Studies Eastern European Markets
Eastern European Markets
Kari Liuhto & Jari Jumpponen
Research report N:o 125 2001. Lappeenranta University of Technology. Department of Industrial Engineering and Management


Over 60 % of the studied enterprises expressed that they have exports. Also a releatively high percentage of the firms indicated that they have started operations abroad, some 40 %. These high percentages do not come as surprise, since the Baltic States are small markets, which automatically pushes most of the largest Baltic corporations abroad.

Some 60 % of the companies indicated that a foothold in a larger economy was one reason to start operations abroad. The second most frequently given answer was "Internationalization is a necessity to survive in future business", over 50 %. Thirdly, the Baltic operations expand their activities in foreign markets to receive a better price for their commodity.

All these aforementioned responses could be easily anticipated, but it is very surprising that the preparation for EU accession did not rank higher among the reasons for starting internationalization. The responses of the Baltic managers indicate that the approaching EU membership is not the driving force for the Baltic corporations´ internationalization, even though the EU is clearly the major export destination.

The Baltic corporations´ management may think that they are able to maintain sales to the EU even without starting-up their own operations inside the current EU. In a way, maintaining production inside the Baltic States can be rational decision since it allows the Baltic corporations to take advantage of lower production costs while enjoying the benefits of the European Single market. On the other hand, EU membership may attract more EU and even non-EU companies to the Baltic States, and nence, increase competition inside the Baltics.

Consequently, increasing competition will force the Baltic companies to improve their effectiveness, either via increasing their size or by sharpening their focus. If the Baltic corporations do not manage to improve their competitiveness, we can witness an increase in bankruptcies, mergers and takeovers in the Baltic States in this decade.

The empirical evidence shows that the operations of the Baltic companies in foreign markets have concentrated on the ex-CMEA countries, especially in the former USSR. The explanation for focusing on the ex-CMEA market may stem from the fact that the Baltic commodities´price-quality ratio better fits these markets than those of the developed West. Also, their earlier business relations and experience in these markets may have offered a competitive advantage to the Baltic corporations, compared to their Western rivals.

The empirical evidence supports the presumption that most of the operations abroad are related to marketing, such as establishing their own representative office or their own sales unit in a foreign market. These sales increasing activities are a logical modal choice since they do not require heavy financial investment. It can be assumed that operational modes, which require more investment and risk taking will increase along with the improvement of the Baltic firms´financial position.

In closing, it can se argued that internationalization is a necessary condition, though not a sufficient condition by itself, for securing the Baltic corporations´survival in future bsuiness. Therefore, Baltic corporations must build strategic alliances between each other or some foreign companies to be able to cope with competitive pressures arriving both from the EU and from the East, as it can be predicted that Russian companies will intensify their investment activities in the Baltic States in years to come.

Until now, Russian investments in the Baltics have remained relatively modest. In Latvia, Russia formed some 7 % of the FDI stock in 1999. In Estonia, Russian investments represented slightly more than 1 % of the FDI stock. In Lithuania, the Russian share was rather modest. However, it would not be a suprise if Russian companies would decide to use the Baltic States as a familiar foothold to the EU single market, and hence, would already decide to increase their investments in the Baltic States before the Baltic States receive their EU membership.

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