Business Economic Group,
School of Economics, UCC
Working Paper Series
BEG Working Paper
2012-02
Post Socialist Path Dependence in
the Innovation Performance of
Previously State Owned Russian
Firms
Gerard Brady & Justin Doran
UCC
Post Socialist Path Dependence in the Innovation Performance of Previously State Owned
Russian Firms
Gerard Brady and Justin Doran
School of Economics
University College Cork
Ireland
Abstract
This paper provides an empirical analysis of whether post socialist path dependence exists in the
innovation performance of previously state owned Russian firms. This is accomplished by analysing
the innovation performance of previously state owned firms and privately owned firms through the
use of innovation production functions and testing for parameter stability across firm ownership to
assess if the innovation system of these types of firms differs. The results indicate that previously
state owned firms are not only less likely to innovate but also respond less to market pressures and are
less efficient in their conversion of R&D effort into innovation output. This difference in innovation
activities may result from path dependence, where previously state owned firms may have had their
innovation systems engrained in them through previous state ownership.
1
1. Introduction
This paper analyses whether post socialist path dependence arising from formerly state ownership of
Russian firm’s impacts on their innovation performance. We test empirically whether Russian firms
which were previously state owned innovate differently than firms which were always privately
owned. Boschma and Frenken (2006) note that “the current state of affairs cannot be derived from
current conditions only, since the current state of affairs has emerged from and has been constrained
by previous states of affairs” (pp 280). This suggests that history and previous occurrences matter.
Martin (2010) notes that the concept of lock-in captures the idea that a combination of historical
occurrences and self-reinforcing effects steer firms along one path rather than another. We
hypothesise that firms which were previously state owned may be at a disadvantage relative to firms
which were always in private ownership as their innovation capacities may not have been developed
to an equal degree.
The approach adopted by this paper is empirical in nature. Using data from the World Bank’s
Business Environment and Enterprise Performance survey (BEEPS) for 937 Russian firms this paper
estimates an innovation production function (Oerlemans, Meeus et al. 1998; Roper 2001; Love and
Mansury 2007). The advantage of using an innovation production function is that it relates various
innovation inputs to innovation output (Doran and O’Leary, 2011). However, rather than simply
estimating an innovation production function for the Russian firms, this paper applies a likelihood
ratio test to assess whether firms which were previously state owned and firms which were always
privately owned innovate differently. The test is essentially a test of parameter stability, assessing
whether the relationship between the innovation inputs and outputs of these two different types of
firms differ. We expect differences to exist in the rate of innovation between these types of firms and
also the way in which these firms innovate. We discuss these differences through the lens of path
dependence, suggesting that previously state owned firms are conditioned to innovate in a certain way
while private firms innovate differently.
This paper contributes to the existing literature on path dependence in innovation activities in two
ways. Firstly, it provides an empirical assessment of whether previously state owned Russian firms
are more or less likely to innovate than firms which have no history of state ownership. Thereby,
providing an analysis of the impact of state owned path dependence on the likelihood of Russian
firms’ innovating. Secondly, this paper progresses to analyse not only whether path dependence
affects the likelihood of innovation but also whether path dependence, arising from previous state
ownership, causes firms to innovate in different ways. This progresses the analysis beyond simply
looking at whether one type of firm is more innovative than the other by explaining what may be
causing this difference in innovation likelihood.
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The remainder of this paper is structured as follows. Section 2 presents a review of the literature
surrounding the concept of path dependence and applies this to the area of innovation. Section 3
presents the methodology utilised by this paper, which is a modified innovation production function
incorporating log-likelihood tests to assess parameter stability. Section 4 discusses the data used by
this paper. Section 5 presents the results of the empirical analysis. Finally, Section 6 concludes and
presents the implications of the findings for Russian firms.
2. Theory and Hypotheses
This section provides an overview of the theory path dependence and relates this to the case of Russia.
It also develops the three key hypotheses which are tested by this paper and contextualises these in
existing theory.
