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The internationalization of Finnishcompanies: the Russian connectionDmitry Zimin a & Vesa Rautio ba Karelian Institute, University of Eastern Finland, Joensuu,Finlandb Department of Geosciences and Geography, University ofHelsinki, Helsinki, 00014, Finland

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The internationalization of Finnish companies: the Russian connection

DMITRY ZIMINa and VESA RAUTIOb*aKarelian Institute, University of Eastern Finland, Joensuu, Finland;

bDepartment of Geosciences and Geography, University of Helsinki, Helsinki 00014,

Finland

This article examines the developments in trade and direct investments betweentwo northern economies, Finland and Russia. On the basis of a review of annualreports of 10 major Finnish companies, belonging to the electronic, construction,foodstuff, and forest industries, this article argues that Finnish-Russian

economic integration can be characterized as ‘asymmetric.’ On the one hand,Finnish construction firms and food producers have become vitally dependent onperformance of their Russian subsidiaries. They also demonstrate geographical

expansion of their operations within Russia. On the other hand, Finnishelectronic and forestry firms have abstained from making major investmentcommitments in Russia. For them, Russia was important either as an export

market or as a source of raw materials. This article also investigatesinternationalization patterns of Finnish companies in 2000�2010, and comes tothe conclusion that for them Russia has been relatively less attractive incomparison to such countries as Estonia, Poland, Hungary, China, India,

Mexico, and Brazil.

Introduction

Since the mid-1990s, the Finnish economy has undergone profound restructuringand become an example of successful development based on knowledge-basedindustries and internationalization (Dahlman et al. 2006; Honkapohja et al. 2009;Schienstock 2007). At the same time, major changes have also occurred on the otherside of Finland’s eastern border � in neighboring Russia. Russia’s market reformshave radically changed the country’s development path and established a newcontext for Russia’s international economic relations. Thanks to their Soviet-era

connections and experience in dealing with the USSR, Finnish firms were among thefirst western companies to enter post-Soviet Russia in order to take advantage ofnew business opportunities. There have been many studies exploring the dynamicsof Finnish-Russian trade and investment ties from different points of view (Eklundand Karhunen 2009; Hirvensalo and Heliste 2003; Johansen and Panova 2007;Karhunen et al. 2008; Lorentz 2007; Ollus and Simola 2007; Rautio andTykkylainen 2001).What has been missing, however, is an assessment of how important Russia has

really become for Finnish companies in comparison to other countries where theyoperate? This is the main question this article is addressing. Paradoxically, if onelooks at official statistical data on Finnish investments, it is easy to assume thatRussia plays a relatively insignificant role. For instance, according to official data,

*Corresponding author. Email: vesa.rautio@helsinki.fi

Polar GeographyISSN 1088-937X print/ISSN 1939-0513 online # 2012 Taylor & Francis

http://www.tandfonline.comhttp://dx.doi.org/10.1080/1088937X.2012.666767

Polar GeographyVol. 35, No. 2, June 2012, 117�134

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by the end of 2010 the Finns invested 10 times more in Belgium than in neighboring

Russia (Bank of Finland 2011a). In contrast, if to review mass media reports

describing Finnish and Russian business life, one can arrive at the opposite

conclusion, namely, that Finnish firms operate very actively in Russia in comparison

to companies from other European countries. This article is an attempt to resolve

this apparent contradiction by analyzing annual reports of 10 major Finnish

companies for the period from 1999 to 2010. Company-level data draw a somewhat

different picture from what official statistics suggest, and allow an observer to trace

the dynamics of the internationalization of the selected companies and thus to

evaluate the place of Russia in the course of this process more precisely.The companies selected are presented in Figure 1 and Table 1. Their selection was

based on two criteria. Firstly, the companies represent the main sectors of the

Finnish economy, and each of them occupies a leading position within its sector.

Hence, all the selected companies are quite famous, at least in Finland, and can be

classified as ‘big business.’ Secondly, all the companies possess some experience of

doing business in Russia. This means that the sample was not chosen in order to

draw conclusions about the Finnish economy as a whole. However, the selected

Figure 1. Location of headquarters of case companies and main destinations for Finnishinvestments in Russia. Source: Eklund and Karhunen (2009) and Fortum (2011).

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companies can be regarded as fairly representative of four key sectors of the Finnish

economy, such as electronics, forestry, the food industry, and construction.The internationalization of the companies selected is measured in terms of two

indicators: net sales and personnel in the countries where the companies operated in

2000�2010. The geography of net sales illustrates the extent of the company’s abilityto enter new markets, as well as indicating which countries the company prioritizes.

