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Contents lists available at ScienceDirect

Journal of Eurasian Studies

j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / e u r a s

1 Q2 Investment climate in Russia and challenges for foreign

2 business: The case of Japanese companies 1
3
4 Q1 Nina Ershova
5 Institute for Industrial and Market Studies, National Research University Higher School of Economics, Myasnitskaya St. 20, 101000 Moscow, Russia
6
7
8 A R T I C L E I N F O A B S T R A C T
9
10
11 Article history: The improvement of the investment climate in Russia and its positive effect on the inflow
12
13 Received 28 June 2016 of foreign direct investment into the country’s economy is being declared at the highest
14
15 Accepted 30 March 2017
levels of the Russian government as an important objective for the further economic
16 Available online
17 development of the country. One of the most important instruments for that improve-
18
19 ment should be the consideration of foreign investor’s opinions and ideas and reaction to
20
21 Keywords:
the most urgent and critical issues which serve as obstacles to their investment activities
22 Russia
23 in Russia.
24 Japan
25
26 business climate This paper considers the case of Japanese investors in Russia. It is based on the results
27
28 foreign investment of a survey of Japanese companies doing business in Russia (members of the Japanese Busi-
29
30 business culture ness Club Moscow) and content analysis of a set of interviews with the representatives of
31
32 Japanese management the Japanese business and academic community and also of non-governmental organizations.
33 We identify which factors attract Japanese capital to Russia and which hinder invest-
34 ment activities. Studying Japanese investment in Russia reveals the particular challenges
35 and obstacles that make Japanese companies reluctant to engage in business activities in
36 Russia. The research reveals and systemizes the factors restricting the development of in-
37 vestment cooperation and their roots, and identifies possible ways of overcoming these
38 challenges.
39 The analysis shows that the constraining factors can be divided into 3 groups by the
40 origin: external – associated with the problems of the investment climate in Russia, inter-
41 nal – associated with specific features of the Japanese production and management system,
42 and other factors – non-economic factors which mainly concern business culture and in-
43 formational issues.
44 Copyright © 2016, Asia-Pacific Research Center, Hanyang University. Production and
45 hosting by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
46 (http://creativecommons.org/licenses/by-nc-nd/4.0/).

47

48
49
50 Institute for Industrial and Market Studies, National Research University 1. Introduction
51 Higher School of Economics, Myasnitskaya St. 20, 101000 Moscow, Russia.
52
53 E-mail address: nershova@hse.ru. Investment climate analysis, especially in the context of
54 1
55 The article was prepared within the framework of the Basic Re- institutional framework building in developing and tran-
56 search Program at the National Research University Higher School of
57
58 Economics (HSE) and supported within the framework of a subsidy granted
sition economies, arouses great interest among researchers.
59
60 to the HSE by the Government of the Russian Federation for the imple- A number of large international projects, such as EBRD Busi-
61 mentation of the Global Competitiveness Program. ness Environment and Enterprise Performance Survey

http://dx.doi.org/10.1016/j.euras.2017.03.001
1879-3665/ Copyright © 2016, Asia-Pacific Research Center, Hanyang University. Production and hosting by Elsevier Ltd. This is an open access article
under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Please cite this article in press as: Nina Ershova, Investment climate in Russia and challenges for foreign business: The case of Japanese companies , Journal of
Eurasian Studies (2017), doi: 10.1016/j.euras.2017.03.001
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62 (BEEPS)2 and Doing Business by the World Bank Group,3 are In recent years investment relations between Russia and 124
63 focused on investment climate research and provide schol- Japan have experienced significant development. Accord- 125
64 ars with an extensive database of characteristics and ing to the Japan External Trade Organization (JETRO)5 data 126
65 indicators for different aspects of the issue which allow com- during 2005–2014 Japan’s FDI stock in Russia increased 29 127
66 parative studies to be conducted. Thus, in the paper of times.6 Despite volume growth, Japanese FDI in Russia also 128
67 Hellman, Jones, Kaufmann, and Schankerman (2000), the experienced major shifts in terms of structure and tech- 129
68 authors summarize the results of a subset of questions from nology. The share of FDI inflow into manufacturing industries 130
69 the BEEPS relating to governance and corruption in tran- of higher technological complexity and capital intensity in- 131
70 sition economies and its influence on the environment faced creased significantly. Regional distribution of Japanese FDI 132
71 by businesses in different countries. The issue of entry reg- is becoming more diversified; apart from regions which have 133
72 ulation for start-up firms in 85 countries including been traditionally attractive for Japanese capital (Moscow, 134
73 developed, developing and transition economies was in- St. Petersburg and the Far East), investment cooperation with 135
74 vestigated in Djankov, Porta, Lopez-De-Silanes, and Shleifer regions of the Central, Volga and Ural Federal districts is de- 136
75 (2002) and regulation of labour markets through employ- veloping intensively. 137
76 ment, collective relations, and social security laws in Botero, However, despite recent progress in investment rela- 138
77 Djankov, Porta, Lopez-De-Silanes, and Shleifer (2004). tions and complementary economic interests of the two 139
78 Moreover, since 2004 the World Bank has extended its countries the level of cooperation is far below its poten- 140
79 methodology to regional studies. As far as Russia is con- tial. The share of the two countries in the structure of mutual 141
80 cerned, regional reports on business climate have been trade and investment relations is rather modest: Russia ac- 142
81 issued twice: in 2008 when they covered 10 cities and towns counts for 2,26% of Japan’s foreign trade turnover and 0,24% 143
82 (primarily regional capitals) (Doing Business in Russia, 2009) of Japanese FDI outflow (in 2014 according to JETRO), while 144
83 and in 2011 when the focus was extended to 30 towns the Japanese share in Russian foreign trade turnover is 145
84 (Doing Business in Russia, 2012). Later in 2013–2014 the almost 4% (in 2014 according to the Federal Customs 146
85 Agency for Strategic Initiatives4 in cooperation with busi- Service7), 1,54% in the inflow of all types of foreign invest- 147
86 ness associations conducted a research project aimed at ment, 3,93% in the FDI inflow (in 2013 according to the 148
87 measuring the investment climate related indices in Russian United Interagency Information and Statistics System, 20158). 149
88 regions and rated them by different criteria (regulative en- Japan is ranked 10th in the list of top investors in the Russian 150
89 vironment, business-related institutions, resources and economy in terms of investment stock of all types and 16th 151
90 infrastructure, small enterprise support) (National Rating in terms of FDI stock in 2013.9 152
91 of Business Climate in the Regions of Russian Federation, Therefore using the case of Japanese investment in Russia 153
92 2015). Moreover, the investigations of the investment climate we can observe that there might exist particular chal- 154
93 in Russia are carried out under the auspices of an official lenges and obstacles that make Japanese companies reluctant 155
94 specialized advisory body – the Foreign Investment Advi- to engage in business activities in Russia. Revealing those 156
95 sory Council (FIAC) (Doing Business in the Russian obstacles and finding ways to neutralize them may give ad- 157
96 Federation, 2014; Investment Climate in Russia – Foreign ditional impetus to the development of investment 158
97 Investor Perception, 2015; Russia’s Investment Climate, cooperation between Japan and Russia. 159
98 2012). This paper analyzes the factors attracting Japanese capital 160
99 As far as the Japanese research of business climate in to the Russian economy and challenges that Japanese busi- 161
100 Russia is concerned, the leading agencies are Japan Exter- ness faces during the process of adaptation to the Russian 162
101 nal Trade Organization (JETRO) and ROTOBO (Japan business environment. The purpose of the research is to 163
102 Association for Trade with Russian and NIS). The JETRO reveal and systemize factors restricting investment coop- 164
103 Survey reports 2014 and 2015 on the activities of Japanese- eration development and their roots and to find out possible 165
104 Affiliated companies in Russia provide a comprehensive view ways of overcoming these challenges using the strengths 166
105 of Japanese companies on the business conditions in Russia of investment ties between the two countries. 167
106 (Japan External Trade Organization (JETRO), Europe, Russia
107 and CIS Division, Overseas Research Department, 2014;
108 2015; ROTOBO Report Industrial Investment in Eurasia, 168
109 2011).

