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.

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

The annual seminar organized by the Working Group for Social Sciences of the Finnish Russian Commission for Scientific and Technological Cooperation was held in Moscow October 27, 2011. At the seminar, focus was on the Russian innovation policies and Russian business environment, also the issue of Finnish firms’ investments in Russia and their potential impact on modernization and diversification was discussed from various perspectives.

The welcoming speeches of the seminar were given by the Finnish chair of the working group Prof. Riitta Kosonen, the Co-chair of the working group Acad. Alexander Nekipelov (Vice-President of RAS) and Ambassador Matti Anttonen from the Embassy of Finland in Moscow. 

In addition, presentations from various viewpoints on the promotion of innovations were given by Prof. Kari Liuhto (Director, Centrum Balticum Foundation), Sergey Balandin (General Chair of FRUCT), Tapani Ryhänen (Director and Head of Eurolab, Nokia Research Center), Vladimir Ivanov (Deputy Scientific Secretary of RAS Presidium), Natalia Ivanova (Deputy Director, Institute of World Economy and International Relations of RAS), Nikolay Komkov (Head of the Laboratory of Governance of Scientific and Technological Development, Institute of Economic Forecasting of RAS), Elena Lenchuk (Head of the Centre for Innovation Economy, Institute of Economics of RAS) and Erkki Kaukonen (Research Director, Research Unit for Science, Technology and Innovation Studies, University of Tampere).

The seminar was organized by the Working group for Social Sciences of the Finnish Russian Commission for Scientific and Technological cooperation and the Russian Academy of Sciences.

More information about the seminar (including the seminar presentations): http://www.issras.ru/seminar_2011/programme.php

More Information: Prof. Riitta Kosonen riitta.kosonen@aalto.fi

		From the left: Matti Anttonen, Riitta Kosonen, and A. Nekipelov (photo: Kirill Nikitin)
		Seminar audience (photo: Kirill Nikitin)
		Kari Liuhto (photo: Kirill Nikitin)
		Erkki Kaukonen (photo: Kirill Nikitin)
		Tapani Ryhänen (photo: Kirill Nikitin)
		Sergey Balandin (photo: Kirill Nikitin)
		A.Nekipelov and Riitta Kosonen (photo: Niina Saloranta)

Academy of Finland and Russian Foundation for Humanities have granted funding for a joint research project between CEMAT and the Institute of Economics at the Karelian Research Center of Russian Academy of Sciences. The three-year project focuses on the impact of weather conditions on regional economies in Russia.

The project analyzes empirically the short-term consequences of different weather conditions on regional economic indicators. The main focus is on agricultural production, which is directly dependent on weather conditions and thereby has a direct income effect on those regional economies, for which agriculture is a major contributor. In addition, the volume of agricultural production has an indirect effect on consumer price inflation and thereby the living standard of the population.

The empirical data collected in the project is combined with the parameters of alternative long-term climate forecasts to simulate comprehensive economic scenarios on the regional implications of weather conditions. In addition, the project team carries out case studies in selected Russian regions with different climate types. The aim is to develop guidelines for taking weather conditions into account in regional economic policies.

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

In order to tackle the problems of disconnected composition of transport sector actors in the Region, RBGC Russia aims to strengthen the cooperation of decision-makers in transport development. Thus, the partnership is built on strong triple-helix cooperation. RBGC Russia is led by Aalto University School of Economics CEMAT. Partnership consists of City of Helsinki, Lappeenranta University of Technology Kouvola Unit, Petersburg State Transport University, North-Western Russian Logistics Development and Information Centre ILOT, and Public Transport Authority Berlin-Brandenburg. The total budget of the two-year project is 617 000 EUR.

RBGC Russia addresses the issue of bottlenecks affecting both passenger and freight transport between the Northern Dimension Partners and other countries of Eastern Baltic Sea Region.  The Project consists of holistic working schemes for Research and Pilot Activities in North-West Russia:

1. Stakeholder research in the public and private transport sector
2. Connectivity Pilot: Introducing a virtual travel planner for St. Petersburg connected with the wider international travel information network for the Baltic Sea Region
3. Logistics Pilot: Elaboration of viable network for logistics capacities in North-West Russia
4. Rail Baltica Growth Corridor Memorandum for St. Petersburg to contribute to transnational RB Growth Strategy

Further information:
 
Project Manager
Malla Paajanen
malla.paajanen(at)aalto.fi
+358 50 366 7391

Project Coordinator
Marja Mattila
marja.mattila(at)aalto.fi
+358 40 353 8158

CEMAT contributed as a research partner to the CREAENT project, which is coordinated by the Small Business Center of Aalto University School of Economics. The aim of the project is to develop models for entrepreneurial education and networking among Finnish, Swedish, Estonian and Latvian universities. The results of the research activities conducted in the project have now been published in the Aalto University publication series.
 
