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RUSSIAN-AMERICAN BUSINESS PARTNERSHIPS.
Term Paper ID:25792
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Essay Subject:
Examines joint ventures since 1987, economic attraction, risks, politics, cultural factors, organizational & personal relations, selecting partners.... More...
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12 Pages / 2700 Words
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Paper Abstract:
Examines joint ventures since 1987, economic attraction, risks, politics, cultural factors, organizational & personal relations, selecting partners.
Paper Introduction:
RUSSIAN-AMERICAN BUSINESS PARTNERSHIPS
This research paper discusses the evolution of business partnerships between Russians and Americans as vehicles for doing business in the Russian Federation, including their potential and problems. From a business standpoint, the terms business partnerships, joint ventures and strategic alliances can be used interchangeably but the term joint ventures is the term most commonly used in the Russian context because of its special legal meaning and is therefore used in this paper. Joint ventures have become the most common vehicle for carrying out American business investment in Russia since 1987. Enormous difficulties stand in the way of their becoming successful financially, but a few thousand hardy investors, American and Russian, have persevered in the face of truly awesome obstacles. Success or failure
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23). Joint ventures inRussia: Put the locals in charge. (1993, Fall). New York: W. Since 1991, actual output ofconsumer goods is only half of what it was under communism (Please, 1996,April 13, p. Apart from production sharing, none of the above involve thesame degree of permanence as foreign joint ventures and should be taken asindicators of a high degree of risk aversion by American investors towardinvestment in the Russian domestic economy under present conditions. 65). . Russian politics are unstable, which means that a permanent cloud of uncertainty hangs over every deal. (1998, Jan. Ethics, trust, and control in Russian organizations: Recentdevelopments). Gill, J. These included such elementary problemsas a lack of office space, communications facilities and livingarrangements for foreigners and acute shortages of materials as well asother problems which continue to plague foreign investors to the presentday including an indifferent and often hostile bureaucracy, corruption,criminality, scarcity of hard currency and the lack of a comprehensivelegal structure. Cycles of trust and distrust in jointventures. . Das and Teng point out that when shared activities are set up amongunits of a single organization, trust and cooperation are developed withina common organizational structure "a system of shared values and norms"(1998, July, p. (19954, May 1). Economist Intelligence Unit. . Joint ventures have become themost common vehicle for carrying out American business investment in Russiasince 1987. By the end of 1989, 12 had been formed,14 involving American investors, and by the end 199 25 ; however, mostof these companies were inactive, only about 4 being in operation (Rosten,1991, Winter, p. & Gustafson, T. When the top 5 Russiancompanies were privatized in 1993, they were sold for prices which were1/1 of comparably sized American companies (Psst!, 1994, Nov. .enthusiasm for the project . Where an intelligent selection of Russian partners was made at theoutset and where capable Russian management was given its head, someRussian American joint ventures have been dramatic successes, such asDialogue, a personal computer manufacturing and distribution joint venturein which the American equity share was only 22 per cent. They seek to minimize direct outlays of capital and to contribute management skills, where possible, rather than capital or technology. cultural, political and economicdifferences" (1997, Spring, p. 5 4). Interpersonal Problems and Trust. The reason the very large companies are willing to take at least somerisk on the outcome of Russia's experiment with political democracy andfree markets is the enormous size of the potential Russian market. 95). Success orfailure depends on a variety of factors, some of which are external to theventure itself and others which relate to the difficulties of managing andoperating such organizations in the Russian environment. . He had, however, an excellent setof Russian partners, Kamaz, a Russian truck manufacturer, Moscow StateUniversity, the Center Institute of Economics and Applied Mathematics andthe Russian Space Research Institute and the Soviet Experimental ComputerInstitute (Lawrence and Vlachoutsicos, 1993, Jan.-Feb., p. . In one, Russia makes asuccessful transition to a market economy, integrates its own economy withthat of the global economy and achieves an economic miracle or chudo. Want to buy a country? 238). During the firstdecade after the collapse of communism, Russia faced a huge shortfall inavailable capital for investment and desperately needed foreign capital.However, it has not always acted as though it welcomed foreign investors. Despite privileges not enjoyed by other Russian entities, such as atwo year tax holiday, foreign joint ventures were not very popular prior tothe collapse of the Soviet Union. Kvint, V. As Western firms . Lawrence, P. they also want operational control. Lost opportunity. Soviet-U.S. Turin meets Detroit on the Volga. Kvint lists some ofthe cultural differences which have bedeviled business relations betweenAmericans and other Westerners and Russians. (1996, April 13). Nothing they say can be moredamaging to the development of a cooperative relationship and interpersonaltrust than overblown expectations in the early stages of a joint venturesor an overly legalistic approach. 