The Baltic States Market Study : Case Study for the Entrance of a Swedish High-Tech Company

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1 Abstract

Emerging country markets are becoming increasingly important in the operations of multinational corporations. On May 1, 2004, the EU welcomed 10 new member states, including the three Baltic States: Estonia, Latvia and Lithuania. As a result, many western multinational corporations have entered these new emerging markets. These countries have witnessed very fast growth and were lucrative to enter. The term “Baltic Tiger” is used to describe the economic boom of the Baltic States from 2000 to 2007. This term is adequate because during this time period the Baltic States had the highest growth rates in Europe. Swedish companies in particular started coming into the Baltic States in 1989 approximately. These companies were looking for and found low cost production. However, today with rising wages, low cost production is more difficult to find.

The purpose of our research is to investigate the current conditions and future predictions related to the external environment and high technology industries in the Baltic States. The investigation of the current state and future potential of the markets were analyzed from an institutional standpoint. We compared this to the institutional environment in Sweden and made predictions on the potential changes in these institutions. Given our analysis and evaluation of the most attractive market, we have devised an establishment and matching strategy for the case company. The case analysis is set against the background of a theoretical framework covering current literature over societal and organizational fields in Latvia, Lithuania and Estonia. Our primary and secondary research was examined in the context of well known theoretical models and our own models and upon analysis, we come to a conclusion and make recommendations for companies interested in doing business in the Baltic States. Our research will be useful for companies curious about the potential and necessary considerations they must take in the Baltic markets in general and within the high technology sector specifically.

Key Words:

Baltic States, Latvia, Lithuania, Estonia, Emerging market, Market entry, High technology company, Electronics industry, Institutional analysis, Swedish companies

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2 Acknowledgements

With these acknowledgements, we intend to express our gratitude and appreciation in thanking all of the people who contributed their time and effort to making this thesis possible.

We would like to thank our advisor, Dr. Hans Jansson at the Baltic Business School for providing us with the opportunity to collaborate with the case company. This collaboration has given us an insight and hands-on experience into the company, the relevant industries, as well as experience in international market research firsthand. His professional input and teachings throughout the masters program have imparted us with valuable knowledge that will be useful to us throughout our professional careers.

We are also thankful to all of our interviewees in Latvia: Erik Sprängare (Trade commissioner) at the Swedish Trade Council; Gunnar Ljungdahl (Chairman) at the Swedish Chamber of Commerce; Ieva Stukle (Investment Project Manager, Investment and trade promotion department, Investment promotion division) and Iveta Strupkāja (Project manager, Investment and trade promotion department, Export promotion division) at the Investment and Development Agency of Latvia and Inese Cvetkova at LETERA. We express great gratitude toward interviewees in Estonia: Henrik Avasalu (Project leader) and Fredrik Tammar (Consultant) of the Swedish Trade Council in Estonia; Marek Mägi (Deputy Director of the Investment and Trade Development Division) at Enterprise Estonia; Göran Broden (MCM, chairman) and Kristiina Sikk (Ombudsman) at the Swedish Chamber of Commerce in Estonia; and Aleksei Hõbemägi (Development Director) at the Federation Of Estonian Engineering Industry. In Lithuania we would like to thank: Vidas Korsakas (Project Leader) at the Swedish Trade Council in Lithuania; Gedeminas Raciukaitis (Head of Laboratory for Applied Research and Consultant on laser technology with Ekspla Ltd) at the Vilnius Institute of Physics; Carl Bernheim (Chairman) at the Swedish Chamber of Commerce in Lithuania; and Jonas Garjonis, (Project manager) at LINPRA, the Engineering Industries Asscocation of Lithuania. The time and insights of all of our interviewees helped make this thesis possible.

Finally, we would like to thank Dr. Hans Jansson, Dr. Joachim Timlon and Dr. Sigvald Harryson for their teachings throughout the program which has given us the context and relevant experiences by which to write this thesis.

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3 Background

3.1 Growth around the Globe and in the Baltic States

In 2008, many important economies around the world are experiencing a slowdown. This slowdown has been the greatest in the advanced economies. In the United States for example, the housing market exacerbated financial stress and its effects have spread broadly. So much so, that the effects on the rest of the world are likely to be significant. Growth in Western Europe has also decelerated. However, the emerging and developing economies have been so far less affected by negative developments in the financial market and have continued to grow at a rapid pace, lead by China and India, although activity is beginning to slow in some countries. (International Monetary Fund).

Emerging country markets are becoming increasingly important in the operations of multinational corporations. One of the driving forces behind a third wave of the internationalization has been the integration of the countries in Central and Eastern Europe into the European Union in 2004. As a result, the last years witnessed many Western MNCs (Multi-National Corporations) establishing their operations in the new EU member states. Already, multinational companies such as Volvo, Saab, Volkswagen, Siemens, Renault, Philips, Samsung, Ikea an Adidas have established themselves in these developing markets. (Lithuanian Development Agency).

