CEMAT’s new working paper Location factors of Finnish firms in India’s three business regions discusses the key factors behind the location decisions of Finnish firms as well as the regional differences that they find when operating in India. Based on interviews with managers of India-based Finnish companies, the study focuses on three main business regions: Delhi and the national capital region, Mumbai and its surroundings, and Southern India, including Bangalore and Chennai. The regions have distinct characteristics when it comes to the resource bases and industrial profiles. According to the interviewed Finnish companies, closeness to the customer base is the most important factor behind the location decisions. Another key factor is investment climate, especially the investment incentives available for foreign companies in specific locations, such as Special Economic Zones. Further, location close to functioning infrastructure is important to enable logistics of both goods and people. Finally, the availability of qualified labour is vital, especially for companies in information technology and services.

For the firms, the Delhi region typically provides a convenient springboard to start operations in India. Being the national capital and the administrative center of the federal state, Delhi is often chosen by firms in industries that benefit from building relations with the different nation-level Ministries. The Mumbai region, in comparison, is the traditional business hub of India with the country’s most important stock exchange, a variety of industries, and good infrastructure. However, its relative importance seems to have slightly decreased as business in other cities has developed, and for Finns, ‘business runs as usual’ in Mumbai. South India, for its part, hosts an agglomeration of information technology related industries. The region offers attractive investment incentives and a sufficient pool of workforce for industries that export to global markets.

Kettunen, E., Penttilä, A. & Kosonen, R. (2012)
Location factors of Finnish firms in India’s three business regions
CEMAT Papers 2/2012

Further information:
Director, Professor Riitta Kosonen and Research Manager Erja Kettunen-Matilainen, forename.surname@aalto.fi

Almost every indicator of the Chinese economy shows decelerated growth: the growth of the gross domestic product has slowed down to 7.4% and that of exports to 7.3%, Purchasing Managers Indices are barely positive, and Shanghai stock exchange rate has decreased since half a year. The inflow of foreign direct investment also shrunk slightly and the growth of the exchange reserves has apparently faded. Also the growth of fixed investment has fallen behind earlier years despite still being around 20%. As economic growth has lagged behind the official target and the development of export market is uncertain, China has again launched large investment plans especially in infrastructure projects.

The government’s goal to increase the share of private consumption in the economy will materialize very slowly for the foreseeable future, as the real growth of retail trade holds out near last year’s figure, at 11.4%. With the inflation slowing down, the consumer prices rose only 2% and producer prices fell over 2% in comparison with last year. Real estate prices in the largest cities have been falling from last winter until last summer, but appear now to be improving again. In the current phase of slow growth, the leaders of the country balance between stimulating the economy and the risk of an accelerating inflation. Forecast institutions expect the growth to be around 8% next year, and despite many challenges, the new leadership is expected to make moderate reforms, at most, in accordance with the current five year plan.

Although the monetary policy concerning banks has been loosened to stimulate the economy, and the amount of loan stock has increased, the debt burden of the local administrations has swollen and the so called shadow banking sector appears to have grown further, complicating the financial options of especially small companies. China however pursues to make its financial sector more efficient and at the same time, to increase the convertability of its currency. It has also started to cumulate gold reserves in order to support the internationalization of yuan. Furthermore, China supports its domestic companies’ investment abroad and regulates the global market of metals e.g. with occasional export restrictions. Along with the rise of its international status, China takes the floor to express more vocally its trade policy views, although it at the same time negotiates to liberalize trade with its neighboring countries. Selling cars to the USA and exporting sun panes to the EU, among others, have resulted in dumping charges.

Foreign companies consider China to be strategically more important than before, although the regulative environment is found to have become more difficult. In particular, industrial producers and business service companies still head for China. Some of the companies also believe in the growth of the consumer market; with the increasing income level, the Chinese middle class is slowly growing. This shows in the birth of a mid-range consumer product market alongside the existing markets of luxury and cheap products, luring also Finnish companies. In the more traditional Finnish business sectors, such as engineering, forest and chemical industry, new investment in factories and joint ventures in China have been released. “The growth may be a bit lower, perhaps a temporarily lower demand, but we see a lot of future potential here".

The complete report (in Finnish) is available at: http://cemat.aalto.fi/fi/electronic/prospects/china/

Further information:
Director, Professor Riitta Kosonen and Research Manager Erja Kettunen-Matilainen, forename.surname@aalto.fi

The conference discussed the challenges and the future outlook of the Chinese economy, the effect of the European financial crisis, the change of Chinese leadership on economic growth in China, and the impact of the rising China on global economy and international relations. The conference featured a panel discussion on the opportunities of the Chinese economy for Nordic businesses, presentations of international top scholars, and a Nordic PhD course.

The conference was opened by Ingmar Björkman, Dean of the Aalto University School of Business, and Geir Helgesen, Director of NIAS. Prof. Riitta Kosonen, Director of CEMAT, introduced the panel discussion on the prospects of Nordic businesses in China (click here for the news on the panel discussion). Keynote lectures of the conference were given by:

• Ilan Alon, Professor, China Center, Rollins College& Fellow, Harvard University
• Kjeld Erik Brødsgaard, Professor, Asia Research Institute, Copenhagen Business School
• Bruce Dickson, Professor, Political Science and International Affairs, George Washington University
• Linda Jakobson, Director, East Asia Program, Lowy Institute for International Policy
• Pang Zhongying, Professor, School of International Studies, Renmin University

Conference program: Final Program

In his doctoral thesis, Leppänen discusses the roles between private and public sectors in Russia. According to Leppänen Russia is one of the most interesting countries what it comes to roles of public and private sectors. Firstly, in Russia, the role of government is present in some form at virtually all sectors of the economy and secondly, to respond to the global crisis of 2008 Russian government initiated very aggressive support measures with its unprecedented financial resources.

In his research Leppänen uses unique data sets and non-parametric regression methodology. Russia, with its huge heterogeneity and heavy structural changes poses many challenges to typical linear or parametric econometric techniques. Non-parametric methodology helps to alleviate these problems but yet such applications with Russian data are virtually non-existent prior to this dissertation.

According to the dissertation, the impact of public capital on private output in Russia is heterogeneous in the sense that for some regions its contribution to private output is insignificant or even negative while it has a considerable positive role for most regions. Leppänen also argues that the Federal financial transfer system has operated roughly according to its nominal target as an interregional insurance scheme among Russia’s regions but should be regarded as insurance against asymmetric regional tax income shocks rather than against output shocks.

Leppänen also examines the motives of private firms who provide public goods to local communities. He concludes that firms aim at mitigating risks arising from labour disloyalty, infrastructure interruptions and, from relations with authorities.

