Trade Liberalization, FDI, and Productivity Growth: Russian experience

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Trade Liberalization, FDI, and Productivity
Growth Russian experience
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Key Question?

• In Chapter XXX we studied theory and evidence of
  the effect of trade liberalization on
  productivity.
• What does the evidence from Russian Firms say
  about presence of such effects?
• What effect can WTO accession have on Russian
  firms?

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Outline

• Theory
• Evidence from other countries
• Firms-level study of Russia
• Effect of import
• Effect of FDI
• Survey of the potential effects of WTO accession

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Traditional Theory of the Effect of Trade
Liberalization on Productivity Was Studied in
Chapter XXX

• Major conclusion in most cases trade
  liberalization have positive effect on overall
  productivity of domestic firms, although the
  least productive firms may have to close. Reasons
  for positive effect
• Incentives to restructure competition effect
• Grater information exchange demonstration
  effect
• Exception presence of external economies of
  scale, i.e. Learning by doing on the level of
  industry, not enterprise.

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Empirical literature

• Detailed overview Chapter XXX
• Bolaky and Freund (2004) effects depends on
  institutions. If too much regulations, effect is
  negative.
• Djankov, Murrel (2000) show that in most Eastern
  European countries effect of trade liberalization
  and increase in competition with imports on
  domestic firms was positive.

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Effects of FDI

• Direct effect
• Spillovers
• Horizontal
• Demonstration effect
• Attraction of labor, trained on FDI
• Competition effect (-)
• Vertical effect
• Incentives for domestic companies to increase
  productivity to become suppliers of domestic
  firms
• Foreign-owned firms sometimes assist domestic
  suppliers

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Evidence from transition countries

• Direct effect is always positive
• Unclear results for horizontal effect. In some
  countries (Romania) the effect is positive, in
  others either negative or insignificant.
• Vertical effects are often positive or
  insignificant.
• Both reasons for vertical effect seem to be
  present.

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Trade liberalization in Russia

• 1992
• State monopoly on foreign trade canceled
• Import subsidies and export tariffs were
  introduced. Subsidies amounted to 10-25 of GDP,
  and lead to losses for the country of up to 10
  of GDP.
• 1993 import tariffs started to be introduced
• 1994 import subsidies fully eliminated
• 1995-6 decrease in some import tariffs, and
  elimination of export tariffs in the framework of
  IMF stabilization program
• 1998-1999 export tariffs on oil reintroduced.
• Early 2000s unification of import tariff rates,
  which resulted in tariff decline.

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Policy toward FDI in Russia

• 1989 joint ventures are allowed
• 1991 fully foreign-owned subsidiaries are
  allowed
• Privatization foreigners officially are allowed
  to participate, but discriminated against.
• Now officially little obstacles for FDI, but in
  practice they exist both on the federal level
  (strategic assets) and on the regional one (red
  tape).

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Bessonova et al (2003) firm-level study of the
effect of trade liberalization on Russian firms
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Effects on TFP

• Effect of competition with imports
• Effects of imported inputs
• Horizontal, backward and forward linkages from
  FDI
• Inter-relationships with complexity

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Data

• Russian firms census 1996-2001
• FDI census 1996-2000
• Trade statistics 1996-2001
• Input-output tables 1995

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Regression analysis results for imports

• Interpretation problem 1998 crisis. However,
  correction of exchange rate was often a part of
  trade liberalization programs in other countries
• 1994-1998
• Import competition has no effect
• Imported inputs have positive effect
• 1998-2001
• Import competition is positive
• Imported inputs have negative effect (disappears
  quickly)

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Complexity

• Disorganization theory
• Is the effect of competition in complex sectors
  different because of disorganization?
• Results
• Effect of import competition (interaction term)
  is negative before 1998
• This effect becomes positive after the crisis

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Conclusions about effect of import competition
and trade liberalization in Russia

• In most of the 1990s the effect of trade
  liberalization is difficult to separate from the
  effects of other reforms.
• Russian firms adjusted to working in market
  economy by 1998, so their reaction to 1998 crisis
  was inline with theoretical predictions.
• Changes in the exchange rate are more important
  factor, which affects behavior of Russian firms,
  than small changes in trade policy measures.

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Regression analysis results for FDI

• Horizontal spillovers
• Positive and significant before crisis
• Positive but insignificant
• Vertical spillovers
• Forward are negative and significant (FDI among
  suppliers)
• Backward are positive and significant (FDI among
  consumers)

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More results on FDI Yudaeva et al 2003

• Foreign-owned companies in Russia are twice as
  more efficient than the domestic ones.
• Regional policy can have negative effect on
  foreign firms productivity
• Horizontal spillover effect is positive
• Horizontal spillover effect depends positively on
  education level

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2004 enterprise survey
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Motivation

• In Russia many people do not understand and trust
  the analysis (often they have a valid reason to
  do so), presented above
• Lets conduct a survey!

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Methodology

• Questioner sent by mail to firms, participating
  in IET surveys
• Questioner was sent to 1332 firms
• 634 forms replied
• Problems non-random sample
• Construction of original sample is non-random
  long-term relationships, new firm, small and
  large firms are underrepresented
• Response is non-random

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Industrial composition of the sample
representative
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Answer to question What if import prices
decrease by 10
passive restructuring passive restructuring
yes no
active restructuring yes 45 9
active restructuring no 25 21
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Conclusions

• In the last 10 years the effect of foreign policy
  on domestic companies was much smaller than the
  effect of other reforms
• After 1998 domestic firms started to react to
  policy shocks in the way, predicted by theory.
  The effect of exchange rate changes in this
  period is more important than the effect of trade
  policy changes, though.

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Conclusions (cont).

• FDI in Russia are more productive than the
  domestic firms, and presence of FDI has positive
  spillovers on domestic firms. Regional policies
  and education level can influence overall effect
  of FDI.
• Fears in Russia of devastating negative effect if
  import competition and WTO accession are not
  confirmed by firms-level evidence and survey
  evidence