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From "red multinationals" to capitalist entrepreneurs?

Western subsidiaries of socialist multinationals

Investment in Western companies by commercial organizations from Eastern Europe and the former USSR began to be of interest to Western researchers some 20 years ago. Research was commenced to estimate the range and volume of these activities in individual countries in order to evaluate the location of these investments and their total volume on an international scale. Such surveys were considered necessary because of the important roles played by subsidiaries of multinational companies in their host countries' national and international policies, and a consequent concern that host countries could be significantly influenced by the strategies of the socialist country of origin of the parent multinational. Furthermore, an increase in investment was becoming evident, apparently contradicting socialist ideologies of the parent companies' countries of origin.

In addition, it was considered important at that time to observe the time scales of development of the "socialist multinationals" to compare with their Western counterparts. As the research progressed beyond the initial stages of identification and associated ownership and capital, it also became possible to evaluate the performance of these subsidiaries of socialist multinationals according to Western financial criteria, bearing in mind that their executives were operating in different political and economic conditions from those encountered in their domestic environment.

In all of the former socialist countries of Eastern Europe, the export and import of products and associated services were the responsibility of organizations accredited to carry out those tasks by the relevant country's Ministry of Foreign Trade. These "foreign trade organizations" may have been directly responsible to the country's Ministry of Foreign Trade, or responsible to an industrial ministry, manufacturing enterprise, state committee, or bank, but in receipt of accreditation from the Ministry of Foreign Trade. In many ways, therefore, these organizations could be regarded as import and export agents for a defined range of manufacturers and service organizations.

There were 350 foreign trade organizations in the former USSR and Eastern Europe in the early 1980s, engaged in the import and export of particular product lines, avoiding duplication with their counterparts in the same country. The export activities of these organizations were traditionally carried out by means of direct selling and distribution through agents, although approximately one third of these organizations (120) had invested in 324 wholly-owned or partly-owned Western companies.

In view of their foreign investment activities, these organizations were sometimes referred to as "socialist multinationals"[1,2], "multinationals from the second world"[3] or even "red multinationals"[4,5]. The use of the term multinational could be questioned, however, due to limited evidence of coordinated strategies of overseas manufacturing, servicing and transfer pricing. The complete range of activities of these organizations was considered to be worthy of study in its own right, but in view of difficulties of access to decision makers in the socialist countries at that time, it was decided by a team of Western European researchers to study the influence of socialist multinationals in Western Europe and the developing countries[6]. Particular attention was paid to the activities of the subsidiaries of "socialist multinationals" in the UK, in view of the existence of publicly available information submitted by these companies as a British legal requirement. Those data were then supplemented by case study research of a sample of those companies[7].

Using the most comprehensively available listing of companies published in a directory prepared at Carleton University, Ottawa[8], and verified by data available from the British Companies House, it was found that there were 49 subsidiaries of socialist multinationals in the UK, with financial data available for 34 of these companies. These subsidiaries achieved a total annual turnover of some [pounds]1.15 billion in the early 1980s. The majority of these organizations were therefore seen to be fairly small in terms of scale of operation, and a study of their activities showed them to be engaged mainly in service operations, such as marketing and distribution or purchasing for their parent companies, and transport and financial services.

There was little evidence of manufacturing in the list or technology transfer by these companies, with the possible exception of some meat slicing and packaging operations in one of the companies. In view of this small scale of operations, it was considered that their scope for influence over Western governments was almost non-existent, although some more scope for leverage may have existed in the developing countries.

The profit margin was less than 1 per cent for more than 50 per cent of the companies, and only 20 per cent of the companies reported a margin on turnover of more than 5 per cent. These margins compared unfavourably with the median of 5 per cent for British companies in the merchandising and service sectors. In addition, profits in relation to total assets were also low with more than 50 per cent of the companies reporting a figure of less than 1 per cent for profit in relation to total assets, compared with a median figure of 9 per cent for UK companies as a whole.