The geography of the number of personnel demonstrates which countries the

company prefers when it comes to placing its facilities.According to standard geographical and economic models, the differences in costs

and prices gradually even out when institutional border barriers disappear, and this

leads to the development of a dynamic competence (Rautio and Tykkylainen 2001,

p. 37). However, this assumption of increasing convergence is not the only possible

scenario, which can be empirically seen, for instance, in the case of US-Mexico

border area. The volume of trade between Finland and Russia has over the time

followed closely current political and institutional developments. Figure 3 presents

the dynamics of trade between the two countries. The present stage started when the

Soviet Union collapsed and Russia’s integration with the global markets started.

These changes created expectations that foreign firms would enter the markets

rapidly and globalization would integrate Russian economy to global markets

within a few years (Sutela 2003, p. 50). However, the integration process has been

notably slower than expected, which can be seen particularly well in Russia’s slow

path to World Trade Organization (WTO) membership.The decline of the local economies in the North and Northwest Russia indicate

that many elements of their resource-based economies are not competitive globally.

The highly needed restructuring of these regions has proceeded slowly due to the

undeveloped institutional (formal and informal) framework. However, recent

developments at national, as well as company levels, indicate that the Russian

economy is integrating more tightly to the global markets. Examples of this are, for

example, the recent WTO membership agreement, which required negotiations that

lasted almost 20 years, as well as increasing internationalization of Russia

companies, such as Noril’sk Nickel (Fortescue and Rautio 2011).

Table 1. The selected Finnish companies.

Rank (sales) among top500 Finnish firms in2010 Name Industry

Sales in 2010,millions of euros

Number ofemployees, end of

2010

1 Nokia Electronics 42,446 129,3553 Stora Enso Forestry 10,297 27,3835 UPM-

KymmeneForestry 8924 22,689

18 YIT Construction 3788 24,31736 Valio Foodstuffs 1822 440347 Fazer Foodstuffs 1514 14,29452 Atria Foodstuffs 1301 581257 Elcoteq Electronics 1070 7783131 Raisio Foodstuffs 443 1111158 PKC Group Electronics 316 5039

Source: Talouselama (2011).

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Previous research has sought to explain the inefficiency of Russia’s economy firstand foremost by regulation and institutional frameworks, which have devotedparticular attention to protectionist regulations in Russian legislation as well as tothe low productivity (Aslund et al. 2010; Goldman 2004; Hanson 2010). However,these theoretical perspectives do not fully explain the recent development patterns ofRussian economy or business environment where numerous domestic and foreigncompanies are able to operate successfully. Moreover, in spite of strong dependencyon natural resources, our article introduces several success cases, which are based oninnovative investments strategies by local and regional administrations (Zimin2010). Through our 10 case studies of Finnish companies, we will examine thepresent Russian business environment in which some of the case companies haveoperated already for several decades.The article is divided into three parts. It begins with an overview of statistical data

describing the internationalization of Finnish companies during the last decade, witha focus on Finnish-Russian economic relations. The next section presents the resultsof the survey of these 10 selected Finnish firms and their operations in Russia. Thelast section summarizes main findings.

Finland’s economic internationalization

The 2000s were a favorable period for the Finnish economy. It combined relativelyhigh growth rates, successful restructuring on account of growth in high-techindustries, and a steady decline in unemployment until the end of 2008. In 2000�2010, Finnish GDP grew by 19%, while the rate of growth in the Euro-zone was just13% (Eurostat 2011). Finnish GDP per capita reached US$ 36,700 in 2010, whichwas comparable to such countries as France and the UK (OECD 2011). Finland hasbeen repeatedly rated as one of the most competitive economies in the world (WorldEconomic Forum 2010). In pursuit of higher profits, Finnish companies haveinternationalized their operations, which, in many cases, led to move theirproduction facilities from Finland to other countries, particularly in Asia andEastern Europe. This trend has mostly affected labor- and resource-intensiveindustries. At the same time, Finland has attracted capital- and knowledge-intensiveenterprises, which have compensated for job losses in other sectors (Honkapohjaet al. 2009).The stock of Finnish foreign direct investment (FDI) abroad grew from 10 billion

euros at the end of 1994 to 56 billion by the end of 2000 and then to 98 billion by theend of 2010 (Bank of Finland 2011b). Eight countries accounted for 87% of theincrease in Finnish FDI in 1994�2010: Sweden, Belgium, the Netherlands, the USA,Germany, China, Russia, and Luxembourg (Figure 2). The presence of suchcountries as Belgium, the Netherlands, and Luxembourg in this list suggests thatthese countries were probably not the final destinations for Finnish FDI, but ratherused for tax optimization purposes (Leino 2011).The stock of Finnish FDI in Russia multiplied spectacularly: from 41 million euro

at the end of 1994 to 2.3 billion euro at the end of 2010 (Bank of Finland 2011b).However, even the relatively large figure for 2010 is certainly a gross under-estimation. This claim is based on the fact that when in 2008 the Finnish majorenergy company Fortum acquired the Russian power generating company TGC-10and paid some 2.2 billion euro, the money was channeled through Forum’s Dutchsubsidiary � Fortum Russia B.V. (Finland’s 2008). As a result, this deal has been

