. Are financial institutions managed well? Is their decision making transparent? Do noneconomic considerations, such as family ties, influence their investment decisions? 3. Can companies raise large amounts of equity capital in the stock market? Is there a market for corporate debt? 4. Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? 5. How reliable are sources of information on company performance? Do the accounting standards and disclosure regulations permit investors and creditors to monitor company management? 6. Do independent financial analysts, rating agencies, and the media offer unbiased information on companies?
	7. How effective are corporate governance norms and standards at protecting shareholder interests? 8. Are corporate boards independent and empowered, and do they have independent directors? 9. Are regulators effective at monitoring the banking industry and stock markets? 10. How well do the courts deal with fraud? 11. Do the laws permit companies to engage in hostile takeovers? Can shareholders organize themselves to remove entrenched managers through proxy fights? 12. Is there an orderly bankruptcy process that balances the interests of owners, creditors, and other stakeholders?
Political and social system	1. To whom are the country’s politicians accountable? Are there strong political groups that oppose the ruling party? Do elections take place regularly? 2. Are the roles of the legislative, executive, and judiciary clearly defined? What is the distribution of power between the central, state, and city governments? 3. Does the government go beyond regulating business to interfering in it or running companies? 4. Do the laws articulate and protect private property rights? 5. What is the quality of the country’s bureaucrats? What are bureaucrats’ incentives and career trajectories? 6. Is the judiciary independent? Do the courts adjudicate disputes and enforce contracts in a timely and impartial manner? How effective are the quasi judicial regulatory institutions that set and enforce rules for business activities?
	7. Do religious, linguistic, regional, and ethnic groups coexist peacefully, or are there tensions between them? 8. How vibrant and independent is the media? Are newspapers and magazines neutral, or do they represent sectarian interests? 9. Are nongovernmental organizations, civil rights groups, and environmental groups active in the country? 10. Do people tolerate corruption in business and government? 11. What role do family ties play in business? 12. Can strangers be trusted to honor a contract in the country?
Openness	1. Are the country’s government, media, and people receptive to foreign investment? Do citizens trust companies and individuals from some parts of the world more than others? 2. What restrictions does the government place on foreign investment? Are those restrictions in place to facilitate the growth of domestic companies, to protect state monopolies, or because people are suspicious of multinationals? 3. Can a company make greenfield investments and acquire local companies, or can it only break into the market by entering into joint ventures? Will that company be free to choose partners based purely on economic considerations? 4. Does the country allow the presence of foreign intermediaries such as market research and advertising firms, retailers, media companies, banks, insurance companies, venture capital firms, auditing firms, management consulting firms, and educational institutions? 5. How long does it take to start a new venture in the country? How cumbersome are the government’s procedures for permitting the launch of a wholly foreign-owned business? 6. Are there restrictions on portfolio investments by overseas companies or on dividend repatriation by multinationals?
	7. Does the market drive exchange rates, or does the government control them? If it’s the latter, does the government try to maintain a stable exchange rate, or does it try to favor domestic products over imports by propping up the local currency? 8. What would be the impact of tariffs on a company’s capital goods and raw materials imports? How would import duties affect that company’s ability to manufacture its products locally versus exporting them from home? 9. Can a company set up its business anywhere in the country? If the government restricts the company’s location choices, are its motives political, or is it inspired by a logical regional development strategy? 10. Has the country signed free-trade agreements with other nations? If so, do those agreements favor investments by companies from some parts of the world over others? 11. Does the government allow foreign executives to enter and leave the country freely? How difficult is it to get work permits for managers and engineers? 12. Does the country allow its citizens to travel abroad freely? Can ideas flow into the country unrestricted? Are people permitted to debate and accept those ideas?

Conclusion

Entry mode¹⁸ is determined by product, market and organizational factors. Regarding products and services, MNEs need to know whether the nature and range of the product or service, along with available marketing strategies will require any adaptation. If so, they should consider a partner in the CIS country they plan to enter. Usually a higher level of control and resource commitment in the foreign market is required for new or wider product offerings as well as higher levels of adaptation. When considering market factors managers need to consider physical distance and experience, as well as identify appropriate marketing strategies and distribution channels, and priorities in revenues, costs, and profits.

Organizationally, major concerns are communication with foreign operations and control of overseas activities. One concern in foreign markets is the control of assets. Firms will prefer to internalize activities in where there is a higher chance of opportunism by the partners in those markets.