2.1 Path dependency in firms
Economic literature has developed the concept of the “innovation system” (Metcalfe & Ramlogan,
2008; Lundvall et al, 2002; Nelson, 1993) which analyses the relationships between the agents which
affect innovation selection decisions. Key to these relationshisps is the role of institutions, which
North (1990) identifies as being not only codified rules and laws but also informal rules formed by
habit and custom. David (1994) refers to the informal institutions, described by North (1990), as
“carriers” of path dependency. Although formal rules, laws and the incentives in a firm may be
changed relatively easily, changes in informal institutions, customs and habits may require a learning
process, often tacit in nature, which will take years (Fritsch & Werker, 1999). At the firm level
Penrose (1959, p 79 - 80) emphasises the importance of the development, experience and knowledge
of a firm’s managers and staff which “will to a large extent determine the response of the firm to
changes in the external world and also determine what it 'sees' in the external world” (Kor &
Mahoney, 2004). Informal habits, rules and customs embedded in a firm or a firm’s managers and
employees may remain in firms over time affecting innovation outcomes. This idea is particularly
interesting in the case Russian firms, having been part of the Soviet command economy until the early
1990s. Firms’ exposure to a command economy may have created weak or perverse rewards for
innovation (Estrin, 2001). The effects of the organisational and habitual behaviour, stemming from
informal rules or incentives created in firms exposed to command economies, may therefore affect the
likelihood of firm innovation in multiple ways.
For instance, the innovation system in command economies can create perverse or weak incentives to
innovate. Under the Soviet regime, firms who partook in innovation were then held to higher
standards and quotas than firms who did not innovate (Estrin, 2001) and firms who did not show
initiative in innovating were not adversely affected by market forces (Pelakin, 1988). This incentive
3
structure created weak or perverse rewards for innovation (Estrin, 2001) much like in the analogy “of
Soviet factories meeting targets set in terms of weight of output by making television sets with bricks
inside” (Coyle, 2007, p. 157).
This paper proposes to test whether post socialist path dependence is present in the innovation
activities of Russian firms which were previously state owned. We assume differences in innovation
activities arise from path dependence caused by previous state ownership. Filatotchev et al (2003)
and Djankov & Murell (2002) show that organisation, structure and even the manner in which firms,
in transition economies, are founded may lead to a more efficient adaptation to market forces in a
firm. These state owned firms had their genesis and came of age in a society governed by socialist
ideology and science push innovation systems which provided weak incentives to innovate and this
may have permanently engrained within these businesses a certain approach towards innovation. On
the other hand, firms which were not exposed to state ownership, and operated in more of a ‘market
economy’ may go about their innovation activity differently (for example engaging customers in the
innovation process) (Estrin, 2001). Therefore, the key hypothesis proposed by this paper, and the first
tested can be defined as follows:
H1: Previously State Owned Businesses and Private Businesses Possess Differentiated
Innovation Systems
2.2 Post socialist path dependency in Russian firms
Having specified that we expect previously state owned businesses and private businesses to innovate
in different ways, this paper now asks how they may differ. Two hypotheses are proposed as to how
and why the innovation systems of these firms may differ. Firstly, we consider a firm’s propensity to
invest in R & D. This is widely recognised in the literature as being positively linked with innovative
capacity as it allows for both internal knowledge generation (Crépon et al, 1998; Freel, 2003; Doran
and O’Leary, 2011) and increases absorptive capacity (Grunfeld, 2003; Veugelers & Cassiman,
1999). However, Yegerov (2009) argues that in Ukraine and Russia R&D inputs have been ineffective
in resulting in innovative outputs because of a systemic inability to use the resources for generating
commercially viable products. This may be attributed to two major issues; the structure of the Soviet
Innovation system and the manner in which transition and privatisation was undertaken both at
national and firm levels.
