Foreign Direct Investment in Russia

Also by Paul Fischer

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AUF SICHEREN WEGEN DEN US-MARKT ERSCHLIEßEN

Foreign Direct Investmentin RussiaA Strategy for Industrial Recover

Paul Fischer

First published in Great Britain 2000 byMACMILLAN PRESS LTDHoundmills, Basingstoke, Hampshire RG21 6XS and LondonCompanies and representatives throughout the world

A catalogue record for this book is available from the British Library.

First published in the United States of America 2000 byST. MARTIN’S PRESS, INC.,Scholarly and Reference Division,175 Fifth Avenue, New York, N.Y. 10010

ISBN 978-0-312-23055-5

Library of Congress Cataloging-in-Publication DataFischer, Paul.Foreign direct investment in Russia : a strategy for industrial recovery / Paul Fischerp. cm.Includes bibliographical references and index.ISBN 978-0-312-23055-5 (cloth)1. Investments, Foreign—Russia (Federation) 2. Russia (Federation)—Economicconditions—1991– I. Title.

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99–049536

© Paul Fischer 2000

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ISBN 978-1-349-41658-5 ISBN 978-0-333-97759-0 (eBook)DOI 10.1057/9780333977590

Softcover reprint of the hardcover 1st edition 2000 978-0-333-77483-0

To the people of Russia

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Contents

List of Figures xiv

List of Tables xviii

List of Boxes xx

List of Maps xxi

Foreword xxiii

Preface xxv

A Word from the Author xxvii

List of Acronyms xxix

Introduction: Background and Rationale of the StudyI FDI: a new challenge for Russia 1II Need for a national programme for investments in industry 4III FDI in current international debate 7IV Study contents and methodology 10

PART I FDI THEORIES AND POLICY IMPLICATIONS

1 Overview of Main FDI Theories 191.1 FDI theories from a historical perspective 191.2 International product cycle paradigm 211.3 Monopolistic competition and market imperfections 241.4 FDI and defensive oligopolistic behaviour 251.5 Internalization theory 271.6 The ‘flying geese’ paradigm of economic development 281.7 FDI and the competitive advantage of nations 311.8 The eclectic paradigm 341.9 The investment development path of nations 371.10 Policy implications of major FDI theories 42

PART II GLOBAL FDI POTENTIAL AND OPPORTUNITIES FOR THE RUSSIAN ECONOMY

2 Determinants of Global FDI 512.1 Economic liberalization and deregulation at national level 522.2 Globalization and integration of world economies 54

vii

2.3 The formation of regional groupings 572.4 The role of international organizations for global

investment standards 632.5 Dynamics of transnational corporations 672.6 Promotional activities of regional bodies 702.7 The spread and development of key technologies 712.8 International movements of capital 74

3 Global FDI Trends 793.1 Significance of FDI for the world economy 79

3.1.1 Main FDI indicators 793.1.2 FDI and public aid 803.1.3 Global economic integration through FDI 843.1.4 The Triad and its cluster regions 87

3.2 Main investing nations 893.2.1 Historical shifts in outward FDI 893.2.2 FDI from G5 countries 903.2.3 FDI from other industrialized and emerging economies 93

3.3 Major destination countries for global FDI 943.3.1 FDI in the industrialized Triad economies 953.3.2 FDI in the emerging economies of Asia and Latin America 983.3.3 FDI in European transition countries 100

3.4 Sectoral distribution of foreign investment 1053.4.1 The growing role of services 1053.4.2 Sectoral distribution of FDI in Central and Eastern Europe 107

Annex 3.1 The world’s leading FDI source countries, 1983–97 110Annex 3.2 The world’s leading FDI recipient countries, 1983–97 112

4 TNCs as Global Investors 1164.1 The world’s leading TNCs and their FDI impact 1164.2 The ‘hidden champions’: the growing importance of

medium-sized TNCs 1204.3 Global FDI strategies of TNCs 123

4.3.1 Options for market entry 1234.3.2 Cross-border mergers and acquisitions 126

Annex 4.1 The world’s top 100 TNCs ranked by foreign assets, 1996 132

Annex 4.2 Top 50 TNCs of emerging economies, 1996 138

PART III FDI AS THE CATALYST FOR INDUSTRIAL TRANSFORMATIONIN SELECTED LARGE EMERGING MARKETS

5 FDI Policies and Prospects in China 1475.1 Competitive advantages and lessons for Russia 1485.2 Inward FDI policies and economic reforms, 1978–98 150

5.2.1 FDI policy adjustment since the late 1970s 150

viii Contents

5.2.2 Main features of Chinese macro management 1525.2.3 Formation of ‘national champions’ for industrial

development 1555.3 Foreign investment patterns in the 1990s: origin and

destinations 1575.3.1 FDI inflows and stock 1575.3.2 Regional and sectoral distribution of FDI 1605.3.3 Leading TNC investors in China 1625.3.4 China’s outward investment position 164

