Business Associations: Incentives and Benefits 261 conditions for their businesses In this context, a question is brought up about the extent to which business associations supplement or replace personal connections; (c) in Russia, an elite exchange is more typical of relations among business enterprises and authorities than capture, but the methods and consequences of this kind of exchange for firms as well as for representatives of government require further examination On the basis of the results of a series of surveys conducted in 2003–2004,7 Pyle (2006a, 2006b) found that, contrary to common belief, business associations are not a weak and ineffective institution of the Russian economy, which is proved by large-scale membership in associations and, recently, by a growing influx of new members He also found that membership in business associations correlates with more active market behavior and enterprise restructuring In a later study, Pyle (2007) showed that regional associations are growing faster in regions with higher levels of democratic institutions, but the effect of membership, measured in this case as the possibility to defend ownership rights, is higher in the less democratic regions Similarly, the results of a survey based on BEEPS-2005 data also provide evidence that membership in associations is more typical of dynamic, relatively large enterprises, and exporters BA members outperform nonmembers in terms of their innovative activities (Desai & Goldberg 2007) A number of interesting results were obtained in qualitative surveys based on in-depth interviews with business associations For instance, Lehmbruch (2003) explored the phenomena of multiple memberships in forest sector associations in Russia and provided strong evidence that, in the case of fragmentation of rights and responsibilities among numerous agencies, competing associations within one sector could apply to different parts of the state apparatus and mobilize different sources of rent for their members Multiple membership, thus, provides better access to patronage Another study by Pachenkov and Olimpieva (2005) provided evidence from in-depth interviews with the heads of BAs in St Petersburg that the main condition for a BA to be successful is to maintain close connections with state authorities using social networks for lobbying These authors stress the necessity to treat separately those BAs created by the businessmen and the so-called supporting structures initiated from higher authorities Such supporting structures are often subordinate to agencies of local authorities, and their leaders often appear to be bureaucrats within those organizations.9 In summary, the empirical results on membership of Russian firms in BAs provide no clear explanation of the main incentives motivating firms to join BAs The kinds of incentives that prevail among medium-size and large industrial enterprises are important, and the need for collective action stems from market pressure In other words, whether the level of competition and the globalization of company operations are the major determinants of membership or whether rent-seeking and the desire to establish personal relationships with authorities are the most important drivers of a 9780230_217287_13_cha11 dd 261 5/12/2009 5:38:11 PM 262 Organization and Development of Russian Business firm’s decisions must be determined In the next section, we present a testable hypothesis that will clarify these issues Consolidation of interests of Russian JSCs: Costs-benefits calculus and main hypotheses about incentives to medium-size and large JSCs to join BAs According to our survey results, the membership rate of Russian mediumsize and large JSCs in BAs (54.7%) sufficiently exceeds the membership rate determined for Russian companies in the BEEPS-2005 survey (20%) The high participation rate indicates that the results of costs-benefits calculus are more favorable for larger companies An obvious explanation would be that large firms are less tentative regarding the cost side of calculus than small ones, which usually experience financial constraints.10 On the basis of a univariate comparison between member and nonmember firms (Table 11.1), we hypothesize that there is no significant difference in the participation rate between privatized and new firms regardless of whether there is a state share in the stock ownership All other corporate governance characteristics might be correlated with membership in BAs It is reasonable to propose that good and bad performers have different incentives to become a member of a BA Empirical surveys have proved that successful businesses are more demanding of the quality of the institutional environment (Golikova et al 2008) As reported by Auzan (2006), “The condition for the establishment of nonprofit business organizations was the appearance, in the course of an emerging market economy, of companies that understood that they would remain in existence in their industries and markets even in the subsequent five years This was the time when interests beyond current business and premise for collective identification came into being” (translated from Russian) Therefore, we hypothesize that, among members of BAs, significantly more successful businesses could be found, including exporters and firms with a long planning horizon Under the increasing competition and globalization of the economy, member firms will strive for active participation in associations in order to defend and promote their collective interests in external and domestic markets A preliminary statistical analysis of survey data on Russian JSCs in 2005 on the basis of cross-tabulation of the level of competition, export activities, and membership in BAs supports this consideration In the 2002 survey, the correlation between membership in BAs and the financial condition of enterprises was hard to trace In 2005, successful Russian companies were clearly interested in BAs In general, the better the financial standing of an enterprise was according to the subjective estimates of the respondent, the more likely it was that the enterprise was a member of an association Objective indicators also confirm that BA members are significantly better off than those outside unions and associations (Table 11.2) Members 9780230_217287_13_cha11 dd 262 5/12/2009 5:38:11 PM 9780230_217287_13_cha11 dd 263 5/12/2009 5:38:11 PM Source: Author’s calculations based on survey data Note: a ␹2 test Total sample, including: Autonomous enterprises Members of the business groups Number of employees: 100–299 300–499 500–999 More than 1,000 Privatized New firms With foreign owners Without foreign owners With a stake of state in the stock ownership Without a stake of state in the stock ownership With large owners Without large owners Separation of ownership and management: General director – large owner General