Market Competition and Firm Performance in Russia

Abstract

We test whether foreign and domestic product market as well as domestic factor market competition affect firm efficiency, using a 1992-1998 panel of 14,961 Russian industrial firms covering 75 percent of industrial employment in 1992. The results provide strong evidence that domestic product market competition, import competition, and local labor market competition have large, positive effects on total factor productivity. The impact of liberalization appears only gradually in the domestic product market, taking about four years to attain 90 percent of the long-run value, but we find no such lags with respect to import competition or labor market competition. The data indicate that local product market competition may be more important than national competition in Russia, suggesting that markets are geographically segmented. Better transportation infrastructure appears to facilitate product market competition, while at the same time reducing firms' monopsony power on the labor market by facilitating worker mobility. We also find that non-state firms outperform state enterprises, even after controlling for selection bias in the determination of ownership. The results suggest that a reduction in import barriers, investment in transportation infrastructure, and elimination of interregional administrative trade barriers would stimulate industrial growth.