The ratios of profit to net assets, however, did not compare unfavourably with British companies in general, although these ratios were extremely variable. It was noted, however, that the relationships between current assets and current liabilities did not always appear to be of a magnitude that would be expected from purely commercial considerations. The effect was to make net assets a smaller magnitude than would usually be anticipated, thereby increasing the profit/net assets ratio.

The research was further extended to study the variations in sales, and profit margins over a five-year interval for which information was available in the late 1970s. A sample of the larger eight Czechoslovakian, East German, Hungarian, Polish and Soviet organizations was chosen for that study (Skoda Cars Limited, CZ Scientific Instruments Limited, London Chemical Company Limited, FLT and Metals Company Limited, Skorimpex Rind Limited, Nafta (GB) Limited, Technical and Optical Equipment (London) Limited, Anglo-Soviet Shipping Limited). That research on financial performance was supplemented by case studies of three of the companies which agreed to be interviewed (London Chemical Limited, FLT and Metals Limited, Skorimpex Rind Limited). This case study sample was increased to five companies following approaches to two further companies (Toolmex Polmach Limited, Ridpath Pek Limited) in addition to the eight companies previously approached.

Political and economic changes in Eastern Europe and the former USSR and the effect on socialist multinationals

Political and economic changes

As a result of the rapid pace of political and economic change in the former USSR and Eastern Europe in the late 1980s, it was decided to update the earlier study[7] to observe the changes in management of these subsidiaries that had taken place over a ten-year period. The political and economic changes which were expected to influence the policies and operations of Western subsidiaries are listed below, as summarized by Hewett[9]:

* The introduction of legislation into the former USSR in 1987 increased the administrative and financial independence of factories from their superior industrial ministries, and transferred foreign trade organizations for industrial products from the Ministry of Foreign Trade to industrial ministries responsible for co-ordinating the manufacture of those same products. A number of individual factories were also granted the right to engage in import and export activities.

The result of these reforms was therefore to reduce the monopoly position of foreign trade organizations over sources of supply and distribution of particular product lines, which could subsequently influence their capabilities to ensure deliveries to Western markets. Some (mainly large) manufacturers therefore entered export markets directly, although other (mainly smaller) manufacturers continued their established links with foreign trade organizations. Opportunities consequently existed for closer links between Western subsidiaries of Soviet foreign trade organizations, and Soviet manufacturers.

* Similar changes had been introduced into the East European countries before their introduction into the former USSR in 1987, and the process of reform continued to accelerate in Eastern Europe, unhindered by any threat of intervention from the Soviet Union. This process of economic and political reform led to communist parties being removed from power in Czechoslovakia, Hungary and Poland from 1989, and the initiation of a process of transition to market economies in those countries. The former GDR also became part of a unified German state, and bilateral trade between the socialist countries through the framework of COMECON ceased in 1991. This latter trend, combined with reduced purchases from the former USSR, increased the pressure for East European organizations to sell their products on Western markets, and provided opportunities for the further use of existing Western subsidiaries.

* The fragmentation of the former USSR into separate sovereign states in 1991 increased the barriers to trade between these former Soviet republics, and parallelled increasing political and economic instabilities within the region. The majority of Soviet exports to Western markets, however, consisted of energy products, timber, minerals and metals; and most of these products originated from the Russian Federation. Soviet foreign trade decentralization was not extended to many of these products, and existing Western companies owned by these remaining foreign trade organizations could consequently be used by their Russian successors.

Sample of Western subsidiaries

In order to study the effects of these changes on Western subsidiaries of multinationals in the former socialist countries of Eastern Europe, the same sample of companies was chosen for study as in the previous research with financial analysis extending to all ten companies which were previously the subject of either previous financial analysis or case study research.

The companies studied, with the abbreviation the authors have used shown in parentheses, are as follows:

(1) Skoda Cars Ltd (Skoda);

(2) CZ Scientific Instruments Ltd (CZ);

(3) London Chemical Co. Ltd (London Chemical);

(4) FLT and Metals Ltd (FLT);

(5) Skorimpex Rind Ltd (Skorimpex);

(6) Nafta (UK) Ltd (Nafta);

(7) Technical and Optical Equipment (London) Ltd (Technical and Optical);

(8) Anglo-Soviet Shipping Co. Ltd (Anglo-Soviet);

(9) Toolmex Polmach Ltd (Toolmex);

(10) Ridpath Pek Ltd (Ridpath).

