Децентрализация и экономические результаты фирм в условиях слабых институтов тема диссертации и автореферата по ВАК РФ 08.00.05, кандидат наук Левина Ирина Александровна

• Левина Ирина Александровна
• кандидат наук
• 2021

Оглавление диссертации кандидат наук Левина Ирина Александровна

Научная новизна

Основные результаты, выносимые на защиту

Список публикаций

Приложение 1. Статья «Мотивы руководителей, модель управления и результаты деятельности фирмы»

Приложение 2. Статья «По знакомству или по конкурсу? Децентрализация принятия решений и стратегии найма на российских фирмах»

Приложение 3. Статья «Что ограничивает децентрализацию на российских фирмах?»

Приложение 4. Working Paper «Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia»

Приложение 5. Paper «Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia»

Работа выполнена в Институте анализа предприятий и рынков Национального исследовательского университета «Высшая школа экономики».

Введение диссертации (часть автореферата) на тему «Децентрализация и экономические результаты фирм в условиях слабых институтов»

Введение

В диссертационном исследовании изучается децентрализация принятия решений на уровне фирм. Практика децентрализации - делегирования руководителями высшего звена части полномочий по принятию решений менеджерам и сотрудникам фирм - в последние десятилетия становится все более и более популярной на фирмах во всем мире. Следуя за этой тенденцией, экономическая литература уделяет все больше внимания исследованию децентрализации принятия решений на фирмах.

Децентрализация может принести фирмам значительные преимущества: она позволяет фирмам быстрее и эффективнее принимать решения, принимать компетентные решения по более широкому кругу вопросов, повышает вовлеченность и мотивацию сотрудников. Таким образом, децентрализация может создавать условия для повышения эффективности и конкурентоспособности фирм и для их роста. Однако, децентрализация сопряжена с дополнительными рисками для фирм. В первую очередь это агентские риски, связанные с тем, что сотрудники, которым фирмы делегируют полномочия по принятию решений, могут использовать эти полномочия в своих личных интересах, в ущерб интересам владельцев фирм. Агентские риски децентрализации существенно зависят от качества институциональной среды: в условиях слабых институтов агентские риски выше. Таким образом, баланс выгод и издержек децентрализации для фирм зависит от институционального контекста.

Существующая литература изучает, в первую очередь, децентрализацию фирм в развитых странах. Децентрализация фирм в странах со слабыми институтами на данный момент недостаточно изучена. Литература фокусируется на проблеме крайне высоких агентских рисков, сопряженных с децентрализацией фирм в условиях слабых институтов. Эмпирическая литература заключает, что при низком качестве институциональной среды децентрализация фирм не может быть успешной. Однако эти выводы эмпирических исследований основаны на данных по фирмам лишь из трех развивающихся стран -Бразилии, Индии и Китая, и не подкреплены данными из других стран со слабыми институтами.

Изучение децентрализации фирм в условиях слабых институтов важно, поскольку и в этих условиях децентрализация может открывать значительные возможности для повышения эффективности и конкурентоспособности фирм, и в большинстве стран нашей

планеты фирмы вынуждены работать именно в условиях слабых институтов. В данном диссертационном исследовании предложены новые подходы к изучению децентрализации фирм в среде со слабыми институтами. Исследуется отдача от децентрализации для фирм в разных институциональных контекстах и изучаются новые, не связанные с агентскими рисками, механизмы ограничивающего влияния слабых институтов на отдачу от децентрализации и, соответственно, на распространенность децентрализации среди фирм. Эмпирический анализ децентрализации фирм в среде со слабыми институтами выполнен на данных по российским промышленным фирмам.

В статье Левина И.А. «Мотивы руководителей, модель управления и результаты деятельности фирмы» (Приложение 1) изучаются различия между децентрализованными и централизованными фирмами в странах Европы: Германии, Франции, Великобритании, Австрии, Испании, Италии и Венгрии. Показано, что децентрализованные фирмы успешнее по целому спектру направлений: они чаще экспортируют свою продукцию, чаще осуществляют инновации, чаще выводят на рынок новые для рынка продукты, чаще занимаются исследованиями и разработками. Несмотря на такое различие в результатах, распространенность децентрализации среди европейских фирм не так широка: даже в странах очень хорошим качеством институциональной среды доля децентрализованных фирм составляет менее 40%. Что ограничивает децентрализацию фирм в странах Европы? Показано, что децентрализация менее распространена на фирмах с более высокой концентрацией собственности, на семейных фирмах, на фирмах, управляемых собственниками, и на фирмах, управляемых мужчинами.

В условиях слабых институтов агентские риски децентрализации могут быть существенно выше. Сохраняется ли преимущество в экономических результатах децентрализованных фирм перед централизованными в этих условиях? Показано, что в Италии и Венгрии, европейских странах с не очень хорошим качеством институциональной среды, децентрализованные фирмы все же демонстрируют лучшие результаты по сравнению с централизованными. В России, стране с достаточно низким качеством институтов, децентрализованные фирмы также оказываются успешнее централизованных в различных сферах деятельности, в частности, они чаще экспортируют продукцию, чаще выводят на рынок новые для рынка продукты, чаще осуществляют инвестиции, однако различия не являются статистически значимыми. Далее в диссертационном исследовании используются данные по российским фирмам для более глубокого изучения децентрализации фирм в среде со слабыми институтами.

В статье Левина И.А. «По знакомству или по конкурсу? Децентрализация принятия решений и стратегии найма на российских фирмах» (Приложение 2) изучается влияние стратегий найма фирмами сотрудников на ключевые должности (на основании открытого конкурентного отбора или по знакомству) на различия в экономических результатах между российскими децентрализованными и централизованными фирмами. Показано, что фирмы, совмещающие децентрализацию с конкурентным наймом ключевых сотрудников демонстрируют лучшие результаты по сравнению как с централизованными фирмами, так и с децентрализованными фирмами, нанимающими ключевых сотрудников по знакомству. В статье также изучаются характеристики фирм, влияющие на их решение о децентрализации. В частности, показано, что децентрализация более распространена на более крупных российских фирмах. Наличие иностранной собственности увеличивает вероятность децентрализации, а наличие государственной собственности - снижает. Получение господдержки снижает вероятность конкурентного найма на ключевые должности для децентрализованных фирм.

В статье Левина И.А. «Что ограничивает децентрализацию на российских фирмах?» (Приложение 3) изучаются институциональные факторы, влияющие на решения российских фирм о децентрализации. Показано, что в российских регионах с более высокой коррупцией вероятность децентрализации фирм ниже, в то время как уровень доверия и качество судебной системы в регионе не оказывают значимого влияния на вероятность децентрализации российских фирм. Отсутствие значимого влияния доверия и качества судебной системы на выбор российскими фирмами централизованной или децентрализованной модели управления не дает подкрепления основанному на литературе предположению о том, что основным механизмом, посредством которого слабые институты ограничивают децентрализацию фирм, являются высокие агентские издержки децентрализации в условиях слабых институтов.

В препринте I. Levina. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia (Приложение 4) и англоязычной статье I. Levina. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia (Приложение 5) предложен новый для литературы механизм ограничивающего влияния слабых институтов на децентрализацию фирм, связанный не с издержками децентрализации, а с возможной ценностью децентрализации для фирм. Вводятся понятия реальной и осторожной децентрализации фирм в условиях слабых институтов. Под реальной децентрализацией понимается делегирование полномочий по принятию решений конкурентно нанятым профессионалам, под осторожной - сотрудникам, нанятым по знакомству. Более подробно

по сравнению со статьей Левина И.А. «По знакомству или по конкурсу? Децентрализация принятия решений и стратегии найма на российских фирмах» (Приложение 2) изучены различия между реально децентрализованными, осторожно децентрализованными и централизованными фирмами. Показано, что в России наблюдается положительная отдача от реальной децентрализации фирм. Изучается влияние коррупции на отдачу от реальной децентрализации. Показано, что в российских регионах с более высокой коррупцией отдача от реальной децентрализации ниже и, соответственно, реальная децентрализация менее распространена среди фирм.

Цели и задачи исследования

Целью данной диссертации является исследование децентрализации фирм: анализ отдачи от децентрализации для фирм в различных институциональных условиях и выявление новых механизмов ограничивающего влияния слабых институтов на децентрализацию фирм.

Задачи диссертационного исследования:

1. Изучение различий в экономических результатах между децентрализованными и централизованными фирмами (отдачи от децентрализации для фирм) в разных институциональных контекстах.

2. Исследование влияния стратегий найма ключевых сотрудников (на основании конкурентного отбора или по знакомству) на отдачу от децентрализации для фирм в условиях слабых институтов.

3. Изучение факторов, ограничивающих децентрализацию фирм.

4. Выявление новых механизмов ограничивающего влияния слабых институтов на отдачу от децентрализации для фирм и распространенность децентрализации среди фирм.

Информационная база исследования

Эмпирический анализ диссертационного исследования основан на данных двух масштабных опросов руководителей фирм: «Европейские фирмы в глобальной экономике» (European Firms in a Global Economy - EFIGE) и «Российские фирмы в глобальной экономике» (Russian Firms in a Global Economy - RuFIGE). Эти данные дополнены оценками качества институциональной среды в регионах России, рассчитанным по данным опроса «Состояние деловой среды и показатели деятельности предприятий» ("Business Environment and Enterprise Performance Survey" - BEEPS). Также в исследовании

используются данные опроса ГеоРейтинг фонда «Общественное мнение» и данные

Росстата.

Научная новизна

В данном диссертационном исследовании:

1. Впервые показано, что в условиях слабых институтов отдача от децентрализации зависит от стратегии найма фирмами ключевых сотрудников (на основании конкурентного отбора или по знакомству). Таким образом, впервые показана качественная неоднородность децентрализованных фирм, которая влияет на параметры эффективности их деятельности.

2. Впервые изучаются различные стратегии децентрализации фирм: реальная децентрализация - делегирование фирмой полномочий по принятию решений сотрудникам, нанятым на основании открытого конкурентного отбора, и осторожная децентрализация - делегирование полномочий по принятию решений сотрудникам, нанятым по знакомству.

3. Впервые эмпирически показано, что положительная отдача от реальной децентрализации фирм наблюдается и в условиях слабых институтов: российские реально децентрализованные фирмы, в среднем, чаще инвестируют, чаще выводят на рынок новые для рынка продукты, чаще экспортируют свою продукцию.

4. Впервые изучается влияние качества институциональной среды не только на риски децентрализации, но и на потенциальный выигрыш фирм от децентрализации. Впервые эмпирически показано негативное влияние коррупции на отдачу от реальной децентрализации фирм и, соответственно, на распространенность реальной децентрализации среди фирм.

Основные результаты, выносимые на защиту

1. Положительная отдача от реальной децентрализации фирм наблюдается и в условиях слабых институтов. В России реально децентрализованные фирмы, в среднем, демонстрируют лучшие экономические результаты: чаще осуществляют инвестиции, чаще выводят на рынок новые для рынка продукты, чаще экспортируют свою продукцию. В то же время различий между российскими централизованными фирмами, нанимающими ключевых сотрудников по знакомству, централизованными фирмами, нанимающими ключевых сотрудников конкурентно, и осторожно децентрализованными фирмами не наблюдается.

2. В российских регионах с более высокой коррупцией отдача фирм от реальной децентрализации ниже.

3. Соответственно, в регионах с более высокой коррупцией реальная децентрализация фирм менее распространена.

Прочие результаты диссертационного исследования

1. Децентрализованные европейские фирмы, в среднем, демонстрируют лучшие экономические результаты: чаще экспортируют свою продукцию, чаще осуществляют инновации, чаще выводят на рынок новые для рынка продукты, чаще занимаются исследованиями и разработками.

2. В странах Европы децентрализация более распространена на более крупных фирмах, фирмах с более высоким качеством человеческого капитала, фирмах с лучшим качеством менеджмента и более молодых фирмах. Децентрализация менее распространена на фирмах с более высокой концентрацией собственности, на фирмах, крупнейший акционер которых является частным лицом или группой частных лиц, на семейных фирмах и на фирмах, управляемых собственниками. Также децентрализация менее распространена на фирмах, управляемых мужчинами.

3. В России децентрализация более распространена на более крупных фирмах и на фирмах с наличием иностранной собственности. Децентрализация менее распространена на фирмах, управляемых собственниками, и на фирмах с наличием государственной собственности.

