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The micro-level factors of economic growth in imperfect institutional environment

Priority areas of development: economics
2017
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal of research: to investigate factors that contribute to the growth and development of high-growth firms (HGFs) in Russia; and the role of fast-growing companies in the formation and change of the market environment. The research is focused on the high-growth firms operating in Russia, as well as Russian industrial enterprises and foreign companies.

Methodology: combines qualitative (including case-study) and quantitative methods depending on the research direction. Methods of quantitative data analysis are used to study the influence of the affiliation with business groups, as well as the factor of access to financial resources, on the emergence and development of HGFs in Russia. Also, quantitative data analysis, including regression analysis, was implemented in the research of company’s growth strategies depending on the chosen export internationalization strategy; and in the evaluation of the economic effect of foreign policy change on the performance of Russian industrial enterprises.

Case study was applied for the assessment of the role of HGFs in the formation of the market environment. The analysis of the organization of advisory bodies for business environment improvement with the participation of foreign investors in Russia is based on the research framework designed and applied in the preceding projects of 2015-2016.

Empirical base of research: Ruslana database (Bureau van Dijk) was used for the analysis of factors influencing the emergence and development of HGFs, the analysis of export activity of Russian manufacturing enterprises. For the selection of HGFs from the same database we used the combination of the “soft (OECD- Eurostat methodology, the requirement of three years of firm’s revenue growth at the level of 20 (30)%) and "hard" selection criteria (4 years of revenue growth of 30% and more for each year).

In addition, we use the accounting information from the SPARK-Interfax system, the customs declarations data from the Federal Customs Service of the Russian Federation, as well as the data of the RUFIGE survey of manufacturing firms in Russia conducted by the Institute for Industrial and Market Studies.

The analysis of the role of HGFs in the formation of market environment is based on the combination of information on the activity of HGFs and the results of interviews with the heads of HGFs participating in business associations. The analysis of the organization of advisory bodies for business environment improvement with the participation of foreign investors in Russia is based on the series of interviews with the representatives of foreign firms, heads of business associations, members and representatives of the Foreign Investment Advisory Council (FIAC) and the International Council for Co-operation and Investment (ICCI), representatives of expert organizations and governmental institutions.

Results of research: the analysis of the influence of affiliation with large business groups, as well as access to financial resources (bank loans) on the development and growth of HGFs ("gazelles") showed that:

  • Affiliation with various business groups adversely affects the company's likelihood of being a “gazelle”.
  • Affiliated companies are on average younger than independent, smaller in size, they have less average state participation, demonstrate better organic growth indicators, presumably have better access to debt financing.
  • HGFs demonstrate a higher default probability level on average and have higher chances of falling into the "blind spot" area of the risk assessment rating system.
  • HGFs due to the specifics of their growth trend are unable to take advantage of providing collateral to reduce the cost of credit risk for the bank, and also cannot claim the role of a privileged borrower.

The results of analysis of the impact of externalities from companies with foreign direct investment on the export propensity of manufacturing enterprises; as well as the effect of 2014 economic and political shocks on the growth and efficiency of Russian industrial firms are the following:

  • The higher the concentration of companies with foreign direct investment in the industry in the region, the higher the propensity of Russian companies to export in the same industry in the same region.
  • In 2015, medium-sized enterprises benefited most from the external effects from FDI, while small enterprises lack financial resources and are less free to enter foreign markets compared to medium-sized companies.
  • The damage from the 2014 economic and political shocks for globalized enterprises involved in international relations with countries that joined the sanctions resulted not in the reduction in growth rates, but in a greater decrease in sales margin.
  • No significant damage to the growth rates of Russian industrial enterprises was revealed, including firms related to Ukraine and the European Union.
  • Firms that exported to China before 2014 demonstrate higher production growth rates, while companies with a high share of imported raw materials and components show higher revenue growth rates. In addition, new growth opportunities were identified for Russian firms with moderate technological and innovation level.

The research of the role of HGFs in the formation of the market environment and institutions showed the following:

  • The self-organization process by HGFs contribute a lot to the growth of trust within certain markets, while state support for trust stimulation was not revealed.
  • The main activities of business associations aimed at improving the institutional environment include the suppression of transactions with illegal methods of counterparties motivation and combating counterfeit products.
  • HGFs use the mechanisms of business associations to form industry standards, protect the national producer, support small business, form an effective public-private partnership.

The analysis of the organization of advisory bodies for business environment improvement with the participation of foreign investors in Russia, the role of foreign business in building an interstate dialogue under the foreign policy contradictions, as well as factors of the effectiveness of the interaction of foreign investors with the state in Russia showed that:

  • The Foreign Investment Advisory Council (FIAC) contributes significantly to the improving the business climate in the country, while the role of national associations of foreign business in this process remains modest.
  • The dialogue between the Russian government and foreign business produce a large number of concrete achievements and results, but the key constraints to the further improvement of the business climate in Russia lie in the political rather than technical sphere.
  • Under the current conditions of deteriorating relations between Russia and the Western countries, the role of international business as an intermediary in normalizing the international situation has significantly increased.

Level of implementation,  recommendations on implementation or outcomes of the implementation of the results

Based on the results of the research, the following recommendations can be formulated for the state economic policy in the sphere of entrepreneurship support and the business environment improvement:

  • Priorities for supporting export activities should be focused on small and medium-size businesses (compared to large businesses). At the same time, the support measures should be aimed at reducing the barriers to SMEs' access to resources that are necessary to increase the productivity of the enterprise and enter foreign markets.
  • In order to create the atmosphere of trust and improve the business environment in the industrial markets, it is necessary to maintain an active dialogue between public authorities and regional and industrial business associations.
  • The Russian government, as well as the authorities of many other developing countries, should use the opportunities for dialogue with the associations of foreign business operating in the country more intensively.
  • Business associations operating in emerging markets are a very promising tool for promoting the long-term interests of the governments of the countries of origin of the respective companies, which is also advisable to use at the key external markets for Russia.

Publications:


Kadochnikov S. M., Fedyunina A. Explaining The Performance of Russian Export: What Role Does the Hard and Soft Infrastructure Play? // International Journal of Economic Policy in Emerging Economies. 2018. Vol. 11. No. 6. P. 541-559. doi