Question

You are the CEO of a company that has to choose between making a $100 million investment in either Russia or Poland. Both investments promise the same long-run return, so your choice of which investment to make is driven by considerations of risk.

1. Assess the various risks of doing business in each of these nations. Compare Poland and Russia in terms of how easily contracts are enforced, how property rights can be registered, and how investors can be protected. Identify in which area you see the greatest difference.
2. Which investment would you favor and why?

Answer 1

INTRODUCTION

International Business

International Business is evolved from international trade and international marketing. International business is a crucial venture due to the influence of varied social, cultural, political, economic, natural factor and government policies and laws.

According to Michael H. Moffett, “International business is the process of focusing on the resources of the globe and objectives of the organizations on global opportunities and threats in order to produce, buy, sell or exchange of goods and services world-wide.

Factors Lead to International Business

1. Establishment of WTO
2. Globalization of Economies
3. Rapid technological Advancement
4. Enlargement of European Union
5. Increase in competition
6. Higher growth rate of GDP in developing Countries
7. Increase in business alliances in degree and variety
8. Emergence of supportive institution

RUSSIA

Russia is the world’s largest country in terms of territory. Its consumer market consists of over 140 million people. It has vast resources, a highly educated workforce, and technologically advanced research and production capabilities. Still, Russia’s economic potential remains largely untapped. Many investors shy of Russia amid growing concerns that the political system in the country is breeding dissent among the population.

As such, the economy has been in a state of flux in recent months and its close proximity to Europe amid the financial crisis remains a pivotal danger. However, none of these things change what Russia has to offer. Its technological capabilities matched with its natural resources give the country’s economy great potential. Political turmoil will only drive prices down, making it a better time to invest in this country.

Investment Climate and Opportunities Overview

1. Dynamic Economic Growth

2. One of the Largest Consumer Markets

3. World-Renowned Human Capital

4. Vast Natural Resources

5. Unique Geographic Position

6. Technologically Advanced Economy

7. Attractive Taxation System

8. Extensive Government Support

9. Stable Social and Political System

RUSSIA’S ECONOMIC OVERVIEW

Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy towards a more market-based and globally-integrated economy, but stalling as a partially reformed, statist economy with a high concentration of wealth in officials’ hands.

RUSSIA: RISK ASSESSMENT

1. SLOW DOWN IN GROWTH: – Growth has slowed down in Q2. This trend should beconfirmed over the whole of 2012, with the Russian economyhowever holding up in a very depressed internationaleconomic context. Oil production reached a record level inthe middle of the year. On the other hand, industrial productionhas suffered from a fall in demand from the mainpartners of Russia (European Union and China). Investmenthas been curbed by a rise in production costs reducingcompany profits. Private consumption, the main driver ofthe Russian economy, was buoyed in HY1 by the rise inwages and social spending, growth in banking credit aswell as the good state of the employment market. However,the rise in inflation is now affecting the increase in realwages and therefore domestic demand. Inflationary pressurehas increased since June, under the effect of the risein the price of food (increased by the effects of the summerdrought) and public services (energy). The Central Bankraised its refinancing rate in mid-September (from 8% to8.25%) to try to contain the rise in prices within the limit ofits 6% “target”.

2. BUDGET & CURRENT BALANCES DEPENDENT ON OIL PRICES: – The 2012 budget was amended in June to take accountof an expected rise in oil prices (from $100 to $115 a barrel),which increases fiscal revenue and allows expenditureto be maintained. Oil revenue accounts for half of Staterevenue and the price of oil ensuring equilibrium in publicfinances has doubled since 2008. Taking into account therecent change in the price of a barrel, revenue should bebelow that expected while expenditure will not be reviseddownwards. Consequently, the balance should be slightlyin deficit at the end of the year. However, Russian publicfinances remain solid with public debt below 10% of GDP,leaving the government some room for manoeuvre, at leastin the short term.