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accounted by both the Bank of Finland and the Russian Statistical Agency (Rosstat)

as Dutch FDI in Russia. According to Mikko Kivikoski, Deputy Director of the

Russian Section of the Finland’s Ministry for Foreign Affairs, the real stock of

Finnish investment in Russia was 8 billion euro at the beginning of 2011 � well

above the official statistical estimate (MID 2011).In addition to FDI statistics, there are also data on the operations of Finnish

affiliated companies abroad.1 These data also paint a picture of a dramatic

internationalization of Finnish companies (Table 2). In 2009, the ‘Big Five’

economies (Sweden, the USA, the UK, Germany, and France) were still the main

countries where Finnish-affiliated firms operated most actively, as indeed they were

back in 1996. In particular, Finnish firms have very strong positions in Sweden, the

country’s western neighbor and its long-term strategic partner. However, one can

also note that the rate of growth of Finland’s economic presence has been much

Figure 2. Stock of Finnish FDI abroad, at year end, in billions of euros. Source: Bank ofFinland (2011a).

Table 2. Finnish affiliated companies in abroad.

Number of employees(1000) Sales (billions of euros)

1996 2006 2009a 1996 2006 2009a

The Big Fiveb 90.9 164.6 181.8 24.6 80.1 65.7Of which Sweden 25.4 66.3 75.6 6.7 31.5 27.3

BRICc 4.2 59.6 151.8 0.3 21.6 34.9Of which Russia 1.0 20.6 52.7 0.1 2.0 7.7

Baltic states 1.7 31.6 51.4 0.1 4.5 6.8Other countries 40.5 125.9 181.3 11.0 40.9 56.2Total 137.3 381.8 566.3 36.1 151.4 163.6As percentage of total employmentin Finland

6.6 15.7 23.1 � � �

Source: authors’ calculations on the basis of Bank of Finland (2011a) and Statistics Finland(2011).aData for 2009 are not fully compatible with data for 1996 and 2006.bSweden, the USA, the UK, Germany, and France.cBrazil, Russia, India, and China.

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higher in the Baltic States and in Brazil, Russia, India, and China (the so-calledBRIC countries), whilst the relative weight of the Big Five has gone down. In 2009,the Finnish economy was much more internationalized in terms of geography andthe scope of operations of Finnish affiliates abroad than it was in 1996.Table 2 also demonstrates that in 2009 the number of employees and sales of

Finnish affiliates in Russia were almost equal to those in the Baltic States and muchless than in Sweden. Given that the Russian economy is larger than the economies ofthe Baltic states and Sweden, and the fact that Russia, just like these countries, isalso a close neighbor of Finland, the scope of operations of Finnish affiliates inRussia has the potential to exceed that in Sweden and the Baltic states in absoluteterms. This, of course, depends on the global economic situation and the furtherevolution of Russia’s business climate.During the last decade, the Russian economy has become an increasingly

attractive target for inward investment. The economy achieved higher rates ofgrowth than the Organization for Economic Cooperation and Development(OECD) average. Despite the economic recession of 2008�2009, in 2010 Russia’sGDP was 60% larger than in the year 2000, and reached approximately US$ 2.2trillion (Bank of Finland 2011c; Rosstat 2011). In per capita terms, Russian GDPwas US$ 10,800 in 2009, which was comparable to such countries as Turkey andMexico (OECD 2011). Surely, to a significant extent, this recovery was the result ofa steady rise in global commodity prices � the main exports of Russia, such as oil,natural gas, metals, and timber. But it is also obvious that Russia’s growth has beendriven by increasing domestic demand as well. Consumer demand rose proportio-nately and, for instance, retail sales grew 2.6 times in real terms over the sameperiod. Furthermore, over the same period investments in fixed capital grew 2.3times (Rosstat 2011). Foreign investments have started to play an increasinglyimportant role. They grew 10 times: from US$ 11 billion in 2000 to US$ 115 billionin 2010 (Rosstat 2011). At the beginning of 2011, the value of accumulated foreigninvestments was US$ 300 billion, of which FDIs accounted for US$ 116 billion(Rosstat 2011).As one of Russia’s neighbors, Finland is naturally affected by developments in

