Federal State Institution of Higher Professional Education Saint-Petersburg University Graduate School of Management Department of Strategic Management BACHELOR THESIS Entry Strategy of Kazakh company «Sarybay TRD» into foreign market Made by the 4th year student of bachelor program, group International Management, Zhussupekov Rakhat Candidate of Science, Associate Professor, Strategic and International Management Department Academic Director of Master in Management Program Yulia N. Aray Saint-Petersburg 2023 5 CONTENTS Introduction 4 CHAPTER 1. COMPANY AND THE MARKET, MANAGERIAL PROBLEM AND METHODOLOGY 6 1.1. Description of the company 6 1.2. Business Model Description 9 1.3. World market of the flour and flour market of Kazakhstan 11 1.4. Managerial Problem Statement 12 1.5. Methods and tools for analysis 13 1.6. Conclusions 16 CHAPTER 2. SELECTION OF COUNTRIES FOR POTENTIAL ENTRY 17 2.1. Primary selection of countries for potential entry. CAGE distance analysis 17 2.1.1. Comparison of countries 27 2.2. Secondary selection of countries for potential entry 28 2.2.1. Analyses of external environments 28 2.2.2. Comparison of Uzbekistan and Kyrgyzstan external environments 37 2.2.3. Analyses of competitive environments 39 2.2.4. Comparison of Uzbekistan and Kyrgyzstan competitive environments 46 2.3. Conclusions 47 CHAPTER 3. DEVELOPMENT OF THE ENTRY STRATEGY 48 3.1.1. Key success factors 48 3.1.2. Competitive strategy. Primary SWOT analysis 50 3.2. Form of entry 53 3.2.1. Export as an entry strategy 56 3.2.2. Business model canvas adaptation 57 3.3. Conclusions 59 Conclusion 60 Reference list 62 Appendix 72 Appendix 1. Transcript of interview 72 Appendix 2. Formula for calculating transportation cost 73 Appendix 3. Scale for the CAGE distance analysis 73 STATEMENT OF A SUBSTANTIVE CHARACTER OF THE COURSE PAPER I am Rakhat Zhussupekov the 4th year student of Graduate School of Management of SPbU (International Management) confirm that there are no elements of plagiarism in my Bachelor thesis, which is performed for public defense in June, 2023. All direct loans from printed and electronic sources as well as from presented earlier course projects and graduate works, candidate and doctoral dissertations have corresponding references. I am aware of the regulation of the educational process existing at Graduate School of Management according to which the detection of plagiarism (direct borrowing from other sources without corresponding references) is the basis for setting a non-satisfactory mark for the annual term paper. Rakhat Zhussupekov 10.06.23 Introduction The paper is a consulting project for the LLC “Sarybay TRD” and the paper examines the managerial problem faced by the company “Sarybay TRD”, flour producer in the city of Kostanay, and potential solution to it. LLC « Sarybay TRD » is relatively new company and operates in Kazakhstan for more than 1 year and does not have any novel growth strategies to go beyond the local market, therefore company needs for expansion geographically with the main aim of increasing its profits and gaining recognition in a foreign market. Therefore it is a managerial problem of the paper. The company produces the three types of flour such as Top grade, I grade, II grade and bran. The relevance of the paper is that Kazakhstan considered as a main flour producer and Kostanay where the company located is considered the best region for production the wheat in Kazakhstan. The research goal of the present study is to define the foreign market for the entry by Sarybay TRD and identify the entry strategy for the chosen market. The objectives of the study are: · To give detailed description of the company and to identify managerial problem; · To use appropriate methodology for research including macro-environment analysis, internal environment analysis, selection of entry market and strategy development; · To analyze countries for entering using specific criteria and come up with two best countries choice; · To analyze micro- and macroenvironments of the two selected countries for entry; · To define target foreign market for entry; · To analyze the competitive position of the company and define entry strategy for the selected market. Research Object and Subject. The research object of this research is company itself “Sarybay TRD” and the data is taken by conducting the semi-structured interview with the economist of the company. The research subject is the foreign market entry strategy. Description of the paper structure The work consists of Introduction, Conclusion, 3 chapters. The first part of the bachelor thesis examines the overall overview of the company like products, the main suppliers, competitors, managerial problem, methodology and the use of instruments. The second part gives overall representation and analysis of the countries through factors and tools for analyzing. The third part defines the target entry market strategy for the company. This is followed by conclusion which draws out the target country for entering and which entry market strategy should firm use. In order to achieve the goal the primary source of data used in the form of interview. It was conducted with the representative of the company in order to analyze the company and the market. Also, for the bachelor thesis paper the secondary sources of data were presented such as news, reports, and data from the company and in order to choose the best country different frameworks and models were analyzed through different factors. For analysis of four countries the GAGE distance framework is used. CAGE (C-cultural, A-administrative, G-geographic, E-economic) distance analysis is used for understanding the differences between countries and access the differences in terms of cultural, geographic, transportation and so on. Due to this analysis it was identified the two best countries and then to find to target market the other tools were used. For example, PESTEL which stands for P-political, E-economic, S-social, T-technological, E-environmental, L-legal was used in order to look at the macroenvironment of the countries and also it gives the set of potential opportunities and threats. Another instrument that was used is Porter’s Five Forces which helps to look at the competitive environment of the industry in terms of buyer’s bargaining power, threat of new entrants, industry rivalry, supplier’s bargaining power and threat of substitutes. The third instrument is Key Success Factors which helps to understand what advantages and/or weak sides company has among competitors in the market. Another key instrument that was used is SWOT analysis where S-strengths, W-weaknesses, O-opportunities and T-threats. It is used for the systematization of the information that was collected for the chosen market in order to realize what opportunities and threats can be in the chosen market and also to look at strengths and weaknesses the company has. For identification the right entry strategy the OLI (O-ownership, L-location and I-internalization) paradigm model was used. It gives the picture of three advantages like ownership, location and internalization and if all of them are present the company can use FDI (foreign direct investment). If something is not present the firm should use another entry strategy. As a result of all work the foreign market was chosen through different analyses and the entry strategy mode was defined for this market. The certain steps of how the entry strategy for the foreign market were described. CHAPTER 1. COMPANY AND THE MARKET, MANAGERIAL PROBLEM AND METHODOLOGY 1.1. Description of the company «Sarybay» TRD is a limited liability company that focuses on production and wholesale of flour and it located in Kostanay. The company was founded in 2022 and produces 3 types of flour such as Top grade, I grade, II grade and bran. Usually bran is used for animals like cows, birds. «Sarybay» TRD operates all around Kazakhstan, mainly in North-Western and Central regions. It has its warehouse in the area of Kostanay from which all the shipments take place. Suppliers and Competitors Main suppliers of «Sarybay»: · LLC “Altynsarinskoe” · LLC “Adlet” · LLC “Nadezhdinka” · LLC “Azia altyn” Speaking about competitors, who offer the quite similar products in the market are LLC “Best Kostanay”, LLC “Romana”, LLC “Aruana 2010”, LLC “Aq-bidai”. Organizational structure “Sarybay TRD” has functional structure with departments and each department focus on the business activities of the company. There are six main departments like Sales, Production, Finance, Law, Engineering and HR department. CEO Sales Finance Leading economist Sales managers Accounting Finished goods warehouse Laboratory zzzzzzzzzzzzzzzzzzzzzzzzzzzz HR department Production HR managers Raw materials warehouse Manufacturing facility Boiler room Law department Engineering Repair site Lawyers Organizational structure of “Sarybay TRD” Source: made by author. In the organizational structure it can be seen that the company does not have marketing department because managers from the sales are responsible for the communication with existing clients and searching for the new ones. Financial indicators The main goal of financial analysis is to obtain the key characteristics that could give an objective and accurate image of financial situation of the firm. At the tables that show the parameters of «Sarybay TRD » over the last year. Using financial indicators will help understand the capacity of the company in order to enter foreign market. Yield of flour from soft wheat 3 classes Name % Day, tonn Month, tonn Year, tonn Top grade 25 12,5 375 4500 1 grade 40 20 600 7200 2 grade 20 10 300 3600 Bran 15 7,5 225 2700 Total products 50 1500 18000 Source: interview with the representative. Costs for the purchase of raw materials (120t) Name Price,rub/tonn Day, rub Month, rub Year, rub Wheat soft 3 classes 15000 750000 22500000 270000000 Source: interview with the representative. Revenues from sales Name Price, rub/tonn Day, rub Month, rub Year, rub Top grade 28000 350000 10500000 126000000 1 grade 24000 456000 13680000 164160000 2 grade 21000 210000 6300000 75600000 Bran 12000 90000 2700000 32400000 Total 1106000 33180000 398160000 Gross profit 356000 10680000 128160000 Salary 1275000 15300000 Social Security contributions 255000 3060000 Taxes 3204000 38448000 Repair and spare parts 400000 4800000 Communal payments 120000 1440000 Operating expenses 150000 1800000 Administrative expenses 1000000 12000000 Total expenses 6404000 76848000 Net profit 4276000 51312000 Source: interview with the representative. As it can be seen from the tables above the company has good capacity in production of flour and it allows to expand own business abroad. 1.2. Business Model Description Business Model Canvas Business model canvas helps companies to visualize its own activities in nine boxes that represent business segments. They are: Key Partners, Key Activities, Key Resources, Value Propositions, Customer Relationships, Channels, Customer Segments, Cost Structure, and Revenue Streams. Also, it gives overall picture of what your business does and how it can develop further[footnoteRef:1]. [1: Hemmer. M. (2016) WHY A BUSINESS MODEL CANVAS IS IMPORTANT TO ORGANIZATIONAL INNOVATION. Retrieved May 20, 2023, from https://blog.onefire.com/archive/why-a-business-model-canvas-is-important-to-organizational-innovation] 1. Customer segments Customer segmentation allows businesses to earn more market share and to identify their best customers in the market, in order to reach those customers through their most effective channels[footnoteRef:2]. Sarybay TRD customers are considered to be B2B wholesale buyer and B2C. [2: Uzialko.A. (2023) What Is Customer Segmentation? Retrieved May 20, 2023, from: https://www.businessnewsdaily.com/15973-what-is-customer-segmentation.html] Company A. Wholesale buyer, supplier of flour to retail stores (near the house).Works region. Orders the highest and I grade of flour. Retail trade in the company store at the mill. 2. Value Proposition Sarybay TRD provides its customers with flour in the range of: · Top grade · I grade · II grade The company guarantees the quality of its products and offers them at a relatively low price in the Kazakhstani market. Due to economies of scale, the company can satisfy the needs of its customers, who are price sensitive and require large volumes of products. 