3. COMPLEX JUDICIAL SYSTEM: – Property rights are widely perceived to be contingent on political connections, and intimidation of businesses by the FSB and police for political and financial ends is frequent. Red tape stifles innovation, and lack of transparency makes adequate partner due diligence elusive. The judicial system is also problematic: legislation implementation is broadly unpredictable and the independence and integrity of Russian courts is deeply flawed.

4. CORRUPTION AND LACK OF GOVERNANCE: – Corruption and weak corporate transparency is another major ongoing risk for investors. Many analysts admit say that this is a big problem – particularly among some of the smaller companies, whose accounts are not particularly transparent. Even well-known and respected companies like IKEA which heavily focus on practicing ethical businesses activities declared a moratorium on subsequent Russian investments due to the ongoing concerns of corruption. Based on the Corruption Perception Index, Russia has a lot of obstacles to fair and efficient business practices. Even Iran, Libya and Pakistan are perceived as having less corruption.

5. POLICIES: – Russia’s economic and fiscal policy is not investor-friendly. The tax code is overly complex. Russia also has a distinct penchant for protectionism: despite its WTO accession, it continues to unpredictably implement levies, tariffs and bans on hundreds of imports. Tight relations between business and politics are highly detrimental to the business environment.

POLAND

Poland’s economy is much smaller than that of Russia. However, with a strong consumer market of 38 million, it is still one of the biggest markets in Europe. The country benefits greatly from its geographical location, which makes it possible to export goods to all European countries and thus reach over 500 million consumers.

Similar to Russia, Poland has a highly educated workforce. Therefore, Poland also falls victim to its proximity to Europe and the ongoing crisis. For these reasons many investors are also shying away from this nation. In these trying times though, Europe still remains a solid economy, and though it has faltered, it has managed to remain intact. As investors flee Europe amid growing concerns over the failure to revive the economy and provide successful solutions, Poland offers a great bargain.

Poland’s economic performance could improve if the country addresses some of the remaining deficiencies in its road and rail infrastructure, business environment, rigid labour code, commercial court system, government red tape, and burdensome tax system.

ECONOMIC OVERVIEW OF POLAND

Poland has the largest economy in Eastern Europe, and one of the highest levels of foreign investment at $13.9 billion as of 2006. Poland’s economy has been growing quickly, at about 6%, for the past 5 years, and was growing at an even faster pace before this. Despite its GDP growth, Poland faces numerous economic issues; it has chronic high unemployment, low wages despite significant increase of productivity, massive flight of educated population abroad, and low level of innovativeness and highest percentage of people working for national minimum wage among countries of European Union

Poland: Risk Assessment

1. DECELEARTING GROWTH IN 2012: – Economic activity remained sustained in 2011, despite a slowdown in growth during the last quarter. Growth has continued to decelerate in 2012. Household spending, which represents 60% of GDP, effectively remains low due to a decline in consumer confidence, in conjunction with an annual inflation rate of 3.8% in August 2012, a public sector wage freeze and deterioration in the employment market (13.3% unemployment). The Polish trade deficit shrank in 2012 following a contraction in domestic demand in Q2 VS. Q1 (-3.1%) and slowing exports (+0.8%). Although exports were impacted by a slowdown in Western Europe, exports towards Russia and Ukraine progressed by more than 20%. The heavy deficit in the income balance wiped out most of the positive effect from the trade improvement. The impact of external trade on GDP was nonetheless limited on account of the low level of trade openness compared to other Central European countries. An expected reduction in inflation should enable the Polish central bank to modify monetary policy. The governor has committed to cutting rates in the event of an economic slowdown. Despite the decline foreign investment flows will cover the current account deficit. At the end of July 2012 net investment flows covered the deficit, i.e. EUR 8 billion. The private construction sector was weighed down by a fall in household demand. The construction production index published monthly by Euro stat fell 8% over the first 7 months of 2012 compared to 2011. Furthermore, the construction sector was boosted, during several months, by the organisation of the European football championships in June 2012 (stadiums, hotels, road networks …) with support from public investment. Corporate credit remained dynamic during Q1, particularly in zloty terms, but investment will decelerate sharply over coming months.