Russia. Russia’s strong economic growth has stimulated an increase in Finnish-Russian trade and investments, particularly since 2004 (Finnish Customs 2011). Thebranch structure of Finnish investments in Russia has been quite diversified. Finnishcompanies invested in the power generation industry (at least one half of the total),wholesale and retail trade, construction and production of construction materials, aswell as in the food, chemical, and timber industries. In terms of geographicaldistribution, approximately a half of accumulated Finnish investments in Russiahave been concentrated in the city of St. Petersburg and in the neighboringLeningrad and Novgorod regions. The remaining half has been invested mainly inMoscow and in the Siberian regions of Chelyabinsk and Tyumen (Eklund andKarhunen 2009; Fortum 2011).Finnish-Russian trade also grew quite rapidly (Figure 3). Thus, in 2008, just

before the economic recession, sales were 3.3 times more than in 2000 (FinnishCustoms 2011). But its structure remained largely the same: oil, gas, metals, andtimber were exported from Russia to Finland; while machinery, foodstuffs, paper,and chemicals moved in the opposite direction. The rise in the value of Russianexports has been the result of a major increase in commodity prices, while growth inFinnish exports has been, as Ollus and Simola (2007) suggest, mostly a consequence

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of a rise in Finnish re-exports to Russia. According to their estimates, by 2006 re-exports had reached at least a quarter of Finnish exports to Russia. On this basis,Ollus and Simola (2007, p. 17) argue that the growth in exports of Finnish-madegoods to Russia might actually be much smaller than the rate of growth of totalexports from Finland to Russia (i.e. including re-exports). At least partially this lackof dynamism in exports of Finnish-made goods to Russia can be explained by therelocation of the manufacturing facilities of some Finnish exporters from Finland toRussia, which has probably led to a fall in the value of their exports to that country.

Internationalization of selected Finnish companies and their business in Russia

Having reviewed official statistics on Finnish trade with Russia, this article nowturns to an analysis of the internationalization patterns of 10 major Finnishcompanies doing business in Russia, with a view to ascertaining the place Russiaoccupies in each company’s business development strategy.

Nokia: arm-length’s approach to Russia

Being a global leader in the production of mobile telephones, Nokia is probably themost recognizable Finnish company. By 2000, it was already facing toughcompetition from other global players. The USA was Nokia’s largest market, butthe company failed to retain its market share and its sales in the USA fell from 5.3billion euros in 2000 to just 1.6 billion in 2010 (Nokia 2011). However, over the sameperiod Nokia managed to access new markets, of which the most sizeable wereChina, India, Brazil, Russia, and Indonesia. The global economic crisis led to a fallin Nokia’s net sales by 20% in 2009 compared to 2008 (Nokia 2010). Moreimportantly, the company has begun to lose its global leadership positions in theproduction of smart mobile phones, which has been attributed to the insufficientattractiveness of the mobile operating system Symbian, developed by Nokia.The internationalization of Nokia’s operations has not led to a major decline in

the number of its employees in Finland. In 2000�2009, it stayed at around 22,000,while the total size of Nokia’s labor force grew very significantly, thanks to thecreation of Nokia Siemens Networks in 2007 and the acquisition of the UScartographic software developer Navteq (Figure 4). In 2010, however, Nokia wasforced to cut some 1700 jobs in Finland as a belated response to changes in themarket. At the same time, the company’s personnel grew in China, Brazil, India, and

Figure 3. Dynamics of Finnish-Russian trade in millions of euros. Source: FinnishCustoms (2011).

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Poland (Nokia 2011). As a result, for the first time in its history, the combined

number of Nokia’s staff in India and China was larger than that in Finland.Russia is important for Nokia as a growing market for its mobile phones, but not

as a production base. In 2003�2010, Nokia’s sales in Russia grew 3.1 times (Nokia

2011). In 2010, Russia was the fourth largest market for Nokia, and the company’s

sales in this country were 7% larger than its sales in the USA (Nokia 2011). At the

same time, Nokia has not set up any manufacturing or research facilities in Russia.

Apparently, there is no reason for Nokia to develop local production because the

Russian market is sufficiently open to foreign-made mobile telephones, while in

terms of production costs Russia is not competitive in comparison with other

countries where Nokia operates, such as China, India, Brazil, Mexico, and Hungary.

Only in late 2010, it was announced that Nokia and Nokia Siemens Networks

intended to set up research facilities in Russia, within the framework of Russia’s so-

called innovation city of Skolkovo (Moen 2011). The Skolkovo project had been

proposed by President Medvedev as a measure to promote the development of high-

tech industries and research in Russia.

