Report: Future of Russian Middle Class
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Report: Future of Russian Middle Class

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Team Finland Future Watch Report

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Report: Future of Russian Middle Class Report: Future of Russian Middle Class Document Transcript

  • Future of Russian Middle Class Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Contents Executive Summary .......................................................................................... 3 Background & objectives ................................................................................... 4 Russian middle class today ............................................................................... 5 Middle class definition for the purpose of current project ................................... 5 Characteristics of Middle Class in Russia .......................................................... 9 Middle class lifestyle in Russia and Finland ..................................................... 10 Free time of middle class................................................................................. 13 The future of Russian Middle Class ................................................................. 16 The most pronounced trends in Russian middle class lifestyle ........................ 16 Future changes in the Middle Class structure .................................................. 18 Future opportunities for Finnish companies ..................................................... 20 Concluding Words – Quo Vadis, Middle Class? .............................................. 24 Appendix 1. Middle class education and work ................................................. 26 Appendix 2. Middle class families .................................................................... 28 Appendix 3. LIFE INDEX - List of indicators and definitions............................. 30 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Executive Summary The post-Soviet Russian middle class has become object of wide interest and international research work due to its sudden and emerging purchasing power, ambitious travel schemes and passion for luxury brands. This writing has been composed with purpose to highlight such trends, phenomena and habits of Russian middle class which should be considered by Finnish industries and service providers when planning product offering for Russian clients. Finnode team in Russia has approached the subject based on interviews of 1,300 persons, future sessions, internal workshops and debate. Foresight work requires imagining possible and likely future but also considering negative scenarios. The latter is usually more difficult. Also in this case our assumption remains that the Russian middle class will continue its prosperous path – provided that no major economic turbulence will hit Russian Federation and its oil related income. For middle class’ sake, it is important that political situation within the country remains peaceful and no ethnic conflict arises in territory of Russia which would trigger chaos or international scandals. Being already empowered by property and income, the middle class would like to have impact and saying also in politics – time will tell how vocal it will become. This study suggests that the current Russian middle class has high ambitions related to the next generation: families are spending without regrets for children’s education, additional language courses and hobbies in order to provide them with opportunities abroad and to secure their access to universities. Interviewees pointed out lack of free time and high stress level which is one reason for investing into family holidays with leisure activities and harmony. Traffic congestion is and will be a burden and time-killer in every mega-city of Russia and there is not much relief to situation apart from onlineshopping, remote work and home entertainment. Maintenance of income level requires hard working and employers do not compensate for sick leaves: with help of medicines and means of phytotherapy, middle class citizens try to get to work every day. Annual vacation is shorter than in EU countries and Russians want to get value for the precious days – without traffic jams. If holiday can be combined with health check and personal training program, plastic surgery or English course for children, even better. Russians are integrating with the global middle class community over cyberspace and becoming more European as time goes. Social media has suddenly become powerful tool of communication and marketing. It should be highlighted that the middle class is on the move and emerging rapidly: ‘new entrants’ explore opportunities that money can buy, are hungry for luxury and travel. The ‘maturing middle class’ appreciates more sustainable consumption and maintenance of health and wealth. From Finnish viewpoint it is important to understand what makes middle class ‘tick’ tomorrow: will it be the flow of new entrants that continue travelling to Finland for affordable tax-free shopping? Is it reasonable to expect that the maturing wealthy middle class will appreciate Finnish food products also in the future? Finnish business community needs to consider its position in relation to middle class consumers, considering country-competitors across the EU zone and Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • co-create services for Russians together with Russians. Finland’s export opportunities of future may appear largely in cyber services, game industry or leadership consulting. Future can be different than we think, but it might be even more different if we thought about it in advance. Background & objectives The writing illustrates lifestyle of so called Russian middle class with purpose to assist various Finnish stakeholders to understand needs and ambitions of this powerful and emerging client segment today and tomorrow. Service providers and producers from tourist industry to construction corporations and retail chains will benefit from better understanding of Russian middle class families’ daily challenges and desires. The main objectives of the study were as follows: • To describe and define the so called Russian middle class in general figures (number of people, average income, age, family status, etc.) and estimate its growth within next 3-5 years, including demographics. • To identify existing and forecast most pronounced trends that will be shaping Russian middle class lifestyle in the future To assess influence and assumed changes of this life style on consumption behavior and sketch potential new business opportunities for Finnish companies and industry clusters. • To summarize results in a report and disseminate findings via signal session or seminar. It was decided to focus at mega cities of St. Petersburg and Moscow which are trend setting in many ways. The study was conducted using both primary and secondary methods of research and consisted of following phases: desk study, expert interviews, focus groups – finally data analysis and reporting. Following sources of background material were used: • Russia Mega Trends: Macro to Micro Implications for 2020 http://www.bmstu.ru/content/image/files/GIL%202012_Russia%20Mega%2 0Trends.pdf by Foster and Sullivan, 05/2012 • Levada Center Research: http://www.levada.ru/eng/research • Consumer Speed Kings. Team Russia Leads the World by Investment Research, http://slon.ru/images/doc/sberbank_consumer_speed_kings.pdf Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. Sberbank 02/2013 www.tekes.fi
