Opal''''s Site Organization and Development of Russian Business_13 pdf

In this context, a question is brought up about the extent to which business associations supplement or replace personal connections; c in Russia, an elite exchange is more typical of re

conditions for their businesses In this context, a question is brought up about the extent to which business associations supplement or replace personal connections; (c) in Russia, an elite exchange is more typical of relations among business enterprises and authorities than capture, but the methods and consequences of this kind of exchange for firms as well as for representatives of government require further examination.

On the basis of the results of a series of surveys conducted in 2003–2004,7Pyle (2006a, 2006b) found that, contrary to common belief, business asso-ciations are not a weak and ineffective institution of the Russian economy, which is proved by large-scale membership in associations and, recently, by

a growing influx of new members He also found that membership in ness associations correlates with more active market behavior and enterprise restructuring In a later study, Pyle (2007) showed that regional associations are growing faster in regions with higher levels of democratic institutions, but the effect of membership, measured in this case as the possibility to defend ownership rights, is higher in the less democratic regions

busi-Similarly, the results of a survey based on BEEPS-2005 data also provide evidence that membership in associations is more typical of dynamic, rela-tively large enterprises, and exporters BA members outperform nonmem-bers in terms of their innovative activities (Desai & Goldberg 2007)

A number of interesting results were obtained in qualitative surveys based

on in-depth interviews with business associations For instance, Lehmbruch (2003) explored the phenomena of multiple memberships in forest sector associations in Russia and provided strong evidence that, in the case of frag-mentation of rights and responsibilities among numerous agencies, com-peting associations within one sector could apply to different parts of the state apparatus and mobilize different sources of rent for their members Multiple membership, thus, provides better access to patronage.8 Another study by Pachenkov and Olimpieva (2005) provided evidence from in-depth interviews with the heads of BAs in St Petersburg that the main condition for a BA to be successful is to maintain close connections with state authori-ties using social networks for lobbying These authors stress the necessity to treat separately those BAs created by the businessmen and the so-called sup-porting structures initiated from higher authorities Such supporting struc-tures are often subordinate to agencies of local authorities, and their leaders often appear to be bureaucrats within those organizations.9

In summary, the empirical results on membership of Russian firms in BAs provide no clear explanation of the main incentives motivating firms

to join BAs The kinds of incentives that prevail among medium-size and large industrial enterprises are important, and the need for collective action stems from market pressure In other words, whether the level of competi-tion and the globalization of company operations are the major determi-nants of membership or whether rent-seeking and the desire to establish personal relationships with authorities are the most important drivers of a

firm’s decisions must be determined In the next section, we present a able hypothesis that will clarify these issues.

test-Consolidation of interests of Russian JSCs: Costs-benefits

calculus and main hypotheses about incentives to

medium-size and large JSCs to join BAs

According to our survey results, the membership rate of Russian size and large JSCs in BAs (54.7%) sufficiently exceeds the membership rate determined for Russian companies in the BEEPS-2005 survey (20%) The high participation rate indicates that the results of costs-benefits calculus are more favorable for larger companies An obvious explanation would

medium-be that large firms are less tentative regarding the cost side of calculus than small ones, which usually experience financial constraints.10 On the basis of a univariate comparison between member and nonmember firms (Table 11.1), we hypothesize that there is no significant difference in the participation rate between privatized and new firms regardless of whether there is a state share in the stock ownership All other corporate governance characteristics might be correlated with membership in BAs

It is reasonable to propose that good and bad performers have different incentives to become a member of a BA Empirical surveys have proved that successful businesses are more demanding of the quality of the institutional environment (Golikova et al 2008) As reported by Auzan (2006), “The con-dition for the establishment of nonprofit business organizations was the appearance, in the course of an emerging market economy, of companies that understood that they would remain in existence in their industries and markets even in the subsequent five years This was the time when interests beyond current business and premise for collective identification came into being” (translated from Russian) Therefore, we hypothesize that, among members of BAs, significantly more successful businesses could be found, including exporters and firms with a long planning horizon Under the increasing competition and globalization of the economy, member firms will strive for active participation in associations in order to defend and promote their collective interests in external and domestic markets A preliminary statistical analysis of survey data on Russian JSCs in 2005 on the basis of cross-tabulation of the level of competition, export activities, and membership in BAs supports this consideration In the 2002 survey, the correlation between membership in BAs and the financial condition of enterprises was hard to trace In 2005, successful Russian companies were clearly interested in BAs In general, the better the financial standing of

an enterprise was according to the subjective estimates of the respondent, the more likely it was that the enterprise was a member of an association Objective indicators also confirm that BA members are significantly bet-ter off than those outside unions and associations (Table 11.2) Members

of associations have a much higher share of exporters and of fast-growing financially well-off companies, which made substantial capital investments

in 2000–2004 from their own funds and generously raised (doubled and more than doubled) compensation to their employees As already reported, this tendency corresponds to the results of previous studies