45). 44). Harvardeconomist Goldman warned in 1994 that "with ever- increasing crime andcorruption, it is even more difficult to start a joint venture than it wasin 199 " (1994, May-June, p. joint ventures were the only options for pioneers, including many entrepreneurs and small companies. R 15). Conclusion As the Russian economy opened its doors to foreign investors towardthe end of communist rule, large American companies and assorted Americanentrepreneurs began, hesitantly at first, and then with greater enthusiasm,to form joint ventures with Russian partners to take advantage of marketopportunities in Russia. References Arino, A., Abramov, M., Skorobogatykh, Rykounina, I. (1997,Spring). 494). Selection of Russian Partners, Interpersonal Problems and Trust Selection of Partners. The Economist said in April 1998 that "most largeforeign companies have developed plans for what they might do in Russia,but are waiting until the economy was stabilized before they commit realmoney" (Russia's, 1998, April 15, p. Riding theRussian roller coaster. Yergin and Gustafsonpoint out that there may be fundamental conflicts of objectives: [Westerners] want to invest primarily in raw materials for export, gain access to the Russian domestic market, and limit technology transfer so as to avoid creating future competitors. Das, T. . . Economist, 57-58. 55). International Studies of Management & Organization, 27, 19-33. And the mafia threatens the entire economy (1993, pp. & Vila J. 5). . Bills frequently go unpaid. When competitors decide to form strategic alliances,the lessons of a lifetime have to be unlearnt and rivalry replaced withcollaboration. 57). Articles appeared in leading businesspublications such as the Harvard Business Review heralding a new age inRussian-American economic cooperation now that the communist dragon hadbeen slain and Russia had turned to capitalism for the solution to itseconomic problems. To takeonly one example, Russia with 15 million consumers produces only 13million cars (Turin, 1998, March 7, p. There are many points of potential conflict between Russianand American partners and between them and their Russian manager. California Management Review, 33, 88-1 8. Not all American investors were taken in by the propaganda. (1994, May-June). The Economist IntelligenceUnit estimated that by the end of 1997 American FDI in Russia was $3.9billion or 53.9 percent of total FDI there (1998, 2nd Q quarter, p. . Even in the best designed partnerships, partners can quarrel overmany things, business strategy, reinvestment or distribution of profits,etc. . . HarvardBusiness Review, 72, 62-74. (1994). Russia's emerging market. In the Russian context, the Russian partner may experience pressuresfrom the government and former associates that may not be fully understoodby the American partner. 37).Some of the most familiar American blue chip companies were involved, IBM,General Electric, Ford Motor, Hewlett Packard, Eastman Kodak, Chevron, AT&T, Mcdonalds & Pepsi Cola. companies considering a joint venture should remember that it is one of the most complex forms of business organization . From a businessstandpoint, the terms business partnerships, joint ventures and strategicalliances can be used interchangeably but the term joint ventures is theterm most commonly used in the Russian context because of its special legalmeaning and is therefore used in this paper. . That is another matter (1993, p. Those who invested hard currency inthe Russian domestic economy suffered substantial losses due to the declinein the ruble. Corruption is a plague. According to Lawrence and Vlachoutsicos, thesingle most important reason why foreign joint ventures in Russia havefailed is over the selection of partners. clearly, the overoptimism of the 1991-1995 period, which is reflected in the business literature, placed strongpressures on Russian-American joint ventures to succeed before much of atrack record of mutual trust and cooperation had been established. Please adjust your set. Kvint termed Russia a gigantic firesale of undervaluedassets with a vast cheap but educated work force and a plethora of naturalresources waiting for the taking. Business negotiations in Russia tend to become endurance contests.That is in part due to the difficulties of finding someone in Russia whocan speak with authority on key points. During the period 1992-1995, 18, foreign jointventures were formed involving $1 billion in private foreign directinvestment (FDI) with the number involving Americans rising from 625 at thebeginning of 1992 to 28 at the end of 1993 (Kvint, 1994, March-April1994, p. Burt, J. He points out that under theSoviet system, production and other goals had become so unrealistic thatlying in statistical reports and negotiations had become commonplace, butnevertheless came as a shock to westerners when they were exposed to thesame practice. The 'honeymoon' period for foreign joint ventures in Russia followedthe end of the Cold War and the failure of the hardliner coup againstGorbachev in 1991. . By January 1998,the Economist Intelligence Unit had concluded that because of Russia'scrippling political and economic problems, "no FDI boom is in prospect"(1998, Jan. In their study ofjoint ventures, Gill and Butler say that the trust is based on "a networkof personal obligations" such as exist in a family and which in the settingof a joint venture occur at three levels, between joint venture partners,between the partners and the joint venture and within the joint ventureitself (1996, p. don't give up on Russia. Organizing your Russian business: When todo a joint venture. Galuzska, P. B.