5.4 Foreign investment legislation and incentives 1665.4.1 Equity joint ventures 1675.4.2 Wholly-owned subsidiaries and holding companies 1685.4.3 Industries to be promoted during 1996–2000 1705.4.4 Incentive mechanisms for foreign investors 171

5.5 Macroeconomic impact and industrial restructuring through FDI 1715.5.1 FDI-induced economic changes 1735.5.2 Impact of FDI on domestic investment and private sector

structures 1765.5.3 Impact of FDI on export performance and employment 1795.5.4 Industrial diversification at sectoral and regional level

through FDI 182Annex 5.1 Catalogue for the guidance of foreign investment

industries, China, 1997–2002 190

6 FDI Policies and Prospects in India 1976.1 Competitive advantages and lessons for Russia 198

6.1.1 India’s future assets 1986.1.2 India’s policy challenges and achievements 200

6.2 Foreign investment policy in preliberalization India 2036.2.1 Prime Minister Nehru’s socialist course and policy of

self-reliance 2036.2.2 The shift towards an open economy under Prime

Minister Rajiv Gandhi 2056.3 India’s New Industrial Policy: economic reorientation

through FDI 2076.3.1 Key organizations and procedures for FDI approvals 2096.3.2 Prospects for FDI policy improvements until 2000 2156.3.3 Investment incentives under the NIP 217

6.4 FDI-related legislation and bilateral agreements 2196.5 Foreign investment patterns in the 1990s: origin and

destination 2226.5.1 FDI approvals and inflows 2226.5.2 Sectoral and regional distribution of FDI 2246.5.3 India’s outward FDI position 2266.5.4 Scope for Indo–Russian FDI 229

Contents ix

6.6 The macroeconomic impact of FDI and the role of ‘nationalchampions’ 230

Annex 6.1 List of industries and services open to FDI, India, 1997–98 233

Annex 6.2 List of industries reserved for the public sector, India, 1997–98 237

7 FDI Policies and Prospects in Mexico 2417.1 Competitive advantages and lessons for Russia 2427.2 Inward FDI policy and structural reforms 2447.3 Foreign investment legislation 246

7.3.1 The 1973 and 1993 FDI laws 2467.3.2 Supplementary legislation 248

7.4 Foreign investment patterns in the 1990s: origin and destination 2497.4.1 FDI inflows and stock 2497.4.2 Sectoral and regional distribution of FDI 2517.4.3 Mexico’s outward investment position 2537.4.4 The NAFTA factor 254

7.5 Macroeconomic impact and industrial restructuring through FDI 2567.5.1 FDI-induced economic changes 2567.5.2 Impact on national export performance 2587.5.3 Industrial restructuring through FDI 2617.5.4 The maquiladora concept and industrial modernization 264

Annex 7.1 Restricted sectors, Mexico, 1997–98 268

PART IV RUSSIA’S KEY INDUSTRIES AND FDI ACHIEVEMENTS IN THE 1990s

8 Russia’s Economic and Industrial Performance during Transition 275

8.1 Socioeconomic transformation since independence 2778.1.1 Impact of economic reforms and structural adjustments 2778.1.2 Foreign trade performance 280

8.2 Russia’s industrial potential: highlights and prospects 2848.2.1 Economic significance of Russian industry during transition 2848.2.2 Industrial production and capacity levels 2868.2.3 Russia’s key industries 291

8.3 Russia’s regions: industrial concentration and employment 3028.4 Structural changes at enterprise level 307

8.4.1 Privatization and ownership patterns 3098.4.2 The geographic spread of enterprises 311

9 Salient Features of FDI in Russia 3159.1 Milestones of FDI into Russia 315

x Contents

9.2 The domestic investment situation and capital requirements 3179.3 Foreign investment patterns and trends: origin and destination 321

9.3.1 FDI flows and stock 3219.3.2 Regional and sectoral distribution of FDI 324

9.4 Legislation related to foreign investment 3269.4.1 General legal situation 3269.4.2 FDI-specific legislation 3289.4.3 Tax legislation 3319.4.4 Labour and land legislation 3339.4.5 Foreign trade and customs regulations 335

PART V TOWARDS A LONG-TERM FDI STRATEGY FOR RUSSIA

10 Strategic State Guidance for FDI 34110.1 Russia’s difficult road to becoming a modern industrial

nation 34110.2 Urgency for an FDI strategy 34310.3 Political implications of an FDI strategy 34610.4 Strategic orientations for FDI policy-making 347

10.4.1 Overall strategic approach to FDI enhancement 34910.4.2 Strategic planning for FDI policy-making 35110.4.3 Strategic intelligence for industrial upgrading 353