3. Channels The company doesn’t have any social media accounts or Google/Yandex ads for promotion strategies. It has board announcements where the company published the ad about the own goods. Also, to reach customers the company uses the word of mouth, Kostanay city is not big enough and people quite fast get to know about it. 4. Customer relations Communication with clients is maintained by e-mail, mail, phone, WhatsApp messenger and in person. These channels are used for price negotiation, order placement, contracts, order tracking, replacements, and returns. For the negotiations with clients the company uses phone, whatsapp for the discussing of the price, the transportation issues, for ordering and its confirmation, about exchange. Using whatsapp customers can see photos and videos and it is easier for them to look at the products and also to send some documents. There are face-to-face meetings in order to look at the company and to its products. 5. Revenue streams Company obtains its revenue due to contracts. When working with new customers, Sarybay TRD has a requirement for the customers to pay before the delivery. 6. Key Resources People are the significant resources of the company. Humans are the main resource because they need to communicate with customers and do all activities of the company. Speaking about the process of running a business the firm uses its financial resources in order to pay taxes and different expenses. Moreover, firm uses physical resources like equipment for manufacturing and production. 7. Key Activities The main activities of the company are producing flour and distribution across city and country. Also, there are some day-to-day activities and employees of Sarybay TRD perform accounting, customer service, control and other activities. 8. Key Partners Sarybay TRD partners are: suppliers of soft wheat varieties of 1, 2, 3 classes, transport companies transporting raw materials to the mill, companies supplying spare parts for mills, companies performing repairs and maintenance of production equipment. 9. Cost structure Regarding the cost structure there are some of them: · Labor costs; · Production costs; · Administrative costs that consist of office rent, parking spots, water and electricity Business Model Canvas Key partners Key activities Value Customer Customer suppliers of soft wheat varieties of 1, 2, 3 classes Producing flour and distribution across city and country; Day-to-day activities ; Accounting; Customer service; Performance control Proposition Economies of scale Wide assortment Low price Little package Relations Email, phone and whatsapp messenger Segments B2B Wholesale buyer B2C Retail trade in the company store at the mill Key resources Channels Human resources Financial resources Production facility and equipment Board announcements Word of mouth Cost structure Revenue streams Sale of produce on a contractual basis Labor costs Production costs Administrative costs Source: made by author. 1.3. World market of the flour and flour market of Kazakhstan The flour production industry is well-developed. Cereals occupy an exclusive place in human nutrition: in some countries, they can account for up to 50% of calories consumed. Among them wheat, which, along with corn and rice, is key: about 30% of all of sown areas for cereals accounted for by this crop and at the same time, about 70% wheat production is directed to food purposes, including for the production of flour[footnoteRef:3]. [3: Agro export (2022)Wheat flour. Retrieved May 20, 2023, from https://aemcx.ru/wp-content/uploads/2022/05/] More than 600 million metric tons of wheat and corn flour are processed annually and consumed in the form of noodles, bread, pasta and other flour products around the world[footnoteRef:4]. Flour is considered as one of the main need of the people because due to flour people can cook different things. According to the Research and Markets the volume of consumption of wheat flour will raise to almost 411 million tons by 2024. [4: Miller (2019) World flour market and trade. Retrieved May 20, 2023, from https://millermagazine.com/blog/world-flour-market-and-trade-3411 ] Kazakhstan is considered as one of main producer of wheat in the world. Starting from 2002 Kazkahstan is in the top 6 of wheat grain exporting countries. Nowadays, Kazakhstan is in top 10 exporting countries[footnoteRef:5]. The main countries leaders in the export of wheat are Russia, Canada, the United States, Argentina, France, Ukraine, Australia, India, Kazakhstan. These 9 countries account for almost 90% of world exports[footnoteRef:6]. [5: Cyberleninka (2020) YIELD AND QUALITY OF GRAIN OF DIFFERENT VARIETIES OF SPRING SOFT WHEAT IN THE CONDITIONS OF AKMOLA REGION OF KAZAKHSTAN. Retrieved May 20, 2023, from: https://cyberleninka.ru/article/n/urozhaynost-i-kachestvo-zerna-razlichnyh-sortov-yarovoy-myagkoy-pshenitsy-v-usloviyah-akmolinskoy-oblasti-kazahstana/viewer] [6: Journal.tinkoff (2022). 5 countries - the largest exporters of wheat Retrieved May 20, 2023, from: https://journal.tinkoff.ru/short/wheat-export/] Agro-industrial complex in Kazakhstan is an in integral and one of the important sector and part of the national economy where products which are significant to society are produced and where big economic potential is concentrated. For example, in 2020, Kazakhstan produced 3,322.6 thousand tons of flour. It's almost 2% more than in 2019. It should be noted that flour is one of the main export products of Kazakhstan. According to the Ministry of Agriculture, for 4 months of the 2020-2021 season Kazakhstan exported 2 million 734 thousand tons of grain and flour. Big part was delivered to Central Asia. This demonstrates the great potential of Kazakhstan in this industry and it worth to mention that Kostanay region where the company located is the main region of producing wheat because Kostanay is considered as the granary region. Kostanay region is on the first place in the country on the production of flour (737 thousand tons)[footnoteRef:7]. [7: Primeminister.kz (2021). Industry, construction, investments - the economy of Kostanay region shows a positive growth trend Retrieved May 20, 2023, from: https://primeminister.kz/ru/news/reviews/promyshlennost-stroitelstvo-investicii-ekonomika-kostanayskoy-oblasti-pokazyvaet-polozhitelnuyu-dinamiku-rosta-15113053] 1.4. Managerial Problem Statement LLC «Sarybay TRD» operates in Kazakhstan for more than 1 year and does not have any growth strategies to go beyond its local market, therefore it needs to expand geographically with the purpose of increasing its profits and getting recognition in a foreign market. Company has capacity which allows expanding its production abroad and the competition is high in the region where the firm operates. Company is able to produce enough goods and it is a good period for company to go abroad. Moreover, one of the reasons is the wish of the company’s management to understand own abilities and knowledge to extend their business abroad and not only work in local market. The main challenge of the thesis paper is to find a new foreign market where the company can increase own potential of its activities and to choose the best type of entry strategy for the entry that will suit in a new market. 1.5. Methods and tools for analysis The right choice of methods and the appropriate study research are significant steps in the research process. When people use wrong methodology it can significantly reflect on the quality of the thesis paper and show its drawbacks instead of its potential benefits. For getting better insights for analyzing the both sources like primary and secondary one will be used because it will give good understanding and it will be useful in this paper. Speaking about primary methods the author used a semi-structured interview, in order to gain in-depth information and certain insights of the company and industry in general, with the representatives of LLC «Sarybay TRD». The questions of the interviews can be found in the appendix 1. The data such as activities of the company, range of products, financial indicators, and managerial problem proposal was obtained from leading economist of the company. The aim of the interview was to obtain the necessary information for a further analysis that would help to identify different sides like strong and weak of the firm, the situation in the market. The main reason of conduction interview with the economist is that this person knows the field and the some specifics of the industry and aware of activities of the company. The paper includes different secondary sources like articles, news, reports that can understand the topic deeper. Also, articles about various frameworks that are used to show the difference between them and evaluate the environment, different changes over the time, some news for assessing situation about policy, government regulations and so on. Therefore, these sources give the overall picture and characteristics that are connected to the industry. Choice of instruments In order to choose right tool the company should evaluate its resource’s capabilities like value, rarity and not to be easily imitated[footnoteRef:8]. Also, to enter to foreign countries company should have the cluster of potential countries where it can enter and it can be done through assessing different factors like politics, economic, geograghic factors and so on. This analysis will be done through the CAGE distance analysis. CAGE analysis is stands for C-Cultural, A-Administrative, G-Geographic and E-Economic (CAGE) and it is about differences or distances between countries that company should emphasize when going abroad. It helps to understand the significant differences between countries and helps to estimate differences in spheres like culture, economy, physical distance and so on[footnoteRef:9]. [8: Volodin Yu.V., Podkovyrov P.A. (2018). INTERNATIONAL MARKET EXPANSION. Strategic decisions and risk management. ;(4):20-35. Retrieved May 20, 2023, from: https://doi.org/10.17747/2078-8886-2018-4-20-35 ] [9: Toolshero (n.d) CAGE Distance Framework. Retrieved May 20, 2023, from https://www.toolshero.com/strategy/cage-distance-framework/] After that when evaluating different countries, two of them can be considered as the best ones. These two countries should be analyzed in depth taking into account the factors that are related to the local market of these countries in general. In this work, the evaluation of both macro- and microenvironment of markets will be discussed. For evaluation macroenvironment different frameworks are used. For instance, PESTEL analysis and EFAS analysis. EFAS (External Factors Analysis Summary) framework in this case can be considered as to be irrelevant because company does not have defined entry strategy on chosen market and to which structure is best suited for this. PESTEL analysis technique is the best choice of the analyzing the macroenvironment because it is rather simple and practical for analyzing external factors of the company[footnoteRef:10]. PESTEL is stands for P-politics, E-economics, S-social, T-technological, E-environmental and L-legal. In some cases PESTEL can be taken as PEST or can be added (for instance Ethical). PESTEL analysis can be an effective tool in the strategy for “Sarybay TRD”. [10: HSE (2017). Research methods in management. Retrieved May 20, 2023, from: https://school.hse.ru/data/2020/12/14/1358320015/НИС4_Методы%20в%20менеджменте.pdf ] In order to analyze competitors in the chosen markets the Porter’s 5 forces or Value net can be used. The latter framework is the analytical strategy tool also known as a Coopetition Framework. It combines two things like strategy and game theory, for describing and analyzing the behavior of different players within a given industry or market[footnoteRef:11]. At the same time, it includes only four main groups such as customers, suppliers, competitors and complementors that have an impact on the course of any business. For analyzing microenvironment Porter's Five Forces will be used. Porter's Five Forces is a model that identifies five competitive forces that shape every industry and helps to determine an industry's weaknesses and