Elcoteq: withdrawal after 12 years of operations in Russia

Elcoteq is a major electronics manufacturing company, producing a wide range of

devices from mobile telephones to microwave systems. This company represents an

example of strong growth driven by rapid internationalization. During the last

decade, Elcoteq’s net sales grew more than 13 times: from 282 million euros in 1997

to 4043 million euros in 2007. However, the last three years have been extremely

difficult for the company. In 2010, its net sales dropped to a quarter of those in 2007,

while the number of personnel was halved (Elcoteq 2011).The company’s geography of operations has changed notably, in 1997 approxi-

mately 98% of Elcoteq’s net sales were in Europe (94% in Finland and Sweden), in

2010 Europe’s share dropped to 66%, while the shares of the Asia-Pacific region and

the Americas increased to 10% and 25%, respectively (Elcoteq 2011). Before the

Figure 4. Nokia’s personnel in 1999�2010. Source: Nokia’s annual reports.

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global economic crisis of 2008, the change was even more dramatic since the share of

the company’s net sales in Europe was around 50%.The geography of Elcoteq’s production has also changed radically. In 1997, the

company’s manufacturing facilities were located only in Finland and Estonia. At

that time Elcoteq had 2793 employees, two-thirds of whom worked in Estonia and

one-third in Finland. In 1998, the company established new plants in Hungary,

Russia, and Mexico. A year later the company came to China. In 2004, it opened

new factories in Brazil and India. A number of acquisitions were also made in

Central and Eastern Europe (Figure 5). At the same time, Elcoteq’s personnel in

Finland shrank dramatically from its peak of 1416 employees at the end of the year

2000 to just 107 at the end of 2010 (Elcoteq 2011).Elcoteq’s Russian plant, located in St. Petersburg, was opened in rented premises

and had 86 employees at the end of 1998. This was a difficult period, as the Russian

economy experienced the consequences of a national financial crisis of August 1998.

At that time many foreign companies either froze or abandoned their projects in

Russia. In contrast, Elcoteq continued to develop its plant, thanks to the fact that its

production was oriented towards export markets. The plant produced ADSL-

modems for Schmid Telecom, hands-free telephone kits for Sony Ericsson, and

circuit boards for Viking Sewing Machines (Korzhakov 2005). Later, the plant

began to assemble mobile telephones on behalf of Nokia and Sony Ericsson

(Shapovalov 2007). This venture grew and in September 2005 the plant moved into

premises specially built for the purpose. It was planned that the enterprise would

eventually employ some 1500 workers (Elcoteq 2006, p. 20). However, the plant’s

number of employees has never exceeded 600.The plant operated in accordance with the so-called ‘customs regime of industrial

processing,’ meaning that the company was exempt from Russian customs duties on

condition that its plant’s production was assembled only from imported components

and then was exported from Russia. Although this allowed Elcoteq to secure a

favorable customs regime, the company could not sell its locally produced goods

within Russia, which was one of its strategic targets. The problem was that Elcoteq

wanted to assemble mobile phones for the Russian market, but import duties on

telephone components were higher than the duties on ready-made telephones.

Figure 5. Elcoteq’s personnel in selected countries, at year-end. Source: Elcoteq’s annualreports.

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This meant that Elcoteq’s assembled telephones would be too expensive incomparison with imported ready-made telephones. Elcoteq tried to lobby theRussian Government with the aim of persuading it to abolish import duties onelectronic components, but without much success. The Government sought toprotect domestic manufacturers, which produced electronic components mainly formilitary purposes (Gryaznevich 2011). Only in June 2007 was import duties on sometelephone components cut, but apparently this was not sufficient for Elcoteq(Shapovalov 2007).In 2008, the global economy started to fall into recession, and Elcoteq was among

the first to face the resulting negative consequences. The company’s own businessstrategy was also not without fault. As a result, in 2008 Elcoteq was forced to reduceits operations dramatically with the aim of cutting costs. One of the measures wasthe decision to sell its plant in St. Petersburg (Elcoteq 2009). This was the end ofElcoteq’s 12-year presence in Russia.

