Doing Business in Russia - Research Proposal Example

INTRODUCTION Man's needs and wants never stops as long as he lives, but, it is not only his needs that must be met but also his wants, that is, his desire for more things aside from what is fundamental in order to survive. In this way, practices, procedures, policies and principles of marketing have emerged. Marketing is being defined in many ways, in many principles by known marketing specialists. A common thought taken from this various definitions is that marketing is an activity which involves an exchange process, its objective is to satisfy human needs and wants and it involves a producer, a consumer and an intermediary. Before the advent of market research, most companies were product-focused, employing teams of salespeople to push their products into or onto the market, regardless of market desire. A market-focused or customer-focused, organization instead, first determines what its potential customer's desire, and then builds the product or service. Marketing theory and practice is justified on the belief that customers use a product/service because they have a need, or because a product/service has a perceived benefit (Wikipedia Online, 2006a). With the fast development of technology, marketing process has also improved. Different marketing strategies have been emerged, marketing researches had boomed and contemporary marketing theories have existed, all of these had been developed to make marketing activity more desirable and beneficial to the consumers and the producers as well. This paper will focus on a market analysis of Australian gourmet product to be offered to the Russian market. It evaluates the Russian economic and financial environment, cultural environment, political environment and technological environment, which are all necessary in the evaluation of the success of the Australian gourmet win in the Russian market. ECONOMIC AND FINANCIAL ENVIRONMENT The economy of Russia includes redoubtable assets. Russia possesses plenty supplies of many of the world's most valued resources, especially those required to support a modern industrialized economy. It also has a well-educated labor force with substantial technical proficiency. At the same time, Soviet-era management practices, a decaying infrastructure, and inefficient supply systems hinder efficient utilization of those resources. For nearly sixty years, the Russian economy and that of the rest of the Soviet Union operated on the basis of central planning meaning state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy. Economic policy was made according to directives from the Communist Party, which controlled all aspects of economic activity. The central planning system left a number of legacies with which the Russian economy must deal in its transition to a market economy. The constant changes in the business environment can make business activities hard to plan for managers. Taxes in Russia are high but some reforms are implemented in order to reduce the amount of taxes paid by companies. During the recent years, the government has put emphasis on reducing regulation and lowering taxes. Depending of the company's location, the tax can vary. A thorough tax code has recently been implemented including a new VAT law and a new profits tax law. The VAT is quite similar to the EU model; however, input VAT is only recoverable when paid whereas output VAT can be accrued on a cash or accrual basis. The government actions regarding the VAT are mixed. On one hand, the Russian government decided not to apply VAT on certain actions (i.e. inter-company loans or derivatives transactions), but on the other hand, some other fields that were not concerned by VAT are now subject to it (i.e. transfer of patents, trademarks, copyrights). The new Profits tax law is lowering the tax rate to a maximum 24% and reduced the number of non-deductible expenses. A value-added tax (VAT) is also applied to virtually all imports, and excise taxes are applied to a small selection of goods. As of January 1, 2004, the VAT, which is applied to the price of the imported good plus its tariff, was reduced to 18 percent, and there are ongoing discussions to lower it to 15 percent or 16 percent at some point in the future. Although pharmaceuticals and printed matter were exempt from the VAT, and some food products and items for children (e.g., diapers) were taxed at a lower VAT rate of 10 percent, the Government of Russia took steps to eliminate such special provisions in January 2002. Several industries complain of excessively high tariffs and discriminatory tariff policies over a range of sectors, including motorcycles, sugar, distilled spirits, wine, fruit, processed food, and forest products. A representative branch of a foreign business is considered a foreign legal entity. In this case, the company is subject to withholding tax ranging from 10-20 %. A company must perform certain activities as similar to those mentioned in the OECD Model Tax Convention to be subject to the Russian tax on its net income. On the contrary to the personal income tax rate which is low (13 % in 2004), employers have to pay heavy payroll taxes that reach 38.5 of the employee salaries. This cover pension fund, social insurance fund, medical insurance and employment fund and had to be paid separately so far. Changes are occurring aiming at grouping the payment of the social taxes altogether and the rate is expected to decrease. (BuyUSA.gov, 2006) Almost two third of the Russian population lives in big cities far away from each other and surrounded by vast and little populated areas, often with poor transportation connections between the cities. This makes the extensive distribution in Russia challenging. For an entry into the Russian market, it is preferable to focus on the bigger cities because an extensive distribution all over the country would be expensive and not profitable. The rural areas are very low populated. The biggest markets are constituted by the biggest cities. In Moscow for example, there is three times more home computers than the national average. The wages are higher, but there are also more competitors and the costs of running a business are higher. (David, 2006) The overall economy of Russia is improving as evidenced with the continued trend of strong consumer spending and a construction boom. This dramatic growth shows more signs of spreading beyond Moscow and St. Petersburg to the regions. Leading European companies, especially those from Germany, France, Scandinavia and Turkey, are well established in both consumer and industrial markets in Moscow and St. Petersburg and are branching out to the smaller regional cities. Many well-known U.S. consumer brands are also successful and many Asian companies from Japan, South Korea and China are also doing well. CULTURAL ENVIRONMENT Russia is a vast country stretching along the European and Asian continents. It is the largest country in terms of landmass and has the world's eight largest population. The Russian distribution network is still characterized by traditions from the past when there were a lack of almost everything. Within many sectors, retailers and suppliers are still very fragmented. There are almost no chains, neither vertically nor horizontally. Only in St. Petersburg 5000 food stores operate, all with different assortment and owners. (Wikipedia Online, 2006) The purchasing power of consumers is concentrated into the hands of the minority of the population. 