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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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Russian Federation
Geographical Position
Population 46.8 millions
GDP per capita $3621
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.
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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
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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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GlobalizationGlobalization 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.
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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 activity2. Definition of the common factors to analyse the markets of
different countries3. Preliminary classification of the factors: as threats or
opportunities4. Expert assessment of the impact of each of the group of
factors5. Analysis of the factors within each group (political, economic,
demographic, cultural, environmental, technological)6. Comparative analysis of the factors and their impact in
different countries7. Conclusions
11Source: adopted from
Cultural Factors
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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.
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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:
A. Real politicians’ values: personal power, not ideas.
B. Strong tribalism tendencyC. Weak position in a world economyD. Economic crisis
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Political situationA. 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_risks10_Oct2013e.pdf
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Political situation
С. 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 сan win future President and Parliament elections has to
solve the same problems and use the same instruments.
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Social SituationMulti 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 societyParty-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_risks10_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/ukrainian/ukraine_in_russian/2012/02/120210_ru_inequality_usa_uk_ukraine_yg.shtml
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C. Income divided societyFormal 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.com/ukraine/gini-index-wb-data.html
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Real social disparityBut 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?PHPSESSID=15d6e4f810b62037c0f63d5abb3fa287
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Civil societyParticipation 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?PHPSESSID=15d6e4f810b62037c0f63d5abb3fa287
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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/topical_report.aspx?campaignid=DemocracyIndex12
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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 country’s 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/whatwedo/pub/corruption_perceptions_index_2012
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Economic freedom
Ukraine’s 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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№ Basic factors Characteristic Opportunity (+), Threat (-)
1 Macroeconomic situation
Unstable with deterioration tendency
2 Business situation
Unstable with deterioration tendency
Economic Factors
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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_id=246787672&cat_id=244851734
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Macroeconomic challenges
Possible IMF credit could1) play role of supportive spring of financial
resources to the Ukrainian economy2) 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 Indices
http://indices.eba.com.ua/
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Investment climate
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Investment Attractiveness Index with the support of theInMind research company
Investment Climate in UkraineThe Investment Climate in Ukraine is… (5 point scale)
–
4%
35% 22%
12%
0%2%
20%43% 48%
33%47%
53% 42%
15%8%
44%40%
35%48%
40%
18% 7% 15% 22% 24% 22% 25% 13% 8% 7% 10%
37%
8%5%
20%
49% 51%
11%
1% 6% 2% 1%
8%
3% 5%
5%
13% 18%
0%
1% 2% 0% 1%
III/2008 I/2009 III/2009 I/2010 III/2010 I/2011 III/2011 I/2012 III/2012 I/2013 II/2013
5 - definitely favourable
4 - rather favourable
3 - neutral
2- rather unfavourable
1 - definitely unfavourable
Mean
Mean
3,1 2,0 2,2 2,7 3,6 3,7 2,3 1,7 1,8 1,7 1,7
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Investment Attractiveness Index with the support of theInMind research company
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Positive Changes in Investment Climate during the last 3 months
The vast majority of experts believe that positive changes have not occurred.
Only a few respondents have specified their answers (Chart shows not percent but the number of responses)
1
1
2
2
2
3
The registration law for expats became a bit clearer
Government seems to recognize the problem with investment climate in
Ukraine
Less pressure by tax authorities
Stability of the UAH
Conducted Investment Forum
At least declarations from the Government about European vector
92% 8%
No positivechanges
Positive changes
68
.
Tax climate
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Tax Index with the support of theInMind research company
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Project MethodologyThe presented results of EBA Tax Index are based on the results of the 3rd wave of the expert survey, conducted among EBA members.
Methodology: EBA Tax Index means the evaluation of 4 factors of tax conditions for doing business:
• Evaluation of quality of the tax legislation
• Evaluation of complication/ease of the tax administration
• Evaluation of the fiscal pressure level
• Evaluation of quality of the tax service
To define the level of each of the 4 factors a 5-point scale was used, where 1 and 5are the extreme opposite evaluations of the factor.
When calculating the integral tax index, means of each factor and its weight were used.
Factors’ weights are defined by expert evaluations of EBA Tax Committee members:
tax legislation– 15%; tax administration – 40%; fiscal pressure – 30%; quality of tax service – 15%.