The report  ”Perceptions of entrepreneurship among future creative professionals – results of a survey for University Students in Finland, Estonia and Latvia” provides knowledge and understanding about how students of creative disciplines in the three countries perceive entrepreneurship as career option, how they assess their own entrepreneurial skills and capabilities, and how they view the entrepreneurial education provided at their home universities.
 
The publication ”Creative entrepreneurs’ perceptions about entrepreneurial education” analyzes the views of young creative entrepreneurs about their entrepreneurial competences and the role of education and training in providing such competences. In addition, the entrepreneurs were invited to think how a future model for entrepreneurial training for creative industries should look like in terms of content, methods and format.
 
Both reports are available in electronic form on the website of Aalto University School of Economics’ library:

Perceptions of entrepreneurship among future creative professionals – results of a survey for University Students in Finland, Estonia and Latvia

Creative entrepreneurs’ perceptions about entrepreneurial education

 
CREAENT (Creative Entrepreneurship Network) project develops universities tools for promoting entrepreneurship among students and supporting the birth and growth of new innovative enterprises in creative fields.  The project is co-financed by the Central Baltic Interreg IV A Program 2007-2013 (European Regional Development Fund) and the State Provincial Office of Southern Finland.  The lead partner of the project is Aalto University School of Economics Small Business Center (Finland), and the partners Tallinn University of Technology (Estonia), University of Tartu (Estonia), and Stockholm School of Economics in Riga (Latvia). The three-year project was started on 1 November 2009, and ends on 31 October 2012.
 
 
The website of the CREAENT project: http://www.pyk.hkkk.fi/creaent/
 
More info: Päivi Karhunen paivi.karhunen@aalto.fi
  

CEMAT's team Riitta Kosonen, Erja Kettunen-Matilainen, Malla Paajanen and Piia Heliste took part in the Aalto-kymppi, the kick-off event of Aalto University’s academic year in terms of sports. The team CEMAT toured the route by transporter trikes, on which also Piia’s daughters Anni and Emmi got a ride. Along the journey there were certainly more people willing to join the ride. Thanks to the merry songs sung by the kids as well as the good team spirit, the whole team arrived at the finish line with a smile..

The team CEMAT with transporter trikes

Nearing the goal

The team CEMAT from the left:  Emmi, Piia, Anni, Riitta, Erja and Malla

Information about the role of CEMAT as a booster for Finnish companies’ operations in Russia is now available in the Russian language at
 (http://info-finlandia.ru/Public/default.aspx?contentid=228775&nodeid=40675&culture=ru-RU).

Info-finlandia.ru is a Russian-language website and electronic journal, which provides information about Finland for the Russian audience. The site is produced jointly by the Ministry for  Foreign Affairs of Finland and the Institute for Russia and Eastern Europe.

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

Along with the massive stimulus package, China's export-driven economy has risen rapidly, and is growing by about 10 % per annum. The rise was driven by the quickly recovered foreign trade, strong growth of industrial production, and huge investments in e.g. infrastructure. However, current problems include the clearly accelerated inflation, and especially real estate prices which have climbed high. China's unemployment during the economic crisis seems to have eased somewhat, and at the same time, wages are rising rapidly, which can be seen in Finnish companies' recruitments. "Wild guess: in the next three years, salaries will double."

According to the new five-year plan, China aims to increase consumption, services and innovations, as well as environment protection. In this vein, China is gradually changing its former development model based on industrial production and exports. The new plan also emphasizes urbanization, social security development, and strategic industries. It is expected that Finnish companies will have opportunities particularly in the construction services as well as healthcare and energy efficiency technologies.