An emerging market can be defined as a growing market and one that is being transformed from a pre-market economy stage to the market stage of the mature Western capitalistic economy. The means of this change is through structural reforms of markets, companies and societies. (Jansson, 16) Emerging markets are characterized by high degree of turbulence, uncertainty and risks as compared to the stable and mature Western markets. This, however, goes along with unprecedented growth, creates attractive opportunities and makes those markets very lucrative to enter. Especially companies entering the market earlier than the competition can enjoy a first mover advantage and reap the benefits of the highest profits. Luo defines an emerging market “as a country in which its national economy grows rapidly, its industry is structurally changing, its market is promising but volatile, its regulatory framework favors economic liberalization and the adoption of a free-market system, and its government is reducing bureaucratic and administrative control over business activities.” They are characterized by rapidly growing and structurally changing economies, shifting from a former centrally-planned system to a market-determined system. (Luo, 5)

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7 Even though the Baltic States are influenced by global processes, it is still possible to identify tendencies that are more typical of this region. For instance, the Baltic States have experienced significant growth in GDP outpacing the growth in other EU countries. The year 2007 marked the sixth consecutive year during which emerging Europe grew substantially faster than Western Europe. The key factor stimulating the economic growth in the Baltic States is domestic demand, although it is quite strongly influenced by external demand as well. Lithuania exports 62% of its products to the EU, Latvia 75% and Estonia 64%.

Since the early 1990’s most people in the countries of the former USSR boosted their standards of living. Many companies adapted to market conditions or were started. Foreign direct investment (FDI) played an important role in the development of new products, productivity and for new fundamentals for exports. Foreign direct investors found – in general terms – a well-working and educated labor force and low labor costs. It is possible that the small economies of the Baltic States benefited from their sheer size and obvious flexibility (Fromlet, p.4).

Yet, the picture is not altogether rosy for emerging Europe. For example, today all EU8 countries apart from Slovenia and Czech Republic suffer from at least one serious economic imbalance. These imbalances are already – or may turn into – impediments to GDP growth (Fromlet, p.3). One such problem in the all three Baltic States is the situation in the labor market. The economic development of the countries depends on the additional involvement of employees in production, and these available resources are depleting. The lack of employees creates conditions for further growth in wages. However, the rise in wages outpacing the growth of labor productivity due to low technological level can not last forever. These tendencies will have a negative influence on further development: decreasing competiveness of local enterprises and increasing demand for technological modernization. Wages are increasing in the Baltic States due to a rapid economic growth and workforce emigration, while qualified workforce is becoming scarce. It is noteworthy that the national research infrastructure is technologically and morally worn out and outdated because of low investments. Another issue discussed in all three States is inflation. It has been fueled by an expanding loan market and increasing domestic demand. (e.g. technological, social changes, social reforms) (Foresight study, 2007, p.10-11)

3.2 Activities of Swedish Businesses in the Baltic States

Sweden has been a major investor in the Baltic States (largest in Estonia and Latvia and number three in Lithuania) and thus played a major role in the development of the Baltic States. Therefore we

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choose a Swedish company operating in the high-tech area as our case company. Partly Swedish involvement it is explained by the market proximity, but also by an investor confidence in the region. Especially strong presence of Swedish businesses is seen in the financial sector where SEB Bank and Swedbank play major role in the economies of all three Baltic countries and telecom with strong positions of TELE2 and TeliaSonera. Volvo, ICA AB, Scania, NCC, Skanska are just a few names present in the market. Currently the companies feel slow down in the growth of the markets, however no panic or rapid removal of business are visible, despite the fact that some of the companies moved to the Baltic States to enjoy low cost advantage that is disappearing quickly.

The beginning of the main wave of Swedish companies doing business in the Baltic States started in 1989 roughly. The Exportrådet in Latvia has tracked the development of Swedish companies in the Baltic and they categorize the activities of Swedish companies as falling into one of three time periods: the “Wild West” period, the “SME entrepreneurs” period, and the “product export” period. The “Wild West” describes a time period from 1989 to 1995 in which big enterprises entered the Baltic States looking for cheap production. Then, the time period from 1995 to 2003 describes the “SME entrepreneurs” period. This period was characterized by the entrance of SMEs looking for low cost production. Such SMEs included those in all types of manufacturing, i.e. of wood, metal, electronics, plastic and textile. From 1999-2003 describes the “product export” period. During this period, Swedish companies started to export their products to the Baltic States. And from 2004 onward, Swedish companies that are more service oriented like retail, IT and consultancy entered. As seen in the figures below the trade turnover between Sweden and the Baltic States has been constantly growing since 2002.

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Figure 1 Imports from Sweden, MEUR

Source: Eurostat

Figure 2 Exports to Sweden, MEUR

Source: Eurostat

3.3 Research Problem and Questions Statement

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MAIN PROBLEM

How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

We have identified three research questions that need to be answered to solve the main problem statement. We will look at existing theory related to the problem to help us focus our study and upon conclusion solve the main research problem.

The first question concerns the attractiveness of doing business in the three Baltic States for a Swedish investor, identifying the differences and similarities between Latvia, Lithuania, Estonia and Sweden in the societal and organizational fields. It addresses both the current state and future perspectives.

RESEARCH QUESTION 1:

What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

Based on our evaluation of the current state and future potential of the business environment in each of the Baltic States from the perspective of a Swedish company, we will be able to better decide what advantages and disadvantages each country has for the establishment and how it differs from Sweden. In order to understand the attractiveness of customer potential for the case company’s business activity in the Baltic States, we need to evaluate the current state and the future potential of the markets in the engineering industries on the example of electronics and electrotechnics where the case company’s customers can be found. The following question addresses this issue:

What are the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries?

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11 Based on the analysis of the current state and future potential in the engineering industries within each country, we will assess the attractiveness of each Baltic State and assign market priorities which will help us make recommendations.

One more question remains:

Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States?

We will address two aspects of the market entry strategy for the case company. These are: where and how should the MNC establish its presence in the Baltic States and how should the MNC deal with various Swedish/Baltic differences based on different societal and organizational aspects?