In addition, Leppänen introduces some important methodological contributions to the literature on composite indicator construction that is theoretically justified and aims at minimal subjectivity. The approach is applied to regional economic potential in Russia and it incorporates various public and private sector subindicators that relate to regional potential.

For more information: Simo Leppänen simo.leppanen@aalto.fi

The report has been produced by the CEMAT team Riitta Kosonen, Erja Kettunen, Simo Leppänen, Anu Penttilä, Mikko Hietikko, Päivi Arkko ja Susanna Saarinen.

Energy income and retail trade support Russian economic growth; Finnish companies expect benefits from WTO membership e.g. in exporting paper and chemical industry products

The growth of Russian gross domestic product slowed slightly to 4.0 % during the second quarter of 2012, yet holding out mostly with the help of energy income and retail trade. The growth of industrial production has waned to around 2.3 % with the exception of the production of vehicles which increased as much as 21.4 % being a bright spot in the otherwise slowly growing industrial sector. Instead, retail trade still leads the growth as income level is rising and citizens invest their resources especially in consumer durables. The Russian consumer goods market is the second largest in Europe and the fifth largest in the world, and is considered to be one of the most promising growth locations of retail trade. Also Finnish companies look at Russia, instead of domestic markets, where the prospects of retail trade are weakening.

Growth in fixed investments in Russia has however further decelerated and focuses almost exclusively on utilizing energy reserves and expanding their export capacity; investments in other business fields do not increase much.  Especially the infrastructural development drags far behind many industrial countries. Part of the road network is beyond repair and the worn out roads are estimated to consume even 7-9 % of GDP. However, Russia has plans to improve the road infrastructure, as it will host the international football tournament, the FIFA World Cup in 2018.

Finnish construction companies have been active especially in St. Petersburg. However, getting construction permits has become difficult after the change of the city administration. The focus of construction business is relocating in Moscow, where apartment building has doubled compared to last summer, and the positive development seems to continue in the future as well.

Growth in Russian foreign trade has slowed down, and trade balance surplus has decreased during the first half of this year. Energy products still form over 71 % of exports, partly due to the high oil price. Income from exporting oil and natural gas is the backbone of the Russian budget. In order to keep the budget in balance and to cover the ever increasing public expenditures, oil price needs to stay at around 100 USD in the future as well. Almost half of Russia’s foreign trade is directed towards the EU, but China is the single most important trade partner. In contrast, Finland’s trade with Russia has reduced slightly and trade deficit has narrowed as fuel imports decreased.

Foreign direct investments (FDI) in Russia grew further, but at the same time the outflow of capital continued. FDI was targeted mainly in trade, finance and the mining industry – international investors were attracted especially by the Russian domestic market. Also from Finland, the FDI stock in Russia rose to a new record. The difficult business environment of Russia, however, clearly slows down the eagerness of investors, as it is often difficult to turn the investments profitable. Nevertheless, the business environment is expected to improve along with Russia’s WTO membership, and after the transition period, Finnish companies anticipate to benefit e.g. in forest industry and information technology. Yet the implementation of the reforms remains to be seen; for example, Russia raised the import duties of certain products at the same day the WTO agreements were supposed to come into effect.

In an international ranking of business environments, Russia now holds the112^th position among 185 countries, having improved its ranking considerably from previous year. President Putin also recently published ambitious goals aimed to develop Russia’s business environment: Russia needs to create high technology, increase both the productivity of work and wages, and improve its ranking to the 20^th place by the year 2018. Also financial market will be modernized, and the plan is to build a centralized system compatible with the European one, enabling e.g. Finnish investors to trade shares directly in the Russian stock exchange.

The complete report (in Finnish) is available at: http://cemat.aalto.fi/fi/electronic/prospects/russia/

Further information:
Director, Professor Riitta Kosonen and Research Manager Erja Kettunen-Matilainen, forename.surname@aalto.fi

Conference 27-28 November and PhD Course 29-30 November

The conference will mainly focus on the increasingly prominent Chinese economy that has a growing impact both on the regional and global levels. What drives China’s economic and political expansion, and under what circumstances can this growth be assumed to continue? What kind of implications does the ‘rising China’ have in the economic, societal, and political scene in other Asian countries, and elsewhere? What is the relationship between politics and business in the Chinese hybrid economy? Will the strategic sectors of the economy continue to be dominated by large state-owned enterprises under Party control?

Hence, the conference will discuss the 'rising China' and its influence on the economies, societies, and politics of wider Asia, as well as other parts of the world.

The following keynote speakers will inspire our proceedings

• Bruce Dickson, Professor, Political Science and International Affairs, George Washington University
• Linda Jakobson, Director, East Asia Program, Lowy Institute for International Policy
• Riitta Kosonen, Professor, Center for Markets in Transition, Aalto University School of Business
• Claes Alvstam, Professor, Centre for International Business Studies, Univ. of Gothenburg
• Kjeld Erik Brødsgaard, Professor, Asia Research Institute, Copenhagen Business School
• Pang Zhongying, Professor, School of International Studies, Renmin University

Confirmed commentators at the PhD course are:

• Kjeld Erik Brødsgaard, Professor, Asia Research Institute, Copenhagen Business School
• Timo Kaartinen, Professor, Social and Cultural Anthropology, University of Helsinki
• Erja Kettunen-Matilainen, Research Manager, Center for Markets in Transition, Aalto University, School of Business
• Bent Nielsen, Associate Professor, Department of Cross-Cultural and regional Studies, University of Copenhagen
• Matti Nojonen, Department of Management and International Business, Aalto University School of Business
• Pang Zhongying, Professor, School of International Studies, Renmin University

For more information on the conference website:
http://aaltochina2012.niasconferences.net

CEMAT China’s economic prospects 1/2012 report has been published in June 2012.
The report has been produced by the CEMAT team Riitta Kosonen, Erja Kettunen, Simo Leppänen and Anu Penttilä.

The Chinese economy is challenged by curdling Western markets and a slow growth of domestic demand; Finnish companies still optimistic

The overheating that threatened the Chinese economy has turned into a trend of slowing growth, and the Chinese gross domestic product grew 8.1% during the first quarter of this year. This was because of the slowdown of the global market and, on the other hand, the tightening of the economic policy of China during the recent couple of years. Forecast institutions estimate that the Chinese economy will grow around eight per cent annually during the few coming years. Also the Chinese decision-makers claim to pursue a slower but higher-quality growth of 7.5%. At the same time they strive to restructure toward more consumption driven and to diminish the dependence on exports and investment. On the other hand, due to internal and external pressures, the slowdown of the economic growth has been steeper than hoped for, and the earlier policy of tightening of the economy is changing again toward a stimulus policy.