By sector, the most rapid growth in early 2011 was witnessed in wood processing industry, metal products and machinery manufacturing. In contrast, a significantly slowing growth rate was seen in the automotive and textile industries. At the same time, China became one of the world's largest shipbuilders. Retail sales increased particularly for fuels, household appliances and food products. Also the demand for gold, silver and gemstone jewelry continued to grow at a very high level. In spite of the over-capacity afflicting the Chinese industrial sector, the barometers for the industries’ future expectations have remained bright for more than two years. In the past few months, however, the Purchasing Managers Index (PMI) has declined in some subsectors such as the prospects for employment and imports.

While the fast increase in real estate prices has recently folded, consumer price inflation has continued to slightly accelerate in the last few months. In particular, food prices have been rising, and as the cost of housing remains very high at the same time, Chinese decision-makers need to fight against inflation in different ways. Economic policies have been tightened, regulation for the housing market has been strengthened, and, for example, lending is curbed by raising banks’ reserve requirements. Chinese banks may face difficulties in the future due to the regional governments’ large debts, some of which may end up being unpaid.

China's foreign trade recovered quickly and reached record high levels again in March and April. In early 2011, exports grew particularly fast to Japan and South Korea, but also to the most significant export markets such as the EU and USA. The most important export products were the traditional ones, i.e. textiles, clothing and shoes, computer equipment and mobile phones. Imports grew nearly 30 %, but slowed down slightly for some import sources after last year’s even faster growth. Major import sources were Japan, the EU, ASEAN and South Korea. The prospects for foreign trade are dimmed with possible problems in the euro area and the US economy.

Also Finland's trade with China has been refreshed to the pre-crisis levels. Finnish imports from China include e.g. phones, clothes and computer equipment, whereas exports consist mainly of various machinery and equipment. In addition, China is emerging as a significant export market for Finland in the exports of furs, berries and the so-called clean-tech products.

Foreign direct investments to China will reach a new record if the current levels of FDI flows continue throughout the year. The most significant source of investment is still Hong Kong, and, in addition, Taiwan and Singapore were among the largest last year. China continues to attract new Finnish companies, and an increasing number of the appr. 300 Finnish companies established in China are small and medium-sized companies. However, foreign companies suffer from China's growing protectionism and, for example, the favoring of local companies in government procurements. Also China’s cost advantage has vanished especially in large cities, and more and more companies are considering relocating to inland China.

At the same time, China is conquering the world. Recent estimates show that Chinese companies were already the world's fifth-largest foreign investors last year. With its largely state-controlled investments, China is searching for technology, expertise and raw materials from abroad. Although the bulk of Chinese capital goes through tax havens, the investments are directed in accordance with the Chinese strategy to commodity rich countries in Africa, Asia and South America, in addition to developed industrial countries.

China’s economic prospects 1/2011 –report (in Finnish) is available at: http://cemat.aalto.fi/fi/electronic/prospects/china/

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

The Russian economy grew at a rate of 4% in 2010, but the growth is expected to slightly slow down in the coming years. The upswing was triggered by rapid increase in industrial production, as well as growth in world prices for oil and other raw materials. Moreover, the increased demand for Russian oil due to the protests in the Middle East and the disaster at the Fukushima nuclear plant in Japan have further stimulated the recovery of the Russian economy from the recent global financial crisis. However, economic growth has brought back rising inflation as the greatest challenge for Russian economic policy. The main reason for the accelerating inflation was the rising cost of food due to the drought in 2010. In contrast, high unemployment that had been the main challenge in the economy during the crisis has decreased more rapidly than expected as a result of growth in industrial production.

In the coming years, economic growth in Russia is overshadowed by volatile oil prices and a number of other factors. Investment demand, which stimulated economic growth in 2010, began to slow down in spring 2011; foreign direct investments are still low; and capital flight from Russia abroad gathered speed towards the end of 2010.  According to the Central Bank of Russia, the net capital outflow from Russia in January-February 2011 amounted to 21.3 billion dollars. The uncertainty about economic development in Russia is reflected in the lack of confidence of economic actors: the main barometers, i.e. the purchasing manager and investor confidence indices went downwards in spring 2011. At the same time, consumer confidence in the Russian economy was decreasing, too, which however does not show in the consumer demand yet.   