11 Russia and its Competitor LEMs 35611.1 Global importance and FDI position of LEMs 35611.2 FDI sourcing patterns of LEMs 36111.3 FDI priorities by main industries 36211.4 FDI trends by type of investor 36611.5 FDI trends by form of investment 36911.6 The competitive scenario and opportunities for higher FDI

into Russia 371

12 The Competitiveness of Russian Industry at the Threshold of the Twenty-first Century 377

12.1 Strengths and weaknesses of Russian industry 37712.2 Industry portfolio analysis 38112.3 Clustering of interdependent industries 38912.4 The regional dimension of Russia’s industry 396

13 FDI Sourcing Potential in the World’s Leading Economies 40513.1 Focus on G7 economies 40513.2 Developing a sector–country methodology 40713.3 Monitoring economic performance of leading industrialized

countries 41013.4 Industrial competitiveness of major Triad economies 412

13.4.1 United States 415

Contents xi

13.4.2 Japan 41913.4.3 The EU’s big five: Germany, France, Italy, UK, Spain 42513.4.4 The smaller OECD economies 446

14 Strategic Target Setting for Russian FDI during 2000–05 45214.1 Compatibility with national goals 45214.2 Overall targets for FDI enhancement 45414.3 Sectoral priorities for FDI in Russia’s main economic regions 45514.4 Targeting FDI exporting countries 45814.5 Targeting FDI players: top 200 and hidden champions 459

PART VI POLICY INSTRUMENTS FOR ENHANCING FDI DURING 2000–05

15 Framework Conditions for Foreign Investors 46715.1 Determining the extent of macro guidance 47015.2 Promoting a transparent legal framework 47215.3 Improving sociopolitical and macroeconomic framework

conditions 47315.4 Developing a national vision through intercultural

understanding 47415.4.1 Attempting to categorize culture 47515.4.2 Culture and economic growth 47615.4.3 Intercultural management and adaptability to global

changes 477

16 FDI-related Policy Instruments 48116.1 Designing incentive mechanisms 482

16.1.1 Types of incentives 48216.1.2 International incentives practice 48316.1.3 Which incentives strategy for Russia? 486

16.2 Assigning special zones for economic and technologicaldevelopment 48916.2.1 Trends in international zone development and the

role of regional authorities 48916.2.2 From export processing zones to high-tech parks with

sector focus 49016.2.3 Towards integrated concepts of regional development 49316.2.4 Which special zone strategy for Russia? 494

16.3 Establishing an investor information system 49616.3.1 Information needs of foreign investors 49616.3.2 Experience of other countries 49816.3.3 Publications and other information products 499

16.4 Planning proactive promotion and confidence-building campaigns 50316.4.1 International practice 50316.4.2 Communication strategy for Russia 505

xii Contents

16.5 Providing top-level advisory services 50816.6 Optimizing financial engineering 515

16.6.1 State guidance for generating investment finance 51616.6.2 Bank consortiums for large-scale project finance 51716.6.3 Domestic capital markets and long-term finance 52016.6.4 Leasing services for industrial equipment 52116.6.5 Venture capital finance for knowledge-intensive industries 52416.6.6 Foreign borrowing instruments 525

Annex 16.1 The MESI experience 527

17 Institution Building and FDI Agenda 53417.1 Role of a federal FDI agency 534

17.1.1 The Russian experience 53517.1.2 International practice 53617.1.3 Governance options for Russia’s FDI agency 53917.1.4 Agency organization and management 541

17.2 Need for an FDI agenda 545

Appendix: Definitions and Explanatory Notes 5491 FDI-related definitions 549

1.1 General characteristics of FDI and its components 5491.2 FDI and portfolio investments 5501.3 FDI stocks and flows 551

2 Types of FDI 5512.1 Greenfield investments 5512.2 Transplants 5522.3 Strategic alliances and joint ventures 5522.4 Mergers and acquisitions 552

3 Motivations for investing abroad 5533.1 Resource-seeking FDI 5533.2 Cost-minimizing FDI 5533.3 Market-driven and strategic FDI 554

4 International practice of industry classification 5544.1 Classification of Russian industries 5544.2 International standard industrial classification 5554.3 European standard classification NACE Rev. 1 555

Bibliography and Selected Reading 5571 Books and studies 5572 Official publications 561Index 565

Contents xiii

List of Figures

I.1 Policies for stimulating national competitiveness 61.1 The ‘flying geese’ paradigm 291.2 Porter’s diamond of competitive advantages 321.3 Investment development path 402.1 Global determinants for increased FDI 522.2 GDP growth in emerging countries, 1998–99 552.3 The world’s main regional groupings 583.1 Development aid, G7 countries, 1993–98 813.2 Outward FDI flows/GDP, G7 countries, 1984–97 823.3 External debt of leading emerging economies, 1997 833.4 Economic importance of FDI, main source countries, 1996 853.5 Role of FDI in domestic economies, main recipient

countries, 1996 863.6 NOI position of main world regions, 1997 883.7 The world’s leading investors, outward FDI stock, 1997–2000 903.8 The world’s leading investors, per capita outward FDI

stock, 1997 913.9 The world’s leading investors, FDI outflows, 1995–2000 923.10 The world’s leading investors, per capita FDI outflows,

