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Industrial dominance: analysis of influence on small companies in Russia
References:
1. Luister Т. Lean production: from words to actions Series: Lean production, Standards and quality, - 2009.
2. Standardized work. Series: Production without losses. Institute of complex strategic work, - 2007.
Pyatkov Maxim Viktorovich, Omsk State University, postgraduate student, Department of International Business E-mail: pmv0990@gmail.com
Industrial dominance: analysis of influence on small companies in Russia
Abstract: Russian economy is characterized by the presence of a number of single-industry towns, where one or several companies influence the development of other firms. The results of author’s research on measuring the influence of industrial dominance are presented. It is found that while dominance has an impact on labour and services availability in the region but not on the availability of capital.
Keywords: single-industry town, industrial dominance, agglomeration effects.
One of modern economy’s characteristics of Russia (and the CIS countries as a whole) has become the existence of a large number of single-industry towns — settlements, in which the driver of economic activity appears to be only one (major) company. Some Russian scientists note that one-industry town — is specific to the formation of post-Soviet countries [1], but the analysis of foreign (outside CIS) research shows that conceptually similar questions have also been studied — in particular, through the study of the dominant firm’ impact on the industry and the region’s economy.
The founder of the “dominance" analysis in the economy can be considered B. Chinitz — US scientist engaged in research of US cities in the 1960s. The analysis of Pittsburgh allowed Chinitz to characterize the influence of the industrial dominance — companies whose presence in the region influences the development of other firms [3]. Based on studies of Pittsburgh, he gave a description of the main characteristics of the regional economy with a dominant company:
1. Tendencies to entrepreneurship activity are low, due to the lack of positive examples of creating your own business, compared to availability to achieve career growth within the existing (large) companies.
2. Access to capital for new companies is also limited: on the one hand, investors tend to invest in the industry already presented in the region; on the other hand — the dominant companies’ investments usually directed to the maintenance and development of its own integrated production chains.
3. Labour resources have little motivation to mobility, because a large company is able to keep a relatively higher level of pay. Furthermore, many businesses exhibit significant restriction of working conditions, which eliminates part of the population of economic processes (e. g., metalworking industry and related businesses usually hire men and vice versa).
4. Infrastructure attractiveness of the region is also low, due to the vertical integration of dominant companies. In addition, a great impact on the region’s attractiveness may have its environmental conditions (eg, air or water pollution).
The above leads to the goal made by the author of research: the need to understand how the presence of a dominant enterprise in the region’s industry impacts the economic potential of small businesses operating in similar conditions.
Measuring the impact of industrial dominance to the agglomeration effects in the industry
Firstly, the analysis of scientific literature devoted to the study of the impact of industrial dominance in the individual effects of agglomeration was performed. The results of the analysis can be divided into three categories, corresponding to the three A. Marshall agglomeration effects:
The first of the three ways in which industrial dominance may have an impact on economic activity is a reduction of risk-behaving activity. B. Chinitz suggested that the desire to open new business, taking the risk is reduced in the presence of large, profitable companies that offer stable attractive working conditions [3].
Subsequent researchers have extended this hypothesis. People working in large corporations have skills that are suitable for a particular type of activity and are less likely to acquire skills related to entrepreneurial activity [11]. Large firms are more stable, offer greater compensation package and additional bonuses, reducing the desire for a change of career path [8].
Industrial dominance also has an impact on the occurrence of agglomeration effects due to access to specialized assets and services. Region dominated by one or several companies is usually limited to the ability to produce a wide range of goods and services; also, large firms are usually vertically
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integrated, making it difficult to enter the market for smaller companies — potential partners of a large enterprise [12]. Resources that dominant company buys often come from own structure, not purchased from local suppliers [10]. The manufacturers of specialized assets and services prefer large customers as buyers which can provide larger sales [9].
Finally, capital funding is a third way to industrial dominance influence on the industry. Large companies are usually able to obtain loans easier because lending institutions prefer more security of a potential credit, rather than new enterprises whose activity requires deep evaluation [4]. Costs of informing potential investors for small businesses is generally higher than for existing business relationships with a wide network [2]. H. Gorg analyzed the economic results of joint ventures with TNC for the host country [6]. It was found that only 40 % of the examples resulted in positive economic effects, while in other cases the economic result was either partially negative or economic stagnation. Among the main factors contributed to negative economic effects stood no horizontal.
In accordance with the selected factors, the author developed a model for a statistical analysis. The modified Cobb-Douglas model describing the dependence of group revenues of small enterprises in the industry on the following factors: a) the borrowed funds of enterprises; b) the cost of production; c) selling expenses is used. Model specification is shown in Table 1.
As a source of information statistics database “SPARKInterfax” is used: it contains information on each company performing in the selected region of Russia; in contrast to the use of aggregate statistics, this approach allows us to assume that the results have a high degree of certainty.