2-3 % of the population, often men and women between 18 and 35, benefit from a high purchasing power. 5-20 % can be considered as "middle-class", with a relatively high purchasing power. They are business people and white-collar employees, often living in big cities. The people with a limited purchasing power are mainly mature-age people with a slight dominance of women. These customers express interest into reliability and quality of goods, especially in the health care sector. The "New Russians" prefer spending their free-time on sport activities and eating out at restaurants. For most people, not only quality but also price is important. The rest of the population is very price-sensitive. The attitude towards Russian brands is that they offer good value for the money. Local products are considered healthier partly because they contain fewer preservatives. Local brand loyalty is increasing, as well as the quality of domestic products. The packaging of products has improved and many Russian leading brands are equal in competition to international brands nowadays. In order for a foreign company to compete, local or national brands can be created and positioned. The three most important factors influencing consumer selection of products are aggressive advertising, promotion and a minor decrease in prices. (Capital Perspectives, 2006a) A company entering the Russian market must be aware of the popular person-to-person marketing. This is mainly due to that distribution and logistic costs are high and this way of marketing is therefore less costly. Russian consumers appreciate however big centers to do their shopping. Large stores will continue to become popular even in the future. Customer preferences regarding advertising have step-by-step changed. Commercial should be humorous, interesting, bright, and beautiful and combine image and product qualities (Capital Perspective, 2006b). In short, the market is becoming more and more competitive as preference for local products are increasing. POLITICAL AND LEGAL ENVIRONMENT The political system of Russia takes the form of a federal presidential republic where the head of state is the President. The Executive power is exercised by selected members of the ruling party headed by the Prime Minister while Legislative power lies in the hands of the two chambers under the Federal Assembly of the Russian Federation. The relationship between the executive and legislative branch has been marked by constant strife mainly due to differing ideologies. While the executive branch is bent on implementing reforms, the legislators have been trying to maintain the ideals set forth in the Soviet Union Era. This state of affairs resulted to the Boris Yeltsin's use of military force in 1993 to dissolve the parliament and call for new elections. With new members of the Parliament, Yeltsin was able to pass a new constitution which gave some semblance of stability to the political system. With the coming to power of Vladimir Putin of the United Russia party, partisan politics has largely been minimized with the reduction of all other parties to minority status. Putin was able to secure a full second term showing that Russian politics is becoming stable under his regime. Putin's presidency has shown improvements in the Russian standard of living, as opposed to the 1990s. Even with these economic improvements, the government is criticized for lack of will to fight wide-spread crime and corruption and to renovate deteriorated urban infrastructure throughout the country. There are currently apprehensions now that Putin's second term is about to end. Suffice it to say, the Russian internal decision making process is largely determined by the head of state and demonstration of power is a norm. The judicial system of Russia is administered by the Ministry of Justice. Judges are dependent on the local government for housing and average salary is below some menial positions. Irregularities in the appointment process still abound and the monitoring and judicial reforms are undermined by the vastness of the Russian territory which covers 11 time zones. In short, there is a large tendency to undermine independence of judges. Legal remedies for fraud, recovery of damages, or reimbursement on business losses are not as clearly defined in Russia as they are in the United States and the United Kingdom. Bribe-taking is reported to still pervade among Russian Government officials and other civil servants although it is illegal. The government improved the law regarding the protection of intellectual property and proprietary information over the past few years. Some laws have been determined to protect patents, brands or labels of origin, copyrights, software and other products. However, the law system for property rights is not enough developed and has to be improved to ensure a satisfactory protection and reach the level of the European legislation. Therefore, companies are still facing high risks. The risks are both external (i.e. viruses or hacking in order to get some confidential information about the company's activities) and internal (i.e. thefts of trade secrets or competitive intelligence). Moreover, corruption can occur when registering the company's rights to the authorities. As well, there is a great risk for counterfeit products even though the authorities are aiming to stop them. TECHNOLOGICAL ENVIRONMENT Under the Soviet Union era, Russia led the space race with the launching of the Sputnik and Yuri Gagarin into space. Much of the technology, however, was focused in improving military arsenals. The Russian innovation system is currently undergoing the process of restructuring and adapting to new market conditions. With the collapse of the Soviet Union came also the collapse of international ties weakening the overall innovation system of Russia. Compounding the problem is the steep decline of government funding for research and development. The most important negative factor impeding the development of the innovation system under the new conditions is an extremely low demand for results of scientific research, which characterizes