1995–97 933.11 The world’s leading recipients, FDI inflows, 1995–2000 973.12 The world’s leading recipients, per capita FDI inflows, 1996–97 973.13 Leading OECD recipients, FDI stock, 1997, 2000 983.14 Leading OECD recipients, per capita FDI stock, 1997, 2000 993.15 Leading non-OECD recipients, FDI stock, 1997, 2000 1003.16 Leading non-OECD recipients, per capita FDI

stock, 1997 1024.1 Concentration of outward FDI stock among top TNCs, 1996 1194.2 Age structure of German hidden champions 1224.3 How to become a global player 1244.4 Global M&A transactions, 1991–98 1264.5 M&A transactions involving major OECD countries, 1997 1274.6 M&A transactions involving LEMs, 1997 1284.7 Majority participation in M&A deals, leading OECD investors,

1997 1305.1 Cumulative inward FDI flows, China, 1989–2000 1595.2 Inward FDI stock, China, 1995–2000 1595.3 Inward FDI by countries of origin, China, 1979–95 1605.4 Regional distribution of FDI, China, 1997 161

xiv

5.5 Sectoral distribution of inward FDI, China, 1983–2000 1625.6 Performance of the top 100 TNCs by origin, China, 1996 1635.7 Forms of inward FDI, China, 1979–2000 1645.8 Cumulative outward FDI flows, China, 1989–2000 1655.9 Outward FDI stock, China, 1995–2000 1655.10 Main economic indicators, China, 1994–2000 1725.11 GDP growth rates, China, 1978–2000 1735.12 Composition of GDP by economic sector, China, 1978–2000 1755.13 Share of FDI in total investment, China, 1990–2000 1765.14 Industrial output by type of ownership, China, 1978–2000 1775.15 Performance of state-owned industrial enterprises, China,

1985–95 1785.16 FDI inflows and exports, China, 1990–97 1805.17 Export performance of foreign affiliates, 1986–2000 1805.18 Growth of industrial production, China, 1978–98 1835.19 Changes in output of leading industries, China, 1980–2000 1845.20 Economic weight of leading interior and coastal regions in

industrial production, China, 1980, 1995, 2000 1885.21 Economic weight of leading interior and coastal regions

in GDP, China, 1980, 1995, 2000 1896.1 FIPB’s privileged links, India 2136.2 FDI inflows, approvals and exports, India, 1991–2000 2236.3 Inward FDI stock, China and India, 1980–97 2246.4 Sectoral breakdown of FDI approvals, India, 1991–97 2256.5 FDI approvals by country of origin, India, 1991–97 2256.6 Outward FDI by region, India, 1991–97 2276.7 Main economic indicators, India, 1994–2000 2316.8 Top 20 Indian companies by sales, 1997/98 2337.1 Annual and per capita FDI, Mexico, 1990–2000 2497.2 Inward FDI stock, Mexico, 1980–2000 2507.3 Inward FDI by country of origin, Mexico, 1990–97 2517.4 Sectoral distribution of FDI, Mexico, 1997 2527.5 Outward FDI stock, Mexico and other LEMs, 1997, 2000 2547.6 Main economic indicators, Mexico, 1994–99 2577.7 FDI inflows and exports, Mexico, 1990–99 2597.8 Mexico’s major trading partners, 1997 2607.9 Industrial production, Mexico, 1994–98 2617.10 Top 20 Mexican companies by sales, 1997–98 2637.11 Development of maquiladora industries, Mexico, 1980–2000 2668.1 Main economic indicators, Russia, 1994–2000 2798.2 Foreign trade with major world economies, 1997 2818.3 Importance of industry in the GDP of leading economies, 1996 2838.4 Employment trends in Russian industry, 1992–98 2848.5 Employment by main economic sector, Russia, 1992–2000 285

List of Figures xv

8.6 Index of industrial production, Russia, 1992–98 2878.7 Capacity utilization in leading industries, Russia, 1994–2000 2888.8 Russia’s leading industries, 1992–97 2918.9 Most populated regions, Russia, 1997 3038.10 Main industrial regions, Russia, 1997 3048.11 Moscow’s role in the Russian economy, 1997 3058.12 Number of enterprises by main economic branches, Russia,

1994–2000 3078.13 Russian industry by type of ownership, 1994–2000 3099.1 Share of FDI by main investing country, Russia, 1913, 1996 3159.2 Capital investments by source of financing, Russia, 1992–96 3189.3 Gross capital formation/GDP, Russia, 1989–97 3189.4 Breakdown of capital investments by economic sector, Russia,