110
169
111 5 JETRO Reports and Statistics, Japan’s Outward and Inward Foreign Direct 170
2
112 Business Environment and Enterprise Performance Survey (BEEPS) – Investment, FDI stock (Based on International Investment Position, net), 171
113 a project conducted under the auspices of EBRD (European Bank of Re- Outward http://www.jetro.go.jp/en/reports/statistics/ Accessed on 16 172
114 construction and Development) and examining the quality of a set of aspects October 2015. 173
6
115 of the business environment. Five rounds of survey have been already con- From 87 million USD in the beginning of 2005 up to 2,5 billion USD 174
116 ducted (1999, 2002, 2005, 2009 and 2012–14). in the beginning of 2014 (JETRO). 175
3 Doing Business is a yearly report of business regulation elements as- 7 Russian Federation Federal Customs Service, Foreign Trade Statistics
117 176
118 sessment implemented yearly since 2003 in 189 economies by the World http://stat.customs.ru/apex/f?p=201:7:34916493764136::NO Accessed on 177
119 Bank Group. 16 October 2015. 178
4 Agency for Strategic Initiatives – a non-government organization es- 8 United Interagency Information and Statistics System, Foreign Invest-
120 179
121 tablished by the Russian Government in 2011 to promote new priority ment Inflow http://www.fedstat.ru/indicator/data.do?id=31335& 180
122 economic and social projects. Website: https://asi.ru/eng/ Accessed on 27 referrerType=0&referrerId=1292884 Accessed on 16 October 2015. 181
123 June 2016. 9 Ibid. 182

