Table of content

Executive Summary.......................................................3

Introduction....................................................................4

PESTEL Model...............................................................5

Political............................................................................5

Economic..........................................................................8

Legal...............................................................................11

Sociocultural..................................................................12

Recommendation..........................................................15

Conclusion.....................................................................16

Reference.......................................................................17

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 A Report for Australian Foreign Direct Investors:

Comparative Attractiveness Assessment of the United Kingdom &

Russia

Executive Summary

 Purpose
This report is a survey of Britain and the Russian political economies, which is
prepared for the Australian investors in determining which target country to do
business.
 Design/Methodology

The investigation shed light on the distinctiveness and investing preferences of these
two investing markets based on the PESTEL framework in political, economic, legal,
and sociocultural dimensions. And qualitative and qualitative methods were used to
collect data and continue the report descriptions.
 Limitations

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The political economy is far more than expectations due to volatile technological
advancement and environmental challenges such as climate change. Aside from that,
some important indicators of evaluating the political, economic, legal, and
sociocultural dimensions are overlooked attribute to word limits. 
 Findings

It is discovered that the United Kingdom (UK) market is more attractive for
Australian foreign direct investment (FDI) as compared to Russia. From a political
facet, the UK owns a flexible tax policy, higher political stability, and liberalization
than Russia. From the economic view, the favorable disposable income and free
economic market in the UK are bright points to appeal to the FDI. From the legal
angle, Russian legislation is less friendly for FDI attractiveness than the UK. And
from the social-cultural perspective, both Australia and Britain are English native
speakers and hold more analogous cultures. 

Introduction

This report was written to explore political economy characteristics and country
attractiveness of Britain and Russia for Australian companies’ FDI outflows. Aimed at
declining the costs and risks involved in selecting and developing international
markets in these two countries, this report will focus on a detailed analysis of four
dimensions accord with the PESTEL framework (Hill, 2011), including political,
economic, legal, and sociocultural facets in these two countries. There are lots of
indicators to measure these four dimensions, while only the imperative and significant
ones will be discussed in this report result from word limits. Meanwhile, the
investigation of this report is based on qualitative and qualitative methods and data.
Other critical barriers encompassing the technological and environmental barriers are
temporarily omitted, which is also another limitation of this report. The concluded

3
outcomes suggest that the overall attractiveness of the UK in FDI inflows is higher
than Russia in political, economic, and legal measurements, likewise, Australian
social culture is more similar to UK’s as opposed to Russia.

PESTEL Model

Political

Firstly, countries with unstable political systems have high investment risks which
reduce the inflow of FDI (Azzimonti, 2018). Foreign investors are more likely to do
business in a low political risk country (Hayakawa et al., 2013). Russia's military
invasion of Ukraine in February 2022 caused multiple sanctions and counter-
sanctions between Russia and the West. Furthermore, Russia plans to sever ties with
WTO which allows other countries to impose tariffs on Russia in excess of WTO
rules (IISD, 2022). This war has raised Russian country risk and built high barriers
to international free trade. Conversely, the UK runs a relatively stable political
system. It is a commonwealth country adopting a parliamentary constitutional
monarchy (The World Factbook, 2022). Meanwhile, the Conservative Party has
become the largest majority in the parliamentary for ten years since 2019 (Marsh,
2020). This has improved the overall political risk in the UK. However, Brexit
generated uncertainty in its nation and caused an effect on the trust of the British
government which made it less attractive for investors. Overall, the UK has a low
political risk level whereas Russia is extremely high. The picture shows in detail: 

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Secondly, democracy has a positive effect on the inflow of FDI (Pinar & Stengos,
2021). The more democratic the country is, the more likely that foreign investors will
do business in this country. Political rights and civil liberties are two basic dimensions
to evaluate the democracy level of a country (BenYishay &
Betancourt, 2014). Political rights empower most of the people and the nature of
liberal democracy needs to protect civil, property and political rights (Mukand &
Rodrik, 2020). UK’s political rights are stronger than Russia which indicates a high
level of democracy in the UK. On the other
hand, BenYishay and Betancourt (2014) asserted that civil liberties are the key
elements of modern democracy. People in the UK own stable civil liberties while
Russian citizens experience weak civil liberties. Hence, the UK is more democratic
than Russia which makes it more attractive to FDI.  