2. STRUCTURE AND HIERARCHY IN POLISH COMPANIES: – Organisations in Poland have a strong respect for hierarchy and authority, with structure and delegation coming from above. This hierarchical style is reflected in manyPolish businessformalities and settings, including the decision-making process and the use of professional titles. Seniority in Polish organisations is acknowledged and respected and the corporate hierarchy is often formed on the basis of age and educational background. For this reason, when negotiating, it is advisable to send delegates of a similar status to those of Polish colleagues, both in age and professional qualifications. Rules and regulations are an important part of the Polish business environment so Polish counterparts may expect theirbusiness partners to know and appreciate established etiquette and business protocol.

3. RELATIONSHIPS: – Doing business in Poland requires an understanding of the importance of relationships in polish businessculture. Building individual relationships is essential to the success of business objectives, especially in the long term. Polish people take time to establish relationships with business partners and to build trust. Poland has a family-focused society, and poles value building and maintaining close personal relationships. This may be considered as a challenge for many foreigners doing business in poland who are not used to sharing personal information with their business partners. For poles this is one of the stages of the trust-building process.

4. COMPLEX BUREAUCRACY: – Although Poland’s per capita GDP is increasing relative to the rest of the EU, it amounts to less than 70% of the EU average. Nonetheless, strong domestic consumption is one of the engines of growth in Poland. Poland has made great strides toward improving the commercial climate, but investors point to an inefficient commercial court system, a rigid labour code, bureaucratic red tape, and a burdensome tax system as challenges for foreign companies.

5. IMPROVEMENTS IN INFRASTRUCTURE: – Although many infrastructure improvements have been completed or are underway, Poland still has much work to do in order to modernize its road and railway network. Weaknesses in transportation infrastructure increases the cost of doing business for U.S. businesses by limiting ready access to all of the markets within Poland and diminishes the country’s current attractiveness as a regional distribution hub. Internet access and connection strength is good in the cities, but still very limited in less populated regions.

6. IMPROVING PUBLIC FINANCES: – The Public finances development and consolidation plan implemented by the government in order to respect Maastricht criteria from 2013 onwards will be pursued. The public deficit, which reached almost 8% of GDP in 2010, is expected to fall below 4% in 2012, through higher taxes on oil products and an increase in social contributions. As a result, public debt should stabilise at around 55% of GDP. However, as a large proportion of the debt is held by non residents, it is vulnerable to risk aversion among investors. Furthermore, the European recession has weighed on foreign direct investment flows in 2012 which has meant that the only stable capital flows financing the current account deficit have come from European structural funds. The Polish banking system seems relatively robust, with capitalisation ratios in excess of Basel III minimum requirements. However, subsidiaries of foreign banks, which are mostly implanted in the euro zone, represent two-thirds of the banking sector, which is therefore dependant on foreign capital. Banks remain highly exposed to currency risk, as household loans denominated in foreign currency account for 14% of GDP. Furthermore, the zloty depreciated by 8% of its value against the euro between January and September 2012.

7. A COMPARATIVELY STABLE POLITICAL CONTEXT: -The 2010 presidential election resulted in Bronislaw Komorowski leading a coalition between his centre-right party (PO), which had been in power since October 2007, and the Polish people’s party (PSA). The general elections held on 9 October 2011 confirmed the coalition’s position. The Prime Minister, Donald Tusk has made budget deficit reduction a priority. However, the latest opinion polls highlight growing popular discontent with current fiscal austerity. Furthermore, the adoption of the euro has been postponed due to the single currency’s current lack of appeal according to the Prime Minister.

CONCLUSION

Both countries have positives and negatives aspect of investment. But after assessing risks Quotient in these two countries one can conclude that it is difficult to set up new facility in Russia. Because there are more factors affecting risk perception in Russia as compared to risk perception in Poland.

Poland is better option than Russia

REASONS FOR THIS

• The only EU country to have avoided recession in 2009
• FDI appeal is reinforced by the size of the domesticmarket
• Diversified economy
• The highest absorption rate of European structuralfunds in emerging Europe