Why Transition Paths Differ: Russian and Chinese Enterprise Performance Compared

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 (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 (%) 91.1 63 Tertiary school enrolment (%) 50.2 1.7 (80) Russia vs China Compared Source: World Bank, IMF, EBRD, State Statistical Bureau Note: years in brackets

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 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 - 274 firms interviewed - 137 firms in sample • Russia: - 13 regions - 437 firms interviewed - 275 firms in sample

18. Variables China Russia 1995 1999 1997 1999 Percentage of firms state owned 79 66 Percentage of equity owned by government a 12 7 Percentage of equity owned by insiders 73 62 Sales Yuan/Rouble (thousands) US dollars (thousands) 26006.87 3114.60 28369.57 3430.42 102694.20 17705.90 166151.20 6754.11 Labour force 4279 3889 971 887 Stock of capital Yuan/Rouble (thousands) US dollars (thousands) 22393.55 2681.86 33604.21 4063.39 157665.40 27183.69 78234.78 3180.28 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 86 82 Percentage of firms facing competition from firms from the rest of the world 17 34 Measure of restructuring achieved by the firm since 1995 (China) or 1997 (Russia)c 65 8 Table 1Descriptive Statistics Notes: a) Almost all Russian firms in the sample had been privatised by 1999. 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. Independent Variable: Logarithm of sales in 1999 Explanatory Variables China Russia Spec. 1 Spec. 2 Spec. 1 Spec. 2 Constant - 0.2932 (1.0989) 0.4980 (1.0627) 2.0439** (0.8146) 1.7185** (0.7291) Dummy variable for state ownership in 1999 - 0.2155 (0.2426) - 0.2827 (0.2485) Dummy variable for controlling shares in hands of insiders 0.2902* (0.1119) 0.2908* (0.1023) Dummy variable for greater than 25% of equity in state ownership - 0.0619 (0.1838) - 0.0185 (0.1617) Logarithm of quantity of labour in 1998 0.8623* (0.1640) 0.9035* (0.1614) 0.8441* (0.1516) 0.9448* (0.1444) Logarithm of stock of capital in 1998 0.0090 (0.0829) 0.0268 (0.0842) 0.3743* (0.1378) 0.3354* (0.1285) Percentage of capital stock that is less than 5 years old 0.0194* (0.0050) 0.0199* (0.0054) 0.0071** (0.0036) 0.0053 (0.0037) Dummy variable for domestic competition 0.1782 (0.3173) 0.1056 (0.3222) 0.0365 (0.1477) 0.0149 (0.1328) Dummy variable for international competition - 0.2436 (0.3241) - 0.2496 (0.3178) 0.0818 (0.1237) 0.0247 (0.1169) Measure of restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) 0.0186*** (0.0096) - 0.0158 (0.0198) Industry that the firm belongs to Yes** Yes** Yes* Yes* Region/location of the firm Yes Yes Yes*** Yes R-square 0.4561 0.4432 0.7092 0.7507 F statistic (Prob > |F|) 10.92 (0.00) 11.07 (0.00) 26.15 (0.00) 31.94 (0.00) 137 138 279 279 Table 2Determinants of Sales in 1999 in China and Russia 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 - R2 = 0.45

22. Sales in 1999 …. 2 • Russia: - insider ownership (+ ve) - labour (+ ve) - capital (+ ve) - technology (+ ve) - industry - region - R2 = 0.70

23. Independent Variable: Growth of sales Explanatory Variables China Russia 1995-99 1997-99 1997-99 Spec. 1 Spec. 2 Spec. 1 Spec. 2 Spec. 1 Spec. 2 Constant - 0.638*** (0.381) - 0.189 (0.260) - 0.485*** (0.286) - 0.056 (0.166) 0.832** (0.245) 0.856* (0.222) Dummy variable for state ownership in 1999 - 0.135 (0.158) - 0.161 (0.160) - 0.188 (0.83) - 0.208** (0.088) Dummy variable for controlling shares in hands of insiders 0.052 (0.069) 0.049 (0.70) Dummy variable for greater than 25% of equity in state ownership - 0.237*** (0.127) - 0.239*** (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) - 0.021 (0.088) - 0.047 (0.091) 0.002 (0.041) 0.002 (0.040) Percentage of capital stock that is less than 5 years old 0.006 (0.004) 0.006 (0.004) 0.006* (0..001) 0.006* (0..1) - 0.001 (0.002) - 0.001 (0.002) Dummy variable for domestic competition - 0.238*** (0.123) - 0.258** (0.123) - 0.086 (0.085) - 0.105 (0.085) - 0.038 (0.080) - 0.038 (0.080) Dummy variable for international competition - 0.014 (0.194) 0.003 (0.192) - 0.079 (0.125) - 0.060 (0.122) - 0.087 (0.071) 0.087 (0.071) Restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) 0.006 (0.004) 0.006*** (0.003) 0.002 (0.011) Industry that the firm belongs to Yes Yes Yes** Yes** Yes** Yes** Region/location of the firm Yes Yes Yes*** Yes** Yes* Yes* R-square 0.2592 0.2533 0.2401 0.2228 0.4209 0.4208 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 137 138 137 138 275 275 Table 3Determinant of Sales Growth in China and Russia 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) 95-99 - technology 97-99 - domestic competition (- ve) 95-99 - restructuring (+ ve) 97-99 - industry 97-99 - region/location 97-99 - R2 = 0.25

