New Research on Firms, Markets, and Institutions in Transitional and Emerging Economies

Poster Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Michigan AB
Hosted By: Association for Comparative Economic Studies
  • Chair: Elizabeth Brainerd, Brandeis University

Residential Energy Consumption and the Persistence of History: Evidence From Ukraine

Miriam Frey
,
University of Regensburg
Ira N. Gang
,
Rutgers University

Abstract

Ukraine's economic and social development at the beginning of the millennium was mainly based on cheap energy and cheap natural and human resources. Traditionally very energy-using, the Ukraine did not reduce its energy consumption in the aftermath of the Soviet Union's breakup, despite the large decline in production. While a carbon tax can be shown to reduce industrial energy consumption significantly (Frey, 2016) little is known about the factors influencing residential energy consumption in Ukraine, which makes it difficult to choose the appropriate policy instrument.

Our paper examines the determinants of residential energy and resource use, including socio-economic factors, and dwelling characteristics and weather conditions. Our focus, however, is on cultural factors and the role of people's attitudes towards the environment in household's energy demand. We look at the case of Ukraine to analyze whether with important historical events like Chernobyl comes persistent regional variations in environmental awareness. Our data is drawn from a 2007 household expenditure survey covering more than 10,000 Ukrainian households, merged with detailed supplementary information on regional level characteristics. While 2007 is particularly useful for analysis as it is the last year in which a uniform residential electricity tariff was applied, we examine earlier data as well as expenditure on water instead of electricity. Our initial results show that after controlling for socio-economic factors, dwelling characteristics and the stock of appliances, there are still statistically significant regional variations. We argue that this is due to differences in environmental awareness and sensitivity, rooted in Ukrainian history. We expect to find differences in regional environmental protection policies and actions including in regional forest reproduction activities.

Ownership Structure and Corporate Risk Taking: Evidence From an Emerging Market

Sheng Xiao
,
Westminster College
Shan Zhao
,
Grenoble School of Management

Abstract

We investigate the impact of ownership structure on corporate risk-taking across Chinese firms between 1999 to 2008. We find a U-shape relationship between the largest shareholder’ ownership and corporate risk taking. Specifically, when the largest shareholder’s ownership is low, the largest shareholder discourages corporate risk taking due to the dominance of the management entrenchment effect, but if the largest shareholding rises past a threshold, it encourages corporate risk taking instead, due to the dominance of the incentive alignment effect. We also find government ownership deters corporate risk-taking, while foreign ownership encourages corporate risk-taking.

Macroeconomic Effects of the Adoption of the Euro in Serbia

Reinhard Neck
,
University of Klagenfurt
Klaus Weyerstrass
,
Institute for Advanced Studies-Vienna

Abstract

In 2009, Serbia applied officially for EU membership, and on 21 January 2014, membership negotiations started. If Serbia joins the EU, it will have to adopt the euro as legal tender as soon as it fulfils the relevant Maastricht criteria. By means of simulations with a macroeconometric model of the Serbian economy, this paper examines what macroeconomic effects can be expected from Serbia’s EU membership and from its membership of the Euro Area. The macroeconometric model for Serbia comprises the key macroeconomic markets, i.e. the labor, goods, monetary and foreign exchange markets. It contains equations for GDP and its expenditure components (consumption of private households, government consumption, fixed capital formation, exports, and imports), the price level, wages, employment, unemployment, interest rates, and exchange rates. In addition, the government sector is modeled in some detail. It is shown that EU accession and the introduction of the euro bring about higher real GDP, more employment, and slightly higher inflation due to additional aggregate demand. Public finances are affected positively. The benefits of joining the Euro Area are mainly due to supply side effects, viz. increases in productivity.

Corporate Governance and Investment: Evidence From Russian Non-Listed Firms

Olga Lazareva
,
National Research University Higher School of Economics
Carsten Sprenger
,
National Research University Higher School of Economics

Abstract

In this paper, we investigate how firm-level indicators of corporate governance affect financing constraints, measured by the cash flow sensitivity of investment. The focus is on unlisted firms, which represent a large part of the economy, especially in emerging markets, and which are more likely to suffer from asymmetric information problems in accessing external funds for investment. We develop two original corporate governance indices based on two rounds of a large-scale survey of Russian enterprises – one for shareholder protection (including board composition and procedures) and one for transparency (including information disclosure and audit). We estimate standard investment regressions with a proxy for investment opportunities and cash flows as the main independent variables, augmented by interaction terms with our corporate governance indices and variables capturing ownership structure. The central result is that better shareholder protection diminishes the cash flow sensitivity of investment, particularly in firms with an outside controlling owner and in firms with low managerial ownership. In contrast, more transparency might even exacerbate financing constraints in some cases. We address the problem of endogeneity of corporate governance by using fixed-effects regressions and an instrumental variable approach. The latter exploits the particular legal framework in Russia where legal provisions for corporate governance depend on a firm’s number of shareholders.