  • Russian middle class today Middle class definition for the purpose of current project There are numerous approaches and definitions of middle class in Russia which has no longer than 20 years of Post-Soviet history behind it. Usually three main items are mentioned as criteria – material status, social and professional status and self-identification. Material status Social and professional status Selfidentification In this study we have chosen to highlight material status as criteria and pay special attention in expenditure of households with purpose to analyze and forecast purchasing behavior of middle class. The following definition was used: Russian middle class are the people who have after Soviet Union managed to adapt to conditions of modern market economy and provide appropriate consumption level and lifestyle for their families. By ‘appropriate consumption level’ we mean the following: - family lives in an apartment (rented, acquired using mortgage lending or inherited) - at least one car in the family - significant expenses are used for services – education, insurance, entertainment - savings exist - vacation abroad 1-2 times per year Let us see what this kind of lifestyle means in terms of annual income and expenses. The estimations were made based on Finpro experts’ knowledge regarding cost of living in Moscow and St. Petersburg. It was concluded that the approximate monthly income per adult family member is about 60,000 Rubles in Moscow and about 50,000 Rubles in St. Petersburg (taken into consideration that there is significant 20-%-difference in cost of living between the two cities). Converting to Euros, the net income per family member reaches 17,000 – 25,000 Euros annually. Income tax is not progressive but uniform 13% in Russia. It is worth mentioning that the average mortgage of Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Russian banks had reached 16 - 18% in 2012, yet lending of households is rapidly increasing. TABLE. RUSSIAN MIDDLE CLASS FAMILY (2 ADULTS & 1 CHILD) IN MOSCOW 1 AND ST . PETERSBURG. COST OF LIVING Item of expenditure Apartment, mortgage or rent 1 car per family, insurance, fuel, and maintenance Annual cost, Russian Roubles/Euros 540 000/ 13 500 150 000/ 3 750 300 000/ 7 500 Food 150 000/ 3 750 Vacation Services, fitness, healthcare, education, telephone 1 Child – toys, activities, education, babysitter Entertainment – going out to cinema, theater, restaurant, cafe 250 000/ 6 250 390 000/ 9 750 150 000/ 3 750 150 000/ 3 750 Savings Total annual expenditure Monthly net salary per 1 employed family member Income per family member given that there is 1 child 2 080 000/ 52 000 86 600/ 2 165 57 800/ 1 445 For understanding and clarity, it was necessary to observe differences between life styles of middle class in Finland and Russia. Based on income statistics, we tried to identify group which corresponds to the earlier defined Russian middle class. We use Better Life Index comparison for comparison. “Better Life Index” is designed to compare some of the key factors of life including education, 1 Source: Finpro experts’ estimations Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • housing, environment which contribute to well-being in OECD countries. It’s an interactive tool that allows to see how countries perform.2 We compared average values of Finland and Russian Federation. According to Better Life Index in Finland, the average person earns 19 000 Euro, compared to 10 700 Euro in Russia. The level of social payments and benefits in Finland enables average Finn to feel secure and support similar lifestyle (housing, car, vacation, level of service expenditure). 25000 20000 19 198,5 15000 10 700,8 10000 5000 0 Finland Russian Federation Households’ income In terms of employment, 68% of people aged 15 to 64 in Finland have a paid job, above the OECD employment average of 66%. 68% 68% 68% 68% 67% 67% 67% 67% 67% 66% 68% 67% Finland Russian Federation Employment rate The number of rooms in a dwelling, divided by the number of persons living there, indicates whether residents are living in crowded conditions. Overcrowded housing may have a negative impact on physical and mental health, relations with others and the development of children. In addition, dense living conditions are often a sign of inadequate water and sewage supply. In the OECD, the average home contains 1.6 rooms per person 2 Information souce. OECD report http://www.oecdbetterlifeindex.org/ The full list of index is in the attachment Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • 2 1,9 1,5 1 0,8 0,5 0 Finland Russian Federation Rooms per person Life expectancy is the most widely used measure of health, although it only takes into account the length of people’s life and not their quality of life. In Finland the life expectancy is 80 years compare to 69 years in Russia. 85 80 80 75 69 70 65 60 Finland Russian Federation Life expectancy On average, 85% of people in OECD countries say they are satisfied with water quality, so Finnish index is on the top (94%) compare to 51% in Russia. 100% 94% 80% 60% 51% 40% 20% 0% Finland Russian Federation Water quality Concerning the public sphere, there is a strong sense of community and high levels of civic participation in Finland, where 94% of people believe that they know someone they could rely on in time of need, higher than the OECD Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • average of 91%. In Russia 88% of people believe that they know someone they could rely on in time of need In general, Finns are more satisfied with their lives than the OECD average, with 82% of people saying they have more positive experiences in an average day (feelings of rest, pride in accomplishment, enjoyment, etc) than negative ones (pain, worry, sadness, boredom, etc). This figure is higher than the OECD average of 80%. In general, Russians are less satisfied with their lives than the OECD average, with 74% of people saying they have more positive experiences in an average day. Characteristics of Middle Class in Russia For the quantitative research we selected interviewees according to following criteria for identification of middle class: - Living in Moscow and St. Petersburg and age group 18-54 (working population) - Moscow – monthly income per family member exceeding 60,000 Roubles. - St. Petersburg – monthly income per family member exceeding 50,000 Roubles. The interview research was carried out in spring, 2012. In total 1300 persons were interviewed: 913 respondents in Moscow and 45 3 in St. Petersburg. Key characteristics are described in below table. TABLE. CHARACTERISTICS OF MIDDLE CLASS IN RUSSIA3 Еducation and employment Family 1. Educated. Overwhelming majority 1. Most representatives of middle class of middle class representatives have a family and more and more has higher education (more than couples choose not to register their 80%). relationships officially (see 2. Employed by the company or appendix). having their own business. 