strengths. Also, it helps in assessing potential adverse events that may somehow affect the business in future[footnoteRef:12]. The five forces to Porter are: the threat of new entrants, bargaining power of customers (buyers), bargaining power of suppliers, threat of substitute products or services and rivalry among existing competitors[footnoteRef:13]. [11: Brandenburger, A. M., & Nalebuff, B. J. (2011). Co-opetition. Retrieved May 20, 2023, from: https://www.mbaknol.com/strategic-management/value-net-framework/] [12: HSE (2017). Research methods in management. Retrieved May 20, 2023, from: https://school.hse.ru/data/2020/12/14/1358320015/НИС4_Методы%20в%20менеджменте.pdf] [13: Ural. O (n/d) Uncovering Porter’s Five Forces Framework’s status in today’s disruptive business context. Retrieved May 20, 2023, from https://essay.utwente.nl/65390/1/URAL_BA_MB.pdf] To compete in the chosen market when company entering to the new market it should have to analyze Key Success Factors (KSF) in order to have a view that it can compete in its target market. Understanding success factors is an integral part of any management position to create and execute a working business plan. When the suitable market is chosen, the business performance of “Sarybay TRD” should be assessed due to the use of such tool. To analyze the chosen market the primary SWOT analysis will be used. SWOT is stands for Strengths, Weaknesses, Opportunities and Threats. When the firm conducts an external analysis it identifies its threats and opportunities. Also, it gives the overall picture how the competition in this industry will evolve and what this evolution has for threats and opportunities. While analyzing the external analysis that focused on the threats and opportunities, the internal analysis gives the organization the picture of its own strengths and weaknesses. Moreover, it helps the firm to identify the competitive advantages that can be the sources and capabilities of the company[footnoteRef:14]. Based on this tool the company can choose the suitable strategy. In addition, SOAR analysis can be an alternative to the SWOT. The SOAR analysis supports the Strengths and Opportunities of the SWOT analysis but has another points instead of Weaknesses and Threats like the Aspirations and Results. Aspirations is about what the firm who they want to serve, wants to do and where they wish to operate. Speaking about the results section is about how the company will recognize and track their progress toward their Aspirations and Opportunities[footnoteRef:15]. However, this paper will rely on the SWOT analysis because it is more analytical approach. [14: Gürel. E (2017) SWOT ANALYSIS: A THEORETICAL REVIEW. Retrieved May 20, 2023, from https://www.researchgate.net/publication/319367788_SWOT_ANALYSIS_A_THEORETICAL_REVIEW] [15: NMBL Strategies (2022). Four alternatives to SWOT. Retrieved May 20, 2023, from: https://www.nmblstrategies.com/blog/four-alternatives-to-a-swot-analysis] In order to help company evaluate the competitive advantages and find appropriate entry strategy the OLI paradigm model will be used. OLI is an acronym for ownership, location and localization advantages of the company on a potential market[footnoteRef:16]. It will help to identify the entry strategy. Another framework that can be used instead of OLI model is LLL (linkage-leverage-learning) tool that was developed by Mathews J.A[footnoteRef:17]. It is a strategic framework that focused on accelerated internationalization—creating a light, flexible lattice structure. However, this framework is used for emerging companies[footnoteRef:18]. [16: Think Insights (2022). OLI: A framework for international expansion. Retrieved May 20, 2023, from: https://thinkinsights.net/strategy/oli-framework/] [17: How Do Linking, Leveraging and Learning Capabilities Influence the Entry Mode Choice for Multinational Firms from Emerging Markets? Retrieved May 20, 2023, from https://opus.lib.uts.edu.au/bitstream/10453/122783/4/How%20to%20do%20linking.pdf] [18: Mathews, J.A. (2017) Dragon multinationals powered by linkage, leverage and learning: A review and development. Asia Pac J Manag 34, 769–775 https://doi.org/10.1007/s10490-017-9543-y] The last evaluation of the suggested strategy Business Model Canvas or Value Creation Chain can be used. This paper will use the former model because it gives overall picture and understanding what changes should be made when the company entering new market and understanding of the business model where the company can get insights about customers that serve about what value propositions are offered so on[footnoteRef:19]. [19: BMI (2022). Business Model Canvas. Retrieved May 20, 2023, from: https://www.businessmodelsinc.com/about-bmi/tools/business-model-canvas/] 1.6. Conclusions In this chapter it can be seen the overall description of the company, what organizational structure it has, financial statement of the company and other points. The managerial problem of the paper was identified and it is that the “Sarybay TRD” operates for more than 1 year and does not have any growth strategies to go beyond its local market, therefore company needs to expand geographically with the purpose of increasing its profits and getting recognition in a foreign market. The main challenge of the paper is to find a new foreign market where the company can increase own potential of its activities and to choose the best type of entry strategy for the entry that will suit in a new market. CHAPTER 2. SELECTION OF COUNTRIES FOR POTENTIAL ENTRY 2.1. Primary selection of countries for potential entry. CAGE distance analysis LLC “Sarybay TRD” will expand own business in CIS ( Commonwealth of Independent States) countries which include Russia, Uzbekistan, Kyrgyzstan and Tajikistan because in these countries there will be little to no language barriers and simplified trade (as the countries are the members of CIS or situated close to Kazakhstan which makes it possible to ship products quickly by land). In this chapter, the analysis of foreign market will be discussed using the CAGE distance framework, therefore some criteria will be used for this analysis. These factors are considered as relevant and give primary outlook on the potential business conduction there. The table below provides the information of what factors will be used while assessing CIS countries for entry. For instance, religion, political situation, distance to the country from Kostanay, transportation costs per 1 truck (to the capital), population, legal aspects, climate, natural resources and so on. CAGE model C · Religion · Belief · Language difference · National holidays · Customs A · Political hostility · Currency difference · Political relationship · Tax G · Climate · Transportation · Distance · Population (density of population) E · Natural resources · GDP per capita · Availability of arable land Source: made by author. The relative scale of ranking that is going to be used in this paper, where 1 is the most favorable factor and 10 is the least favorable. This ranking is based on the data that was obtained through the analysis of overall evaluation of each factor. For example, in the factor ‘Natural resources’ 1 means that country is rich and possesses a lot of resources and 10 means that the state does not have natural resources or their amount is low. In the “Geographic” section when considering Climate, the author considers that if country has a good climate to produce wheat and does not needed in import of flour the scale in that case will be increased because regardless of other factors in “Geographic” section Climate is more important in consideration and it will be useless to enter to such country where the wheat and flour productions are on the high level. The distance is calculated using the AMK service[footnoteRef:20]. The formula for transportation costs can be find in appendix 2. [20: Calculation of distances between cities. Retrieved May 20, 2023, from https://www.amk-service.ru/distance] Russia Cultural Speaking about Russia the author can say that it has different religion and different customs. Concerning language aspect most Kazakh people can speak in Russian but not everyone. Also, there are some differences in values, but in the value like hospitality the difference is not significant it is almost the same. By criteria like level of life it can be seen that cultures are similar. Moreover, there was a survey which was conducted by Bendas T.V. In this survey there were 50 Kazakhs and 50 Russians and different methods were used ( experiment, test Kettela, MMPI and others). Based on the results it can be seen that Russians surpassed Kazakhs in terms of characteristics such as emotional stability; extraversion and social boldness; self-confidence and self-esteem, intellectual activity and productivity; working capacity; social needs and social significance; altruism; conformism; daydreaming; teaching and administrative capacity. The difference of Kazakhs from Russians was observed in terms of: orientation towards official subordination; ethnocentrism (this was given only in communication with representatives of other ethical groups, and not one's own); collectivism: anxiety and self-doubt; creativity and artistry: higher affiliation motivation (belonging to a group)[footnoteRef:21]. [21: Russia and Kazakhstan: ethnocultural and gender differences. Retrieved May 20, 2023, from https://cyberleninka.ru/article/n/rossiya-i-kazahstan-etnokulturnye-i-gendernye-razlichiya/viewer] Administrative Also, now from political side Kazakhstan and Russia share a long-standing and complex relationship that is shaped by their historical ties, geographic proximity, and strategic interests. Historically, Kazakhstan was part of the Soviet Union, and its economy, political system, and culture were closely intertwined with Russia's. After the collapse of the Soviet Union, Kazakhstan became an independent country, but it maintained close ties with Russia through various agreements and partnerships. Also, Kazakhstan and Russia are both the part of different organizations such as UN, OSCE, CIS, CSTO, SCO and other international organizations[footnoteRef:22]. Today, due to some political situation in the world some countries have been opposing Russia and it makes the relationship with Russia unstable. In 2022, due to recent situation it can be seen that Kazakhstan almost does not hide that it does not support Russia in the conflict situation with Ukraine[footnoteRef:23]. [22: RF Embassy in the republic of Kazakhstan (2016). RUSSIA AND KAZAKHSTAN IN THE FOREIGN POLITICAL SPHERE. Retrieved May 20, 2023, from: http://www.rfembassy.kz/lm/vneshpol/information/] [23: Novaya gazeta (2022). What do allies think? Retrieved May 20, 2023, from: https://novayagazeta.ru/articles/2022/02/26/chto-dumaiut-soiuzniki] The currency exchange is rather high, for example, 1 rub is equal to 6.7 tenge. In addition, speaking about the taxation of Russia is the following: Corporate Tax – 20%; VAT – 20%; agreement on the avoidance of double taxation – yes; but for the socially significant food and non-food products VAT is charged at the rate of 10%; import tax – 10%[footnoteRef:24]. [24: Tax Code of the Russian Federation. Retrieved from May 30, 2023, from http://www.consultant.ru/document/cons_doc_LAW_28165/35cc6698564adc4507baa31c9cfdbb4f2516d068/] Geographic The distance to the capital from Kostanay warehouse is 2050 km and the transportation cost is equal to 119 583 RUB. Moreover, Russia is the biggest country in the world and the population of Russia is 145, 5 million. In Russia, landscape varies from desert to frozen coastline, high mountains to big marshes. The area of Russia is 17,098,242 km2[footnoteRef:25]. Also, the climate of Russia is quite diverse. Russia has a varied climate, e.g. arctic, subtropical, temperate, subarctic[footnoteRef:26]. Russia has rich soils that can provide a high yield of wheat. Most of the land used to grow wheat in Russia is in the chernozem zone, one of the most fertile soils in the world. This makes it possible to obtain high-quality grain, which makes it competitive on world markets[footnoteRef:27]. [25: Largest Countries in the World (by area). Retrieved May 20, 2023, from: https://www.worldometers.info/geography/largest-countries-in-the-world/] [26: Seasons of the year. Climate of Russia. Retrieved May 20, 2023, from: https://xn----8sbiecm6bhdx8i.xn--p1ai/%D0%BA%D0%BB%D0%B8%D0%BC%D0%B0%D1%82%20%D0%A0%D0%BE%D1%81%D1%81%D0%B8%D0%B8.html] [27: (n.d) What types of wheat are grown in Russia and where do they grow. Retrieved May 20, 2023, from https://geostart.ru/post/21135] Thanks to favorable climatic conditions and large areas of agricultural land, Russia ranks first among the countries of the world in wheat exports. It follows that Russia as a whole does not need imported wheat, since it fully covers domestic needs for wheat and flour[footnoteRef:28]. [28: Pathways (2022). The country-gas station was the world leader in the export of grain. Retrieved May 20, 2023, from https://dzen.ru/a/YwIIXRrgGEHDYBhX] Economic Regarding the economic situation the author can say that Russia has a lot of natural resources and resources for producing the wheat and flour. It can be said that Russia possesses over 20% of the world’s reserves. Moreover, Russia is ranked 1st in the world by gas resources (32% of world’s reserves, 30% of world production), the 2nd in oil production (10% share of world production), the 3rd in coal reserves (22 coal basins, 115 fields which include Siberia, Ural)[footnoteRef:29]. Russia is ranked first country exporter in wheat in the world. The volume of wheat export is 39 million ton[footnoteRef:30]. GDP, in 2022, of Russia Federation is 2 130 billion USD[footnoteRef:31]. The GDP per capita is 1016 USD per month per person. Also, Russia has 85.3 mln hectar of the arable land for production[footnoteRef:32]. [29: Natural Resources, Economy of Russia. Retrieved May 20, 2023, from: https://www.advantour.com/russia/economy/natural-resources.htm] [30: Journal.tinkoff (2022) 5 countries - the largest exporters of wheat. Retrieved May 20, 2023, from https://journal.tinkoff.ru/short/wheat-export/] [31: GDP of Russia (2023) Retrieved May 20, 2023, from: https://gogov.ru/articles/vvp-rf] [32: The area of arable land in Russia has decreased by 6% over the past 20 years (n.d). Retrieved May 20, 2023, from https://agbz.ru/articles/ploshchad-pakhotnykh-zemel-v-rossii-snizilas-na-6-za-poslednie ] Uzbekistan Cultural Regarding Uzbekistan it has quite the same language with Kazakh one. The religion and belief is the same with Kazakhstan. In order to identify differences between countries it is necessary to go back to history because from this perspective it can be noticed the difference between two cultures. The main difference lies in the area of ​​their ethnic origin. And from here the rest of the nuances follow. Moreover, there are genetic studies of the Kazakhs that show that their ancestors lived in this territory for thousands of years. In the past Kazakhs were nomads and were engaged in cattle breeding while Uzbeks have been sedentary farmers since ancient times. Therefore, they have some different culture, very different cuisines and folk customs. Of course, both cultures are very friendly and hospitable. Administrative The political relationship with Kazakhstan is good. Speaking about the relationship between Kazakhstan and Uzbekistan, the author can say that it is stable. Kazakhstan and Uzbekistan share a complex and multi-dimensional relationship due to their geographic proximity, historical ties, and cultural similarities. In the early post-Soviet period, the two countries had tense relations due to disputes over borders, water resources, and economic issues. However, in recent years, the relationship between Kazakhstan and Uzbekistan has significantly improved, and the two countries have been strengthening their political, economic, and cultural ties. They both are active in regional organizations such as the Shanghai Cooperation Organization (SCO) and the Central Asian Regional Economic Cooperation (CAREC), where they have worked together to address common challenges and opportunities in the region. In 2020, Kazakhstan was the third largest trading partner of Uzbekistan with a 9.3% share in foreign trade after China and Russia[footnoteRef:33]. [33: (2022) Bilateral cooperation between Uzbekistan and Kazakhstan: will the dynamics continue? Retrieved May 20, 2023, from https://cabar.asia/ru/dvustoronnee-sotrudnichestvo-uzbekistana-i-kazahstana-sohranitsya-li-dinamika] The currency exchange between Kazakhstan and Uzbekistan is: 1 tenge is equal to 25.35 Uzbekistani sums. The trade system is the following: Corporate Tax – 15%; VAT – 12%; import tax – 12 %; agreement on the avoidance of double taxation – yes. Geographic The distance from Kostanay to the capital is 1977 km. Transportation cost is 115 325 RUB. The population of Uzbekistan is 36 million. The country covers a total area of 447,400 km2, and it is ranked in the world's 56th largest country regarding the surface area and the 42nd largest by population[footnoteRef:34]. Uzbekistan is sunny country. Average temperature of January from +4 on the south side to -10 on the north side, in July from +27 on the north side to +37 on the south side. Climate is very arid, little precipitation, low humidity. These indications characterize the country as very dry and hot, it lasts almost all year round[footnoteRef:35]. The territory of Uzbekistan is diverse, but large areas of this country are of little use for life: these are deserts, steppes and mountains. In this regard, there is an acute shortage of agricultural land, and an even greater shortage of the necessary moisture. The best irrigated lands are occupied by monocultures of cotton and a variety of vegetables. And wheat, soybeans and other oilseeds are not sufficiently adapted to the climate of Uzbekistan, taking into account the lack of land and due to natural and climatic conditions. Based on this, it becomes difficult to grow food wheat that meets the needs of bakery production. In addition, the low content of protein and gluten in the grain, as well as the lack of physicochemical properties, limit the ability to produce high quality bread and bread products[footnoteRef:36]. In this regard, bread, which is mainly consumed by the population, is made from Kazakh flour, the export of which, according to some data, is up to 40% of all bread consumed in the country[footnoteRef:37]. [34: World Atlas (2019) What Are The Major Natural Resources Of Uzbekistan? Retrieved May 20, 2023, from: https://www.worldatlas.com/articles/what-are-the-major-natural-resources-of-uzbekistan.html ] [35: FB.ru (2017). Climate of Uzbekistan: description of weather conditions by months. Retrieved May 20, 2023, from: https://fb.ru/article/318838/klimat-uzbekistana-opisanie-pogodnyih-usloviy-po-mesyatsam ] [36: Kazakhzerno (2021).Uzbekistan wants to grow wheat and oilseeds in Russia. Retrieved May 20, 2023, from: https://kazakh-zerno.net/186637-uzbekistan-zhelaet-vyrashhivat-pshenicu-i-maslichnye-kultury-v-rossii/ ] [37: Kazakh zerno. Retrieved May 20, 2023, from: https://kazakh-zerno.net/26109-proizvodimaya-v-uzbekistane-pshenitsa-ne-goditsya-v-pishchu-i-iz-nee-vypekayut-tolko-tak-nazyvaemyj-sotsialnyj-khleb-eksperty/ ] Economic Uzbekistan has quite significant amount of natural resources. Uzbekistan is the 7th largest producer of the gold in the world and approximately 80 tons are produced annualy. Also, there are other minerals which play significant role in the economy of Uzbekistan they include copper, zinc, lead, uranium, and tungsten[footnoteRef:38]. GDP of Uzbekistan in 2022 is about 80.3 billion USD. The GDP per capita for 2022 is 175 USD per month per person. In addition, Uzbekistan is the 5th largest producer of cotton and the 2nd largest exporter of cotton in the world[footnoteRef:39]. In Uzbekistan there are 4.4 mln hectar of the arable land[footnoteRef:40]. [38: World Atlas (2019). What Are The Major Natural Resources Of Uzbekistan? Retrieved May 20, 2023, from: https://www.worldatlas.com/articles/what-are-the-major-natural-resources-of-uzbekistan.html] [39: Azomining (2012). Uzbekistan: Mining, Minerals and Fuel Resources. Retrieved May 20, 2023, from https://www.azomining.com/Article.aspx?ArticleID=175 ] [40: State of land resources in the republic of Uzbekistan (n.d). Retrieved May 20, 2023, from https://cyberleninka.ru/article/n/sostoyanie-zemelnyh-resursov-v-respublike-uzbekistan/viewer] Kyrgyzstan Cultural In Kyrgyzstan the language is also quite the same because in the history, the founders of Kazakh khanate were from Kyrgyzstan. The religion is also the same as in Kazakhstan. It can be see that the ethnogenesis between two cultures was in appeared in different conditions. Kyrgyz people were one of the most ancient Turkic-speaking folks. And Kazakh people were arose about two thousand years later. Speaking about customs it can be said that they are also the same. For instance, how the wedding is held. "Kyz uzatu" ( farewell to the bride) is among the Kyrgyz and Kazakhs. National dish of both countries (Kyrgyz and Kazakhs) is beshbarmak and the national holiday of two nations is Nauryz Celebration. Values like respect and hospitality has always considered a hallmark of the two nations. Moreover, hunting with a golden eagle can be seen mainly common only among the Kazakhs and Kyrgyz. Despite the facts that both cultures have the same cuisine some slight differences appear. For example, both countries can eat horse meat, mutton and beef however, the camel meat are more often on the table of Kazakhs, and Kyrgyz people prefer yak meat since camels not bred in the foothills[footnoteRef:41]. [41: (2020). KYRGYZ AND KAZAKH, WHAT ARE THESE PEOPLES SIMILAR AND DIFFERENT Retrieved May 20, 2023, from https://vk.com/wall-187832019_249 ] Administrative Now, the relationship between Kazakhstan and Kyrgyzstan the author can say that their relationship has diverse character meaning that they had both good and some negative relations during the history. The two states have identical or close positions on a wide range of issues of international politics. Kyrgyzstan and Kazakhstan closely cooperate within the framework of the UN, OSCE, CIS, CSTO, EAEU and SCO. Also, the president of Kazkhstan K. Tokayev, on May 26, 2022, at the invitation of President S. Japarov, had an official visit to Kyrgyzstan. The visit took place against the backdrop of the 30th anniversary of the establishment of diplomatic relations between the countries and laid a solid foundation for further strengthening the political dialogue, as well as building up trade, economic, investment, cultural and humanitarian cooperation. Recently Kyrgyzstan and Tajikistan has a conflict between each other because of the territory. The currency exchange is: 1 tenge is equal to 0.19 Kyrgyzstani som. The tax system is corporate tax – 10%; VAT – 12% rating, import tax – 12% ; agreement on the avoidance of double taxation – yes. Geographic The distance from Kostanay to the Bishkek is 1902 km, and the transportation cost is 110 950 RUB. Population is 7 million. The area of Kyrgyzstan is almost 200,000 km². Situation with climate in Kyrgyzstan is not good enough. For example, at the end of 2021, spiked grain was harvested from 557,000 hectares of land. 1.3 million tons of crops were harvested from the sown area (in terms of after processing), compared to 2020, this is 28.4% less. Including the harvest of wheat decreased by 42.3%, barley - 46.3%, corn - 3.2%. According to the National Statistical Committee the reason of such decrease was the air temperature, which was above the norm in summer and the lack of water during the vegetative period[footnoteRef:42]. Therefore, there is a high demand in flour in this country and Kyrgyzstan is highly dependent from supplies of grain and flour from abroad and, for example. In 2020 its imports amounted to 92.7 thousand tons and Kazakhstan is leading here and it was 86 thousand tons from Kazakhstan[footnoteRef:43]. [42: (2022) How many wheat reserves does Kyrgyzstan have? Short review. Retrieved May 20, 2023, from https://economist.kg/novosti/ekonomika/2022/03/23] [43: (2021) Will flour become more expensive in the Kyrgyz Republic? We look at the harvest of wheat from the countries-sellers. Review. Retrieved May 20, 2023, from https://ru.sputnik.kg/20210805/kazahstan-rossiya-pshenica-urozhaj-prognoz-1053451018.html] Economic Kyrgyzstan’s natural resources are abundant. One of the main mineral resource of the