Our investigation will probe into existing theory related to the problem to help us focus our study and upon conclusion solve the main research problem.

3.4 Research Purpose and Delimitations

The intent of our research is to provide a basis for a multinational company to increase its operations in the Baltic States by increasing its market knowledge, providing an analysis of the market potential and a proposal of establishment alternatives in Estonia, Latvia and Lithuania.

• In our analysis of the business environment will concentrate on the needs of the case company mostly, as a Swedish business representative. Most of aspects that we touch would be relevant for the majority of Swedish investors, while some might be irrelevant or lacking because of the business specifics.

• Our research is limited to the level of countries and industries; it does not address specific companies within the industries. Due to this fact business marketing strategy dealing with pricing strategy is outside the scope as customer needs have to be identified that would require analysis on the company level for this specific industry. The recommendations are limited to choosing the form of establishment and matching strategy in the Baltic States. Entry strategy deals with entry mode,

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node and role leaving process analysis for further research as it requires customer analysis on a company level.

• The case company’s customers are found in various industries. For the purpose of the research we have chosen two industries that are mostly represented in the Baltic States, where the case company’s customers can be met – metal industry and electronics. Mostly to describe the situation in the engineering industries like these, this paper will refer to electronics and electrotechnics industry as an example.

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4 The Theoretical Framework

For the company to make a proper decision about where, why and how to establish in the Baltic States, analysis has to be performed based on a theoretical platform. This section presents a theoretical background and models on which our research relies in order to answer the research questions and ultimately solve the main research problem.

Multinational companies must be aware that they are not alone in the business world and they are highly dependent on the environment in which they are operating. Therefore it is important that companies reflect on the environment as networks and institutions. This is called the Institutional network approach. Institutions within this approach are described as a kind of infrastructure that stablizes strategic behavior, thereby reducing uncertainty. This approach divides society into different social groupings, characterized by different regularities and rules, which are embedded into each other as a multi-layered system. (Jansson, 2007)

4.1 Research Stages

In our paper we are performing a comparative analysis of the three Baltic States. In order to do that we have developed the following sequence of research in our paper: first the external environment is analysed in order to evaluate attractiveness of Doing Business in each of the Baltic States for a Swedish investor. This will be done using the Basic Institutions Model described below, identifying institutions important for a Swedish investor, alligning country data and thus making possible assigning ranks to each of the Baltic countries. The same model will be used to make a comparative analysis of country attractiveness regarding the current sate of the case company’s customer industries and their future development. Once again the institutions important for the development of the case company’s potential customer industries will be identified and country data alligned and compared allowing for attractiveness ranking. A combination of results of “Doing Business Attractiveness” and “Customer Potential Attractiveness”will help us in suggesting the entry and environment matching strategy. This approach is summarized and depicted in Figure 3.

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Figure 3 Research Stages

Source: Own

Now we present theoretical framework underlying this research. The major analysis object in our research in order to solve the research problem is the external environment. When the external environment is viewed from an institutional perspective, the external institutional setting consists of two components: societal sectors and organizational fields. These are represented in the form of the Basic Institutions Model.

The second component of our model consists of the entry and matching strategy. In order to enter a local market network, these major factors need to be considered. They are the entry mode, the entry node and the entry role. In order to match values and norms of the home country with the foreign country entered we use the matching strategy that is based on the consideration regarding how companies manage to handle relationships towards the social external institutional framework to gain legitimacy. The legitimacy is very important and based on how the multinational companies handle and follow a number of different rules, regulations, values and norms. The reason for obtaining a legitimacy based business strategy is that the companies that will establish new businesses in emerging markets normally need to prove that the high efficiency doesn’t contradict basic social needs. (Jansson, 2007)

Doing Business Attractiveness Customer Potential Attractiveness

Entry and Matching Strategy External Environment Analysis of

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4.2 The External Environment

There is a need to be able to cope with the complexity and volatility of emerging country markets, which are often quite different from the domestic market. Therefore, in order to diminish the risk of doing business in a new market, environmental factors are made transparent, and outlined beforehand. As stated in Jansson (2007) the institutional approach to environmental analysis is divided into four stages;

• The identification stage • The descriptive stage • The explanation stage • The prediction stage

As the basis for the analysis of the external environment, the Basic Institutions Model is chosen. According to it the institutional world is divided into three layers. Micro institutions – in our case we place Swedish investor in the center of the model. Moreover, at the same time we put potential case company’s customer industries, since the institutions influence their current state and future development. Meso institutions are represented by an organizational field and macro institutions in the societal field. (Jansson, 2007, 37) We will employ the outside-in approach for the analysis, starting with the outer rectangle of the Basic Institutions Model and will move towards the Swedish investor, multinational company. At the same time we will use outside in approach to reveal how forces in the organizational field influence future development of the case company’s potential customer industries.

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Figure 4 The Basic Institutions Model

Source: Based on Jansson, 2007, 38, adjusted for the research

In the societal level of the institutional analysis institutions like country culture, educational/training system, political and legal systems and others presented in the Figure 4 above will be given attention, whereas the organizational field is represented by institutions that are in the most interaction with the company of our interest and the ones that influence the case company’s potential customer industries the most. These institutions include labour and financial market as well as interaction with governmental structures, etc.

In the identification stage, the environment will be scanned and monitored to find appropriate institutions that have the major influence on the company’s potential business activities in the region. In order to identify the institutions, the basic institutions model will be used. Then we will attempt to further describe the institutions and highlight the influence of the societal sector on the organizational fields and the company.