director – hired manger Listing (preparation) on the Russian stock exchange No listing (preparation) Listing (preparation) on the foreign stock exchange No listing (preparation) 45.3 47.4 41.8 58.3 46.8 44.4 31.0 43.9 51.2 28.9 48.2 40.7 45.4 42.8 56.6 37.9 52.1 35.2 47.9 26.3 47.9 41.7 52.3 55.6 69.0 56.1 48.8 71.1 51.8 59.3 54.6 57.2 43.4 62.1 47.9 64.8 52.1 73.7 52.7 Nonmember 54.7 52.6 58.2 Member 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Total 128 541 57 715 242 171 151 229 665 121 121 672 135 568 650 99 290 215 793 487 306 N 0.002 0.008 0.004 010 325 0.000 0.136 0.000 0.123 Significance of differencesa Table 11.1 Characteristics of companies: Members and nonmembers of business associations (percentage of respondents who answered) 264 Organization and Development of Russian Business Table 11.2 Indicators of financial standing of joint-stock companies and membership in business associations (percentage of respondents who answered) Indicator Share of respondents having reported their membership % in lines Type of association Members Nonmembers Share of companies which doubled and more than doubled sales volume at current prices in 2000–2004 Any National Industrial Regional 36.4 36.4 36.3 43.7 28.6 31.6 31.6 30.3 Share of companies which doubled and more than doubled wages in 2000–2004 Any National Industrial Regional 42.5 46.2 40.3 43.7 31.5 34.3 36.4 36.0 Share of exporters Any National Industrial Regional Any National Industrial Regional Any National Industrial Regional 55.0 60.3 53.7 52.0 48.1 46.9 53.3 51.0 49.5 51.8 50.0 50.0 41.5 44.8 47.0 47.4 29.5 37.1 34.6 37.0 34.6 40.1 40.7 40.7 Large-scale investment Share of own resources in investment is more than 60% Significance of differencesa 0.026 No (0.585) 0.005 0.016 0.001 0.002 0.061 0.023 0.000 0.000 0.095 No (0.301) 0.000 0.013 0.000 0.002 0.001 0.049 0.031 No (0.505) Note: a ␹2 test Source: Author’s calculations based on survey data of associations have a much higher share of exporters and of fast-growing financially well-off companies, which made substantial capital investments in 2000–2004 from their own funds and generously raised (doubled and more than doubled) compensation to their employees As already reported, this tendency corresponds to the results of previous studies An incentive to join an association is to hedge the risks of doing business in a fragile institutional environment with unsecured property rights and lack of state long-term policy predictability.11 According to worldwide governance indicators (Kaufmann et al 2008), the institutional environment in Russia is still unfavorable for doing business and developing a civil society Except for progress attained in the perceptions of political stability and regulatory quality, other indicators in Russia, such as voice and accountability, government effectiveness, rule of law, and control of corruption, remain on a very low level or even demonstrate negative dynamics In an 9780230_217287_13_cha11 dd 264 5/12/2009 5:38:12 PM Business Associations: Incentives and Benefits 265 imperfect institutional environment, an owner/top manager is dependent on the availability of his/her personal contacts with state officials, who might assist in resolving problems in the interactions with different parts of the state bureaucratic apparatus We argue that participation in BAs is one of the most convenient means to attain personal access to state officials via membership in the association One of our respondents explained the situation during the interview: “To solve problems nowadays when we go up to the authorities and ask: ‘When will this end?’ It shouldn’t be done this way Well, those problems are being taken care of behind closed doors A man stays behind after the meeting, goes up to the official, and says: ‘Come on, give me a break, please I am dying here.’ ” (excerpt from an interview with the head of an association in the Moscow oblast, December 2007, translated from Russian) Thus, participation in BAs should be treated not only as a mechanism that supplements or replaces personal contacts but as one of the best options to establish and maintain useful personal contacts with the bureaucrats that could reduce the administrative burden or provide financial or organizational assistance (Table 11.3) Therefore, we expect that the dichotomy of member and nonmember matters in the context of benefits Table 11.3 Types of support rendered to authorities and aid through various channels depending on membership in business associations (percentage of respondents who answered) Rendering support % in column Membership in BAs Total sample Yes Rendering support to local authorities by firms No Yes No Total N 88.8 11.2 100 430 74.5 25.5 100 353 82.4 17.6 100 783 Yes No Total N 27.0 73.0 100 430 18.1 81.9 100 354 23.0 77.0 100 784 Yes No Total N 36.1 63.9 100 421 19.7 80.3 100 351 28.6 71.4 100 772 Significance of differencesa 0.000 Receiving financial support from the authorities by firms Significance of differencesa 0.003 Receiving organizational support from the authorities by firms Significance of differencesa 0.000 Note: a ␹2 test Source: Author’s calculations based on survey data 9780230_217287_13_cha11 dd 265 5/12/2009 5:38:12 PM 266 Organization and Development of Russian Business obtained from the authorities, but the strategy of multiple choice in this case is more beneficial, as it increases the probability to obtain assistance from different sources Such assistance, undoubtedly, is of extreme importance, first of all, for weak market players This consideration supports Lehmbruch’s (2003) statement that “the actual role of many Russian business associations lay in the intermediation of individual interests, rather than aggregation and representation of collective interests” (p 14).12 The results of our survey show that the members of BAs who wish to maintain steady relationships with authorities and are successful at maintaining them derive substantial benefits from these relationships (Table 11.4) They are much more likely to obtain financial and nonfinancial support using administrative facilities for the consolidation of their market positions Insecure property rights and more active state pressure on large business in the 2000s caused the reincarnation of the Soviet-era paradigm of the behavior of general directors, which is an incentive to demonstrate loyalty to the authorities In the context of membership in BAs, it means that the general directors, who are large owners, usually accept an invitation from Table 11.4 Benefits for members of associations from the establishment of steady contacts with authorities (share of joint-stock companies having obtained support from authorities, %) Establishment of steady contacts with authorities in the framework of associations Significance of differencesa Yes Organizational support Financial support from