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Why Transition Paths Differ: Russian and Chinese Enterprise Performance Compared By Sumon Bhaumik, London Business School and Saul Estrin, London Business.

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Presentation on theme: "Why Transition Paths Differ: Russian and Chinese Enterprise Performance Compared By Sumon Bhaumik, London Business School and Saul Estrin, London Business."— Presentation transcript:

1 Why Transition Paths Differ: Russian and Chinese Enterprise Performance Compared By Sumon Bhaumik, London Business School and Saul Estrin, London Business School

2 Aim of Paper To use enterprise level data to understand the causes of different economic performance in Russia and China. To distinguish between the following factors driving enterprise growth: - Reallocation of factor inputs - Changes in total factor productivity, driven by the market incentives – competition and restructuring. - Ownership changes. - Institutions.

3 Features of Paper Related to large literatures explaining enterprise performance in Russia and China. Testing across common data set and comparison of findings. Use of information about competition, restructuring and ownership, as well as factor inputs. Where relevant, results consistent with studies on each country separately.

4 Structure Russia and China – Hypothesis The Estimation Framework The Data Sets Main Findings Conclusions

5 Main Results China –Performance can be associated with rapid increase in both factor inputs and TFP, as well as restructuring. –Performance not greatly related to ownership or institutional/ demand factors. –Chinese economic success based on both effective transfers of resources to high productivity uses, and on efficient use of those inputs. Russia –Growth not driven by improvements in factor quantity or quality. –TFP not influenced by enterprise restructuring or market competition. –Privatization to outsiders not found to improve performance. –Russian economic performance explained primarily by demand factors and institutional factors at the regional level.

6 Russia and China Compared Point of Comparison – start of transition: 1991 (Russia), 1978 (China) Similarities –Central planning – common problems of information and incentives. –Widespread state ownership, especially in the industrial sector. –Absence of institutional and legal infrastructure for operation of competitive markets. Differences –China less developed than Russia. Income levels lower Share of industrial sector lower Need for restructuring less Inheritance of human and physical capital smaller

7 Russia vs China Compared RUSSIA (1991)CHINA (1978) GNP per capita US $3783 (88)285 Share of industrial output in GDP (%) 42.4 WB (89) 46 EBRD (92) 44.6 WB 48.2 Stat office Share of industrial employment in total labour (%) 39 WB (80) 30.3 IMF 13.3 WB 17.3 Stat office Share of agricultural employment in total labour (%) 20 WB (80) 13.5 IMF 75 WB 70.5 Stat office Literacy rate (%)98 (89)66 (80) Secondary school enrolment (%) Tertiary school enrolment (%) (80) Source: World Bank, IMF, EBRD, State Statistical Bureau Note: years in brackets

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11 Russian and Chinese Reform Compared “Different Heritage” development versus restructuring Speed of change – rapid versus gradual Form of transition – “big bang” versus experimental, comprehensive versus partial, rigid versus flexible Sequence of transition China – markets and competition prior to private sector growth. Incentives provided to SOEs and semi-privatised firms. Privatisation slow and limited. Russia – simultaneous introduction of markets and private ownership. Improvement in performance intended to derive primarily from privatization.

12 Implications for Growth of Firms Russia Markets introduced imperfectly, especially for capital. Transition issue primarily one of restructuring rather than development. Privatization flawed – insider ownership predominates. Hard budget constraints only intermittently imposed; incentives unclear. China Transition issue primarily only of development rather than restructuring. Growth primarily via market incentives to transfer resources from low to high productivity uses. Also incentives to improve efficiency within firms via market competition and private ownership.

13 Hypotheses Determinants of Productivity/Growth of Productivity RussiaChina -reallocation of factor inputs  -growth in TFP caused by restructuring  ? ownership changes  ? technology  competition  -institutional factors  Test using data set chosen for comparability – Russian former SOEs; mainly new privatized and Chinese former SOEs in less developed region, partially privatized

14 Model Production:Y = L  K  A  M  Sales: S  P.Y = P. L  K  A  M  Price:P = P(Q,C) Equation to be estimated: ln S =  ln L +  ln K +  ln A +  ln M +  ln Q +  ln C

15 Measurement Issues …. 1 Sales, labour, capital, technology: - company records Competition:- qualitative info Ownership:- state ownership - insider ownership

16 Measurement Issues …. 2 Enterprise restructuring: - qualitative information Demand and institutional factors: - industry dummy variables - regional dummy variables