today's Russia. Only high education is in great demand, although students pursuing higher education do not plan to work in the R&D field (where average wages are extremely low today - even by the Russian standard), but in order to pursue career in other branches of economy. The private sector that has emerged in Russia during the last decade so far shows little interest in investing in R&D. The first early signs of such interest are displayed only by some of the largest raw material companies, which have been able to adapt to new market conditions sooner and accumulate sufficient financial wealth to invest in long-term strategic development. Companies operating in various processing industry branches, whose demand for innovation is potentially much higher than that among raw material companies, are, at least as far as the majority of them is concerned, do not have the financial capabilities to make sizeable investments in R&D. Yet another problem, which seriously aggravates the situation, is low competitive strength of Russian applied research. Research organizations use primarily old approaches in their activities, which are not oriented to maximally meet quickly changing demands of their customers, and are not able to offer their customers in the manufacturing sector a comprehensive package of necessary services as required today. Only a small portion of private research institutions (which have set themselves out from the core of large parent research organizations and inherited their competitive strengths) have been able to adapt to new conditions and provide competitive comprehensive services. As a result the companies that are in need of upgrading are currently purchasing not only imported equipment, but also imported technologies. In 2002 only about 10% of industrial enterprises have been evaluated by Russian statistical authorities as 'innovation-based' (i.e. engaged in innovation activities). At the same time, 62% of all expenditures in innovation fell on purchases of equipment (including, to a large degree, purchases of second-hand units), 18.3% fell on purchasing new technologies (including 10.5% on the purchase of patents and licenses). Finally, one more important problem faced by the Russian innovation system is the extremely low degree of commercialization of results of scientific and research activities. Currently, less than 1% of scientific findings find application in the economy. This, to a large degree, is a result of legal regulations: results of studies conducted to government orders (which still by far outweigh all other research) remain the property of the state and may be commercialized only very slowly due to low efficiency of respective government mechanisms. Researchers are not given the opportunity to show business initiative and commercialize results of their studies in the small-sized business are. The same obstacle (as well as the excessive degree of secretiveness applied to results of research and development which in some manner relate to the defense sector) does not allow Russian R&D organizations to access international markets, which could partially compensate for the rapid decline in domestic demand. Government funding continues to remain the main source of funding for most R&D organizations. In the recent years volumes of this funding have been growing not sufficiently quickly to at least partially correspond to growing needs. The Russian innovation system is seriously lagging behind the standards adopted by developed nations. The Russian government is on the whole aware of this lag. It regularly proclaims that priority is given to the development of fundamental and applied science in the context of Russian economy, but does not invest enough effort to overcome the gap. The government's innovation policy (including the distribution of funds) can be described as not sufficiently focused. Various programs for science and technology development, which are being evolved by different government agencies, do not sufficiently interact with each other. Direct funding of research institutions prevail, which is then pulverized among numerous low-efficient links in the chain to the prejudice of the most promising lines of research and projects. At the same time, frequent changes to the system of government regulation and to the distribution of functions among various government bodies leads to too frequent changes in priorities: many earlier adopted programs remain not completed. (Ministry of Trade and Industry, 2006). The technological capability of Russia with regards to economic applications is still crude although important reforms are currently underway. One of the programs that are still currently undertaken is the Pro Act technology program in collaboration with Finland. The program has shown some promising results especially for the development of R&D. CONCLUSION All in all, the Russian market is becoming more and more attractive for almost all industries as reforms are being undertaken in all aspects of Russian society. Although the country is still recovering from the Soviet Union era of capitalist market neglect, it has shown a tremendous increase in improving its economic, political, legal, financial and technological environment. The cultural environment has also seen a shift from socialist perspectives to a more consumer like attitude although patriotism is still deeply rooted. The prospect for the introduction of Australian gourmet product in the Russian scene is, by and large, attractive although it must be competitive with the prices of the local industry. This is quite challenging considering the high import taxes and protective tariffs imposed on foreign products. Other foreign ventures have been successful and with the improved economic environment of Russia, the probability of success for this venture is high. REFERENCE LIST: BuyUSA Online (2006). Doing Business In Russia: A Country Commercial Guide for U.S. Companies - 2006. Retrieved Dec. 18, 2006 from http://www.buyusa.gov/russia/en/ccg.html Capital Perspective (2006a). The consumption behaviors of Russians. Retrieved December, 18, 2006 from http://www.capitalperspective.ru/russia/business/export/consumption-behaviors-russia.htm Capital Perspective (2006b). Marketing Products in Russia. Retrieved December, 18, 2006 from http://www.capitalperspective.ru/russia/business/export/marketing-products-russia.htm David, Chelly (2006). The Russian Market. Blackwell Publishing: London Ministry of Trade and Ministry (2006). New Knowledge and Competence for Technology and Innovation Policies ProACT Research Programme 2001-2005. Libria Oy: Helsinki Wikipedia Online (2006a). Info on Marketing. Retrieved December, 18, 2006 from www.wikipedia.org Wikipedia Online (2006b). Info on Russia. Retrieved December, 18, 2006 from www.wikipedia.org Read More