Opal''''s Site Organization and Development of Russian Business_2 pptx

8 Organization and Development of Russian Businessthat, for JSCs not affiliated with company groups or parent companies of the groups, the influence was identified for ownership and gove

8 Organization and Development of Russian Business

that, for JSCs not affiliated with company groups or parent companies of the groups, the influence was identified for ownership and governance features supporting the protection of property rights and for the pressure of com-petition with manufacturers from developed countries as an incentive for improving management quality

In Chapter 8, we test a competing hypothesis on the nature of Russian business groups and possible tools for disciplining the executive managers

in the subsidiaries of those groups Our empirical results show that ness groups act as integrated companies rather than a network of companies and that hierarchical coordination prevails inside the groups We also con-firmed that the most important way to resolve the agency problem in the groups is through the participation of the ultimate owners by themselves or represented by the parent company in the management Corporate govern-ance instruments are important, mostly in subsidiaries acting in regulating industries or in state-owned companies However, one in three subsidiaries that is a private company in nonregulated industry also develops internal corporate governance Corporate governance as a disciplinary tool is neces-sary in state-owned as well as new private companies

busi-Chapter 9 examines the impact of business integration on enterprise restructuring and financial and operating performance of group subsidi-aries in Russia Directors of affiliated enterprises and, especially, of those merged after mass privatization acknowledge the impact of groups on the market competitiveness of the enterprises A comparison of subsidiaries and independent enterprises supports the positive attitude of directors toward group membership Our survey results indicate, as many other studies in Russia have shown, that group subsidiaries outperform independent enter-prises in terms of corporate restructuring and financial and operative per-formance However, it is not clear whether the comparative advantages of group enterprises are explained by higher productivity alone The results of our comparison of total factor productivity in affiliated and independent enterprises are mixed The higher productivity of affiliated enterprises is mostly due to companies that joined the groups before 1995 The advan-tages of affiliated enterprises over independent ones provide an additional explanation of the stability of a business group as an organizational form in Russian industry Better firm performance helps to solve agency problems

in subsidiary companies

The chapters in Part III, “The Role of External Players in Corporate Governance,” present the outcomes of our research on the relationship among industrial and communications companies and commercial banks, business associations, and the government It is controversial whether the latter three economic entities have a specific influence on corporate govern-ance and the performance of nonfinancial enterprises Chapters 10, 11, and

12 present empirical evidence of these issues from a careful examination of the results of the enterprise survey

The focus of Chapter 10 is on the banking sector With the objective of clarifying the emerging role of commercial banks in corporate finance in economically buoyant Russia, we reveal the results of an analysis in this chap-ter conducted from a macro and micro standpoint Macro-economically, the share of the banking sector in the overall corporate investment finance has been rising The results from our joint survey reveal that about one-third of medium-to-large scale enterprises have no external borrowings, suggesting that there is still a large capacity for the banking sector to increase its role These firms tended to be smaller, with a closely held ownership structure, and were not active in new investments In this chapter, the role played by Sberbank, the largest Russian saving bank, is also examined; it is by far the largest major bank that has served as a main supplier of funds since the financial crisis of 1998 The enterprises that showed Sberbank as the larg-est financer were mostly large ones and had export records They tended to have special relationships with the government, implying that the corpo-rate financing mechanism had been evolving in close cooperation between the government and enterprises.

Chapter 11 scrutinizes the relationship between the business associations and their member firms Empirical literature on the membership of Russian firms in business associations provides no clear explanation of the main incentives of the firms to participate in collective action In this chapter, we explore whether these incentives are inspired by market pressure, or, on the contrary, whether rent-seeking and a desire to establish personal relation-ships with authorities influence major decisions within a firm To clarify these issues, we empirically examine the determinants of membership in associations and explore the reasons for simultaneous membership in dif-ferent types of associations, that is, the phenomenon of multiple member-ship Our estimation results reveal that the larger and better-performing enterprises are more interested in joining associations in situations of competitive pressure from the Baltic countries, Turkey, and China We also confirmed that enterprises with general directors who are large owners sig-nificantly more often become members of associations than do firms headed

by hired CEOs The main benefits from joining these business associations are related to the close interactions with state authorities We argue that this feature may help to overcome information asymmetry in the fragile institu-tional environment of Russian business In addition, multiple membership significantly increases the chances to obtain financial and organizational support from the state and, thus, is a rational strategy of market players