regional or local authorities Assistance in contacts with federal agencies Assistance in contacts with Russian partner enterprises Assistance in contacts with foreign partner enterprises Lending on favorable terms Budget subsidies Help in search of Russian investors Assistance in contacts with banks and financial institutions Help in search of foreign investors No 52.8 38.6 32.9 24.8 0.000 0.003 29.9 21.3 13.0 11.8 0.000 0.010 11.0 2.7 0.000 10.2 10.2 7.9 7.9 3.9 5.7 1.8 3.9 0.009 0.091 0.002 0.083 3.1 0.9 0.080 Note: a ␹2 test Source: Author’s calculations based on survey data 9780230_217287_13_cha11 dd 266 5/12/2009 5:38:13 PM Business Associations: Incentives and Benefits 267 the authorities to join an association initiated from the top, even in a situation in which the potential benefits from participation remain unclear: “Basically, many of our associations were created artificially, that is, they did not grow from below They said there in the oblast: ‘Guys, we should support the Chamber of Commerce and Industry It is such an expert institution It is recognized all over the world, and we need its stamp of approval.’ Some of the firms think: ‘Well, the membership dues are chicken-feed for me The authorities want this for some reason, and it comes from the regional center I may later get some support from them, some extra natural gas or something else.’ In reality, they join just because of the potential payoff.” (excerpt from an interview with the head of an association in the Moscow oblast, December 2007, translated from Russian) The information quoted above suggests that, in this case, the low costs of joining an association plus the incentive to obtain potential support outweigh the objections of joining the association that are put forth by the authorities These relationships have the quality of an informal bargain and make it easier for the authorities to perform their public functions and for the firms to work in a certain area In the context of these considerations, we speculated that (a) the presence of large owners in a stock ownership structure and (b) a pattern that occurs when a general manager is a large shareholder13 should correlate positively with membership in associations Those directors who became large owners during the privatization and after-privatization redistribution of property rights for their benefit take a much more personal interest in seeking additional channels and chances to keep in contact and maintain relationships with the authorities, including the “brokerage” of associations in order to secure property; this is unlike the new generation of hired managers, who often prefer to distance themselves from them, as their job expectations are usually not connected with a certain industry or location Correspondingly, we expect that the personal characteristics of the general director, such as age and prior job experience, should also matter The last hypothesis establishes links between the level of concentration of the business community and the probability of becoming a member of an association Wherever the concentration of the business community is higher, which is typical of the location of companies in larger and, correspondingly, higher-status settlements, informal social networks are more likely to transform into an institution of bottom-up associations (Figure 11.1) We expect the type of location to be a significant determinant of JSC membership in associations The level of market competition, according to our survey results, has a rather weak correlation with membership in associations Only among companies whose officials reported strong or not very strong competition with the Baltic countries, China, and Turkey were there significantly more participants in associations (62.9%) than among firms that lacked this 9780230_217287_13_cha11 dd 267 5/12/2009 5:38:13 PM 268 Organization and Development of Russian Business 60 50 40 30 20 10 Moscow Capital of oblast (republic) Nonmember of BA Member of industrial association Figure 11.1 Noncapital city Urban communities, villages Member of national association Member of regional association Membership in associations by type of settlement Source: Survey data competition (51.9%; significance of difference, 0.009) These results support the idea that the level of competition can hardly be considered to be among the major determinants of membership in BAs As we reported in the first section, on the basis of a study conducted in 2004, Pyle (2007) revealed a positive correlation between membership in associations and level of democratization in a region In our study, using an aggregate rating of the level of democracy in Russian regions in 2000–2004,14 we could not demonstrate this correlation for membership in regional or in any other type of associations However, if we turn our attention from the aggregate evaluation to its individual components, we can see that some of these components, such as expert assessments of openness and political pluralism, have weak positive correlations with membership of joint-stock companies in unions or industrial associations The development of a civil society and local self-government has little to with membership in regional associations Contradicting the results of Duvanova (2007a, 2007b) obtained using BEEPS data for 25 post-communist countries, including Russia, we did not find any correlations between membership in associations and corruption In addition, membership in national associations is unrelated to any of the particular indexes describing the levels of democracy in the regions Empirical analysis of factors correlating with membership of JSCs in associations To provide a comprehensive analysis of determinants that could predict the probability of a company to be a member of an association and test the hypotheses characterizing the incentives to join associations developed in the previous section, we estimate a binary logistic regression model with 9780230_217287_13_cha11 dd 268 5/12/2009 5:38:13 PM Business Associations: Incentives and Benefits 269 a dependent variable that takes a value of for firms with a membership in any type of association and otherwise The independent variables characterize: ● ● ● ● ● The patterns of separation of ownership from management with a general director who is a hired manager without company shares, which is a basic category The personal characteristics of CEOs, who decide whether to participate in the associations, include the age of the general director or Chairman of the Board of Directors and a dummy for his/her previous job experience within governmental bodies; The characteristics of stock ownership: dummy variables, which take a value of for those firms with large shareholders with more than blocking stock and presence of state and foreign owners; The financial standing of the enterprise measured by dummies, which