Economic Co-operation Across the Finnish-Russian Border - Factors of Sluggish Development and Success of Enterprises

Rautio, V. & Tykkylaeinen, M. (2000). Economic Co-operation Across the Finnish-Russian Border - Factors of Sluggish Development and Success of Enterprises. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-00-071

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Abstract

The post-Cold War era in Europe in the 1990s has caused people to recognize the complexity of economic development and economic co-operation. The opening of borders has not always meant an increase cross-border economic activities in general. On the contrary, the adverse socio-economic development of many border areas has been unanticipated. The Finnish-Russian border is one example of this dissonance.

This paper analyses the operation of Finnish companies in economic activities in Russia during the 1990s. The study investigates barriers to the Finnish- Russian trade, economic co-operation and foreign direct investment (FDI). A micro level approach is applied aiming to find out what is the role of institutions, mental boundaries and pure economic factors in this border-crossing development process.

The authors have chosen the mining company Pechenganickel and its employees in two Russian mining towns on the Kola Peninsula, Nikel and Zapolyarnyj, as their case study objects for the research. The employees in Nikel and Pechenga are very conducive to foreign co-operation. Mental barriers are low, at least compared with the outlook of Finns to Russians.

The economic activities of two Finnish companies in Russia have been studied. One of the case study companies, Outokumpu, has operated as a supplier of technological know-how to Russia and has investigated various investment projects there. The strategy has been cautious and no acquisitions or notable FDI have been executed.

Institutionalists blame high bureaucracy and complicated custom regulations for the low level of cross-border trade and co-operation. Are there more important causes beyond those factors? Is it just lacking demand and the disadvantageous location of economic activities, which matter in border areas? Such argument can be supported as well. This is illustrated by the success of the Baltic Beverage Holding AB (BBH). This beer producer has a market share of 23 per cent in Russia and 40-50 per cent in the Baltic States, and the growth continues. BBH's success proves that in certain fields and markets there are no insuperable institutional barriers for foreign companies in the economies of those countries.

The study concludes that the main causes for sluggish development development in many sectors seem to be demand-driven and structural (and spatio-structural). The collapse of the former economic system brought about such a deep and unanticipated decline that not all the companies could properly cope with. Nevertheless, the study shows that there is potential for trade and FDI to Russia in the future.

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