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183 2. Data and methodology Although the survey link was sent to about 187 compa-
184 nies (members of the JBC Moscow), the maximum number
185 The research is based on the results of a survey of Jap- of responses for some questions was 32, which gives us a
186 anese companies – members of the Moscow Japanese response rate of approximately 17%. Moreover the number
187 Business Club (JBC). The survey was conducted by the Na- of blank responses increased towards the end of the ques-
188 tional Research University – Higher School of Economics tionnaire leaving some gaps in the dataset. Therefore the
189 (HSE, Moscow), Institute for Industrial and Market Studies low response rate presumably makes the sample biased by
190 in April–June, 2015 in the framework of a research project the nature of companies and the sphere of their activity.
191 “Russia’s Business Climate through the Eyes of Foreign As an addition to the survey we used the results of
192 Firms”. Basically the target of the survey was to see how content analysis of several interviews with representa-
193 the members of foreign business associations in Russia eval- tives of Japanese business, academic community and non-
194 uate the business climate in Russian regions and how current governmental organizations to illustrate the main findings.
195 political and economic events affect their activities. Another The interviews were partially conducted by the author and
196 objective of the study was to identify the main problems partially available in open Internet sources. In the inter-
197 foreign firms are facing in the current political and eco- view analysis we were trying to reveal challenges, problems
198 nomic situation in Russia, to gather ideas how these and obstacles that have been mentioned by the inter-
199 problems can be addressed by Russian regional and federal viewee and categorize them depending on the frequency
200 administrations and to find out what regional administra- of occurrence.
201 tions in Russia can do to make their regions more attractive The interviews were given by the representatives of the
202 for foreign investors. However, is this paper the use of the business community (70%), non-governmental organiza-
203 survey data will be mostly limited to the factors of attrac- tions (20%) and academic people (10%) and took place in
204 tiveness of Russia as an investment destination and the 2008–2015. As for the distribution of the business repre-
205 problems and challenges that Japanese companies face. The sentatives by spheres of activity, these were mostly
206 survey was administered online: member companies of the companies producing machinery and electronics, and those
207 JBC Moscow received an Internet link (URL) to the online involved in manufacturing industries (62% in total). The rest
208 questionnaire form. The form was available in Japanese, were companies from the banking sphere, IT, construc-
209 Russian and English. Below is a short description of com- tion, pharmaceuticals and trade. 90% of the interviewed
210 panies that participated in the survey. representative’s firms have offices or branches in Russia.
211 More than a half of the companies (55%) started doing During the interviews and further analysis we concen-
212 business in Russia after 2005, while about a quarter have trated on the questions concerning factors attracting
213 been in Russia since before 1991. The number of employ- investment and challenges for foreign companies.
214 ees of the Russian branches or subsidiaries in most cases The limitations to the interview sample might be the
215 does not exceed 50 people (71%). And as a rule the survey small number (20 interviews) and some possible gaps in
216 participants are under foreign ownership (86%). Most of the content in the open-source interviews which were con-
217 companies (62%) are engaged in importing to Russia with ducted under a different topic outline. Due to the informal
218 following sales on the domestic market. However, some nature of some interviews and according to the will of
219 companies produce goods and services in Russia in order interviewees not all interviewee names are available in this
220 to sell them on the domestic market (19%) otherwise on both paper.
221 domestic and foreign markets (12%). The overwhelming ma- The interview results have also provided additional sub-
222 jority of Japanese companies that participated in the survey jects reflecting the challenges for Japanese business in Russia
223 (more than 82%) do not invest in R&D in Russia. that could not be directly revealed through the survey. These
224 As far as the sectoral distribution of the answers is con- relate to business culture and management practices rather
225 cerned, 53% of respondents are working in manufacturing, than drawbacks relating to the business climate. There-
226 20% in business and investment consulting, 13% in trade and fore on the basis of the interview content analysis we could
227 7% in both transport and financial services. More than a half also suggest a general classification of challenges for Jap-
228 of the companies are represented in 1 or 2 regions only anese business in Russia. It is assumed that each problem
229 (55%), while the distribution between other groups is quite or challenge can be assigned to a particular group depend-
230 flat: 22% work in 3–10 regions and 22% in more than 10 ing on the origin of the problem.
231 regions (some in more than 20 regions of Russia). Al- The first group includes factors emerging from the socio-
232 though companies may be engaged in business activities in economic, institutional and cultural environment and the
233 a number of regions, for the majority of them Moscow is characteristics of the investment climate of the country in
234 the most important region for their business (65%). Only 4 general. These factors, which could be called external, are
235 more regions were marked in this question: Kaluga region, faced by all investors doing business in Russia, not only
236 Kursk region, Moscow region and Saint Petersburg. foreign but also local, however, foreign firms are addition-
237 So according to the statistics, the prevailing group of com- ally affected by the factor of an unfamiliar business
238 panies in the sample is represented by companies registered environment as well as cultural differences.
239 in Moscow and engaged in importing and selling manu- Another group of factors concerns the organization of
240 facturing goods or providing consulting services in different internal processes within a firm and originates from the cul-
241 regions of Russia. However, there are several limitations to tural specifics and models common for the home country
242 the dataset used in this paper. First of all the major limi- business environment. These factors, which mostly include
243 tation is a small sample due to the low response rate. the issues of personnel management and production orga-