For CIS, the region is poised for further growth, but some major obstacles remain on the road to prosperity. Chief among them are social and economic tensions between ethnic groups, which can create problems ranging from labor markets conflicts to security risks for local businesses. Such dynamics are a special concern during periods of economic distress, high unemployment and political unrest—known causes of nationalistic, antioutsider fervor.

Russia should not be underestimated as it plays an important role in the economies of the CIS. And Vladimir Putin has been frank about his ambition to create a Eurasian economic union, composed mainly of former Soviet states, as a counterweight to the EU. The long-term possibility of new realignments, this time toward the East, cannot be dismissed.

A case in point, most recently, the developments in Crimea have shown that despite years of change and effort toward global integration, Russian strategic goals in the region should not be overlooked. Putin’s rule, reminiscent of the iron hands that governed Russia during the Soviet era, coupled with those weakened by the Great Recession in the West, is a recipe for a meal that’s only served very cold.

¹ This classification borrows much from Hurrell, A. 1995. “Regionalism in Theoretical Perspective,” In Regionalism in World Politics, eds. L. Fawcett and A. Hurrell, 37–73. Oxford: Oxford University Press. Good sources that discuss regional theory and have relevance to the post-Soviet space are Kubicek, P. 1997. “Regionalism, Nationalism, and Realpolitik in Central Asia.” Europe-Asia Studies 49, no. 4, pp. 637–55, and Bohr, A. 2004. “Regionalism in Central Asia: New Geopolitics, Old Regional Order.” International Affairs 80, no. 3, pp. 485–502.

² Grieco, J. 1995. “The Maastricht Treaty, Economic and Monetary Union, and the Neo-Realist Research Programme.” Review of International Studies 21, no. 1, pp. 21–40.

³ For the idea that regionalism could be an instrument for hegemonic control, see Mittelman, J., and R. Falk. 1999. “Hegemony: the Relevance of Regionalism?,” In National Perspectives on New Regionalism in the North, eds. B. Hettne et al. London: Macmillan. See also Payne, A., and A. Gamble (eds). 1996. Regionalism and World Order. Basingstoke: MacMillan.

⁴ For assessment of Russia’s role as a hegemon with respect to Central Asia, see Allison, R. 2004. “Regionalism, Regional Structures Ad Security Management in Central Asia.” International Affairs 80, no. 3, pp. 467–9.

⁵ ‘Russia Celebrates Its Central Asian Energy Coup’, Eurasianet.org, 16 May 2007.

⁶ Allison (2004, p. 470).

⁷ Romer, P.M. 1994 “The origins of endogenous growth.” Journal of Economic Perspectives 8, no. 1, pp. 3–22.

⁸ Petrolongo, B., and C. Pissarides. 2001. “Looking into the Black Box: A Survey of the Matching Function.” Journal of Economic Literature 39, pp. 390–431.

⁹ Endogenous growth is long-run economic growth at a rate determined by forces that are internal to the economic system, particularly those forces governing the opportunities and incentives to create technological knowledge.

¹⁰ Will, B. 2013. “Skill Mismatch, Education Systems, and Labor Markets in EU Neighborhood Policy Countries.” Search, European Institute, http://ub.edu/search-project/wp-content/uploads/2013/09/WP05.20.pdf last accessed on 01/04/2016.

¹¹ Sondergaard, L., and M. Murthi. 2012. Skills, Not Just Diplomas: Managing Education for Results in the CIS and Central Asia. Washington: The World Bank.

¹² Post-Fordism is the name given by some scholars to what they describe as the dominant system of economic production, consumption and associated socio-economic phenomena, in most industrialized countries since the late 20th century.

¹³ ETF 2011. Labour Markets and Employability: Trends and Challenges in Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. Turin: European Training Foundation; Eurostat 2010. Statistical Pocket Book for the Candidate and Potential Candidate Countries. Brussels: Eurostat, p. 229.

¹⁴ Other factors that affect wage and/or employment inequalities are migration, technological change and changes in the skill distribution of the labor force.

¹⁵ Pacek, N., and D. Thorniley. 2007. The CIS Markets: Lessons for Business and the Outlook for Different Markets. 2nd ed. London: The Economist and Profile Books.

¹⁶ Ibidem.

¹⁷ Arnand Prasad Arkalgud (September 9, 2011) Filling “institutional voids“ in emerging markets. Forbes magazine. http://forbes.com/sites/infosys/2011/09/20/filling-institutional-voids-in-emerging-markets/ Last accessed on 12/15/2015.

¹⁸ http://globaledge.msu.edu/reference-desk/online-course-modules/market-research-and-entry