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Tax Index with the support of theInMind research company
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Report noticeThe results are presented by each of 4 factors, in particular:
• Mean of each factor
• Numeric value, which divides the upper half of the sample from the lower part (median)
The results are also segmented by company size in accordance to Commercial Code of Ukraine:
– Small enterprises: 50 or less employees, gross income – less than UAH 70 million during the financial year 2012
– Medium enterprises: 50 to 250 employees, gross income – UAH 70 to 100 million during the financial year 2012
– Large enterprises: more than 250 employees, gross income – більше UAH 100 million during the financial year 2012
Participants: 100 representatives of EBA member companies
Timeframes: the data is collected in April-May 2013 and reflects the situation in 4 quarter 2012 – 1 quarter 2013
Research Conduction: The research is conducted by the EBA, analytic support provided by InMind research company
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Customs climateTax Index with the support of theInMind research company
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Overall results
1 wave, 2011
2 wave, ІІ-ІІІ quarter 2012
3 wave, IV/2012 – І/2013
TAX INDEX(integral rate)
1,90 2,42 2,32
Tax legislation 1,76 2,32 2,25
Easiness of tax administration 1,62 2,32 2,17
Fiscal pressure 2,11 2,56 2,39
Quality of tax service 2,36 2,53 2,64
Minimum Index value – 1, maximum – 5.
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Customs climate
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Customs Index with the support of theInMind research company
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Project DesignThe represented results of EBA Customs Index are based on data of expert survey conducted among EBA members.
It represents evaluation of 5 factors characterizing customs procedures, being undergone by companies while interacting with customs. Calculation of the customs index is based on weighted means of each factor.
In addition to expert evaluation of factors, survey includes measures of each factor indexes de-facto.
As additional information for customs procedures the survey also regarded:• Usage of electronic declaration practice• Evaluation of change in corruption level of customs authorities• Evaluation of usage practice of the new Tax Code
• Evaluation of procedures of customs clearance of one supply (25%) duration of customs clearance of one supply(12,5%) share of goods chosen for physical inspection (10%) share of goods, classification code of which has been changed by customs authorities (2,5%)
• Evaluation of customs value identification procedure (25%)• Amount of paperwork (25%)• Number (5%) and duration (5%) of inspections• Professional level of customs authorities (15%)
Factors and weight coefficients
EBA Customs Index
Additional information
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Customs Index with the support of theInMind research company
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The report is structured by information regarding each factor and contains the following data:
• Measures of central tendencies of expert evaluations of each factor (mean and median)
• Distribution of expert evaluations of each factor by 5-point scale
• Mean values of indexes characterizing each factor (in dynamics)
The results are also segmented by company size: small/medium and big business
Report CommentThe results are based on data of the 7th wave of expert survey regarding real experience of companies. The expert evaluations of factors characterizing customs procedures and calculation of the integral index are conducted for the first time.
Participants: 67 representatives of EBA companies-members and participants of the Customs Committee
Timeframes: data collected in July-August 2013 and reflect the situation of the 1st half 2013
Conducted: The research is conducted by EBA, analytical support: InMind research company
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Customs Index with the support of theInMind research company
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Overall results: customs index1 – minimum/negative index value3 – average/neutral index value5 – maximum/positive index value
Scale from 1 to 5, where:
1st half 2012
2nd half 2012
1st half 2013
CUSTOMS INDEX(integral index)
2,84 3,06 2,81
Customs clearance of one supply: 3,15 3,28 3,04- duration of customs clearance 3,16 3,02 3,03
- share of goods chosen for physical inspections 3,30 3,74 3,22
- share of goods, classification code of which was changed
2,50 2,74 2,37
Customs value 3,13 3,44 2,75
Amount of paperwork 2,11 2,27 2,28
Inspections 3,44 3,46 3,33- number of inspections 4,91 4,92 4,82
- duration of inspections 1,98 2,00 1,83
Professional level 2,63 3,12 3,07
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Customs Index with the support of theInMind research company
5
1st half 2010
2nd half 2010
1st half 2011
2nd half 2011
1st half 2012
2nd half 2012
1st half 2013
Average number of days spent on custom clearance procedures for one supply
2,4 2,0 2,5 2,8 2,5 2,7 2,8
Share of goods chosen for physical inspections (%)
55% 52% 26% 41% 22% 14% 18%
Customs classification (%) N/A 6% 8% 9% 9% 8% 10%
Customs value: overall number of customs authority refusals (%)
34% 38% 27% 33% 27% 24% 25%
Average number of documents demanded for customs clearance of one supply
10,8 10,9 9,8 10,6 8,0 10,2 7,3
Average share of companies, which experienced inspections after customs clearance
N/A 22% 40% 23% 3% 4% 11%
Overall results: experience of companies
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№ 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
Demographic Factors
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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
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Ukraine, age structure (2012)
0-14 years
15-24 years
25-54 years
55-64 years
65 years and over
82
Education
Literacy 99,7 %
Students per 10 000 popul.
578 (2012) 310 (1990)
Total institutions and universities
334 (2012)
Total students, thsd 1824,9
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Labor migration1.2 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 population’s rate of participation in labour migrations is 2.9 times higher than the urban population’s: 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)
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Health careTotal expenditure on health per capita (Intl $, 2011)
528
Total expenditure on health as % of GDP (2011)
7.2
