The first wave of FDI into the ex-Soviet Baltic region began shortly before or during 1991, around the time of Baltic country independence and the abolition of the USSR. The inflow to the region continued to grow in volume by an average of 350% in the three Baltic countries from 1995 to 2003, and into Russia somewhat later, but with substantial growth during the late 1990s.
In the early years of this new wave of investment, much was lacking in terms of information about market characteristics such as demographics, traffic flows, consumer demand and competition.
It was a frontier-like atmosphere with decisions being made on observations, estimates and with minimal data. In fact, the decision of where to locate a business seemed less important than just being in the country, or especially being in the capital cities of these newly emerging nations.
How, then, have these initial investments fared as the transition to market economy developed? Have companies that made investment decisions in 1992 or 1993 been influenced to change their operations or their locations? And if so, which factors led to the need to change location?
In an earlier survey of first-wave companies that moved to Baltic locations from Nordic countries, we discovered regularities in company motives and in their choice of location within the region. Actual site selection was often less carefully considered by the companies than which countries and cities to consider.
The availability of office space and commercial properties within the region in the early 1990s was limited and many buildings throughout the Baltic capitals were being renovated to meet western standards (an important FDI opportunity in itself). Other location considerations included which cities to enter and how best to serve the emerging market in terms of strategic locations within the region.
In the early 1990s, Russia was seen by investors as the market with big potential but high risk. Many investors considered the Baltic countries to be a safer investment location and a ‘gateway’ to their eventual target – Russia. Inside Russia, the decision to be in St Petersburg was seen by several Nordic companies as a gateway to the rest of Russia, yet a safer location than in Moscow or other interior cities. Today, that decision may be viewed quite differently as Moscow has become the economic centre of the new Russia, and with the emergence of interior cities such as Ekaterinburg and Samara as market opportunities expand.
Given the multitude of questions facing companies from the outset, it is likely that less than optimal sites and locations were selected in the early years and that companies have reconsidered their location strategy where problems or opportunity costs can be recognised.
Determining how many of the original post-Soviet foreign investors have survived is difficult. According to our responses and confirmed addresses (internet, telephone or postal), we estimate that of the original 107 Nordic companies listed as of 1994, at least half of these have survived in recognisable form – either as the same companies, or with documented changes of name or affiliation.
The survivors that we traced seem to represent all sectors and companies that had stronger footing at the beginning of the transition. Small entrepreneurial partnership ventures seem to have been less likely to survive than larger FDI firms.
In a sample of the surviving companies that we visited, we found that most companies added employment during the time interval of about 10 years, resulting in a total increase of more than 3300 jobs, or 176 per firm. Manufacturing firms added the most jobs, followed by construction and transportation.
Location changes were common among survivors and the reasons for change vary but lean towards a need for more space to accommodate growth, or for logistical purposes. As expected, manufacturing firms were less likely to have changed location (28% moved) than those in other sectors, where 77% moved.
In St Petersburg, we interviewed eight companies, including a variety of firms engaged in sales, service, construction, manufacturing and shipping. The reported adaptations included both location and operational changes to improve efficiency and increase profits. The companies emphasised the many changes that have occurred in the St Petersburg market, especially since the rouble crisis of 1998. They describe sacrifices made during the crisis in order to survive, and how these strategies enabled the companies to be stronger in the post-crisis era.
In Estonia, company survival was associated with an ability to survive the Russian rouble crisis in 1998. Mistra Autex, Pomorfin and Kunda Nordic Cement are examples of manufacturing companies that have survived the transition and have increased productivity despite rising costs, and have expanded their markets through connections to Europe. Mistra Autex worked to meet high standards of automotive supplier requirements and won contracts with Volvo and other companies. This completely shifted its market from old Soviet companies to European companies.
Pomorfin shifted production from its shoe manufacturing plant in Finland to Estonia and has used clever technology and internet marketing to expand sales world-wide. This firm has increased productivity through adaptive computer-based production and global marketing technology.
Kunda Nordic Cement is now owned by Heidelberg Cement Company and has gained market network and capital for production investments in this way. Its development of an old Tsarist-era port nearby has led to growth in this sector of the company and to attraction of other firms to Kunda in forest products and other resources.
In Latvia, the companies mentioned similar competition for labour and rising labour costs. Latvia was also hit hard by the Russian rouble crisis and the loss of the export market in Russia. As in Estonia, competition for labour and market share has increased and Latvia has a growing real estate market and a housing boom that is driving growth in companies, including Electrolux, where sales have doubled in about three years.
Tetra Pak is still working to gain market share in its dairy packaging line and it will depend, to some extent, on consumer preferences for packaging. Plastic pouch packaging by competitors has become an important issue for the company’s market share in the liquid packaging industry. Tetra Pak developed an innovative wine box production and marketing strategy in Russia that shows promise in a rather young wine market where bottled wine has not become as established among consumer expectations as it has in Europe and elsewhere.
It is clear that early foreign investors into the ex-Soviet Baltic region have adapted through location changes and through operational shifts, including many changes in product or service lines, and the ability to survive during the early transition period was probably due, in part, to these adaptations. Companies have seen major changes in their Baltic markets as incomes increase and tastes change, and they have used their relatively low-cost setting to expand into export markets beyond the region.
Many examples of EU effects were seen where growth has been spurred either directly or indirectly from its expenditures in the Baltic countries. This is especially apparent in the real estate market, but also in ease of shipping across borders and increased visa-free tourist travel to the Baltic capitals.
At the same time, growth in Russia has revived some market opportunities for Baltic companies to look east, and there are many examples today of foreign companies in Russia coming from Baltic countries. The labour shortage in Tallinn and Riga is good evidence of growth and increasing opportunities and prosperity among Baltic residents.
Labour competition has elevated labour costs for Baltic companies and may eventually remove one of their most important cost advantages, if productivity growth does not also grow here. Continued success of foreign companies will depend on productivity and adaptation as the Baltic area continues to evolve into its own economic and cultural region within the global economy.
Professor Harley Johansen is the Head of Geography at the University of Idaho.