4. Среди российских децентрализованных фирм, реальная децентрализация более распространена на фирмах, управляемых собственниками, и менее распространена на фирмах, получающих финансовую или организационную поддержку от государства.

5. В России децентрализация менее распространена в регионах с более высокой коррупцией, в то же время значимого влияния качества судебной системы и доверия в регионе на распространенность децентрализации среди фирм не наблюдается.

Список публикаций

Результаты диссертационного исследования опубликованы в 4 статьях общим

объемом 6,5 п.л. (личный вклад автора составляет 6,5 п.л.) и одном препринте объемом 1,3

п.л. (личный вклад автора составляет 1,3 п.л.).

1. Левина И. 2014. Мотивы руководителей, модель управления и результаты деятельности фирмы. Экономический журнал Высшей школы экономики 18 (3), 429-453

2. Левина И. 2016. По знакомству или по конкурсу? Децентрализация принятия решений и стратегии найма на российских фирмах. Прикладная эконометрика 43 (3), 73-95

3. Левина И. 2017. Что ограничивает децентрализацию на российских фирмах? Экономическая политика 12 (5), 1-18

4. Levina I. 2018. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia (Децентрализация фирм в стране со слабыми институтами: изучение российского опыта). Leibniz Institute for East and Southeast European Studies (IOS) Working Paper No. 375

5. Levina I. 2020. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia (Децентрализация фирм в стране со слабыми институтами: изучение российского опыта). Journal of Comparative Economics, 48 (4), 933-950

Приложение 1. Статья «Мотивы руководителей, модель управления и результаты деятельности фирмы».

Левина И. 2014. Мотивы руководителей, модель управления и результаты деятельности фирмы. Экономический журнал Высшей школы экономики 18 (3), 429453

Разрешение на копирование: Работа размещена в открытом доступе на сайте журнала: https://ej.hse.ru/

Мотивы руководителей, модель управления и результаты деятельности фирмы1

Левина И.А.

В работе анализируются различия между фирмами с централизованной и децентрализованной системой управления и исследуются факторы, влияющие на выбор руководством фирмы модели управления. Эмпирический анализ работы основан на данных опроса «Европейские фирмы в глобальной экономике», проведенного в 2010 г. в семи странах Европы: Германии, Англии, Франции, Австрии, Испании, Италии, Венгрии.

В работе показано, что фирмы с децентрализованной системой управления демонстрируют лучшие результаты деятельности по целому спектру направлений: больше вовлечены в международную торговлю (в том числе в более сложные формы международной торговли), инновационную деятельность, исследования и разработки, обучение сотрудников. Показано также, что на вероятность централизации управления фирмой значительное влияние оказывают факторы, связанные с распределением собственности, а также индивидуальные характеристики генерального директора фирмы. В частности, концентрация собственности в руках частных лиц или семей, принадлежность генерального директора фирмы к семье, контролирующей фирму, приводят к существенному увеличению вероятности централизации управления фирмой. Полученные результаты могут отражать влияние на выбор модели управления фирмой личных (поведенческих) мотивов собственников или руководителей фирмы.

Описанные закономерности верны как на выборке опроса в целом, так и для каждой из стран, вошедших в выборку. Влияние формата собственности и индивидуальных характеристик генерального директора на вероятность централизации управления фирмой велико. К примеру, в соответствии с результатами предложенной в работе простой регрессионной модели, для фирм, на которых генеральный директор контролирует фирму или является членом семьи, контролирующей фирму, вероятность централизации управ-

1 Работа выполнена в рамках проекта «Факторы глобальной конкурентоспособности российских предприятий» при поддержке Программы фундаментальных исследований НИУ ВШЭ. Работа была представлена на рабочем семинаре Института анализа предприятий и рынков НИУ ВШЭ. Автор благодарит всех участников семинара, в особенности Голикову В.В., Гончар К.Р., Долгопятову Т.Г., Кузнецова Б.В., Яковлева А.А., за полезные советы и комментарии.

Левина Ирина Александровна - научный сотрудник Института анализа предприятий и рынков НИУ ВШЭ (ИАПР НИУ ВШЭ). E-mail: [e-mail]

Статья поступила в Редакцию в сентябре 2014 г.

ления, в среднем по выборке, выше на 15 процентных пунктов; в Австрии, где описанный эффект достигает наибольшего масштаба, - на 38 процентных пунктов.

Ключевые слова: децентрализация управления; модель управления фирмой; структура собственности; производительность.

1. Введение

В последние десятилетия наблюдаются значительные изменения в организации управления фирмами. В частности, все более распространенной становится децентрализованная модель управления, при которой часть стратегических вопросов, касающихся управления фирмой, переходит из зоны ответственности руководства фирмы в зону ответственности менеджеров среднего звена. Тенденция к большей децентрализации управления фирмами отмечена, например, в работах [Bloom et al., 2010a; Acemoglu et al., 2007].

На фоне происходящих изменений тема децентрализации управления фирмами вызывает значительный интерес в литературе. На протяжении последних десятилетий опубликовано множество теоретических работ, в которых исследуются факторы, влияющие на выбор руководством фирмы модели управления; анализируются причины, приведшие к наблюдающемуся увеличению степени децентрализации управления фирмами. Эмпирические исследования по теме децентрализации управления фирмами до недавнего времени были серьезно ограничены отсутствием качественных опросных данных о внутренней организации фирм. В последние годы было проведено несколько масштабных опросов фирм по вопросам, касавшимся, среди прочего, и децентрализации управления, и эмпирическая литература по теме также стала быстро развиваться.

Тем не менее, как отмечено в работе [Acemoglu et al., 2007], несмотря на большое количество теоретических и эмпирических работ, в настоящее время исследователи далеки от консенсуса относительно факторов, определяющих выбор руководством фирм моделей управления, и причин, приведших к существенному сдвигу фирм в сторону большей децентрализации управления. С момента опубликования этой, очень авторитетной, работы прошло 7 лет, однако многие вопросы, связанные с децентрализацией управления на фирме, по-прежнему остаются открытыми для дальнейшего исследования и обсуждения.

В данной работе используются результаты масштабного обследования фирм «Европейские фирмы в глобальной экономике» для изучения различий между фирмами с централизованным управлением и фирмами с децентрализованным управлением и выявления факторов, влияющих на выбор руководством фирмы модели управления. Опрос «Европейские фирмы в глобальной экономике» был проведен в 2010 г. в семи странах Европы: Германии, Англии, Франции, Австрии, Испании, Италии, Венгрии. В опросе приняли участие почти 15000 малых, средних и крупных фирм. В рамках опроса была собрана подробная информация о различных аспектах деятельности фирм: структуре собственности, модели управления, структуре занятости, участии фирм в различных формах международной торговли, инновационной деятельности фирм, исследованиях и разработках, проводимых на фирмах, и др. Таким образом, данные опроса позволяют исследовать

связь между моделью управления фирмой и широким спектром факторов, касающихся различных направлений деятельности фирм.

В работе показано, что между фирмами с централизованным управлением и фирмами с децентрализованным управлением наблюдаются существенные различия. Фирмы с децентрализованным управлением, в среднем, демонстрируют лучшие результаты деятельности по целому спектру направлений: они больше вовлечены в международную торговлю, в том числе в более сложные формы международной торговли; больше занимаются инновационной деятельностью; чаще выводят на рынок новые для рынка продукты; больше занимаются исследованиями и разработками; чаще обучают сотрудников. Все перечисленные различия между фирмами с децентрализованным управлением и фирмами с централизованным управлением экономически и статистически значимы. К примеру, доля экспортеров составляет 63% среди фирм с децентрализованным управлением и 53% среди фирм с централизованным управлением; доля фирм, занимающихся исследованиями и разработками - 59% среди фирм с децентрализованным управлением и 46% среди фирм с централизованным управлением. Уровень статистической значимости перечисленных результатов составляет 1%.

Описанная закономерность верна как на выборке опроса в целом, так и для каждой из стран, вошедших в выборку. В каждой из стран, вошедших в выборку опроса, фирмы с децентрализованным управлением, в среднем, больше вовлечены в международную торговлю (в том числе в более сложные формы международной торговли), инновационную деятельность, исследования и разработки, обучение сотрудников. Наиболее выраженные различия между фирмами с децентрализованным управлением и фирмами с централизованным управлением наблюдаются в Германии и Испании.

Если, как видно из данных, децентрализованные фирмы демонстрируют лучшие результаты деятельности по широкому кругу направлений, то возникает вопрос, почему не на всех фирмах используется децентрализованная модель управления. В соответствии с данными опроса «Европейские фирмы в глобальной экономике» даже среди крупных фирм, с занятостью более 250 человек, фирмы с децентрализованным управлением составляют менее половины (46%) от общего числа фирм.

В современных теоретических моделях выбор модели управления осуществляется руководством фирмы на основании сравнения преимуществ и издержек, связанных с децентрализацией управления. В эмпирической литературе показана связь между выбором руководством фирмы модели управления и такими факторами, как уровень конкуренции (см., например: [Bloom et al., 2010a]); сложность задач, с необходимостью решения которых сталкивается руководство фирмы ([Acemoglu et al., 2007]); качество человеческого капитала на фирме ([Caroli, Van Reenen, 2001]); доступность информационных технологий ([Bresnahan et al., 2002]); уровень доверия в среде, где оперирует фирма ([Bloom et al., 2012]).

В нашей работе проводится эмпирический анализ данных с целью выявления факторов, влияющих на выбор руководством фирмы модели управления (централизованной или децентрализованной). Верно ли, что, как часто предполагается в теоретических моделях, выбор модели управления фирмой осуществляется руководством фирмы исключительно на основании сравнения преимуществ и издержек той или иной модели управления? Влияют ли на выбор модели управления фирмой факторы, не связанные непосредственно с преимуществами или издержками централизованной или децентрализо-

ванной модели управления? Например, человеческий фактор: личные мотивы собственников или руководителей фирмы?

В соответствии с результатами представленного в работе регрессионного анализа, помимо факторов, определяющих соотношение преимуществ и издержек централизованной и децентрализованной моделей управления (таких как размер фирмы, качество человеческого капитала на фирме, качество менеджмента, возраст фирмы), на выбор руководством фирмы модели управления существенное влияние оказывают факторы, связанные с распределением собственности на фирме, а также индивидуальные характеристики генерального директора фирмы. В частности, концентрация собственности в руках частных лиц или семей, принадлежность генерального директора фирмы к семье, контролирующей фирму, приводят к существенному увеличению вероятности централизации управления фирмой.

Указанные результаты имеют высокий уровень экономической и статистической значимости. Так, например, для фирм, крупнейший акционер которых является частным лицом или группой частных лиц, вероятность централизации управления выше на 6-9 процентных пунктов; для фирм, контролируемых частными лицами или семьями, - на 11 процентных пунктов; для фирм, генеральный директор которых контролирует фирму или является членом семьи, контролирующей фирму, - на 15 процентных пунктов. Перечисленные результаты статистически значимы на однопроцентном уровне значимости.

Список литературы диссертационного исследования кандидат наук Левина Ирина Александровна, 2021 год

Литература

1. Левина И. Мотивы руководителей, модель управления и результаты деятельности фирмы // Экономический журнал Высшей школы экономики. 2014. № 18. Вып. 3. С. 429-453.

2. Левина И. По знакомству или по конкурсу? Децентрализация принятия решений и стратегии найма на российских фирмах // Прикладная эконометрика. 2016. № 43. Вып. 3. С. 73-95.

3. Acemoglu D., Aghion P., Lelarge C., Van Reenen J., ZilibottiF. Technology, Information, and the Decentralization of the Firm // Quarterly Journal of Economics. 2007. Vol. 122. No 4. P. 1759-1799.

4. Aghion P., Bloom N., Van Reenen J. Incomplete Contracts and the Internal Organization of Firms // Journal of Law, Economics, and Organization. 2014. Vol. 30. Supplement 1. P. i37-i63.

5. Aghion P., Bloom N., Lucking B., Sadun R., van Reenen J. Turbulence, Firm Decentralization and Growth in Bad Times // Stanford Mimeo, 2016.

6. Athanasouli D., Goujard A. Corruption and Management Practices: Firm Level Evidence // Journal of Comparative Economics. 2015. Vol. 43. No. 4. P. 1014-1034.