Data were extracted from the published accounts of the companies for their three financial years ending in 1989 to 1991. It is acknowledged that certain subjectivity exists in published accounting data as a result of its selection and presentation. This factor limits its use for comparative purposes and consequently some caution has been exercised in interpreting the analysis and the ratios calculated.

Extracts of the company data are tabulated in Tables I-IV, together with the earlier survey data[7]. Certain additional data for this earlier period were also extracted from the original published accounts for the relevant years. An adjustment was made to the percentage change in the intervening period using an RPI factor, in an attempt to take account of the effects of inflation. It is acknowledged that different businesses are affected in different ways by changing prices, but it was felt that a consistently applied adjustment would be appropriate to judge the order of magnitude of the effect. Comparative data on the growth of UK businesses over the period 1988/89 to 1990/91 was obtained from ICC[10], and a summary is given in Table V. Selected ratios were calculated from the company data, and comparative ratios for the distribution and service sectors were also obtained from ICC[10] and the results are tabulated in Tables VI-X. Manufacturing sector ratios were not included in the comparison as, with the possible exception of Ridpath (which carries out some basic food processing and packaging) there are no manufacturing companies in the sample.







Financial performance of Western subsidiaries of Russian and East European multinationals


Turnover. As shown in Table I, four of the companies in the sample showed growth in turnover over the three-year period, but six showed contraction. The [TABULAR DATA FOR TABLE VII OMITTED] performance of those showing an increase does not compare too unfavourably with the performance of UK companies in the same period (Table V), although with the exception of London Chemical, they appear to lie in the lower ranges of the UK business sectors. Exceptionally high growth is shown by London Chemical, which the published accounts indicate is attributable at least in part [TABULAR DATA FOR TABLE VIII OMITTED] to the conversion of commission business to trading on the company's own account, as reported further in an updated case study of this company[13, pp. 88-90].

It must be recognized that the UK industrial sector growth rates used are composite figures derived from a wide range of companies. However, those of the sample companies showing a contraction appear to be performing at lower levels than the lower quartile of UK company performance. In individual companies' circumstances, explanations may be found for their contraction in sales. For example, Anglo-Soviet sold a subsidiary company during 1990, which appears to be partly responsible for the reduction in turnover. Similarly, contraction in the turnover of Toolmex is also likely to be attributable to the sale of part of the business (its electrical products activities) and the recession in the machine tool industry, which apparently could not be compensated for by the [TABULAR DATA FOR TABLE IX OMITTED] introduction of a new product range (fork lift trucks) reported in a case study of that company[13, pp. 91-4]. The turnover performance of Nafta appears to be out of line with its sector, perhaps because of its narrow product range. The oil and gas distribution sector shows growth over the period of 40 per cent[10, p. 65], while Nafta has contracted by 16 per cent. This is probably due to Nafta's [TABULAR DATA FOR TABLE X OMITTED] turnover being influenced heavily by changes in international spot price for oil over the period under review, while the UK oil and gas sector figures cover a much wider product range.

Skoda's changes in turnover also appear to be lower than its sector, at -14.9 per cent; while the UK foreign vehicle distributors sector shows an overall decline of only 1 per cent[10, p. 65]. Delays in the launch of Skoda's new model, the Favorit, and additional costs incurred are likely to have contributed to its turnover performance[14].

In comparison with the earlier period, most of the selected companies show substantial changes in turnover, even after an adjustment for the effect of inflation in the intervening 11 years. From this it can be concluded that significant changes may have taken place in the nature or structure of the companies' businesses over the period. Five of the companies show a decline in the real level of turnover, most significantly Anglo-Soviet. A review of the published accounts reveals that the major contribution to this substantial drop occurred in 1983, with turnover having been at its highest in 1981. The directors' report for 1983 notes the cessation of bunkering activities during the year, and it appears that the prior year's figures have been restated on a comparable basis. For example, turnover of [pounds]332 million in the 1982 accounts is restated as [pounds]21 million in the 1983 accounts.