In centrally planned socialist economies the innovation process was largely undertaken using a ‘linear
model’ of innovation (Fritsch &Werker, 1999, p.9). Under this model the innovation process was
planned according to successive pre-determined steps e.g. invention, development, innovation,
diffusion. R&D was carried out mainly through research institutions which were separate of firms,
4
customer and markets, liable to political interference and firms were reduced essentially to production
units (Radosevic, 2003). The assumption underlying the linear model of innovation is that R&D will
create a technology push effect while the role of markets, users and other non-R&D activities were
considered irrelevant (Radosevic, 2003). Literature has shown the importance of internal networks of
people within organizations to developing R&D capabilities (Paruchuri, & Nerkar, 2012). In former
state firms there may be a level of path dependence affecting the R&D process and therefore
impacting on innovation outcomes at both a managerial and organisational level.
The strict adherence to this linear innovation model suffered from a major shortcoming, in that it
largely ignored the feedback process seen as central to sucessful innovation (Porter, 1990). In many
cases, firms in this economy could simply 'unload' their output on markets without caring about
consumer preferences (Fritsch & Werker, 1999). Firms in the Soviet command economy were also
protected from the market forces of competition. When there were a number of firms in an industry
commodity prices were set by planning authorities which negated any chance of competition (Fritch
& Werker, 1999, p.9). Key to the likelihood of innovation in firms is Porter’s (1990, p.78) argument
that demand conditions and firm rivalry are key factors affecting a firm’s ability to overcome barriers
to innovation. Strong pressure to innovate from consumers added to a willingness to listen to
customers will determine how a firm responds to market needs and drive innovation (Nasution et al,
2011; Fritsch and Werker, 1999; Porter, 1990). In the same manner domestic rivalry with local
competitors has a “powerful and stimulating” (Porter, 1990 p. 85) effect on a firm’s propensity to
innovate (Slater & Narver, 1995).This pressure from customers and competitors is an important part
of the innovation selection process. Former state firms who have failed to adapt to the market
economy may be inherently poor at learning by anticipating consumer and market preferences. This
leads us to our second hypothesis:
H2: Privately owned firms respond more strongly to market pressures for innovation than
previously state owned firms.
For firms who were formerly state owned ‘production units’ the level of success with which they have
adapted to market conditions will have an important and lasting effect on their innovation decision.
Radosevic (2003) shows that transition from command to market economy in Russia has deeply
affected not just the manner in which both R& D and innovation are carried out in these countries but
also the scale of innovation activities actually taking place (Radosevic, 2003). Radosevic and Auriol
(1999, p351) argue that in post socialist states R&D and innovation were neglected as they were
perceived as a “liability or tax burden”, and not as an avenue through which countries could achieve
future growth. Lack of property rights, funding and incentives negatively affected firms innovation
decisions (Radosevic, 2003). This leads us to our third hypothesis:
5
H3: Private firms are more effective at performing R&D than previously state owned
firms.
3
Methodology
In order to analyse whether there is a difference in the innovation performance of previously state
owned firms and private firms an innovation production function is estimated (Oerlemans, Meeus et
al. 1998; Roper 2001; Love and Mansury 2007). Following from Freel (2003), Mansury and Love
(2008) and Hall et al. (2009) the innovation production function specified in equation (1) relates the
probability of a firm engaging in innovation activity to a number of key explanatory factors. A probit
model is used to estimate equation (1).
IOi = α 0 + βSOi + χR & Di + δ m Z mi + ε i
(1)
Where IOi is a binary indicator of whether firm i engaged in product innovation, where product
innovation is defined as the introduction of a significantly new or improved product or service.
SOi is a binary indicator of whether firm i was previously state owned; where a value of one indicates
that firm i was previously state owned and a value of zero indicates that firm i has never been state
owned. β is the corresponding coefficient which indicates the effect of previous state ownership on
the innovation performance of the firm. If previously being state owned has had a negative path
dependent effect on the likelihood of firm innovation β will be negative. If, on the other hand being
previously state owned has a positive effect on the likelihood of innovation β will be positive.
Finally, if β is insignificant this implies that previous state ownership has had no effect on the
innovation performance of the firm and there is no evidence of previous state ownership having a path
dependent effect on the likelihood of innovation.
