Trade Liberalization, FDI, and Productivity Growth: Russian experience

Key Questionы: In Chapter XXX we studied theory and evidence of the effect of trade liberalization on productivity. What does the evidence from Russian Firms say about presence of such effects? What effect can WTO accession have on Russian firms?

Outline Theory Evidence from other countries Firms-level study of Russia –Effect of import –Effect of FDI Survey of the potential effects of WTO accession

Traditional Theory of the Effect of Trade Liberalization on Productivity Was Studied in Chapter XXX Major conclusion: in most cases trade liberalization have positive effect on overall productivity of domestic firms, although the least productive firms may have to close. Reasons for positive effect: Incentives to restructure – competition effect Grater information exchange – demonstration effect Exception: presence of external economies of scale, i.e. Learning by doing on the level of industry, not enterprise.

Empirical literature Detailed overview – Chapter XXX Bolaky and Freund (2004): effects depends on institutions. If too much regulations, effect is negative. Djankov, Murrel (2000) show that in most Eastern European countries effect of trade liberalization and increase in competition with imports on domestic firms was positive.

Effects of FDI Direct effect Spillovers: –Horizontal Demonstration effect Attraction of labor, trained on FDI Competition effect (+-) –Vertical effect Incentives for domestic companies to increase productivity to become suppliers of domestic firms Foreign-owned firms sometimes assist domestic suppliers

Evidence from transition countries Direct effect is always positive Unclear results for horizontal effect. In some countries (Romania) the effect is positive, in others either negative or insignificant. Vertical effects are often positive or insignificant. –Both reasons for vertical effect seem to be present.

Trade liberalization in Russia 1992: –State monopoly on foreign trade canceled –Import subsidies and export tariffs were introduced. Subsidies amounted to 10-25% of GDP, and lead to losses for the country of up to 10% of GDP. 1993: import tariffs started to be introduced 1994 import subsidies fully eliminated : decrease in some import tariffs, and elimination of export tariffs in the framework of IMF stabilization program : export tariffs on oil reintroduced. Early 2000s: unification of import tariff rates, which resulted in tariff decline.

Policy toward FDI in Russia 1989 – joint ventures are allowed 1991 – fully foreign-owned subsidiaries are allowed Privatization: foreigners officially are allowed to participate, but discriminated against. Now: officially little obstacles for FDI, but in practice they exist both on the federal level (“strategic assets) and on the regional one (red tape).

Bessonova et al (2003): firm-level study of the effect of trade liberalization on Russian firms

Effects on TFP Effect of competition with imports Effects of imported inputs Horizontal, backward and forward linkages from FDI Inter-relationships with complexity

Data Russian firms census FDI census Trade statistics Input-output tables 1995

Regression analysis: results for imports Interpretation problem: 1998 crisis. However, correction of exchange rate was often a part of trade liberalization programs in other countries –Import competition has no effect –Imported inputs have positive effect –Import competition is positive –Imported inputs have negative effect (disappears quickly)

Complexity Disorganization theory Is the effect of competition in complex sectors different because of disorganization? Results: –Effect of import competition (interaction term) is negative before 1998 –This effect becomes positive after the crisis

Conclusions about effect of import competition and trade liberalization in Russia: In most of the 1990s the effect of trade liberalization is difficult to separate from the effects of other reforms. Russian firms adjusted to working in market economy by 1998, so their reaction to 1998 crisis was inline with theoretical predictions. Changes in the exchange rate are more important factor, which affects behavior of Russian firms, than small changes in trade policy measures.

Regression analysis: results for FDI Horizontal spillovers –Positive and significant before crisis –Positive but insignificant Vertical spillovers –Forward are negative and significant (FDI among suppliers) –Backward are positive and significant (FDI among consumers)

More results on FDI: Yudaeva et al 2003 Foreign-owned companies in Russia are twice as more efficient than the domestic ones. Regional policy can have negative effect on foreign firms productivity Horizontal spillover effect is positive Horizontal spillover effect depends positively on education level

2004 enterprise survey

Motivation In Russia many people do not understand and trust the analysis (often they have a valid reason to do so), presented above Let’s conduct a survey!

Methodology Questioner sent by mail to firms, participating in IET surveys Questioner was sent to 1332 firms 634 forms replied Problems: non-random sample Construction of original sample is non-random: long-term relationships, new firm, small and large firms are underrepresented Response is non-random

Industrial composition of the sample: representative

Answer to question: What if import prices decrease by 10% passive restructuring yesno active restructurin g yes45%9% no25%21%

Conclusions In the last 10 years the effect of foreign policy on domestic companies was much smaller than the effect of other reforms After 1998 domestic firms started to react to policy shocks in the way, predicted by theory. The effect of exchange rate changes in this period is more important than the effect of trade policy changes, though.

Conclusions (cont). FDI in Russia are more productive than the domestic firms, and presence of FDI has positive spillovers on domestic firms. Regional policies and education level can influence overall effect of FDI. Fears in Russia of devastating negative effect if import competition and WTO accession are not confirmed by firms-level evidence and survey evidence