take a value of for the presence of large capital investment in 2001– 2003; the presence of exports and a long planning horizon (more than years); and listing (or preparation for listing) on the foreign and Russian stock exchange; The level of competition with the Baltic countries, Turkey, and China, which was found to be significant at the preliminary stage of analysis, was included as a categorical variable with no competition as a basic category; The control variables include industry affiliation (communications as a basic category); company size, measured as a logarithm of employees; dummies, which take a value of for the case of a new company established after 1992; membership in a business group; and location in capital cities (Moscow or oblast capitals) To identify the influence of the institutional components of the business climate and check the robustness of the model, we first constructed a model without factors characterizing the quality of the regional institutional environment For the second step, we included aggregated assessments of a regional investment climate derived from the journal EXPERT15 with “insignificant potential and moderate risk” as a basic category For the third step, instead of assessment from the journal EXPERT, we used individual components of the aggregate rating of the level of democracy in Russian regions in 2000–2004 reported above The better the situation in a region, the higher its rating relative to this component Table 11.5 shows our estimation results Close estimates of factors correlating with participation in associations were obtained in all three models A steady significant effect is typical of ownership, corporate management patterns, and the personal characteristics of general directors: the chances of being a member of an association multiplied for companies headed by general directors who were large owners The age of a director had a positive 9780230_217287_13_cha11 dd 269 5/12/2009 5:38:13 PM 270 Organization and Development of Russian Business Table 11.5 Logistic regression analysis of the determinants of participation in business associations Model Constant Company size (log of number of total workers) New enterprise (= 1) With state owners (= 1) With foreign owners (= 1) Listing on foreign stock exchange (= 1) Listing on Russian stock exchange (= 1) Large owners (with more than blocking stock) (= 1) Large capital investment (= 1) [A] [B] [C] Ϫ4.258*** (0.790) 0.376*** (0.092) Ϫ4.077*** (0.798) 0.351*** (0.094) Ϫ4.968*** (0.934) 0.397*** (0.094) 0.731*** (0.209) 0.772*** (0.211) 0.683*** (0.212) Planning horizon of more than years (= 1) Export (= 1) 0.526** 0.524*** 0.584*** (0.220) (0.219) (0.223) Level of competition with Baltic countries, Turkey, and China (no competition as a basic category) High level of competition (= 1) 0.680** (0.295) 0.677** (0.297) 0.711** (0.297) Medium level of competition (= 1) Separation of ownership and management (general director-hired manager as a basic category) General director – large owner (= 1) 0.473** (0.239) 0.438* (0.240) 0.478** (0.242) Large owners are managers, general director is not a shareholder (= 1) Large shareholders are not managers, general director is a shareholder (= 1) Age of general director 0.291*** 0.282*** 0.275** (0.110) (0.112) (0.113) Job experience of general director or board chairman at governmental bodies in previous 10-year period Components of aggregate rating of democratization: Openness X Electoral democracy Political pluralism Independent mass media Economic liberalization Civil society Political system X X X X X X X X X X X X X 0.530*** (0.164) 20.398** (0.182) Continued 9780230_217287_13_cha11 dd 270 5/12/2009 5:38:14 PM Business Associations: Incentives and Benefits 271 Table 11.5 Continued Model [A] [B] [C] Elites Corruption Local self-government Location in capital cities X X X X X X 0.496** 0.424** 0.535** (0.217) (0.217) (0.219) EXPERT Regional investment climate estimation (insignificant potential and moderate risk as a basic category) High potential and moderate risk (= 1) Medium potential and moderate risk (= 1) Reduced potential and moderate risk (= 1) Industry dummies N Ϫ2Log likelihood Pseudo R Wald test (␹2 ) X X X yes yes 573 550 674.975 658.458 0.230 0.211 107.883*** 94.017*** X X X yes 573 664.191 0.251 118.667*** Notes: ***: significant at the 1% level, **: at the 5% level, *: at the 10% level Standard errors are reported in parentheses X: The variable was not included in the model Forward stepwise method was used; free cells: coefficients were not included in the final equation Source: Author’s estimation based on survey data significant influence in all three models We found no influence of state and foreign owners of the company or of the availability of large owners with more than a blocking stake Of the basic characteristics of a company, firm size increases the chances that a company will be a member of any BA (the larger a firm, the more chances to participate in the association), while being a member of business groups and history (whether it is a privatized or a new entity) have no significance In all three models, the location of a company in the country or an oblast capital increases the likelihood that it will be a member of a BA Among the indicators of a firm’s performance, large capital investment and exports have a positive effect on the likelihood that it will be a member of an association, while a long planning horizon and its presence on the Russian or a foreign stock exchange not matter at all The introduction of evaluations from the journal EXPERT of the regional institutional environment reduced the sample to 550 observations and slightly worsened the fitness of the model However, the revealed correlations, excluding location in capitals, did not lose in significance Location in capitals was significant at the 1% level, and, in the second model, it became significant at the 5% level This model demonstrates that none of the evaluations of the regional investment potential (all the surveyed regions were of moderate investment risk) has an influence on membership 9780230_217287_13_cha11 dd 271 5/12/2009 5:38:14 PM 272 Organization and Development of Russian Business of a joint-stock company in a BA, as such evaluations were not included in the final equations Using individual components of an aggregate rating of the level of democracy in Russian regions in 2000–2004 instead of the journal EXPERT assessments provides better estimation results In addition to the major factors correlated with participation in BAs revealed earlier, two institutional components of the democracy rating have a significant influence on membership in BAs One is a positive correlation in the case of openness (i.e., transparency and integration into the national political life), and the other is a negative correlation in the case of a political