Profit. Patterns of net profit growth and contraction among the selected companies are shown in Table II. They display considerable variation, and it is difficult to draw conclusions from these figures alone.

Levels of profit among UK companies have declined over the period in more than half the industries in both the distribution and service sectors[10, p. 67], although those in the upper quartile seem to have performed well (Table V). However, a consideration of profitability ratios is likely to be more revealing than the absolute figures.

Total assets. Table III summarizes the changes in the book values of total assets in the sample companies, and it can be seen that here too there is no clear pattern over the recent years reviewed (1988/91). Again the majority (six out of ten) show a reduction, while the majority of industries in the distribution and service sectors increased their total assets during the period (Table V and [10, p. 69]. Neither does there appear to be any discernible direct correlation in most cases between changes in total assets and turnover.

Only three of the companies show an increase in total assets after inflation adjustment since the earlier survey period. The reasons for the changes are often difficult to identify from published accounting information. However it is likely that such large changes are attributable to changes in business structure and/or activities since 1979/80. The most substantial percentage increase in total assets has occurred in London Chemical, which as noted later in the case study has expanded its operations considerably in the intervening years. In the case of Nafta, the sizable decrease can be explained by a restructuring of ownership and trading activities which, according to its published accounts, took place in 1986/87.

Capital employed. Capital employed (long-term finance) has risen over the three year period 1988/89 to 1990/91 in all of the companies studied, with the exception of Skoda (as can be seen in Table IV). In comparison with growth in capital employed in UK businesses (Table V), several of the sample companies exhibit greater increases over the period. Further, in contrast with the decreases in total assets since 1979/80 shown by the majority of the companies, seven show an increase in capital employed. The greatest increases are shown by FLT, with an almost four-fold growth in real terms, and Toolmex, which has risen from negative capital employed in 1979/80 to over [pounds]2 million in 1990/91. A company by company comparison indicates no direct association in most cases between changes in capital employed and total assets. For example, Skorimpex shows an increase in capital employed but a decrease in total assets. This may indicate a changing reliance on short-term liabilities as a source of funds. Hill[7] noted that the current liabilities of British based socialist-owned companies were often at higher levels than might be expected from purely commercial considerations. Given that the business of these companies usually includes the import and distribution of Eastern European products, significant trading activities with other group companies could be expected. However in some cases the inter-company balances form a very substantial proportion of total current liabilities. For example, Skoda, FLT and Skorimpex all have balances owing to their parent companies which comprise an average of over 70 per cent of current liabilities for the three recent years reviewed. Skoda's holding company balance also appears to be particularly high in comparison with its turnover. Some of these items may therefore effectively be operating as long-term finance, thus obscuring the true magnitude of capital employed. In the case of Anglo-Soviet, this implication is stronger still, in that there is a consistent amount of [pounds]1,279,000 owing to the holding company included in current liabilities for 1989, 1990 and 1991. Finally it is worthy of particular remark that CZ is the only company in the sample with long-term loans explicitly forming part of its capital employed. These amounted to 36 per cent of capital employed in 1991, and the financial statements indicate them to be interest free and unsecured. It is therefore reasonable to assume that they are provided through the parent company.


Net profit margin. Table VI illustrates that levels of profitability have remained relatively low. A comparison with the net margins of UK businesses in the distribution and service sectors as a whole shows the selected companies to be performing at relatively low levels.

Only Technical and Optical and Anglo-Soviet were performing at anything other than the lowest quartile levels overall, with Anglo-Soviet also showing a substantial improvement in the last year reviewed. The published accounts reveal that this could be attributable in part to the disposal of the subsidiary company which also considerably reduced its total turnover.

When reviewed alongside the net profit margins of the earlier period, the sample companies' achievements appear to be much the same as before. The most significant changes appear to be in Anglo-Soviet and in Technical and Optical, which have both made improvements in their position.