The PKC Group: a success in Russia

The PKC Group is a smaller company in comparison to Elcoteq. It manufactureswiring harnesses for commercial vehicles and components for telephones. Thisproduction requires a considerable manual labor input. The last decade was asuccessful period for this company: in 2000�2010 its output grew 2.4 times, andreached 316 million euros in 2010, while the company’s workforce grew 6.6 timesduring the same period (PKC Group 2011). PKC has succeeded in internationalizingits operations. For instance, Finland’s share in its net sales fell from 37% in 2000 to17% in 2010. In monetary terms PKC’s net sales in its domestic market remainedstable, while they grew significantly in other European countries, as well as inMexico, Brazil, and China. In 1997, the company set up its first plant in abroad � inBrazil. In 2002, it started its manufacturing activity in Estonia. In 2003, PKCacquired a Finnish company, the Carhotec Group, together with its plant in thetown of Kostomuksha in Russian Karelia. In 2004�2006, PKC went to Mexico andChina, and in 2006 the company set up its second plant in Russia, in the city ofPskov. In 2008, PKC acquired a large Polish competitor (Segu Polska), while thePskov plant was closed down. At the beginning of 2011 the company’s personnelwas concentrated in Poland (22% of the total), Brazil (21%), Estonia (19%), Russia(18%), and Mexico (10%) (PKC Group 2011).The global economic crisis of 2008�2009 was a severe test for PKC. In 2009, its

net sales and workforce fell by 35% and 28%, respectively, compared to 2008 (PKCGroup 2010). However, already in 2010 the situation had improved dramatically.Both the number of personnel and net sales exceeded their pre-crisis levels, with onenotable exception: PKC’s personnel continued to shrink in Finland, despite theresumption of the company’s growth.Just like Elcoteq, PKC’s Kostomuksha plant has operated according to the

customs regime of industrial processing and is exempt from customs duties. Inaddition, the plant has been situated very close to the Finnish-Russian border, andthus benefited from low logistical costs. Furthermore, Kostomuksha, a typicalmining town, had a high unemployment rate among women, who have become arelatively cheap and stable source of labor for PKC’s plant in this town (Prohorovaand Rautio 2008).

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The PKC story suggests that Russia can be successfully used as an export-oriented

production base, in labor-intensive industries. Although on the whole Russia’s

business climate is a more difficult environment in comparison to, say, Estonia, for

PKC, Russia and Estonia have been equally important as production bases.

Another observation is that PKC’s internationalization has led to a fall in its

personnel in Finland, just like in the case of Elcoteq.

YIT: strong positions in St. Petersburg and Moscow

YIT is a leading Finnish construction company. In 2000�2010, YIT’s business grewin both domestic and foreign markets. During this period the company’s revenues

grew in Finland by 80%, while its revenues abroad rose more than 16 times and

reached 62% of YIT’s total revenues in 2010 (YIT 2011). The main markets for

YIT’s international expansion have been Russia, Sweden, Norway, and since 2008 a

few countries in Central Europe, particularly Germany, Austria, and Poland (Figure

6). YIT’s operations in the Nordic and Central European countries grew mainly on

account of acquisitions, while in Russia this was a result of the growth of YIT’s

subsidiary, YIT-Lentek, established in Leningrad (now St. Petersburg) in 1988.

Initially, this was a joint venture, which later became fully owned by YIT.Initially, in Russia the company focused on residential, commercial, and

industrial construction in St. Petersburg and the adjacent Leningrad and Novgorod

regions. YIT has quickly became a leading residential construction firm in St.

Petersburg, despite tough competition from locally owned firms. Since 2002, the

company has expanded into Moscow and the Moscow region. Since YIT also

established a presence in three other major cities: Yekaterinburg, Rostov-on-Don,

and Kazan. Accordingly, the company’s personnel grew steadily in Russia, and by

the end of 2010, Russia’s share in YIT’s personnel was 9% (YIT 2011).

Figure 6. Dynamics of YIT’s revenues, in millions of euros. Source: YIT’s annual reports.

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Apart from YIT, several other major Finnish construction firms � Lemmikainen,NCC, SRV, and Technopolis � have successfully developed business in Russia.2

They have also started from St. Petersburg and then expanded their operations toMoscow and other major Russian cities. Furthermore, these companies haveattracted their Finnish suppliers of construction materials and equipment andproviders of consulting and financial services, which have also set up their ownsubsidiaries in Russia. Most of these firms have been based in St. Petersburg andMoscow or their nearby regions.

Finnish forest industry companies: Russia is important

Unlike the aforementioned construction companies, the two largest Finnish forestryfirms � UPM-Kymmene and Stora Enso � have been much more cautious in termsof investing in Russia. The Russian operations of UPM-Kymmene and Stora Ensohave been limited to timber harvesting, the production of sawn-wood and plywood,and three corrugated board factories. Geographically, the timber and wood-workingsubsidiaries have been based in Northwest Russia: in the Novgorod and Leningradregions and in the Republic of Karelia. Their production has been exported toFinland and Central Europe � for further processing at plants of their parentcompanies. Stora Enso has established its corrugated board factories in Balabanovo(Kaluga region), Arzamas (Nizhniy Novgorod region), and Lukhovitsy (Moscowregion). Their production has been oriented towards the Russian domestic market �to satisfy the needs of the booming packaging industry. By the end of 2010, thenumber of staff in Russia of Stora Enso and UPM-Kymmene reached 1374 and1081, respectively, which was 5% of the total workforce in each of the companies(Stora Enso 2011; UPM-Kymmene 2011). Russia’s share in the companies’ sales wasless significant. It was approximately 3% in 2010 in the case of Stora Enso, whileUPM-Kymmene has not published figures for its sales in Russia (Stora Enso 2011).Both companies have made multimillion investments in high-added-value