-S. Cultural Problems Almost all Russians have grown up without any experience before 1991without any experience with capitalism and very few American companies haddone any business within Russia for decades, if ever. 19). Yergin and Gustafson said that by 1993,total FDI in Russia was only $1.4 billion ($4 million of which wasAmerican), as contrasted with an estimated $1 billion in the PRC. Country reportRussia. A plague of disjointed ventures.Business Week, 55. J., Pulla, S. Psst! W. joint ventures: Pioneerson a new frontier. Business Eastern Europe, 6. In 1997, an Arnold & Porter lawyer in Moscow, Jeffrey Burt, said ineffect that Westerners had made excessive use of foreign joint ventures inRussia: U.S. Because of the externalstresses to which foreign joint ventures are subject, it is absolutelyessential that the American and Russian partners and their managers becompatible and proceed to act in a harmonious fashion. & Butler, R. Thismuch ballyhooed level of FDI was only a drop in the bucket compared withRussia's needs and was, in Yergin's and Gustafson's view, the result of thefact that "by any commercial standards, the obstacles to investing inRussia are among the highest in the world" (1993, p. to a free market" (1993, p. Internet: http://www.iep.doc.gov/bisnis/bulletin/97 2r3.htm. [it] is neither suitable nor appropriate for most purposes (1997, Feb., p. Thereafter, FDI in Russia slowed. (1998, July). Goldman, M. Enormous difficulties stand in the way of their becomingsuccessful financially, but a few thousand hardy investors, American andRussian, have persevered in the face of truly awesome obstacles. London: Economist. McCarthy, D. Economist, 64. . No FDI boom is inprospect. Alternatives According to McCarthy et al, foreign joint ventures, Russian style,entail complexity: "they are the most complex form of cooperation sincethey require difficult negotiations in the formative stage, as well asjoint decision making, power sharing and profit sharing" (1993, Fall, p.113). 24 -241). H. There were, however, critics even then who pointed out that the newRussia was politically unstable and that its new found prosperity waslopsided benefitting a few at the expense of the many. Goldman, M. 64). The Americanpartner, Joe Ritchie, had earned in less than five years a profit of $1 million on an investment of $5 million. . . Most were built on high hopes, shaky laws, and naivete. (1997, Feb.). . (1998, April 8). EuropeanManagement Review, 14, 81-86. (1994, March-April). 1). . Russians welcome Westerners as lenders, as portfolio investors, as minority partners. He said "the climate for internationaljoint ventures has never been better" (1994, March-April, p. Business Problems Americans and other foreign partners must perforce rely on theirprospective Russian partners for basic information concerning the businessin question. Russia 2 1 . When laws or regulations change, there is no central source to which the investor can refer to find out what is happening. Economist, R 3-R 22. Lacking broad publicsupport, the regime relied too much on a narrow tax base and basicallysurvived by printing money which produced domestic inflation and led to asteady decline in the ruble which in 1998 became official. . (1991, Winter). 35). Arino et al recommend that foreign investors look "for honesty andseriousness in their partners, . and Teng. Prior to the end of 1988, whenrestrictions on the percentage on foreign ownership were removed, theSoviet partner had to own at least fifty one percent of the joint ventureand the Chairman of the Board of Directors and the Director General orchief operating officer had to be a Soviet citizen (Rosten, 1991, Winter,p. Economist, 65-67. They point out that these relationships developslowly over time and are highly informal. Between trust and control:Developing confidence in partner cooperation in alliances. Rosten, Keith A. Regardless of the equity ownershipsituation, the foreign (American) partner is to a large extent dependent onhis Russian partner for the success of the joint venture. . 83). Kvint says that the failure of many foreign joint ventures inRussia has been due less to business conditions there than to "poorplanning on the part of foreign investors" (1994, March-April, p. 63). New York: RandomHouse.----------------------- 14 RUSSIAN-AMERICAN BUSINESS PARTNERSHIPS This research paper discusses the evolution of business partnershipsbetween Russians and Americans as vehicles for doing business in theRussian Federation, including their potential and problems. 4). (1993, Fall). Recommendations. The chancesof that occurring in the unpredictable Russian environment are high and areincreased if there are communications difficulties between the Russians andAmericans involved. 5, p. 94). It is also a cultural norm. . considerable . I. For all practical purposes, foreign investment disappearedfrom the Soviet scene during the Stalinist era and until Russian-foreignjoint ventures were authorized again by the regime of Mikhail Gorbachev in1987 under decrees which permitted Soviet state enterprises to enter intojoint ventures with foreign partners. Yergin and Gustafson say that the obstacles which have facedmost foreign investors in Russia are so great that since 1987 "foreigncompanies are trying to decide whether investment in Russia will be aprudent bet on the future, or money thrown down a black hole" (1993, p.16). product complementarity . (1998, Second Quarter). The Russian banking system is chaotic . and commitment to the partnership" amongother criteria (1997, p. 6). In their book, Yergin and Gufstafsonposit two different scenarios in the year 2 1 . Political Risks Joint ventures are commonly used to reduce the political risks ofentering the Russian market which are exceptionally high. The Russian market forconsumer goods has been very slow to develop. California Management Review, 36, 99-115. Attractions of the Post-Soviet Union Market Joint ventures, Russian companies jointly owned by foreign andRussian investors, were not uncommon in the late 19th and early 2 thcentury and were briefly permitted in the 192 s under Vladimir Lenin's NewEconomic Policy. 