It is widely held in the literature that R&D has a strong positive impact on innovation performance
(Cohen and Klepper 1996). Therefore, this paper includes R&Di; a binary indicator of whether firm i
engaged in R&D activity during the reference period. It is expected that R&D will have a positive
impact on the probability of innovation. This suggests that χ will be positive.
Zmi is a vector of company specific factors including the size of the firm, whether it is in the
manufacturing or services sector, the proportion of the workforce with a degree, the number of years
of experience of the top manager, the proportion of sales which are derived from exports, the
proportion of the firm which is foreign owned, whether the firm has applied for government contracts
6
and whether the firm has received any government grants. It measures the impact of each of these
factors on the likelihood of the firm innovating. The inclusion of these variables is consistent with the
international literature (Roper et al, 2008; Nelson and Winter, 1982; Grossman and Helpman, 1990;
Krugman, 1995).
As the key focus of this paper is to analyse post socialist path dependence in the innovation
performance of Russian firms, equation (1) is initially estimated and special consideration is given to
the SOi variable. In doing so this paper identifies the differences among ownership types regarding
their propensity to engage in innovation activity. However, this paper further develops upon this
analysis by acknowledging that while previous state ownership may impact on the propensity to
engage in innovation it may also affect the way in which firms innovate. For example, firms which
had been previously owned by the state may be less likely to engage with customers for innovation as
they would previously have had a strong science push as opposed to market pull innovation strategy
whereas newer, privately owned businesses may be more responsive to market incentives and may
engage more with customers.
In order to investigate whether this is the case, equation (2) is estimated separately for firms which
were previously state owned and firms with no history of state ownership.
IOi = α s 0 + χ s R & Di + δ sm Z mi + ε si
(2)
Where each variable is defined as above with the addition of the subscript s; here s indicates that, for
each type of ownership, state owned and none state owned, different coefficients may be observed.
As two types of ownership are identified in this paper, equation (2) is estimated twice, once for each
ownership type. By allowing for a variation in the coefficients across ownership types, differences in
firms’ innovation strategies and value chain can be observed. If significantly different relationships
are observed between previously state owned firms and private entities, this may indicate post
socialist path dependence in state owned firms which may hamper their innovation attempts.
In order to ensure that the variance in coefficients across sectors is significantly different, likelihoodratio tests are employed (Long and Freese 2001; Greene 2008). These involve comparing the
unrestricted estimation of equation (1), of the full sample of firms, to the restricted estimations of
equation (2), the individual estimations based on previous ownership. The test assesses whether the
composite models, comprised of the ownership estimations of equation (2), provide a better
estimation than the aggregate model specified in equation (1). The null hypothesis of the test is that
7
the aggregate model applies to each of the ownership types analysed and that there is parameter
stability across ownership type. This is expressed as:
k
log L(θˆ) = ∑ log L j (θˆ j )
(3)
j =1
Which states that the sum of the log likelihood of the composite ownership models equals the log
likelihood of the aggregate model. Should the likelihood-ratio test indicate a significant difference in
the coefficient estimates across the ownership regressions this would support the hypothesis that the
mechanisms through which firms with different ownership backgrounds perform innovation vary.
While if the likelihood-ratio tests indicate that there is no significant differences across the
estimations this suggests that firms, regardless of their previous ownership, innovate in the same way.
4
Data
The data used in this paper is taken from the 2009 BEEPS (Business Environment and Enterprise
Performance Survey) which is available through the World Bank Enterprise Surveys dataset. The
2009 BEEPS was conducted in conjunction with the European Bank for Reconstruction and
Development (EBRD) and contains information from 11,800 enterprises in 29 countries.
BEEPS 2009 data uses a stratified random sampling method to construct samples and ensure they are
representative. Firm size ranges from 2 to 10,000 employees .For example, in each country, the
composition of the sample in terms of manufacturing versus services was constructed relative to the
sectors contribution to GDP. Each sample is stratified on three levels in these countries, namely
industry, establishment size, and region. Firms that operate in sectors subject to government price
regulation and extensive supervision such as banking, electric power, rail transport, and water, were
excluded from the sample (Gorodnichenko & Schnitzer, 2011; Roper, 2010). The percentage of
confirmed non-eligible units as a proportion of the total number of contacts to complete the survey
was 44% (EBRD-World Bank Business Environment and Enterprise Performance Survey, 2009). As
we specifically consider Russia this results in a sample size of 937 firms.