Country Culture

Government: Corruption, Bureaucracy, Tax System, and Financial Support for Industries

Labour Market Swedish Investor Education System Country Economic Stability Political System Legal System Financial Market R&D Institutions Case company’s Customer

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17 To conclude the analysis of the external environment, predictions will be made for the future developments of the various institutions influencing potential business of the company. One of the most important characteristics of the emerging markets is the dynamism and low degree of predictability. In order for the decision makers to reduce the risk and uncertainty, predictions of the future institutional developments are necessary.

The analysis of the external environments to the case company is performed in order to answer the first two research questions:

What environment in the societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

What is the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries?

4.3 Entry and Matching Strategy

After determining the Doing Business attractiveness and Customer Potential attractiveness based on the external analysis we will analyze and recommend the entry strategy for the company to the Baltic States. This will concern the entry mode (what kind of organization of the firm is appropriate), entry node (showing how the company should plug into the local network – either by dyad or a triad). The last factor is the entry role which describes the commercial role – whether the company would perform a function of a buyer, a seller or a manufacturer. The entry process, which has to be addressed as well, is outside the scope of the current paper.

The main strategic issue that the company faces when it comes to the social issues is similar to the economic aspect – finding a right trade-off between local adaptation and global integration. In order to solve this dilemma, the matching strategy has to be developed for the company. This is done by matching external environment with the internal environment and making those two compatible, which means that norms, values and beliefs of the case company and of the Swedish MNC have to be matched against norms, values and beliefs of the markets in the Baltic region. The matching will be done mostly on the societal level, including matching to both organizational fields and societal sectors.

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When performing the matching the MNC can be in four major strategic change situations – either following the environment or making the environment follow the rules of the MNC.

• If the adaptation takes place both in internal and external environments, such a case is called “the twin change”

• The “MNC change” is an adaptation of MNC to the external environment by making changes in the company’s internal environment

• The “external context change” is in place when the company forces the external environment to change in order to adapt to company’s internal environment

• When the acceptable match is present, neither the company nor the external environment have to adapt which is called the “no change” case

Thus the company can choose either a proactive or a reactive approach when it comes to dealing with the external environment. According to Oliver, as presented in Jansson (89, 2007), the strategies might range from more proactive strategies such as to innovate, manipulate and defy the environment, to more compromising strategies as avoid or compromise to more passive strategies such as acquiesce.

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Matching strategy Organizational routine Examples

Innovate Generate change

Move fast

Creating flexible capabilities and organizational controls

Manipulate Co-opt

Influence Control

Shaping values and criteria

Defy Dismiss

Challenge Attack

Ignoring explicit norms and values

Avoid Conceal

Buffer Escape

Changing goals, activities or domains

Compromise Balance

Pacify Bargain

Balancing the expectations of multiple constituents

Acquiesce Habit

Imitate Comply

Following invisible, taken for granted norms

Figure 5 Matching Strategies

Source: Jansson based on Oliver, 89, 2007

Using the entry and matching strategies we can answer our third research question:

Given our evaluation of the business environment and Swedish/Baltic differences as addressed by research problem one and the attractiveness of the case company’s customer potential addressed in research problem two, how should the Swedish MNC establish in the Baltic States?

Using the theory and models developed above, we should be able to adequately answer our main problem which is:

How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

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5 Methodology

In this chapter we introduce the model and process of conducting our research. We start by describing and justifying the research strategy and the approach that we chose. Next, we describe the data collection methods for both primary and secondary data. We will proceed with the quality aspect of the research to explain how internal, external validity as well as reliability have been achieved. We will finish the chapter by presenting the reader with the research model on which we base this paper.

5.1 Research strategy

According to Yin, there are several ways to conduct social science research. Those include case study, experiments, surveys, histories and archival studies. Each of those is a way to collect and analyze empirical evidence and has its own advantages and disadvantages. The choice of the research strategy is dependent on three major conditions – the type of research question, the control the investigator enjoys over the actual events and the focus which can be either contemporary or historical phenomena.

For our paper we have chosen the case study as a backbone for the research strategy. Yin defines the case study as an “empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident.” (Yin, 2003, 13) Case studies can be distinguished from other methods of doing social science research because they are the preferred strategy when “how” or “why” questions are being posed, when the investigator has little control over events and when the focus is on a contemporary phenomenon within some real-life context (Yin, 2003, 9).

Our main problem is a “how” question: How can a multinational Swedish company, operating in the high technology sector, successfully establish their operations in the Baltic States? In our paper we analyze the major characteristics of institutions displaying how they influence the technological companies that wish to establish themselves in the region. For this purpose we had to evaluate quantitative but also qualitative indicators, which are multiple and complex. Since we are looking into understanding how these indicators are related and influence the company’s activity in the Baltic States and since we are considering unique internal characteristics of the company, the case study approach is the most suitable option. Our study mostly takes into consideration present phenomena in the Baltic States and in the industries in which our case company operates. Moreover, we as

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21 investigators, have little control over these current phenomena and no means to manipulate the relevant behaviors, which again favor the case study as the form for our paper.

A case study can be inductive, deductive or abductive. An inductive case study is used when there are no theories yet on the specific topic and the researcher has to develop a new theory. When the researcher wants to find information that suits existing theories, the case study is called deductive. And finally, when a case study is built on new or developed theories as well as older theories, it is called an abductive case study. (Merriam, 1998)

It should be noted that some historical, for example statistical economic data is part of our analysis, which adds traits of archival analysis to our study. This strategy is necessary since part of our research is of a predictive nature about the region’s development based on the historical data. Moreover, interviews with experts in- appropriate fields helped us to deepen the understanding of the processes and key factors that either drive development or serve as stabilizers of the particular institutions.