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244 nization, can be specific for foreign firms representing region and is growing continuously”,10 moreover, “within 305
245 different countries. The special features and characteris- the market the demand for high-quality goods goes up due 306
246 tics of the Japanese model of business organization make the increase of solvency and that attracts Japanese firms as 307
247 this group of factors extremely important and illustrative. the segment of high-quality and expensive good is the target 308
248 We could also distinguish the third group of chal- for Japanese producers”.11 On the other hand, many repre- 309
249 lenges relating to the compatibility of business cultures of sentatives of the Japanese business community agree that 310
250 the home and host economy and informational issues such while the Russian market is expanding fast, it is very 311
251 as the availability of experience of doing business in the host dynamic and characterized by a rapid change in consum- 312
252 country and the image of the country as an investment des- er preferences that are difficult to predict and forecast, 313
253 tination. It was revealed that both of them are quite especially in the long term. The problem is that the Japa- 314
254 important for the perspective of the development of Jap- nese management style focuses on long term strategic 315
255 anese business in Russia. planning, therefore the low predictability of the Russian 316
256 Given the variety of problems that foreign firms can face market is regarded as a significant disadvantage. 317
257 in a different business environment, the ways of address- Another quite popular reason highlighted by a quarter 318
258 ing the challenges differ a lot depending on their origin. of companies was the high profitability of investment in the 319
259 Consideration of different aspects and layers of challenges Russian economy. The availability of infrastructure in par- 320
260 may allow us to suggest comprehensive and systematic rec- ticular regions and the presence and support of business 321
261 ommendations that could be useful for the further partners were mentioned as quite important factors by some 322
262 development of investment cooperation between Japan and interviewees. It was surprising that only a few respon- 323
263 Russia. dents mentioned the availability of natural resources as a 324
264 factor attracting investment. Previously most Japanese in- 325
265 3. Results vestment projects in Russia were associated with the 326
266 development of natural resources. Nowadays the share of 327
267 3.1. Attracting factors manufacturing projects is growing, and the quality of human 328
268 resources is becoming increasingly important. Japanese in- 329
269 Before providing the detailed analysis of challenges that vestors note the high educational level of Russian employees, 330
270 Japanese firms have to face in Russia it is necessary to de- but labour costs in practice often turn out to be much higher 331
271 scribe the main reasons for companies to enter the market than expected. In many cases it is caused by hiring process 332
272 and engage in production activities. In order to reveal the and staff turnover problems. The Japanese management 333
273 main factors attracting Japanese investors to Russia we asked system is based on the principles of high loyalty, motiva- 334
274 about the main reasons for starting to do business in Russia. tion and commitment to the corporate culture. Trying to 335
275 The distribution of answers to this question is presented in adapt this model in Russia, Japanese companies face high 336
276 Table 1. According to the answers of companies participat- personnel turnover because of the differences in the busi- 337
277 ing in the survey the most popular reason was gaining access ness cultures and management practices. This factor will be 338
278 to the Russian market (81%). The interview results corre- additionally analyzed in Section 3.3. 339
279 spond to the survey findings. The interviewees noted the Slightly more detailed results were obtained for the ques- 340
280 developing and promising Russian market as the most im- tion on investment incentive factors in particular regions 341
281 portant (sometimes the only) factor attracting Japanese that were most important for the company’s investment ac- 342
282 investors. The respondents also pointed out the high de- tivity in Russia. Although the proximity to consumer markets 343
283 velopment potential of the market and the growth of and high profitability of potential investment are still the 344
284 personal consumption underlying demand expansion. main factors (78% and 33% respectively), the quality of the 345
285 Almost 70% of interviewees mentioned that the “Russian infrastructure and the availability of a qualified labour force 346
286 market is the biggest and most promising market in CIS also play an important role in the investment decision (see 347
Table 2). However, these results can be applied only to a 348
287 narrow range of regions prevailing in the survey, namely 349
288 Table 1
Moscow, Kaluga region, Kursk region, Moscow region and 350
289 Main reasons for Japanese firms to start investing in Russia: Interview and Saint Petersburg. 351
290 survey results. Recent tensions in Russian international relations and 352
291 Attractiveness factors HSE survey Interview the economic crisis have inevitably affected the activity of 353
292 (in percentage (in percentage Japanese companies in Russia. About a half of the respon- 354
293 points) points) dents (48%) believe that the investment climate has become 355
294 Market, demand, potential 80,8 72,2 somewhat (28%) or significantly (20%) worse during the last 356
295 Resources 11,5 5,6 3 years, while only about a third think that it has become 357
296 Logistics, infrastructure n/a 11,1 slightly (32%) or significantly (4%) better. 358
297 Partners n/a 22,2
298 Availability of qualified labour 3,8 – 359
299 Flexible education and retraining 3,8 –
300 policies 360
10 361
301 High profitability of investments 26,9 – From the interview with Junichi Okishima, Director of Yokohama
302 in Russia company, 2012. Analytical Agency AUTOSTAT http://www.autostat.ru/ 362
news/view/9434/ (in Russian, Accessed on 27 June 2016). 363
11
303 Source: HSE survey, interviews with Japanese business representatives. From the interview with representatives of the Japan Association for 364
304 Notes: The sum does not equal 100% due to multiple answer choice. Trade with Russia and NIS (ROTOBO), 2012. 365

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366
367 Table 2 tailed information about challenges and problems mentioned
368
369 Reasons to invest in the particular region chosen. in the survey.
370
371 Regional attractiveness factors HSE survey More than a third of the companies marked regulation
372
373 (in percentage and customs clearance as significant difficulties for their
374
375 points) business. Concerning regulation, many companies speci-
376
377 Proximity to consumer markets 77,8 fied labour regulation, company establishment procedures
378
379 High profitability of potential investments 33,3 and GOST as the most important regulatory obstacles. In-
380 Quality of infrastructure 22,2
381 terview respondents often mentioned the difficulty and the
382 Preexisting highly qualified labour force 16,7
383
384 Political stability 11,1 complexity of the registration process and the establish-
385
386 Pro-investment incentives provided by the 11,1 ment of the company. Construction seems to be the most
387
388 regional government problematic case in this issue. Greenfield investments (es-
389
390 Production cluster proximity 5,6 pecially in the manufacturing sector) involve major facilities
391 Low labour costs 5,6
392
393 Flexible education and retraining policies 0,0
and construction investment, while Russian procedures for
394
395 Natural resources 0,0 obtaining building permits serve as a serious barrier to the
396
397 Low regulatory burden 0,0 project: the process takes an average of 540 days and re-
398 quires about 53 documents. As a result, the cost of obtaining
399 Source: HSE survey.
400
401 Notes: The sum does not equal 100% as up to 3 answers choice was avail- a permit turns out to be several times higher than in other
402
403 able for this question. BRICS countries, for instance.13
404 Results of questions about corruption, labour retention
405 and perception of the investment climate dynamic should
406
407 However, they stay quite optimistic about the pros- be mentioned among other interesting survey results related
408
409 pects: according to Fumitaka Kawashima, the vice-president to the issue of obstacles for the Japanese business. 20% of
410
411 of Toyota Motor RUS “although the Russian market is shrink- companies supposed that the situation with corruption
412
413 ing due to the crisis, the company’s market share is became better during the last 3 years, while 4% think that
414
415 increasing steadily. . . we understand that current market in- it has become worse. On the other hand, about a third of
416
417 stability is temporary and . . . we are expecting recovery and survey participants answered that nothing has changed and
418
419 growth of the market”.12 According to the HSE survey two the corruption problems remained at the same level, while
420
421 thirds of the respondents admit that despite the crisis and a quarter of interview respondents confirmed that doing
422
423 market shrinkage Russia remains an attractive investment business in Russia is usually associated with corruption. In
424
425 destination. 24% of respondents state that doing business one of the questions survey participants were asked to assess
426
427 in Russia became somewhat less (14%) or much less (10%) the amount of informal payments to different regulatory
428
429 attractive than a year ago. agencies and officials. Only one firm assessed them as 6–10%
430 of total annual sales, or estimated total annual value, while
431
432 3.2. External challenges other respondents answered that they have never heard or
433 do not know about such payments.
434
435 As far as the risks and challenges are concerned there Obviously, red tape, corruption and lack of transparen-
436
437 is a various range of factors mentioned in the interviews cy of bureaucratic procedures and competitive tendering
438
439 and the survey. In the question about the main difficulties practices damage the country’s investment image. Japa-
440
441 and obstacles faced by Japanese companies during the first nese investors are also concerned about inconsistencies and
442
443 year of operation in Russia, the respondents mentioned shortcomings in the Russian legislation, which causes in-
444
445 various spheres and factors. The results are shown in Table 3. creased costs for legal services burdening the budget of
446
447 It was surprising that half of the companies had difficul- investment projects. The issues of property rights (espe-
448
449 ties associated with the language barrier. However, it cially intellectual property rights) protection and contractual
450
451 corresponds to the structure of respondents who were ac- obligations enforcement mechanisms are also mentioned
452
453 tually answering the survey questions: a half of respondents as quite important issues by Japanese specialists.
454
455 did not speak Russian at all and 27% spoke only some. It is Concerning the problem of recruitment and retention of
456
457 worth noting that 86% of respondents were representing top- skilled personnel (especially in regions), the majority (63%)
458
459 or middle-level management. of the companies do not have them. However, 25% face these
460
461 According to the interview and survey results there are problems sometimes and for 13% it is a considerable
462
463 a number of important factors mentioned in both sources. problem. Respondents specified that there might be diffi-
464
465 These are corruption, bureaucracy, different types of reg- culties with recruiting specialized engineering staff with
466
467 ulatory procedures (especially labour and immigration law, good English and also in the Far Eastern region of Russia.
468
469 and the complexity of company establishment proce- However, interview respondents claimed that labour turn-
470
471 dures), law and regulation in general, the lack of over is quite a problem. Yuichi Tsujimoto, the Hitachi
472
473 infrastructure and the problems of labour resources, espe- Construction Machinery President says: “Personnel train-
474
475 cially labour cost and availability, and hiring problems. At ing is an important area, we recruited Russian employees,
476
477 this point interviews served as a substantial source of de- sent them to study in Japan, organized programs in pro-
478
479
480 12 From the interview with Fumitaka Kawashima, Vice President of Toyota