7. Baron J. Trust: Beliefs and Morality // Economics, Values, and Organization / BenNer A., Putterman L. (eds.). Cambridge University Press. 1998. P. 408-418.

8. Bloom N., van Reenen J. Measuring and Explaining Management Practices Across Firms and Countries // Quarterly Journal of Economics. 2007. Vol. 122. No 4. P. 1351-1408.

9. Bloom N., Mahajan A., McKenzie D., Roberts J. Why Do Firms in Developing Countries Have Low Productivity? // American Economic Review: Papers&Proceedings. 2010a. Vol. 100. No 2. P. 619-623.

10. Bloom N., Sadun R., Van Reenen J. Recent Advances in the Empirics of Organizational Economics // Annual Review of Economics. 2010b. No 2. P. 105-137.

11. Bloom N., Sadun R., Van Reenen J. The Organization of Firms Across Countries // Quarterly Journal of Economics. 2012a. Vol. 127. No 4. P. 1663-1705.

12. Bloom N., Schweiger H., Van Reenen J. The Land that Lean Manufacturing Forgot? Managerial Practices in Transition Countries // Economics of Transition. 2012b. Vol. 20. No 4. P. 593-635.

13. Bloom N., Eifert B., Mahajan A., McKenzie D., Roberts J. Does Management Matter? Evidence from India // Quarterly Journal of Economics. 2013. Vol. 128. No 1. P. 1-51.

14. KastlJ., MartimortD., PiccoloS. Delegation, Ownership Concentration and R&D Spending: Evidence from Italy // Journal of Industrial Economics. 2013. Vol. 61. No 1. P. 84-107.

Ekonomicheskaya Politika, 2017, vol. 12, no. 5, pp. 1-18

Irina Levina, Institute for Industrial and Market Studies, National Research University Higher School of Economics (20, Miasnitskaia ul., Moscow, 101000, Russian Federation). E-mail: [e-mail]

What Is Limiting Decentralization at Russian Firms?

Abstract

The paper investigates the influence of institutional factors on decentralization of decision-making at Russian firms. Decentralization is important for firms' growth and development. While in the absence of decentralization a firm's growth opportunities are limited by time and abilities of its CEO, decentralization opens doors for quicker decision-making on a larger range of questions, that creates room for the firm's growth. However, decentralization is associated with agency risks and risks of information leakage. Weak judicial system, high corruption, and low level of trust increase risks associated with decentralization and, therefore, can significantly limit firms' opportunities for decentralization. In this paper the author empirically explores the influence of corruption, quality of court system and trust on decentralization of decisionmaking at Russian firms in Russian regions. The empirical analysis presented in the paper demonstrates the important limiting influence of corruption on decentralization of decision-making at Russian firms. In the regions with higher corruption firms are less likely to decentralize and more likely to choose a management model with centralized decision-making and selection of people for top positions through connections. At the same time, the presented analysis does not reveal any significant influence of the court system's quality or the level of trust in the Russian regions on the probability of decentralization at Russian firms.

Keywords: decentralization of decision-making, hiring for top positions, quality of institutions, corruption.

JEL: L22, M51, K42, O17.

References

1. Levina I. Motivy rukovoditelei, model upravleniia i resultaty deiatelnosti firmy [Owners' Motives, Decision-Making Model and Firm Performance]. Ekonomicheskii zhurnal VShE, 2014, vol. 18, no. 3, pp. 429-453.

2. Levina I. Po znakomstvu ili po konkursu? Decentralizaciia priniatiia reshenii i strategii naima na rossiiskih firmah [Through Connection or by Competition? Decentralization of Decision-Making and Hiring Strategies at Russian Firms]. Prikladnaiia econometrika, 2016, vol. 43, no. 3, pp. 73-95.

3. Acemoglu D., Aghion P., Lelarge C., van Reenen J., Zilibotti F. Technology, Information, and the Decentralization of the Firm. Quarterly Journal of Economics, 2007, vol. 122, no. 4, pp. 1759-1799.

4. Aghion P., Bloom N., Van Reenen J. Incomplete Contracts and the Internal Organization of Firms. Journal of Law, Economics, and Organization, 2014, vol. 30, supplement 1, pp. i37-i63.

5. Aghion P., Bloom N., Lucking B., Sadun R., Van Reenen J. Turbulence, Firm Decentralization and Growth in Bad Times. StanfordMimeo, 2016.

6. Athanasouli D., Goujard A. Corruption and Management Practices: Firm Level Evidence. Journal of Comparative Economics, 2015, vol. 43, no. 4, pp. 1014-1034.

7. Baron J. Trust: Beliefs and Morality. Economics, Values, and Organization, Ben-Ner A., Putterman L. (eds.). Cambridge University Press, 1998, pp. 408-418.

8. Bloom N., van Reenen J. Measuring and Explaining Management Practices Across Firms and Countries. Quarterly Journal of Economics. 2007, vol. 122, no. 4, pp. 13511408.

9. Bloom N., Mahajan A., McKenzie D., Roberts J. Why Do Firms in Developing Countries Have Low Productivity? American Economic Review: Papers & Proceedings, 2010a, vol. 100, no. 2, pp. 619-623.

10. Bloom N., Sadun R., Van Reenen J. Recent Advances in the Empirics of Organizational Economics. Annual Review of Economics, 2010(b), no. 2, pp. 105-137.

11. Bloom N., Sadun R., Van Reenen J. The Organization of Firms Across Countries. Quarterly Journal of Economics, 2012a, vol. 127, no. 4, pp. 1663-1705.

12. Bloom N., Schweiger H., Van Reenen J. The Land that Lean Manufacturing Forgot? Managerial Practices in Transition Countries. Economics of Transition, 2012b, vol. 20, no. 4, pp. 593-635.

13. Bloom N., Eifert B., Mahajan A., McKenzie D., Roberts J. Does Management Matter? Evidence from India. Quarterly Journal of Economics, 2013, vol. 128, no. 1, pp. 1-51.

14. Kastl J., Martimort D., Piccolo S. Delegation, Ownership Concentration and R&D Spending: Evidence from Italy. Journal of Industrial Economics, 2013, vol. 61, no. 1, pp. 84-107.

Приложение 4. Working Paper «Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia».

Levina I. 2018. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia. Leibniz Institute for East and Southeast European Studies (IOS) Working Paper No. 375

Разрешение на копирование: Работа размещена в открытом доступе на сайте Leibniz Institute for East and Southeast European Studies: https://ios-regensburg.de/en.html

c

Leibniz Institute for EAST AND SOUTHEAST EUROPEAN STUDIES

Arbeitsbereich Ökonomie

IOS Working Papers

No. 375 August 2018

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

Irina Levina *

* Institute for Industrial and Market Studies, National Research University Higher School of Economics, Russia. Address for correspondence: 28/11 Shabolovka Str., Moscow 119049 Russia; e-mail: [e-mail] and [e-mail].

This paper was prepared within the framework of the Basic Research Program at the National Research University Higher School of Economics (HSE) and supported within the framework of a subsidy by the Russian Academic Excellence Project '5-100'. The author thanks participants of the LMU Munich Chair of Social Sciences and Eastern European Studies Workshop "Growth and Redistribution in Limited Access Orders", IIMS HSE research seminar, 19th HSE April International Academic Conference on Economic and Social Development, 7th Annual ICSID HSE Conference, 10th Joint IOS/APB/EACES Summer Academy on Central and Eastern Europe "Firm Behavior in Central and Eastern Europe: Productivity, Innovation and Trade", and 2018 Silvaplana Political Economy Workshop for questions, valuable comments and suggestions that helped to improve the paper.

Leibnii institute for EAST AND SOUTHEAST EUROPEAN STUDIES

Landshuter Straße 4 D-93047 Regensburg

Telefon: [phone] Telefax: (09 41) 943 54-27 E-Mail: [e-mail] Internet: www.ios-regensburg.de ISSN: 2199-9465

Contents

Abstract......................................................................................................................... v

1. Introduction .............................................................................................................. 1

2. Literature Review ..................................................................................................... 5

3. Theory...................................................................................................................... 8

4. Data and Empirical Strategy .................................................................................. 10

5. Empirical Results ................................................................................................... 15

6. Conclusion ............................................................................................................. 21

References ................................................................................................................. 23

Appendix..................................................................................................................... 25

List of Tables

Table 1: Decentralization and investment of Russian firms........................................16

Table 2: Corruption, decentralization and investment................................................19

Table A1: Descriptive statistics.....................................................................................25

List of Figures

Graph 1: Decentralization and investment of Russian firms...................................... 17

Graph 2: Predicted probability of investment for firms with different decentralization

strategies at different levels of corruption................................................... 20

Abstract

Can decentralization of firms be successful in an environment with weak institutions? Decentralization can do a great job for improving firms' efficiency and competitiveness by creating opportunities for quicker and more competent decision-making and enhancing motivation of employees. However, decentralization is associated with a substantial increase in agency risk, which is particularly important for firms that operate under weak institutions. Hence, the popular belief is that in countries with weak institutions, firms are unable to successfully decentralize.

In this paper, we study evidence from Russian firms to challenge this belief. Following anecdotal evidence and trends observed in the data, we introduce the notions of real decentralization for firms that decentralize decision-making to competitively hired professionals and cautious decentralization for firms that decentralize to people hired through connections. We demonstrate that really decentralized firms are, on average, significantly more likely to invest even in Russian weak institutional conditions. We also show that the gap in investment between really decentralized and other firms declines as corruption grows. Empirical research presented in the paper implies that there still can be significant room for decentralization even in an environment with weak institutions, such as that of Russia. However, as the role of non-market factors (such as corruption) in firms' prosperity increases, the potential value of decentralization for the firms declines.

JEL-Classification: D02, D22, D23, L2, M2, M51

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

1. Introduction

The practice of decentralization of decision-making - delegation of some decision-making authority from the very top of firm's managerial hierarchy down to the middle-level and local managers and employees - is becoming increasingly widespread in firms in developed countries during the past decades and is being widely studied in the literature. Decentralization has a huge potential for improving firms' efficiency and competitiveness. It creates conditions for quicker and more competent decision-making on a wider range of questions, can enhance motivation of employees and improve efficiency of use of local information. Although decentralization is associated with an increase in agency risk, there is growing evidence that in an environment with good institutions, benefits that decentralization can bring to a firm can by far outweigh costs overall. Moreover, decentralization allows more productive firms to grow larger and, thus, has the potential to improve efficiency and competitiveness not only at the level of firms but also at the level of countries.

Yet, evidence on decentralization of firms in countries with weak institutions is still very limited. The existing literature mainly focuses on very high agency costs of firms' decentralization in an environment with weak institutions. A number of papers provide evidence on the extremely high degree of centralization of firms in developing countries, implying that almost all major decisions in firms in developing countries are taken personally by owners, and relate low productivity of firms in developing countries to their inability to successfully decentralize (Bloom et al., 2010(c); Bloom et al., 2010(a), Bloom et al. 2013). Evidence on decentralization of firms in post-Communist countries is even more limited. Overall, there is a popular belief, in both, academic and business society, that the successful decentralization of firms in an environment with weak institutions - poor social norms, low trust, weak judicial system, and high corruption - is impossible.

In this paper, we study evidence from Russian firms to challenge this belief. Can decentralization of firms be successful in an environment with weak institutions? While the previous literature that studies decentralization of firms under weak institutions concentrates on the high agency costs of decentralization, in this paper we pay attention to the benefits for efficiency decentralization can bring to a firm - benefits from quicker and more efficient decision-making and better motivation of employees - presuming that these benefits can be so

high that they can outweigh the costs of decentralization even in an environment with weak institutions. Next, we pose a question under which institutional conditions can potential benefits from decentralization be valuable for the firm.

Anecdotal evidence suggests that many firms that operate in an environment with weak institutions do not even consider decentralization to be a viable option because of the high agency risk. Some firms try to mitigate agency risk by exploiting the 'cautious' strategy of decentralization: to feel safer, decentralizing some of the decision-making authority, owners or CEOs of such firms hire for top positions relatives, friends or acquaintances, people they trust to on the basis of recommendations from friends, and so on. Following this observation, in this paper we distinguish between the two decentralization strategies: decentralization to the competitively hired professionals vs. decentralization to people who can be trusted on the basis of relationships, connections, and so on (not necessarily professionals). We introduce the notions of real decentralization for firms that decentralize decision-making to competitively hired professionals, and cautious decentralization for firms that decentralize decision-making to people hired through connections. Cautious decentralization, while is believed to be much less risky under weak institutions, is unlikely to create conditions for delegating decisionmaking responsibilities to really professional and talented people. Real decentralization does create such conditions.