In Chapter 12, we analyze the influence of the state on the improvement

of corporate governance in Russia of the early 2000s Taking into account the low quality of market institutions in the 1990s (i.e., the market failure phenomenon), we assume that state intervention as the second-best solu-tion had a positive impact in this case Using a firm-level dataset obtained from our enterprise survey, we test this hypothesis in two types of corporate

10 Organization and Development of Russian Business

models: state-owned or mixed firms and politically connected firms The first model confirmed a strong positive influence of state ownership on the corporate governance in Russia in 2001–2004 The estimation results are sta-tistically robust in different model specifications We connect this empirical evidence with attempts of the Russian government to use standard mecha-nisms and procedures of corporate governance to defend its property rights

in its relationships with state-owned and mixed enterprises

The concluding chapter summarizes the major findings in this study and discusses the remaining issues and agenda for future research

We are hopeful that this volume will provide an insight into firm zation and management in Russian business and stimulate further discus-sion and research on this topic

organi-Notes

1 Many experts point out, however, that a large part of this remarkable growth

of FDI inflow in recent years can be explained by active repatriation of offshore Russian capital Nevertheless, it is also a fact that many Western companies, including several world-famous multinational enterprises, embarked or decided

to embark on the Russian market, which also boosts direct capital investment into Russia

2 We describe the details of the joint survey in the Appendix of this book

3 Chapter outlines have been prepared by their individual authors

Bibliography

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Dolgopiatova, T (2007) Ownership concentration and Russian company

develop-ment: Empirical evidence, Problems of Economic Transition, 50/5: 7–23.

Dolgopyatova, T (ed.) (2006) Integratsionnye Protsessy, Korporativnoe Unpravleniye i Menedzhment v Rossiiskikh Kompaniyakh Seriya “Nauchnye doklady: Nezavisimyi

Ekonomicheskii Analiz,” No 180 (Moscow: Moskovskii obshchestvennyi nyi fond i Proekty dlya budushchego)

nauch-Dolgopyatova, T G., Iwasaki, I., & Yakovlev, A A (eds.) (2007) Rossiiskaya Korporatsiya: Vnutrennyaya Organizatsiya, Vneshnie Vzaimodeistviya, Perspektivy Razvitiya (Moscow:

Izdateliskii dom GU-VSHE)

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(vari-ous issues) (London: EBRD)

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issues) (Moscow: Rosstat)

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aktsionernye obshchestva v Rossii, Rossiiskii Zhurnal Menedzhmenta, 4: 55–76.

Iwasaki, I (2007) Legal forms of joint stock companies and corporate behavior in

Russia, Problems of Economic Transition, 50/5: 73–86.

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econ-omy: Evidence from Russia, Journal of Corporate Finance, 14: 532–549.

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motozuku bunseki, Keizai Kenkyu, 58: 151–162.

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vzaimoot-noshenii i ikh evoliutsiya, Voprosy Ekonomiki, 1: 124–139.

The Emergence of Russian

Corporations: From the Soviet

Enterprise to a Market Firm

Tatiana G Dolgopyatova, Ichiro Iwasaki, and Andrei A Yakovlev

Introduction

In this chapter, the evolution of an enterprise model in the Russian economy

is examined using two key events that predetermined major changes in enterprise behavior as division lines The first was the disintegration of the Soviet Union, the swift dismantling of central planning, and the shock ther-apy of price liberalization in 1991–1992 The second event was the financial crisis of August 1998 and the political crisis that followed, which served

as starting points for radical improvement in macroeconomic policy and strengthening of the role of the state