25. Growth of Sales …. 2 • Russia: - state ownership (- ve) - labour (+ ve) - industry - region - R2 = 0.42

26. Independent Variable: Proportional growth of sales Explanatory Variables China Russia 1995-99 1997-99 1997-99 Spec. 1 Spec. 2 Spec. 1 Spec. 2 Spec. 1 Spec. 2 Constant - 0.105** (0.047) - 0.039 (0.031) - 0.051 (0.048) - 0.0003 (0.022) 0.095* (0.032) 0.097* (0.029) Dummy variable for state ownership in 1999 - 0.009 (0.019) - 0.013 (0.019) - 0.023** (0.011) - 0.025** (0.011) Dummy variable for controlling shares in hands of insiders 0.004 (0.007) 0.004 (0.007) Dummy variable for greater than 25% of equity in state ownership - 0.027** (0.011) - 0.025** (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) - 0.004 (0.013) - 0.007 (0.012) - 0.001 (0.004) - 0.001 (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) - 0.0002 (0.0002) Dummy variable for domestic competition - 0.032*** (0.017) - 0.035** (0.017) - 0.005 (0.010) - 0.008 (0.011) - 0.007 (0.010) - 0.007 (0.010) Dummy variable for international competition - 0.008 (0.022) - 0.005 (0.022) - 0.015 (0.016) - 0.012 (0.016) 0.003 (0.007) 0.003 (0.007) Restructuring achieved by the firm since 1995 (China) or since 1997 (Russia) 0.001* (0.0005) 0.0006 (0.0005) 0.0002 (0.001) Industry that the firm belongs to Yes Yes Yes** Yes** Yes** Yes** Region/location of the firm Yes Yes Yes Yes*** Yes* Yes* R-square 0.3129 0.3030 0.1640 0.1548 0.3866 0.3865 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 137 138 137 138 275 275 Table 4Determinant of Proportional Sales Growth in China and Russia 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) 95-99 - technology (+ ve) both - domestic competition (- ve) 95-99 - restructuring (+ ve) 95-99 - industry 97-99 - R2 = 0.31 95-99 = 0.16 97-99

28. Proportional Growth of Sales .. 2 • Russia: - state ownership (- ve) - labour (+ ve) - industry - region/location - R2 = 0.38

29. Independent Variable: Growth of sales Explanatory Variables 1997-98 1998-99 Spec. 1 Spec. 2 Spec. 1 Spec. 2 Constant 0.2205 (0.2386) 0.2016 (0.2062) 0.5477* (0.1289) 0.5624* (0.1151) Dummy variable for controlling shares in hands of insiders 0.0028 (0.0703) 0.0030 (0.0699) 0.0445 (0.0563) 0.0429 (0.0574) Dummy variable for greater than 25% of equity in state ownership 0.0018 (0.0809) 0.0019 (0.0807) 0.0011 (0.0853) - 0.00004 (0.0851) Logarithm of quantity of labour 0.8691* (0.2107) 0.8752* (0.2062) 1.1937* (0.1457) 1.1904* (0.1403) Logarithm of stock of capital 0.0763*** (0.0424) 0.0759*** (0.0427) - 0.0802** (0.0337) - 0.0801* (0.0336) Percentage of capital stock that is less than 5 years old - 0.0002 (0.0014) - 0.0002 (0.0014) - 0.0007 (0.0014) - 0.0007 (0.0014) Dummy variable for domestic competition - 0.0583 (0.0666) - 0.0584 (0.0667) 0.0364 (0.0580) 0.0369 (0.0573) Dummy variable for international competition 0.0455 (0.0631) 0.0454 (0.0630) 0.0321 (0.0662) 0.0323 (0.0659) Measure of restructuring achieved by the firm since 1997 - 0.0020 (0.0074) 0.0015 (0.0084) Industry that the firm belongs to Yes Yes Yes Yes Region/location of the firm Yes* Yes* Yes* Yes* R-square 0.2201 0.2199 0.2927 0.2927 F statistic (Prob > |F|) 4.10 (0.00) 4.27 (0.00) 8.00 (0.00) 8.30 (0.00) N 275 275 279 279 Table 5Determinants of Growth of Sales in Russia 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 6Determinants of Sales and Growth of Sales in Russia

31. Determinants of Enterprise Performance