Corresponding author: Ichiro Iwasaki ( iiwasaki@ier.hit-u.ac.jp ) © 2016 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Iwasaki I, Maurel M, Meunier B (2016) Firm entry and exit during a crisis period: Evidence from Russian regions. Russian Journal of Economics 2(2): 162-191. https://doi.org/10.1016/j.ruje.2016.06.005
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In this paper, we aim to empirically analyze the determinants of firm entry and exit in Russia using a regional-level panel data for the years of 2008–2014, with special emphasis on institutional failures and the politico-economic impact of external crises. We found that these two elements exhibit statistically significant and economically meaningful effects both on the creation and destruction of Russian firms, controlling for potentially explanatory factors. Our empirical results also suggest that the process of firm entry and exit is manifold across Russian regions due to their heterogeneity. Nevertheless, a surprisingly robust estimate of the world oil price (irrespective of the difference in target regions) suggests a possible high exposure of each Russian region to a global crisis. This comes from the importance of oil trade with the world and, accordingly, the ongoing crisis may bring a harmful influence to regeneration of Russian businesses.
firm entry, firm exit, institutions, economic integration, crisis, Russia
One generation after the launch of the perestroika, two features characterize Russian business relative to many other transition countries: first, barriers to entry are considerably more pronounced and second, as a result, the extremely low level of firm entry in Russia by international standards. The Amadeus dataset, which is restricted to firms with more than 50 employees, provides a record of formal entry and shows gross entry rates from 1999 at below one percent. Entry rates are significantly lower in Russia than in other former socialist economies, and even these are (negative) outliers by developed economy standards (Aidis and Estrin,
The reinforcement of SMEs is key for the emergence of values and norms attached to the market economy. In terms of purely formal constraints, Russia performs relatively well; but enforcement is poor. The rule of law is also weak, creating uncertainty and non-consistency, which is damaging to the firms’ prosperity. The absence of confidence in investing at home is reflected by the net private capital outflows, which stood in 2014 at $150 billion, equivalent to 8% of GDP. One of the main problems faced by Russian business owners is illegal practices such as bribing and corruption, as repetitively reflected in the Russian firms’ survey by the World Bank. The fatality of being involved in corruption activities constitutes the main pervasive and self-reinforcing entry barrier.
The World Bank doing business indicators provide useful information for assessing the quality of the business environment across a large set of countries: ease of doing business, starting a business (licenses), getting electricity, registering property, getting credit, protecting minority investors, enforcing contracts, resolving insolvency. As reported by Doing Business, Russia ranks 13th out of 25, its worst position being registered under the protection of minority investors, trading across borders, and dealing with construction permits items. Two out of those three indicators correspond to our research questions: Trading across borders records the time and cost associated with the logistical process of exporting and importing goods. More precisely, it measures the time and cost (excluding tariffs) associated with three sets of procedures —documentary compliance, border compliance and domestic transport —within the overall process of exporting or importing a shipment of goods. This indicator describes the logistical obstacles towards a deeper integration of Russian enterprises into the world economy. Protection of minority rights measures the strength of minority shareholder's protection against misuse of corporate assets by directors for their personal gain, as well as shareholder rights, governance safeguards and corporate transparency requirements that reduce the risk of abuse. One interesting component in the building of the protection of minority rights is the ease of shareholder suit index, which is one of our variables of interest.
Another pernicious feature of the Russian economic performance over the recent decades is the continuous fall of non-energy goods and services in total exports, echoing the weaknesses of SMEs in the manufacturing and service sectors, while oil represents the lion's share of total trade. In fact, in recent years, the concentration of Russia's economy in the oil and gas sector has steadily increased over time. In addition, Russia's non-energy sector has become less competitive in world markets. While the volume of the nation's non-energy merchandise exports grew at an annual rate of 11% in 2010, they grew by only 7.6% in 2014.
In this paper, we aim to analyze the determinants of firm entry and exit in Russia using a hand-crafted regional-level panel data for the years of 2008–2014, with a special emphasis on the institutional failures and the politico-economic impact of external crises. We found that these two elements exhibit statistically significant and economically meaningful effects both on the creation and destruction of Russian firms, while controlling for potentially explanatory factors. The robust estimate of the world oil price, irrespective of the difference in target regions, indicates that Russian regions are possibly sensitive to a global crisis whatever the circumstances. Accordingly, the ongoing crisis may bring a harmful influence to a regeneration of the Russian business.