An incentive to join an association is to hedge the risks of doing business

in a fragile institutional environment with unsecured property rights and lack of state long-term policy predictability.11 According to worldwide gov-ernance indicators (Kaufmann et al 2008), the institutional environment

in Russia is still unfavorable for doing business and developing a civil ety Except for progress attained in the perceptions of political stability and regulatory quality, other indicators in Russia, such as voice and account-

soci-ability, government effectiveness, rule of law, and control of corruption,

remain on a very low level or even demonstrate negative dynamics In an

Table 11.2 Indicators of financial standing of joint-stock companies and

member-ship in business associations (percentage of respondents who answered)

their membership % in lines

Significance

of differences a Type of

association

Members Nonmembers

Share of companies

which doubled and

more than doubled

sales volume at current

which doubled and

more than doubled

imperfect institutional environment, an owner/top manager is dependent

on the availability of his/her personal contacts with state officials, who might assist in resolving problems in the interactions with different parts of the state bureaucratic apparatus We argue that participation in BAs is one

of the most convenient means to attain personal access to state officials via membership in the association One of our respondents explained the situ-ation during the interview: “To solve problems nowadays when we go up to the authorities and ask: ‘When will this end?’ It shouldn’t be done this way Well, those problems are being taken care of behind closed doors A man stays behind after the meeting, goes up to the official, and says: ‘Come on, give me a break, please I am dying here.’ ” (excerpt from an interview with the head of an association in the Moscow oblast, December 2007, translated from Russian) Thus, participation in BAs should be treated not only as a mechanism that supplements or replaces personal contacts but as one of the best options to establish and maintain useful personal contacts with the bureaucrats that could reduce the administrative burden or provide finan-cial or organizational assistance (Table 11.3) Therefore, we expect that the dichotomy of member and nonmember matters in the context of benefits

Table 11.3 Types of support rendered to authorities and aid through various

chan-nels depending on membership in business associations (percentage of respondents who answered)

Rendering support

% in column

Membership in BAs

Total sample

Receiving organizational support

from the authorities by firms

obtained from the authorities, but the strategy of multiple choice in this case

is more beneficial, as it increases the probability to obtain assistance from different sources Such assistance, undoubtedly, is of extreme importance, first of all, for weak market players This consideration supports Lehmbruch’s (2003) statement that “the actual role of many Russian business associations lay in the intermediation of individual interests, rather than aggregation and representation of collective interests” (p 14).12 The results of our survey show that the members of BAs who wish to maintain steady relationships with authorities and are successful at maintaining them derive substantial benefits from these relationships (Table 11.4) They are much more likely to obtain financial and nonfinancial support using administrative facilities for the consolidation of their market positions

Insecure property rights and more active state pressure on large business

in the 2000s caused the reincarnation of the Soviet-era paradigm of the behavior of general directors, which is an incentive to demonstrate loyalty

to the authorities In the context of membership in BAs, it means that the general directors, who are large owners, usually accept an invitation from

Table 11.4 Benefits for members of associations from the establishment of steady

contacts with authorities (share of joint-stock companies having obtained support from authorities, %)

Establishment of steady contacts with authorities in the framework of associations

Significance

of differences a

Assistance in contacts with federal agencies 29.9 13.0 0.000

Assistance in contacts with Russian partner

Help in search of Russian investors 7.9 1.8 0.002

Assistance in contacts with banks and

the authorities to join an association initiated from the top, even in a

situ-ation in which the potential benefits from participsitu-ation remain unclear:

“Basically, many of our associations were created artificially, that is, they did not grow from below They said there in the oblast: ‘Guys, we should support the Chamber of Commerce and Industry It is such an expert institution It

is recognized all over the world, and we need its stamp of approval.’ Some

of the firms think: ‘Well, the membership dues are chicken-feed for me The authorities want this for some reason, and it comes from the regional center I may later get some support from them, some extra natural gas or something else.’ In reality, they join just because of the potential payoff.” (excerpt from an interview with the head of an association in the Moscow oblast, December 2007, translated from Russian)

The information quoted above suggests that, in this case, the low costs of joining an association plus the incentive to obtain potential support out-weigh the objections of joining the association that are put forth by the authorities These relationships have the quality of an informal bargain and make it easier for the authorities to perform their public functions and for the firms to work in a certain area In the context of these considerations,

we speculated that (a) the presence of large owners in a stock ownership structure and (b) a pattern that occurs when a general manager is a large shareholder13 should correlate positively with membership in associations Those directors who became large owners during the privatization and after-privatization redistribution of property rights for their benefit take a much more personal interest in seeking additional channels and chances to keep in contact and maintain relationships with the authorities, including the “brokerage” of associations in order to secure property; this is unlike the new generation of hired managers, who often prefer to distance them-selves from them, as their job expectations are usually not connected with a certain industry or location Correspondingly, we expect that the personal characteristics of the general director, such as age and prior job experience, should also matter

The last hypothesis establishes links between the level of concentration

of the business community and the probability of becoming a member of

an association Wherever the concentration of the business community is higher, which is typical of the location of companies in larger and, cor-respondingly, higher-status settlements, informal social networks are more likely to transform into an institution of bottom-up associations