2. Most families (about 70%) have Practically all representatives of children (number includes also middle class work (about 95%). couples with adult children) 3. Most representatives of middle 3. Above 50% of middle class families class work under job contract; have children younger than 11 years only 20% in Moscow and 24% in old . St. Petersburg have their own 4. Most representatives of middle class businesses. live in their own apartment, either a 4. As a rule, representatives of privatized one or financed with middle class work as specialists mortgage lending and/or savings. and department heads. The findings of interview study seem to match with results of the recent Sberbank research which is devoted to the consumer market development of Russia 2013-2020. 3 Information source: Synovate Comcon. Wealthy Consumer Lifestyle Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Acording to Sberbank , “the average age at which Russians are marrying is rising. Marriage is becoming less popular, and the tradition of staying with one’s parents close to the point of marriage continues to break down. Multigenerational and other combined living arrangements are leading to shifting consumption patterns. Russian trends have diverged from the West, where the ‘floating generation’ is increasingly either staying home or returning home to save money, while peers and even separated couples are forced to cohabit”4 Middle class lifestyle in Russia and Finland Let us look at main differences of middle class in Russia (Moscow, St. Petersburg) and Finland. TABLE. DIFFERENCES IN MIDDLE CLASS LIFESTYLE Finland Helsinki City population Helsinki – 1 mln Working hours 8 a.m. – 4 p.m. Approximate time of leaving home Approximate time of returning home Vacation 7 a.m. Russia Moscow & St. Petersburg Moscow – about 10 mln St. Petersburg – about 5 mln 9 a.m. – 6 p.m. (extra working hours usual, frequently finish work after 8 p.m.) 6.30 a.m. About 5 p.m. After 8 p.m. 30 days of annual leave converts to 5 working weeks of vacation. In average 10 public holidays annually. Sick leave 2 months with retention of salary Payment for pharmaceuticals 80% by insurance (KELA), 20% by patient 28 days of annual leave converts to 4 working weeks of vacation (as Sat & Sun are included). In average 12 public holidays per year First day of sick leave with retention of salary (thereafter max 800 EUR monthly compensation from public fund) Usually 100% by patient Some observations and key differences between life style of Finnish and Russian middle class people should be considered Information source: Consumer Speed Kings. Team Russia Leads the World. Sberbak Investment Research. February 2013 4 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • - Russians have much less free time during weekdays and parents get home very late in evenings. Business life ‘wakes up’ typically after 10.00 am. - To keep fit and retain working condition is extremely important. Unlike Finland, sick leave days are immediately cut from salary in Russia. It is quite common for an employee to go to work during sick leave or being ill. As a rule, this is explained by heavy work load and employee’s fear to lose his job and income. - Annual vacation is short compared to Finland and many other EU countries but numerous public holidays allow people to take long weekend breaks in connection to Women’s Day March 8th, 1st of May, Victory Day May 9th, National Day and New Year’s celebration. - Growing share of “virtual” space in middle class’s life: shift of communication to mobile telephones, social networks. Almost all (more than 90%) middle class representatives use the Internet. Almost half of middle class representatives in St. Petersburg and Moscow use mobile Internet. The most popular social networks VKontakte (eng. ‘in touch’) www.vk.com and www.mail.ru have applications for mobile phones. VKontakte has layout very similar to Facebook. - People use a lot of time in commuting traffic. Mobile working, using tablets and smart phones is common during subway trip, also during driving. Specifically in Moscow, road traffic jam may stop anyone even for hours. Let us look at the differences in the expenses breakdown of middle class in Russia and Finland. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • CHART. MIDDLE CLASS EXPENSES BREAKDOWN 5 100 % 7,2 % 90 % 5,7 % 7,2 % 9,2 % Savings 5,0 % 80 % 18,8 % 18,7 % 70 % 60 % 12,0 % 50 % 7,2 % 40 % 7,2 % Child – toys, activities, education, baby-sitter 14,4 % 30 % Entertainment – going out to cinema, theater, restaurant, cafe 6,4 % 17,0 % 11,0 % Vacation Food Transport (1 car per family, insurance, gas, repairs) 20 % 26,0 % 27,0 % Russian middle class 10 % Services, fitness, healthcare, education, telephone Average Finn Flat, mortgage or rent 0% 1. Rather high expenses on children (toys, education, insurance, baby-sitter) are explained by the low level of state support and high children-centeredness of middle class families when both working parents try to invest into the child as much as they can. 2. Rather low expenses on services. It is expected that with development of middle class in Russia and growth of their income, the share of this type of expenses will grow. 5 Information source: Statistics Finland. Finpro expert estimation. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • CHART. MIDDLE CLASS ONLINE SHOPPING 6 90 80 70 60 50 40 30 20 10 0 73 73 77 78 51 49 32 23 personal computer laptop Moscow tablet mobile phone/smart phone St. Petersburg It should be noted that more than 50% of middle class representatives in St. Petersburg and Moscow already practice online shopping. Hectic lifestyle and traffic congestion in mega-cities will contribute for growth of cyber shopping and e-services in the future. Sberbank report highlights this trend as well – «Internet retailing will be boosted by growing PC, laptop and tablet ownership. More store based retailers are launching online offers that are developing extremely rapidly»7 Free time of middle class According to interview research of Finpro, middle class representatives spend their free time in a rather traditional and urbanized manner i.e. they are frequent visitors of theaters, museums, restaurants, bowling centers and sports events. Families go to parks together or drive to the country-side at weekends. It is worth mentioning that around 70% of adults in mega-cities go to cinema every month. Cultural activities About 35-40% of middle class representatives visit theaters, museums, galleries and concerts at least once a month. Approximately 30% of interviewees informed to visit nightclubs occasionally. The survey shows that citizens of Moscow and St. Petersburg visit cultural events more often than Russians in general. Information source: Synovate Comcon. Wealthy Consumer Lifestyle Information source: Consumer Speed Kings. Team Russia Leads the World. Sberbak Investment Research. February 2013 6 7 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • CHART. FREE TIME. VISITED ONCE A MONTH OR MORE (% FROM POPULATION 8 OF EACH CITY ) 80 69 68 70 60 50 40 40 41 40 37 41 40 34 27 30 20 10 0 cinema theatre museum Moscow concert night club St. Petersburg On average, families spend 10-30% of their total budget on entertainment and leisure. Several focus groups participants mentioned that they have money to spend on entertainment but don’t have enough time. Research participants consider that visiting cafes and restaurants is part of their everyday lifestyle. Cafes and restaurants are convenient places for all kinds of meetings (business meetings, meetings with friends or family members) and popular for quick lunch or snack during the day. CHART. EATING OUT. VISITED ONCE A MONTH OR MORE (% OF POPULATION )9 100 81 80 80 72 63 61 60 60 58 60 58 54 50 sushi bar 53 bar restaurant 40 20 0 café fast food pizzeria Moscow St. Petersburg 77% of middle class representatives in large cities visit cafes as least once a month; in Moscow with frequency 2.1 times a month. About 64% of middle class representatives visit fast food restaurants, this share in Moscow is 8 9 Information source: Synovate Comcon. Wealthy Consumer Lifestyle Information source: Synovate Comcon. Wealthy Consumer Lifestyle Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • higher. Pizzerias come as number three in ranking. 