Doing business in Central and Eastern Europe: political, economic, and cultural diversity

Business Horizons, Sept-Oct, 1995 by Fred Luthans, Richard R. Patrick, Brett C. Luthans

The first principle of international management is to recognize and appreciate the considerable diversity of countries in the global economy. This is especially true when considering the emerging countries of Central and Eastern Europe (CEE). Nevertheless, in the rush to do business in this part of the world, the former communist countries are often still treated as one "bloc."

Now, after nearly six years of experience since the fall of the Berlin Wall, the time has come to recognize the considerable diversity in the CEE countries. The purpose of this article is to give a brief overview of the political, economic, and cultural environments in selected CEE countries. The differences revealed must be taken into consideration when multinational corporations (MNCs) do business there.

CEE PAST AND PRESENT

Describing the current environment in CEE countries is very difficult, because it is changing almost every day. Though these countries are considerably different, they all still have a common bond. All were under a communist-based centrally planned economy, and all are struggling to make the transition to a market economy. What we have done here is give an up-to-date review on the environments of a sampling of these countries.

With all of its problems, the former Soviet Union still dominates Central and Eastern Europe. An appropriate place to start an analysis of its present is with its past. Perhaps the best overview comes from Puffer (1994), who recently provided a useful description of three distinct eras of the former Soviet Union. She notes that "Traditional Russian Society" (before 1917) was characterized by centralization of authority and responsibility; collective action; a dual ethical standard (honesty in personal relationships, deception in business relationships); and bipolar characteristics ranging from helplessness (a religious savior would deliver them from their plight) to bravado (belief in the ability to outsmart others).

The second era, from 1917-1991, is characterized as the "Red Executive" and is noted for the following: centralized leadership and communist domination; party service and the goal of the enterprise's collective good; a dual ethical standard (honesty in personal conduct with employees, but dishonesty in business dealings, including the use of blat, which involves informal influence or connections in obtaining favors); and a combination of helplessness and bravado due to producing inferior products but operating some of the largest organizations in the world.

The third era, from 1991 up to the present, Puffer terms the "Market Oriented Manager." She characterizes the current Russian environment for doing business as sharing power with numerous stakeholders in state enterprises; assuming responsibility for private enterprise success and effectively delegating responsibility to employees; the necessity of blat; bipolar extremes ranging from cynicism over problem solving abilities to overpromising to clients and business partners; and a high degree of achievement motivation with regard to quality service and products, but with social contempt for success as a reward. The last characteristic is depicted as "blind, burning envy of a neighbor's success... [that] has become (virtually at all levels) a most powerful brake on the ideas and practices of restructuring [the economy]" (McCarthy, Puffer, and Shekshnia 1993).

This historical backdrop has left most Central and Eastern Europeans facing a real dilemma. They still want the social and economic benefits they had under the old regime--full employment, avoidance of recessions and cyclical instability, and generous welfare entitlements. But they also want to rid themselves of the overcentralized, oversocialized, excessive, and often brutal concentration of political power and inefficient economic planning. Can they have it both ways?

Since the fall of the Berlin Wall on November 10, 1989, the major former communist countries have seemed to resolve their dilemma into three generally recognized tiers of success:

1. In the clear lead is the Czech Republic, followed by Hungary and Poland. More than half of the people in these three countries work in private businesses. Inflation is under control in all three. The Czech Republic has low unemployment and the most advanced economy, but Poland and Hungary, though still suffering from high unemployment and political instability, are experiencing positive economic growth and dramatically increasing exports to the European Union (EU).

2. In the middle tier are Slovenia, Slovakia, the Baltic states, and possibly Russia (at least until the meltdown of the value of the ruble last year and their disastrous conflict with Chechnya). Though considerably behind the top group, and still facing many severe problems, this middle group seems committed to privatization; almost three-fourths of the total economy in Russia is now privately held. And except for the tremendous uncertainties in Russia, they seem to be progressing in the right direction. As evidence of optimism for this middle group, the Economist Intelligence Unit (EIU), a research organization of The Economist, recently predicted that Slovenia had the brightest medium-term prospects of all CEE countries, and that Slovakia was third. (In addition, the Czech Republic was second, but Russia was well down the list.)