Prior to 1991, one could speak about socialist enterprise of the type that many researchers, from Josef Berliner to Janos Kornai, had been studying for several decades The period from 1992 to 1998 in Russia was the time of classical transition firm, which disagreed with the forecasts of mainstream economists and led to serious challenges to the prevailing economic theory These challenges were met by studies of economic transition and company behavior in transition economies, with the participation of leading econ-omists of the world, including Andrei Shleifer, Gerard Roland, and Josef Stiglitz Finally, after 1998, the specific features of the transition firm started

to erode and, the patterns became more in agreement with the standard models established in developing and developed economies Our research focuses on this transitional period in Russia However, to clarify the con-temporary trends, we focus on the features of the socialist enterprise and the transition firm and compare their Russian prototypes with counterparts

in Eastern Europe and China

The remainder of this chapter is organized as follows: The first section is

a discussion of the Soviet model of the socialist enterprise and its istics The second section is an examination of Russian enterprise reforms

character-in the character-initial stage of systemic transformation to a market economy The

third section traces the evolutionary process of Russian corporations after the 1998 financial crisis.

The Soviet socialist enterprise

The classical ideal model of a planned socialist economy implied that each enterprise was included in the system of central planning This means that higher-ranking agencies of the state established output and input plans for an enterprise, identified suppliers and customers, and made decisions regarding capital investments and appointments of top managers In this system, the main function of the enterprise was to achieve the target plan that had been set by the authorities In this sense, the socialist enterprise has never been a firm Rather, it was a production division or a shop in the gigantic “single factory,” as it had been described by Vladimir Lenin

In formal terms, the enterprise was considered a national property However, in reality, the chief representative of the enterprise who protected the interests of the enterprise and its employees was the general manager – enterprise director

Physical resources were the main incentive for the socialist enterprise They were the decisive factor, taking precedence over money Decisions

on the reallocation of resources for the next planning period were ally dependent on successfully meeting the targets of the preceding period Product demand was insignificant to the socialist enterprise because the right to acquire products was not based on customer solvency but, rather,

gener-on the customers identified in the procurement plans Physical demand was also a matter of certain importance This demand was taken into account

in the compilation of a plan for the next term, but the compilation was also affected by many other matters, such as the achieved volume of output by certain item After the plan was adopted, the target received from higher authorities became the primary task, and the enterprise produced the prod-ucts specified in the plan However, product demand usually changed as the plans were being compiled, and some of the production then appeared to

be unwanted by customers At the same time, the products in high demand were always in short supply because changes in plans regularly lagged behind changes in demand This process and its implications as a base for chronic shortages of resources in a planned economy are discussed in detail

by Kornai (1980)

The priority right to acquire products in short supply was given to the

cus-tomers whose needs had been considered in procurement plans However, suppliers had also some room for maneuvers in their relations with these customers This was because each plan was initially compiled in physical terms (units of production) Prices were regarded as an auxiliary account-ing instrument, which could be used for the aggregation of plan targets for individual enterprises into integrated plans for industrial sectors and the

14 Organization and Development of Russian Business

economy as a whole However, total plan targets (excluding key designated items) were approved in value terms, as so-called “plans of gross output.” This enabled suppliers to operate on changes in assortment, producing (and imposing on customers) those products that were easier to make under regu-lar shortage of key inputs This enabled suppliers to operate with changes

in product type and customer demand, and to produce products that were easier to manufacture in consideration of the regular shortages of key components

Simultaneously, enterprise managers were constantly involved in tions with their suppliers about the procurement of key resources; they were also involved with their superior agencies about getting their plans of gross output either considered as fulfilled despite deviations from the planned assortment or corrected for shortages of resources Managerial success in this informal interaction, which was first described by Berliner (1952) and later analyzed in a series of Duke–Berkeley Occasional Papers on the Second Economy in the USSR, was one of the main factors in the fulfillment of the target plans of an individual enterprise In turn, failure to fulfill a plan was a cause for superior agencies to penalize the enterprise to the point of dismiss-ing its top manager from office

negotia-The role and functions of the socialist enterprise in the centrally planned economy led to a number of important consequences, which determined typical managerial behavior Among them are the following: (a) attention was given to production and technology (typically, the absolute majority of enterprise directors in the USSR and other socialist countries were educated engineers and technicians); (b) the focus was on day-to-day operations of

an enterprise with a short planning horizon (the management could make decisions within their approved annual plans, while decisions for more prolonged horizons that were related to the compilation and approval of five-year plans and implementation of investment projects came within the competence of higher levels of government); and (c) managers were involved

in systematic informal negotiations with superior agencies about planned target volumes and resources allocated to the enterprise and with suppliers and customers on product mix and other terms of supply

