How Transition Paths Differ: Enterprise Performance in Russia and China
Sumon Bhaumik, Saul Estrin
China’s GDP per capita has been increasing by an impressive 8% per annum for more than twenty years, while Russian GDP had fallen to 64% of its 1990 level by 2000, with output declining in seven years of the ten. To throw light on the broader issues of divergence in transition paths, we analyze the determinants of company performance in China’s and Russia’s very different economies. We find that in China enterprise performance was
associated with rapid increases in factor inputs but was not significantly affected by ownership or institutional factors. In contrast, region-specific factors were the most important determinants in Russia, while improvements in factor quantity (except for labor), quality and privatization to outsiders did not improve sales growth.
China and Russia both embarked on their transition paths from more or less unreformed systems of central planning, although Chinese planning was never so complete as Russian and operated through regional structures rather than industrial ministries. However, there were also very marked differences in initial conditions. China was a much less developed economy in 1978 than Russia in 1991: its GNP per capita was $285, against $3,783 in Russia. The stock of human capital was also of markedly lower „quality‟ in China, with a literacy rate of 66% in 1980, as compared to 98% in Russia. This meant that the two countries faced fundamentally different resource reallocation challenges. In China, it was necessary to transfer labor from low- to higher-productivity activities (i.e.from agriculture to industry) in order to raise national income. In Russia, the structure of output needed to be rebalanced from the concentration on heavy industry and defence favored by central planners, towards domestic consumer demand and activities enjoying an international comparative advantage at world prices.
The two countries also followed very different transition paths. In China, markets were liberalized first and they have gradually become more competitive and efficient at resource allocation, while the process of privatization has been much slower and more limited. Hence, strong market-based incentives were provided to state-owned and semi-private firms such as the town-village enterprises (TVEs). In contrast, Russia attempted to introduce markets and private ownership virtually simultaneously, with presuming that privatization would lead to much of the intended enhancement of company performance. The noticeable success of the Chinese strategy and the failure of the Russian strategy to make non-energy firms and industries a major force in the global market make a comparison of micro evidence about the impact of these strategies on firm performance an interesting exercise.
The study is based on two comparable random surveys conducted in 2000, which included retrospective questions (five years back for China and three years back for Russia). The sample comprised 274 Chinese firms from the Sha‟anxi, Hunan and Shanxi provinces, and 437 Russian
firms operating across 13 oblasts. The Chinese sample included a mix of fully state-owned firms,
corporatized state-owned enterprises, and a few town-village enterprises involved in mining, light industries, engineering products, chemicals and utilities. The Russian firms operated in the chemicals, machinery, wood and paper, construction materials, light industry, and food processing industries. Quantitative measures, such as sales, labor and capital are comparable across the samples, although some qualitative variables differ between the two samples. While the choice of non-coastal and non-southern Chinese firms a priori biases the comparison in favor of the Russian firms, which
were located in the main industrial regions of the country, this bias strengthens our conclusions rather than weakening them.
The descriptive statistics obtained from the data highlight the patterns of evolution of the Russian and the Chinese firms over the period and are consistent with the evidence presented in the transition literature. First, as one would expect, collectively the state had the controlling stake in most firms in our Chinese sample, while in Russia the majority of firms were controlled by insiders. Second, even though the real sales of the average Chinese firm in our sample grew between 1995 and 1999, while the real sales of the average Russian firm in our sample declined, sales per laborer in Russian firms remained higher that that in Chinese firms, even after the 1998 recession and the adverse impact of the sharp depreciation of the ruble vs. the US dollar value of Chinese sales. Further, there was real sales growth in a large minority of Russian firms. Third, the size of the labor force for both Russian and Chinese firms declined over time, indicating some degree of restructuring in both countries that involved laying off surplus laborers. Fourth, while the real capital stock (valued at historic cost) of an average Chinese firm grew substantially over the 1995-99 period, an average Russian firm experienced severe real decapitalization during 1997-99, rather more markedly than the decline in demand. This decapitalization can be found in the population data as well and is probably the consequence of Russian firms selling assets and writing off unproductive capital in the aftermath of the 1998 crisis. Interestingly, however, despite the significant capitalization of the Chinese firms, the average of the proportion of new (i.e., less than five years old) capital stock in Chinese firms remained less than 20%, suggesting that investment was concentrated in large firms.
The empirical strategy involves the estimation of separate augmented sales functions using the Chinese and the Russian data. The results show that, in the late 1990s, economic factors had a much greater impact on enterprise performance in China than in Russia, even though we have contrasted samples of firms from more isolated inland regions in China with companies from across Russia, including such leading centers as Moscow and St. Petersburg. These results were subjected to a host of sensitivity checks and they remained robust to all changes in specification.
To summarize the main results, in China enterprises appear to be responsive to market and supply phenomena – managerial effort, technology and investment. However, we find little or no
significant impact from institutional factors at a sectoral or regional level, or from the extent of privatization. In contrast, Russian firms are unresponsive to almost all the normal economic drivers – long run factor supplies, outsider versus insider privatization, competition, management effort, or technological factors – though we do identify a positive relationship between changes in sales and
employment. The determinants of enterprise performance in Russia in fact prove to be largely region-specific, and these we interpret to be largely institutional. We go on to explore more formally whether these findings may be explained by differences in managerial quality between Russia and China and inter-regional variation in the quality of institutions. The regressions suggest that both factors are relevant in understanding the difference in enterprise performance in the two systems.
In conclusion, what inference can we draw from the fact that economic factors like changes in labor and capital and, to a limited extent, the level of technology, explain inter-firm variation in sales growth in China, while in Russia most of the variation is explained by region-specific factors? The first and the most obvious implication is that, unlike in China, the Russian market remains both geographically and institutionally fragmented, an observation that is consistent with our knowledge about the political economy of economic governance in Russia and China. Moreover, the
effectiveness of reforms that liberalize markets while leaving ownership unchanged or only partially
adjusted seems to be strongly supported by our Chinese findings.
We therefore confirm that state-owned and corporatized firms in China are responding to market
signals and improving performance along the same lines as privately owned firms in market
economies. This suggests that, in certain contexts, such as the one of modern China, market
incentives are sufficient to ensure some degree of efficiency in enterprise activity without immediate
full privatization. This is not to say that performance cannot be further improved by private
ownership; indeed, the evidence that privatization improves enterprise performance is strong. But it
is consistent with the view that neither “big bang” reform policies nor early privatization are the sine
qua non of successful transition.
Sumon Bhaumik is a lecturer at Queen’s University Belfast, Saul Estrin is a professor of economics and deputy dean at London Business School. Their full paper can be viewed at