Return on total assets. The return on total assets of the sample companies does not compare very favourably with those of the UK service and distribution sectors, and some vary considerably over the period (see Table VII). Six of the companies fall within the lower quartile ranges for 1990/91, the remainder mostly around median levels. Toolmex and Ridpath show particularly steep declines, and the reasons for this are evident from changes in market conditions, with organizational changes in the sources of supply having a particularly important effect on Ridpath[13, pp. 91-8].

The general position seems to have improved slightly from the 1978/80 position, where seven of the companies fell below the lower quartile value and none appeared above the general median level.

Return on capital. Most of the selected companies show considerable fluctuations in return on capital for the three-year period reviewed (as can be seen in Table VIII), but for 1991 are fairly evenly distributed above and below the median levels for the UK service and distribution sectors. Although the definition of capital employed used in ICC[10] appears to be different to that used in the earlier study it is nevertheless interesting to note that Hill[7] also found a considerable dispersion around the median levels for the comparable measure used (return on net assets). Comparable capital employed data for the earlier period have been extracted by the authors from the original published accounts of the companies, and these confirm the wide variations found in this performance measure. The comments noted above regarding the extent and nature of holding company balances also apply to this ratio, and its interpretation should therefore be treated with some caution. However, it may be inferred from the profitability ratios in general that, as concluded by Hill[7], the primary purpose of these companies is not the generation of high levels of profit, but to serve as a channel for the receipt of foreign currency.

Asset utilization

Total asset turnover. Table IX shows total asset turnover ratios. In contrast with some of the other measures used, the total asset turnover ratios compare quite favourably in the recent survey period with those of the UK distribution and service sector industries as a whole (Table IX). Asset utilization in five of the ten selected companies is higher than the upper quartile for all three years, although the other five tend towards the lower quartile. FLT and Nafta show particularly efficient utilization ratios in this context, and a comparison with their particular sectors (metal stockholders (non-ferrous) and oil and gas distribution respectively) confirms their positions well ahead of the averages[10, p. 33].

In the earlier period, only three of the ten companies showed asset utilization ratios at median or higher levels, although only Nafta and Toolmex have shown any improvement on an individual company basis. Anglo-Soviet is notable for a substantial decline, from 17.3 in 1989/80 to 0.5 in 1990/91.

There could be many explanations for these variations, including company policies and strategies for fixed asset investment (or lack of it), inventory holdings, debt factoring, cash management and so on. Unfortunately these are not readily apparent from the published accounts of individual companies.

Fixed asset turnover. Finally, Table X shows fixed asset turnover ratios. Again in many cases these appear to be better than those in comparable UK business sectors, with six of the sample companies generally exceeding the upper quartile figures. However, in comparing with the earlier period, only Nafta, and to a lesser extent FLT, show any significant improvement. Skoda, Toolmex and Ridpath seem to be operating at slightly higher levels than 11 years ago, but their recent pattern is of decline. Anglo-Soviet shows a tremendous decline in this ratio since the earlier period, and London Chemical has also declined substantially. Most of the companies show quite low percentages of fixed assets to total assets, but this would be expected in nonmanufacturing companies. Again, it is difficult to identify the causes of these fluctuations from the information available, and it should also be noted that a lack of investment in fixed assets can also cause an apparent improvement in this ratio as the book value of the assets declines over time.


The information presented in this article has illustrated that even though major changes were taking place in the countries of their parent organizations in the early 1990s, most of the British subsidiaries of Russian and East European organizations appeared to be operating in generally the same lines of business as previously. This evidence, presented in several of the companies' annual reports, was confirmed by data obtained from follow-up case studies of a sample of four companies previously surveyed ten years ago (London Chemical Company Ltd, Toolmex Polmach Ltd, FLT and Metals Ltd, Ridpath Pek Ltd). The information from these case studies, which is fully reported in Hill and Hay [13], also showed that the companies were achieving a growing sense of independence in decision making related to their business activities, reacting to changes in markets and supplies by policies of product diversification and broadening of the base of supplies.