Table 1. - Description of model variables
Category Variable abbrevia- tion Description of variable
Dependent variable Q Revenue
Standard variables K Loans (long- and short-term)
L Cost of sales (salary)
A Commercial expenses
Agglomeration effects LP Labour availability
SP Services availability
KP Capital availability
Industrial dominance D Herfindahl-Hirschman index
Assessing the impact of industrial dominance in the food industry of the Omsk region
The object of the analysis is the food industry of the Omsk region. The factors influencing the decision to choose this industry are follows:
• the industry presents a relatively high share in the region’s economy (up to 7 %) during the period under review; in this case, it consists of a relatively
large number of companies meeting the criteria of sampling;
• enterprises in the industry have relative freedom to choose their location, since depend not only on the availability of resources, but also the efficiency of logistics operations;
• the studied firms have relatively homogeneous business processes. Compared with other industries (eg. petrochemicals), the production and sale in the food industry has a number of similar stages (purchase of agricultural inputs, processing, logistics and distribution), which minimizes the risk of inclusion in the sample companies with incorrectly specified NACE.
The main characteristics of the sample are presented in Table 2.
During 2005-2012 food production industry is characterized as middle-concentrated p (Herfindahl-Hirschman index approx. 800-1200). Based on the variables presented above, the sample was prepared for the analyzed period for the two groups of companies — the 5 largest (dominating) and other (dominated). The results are presented in Table 3.
The results allow us to draw the following conclusions:
Variable LLP can be described as “the availability of labour” A negative sign, standing in front of the variable coefficient indicates that in the period under review, the larger availability of labor resulted in less revenue for the dominated companies. Thus, small and medium-sized companies did not receive additional economic benefit in the case of the entry of new workforce involved in food production.
Variable KKP in the presented model describes the availability of capital resources. Given the fact that the variable part of the equation of the model has a positive sign, the presence of large firms in the period had no significant impact on the offer of capital resources to small and medium-sized companies. In other words, agglomeration effect here was not offset by the presence of industrial dominance.
Variable SSP describes availability of services (in this analysis — transport services). The level of significance at this variable does not allow making certain conclusions.
Finally, factor analysis of industrial dominance suggests that in the studied period, the growth of industrial dominance was accompanied by a decrease in economic efficiency (revenue) of the dominated companies. Thus, industrial dominance played a negative role for the companies in the industry.
The results of calculations lead to the following conclusion: given the fact that the coefficient squared (R2) is greater than 90 %, and the level of significance (p) was within the established norm of 10 %, it can be argued that this model reflects the impact of industrial dominance on the economic efficiency of enterprises (in particular, the availability of agglomeration effects) in the region with high reliability. Since the model was applied to test for heteroscedasticity, it can be argued that there are no statistical errors. The absence of autocorrelation in the present model suggests that these results can be used in the analysis.
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Industrial dominance: analysis of influence on small companies in Russia
Table 2. - Comparison of economic indicators dominant group of companies with other companies in the sector in 2012
Group Number of objects Assets, krub. Revenue, krub. Cost of sales, krub. Profit, krub.
Dominating 5 17 543 274 21 146 977 16 802 731 2252392
Other 110 11481967 14 861 467 12 322 953 108 268
Share 4,54 % 60 % 59 % 58 % 95 %
Table 3. - The results of regression analysis of the companies’ efficiency with regard to the factors of dominance and agglomeration
Variable Coefficient Standard error T-statistic Level of significance
LLP -0,000103 4,41*10-5 -2.327361 0.0805
Kkp 1,89*10-5 7,24*10-6 2.612450 0.0593
Ssp -0,068289 0.038245 -1.785553 0.1487
D -0.008898 0.000882 10.08384 0.0021
C 0.134791 0.037241 3.619459 0.0224
R2 0.940753
Resume
According to the results the following conclusions are made:
Firstly, the empirical results support the hypothesis that companies operating in the sector in which it one or more dominant firms operate are less productive. Based on the results, the food industry of the Omsk region was had a negative impact due to the presence of industrial dominance.
Secondly, the analysis does not provide an unambiguous confirmation of the hypothesis that the effect of regional domination limits the possibility of using the effects of agglomeration. It is revealed that in some cases the presence of industrial dominance did not have restrictions on the use of agglomeration effects. Since we have not received unequivocal results, other explanations are also possible. In addition, the obvious limitations of this conclusion due to use of statistical data should be mentioned (due to the fact that agglomeration effects themselves are small quantities, the lack of identified strengths laws is understandable). Overall, it may be
concluded that the dominance in the industry has a partial negative impact on the availability of some agglomeration effects, but its influence is not limited to this area.
Finally, the results from the analysis point out that the development of effective strategies for economic development of any industry requires an understanding of interaction mechanisms between large and small businesses within the industry. Excluding this factor, governmental economic support programs, at best, give mixed results, at worst — will be ineffective. Moreover, since the industrial dominance is not a short-term phenomenon, and often becomes the result of long-term trends, the exclusion of this factor from consideration of policy programs might lead to the fact that the minimization of the negative impact by regional policy instruments exclusively would be impossible. So, even the simple understanding that industrial dominance is a problem that influences the economic efficiency of the industry should be enough to encourage the search for new methods of development and refinement of economic policy instruments.