1992–97 3199.5 FDI inflows, Russia, 1992–2000 3229.6 Major foreign investors, Russia, 1996–97 3239.7 Joint ventures and wholly-owned subsidiaries, Russia, 1992–97 3249.8 Sectoral distribution of FDI, Russia, 1997 3259.9 FDI by main economic region, Russia, 1997 32610.1 National competitiveness in the late 1990s 34210.2 SWOT analysis for Russia 34910.3 Five-step process for strategic FDI enhancement 35210.4 Focal areas of FDI intelligence 35311.1 GDP in purchasing power parities, leading world economies,

1997 35711.2 Per capita GDP in purchasing power parities, leading world

economies, 1997 35711.3 Main FDI ratios, LEMs, 1996 and 1997 36011.4 FDI flows to LEMs from G5 countries, 1996 36311.5 Country risk ratings of emerging markets, 1998 37312.1 Industrial production gap, Russia, 1991–2000 37912.2 Russia’s industry portfolio, 2000–05 38412.3 Attractiveness and competitive advantage, selected

Russian industries 38512.4 Russia’s industry life-cycle 38713.1 Sector–country matrix 41013.2 Country representation in the top 500 TNC league, 1997 41213.3 Top 30 US TNCs by sales, 1997 41713.4 Industrial competitiveness, United States, 1997, 2000 41813.5 FDI performance by sector and region, United States, 1996 42013.6 Top 20 Japanese TNCs by sales, 1997 42113.7 Industrial competitiveness, Japan, 1997, 2000 42313.8 FDI performance by sector and region, Japan, 1996 42413.9 Industrial competitiveness, leading EU economies, 1997, 2000 425

xvi List of Figures

13.10 Industrial competitiveness, Germany, 1997 42713.11 Top 30 German TNCs by sales, 1997 42813.12 FDI performance by sector and region, Germany, 1996 43013.13 Top 30 French TNCs by turnover, 1997 43213.14 Industrial competitiveness, France, 1997 43313.15 FDI performance by sector and region, France, 1996 43413.16 Industrial competitiveness, Italy, 1997 43513.17 Top 30 Italian TNCs by sales, 1997 43713.18 FDI performance by sector and region, Italy, 1996 43813.19 Top 20 UK TNCs by sales, 1997 44013.20 Industrial competitiveness, United Kingdom, 1997 44113.21 FDI performance by sector and region, United Kingdom, 1996 44213.22 Top 30 Spanish TNCs by sales, 1997 44313.23 Industrial competitiveness, Spain, 1997 44413.24 FDI performance by sector and region, Spain, 1996 44513.25 Top industrial TNCs from smaller OECD countries by sales,

1997 44615.1 Macrosystems to be optimized for FDI enhancement 46715.2 Categories of cultures by world regions 47616.1 FDI-related instruments 48116.2 Most common mistakes in public communication 50416.3 FDI communication components 50916.4 External advisory structure 51416.5 Leading western banks offering project finance 52016.6 Share of leasing in loan provisions, Russia, 1996–2000 52316.7 Target areas for leasing finance, Russia, 1997 52316.8 User sectors demanding leased equipment, Russia, 1997 52316.9 Country ratings and risk premiums 52616.10 Phased programme for FDI projects 52717.1 Alternative governance models for Russia’s FDI agency 54017.2 Proposed structure of an independent FDI agency 54217.3 Fundamental rules of good agency management 544

List of Figures xvii

List of Tables

1.1 Historical overview of main FDI theories, 1960–94 221.2 OLI variables according to Dunning 361.3 Competitive advantage and internationalization 371.4 OLI advantages and internationalization 371.5 Main features of the five stages in a country’s NOI

position 381.6 Policy implications of major FDI theories 432.1 Degrees of economic integration 602.2 R&D expenses by major economies, 1996 722.3 Market potential of selected advanced technologies,

1990–2000 732.4 Markets for main derivative instruments 763.1 Selected world FDI and economic indicators, 1981–98 803.2 Outward FDI stock by region, 1914–97 893.3 Inward FDI stock by region, 1914–97 953.4 FDI in Central and Eastern Europe, 1997 1033.5 Sectoral breakdown of FDI stock held by G5 countries,

1975–95 1063.6 Sectoral distribution of inward FDI stock, leading

European transition economies, 1997 108Annex 3.1 The world’s leading FDI source countries, 1983–97 110Annex 3.2 The world’s leading FDI recipient countries, 1983–97 1124.1 Top 15 TNCs by foreign assets, sales and employment,

1997 118Annex 4.1 The world’s top 100 TNCs ranked by foreign assets, 1996 132Annex 4.2 Top 50 TNCs of emerging economies, 1996 1385.1 FDI ventures in the automotive sector, China, 1996–98 1856.1 Number of people and households by income class,

India, 1997 1986.2 FDI incentives offered by India’s southern states,

1996–97 2208.1 Foreign trade, Russia, 1994–98 2828.2 Output of selected chemicals, Russia, 1992–98 2928.3 Output of machine tools and mechanical equipment,