Industrial production grew slightly over 10%, which is slower than before because of the weak demand in export markets, among other things. Meanwhile, the operational preconditions have become more challenging due to the lack of financing and work force as well as the rising costs, and the industrial profits have started to diminish. The production growth slowed down most in state-controlled companies and foreign-owned industrial companies. The growth was fastest in extractive industry and wood processing. Also retail trade grew moderately; while the nominal growth exceeded the target of 15% set by the government, the real retail growth stayed at slightly over 10%. For example, the growth of the retail sales of cars faded. The prices of cars have declined, and the government has launched a subsidy package to encourage car purchases, meant to stimulate demand.

The greatest internal challenges of China include the slow growth of domestic demand. Thus, the high overall GDP growth will probably be maintained by the old means, such as investment in infrastructure. Investments in fixed assets grew still fast last year, albeit slower than during the stimulus measures. The heated investment intensity has however resulted in a deep debt of provinces and for example the Ministry of Railways. The construction sector is expected to slow down considerably after completing the unfinished sites.

The state debt will probably grow further along with the budget deficit. The budget remains in deficit as decision-makers aim to expand domestic consumption with tax reforms and improvements of the social security. Meanwhile, it is unclear how for example the pension scheme will be financed in the future, as the population will age in the case of China before the country has prospered. It seems China needs to restructure its economic model, but on the other hand, the continuity of the political system is to be ensured in the face of the wide change of leadership.

Inflation has declined below the 4% level set by the government as, for example the record-high prices of food supplies turned down. Also the real estate prices saw the first annual decrease of couple of per cents covering the whole country. Instead of the real estate bubble bursting, the decision-makers probably want to see the apartment prices to decrease in a controlled way by 10-30% before starting to call off the tightening measures of the housing market. At the same time, increases in wages have continued to be rapid. Costs increasing and due to problems related to the availability of skilled work force, it seems that the era of low cost production in China is ending. China is encouraging companies to transform into higher value-added producers or relocate their mass production to the interior of the country.

Credit granting has been weak, because the volume of deposits is decreasing, demand for loans is curdling and capital is outflowing from China. According to estimates, as much as 15% of the loan stock of Chinese large-scale banks consists of bad loans despite the statistics claiming a 1%. The risk of the volume of bad loans to increase is great, as the economic growth of China has been maintained by loan financed, unprofitable infrastructure projects of local administrations. Nevertheless, the Chinese state would probably sustain its banking sector even in the worst case. The weak availability of loans has led to a so called shadow banking system, which however is now becoming restricted: a new finance reform trial is going on, and some of the operators in the shadow banking system will be registered as banks. In addition, taking loan abroad will be facilitated. Also the range of yuan has been widened, and the currency is planned to become freely exchangeable during few coming years.

The growth of Chinese foreign trade has clearly slowed down, as the European debt crisis and the stumbling recovery of the US have decreased Chinese exports. Exports to the EU decreased a couple of per cents during the first quarter of this year. The greatest external threat of China is apparently the slowing down of its most important export markets. Still, high export growth rates were registered to Asia and BRIC-countries. Among the export product groups, only mobile phones and their parts generated high growth. In terms of imports, the weakest development concerned Japan, as imports to China from Japan decreased by 10% in January-March. Imports from the EU increased however by 10% and from ASEAN-countries by 6%. Trade with the US was still low in the beginning of the year, but picked up clearly in May.

Inward foreign direct investments in China were record-high last year, but the investment intensity slowed down and turned negative in the beginning of this year. On one hand this was due to the high base value, but on the other hand, also due to the weak state of the global economy. Investment flow from Finland to China were negative probably because of the euro crisis and repatriating profits, but the total investment of Finnish companies in China is estimated to reach already the level of 10 billion euro. According to its current five year plan, China strives to change the emphasis of the foreign direct investment toward high technology and high value added sectors. Despite the challenges of the operational environment, the majority of companies from e.g. US and Finland plan to invest more in China in the near future.

Also Chinese companies invest more than ever abroad to acquire raw materials, markets and know-how. Outward foreign direct investments were 60 billion dollars last year. Typical investors are state owned or controlled Chinese companies. In the current investment wave, Chinese companies try to get through acquisitions technology, business know-how, market positions and immaterial property such as brands. Last year a third of the acquisitions were made in Europe, a quarter in Asia and a fifth in North America. Very few Chinese companies have invested in Finland, however.

The complete report is available at:

Further information:
Director, Professor Riitta Kosonen and Research Manager Erja Kettunen-Matilainen, forename.surname@aalto.fi

The three-year joint research project between CEMAT and the Institute of Economics at the Karelian Research Center of Russian Academy of Sciences, focusing on the impact of weather conditions on regional economies in Russia was started on Thursday 14.6.2012 with a kickoff meeting of the research personnel. The meeting concentrated on the first research topics and division of labour between the partners.

The aim of the project is analyze how different possible climatic conditions reflect in regional economies in the coming decades using regional economic indicators and climate scenarios. One focus of the project is agricultural production directly dependent of weather conditions, which has a direct effect in income of agriculture-intensive regions and an indirect effect in consumer price inflation, thus affecting standard of living in the regions. The project however intends to acquire as broad as possible a view of possible economic implications in Russian regions.

In addition to the quantitative results, case studies will be conducted in Russian regions with different climate conditions in order to examine the consideration of weather conditions in regional policy-making.

The research funded by Academy of Finland and Russian Foundation for Humanities.

More information: Director, Prof. Riitta Kosonen, riitta.kosonen@aalto.fi and Simo Leppänen simo.leppanen@aalto.fi

Domestic investment and exports are among the most important factors for stimulating economic growth across Russia. This is shown in a study by Lic.Sc. Svetlana Ledyaeva for the Aalto University School of Economics.

CEMAT's researcher Svetlana Ledyaeva (Lic.Sc., Moscow State University) defended her dissertation “Empirical essays on Russia`s macroeconomic and integration development in transition era” in the subject area of economics on Friday, June 8, 2012. Professor Ronald Davies (University College Dublin) acted as opponent, and Professor Pertti Haaparanta as custos.

Read more about Svetlana Ledyaeva’s dissertation: http://econ.aalto.fi/en/current/news/view/2012-05-30/

Further information: Svetlana Ledyaeva, Svetlana.Ledyaeva@aalto.fi

Dr. Päivi Karhunen

The Research Council for Culture and Society of the Academy of Finland has selected 16 new Academy Research Fellows for the funding period of 2012-2017.