Human Capital, Product Innovation and Market Environment in Manufacturing Firms in China

Xiuli Sun
,
Southwestern University of Finance and Economics

Abstract

Product innovation is vital to most manufacturing firms’ growth and propensity. This is
especially true for firms in China where firms need to face more complex environmental
situations than their counterparts in market economies since the relatively underdeveloped
government, legal, and financial institutions in China lead to environmental turbulence as well as
dysfunctional competition. In this paper, we examine how firm-level human capital affects
product innovation in different market environment, using firm-level enterprise survey data from
China conducted by the World Bank (2000, 2002) in large cities and middle cities respectively.
Our unique datasets provide us an opportunity to study how different market environment might
mediate between human capital and innovation. Two product innovation measures are used, new
product sales and new product counts. From the data, we find that in middle cities, firms tend to
have more product innovation in count but similar product innovation in value. By employing
Tobit model and zero-inflated Poisson model, we find that that the number of skilled human
capital tends to have a positive effect on product innovation; management team’s average age
tends to have a negative effect, indicating that a firm with older management team tends to have
less product innovation. Moreover, human capital tends to play a more important role in middle
cities while R&D spending is more important in large cities. Surprisingly, we find Management
team’s schooling tends to have a positive coefficient in determining product innovation counts
and value in middle cities and product innovation value in big cities, but it has a negative effect
on product innovation counts in big cities. In addition, we find that competition tends to have a
negative effect on product innovation in small cities while it has a positive effect on product
innovation in big cities for both product innovation measures.

Teaching Comparative Economics in a Study-Abroad Program

Paul R. Koch
,
Olivet Nazarene University

Abstract

Instruction in the field of comparative economics has changed dramatically over the past few decades. Once primarily a comparison of market capitalism and planned socialism, courses in this area now focus on the "varieties of capitalism," including those manifestations which still retain a significant degree of governmental involvement.
The continent of Europe provides an excellent case study in the contrasts:
- The "social market" model of the northern European nations;
- The "social democratic" model of the Scandinavian countries;
- The "corporatist" model of France and some southern European nations;
- The "state capitalist" model of the Russian Federation;
- The "emerging market" model of the relatively new members of the European Union in Central and Eastern Europe.
- The "Anglo-Saxon" hybrid model of the United Kingdom.
The International Business Institute (IBI) provides an excellent opportunity to teach these subjects in the context of the nations and regions under consideration. One of the courses in the IBI program, Comparative Economic Systems, is offered primarily during the first three weeks of this experience, when the group is in Lithuania, Latvia, the Russian Federation, and Germany.
This poster will describe how the design of the program, which combines formal class sessions with corporate and organizational seminars and visits to sites of historical and cultural interest, as well as informal interaction between students and faculty, enables the content of comparative economics to be presented in an integrated manner. After an introduction to the entire sub-field, this portion of the class addresses the economies of the Russian Federation, Germany, France, Sweden, the United Kingdom, the Baltic states, and other case studies in post-Communist transition.

Microeconomic Determinants of Non-Performing Loans: Does the Firms’ Ownership Play a Crucial Role?

