Differences of Doing Business in Eu Compared with Soviet System

1. What are the most important differences of doing business in the EU, compared with operating under the Soviet system?

The former Soviet Union had a system where the government controls and owns the nations natural and capital resources (communism) and where the government decides how many goods should be made. Latvia gained independence from the Soviet Union on August 1991 and joined the EU on May 2004. Although Latvian people led simple lives under Soviet control, they enjoyed high employment, productive manufacturing and less corruption.

After joining the EU, Latvian government and its’ people couldn’t quickly adapt to the changes required by an open market economy. Latvian officials were having hard time to adjust to the EU standards i.e. RS officials (revenue services) refusing to implement the changes in the tax system or to make things worst changing the rules very often without giving enough time for implementation; the officers asking bribes in order to grant approvals.

With the new market economy many people living in Latvia, especially people who had worked under the Soviet rule, were having hard time to adjust to capitalism. Latvians had different ways of thinking from the EU and the Western markets. Latvian entrepreneurs were enjoying the new open-market economy but were feeling guilty about their gains by people who had the former Soviet ideology.

2. What austerity measures did the EU impose on Latvia? Why did these measures affect Latvia’s economy so adversely?

Following the 2008 financial crisis, the gross domestic product of Latvia declined by 18% in 2009. The real estate and construction sectors had grown out of control and this burst a property bubble leading to a financial crisis in Latvia. The financial institutions’ lack of careful examining the loans during the economic growth phase had very negative effects on the Latvian economy.

In order to recover from this harsh financial crisis Latvia got emergency loans from the EU in exchange of hard austerity measures which comprised of massive wage-cuts and tax increases.

The austerity measures had an adverse effect on the economy because as a result of the cuts in the government spending there were layoffs in public and private sector. The increase in taxes reduced household income and consumption. As a result of these austerity measures there was a brain drain from Latvia to other countries and especially to Germany. The real estate prices declined, companies and individuals holding loans went bankrupt, salaries decreased, unemployment raised.

3. What are the factors that support Sandis, Kaspars and Valdis in regards to:

a) Retaining Hotel Latvia?

After joining the EU, the business environment presented disadvantages to Sandis, Kaspars and Valdis: Latvian people were slow to adopt to market economy, bankers and government officials were corrupt, building contractors were taking advantage of the excess demand in the construction industry. But according to the case we see that Latvia’s credit and investment ratings were getting better in the year 2012. Although investors become interested on buying the hotel in 2013 their offers were still much below what the co-owners considered to be an acceptable price. Considering the above factors and keeping in mind that the owners were able to overcome all the difficulties; Sandis, Kaspars and Valdis should keep Hotel Latvia because selling the hotel will result with zero net gain for them.

b) Seeking a new partner?

In order to be able to pay a larger part of their loan, co-owners are looking for an additional partner who can provide them with cash. Unfortunately they experience an unfavourable event where another hotel significantly cut down its room prices which resulted by driving away all potential