481 Motor RUS, 2014. Analytical Agency AUTOSTAT http://www.autostat.ru/ 13

Industrial investment in Eurasia (report), ROTOBO (The Japan Asso-
482 news/view/17784/ (in Russian, accessed on 27 June 2016). ciation for Trade with Russia & NIS) 2011, p. 79.

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483 Table 3
484 Main obstacles and problems mentioned by Japanese firms as faced in the first year of operation in Russia.

485 Obstacles and problems (HSE) HSE survey (in Interview (in
486 percentage points) percentage points)

487 Law and regulation 36 25

488 Immigration and labour law 15
489 Business registration n/a 10
490 Custom clearance 36,0 –
491 Corruption, bureaucracy 4 25
492 Infrastructure 12 20
493 Labour resources management 8 35
494 Language 52 10
495 Taxes 24,0 –
496 Access to finance 12,0 –
497 Security 4,0 –
498 Lack of partners n/a 20
499 Localization 10
500 Competition by other firms within the sector 20,0 –

501 Source: HSE survey, interviews with Japanese business representatives.

502 Notes: The sum does not equal 100% due to multiple answer choice.

503

504 fessional colleges led by Japanese specialists”.14 And this suppliers from Japan to enter the Russian market, however, 545
505 practice of personnel training is quite typical for Japanese the partner companies and suppliers of the Japanese manu- 546
506 companies. Therefore labour turnover causes big losses of facturers are reluctant to do so because given the existing 547
507 investment in human capital and staff development. output of Japanese enterprises in Russia (in particular au- 548
508 Actually all the top-list obstacles mentioned by the tomotive) the transfer of production facilities is considered 549
509 interviewees are associated with additional expenses and unprofitable for them.16 Furthermore, the potential Japa- 550
510 lead to a decrease in profitability. For example, changes in nese suppliers also face the problem of high-quality material 551
511 laws and regulation cause increased spending on lawyers supply on their level of the production chain. 552
512 and specialists and so on. Many problems are caused by Thirty of the top-100 biggest world automotive compo- 553
513 infrastructural problems. At the stage of plant construc- nent suppliers are Japanese companies, however, only 4 of 554
514 tion Japanese companies face a lot of delays of business plan them have production facilities in Russia. These are Asahi 555
515 implementation due to additional time and capital ex- Glass in Nizhny Novgorod; Toyota Boshoku (Toyota’s sub- 556
516 penses on solving problems of access to the infrastructure. sidiary) in St. Petersburg; Takata in Ulyanovsk region and 557
517 Registration process usually takes longer time than ex- one of the leading global suppliers of automotive compo- 558
518 pected, however, recently the procedures-related obstacles nents – Denso – which has signed an Industrial Assembly 559
519 seem to decline. Memorandum with the Russian Ministry of Economic De- 560
520 Another major problem that Japanese companies have velopment in 2012.17 561
521 to deal with is balancing between production localization Lack of modern infrastructure, effective logistics and con- 562
522 and import. A lack of reliable partners forces companies to nectivity also add problems to the foreign investment 563
523 import parts and materials while the governmental Mem- projects in Russia. Weak infrastructure in some regions does 564
524 orandum, as well as economic sense, requires an increase not allow effective matching of the raw materials market 565
525 in production localization. Localization of production at Jap- and consumer markets and this increases transportation and 566
526 anese factories in Russia in general does not exceed 15–20%.15 logistics costs. For Japanese companies operating both in 567
527 Q3 “We have to admit that Japanese manufacturers do not trust the Far East and in the European part of Russia the devel- 568
528 the quality of the components and materials produced by opment of logistics and transport infrastructure is among 569
529 Russian suppliers; therefore they are quite reluctant to lo- the priorities. 570
530 calize production although they have to follow the terms All these major risks emerge from the weaknesses and 571
531 and conditions of the governmental agreements on indus- drawbacks of the Russian investment climate, therefore each 572
532 trial assembly. They prefer to purchase materials and of them should be addressed directly to facilitate the pro- 573
533 components from their subsidiaries or suppliers with whom cedural and regulatory part of it and make the climate more 574
534 they work in the Japanese market; move their own com- foreign-business friendly. In general there is no consensus 575
535 ponent production facilities closer to the assembly plant or between Japanese investors in the perception of change in 576
536 to work with the subsidiaries of European or American com- the Russian investment climate during the last 3 years 577
537 panies. Japanese companies also try to persuade their among the HSE survey respondents: 36% of firms think it 578
has become slightly or significantly better while 48% believe 579
538
14
it is deteriorating. 580
539 From the interview with Yuichi Tsujimoto, President of Hitachi Con-
540 struction Machinery, 2014. Vedomosti http://www.vedomosti.ru/ 581
541 newspaper/articles/2014/08/19/pozicii-ssha-i-yaponii-nevovsem- 582
542 absolyutno-sovpadayut-yuiti (in Russian, accessed on 27 June 2016). 16 From the interview with representatives of the Japan Association for 583
543 15 584
From interviews with Japanese company representatives from facto- Trade with Russia and NIS (ROTOBO), 2012.
544 ries in Yaroslavl’ and St. Petersburg. 17 Forum “Avtoevolutsiya”. Vedomosti annex 08.02.2012. 585