The short-term views of Finnish firms on their Russian business are in general positive, although growth expectations have become more moderate. During the past six months, the turnover of Finnish manufacturing companies’ Russian operations decreased slightly, which may have resulted from the general slowdown in Russian investment demand in the first months of 2011. The Finnish service companies, in contrast, reported an increase in turnover during the same period, retailers being in the forefront of business expansion. Furthermore, the construction business which has until now suffered from the crisis, finally shows signs of recovery. Finnish construction companies have announced during 2011 new large-scale investments to the St. Petersburg housing construction market as well. Moreover, the shortage of qualified labor, which was temporarily alleviated during the crisis, has reappeared as a top challenge faced by foreign companies in Russia. The problems caused by the cumbersome bureaucracy have not diminished, either.

On the positive side, Russia’s foreign trade grew rapidly in 2010. The value of exports was increased by the high price for oil, while also the volume of exports grew from the previous year. The growth in the value of imports was nearly as high as for the exports; in particular, the rise in industrial investments spurred the imports of investment goods. The Finnish total exports to Russia picked up as well in the second half of 2010. Nevertheless, this did not concern the most important export articles, machinery and equipment, the exports of which did not recover despite the rising investment demand in Russia. Moreover, transit exports via Finland to Russia increased nearly 20% in 2010, but were still far from the high figures of 2008.  

From the viewpoint of Finnish firms there are a number of question marks in the Russian economy, one of which is the increased protectionism of the Russian state. During the last year the state has intervened in the economy by, for example, controlling the domestic prices for fuel. In addition, the threshold to increase or decrease import duties in accordance with the needs of the domestic economy is low. Russia’s potential accession to the World Trade Organization which would bring stability in this respect still remains an open question. Finally, the approaching presidential election is expected to increase state interventions in the market in the name of restraining consumer price inflation.

Ecomomic prospects of Russia 1/2011 -report (in Finnish) is available to read at:
http://cemat.aalto.fi/fi/electronic/prospects/russia/

Further information:
Director, Prof. Riitta Kosonen, riitta.kosonen@aalto.fi and  Research Manager, Päivi Karhunen, paivi.karhunen@aalto.fi

CEMAT participates in the Centre of Excellence (CoE) in Research on Russia as an associate partner. Hosted by the University of Helsinki and led by director Markku Kivinen of the Aleksanteri Institute, Choices of Russian Modernisation is one of the 15 new Centres of Excellence in Research for 2012-2017 funded by the Academy of Finland.

The Centre of Excellence will adopt a new multidisciplinary approach, the Finnish School, to study modernization in Russia. Leading to a new paradigmatic approach in Russian studies, modernization in Russia is elaborated in a multidisciplinary manner focusing, in particular, on the choices made under conditions of the society’s resources and rules.

In addition to researchers from Aleksanteri Institute and CEMAT, the Centre of Excellence includes researchers from the Department of Modern Languages (Russian Studies) of the University of Helsinki, the Department of Political Studies of the University of Tampere, and the European University at in Saint Petersburg, Russia.

More information: Aleksanteri Institute’s website ( http://www.helsinki.fi/aleksanteri/index.htm)

Director, Prof. Riitta Kosonen riitta.kosonen@aalto.fi

CEMAT’s active China cooperation especially in the fields of IPR and EU-China trade relations continued in May when Professor, Dean Zhang Min of the Chinese Academy of Social Sciences (CASS), Institute of European Studies, Science and Technology Department, visited CEMAT during May 7 – June 7, 2011. The visit was a continuation of the cooperation between CEMAT and CASS that started within the research project ”Globalization and International Management: Successful Governance of Intercultural Communication in Finnish-Chinese Business Operations” funded by the Academy of Finland and CASS in 2008–2010.

Prof. Zhang Min is specialized in EU-China economic relations, and European innovation and technology policies, and her research has also covered e.g. the European labour market, as well as the economic development of Southern European countries. Prof. Zhang cooperates with CEMAT related to e.g. the IPR questions between the EU and China.

More information on CEMAT’s China projects: Director, Prof. Riitta Kosonen, riitta.kosonen@aalto.fi, and Research Manager Erja Kettunen-Matilainen, erja.kettunen-matilainen@aalto.fi.

Website of Economic Monitoring of Northwest Russia:
http://cemat.aalto.fi/en/electronic/economicmonitoring/

Further information: Director, Prof. Riitta Kosonen, riitta.kosonen@aalto.fi and Research Manager Päivi Karhunen, paivi.karhunen@aalto.fi