This pattern of behavior was typical of enterprises in all socialist mies However, a substantial number of national features were related to the planning system in the USSR as well as to ideological approaches to organization of the Soviet planned economy There are five features prima-rily responsible for the transformation of the Soviet enterprise, and they are described in detail below

econo-First, Soviet enterprises had a very low degree of independence, termined by the scale and detailed elaboration of central planning in the USSR.1 They had no access to real economic information, which was collected

prede-by the central economic agencies Their experience in horizontal tion with other enterprises was limited to mutual adjustment of terms of

interac-production and supply in the framework of adopted plans Production side of state plans in the USSR was regarded as criminal until the late 1980s Outside of centralized planning, the only legal activity was food production

out-on private plots in rural areas, whereas, in most of Eastern Europe, small private ownership was permitted Economically and ideologically, the USSR was quite closed Soviet enterprises had practically no contact with Western firms, and their managers had no knowledge of the operations of the mod-ern market economy In the best cases, they based their understanding on

information gleaned from Das Kapital by Karl Marx.

Second, deliberate industrial policy for higher concentration of output and product specialization, which was the strongest in the 1960s and 1970s

in the Soviet Union,2 was the cause for the establishment of a tive industrial structure in which each enterprise had very limited numbers

noncompeti-of suppliers and customers As a result, enterprise directors knew each other well, and the whole managerial corps was a cohesive informal corporation Readiness of the members of this corporation to help each other was one

of the factors responsible for the survival of Russian enterprises and for the setup of barter networks under the crisis of arrears in the 1990s However, the productive assets of Russian enterprises, which had been established under the industrial policy of preceding decades, were so specific that the enterprises were highly dependent on their partners For this reason, after the launch of reforms, the activity of Russian enterprises became more disor-ganized than that of East European economies (Blanchard & Kremer 1997).Third, price disparities were greater in the USSR because the planning system lived longer and isolation from the world market was more complete The disparities resulted from the desire of enterprises to overprice their prod-ucts in order to fulfill their “plans of gross output” (Kornai 1980) Central economic agencies used administered prices to prevent this tendency, but price control produced sufficient effects only in mono-product extract-ing and primary processing industries In industries with more differenti-ated products, producers bypassed this obstacle by operating on changes

in assortment when modified old products were passed for new ones with higher costs This enabled the enterprises to demonstrate higher volumes

of “gross output” at unchanged volumes of output in physical terms As

a result, in the course of time, prices of primary materials became stated, and prices of products with high level of processing grew overstated

under-in comparison with under-international prices This historically established tive overstatement of costs and prices in some industries determined, to a large extent, the scale of competitive weakness of enterprises in these indus-tries in Russia after prices in foreign trade were liberalized

rela-Fourth, the Soviet Union was considered the heart of world socialism It resisted the United States and what it referred to as “imperialist aggression” while emphasizing the expansion of its military industrial complex (MIC)

As a result, the share of enterprises belonging to the MIC and dependent on

16 Organization and Development of Russian Business

military procurement orders was much higher in the USSR than in other socialist countries For this reason, a sharp reduction in military spending

in the age of reform had a stronger effect on the enterprises Since many of these enterprises had been making technologically complex products and had been key customers of their suppliers, this reduction was an additional factor responsible for higher disorganization and a deeper slump in output

(Blanchard & Kremer 1997).