Table 1 displays summary statistics of the variables utilised by this paper. As the focus is on the
differences between previously state owned firms and firms which were always privately owned the
descriptive statistics are disaggregated into these two categories. Of the total sample 28.5% of firms
were previously state owned with the remainer always having been privately owned.
8
Variable
Table 1 Descriptive Statistics
Previously State
Owned
Privately Owned
Innovation Activity
Product Innovation
65.54
66.57
Internal Capabilities
Participate in R&D
36.33
34.03
Government Support
Government Subsidies
Applied for Government Contracts
8.61
37.45
5.82
25.52
Market Factors
Importance of Foreign Competitors for Innovation
Importance of Customer Pressure for Innovation
Importance of Domestic Competition for Innovation
36.70
56.18
64.42
33.88
61.34
66.87
Firm Specific Factors
Service Industry
Employees with a Degree
Experience of Top Manager (years – average)
Number of Employees (average)
Exports (% of Sales)
20.22
29.41
19.52
435.31
19.52
27.91
40.04
14.23
92.04
14.23
3.11
4.21
Ownership
Proportion of ownership is foreign
As this paper focuses on the impact of post socialist path dependence on innovation activity, a
measure of firm level innovation is required. BEEPs data contains questions on innovation activity
similar to those defined by the OECD and the Eurostat’s Community Innovation Survey (OECD
2006). Firms are required when completing the survey to indicate whether they have introduced new
goods or services during a three year period. Doran and O’Leary (2011) argue that this type of
question matches closely with Schumpeter’s (1934) definition of product innovation which is “the
introduction of a new good – that is one with which consumers are not yet familiar – or of a new
quality of good” (p.66). Based on this definition, it can be seen in Table 1 that 65.54% of previously
state owned firms and 66.57% of private firms introduced some form of product innovation during the
reference period 2006-09.
The BEEPS data also contains information on the R&D performance of firms. Firms are asked
whether in the last three years the firm spent funds on research and development activities, either inhouse or contracted with other companies (outsourced). Table 1 indicates that 36.33% of previously
state owned firms performed R&D while 34.03% of privately owned firms performed R&D. This
slight difference in proportions may be attributed to previously state owned firms possessing a strong
history of engaging in R&D (Radosevic, 2003).
indicator of its effectiveness.
9
However, merely performing R&D is not an
In terms of government support for innovation, two variables can be derived from the data. Firstly,
whether the firm received any subsidies from the national, regional or local governments sources in
the last three years and secondly whether the firm secured or attempted to secure a government
contract in the last year. We can also see that previously state owned firms are more likely to get
government subsidies and apply for government contracts, suggesting that there may still be some
dependency by these firms on government even though they are no longer state owned.
Three types of market factors are considered. The effect of domestic competition, international
competition and customer pressure on the decision to introduce new products is measured as a binary
variable where 1 indicates that these factors played an important or very important role in the firm’s
decision to innovate and 0 indicates that they did not play an important role in the firm’s decision to
innovate. It can be noted that more private firms perceive pressure from domestic competitors and
customers to be important relative to previously state owned firms. However, more previously state
owned firms perceive domestic competition to be important for innovation than private firms.
Regarding our firm specific control factors we see large differences between previously state owned
and privately owned firms. Previously state owned firms are, on average, larger, possess less degree
educated employees but have longer serving managers and have a higher proportion of sales sold as
exports than private firms. However, private firms have a higher proportion of foreign ownership.
5
Results
5.1 Full Sample Analysis
This section presents the results of the empirical analysis.
The marginal effects of the probit
estimation of equation (1) are displayed in Table 2. As marginal effects are used the coefficients
presented can be interpreted as the marginal change in the dependent variable for a change in the
independent variable.