References:
1. Tulchinsky G. L. From “salvation” to innovation development: Social partnership as the basis of solving single-industry towns’ problems//Municipal authority. - 2011, - № 2, - Р. 36-40.
2. Berger A. N. and Udell G. F. Small business credit availability and relationship lending: the importance of bank organisational structure//The Economic Journal. - 2002, - № 112 (477), - Р. 32-53.
3. Chinitz B. Contrasts in agglomeration: New York and Pittsburgh//The American Economic Review. - 1961, -№ 51 (2), - Р 279-289.
4. Cole R. A. et al. Cookie cutter vs. character: the micro structure of small business lending by large and small banks//Journal of Financial and Quantitative Analysis. - 2004, - № 39 (2). - Р. 227-251.
5. Drucker J. Regional Industrial Dominance, Agglomeration Economies, and Manufacturing Plant Productivity-US Census Bureau Center for Economic Studies. - 2007, - Paper № CES-07-31.
6. Gorg H. Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Investment? - [Electronic resource]. -Available from: http://ideas.repec.org/pZiza/izadps/dp944.html
7. Malmberg A. and Maskell P. The elusive concept of localization economies: towards a knowledge-based theory of spatial clustering//Environment and Planning A. - 2002, - № 34 (3), - Р. 429-449.
8. Mason C. M. Spatial variations in enterprise: the geography of new firm formation//Deciphering the Enterprise Culture: Entrepreneurship, Petty Capitalism, and the Restructuring of Britain. - 1991, - Р. 74-107.
9. Nelson R. R. and Winter S. G. An Evolutionary Theory of Economic Change. Cambridge. - Harvard University Press, 1982.
10. Porter M. E. Clusters and the new economics of competition//Harvard Business Review. - 1998, - Р. 77-90.
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11. Sorenson O. and Audia P. G. The social structure of entrepreneurial activity: geographical concentration of footwear production in the United States, 1940-1989//The American Journal of Sociology. - 2000, - 106 (2), - Р. 424-461.
12. Stigler G.J. The division of labor is limited by the extent of the market//Journal of Political Economy. - 1965, -№ 59 (3), - Р 185-193.
Shuvalov Valery Alekseevich, The Russian Presidential Academy of National Economy and Public Administration, Master's Degree Student, Institute of Business and Business Administration E-mail: shuvalov.valeriy@gmail.com
The role of state regulation in the innovative development of the regions of Kazakhstan
Abstract: The role of the state in the industrial development of regions is shown. The emphasis is put on the innovation component.
Keywords: Kazakhstan, state regulation, policy of industrialization, region.
Kazakhstan defined its way of large-scale industrialization as a basis of the transition to innovative economy. The state support of innovations defined them as a strategically important direction of the industrial development of the Republic of Kazakhstan [1; 2; 3].
State innovation policy realized in Kazakhstan presupposes the development of innovative clusters, formation of innovative environment, commercialization of scientific and technological development with the use of different tools of state and private partnership in the sphere of development and promotion of innovations at all levels.
The effectiveness of innovative component from the point of interaction and cooperation of authority and business is mainly determined by the level of development at which the state and private partnership is and how the cooperation between state regulation bodies and representatives of business community goes on. High hopes are related to the implementation of a German program on development of small and midsized innovative business ZIM in the practice of Kazakhstan.
The international experience shows that the dynamic development of a state and its economy as well as strive to achieve high positions in the world rating is primarily determined by the level of competitiveness of its regions and the results of actions on improvement of business climate at regional level.
In order to realize and implement the managerial solutions regarding the enterprises of different industries and forms of ownership, there is a need for a clear coordination of interaction between the representatives of small and midsized business on the one side and state bodies and enterprises on the other side.
But, as the studies show, the innovative activity at the level of regions in Kazakhstan still remains very low. Only few enterprises can independently perform scientific and research works related to innovations. Granted that around 30 % of companies conduct project and construction developments
and activate technological activity, i. e. they master new technologies and the technologies that are already used by other enterprises that are more active in innovative activity.
As a result of the author’s researches and analysis conducted by him, it was possible to find out the key problems, which are inseparably associated with the innovative activity of regions in Kazakhstan:
- a situation when the state order for innovations is not fully agreed and, consequently, not fully financed;
- production (real) capacities of operating enterprises are not loaded enough;
- a low level of business activity of enterprises in the sphere of innovative and investment activity is observed;
- imbalance between the operating technological structures of the primary production and the requirements of the new production is observed;
- deterioration of scientific component of the innovative process, reduction of financing of scientific works, both budgetary and extra-budgetary, drain of professionals from scientific and research institutions due to low salaries.
Currently, the principles of state and private partnership are gaining ground as a new mechanism of active inclusion of business representatives in the innovative managerial decision-making is being developed with their help. High hopes are associated with the innovative managerial technologies and their growing role in the management of a region. They allow reaching new higher qualitative characteristics in the sphere of innovation management at regional level.
Managerial technologies aimed at the improvement of innovative development of an industrial region allow strengthening the role of regional economy, increasing the scope of enterprises and other regional subjects and attracting them at the expense of the scale of participation in the innovative processes.
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