One of the new Academy Research Fellows is Dr. Päivi Karhunen, head of CEMAT's Russia research team.  Her research theme for the post is Institutions and International Business Strategy in Emerging Economies.

The aim of research posts as Academy Research Fellow is to provide an opportunity for the most talented researchers to develop their skills of academic leadership and to establish themselves as independent researchers. The post is filled for five years and the new Research Fellows are to start the post in September.

CEMAT Russia’s Economic Prospects 1/2012: Oil exports, retail trade and foreign car manufacturers’ investments hastened Russia's economic growth more than expected; Finnish companies' expectations generally positive

The complete report (in Finnish) is available at:
http://cemat.aalto.fi/fi/electronic/prospects/russia/

Russia's gross domestic product (GDP) grew by 4.3 %, slightly faster than expected. Real GDP growth accelerated at the end of the year due to the stirring up of manufacturing, retail trade and construction. The biggest growth engine was the automotive industry, where production increased by as much as 25 %. In addition, similar to the entire post-crisis period, consumer demand continued to grow which maintained the development of retail sales. The historically low inflation (6.1 %) also contributed to the recovery of the trade primarily due to the more moderate increases in food prices than earlier.

However, economic growth was marred by both internal and external risks, especially by the capital flight - exacerbated by the election campaign in December - as well as the slowdown of export market growth in the turmoil of international financial crisis in spring 2012. All in all, recovery has been slower than after the so-called ruble crisis in 1998: for example, fixed investment is still at a lower level than before the economic slump in 2009.

The Russian economy is highly sensitive to the uncertain global development, and for 2012, the GDP growth forecasts range from 2.3 % to 4.2 %. There is a risk of continuous capital flight, which has resulted in, for instance, the shortage of liquidity in Russia's banking sector. This in turn may adversely affect the companies' access to finance for investments. At the same time, confidence in the Russian banking sector has fallen very low, apart from the largest state banks, which seem to have strengthened the role of government in the local banking sector.

In spite of the low inflation rate, the real growth of public revenues has been slow. The real value of wages fell in 2009 as a result of the economic crisis, and at the same time, cross-industry wage differentials have narrowed along with the raise in the salaries of the public sector. Thanks to the pension reform, pensions in 2008-2010 increased in real terms by almost 80 %, and this year, also a reform of the army payroll will be carried out. Employment has also developed favorably, and estimates suggest that Russia's unemployment rate is about 6.5 % which is almost two percentage points lower than during the crisis. The favorable employment trend has simultaneously caused a more severe competition for skilled labor.

Last year's budget finally showed a small surplus (0.8 % of GDP), far better than expected. The fact that oil prices remained high throughout the year augmented the budget revenue. In addition to oil revenues, the rise of social insurance fees based on employers' wage costs increased the government revenues. In the expenditures, expenses especially in health, road infrastructure, defense and training were on the rise. The growth in pension expenditures, in turn, came to a halt after the earlier dramatic increase for three years.

The value of Russia's foreign trade rose to a significantly higher level than before the crisis, but at the same time, the dependence on energy exports rose almost to the former peak. Various fuel and energy products accounted for as much as 68 % of the export value, although the Russian state aims to increase the degree of oil refinement by raising export duties in products such as heavy fuel oil. Russia's energy sector has also suffered from problems with the export of natural gas to Europe via Belarus and Ukraine because of price disputes. Although China has become Russia's most important trade partner, passing Germany in recent years, Russia has intensified cooperation particularly with the CIS countries to facilitate trade in these important export markets.

Economic integration has also progressed at the multilateral level, when the negotiations for Russia's accession to the WTO were finally completed in December. This will ensure the same treatment for foreign products as local ones during the transition period in Russia, which will improve, in the long term, Finnish companies' competitive advantage. This is truly good news for Finnish exporters, since exports from Finland to Russia have recovered rather slowly after the economic crisis, while the value of imports, in turn, has been growing fast because of the rising of oil prices.

In spite of the good buoyancy of oil exports, Russia's energy sector is in dire need of investments in order to renew the capacity that is becoming outdated. The government wants to strictly control the strategic sector, while at the same time foreign investors are not interested because of Russia's notoriously difficult investment climate. In fact, foreign direct investments in Russia are mainly Russian capital recycled through tax havens, and all in all, very few actual foreign investments are directed to Russia. In an international comparison of investment risks, Russia recently got a score close to Pakistan.

Investments from Finland to Russia, however, have been on the rise. Finnish companies' expectations for 2012 and 2013 are still mostly positive, although last winter’s election riots occasionally increased uncertainty in the investment climate. Operations are now expected to grow at a slightly slower pace.

Attracting foreign investment has been one of Russia's economic policy priorities in recent years. The main objectives of Russia's recent 2020 strategy are the reduction of raw material dependence and the transition to a post-industrial, service and innovation-based economic model. In addition, Russia intends to improve the business environment and to increase the investment attractiveness by reducing regulations and subsidies, as well as to attract high-skilled labor force to facilitate labor market shortages.

Information:

CEMAT, Director, Professor Riitta Kosonen and Research manager Erja Kettunen-Matilainen, forename.surname@aalto.fi

Lithuania’s booming exports and promotion of high technology contribute to its potential as an investment target, challenged by persistent emigration

CEMAT Lithuania’s economic prospects 1/2012 report has been published in our website in Finnish. The report was produced by the CEMAT team Riitta Kosonen, Petri Järvikuona, Erja Kettunen and Piia Heliste.

The report is available (in Finnish) at: http://cemat.aalto.fi/fi/electronic/prospects/lithuania/

The gross domestic product (GDP) of Lithuania grew by 5.8 % in 2011. The growth was heavily dependent on exports, since the purchasing power of households still remained rather modest. The primary engine of economic growth was industrial production that grew by over 7 %. Industrial production is estimated to grow fast also in the future. Also the growth pace of retail trade was surprisingly fast during the first half of the year. However, this was at least partially explained by a demand peak for used cars, in view of the higher import duties in the CIS region that came into effect in the summer.

In addition, the construction sector in Lithuania began to grow after a few really harsh years, although the volumes are still far behind the levels of 2008. The real estate market is still relatively quiet, and for example apartment prices in the largest cities are approximately 40 % lower than in the peak year 2007. According to estimates, the bottom of the real estate market has, however, been reached.

Inflation is one of the greatest concerns in Lithuania at the moment: in particular, the prices of food and accommodation have been on the rise.  However, on a year-on-year basis inflation has slightly decreased, ending up to 3.4 % in December 2011. The price hike of heating energy will take an increasingly larger share of the disposable income and will probably affect the growth of the whole economy, as the majority of the energy income is running abroad.

