Foreign Direct Investment in Russia-Free-Samples-Myassignmenthelp.com

Question: Perform a Country analysis and assessment of a new emerging Market where rapid GDP growth has created attractive Investment Opportunities. Answer: Introduction Country analysis refers to the detailed evaluation and interpretation of a countrys social, political and economic environment. This is helpful for the investors in the financial market. The following report addresses the country analysis of Russia in respect of the emerging market of textile and apparel industry. It focuses on the general overview of the country and detailed analysis of various social, economic and political factors, which influence the growth of the economy, scope of emerging markets, and level of FDI. The factors for competitive advantage, potential and opportunities of FDI, trade policies, foreign currency and exchange market, and recommendations for the scope of investment in the textile industry will be discussed in this report. Russia, officially the Russian Federation, is the biggest country in the world by the surface area, spanning over 11 time zones, and it is the 9th most populous country, with more than 144 million of people by March 2016 (Neumann 2016). The European western region of the country is more populous and more developed compared to the eastern region. The history of Russia is quite old and over the millennium, the country has gone through major political, social and economic changes. After the Russian Revolution, the Soviet Union was the biggest socialist state in the world. It played a major role in the allied powers in World War II and became the rival of United States in the cold war. The Soviet era witnessed major technological accomplishments of the last century. However, the Union or USSR collapsed in 1991 due to many radical reforms by then president, Mikhail Gorbachev, and the new Russia was born (Kaiser 2017). The economy of Russia holds the 12th position among the largest economies by nominal GDP and 6th by PPP in 2015 (Neumann 2016). The country is one of the market leaders in the production of natural gas and oil. It is part of many economic and social councils of the world. PESTL analysis of Russia PESTL is a market analysis tool, which helps to evaluate the external forces influencing the business and operation of a nation or any organization. PESTL stands for political, Economic, Social, Technological and Legal factors, affecting the external forces of a nation or an organization (Shabanova et al. 2015). The PESTL analysis for Russia is explained below. Political: Russia maintains an open foreign relationship strategy. The country witnessed economic and political turmoil when it got defeated in Afghanistan and the economy was badly affected. The government worked hard to regain stability and currently the system has become economically and politically stable. It has relationships with 191 countries and embassies in 144 countries. However, there is no political freedom in Russia, even though it is a federation and the corruption rate is very high (Vovchenko, Kochka and Pogorelenko 2015). Economic: The economy is growing and expected to reach $3.18 billion GDP by 2018 (Liuhto, Sutyrin and Blanchard 2016). The strong resource sector is the backbone of the economy. However, the corruption and high crime rate in the country discourages the investors for investing in the country, making the financial market vulnerable. Russia has the largest agricultural area and produces more crops than many nations, and maximum of crops gets exported to Asia and Europe. The economy is largely dependent on the price of oil. However, the textile industry in Russia is not developed. The country imports apparels from South East Asia (Shabanova et al. 2015). Social: Russia has a capitalist social structure. There were many social problems, such as, income inequality, high crime rate, high corruption, high death rate, and low living standards. However, the situation is improving with the government intervention (Wirtschafter 2015). Technological: Technology is one of the strengths of the country. When the technological revolution started, Russia became a pioneer in this, especially in space science. The first man in space was a Russian. The technological advancements such as, Nanotechnology and Rosnano, and in IT fields, manufacturing of weapons, and in the fields of mathematics, chemistry, aerospace engineering have contributed significantly in the development of the country (Aslund 2013). Legal: Russian jurisdiction is strong, although people have less political freedom. The government has brought about new legislative reforms in the country to attract investors in the country. The textile and apparel industry is the new emerging market, which has a big scope in the country. With a substantial amount of investments in this sector, it has a scope of huge growth. The industry can focus on the PESTL analysis of the country and can take actions accordingly. Factor endowments creating competitive advantage Russia has been endowed with huge amount of natural resources, such as, oil and natural gas. This leads to low energy prices. Relatively educated work force is another factor leading to competitive advantage. Hence, the reserve of natural resources and raw materials, lower prices of oil and educated work force are the factors for competitive advantage and in the next few years, Russia needs to improve the level of competency through development of skills and competency. These are favorable for the development of manufacturing industry (Series 2014). The textile and apparel industry is one type of manufacturing industry. The lower prices of energy and raw materials, the huge amount of agricultural land and skilled labor can help in the growth of this industry. Russia can easily grow cotton and develop the industry. The conditions of the textile manufacturing plants can be improved and it can produce apparel within the country, rather than importing from other countries (Hansen 2014). However, the economic and international relations factors, such as, exchange rate with other countries should be made favorable. The investors should feel confident about investing in Russia. The government must impose some protection for the domestic producers and thereby encouraging the improvement in the factors for competitive advantage (Kalotay 2015). Foreign currency and foreign exchanges influence The foreign currencies and exchange rate play a major role in the development and shaping of the economy of a nation. The exchange rate is the price of a countrys currency in terms of the currency of another country (Gabaix and Maggiori 2015). Hence, there are two components in the exchange rate, one is the domestic currency and the other is the foreign currency. For international trade, exchange rate is the most important part. It directly affects the export and import of a country. When the Russian Ruble is stronger compared to other currencies, the imports become cheaper and exports become costlier (Ghosh, Ostry and Chamon 2016). The major trading partners of Russia are Italy, Germany, China, Poland, Turkey, UK, USA, Switzerland and Finland. It also has trading partnerships with the countries in South East Asia for the imports of textiles. The other importing products are machineries, vehicles, food, chemical