The study of firm's birth and death in Russia is relatively scarce. Noticeable exceptions are
The remainder of the paper is structured as follows: The next section reviews the literature about firms’ net entry and creative destruction, by focusing on transition countries. Section 3 presents statistical evidence on the entry and exit of Russian firms over the period 2008–2014. Section 4 conducts the empirical analysis while Section 5 interprets the empirical results and concludes the paper.
The process of entry of new firms is an important element in the dynamics of market economies, as underlined by
The empirical evidence on emerging markets strongly supports the predictions with respect to regulations, but the argument with regard to institutions has rarely been tested. Using data on regulations of entry in 85 countries,
In the specific case of Russia,
The exiting literature has also highlighted the weak institutional environment in Russia with respect to entrepreneurship (
In this paper we also try to quantify the extent to which the 2008 financial shock and subsequent economic crisis affected the firm creation and destruction in Russia. The global turmoil impacted the emerging countries in different ways, depending on their previous growth patterns and forms of international integration (
Although Russia entered the crisis with a strong fiscal position, low public debt and large reserves (
Further, in December 2014, Russia entered a new financial crisis which has exposed the real scale of the economic problems that have been growing in the country for several years. The main macroeconomic indicators deteriorated considerably, the confidence of its citizens in the state and in institutions in charge of economic stability declined, the government and business elites became increasingly dissatisfied with the policy direction adopted by the Kremlin, and fighting started over the shrinking resources (
Based on the above discussions, we conjecture that the firm entry rate into the market is impacted mainly through the evolution of the oil sector, a fact that is entirely compatible with the low integration of Russian SMEs in the world economy. We also give great attention to the institutional failures that reinforce the curse of the oil sector, namely the poor efficiency of the judiciary system. The latter contributes to bail out inefficient firms and to reinforce barriers to entry and exit.
In this section, we overlook the dynamics and trends of firm entry and exit in Russia overall and its regions during the period 2008–2014. The Federal State Statistics Service (Rosstat) discloses monthly rates of firm entry and exit all over the Russian Federation, and yearly rates for federal districts and constituent entities, which are displayed in Figs.
Dynamics of firm entry and exit in Russia, 2008–2014.
Note: Firm entry and exit rate denote number of newly established and liquidated firms per 1,000 organizations, respectively.
Source: Russian Federal State Statistics Service (http://www.gks.ru).
Dynamics of firm entry and exit in Russian federal districts, 2008–2014.
Note: Firm entry and exit rate denote number of newly established and liquidated firms per 1,000 organizations, respectively.
Source: Russian Federal State Statistics Service (http://www.gks.ru).
Ranking of Russian regions in terms of firm entry and exit in 2008 and 2014.
Panel (a) of
Regarding the entry of new firms into the market, Panel (a) of
With respect to the firm exit, Panel (b) of
Similarly, as indicated in Panel (b) of
In sum, the aforementioned findings suggest firstly that the market entry of Russian firms was discouraged by the global financial crisis, which started in September 2008 and lasted at the end of 2014, a period characterized by subsequent economic downturns. Firms’ exit exhibited a strong upward trend and it is conceivable that this phenomenon was also triggered by the 2008 financial shock from the US and amplified by the following crises in Europe and Ukraine. Second, the above tendency was observed in all federal districts, suggesting that the recent crises have negatively influenced Russian firms and entrepreneurs whatever their geographical location and specialization. Third, the level and volatility of firms’ entry and exit rates vary greatly across Russian regions and over time. This suggests that the impact of the crisis was different, depending on the vulnerability to the world crisis and the reliance on the oil sector, but, in a more discriminative way, on the differences in institutional and business environments.
In this section, we will empirically examine the determinants of firm entry and exit in Russia using a regional-level panel data for the period between 2008 and 2014. Here, inspired by the arguments in the existing literature and the observations reported in the previous section, we intend to perform regression analysis paying a special attention to two aspects: institutional failures and the recent politico-economic crises. More specifically, we will estimate a multivariate regression equation, which takes a natural logarithm of firm entry or exit rate as a dependent variable and proxies for the regional-level institutional quality and the economic integration as independent variables, while controlling for other potentially explanatory factors. The next subsection gives a detailed explanation of independent variables used in our regression analysis. Subsection 4.2 reports estimation results, and Subsection 4.3 checks statistical robustness of the empirical evidence.