5.2 Research design and approach

According to Yin, the research design links the data to be collected with the initial question of the study. Each case study has a separate research strategy with its own research design. According to Yin, a research design is defined as a “plan that guides the investigator in the process of collecting, analyzing and interpreting observations.” (Yin, 2003, 21) The four types of the research design can be distinguished based on the single or multiple case design and holistic and embedded design characteristics. Yin first distinguishes between the single-case and the multiple-case design. He says that a single-case design is most appropriately used when the case represents a test of a well formulated theory, when the case represents a unique case, when a single case is the representative case, when the case fills a revelatory purpose, or when the case is the longitudinal case (studying the same single case at two or more different points in time. (Yin, 2003). The multiple-case design is most advantageous when one study contains more than one case. The second distinction that Yin makes is between a holistic and embedded case design. The embedded design is preferred when a single case study involves more than one unit of analysis. Yet, if only one unit of analysis is examined, the preferred option is the holistic design case study. (Yin, 2003)

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Our paper exploits a holistic single case design. We chose the holistic case design because the relevant theory underlying the case study is itself of a holistic nature (Yin, 2003). We chose to have a single case design because we base it on a well-formulated theory and by using an abductive approach we partly confirm and partly extend the existing theory. Moreover, we consider the case company as a single unit in our analysis since there is no logical need to split the company into additional units. Our case company employs just several people and therefore there is no fear that some specific phenomenon in operational detail might be omitted.

5.3 Scientific Approach

There are several different possible scientific approaches in the research process. An exploratory research approach is used when the researcher has limited knowledge about the research problem. This approach is common in the initial phase of the research process when the researcher defines the problem area and problem questions. A descriptive approach is preferred when the purpose is to explain different phenomena, make predictions or show connections between variables. It outlines the characteristics of a certain phenomena and tries to determine the frequency of its occurrence. Lastly, the causal research approach is preferred when trying to explain, generalize and determine causalities between different phenomena.

We start our research by using an exploratory approach when gathering the necessary data, both secondary and primary. When describing the current situation in the external and internal environment of the company we apply the descriptive approach. The case study moves to explanatory phase when we explain the environments and draw conclusions.

5.4 Data collection

Data sources can be classified into roughly two forms: primary and secondary sources. Secondary data is data that already exists. Examples of this type of information include books, articles, journals, previous studies, Internet sources etc. The secondary data that we collected provided a basis for the interview questions. The other type of data is primary data. Primary data is data gathered for the first time and for the purpose of use in the study at hand. It may consist of observations, interviews or surveys. The interview is used when the purpose is to obtain in-depth information (Merriam, 1998). Interviews can be structured, non-structured or semi-structured. In structured interviews, the same

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23 questions are asked of all interviewees. In semi-structured interviews the questions are unspecified and thus they are often formed and adapted during the interview. Lastly there are non-structured interviews during which there are no predetermined questions and the interviews are conducted for exploratory purposes.

Our interviews took the form of structured interviews in which we asked specific and similar questions to each interviewee. In the following three sections we will describe the sources of data we will use in order to answer our three research sub-problems and thus our main research problem. The meso and macro institutions

The meso and macro institutions refer to the organizational fields (meso) and societal institutions (macro) as found in the basic institutions model. Our research includes investigating the financial markets, the labor markets, the government, the legal system, the political system and country culture just to name a few institutions. The secondary sources include journals, newspapers, books, databases and materials from country development organizations. Our primary sources included interviews with representatives of country development organizations, chambers of commerce and trade councils for Swedish companies.

The Industry

We have researched closely engineering industries, especially Electronics/Electrotechnics industry to the fullest extent possible in each of the Baltic States. We have addressed important issues such as the growth of the industry, investments in the industry, employment in the industry, the production levels and foreign trade within the industry and the share of the electronics industry within the industrial sector. We have researched the fund availability for the development of new technologies in the industry and researched professional and industry associations within each country.

Our research included the review of secondary sources from journals, newspapers, books, databases, pamphlets from professional and interest associations on the topic, websites etc. Our primary sources included interviews with representatives of industry associations with a good knowledge of the Baltic States and doing business there.

Establishment strategy

As we have learned much about the countries on the industry and country levels, we can evaluate which market is most attractive currently for a Swedish MNC and for the case company and make a

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suitable recommendation. Our country research has given us insight into cultural differences and establishment alternatives for companies. The research needed to answer our third question was given by secondary sources and interviews as described previously.

5.5 Quality of Research

It has been said that the investigator has to be very careful when the case study is performed in order to overcome the traditional criticism of this research strategy. According to Yin, “perhaps the greatest concern has been over the lack of rigor of case study research” (21, 1984). The case studies are often accused of biased attitude of the author that influenced the direction of findings and conclusions. In our paper we have done the most to avoid getting trapped into such state, therefore various sources have been exploited to ensure objective presentations of data. Moreover, a substantial amount of primary data has been acquired to deepen the understanding of the reality.

Another critique of the approach is that the case study provides very little basis for scientific generalization. However, this paper does not state that the results can be generalized statistically; instead we strive for an analytical generalization and constantly move between the theoretical to empirical parts of the paper, as suggested by the abductive approach. This allows us to ensure that both theoretical and normative conclusions are sound.

Finally, the third complaint about the case studies is their complexity and lengthiness. We tried to cope with it by having a specific focus of our study to ensure that only the most relevant information is included.