system component, which characterizes real political balance, independence from court and law enforcement bodies, and civil rights violations The interpretation of the last result might include two options: availability of a defensive strategy in the case of bottom-up associations or orientation on the personal links with the authorities in the case of top-down institutions Membership: Single or multiple choices An examination of medium-size and large member firms of industrial associations as a whole (Figure 11.2) indicates that the majority (three-quarters) prefer to be a member of only one of three types of associations, choosing a nationwide or industry-wide type slightly more frequently than a regional type A quarter of BA members are in different associations at the same time On average, one of 10 BA members chooses a strategy of simultaneous membership in all three types of associations To check the hypothesis regarding benefits from obtaining multiple membership in different associations, we reorganized and recoded our survey data with the introduction of a new variable, which takes a value of for nonmembership in any type of association (default category), for National associations 30% 3% 7% 9% 18% Regional associations Figure 11.2 6% 28% Industrial associations Strategies of membership in associations (% of number of members) Source: Survey data 9780230_217287_13_cha11 dd 272 5/12/2009 5:38:14 PM Business Associations: Incentives and Benefits 273 membership exclusively in one (any) type, for participation in two types of BAs, and for participation in the three analyzed types As the local and regional authorities are strongly dependent on the sustainable development of businesses in the territory (the individual profit income tax is one of the major sources of local budgets), it is reasonable to propose that, first of all, they will support larger firms with a long planning horizon and high investment potential All the respondents from the state bodies interviewed in 2008 in the Karelia and Moscow oblast stressed their strong interest in creating new jobs within their territories In the context of possibilities to manage the routine relationships with company management, we argue that (a) companies with a state stake in ownership, (b) open JSCs, and (c) autonomous enterprises with CEOs located in a particular territory have more opportunities to be the recipients of state financial and organizational support In consideration of these points, we ran a binary logistic regression to determine how multiple choice correlates with the propensity to obtain financial and organizational aid from the authorities We controlled for industrial affiliation using communications as a basic category, size of the company measured as a logarithm of employees, history of organization or whether it was privatized or new (organized after 1992), legal status (open or closed JSC), and affiliation with the business groups In addition, we used dummy variables, which take a value of for location in capitals and the presence of state or foreign owners in stock ownership We also took into account the performance of the firm To separate good and bad performers, a wide range of indicators were used They included subjective estimations of respondents with good standing as a basic category and dummy variables, which take a value of for the availability of a long planning horizon in excess of three years, large capital investment in 2000–2003, and exports An institutional environment of the region should be taken into consideration as well We argue that the better the conditions for doing business for the whole business community are, the fewer opportunities there will be for particular businesses to obtain direct financial and organizational support from state authorities In our models, the institutional environment of the region is controlled by the aggregate rating of the level of democracy described in the previous section To estimate the path dependency and role of networks, we include a dummy variable, which takes a value of for those firms with a general director or chairman of the board of directors with previous job experience in governmental bodies We also use a variable that provides the information of the general director’s age Finally, we evaluated the linkages between a company and authorities by including a dummy variable informing whether there were initiatives from the firm to render support to the state bodies It is natural to assume that 9780230_217287_13_cha11 dd 273 5/12/2009 5:38:14 PM 274 Organization and Development of Russian Business Table 11.6 Logistic regression analysis of probability to obtain financial and organizational support from the state authorities Dependent variable Financial support from the authorities Organizational support from the authorities Constant Ϫ1.530** (0.601) Ϫ1.273*** (0.358) Company size (log of number of total workers) HCG member (= 1) Legal status (open JSC = 1) Ϫ0.593*** (0.224) New enterprise (= 1) 0.620** (0.265) With state owners (= 1) 0.918*** (0.227) 0.711*** (0.226) With foreign owners (= 1) Ϫ 0.560 ** (0.283) Large capital investment (= 1) Planning horizon of more than 0.562** (0.216) 0.555*** (0.200) years (= 1) Export (= 1) 0.414** (0.190) Aggregate rating of level of democracy Ϫ0.042** (0.017) Age of general director Subjective estimation of performance (“good” as a basic category) “Satisfactory” (= 1) “Bad” (= 1) Job experience of general director or board chairman at governmental bodies in previous 10-year period Rendering support to the state bodies (= 1) Location in capitals (= 1) 1.091*** (0.367) Membership in associations (non-member as a basic category) Membership in type of associations (= 1) Membership in types of associations (= 1) Membership in types of associations (= 1) Industry dummies N -2Log likelihood Pseudo R Wald test (x2) 0.508** (0.225) 0.700*** (0.209) 1.124*** (0.309) 1.240*** (0.412) yes 650 626.193 0.128 56.247 1.323*** (0.403) yes 641 698.797 0.151 71.561 Notes: ***: significant at the 1% level, **: at the 5% level, *: at the 10% level Standard errors are reported in parentheses Forward stepwise method was used; free sells: coefficients were not included in the final equation Source: Author’s estimation based on survey data 9780230_217287_13_cha11 dd 274 5/12/2009 5:38:14 PM Business Associations: Incentives and Benefits 275 a company in which CEOs cooperatively support the needs of the territory will have more opportunities to obtain rewards The results of calculations are presented in Table 11.6 Logistic models demonstrated that a multiple choice of membership was rewarded in both cases The chances to obtain financial and organizational aid from authorities were sufficiently higher in the case of participation in three types of BAs The performance of the firms did not have an influence, or, in other