Energy dependency on Russia is indeed one of the most important questions of the future in the Baltic countries. The planned nuclear power plant in Visaginas is again gaining momentum, but financing of the power plant still remains a question.

The unemployment rate in Lithuania peaked at 18 % in spring 2010, but it had descended below 14 % by the end of 2011. The biggest problems include the massive youth unemployment and rising long-term unemployment. In addition, the weak economic prospects and low wage levels in Lithuania drive young educated Lithuanians to seek jobs abroad, resulting in problems with the availability of skilled work force.

Emigration, decreasing population and ageing are significant challenges for the economic growth of Lithuania in the future. The current development will lead to a fast increase in the number of people living on social security, and at the same time the share of tax payers will decrease especially in the private sector due to emigration.

The public debt of Lithuania has increased at an alarming pace, and was almost 40 % of the GDP in the early 2011. Despite this, Lithuania is still one of the least indebted countries in Europe. The state budget still remains in deficit, although the implemented saving measures have reduced the deficit considerably. The goal of the government is to press the deficit below the Maastricht threshold value (3 % of GDP) during 2012 so that Lithuania could join the European Monetary Union in 2014. According to estimates, the goal is too optimistic, and the possibly accelerating inflation or increasing current account deficit may bring obstacles to a fast membership in the Euro zone.

Russia continues to be the most important trade partner of Lithuania in both exports and especially in imports. Lithuania’s foreign trade grew rapidly last year, but especially during the first half of the year growth was faster in imports, which resulted in a widening current account deficit. If deficit continues to grow, decision-makers will have to implement measures to cut the deficit before long. In practice, the options include either abandoning the fixed rate of Lita and devaluation of the currency, or implementing additional saving measures. The approaching parliamentary elections would further complicate the decision making in this matter.

The growth of inward foreign investment was relatively modest during 2011. The scientific potential and growth of high technology in Lithuania have attracted interest from the United States, and a momentary peak of Lithuanian exports to the US was seen in summer 2011. Investments from the US to Lithuania are still modest, however, although they may considerably increase in coming years. New actors, such as NASA, are interested in starting operations in Lithuania. Some analysts consider Lithuania as the most attractive investment target in the Baltic region for international companies.

Further information: Director, Prof. Riitta Kosonen riitta.kosonen@aalto.fi and Project Manager Piia Heliste piia.heliste@aalto.fi

Latvia’s cautious growth is driven by exports of basic products; risks include the large scale emigration and problems of the Euro zone

CEMAT Latvia’s economic prospects 1/2012 report has been published on our website in Finnish. The report was produced by the CEMAT team Riitta Kosonen, Piia Heliste, Otto Kupi, Sinikka Parviainen and Mikko Hietikko.

The report (in Finnish) is available at: http://cemat.aalto.fi/fi/electronic/prospects/latvia/

The Latvian economy plunged during 2008-2009 due to the global financial crisis, but in 2010, the gross domestic product (GDP) of Latvia turned back to cautious growth. At the end of the fourth quarter of 2011, the GDP grew already by 5 % year-on-year, and current forecasts of economic growth for 2012 vary between 1-4 %.

Last year, the growth of Latvian GDP was mainly driven by exports. The exports are, however, still dominated by low value added products, such as wood and basic metals. Furthermore, Latvia’s trade balance has been in deficit for almost 20 years.

Also retail trade and industrial production show positive signs of recovery, and even the construction sector is gradually picking up, although output remains far behind the earlier levels of the real estate boom experienced before the crisis. Yet, the confidence of Latvian companies in the economy still remains rather weak. In contrast, consumer confidence is somewhat stronger in Latvia than in the Euro area on average.

The annual inflation in Latvia has varied strongly: from over 15 % during the economic boom, to a 2 % deflation during the darkest days of the economic crisis. During 2011, inflation was rising slowly, and in early 2012, it has remained at just over 4 per cent.

Investments in fixed capital have somewhat recovered from the collapse in 2009, but are still at a relatively low level. During the economic crisis, even a fifth of all fixed investments were made by the Latvian state. At the other front, the stock of inward foreign direct investments in Latvia did not decrease significantly due to the crisis.

The Latvian government budget has been stabilized quite successfully by radical cuts in expenditures, as well as by retrenchments and increases in taxes. The budget is still in deficit, which, however, is much smaller than what was measured in the stabilization program agreed with the IMF and the European Commission.

According to the economic review of the Bank of Latvia in January 2012, the expectations for a slowdown in the Latvian economy have increased recently. Several countries in the Euro zone had to implement larger than expected stabilization measures, which weakened the short-term growth prospects of the area. Also, one of the factors restricting the economic growth of Latvia is the relatively narrow industrial base, especially the lack of high tech companies focusing on higher value added production.

A further threat to the Latvian economic development is the wide and relentless emigration. The massive migration of the Latvian work-force abroad has already caused labor shortages in many domestic sectors. Besides the shortage of labor, emigration also weakens the already fragile domestic demand.

Despite labor shortages in certain sectors, also unemployment is still very high at around 14 %. The wage levels have remained quite stable during the last few years.

According to Finnish companies’ views, the financial crisis has, however, cleared the Latvian market. The crisis did not cause major problems for Finnish companies operating in Latvia, albeit some firms have seen their market shares shrink a little, or have experienced slight economic losses. After the slower pace of 2009-2010, the investment activity of Finnish companies increased cautiously in 2011. The companies expect the first half of 2012 to be still somewhat difficult, while the worst slump seems to be over.

More information: Director, Prof. Riitta Kosonen riitta.kosonen@aalto.fi and Project Manager Piia Heliste piia.heliste@aalto.fi

Russian companies are more interested in investing in Finland

Russian companies are more and more interested in investing in Finland.  Companies appreciate above all Finland’s stable and transparent environment for doing business. This was shown in the recent study conducted at CEMAT, which was based on interviews with 19 representatives of Russian-managed firms operating in Finland.

“Finland is a paradise for small business”

The geographical proximity of Finland to Russia, especially St. Petersburg, provides good opportunities for business based on Russian demand. This includes, for example, tourism, construction, real estate and logistics services offered to Russian customers. “Finland is a paradise for small business,” summed up a Russian interviewee, who had sold his business in Moscow and moved to Finland to work as a tourism entrepreneur. In addition to business motives, also personal reasons attract Russian entrepreneurs to Finland. These include factors such as clean nature and safety as elements enhancing the quality of life.