This estimation is based on the full sample of firms, incorporating previously state owned firms and
private firms. What can immediately be noted is that firms which were previously state owned are
8.13% less likely to introduce new product innovations than firms which were never state owned.
This finding supports hypothesis one outlined above; that previously state owned enterprises are less
innovative than firms which have no previous state ownership connection. This may indicate post
socialist path dependence, in that previously state owned firms possessed no incentives to innovate
due to insulation from competition and market factors and that, despite the crutch of state support
being removed from them, they still have not adapted sufficiently to be equally innovative as privately
owned firms (Estrin, 2001).
10
Table 2: Probit Estimation of Equation Full sample Regression
Variable
dy/dx
Std. Err.
Internal Capabilities
R&D
0.2994*** (0.0295)
Government Support
Government Subsidies
0.1178* (0.0580)
Applied for Government Contracts
0.1046*** (0.0337)
Market Factors
Importance of Foreign Competitors
0.0300 (0.0349)
Customer Pressure
0.0730** (0.0350)
Domestic Competition
0.0283 (0.0367)
Firm Specific Factors
Service Industry3
0.0076 (0.0362)
Employees with a Degree
-0.0020*** (0.0006)
Experience of Top Manager
0.0021 (0.0017)
Number of Employees
0.0001** (0.0001)
Exports - % of Sales
0.0008 (0.0009)
Ownership
Proportion Foreign Owned
0.0014 (0.0009)
Previously State Owned
-0.0813* (0.0438)
Obs
937
Chi2
147.22
Prob > Chi2
0.0000
Pseudo R2
0.1229
Lof-Likelihood
-525.31
Note 1: ***, ** and * indicates significance at the 99%, 95% and
90% levels.
2: Marginal effects are presented for ease of interpretation.
3: Base category is manufacturing sector.
The following is a brief overview of the full sample results before progressing to testing for parameter
stability across previously state owned firms and privately owned firms. Research and development
(R&D) is found to have a significantly positive effect on the likelihood of Russian firms introducing
new product innovations. Firms which engage in R&D are approximately 30% more likely to
innovate than firms which do not engage in R&D activity. Firms which received government
subsidies and applied for government contracts are also found to be more innovative. This positive
effect of government subsidies may result from these subsidies enabling firms to overcome the fixed
costs associated with innovating and allowing them to introduce new products to the market. The
positive effects of applying for government contracts may be attributed to increased competition
among firms applying for these contracts, and the need to be innovative in order to win the contract.
In terms of market forces only customer pressure is found to have a significantly positive effect on
firms’ innovation. This is consistent with Roper et al (2008), Freel (2003) and Freel (2000) who all
11
find a significant relationship between customer interaction and innovation. Pressure from foreign or
domestic competitors is found to have no significant effect on the likelihood of innovation.
Regarding firm specific characteristics, sector, the experience of management and the propensity of
firms to export have no significant effect on the likelihood of innovation. However, larger firms are
found to be more innovative than smaller firms, a finding consistent with Doran and O’Leary (2011).
The proportion of workers with a third level qualification is found to have a significantly negative
effect on the likelihood of firm innovation. This is inconsistent with Cohen and Levinthal (1990) who
suggests that absorptive capacity should have a positive effect on the likelihood of innovation.
However, this negative result is not unique in the literature with Doran and O’Leary (2011) also
finding a negative effect of human capital on innovation. They suggest that this may be explained by
the fact that it is the tacit, pertinent knowledge generated through the undertaking of R&D applied to a
particular problem, not the generic skills associated with possessing a degree, which is vital for
innovation. This may explain this negative third level education effect, with absorptive capacity
obtained through the undertaking of R&D being most important for innovation.
Finally, the
proportion of the firm which is foreign owned is found to have no significant impact on the likelihood
of innovation.