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586 As for the activities of the regional governments that In the analysis of adaptation of Japanese production and
587 attract investment, half of the respondents think that some management systems to Russian conditions we partially
588 or most regional administrations are actively trying to attract used the framework of the approach described in the re-
589 foreign investors. The other half supposes that only few or search on the performance of hybrid factories carried out
590 no regional governments are involved in such activities. by Abo et al. (2007) (Japanese Multinational Enterprise Study
591 These results correspond with the answers to the ques- Group).18 Companies primarily representing the manufac-
592 tion about whether the regional administration is rather turing sector were looked at when talking about the
593 helpful or a hindrance for foreign investors. The answers application of Japanese production and management prac-
594 were divided into two halves again (20% each), while 30% tices since the tertiary sector represents a limited range of
595 said government of the regions does not help, but does not distinctive features of Japanese production and manage-
596 hinder. That points to the fact that regional administra- ment system. Eventually we can find out which practices
597 tions in Russia have very different policies towards in business organization and management can be useful and
598 supporting foreign investors, each case is unique. That may effective for Japanese companies operating in Russia and
599 reflect the level of ‘saturation’ of the region by foreign in- which cannot be adopted. The analysis was based on the
600 vestment or simply the competence of the regional Japanese automotive production plants in Russia (see details
601 administration. in Ershova, Lavrov, & Plotnikov, 2013).
602 In addition to the challenges described for the last 3 years, The issue of product diversification and production line
603 foreign investors as well as locals suffered the influence of flexibility seems to be quite an important part of the pro-
604 international sanctions and the economic crisis. Actually this duction organization process in Japanese plants in Russia,
605 aspect has come to the fore for foreign investors and to some given the rapid changes in the preferences of the market.
606 extent obscured common challenges of the investment For example, the Nissan factory in Kamenka (St. Peters-
607 climate. In this respect the survey showed that interna- burg) has only one production line but unlike the Japanese
608 tional tensions, sanctions and the economic crisis have made plants, process automation is extremely low – about 10%.
609 business in Russia significantly more difficult for 38% of the All welding and painting is performed manually, even the
610 respondent Japanese companies, somewhat more difficult transportation of parts is not automated and is done man-
611 for 43%. ually using special trolleys.19 Such a low level of automation
612 The main risks and problems concern the exchange rate does not allow the company to increase the efficiency of in-
613 fluctuations and ruble devaluation. About 76% of respon- dividual employees. This in turn limits the speed of the
614 dents noted the decline of competitiveness due to ruble production line and hence the output.
615 devaluation. More than a half of companies (57%) com- Japanese equipment and mostly imported parts pro-
616 plained that their products or services have become duced in Japan help ensure the quality of products, for
617 significantly less competitive on the Russian market. With example, there are almost no cases of defects at the Toyota
618 regard to global operations, Japanese companies have also plant in Russia. The system of stopping the production line
619 marked several types of risks emerging from the current eco- for quality control is applicable at every stage of produc-
620 nomic and political instability: besides exchange rate tion because the level of automation on the plant is very
621 fluctuations (71%) respondents were also concerned about low. The admissible share of defects at the Nissan factory
622 problems with the import of raw materials, components and is 2%. Most defects are eliminated in 5 minutes on the pro-
623 equipment (24%); restriction on participation in global deals duction line.20
624 by foreign regulatory authorities, problems with process- Regarding “just in time” production system applicabil-
625 ing of payments on international transactions, introduction ity, it is almost impossible to implement it in Russian
626 of additional trade barriers (14% each); restriction in access factories given the low level of localization of component
627 to foreign credit (9,5%) and problems with the import of raw production and the fact that the delivery period for im-
628 materials, components and equipment (5%). ported parts from Japan is up to 2 months. Therefore the
629 arrangement of logistic systems or local supply channels
630 3.3. Internal factors
631
632
633 Whatever the local investment climate characteristics are 18 The approach deals with the analysis of transferability (applicability