words, state assistance was not provided to weak market players and, thus, was not a cause of distortion Both models clearly demonstrate that state bodies preferred to provide assistance to enterprises with a state stake in ownership and a long planning horizon On the other hand, chances for obtaining financial aid were reduced for enterprises with a foreign ownership stake The sign of the coefficient with a variable characterizing the level of democratization in the region (negative and significant at the 5% level) demonstrates that, in more democratic settings with higher ratings, the chances to obtain financial assistance are lower Contrary to our expectations, network relations based on former CEO job experience with governmental bodies not increase the chances for any kind of aid The opportunities to obtain organizational support from state officials are higher for new enterprises with a legal status of open JSC A better strategy to obtain financial assistance from state bodies, all else being equal, is to be cooperative and meet the needs of providers Practical value of enterprise unions: Reputation of associations from a membership viewpoint In the 2002 survey, a pessimistic assessment of associations prevailed among their participants For instance, only 29% of the respondents answered the following question affirmatively: “Have nongovernment organizations of entrepreneurs improved their protection of interests of the business community in the last three years?” Twenty-six percent of the respondents believed that membership in associations brought no benefits to their enterprises (Golikova et al 2003) To evaluate the changes that have occurred within three years, we compared the assessments given by our respondents in the 2002 and 2005 surveys in a commeasurable range of enterprises (open JSCs with more than 100 employees in industry) using only the identical wording of answers to this question (Table 11.7) Our analysis shows that the general assessment of associations in the compared subsamples remains practically unchanged Their activities were considered useless by less than 13% of the respondents in 2002 and by 16% in 2005 The negative opinion of BAs is unrelated to the organizational and legal forms of enterprises, their industrial affiliation, and their integration or nonintegration into business groups Many more negative views were given by enterprises not involved in active interaction with authorities, that 9780230_217287_13_cha11 dd 275 5/12/2009 5:38:14 PM 276 Organization and Development of Russian Business Table 11.7 Utility of business associations and their contribution to the establishment of standards and rules of conduct of business, evaluated by respondents in 2002 and 2005 (percentage of respondents who answered) Answers to the question: “What benefits does your enterprise obtain from membership in nongovernment enterprise associations?” 2002* 2005 None Participation in preparing legislation Establishment of steady contacts with government administration Support with conflict resolution Defining new standards of conduct of business Number of observations 12.3 9.9 18.5 13.6 7.4 127 17.2 20.2 30.6 6.1 16.5 297 Source: Survey of 304 open JSCs conducted by the Autonomous Non-profit Organization “Projects for the Future: Scientific and Educational Technologies” in three regions of Russia; survey of 822 JSCs is, those which render no help to local governments and receive no organizational and financial aid from them Finally, more negative assessments have come from individual enterprises that have not yet completed the separation of ownership and management, in other words, those in which the CEO was a hired manager but large shareholders held key managerial positions Although dissatisfaction with the activities of associations is unchanged, demand for law is showing impressive positive changes For instance, the share of respondents who report an advantage of associations in the preparation of legislation and in defining new standards of conduct of business has more than doubled.16 Among such respondents, the share of larger enterprises is significantly higher The share of open JSCs is higher than that of closed ones, and that of integrated businesses is larger than that of autonomous ones Furthermore, among the respondents who indicated a growth in the demand for law, the percentage of enterprises that have listed their shares on Russian or foreign stock exchanges is significantly higher as well At the same time, the share of respondents pointing at the role of associations in conflict resolution has been reduced by half In our opinion, this is evidence that the number of internal conflicts in the business community in the last three years is on the decline and emerging conflicts are more often resolved in a pretrial mode in negotiations between parties In addition, in the case of failure, the instruments of formal law are being used In the past, the share of respondents who indicated that associations helped them to establish steady contacts with authorities almost doubled, increasing from 18% to 31% The question of whether this increase indicates that the dialogue between business and the authorities is progressing satisfactorily remains to be answered We believe that it is too early to 9780230_217287_13_cha11 dd 276 5/12/2009 5:38:14 PM Business Associations: Incentives and Benefits 277 make such a conclusion Since the Yukos affair, a demonstration of loyalty to the authorities has become a rational strategy of conducting business for large and medium-size companies, which can, if only partially, protect them from excessive interest on the part of the government The results of the empirical survey of 147 enterprises in two Russian regions conducted in 2005 show that all enterprises, whether they are association members or not, are equally keen on establishing personal relations with people Table 11.8 Evaluation of contribution of NGBOs to the solution of important problems of the business community by the respondent joint stock companies (percentage of respondents who answered) Answers to the question: In Members “What benefits does total of national your enterprise obtain sample associationsa from membership in nongovernment enterprise associations?” Members of Members industrial of regional associationsa associationsa None 17.8 20.3 12.6 28.9 Participation in preparing federal and local legislation 19.6 18.0 24.4 11.8 Establishment of steady contacts with government administration 27.9 27.3 19.3 32.9 Informational support 53.4 57.8 52.1 46.1 Strengthening of positions in the Russian market 20.0 18.8 27.7 11.8 Strengthening of positions in foreign markets 5.1 4.7 5.9 5.3 Support with conflict resolution 6.2 1.6 6.7 10.5 Protection from unfair competition and unscrupulous bureaucrats 9.0 10.9 10.1 7.9 Chance to take part in establishment of new standards