5.2 Testing for Parameter Stability
While the above results are based on the full sample estimates and find that previously state owned
enterprises are less likely to innovate, suggesting a negative path dependent effect, it is also possible
that previously state owned firms were conditioned to innovate in different ways to private firm. If
this is the case, and path dependence has resulted in previously state owned firms innovating in
different ways to private firms, this would manifest itself in parameter instability in the regression
estimates presented in Table 2. In order to test for parameter instability a likelihood ratio test is
applied to the estimates of two separate regressions; (i) for previously state owned firms and (ii) those
firms which were never previously owned by the state. The results for the likelihood ratio test are
presented in Table 3. It can be noted that the null hypothesis, that the parameters are stable across the
two regressions, can be rejected at the 10% significance level. This suggests that, not only are
previously state owned firms less likely to innovate as identified in Table 2, but that they also
innovate in different ways to firms which were never previously state owned. This provides support
for hypothesis two identified in Section 2.
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Table 3: Likelihood Ratio Test of Parameter Stability
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
All
937 -598.92
-525.32
14
1078.63 1146.43
Private
670 -426.93
-368.45
13
762.90
821.49
State Owned
267 -171.95
-147.16
13
320.32
366.96
LR chi2(12)
19.41
Prob > chi2
0.0791
Note 1: Null hypothesis is that the parameters are stable across the two regressions
while the alternative is that there is a significant difference in the parameters
across previous ownership structure.
5.3: Previously State Owned versus Private Firms
The results of the probit estimates of (2) are presented in Table 4. A number of dissimilarities can be
observed for the two types of firms considered, possibly arising from path dependence in the firms
which were previously owned by the state. The first point to note is that while performing R&D
increases the likelihood of innovating in both private and previously state owned firms there is a
substantial difference in the marginal effect. Private firms which engage in R&D are 30.68% more
likely to innovate while previously state owned firms are only 25.97% more likely to innovate. The
differences between the efficiency of R&D performance in the two types of firms may be attributed to
the different incentives faced by these firms. Firms which were previously state owned were, for a
substantial number of years, ingrained in a system which did not require or encourage new product
innovation through R&D but instead was dictated to as to the products to introduce, insulated from the
market economy. Private firms on the other hand exist in a market where dynamic competition and
perpetually shifting equilibriums require continual innovation (Schumpeter 1934).
In terms of government support, private firms which apply for government contracts are more likely
to innovate while state owned firms appear to rely on government subsidies for innovation. This
suggests that the role of government varies depending upon the type of firms which are considered.
Turning to market factors, again there is a difference in how these firms innovate. Customer pressure
has a positive effect on the likelihood of private firms innovating while domestic competitors have a
positive effect on the likelihood of previously state owned firms innovating. This difference may
again be due to the ingrained factors which shaped the character of the businesses, with private firms
being more market orientated than the previously state owned counterparts.
Regarding firm specific factors, the proportion of employees with a degree has a negative effect on
both types of firms. The manifestation of this negative effect and its possible causes have already
been discussed in Section 5.1 and as it appears to impact both types of firms is not discussed further
here. However, manager experience is found to have a positive effect on the likelihood of private
firms innovating. This may again be due to the alternative structures of the firms, with privately
13
owned firms being profit maximising and efficient and underperforming managers being replaced
while previously state owned firms may lack this flexibility, with managers persisting and not
changing or with dynasties emerging, resulting in the firm failing to acquire dynamic management
which could stimulate innovation.
Finally, for privately owned firms, the higher the proportion of the firms which is foreign owned the
more likely the firm is to innovate. Firms with full or partial foreign ownership may be under higher
levels of pressure to perform and may have access to alternative funding sources which indigenously
owned businesses may not be able to exploit. Indeed, Doran and O’Leary (2011) find that foreign
owned firms have a higher propensity to innovation than indigenously owned firms, possibly owing to
deep pockets or interconnections with R&D facilities owned by the same investors in different
countries. This exposure appears to be lacking in previously state owned businesses which is not
surprising given their history which would have been strongly national, and disinclined towards
foreign investment (Yegerov, 2009).