58% of the population of mega cities (+ 1mio) visit pizzerias at least once a month. In Moscow the share of people fond of pizza restaurants is significantly higher than in other cities. The share of sushi bar visitors coincides with the share of visitors of pizzerias and bars. The average frequency of visits to pizzerias and bars in cities 1mln.+ varies from 1.6 to 1.8 times a month. According to Sberbank findings “Eating habits in Russia are changing: the speeding pace of lifestyles has led to a desire to reducethe time spent cooking. This has resulted in greater use of processed and precooked foodstuffs, as well as a rise in snacking and eating out (including fastfood restaurants)”10 Physical activities Most middle class representatives try to lead an active lifestyle by visiting swimming pools, saunas, fitness clubs and gyms. CHART. VISITING FITNESS AND SPA CENTERS (% OF POPULATION )11 60 45 52 51 48 48 47 33 32 40 20 0 bath, sauna swimming pool Moscow fitness-club gym St. Petersburg Less than half of middle class representatives visit fitness clubs (in Moscow the share is - 48%, and in St. Petersburg 47%) once a week. The number of swimming pools visitors is roughly equal to the number of people visiting fitness clubs. Muscovites visit swimming pools more frequently than residents of other cities 1mln.+, about 2.3 times per month on average. Approximately 50% of middle class representatives visit public baths and saunas and 35% go to gym once a week. To keep fit and look good, middle class representatives also visit hairdressers’, beauty parlors and beauticians’. Russians appreciate sauna but it is not common to have home-sauna in a city flat. Younger Russian women already comprise a universe of consumers that spend more of their disposable income on beauty treatments than most other comparable nations. The desire for beauty and youthful looks shows little signs of ending, as anti-aging cosmetics, Botox treatments and plastic surgery procedures still command growth rates in the range of 15 - 20%12. Information source: Consumer Speed Kings. Team Russia Leads the World. Sberbak Investment Research. February 2013 11 Information source: Synovate Comcon. Wealthy Consumer Lifestyle 12 Information source: Consumer Speed Kings. Team Russia Leads the World. Sberbak Investment Research. February 2013 10 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • The future of Russian Middle Class The most pronounced trends in Russian middle class lifestyle 'new entrants' - middle class is growing in absolute number hectic pace of life & congestion demand for services time spent in cyber space mistrust in Russian service providers integration of middle class into world community New entrants and maturing middle class – middle class is growing in number Share of middle class is growing in population structure and absolute poverty is decreasing. According to Levada Center, growth rate of middle class is about 1.5-2% per year. If rate remains the same, the share of middle class will reach 16-20% by 2018. In terms of number of people, middle class will amount to 20-26 million people in 2018 (taking into consideration the forecast of total population of Russia 131 million). Approximately 50% of middle class will live in the two Russian capitals – Moscow and St. Petersburg. The share of middle class representatives in Novosibirsk and Yekaterinburg will increase up to 1015% of the total population by 2018. The layer of middle class will also grow in other cities with more than 1 million people (Nizhny Novgorod, Rostov-on-Don, Krasnodar, Samara, Kazan, Chelyabinsk, Ufa, and Volgograd). It should be considered, whether the ‘new entrants’ of the club require different service offering hotels and restaurants compared to ‘the maturing’ middle class members who already have history of travelling and more mileage behind them. New entrants are probably more interested in catching up living standard and material than applying ecological way of living? Some say, that the ecological awareness is hitting middle class of Russia, but those who are just about to get wealthy, would probably take care of their material ambitions first. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Hectic pace of life & demand for services In future, the pace of life of middle class will become even more hectic and active. We expect that in the future, distant working will increase and middle class will work at least 20% of total working hours from home. The lack of free time and its optimization will become even more burning issue for middle class. Growing population of big cities (Moscow and St. Petersburg) and growing number of cars will make middle class search for new ways to optimize working time and weekend-time. People are getting more anxious about waiting times and traffic jams. We forecast that the value of services in middle class expenditure pattern will grow approaching the European level (from 10-12% to 18-20%). This means the market of services for middle class will grow almost twice. Mistrust in Russian service providers Strong trend of mistrust in Russian service providers and products exist specifically in communal sectors of education and health care. Middle class consumers seem to trust foreign service providers and appreciate education opportunities, medical treatment and diagnostics abroad better than home. This creates a unique and fast-growing market of service industry outside of Russia. According Sberbank data “The incidence of adult and private education in Russia is on the rise, and there are many more private schools and education possibilities than ever before”13 Time spent in cyber space and virtual experiences Due to hectic pace of life, middle class even now “lives” more and more in the virtual space. It includes socializing with friends (social networks), finding information about products and services, distance working, online shopping. In the future most purchases will be made online. The Internet will be the main information source for middle class. Besides, the Internet will expand the choice for Russian buyers because the number of customers of foreign online stores will grow very fast. It should be noted that the influence of social networks as a marketing