production facilities (e.g. paper mills) in more distant countries, such as China,Brazil, Uruguay, and Poland, thus underscoring the greater attractiveness of thesecountries in comparison to Russia. At the same time, the Finnish companies havescaled down their operations in their traditional markets in Western Europe,particularly in Finland, Sweden, France, and Germany. Thus, in 2000�2010, thenumber of Finnish employees of Stora Enso and UPM Kymmene fell by 50% and55%, respectively (Stora Enso 2011; UPM-Kymmene 2011). Nonetheless, for bothcompanies Finland has remained the country with the largest number of employees(Figure 7).

Finnish food companies: struggling to conquer the Russian market

The Russian food industry has been one of the sectors where the Finnish presencewas already quite notable in the early 1990s, while exports of Finnish meat and dairyproducts started already in the late 1950s and were directed mainly to the Leningrad(St. Petersburg) market (Androsova 2011, p. 39). In the early 1990s, Finnish alcoholcompanies were among the first foreign investors in Russia. The Finnish companyHartwall, together with its Swedish partner Pripps, established the joint ventureBaltic Beverage Holding (BBH), which acquired the Baltika Brewery in St.

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Petersburg. Since then Baltika has become Russia’s leading brewing company.

Another Finnish firm Sinebrychoff bought Vena Brewery, also in St. Petersburg.3

Lastly, the Alko Group, through its subsidiary Primalko Oy, established a company,

called Ustyuzhna Distillery, producing alcoholic drinks in the Vologda region (see

Figure 1).Since the early 2000s, Russia’s economic situation has begun to improve, and

several new Finnish food companies have invested there. Russia has been an

important export market for them, and the companies felt that by establishing their

own production facilities in Russia they would increase their competitiveness in this

market. In addition, having their own Russian production facilities has allowed

these companies to reduce the negative consequences of changes in Russia’s food

import regulations. According to the Russian national security strategy in force till

2020, Russia aims at raising its level of self-sufficiency in all major foodstuffs.

Russia’s self-sufficiency in the consumption of pork and beef should increase from

79% in 2008 to 85% in 2020 (Ukaz 2010). Accordingly, Russian economic policy

strongly supports domestic primary production with incentives such as investment

subsidies and new restrictions on imports of some foodstuffs (Atria 2011, p. 25).4

Under these circumstances, it has been quite rational for foreign exporters to

establish own production facilities in Russia.During the last decade, the most active investors in Russia among large Finnish

food producers were Fazer (bakery products and confectionery), Atria (meat

products), Raisio (margarine, cereals and malt), and Valio (dairy products). Up to

2000, all four firms had their production facilities concentrated in Finland and

Sweden. Around 2003�2004, they began to internationalize by acquiring enterprises,mostly in the Baltic States and Northwest Russia. They have rapidly increased their

market shares and become leading food companies in these markets. Since 2007�2008, they have started to invest substantial resources in new production facilities in

Northwest Russia, to acquire stakes in suppliers of raw foodstuffs, and invest in

adjacent economic sectors. For them, Russia has become very important in terms of

sales and the number of personnel (Figure 8). But there was one exception: because

of financial difficulties, Raisio left Russia in 2007 (Raisio 2008).

Figure 7. Number of personnel in selected countries at the end of 2010. Source: annualreports of these companies.

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Conclusions

On the basis of this survey, it is possible to draw several tentative conclusions.

Firstly, in 2000�2010, Finnish big business underwent profound internationalizationin terms of both the geography of sales and the distribution of personnel. In 2000,

many of these companies focused on the domestic Finnish market. In 2010, the

relative importance of this market had diminished for all of them. Finnishcompanies were bold enough to enter foreign markets, even such distant ones as

China, Mexico, India, and Brazil though the different industries experienced

internationalization differently. Electronic producers and forestry firms havebecome genuinely global corporations, while firms representing the food industry

and construction have undergone internationalization mostly within the Baltic Sea

region. Most of the reviewed companies have reduced their personnel in Finland asthey have sought to increase their efficiency by taking advantage of lower labor costs

in other countries.Secondly, for all the companies surveyed, Russia was an important country as a

market and/or as a place of production (Table 3). For Finnish electronic firms (e.g.