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Lastly, host taxes affect the decision of foreign investment, especially on the decision
of whether to invest or not (Davies et al., 2021). Thus, it is reasonable for the
government to use a tax policy to attract more multinationals. Bilicka (2022, 2021)
illustrated that multinational companies paid less or no tax when expanding or
entering the UK market. Moreover, the UK maintains tariff-free trade with the EU, the
lower trade barriers have increased trade between the UK and the EU (Dhingra et al.,
2018). Therefore, the flexible taxation policy made the UK one of the fast recoveries
post Covid-19. On the contrary, Russia runs a complex tax policy system. Although
Russia has implemented several tax cuts policies for international corporate, the
changeable tax policies, complex tax regulations and corrupt tax officers made
multinationals lose confidence to invest in Russia (Jones et al., 2000). The following
picture shows Russia received irregular revenue from taxes on international trade
which also implies an unstable tax policy in Russia. Hence, Russia is less attractive in
the political dimension than the UK.  

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Economic

This section is to critically compare the economic environments of the UK and Russia
to clarify associated benefits, risks and costs. As noted by Begley, Tan and Schoch
(2005), the evaluation of the attractiveness of the economic environment is based on
various economic indicators including the effectiveness of the financial system, GDP
growth rate, unemployment rate, disposable income level and so forth. The UK is one
strong developed country in Europe, and its economic system has reflected a high
degree of freedom (OECD 2022). Yet for Russia, the national economy has
experienced a transformation into a market-oriented one, but the market freedom level
is lower compared with the one in the UK. Thus, it is feasible to note that the higher
level of market freedom in the UK is more beneficial for FDIs because the
government of the UK is expected to provide limited interventions in business

7
activities (Austrade 2022).

In addition, the indicator of GDP growth rate is essential to reflect the healthy level of
the national economy (Begley, Tan & Schoch 2005). According to the statistics of
Trading Economics (2022), the GDP growth rates of the UK and Russia can be shown
in figure 4: both countries had experienced a significant GDP decline due to the
outbreak of the COVID-19 pandemic, but they also had successfully achieved
economic recovery based on the suitable governmental policies. In 2022, Russia is
estimated to reach a GDP growth rate of around 4.4%, and the UK also could arrive at
about 1.2%. The GDP growth performance in Russia is better than the one in the UK,
which could increase the attractiveness of Russia for FDIs.
Figure 4: GDP Growth Performance in Russia & the UK from 2018 to 2022.

Source: Derived from Trading Economics (2022)

Next, the indicator of the unemployment rate also could evaluate the attractiveness of
the economic environment. The statistics of Trading Economics can be shown in
figure 5. It can be seen from the chart that the unemployment rate in Russia is higher
than that in Britain before 2021. The unemployment rate of the UK increased
significantly from 3.5% to 6.25% in the first half of 2020, and the key driver was the
COVID-19 pandemic. Similarly, the unemployment rate of Russia also experienced a

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sharp increase from 4.7% to 6.4% in the same period. Learned from the identification
of OECD (2022), the government of the UK has formulated and implemented
appropriate economic recovery strategies to encourage people to stay with the
pandemic and take vaccination the COVID-19. In 2022, the UK and Russia had
successfully reduced the unemployment rate to reach around 5.0% and 3.8%
respectively. It can be seen that the measures taken by both countries to reduce the
unemployment rate have achieved remarkable results.
Figure 5: The Unemployment Rate of the UK & Russia from from 2018 to 2022.