and sales tool will grow in 5 years. Integration of Russian middle class into world community Open borders, lower visa barriers, better knowledge of foreign languages and increased leisure travelling abroad will make Russian middle class lifestyle become closer to European one but national specifics will stay – Russian cultural heritage and pride for should never be underestimated. Signals of Europeanization came out from interviews: • Long term love for luxury goods and visible ‘bling-bling’ is going out of fashion. Maturing middle class Russians are becoming rational with their spending and Information source: Consumer Speed Kings. Team Russia Leads the World. Sberbak Investment Research. February 2013 13 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • many are committed to years of mortgage. Jokes about ‘nouveau riche’ Russians are not that common compared to immediate post-Soviet years. • Re-vitalizing. Increasing number of middle class professionals becomes food conscious and sports-oriented. First signs of interest towards biologically pure (bio) products appear even in big retail chains, where the first shelves with "bio" goods were opened quite recently. • Middle class Russians are becoming more ecologically conscious and responsible. The ecology movement is a hot topic in Russia and its leaders make up significant share of political opposition. Energy efficiency, renewable energy and energy independency are fast growing trends among middle class and upper-middle class Russians that live in their own houses. Future changes in the Middle Class structure Considering middle class as a group of people with common social and economic features (level of income, education and professional status), we suppose that in the future two subgroups will differentiate: 1. Those that currently belong to the middle class i.e. the maturing middle class. For this group, investments will become priority rather than consumption: investing in future, in extra sources of income and development of next generation. Most desired services will be education abroad, leisure for teenagers and family entertainment. As soon as the representatives of this segment have already purchased real estate, they will be primarily interested in home improvement, furniture, indoor design, and countryside real estate and apartments for their growing children. 2. The ‘wanna-be’ middle class or new entrants. Those who currently cannot qualify for the middle class due to early phase of career which is limiting income today but who have good educational background combined with ambition. Within soon they would need to solve the same challenges and tasks as the "current middle class": finding a balance between work and family leisure, lack of free time, allocating a part of family income for investing in real estate and future of the family, finding products and services of best quality for themselves and for children. Above matches the usual middle class evolution but it seems that in Russia the cycles are faster than average. Wide range of services will soon need to be adjusted and focused on different age groups within middle class. In general, it can be asserted that, despite their unevenness, the new and old representatives of middle class will have similar problems, and their expectations related to product and service market will be similar too. The key thing is that middle class is emerging strongly during future years and new members have a lot to catch up. The income level of middle-class people will depend on inflation and can increase annually by 10-15% at most. This huge consumer segment is by large debt-free. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • The following current trends are assumed to continue or strengthen in the future: • rational consumption: gathering information about products and services in advance, comparing cost with quality and advantages, quality over price • increased online shopping of products and services and purchases abroad • investing and purchasing real estate in Russia and abroad • the desire to choose natural, healthy and clean food in Russia – respect for best-before-dates • careful attention to health, sports activities (at home or fitness-centers), appearance, using services of beauty parlors • use of private medical services due to mistrust in public health care • increased attention to education and multi-focused development of children, wider use of paid educational services and calculating options of foreign education of children • quality time with family: home and abroad • more traveling - 'full-time' vacations and express weekend trips to European countries, exotic experiences • emigration is considered as realistic option - part of middle class is packing • more vocal protests against misbehaviors of public authorities and politicians; empowered by property, the middle class desires power in politics, they also demand transparency and fair treatment or alternative thinking • middle class wants to interact with middle class: visible trend for separation between Russians and immigrants from ex-Soviet territory. Wild Cards - What could stop them? The middle class will expand, unless some substantial negative changes happen in the Russian political and economic environment. The growth of the middle class can be constrained by legislation which prevents free business development in Russia. The future of these people depends on the state policy and whether citizens agree to it. International conflict or internal ruling could prevent middle class from travelling and this would create unrest in people. Currently the state policy can even provoke emigration and brain-drain is a real risk for the future. Anti-corruption measures of Kremlin are loud and visible across the local national media but Russians are suspicious of any concrete results and doubt that any significant change would take place in middle class citizens’ favor. Time will tell. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Future opportunities for Finnish companies How will changes in the quantity, composition and lifestyle of Russian middle class influence the opportunities for Finnish companies? In the course of the project, four key sectors of interest were chosen to be examined more carefully: well-being and health care, leisure travel, food & diet and education. It seems that the Finnish offering is particularly strong in mentioned fields. Some ideas have been listed in below chart and described underneath: •health resorts and well-being centers •check-up and diagnostics centers •centers for future mothers and mothers with babies •family centers •Nordic walking - how to do wellbeing & healthcare food & diet •tailor-made tours (hunting, fishing, golf, tennis, sailing, skating) for narrow audience •Green card for new golfers •honeymooners' weekends •anniversary travel (photos) •wine tastings •mother & baby weekends leisure & travel education •baby food •bio-products for children and for mothers-to-be •traffic snacks and survival kits •quick gourmet • short-term educational programmes for children •further education for adults •learn English in Finland (Finglish for Russians!) •100 words of English during weekend Well-being and healthcare In 5-10 years the Russian middle class will be integrated