In this paper, we suggest that the benefits from real decentralization for the firm's efficiency can be so important that they do have the potential to outweigh the agency costs of decentralization even under weak institutions. Next, we note that the benefits that real decentralization can bring to a firm - benefits for the firm's efficiency - while being highly valuable for firms that operate in a competitive economic environment, can be devalued as the environment deviates from a competitive one. We argue, that in an environment with weak institutions, as the role of non-market business strategies involving corruption, connections, etc. for firms' prosperity increases, the potential value of decentralization for firms declines (due to a decline in comparative benefits from higher economic efficiency in the environment where economic success is to a large degree determined by non-market factors). To test our hypotheses empirically, we explore the relationship between decentralization strategies and the investment behavior of firms in Russian regions. We find that data is consistent with our theory.

Empirical analysis of the paper is based on the data of "Russian Firms in a Global Economy" (RuFIGE) survey that was conducted by the Higher School of Economics, Moscow, Russia, in 2014. The survey dataset provides unique data on organizational choices, hiring strategies, investment behavior and other characteristics or choices of approximately 2000 manufacturing firms across 60 Russian regions. For the purposes of our analysis, we complement firm-level data from the RuFIGE survey with data on the quality of institutions in Russian regions estimated from the "Business Environment and Enterprise Performance Survey" (BEEPS) that was run by the European Bank for Reconstruction and Development in cooperation with the World Bank in Russian regions in 2011-2012.

Russian institutional conditions are far from being good. In 2014 - the year of focus in our study - Russia scored 27 out of 100 by the Transparency International Corruption Perceptions Index, ranking much worse than many Eastern European post-Communist countries and being close to a number of Central Asian and African countries. According to the data of the Russian Public Opinion Fund, more than 50% of Russian people do not condemn those who give bribes; and 30% do not condemn those who take bribes. Russia's 2014 rule of law score from the World Bank Worldwide Governance Indicators was -0.7 out of a range from -2.5 (the worst) to 2.5 (the best). According to the World Values Survey 2011 data, only 28% of Russian people believe that most people can be trusted, and 66% of Russians think that one needs to be very careful in dealing with people. Thus, we believe, Russia represents a good case to study decentralization of firms in an environment with weak institutions.

Our empirical results suggest, that even in a weak institutional environment, such as that of Russia, the tradeoff between the benefits and costs of firms' real decentralization can be in favor of decentralization. The results of the regression analysis presented in this paper demonstrate that, while cautiously decentralized Russian firms do not differ from the centralized ones in terms of investment, really decentralized Russian firms are 40% more likely to invest compared to other firms. The difference is impressive.

Next, we exploit the variation in corruption across Russian regions to explore the effect of the institutional environment on the potential value of decentralization for the firms. The results of the presented regression analysis demonstrate that the gap in investment between really decentralized and other firms, while being very substantial at moderate levels of corruption, shrinks as corruption grows. Corruption disrupts fair competition and strongly contributes to

the prosperity of non-market business strategies, and, therefore, devalues potential benefits from decentralization for the firms. Nevertheless, according to the predictions of our regression models, really decentralized firms turn out to be significantly more successful in terms of investment under a wide range of corruption values, including the median for Russian regions' level of corruption, and even some higher levels.

Hereafter the paper is organized as follows. Section 2 presents the literature review. Section 3 discusses the theory. Section 4 describes the data and the empirical strategy. Section 5 presents and discusses the results of the empirical analysis. Section 6 concludes.

2. Literature Review

During recent decades, a sustainable tendency toward greater decentralization of firms has been observed in developed countries (Rajan and Wulf, 2006; Bloom et al., 2010(b); Quadalupe and Wulf, 2010). The theoretical literature outlines several channels through which decentralization can facilitate growth and improve the efficiency of firms. Not only does decentralization relax the time burden on the CEO, which is essential for a firm's growth (Penrose, 1959; Chandler, 1962), decentralization can also improve the incentives of managers and employees, facilitate communication, reduce negative consequences of information asymmetry and promote more efficient use of available information (Aghion and Tirole, 1997; Baker et al., 1999; Rajan and Zingales, 2001; Dessein, 2002; Aghion et al., 2014). However, decentralization is associated with agency costs, which stem from the misalignment of incentives between firms' owners/CEOs and their subordinates (Aghion and Tirole, 1997; Bloom et al., 2012(a); Aghion et al., 2014; et al.). The agency costs of decentralization become a particularly important issue in environments with weak institutions (Bloom et al., 2010(a)). Overall, from the theoretical perspective, the balance of benefits and costs of decentralization for a firm is unclear.

Empirically, a number of recent papers demonstrate a correlation between decentralization and economic performance of firms in developed countries. Acemoglu et al. (2007), using data on French and British firms, show that decentralized firms are on average more productive. Kastl et al. (2013) use data on Italian manufacturing firms to document that decentralized firms tend to spend more on R&D. Levina (2014) explores data on firms from 7 countries in Europe and demonstrates that decentralized firms are on average more innovative and more successful in international trade. Aghion et al. (2017) use data on firms from 10 OECD countries to provide evidence that decentralized firms are more resistant to economic crises: they demonstrate better performance in terms of survival chances, productivity, sales and profits during and after the crisis. Although these papers interpret correlation between decentralization and firms' economic outcomes in different ways that imply different directions of causality, they all indicate the same empirical pattern: decentralized firms tend to demonstrate superior economic performance in developed countries.

Bloom et al. (2012a) argue that the effect from firms' decentralization may spread far beyond the economic performance of particular firms. Decentralization creates preconditions for firms'

growth: it allows more productive firms to grow larger and to take market share from less productive firms and, thus, supports the efficient reallocation of capital and labor across firms. Therefore, greater firm-level decentralization may lead to higher productivity and competitiveness of the country.

However, the popularity of firms' decentralization varies significantly across countries. The literature demonstrates a strong influence of the environment, in particular, of the institutional environment on the decentralization choices of firms. Bloom et al. (2010b) show that higher product market competition leads to greater levels of decentralization. Authors reason that higher competition might make decentralization more likely by first, making local managers' information and quicker decision-making more valuable, and second, reducing the agency problem. Bloom et al. (2012a) demonstrate that higher trust in the region, as well as stronger rule of law in the country increases decentralization in firms. Higher trust and stronger rule of law relieve the agency problem, therefore, making decentralization less costly. Finally, Athanasouli and Goujard (2015) and Levina (2017) show that corruption makes firms' decentralization less likely.

In accord with these relations, survey data indicate that in countries with weak institutions, firms' decentralization is much less popular than in countries with good institutions (as noted, e.g., in Bloom et al., 2010(c), Bloom et al., 2012(a), Aghion et al., 2014). Despite the importance of the topic, evidence on decentralization of firms in countries with weak institutions is still very limited. Bloom et al. (2010a) present evidence on an extremely high degree of centralization of firms in developing countries. According to the authors, almost all major decisions at firms in developing countries are taken personally by owners, who do not consider delegation to be a viable option due to the fears of fraud and expropriation by managers. Authors relate a lack of decentralization in developing countries to a weak institutional environment, in particular, to low trust and poor rule of law, which make the agency risks from decentralization particularly high. Moreover, authors link the low productivity of firms in developing countries to their inability to successfully decentralize.

Even less is known about the decentralization of firms in post-Communist countries. Bloom et al. (2012b) study the management practices of firms from post-Communist countries and point to a huge variation in the quality of management both within and between ex-Communist countries. Authors find that while Central Asian post-Communist countries have on average a

very poor quality of management, Central European post-Communist countries demonstrate a rather good quality of management, which is only moderately worse than in Western European countries. Authors also demonstrate a strong link between the quality of management and economic performance of firms in post-Communist countries. However, this study explores quality of management, not decentralization of firms from post-Communist countries. Levina (2016) studies the decentralization practices of Russian firms and is, to the best of our knowledge, the first study to present empirical evidence on the positive experiences of decentralization of firms in an environment with weak institutions. The author shows that Russian firms that accompany decentralization with competitive hiring for top positions are on average more innovative and more likely to export their production.

This paper adds to the literature by providing more evidence on the possibilities for the successful decentralization of firms in an environment with weak institutions and taking the first steps to understanding the conditions under which decentralization (even if successful) can be valuable for firms in an environment with weak institutions. In contrast to prior literature, this paper concentrates not on the costs of decentralization in an environment with weak institutions, but on the potential benefits for efficiency that the firm can gain from decentralization even in an environment with weak institutions. The paper introduces the concepts of real decentralization for firms that decentralize decision-making to competitively hired professionals, and cautious decentralization for firms that decentralize decision-making to people hired through connections and explores the relationship between decentralization strategies and investment outcomes of Russian firms in different institutional settings.

3. Theory

Decentralization can enhance firms' efficiency and competitiveness through several channels. First, decentralization creates preconditions for more efficient use of CEOs' and top managers' time (by allowing them to concentrate on the most important or challenging questions while delegating other questions to lower level employees), for quicker decision-making on a wider range of questions and reacting more quickly to changes in the environment. Moreover, decentralization can also strongly improve the efficiency of decision-making by creating an environment that stimulates the more efficient use of available information and better communication. Finally, decentralization is associated with greater involvement, greater independence and greater responsibility of employees, which can have an important effect on employees' motivation.

However, decentralization is associated with agency risks: risks that employees can use the delegated authority not necessarily in the best interests of the firms, but in their own interests. Agency risks of decentralization can be particularly high in countries with weak institutions. Firms that choose to decentralize in a weak institutions environment have to take the risk that employees can use the delegated authority to cheat the firm in various ways, to take bribes for promoting nonoptimal suppliers, partners or projects, or even to directly steal. Weak social norms, high corruption and high social tolerance to corruption, and a poorly functioning judicial system make misuse of delegated authority by employees much more likely and more difficult to fight.

To mitigate agency risks of decentralization, firms may choose to decentralize decision-making authority to people whom firms' owners or CEOs trust to due to some type of relations or acquaintance, recommendations from friends, etc. This implies that firms hire people for the key positions not on the basis of open competition (that would allow for choosing the most efficient and professional people), but through connections, from the highly restricted pool of candidates whom firms' owners or CEOs trust to. Such a strategy, while making decentralization much less risky, is at the same time likely to result in much lower efficiency and professionalism of people hired for the key positions, which can be detrimental for the efficiency of decentralization.

Therefore, in economies with weak institutions, it is important to distinguish between the two firms' decentralization strategies: real decentralization - decentralization of decisionmaking authority to competitively hired professionals, and cautious decentralization - to 8

people hired through connections, not necessarily professionals. Cautious decentralization allows for the relaxation of time limitations of CEOs and top managers without taking substantial additional agency risk. However, cautious decentralization is unlikely to create conditions under which decision-making authority can be delegated to highly efficient professionals, which makes its opportunities to improve significantly firms' efficiency really questionable.

At the same time, real decentralization does create conditions for the decentralization of decision-making authority in favor of highly professional, talented and motivated employees (hired competitively at the open labor market), which has a potential to yield huge benefits to firms' efficiency and competitiveness - benefits from higher speed and efficiency of decisionmaking and higher motivation of high-qualified employees. In this paper, we suggest that benefits from real decentralization can be so high that they can outweigh the agency costs of decentralization even in an environment with weak institutions. Therefore, our first hypothesis is: Hypothesis 1: Real decentralization (decentralization of decision-making authority to competitively hired professionals) can have an economic payoff for firms even in an environment with weak institutions.

However, weak institutions can hamper decentralization not only by increasing agency risks. Weak institutions can also devalue potential benefits from decentralization (even from real decentralization), which can play an even more important role for firms' low willingness to even try to decentralize under weak institutions. Potential benefits from real decentralization -benefits for firms' efficiency from improvements in the speed and efficiency of decision-making and in the motivation of employees - can be highly valuable for firms in a competitive environment. However, the lower is the role of market competition, and the higher is the role of non-market business strategies (based on corruption, connection to the bureaucrats, and the like) for firms' economic success under weak institutions, the lower becomes the value of economic efficiency and, hence, the potential value of real decentralization for the firms. This brings us to our second hypothesis:

Hypothesis 2: As the role of non-market factors (such as corruption, connections, etc.) for firms' prosperity increases, economic payoff from real decentralization for the firms declines.