17 Data …. 1 China:- Sha’anxi, Hunan, Shanxi firms interviewed firms in sample Russia:- 13 regions firms interviewed firms in sample

18 Table 1 Descriptive Statistics Variables ChinaRussia Percentage of firms state owned 7966 Percentage of equity owned by government a 127 Percentage of equity owned by insiders 7362 Sales Yuan/Rouble (thousands) US dollars (thousands) Labour force Stock of capital Yuan/Rouble (thousands) US dollars (thousands) Percentage of capital stock that is less than 5 years old 18 7 Percentage of firms facing competition from firms from other regions of the country 8682 Percentage of firms facing competition from firms from the rest of the world 1734 Measure of restructuring achieved by the firm since 1995 (China) or 1997 (Russia) c 658 Notes:a) Almost all Russian firms in the sample had been privatised by b) Measured as the ratio of temporary labourers to labourers with permanent/long term contracts. c) The scale for Chinese data is 0-160, while the range for the Russian data set is 0-15.

19 Data …. 2 Sales:- marginal real growth Size:- Chinese firms larger in terms of employment Capital:- significant capitalisation of Chinese firms and major decapitalisation of Russian firms Competition:- Russia more open than China

20 Table 2 Determinants of Sales in 1999 in China and Russia Independent Variable: Logarithm of sales in 1999 Explanatory Variables ChinaRussia Spec. 1Spec. 2Spec. 1Spec. 2 Constant (1.0989) (1.0627) ** (0.8146) ** (0.7291) Dummy variable for state ownership in (0.2426) (0.2485) Dummy variable for controlling shares in hands of insiders * (0.1119) * (0.1023) Dummy variable for greater than 25% of equity in state ownership (0.1838) (0.1617) Logarithm of quantity of labour in * (0.1640) * (0.1614) * (0.1516) * (0.1444) Logarithm of stock of capital in (0.0829) (0.0842) * (0.1378) * (0.1285) Percentage of capital stock that is less than 5 years old * (0.0050) * (0.0054) ** (0.0036) (0.0037) Dummy variable for domestic competition (0.3173) (0.3222) (0.1477) (0.1328) Dummy variable for international competition (0.3241) (0.3178) (0.1237) (0.1169) Measure of restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) *** (0.0096) (0.0198) Industry that the firm belongs to Yes** Yes* Region/location of the firm Yes Yes*** Yes R-square F statistic (Prob > |F|) (0.00) (0.00) (0.00) (0.00) Note:1) The values within the parentheses are the standard errors. 2) *, ** and *** indicate that the coefficient is significantly different from zero at the 1 percent, 5 percent and 10 percent levels.

21 Sales in 1999 …. 1 China:- labour (+ ve) - technology (+ ve) - enterprise restructuring (+ ve) - industry affiliation - R 2 = 0.45

22 Sales in 1999 …. 2 Russia:- insider ownership (+ ve) - labour (+ ve) - capital (+ ve) - technology (+ ve) - industry - region - R 2 = 0.70

23 Table 3 Determinant of Sales Growth in China and Russia Independent Variable: Growth of sales Explanatory Variables ChinaRussia Spec. 1Spec. 2Spec. 1Spec. 2Spec. 1Spec. 2 Constant *** (0.381) (0.260) *** (0.286) (0.166) 0.832** (0.245) 0.856* (0.222) Dummy variable for state ownership in (0.158) (0.160) (0.83) ** (0.088) Dummy variable for controlling shares in hands of insiders (0.069) (0.70) Dummy variable for greater than 25% of equity in state ownership *** (0.127) *** (0.127) Change in (logarithm of) quantity of labour 0.842* (0.301) 0.863* (0.304) 0.875* (0.199) 0.856* (0.209) 1.342* (0.192) 1.337* (0.184) Change in (logarithm of) stock of capital 0.424* (0.139) 0.405* (0.142) (0.088) (0.091) (0.041) (0.040) Percentage of capital stock that is less than 5 years old (0.004) (0.004) 0.006* (0..001) 0.006* (0..1) (0.002) (0.002) Dummy variable for domestic competition *** (0.123) ** (0.123) (0.085) (0.085) (0.080) (0.080) Dummy variable for international competition (0.194) (0.192) (0.125) (0.122) (0.071) (0.071) Restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) (0.004) 0.006*** (0.003) (0.011) Industry that the firm belongs to Yes Yes** Region/location of the firm Yes Yes*** Yes** Yes* R-square F statistic (Prob > |F|) 4.63 (0.00) 4.71 (0.00) 4.60 (0.00) 4.06 (0.00) 7.80 (0.00) 8.12 (0.00) N Note:1) The values within the parentheses are the standard errors. 2) *, ** and *** indicate that the coefficient is significantly different from zero at the 1 percent, 5 percent and 10 percent levels.

