Why Transition Paths Differ: Russian and Chinese Enterprise Performance
Compared
By
Sumon Bhaumik, London Business School
and
Saul Estrin, London Business School
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.
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.
Structure
• Russia and China – Hypothesis
• The Estimation Framework
• The Data Sets
• Main Findings
• Conclusions
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.
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
Russia vs China Compared
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)
Source: World Bank, IMF, EBRD, State Statistical BureauNote: years in brackets
GDP growth
0
100
200
300
400
500
600
700
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
transition years
CHINA RUSSIA
GDP per head indices
0
1
2
3
4
5
6
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
transition years
CHINA RUSSIA
Industrial labour productivity
0
20
40
60
80
100
120
140
160
180
200
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10. 11. 12.
transition years
ind
ex
RUSSIA CHINA
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 flexibleSequence 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.
Implications for Growth of FirmsRussia• 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.
HypothesesDeterminants of Productivity/Growth of Productivity
Russia China
-reallocation of factor inputs
-growth in TFP caused by
restructuring ?
ownership changes ?
technology
competition
-institutional factors
Test using data set chosen for comparability – Russian former SOEs; mainly new privatized and Chinese former SOEs in less developed region, partially privatized
Model
• Production: Y = LKAM
• Sales: S P.Y = P. LKAM
• Price: P = P(Q,C)
• Equation to be estimated:
ln S = ln L + ln K + ln A + ln M + ln Q + ln C
Measurement Issues …. 1
• Sales, labour, capital, technology:
- company records
• Competition: - qualitative info
• Ownership: - state ownership
- insider ownership
Measurement Issues …. 2
• Enterprise restructuring:
- qualitative information
• Demand and institutional factors:
- industry dummy variables
- regional dummy variables
Data …. 1
• China: - Sha’anxi, Hunan, Shanxi
- 274 firms interviewed
- 137 firms in sample
• Russia: - 13 regions
- 437 firms interviewed
- 275 firms in sample
Table 1
Descriptive Statistics 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
102694.2017705.90
166151.20
6754.11Labour force 4279 3889 971 887
Stock of capital Yuan/Rouble (thousands) US dollars (thousands)
22393.55
2681.86
33604.21
4063.39
157665.4027183.69
78234.78
3180.28Percentage 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
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.
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
Table 2
Determinants of Sales in 1999 in China and Russia 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
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.
Sales in 1999 …. 1
• China: - labour (+ ve)
- technology (+ ve)
- enterprise restructuring (+ ve)
- industry affiliation
- R2 = 0.45
Sales in 1999 …. 2
• Russia: - insider ownership (+ ve)
- labour (+ ve)
- capital (+ ve)
- technology (+ ve)
- industry
- region
- R2 = 0.70
Table 3
Determinant of Sales Growth in China and Russia 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
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.
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
Growth of Sales …. 2
• Russia: - state ownership (- ve)
- labour (+ ve)
- industry
- region
- R2 = 0.42
Table 4
Determinant of Proportional Sales Growth in China and Russia 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
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.
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
Proportional Growth of Sales .. 2
• Russia: - state ownership (- ve)
- labour (+ ve)
- industry
- region/location
- R2 = 0.38
Table 5
Determinants of Growth of Sales in Russia 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
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.
Table 6
Determinants of Sales and Growth of Sales in Russia Independent Variable
Explanatory Variables Log of Sales (1999)
Growth of Sales (1997-1999)
Constant 2.5267* (0.8109)
1.5334* (0.2439)
Dummy variable for controlling shares in hands of insiders
0.3374* (0.1204)
0.0817 (0.0723)
Dummy variable for greater than 25% of equity in state ownership
-0.0635 (0.1801)
-0.2258*** (0.1250)
Logarithm of quantity of labour in 1999/ Change in quantity of labour in 1997-1999
0.7378* (0.1405)
1.2026* (0.1740)
Logarithm of stock of capital in 1999/ Change in stock of capital in 1997-1999
0.4487* (0.1284)
0.0019 (0.0428)
Percentage of capital stock that is less than 5 years old
0.0054 (0.0036)
-0.0024 (0.0021)
Dummy variable for domestic competition
0.0702 (0.1633)
-0.0567 (0.0829)
Dummy variable for international competition
0.0766 (0.1363)
0.0259 (0.0791)
Measure of restructuring achieved by the firm since 1997
-0.0303 (0.0210)
0.0031 (0.0112)
Industrial growth during 1997-1999 0.0014 (0.0067)
0.0039 (0.0029)
Proportion of debt that was overdue in 1998
0.0098 (0.0082)
-0.0072 (0.0049)
Unemployment in 1998 -.0481*** (0.0274)
-0.0669* (0.0139)
Gross regional product per capita in 1997
-0.0148 (0.0117)
-0.0087 (0.0085)
Index of legislative quality in 1997 -0.0696*** (0.0382)
-0.0394*** 0.0203
Industry that the firm belongs to Yes* Yes** R-square 0.7420 0.4366 F statistic (Prob > |F|)
31.68 (0.000)
8.92 (0.000)
N 227 223
Determinants of Enterprise Performance
Level Growth Proportional Growth
R C R C R C
Allocative
Efficiency
- labour ? ?
- capital ?
TFP
- ownership
? ()
- competition
- technology ()
- restructuring ()
Institutions () ()