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Barriers to Investment by Russian Firms: Property Protection or Credit Constraints?

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Author Info
Susan J. Linz ()

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Abstract

A multitude of explanations for low investment by Russian firms have been offered: high inflation, high interest rates, falling production, falling GDP, an underdeveloped banking system, a confiscatory tax regime, calls for the re-nationalization of industry, excessive regulations, and an underdeveloped legal system, among others. This paper's basic premise is that investment in Russia will not occur if firms are unable to ensure the security of their property and property rights; that is, if the risk of destruction or expropriation is high. Nor will investment occur if access to investment funds is limited. Data collected from 264 Russian firms in the spring and fall 2001 are used to construct a security index and credit index in order to evaluate the relative importance of property protection and access to financing on the investment activities of manufacturing, retail, and other service sector firms in Moscow, Rostov, Taganrog, and Vladivostok. For the firms participating in this survey, the reported percentage of profit reinvested is significantly higher among firms which responded positively to questions about the effectiveness of police and courts in protecting their property and property rights, and significantly lower among firms which made above-average payments (official and unofficial) for property protection. Unofficial payments alone lower investment by 20%. Firms with access to credit reported reinvesting a significantly greater share of their profits. All other things equal, firms in Moscow, and firms in food processing and food distribution reinvested a significantly greater share of their profits. Manufacturing firms reported reinvesting a significantly smaller share of their profits in comparison to retail shops or other service sector companies. These results do not vary with the amount of collateral a firm has; that is, whether the firm owns or leases its premises.

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Publisher Info
Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 469.

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Length: 37 pages
Date of creation: 01 May 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-469

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Related research
Keywords: Russia; investment; property protection; credit; transition cost;

Other versions of this item:

Find related papers by JEL classification:
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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    Other versions:
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  5. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
    Other versions:
  6. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
  8. Joel Hellman & Mark Schankerman, 2000. "Intervention, Corruption and Capture: The Nexus between Enterprises and the State," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 545-576, November. [Downloadable!] (restricted)
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    Other versions:
  11. Gaviria, Alejandro, 2002. "Assessing the effects of corruption and crime on firm performance: evidence from Latin America," Emerging Markets Review, Elsevier, vol. 3(3), pages 245-268, September. [Downloadable!] (restricted)
    Other versions:
  12. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July. [Downloadable!] (restricted)
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