with the global middle class and familiar with lifestyle and life quality abroad. They will accept and adapt some new values such as eco-lifestyle, sustainability and seek harmony for their life. The lifestyle in big cities will still negatively influence wellbeing of the middle class: traffic situation, ecology, long working week and reduced vacation compared to EU countries. Middle class will need products and services to be able to support or recover their health and well-being quickly. Following ideas reflect local observations in Russia and interview results: Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • - Sanatorium concept could be re-vitalized and developed. This (Lat. sanare – to heal, to cure) is a medical facility where means of natural healing are used for treatment and prevention purposes (climate, mineral waters and springs, etc), as well as physiotherapy, remedial gymnastics, healthy food/diet therapy, and certain schedule providing full rest. Sanatoriums are organized both at resorts and outside them – in the countryside, in the area with favorable natural and sanitary-hygienic environment (local sanatoriums). - Health and medical tourism will become very popular. Express check-up and diagnostics of health will be in high demand. Middle class is very busy and the Russian health care cannot provide quick service. The trend of health check-up/diagnostics abroad will be growing further and more people learn about detox. - The level of trust in Russian health care is rather low. Consequently foreign clinics and sanatoriums/spa-centers in the territory of Russia will be popular in the future. In our opinion, family doctor will become a more common phenomenon in the middle class segment. Many foreign clinics have already opened facilities in Moscow and St Petersburg. - Care for future mothers, treatment of babies and small children are ‘forgotten segments’ when it comes to both medical services and wellbeing. Middle class parents are well aware of negative impact of pollution in big cities on babies and children (for example, each 5th child in St. Petersburg is diagnosed with respiratory disease, main cause of it being environment, apart from heredity). - Maturing middle class has grandparents and will be ageing: geriatric treatments or rest and activities for senior citizens might provide opportunities in Finland - Short-term rehabilitation programs will be popular. Programs with components of healthy and eco-friendly food, oxygen cocktails and mineral waters as an idea. - Family centers with leisure opportunities will be required. Multi-purpose centers for weekend stay of families with package of services for all family members from baby to grandfather. - Programs for women and men including health and wellness, beauty treatments will not go away from fashion - Family leisure programs, entertainment centers for children like HopLop, family swimming-pools and SPA centers Leisure and Travel Although in the future middle class will travel abroad more often, the total number of vacation days abroad will remain the same but there will be more business trips. Within 5-10 years Finland will find it hard to compete with such countries as Italy, Spain and France where middle class representatives go for beach vacation. Nevertheless, the “Land of a Thousand Lakes” can achieve success in “niche” products, namely: Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • - Tours intended for narrow target groups: music tourism and festival visits, fishing and hunting tours. - Medical tourism – tours with the purpose of disease diagnostics/check-up and prevention, tours for after-surgery patients, rehabilitation, tours for future mothers (preparation for labor and childbirth), tours for mothers with babies; - Individual tours with budget exceeding 1000 Euros per person. - Educational trip packages for children: ‘Learn 100 words of English before Sunday evening’, ‘Learn camping skills’, - ‘Wanna-be-golfers’ would benefit from basic skills in order to survive in ‘pay-and-play’ environment to start with. Afterwards they might return to play and then go for official Green Card. We would like to emphasize that residents of St. Petersburg and the NorthWest region are well aware of touristic products offered by Finland. There is a strong need to promote Finland in the Moscow region in the future. Moscow residents should learn more about touristic offers. Needless to say that all these services, options and packages, prices and features should be available online in Russian language and just one click away. Russian tourists are of interest to all EU countries due to growth. Food & Diet Middle class will gradually study international experience and its requirements to food quality will become higher. Among well-off buyers whom we studied in this project, the share of those who will fully shift to foreign food products/food produced by foreign companies in Russia will grow. Middle class families buy bottled water for drinking and cooking; there are special brands which are marketed as specifically purified for children. - The key dietary trend of the future will be ‘fast gourmet’ products, i.e. good, healthy and easy-to-cook meals. Vacuum packed meat products which are ready to be roasted in the oven, high quality vegetable mixes for soups and new kind of instant meals would be of interest by busy but demanding families with one or two careers. - Middle class will pay a lot of attention to the country of origin and product ingredients. - We believe that the Finnish food products including dairy products, baby food, fish and meat (if not super food) will have excellent reputation also in the future because of the country brand but there will need to be new products to match interest and curiosity of people who can afford and will pay premium for quality. - Functional food products will be in high demand, for example products for lower cholesterol or products for weight control. There will be more small shops selling directly from farmers and middle class will appreciate clean eco-apples, specifically for children. - Food concept and brand for mothers-to-be which could be connected to clean berries and eco-ingredients might be an idea. Concept could be applied to detox-products for weight control or just well-being. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Education We have identified huge potential for Finnish companies in field of education during the interviews with experts and middle class representatives. We think the demand will be concentrated in the following segments: - Language, sports and summer camps for school-children above 10 year of age are very interesting for middle class families. Such camps are seen as a chance to spend the vacation in a comfortable and safe environment, to improve health and to learn a foreign language (mostly English). - Short-term educational programs for children who come for vacation with the family: classes for several hours per day aimed at training language or sports skills. It is important that programs are adapted for Russian children. - Higher educational programs in English that enable to get a degree in the popular field. - Internships or short-terms courses and programs for students and senior school children in English. It is worth mentioning that in the future Russian middle class will pay increased attention to children-oriented services. The youngest family members will have a significant influence on decisions regarding free time and vacationing. Russians won’t learn English from TV as long as all movies are dubbed into Russian and language barrier exists between Russians and foreigners. The maturing middle class will be travelling for many years and they are not going to study new languages. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Concluding Words – Quo Vadis, Middle Class? During this foresight project, it became clear that many challenges of today will shape daily life of Russian middle class also tomorrow: congestion in traffic, stress at work and social pressure will not fade away. Motivated Russian consumers are eager to experiment with innovative services, time-savers and new smart solutions in order to improve quality of life. Middle class in Moscow are ‘New Yorkers’ of Russia – they happily pay for fast access to value adding and smart service. They do and will appreciate good food but they don’t have time to stop. Finland can be a place to stop – for a short while – but provided that our country can offer smooth landing by air and smooth border crossing by car. Shops will need to be open when middle class has time to go and Russian public holidays will need to be taken into consideration in Finland. Entire Eurozone is competing for attention of Russian consumers and travelers which is the fastest growing tourist segment in Europe. Finland’s opportunity must be easy access and great product offering, including global luxury brands but also home-deliveries and online shopping. Russians are no longer travelling in order to get access to the desired goods but rather in order to experience ease of shopping, relaxation and to have fun or treat their beauty and health. Easy access and fast track are the keys to success. Sustainability and eco-life style have not touched many Russian souls yet, but Russian media is already promoting environment-friendly solutions, idea of recycling and ‘green city’ concept. The change will start from the current middle class and their children. Finland is considered a role model in green thinking and Finnish food products are considered clean and natural. Such country image should be nursed and kept fresh as future will be greener in Russia. Green thinking will attract tourists in the future and boost Finland’s competitiveness. Food products should be modified for Russian consumers with fresh and rich outlook, considering recyclable packaging – there is space left for Finland as forerunner of green thinking. First steps of recycling are taken at the moment and if masses of mega-cities vote for clean environment, then change will be seen in consumer behavior of middle class. Middle class parents want to spend quality time with children and invest in their education. The special status of children in Russian families should not be overlooked – and there is no place like Heureka in Russia yet. Families listen to children when planning for holidays and try to make their dreams come true. Parents spend more time in considering children’s education and future career than Finnish parents. The mistrust and non-appreciation of Russian education system will contribute for interest of private education of adults as well: Finland should offer palette of educational programs in English which would include both online and residential modules. Lack of sales management training and customer service education is an opportunity. Russians want their children to learn English. Finland’s service offering should be visible and loud across the social media which has become significant commercial platform for middle class consumers. At the moment there is no one-stop-channel for virtual booking of trip and stay, treatment and fun in Finland which could be paid electronically. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Such platform of ‘My Finland Experience’ with link and access to all key service providers across the country would be an asset and direct response to the requirement of ‘easy access’ and customized holiday or tailor-made health booster weekend. Finland has a unique country brand in the eyes of middle class Russians which should be developed further: Russian food supermarket with ‘Little Finland’-corner has not been seen yet. A small country and its business community would benefit from joint effort and collaboration against competitive offering of other countries. Foresight work is a never ending process: this project will be continued by workshops and active debate in Finland across stakeholders of different industries. The power question is: which opportunities are open for us in Finland in any given future scenario of the Russian middle class? In St Petersburg 15th March, 2013 Finpro Team: Daria Ivanova Ekaterina Malevskaya-Malevich Elisa Karvonen Kirsi-Maarit Poljatschenko Ekaterina Reizman Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Appendix 1. Middle class education and work Table. Middle class education 120 100 80 PhD 60 Higher 83 84 Higher, not finished 40 College 20 0 Moscow St. Petersburg Table. Middle class work 120 100 80 Do not work 60 94 94 Moscow 40 Work St. Petersburg 20 0 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Table. Middle class occupation 120 100 20 24 80 Own business 60 Employed 40 80 76 Moscow St. Petersburg 20 0 Table. Positions held by middle class representatives 120 Other 100 80 Specialist without higher education 60 Specialist with higher education Head of department 40 Deputy Director, key specialist 20 Head (Director, CEO) 0 Moscow St. Petersburg Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Appendix 2. Middle class families Diagram. Marital status of middle class 120 100 No answer 80 Widowed Divorced 60 Single 40 Couple, unmarried Married 20 0 Moscow St. Petersburg Diagram. Children 120 100 80 30 31 No kids 60 Kids in the family 40 70 69 Moscow St. Petersburg 20 0 Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Diagram. Children’s age 160 140 120 100 26 15-18 y.o. 15 15 16 80 60 40 20 19 y.o. and older 29 12-14 y.o. 13 14 9-11 y.o. 18 19 6-8 y.o. 16 19 3-5 y.o. 19 30 22 Moscow under 2 y.o. St. Petersburg 0 Diagram. Housing of middle class 120 100 80 2 10 7 3 10 5 60 40 Rented appartment Apartment from government 74 77 20 Private apartment Private house 7 5 Moscow 0 Room in the apartment St. Petersburg Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. www.tekes.fi