In order to deal with the critique presented above, Yin states that “the case study investigator must maximize four aspects of the quality of any design and test the following aspects: construct validity, internal validity, external validity and reliability” (27,1984). The following chapter presents how we were able to cope with the possible problems of a case study to ensure a sound research.

5.5.1 The Validity Concept

The concept of validity can be defined as whether a measuring device actually measures a concept within a theory. Validity concerns whether a developed framework is a relevant representation of

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25 reality. There are three measures or tests that one can use to determine whether the research is valid. These are construct validity, internal validity and external validity.

Construct validity

This aspect concerns “establishing correct operational measures for concepts being studied” (Yin, 34, 2003). It is said that test on the construct validity is especially problematic in case studies because subjective judgments are used when collecting data. In order to increase the construct validity we have used multiple sources of data collection to ensure that biases are lowered to a minimum and various viewpoints are presented.

Internal validity

This aspect is “a concern for causal case studies, in which an investigator is trying to determine whether event x led to event y. if the investigator incorrectly concludes that there is a causal relationship between x and y without knowing that some third factor-z- may actually have caused y, the research design has failed to deal with some threat to internal validity.” (Yin, 36, 2003) In order to make sure that the research is objective when we show that certain conditions lead to other conditions, we have based our inferences on long term observations, involved the triangulation method and the paper has been checked by the supervisor throughout the whole process of the study. Moreover, the fact that two researchers were involved decreased possible biasness. We have performed multiple interviews and combined the findings with evidence we obtained from various secondary data sources.

External Validity

This type of validity deals with how well the findings can be generalized beyond the single case study. Critics state that single case studies provide a poor basis for generalizing. However, the same critics make this comparison to survey research which relies on statistical generalization whereas case studies rely on analytical generalization. Analytical generalization is the process by which the investigator strives to generalize a particular set of results to some broader theory. Therefore the analogy is not valid. (Yin, 2003) In our specific paper we argue that the research can be generalized to the companies working in the high performance material segment since the study reveals factors that are major influencing forces on this type of companies. The theoretical conclusions can be generalized to a higher degree since the uniqueness of the company is not influencing it.

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5.5.2 Reliability

The last test checks if the investigator followed the same procedure as we did and conducted the same case study over again – if he or she would arrive to similar results. Thus, as stated in Yin, “the goal of reliability is to minimize the errors and biases in the study” (37, 2003). We believe that we have ensured high degree of reliability by strictly following the steps of the research and having precise guidelines for the interviews.

5.6 Possible Types of Errors

In a case study, there may be many types of errors ranging from the collection of data to how it is interpreted. The institutional analysis of the external environment encompasses four stages of analysis: the identification of institutions, the description of institutions, the explanation of institutions and the prediction of institutions. In the identification of institutions, we had to select relevant data for the analysis. The process of selection involves some unavoidable bias. In the description of institutions, we might have misinterpreted the author’s words. In the explanation stage, there was subjectivity involved in explaining the relevance to companies. And prediction stages, one has to deal with uncertainty inherent in the data as well as reconciling different predictions. In the interviews, we faced the dilemma of talking to some interviewees in their foreign tongue. Whenever possible, we conducted the interviews in the language most preferable for the interviewee as to facilitate personal expression. We tried to formulate the questions in understandable language and verified answers of which we were unsure.

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5.7 Research Model

MAIN PROBLEM

How can a multinational company from Sweden, operating in the high technology sector, successfully establish their operations in the Baltic States?

What is the current state and the future potential of the markets in the Baltic States in terms of development of the case company’s customer industries?

How should the Swedish MNC establish in the Baltic States? What environment in the

societal and organizational fields does a Swedish company encounter in the Baltic States and how is it different from Sweden, what are the potential changes in that environment?

Theoretical study: Market study, Environmental Analysis

Personal interviews and phone interviews Analysis Conclusions Main Problem Research Questions Secondary Sources Primary Sources

Where and what kind of entity should the MNC establish in the BalticStates?

How should the MNC deal with various Swedish/Baltic

differences? Research

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Chapters 6, 7 and 8 are devoted to Latvia, Lithuania and Estonia respectively. These will cover empirical data of the societal and organizational fields and their interrelations in the Basic Institutions Model. The Institutions in the model were chosen on the basis of their essentiality for 1) doing business in the Baltic States from a Swedish business perspective and 2) for development of industries that can be potential case company’s customers.

Figure 6 The Basic Institutions Model

Source: Based on Jansson, 2007, 38, adjusted for the research

As depicted in the figure above, in the heart of our research lie two major focus objects: Swedish investor in the Baltics and industries that are potential case company’s customers. The societal field is composed of the following institutions: Country culture, Country’s economic stability, Political and Legal systems, Education system. From organizational fields we address Labor market, Financial market, Government from corruption, bureaucracy, the tax system and financial support for industries

Country Culture

Government: Corruption, Bureaucracy, Tax System, and Financial Support for Industries

Labour Market Swedish Investor Education System Country Economic Stability Political System Legal System Financial Market R&D Institutions Case Company’s Customer

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29 perspectives, and R&D institutions. This empirical chapter of this thesis describes and explains these institutions. In the analytical chapters, that will follow, this data will be used for analysis and forecast to determine the attractiveness level of doing business in each of the countries from the Swedish businesses standpoint and determine the market attractiveness level regarding the case company’s potential customer industries.