634
635 an investor has to adapt not only to its institutional and eco- and adaptability) of Japanese-style management and production systems
636
637 nomic factors, but also to the peculiarities of the local across different regions abroad and assesses 23 aspects of these systems.
638 According to the author’s methodology 23 elements characterizing the Jap-
639
640 business environment and business and management prac- anese system of management and production are assessed using a 5-point
641
642 tices. Of course, these issues are relevant not only for scale by representatives of the Japanese TNCs’ affiliates abroad for their
643
644 Japanese firms, but for all companies involved in foreign op- compliance with the typical Japanese practices applied on national en-
645
646 erations. However, in the case of Japanese business, terprises. The study allows us to compare those elements and see to what
647
648 companies are often trying to implement a production and extent Japanese common practices can be applied to the overseas branches,
649 in particular countries or groups of countries. Research is conducted pri-
650
651 management model, which was developed in the specific marily among manufacturing companies (transportation machinery,
652
653 framework of Japanese economic, social, psychological and electronic and electrical engineering), especially because the production
654
655 cultural conditions and functions effectively in terms of a process includes the maximum number of common practices and ele-
656
657 full range of appropriate conditions, in a foreign environ- ments to be considered.
19 Nissan’s factory in Kamenka from inside http://www.autopeople
658
659
660 ment. But in a different business and cultural environment, .ru/article/nissan/producer/25297.html (in Russian, accessed on 27 June
661
662 Japanese management and production practices may not 2016).
663 only be ineffective, but even inapplicable. 20 Ibid.

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664 seems problematic and time-consuming while the organi- 3.4. Other/non-economic factors 725
665 zation of cluster productions in collaboration with Japanese 726
666 sub-contractors in Russia will be possible only with the rapid The interview analysis allowed us to distinguish some 727
667 growth of output on the partner’s assembly plants and guar- factors that cannot be classified either as emerging from the 728
668 anteed sales stability. But unfortunately the problems of investment environment drawbacks (external) or from Jap- 729
669 implementing the Japanese production model in many cases anese production system applicability (internal). These 730
670 do not allow output to be raised to either potential or even concern the informational issues and compatibility of busi- 731
671 planned levels. ness cultures. 732
672 As far as personnel management is concerned, some One of the major factors hindering the development of 733
673 companies localize management because they admit that investment cooperation between Russia and Japan is the per- 734
674 the Japanese management system is too specific to be used ception of the Russian investment climate in Japan and the 735
675 in most business cultures unchanged. In particular, Sony uses underlying lack of information about the Russian market 736
676 management localization widely. Its aim is to develop local and the business climate. The insufficient experience of 737
677 human resources and to provide an opportunity for pro- doing business in Russia and the lack of research on busi- 738
678 fessional growth and development. 21 The training ness opportunities has a negative impact on the decisions 739
679 programme is an important part of the personnel manage- of potential Japanese investors trying to avoid the risks as- 740
680 ment strategy for all Japanese companies. Many firms sociated with uncertainty. Therefore it is necessary to 741
681 organize training and practical experience in factories in promote a favourable image of the Russian business envi- 742
682 Japan and Europe. However, unlike in Japanese compa- ronment and investment climate to provide potential 743
683 nies, opportunities for interdepartmental staff rotation are investors with information about the conditions for doing 744
684 limited due to the narrow specialization of employees. business. 745
685 Although as in most countries, the Japanese principle of The impact of the next important factor – the compat- 746
686 lifetime employment cannot be applied unchanged, the focus ibility of business cultures of Japan and Russia – is activated 747
687 on long-term cooperation and clear criteria for promotion on the stage of business collaboration development. Actu- 748
688 corresponds to the preferences of Russian employees. The ally internal restricting factors emerge largely from the 749
689 main hiring criteria are qualification and motivation, and problem of compatibility of the host and home business cul- 750
690 the competition is rather high. However, the turnover, es- tures. Despite all the differences, we managed to find certain 751
691 pecially at the beginning (and for those reluctant to adapt characteristics that can serve as a basis to provide mutual 752
692 to the Japanese management system), is also high. understanding in business relations. 753
693 In general according to the “hybrid” factories approach On the one hand, the value system of Russian and Jap- 754
694 developed by the Japanese Multinational Enterprise Study anese employees, and as a result the approach to the working 755
695 Group, the overall level of application of elements of the process, differs radically, not least in terms of the motiva- 756
696 Japanese management and production system is rather low. tion system. Due to unclear corporate culture and values, 757
697 Systemic, interrelated elements of the model were the least Russian workers lack moral incentives which is an extreme- 758
698 applicable in a foreign business environment because they ly important tool for human resource management in the 759
699 are originally based on the specifics of the organization of Japanese model. In addition, there are fundamental differ- 760
700 the company’s external relations as well as on the econom- ences in approaches to the development of projects and 761
701 ic and social environment in Japan. These elements include assignments: the Japanese pay great attention to the details 762
702 primarily the “just-in-time” supply and production system, of a project that may seem minor to the Russian side. While 763
703 participation in the “quality circles”, and the system of re- the conceptual approach of the Russians and the lack of plan- 764
704 cruitment, remuneration and promotion. ning accuracy can cause tension and delays in negotiations 765
705 Among the most applicable elements of the Japanese with the Japanese. 766
706 management and production system are those related to On the other hand, both cultures share the principles of 767
707 the maintenance of harmonious teamwork, as well as co- collectivism and high context (Hall, 1959). Business rela- 768
708 ordination of work processes. Also quite applicable are tionships in Russia and Japan are largely based on 769
709 indicators related to the technical support of production, interpersonal relations and informal methods for resolv- 770
710 equipment and characteristics of the production line that ing problematic issues. These common features can serve 771
711 is the most “autonomous” and not fundamental elements as a basis and a “start point” for the development of mu- 772
712 of the Japanese production model. tually acceptable ways of organizing productive business 773
713 In general, the model of adaptation of Japanese compa- cooperation. 774
714 nies in Russia is close to that of Japanese companies in CEE 775
715 countries. These have a higher degree of localization of man- 4. Conclusions 776
716 agement and low applicability of Japanese methods with 777
717 a fairly strong control of the parent company. On the other The Russian economy is quite attractive for Japanese in- 778
718 hand, such a strategy is typical for the initial stage of Jap- vestors as it provides a range of opportunities and 779
719 anese business development, because over time we can advantages that Japanese companies usually seek in their 780
720 expect an intensification of implementation of elements of foreign expansion strategies. But on the other hand, almost 781
721 the Japanese system and growth of branch autonomy. each advantage entails some kind of a challenge caused 782
722 either by factors of the business environment and institu- 783
723 tional framework or by conflicts with the Japanese approach 784
724 21 From the interview with S. Arai, Director General of Sony CIS, 2005. towards organization and management. 785