of conducting business 14.5 12.5 18.5 10.5 Participation in preparation and supervision of industrial quality standards 12.1 8.6 24.4 6.6 Number of observations 455 128 119 76 Note: a Nonmembers of other associations Source: Survey data 9780230_217287_13_cha11 dd 277 5/12/2009 5:38:15 PM 278 Organization and Development of Russian Business from the government The platforms of associations may possibly serve as one of the channels for such communication in an underdeveloped civil society Assessments by the respondents of benefits from their membership in BAs across all 822 joint-stock companies of the sample are given in Table 11.8 As in 2002, for most of them, this benefit is related to informational support that they obtain from the associations, as reported by about one half of the respondents who are members of BAs; every fourth respondent has a positive opinion regarding the establishment of steady contacts with authorities; every fifth reports the success of associations in making their position in the Russian market stronger However, efforts of all types of Russian BAs for the promotion of Russian enterprises in foreign markets are barely noticed by the overwhelming majority of the respondents, which means that these efforts are insufficient From the answers, it is evident that our respondents are more satisfied with the activities of industrial associations, which received fewer negative appraisals in general and were also positively viewed by every fourth or fifth respondent in six of nine assessed directions At present, the least developed institution is regional associations, the activities of which, excluding informational support and establishment of contacts with authorities, are little appreciated by the survey participants We conjecture that this lack of appreciation may be due to the fact that, in most cases, these regional associations were not organized by the business community but initiated by regional authorities and most probably reflect the interests of regional governments rather than those of entrepreneurs Concluding remarks Our survey results show that about one half of medium-size and large Russian JSCs are members of various national, industrial, and regional unions and associations At the same time, according to many studies, associations of small businesses so far include few potential members, which is a sign of their institutional weakness In the last three years, the share of medium-size and large companies that joined BAs has increased, which is a sign that economic agents have a positive interest in an institution of a civil society Overall, our testable hypotheses were confirmed In other words, the larger and better-performing enterprises, which are active in restructuring and operate in a competitive environment, are more interested in using a platform of associations The institution of associations is developing in the territorial dimension with great irregularity The status of the settlement in which an enterprise is located is one of the most influential factors in its joining a BA The diffusion is centrifugal, moving from the center to the provinces, where this institution of a civil society is, so far, underdeveloped 9780230_217287_13_cha11 dd 278 5/12/2009 5:38:15 PM Business Associations: Incentives and Benefits 279 The hypothesis regarding the role of the patterns of separation of ownership from management in making decisions to join associations has been proven for membership in any type of association The status of a director who is also a large owner of the company is a significant determinant of membership in associations One of five member firms in associations and one of four among members of industrial associations are involved in lobbying Significantly more enterprises that support local authorities and receive organizational support from them were found among members of associations, which is a confirmation of the hypothesis involving an exchange of elites and a proof of the conclusions reached by Frye (2002) Regional and local authorities give assistance to members of BAs twice as frequently as they to nonmembers with regard to the establishment of contacts with federal agencies, the search for Russian partners, and efforts to obtain external financing Interactions with state authorities are of great importance for the members of associations Most probably, the opportunity to establish closer ties to the authorities and personal relationships that comes with membership in associations is a strong incentive for joining BAs We have revealed that multiple memberships in different types of associations provide more rewards to the participants and increase the probability to obtain financial and organizational assistance from the state Involvement of a firm in corporate integration has no influence on its membership in BAs In other words, autonomous enterprises and members of business groups are equally likely to be members of BAs This means that the surveyed enterprises not use the associations as an institution to replace or supplement business integration We found no evidence that, in the last three years, members of associations had changed their opinion regarding the benefits of membership In general, approximately one of six member enterprises believes that the membership is useless for them Many more negative judgments are expressed by enterprises that are not involved in active interaction with the authorities This results in no help to local agencies and eliminates the possibility of receiving organizational and financial assistance from them More critical assessments are typical for the enterprises that have not yet completed separation of ownership and management Although satisfaction with the activities of associations is unchanged, the realization of a rising demand for law has achieved substantial progress The share of respondents who report that the platform of associations has been useful for improvements in federal and local legislation and in defining new standards of conduct for business has more than doubled The larger enterprises are more deeply involved in these activities and include open joint-stock companies rather than closed ones, integrated businesses rather than independent ones, and enterprises that have placed their securities on Russian and foreign stock exchanges 9780230_217287_13_cha11 dd 279 5/12/2009 5:38:15 PM 280 Organization and Development of Russian Business According to our survey results, at present, the most advanced and efficient institutions representing the interests of medium-size and large JSCs are industrial associations, which were initiated by businesses, worked a difficult way of self-organization, and successfully gained respect in the business community At the opposite pole are regional associations, created and often even imposed from the top-down, which are being used