24 Growth of Sales …. 1 China:- labour (+ ve)both - capital (+ ve) technology domestic competition (- ve) restructuring (+ ve) industry region/location R 2 = 0.25

25 Growth of Sales …. 2 Russia:- state ownership (- ve) - labour (+ ve) - industry - region - R 2 = 0.42

26 Table 4 Determinant of Proportional Sales Growth in China and Russia Independent Variable: Proportional growth of sales Explanatory Variables ChinaRussia Spec. 1Spec. 2Spec. 1Spec. 2Spec. 1Spec. 2 Constant ** (0.047) (0.031) (0.048) (0.022) 0.095* (0.032) 0.097* (0.029) Dummy variable for state ownership in (0.019) (0.019) ** (0.011) ** (0.011) Dummy variable for controlling shares in hands of insiders (0.007) (0.007) Dummy variable for greater than 25% of equity in state ownership ** (0.011) ** (0.011) Change in (logarithm of) quantity of labour 0.085* (0.032) 0.088* (0.033) 0.117* (0.031) 0.115* (0.032) 0.141* (0.021) 0.141* (0.020) Change in (logarithm of) stock of capital 0.063* (0.017) 0.060* (0.018) (0.013) (0.012) (0.004) (0.004) Percentage of capital stock that is less than 5 years old 0.001*** (0.000) 0.001** (0.000) 0.001* (0.000) 0.001* (0.000) (0.0002) (0.0002) Dummy variable for domestic competition *** (0.017) ** (0.017) (0.010) (0.011) (0.010) (0.010) Dummy variable for international competition (0.022) (0.022) (0.016) (0.016) (0.007) (0.007) Restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) 0.001* (0.0005) (0.0005) (0.001) Industry that the firm belongs to Yes Yes** Region/location of the firm Yes Yes*** Yes* R-square F statistic (Prob > |F|) 4.84 (0.00) 4.50 (0.00) 3.57 (0.00) 3.28 (0.00) 7.22 (0.00) 7.52 (0.00) N Note:1) The values within the parentheses are the standard errors. 2) *, ** and *** indicate that the coefficient is significantly different from zero at the 1 percent, 5 percent and 10 percent levels.

27 Proportional Growth of Sales.. 1 China:- labour (+ ve)both - capital (+ ve) technology (+ ve)both - domestic competition (- ve) restructuring (+ ve) industry R 2 = =

28 Proportional Growth of Sales.. 2 Russia:- state ownership (- ve) - labour (+ ve) - industry - region/location - R 2 = 0.38

29 Table 5 Determinants of Growth of Sales in Russia Independent Variable: Growth of sales Explanatory Variables Spec. 1Spec. 2Spec. 1Spec. 2 Constant (0.2386) (0.2062) * (0.1289) * (0.1151) Dummy variable for controlling shares in hands of insiders (0.0703) (0.0699) (0.0563) (0.0574) Dummy variable for greater than 25% of equity in state ownership (0.0809) (0.0807) (0.0853) (0.0851) Logarithm of quantity of labour * (0.2107) * (0.2062) * (0.1457) * (0.1403) Logarithm of stock of capital *** (0.0424) *** (0.0427) ** (0.0337) * (0.0336) Percentage of capital stock that is less than 5 years old (0.0014) (0.0014) (0.0014) (0.0014) Dummy variable for domestic competition (0.0666) (0.0667) (0.0580) (0.0573) Dummy variable for international competition (0.0631) (0.0630) (0.0662) (0.0659) Measure of restructuring achieved by the firm since (0.0074) (0.0084) Industry that the firm belongs to Yes Region/location of the firm Yes* R-square F statistic (Prob > |F|) 4.10 (0.00) 4.27 (0.00) 8.00 (0.00) 8.30 (0.00) N Note:1) The values within the parentheses are the standard errors. 2) *, ** and *** indicate that the coefficient is significantly different from zero at the 1 percent, 5 percent and 10 percent levels.

30 Table 6 Determinants of Sales and Growth of Sales in Russia

31 Determinants of Enterprise Performance LevelGrowthProportional Growth RCRCRC Allocative Efficiency - labour  ?  ?  - capital  ?  TFP - ownership ?  ()() - competition  - technology  ()()  - restructuring  ()()  Institutions  ()()  ()()


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