Russia, 1992–96 2938.4 Output of transport equipment, Russia, 1992–98 2958.5 Output of selected electrical goods industries, Russia,

1992–98 296

xviii

8.6 Output of selected textile and light industries, Russia,1992–98 298

8.7 Prospects for selected building materials, Russia, 1992–2000 300

8.8 Output of selected food and beverage industries, Russia,1992–98 301

10.1 Generic strategy options for FDI enhancement 35011.1 Economic performance of the world’s largest emerging

economies, 1997 35811.2 FDI inflows and stock in large emerging economies,

1995–2000 35911.3 Trends in FDI to LEMs from major Triad markets 36111.4 FDI policy priorities by main industrial sectors, LEMs 36411.5 TNC strategies in LEMs by size category 36811.6 Preferences of market entry modes by type of TNC, LEMs 36912.1 Competitiveness of Russian industry compared with

China and India 38012.2 Examples of activity classification within manufacturing 38212.3 Industrial clusters in selected advanced economies 39112.4 Factors contributing to industrial cluster building 39412.5 Industrial strengths and weaknesses of Russia’s greater

economic areas 39813.1 Cascading approach to assess the technology potential in

advanced economies 40813.2 Economic performance of leading OECD economies,

1998–2000 41313.3 Sector–country competitiveness matrix, leading OECD

economies 41414.1 Targets for inward FDI to Russia, 2000–05 45414.2 Priority industries to be targeted, Russia, 2000–05 45714.3 Target countries for increasing inward FDI, 2000–05 45814.4 Target industries and companies in priority AA countries,

2000–05 46115.1 Comparative analysis of macrosystems, LEMs, late 1990s 46816.1 Conditions for FDI in mature industries, LEMs 48416.2 FDI incentives offered by LEMs 48516.3 Zone development strategies, emerging markets, 1980s

and 1990s 49116.4 Proposed publications programme, 2000–05 50016.5 Proposed programme for public relations, 2000–01 51016.6 Top 30 Russian banks, 1997, 1999 518

List of Tables xix

List of Boxes

2.1 Realities of globalization 572.2 Notification criteria for the EU Merger Control Regulation 612.3 The six leading principles guiding an international investment

agreement 662.4 Types of TNCs 695.1 China’s policy objectives in the 1990s 1555.2 Fundamental laws and texts governing FDI in China 1676.1 Main responsibilities of the FIPB 21412.1 Key industrial indicators to be monitored for an FDI strategy 37914.1 National goals for the Russian Federation 45315.1 Major issues to be addressed by macro guidance 47116.1 Types of FDI incentives 48316.2 Ireland’s FDI incentives package, 1997 48616.3 California’s Enterprise Zone Program, 1997 49016.4 Phases of park development 49616.5 Process of building an effective communication programme 50816.6 Questionnaire used by the Trade and Investment Agency of

the State of California to determine the degree of satisfactionamong foreign investors, 1997 513

xx

List of Maps

2.1 The world’s main regional groupings 585.1 China 1476.1 India 1977.1 Mexico 2418.1 Russia 27416.1 France’s technopoles 492

xxi

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Foreword

The opening of Russia’s economy has brought in new businesses, productsand services; but most importantly, it has introduced new ideas and newmanagement practices. It is this intercultural enrichment through anexchange of ideas that will have a lasting impact, as it will shape the humanpotential that will be the motor for socioeconomic development in ourcountry.

We are convinced that Russia should, and can, take its destiny in itsown hands. One positive effect of the crisis is that it has checkedimmoderate dependence on imports and given a chance to local industry. Interenterprise cooperation with foreign investors will accele-rate the progress of Russian companies. Already, in what appears to be a win–win situation, those investors with a long-term commitment to Russia are gradually seeing the benefits of local production over exports.

I am proud that the Moscow State University of Economics, Statistics andInformatics (MESI) was given the opportunity to participate in the realiza-tion of this seminal work on foreign direct investment (FDI). I particularlythank the German government, whose financial and technical supportenabled the establishment and development of ICA, the first investment-oriented consulting agency established by ministerial regulation in aRussian university.

Over the past three years, ICA has enhanced its human and technicalcapabilities, guided by the bilateral cooperative programme. Today, theICA team conducts studies and advisory projects for the Ministry, nationaland foreign organizations, and potential investors. In return, these con-sultancy assignments yield useful material and ideas for the trainingprogrammes at MESI and, increasingly, other universities. All concerned –students, teaching staff, officials, young entrepreneurs and managers of companies and banks – learn and grow in the process.

The success of this pilot agency shows its relevance. I would welcomethe idea of creating similar centers of excellence in other universities in Moscow and the regions. The network could then effectively serve as a think-tank for Russia’s policy-makers and as a valuable support to afederal FDI agency for initiating and implementing investment-relatedprojects.

xxiii

I congratulate the author – who is the Strategic Advisor for the coopera-tive programme between Germany and Russia – for his commitment andcontribution to the Russian effort and trust that the publication will receivethe acceptance that it deserves.