No quick profits due to small market size and high costs of doing business

According to the Russian companies’ experiences, Finland is not the market for those looking for quick profits. The flipside of the stable and transparent business environment is high taxation, in addition to which the small size of the Finnish market and high costs of doing business erode profitability. “Nobody comes to Finland because of profits - it is the same as going picking watermelons in taiga”, summed up another entrepreneur.

On the other hand, the above-mentioned disadvantages of the business environment make Finland a good “test laboratory” for those Russian companies, which target the global markets and want to streamline their business processes in a stable and highly competed market with clear rules. In addition, internationally-oriented Russian companies are interested in the Finnish high-tech know-how and the access to the EU market via Finland.

No major problems in relations to local stakeholders

The Russian companies’ experiences of operating in Finland are in general positive. The transparency of the public sector is highly appreciated, but at the same time the authorities are perceived as rather distant. Moreover, the interviewees had not encountered any major problems when co-operating with Finnish companies, and most of the companies included in the study have both Finnish and Russian customers and business partners.  

The challenges in the Russian-Finnish business cooperation are mainly caused by differences in time orientation and other aspects of business culture. Only few Russian companies, which provide consumer services, had faced open prejudices. Nevertheless, Russian companies perceived the threshold to participate in Finnish business associations as relatively high. 

Do Russian companies employ Finnish staff?

The Russian companies participating in the study employ mostly Russian-speaking staff in their Finnish operations. This is mainly because fluency in Russian is considered essential in the communication with Russian customers and with the Russian headquarters. However, the companies’ experiences from Finnish employees have been positive, and the need to recruit Finnish employees is expected to increase as the number of Finnish customers is growing.

The study ”Russian Companies in Finland”, conducted at CEMAT, examined the stakeholder relations of Russian companies operating in Finland and their integration to the Finnish business environment. The study was funded by the Paulo Foundation. A research report in English will be published in the spring of 2012. 

More information: Riitta Kosonen (riitta.kosonen@aalto.fi) ja Päivi Karhunen (paivi.karhunen@aalto.fi)

CEMAT has conducted a study on the operations of Finnish companies in Southeast Asia, focusing especially on the integration process within the Association of Southeast Asian Nations (ASEAN). The study enquired, in particular, how the regional economic integration affects the business environment of firms located in e.g. Malaysia and Singapore. Based on company interviews, we investigated the companies’ experiences on trade barriers and the free trade area AFTA, as well as their perceptions on the actual integration of markets in Southeast Asia. The below summary is based on a presentation given at the Annual meeting of the Finland-Malaysia Association on the results of the study.

The East Asian region is characterized by a slowly evolving process of formal regional economic integration that takes place among national economies of various levels of economic development. The most well-known regional grouping is ASEAN since 1967, and its free trade area AFTA, originated in 1992. In addition, there are other bilateral and regional cooperation schemes, such as the ones where ASEAN has engaged in free trade agreements with third countries, including China, Japan, and South Korea.

By definition, free trade areas provide vast possibilities for firms in benefitting from fewer trade barriers when exporting and importing inside the region. Hence it is interesting to look at the experiences of the “end-users” of free trade areas, that is, the companies that engage in intra-regional trade and investments. How do firms perceive the opportunities of the regional economic integration in ASEAN? What kinds of challenges have they faced when operating in the region?

To answer these questions, we interviewed managers of Finnish companies established in the ASEAN region, most of which are located in Malaysia and/or Singapore. The interviewees were asked about their view on the importance of the Southeast Asian market for their operations, their opinion about the formal regional economic integration, the level of tariffs, as well as their experiences on the ease of trade in practice, such as customs procedures, administrative practices and bureaucracy that they face in trade. The companies represented various sizes and sectors mostly in manufacturing industries.

According to our findings, the interviewed Finnish companies typically consider Southeast Asia an important market in their operations; a few managers mentioned that China and the other BRICs (particularly India and Russia) are clearly their main focus. Half of the respondents characterized Southeast Asia either as “the most important growth market”, a “potential market” or a stable market where operations will remain as before. Growth prospects were foreseen especially in Vietnam and Malaysia. For a few firms, Southeast Asia is a small or “a saturated market”. The reason for regarding Southeast Asia a potential market was its size and other characteristics: “…there are more than 600 million people, a generally good infrastructure – not everywhere but mostly, the GDP growth is 6-7 %, and English is widely spoken.” Echoing this, many respondents also mentioned that the ASEAN countries are relatively easy business environments, especially compared with China or India.

However, the perceptions about the ASEAN integration were fairly blurred. A major reason for this seems to be the slowness of the integration process, the several exceptions included in the AFTA agreement, and the general ambivalence in its enforcement. Originally, the agreement implied that for most manufactured goods imported from one ASEAN country to another, import tariffs were gradually reduced to the level of 0-5 % of the products’ value. The member countries were free to determine the speed of tariff reductions on a national basis, while the general aim was to fully realize AFTA by 2010 for the more developed member countries, and by 2015 for the less-developed ones.

For companies, the current status of the ASEAN free trade area indicates that an integrated market area is gradually in the making. However, the possibility of member countries to apply exclusions to the scheme makes the progress of AFTA somewhat difficult to foresee and thus non-transparent for companies. This means that for a company located in the region, intra-ASEAN imports or exports may be hampered by the sector-specific restrictive trade policies announced by individual member countries – in spite of what was formally agreed in the AFTA. These restrictive policies often protect the domestic sectors that are considered strategically important, such as the automobile sector in Malaysia.

Also, it was found that while many of the companies have units in several ASEAN countries, their location decisions are not based on the prospects for regional economic integration. Most of the respondents, indeed, do not regard AFTA as central in their investments decisions. Instead, investments are based on the companies’ global strategies where China has a central role. Interviewees explained this by the fact that it is hard to build strategies on a free trade area that is only in the making. According to one Finnish manager, “…we cannot make decisions based on these expectations of a FTA which are unsure. So, the possible advantages, if there are any, are realized only afterwards”. Quite surprisingly, the same seemed to apply to the recently established free trade area between China and Southeast Asia, despite some firms had regional production chains between China and the ASEAN countries.

There was a clear difference between large and small companies, however, in the general awareness about free trade areas. Typically the managers of larger companies were better aware of the FTA developments and the overall trade policy front, than were the managers of small firms. “It is hard to tell whether ASEAN would affect our business, because I do not understand much about these… We do not have any big problems there, either.” This might also reflect the recent outburst in the number of bilateral FTAs which makes the regional trade regimes complicated and almost impossible for the companies to follow.