4. Data and Empirical Strategy

Empirical analysis presented in this paper is based on the data of a large survey of Russian manufacturing firms "Russian Firms in a Global Economy" (RuFIGE), that was run in 2014 by the Higher School of Economics Institute for Industrial and Market Studies. Approximately 2000 manufacturing firms from 60 Russian regions took part in the survey1. The RuFIGE survey provides unique data on the organizational choices and hiring strategies of Russian manufacturing firms. In addition to this, the survey provides much other information about the firms, including information on firms' investment behavior, property structure, connections with the state, etc., that allows us to conduct a rigorous regression analysis.

The RuFIGE decentralization question is formulated in the following way: "With reference to strategic decisions, which of the following statements better describes your firm's situation?

1. Decisions in your firm are centralized: the CEO/owner takes most decisions in every area

2. Decisions in your firm are decentralized: managers can take autonomous decisions in some business areas"2

Note that the wording of the decentralization question is rather soft. However, even with this soft wording, only 17% of Russian manufacturing firms referred themselves as being decentralized.

The question about firms' strategies of hiring for top positions allows us to distinguish between cautious decentralization and real decentralization. The question is phrased as: "What are the most important factors the owners/CEO of your firm take into account primarily when they appoint employees to the key managerial positions? Choose two most important factors:

1. Level and quality of education

2. Previous professional experience at your firm

1 The survey sample was designed to be representative by firms' industry and size, with one exception: to make statistical analysis in the group of large firms possible, large firms were intentionally overrepresented in the sample. The survey provides sampling weights that allow us to work with survey data as with representative by industry and size of the firms. This approach is standard for firms' surveys. More information about the survey can be found at the site of the Institute for Industrial and Market Studies, Higher School of Economics: https://iims.hse.ru/en/rfge/.

2 The question is formulated analogously to the decentralization question of the earlier firms' survey "European Firms in a Global Economy" (EFIGE), that was run in 2010 by the European think tank Bruegel. More information about the survey can be found at http://bruegel.org/efige/.

3. Professional experience at other firms (organizations)

4. References from acquaintances or people whom owners/CEO of your firm trust to

5. References from former employers or recruitment agencies

6. Personal acquaintance with the candidate

7. Interview results"3

Note that respondents were asked to select two answer choices. The answer choices proposed in the question fall into two categories: factors that are associated with fully competitive hiring (interview results, level and quality of education, professional experience at other firms (organizations), references from former employers or recruitment agencies), and factors that take into account some sort of connections or prior acquaintance with the candidates and, thus, imply deviations from fully competitive hiring (personal acquaintance with the candidate, references from the acquaintances or people whom owners/CEO of this firm trust to, previous professional experience at this firm).

We define our variable for decentralization strategy on the basis of the decentralization and hiring strategy questions as:

Centralized if it responded to the decentralization question that decisions in the firm are centralized

Cautiously decentralized if it responded to the decentralization question that decisions are decentralized but selected in the hiring question at least one factor that implies deviations from fully competitive hiring for top positions Really decentralized if it responded to the decentralization question that decisions are decentralized and did not select in the hiring question any factors that imply deviations from fully competitive hiring for top positions

A firm is

3 This question was formulated particularly for the "Russian Firms in a Global Economy" (RuFIGE) survey. It has no analogues, either in the "European Firms in a Global Economy" (EFIGE) survey, or in the other surveys that study decentralization at the firms. The novel combination of decentralization and hiring strategy questions in the RuFIGE survey provides us the unique opportunity to study the interplay between firms' organizational choices and hiring strategies.

According to the data, the vast majority of Russian manufacturing firms, 87%, are centralized. 10% are cautiously decentralized. The share of fully decentralized firms is impressively small and amounts to only 7%.

For the purposes of our analysis, we supplement the RuFIGE firm-level data with the data on quality of institutions in Russian regions, which we estimate from the "Business Environment and Enterprise Performance Survey" (BEEPS). The BEEPS collected extensive information about firms and their estimates of the business environment in Russian regions; in particular, the survey questionnaire includes a wide range of questions on the quality of institutions in Russian regions. The BEEPS sample covers 4200 firms in 37 Russian regions. The sample is representative within each region, which allows aggregating survey data at the level of regions4. We estimate business corruption from the BEEPS question "To what degree is corruption an obstacle to the current operations of your establishment?" as a share of firms (in the region) that perceive corruption to be an obstacle to their operations, and the quality of judicial system from the question "To what extent do you agree to the following statement: "The court system is fair, impartial and uncorrupted" as a share of firms (in the region) that agree or tend to agree with this statement.

Finally, we use data on GRP per capita in Russian regions from the Russian Federal State Statistics Service (Rosstat). Descriptive statistics for the variables used in the empirical analysis of this paper are provided in Table A1 in the Appendix.

To test whether our theory is consistent with the data, we explore the relationship between the decentralization strategies and investment outcomes of Russian firms. We do not rely on data of firms' financial performance because information about the financial performance of firms from countries with weak institutions - Russian firms in particular - is often being hidden or manipulated and, thus, in general is considered to be highly unreliable5. Thus, to avoid problems with the low quality of firms' financial performance data, we work with data on firms' investment outcomes, suggesting that more economically successful firms are more likely to

4 The BEEPS data cover nearly 80% of the RuFIGE sample (namely, 35 regions with 1536 of 1950 RuFIGE firms). To account for possible deviation from the representativeness of the RuFIGE data that might occur when we limit the RuFIGE sample by adding into analysis BEEPS-based regional variables, we use the re-weighting procedure.

5 For example, only approximately half of Russian firms responded to the question about revenue in Russian Firms in a Global Economy survey - the survey the analysis of this paper is based on.

implement investment. We use business corruption in Russian regions to measure the spread and importance of non-market factors for firms' prosperity.

Therefore, to test Hypothesis 1, which assumes that real decentralization can have an economic payoff for firms even in an environment with weak institutions, we estimate the following probit regression models:

(1) P{Investi} = <P((rCautiously_Decentri + (2Really_Decentri + (3Firm_Controls) where

Investi is a dummy variable equal to 1 if firm i implemented capital investment during three pre-survey years,

CautiouslyDecentri and ReallyDecentri are dummy variables for cautiously decentralized and really decentralized firms, respectively (centralized firms are the reference category),

Firm Controlsi - a vector of control variables that includes log employment at the firm, dummy variable for firms that are part of holdings, dummy variable for change of main shareholders during the three pre-survey years, dummy variables for the presence of state and foreign property in the firm's property structure, dummy variables for the receipt of support from government or state orders by the firm, log revenue and (as approximately half of the firms in our sample did not respond to question about revenue) dummy variable for non-response to the revenue question, dummies for the type of locality firm operates in (regional center/other city or town/village).

To test Hypothesis 2, which suggests that the economic payoff from real decentralization should be lower in an environment with a higher importance of non-market factors for firms' prosperity, we add the interaction of firm's decentralization strategy with business corruption in the region to the regression models (1). As the results of estimation of regression models (1) demonstrate that there is no difference between centralized and cautiously decentralized firms in terms of investment, for the sake of simplicity in this analysis, we combine these two groups of firms into one - the reference group. Therefore, we estimate the following probit regression models with robust standard errors clustered at the level of regions:

(2) P{Investij} =

= Really Decentrij + (2 Corruption + (3 ReallyDecentrf Corruption + + (4Regional_Controlsj + (5Firm_Controlsij)

where index i stands for the firm, and j - for the region firm is located in;

Investij, as above, is the investment dummy for firm i situated in region j,

Really_Decentrij is a dummy variable for really decentralized firms (centralized and cautiously

decentralized firms are the reference category),

Corruption denotes corruption in region j,

RegionalControlsj is a vector of region-level control variables that includes log GRP per capita and a measure of quality of judicial system in region j,

Firm Controlsij is a vector of firm-level control variables, the same as in the regression models (1), with the only exception being that (due to the presence of region-level controls) dummies for the firm's region are excluded.

5. Empirical Results

This section presents the results of the regressions analysis. Regressions presented in Table 1 explore the potential link between decentralization strategies and the investment behavior of the firms. Models 1.1 - 1.5 vary by the list of control variables. In the baseline Model 1.1, we estimate the relationship between firms' decentralization strategies and investment, controlling only for the firms' size, sector and region. In Model 1.2, we control for firms' belonging to a holding, recent change in main shareholders, and presence of state and foreign shares in firms' property. In Model 1.3, we add controls for the receipt of support from the government or state orders - factors that are likely to affect investments of firms in a Russian weak institutions environment, as well as control for the type of locality the firm operates in, and the position of the respondent. In Model 1.4, we add control for the firms' revenue. However, as only approximately half of the firms in our sample answered the question about revenue, the best we can do is to add control for revenue for the firms that responded to the revenue question together with control for the fact of non-response to the revenue question. Finally, in Model 1.5, we re-estimate Model 1.4 with the sub-sample of firms that responded to the question about revenue.

Models 1.1 - 1.5 demonstrate that, while cautiously decentralized firms - firms that decentralize decision-making authority to people hired through connections - do not differ in the probability of investment from centralized firms (the reference group), really decentralized firms - firms that decentralize decision-making authority to competitively hired professionals - are significantly more likely to invest.

Table 1: Decentralization and investment of Russian firms

(1) (2) (3) (4) (5)

Firm implements investment

Firm is centralized Reference group

Firm is cautiously decentralized -0.074 -0.020 -0.020 0.010 -0.310

(0.137) (0.142) (0.152) (0.153) (0.190)

Firm is really decentralized 0.451*** 0.448*** 0.446*** 0.479*** 0.594***

(0.145) (0.149) (0.159) (0.159) (0.230)

Employment at the firm, log 0.300*** 0.286*** 0.326*** 0.267*** 0.213***

(0.034) (0.037) (0.040) (0.043) (0.065)

Firm belongs to a holding 0.204 0.149 0.153 -0.074

(0.141) (0.150) (0.149) (0.210)

Main shareholders changed during last 3 years 0.150 0.166 0.069 0.367*

(0.167) (0.170) (0.166) (0.210)

Firm has state share in property -0.478** -0.543** -0.558** -0.331

(0.209) (0.219) (0.223) (0.325)

Firm has foreign share in property 0.059 0.022 -0.004 -0.030

(0.235) (0.240) (0.247) (0.310)

Firm receives support from government 0.130 0.121 0.163

(0.115) (0.117) (0.160)

Firm receives state orders 0.166 0.112 0.079

(0.108) (0.111) (0.151)

Revenue, log (zero values for firms that did not 0.130***

respond to the question about revenue) (0.040)

Firm did not respond to the question about 0.002

revenue (0.167)

Revenue, log 0.163***

(0.050)

Control for type of locality (regional center/other Yes Yes Yes

city or town/village)

Control for position of the respondent Yes Yes Yes

Control for sector Yes Yes Yes Yes Yes

Control for region Yes Yes Yes Yes Yes

Observations 1,734 1,658 1,602 1,602 883

Pseudo R-squared 0.139 0.141 0.159 0.181 0.210

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

To illustrate the size of the effect of firms' decentralization choices on the probability of investment, we present predictive margins of centralized, cautiously decentralized and really decentralized firms, estimated from Model 1.4 (our most accurate full sample specification) in Graph 1. We see that really decentralized firms are approximately 40% more likely to invest compared to other firms. The difference is really impressing.