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6 Country’s Empirical Data - Latvia

6.1 Country Overview

6.1.1 Geography and Infrastructure

The Republic of Latvia borders with Lithuania, Estonia, Russia, Belarus, and the Baltic Sea. The country covers territory of 64,589 square kilometers. Latvia’s capital city is Riga. Latvia is a strategically important centre connecting the Baltic states as a large market, as it is only a few hours’ drive from Riga to Vilnius in Lithuania or Tallinn in Estonia, and at the same time it serves as a transport route connecting Russia with western Europe. Important transport infrastructure hubs for international logistics are the ports of Riga, Liepaja and Ventspils. Countries’ railway corridors are joining the large ports with important Russian markets, and providing access to Russia’s Far East region. Latvia's road network is well developed, but resources for improvement are required. Riga International airport that connects Latvia with major cities has the biggest passenger turnover volume in the Baltic region. Latvia lies in the East European Time Zone (one hour ahead of Swedish time).

6.1.2 People

Based on the CIA World Fact Book data we present the information on Latvian inhabitants. The total population of Latvia is 2,294,590 people and it is declining at a rate of 0.67 %. The capital Riga with 727,578 inhabitants represents 32% of the population of the country, followed by Daugavpils with 109,482 inhabitants and Liepaja with 85,915. Looking at the composition of inhabitants, following ethnic groups are represented: Latvians are the majority with 59% of the population, followed by Russians (28.5%), and others. Latvian is the official language and it is spoken by 58.2% of the population; Russian language with 37.5% follows. The major religion group is Lutherans, though Roman Catholic and Russian Orthodox are strongly present as well.

6.1.3 History

As said by Bernheim (Interview, 08.04.2008): “The soul of the country is in its history”. Historical developments influence the cultural aspect of the countries and therefore these are presented briefly in this section.

• 10th century: Area that is today Latvia was inhabited by several Baltic tribes who had formed their own local governments

• Year 1054: German sailors initiated a period of increasing Germanic influence

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31 • The onset of World War I brought German occupation of the country’s western province

• Year 1918: the Latvian People's Council declared Latvia's independence

• The German-Soviet Nonaggression Pact forced Latvia under Soviet influence. After World War II, the USSR subjected the Latvian republic to a social and economic reorganization which rapidly changed the rural economy to one based on heavy industry and as a part of the goal to integrate Latvia into the Soviet Union, 42,000 Latvians were deported and the policy of encouraging Soviet immigration to Latvia was promoted

• Year 1991: Latvia re-claimed independence. After regaining its independence, Latvia has rapidly moved away from the political-economic structures and socio-cultural patterns which underlay the Soviet Union

• Already in the spring of 2004 the country joined both NATO and the European Union. Since 2008 Latvia is also a part of Schengen area

6.2 Societal Fields

6.2.1 Country Culture and Business Culture

We find it the most appropriate to concentrate on the cultural aspects relevant to this paper and limit us to the discussion of the values and the thought styles of the people in the Baltic States. We argue that history and people are the major influencers in our case and therefore those were presented above. The history of Latvia is quite complex because it has often been a part of other countries. From the historical perspective, the colonization by Germans, Scandinavians and Russians has influenced the culture of Latvians very much. Scandinavian calmness, Russian emotionality, German preciseness and other characteristics are mixed in the inhabitants of Latvia.

When it comes to running business in Latvia, short-sightedness is said to be evident thought style when compared to Sweden – that the investors have to bear in mind when dealing with partners or hiring employees.

Swedish businessmen are more long term oriented. They tend to plan. They develop relations over time. In Latvia Latvians or Russians make money now or the next week – they are not interested to make money in a year. (Sprängare, Interview, 3.04.2008)

Thus it is very important to have good connections, relationships with people, partners that Swedish businesses can trust.

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When management style is concerned, according to Sprängare (Interview, 3.04.2008), it is a lot more management by fear – but it is diminishing since people do not accept it any longer. Moreover, it mostly refers to how the blue collars are managed. Interestingly no major differences have been found between Russian managed and Latvian managed companies in Latvia.

In the study of business patterns of Latvian and Russians companies we found very little differences, though Latvians said we’re totally different from Russians and vice versa. (Ljungdahl, Interview, 01.04.2008)

But rather it is a question of generations – people who lived longer under Soviet regime were, of course, much stronger influenced by it.

In management it is a generation thing - elderly people are more hierarchical, controlling, with military discipline. Younger people are more European, delegating, they practice group work. (Sprängare, Interview, 3.04.2008)

Additionally since Latvia regained its independence there is a sense of proud of being small and independent country, and this sense can be felt also in the personal behavior – people became much more self-reliant and persistent after the break of the Soviet Union.

When looked at the values for people in Latvia, according to the materials provided by the Swedish Trade Council in Latvia based on the research by Berlin Centre of Social Studies and Dublin Institute of Economic and Social Studies there are following top three priorities for inhabitants of Latvia:

1. Job

2. Family

3. Education

The results reveal that people in Latvia value work and education very high, family value is also important. Thus investors should expect real dedication when it comes to employees that they would hire and the same attitude from Latvian business partners. In business people are very goal-oriented and focused and do not want that their time is wasted:

When Swedish businessmen come to Latvia they do not expect such a pace. Get to the point in ten minutes! You want to sell something or you want to chat? (Sprängare, Interview, 3.04.2008)

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33 As shown in the demographical composition Latvia has a big Russian minority share. In an attempt to preserve the Latvian language and prevent ethnic Latvians from becoming a minority in their own country, Latvia enacted language, education, and citizenship laws which require a working proficiency in the Latvian language in order to become a citizen. Such legislation has caused concern among many non-citizen resident Russians, thus the national issue is quite sensitive in Latvia. This also implies those local managers need the knowledge of both Russian and Latvian. Another implication that the two different audiences might need to be addressed differently – there are separate communications channels (like TV, newspapers, etc.) for Russians and Latvians. Moreover, for Swedish investors interested in a huge Russian market Latvia with big Russian speaking share can be a big advantage and a first step towards Russia. Employees or partners speaking Russian and understanding Russian culture can be found here quite easily.

