Decentralization and competitiveness

Institute for Market and Industrial Studies held another session of the research seminar "Institutional problems of the Russian economy" on March 22, 2018.

Irina Levina, IIMS research fellow, presented her paper «Does firms’ decentralization pay off in weak institutions setup? Decentralization and investment of Russian firms».

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 we use evidence from Russian firms to challenge this belief. We demonstrate that firms that accompany decentralization with hiring for top positions on the fully competitive basis are, on average, significantly more likely to invest and to implement large investment even in Russian weak institutional conditions. We also show 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.