Professor Alexander F. KiselevFirst Deputy Minister of Education

Russian Federation

xxiv Foreword

Preface

In an increasingly interdependent world, when a country like Russia faces acrisis, its immense potential is lost to the global economy. The world needsRussia as much as Russia needs the world. Paradoxically, the current crisishas shown its own solution: revive the industrial sector to create a strongfoundation for the real economy. Industry is the pillar for all other econ-omic activities, and it makes the country less vulnerable to the whims offinancial markets.

Germany has supported Russia’s reforms by promoting concrete projectsin the manufacturing, infrastructure, and energy sectors through itsTRANSFORM programme. During his last two visits, Chancellor Schröderreiterated that targeted investments, rather than general financialassistance, would have a positive impact. It is along these lines thatGermany will defend Russia’s case with the European Union, the inter-national funding agencies, and the WTO.

Official bodies such as KfW, CIM, GTZ, DEG, as well as the GermanFederation of Industry (BDI) and the Association of German Chambers ofIndustry and Commerce (DIHT) have played a pivotal role in promotingcooperation and foreign direct investment (FDI) in manufacturing. Today,Germany is Russia’s first creditor and trading partner. It is also one of the largest investors in Russia, with a total accumulated FDI of aboutDM1.8 billion, which, however, accounts for only 0.3 per cent of Germanstock worldwide.

Russia’s share in global FDI inflows hardly matches the potential that the country offers. Germany’s Mittelstand, with its tens of thousandsof companies, represents an immense untapped potential in capital, know-how, and technology. Many of these companies as well as thosefrom other countries are waiting to expand their business to Russia.However, they need adequate assurance that their investments are safe-guarded and that the Russian government is serious about integrating FDI.A far-sighted FDI policy, buttressed by strong institutions and accompa-nied by a clear commitment to the rule of law, would improve investors’confidence.

I am pleased to present this publication on FDI as a serious option forindustrial revival in Russia. It is the result of years of study and analysis bythe author in the framework of a bilateral programme sponsored by theGerman Ministry of International Cooperation (CIM–GTZ facility) andimplemented in close cooperation with the Russian Ministry of Education(MESI–ICA).

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I sincerely hope that it will be successful in its endeavour to inform andguide Russian policy-makers, scholars and businessmen in their efforts to ultimately create confidence in Russia as a promising investmentdestination.

Dr Ernst-Jörg von StudnitzAmbassador of the Federal Republic of Germany to Russia

xxvi Preface

A Word from the Author

The decision to write this book was taken in 1995 when I was sent asadvisor for enhancing investment and interenterprise cooperation as partof the TRANSFORM Programme1 between Germany and Russia. I hadobserved during earlier missions (1993–95) on behalf of the EuropeanCommission (TACIS Programme) that foreign direct investment (FDI) couldbe a realistic option for reviving Russia’s economy.

At that time, technical assistance by multilateral donors, although gener-ous, was already showing little impact. General institution building andtraining programmes were useful in the early years of reforms; what isneeded now is a strategy that involves foreign enterprises as suppliers ofequity capital, processing technologies and know-how. Such a strategywould supplement current efforts towards macro-level structural adjust-ment based on neokeynesian and monetarist theories developed in a free-market context.

Policy-makers, academics and donors are slowly understanding that theonly sustainable solution for overcoming Russia’s persistent crisis hinges onindustrial recovery. For this, Russia’s manufacturing sector needs substan-tial capital and investments. But the state budget is insufficient and othersources of finance are not available. FDI could make the difference as seenby the success stories of China, India and Mexico. In these countries,pragmatic reforms at micro level led to an improvement of macroeconomicand financial indicators. By adopting an investor-friendly, strategicapproach, the Russian government could acquire a much larger share ofglobal FDI flows. Annually, transnational corporations (TNCs) investedclose to US$450 billion worldwide during 1995–98 (US$650 in 1998).Russia received on average only US$2–3 billion – not even 1 per cent ofglobal flows. Given Russia’s potential, FDI inflows could easily be increasedfour to five times by 2005.

For the TNCs, an investor-friendly Russia offers a promising market,qualified professionals and a diversified raw materials base. There have beenmany success stories of TNCs in Russia, but they have not been publicized.There are opportunities for many more foreign companies. To succeed, newentrants will have to change their management attitudes. Like other largeemerging markets (LEMs), Russia requires a long-term approach rather thanstrict adherence to the rule of immediate returns dictated by the ‘share-holder value’ imperative. Russian consumers, like those of other countries,will reward companies that have a long-term strategy and commitment,and are good corporate citizens.