As a result of these changes, combined with support from their parent multinational, the subsidiary companies have survived and maintained some competitiveness in their established markets. In general, however, these companies have remained in positions of low levels of financial performance, compared with UK businesses in general, although some of these companies have improved their relative position compared to ten years previously.

The financial data also show, though, that most of these ten companies have changed substantially over the period since the first survey in terms of total assets, capital employed, turnover and profit. However from the information given in their published accounts, most seem to be operating in generally the same lines of business now as then. When compared with UK businesses in general, the companies still appear to be positioned in the lower levels of performance, although there are some exceptions. On the other hand, there is also evidence that some of these companies have improved their performance position relative to UK businesses in the service and distribution sectors since the 1978/80 survey period.

Since some of the information contained in this article is based on published data from the early 1990s (as published financial data may not be available until two years after the financial year to which it relates) it is important that this type of research be repeated at regular intervals to assess the changes in performance and operations of Western subsidiaries of multinationals from the former socialist countries. This updating of such research is clearly important as political and economic turbulence continues in Eastern Europe and the former USSR.

On the basis of the research presented in this article, it can be concluded that there is little evidence of a major transition in the business performance of the Western subsidiaries of the former socialist multinationals, probably because of a continuing scarcity of financial resources in their parent organizations as a consequence of their domestic political and economic problems. Furthermore, the recession in Western markets, particularly in the UK where this research was conducted has also acted as a barrier to their business development. The emergence of the former subsidiaries of Eastern multinationals as competitive entrepreneurs in modern capitalist economies will therefore require political and economic stability and development in their parent locations, and an end to market recession in their host countries.


1. McMillan, C.H., "Growth of external investments by the comecon countries", The World Economy, Vol. 2 No. 3, September 1979, pp. 363-86.

2. Goldman, M.I., The Enigma of Soviet Petroleum: Half Full or Half Empty, George Allen & Unwin, London, 1980.

3. McMillan, C.H., Multinationals from the Second World, Macmillan, London, 1986.

4. Hill, P., "Les proies des multis rouges", Vision, February 1977, pp. 44-8.

5. Meyer, H.E., "This communist internationale has a capitalist accent", Fortune, February 1977, pp. 134-48.

6. Hamilton, G., Red Multinationals or Red Herrings?, Frances Pinter, London, 1986.

7. Hill, M.R., "Soviet and East European Company Activity in the United Kingdom and Ireland", in Hamilton, G. (Ed.), Red Multinationals or Red Herrings, Frances Pinter, London, 1986, pp. 17-87.

8. McMillan, C.H. and Egyed, P. (Eds), East-West Business Directory: A Listing of Companies in the West with Soviet and East European Equity Participation, Duncan Publishing, London, 1983.

9. Hewett, E.A., Reforming the Soviet Economy, The Brookings Institution, Washington, DC, 1988.

10. ICC, Industrial Performance Analysis, Hampton/ICC Business Publications, 1992/93.

11. Accountancy, Vol. 100 No. 1132, December 1987, p. 51.

12. Accountancy, Vol. 114 No. 1212, August 1994, p. 67.

13. Hill, M.R. and Hay, C.M., East-West Trade, Industrial Co-operation and Technology Transfer, Avebury, Aldershot, 1993.

14. Cornforth, J., "Update of the performance and strategies of selected (former) Soviet and East European owned subsidiaries operating in the UK 1986-1991", unpublished MBA project, Loughborough University of Technology, Leicestershire, 1993.

Ruth King is Lecturer in Accounting and Financial Management at Loughborough University Business School and is Executive Editor of Accounting Education: An International Journal. Her current research interests are accounting, education and financial reporting.

Malcolm Hill is Professor of Russian and East European Industrial Studies at Loughborough University Business School. His current research interests include technology transfer from Western companies to organizations in the former socialist countries of Eastern Europe.

John Cornforth is an aerospace engineer who has recently completed an MBA at Loughborough University Business School.
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Title Annotation:Eastern European and Russian companies with British subsidiaries
Author:King, Ruth; Hill, Malcolm; Cornforth, John
Publication:European Journal of Marketing
Date:Dec 15, 1995
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