Finally, the Soviet model of a planned economy was very conservative, and Soviet enterprises had no experience of operation under reform Eastern Europe started to reform its planning system and to introduce some ele-ments of market economy as early as at the end of the 1960s China began

a similar process in 1979, but, until that time, enterprises had gone through several waves of centralization and decentralization and had also survived the Cultural Revolution Against this background, the Soviet Union limited all experiments in the late 1970s and early 1980s to various schemes of dis-tribution of final enterprise income and never touched upon the issues of industrial organization and planning

In general, a planned economy used quite different criteria for the ment of enterprise performance and incentive mechanisms than those used

assess-in a market economy As the Soviet economy reached a crisis level assess-in the mid-1980s, changes in economic policy began to emerge On the micro level, the logic of changes was focused on the transformation of incentives

of economic agents The formation of new incentive mechanisms took two directions

On the one hand, private initiative was allowed for the first time in ices and supply of consumer goods In 1986–1988, laws on personal labor and cooperative enterprises were enacted, and small private businesses were allowed State-owned enterprises were permitted to launch joint ventures with foreign partners Output prices for products and services of individual and cooperative, small-scale and joint ventures were unregulated However, until 1992, the share of this private segment in the economy was too small

serv-to affect the behavior of state-owned enterprises

On the other hand, state-owned enterprises were given a greater extent of independence This was regarded as a fundamental line of economic trans-formation aimed at the enhancement of efficiency of the Soviet socialist economy Enterprise directors, willing to escape from the control of superior agencies, supported this line in every possible way The Law on the State-Owned Enterprise, which was enacted in 1987 and came into effect in 1988, was an important step in this direction This law provided for the creation

of councils of labor collectives and the introduction of elected directors, which, indeed, made top managers independent from supervisory agencies The law permitted labor collectives in agreement with a supervisory min-istry to lease assets of a state-owned enterprise and, later, to buy out the

leased property with profits (this was one of the displays of “nomenklatura

Table 1.1 Chronology of enterprise reforms and related events in the USSR and

1987 Jan Resolution on joint enterprises adopted by

the USSR cabinet of ministers

CJun USSR law on state enterprises enacted C

1988 May USSR law on cooperatives enacted C

Jun USSR law on corporate tax enacted F

Dec USSR law on trade union enacted HDec USSR law on investment activities enacted G

Dec RSFSR law on ownership enacted CDec RSFSR law on enterprises enacted C

1991 Mar RSFSR law on competition and limitation

of monopoly enacted

DJun RSFSR law on investment enacted GJul USSR law on denationalization and

privatization enacted

BJul USSR law on foreign investment enacted GJul USSR anti-monopoly law enacted DJul RSFSR law on privatization enacted BAug Soviet coup d’état attempt

Dec RSFSR law on corporate tax enacted FDec RSFSR law on value-added tax enacted FDec Collapse of the Soviet Union

1992 Jan Liberalization of price and foreign trade A

Jun Mass-privatization program adopted BJun Law on consumer cooperatives adopted CSep Law on monetary system adopted EOct Law on foreign exchange regulation adopted E

1993 May Treasure bills market initiated E

Aug Law on labor protection adopted H Sep–

Oct

Constitutional crisis

Continued

18 Organization and Development of Russian Business

1994 Jul Monetary privatization begins B

Sep Currency crisis

1995 Jun Law on small and medium-sized

enterprises (SMEs) enacted

GJul Currency corridor system introduced EAug Law on natural monopoly adopted DOct Law on state regulation of trade activities

adopted

ANov Loan-for-share privatization begins BNov Law on financial-industrial groups adopted CDec Law on production sharing agreement

adopted

G

1996 Jan Law on joint-stock companies enacted C

May Law on producer cooperatives adopted CJun Full currency convertibility introduced ENov First IPO by Vympelkom at NYSE

1997 Jul First corporate Eurobond issued

1998 Jan Denomination of ruble conducted E

Feb Law on limited liability companies adopted CJul Law on workers’ JSCs (people’s enterprises)

adopted

C Aug Financial crisis

Sep Float exchange rate system introduced E

1999 Jan New tax code (Part I) enacted F

Feb Law on restructuring of credit

organizations adopted

EJul New law on labor protection adopted HJul Law on foreign investment adopted G

n 2000 May The program of national development

strategy (Gref’s Program) announced

AAug New tax code (Part II) adopted F

Aug Law on audit activities adopted E

Nov Law on investment funds adopted G

Continued