country is gold. Places with gold deposits are Talas Province, the area surrounding the Chatkal River, Makmal, and Kumtor Mine. Gold is 10 % of the country’s GDP and makes up 90% of the extracted natural resources of Kyrgyzstan[footnoteRef:44]. GDP of Kyrgyzstan for 2022 is 10,5 billion USD[footnoteRef:45]. The GDP per capita for 2022 is 111 USD per month per person. [44: Natural Resources of Kyrgyzstan That Will Surprise You. Retrieved May 20, 2023, from https://silkroadexplore.com/blog/natural-resources-of-kyrgyzstan-that-will-surprise-you/ ] [45: Interfax (2023) Kyrgyzstan 2022 GDP increases 7% - preliminary data. Retrieved May 20, 2023, from https://interfax.com/newsroom/top-stories/88991/#:~:text=March%2024%20(Interfax)%20%2D%20Kyrgyzstan's,%2C%20said%2C%20citing%20preliminary%20data. ] In addition, the resources of Kyrgyzstan also include coal which is assessed reserves of 27 billion tons, iron ore (estimated reserves of 5 billion tons), and others of lesser quantity including mercury, uranium, and antimony. Speaking about arable land Kyrgyzstan has 1.3 mln hectar[footnoteRef:46]. [46: REPORT OF THE KYRGYZ REPUBLIC (n.d). Retrieved May 20, 2023, from http://www.cawater-info.net/5wwf/national_report_kyrgyzstan ] Tajikistan Cultural Tajik language is quite different, In Tajikistan the language is belongs to the Persian language group and uses the Persian alphabet while Kazakh language belongs to the Turkic language but in Tajikistan some people can speak in Russian so there is no problem. The mentality is quite the same with Kazakhstan. Also, the main difference can be find in the cuisine. While in Kazakhstan most of the dishes are done with meat, in Tajikistan people mostly prefer dishes that are based on the bread, rice and fruit. The favorite dish is pilaf in which people can put even nuts, fish. There are no differences between these peoples in terms of life, reception of guests, attitude towards elders and children[footnoteRef:47]. [47: Oboidomkursk (2022) Kazakhstan Uzbekistan Tajikistan Turkmenistan Kyrgyzstan what does stan mean. Retrieved May 20, 2023 from https://oboidomkursk.ru/kazahstan-uzbekistan-tadzhikistan-turkmenistan-kyrgyzstan-chto-znachit-stan/ ] Administrative Since the establishment of diplomatic relations, Tajik-Kazakh bilateral relations have traditionally been built in line with mutually beneficial cooperation and, overall, are successfully developing in different spheres including political, trade, economic, scientific, technical, cultural and other spheres. One of the positive events to the bilateral relation was when the president of Kazakhstan N.Nazarbayev visited Tajikistan in September 2007. Between both countries there were signed agreements in the sphere of culture and arts, agriculture, technical and professional education, investments and trade. Moreover, Kazakhstan took an active part in the attempts of a peaceful settlement civil war in Tajikistan; several rounds and consultations inter-Tajik peace talks were held on Kazakh territory, and Kazakh border guards took part in the protection of the Tajik-Afghan borders[footnoteRef:48]. Both countries are the part of different organizations including UN, CIS, EurAsEC, CSTO and SCO. Recently, the President of Kazakhstan Kassym-Jomart Tokayev arrived in Dushanbe and met with the President of Tajikistan Emmomali Rahmon. They discussed further development in different spheres and to increase the bilateral trade volume to $2 billion in the next five years[footnoteRef:49]. Recently Kyrgyzstan and Tajikistan has a conflict between each other because of the territory. [48: MFA (2019) Relations of Tajikistan with Kazakhstan. Retrieved May 20, 2023, from https://mfa.tj/ru/almaty/otnosheniya/dvustoronnie-otnosheniya] [49: Kussainova. M (2021) Kazakhstan, Tajikistan agree to boost strategic ties for sustainable development. Retrieved May 20, 2023, from https://www.aa.com.tr/en/politics/kazakhstan-tajikistan-agree-to-boost-strategic-ties-for-sustainable-development/2248773] The currency exchange is: 1 tenge is equal to 0.02 Tajikistani somoni. The tax system is Corporate Tax – 18%; VAT – 15%; import tax – 15%; agreement on the avoidance of double taxation – yes. Geograhic Also, the distance to the capital is 2390 km, and the transportation cost is 139 416 RUB. The population is 10 million. Tajikistan is considered as a landlocked country and has an area of 141,380 km². Tajikistan is the 24th smallest country in Asia and ranked 96th in the world[footnoteRef:50]. In Tajikistan the land for producing wheat is slightly decreased. According to the Abdukodir Yatimov, chief specialist of the department of crop production of the Ministry of Agriculture of the Republic of Tajikistan, he mentioned that in 2018 country produced 545 thousand 642 tons of wheat, which is 92 thousand 74 tons less than in the same period last year[footnoteRef:51]. The reasons of such decreasing of the land in the production of wheat are the following: firstly, it is due to increasing of the sown area of ​​cotton, potatoes, vegetables and fodder plants. Secondly, it is because of the climate changes like due to the snowless autumn-winter period and hot summer, the wheat harvest in rainfed lands was very low[footnoteRef:52]. As a result, in Tajikistan there is a scarcity of flour and in order to provide the whole country with flour Tajikistan should produce 1,7 million ton of flour but Tajikistan does not has such capacity and country is needed to import the flour from Kazakhstan[footnoteRef:53]. [50: Tajikistan Geography (n.d.). Retrieved May 20, 2023, from: https://www.worlddata.info/asia/tajikistan/index.php ] [51: Karaev. S (2018) Why is Tajikistan doomed to eternal flour import? Retrieved May 20, 2023, from https://www.asiaplustj.info/news/tajikistan/economic/20181030/pochemu-tadzhikistan-obrechyon-na-vechnii-import-muki] [52: Karaev Saifiddin (2018) Why Tajikistan is doomed to eternal flour import. Retrieved May 20, 2023, from https://www.asiaplustj.info/news/tajikistan/economic/20181030/pochemu-tadzhikistan-obrechyon-na-vechnii-import-muki ] [53: Khakimova. T ( 2019) In Tajikistan, flour prices rose for the sixth time in a year. Retrieved May 20, 2023, from https://rus.ozodi.org/amp/30272990.html] Economic Tajikistan has more than 50 types of mineral resources. In 2017, mining is considered as for 22.6 % of the total industrial sector. This sector was 5.5% share of GDP on 2016. Moreover, there are some key natural resources such as petroleum, gold, uranium, silver, tungsten, zinc and lead. Tajikistan also has natural gas, oil and coal reserves and more than 400 mineral deposits. The GDP of Tajikistan for 2022 is 11,3 billion USD[footnoteRef:54] and the GDP per capita for 2022 is 73 USD per month per person. Tajikistan has 739 thousand hectar of arable land[footnoteRef:55]. [54: GDP of Tajikistan in 2022 exceeded $11.3 billion (2023) Retrieved May 20, 2023, from https://centralasia.news/19200-vvp-tadzhikistana-po-itogam-2022-goda-prevysil-113-mlrd-dollarov.html] [55: Land use in the Republic of Tajikistan (n.d). Retrieved May 20, 2023, from http://www.cawater-info.net/bk/land_law/files/carnet-tj.pdf] Distance to the capital from Kostanay and Transpotation costs Country Distance to the capital from Kostanay, km Transportation costs per 1 truck, RUB Russia 2050 119 583 Uzbekistan 1977 115 325 Tajikistan 2390 139 416 Kyrgyzstan 1902 110 950 Source: made by author. Factor 5. Taxation Russia. Corporate Tax – 20%; VAT – 20%; agreement on the avoidance of double taxation – yes; but for the socially significant food and non-food products VAT is charged at the rate of 10% ; import tax – 10%[footnoteRef:56] . [56: Consultant.ru (2023). Tax Code of the Russian Federation (part two). Retrieved May 20, 2023, from http://www.consultant.ru/document/cons_doc_LAW_28165/35cc6698564adc4507baa31c9cfdbb4f2516d068/] Uzbekistan. Corporate Tax – 15%; VAT – 12%[footnoteRef:57]; import tax – 12 %; agreement on the avoidance of double taxation – yes. [57: Asquith. R (2022). Uzbekistan confirms VAT rate cut to 12% January 2023. Retrieved May 20, 2023, from https://www.vatcalc.com/uzbekistan/uzbekistan-confirms-vat-rate-cut-to-12-january-2023/] Tajikistan. Corporate Tax – 18%; VAT – 15%; import tax – 15%[footnoteRef:58]; agreement on the avoidance of double taxation – yes. [58: Vatcompliance.co. Retrieved May 20, 2023, from https://vatcompliance.co/countries/tajikistan-vat-guide/#:~:text=The%20standard%20VAT%20rate%20in%20Tajikistan%20in%202023%20is%2015%25.] Kyrgyzstan. Corporate tax – 10%; VAT – 12% rating, import tax – 12%[footnoteRef:59] ; agreement on the avoidance of double taxation – yes. [59: Trade economics. Retrieved May 20, 2023, from https://tradingeconomics.com/kyrgyzstan/sales-tax-rate] Population and taxation Country Population, mln Corporate tax (%) VAT (%) Import tax (%) Russia 145,5 20 10 10 Uzbekistan 36 15 12 12 Tajikistan 10 18 15 15 Kyrgyzstan 7 10 12 12 Source: made by author. 2.1.1. Comparison of countries After analyzing countries by different factors the table below shows the overall comparison between countries. The number that are presented in the table are calculated using scale that can be found in the appendix 3. Final evaluation C A G E Total Factors · Religion · Belief · Language difference · Customs · National holidays · Political hostility · Political relationship · Tax · Currency difference · Climate · Transportation · Distance · Population · Natural resources · GDP per capita · Availability of arable land Russia 4.8 The same language, different religion and belief, some different values. 2.5 Current political instability but good relationship. The high exchange rate. Members of different international organizations. 4 The biggest country in the world. Population is 145.5 mln. The distance is 2050km. Good climate to produce wheat and flour. 2.3 Has a lot of natural and mineral resources. The highest GDP. 1st in the world by gas resources, the 2nd in oil production, the 3rd in coal reserves. 13.6 Uzbekistan 2.6A little difference in language, same religion and belief. Different national cuisine. 2,75 Good relationship and no conflicts. Members of different international organizations. 2.3 Shortage of agricultural land. Population is 36 mln. The distance is 1977km. 3 the 7th largest producer of the gold in the world, the 5th largest producer of cotton and the 2nd largest exporter of cotton in the world. 10.65 Tajikistan 3.2 Different language, dish, the same holidays, belief, religion. 2.5 Good relationship Members of different international organizations. Conflict between Kyrgyzstan and Tajikistan. 3.3 The furthest country, not good climate and as a result cannot provide citizens with right amount of flour. Population is 10 mln. High demand. The distance is 2390km. 3 50 different minerals. Mining is considered as for 22.6 % of the total industrial sector. 12.0 Kyrgyzstan 2.0 The same holidays, dish, religion, belief, little difference in language. 2.5 Good relationship. Members of international organizations. Conflict between Kyrgyzstan and Tajikistan. 2.0 The closest country to Kazakhstan. Population is 7 mln. Not good climate and high dependence from importing from Kazakhstan. The distance is 1902km. 3 One of the main resource is gold. Coal reserves of 27 billion tons, iron ore (estimated reserves of 5 billion tons). 9.5 Source: made by author. To conclude, it can be seen that the two best markets where the company can go abroad are Kyrgyzstan and Uzbekistan. Both countries are located near to Kazakhstan and they have scarcity of flour because they need to satisfy the needs of own customers. In addition, the most significant factor was Climate one because as it was mention previously the country that has a good climate and has needed resources can be considered as not appropriate for the company to enter while the country who has struggle in this factor can be considered as the appropriate for consideration and it worth to mention that in such countries there is always a demand and where is the demand there is a supply. 