Executive Summary
This report focuses on an analysis of the macro-environmental situation in the Romanian market. The findings were obtained by utilizing the PEST and SWOT analysis tools, as well as Geert Hofstede’s paradigm of cultural dimensions, to investigate political, economic, social, technological, and cultural factors. It was found that Romania is characterized by an overall favorable investment climate, primarily defined by the openness of the economy and its aspiration to attract new international investors.
Flaws such as the lack of a skilled workforce, limited capacity for innovation, and corruption were identified as well. Nevertheless, these disadvantages are associated with only moderate risk and therefore the company can proceed to enter the Romanian market through joint venturing to gain culturally relevant experience. A suggestion is to postpone the entry for at least a few years to see if the economy will stabilize and to avoid the detrimental effects of potential changes in governmental policies.
Introduction
When exploring opportunities to enter new markets and expand operations globally, a business should take into account long-term growth and profit potential. For this reason, the completion of an environmental market analysis is a must. This report summarizes the findings of an analysis of the Romanian market. The assessment is conducted primarily by using such tools as the PEST and SWOT analysis frameworks, which when implemented together provide a thorough overview of the country in terms of the dominant political, economic, social, and technological factors. Along with this, a summary of a cultural evaluation based on Geert Hofstede’s paradigm will be provided as well with the goal of discerning major cultural differences between the target market and the Canadian market, and recommendations will be made for an effective mode of entry.
PEST Analysis
Political Factors
During the second half of the 20th century, Romania was dominated by communism and had a dictatorial and highly oppressive political culture. The situation started to change after the 1989 revolution. Since then, the country has adhered to a more democratic leadership style and shifted towards capitalism (U.S. Department of State, 2018). This transition was supported by appropriate legislation and membership in the European Union (EU).
As part of the EU trade bloc, Romania implements directives to “protect investors, safeguard market integrity by establishing harmonized requirements governing the activities of authorized intermediaries and to promote fair, transparent, efficient and integrated financial markets” (Georgescu & Dudian, n.d., p. 156). As for the specific, present-day priorities of the Romanian government as reported by the World Bank Group (2019a), they include enhanced absorption of EU funds, investment in infrastructure, and simplification of the tax system.
At the same time, the country suffers from widespread corruption. According to Hill and McKaig (2015), when the level of corruption is substantial, businesses’ profits can be significantly reduced due to bureaucrats’ demands for side payments, and the risk increases that a company will not be able to operate freely at all. Acknowledging that this situation also hurts economic growth, the Romanian government is currently implementing various anti-corruption measures with the help of the National Anti-Corruption Directorate, which has been able to resolve a few major cases of misconduct in recent years (World Bank Group, 2019a).
Another positive political factor is the presence of constructive bilateral relationships between Canada and Romania. The countries have numerous mutually beneficial agreements, including protections for foreign investment and avoidance of double taxation (Government of Canada, n.d.). Overall, in light of all the factors summarized in this section, the political trends point to liberalization processes at work in the Romanian market and positive development-related policy trends as well.
Economic Factors
Over the last decade, Romanian macroeconomic indicators have demonstrated a positive trend. For example, the GDP has grown from US $189.05 billion in 2016 to the US $239.44 billion in 2018 (Import-Export Solutions, 2019). At the same time, there has been an increase in the inflation rate as well, from -1.6% in 2016 to 4.7% in 2018, indicating that the local currency has slightly declined in value (Import-Export Solutions, 2019).
In addition, Romania has a high poverty rate (19% in 2013), which is 10% higher than the European average (Enache, 2015). However, a noticeable decrease in the risk of poverty by 11.3% since 2007 has been observed, and the unemployment rate remains relatively stable (World Bank Group, 2019a; Import-Export Solutions, 2019). Therefore, even considering the recent increase in inflation, it is valid to say that the real economic growth rate in the country is robust.
Even though Romania has a good production profile and that local consumers have sufficient financial bargaining power, the overall stability of the Romanian economic situation is still in question. According to the Global Economic Prospects Forecast, by 2021, annual economic growth in the country will decline by at least 1.3% compared to 2018 (World Bank Group, 2019b). A more detailed summary of Romanian macroeconomic indicators is provided in Appendix A.
Social Factors
Besides the social factors interrelated with the economic factors discussed above, including poverty and unemployment, Romania is currently experiencing a demographic decline. According to data provided by Michigan State University (n.d.), its major causes are “low birth-rate and emigration of educated youth” (para. 3). Additionally, significant disparities in terms of education are observed (Michigan State University, n.d.); Dima and Nedelcu (2017) state that the overall quality of education is low and present-day programs do not meet the needs of the country’s population or industries. This leads to difficulty in recruiting a competent workforce, which in turn can cause a decrease in the competitiveness and efficiency of companies in the market.
Moreover, the country has not been successful at retaining and attracting talent (Dima & Nedelcu, 2017). While macro-cultural, economic, and political factors may play a mediating role, one of the most apparent reasons for the poor outcome in terms of talent attraction is the insufficient number of jobs and career opportunities in general (Cristian & Baragan, 2015). As Enache (2015) notes, over 29% of Romanian citizens who were able to work remained inactive in 2013, and the rate of professional inactivity has increased twofold since 2000. Moreover, people tend to stay unemployed for years and lose their skills and competencies (Enache, 2015). This means that the country faces notable difficulties when it comes to hiring talented personnel.
