Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia

Journal of Comparative Economics. 2020. Vol. 48. No. 4. P. 933–950.

Levina I. A.

The paper studies evidence from Russian firms to explore whether the decentralization of firms
can be successful under weak institutions. The paper distinguishes between two strategies for
decentralization of firms in an environment with weak institutions: decentralization of decisionmaking
authority to professionals hired through open competition (real decentralization) and
decentralization to people hired through connections (cautious decentralization). The paper argues
that real decentralization has the potential to significantly improve the efficiency of firms
and therefore can have economic payoff for firms even under weak institutions. However, the
higher the distortionary effect of corruption on fair market competition in an environment with
weak institutions, the lower the firms’ returns to being economically efficient. Therefore, the
lower the returns to real decentralization, and, hence, the firms’ willingness to really decentralize.
The empirical analysis presented in the paper demonstrates that really decentralized
Russian firms are, on average, more successful compared to other firms in a range of activities:
they are more likely to invest, to bring to the market innovative products that are new to the
Russian or global market, and to export. The gap between really decentralized and other firms in
the probability of investment and introduction of new products to the market is very substantial
under low or moderate levels of corruption. However, the gap shrinks as corruption grows and
disappears under very high levels of corruption. Correspondingly, real decentralization is less
popular in Russian regions with higher corruption.

Keywords: Russia, investment, decision-making, corruption, decentralization

Publication based on the results of: Factors of Competitiveness and Growth of Russian Manufacturing Enterprises (2018)