products, consumer goods etc. (Hameed and Rose 2016). The developed industries are machinery construction, energy and fuel, chemical and petrochemical, metallurgy, and agriculture. Thus, the textile industry is not developed yet, rather it is an emerging market. The foreign exchange is a major contributor in the development of the industries in Russia. When the currency appreciated due to high exchange rate, the global investors become interested to invest their money in the hope of higher return (Paw?ta and Miko?ajczyk 2016). Hence, the textile industry would be benefitted if it receives foreign direct investment from global investors. The amount of the investment is dependent on the exchange rate. If t he exchange rate is high in favor of Russia, the Ruble will appreciate and the investors will get higher return from their investments in Russia. The textile industry of Russia can develop with the help of the foreign direct investment. When the industry and domestic market will be developed, the country can reduce the textile imports (Hansen 2014). Existing trade policies, systems, barriers and incentives During the existence of USSR, two main trade policies were state monopoly on the foreign trade and tough protectionism (Makeeva and Chaplygina 2015). After 1991, Russia has adopted extremely liberal principles for establishment of free market. It had started trade with the developed western countries. Russia has trade agreements with European Union, and has membership in World Trade Organization (WTO). It is the 3rd trading partner of EU and EU is the 1st trading partner of Russia (Kuznetsov and Mezhevich 2016). The country has imposed specific tools such as import quota and export quota, import and export licensing, technical regulations in the international trade policies. It also has formulated policies for service trade, although those are not rigid apart from the currency regulation. The new agreement between EU and Russia focuses on building a comprehensive framework for the bilateral trade relations, along with stable and balanced rules for trade and investments. EU is the maj or FDI provider for Russia, by providing almost 75% of the total FDI inflow (Ec.europa.eu 2017). The trade barriers are mostly faced by United States companies while doing business in Russia. They face many tariff and non tariff barriers during exports. Russia banned US agricultural products and food items in 2014 after the annexure of Crimean peninsula. In the financial sector, there is a serious limitation for the foreign companies to access all the financial services in the country. The inefficient banking sector and underdeveloped financial sector are major obstacles towards economic growth of Russia. The restrictions on foreign capital investment and lack of competition in these sectors possess barriers to growth (European Commission 2016). The Russian government has started providing tax incentives and subsidies for investment. It also provides incentives for exports. This is a step towards trade liberalization. Existing level of FDI The FDI inflow in Russia was highest in the year 2008 at 74.8 billion USD and then declined. It again shot up to 69.2 billion USD in 2013 due to the transaction between BP and Rosneft, and declined very sharply to 22 billion USD and 6.5 billion USD in 2014 and 2015 respectively. The rapid fall in FDI inflow in 2014 pushed down the country to the 16th position in FDI inflows in the world from 5th position in 2013. The slump in FDI inflow occurred due to the influence of the conflict in Ukraine, poor climate for investments, introduction of the sanction plans, and downfall of the overall economy due to falling prices of oil (cbr.ru 2017). This was the first year when outward FDI flow exceeded the inward FDI flow in Russia. In 2015, the fall in FDI was 92% from that in 2014. However, the inflow increased by 62% from 2015 and reached 19 billion USD, due to privatization of the Rosneft company (santandertrade.com 2017). (Source: World Bank 2017) (Source: World Bank 2017) The share of FDI is very low in the GDP of Russia, only 1.5%, in the view of the growth potential of the economy (cbr.ru 2017). The FDI mostly comprises of working capital investments. In the recent years, the country has adopted many reform schemes, but corruption, administrative problems and uncertainties about regional stability have posed significant challenges. The FDI inflow is not expected to improve as long as the conflict in Ukraine and enduring problems of the governing system continue. To maintain a balance, the capital outflow should be reduced. From the FDI data of the UNCTAD and Central Bank of Russia, it is found that the major FDI inflow was in trade and repair of vehicles, 28.3%, followed by manufacturing (23.9%), financial activities and insurance (13.9%), mining and quarrying (13%) and real estate (4.3%) (unctad.org 2017). Thus, textile industry can establish its position to gain the foreign support. If the government shifts its focus to develop the textile industr y, the FDI inflow can happen in that sector and can contribute in the development of this sector, as well as of the economy. (Source: unctad.org 2017) Recommendations To overcome the challenges, it can be recommended that, Russia should promote the technological modernization of the textile industry and the economy through the facilitation of advanced technologies and equipment from abroad. It should expand the usage of the customs and the tariffs for exports, which includes the reduction of duties on the raw materials and equipment for producing export goods and establishment of special zones for processing of export products, and should take measures to eliminate export restrictions in the international market. Russia should adopt measures to increase the level of FDI in the textile industry and reduce the financial regulations to encourage the investors (Makeeva and Chaplygina 2015). In the end, it can be concluded that, the Russian economy is still recovering from the financial crisis of 2008-2009. Although the level of FDI has been improving after the sharp downfall in 2014, the country needs to adopt more liberal policies for increasing the level of foreign investment in the country. The PESTL analysis describes the economic, social, political, technological and legal scenario of the country. The existing level of FDI is 19 billion USD although, the textile sector does not receive any foreign capital. The textile industry is not yet developed and the country imports from the South East Asia. It is an emerging market, where there is a huge opportunity for potential FDI. References Aslund, A., 2013.How capitalism was built: the transformation of Central and Eastern Europe, Russia, the Caucasus, and Central Asia. Cambridge University Press. cbr.ru, 2017.Statistics | External Sector Statistics | Bank of Russia. [online] Cbr.ru. Available at: https://www.cbr.ru/Eng/statistics/?PrtId=svs [Accessed 19 Aug. 2017]. Ec.europa.eu, 2017.Russia - Trade - European Commission. [online] Ec.europa.eu. Available at: https://ec.europa.eu/trade/policy/countries-and-regions/countries/russia/ [Accessed 19 Aug. 2017]. European Commission, 2016.Trade and Investment Barriers and Protectionist Trends. [online] trade.ec.europa.eu. 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