Graph 1: Decentralization and investment of Russian firms

Margins with 95% CIs i • i

i • i

i-•-1

-1-1-1-1-r

.3 .4 .5 .6 .7

Pr(Invest)

The results are consistent with our Hypothesis 1, which suggests that real decentralization might have an economic payoff even for firms that operate in a weak institutions environment. Does this imply that really decentralized firms are so lucky as to be never cheated by their employees who gain responsibility and decision-making authority under decentralization, even in Russian conditions with weak formal and informal institutions? No, it does not. However, our results demonstrate that the benefits from real decentralization (from the improved firm's efficiency due to the softening of the CEO's time limitation constraint, increase in speed of firm's reaction, better access to information, enhancement in motivation of employees, in particular of key employees, and so on) can be large enough to strongly outweigh (on average) the probably inevitable losses from decentralization, even under weak institutions.

w

CD O O ■C

o

CO N

cd O

Predictive

Centralization -

cd Cautious decentralization

o

cd T3

N

Real decentralization

Regressions presented in Table 2 estimate firms' pay off from real decentralization in terms of investment at different levels of corruption. These regressions include the interaction between firm-level real decentralization and business corruption in the region. As the results of the regression analysis presented in Table 1 did not reveal any difference in terms of investment between cautiously decentralized and centralized firms, for the sake of simplicity, we join these two groups together in the subsequent analysis. Similar to the regression models presented in Table 1, Models 2.1 - 2.5 vary by the list of control variables.

According to the predictions of Models 2.1 - 2.5, really decentralized firms are more likely to invest under relatively low values of corruption (see the positive significant coefficient for the dummy variable for really decentralized firms), but as corruption grows, the gap in investment between really decentralized firms and other firms decreases (see the negative and statistically significant coefficient for the interaction term). At high values of corruption, the gap disappears.

Table 2: Corruption, decentralization and investment

(1) (2) (3) (4) (5)

Firm implements investment

Firm is really decentralized 0.976** 1.238** 1.696*** 1.441*** 4.524***

(0.398) (0.547) (0.503) (0.499) (1.169)

Corruption in the region 0.485 0.593 0.817** 0.974*** 0.784

(0.446) (0.411) (0.344) (0.372) (0.494)

(Firm is really decentralized) * (Corruption in 1.095** -1.503* -2.179*** -1.732** -6.347***

the region) (0.551) (0.777) (0.720) (0.718) (1.870)

GRP per capita, log -0.279 -0.231 -0.133 -0.152 -0.351*

(0.197) (0.183) (0.184) (0.174) (0.186)

Quality of judicial system in the region 0.044 0.238 0.786 0.659 0.623

(0.669) (0.614) (0.652) (0.626) (0.662)

Employment at the firm, log 0.282*** 0.269*** 0.298*** 0.229*** 0.151*

(0.036) (0.037) (0.042) (0.045) (0.083)

Firm belongs to a holding 0.420** 0.359* 0.323 0.118

(0.178) (0.192) (0.198) (0.254)

Main shareholders changed during last 3 years 0.055 0.028 -0.058 0.323

(0.164) (0.173) (0.184) (0.210)

Firm has state share in property -0.476** -0.538** -0.560* -0.441

(0.215) (0.265) (0.295) (0.338)

Firm has foreign share in property -0.057 -0.066 -0.101 -0.375

(0.273) (0.312) (0.331) (0.367)

Firm receives support from government 0.092 0.147 0.396**

(0.129) (0.129) (0.192)

Firm receives state orders 0.231* 0.172 0.169

(0.120) (0.120) (0.173)

Revenue, log (zero values for firms that did 0.165***

not respond to the question about revenue) (0.042)

Firm did not respond to the question about 0.210

revenue (0.201)

Revenue, log 0.189***

(0.051)

Control for type of locality (regional Yes Yes Yes

center/other city or town/village) 1 to 1 to 1 to

Control for position of the respondent Yes Yes Yes

Control for sector Yes Yes Yes Yes Yes

Observations 1,357 1,302 1,261 1,261 728

Pseudo R-squared 0.0624 0.0709 0.0923 0.119 0.162

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

To visualize the results of the regression analysis, Graph 2 presents the predictive margins of really decentralized firms vs. other firms at different levels of corruption estimated from Model 2.4. We see that under low corruption, really decentralized firms are much more likely to invest. As corruption grows, the probability of investment of not really decentralized firms increases, which probably reflects that these firms benefit from the use of non-market strategies under higher corruption (on average). At the same time, for really decentralized firms, the probability of investment declines as corruption grows. Thus, the gap between really decentralized firms and other firms decreases as corruption grows and disappears at high values of corruption. The results are consistent with our Hypothesis 2, which suggests that the potential value of real decentralization for the firms declines as the role of non-market strategies for firms' economic success increases.

Graph 2: Predicted probability of investment for firms with different decentralization strategies at different levels of corruption

Predictive Margins with 95% CIs

Corruption

Really decentralized firms - Other firms

Note, however, that according to Graph 2, real decentralization remains economically beneficial for Russian firms (at least in terms of investment) under a wide range of values of corruption, including actually, the high ones. Graph 2 shows that really decentralized firms are more likely to invest under the median for Russian regions (covered by the BEEPS sample) level of corruption (0.55), and even under some higher values. This suggests that considerable room for decentralization can be present under a wide range of institutional conditions, including those far from perfect, e.g., Russian ones. 20

6. Conclusion

In this paper, we challenge the popular belief that decentralization of firms cannot be successful under weak institutions. Speaking about decentralization of firms in transition and developing countries, researchers and businessmen usually emphasize the high agency risk of decentralization in an environment with weak institutions. A popular view is that under poor social norms, weak judicial system, and high corruption, the agency costs of decentralization are so high that decentralization becomes senseless (if not destructive) for firms. However, the potential benefits for firms' efficiency that decentralization can bring with it (due to improvement in firms' speed of reaction, widening the spectrum of questions that can be solved simultaneously, enhancement in motivation of firms' employees, etc.) are basically overlooked in this discussion.

In this paper, we use evidence from Russian firms to explore whether the benefits of decentralization can outweigh its inherent costs in an environment with weak institutions. We distinguish between the strategies of real decentralization (decentralization of decision-making authority to competitively hired professionals) and cautious decentralization (decentralization to people hired through connections). Real decentralization creates opportunities for the efficient delegation of decision-making responsibilities to competitively hired highly professional people, while cautious decentralization is unlikely to create such conditions. To explore whether decentralization can be successful under weak institutions, we compare the investment behavior of centralized, cautiously decentralized and really decentralized Russian firms.

Using the unique data about decentralization and hiring strategy choices of Russian manufacturing firms from the "Russian Firms in a Global Economy" (RuFIGE) database, we show empirically that real decentralization can be beneficial for firms even in an environment with weak institutions. Empirical analysis, presented in the paper, demonstrates that really decentralized firms are 40% more likely to invest compared to other firms. The difference is impressive! Given the low quality of Russian formal and informal institutions, this implies that benefits from decentralization can be really strong.

However, the benefits from decentralization, while being highly valuable for firms in a competitive environment, can be strongly devalued as the environment deviates from a competitive one and the importance of non-market business strategies (such as corruption, connections, etc.) for firms' economic success increases. We show that the gap in investment

between really decentralized firms and other firms shrinks as corruption grows, becoming statistically insignificant under very high values of corruption. Nevertheless, according to the predictions of our regression analysis, really decentralized firms demonstrate significantly better performance in terms of investment under a wide range of corruption values, including the high ones. For example, at the median for Russian regions level of corruption6, the average payoff from real decentralization (in terms of investment) is still substantial.

Our results demonstrate that there are firms that do manage to successfully decentralize even in the Russian institutional climate with weak social norms, low trust, high corruption and high social tolerance to corruption, weak rule of law, etc. We can suggest that successful decentralization of firms in an environment with weak institutions should require the creation of some type of special mini-environment - with higher trust and better norms - at least within the firm. Do successfully decentralized Russian firms have a special better-than-average mini-climate? While up to now this is not explicitly confirmed by the data, logic and anecdotal evidence suggest that they do. Could these effects spread beyond these firms and contribute to the improvement of trust and social norms climate at the level of the locality, region, or, maybe, even the entire country? We believe this is a very important question for further development of this research.

6 Regions covered by the BEEPS data are considered. 22

References

Acemoglu D., Aghion P., Lelarge C., Van Reenen J., Zilibotti F. 2007. Technology, Information, and the Decentralization of the Firm. Quarterly Journal of Economics. Vol. 122, no. 4, pp. 1759-1799.

Aghion P., Bloom N., Lucking B., Sadun R., Van Reenen J. 2017. Turbulence, Firm Decentralization and Growth in Bad Times. National Bureau of Economic Research Working Paper No. 23354.

Aghion P., Bloom N., Van Reenen J. 2014. Incomplete Contracts and the Internal Organization of Firms. Journal of Law, Economics, and Organization. Vol. 30, suppl. 1, pp. 37-63.

Aghion P., Tirole J. 1997. Formal and Real Authority in Organizations. Journal of Political Economy. Vol. 105, no. 1, pp. 1-29.

Athanasouli D., Goujard A. 2015. Corruption and Management Practices: Firm Level Evidence. Journal of Comparative Economics. Vol. 43, no. 4, pp. 1014-1034.

Baker G., Gibbons R., Murphy K. 1999. Informal Authority in Organizations. Journal of Law, Economics, and Organization. Vol. 15, no. 1, pp. 56-73.

Bloom N., Mahajan A., McKenzie D., Roberts J. 2010(a). Why Do Firms in Developing Countries Have Low Productivity? American Economic Review: Papers & Proceedings. Vol. 100, no. 2, pp. 619-623.

Bloom N., Sadun R., Van Reenen J. 2010(b). Does Product Market Competition Lead Firms to Decentralize? American Economic Review: Papers & Proceedings. Vol. 100, no. 2, pp. 434-438.

Bloom N., Sadun R., Van Reenen J. 2010(c). Recent Advances in the Empirics of Organizational Economics. Annual Review of Economics. Vol. 2, pp. 105-137.

Bloom N., Sadun R., Van Reenen J. 2012(a). The Organization of Firms across Countries. Quarterly Journal of Economics. Vol. 127, no. 4, pp. 1663-1705.

Bloom N., Schweiger H., Van Reenen J. 2012(b). The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries. Economics of Transition. Vol. 20, no. 4, pp.593-635.

Bloom N., Eifert B., Mahajan A., McKenzie D., Roberts J. 2013. Does Management Matter? Evidence from India. Quarterly Journal of Economics. Vol. 128, no. 1, pp. 1-51.

Chandler A. 1962. Strategy and Structure: Chapters in the History of the Industrial Enterprise.

Cambridge : MIT Press.

Dessein W. 2002. Authority and Communication in Organizations. Review of Economic Studies. Vol. 69, no. 4, pp. 811-838.

Guadalupe M., Wulf J. 2010. The Flattering Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies. American Economic Journal: Applied Economics. Vol. 2, no. 4, pp. 105-127.

Kastl J., Martimort D., Piccolo S. 2013. Delegation, Ownership Concentration and R&D Spending: Evidence from Italy. Journal of Industrial Economics. Vol. 61, no. 1, pp. 84-107.

Levina I. 2014. Owners' Motives, Decision-Making Model, and Firm Performance. Higher School of Economics Economic Journal. Vol. 18, no. 3, pp. 429-253 (in Russian).

Levina I. 2016. By Connection or By Competition? Decentralization of Decision-Making and Hiring Strategies at Russian Firms. Applied Econometrics. Vol. 43, no. 3, pp. 73-95 (in Russian).

Levina I. 2017. What Limits Decentralization at Russian Firms. Economic Policy. Vol. 12, no. 5, pp. 62-79 (in Russian).

Penrose E. 1959. Theory of the Growth of the Firm. New York: Wiley & Sons.

Rajan R., Wulf J. 2006. The Flattering Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies. The Review of Economics and Statistics. Vol. 88, no. 4, pp. 759-773.

Rajan R., Zingales L. 2001. The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms. Quarterly Journal of Economics. Vol. 116, no. 3, pp. 805-851.

Appendix

Table A1: Descriptive statistics

Variable Type of variable Number of observations Mean Min Max

Firm-level data

Employment at the firm continuous 1822 101.85 10 53000

Firm's revenue, mln rub continuous 1019 8820.2 0.01 7500000

Firm did not respond to question about revenue binary 1950 0.48 0 1

Firm implements investment binary 1899 0.41 0 1

Firm is centralized binary 1898 0.83 0 1

Firm is cautiously decentralized binary 1866 0.10 0 1

Firm is really decentralized binary 1866 0.07 0 1

Firm belongs to a holding binary 1935 0.10 0 1

Main shareholders changed during last 3 years binary 1853 0.06 0 1

Firm has state share in property binary 1950 0.02 0 1

Firm has foreign share in property binary 1950 0.02 0 1

Firm receives support from government binary 1891 0.17 0 1

Firm receives state orders binary 1883 0.21 0 1

Region-level data

GRP per capita, thousand rub continuous 1950 285.07 127.52 1327.22

Corruption in the region continuous 1536 0.56 0.22 0.94

Quality of judicial system in the region continuous 1536 0.33 0.001 0.61

Приложение 5. Paper «Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia».