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786 As a result of analysis, the constraining factors can gen- the other hand, the difference in motivation and value
787 erally be divided into 3 groups according to their origin – system should be addressed as, if neglected, this aspect
788 external, internal and other (non-economic) factors. Exter- leads to increased labour turnover;
789 nal factors include the weaknesses and drawbacks of the (6) Address actively the position of business community to
790 Russian business environment and investment climate. In the Russian governmental bodies via a collective voice
791 other words, these are the factors faced by all investors doing that can be provided by the Japanese Business Club in
792 business in Russia. The perception of the Russian invest- Moscow.
793 ment climate by Japanese investors also turned out to be
794 quite important. The internal group of factors is more spe- Thus, the solution to the problem of improving Russian–
795 cific and concerns the process of adaptation of Japanese Japanese investment relations and promotion of cooperation
796 companies to the Russian business environment. In the case lies in several areas. In terms of economic factors, the im-
797 of Japanese investment they might be common for over- provement of the investment climate is a priority. We need
798 seas branches of Japanese companies, in other words based not only to provide comfortable conditions for doing busi-
799 on the distinctive features of Japanese business culture. Other ness in Russia but also to clearly inform potential investors
800 or non-economic factors are associated with the compat- of new opportunities. Problems in the adaptation of the Jap-
801 ibility of business cultures and information issues. anese production and management system to Russian
802 In order to overcome the challenges for investment proj- conditions seem resolvable and the aspects of the compat-
803 ects on the basis of our analysis we could develop the ibility of business cultures seem to be rather helpful at this
804 following recommendations for both sides. point. A much more difficult task is to overcome the infor-
805 For the Russian side: mation barriers and improve the perception of the Russian
806 business environment among potential Japanese investors.
807 (1) Promote development of infrastructure: moderniza-
808 tion of railways and ports (especially in the Far East
809
810 region) to raise their capacity; construction of roads with Acknowledgements
811 possible attraction of foreign investors;
812
813 (2) Implement the programmes of gas, electricity and water The article was prepared within the framework of the
814
815 supply systems construction with possible attraction of Basic Research Program at the National Research Universi-
816
817 foreign investors; ty Higher School of Economics (HSE) and supported within
818
819 (3) Develop social and educational facilities in the regions the framework of a subsidy granted to the HSE by the Gov-
820
821 that attract FDI in order to provide labour supply, re- ernment of the Russian Federation for the implementation
822
823 training programme support; of the Global Competitiveness Program. The author ac-
824
825 (4) Loosen immigration policy and regulation, simplify the knowledges the support and assistance of the Japan
826
827 work permit related procedures; Foundation and Kyoto Institute of Economic Research (Kyoto
828
829 (5) Provide informational support for foreigners working in University, Japan) during the Japan Foundation Japanese Q4
830
831 Russia, promote language schools and courses; Studies and Intellectual Exchange Fellowship Program
832
833 (6) Simplify and optimize business registration and customs (2011–2012). The author also expresses special gratitude
834
835 clearance procedures, reduce paperwork; to the Japanese Business Club (Moscow) for support and as-
836
837 (7) Support active interaction with foreign business via such sistance in the survey organization, and to all companies
838 which took part in the survey and interviews. Q5
839 mechanisms as International Council for Cooperation and
840 Investment (an advisory body of the Russian Union of
841 Industrialists and Entrepreneurs (RSPP)) in order to react Q10
842 Uncited references
843 on business needs and receive feedback.
844 Analytical Agency AUTOSTAT, 2012, Analytical Agency
845 For the Japanese side:
846 AUTOSTAT, 2014, Forum “Avtoevolutsiya”, 2012, Ide, 2012,
847 JETRO Reports and Statistics, 2015, Nissan, 2016, Ouchi, 1981,
848 (1) Apply more aggressive and active strategy for entering
849 , 2011, Russian Federation Federal Customs Service, Foreign
850 Russian market. Timely response and quick adaptation
851 Trade Statistics, 2015, Vedomosti, 2014
852 to the changing market conditions is essential;
853 (2) Use the opportunities of innovative and technology-
854
855 intensive industries. Many interviewers stressed the low References Q6
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857
858 market and the wide perspective for IT development; Abo, T., et al. (2007). Hybrid factories: A worldwide comparison of global
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869
870 (4) Localize the labour management in the factories in Russia .ru/news/view/17784/. (Accessed 27 June 2016).
871
872 as much as possible (as in the case of Sony); Botero, J. C., Djankov, S., Porta, R. L., Lopez-De-Silanes, F., & Shleifer, A.
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