12). 243). In the event of a dispute, there is no reliable path for legal redress. Inthe other Russia retreats into economic and political nationalism andresumes an imperialistic stance vis-a-vis its neighbors. (1993). J. He points out also that Russians tend to be secretive intheir personal dealings and have difficulty with Americans in particularbecause of their tendency to become overfamiliar in personal matters.Russians are oversensitive to patronizing Americans who refer to Russia asa less developed or backward country. & Vlachoutsicos, C. In their study ofWestern European joint ventures in Russia, Arino et al concluded that"investing in Russia involves significant country risk, mainly because ofpolitical instability, lack of infrastructure, lack of laws governing andprotecting business interests, and difficulties in obtaining supplies andraw materials . Most foreignjoint ventures focused on industries where earnings could be rapidlytranslated into repatriatable hard currency such as oil and gas and hotelsand other tourist related businesses. (1996). Some American companies, such as Reebok, have entered the Russianmarket through wholly owned subsidiaries. Secondly, by internationalstandards, assets in Russia are incredibly cheap. 1 1). Alternatives suggested by Burt include licensingarrangements, turnkey construction and technical services arrangements,contract manufacturing, straight sales agreements, management contracts,production sharing agreements and other contractual understandings. Goldman pointed out that the avowedlycommunist regime in the People's Republic of China did a much better job ofremoving red tape and creating a positive climate for foreign directinvestment than did the Russians. Most of the investors in the first wave of investors were very largecompanies; however, there was also a sprinkling of small entrepreneurs,some of whom were hurt very badly: A number of joint ventures launched in the glamour of the Gorbachev years are on the rocks . . 12, p. According to McCarthy et al, the expectationsassociated with this first wave of American investment in the new Russiawere not met: "unfortunately, the benefits expected by the partners werenot as great as had been hoped, and the difficulties were far greater thananticipated" (1993, Fall, p. Yergin andGustafson described this 'free for all' investment environment of the early199 s: In the West, it is assumed that a contract, once signed, is a contract and thus enforceable. Harvard Business Review, 71, 44-55. Very few Soviet style managers understand the veryconcept of generating a profit and few of them were accustomed under theSoviet system for taking full responsibility for the operations theymanage. Economist Intelligence Unit. Control is the central issue. 64).In 1995, the market capitalization of Russia's leading oil companiesdivided by their oil output came to only $3.5 a barrel, while the Westernoil majors were valued a $6 a barrel. The Russian economy was then taking the very first stepsaway from what Yergin and Gustafson call "a command economy, which was runby planners of the center . . Lawrence& Vlachoutsicos said "the possible gains from investing in Russia today faroutweigh the hazards" (1993, Jan.-Feb., p. have acquired increasing sophistication in the market, the joint venture has acquired a secondary, if not tertiary status, as a form of business collaboration . The Russian investment dilemma.Harvard Business Review, 72, 62-74. . Justbecause Russia is terra incognita, American business firms need not abandontheir usual feasibility studies and the use of other techniques they woulduse to test the soundness of making an investment in other markets.Polaroid's joint venture in Russia has succeeded because it realized thatin view of the chaotic state of the processed film development industry,the market for instant film development was huge. Das and Teng say that "open and promptcommunications among partners is believed to be an indispensablecharacteristic of trusting relationships" in joint ventures (1998, July, p.5 4). European Management Journal, 14, 81-89. A. 62). This concept of 'sanctity of contract' appears exotic to many Russians, as does the notion of 'conflict of interest.' Taxes are high; worse, they are apt to be changed at a moment's notice . But a controlling share of equity? To theextent they cannot control their partner or their manager, the foreign(American) investor is anxious that it may be presented with what Das andTeng call a "major, unpleasant surprise" (1998, July, p. By far the biggest complaint among foreigners is that once their joint venture gets running and there's a profit, the Russian side suddenly wants a controlling interest or total ownership (Galuszka, 1995, May 1, p. Norton. (1994, Nov. I. & Simmonds, P. Despite a myriad of obstacles, a few of thoseventures have prospered, many have failed and most have barely survived asRussia itself muddles through its first full decade of experimentation withpolitical democracy and free market economics. (1998, March 7). . Yergin, D. A great deal of the success ofthe American partner depends on what entity it selects as its equitypartner and whom it selects to run the joint venture.
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