To assess the impact of institutional failures on the creation and destruction of Russian firms, we employed four proxies for the efficiency of the judiciary system which are available at the regional level. They include: the mean and median duration of lawsuit at a regional arbitration court, the acceptance rate of petition by regional arbitration courts, and lawsuits application number to regional arbitration courts per 1,000 organizations. As emphasized in
In addition to the above court-related variables, we will also utilize a criminal risk ranking evaluated by the Expert rating agency—a famous Russian think-tank, which is a regional-level time-variant variable, as an additional proxy for the institutional quality. According to the Transparency International, Russia has much worse levels of corruption than Brazil, China and India for 1998 — 2004, improving somewhat to converge with Indian levels in 2002. The Business Environment and Enterprise Performance Survey (BEEPS) reports a significant worsening in the perception of corruption between 2002 and 2005 as compared with transition countries, where the situation improved (
To assess possible impact of the politico-economic crises on firm entry and exit, we adopted four variables according to the discussion in Section 2. They comprise: a natural logarithm of world oil price, total trade volume as percentage of gross regional products (GRP), inflow of FDI in % of GRP, as well as a natural logarithm of direct distance between Brussels and the capital cities of Russian regions. As suggested in
In the regression estimation, we will also control for a series of factors that represent medium-term economic development, financial constraints, quality of social infrastructure, degree of inter-firm competition, market density as well as natural obstacles for business. The medium-term economic development is expressed by the GRP growth rate. The financial constraint is measured by a natural logarithm of number of credit organizations and their branches per 100,000 residents, which is considered as one of major barriers to both starting up and expansion of businesses in Russia (Puffer and McCarthy,
With regard to the time-variant variables, to avoid possible endogeneity with the dependent variables, a lagged three year moving average is utilized except for the world oil price, which is obviously exogenous for the overwhelming majority of Russian firms and entrepreneurs. The definition, descriptive statistics, and source of the aforesaid variables are described in
Definition, descriptive statistics, and source of variables used in the empirical analysis.
(http://www.imf.org/external/np/res/commod/index.aspx/) |
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Tables
Panel data estimation of firm entry model in Russian regions.
Panel data estimation of firm exit model in Russian regions.
With respect to the institutional variables,
With regard to the economic integration variables, the world oil price displays a remarkably robust estimate in the firm entry model. In fact, as reported in
Many estimates of the control variables are significant, which corresponds to our predictions: medium-term economic growth encourages firm creation and, at the same time, keeps existing organizations alive. Intensive inter-firm competition blocks new comers and evicts poorly performing companies from the market. High market density is a key promoting factor for both firm entry and exit. In regions with hard climate conditions, firms tend to stay in the market probably due to high initial sunk costs.
As a next step, we addressed the issue of heterogeneity of Russian regions. It is argued that Russia is a huge country and hence there exists a great variation among regions in terms of the socio-economic systems as well as the market/industrial structure. To examine possible influence of regional heterogeneity, we re-estimated Model [4] in
The results are reported in
Examination of heterogeneity among Russian regions.
In the previous subsection we mainly utilized a random-effects model to obtain estimates of the time-invariant variables and checked the statistical robustness of the time-variant variables by estimating a fixed-effects model. As additional robustness check, we also conducted the estimation using a population-average estimator, a between-effects estimator, a Hausman–Tylor estimator and a system GMM estimator, and found no remarkable differences from the estimation results reported in Tables
Furthermore, we also carried out a supplementary estimation, in which various sample restrictions were placed on the regression models and confirmed that these sample restrictions do not substantially change our major empirical findings. More specifically, supplementary regressions were conducted with the following five settings: (a) excluding Moscow and St. Petersburg, which are under direct control of the Federal government (i.e., federal cities), from observations; (b) excluding so-called “resource-rich” regions from observations; (c) dividing observations into those for the years of 2008–2011 and those for the years of 2012–2014; (d) limiting regions to those with FDI in % of GRP within the mean ±1 standard deviation; (e) limiting regions to those with total trade in % of GRP within the mean ±1 standard deviation.