For a company it is a good strategy to start in Latvia, get partners here that understand Russian language and culture, still being the EU citizen, obeying the EU laws. Swedes perceive Russian environment to be tough; it is often better that the business is managed by Latvian intermediary. (Sprängare, Interview, 3.04.2008)

To sum up, Latvian culture has been influenced strongly by country’s history. For Latvia German, Scandinavian and Russian influenced played the major role. Older generation of people in Latvia tend to be more hierarchy oriented, more controlling as managers and more expecting to be told what to do as employees. The younger generation is much more independent, proud, persistent and European values-oriented. The businesses tend to be more short-sighted than in Sweden and thus well trusted partners have to be found to ensure successful cooperation. Big Russian speaking share of inhabitants implies necessity to know both languages and address two separate groups. Advantage of Latvia is an ability to use it as a platform for further expansion eastwards.

6.2.1.1 Country Economic Stability

The macroeconomic stability and growth of economies are important for the investor as it partly determines the attractiveness of doing business in Latvia. We will address the most important indicators of Latvian economy that are relevant for our study.

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6.2.1.1.1 GDP

Latvian economy has been booming during the recent years. In 2007 it has reached the Gross Domestic Product of 12.4 billion EUR, growing more than 7% since 2003 yearly (according to Eurostat data – see Figure 7).

Figure 7 Growth rate of GDP over previous year in Latvia

Source: Eurostat

In order to cool down the economy, the government's in March 2007 accepted the anti-inflation plan that has helped to end the boom in the residential real estate market, a key factor behind the domestic demand overheating. As a result of it contrasting to such a fast growth pace, according to the Central Statistical Bureau in Latvia, the growth in the first quarter of 2008 has been just 3.6%, which is a radical drop as compared to the previous performance.

6.2.1.1.2 Inflation

Since 2004 the side effect of the growth in Latvia has been high inflation. Latvia holds a negative record of the European Union of the highest inflation rate.

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Figure 8 Annual average rate of inflation in Latvia

Source: Eurostat

The growth in the indicator can be attributable to growth of world commodity prices, skyrocketing internal demand fuelled by cheap loans and growing real estate bubble. As mentioned above, the domestic demand and real estate markets became almost paralyzed in the first half of 2008 due to the Anti-Inflation plan. As seen by the results economy growth drastically dropped, while the main goal of Anti-inflation plan – to defeat inflation – has not been achieved. According to the latest data in April 2008 there was a record high inflation level in Latvia – 17.5%.

6.2.2 Political System

Latvia is a parliamentary republic. The legislature is represented by the 100-seat parliament - Saeima, which sits for a four-year term (last elections were held in 2006) and is elected by proportional representation. The president is elected by the Saeima for a period of four years (Last elections took place in 2007). The president is the head of state and appoints the prime minister - subject to approval by the Saeima (CIA Country FactBook).

Latvia's political scene since 1991 has been characterized by change and the frequent emergence of new political parties, especially before the elections. In Latvia the governments have tended to prove fractious and short-lived—Latvia has had 13 governments since independence - Such a frequent change of the political forces may lead the impression of instability in politics. However, the frequent changes in government, did not lead to major shifts in the course of the country - there has been a

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commitment by successive governments to meeting the requirements first for EU membership and now for Euro zone entry.

As Ljungdahl (Interview, 01.04.2008) puts it:

Despite of the fact of yearly changes of government I do not see any crisis. The main thing that pulled together politicians in Latvia before was that everybody wanted to join NATO and EU and that made all other differences diminished. And I think now we have another thing that brings people together - the ambition to enter the Eurozone and that gives the strengths to forces willing to keep situation stable.

Thus, despite frequent changes on the political horizon, the overall economic course has been kept by Latvia throughout political reform process. We conclude that the country has a stable political environment from the perspective of doing business in Latvia.

6.2.3 Legal System

For the purpose of the study we are mostly interested to understand how the investor is protected by the law. Moreover, we consider how difficult is to start business activities for foreign companies like our case company.

Since the restoration of Latvia’s independence, the legal system has been vastly reformed to meet the demands of modern open economy. According to the CIA World Fact Book, the legal system in Latvia is based on civil law system with traces of Socialist legal traditions and practices. There is a three level court system in Latvia – district regional and supreme courts. In general, it can be said that the foreign investors are treated equally with the local enterprises and are protected by the Latvian laws. Foreigners are allowed to carry out business in Latvia in the form of a limited liability company, a joint stock company or through a branch of a foreign company. It is also possible to set up a representative office, which has no rights to carry out entrepreneurial activities. Foreigners who consider commencing business in Latvia also frequently prefer limited liability company as a legal form of entrepreneurial activity. There are no restrictions on the ownership of Latvian companies by foreigners. The cost of establishing a Latvian company is relatively modest. Registration fee is 100 LVL for registration within 3 working days. The minimum requirements for the registered share capital in Limited Liability Company are set at LVL 2,000. Branches of foreign companies in Latvia have no legal personality. However a branch of a non-resident company is treated by the law as a separate Latvian taxpayer subject to the same reporting requirements as are applied in respect of local