mainly as a channel for communication with authorities Acknowledgments This research was conducted with financial support of SU-HSE, which included funds from the Program for Fundamental Studies granted by the Ministry of Economic Development and Trade of the Russian Federation in 2007–2008 Qualitative data from in-depth interviews were collected and transcribed within the framework of a joint project of the State University – Higher School of Economics and Helsinki School of Economics “New business strategies of foreign and Russian companies: Interactions with stakeholders” (in 2007–2009, this project was funded in Russia by the Russian Fund for the Humanities, project N 07-02-93203a/F) I would like to thank Andrei Yakovlev and Yurii Simachyev for their useful comments and suggestions Special thanks are given to Olga Uvarova for her assistance in preparation of the manuscript and Dina Yakupova for transcribing the interviews Notes Both surveys were conducted by the Autonomous Non-profit Organization “Projects for the Future: Scientific and Educational Technologies.” The data were obtained within the framework of a joint project of the State University – Higher School of Economics and Helsinki School of Economics “New Business Strategies of Foreign and Russian Companies: Interactions with Stakeholders.” In 2007–2009, this project was funded in Russia by the Russian Fund for the Humanities (project N 07-02-93203a/F) This is extremely important, but, in our opinion, such motivation being focused on market behavior of the firms does not cover the whole range of incentives to join a BA – a well-known phenomenon of rent-seeking in the interactions with state authorities The conclusion concerning the “spontaneous” emergence of BA does not fully correspond to Russia’s history of the formation of associations via direct or indirect incentives of state officials Lack of data on the exact time for joining the association gives no opportunity to solve the causality problem There is a lack of strong arguments of whether joining the BAs improves firm performance or, on the contrary, better performers more often prefer to become the participants of interest groups in order to obtain assistance for the implementation of more ambitious development trajectories W Pyle stressed this point in his research of membership in BAs and enterprise restructuring 9780230_217287_13_cha11 dd 280 5/12/2009 5:38:15 PM Business Associations: Incentives and Benefits 281 The survey is implemented in 25 economies in transition, including Russia The data for Russia are available for 1999, 2002, and 2005 The BEEPS sample is heavily weighted toward small enterprises and private firms with a strong representation of services (Raiser et al 2003), and, thus, general estimations could not be directly compared with our survey results They suggested measuring trust by the level of prepayment required by the firm The survey covered 500 companies of various sizes and forms of ownership in Russian cities The sample has some limitations regarding the representation of regions Companies in Siberia, the Far East, and Southern Russia are not included The limitations include types of settlement because companies outside the federal and republican capitals are not included and the rate of refusal to answer is high at 44%, which may result in biased assessments Initially, to make the most general assessment of membership of Russian companies in BAs, 1,353 companies were surveyed in 48 regions of Russia Later, 606 companies were surveyed in order to make a more detailed comparison of the characteristics and mode of behavior of the firms that are members and nonmembers of the associations; the latter, in line with the a priori construction of the sample, were presented in equal proportions Intuitively, this conclusion is relevant not only to the multiple choice of membership within one sector, but, in a much broader context, to multiple membership in general This population of BAs could hardly be treated as institutions of a civil society, as they represent the interests of the founders Usually, the heads of such associations limit membership by loyal firms with a long history of personal relationships 10 Our calculations, based on the results of a survey of 147 firms of various legal forms conducted in two Russian regions in 2005, prove that only two small firms mentioned high dues as an obstacle to membership in BAs 11 Forty percent of respondents from the sample of 1,002 industrial enterprises in the World Bank – HSE survey reported that uncertain government policies are to be serious or very serious obstacles for doing business 12 This is not a one-way road: members of associations also more frequently provide support to the authorities 13 The identification procedure is described in detail in Chapter 14 Offered in Petrov & Titkov (2005) The suggested assessment of the level of democracy in a region is based on a moving average The regions were evaluated on a five-point scale for each of nine individual components For instance, when evaluating corruption, an assessment of joining economic and political elites and corruption scandals was made; when evaluating an open/closed type of political life, transparency and the degree of involvement in national political affairs were taken into account; when evaluating local self-government, the researchers took into account whether there were elected local authorities and, if so, whether they were active and influential Information on the levels of individual indexes and the aggregated expert assessment in the regions in 2000–2004 was derived from the book (Rossija regionov, 2005, p 269) 15 Based on the evaluation of investment risk and potential Details could be found in http://www.raexpert.ru/rating/regions/2004 16 Frye (2002) shows, by using empirical survey data of 2000, that members of associations are, in general, better lobbyists at all levels of state and municipal government than nonmembers 9780230_217287_13_cha11 dd 281 5/12/2009 5:38:15 PM 282 Organization and Development of Russian Business Bibliography Auzan, A (2006) Grazhdanskoye obschestvo ne chram, a alternativny sposob proizvodstva obshestvennogo blaga (interview recorded on the website: www.opec.ru) (available at: http://www.opec.ru/point_doc.asp?d_no=47179) Campos, N F & Giovannoni, F (2006) Lobbying, corruption and political influence Discussion paper No 06–14, CEDI 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Significance of differencesa Table 11.1 Characteristics of companies: Members and nonmembers of business associations (percentage of respondents who answered) 264 Organization and Development of Russian. .. collected and transcribed within the framework of a joint project of the State University – Higher School of Economics and Helsinki School of Economics “New business strategies of foreign and Russian