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It is in the interest of Germany and other creditor governments tocooperate with Russian authorities for promoting FDI. This will also helptheir own companies, both big and medium-sized, gain access to a practi-cally undiscovered market. Contrary to common perceptions, outwardinvestment to Russia helps expand business and therefore employment inthe home country. Supporting Russia will be a positive-sum game where allparties will become winners. Prosperity in Russia will mean stability on theEurasian continent. Reengineered factories and the introduction of lesspolluting technologies will reduce environmental risks that would haveglobal repercussions. On their part, the Russian authorities will need to stepup their efforts to gain investor confidence by rapidly improving frame-work conditions, opening joint stock companies to foreign investors anddefining a clear FDI strategy.

Success in this endeavour will gradually reduce Russia’s dependence onforeign loans and help its people regain confidence in themselves, theirleaders and their country. Russia has all the assets – human and natural – totake its destiny in its own hands and achieve a Russian chudo.2

I would like to express my particular thanks to the German governmentfor this unique opportunity to participate in its TRANSFORM Programmeduring this interesting period of change in Russia. I would also like tothank all my Russian colleagues at MESI and other specialists, who enabledme to gain an understanding of Russia’s hidden potential. I am particularlygrateful to Mira Shah for her indefatigable support with the Englishtypescript.

Paul Fischer

Notes1. The bilateral programme promotes private sector development and aims to facili-

tate Russia’s transition to a market economy.2. Russian word for ‘miracle’.

xxviii A Word from the Author

List of Acronyms

APEC Asia-Pacific Economic CooperationASEAN Association of Southeast Asian NationsASSOCHAM All-India Association of Chambers of CommerceBDI Bundesverband der Deutschen Industrie, GermanyCCFI Cabinet Committee on Foreign Investment, IndiaCII Confederation of Indian IndustryCIM Centrum für Internationale Migration, GermanyCIS Commonwealth of Independent StatesCOMECON Council of Mutual Economic AssistanceDEG Deutsche Entwicklungsgesellschaft, GermanyDETDZ Dalian Economic and Technological Development Zone,

ChinaDIHT Deutscher Industrie- und Handelstag, GermanyEBRD European Bank for Reconstruction and DevelopmentEMR exclusive marketing rights, IndiaEOU export-oriented units, IndiaEPZ export processing zones, IndiaEU European UnionFDI foreign direct investmentFIC Foreign Investment Commission, MexicoFICCI Federation of Indian Chambers of Commerce and

IndustryFIG financial–industrial groups, RussiaFIL Foreign Investment Law, RussiaFIPB Foreign Investment Promotion Board, IndiaFIPC Foreign Investment Promotion Council, IndiaGATT General Agreement on Tariffs and TradeGEA greater economic areas, RussiaGTZ Gesellschaft für Technische Zusammenarbeit, GermanyHCI Hellenic Centre for Investment, GreeceICA International Consultancy Agency, MESI, RussiaICT information and communication technologyIDA Investment Development Agency, IrelandIDP investment development pathIFC International Finance CorporationIIC India Investment CentreIIM Indian Institute of ManagementIIT Indian Institute of TechnologyIMF International Monetary Fund

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INEGI Instituto Nacional de Estadística, Geografía e Informática,Mexico

IPC international product cycleISIC International Standard Industrial ClassificationKfW Kreditanstalt für Wiederaufbau, GermanyLEM large emerging marketMAI Multilateral Agreement on InvestmentMERCOSUR Mercado Común del SurMESI Moscow State University of Economics, Statistics and

Informatics, RussiaMIBA Moscow International Business Association, RussiaMIGA Multilateral Investment Guarantee AgencyMITI Ministry of International Trade and Industry, JapanMOFTEC Ministry of Foreign Trade and Economic Cooperation,

ChinaNAFTA North American Free Trade AssociationNCAER National Council for Applied Economic Research, IndiaNIC newly industrialized countryNIP New Industrial Policy, IndiaNOI net outward investmentNRI nonresident IndianOCB overseas corporate body, IndiaOECD Organisation for Economic Co-operation and DevelopmentOEM original equipment manufacturerOSCE Organization for Security and Cooperation in EuropePPP purchasing power parityPSU public sector unit, IndiaRBI Reserve Bank of IndiaSAARC South Asian Association for Regional CooperationSBI State Bank of IndiaSDZ special development zoneSECOFI Secretaria de Comercio y Fomento Industrial, MexicoSEZ special economic zones, ChinaSIA Secretariat for Industrial Assistance, IndiaSME small and medium-sized enterprisesSOE state-owned enterprise, ChinaSPC State Planning Commission, ChinaTNC transnational corporationTRIM trade-related investment measureTRIP trade-related intellectual propertyUN United NationsUNCTAD United Nations Conference on Trade and DevelopmentUNIDO United Nations Industrial Development OrganizationVTE village and township enterprises, ChinaWTO World Trade Organization

xxx List of Acronyms

Introduction