Technological Factors
Research and innovation are essential elements of the EU’s economic growth strategy. These factors are considered essential for generating new jobs and fostering greater sustainability and inclusion across the European states (Iancu, 2014). While many of the EU members, including Finland and Germany, have had excellent results in research and development intensity, Romania still underperforms (Appendix B). In terms of R&D indicators, it has the lowest rate among the EU member states (Iancu, 2014). This means that Romania does not have sufficient technological specialization at the present moment.
However, Iancu (2014) notes that the country is active in patent application activity, or other words, it purchases patent technologies developed in other states. Although this practice may signify that Romania is still aiming to increase its competitiveness in terms of technological advancement, its current achievements in this regard remain rather modest.
SWOT Analysis
In this section, the findings of the PEST analysis are summarized within the four categories of the SWOT framework: Strengths, Weaknesses, Opportunities, and Threats (Table 1). The utilization of this analysis model will help to systematize the previously noted observations and more easily identify the level of risk.
Table 1: Results of Romania’s SWOT analysis.
Cultural Dimensions Analysis
The evaluation of cultural differences between countries helps identify discrepancies in worldviews, values, and behaviors that may interfere with the familiar way of conducting business and decrease demand for a product or service by local consumers. Cultural distance is a significant factor defining the attractiveness of a market because it is a predictor of a company’s profit (Hill & McKaig, 2015). Conversely, a failure to evaluate cultural differences may result in significant financial losses upon entry.
When it comes to Canada and Romania, the countries are different in many dimensions of culture defined by Hofstede (Appendix C). For example, with a score of 39 in the Power Distance dimension, Canada is characterized by an egalitarian approach to leadership and business conduct (Hofstede Insights, 2019). Romania has a score of 90 in this dimension, which means that Romanians tend to respect hierarchy and formality in professional relationships. The difference is significant and it is important to take into account the way it may affect communication between local stakeholders (including employees, authorities, and so on) and the company.
Another noticeable difference between the countries is in the Uncertainty Avoidance dimension, where Canada has a score of 48 and Romania has a score of –90 (Appendix C). A relatively low score signifies that Canadians tend to accept uncertainty and show a “willingness to try something new or different, whether it pertains to technology, business practices, or consumer products” (Hofstede Insights, 2019, para. 4). Conversely, Romanians do not accept uncertainty easily, and this cultural element has serious implications for the company to consider. The demand for its products and services in the Romanian market may be low due to a lack of interest or even hostility towards a new brand on the part of the local people.
Recommendations
The main factors speaking in favor of a decision to enter the Romanian market are the openness of the economy, favorable political trends, membership of the country in the EU, and adherence to the EU’s development orientation. A sufficient level of openness, which can also be detected in the bilateral Canadian-Roman agreements about the avoidance of double taxation and in other areas, indicates that international corporations can operate in the Romanian market with sufficient freedom and may be profitable.
Additionally, a fast growth rate provides multiple opportunities for accelerated business growth and the development of stronger competitive advantages. Based on all this, a decision to expand in the target country can be affirmed, yet it might be recommended to choose the timing and the entry strategy very carefully due to concerns about economic instability and cultural distance.
One suggestion would be for the company to be a later entrant: it could wait for a few years and see whether or not the economic situation in Romania continues to improve and stabilize. Additionally, later entrance would benefit the firm because various Romanian policies, including those about business operations, are still evolving and may be modified by the government shortly. According to Hill and McKaig (2015), such changes may entirely diminish the value of early entrance because they might require the altering of strategies and business models.
In addition, since significant cultural differences were noted during the analysis, entry as a joint venture would be preferable to entry using a wholly-owned subsidiary model. In this case, the company would not enjoy total control over its operations in the Romanian market and would have to share information and other resources with a selected partner. Nevertheless, the company would gain the chance to learn from the partnership (assuming that it would be established wisely and with great caution) and gain the experience needed to succeed in the new market without substantial risk.
References
Caramihai, M. C., Tănase, N. M., & Purcărea, A. A. (2017). Proposals for improving innovation and technology transfer policies in Romania. Procedia Engineering, 181, 984-990.
Cristian, E. R., & Baragan, G. L. (2015). Identification of main economic and social causes of Romanian migration. Ecoforum, 4(2), 164-169.
Dima, A., & Nedelcu, M. (2017). Competitiveness analysis of the Romanian economy. In C. Ignatescu, A. Sandu, & T. Ciulei (Eds.), Rethinking social action. Core values in practice (pp. 198-209). Suceava, Romania: LUMEN Proceedings.
Enache, G. S. (2015). The economic and social situation in Romania. Web.
Georgescu, A., & Dudian, M. (n.d.). Romanian capital market – PEST and SWOT analyses. Web.
Government of Canada. (n.d.). Canada-Romania relations. Web.
Hill, C., & McKaig, T. (2015). Global business today (4th Canadian ed.). Toronto, Canada: McGrow-Hill Education.
Hofstede Insights. (2019). What about Canada? Web.
Iancu, V. (2014). Romania in the context of European innovation and marketing of intellectual output. Procedia Economics and Finance, 8, 380-387.
Import-Export Solutions. (2019). Romania: Economic indicators. Web.
Michigan State University. (n.d.). Romania: Risk assessment. Web.
U.S. Department of State. (2018). U.S. relations with Romania. Web.
World Bank Group. (2019a). Overview. Web.
World Bank Group. (2019b). Romania. Web.
Appendix A: Main Economic Indicators of Romania
Appendix B: Innovation Capacity: Romania vs. EU
Appendix C: Comparison of Countries’ Scores Based on Hofstede’s Framework of Cultural Dimensions
