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

Author

Listed:
  • Susan J. Linz
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.

Suggested Citation

  • Susan J. Linz, 2002. "Barriers to Investment by Russian Firms: Property Protection or Credit Constraints?," William Davidson Institute Working Papers Series 469, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2002-469
    as

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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39853/3/wp469.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dorbec, Anna, 2004. "Liquidity provision in transition economy: the lessons from Russia," BOFIT Discussion Papers 17/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Alexander Pakhalov, 2020. "Import of Institutions as an Approach to Investment Climate Reform: Evidence from Russia," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 6(2), pages 127-144, April.

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    More about this item

    Keywords

    Russia; investment; property protection; credit; transition cost;
    All these keywords.

    JEL classification:

    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P31 - Political Economy and Comparative 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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