Polona Domadenik
,
University of Ljubljana
Matjaz Koman
,
University of Ljubljana

Abstract

Literature discusses the phenomena of non-performing loans as the consequence of recent economic and financial crises. As the burden of firms' debts differs across countries at similar level of development we might assume that there are systemic reasons behind. There are evidences that regulatory system involving governance of corporate sector needs to be a subject to major legislative and institutional reforms, primarily in response to exposures of serious cases of corruption and abuse in the financial and business sectors by well-connected businesspeople. The recent global financial crisis indicated continued occurrence of irresponsible forms of corporate development and practices, underscoring structural weaknesses within the regulatory system in spite of reforms being taken in last two decades.
Using an administrative dataset of balance sheets' data of Slovene firms (since 1995) combined with complete registry of non-performing loans (NPL) evidenced in the period of 2008 and 2012, structure of management boards and ownership data, we are trying to identify the mechanisms behind the risky behavior of particular firms before the crisis. Besides special firm-bank relationship we assume that also firm-level ownership leading to specific investment behavior of particular ownership groups affect the probability of firms' NPL. Understanding the channel of building these debts would enable policy makers to identify the structural weaknesses and control from similar settings in the future. In this context it is important to understand whether NPLs are the consequence of poor governance models at the firm level or is simply due to global downturn. In order to disentangle both effects we build a model of firm behavior incorporating investment decisions in the environment of soft budget constraints for state owned firms that is evidenced in easier access to loan markets and subsidies being given by the state. We investigate the relationship between state ownership, well-connected businesspeople and corporate investment patterns and test the underlying theoretical channels of influence.

Riots and the Window of Opportunity for Coup Plotters: Evidence on the Link Between Urban Protests and Coups d'État

Lena Gerling
,
University of Muenster

Abstract

This paper investigates the impact of urban protests on coup attempts in a sample of 39 Sub-Saharan African countries for the period 1990 to 2007. Widespread public discontent, especially when occurring in urban centers, can act as a trigger of coups d'état in autocratic regimes by opening a window of opportunity for leadership removals by the ruling elite. The main difficulty in testing this relationship is that public revolts are rarely exogenous to coup risk. To address this problem, variation in rainfall is used to create an instrument for urban protests. The results show that rainfall-related popular uprisings in urban areas increase the likelihood of a coup attempt and thus help to solve the collective-action problems associated with coup plots.

Autocracy and the Public: Threats of Mass Revolts and Policy Control in Dictatorships

Thomas Apolte
,
University of Munster

Abstract

Threats of mass revolts would effectively constrain a dictator's public policy if it were not for the collective-action problem. Mass revolts nevertheless happen, but there is no established explanation for them, nor do we have a clear understanding about their implications for policy control in dictatorships. In order to enhance our understanding in this field, we link a simple threshold model of expressive behavior to an agency theory in order to explain how mass revolts may impact on a winning coalition's incentives to keep supporting an incumbent dictator. Having observed public policy and updated the latter’s belief on the type of the government, the winning coalition's members may exploit the incident of a mass revolt for escaping a loyalty trap that otherwise prevented them from switching to disloyalty.
The model distinguishes the unintended side effect of expressive behavior of members of the general public from the deliberately exerted power of a winning coalition. The latter alone is the one that decides on ousting an incumbent in light of its observation of public unrest and in light of its updated belief on the character of the incumbent. As a result, there are two filters between the degree of relative deprivation of the general public on the one hand and an overthrow of a dictator on the other: the stochastic element in the outbreak of public unrest and the interest of the winning coalition in ousting the incumbent.
Our approach has a rich set of empirical implications that are discussed in the paper. The most important is that public unrest raises the probability of enforced regime changes but that the threat thereof is, if any, only weakly instrumental with respect to an efficient and effective control of public policy by the general public in an autocracy.

Undoing Gender with Institutions: Lessons From the German Division and Reunification

Quentin Lippmann
,
Paris School of Economics
Alexandre Georgie
,
Paris School of Economics
Claudia Senik
,
Paris School of Economics

Abstract

Social scientists have provided empirical evidence that "gender trumps money", in the
sense that gender norms can be more powerful then economic rationality in shaping daily
arrangements between spouses. In particular, it has been shown that when they deviate
from the "male breadwinner" norm, women react by "doing gender", i.e. overplaying
their feminine role by increasing the number of housework hours that they accomplish. It
has also been shown that the risk of divorce increases when a woman earns more than her
husband. This paper shows that, however powerful, these norms are cultural and can be
trumped by institutions. We use the 41-year division of Germany as a natural experiment
and look at differences between East and West Landers in terms of gender behavior after
the German reunification. As most countries of the socialist bloc, the former GDR had
designed institutions that were much more gender equalizing than their counterpart in the
former FRG. We show that these institutions have created a culture that keeps influencing
behavior up to the current period. In particular, East Germany differs from West Germany
in the sense that a woman can earn more than her husband without "doing gender" and
without putting her marriage at risk.