2.2. Secondary selection of countries for potential entry 2.2.1. Analyses of external environments Secondary selection of markets for a potential entry of «Sarybay TRD» focuses on 2 countries like Uzbekistan and Kyrgyzstan. This section will apply a deeper analysis on the general and business environments of two potential best markets and leads to a conclusion where a single market will be chosen for entry. Analysis of external environment for Uzbekistan market PESTEL analysis for Uzbekistan P-Political · Kazakhstan is the main exporter of flour to Uzbekistan · Government of Uzbekistan launched a project “Agriculture development Strategy 2020-2030” for the development of the domestic market E-Economic · Decreasing price for flour in Uzbekistan due to local increasing amount of flour mills and accordingly the increasing amount of flour production · Economic consequences (closing companies) because of coronavirus · Issuance of a loan in the amount of 200 million USD by the World Bank to Uzbekistan for development agriculture · Gray market in flour industry in Uzbekistan S-Social · Stable demand for flour as a product of basic necessities in human life · Population growth in Uzbekistan T-Technological · New technologies investment projects for the creation of new agricultural machinery enterprises E-Environmental · Climate change L-Legal · Law on special economic zones · Land Code Source: made by author. Political Kazakhstan as the main exporter of flour for Uzbekistan Uzbekistan, in 2020, bought grains and products (flour, cereals) from Kazakhstan for $666.1 million, and in 2021, the supply of cereals amounted to $648.3 million (97.9% of total imports), and flour - $92.9 million (97.2%)[footnoteRef:60]. In 2022, the import of flour has increased compare to the previous year, country imported 124.8 thousand tons of wheat flour in the amount of 38.5 million USD. One of the main suppliers of flour is Kazakhstan[footnoteRef:61]. [60: (2022) Gazeta. uz. Retrieved May 20, 2023, from https://www.gazeta.uz/ru/2022/04/03/wheat/] [61: (2022) Totalkz. Import of flour increased Uzbekistan. Retrieved May 20, 2023, from https://total.kz/ru/news/biznes/import_muki_uvelichil_uzbekistan_date_2022_05_30_16_29_37#!] Agriculture development Strategy 2020-2030 Agriculture plays an important role in the economy of Uzbekistan. Government of Uzbekistan implemented an Agriculture Development Strategy for 2020-2030. It is a policy with vision to develop an agri-food sector that it will be competitive, market-based and export-oriented sector and increase the incomes of farmers, create new jobs and be aware of sustainable use of natural resources[footnoteRef:62]. [62: LAND CODE OF THE REPUBLIC OF UZBEKISTAN. Retrieved May 20, 2023, from https://www.fao.org/faolex/results/details/es/c/LEX-FAOC197241/] Economic Decreasing price for flour due to local increasing amount of flour mills and accordingly the increasing amount of flour production In Uzbekistan the price for the flour will be decreased. According to the, Head of the Department of the Ministry of Finance of the Republic, Tulkin Mirzaev, “an additional 50,000 tons of local flour will be brought to the market. Due to this, prices are stabilizing. Prices for flour will not increase, only in Tashkent a change in the cost of pan bread is expected”[footnoteRef:63]. Moreover, the authorities of Uzbekistan came to the decision to develop their own flour-grinding industry. Therefore, government of the country built a system of incentives for their own industry and barriers for Kazakhstan. In particular, tariffs and duties on the import of raw materials (that is, high-quality Kazakh wheat) into the country have been zeroed, and on the supply of processed products (flour) they have increased, the excise duty is 10 percent. Thus, the number of mills in the country is growing[footnoteRef:64]. [63: IA Red Spring (2022). In Uzbekistan, flour prices will decrease, but a loaf of bread may rise in price. Retrieved May 20, 2023, from https://rossaprimavera.ru/news/c526d071] [64: Forbes (2023). Why Kazakhstan has lost the status of the largest flour exporter. Retrieved May 20, 2023, from https://forbes.kz//finances/markets/pochemu_kazahstan_poteryal_status_krupneyshego_eksportera_muki/?] Economic consequences (closing companies) because of coronavirus Pandemic had a serious economic consequences. For example, because of the pandemic almost 475,000 small businesses were closed temporarily and some of them got bankrupt because they could not possess a lot of reserves for their employees and due to their small size[footnoteRef:65]. [65: International Labor Organization (2020). Assessment of the impact of COVID-19 on the socio-economic situation in Uzbekistan: income, labour market and access to social protection. Retrieved May 20, 2023, from https://www.ilo.org/wcmsp5/groups/public/---europe/---ro-geneva/---sro-moscow/documents/publication/wcms_759842.pdf] Issuance of a loan in the amount of 200 million USD by the World Bank to Uzbekistan for development agriculture 200 million USD financing package was authorized by The World Bank’s Board of Executive Directors for the project which is called Second Rural Enterprise Development Project (REDP). It will support the creation and increasing of farms and rural firms in 10 regions of country. Also, it will help create new jobs and ensure a flow of funding to micro, small and medium enterprises (MSMEs), and to financial institutions. The main important component of the project is that it helps to get rid of several constraints faced by farmers, agro-enterprises and other beneficiaries engaged in agriculture and rural economic activity and helps to gain access to finance, thanks to the increase of two financial instruments such as: line of credit and partial credit guarantees. Also REDP will assist in assisting related technical support for new and existing companies, farms and rural enterprises[footnoteRef:66]. [66: (2022) Farmers in Uzbekistan to Get Better Access to Finance, With World Bank Support. Retrieved May 20, 2023, from https://www.worldbank.org/en/news/press-release/2022/03/22/farmers-in-uzbekistan-to-get-better-access-to-finance-with-world-bank-support] Gray market in flour industry in Uzbekistan In Uzbekistan there were cases where the Uzbek flour producers sell their flour under the Kazakh brand, offering flour to customers that flour was made in Kazakhstan. Evgenyi Gan, the president of the Union of Grain Processors of Kazakhstan, wrote that “the mass production of counterfeit flour products in Uzbekistan undermines the image of the country itself, while causing irreparable material damage to Kazakhstani producers”[footnoteRef:67]. [67: Buyanov. S (2020). Uzbek counterfeit pushes Kazakhstani mukomolets out of the market. Retrieved May 20, 2023, from https://eldala.kz/specproekty/1961-uzbekskij-kontrafakt-vytesnyaet-kazahstanskih-mukomolov-s-rynka] Social Population growth Population in Uzbekistan is always growing and in 2023 the population of Uzbekistan as of January 1, 2023 amounted to 36 million 24 thousand 946 people, having increased by 753.6 thousand over the year. Also, Uzbekistan is considered as "the country with the youngest and fastest growing population" in the CIS[footnoteRef:68]. [68: Abdülkerimov.B, Keskin.O (2023). The population of Uzbekistan exceeded 36 million people. Retrieved May 20, 2023, from https://www.aa.com.tr/ru/] Stable demand for flour as a product of basic necessities in human life Flour is considered as the main product in human life. In Uzbekistan there is a high demand for the product and the flour consumption of population is 2.5 million tons of flour. Technological New technologies investment projects for the creation of new agricultural machinery enterprises In Uzbekistan there are lack of equipment and outdated machinery and economy of Uzbekistan is mainly depended on the agricultural productivity. That is why President approved to buy new equipment. It will be done due to the fairs with participation of domestic and international leading world producers. And because of the scarcity of needed equipment there is a demand for 82,000 units of various agricultural machinery and equipment[footnoteRef:69]. [69: Aliyeva. K (2018). New brand of agricultural machinery to appear in Uzbekistan. Retrieved May 20, 2023, from https://www.azernews.az/region/131845.html ] Environmental Climate change As it was mention previously Uzbekistan is sunny country and climate is very arid, little precipitation, low humidity. These indications characterize the country as very dry and hot, it lasts almost all year round[footnoteRef:70]. There is an acute shortage of agricultural land, and an even greater shortage of the necessary moisture. The best irrigated lands are occupied by monocultures of cotton and a variety of vegetables. And wheat, soybeans and other oilseeds are not sufficiently adapted to the climate of Uzbekistan, taking into account the lack of land and due to natural and climatic conditions. Based on this, it becomes difficult to grow food wheat that meets the needs of bakery production. In addition, the low content of protein and gluten in the grain, as well as the lack of physicochemical properties, limit the ability to produce high quality bread and bread products[footnoteRef:71]. In this regard, bread, which is mainly consumed by the population, is made from Kazakh flour, the export of which, according to some data, is up to 40% of all bread consumed in the country[footnoteRef:72]. [70: FB.ru (2017). Climate of Uzbekistan: description of weather conditions by months. Retrieved May 20, 2023, from: https://fb.ru/article/318838/klimat-uzbekistana-opisanie-pogodnyih-usloviy-po-mesyatsam ] [71: Kazakhzerno (2021).Uzbekistan wants to grow wheat and oilseeds in Russia. Retrieved May 20, 2023, from: https://kazakh-zerno.net/186637-uzbekistan-zhelaet-vyrashhivat-pshenicu-i-maslichnye-kultury-v-rossii/ ] [72: Kazakh zerno. Retrieved May 20, 2023, from: https://kazakh-zerno.net/26109-proizvodimaya-v-uzbekistane-pshenitsa-ne-goditsya-v-pishchu-i-iz-nee-vypekayut-tolko-tak-nazyvaemyj-sotsialnyj-khleb-eksperty/ ] Legal Law on special economic zones There is a law in Uzbekistan for special economic zones (SEZ). It defines the standard terms and conditions applicable to domestic and foreign investors operating in these zones. Some of these are dedicated to Agriculture. Also, it provides some benefits in the form of taxation, facility services and the number of special foreign exchange and customs advantages[footnoteRef:73]. [73: Main department of Strategic development and Investment (2020) Invest in agri-food sector in Uzbekistan. Retrieved May 20, 2023, from https://www.switch-asia.eu/site/assets/files/2747/ready_to_print_heavy_mode_invest_to_agriculture_brochure_22_12_2020.pdf] Land Code This Code is uses for the regulating of land relations with the aim to ensure scientifically substantiated, rational use of land and protection of parcels, reproduction and increase of fertility, preserving and improving natural environment, creating conditions for equal development of all forms of economy, protection of juridical and real people right to land parcels, strengthening lawfulness[footnoteRef:74]. [74: (n.d) LAND CODE OF THE REPUBLIC OF UZBEKISTAN. Retrieved May 20, 2023. from https://faolex.fao.org/docs/pdf/uzb70912E.pdf] Analysis of external environment for Kyrgyzstan market PESTEL analysis for Kyrgyzstan P-Political · Conflict between Kyrgyzstan and Tajikistan · Kazakhstan as the main exporter of flour for Kyrgyzstan · Unsustainable electricity subsidy regime E-Economic · Growing price for flour because of benefits that are granted for the import and processing of grain for flour mills ends · Cheap labor force · Economic consequences (closing companies) because of coronavirus · Gray market in flour industry in Kyrgyzstan S-Social · Stable demand for flour as a product of basic necessities in human life · Population growth T-Technological · Low level of technology and innovation E-Environmental · Climate changes · Degradation of agricultural land L-Legal · Land Code · Law on special economic zones Source: made by author. Political Conflict between Kyrgyzstan and Tajikistan Kyrgyzstan suffered from the conflict with Tajikistan. In 2022 in September, on the border between Kyrgyzstan and Tajikistan appeared the conflict. This conflict matured for a long time, but never before reached such proportions. From this conflict over a hundred people died in a few days, three times as many were injured, thousands were left