Nokia), Russia is important only as a sizeable market, but not as a production base.

They clearly regard Russia as not being sufficiently competitive for placing theirhigh-tech manufacturing and research facilities in comparison to Hungary, Poland,

China, India, and Brazil. The same can be said about the reviewed Finnish pulp-

and-paper and wood-working companies, which have used Russia mainly as asource of timber and low-added-value wooden products. In contrast, the survey

demonstrates that for Finnish construction and food companies, Russia has becomevery important both as a lucrative market and as an important base for their

operations. These companies have achieved the highest degree of integration into the

Russian economy, which means that their future performance will be greatlyaffected by Russia’s further socio-economic development. On this basis, it is possible

to name the current stage of Finnish-Russian economic relations as one of

‘asymmetric integration’ � the integration occurring only in a few particulareconomic branches.Thirdly, the geography of operations of Finnish companies within Russia has

broadened considerably. In the 1990s, they were concentrated mainly in St.

Figure 8. Share of Russia in the companies’ sales and personnel in 2010 (%). Source: annualreports of the companies.

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Petersburg, Moscow, and in surrounding regions, by the second half of the 2000s

Finnish companies had begun to expand into other regions, particularly to the

largest Russian cities, such as Yekaterinburg, Rostov-on-Don, Kazan, Nizhniy

Novgorod, Samara, and Novosibirsk. A growing number of Finnish firms have been

attracted to the Kaluga region, thanks to its particularly favorable business climate

(Zimin 2010). This geographical expansion suggests that, on the one hand, Finnish

companies are seeking to enter new markets where competition is not as high as in

St. Petersburg and Moscow. On the other hand, these companies find the risks of

doing business in the new, more peripheral, regions of Russia acceptable.Fourthly, although Russia has been a new and rapidly growing market, it has not

been an easy place to develop business. Our survey describes several cases where

Finnish companies encountered major problems in Russia, though the situation is

not hopeless. The Russian Government has demonstrated its willingness to improve

the country’s business climate. For instance, PKC Group has been quite successful

in Russia, thanks to the customs regime of industrial processing, allowing the

company to operate in the country without paying import and export duties.

Likewise, Elcoteq’s efforts to persuade the Government to reduce some import

duties were partially successful in 2007, which suggests that in principle the Russian

Government can change its policies under the influence of foreign investors.Finally, the survey shows that some companies have withdrawn from Russia not

only because of problems in doing business in this country, but also because of their

internal difficulties or some negative market trends. Thus, Elcoteq has not only sold

its plant in St. Petersburg, but has also dramatically reduced its presence in other

countries. Some companies continue to invest in Russia despite the fact that their

Russian operations remain loss-making. Apparently, such companies, for example

Atria, have a long horizon of planning and regard Russia as a strategically

important market. In contrast, companies with shorter planning horizons do not

tolerate losses and prefer to quit or abstain from entering the Russian market.

Table 3. Summary of the survey.

Company Industry

In 2000�2010, Russia wasimportant as. . .

. . .amarket

. . .a productionbase

Other countries of expansion, interms of personnel

Nokia Electronics � China, India, Brazil, Hungary,Mexico

Elcoteq Electronics � (until 2008) China, Mexico, Hungary,Estonia, Brazil

PKC Group Electronics � Estonia, Mexico, BrazilYIT Construction � � Nordic and Baltic statesUPM-Kymmene

Forestry � China, Austria

Stora Enso Forestry � Poland, Estonia, China, BrazilFazer Foodstuffs � � Sweden, EstoniaAtria Foodstuffs � � SwedenValio Foodstuffs � � Estonia and BelgiumRaisio Foodstuffs � � (until 2007) UK

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Acknowledgments

The authors gratefully acknowledge financial support from the Academy of Finland.

Notes

1. These are the companies where the share of Finnish investors is at least 10%.

Unfortunately, the methodology for collecting these data changed in 2007, when the

task of data collection was transferred from the Bank of Finland to Statistics Finland

(Statistics Finland is National Statistical Service bureau, http://www.stat.fi/index_en.

html). This means that the data for 1996�2006 are not fully compatible with the data

for 2007�2009.2. However, some foreign construction companies have failed to succeed in Russia. Thus,

in 2007, the major Swedish construction company Skanska decided to leave this

market. As one of the company’s representatives explained: ‘it was impossible in the

dynamic Russian market to exercise the same classic corporate procedures that

Skanska successfully used in more stable and predictable markets’ (Dranitsyna 2007).3. In the 2000s, both BBH and Synebrychoff were acquired by the Danish Carlsberg

Group.4. For example, import quotas for poultry were cut by 20% in 2009 (Atria 2011, p. 25).

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