Levina I. 2020. Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia. Journal of Comparative Economics, 48 (4), 933-950. DOI:

https://doi.org/10.1016/j.jce.2020.05.006

Разрешение на копирование: Согласно https://www.elsevier.com/about/policies/sharing автор статьи может использовать полную журнальную версию статьи в своей диссертации при условии, что указан DOI статьи.

Journal of Comparative Economics xxx (xxxx) xxx-xxx | - fjj§t Contents lists available at ScienceDirect

Journal of Comparative Economics

ELSEVIER journal homepage: www.elsevier.com/locate/jce

Decentralization of firms in a country with weak institutions: Evidence from Russia

Irina Levina

Institute for Industrial and Market Studies, National Research University Higher School of Economics, 20 Myasnitskaya Street, Moscow101000, Russia

ABSTRACT

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.

Journal of COMPARATIVE ECONOMICS

ARTICLE INFO

Keywords:

Decentralization

Decision-making

Investment

Corruption

Russia

JEL-classification:

D02

D22

D23

L2

M2

M51

Introduction

Can the decentralization of firms be successful in an environment with weak institutions? The practice of decentralization - the delegation of some decision-making authority from the top of a firm's managerial hierarchy down to middle-level and local employees - is becoming increasingly widespread at firms in developed countries. Decentralization has a huge potential to improve firms' efficiency and competitiveness; it creates conditions for quicker and more competent decision-making on a wide range of

This paper was prepared within the framework of the Basic Research Program at the National Research University Higher School of Economics (HSE) and supported within the framework of a subsidy by the Russian Academic Excellence Project '5-100'. The author thanks participants of the IIMS HSE research seminar, LMU Munich Chair of Social Sciences and Eastern European Studies Workshop "Growth and Redistribution in Limited Access Orders", 19th HSE April International Academic Conference on Economic and Social Development, 7th Annual ICSID HSE Conference, 10th Joint IOS/APB/EACES Summer Academy on Central and Eastern Europe "Firm Behavior in Central and Eastern Europe: Productivity, Innovation and Trade", 2018 Silvaplana Political Economy Workshop, Second Ghent Russia Colloquium "Russia's Political Economy since 1992: Back to the Future?", the 2019 Meeting of the European Public Choice Society, and the anonimous referees for valuable comments and suggestions that helped to improve the paper.

E-mail address: [e-mail].

https://doi.org/10.1016/jJce.2020.05.006

Received 10 October 2018; Received in revised form 23 May 2020; Accepted 28 May 2020

0147-5967/ © 2020 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.

Please cite this article as: Irina Levina, Journal of Comparative Economics, https://doi.org/10.1016/j.jce.2020.05.006

questions and can enhance employee motivation. Although decentralization is associated with an increase in agency risk, there is growing evidence that in an environment with good institutions, the benefits that decentralization can bring to a firm can far outweigh its potential agency costs. But what about countries with weak institutions: poor social norms, high corruption, and weak judicial system? Agency costs of decentralization are expected to be much higher in such an environment. Evidence on the decentralization of firms in countries with weak institutions is still very limited. At the same time, there is a popular belief that decentralization cannot be successful in countries with weak institutions, so it is not worth even trying.

In this paper, I challenge this belief by studying evidence from Russian firms. Previous literature that studies the decentralization of firms in an environment with weak institutions primarily focuses on the high agency costs of decentralization in such conditions. In this paper, I look from another perspective, and pay more attention to the potential benefits that decentralization can bring to a firm, even under weak institutions. Even under weak institutions, decentralization, if implemented properly, can relieve the excessive workload of CEOs, significantly improve the speed and quality of decision-making at firms, and enlarge the scope of questions firms are able to respond to simultaneously, thus making the firms more competitive and creating opportunities for their growth. Moreover, decentralization can increase the involvement of employees, which may greatly improve their attitude toward work, intrinsic motivation, and productivity. Yet the potential of decentralization to improve the firm's efficiency is likely to be highly dependent on the professionalism and talent of the employees who gain the delegated authority.

I distinguish between two strategies for the decentralization of firms in an environment with weak institutions: the strategies of real and cautious decentralization. I introduce the concept of real decentralization to represent the decentralization of decision-making authority to people hired through open competition - that is, to the most professional and talented people a firm can hire - and the concept of cautious decentralization to represent decentralization to people hired through connections - to people whom firm owners or top managers trust on the basis of some sort of connections or recommendations, but who are not necessarily good professionals. Anecdotal evidence suggests that cautious decentralization is rather popular in economies with weak institutions. It is believed to be a good adaptation of the idea of decentralization to the conditions of weak institutions; however, its potential to improve firms' efficiency seems to be quite limited. In this paper, I am primarily interested in real decentralization of firms in an environment with weak institutions.

I presume that the improvements in efficiency that can be brought to a firm by real decentralization can be so important that they can outweigh the expected costs associated with decentralization even under weak institutions. This assumption implies that real decentralization under weak institutions can be successful and can yield positive payoff to firms. However, I argue that the greater the role of non-market factors in the economic wellbeing of firms in an environment with weak institutions - for example, the higher the distortionary effect of corruption on fair market competition - the lower the firms' returns to being economically efficient. The firms' returns to real decentralization and thus their willingness to really decentralize will be correspondingly lower as well. I test these assumptions against the data on Russian firms and find that the data is consistent with the theory.

Institutional conditions in Russia are far from good. In 2014 - the year of focus in this study - Russia scored 27 out of 100 in the Transparency International Corruption Perceptions Index, ranking much worse than many post-Communist Eastern European countries and similarly to a number of Central Asian and African countries. According to the data of the Russian Public Opinion Fund, more than 50% of Russian people do not condemn those who give bribes; 30% do not condemn those who take bribes. Russia's 2014 rule of law score from the World Bank Worldwide Governance Indicators was -0.7 out of a range from -2.5 (the worst) to 2.5 (the best). According to the World Values Survey 2011 data, only 28% of Russian people believe that most people can be trusted and 66% of Russians think that one needs to be very careful in dealing with people. Therefore, I believe that Russia represents a good case through which to study the decentralization of firms in an environment with weak institutions.

The empirical analysis of this paper is based on the data of the "Russian Firms in a Global Economy" (RuFIGE) survey, which was conducted by the Higher School of Economics, Moscow, Russia, in 2014. The survey provides information on the organizational choices; hiring strategies; investment, innovation, and export activities and outcomes; and other characteristics or choices of about 2,000 manufacturing firms across 60 Russian regions. To the best of my knowledge, RuFIGE is the only survey that combines information about firms' choices regarding centralization or decentralization with information about criteria for hiring for top positions. This unique combination allows me to distinguish between firms' strategies of real and cautious decentralization in the empirical analysis. I complement firm-level data from the RuFIGE survey with data on the quality of institutions in Russian regions estimated from the "Business Environment and Enterprise Performance Survey" (BEEPS) that was run by the European Bank for Reconstruction and Development in cooperation with the World Bank in Russian regions in 2011-2012 and data on trust in Russian regions estimated from the Russian Fund "Public Opinion" GeoRating-2014 Survey.

I demonstrate empirically that really decentralized Russian firms are, on average, more successful in a range of activities: they are more likely to invest, to bring to the market innovative products that are new for the Russian or global market, and to export their production, compared to other firms. At the same time, no significant difference in the probability of investment, of introduction of innovative products, or of exporting products is observed between the other groups of firms - cautiously decentralized firms, centralized firms that hire competitively for top positions, and centralized firms that hire through connections. The difference between really decentralized firms and other Russian firms in the probability of investment and of introduction of new products to the market depends on the level of corruption: this difference diminishes as corruption in the region grows. Accordingly, in Russian regions with higher corruption, firms are less likely to be really decentralized. Yet the gap between really decentralized firms and other Russian firms in the probability of investment, of introduction of new products, and of exporting products is impressively large under low, moderate, and even median (for Russian regions covered by both the RuFIGE and the BEEPS samples) levels of corruption.

The empirical results presented in this paper imply that there is considerable room for the successful decentralization of firms under a wide range of institutional conditions, including rather poor conditions like those seen in Russia. The results demonstrate that

the strategy of real decentralization, which is traditionally considered to be very risky under conditions of weak institutions, can work fairly well and have economic payoff for firms even in an environment with weak institutions (at least, payoff in terms of the likelihood of investment, introduction of new products, and export). At the same time, the strategy of cautious decentralization does not improve firms' outcomes with regard to chances to invest, to bring new products to the market, and to export. The paper also presents a novel channel through which corruption can limit the real decentralization of firms, arguing that corruption, in particular the distortionary effect of corruption on fair market competition, can reduce the value of economic efficiency for firms and, thus, the potential value of real decentralization and firms' willingness to really decentralize. The paper presents empirical support for this argument, highlighting a mechanism of the negative influence of corruption on economic development that has not been studied in prior research.1

The remainder of the paper is organized as follows. Section 2 presents the literature review. Section 3 discusses the theory. Section 4 describes the data and the empirical strategy. Section 5 presents and discusses the results of the empirical analysis. Section 6 concludes the paper.

Literature review

During recent decades, a sustained tendency toward greater decentralization of firms has been observed in developed countries (Rajan and Wulf, 2006; Bloom et al., 2010b; Guadalupe and Wulf, 2010). The theoretical literature outlines several channels through which decentralization can facilitate growth and improve the efficiency of firms. Decentralization not only relaxes the demands on the time of the CEO, which is essential for a firm's growth (Penrose, 1959; Chandler, 1962); it also incentivizes managers and employees, facilitates communication, reduces negative consequences of information asymmetry, and promotes more efficient use of available information (Aghion and Tirole, 1997; Baker et al., 1999; Rajan and Zingales, 2001; Dessein, 2002; Aghion et al., 2014). However, decentralization is associated with agency costs that stem from the misalignment of incentives between firms' owners/CEOs and their subordinates (Aghion and Tirole, 1997; Bloom et al., 2012a; Aghion et al., 2014). The agency costs of decentralization become a particularly important issue in environments with weak institutions (Bloom et al., 2010a). Overall, from the theoretical perspective, the balance between the benefits and costs of decentralization for a firm is unclear.

Several recent papers empirically demonstrate a correlation between decentralization and economic performance of firms in developed countries. Acemoglu et al. (2007), using data on French and British firms, show that decentralized firms are, on average, more productive. Kastl et al. (2013) use data on Italian manufacturing firms to document that decentralized firms tend to spend more on R&D. Levina (2014) explores data on firms from seven countries in Europe and demonstrates that decentralized firms are, on average, more innovative and more successful in international trade. Aghion et al. (2017) use data on firms from 10 OECD countries to provide evidence that decentralized firms are more resistant to economic crises: they demonstrate better performance in terms of survival chances, productivity, sales, and profits during and after the crisis. Although these papers interpret the correlation between decentralization and firms' economic outcomes in different ways, which imply different directions of causality, they all indicate the same empirical pattern: decentralized firms tend to demonstrate superior economic performance in developed countries.

The popularity of firms' decentralization varies significantly across countries. The literature demonstrates a strong influence of the environment, and of the institutional environment in particular, on the decentralization choices made by firms. (Bloom et al., 2010b) show that higher product market competition leads to greater levels of decentralization. The authors reason that higher competition might make decentralization more likely by, first, making local managers' information and quicker decision-making more valuable and, second, reducing the agency problem. (Bloom et al., 2012a) demonstrate that higher trust in the region and stronger rule of law in the country increase decentralization in firms. Higher trust and stronger rule of law relieve the agency problem, thereby making decentralization less costly. Athanasouli and Goujard (2015) show that firms in more contract-dependent industries located in more corrupt regions are less likely to be decentralized. The authors relate this result to the higher risks attached to the dissemination of information about firms' involvement in corruption practices under decentralized governance.

