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Companies Investing in Upgrades Less Hit by Crises

Generally, Russian businesses are fairly resistant to external shocks. Many enterprises have not only survived the 2008 crisis, but have increased their market share since then. Major companies with foreign owners and those investing in restructuring and modernisation have a better chance of success, according to Boris Kuznetsov, Professor at the Department of Economic Analysis of Organizations and Markets and co-author of the study 'The impact of industrial strategies on resilience to external shocks and on the post-crisis development trends'

Before the 2008 crisis, Russian businesses were generally doing well; growing consumer demand, access to cheap loans, and a stable ruble enabled virtually all companies in the Russian market to increase their turnover and profits.

The crisis came as a sizeable shock, causing a major drop in production—in Russia to a greater extent than in many other countries. The subsequent economic recovery between 2010 and 2011 did not result in the same growth rates as prior to the crisis, and macroeconomic statistics over the past two years have indicated an overall decline in economic growth rates and an onset of stagnation in manufacturing industries.

Experts from the HSE's Institute for Industrial and Market Studies (IIMS) studied the developments in Russian companies before, during, and after the 2008 crisis at the micro-level, looking in particular at the strategies companies used to deal with the crisis and to recover from it, and examining various factors determining whether a company would increase its market share and turnover or plunge into stagnation after the crisis.

The study included an empirical analysis of trends in Russian manufacturing enterprises which survived the 2008-2010 financial crisis, including the internal and external factors determining these trends.

The study is based on empirical data from 967 medium-sized and large manufacturing companies in 48 Russian regions collected from a 2009 survey and the companies' 2008-2012 financial statements from the SPARK-Interfax database. The researchers used a hierarchical cluster analysis to characterise the most typical post-crisis trends in Russian manufacturing companies, using trends in company revenue as the key indicator of their performance.

Professor Boris Kuznetsov presented the findings at the IIMS seminar 'Institutional problems of the Russian economy'.  

Crisis Made Businesses Stronger

The study reveals that many companies have not only survived the crisis, but have since grown stronger and increased their turnover, market share and profits.

The researchers found that in terms of revenue, more than 90% of the surveyed companies fit in either of the two main clusters—conventionally defined as 'consistent growth' and 'stagnation'—with 58% of the companies falling in the former and 34% in the latter category. The trends were inconsistent in the remaining 8% of companies, excluding them from the above categories.

The first cluster was growing before 2008 and then experienced a brief decline followed by recovery and ongoing growth; the second cluster had also been growing before the crisis, but never fully recovered after the decline and is now in stagnation.

The third cluster is a fairly small group of companies which were almost unaffected by the crisis, but suffered a sharp decline in 2010.

"We did not examine the most common question of what helped companies survive the crisis. It is known that some 6% of Russian companies did not survive, while some others are close to bankruptcy but nevertheless choose to stay in the market, " said Kuznetsov.

More Investment Makes Stronger Businesses

The study identified some of the factors determining whether a company will end up in either the growing or the stagnating cluster.

In addition to the company's structural characteristics—such as the industry and size—the researchers analysed the impact of factors such as foreign co-ownership, investment in technology and business processes in the pre-crisis period, and the institutional environment in the region where the company is based.

Major companies in the food and chemical industries with more than ten years in the market were more likely to be in the growing cluster.

Those who had invested heavily in their restructuring and modernisation of fixed assets and technology before the onset of the crisis were more likely to quickly recover and grow after the crisis.

Having foreign owners and being part of a holding company also provided some immunity against external shocks, the study's authors found.

They also noted that a favorable investment climate in the region where the company was located was an essential success factor. "The better the institutional environment and the lower the corruption in the region, the more likely local companies were to experience fast post-crisis recovery," Kuznetsov stressed.

He noted that one of the study's hypotheses about success factors was not confirmed—namely, the role of being close to government and receiving government support. "We had assumed that companies seeking a close relationship with government would be more likely to stagnate and fail to recover to their pre-crisis revenues, but in fact we found no connection whatsoever between a company's revenue trends and its proximity to government," Kuznetsov noted.

The study's authors conclude that government can significantly help Russian companies in times of economic uncertainty by taking steps to support restructuring and modernisation and to improve the institutional environment, in particular by combating corruption.

 

November 20, 2014