The above findings led us to the judgment that the estimation results reported in this paper are robust across the various specifications, apart from the regional heterogeneity discussed in the previous subsection.
This paper is based upon a rich and unpublished panel dataset of regional-level data for the period 2008–2014. Our regression analysis gives a special attention to two aspects: institutional failures and the recent economic crises and downturns that characterize the period of investigation. More specifically, we take the natural logarithm of firm entry or exit rate as the dependent variable and focus on two explanatory sets of variables: four proxies for the efficiency of the judiciary system which are provided by
The results lead us to the overall conclusion that the Russian economy functions within a legal, institutional and political environment that hinders the competition among firms, which is detrimental for economic development. On top of that, corruption and vested interests complicate furthermore the overall framework where private companies are forced to operate. As a result, entry rates of new businesses are declining over the period of the analysis, while the number of firms leaving the market is increasing. This is the case, in spite of already low entry rates as compared to other transitional economies.
More specifically, the entry and exit rates of businesses depend upon the efficiency of the judiciary system in resolving disputes related to the non-compliance with contracts and the non-payment of arrears. The resulting uncertainty and instability amplified by discretionary bureaucratic practices of public administrations distort dramatically the economic governance principles at all levels. In terms of entry/exit of businesses, this translates into a chaotic evolution of the two rates, with successive peaks and bottoms over the period.
Two major external factors bring additional menaces to the already fragile economic conditions. Firstly, Russian firms, mainly SMEs, are highly sensitive to the variation of the world oil price, regardless of their geographical location and specialization. The oil price is the only variable pertaining to the integration of Russia in the world economy which is robustly related to firms’ entry and exit. Our findings have two policy implications, namely that the oil curse can be a blessing if the rent is not a source of widespread corruption and does not impede the development of other sectors employing entrepreneurs and workers; and a rule of the law favorable to the emergence of a sound business environment is key to allow SMEs to enter/exit the market in a creative way. Russian economy, based essentially on oil and gas related activities, is therefore insufficiently diversified to cope with the negative impact of falling prices of these natural resources.
No after-oil strategic perspectives of development exist, which will definitely have serious implications in the future. The second important external factor is related to the vulnerability of the economy to world crises. Although the degree of integration of Russian economy into the global economy is relatively low, the 2008 crisis did have impact on the entry and exit of Russian businesses.
The internal and external factors damaging the economic performance influence the firm creation and destruction at national, regional and district levels. Specifically, the entries are declining as a consequence of those factors while exits are increasing, which leads to a low survival rate of enterprises. This tendency is somehow attenuated in certain regions where the local governments are in political harmony with the central power, which grants them some privileges to cope with the adverse effects of exogenous influences. Overall, the impact of external threats on various regions vary according to the degree of vulnerability to outside crises, which in turn depends on the extent to which a particular region is more or less isolated from the source of the crisis.
To conclude, the firm creation and firm destruction in Russia is a multifarious process, in particular at regional level. As a general rule, the medium-term perspectives of economic growth encourages the entries of new businesses, as it is common to all countries. At the same time, those perspectives keep alive the majority of existing organizations. Strong inter-enterprise competition limits the entry of newcomers and evicts poorly performing companies from the market. High market density represents a major promoting factor both for entries and exits.
This research work is financially supported by the Japan Securities Scholarship Foundation, the Nomura Foundation, the Suntory Foundation, and the Joint Usage and Research Center, Institute of Economic Research, Hitotsubashi University. We thank Tatiana Mikhailova and other participants in the XVII International Academic Conference on Economic and Social Development at the National Research University Higher School of Economics, Moscow, 21 April 2016, for their valuable comments and suggestions.
Authors’ calculation based on the official statistics of the Federal State Statistical Service of Russia (http://www.gks.ru).
UNCTAD database (http://unctadstat.unctad.org). See Iwasaki and Suganuma (2015a, 2015b) for details of the recent trend of international trade and FDI inflow in Russia.
The estimation results are the following:12.44) (9.15) Figures in parentheses beneath regression coefficients are t-statistics computed based on robust standard errors. *** and ** denote statistical significance at the 1% and 5% levels, respectively. Null hypothesis of the F-test is that all coefficients are zero.
The Hausman–Tylor and system GMM estimations were attempted to estimate and endogenize non-lagged time-variant independent variables.