Despite the importance of the topic, empirical research on the decentralization of firms in countries with weak institutions is still very limited and is mostly based on evidence from just several developing countries. (Bloom et al., 2010c) and (Bloom et al., 2012a) study survey data from Brazil, China, and India and conclude that there is very little delegation in developing countries. (Bloom et al., 2010a) argue that firms in developing countries are basically unable to successfully decentralize decision-making (stating, e.g., that "in developing countries owners tend to make almost all major management decisions because of fears of expropriation from their managers"). The authors relate this difficulty to low trust and poor rule of law in developing countries. However, these conclusions are, again, based on the analysis of survey data from Brazil, China, and India. Bloom et al. (2013) study evidence from Indian textile firms and show empirically that the number of brothers and sons that an owner of a firm has is a strong predictor of firm size, which signals the extremely high degree of centralization of Indian firms. In contrast to this striking evidence, however, Wu (2017) presents an analysis of the performance of one particular Chinese newspaper that undertook a change in organizational structure from a more decentralized to a more centralized one. The author shows that more decentralized governance was associated with better performance in some respects.

One branch of the literature studies the influence of the strategy of hiring for top positions - competitive hiring or hiring through

1 This paper is based on the results of my earlier research. It incorporates some of the ideas from and results of two papers published only in Russian, Levina (2016) and Levina (2017). In addition, the paper develops new theoretical arguments and presents new empirical results. The Literature Review section provides a review of Levina (2016) and Levina (2017) and a discussion of the contribution of the present paper.

family ties - on the performance of firms. Bloom and Van Reenen (2007) argue that hiring for top positions through family ties can have both positive and negative consequences for firms. On the one hand, hiring through family ties allows the reduction of agency risks. On the other hand, such a hiring strategy strongly limits the pool of candidates and, correspondingly, the range of managerial talent that firms can choose from when seeking candidates for top positions. Perez-Gonzalez (2006) and Bennedsen et al. (2007) emphasize the importance of competitive hiring for CEO positions for the economic results of firms. The authors argue that competitive hiring allows the hiring of highly professional, talented, and motivated CEOs, whereas hiring CEOs through family ties hurts firms' performance by limiting the pool of eligible candidates. Using data on US corporations, Perez-Gonzalez (2006) demonstrates empirically that firms that hire CEOs competitively outperform firms that hire CEOs on the basis of family ties. Bennedsen et al. (2007) provide convincing support for this empirical result using data on Danish firms and an empirical strategy based on instrumental variables regressions. However, the literature on hiring for top positions does not interact with the literature on firm de-centralization.2

This paper presents new empirical evidence on the decentralization of firms in one post-Communist country with weak institutions, Russia. The paper distinguishes between two strategies for the decentralization of firms in an environment with weak institutions: real decentralization - the delegation of decision-making authority to competitively hired professionals, and cautious decentralization - the delegation to people hired through connections. The paper argues that real decentralization has the potential to improve the economic efficiency of firms even in an environment with weak institutions and empirically shows that really decentralized Russian firms, on average, turn out to be more successful 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 their production. Yet the share of really decentralized firms in Russia is very low. Seeking to understand why this is the case, this paper explores the role of institutional climate for the value of real decentralization for firms. The paper argues that the higher the distortionary effect of corruption on fair market competition in an environment with weak institutions, the lower the value of economic efficiency for firms and, therefore, the lower the potential payoff from real decentralization and the willingness of firms to really decentralize. The paper provides empirical support for these arguments.

This paper builds on the results of my earlier research, Levina (2016) and Levina (2017), published only in Russian but not in English. Levina (2016) is, to the best of my knowledge, the first paper that points to the importance of the strategy of hiring for top positions for the efficiency of decentralization of firms in an environment with weak institutions. The paper shows empirically that Russian firms that accompany decentralization with competitive hiring for top positions are more successful in innovation and export compared to both centralized firms and firms that combine decentralization with hiring for top positions through connections. Levina (2017) explores which institutional factors limit decentralization and competitive hiring for top positions in Russian firms. The paper demonstrates that in Russian regions with higher corruption, the share of firms that decentralize and accompany decentralization with competitive hiring for top positions is lower. The paper relates this trend to the higher risks associated with decentralization and competitive hiring under higher levels of corruption.

The present paper incorporates some of these ideas and results. In addition, it builds new theoretical arguments about the channels of influence of a weak institutional climate on the value of decentralization for firms and, hence, on firms' willingness to decentralize. To support the theoretical arguments, this paper presents new empirical evidence on the experience of successful real decentralization of firms under conditions of weak institutions and on the negative influence of corruption on the benefits firms gain from real decentralization.

Theory

Decentralization can enhance the efficiency and competitiveness of firms through several channels. First, decentralization provides CEOs and top managers the opportunity to concentrate on the most important and challenging questions while delegating other questions to lower-level employees. Second, it creates the preconditions for quicker decision-making on a wide range of questions, which allows firms to react more quickly to changes in the environment. Moreover, decentralization can also strongly improve the efficiency of decision-making by creating an environment that stimulates the more efficient use of available information and better communication. Finally, decentralization is associated with the greater involvement, greater independence, and greater responsibility of employees, which can have an important effect on employees' motivation (see e.g. Chandler, 1962; Aghion and Tirole, 1997; Baker et al., 1999; Rajan and Zingales, 2001; Dessein et al., 2002; Weibel et al., 2014; Bock, 2015).

However, decentralization is associated with agency risks: risks that employees may use the delegated authority in ways that are not necessarily in the best interests of their firms but in their own interests (see e.g. Aghion and Tirole, 1997; Bloom et al., 2012a; Aghion et al., 2014). Agency risks of decentralization can be particularly high in countries with weak institutions (Bloom et al, 2010a). Firms that choose to decentralize in a weak institutional environment have to take the risk that employees may use their delegated authority to cheat the firm in various ways - to take bribes for promoting nonoptimal suppliers, partners, or projects, for example, or even to steal directly from the company. Weak social norms, high levels of corruption, high social tolerance of corruption, and a poorly functioning judicial system make the misuse of delegated authority by employees much more likely and more difficult to fight.

To mitigate the agency risks of decentralization, firms may choose to decentralize decision-making authority to people whom the

2 The only exception I am aware of is my own earlier paper (Levina, 2016), published only in Russian, not in English. As I explain in more detail in the next paragraphs, the present paper incorporates some of the results from Levina (2016).

firms' owners or CEOs trust based on some type of prior relations or acquaintanceship, recommendations from friends, or similar. This implies that firms hire people for key positions not on the basis of open competition (which would allow them to choose the most efficient and professional people) but through connections within the highly restricted pool of candidates whom firms' owners or CEOs trust. Such a strategy, while making decentralization much less risky, is at the same time likely to result in much lower efficiency and professionalism of the people hired for key positions, which can be detrimental to the efficiency of decentralization.

Therefore, in economies with weak institutions, it is important to distinguish between the two decentralization strategies available to firms: real decentralization, which is decentralization of decision-making authority to competitively hired professionals, and cautious decentralization, or decentralization to people hired through connections, not necessarily professionals. Cautious decentralization allows for the relaxation of the time limitations of CEOs and top managers without adding substantial agency risk. However, cautious decentralization is unlikely to create conditions under which decision-making authority can be delegated to highly efficient professionals, which makes its opportunities to significantly improve firms' efficiency really questionable.

At the same time, real decentralization does create conditions for the decentralization of decision-making authority to highly professional, talented, and motivated employees (hired competitively on the open labor market), which has the potential to yield huge benefits for firms' efficiency and competitiveness - benefits resulting from increased speed and efficiency of decision-making and the higher motivation of highly qualified employees. In this paper, I suggest that benefits from real decentralization can be so high that they can outweigh the agency costs of decentralization, even in an environment with weak institutions. Therefore, my first hypothesis is as follows:

Hypothesis 1: Real decentralization (the decentralization of decision-making authority to competitively hired professionals) can

have economic payoff for firms even in an environment with weak institutions.

What limits the real decentralization of firms in countries with weak institutions? The literature has a good deal to say about the risks associated with decentralization, particularly agency risks. However, if Hypothesis 1 is true, and real decentralization can have economic payoff for firms even when institutions are weak, the risks associated with decentralization are probably not the only or even the most important factor that limits the real decentralization of firms in countries with poor institutions.

Weak institutions can hamper the decentralization of firms not only by increasing agency risks. They can also devalue the potential benefits of decentralization (even of real decentralization), which can play an even more important role for firms' low willingness to even try to decentralize under weak institutions. The potential benefits of real decentralization - benefits to firms' efficiency from improvements in the speed and efficiency of decision-making and in the motivation of employees - are highly valuable for firms in a competitive market environment. However, the higher the distortionary effect of corruption on fair market competition in an environment with weak institutions, the lower the value of economic efficiency for firms' economic success. Under such conditions, the potential benefits of real decentralization lose their importance for firms' outcomes. This brings me to my second and third hypotheses:

Hypothesis 2: Firms' returns to real decentralization decline as corruption grows.

Therefore,

Hypothesis 3: The popularity of real decentralization among firms is lower in regions with higher corruption.

Data and empirical strategy

Empirical analysis in this paper is primarily based on data from a large survey of Russian manufacturing firms, "Russian Firms in a Global Economy" (RuFIGE). The survey was conducted in 2014 by the Higher School of Economics, Moscow, Russia, and collected information about 1,950 firms from 60 Russian regions.3 The RuFIGE survey contains a unique combination of questions about the decentralization of decision-making and the strategies of hiring for top positions at the firms as well as a great deal of other information about the firms. The decentralization question in the RuFIGE survey is analogous to the decentralization question in the earlier survey "European Firms in a Global Economy" (EFIGE), which was conducted in 2010 by the European think tank Bruegel.4 The RuFIGE survey question about the strategies used in hiring for top positions has no analogs either in the EFIGE survey or in other surveys that are commonly used in research on firms' decentralization, such as the Management, Organization and Innovation (MOI) survey or the World Management Survey (WMS). The novel combination of decentralization and hiring strategy questions in the RuFIGE survey data allows me to distinguish between real and cautious decentralization strategies.

The empirical analysis also relies on estimates of business corruption in Russian regions based on the "Business Environment and Enterprise Performance Survey" (BEEPS). The BEEPS data is a widely used source of information about the quality of the institutional

3 The survey sample was designed to be representative by firms' industry and size, with one exception: to make statistical analysis in the group of large firms possible, large firms were intentionally overrepresented in the sample. The survey provides sampling weights that allow me to work with survey data as representative by industry and size of the firms. This approach is standard for firms surveys. More information about the survey can be found at the site of the Institute for Industrial and Market Studies, Higher School of Economics: https://iims.hse.ru/en/rfge/.

4 More information about the EFIGE survey can be found at http://bruegel.org/efige/.

environment in Russian regions. The BEEPS was conducted in Russian regions in 2011-2012 by the European Bank for Reconstruction and Development in partnership with the World Bank. The survey collected extensive information about firms and their estimates of the business environment. The survey sample covers 4,200 firms in 37 Russian regions. The sample is representative within each region, which allows for aggregating the survey data at the regional level. The BEEPS data covers nearly 80% of the RuFIGE sample (namely, 35 regions with 1,536 of 1,950 RuFIGE firms).5

Finally, I employ data on economic, geographic, and cultural characteristics of Russian regions from the Russian Federal State Statistics Service (Rosstat), estimates of the quality of the judicial system in Russian regions drawn from the BEEPS, and estimates of the level of trust in Russian regions calculated from the Russian Fund "Public Opinion" GeoRating-2014 survey data. Descriptive statistics for the variables used in the empirical analysis of this paper are provided in Table A1 in the Appendix A. The RuFIGE survey question about the decentralization of decision-making at firms is formulated as follows: With reference to strategic decisions, which of the following statements better describes your firm's situation?

1 Decisions in your firm are centralized: the CEO/owner takes most decisions in every area

2 Decisions in your firm are decentralized: managers can take autonomous decisions in some business areas.

The question about strategy of hiring for top positions is formulated as follows:

What are the most important factors the owners/CEO of your firm take into account primarily when they appoint employees to the key managerial positions? Choose two most important factors:

1 Level and quality of education

2 Previous professional experience at your firm

3 Professional experience at other firms (organizations)

4 References from acquaintances or people whom owners / CEO of your firm trust

5 References from former employers or recruitment agencies

6 Personal acquaintance with the candidate