homeless[footnoteRef:75].The main reason of this conflict is the border after the collapse of Soviet Union. Today, both countries cannot agree on the fate of more than 70 disputed areas and, only 504 out of 970 kilometers have been demarcated[footnoteRef:76]. [75: Umarov. T (2022) Revenge cult. Where and where is the war between Kyrgyzstan and Tajikistan. Retrieved May 20, 2023, from https://carnegieendowment.org/politika/87961] [76: Tajik-Kyrgyz border: latest news. Retrieved May 20, 2023, from https://tj.sputniknews.ru/kyrgyzstan-tajikistan-novosti-granica/] Kazakhstan as the main exporter of flour The main supplier of flour is Kazakhstan according to the analysis of the Federal Statistical Committee. For the last 10 months Kyrgyzstan purchased 21.9 thousand tons of wheat flour from the different countries. And the most of it republic of Kyrgyzstan bought from Kazakhstan it is almost 14.8 thousand tons[footnoteRef:77]. Kyrgyz Republic cannot fully provide itself with wheat and actively imports it. [77: Timkiv. V (2023). Which countries Kyrgyzstan buys flour and wheat from – list. Retrieved May 20, 2023, from https://ru.sputnik.kg/20230107/kyrgyzstan-muka-pshenica-import-1071811541.html] Unsustainable electricity subsidy regime This regime was introduced in 2009 as the social security measure by the government. As a result Kyrgyzstan has lowest electricity tariffs in the world and it takes 4th place in the world in terms of cost of electricity. The cost for a kilowatt-hour cost on average $0,017 in the republic[footnoteRef:78]. [78: KUDRYAVTSEVA. T (2021). Kyrgyzstan is among countries with cheapest electricity in world. Retrieved May 20, 2023, from https://24.kg/english/216604_Kyrgyzstan_is_among_countries_with_cheapest_electricity_in_world/] Economic Growing price for flour because of benefits that are granted for the import and processing of grain for flour mills ends In Kyrgyzstan the price for flour is expecting to grow in 2023 according to the President of the Flour Millers Association Rustam Zhunushov. The price for the grain will rise by 12 per cent, and flour by 15 per cent. The increase in price is connected to the fact that on December 31, the period of benefits granted for the import and processing of grain for flour mills ends[footnoteRef:79]. Due to this fact the price for the bread also increase by 18-20 per cent. [79: KUDRYAVTSEVA. T (2022). Prices for flour and bread expected to rise in Kyrgyzstan. Retrieved May 20, 2023, from https://24.kg/ekonomika/254310_vkyirgyizstane_ojidaetsya_rost_tsen_namuku_ihleb/.] Cheap labor force Kyrgyz Republic has advantage over the neighbors like cheap labor force. The minimum wage is set 1970 KGS per month or 22.508 USD[footnoteRef:80]. That is why it can be seen as advantage in terms of doing business. [80: Take-profit.org (n.d) KYRGYZSTAN WAGES: MINIMUM AND AVERAGE. Retrieved May 20, 2023, from https://take-profit.org/en/statistics/wages/kyrgyzstan/] Economic consequences (closing companies) because of coronavirus During the pandemic it was noticed that half of the over 600 surveyed micro, small and medium enterprises (MSMEs) reported that company activities have been temporarily stopped, with decreased working hours, unpaid vacation, and partial firing commonplace[footnoteRef:81]. [81: The World Bank (2022) Sustaining Small Business through the Pandemic in Kyrgyz Republic. Retrieved May 20, 2023, from https://www.worldbank.org/en/news/feature/2022/05/06/sustaining-small-business-through-the-pandemic-in-kyrgyz-republic ] Gray market in flour industry in Kyrgyzstan In Kyrgyzstan there was a case when one local flour mill sell own flour under the Kazakh brand for getting more profit. During the search, more than 200 50-kilogram sacks of flour and seven thousand empty sacks of the same volume with the fake trademark "Etalon" were found, prepared for the packaging and further sale of about 350 tons of flour[footnoteRef:82]. [82: Kundemi (n.d) Flour mills in Kyrgyzstan sold flour under a Kazakh brand in order to get more money. Retrieved May 20, 2023, from https://kundemi.kg/index.php?newsid=6700] Social Stable demand for flour as a product of basic necessities in human life In Kyrgyzstan there is a high demand for flour. Due to this demand the price of flour increased. People, because of the unstable situation in the world, started to buy products in a big quantity, including flour. Food shortages arose from panicked demand. Residents are purchased for months in advance, and they themselves create a shortage[footnoteRef:83]. Moreover, the population of Kyrgyzstan annually consumes more than 1 million tons of flour. 900 thousand tons of these volumes are imported, for instance, in 2021 the consumption was covered by imports from Kazakhstan and Russia[footnoteRef:84]. [83: Balbakova. E(2022) Sugar panic: Kyrgyzstan massively buys products due to their rise in price. Retrieved May 20, 2023, from https://mir24.tv/news/16500531/saharnaya-panika-zhiteli-kyrgyzstana-massovo-skupayut-produkty-iz-za-ih-podorozhaniya] [84: Zholdoshev (2021). The seed of the problem. Is Kyrgyzstan ready to reduce imports of wheat and flour? Retrieved May 20, 2023, from https://rus.azattyk.org/amp/31798642.html] Population growth At the beginning of 2023 the population of Kyrgyzstan is 6,799,321 people. It was increased by 1.67% (111,486 people) compared to population of 6,687,835 the year before. Also, it is predicted that the population of Kyrgyzstan is expected to grow by 113,345 people and aims to reach 6,912,666 in the beginning of 2024[footnoteRef:85]. [85: (2023) Kyrgyzstan population. Retrieved May 20, 2023, from https://countrymeters.info/en/Kyrgyzstan#:~:text=As%20of%201%20January%202023,of%206%2C687%2C835%20the%20year%20before.] Technological Low level of technology and innovation Water quality is deteriorating due to chemical and organic pollution attributable mainly to the numerous (untreated) dumps and waste tailings from mining enterprise. There is a high share of water up-take by the agricultural sector is due to inefficient use of water resources resulting from outdated irrigation technologies and a lack of water saving technologies[footnoteRef:86]. [86: UNIDO. (2018). Diagnostic for the Programme for Country Partnership (PCP). The Kyrgyz Republic. Building a competitive manufacturing base for strong and inclusive growth] Environmental Climate changes Climate change is expected to significantly impact Kyrgyzstan's water resources, which are crucial for several sectors of the economy, including agriculture and energy. According to estimates accepted by the Intergovernmental Panel on Climate Change (IPCC), annual average temperature rise in Central Asia is expected to be as high as 1.9-5.5 °C by 2050, where the major source of uncertainty is due to alternative general circulation models of climate used in the analysis (Lioubimtseva & Henebry, 2009)[footnoteRef:87]. [87: Lioubimtseva, E., & Henebry, G. M. (2009). Climate and environmental change in arid Central Asia: Impacts, vulnerability, and adaptations. Journal of Arid Environments. https://doi.org/10.1016/j.jaridenv.2009.04.022] Degradation of agricultural land Another important factor considering the environmental problem is degradation of agricultural land. It includes the erosion of soil, salinization, loss of humus and pollution because of extreme use of fertilizers and suboptimal cropping patterns, which is not recoverable for decades. For instance, in 2011, more than half of agricultural land, including arable land and pastures, was subject to degradation[footnoteRef:88]. [88: Ubaidullaev, M. B. (2015). Problems of ground resources in Kyrgyzstan, agro-food economy. Territoriya Nauki, (5), 94–100.] Legal Law on special economic zones In Kyrgyzstan there is a law for special economic zones. They have some preferences in terms of tax, customs, administrative, financial incentives and a number of other preferences and they operate on preferential terms. However, the current taxation system does not give appropriate incentive to the free economic zones (FEZ) subjects. As a result, the FEZ are not seeking to expand production and raise the number of jobs. There is absence of income tax relief for employees, value added tax cost, social insurance depending on the investment contribution. Therefore, the FEZ are faced with some issues like lack of financial resources, lack of information, and underdeveloped infrastructure in the FEZ[footnoteRef:89]. And most of them do not use their potential. [89: (n.d) What Hinders the Development of Free Economic Zones in Kyrgyzstan? Retrieved May 20, 2023, from file:///C:/Users/user/Downloads/What%20Hinders%20the%20Development%20of%20Free%20Economic%20Zones%20in%20Kyrgyzstan_.pdf] Land Code Land Code in Kyrgyzstan is created for the rational use of land and its protection. Also, it includes different principles such as preservation of land as a natural object, the basis of life, ensuring environmental security; effective functioning of the land and so on. For example, speaking about agricultural land they can be provided for the rent for 5 years but there is an except for the land like rainfed arable land and land covered by perennial plantations, land for seed-breeding, pedigree stockbreeding, experimental farming, scientific-research, experimental-breeding, varietal-testing works and agricultural cooperatives and they are provided for the 20 years rent.[footnoteRef:90] [90: Faolex. Land Code of the Kyrgyz Republic. Retrieved May 20, 2023, from https://www.fao.org/faolex/results/details/ru/c/LEX-FAOC018073/] 2.2.2. Comparison of Uzbekistan and Kyrgyzstan external environments In this section the comparison of macroenvironments between two markets (Kyrgyzstan and Uzbekistan) in the political, economic, social, technological, environmental and legal factors are compared and evaluated. As it can be seen in political sector Kyrgyzstan had a conflict with Tajikistan recently. Both countries are dependent on the Kazakh flour and Kazakhstan is the main exporter for both countries. Regarding from economic side in Uzbekistan there is no price increase for flour while in Kyrgyzstan the price for flour increased which can be seen as a consequence of increasing in demand. From social perspective it can be seen that the demand in Uzbekistan does not rise however in Kyrgyzstan the demand for flour increased because the situation in Uzbekistan is rather good with flour compare to Kyrgyzstan. Speaking about technological side, in Uzbekistan there is good technology in production of agriculture while in Kyrgyzstan there is a scarcity of technology and it needs in improvement and further development. In environmental factor the situation in both countries with climate is not good enough and both countries have not enough land for producing a big amount of wheat and as a result both countries import wheat and flour. In the legal section it can be noticed that the Law on the Special economic zones are similar but in Kyrgyzstan there is a low potential for these zones because they do not use full potential while in Uzbekistan the situation is rather good. The table below provides the information about comparison of factors and the sum of effects that show what country is better. Comparison of macroenvironments of Uzbekistan and Kyrgyzstan Uzbekistan Effect Kyrgyzstan Effect Political Kazakhstan as the main exporter of flour for Uzbekistan + Kazakhstan as the main exporter of flour for Kyrgyzstan + Agriculture development Strategy 2020-2030 - Conflict between Kyrgyzstan and Tajikistan - Unsustainable electricity subsidy regime + Economic Decreasing price for flour due to local increasing amount of flour mills and accordingly the increasing amount of flour production - Growing price for flour because of benefits that are granted for the import and processing of grain for flour mills ends + Economic consequences (closing companies) because of coronavirus - Cheap labor force + Issuance of a loan in the amount of 200 million USD by the World Bank to Uzbekistan for development agriculture + Economic consequences (closing companies) because of coronavirus - Gray market in flour industry in Uzbekistan - Gray market in flour industry in Kyrgyzstan - Social Stable demand for flour as a product of basic necessities in human life + Stable demand for flour as a product of basic necessities in human life + Population growth + Population growth + Technological New technologies investment projects for the creation of new agricultural machinery enterprises - Low level of technology and innovation + Environmental Climate changes + Climate changes + Degradation of agricultural land + Legal Law on special economic zones - Law on special economic zones + Land Code + Land Code + Sum of effects (+/-) (+6/-6) (+11/-3) Source: made by author. As it can be seen from the table above the best market for the company in terms of macroenvironment is Kyrgyzstan (11 advantages and 3 disadvantages) while in Uzbekistan there are more disadvantages (6 advantages and 6 disadvantages). In the next section the author analyzed the competitive environment of these countries. 