Source: Derived from Trading Economics (2022)

In the end, the disposable income determines the purchasing power of the target
people (Minguzzi & Passaro 2001). For Russia, the figure for household income per
capita was around 6493.14 USD in 2021, and the one in the UK was approximately
35,234.56 USD (Office for National Statistics 2021). Individuals in the UK are
expected to show stronger purchasing power, which could support domestic and
foreign businesses to generate more revenues and profits.

9
Legal

First of all, the UK has free and flexible labor regulations, which not only ensure the
efficient operation of companies, but also guarantee the legitimate rights and interests
of employees. Employment contracts in the UK are usually written to avoid labor
disputes, and employees must sign a labor contract within two months of starting
work (Pilz, 2019). In addition, the UK government encourages and provides
convenience for foreign labor to make up for the domestic shortage of jobs. Compared
with the UK, although Russia also protects labor rights and interests in terms of
working hours and social insurance, recently due to the global financial crisis, the
Russian government implemented the new "Administrative Measures for the Issuance
of Temporary Labor Permits to Foreign Citizens" and according to this method, the
Russian government determines the quota of foreign workers every year based on the
number of foreign workers in the previous year and the needs of enterprises to declare
(Varnavskii and and Tsvirkun, 2018). The pressure on domestic employment in Russia
has increased, and therefore the Russian government has sharply reduced the quota of
foreign labor permits.

In addition, The UK and Russia are also different in the legislative model of
competition law.The UK adopts a comprehensive legislative model, which integrates
anti-monopoly and anti unfair competition into separate laws and regulations for
adjustment. However, such a model is easy to confuse and difficult to implement
because it makes no distinction between monopoly and unfair competition in law.
However, Russian competition law is that it implements a legislative model of anti-
monopoly and anti-unfair competition mergers. Compared with the UK, this model
clearly distinguishes between monopoly and unfair competition, which is conducive
to the coordinated operation of the implementation of competition law.

As we know, the realization of economic goals requires reliable legal protection, and

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the Foreign Investment Law between the two countries are also different. Firstly, the
UK has no laws to guide or restrict foreign investment, so foreign investors enjoy the
same treatment as British funded companies, which means that foreign investors can
engage in various forms of economic activities in the UK. Meanwhile, the central and
local governments in the UK have preferential policies to encourage foreign
investment, so foreign investment projects can enjoy a number of support policies at
the same time. Although Russia also encourages foreign investment and local laws
give investors tax incentives, Russia imposes some restrictions on foreign business
activities in the country, for example: Nationalisation of foreign companies’ property
if they decide to exit from Russia.(Allen Overy,2022)

In conclusion, although Russia has provided a efficient competition law and an

attractive foreign investment law, the reduction of foreign employee quotas and
restrictions on foreign investment policies are detrimental to the development of the
company. Compared with Russia, the investment environment and preferential
policies in the UK are better. Additionally, the legal system of Australia and British
are common law whereas Russia's legal system is civil law system.Therefore, it is
much easier for Australian company to operate in the UK to a certain extent.

Sociocultural

Different countries have different cultures because each country has different
behavior. The cultures are important in selecting a country to invest in. The culture
which can derive socio-culture will be affected how businesses operate (Pinkston &
Carroll, 1994). If the difference is enormous from the home country, the company
might need to spend more resources and time to adapt to that country or the product or
service might not be suitable for the native people sociocultural. Therefore, this part
of the essay will discuss the sociocultural in UK and Russia.

