The Empirical Analysis of Governance Structures in Russian Manufacturing NADEZHDA GOREYKO gnadinea@gmail.com SVETLANA AVDASHEVA avdash@hse.ru INSTITUTE OF INDUSTRIAL AND MARKET STUDIES, STATE UNIVERSITY – HIGHER SCHOOL OF ECONOMICS, MOSCOW, RUSSIA 8th ENEF Meeting “Strategy and Economics of the Firm”, Strasbourg, France, 7-8 September 2011

Governance in Economic Theory Seminal work of Williamson (1985): classification of governance structures on market, hierarchical and hybrid There are a number of hybrid models of governance (Ménard, 2004) One classification of hybrid models for buyer-supplier relationships is proposed by value chain theory (Gereffi et al., 2005) as modular, relational and captive Despite the importance of governance structures the governance structures in Russia have been studied insufficiently

The Goal of Research: To classify enterprises by the type of governance To measure the shares of different transactions’ governance in manufacturing To test the hypotheses on the impact of governance models on: Governance inside the firms Price and non-price competition of enterprises Investment decisions on the level of enterprises Contract risk assessment by the enterprises To make conclusions on reliability of classification of hybrid governance on modular and relational

Overview of the paper Methodology of governance structures analysis Source of data Classification of governance types Hypotheses of empirical analysis Governance types in Russian manufacturing: results of the hypothesis testing Conclusions and implications

Source of Data: Sample Survey of Russian Manufacturing Enterprises Survey of top managers of 957 enterprises by IIMS (Higher School of Economics) in 2009 8 Manufacturing industries 50 regions of Russian Federation Mid-sized enterprises: entities with the number of employees less than 100 (in 2005) and more than 10 000 are excluded from the sample. About 8% of an average number of employees in manufacturing and 6% of manufacturing product in Russia

Approaches to Analysis New Institutional Economics Value Chain Theory

New Institutional Economics R A N S C I O Asset specificity Market Frequency Hybrid Uncertainty Hierarchy

Value Chain Theory H Y B R I D Modular Relational Captive

Classification of Governance Types for Supplier-Buyer Relations

Hypotheses of empirical analysis-1 H1. The structure of Russia's manufacturing sector is bipolar: the majority of enterprises is involved in market transaction or hierarchy; the latter prevails H2. There is a connection between the model of transaction governance and model of governance in the company. Under modular governance management is more frequently diverged from the ownership H3. Participants in different types of transactions have different attitudes towards price and non-price competition: H3.1. Market governance implies relatively low transaction cost for the participants: the share of prepayment as a measure of distrust (high transaction cost) should be lowest H3.2. The preferred tool to assure quality depends on the type of buyer. Suppliers in modular transactions should prefer ISO certification in contrast to brand name.

Hypotheses of empirical analysis-2 H4. The enterprises within hierarchies have higher investment on the level of enterprises (with high level of specificity). H5. Participants in hierarchical transactions have lower assessment of adverse events in the future. This should be true both for opportunism of partners in transactions and for trends in performance. Participants in relational (but not modular) transactions evaluate risks of partners’ opportunism as highest.

H1: The Structure of Russian Manufacturing H1 is not Supported: hierarchical and market governance models do not prevail in Russian manufacturing

H2 is Supported: under modular governance the management is more often diverged from ownership than under relational one

H3.1 is partly Supported: the share of trade credit minus share of prepayments in shipments is significantly higher for the participants of market transactions in comparison with hybrid transactions (OLS regression) Sample All enterprises Independent enterprises Subsidiaries of holding companies Constant 24.82* (1.86) 23.45* (1.77) 16.34 (1.02) 14.72 (0.92) 57.40** (2.30) 57.30** Hierarchy 2.51 (0.39) 3.82 (0.59) 0.83 (0.09) 2.80 (0.32) 5.58 (0.52) 4.11 Hybrid -10.87** (-2.07) -13.23** (2.20) 6.13 (0.56) Modular -11.83** (-2.06) -12.08* (-1.84) -0.10 (-0.80) Relational -2.00 (-0.27) -14.93 (-0.60) 16.03 (0.98) SIZE (ln employment) 0.45 (0.22) 0.57 (0.28) 1.93 (0.77) 2.04 (0.81) -6.79* (-1.72) -6.65* (-1.67) Industries Yes Participation of state in the ownership -14.38* (-1.93) -15.36** (-2.06) -9.90 (-1.16) -11.04 (-1.29) -22.48 (-1.43) -24.00 (-1.52) Created after 1990 13.87 (1.61) 15.36* (1.78) 18.57* (1.83) 20.04** (1.96) 2.42 (0.15) 4.68 Competition 16.33*** (2.98) 15.83** (2.86) 14.19** (2.16) 13.65** (2.07) 31.68*** (3.10) 31.19*** (3.04) N 634 452 181 F-statistics 15.70** 14.58*** 10.62*** 9.70*** 6.94*** 6.49*** R2 adjusted 0.23 0.22 0.21 0.30

Final product suppliers H3.2. is supported: under modular transactions enterprises more often choose ISO certification instead of brand name financing (binary logistic regression) Dependent variables BRAND name (1 – yes, 0 – no) ISO certification (1- yes, 0 – no) Sample All enterprises Final product suppliers Hierarchy - Hybrid -*** +** Modular Relational SIZE (ln employment) +*** Competition +* Participation of state in the ownership -** Industries Yes N 644 318 -2Log likelihood 760.87 759.49 396.15 R2 Nagelkerke 0.09 Test of the model χ2 62.16*** 63.54*** 21.14**

Purchasing of technologies H4 is supported: enterprises in hierarchies have higher chances to invest whatever indicator of investment we use (binary logistic (a) and ordinal (b) regression) Dependent variables (sunk investments indicators) Lean production LEANa Investments INVb R&D expenditures R&Da Equipment purchasing EQUIPa Purchasing of technologies TECHa Hierarchy +*** +* +** Hybrid + SIZE (ln employment) Competition Participation of state in the ownership -** Divergence of management from ownership Industries Yes N 769 581 -2Log likelihood 806.70 1161.90 730.06 974.52 767.13 R2 Nagelkerke 0.05 0.15 0.27 0.09 0.11 Test of the model χ2 27.82*** 80.62*** 157.64*** 51.36*** 60.17***

Probability of banlruptcyb H5 is partly supported: enterprises in hierarchies consider themselves more protected in contracts but assess the probability of bankruptcy as higher; enterprises in relational structures consider the risk of unfair competition as highest Unfair competitiona Contract protectiona Probability of banlruptcyb Hierarchy - +** +* Hybrid + +*** Modular Relational Industries Yes Size(ln_employment) -* Agglomeration -*** -** Switching cost State ownership N 668 644 527 -2Log likelihood 882.57 876.17 713.73 761.02 793.66 R2 Nagelkerke 0.05 0.06 0.07 0.08 Test of the model χ2 25.28** 31.68*** 33.74*** 36.66*** 36.70***

Conclusions and implications

Conclusions-1 In Russian manufacturing there exist all types of governance between suppliers and buyers. Hierarchical governance does not prevail. 2) Governance type matters: … for the model of governance within the firm; … for scope of price competition; … for the way to assure quality; … for the amount of investment on the level of enterprise; … for the assessment of contract protection and risk.

Conclusions-2 Relational and modular governance models as a types of hybrids are very different in terms of impact on the behavior of the enterprises. Therefore the classification according to the role of buyer in codification and standards’ setting is important to explain inter-firm relations.

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