2.2.3. Analyses of competitive environments Analysis of competitive environment for the industry of Uzbekistan. Porter’s Five Forces Analysis. In this section the author analyze the competitive environment of Uzbekistan first using Porter’s Five Forces Analysis and then analyze Kyrgyzstan. Threat of new entrants The most important thing that is needed to pay attention to, when analyzing a threat of new entrants, is the entry barriers to the industry and it includes of different aspects to analyze like the possibility of economies of scale, the amount of initial investments, product differentiation, etc. These factors are going to be discussed one by one. The final will be ranked from 1 to 5 where score 1 means easy for competitors to join the market and score 5 means it is very difficult or impossible for new firms to enter the market. Starting with the first factor that was mention is the possibility of economy of scale. Since the flour industry implies the economy of scale and the Uzbekistan market has an advantage on it over new firms because in Uzbekistan the flour production started to develop and most of their flours they produce by themselves. In 2022, Uzbekistan won a UN tender for the supply of humanitarian flour to Afghanistan. Flour production within the country has increased, and the number of companies involved in the sale of flour has also increased. And it is likely that this trend will continue[footnoteRef:91]. [91: Inbusiness.kz (2022) Uzbekistan sharply increased imports of Kazakh grain and flour. Retrieved May 20, 2023, from https://inbusiness.kz/ru/last/uzbekistan-rezko-uvelichil-import-kazahstanskogo-zerna-i-muki] The next factor which will be considered is the initial investment. It will require a significant amount of money through the equity based approach because the investment will be required for construction, salary for workers (labor force), rent, equipment, and so on and expand in the market there is a low chance for the new entrance. Speaking about product differentiation it is low. When companies entering to the flour industry it is quite difficult to differentiate from others because the product is the same worldwide and the difference can be in the form of grade and weight. Entering to the new market it will be easier to adapt. After considering all of these factors it can be concluded that the threat of new entrants is low. The rating is 4. Buyers’ bargaining power There are several aspects that are worth paying attention to such as homogeneity of a product/service, product differentiation, substitution, switching costs, etc when the firms starts to analyzing buyers’ bargaining power. These factors will be discussed one by one. The rating will be from 1 to 5 where score 1 means consumers does not have a high power for the firms and 5 means pressure from consumers that can exert on firms to get them to provide better quality, low price and so on. The first factor is homogeneity of the product. The product is considered as a homogeneous. And the product cannot be differentiated by others only in terms of the grade of the flour. Speaking about the factor as backward integration, it can be seen that it is low. Since the buyer cannot easily backward integrate – or begin to produce the seller’s product themselves because it requires a lot of different resources which decreases the power of the buyer. The third factor to consider is the product differentiation. As it was mention in the flour industry the flour is not highly differentiated that make the power of the buyer higher. Buyer can only choose what type of grade he/she wants. As a result it increases the buyer’s power. Considering the forth factor switching costs it can be stated that it is low because customers will not be price sensitive to the goods (especially to the goods from Kazakhstan because flour is cheaper from Kazakhstan) and they are not committed to one brand of flour and it is easy for them to buy another brand of flour. The next factor is substitution of the product. Speaking about this factor it can be seen that the flour is such a product that does not have substitutes, however, buyers can choose the type of flour such as wheat flour, corn flour, rice flour, pea flour and so on. After combining all of these factors it can be concluded that the buyers’ bargaining power is medium. The rating is 3. Suppliers’ bargaining power For analysis of supplier’s bargaining power it is important to consider the following factors such as probability of forward vertical integration, substitution of the product and others. The final will be ranked from 1 to 5 where score 1 means suppliers do not have high power for increasing prices, there are a lot of suppliers in the market and score 5 means suppliers can have a power for buyers and affect the competitive environment for the buyer and impacts the ability to achieve profitability. Considering the factor to when analyzing suppliers’ bargaining power is the probability of forward vertical integration by them. Even though the suppliers might have the resources to integrate forward, they might be unlikely to do that since it is much more profitable for them to sell raw materials and there is a low chance that they will integrate vertically because it will need more additional costs and equipment for this. Analyzing the second factor the lack of substitutes for a product provider it can be seen that the raw material (wheat) Uzbekistan mostly buy from Kazakhstan and that is why this factor is low because most of the wheat is imported and there is no necessity in suppliers in this. The next factor that can be analyzed is the importance of the supplier’s product for the market players. The supplier’s product is significant for market players because due to this product the flour can be made. However, for the company supplier’s product will not be important because Kazakhstan in terms of the raw material is better than in Uzbekistan and, as it was stated, Uzbekistan imports the wheat from Kazakhstan for the local flour mills. Analyzing costs of transition to another supplier it can be stated that it is low due to the fact that Uzbekistan’s wheat is inferior to the Kazakh one. Therefore, the Kazakh companies are not rely to the suppliers from Uzbekistan. To sum up, after analyzing all of these factors the suppliers’ bargaining power is low. The rating is 1. Threat of substitutes When analyzing the threat of substitutes it is important to identify such factors as substitution of a need, switching costs, performance of the product. The rank will be from 1 to 5 where 1 means that for customers it will be easy to switch from one product to another where 5 means that it is hard for customers to substitute the product. Speaking about the substitution of a need it can be said that it is low because such product as a flour is in demand and there is no substitute product to flour. However, people can choose the other types of flour like wheat flour, rye, barley, oat, rice, buckwheat, spelled, pea and soy. Speaking about switching costs it can be notices that it is medium or high. Customers cannot substitute the flour products with something else and the difference in this case can be only in the type of flour and the grade which can be used in different purposes. Overall, the threat of substitutes is medium due to the fact that Uzbekistan starts to import less flour and more wheat that can lead that the amount of local flour will be more. The rating is 1. Rivalry among competitors When speaking of the competition within the flour industry, it is needed to pay attention to the number of players, concentration, switching costs. The rank is from 1 to 5 where 1 means that there is a possibility for the company to compete and have some benefits among competitors and 5 means that the competition is intensive in the market and low chance to compete. Analyzing the first factor- the number of flour mills, there are 58 companies[footnoteRef:92] which make the industry quite intense and increase the rivalry among competitors. [92: Flour - production, sales, In Uzbekistan: catalog of companies and organizations, their addresses, phone numbers, contacts (n.d). Retrieved May 20, 2023, from https://www.yellowpages.uz/rubrika/muka-proizvodstvo-prodazha] Another factor is the concentration of the industry. It is medium because the authorities of Uzbekistan came to the decision to develop their own flour-grinding industry. And for this they built a system of incentives for their own industry and barriers for Kazakhstan. In particular, tariffs and duties on the import of raw materials (that is, high-quality Kazakh wheat) into the country have been zeroed, and on the supply of processed products (flour) they have increased, the excise duty is 10 percent. Thus, the number of mills in the country is growing[footnoteRef:93]. Uzbekistan is increasingly buying Kazakh wheat, processing it at home and selling flour to Afghanistan. It turns out the products are cheaper than Kazakhstani ones. In connection with this, the supply of flour is reduced every year more and more[footnoteRef:94]. As a result, companies in Uzbekistan can control the market. [93: Forbes (2023). Why Kazakhstan has lost the status of the largest flour exporter. Retrieved May 20, 2023, from https://forbes.kz//finances/markets/pochemu_kazahstan_poteryal_status_krupneyshego_eksportera_muki/?] [94: Urmanov. A (2020) Chronicle of a declining industry: why Kazakh flour is faked in Uzbekistan. Retrieved May 20, 2023, from https://www.caravan.kz/articles/khronika-padayushhejj-promyshlennosti-dlya-chego-v-uzbekistane-poddelyvayut-kazakhstanskuyu-muku-668407/] The third factor to consider is switching costs. They are low because usually consumers do not have specific brand loyalty, the product is homogeneous and that is why they are low. The forth factor is costs. It can be said that most of the companies are dependent on the variable costs rather than fixed costs since the activities of companies are connected with production and when there is an increasing of production the variable costs will be changed because there will be incremental cost of producing additional units of output. As a result, after combining all of these factors the rivalry among competitors is high. The rating is 4. Analysis of competitive environment for the industry of Kyrgyzstan. Porter’s Five Forces Analysis Threat of new entrants As well as in Uzbekistan, the things that should be described are the capital requirements, economies of scale, product differentiation. These factors are going to be discussed one by one. The final will be ranked from 1 to 5 where score 1 means easy for competitors to join the market and score 5 means it is very difficult or impossible for new firms to enter the market. It requires the significant amount of initial capital investment in order to enter in the market. The additional cost will be required such as for the rent, labor force, equipment and so on in order that the company can has a competitive advantage. Considering the second factor economies of scale. New companies have a potential in the market since it can be seen that the Kyrgyzstani market cannot provide for own citizens with enough flour and since the flour industry requires the economy of scale, the Kyrgyzstani market does not have a big advantage on it over the new firms. As a result, it can be seen that the industry is not good developed in terms of the high production of flour and it will be not difficult to enter.