Most of the interviewees mentioned one or several types of barriers that they have faced, such as burdensome customs procedures, high level of import tariffs, national standards, anti-dumping accusations, and “tariff wars”. Two companies reported that their industry had reasonable tariff levels – between 5-10 % - thus “not causing any headaches” for them. To tackle the trade barriers, the managers gave some potential solutions that they would use to solve problems caused by local trade policies. These included using Finnish authorities as intermediates: if the issue was a broader question related to Finnish industries in general, the company would turn to the Finnish Embassy who helps in negotiating the problem with the host country officials. Alternatively, the company might make use of a Finnish ministerial visit to take up the issue of trade barriers: “When the minister’s speech is being prepared, I could talk to him/her and hint about the problem”.

All in all, it was found that the level of formal regional economic integration is relatively low in East Asia. The ASEAN free trade area represents an early stage of integration, and, being still in the making, also remains somewhat obscure for companies. Part of the problem is the lack of legal binding of the Association’s agreements. This is especially relevant regarding the plans for an Economic Community, a common market, which cannot be fulfilled without a legal system for its implementation. Our findings imply that in its present form, regional economic integration in ASEAN is, still, more a question of diplomacy between the member states than of an integrated market for companies operating in the region.

More information: Research Manager Erja Kettunen-Matilainen

Publications:
Kettunen, E., Kosonen, R. & Penttilä, A. (2011)
Business Prospects in Integrating Markets? Experiences of Finnish Companies on Regional Economic Integration in Asean and the Baltic Sea Region
CEMAT Papers 2/2011.

Kettunen, E. (in press)
Challenges and opportunities of firms in integrating ASEAN.
Proceedings of the International Symposium 2011 “Economic Crisis in Europe: Perspectives from Japan”. Kansai University Japan-EU Research Center Report 1/2012.

The project analyzes success stories of high-tech entrepreneurs

What are successful high-tech entrepreneurs made of? This question is addressed in a new research project coordinated by the European University at St. Petersburg.

The project analyzes success stories of high-tech entrepreneurs in four countries with different technological profiles.

CEMAT is responsible for the research activities conducted in Finland. The project is an important milestone in Finnish-Russian research cooperation in social sciences, because it is one of the first comparative studies implemented with Russian funding. The project is financed by the Russian state corporation of nanotechnologies RUSNANO.

The aim of the project is to find out, what are the personal characteristics of successful high-tech entrepreneurs in different cultures, and what is the role of the local innovation system in the entrepreneurial process.

In addition to the country-level analysis, the research addresses sub-national variation within Russia. This is done by implementing the study in four culturally, geographically and institutionally different locations (St. Petersburg, Kazan, Novosibirsk and Tomsk).

The data collection for the study will take place during spring 2012 and the project will be completed by autumn. The results of the project will be presented in a seminar in St. Petersburg in September 2012. In addition, CEMAT will organize a dissemination event targeted to the Finnish audience in autumn.

More information:
Director, Prof. Riitta Kosonen and Research Manager Päivi Karhunen, firstname.lastname@aalto.fi

During the last couple of years, the longstanding economic growth of China has culminated impressively as a rise to the largest industrial producer in the world, as well as the world’s second largest economy. The massive stimulus package helped China to live through the global economic crisis two years ago. Later, the Chinese decision-makers had to tighten the fiscal policy, in particular, to curb the overheating caused by the stimulus.

In 2011, the development of the Chinese domestic market has been characterized by the rise of food prices, expanding real estate bubble and the rapid increase in the wage level that has been spurred with noticeable rises of the minimum wages. The frantic growth in consumer prices seemed to fold in summer 2011, but inflation was still clearly above the target set by the Chinese government, and was more rapid in the countryside than in urban areas. The price of food supplies increased by over 12 %, partly due to the severe drought that afflicted many rice production areas in China. The expanding real estate bubble was shown in the violent, mostly speculative, rise of prices both in residential and business property. Towards the end of the year the weakened prospects started however to reflect also in the real estate prices, and several large Chinese real estate developers recently reported decreasing sales volumes. At the same time, the rapid growth of wages continued, which seems not been affected even by the global financial crisis. The long-term goal of the Chinese decision-makers is to increase the income level of the citizens, and the rises of the minimum wages have in many areas been around 15 %. According to the goals of the five year plan, the general wage level should rise about 40 % and the minimum wages by 100 %. At the same time, the government aims to foster private consumption by the reform of income taxation.

Besides the real estate bubble, the most significant threats to the Chinese economy are the rapidly increased debt in regional administrations, the financial difficulties of SMEs, as well as the challenges of the Chinese economic model behind these problems combined with the problems in China’s main export markets. As a part of the stimulus package, the central government obligated the regional administrations to invest e.g. in infrastructure projects, which has led them to run into growing debt. At the same time, the tax income of the state is decreased by the reform of the income taxation. As the debt of the state-owned companies is also increasing, the total debt of the Chinese state will according to some estimates rise as high as to 150 % of GDP. Because the Chinese economic model encourages banks to concentrate their lending to the large state-owned companies, small firms have been left to struggle alone with their financing. This has created a shadow banking sector operating beyond the reach of regulation that small and medium-sized companies need to turn to. The phenomenon has been especially observable in Wenzhou, a traditional model city of the Chinese economic growth, that has more recently become known as the center of speculation and shadow banking system.

Despite these local problems, the industrial production in China has still increased rapidly, albeit being slightly slower in the largest cities than elsewhere. Production expanded fastest e.g. in wood processing, machinery and electrical appliances, as well as IT industry. Finnish companies saw growth potential especially in the demand of special equipment for environmental technology. In contrast, the growth of textile industry clearly decelerated, which was based mainly on the record-high rise of the world market price of cotton by 170 % until spring 2011. Also retail trade increased rapidly, but for many products (foodstuffs, fuels, precious metals and jewelry), retail growth was based on the fast increase in prices. In comparison, the growth of car sales slowed down considerably.

China’s foreign trade continued to be buoyant after the rough slump in 2008. In January-September 2011, Chinese exports grew, especially, to some ASEAN countries, Brazil and Russia; at the same time, imports increased rapidly from Russia, Canada, Vietnam and Indonesia, in particular. One significant change was the decrease in the share of Japan due to the earthquake in March 2011, causing delivery problems to Japanese companies. The problems of the global economy seem to slow down the growth of demand in Europe and the United States that are important export markets for China. For example, Finland’s trade with China grew more slowly than Finland’s total trade. The largest commodity group in Finnish imports from China was telecommunications, radio and television equipment, the share of which however decreased considerably. Also Finnish exports to China increased more slowly than its total trade, as the deliveries of paper machines, among others, decreased. In contrast, the exports of fur increased rapidly, and the total share of pelt, skin and fur of the Finnish exports to China was already 8 %.