  • Appendix 3. LIFE INDEX - List of indicators and definitions TOPICS INDICATORS Rooms per person Housing expenditure Housing Dwelling with basic facilities Household disposable income Income Household financial wealth Employment rate Jobs Long-term unemployment rate Personal earnings Job security Community Quality of support network Educational attainment Education Years in education DEFINITIONS SOURCES It signals whether the persons occupying a dwelling are living in crowded conditions. It is measured as the number of rooms in a dwelling divided by the number of persons living in the dwelling. it is calculated by dividing the final consumption expenditure of households in housing and maintenance of the house by the net adjusted disposable income of the households. It provides an assessment of the potential deficits and shortcomings of accommodation focusing on facilities for personal hygiene. One basic facility is considered here: a lack of indoor flushing toilet (measured as the percentage of dwellings not having indoor flushing toilet for the sole use of their household). EU-SILC for European countries and from comparable national surveys for non-EU countries It includes income from work, property, imputed rents attributed to home owners and social benefits in cash, net of direct taxes and social security contributions paid by households; it also includes the social transfers in kind, such as education and health care, that households receive from governments. Income is measured net of the depreciation of capital goods that households use in production. It consists of various financial assets owned by households (e.g. cash, bonds and shares) net of all types of financial liabilities. It is the share of the working age population (people aged from 15 to 64 in most OECD countries) who are currently employed in a paid job. Employed persons are those aged 15 and over who declare having worked in gainful employment for at least one hour in the previous week, following the standard ILO definition. It is the number of persons who have been unemployed for one year or more as a share of the labour force. Unemployed persons are those who are currently not working but are willing to do so and actively searching for jobs. it shows the average annual earnings per full-time employee it is the share of dependent employment with job tenure of less than 6 months. It shows the proportion of the population reporting that they have relatives, friends, or neighbours they can count on to help if they were in trouble. It profiles the education of the adult population as captured through formal educational qualifications. Educational attainment is measured as the percentage of the adult population (25 to 64 years of age) holding at least an upper secondary degree, as defined by the OECD-ISCED classification. it measures the average duration of formal education in which a five-year old child can expect to enrol during his/her lifetime. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. OECD National Accounts database European Union Statistics on Income and Living Conditions (EU-SILC) and national statistical offices of Brazil, Canada, Chile, Japan, Korea, Mexico, Turkey and the United States. OECD National Accounts at a Glance OECD National Accounts at a Glance OECD Employment Outlook OECD Employment Outlook OECD Employment Outlook OECD Factbook OECD Education at a Glance www.tekes.fi
  • Students skills in maths, reading and science Air pollution Environment Water quality Voter turnout Civic engagement Consultation on rule-making Life expectancy Health Self-reported health Life Satisfaction Safety Life Satisfaction Homicide rate It measures the capacity of students near the end of compulsory education. Studentswere tested on their reading ability, skills in maths and level in sciences . This indicator comes from the 2009 edition of OECD’s Programme for International Student Assessment (PISA), which focused on reading. It refers to the population-weighted average concentrations of fine particles (PM10) in the air we breathe (measured in micro grams per cubic meter); data refer to residential areas of cities larger than 100,000 inhabitants. Particulate matters consist of small liquid and solid particles floating in the air, and include sulphate, nitrate, elemental carbon, organic carbon matter, sodium and ammonium ions in varying concentrations. Of greatest concern to public health are the particles small enough to be inhaled into the deepest parts of the lung: these particles are less than 10 microns in diameter (PM10). PM10 also includes fine particulate matter known as PM 2.5. it shows the percentage of people reporting to be satisfied with the quality of local water It measures the extent of electoral participation in major national elections. Only the number of votes casted over the population registered to vote are considered. The voting-age population is generally defined as the population aged 18 or more, while the registered population refers to the population listed on the voters' register. The number of votes casted are gathered from national statistics offices and national electoral management bodies. It describes the extent to which formal consultation processes are built-in at key stages of the design of regulatory proposals, and whether mechanisms exist for the outcome of that consultation to influence the preparation of draft primary laws and subordinate regulations. This indicator is a composite index aggregating various information on the openness and transparency of the consultation process used when designing regulations. It is the standard measure of the length of people’s life. Life-expectancy measures how long on average people could expect to live based on the age specific mortality rates currently prevailing. Life-expectancy can be computed at birth and at various ages. It is based on questions of the type: “How is your health in general?”. Data are based on general household surveys or on more detailed Health Interviews undertaken as part of the official surveys in various countries. It measures overall life satisfaction as perceived by individuals. Life satisfaction measures how people evaluate their life as a whole rather than their current feelings. It is measured via the Cantril Ladder (also referred to as the Self-Anchoring Striving Scale), which asks people to rate how they value their life in terms of the best possible life (10) through to the worst possible life (0). The score for each country is calculated as the mean value of responses to the Cantril Ladder for that country. It measures the number of police-reported intentional homicides reported each year, per 100,000 people. The data come from the United Nations Office on Drugs and Crime (UNODC) and are based on national data collected from law enforcement, prosecutor offices, and ministries of Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. OECD PISA Results OECD Environmental Outlook OECD Society at a Glance OECD Regulatory Management Systems’ Indicators Surveys 2005, 2008 and 2009, OECD, Paris OECD Health Database OECD Health Database OECD Society at a Glance UNODC www.tekes.fi
  • interior and justice, as well as Interpol, Eurostat and regional crime prevention observatories. Assault rate Employees working very long hours Work-life balance Time devoted to leisure and personal care It is based on the percentage of people who declare that they have been victim of an assault crime in the last 12 months. The data presented here are drawn from the Gallup World Poll. It shows the proportion of employees who usually work for pay for more than 50 hours per week. The data exclude self-employed workers who are likely to chose deliberately to work long hours. It presents data from national time use surveys on the hours devoted to leisure and personal care in a typical day. Tekes – teknologian ja innovaatioiden kehittämiskeskus Tekes on tutkimus- ja kehitystyön ja innovaatiotoiminnan rahoittaja ja asiantuntija. OECD Labour Force Statistics OECD Time Use Survey www.tekes.fi