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Table 4: Probit Estimation of Equation (2) for Previously State Owned and Private Firms
Private
State Owned
Variable
dy/dx
Std. Err.
dy/dx
Std. Err.
Internal Capabilities
R&D
0.3068***
(0.0342)
0.2597***
(0.0593)
Government Support
Government Subsidies
0.0785
(0.0791)
0.1813*
(0.0870)
Applied for Government Contracts
0.1191***
(0.0398)
0.0829
(0.0629)
Market Factors
Importance of Foreign Competitors
0.0021
(0.0417)
0.1085
(0.0662)
Customer Pressure
0.0704*
(0.0415)
0.0647
(0.0669)
Domestic Competition
-0.0080
(0.0429)
0.1423**
(0.0724)
Firm Specific Factors
Service Industry3
-0.0055
(0.0416)
0.0877
(0.0711)
Employees with a Degree
-0.0019***
(0.0007)
-0.0027**
(0.0014)
Experience of Top Manager
0.0042*
(0.0023)
-0.0016
(0.0026)
Number of Employees
0.0005***
(0.0002)
0.0001
(0.0001)
Exports - % of Sales
0.0029
(0.0026)
0.0001
(0.0011)
Ownership
Proportion Foreign Owned
0.0020*
(0.0011)
-0.0005
(0.0019)
Obs
670
267
Chi2
116.95
49.59
Prob > Chi2
0.0000
0.0000
Pseudo R2
0.1370
0.1442
Log-Likelihood
-368.44
-147.16
Note 1: ***, ** and * indicates significance at the 99%, 95% and 90% levels.
2: Marginal effects are presented for ease of interpretation.
3: Base category is manufacturing sector.
6
Conclusions
This paper analyses whether there is post socialist path dependence in the innovation activities of
Russian firms which were previously state owned. It does this by comparing previously state owned
firms’ innovation system with that of firms which were always privately owned.
This is
accomplished through using the World Bank’s Business Environment and Enterprise Performance
survey (BEEPs) for 937 Russian firms. Three hypotheses are proposed and tested using a probit
estimation of an innovation production function and subsequent testing of parameter stability across
the two types of firms identified by this paper.
The results indicate that not only are previously state owned firms approximately 8% less likely to
innovate relative to their privately owned counterparts but they also innovate in different ways. Most
strikingly while both previously state owned firms and private firms are more likely to innovate if
they perform R&D there is asymmetry in the effectiveness of their R&D effort. While privately
owned firms who perform R&D are approximately 31% more likely to innovate, previously state
15
owned firms who perform R&D are only approximately 26% more likely to innovate. This difference
suggests that the effectiveness of R&D performed in previously state owned firms is less than that of
privately owned firm. This asymmetry in efficiency may have resulted from path dependence, where
previously state owned firms, who historically faced weak or perverse rewards for innovation, still
have not adapted fully to their new, market oriented environment (Estrin, 2001).
The results also note that privately owned firms respond more strongly to consumer pressure than
previously state owned firms. State owned firms which find themselves placed under consumer
pressure to innovate are no more likely to innovate than firms which face no pressure. This implies
that regardless of the demands of consumers, previously state owned firms will innovate at their own
pace. This suggests an inward focused innovation strategy which does not respond fully to market
incentives (Nasution et al, 2011; Pelakin, 1988). Conversely, privately owned firms which experience
pressure from customers are approximately 7% more likely to innovate than firms which experience
no pressure, implying that these firms do respond to market incentives.
The key implication of these findings is that state ownership appears to leave a mark on firms,
conditioning them to approach innovation in a certain way. Based on Russian evidence, it suggests
that these firms will suffer from lower levels of innovation relative to their privately owned rivals and
that their innovation efforts will be less effective. This suggests that when privatising firms there is a
need to ensure that they adopt the best innovation practices available in their private counterparts.
Failure to do so may undermine their subsequent performance and competitiveness as innovation has
been show by others [such as (Crépon, Duguest et al. 1998; Lööf and Heshmati 2006; Johansson and
Lööf 2009)] to be vital to maintaining productivity growth.
16
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