Participation in the 10th Joint IOS/APB/EACES Summer Academy
The Leibniz Institute for East and Southeast European Studies (IOS) together with EACES and the Academy for Civic Education (APB) organized their 10th Joint Summer Academy on Central and Eastern Europe. The event titled "Firm Behavior in Central and Eastern Europe: Productivity, Innovation and Trade” took place in a German town of Tutzing on June 11-13, 2018. ICSID research fellow Irina Levina presented her research project on decentralization of firms "Does firms' decentralization pay off in weak institutions setup? Decentralization and investment of Russian firms" during one of the panels.
Decentralization can make a great job in improving firm’s effectiveness and competitiveness by creating opportunities for quicker and more competent decision-making on a wider range of questions, and by improving motivation of employees. At the same time, decentralization always brings with it a substantial increase in agency costs. The latter is especially important for firms that operate in the environment with weak institutions. The popular belief is that decentralization at the firms cannot be successful in the environment with weak institutions, due to prohibitively high agency costs. In this paper evidence from Russian firms is used to challenge this belief. It is demonstrated that firms that accompany decentralization with hiring for top positions on the competitive basis are, on average, significantly more likely to invest even in Russian weak institutional conditions. It is also shown that gap in investment between firms that accompany decentralization with competitive hiring and other firms declines as corruption grows. Empirical research presented in the paper implies that there can be still a significant room for decentralization even in the environment with weak institutions, like Russian.