(Figure 11.1) We expect the type of location to be a significant determinant

of JSC membership in associations

The level of market competition, according to our survey results, has

a rather weak correlation with membership in associations Only among companies whose officials reported strong or not very strong competition with the Baltic countries, China, and Turkey were there significantly more participants in associations (62.9%) than among firms that lacked this

competition (51.9%; significance of difference, 0.009) These results port the idea that the level of competition can hardly be considered to be among the major determinants of membership in BAs As we reported in the first section, on the basis of a study conducted in 2004, Pyle (2007) revealed a positive correlation between membership in associations and level of democratization in a region In our study, using an aggregate rating

sup-of the level sup-of democracy in Russian regions in 2000–2004,14 we could not demonstrate this correlation for membership in regional or in any other type of associations However, if we turn our attention from the aggregate evaluation to its individual components, we can see that some of these com-ponents, such as expert assessments of openness and political pluralism, have weak positive correlations with membership of joint-stock companies

in unions or industrial associations The development of a civil society and local self-government has little to do with membership in regional associa-tions Contradicting the results of Duvanova (2007a, 2007b) obtained using BEEPS data for 25 post-communist countries, including Russia, we did not find any correlations between membership in associations and corruption

In addition, membership in national associations is unrelated to any of the particular indexes describing the levels of democracy in the regions

Empirical analysis of factors correlating with

membership of JSCs in associations

To provide a comprehensive analysis of determinants that could predict the probability of a company to be a member of an association and test the hypotheses characterizing the incentives to join associations developed in the previous section, we estimate a binary logistic regression model with

Figure 11.1 Membership in associations by type of settlement

Source: Survey data.

a dependent variable that takes a value of 1 for firms with a membership

in any type of association and 0 otherwise The independent variables characterize:

The patterns of separation of ownership from management with a general

●

director who is a hired manager without company shares, which is a basic category The personal characteristics of CEOs, who decide whether to participate in the associations, include the age of the general director or Chairman of the Board of Directors and a dummy for his/her previous job experience within governmental bodies;

The characteristics of stock ownership: dummy variables, which take a

The control variables include industry affiliation (communications as

●

a basic category); company size, measured as a logarithm of employees; dummies, which take a value of 1 for the case of a new company estab-lished after 1992; membership in a business group; and location in capital cities (Moscow or oblast capitals)

To identify the influence of the institutional components of the business climate and check the robustness of the model, we first constructed a model without factors characterizing the quality of the regional institutional environment For the second step, we included aggregated assessments of a

regional investment climate derived from the journal EXPERT15 with nificant potential and moderate risk” as a basic category For the third step,

“insig-instead of assessment from the journal EXPERT, we used individual

compo-nents of the aggregate rating of the level of democracy in Russian regions in 2000–2004 reported above The better the situation in a region, the higher its rating relative to this component

Table 11.5 shows our estimation results Close estimates of factors lating with participation in associations were obtained in all three models

corre-A steady significant effect is typical of ownership, corporate management patterns, and the personal characteristics of general directors: the chances

of being a member of an association multiplied for companies headed by general directors who were large owners The age of a director had a positive

Table 11.5 Logistic regression analysis of the determinants of participation in

With state owners (= 1)

With foreign owners (= 1)

Listing on foreign stock exchange (= 1)

Listing on Russian stock exchange (= 1)

Large owners (with more than

Separation of ownership and management (general director-hired manager as

director is not a shareholder (= 1)

Large shareholders are not managers,

general director is a shareholder (= 1)

Job experience of general director or board chairman at governmental bodies

in previous 10-year period

Components of aggregate rating of democratization:

EXPERT Regional investment climate estimation (insignificant potential and

moderate risk as a basic category)

Notes: ***: significant at the 1% level, **: at the 5% level, *: at the 10% level Standard errors

are reported in parentheses X: The variable was not included in the model Forward stepwise method was used; free cells: coefficients were not included in the final equation.

Source: Author’s estimation based on survey data.

significant influence in all three models We found no influence of state and foreign owners of the company or of the availability of large owners with more than a blocking stake

Of the basic characteristics of a company, firm size increases the chances that a company will be a member of any BA (the larger a firm, the more chances to participate in the association), while being a member of business groups and history (whether it is a privatized or a new entity) have no sig-nificance In all three models, the location of a company in the country or

an oblast capital increases the likelihood that it will be a member of a BA

Among the indicators of a firm’s performance, large capital investment and exports have a positive effect on the likelihood that it will be a member

of an association, while a long planning horizon and its presence on the Russian or a foreign stock exchange do not matter at all

The introduction of evaluations from the journal EXPERT of the regional

institutional environment reduced the sample to 550 observations and slightly worsened the fitness of the model However, the revealed correla-tions, excluding location in capitals, did not lose in significance Location

in capitals was significant at the 1% level, and, in the second model, it became significant at the 5% level This model demonstrates that none

of the evaluations of the regional investment potential (all the surveyed regions were of moderate investment risk) has an influence on membership