Inward foreign direct investments in China were still on a high level, and were manifold compared to the other BRIC countries. The inflow of FDI into China accelerated further in early 2011, and was growing as much as 30 % year-on-year. Also Finnish companies invested in China more than ever: the flow of Finnish investment to China was about 1.4 billion euro in 2010, which was no less than one third of all investment flows from Finland abroad. Thus China passed Sweden as the largest target country of Finnish investment, reflecting the positive expectations for long-term economic growth and the market potential in China. Several Finnish companies reported also about new investments or re-investment plans in China.

Among China analysts, there are various views about the future of the Chinese economy, and one can see the country to be at the crossroads of three paths. First, China may be on its way to become the world’s largest economy, which, however, would require many structural changes in its economy. The second possible path is the slowing down of economic growth and China’s future as a mid-income country similar to Mexico. The third and the most pessimistic scenario is the escalation of China’s current economic problems, such as the real estate bubble and the debt of regional governments, which, if spread out in the national economy, could collapse China’s current economic model. The future seems to depend both on the Chinese decision-makers and the development of the global economy. Some of the Finnish companies see also a potential in the possible downturn, “if one has war chest, to go to the battle field, and ride to victory.”

The complete report is available at:
http://cemat.aalto.fi/fi/electronic/prospects/china/

Further information: Director, Prof.Riitta Kosonen riitta.kosonen@aalto.fi

The escalation of Europe’s debt crisis towards the end of 2011 cast dark clouds over Russia’s economy that had been growing briskly thanks to high world prices for oil and the resulting high export income. Russia’s economic growth slowed down in the second half of 2011, which was mainly due to the decelerating growth in investment demand. The low investment activity is explained by the ailing demand for industrial production, and the deteriorating investment climate resulting in capital flight. The capital outflow from Russia continued on a high level throughout 2011. It was further accelerated by political instability, which was caused by the demonstrations following the Duma elections in December 2011. The political instability is expected to continue at least until the Presidential elections in March 2012, although the protests do not yet seem to seriously question the return of Vladimir Putin as the president of Russia.

The lack of investment activity in the Russian economy has hit the demand for domestic industrial production, the growth of which started to slow down towards the end of 2011. At the same time, industry confidence turned negative. Moreover, the Russian investment demand seems to mainly target imported goods, as the imports of machinery and equipment to Russia grew strongly in 2011. This showed in the brisk growth of Finnish exports to Russia as well.
In contrast to industrial production, Russian service and retail industries have not yet significantly suffered from the economic uncertainties. In these sectors the growth has been maintained by Russian consumers, whose confidence has continued to be strong. Decreasing unemployment, increasing wages and lowering inflation have contributed to the growth in consumer demand. The construction sector has, for its part, benefitted from the recovering credit market. The consumer demand is hoped to replace the oil exports as the booster for Russia’s economic growth in the future, as the global economic uncertainty will inevitably lower the world prices for oil. 

The growing uncertainty in the Russian economy shows in the views of Finnish companies as well. In general, their operations in Russia developed positively in 2011, but the second half of the year was not as bright as expected. Similarly, growth expectations for the next six months turned negative in autumn 2011 for the first time since autumn 2008. Economic uncertainty has been reflected in the Finnish investments to Russia as well. The ongoing investment projects are continued, but the launch of new projects has been postponed. On the other hand, Finnish companies emphasize the long-term perspective in their strategy for Russia. Therefore, the ups and downs of the Russian economy are taken relatively calmly.

The positive news in late 2011 was that the negotiations on Russia's admission to the World Trade Organization WTO were finally completed, after having been ongoing for nearly 20 years. The entry of the membership agreement into force in 2012 is now subject to its ratification in the Russian Duma. The membership is good news for Finnish businesses and Finnish exports, although its benefits will realize only in the future due to the long transition periods granted to Russia. In addition to direct benefits, such as decreasing import duties, the membership is expected to make the investment climate in Russia more favorable.

The complete report is available at:
http://cemat.aalto.fi/fi/electronic/prospects/russia/

Further information: Director, Prof.Riitta Kosonen riitta.kosonen@aalto.fi

In the first half of 2011, the social and economic development of St. Petersburg was stable. Industrial production, communication and retail trade recorded somewhat solid growth. However, the construction sector experienced a considerable decline. Notable increase in electricity and heating tariffs and in social payments put strains on retail development.

Economic recovery in the Leningrad province continued. Industrial production and retail sales experienced firm growth and exports were especially surging. This was largely owed to the versatile regional economy, proximity to Saint Petersburg and high oil prices. However, the regional investment sphere is suggesting some signs of potential negative reflections from global economic uncertainty. Foreign investments have declined substantially concerning both loans and direct investments. Furthermore, the outflow of foreign investments from the region has intensified.

After a recovery year in 2010, Karelia’s economy remained on the growth path during the 1H2011 but showed stagnation or decline on many fronts including industrial production. Export growth leaned heavily on high global raw material prices and if the global economy faces a second wave of the crisis in 2012, the Karelian economy will likely plunge back in to a recession. Positive developments also took place in the 1H2011. The amount of cargo increased, retail sales were robust to high inflation, corporate profits soared and very high growth figures were recorded in both domestic and foreign investments.  The biggest news in Karelia in 2010 was the resignation of the twelve-year leader of the region, Governor Katanandov. The successor Andrei Nelidov has tackled the problem of the high share of loss-making companies in Karelia, and promised notable changes in the regional economic development strategy.

Judging by the results of 2010, the Murmansk province seemed to be overcoming the negative consequences of the world financial crisis of 2008/2009. However, during the 1H2011 there were some signs that this recovery might be short-lived. It is becoming increasingly clear that with the current economic base the region will not achieve a higher development stage, and the major investments in energy, raw material and transportation sectors need to be fulfilled in order to find a new growth path. This situation has already prevailed for several years now, but a positive indication is that the investments are proceeding closer to materialization, despite the constant postponements. However, if the global financial crisis re-emerges, this fulfillment will probably shift again by at least a couple of years.

Reports are available at:

Saint-Petersburg
http://cemat.aalto.fi/en/electronic/economicmonitoring/reports/saintpetersburg/

Leningrad province
http://cemat.aalto.fi/en/electronic/economicmonitoring/reports/leningrad/

Republic of Karelia
http://cemat.aalto.fi/en/electronic/economicmonitoring/reports/karelia/

Murmansk province
http://cemat.aalto.fi/en/electronic/economicmonitoring/reports/murmansk/

Further information: Director, Prof. Riitta Kosonen, riitta.kosonen@aalto.fi