The Long Shadow of Forced Labour in Russia

Louise Grogan
,
University of Guelph

Abstract

Much of the geographic area spanned by contemporary Russia was first populated by forced labour under Joseph Stalin's 1928 Five Year Plan. Millions were incarcerated during this industrialisation drive. The impact of local Gulag camp history on contemporary incomes and interpersonal trust is here quantified, using Soviet secret police secretariat decisions regarding camp locations to aid in identification. The observed substantial negative impact of prisoner numbers on trust is found to be attributable more to local institutional factors than to intergenerational transmission of low trust beliefs amongst former prisoners. Consistent with these findings, levels of interpersonal trust amongst descendants of Russian immigrants to the US are shown not to differ from those of other European immigrants.

Democratic Institutions and Prosperity: A Bundled Approach

Helena Helfer
,
University of Muenster

Abstract

Even though it has been part of scholarly discourse for decades, theoretical and empirical
evidence on the relationship between democratic institutions and economic prosperity
remains ambiguous. The proposed study adds to this discussion by introducing a bun-
dled approach for measuring institutions. This approach is especially insightful since
it takes interrelations between institutions into account that tend to be overlooked in
many empirical studies, which estimate prosperity eects of single institutions only. The
composite index created for this paper allows for two levels of bundled analyses: rstly,
on the dimensional level of political, economic and societal institutions, and secondly,
on the overall level of democracy.
The study presents evidence from regression analyses that a higher initial level of eco-
nomic prosperity results in a smaller prosperity-enhancing eect of the institutional
bundles and of the overall democracy index. It also reveals evidence on the relative
importance of the institutional bundles for both the level and the growth of economic
prosperity. We nd that the relative of importance of the institutional bundles diers
for developing and developed countries as we analyze dierent clusters of countries. We
also compare several geographic groups of developing countries and present evidence on
the respective institutional bundles that are most prosperity-enhancing for each devel-
oping region. We explain our ndings based on the unique conditions that each group
of countries exhibits. Taking endogeneity concerns with regard to our composite index
into account, we substantiate our ndings using an instrument variable approach. In
conclusion, we nd that there is merit to the bundled approach of measuring institutions
since the study nds conclusive results for the institutional bundles while the results for
single indicators lack coherence. The results are representative for a panel observing the
years from 1995 to 2010 and covering 148 countries.

Informal Competition and Productivity in Sub-Saharan Africa

Nesma Ali
,
University of Paris-Est
Boris Najman
,
University of Paris-Est

Abstract

Despite the recognised contribution of competition to spurring productivity growth, competition stemming from informal firms has always been considered as a threat to formal firms. This paper investigates the significance of this default hypothesis. Using the World Bank’s Enterprise Surveys, we update the two-step methodology of Guiso et al. (2004) to build a regional indicator of informal competition. We show that a higher intensity of regional informal competition can increase the labour productivity of formal firms. Furthermore, we show that informal competition can modify formal firms’ investment structures in terms of their internal organisation and competences. This mechanism draws on the importance of formal firms’ human and financial capital and highlights the weaknesses of the Sub-Saharan African business environment, which currently jeopardises any potential positive effects being gained from informal competition.

Does Foreign Investment Cause Corruption?

Sharon Eicher
,
College of William and Mary

Abstract

Institutions, or lack thereof, cause opportunities for corrupt behaviors to flourish, but how much is this a “Supply and Demand” issue? Foreign investors bring investment capital which potentially increases payoffs from graft, kickbacks, facilitation payments, and other forms of corruption. Foreign investors “supply” corruption payments. Is an increase in inflow of net foreign investment associated with an increase in corruption, as indicated by the Corruption Perceptions Index?

If foreign investment worsens corruption, then corrupt behavior is opportunistic and international firms are largely responsible for worsening ethical behavior as the suppliers of corruption payments. If foreign investment decreases corruption, then market opportunities and international activities have the ability to improve governance and ethics in a society. Either way, participants in international markets serve as agents who affect institutional development and governance.

Alternative approaches to measure foreign investment are compared with Transparency International’s cpi measurement of corruption. Deterrents to corruption, as reported by international business practitioners are compared. Granger causality of corruption and foreign investment are analyzed as are elasticities of corruption to foreign investment.

JEL Classifications
  • O1 - Economic Development
  • P2 - Socialist Systems and Transitional Economies