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The first thing to discuss is the culture difference, and one of the overarching
components is language. The UK uses English whereas Russia uses the Russian
language. Language is one of the important aspects of investment in other countries.
The differences in the language will increase the costs of communication and the risk
of miscommunication or misinterpretation (Konara & Wei, 2014). Moreover, Konora
and Wei (2014), stated that language barriers can make frustration, mistrust, conflict,
and resistance among co-workers. From the Australian Bureau of Statistics (2017) the
result of the census 2016 72.7% of the population speak English in their home. It is
mean the risk and cost of language to do invest in the UK lower (considering the
differences in the accent) than in Russia. Then from Hofstede Insights (2022) (Figure
3), Australia and United Kingdom have more similar cultures than Russia based on six
dimensions cultures from Hofstede. The distance of culture can affect the investment.
The majority of studies find that the larger the distance of culture gives negative
impacts on foreign direct investment (Kapás& Czeglédi, 2020). However, there were
some studies that the investment must be done in opposite cultures of the home
country. Tang (2012) found out that the differences in individualism between the two
countries will encourage FDI. But, it is better to invest in the market that the investor
understand because it will save time to understand the cultures and reduce the risk
between the differences.

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Figure 6: Country Comparison (Hofstede Insights, 2022).

Then the differences in the income between UK and Russia. To CEIC DATA (2021),
the annual household income per capita in 2021 for the UK was 35,231.563 US
dollars, while Russia's annual household income per percapita 2021 was 6,493.140
US dollars (Figures 1 & 2). From the chart's pattern overall UK increase over the year
(the 2019 decrease might be because COVID-19 pandemic), While Russia was more
stable, except 2020 might be because of the COVID-19 pandemic.From figures 1 and
2, the future annual household income per capita for the UK might increase, while
Russia might remain stable. It can mean that the wage in the UK can be increased in
the future, which will increase the expenses for the investors, while Russia remains
stable. However, if the investment that related to imports and exports, the UK is the
best option because the annual household income per capita in the UK is much higher
than in Russia. For example, for a product that will be sold for 100 USD, the UK
people will think that product is not expensive because of their high annual income,
while Russia might find it expensive.

Figure 7 : Annual Household Income per Capita: USD: United Kingdom (CEIC DATA, 2021)

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 Figure 8: Annual Household Income per Capita: USD: Russia (CEIC DATA, 2021)

Recommendation

In accordance with the previous analysis results, there are three recommendations
for the Australian Trade Commission regarding the potential risks and
challenges Australian companies may encounter in their international expansions.
 Firstly, the UK’s peacefully political stability, flexible taxation policy, higher
democratic rights, more free economic market, higher disposable income are all
benefits. Furthermore, both Australian and British speak English and their high
similarities in cultural backgrounds are favorable determinants availing to Australian
corporations’ business efficiency improvement and communication costs
reduction.  Thus, the UK is a smarter investing choice for Australian firms.
 Secondly, although Russia is almost disadvantaged in all above four dimensions
for Australian FDIs, considering some industries’ specificity and corporations’ overall
variable operating strategies, it is recommended companies tailor analysis of the
political economy and FDI attractiveness in the expanded markets. For instance,
Russia is viewed as one of the world top three natural gas producers, the top one gas

14
 reserves and exporter, and it was reported its crude and condensate outputs, making
up 14% of global total supply in 2021 (IEA, 2022).
 Thirdly, as depicted earlier in figures 6 and 7 of the annual household income per
capita, UK employees are paid higher income, revealing employers in the UK would
spend higher expenditures than in Russia. Which would hamper investors’ substantial
profits-making. Hence, it is recommended Australian investors to take that into
account in their FDIs.

Conclusion

The international investors are confronted with an increasingly volatile and uncertain
economic environment, suggesting more risks, challenges, and opportunities they may
face as doing business in cross-country markets (Nicholls, 2012; Wickramasekera et
al., 2019). Therefore, the Australian investors must aware and be well-prepared when
decided to invest in another country. In congruence with the preceding analysis of
political, economic, legal, and sociocultural dimensions between the UK and Russia,
the former displays integrally more attractive tendency than the latter. To be more
specific, politically, UK exhibits higher stability, liberties, and tax policy flexibility
than Russia. Economically, UK possess more freedom in the economic market and
higher disposable income than Russia. Legally, the law system is more friendly in the
UK than in Russia. Social-culturally, the cultural obstacles and language hurdles
between Australia and Russia is higher, while the reserved condition between
Australia and the UK.

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