Challenges Faced by Japanese Investors in Russia

REPORT'S AUTORS:

Nina Ershova, Research Fellow, HSE Institute for Industrial and Market Studies.

 

Ershova examined Japanese companies' experience of investing in Russia. Her paper "Challenges for foreign investors in Russia: the case of Japanese companies" is based on findings from a survey of 32 companies — members of the Japan Business Club in Moscow, conducted between April and June 2015, and content analysis of twenty interviews with Japanese business, academic and NGO representatives conducted between 2008 and 2015.

According to the Japan External Trade Organisation (JETRO) data, in 2005–2014, Japan’s foreign direct investment (FDI) stock in Russia increased 29-fold. Yet Japan was the 13th ranked investor in the Russian economy in terms of  FDI stock in 2013.

While the regional distribution of Japanese FDI has been getting more diversified, the traditionally attractive regions continue to be Moscow, St. Petersburg and the Far East of Russia. Thus, Moscow is the most important business region for 65% of respondents, and 55% of companies are represented in one or two Russian regions only.

Most Japanese companies (62%) are engaged in importing goods to Russia and then selling them in the Russian market. Just 31% of companies are focused on manufacturing goods and providing services locally and even fewer (18%) invest in R&D in Russia.

Reasons Why They Are Coming

Gaining access to the Russian market was the most popular reason reported by 81% of respondents; one-quarter noted a high return on investment in the Russian economy, 11.5% mentioned Russia's abundant natural resources, and 3.8% indicated the availability of skilled human resources.

Almost 70% of respondents described the Russian market as the biggest and most promising in the CIS region. Also important was Russian consumer demand for high-quality Japanese products.

Despite the crisis, Japanese companies tend to focus on a long-term presence in Russia, even though the local market's low predictability and rapid changes in consumer preferences are seen as major challenges.

Hurdle Run

In the first year of their operation in Russia, about half of the Japanese companies surveyed struggled with the language barrier.

• 36% reported difficulties with customs clearance, and about the same number found the local business incorporation procedures and labour regulations as a problem;
• 24% mentioned high taxes;
• 20% noted tough competition;
• 12% reported infrastructure deficiencies and the same number complained about limited access to financing opportunities;
• 38% faced difficulties with recruiting and retaining highly skilled personnel, particularly in the Far East of Russia, and more broadly, with finding local staff with a good level of English.

Corruption — a sensitive issue for Russians — does not seem to bother Japanese companies too much and was mentioned by only 4% of respondents. However, one-quarter of all interviewees confirmed that they associated doing business in Russia with corruption. According to Japanese respondents, legislative shortcomings, red tape and non-transparent tendering processes are damaging the country's investment image.

The construction sector seems to be the most problematic: gaining access to infrastructure requires substantial investments of time and money, while obtaining a construction permit takes an average of 540 days and more than 50 different papers to be filed, which is significantly more than in other BRICS countries.

Tensions in Russia's international relations and the economic crisis have affected investment activity. Risks associated with exchange rate volatility were mentioned by 68% of respondents, while potential problems with international payment processing concerned 14% of respondents.

Cultural Differences

According to Ershova, an important obstacle to cooperation is the observed difference in business cultures between Russia and Japan and their respective approaches to work. Thus, due to "fuzzy corporate culture and values, employees in Russian companies lack the moral incentives to perform, whereas moral incentives are extremely important for HR management in the Japanese model," the study says. In addition to this, there are fundamental differences in approaches to project design and job assignment, where the Japanese tend to pay great attention to details which their Russian partners may find unimportant. In turn, the Russians' broad conceptual approach, often lacking accuracy and detail in planning, can cause tensions and delays in negotiations with the Japanese.

On the other hand, both cultures share the values of collectivism and high context, interpersonal communication and informal dispute resolution, all of which can contribute to productive partnerships.

Overcoming Barriers

Based on her findings, the researcher offers Japanese companies the following advice for overcoming barriers to investment cooperation:

• Use a more aggressive strategy for entering the Russian market;
• Respond promptly to changes in the local market environment;
• Use opportunities available in innovation-driven and technology-intensive industries;
• Manage operations in Russia locally;
• Take into account the local business culture, values and incentives for better personnel retention.

Russia, in turn, needs to improve its infrastructure:

• Upgrade its ports and railways;
• Build roads, gas, power and water supply systems (also with foreign capital participation);
• Liberalise immigration policies, simplify business incorporation and customs clearance procedures;
• Provide informational support to foreigners working in Russia and step up cooperation with investors via various mechanisms for interaction between foreign businesses and the Russian authorities.

August 17, 2016