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The disadvantage of entrants: did transition eliminate it? The case of the Russian footwear industry (1992–2000)

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Abstract

Several studies have analyzed entry in developed capitalist economies coming to the conclusion that entrants are usually smaller, less productive and at higher hazard than incumbents. This study considers if this was the case also in the rather peculiar situation of those firms which entered during the period of transition from planned to market economy, in one of the ex-soviet countries. Additionally this work considers whether or not the uncertain environment generated by transition did activate a process of entry, as situations of uncertainty are generally supposed to do. The main result of this paper is that despite the fact that incumbents were firms created and organized to meet the objectives of the soviet regime, they were not outperformed by subsequently-created firms which were formed to match the needs of a transitional/quasi market economy. These results do not support “vintage” and “liability of obsolescence” models which suggest that new comers are better fitted to match new conditions.

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Notes

  1. The reference is mainly to national entrants; the case of technologically advanced foreign entrants is completely different (Aghion et al. 2004) and concerns our study in minimal measure.

  2. The reaction of incumbents to entrants is also different in different industries and different the effects of entry are in different industries e.g.in laggard sectors entry discourages innovation (Aghion et al. 2004).

  3. “Efficient organization requires trust among members; and trust takes time to build. Setting up and refining roles and routines. Learning about the relevant environment, and developing relationships with existing organizations also take time. Once established, these patterns of relationships form a social structure supporting an organization’s survival chances” (Carroll and Hannan 2000:288).

  4. The Registry of the Russian Industry has been used by several studies, among others, Brown and Earle (2000) and Brown and Brown (1999). The Registry is a work of Goskomstat, the Russian Statistical Agency.

  5. We can observe (table 2.9 in Goskomstat 1999:64 and Goskomstat 1999b:32) that in the Russian light industry the share of employees in firms omitted by the Registry of the Russian industry was in the years 1996–1998, respectively, 20%, 23% and 22%.

  6. The Audretsch et al. (2000) s’ study, about firm survival in The Netherlands in 1978–1992 contains “all establishments with at least ten employees, whereas data sets from the years after 1986 consist of all firms with at least twenty employees and only a sample of the firms with less than twenty employees” (Audretsch et al. 2000:3). These authors notice that their “database contains only new firms that have attained this minimum size. The main disadvantage of this minimum size is that most firms actually start with fewer than ten employees. This means we are only able to track the performance of firms that have already grown to this minimum size. This will tend to bias our results towards higher survival rates than if we were able to include firms at the moment of conception.” (Audretsch et al. 2000:3). Even if their threshold is much lower than ours, their bias concerns a share of employment similar to that concerned by our study and the effects should be similar. In The Netherlands, just firms with less than 10 employees accounted for 15% of total employment in 1995 (Jonker 2002:4). Doms et al. (1995) study the exit of firms in the USA, using a sample, which includes plants with more than 20 employees. Their threshold is much lower than the one adopted by the Registry of the Russian industry (20 instead of 100 employees), but in the United States employment in small and micro firms (average size = 2.28 employees) accounts for 37% of employment in non-primary private enterprises (European Commission 2003). In 10 OECD economies Bartelsman et al. (2005) find that a considerable share of entrants have less than 20 employees, while there is little difference between the entry rate of firms with more than 50 employees and of those having between 21 and 50 employees.

  7. On the same line Persson (2004). Doms et al. (1995) use establishment identification numbers and an additional geographical screen to filter out plants which have successors but are catalogued under a different establishment identification number. Even so, they believe “It is likely that a small number of false exits still exist in the data set with the result that we may overstate exit in the small to mid-size company size classes. However we believe the problem is small and does not affect the general inverse relationship between size and exit that we observe.” (Doms et al. 1995:529). Dunne et al. (1988) during data collection “attempted to maintain the same identification numbers over time for plants that did not undergo ownership changes. But administrative changes, such as sale of the plant or legal reorganisations, could sometimes lead to a change in the plant’s identification number. These changes could result in a failure to identify a plant that continued in operation across census years and this would then lead to an overstatement of the degree of entry and exit” (Dunne et al. 1988:499). The data set used by Evans (1987) is the Small Business Data Base (SBDB). In Evans’s study exit is when a firm is no more in the data base. This could depend on many causes: the firm “may have failed, (i.e. filed for bankruptcy. It may have voluntarily dissolved itself, it may have merged with another firm, or it may have been acquired by another firm. It is impossible to distinguish between these possibilities with the SBDB. Mata et al. (1995) consider a plant as ‘born’ in a given year if that was the first year it appeared in the database. They define a plant death as occurring in the year for which no further record exists of its activity.

  8. A rate of 14.73% of missing observations is quite low when we compare it with non-responses in typical surveys and when we consider that these are data on transitional years, when there was a high degree of chaos. Brown and Earle (2000) do not provide a percentage of missing observations, but show that they cover 91% of the working population that they analyse. We do not have a different source of figures about the total workforce of the sample of firms that we study. Therefore a direct comparison with them is not possible. However, considering that in labour terms, firms with missing observations are often smaller than the average, our rate of missing observations has an ability to cover the total footwear employment pretty similar to theirs. Carlin et al. (2001) start with a sample of 3,305 firms and then analyse a set of 2,245 firms.

  9. Dunne et al. (1988) find that :”the entering firms in 1967 produce output equal to 35.2% of the average firm output in their industry” (Dunne et al. 1988:510).

  10. “Largest” relatively to the average firm at the moment of their entry.

  11. Dunne et al. (1988) show that in the USA the market share of entry cohorts of firms entered in the last ten years was in 1982 27.1%, in 1977 27.8% and in 1972 27.2%.; in Canada “entrants to the manufacturing sector via plant opening or acquisitions between 1970–1 and 1980–1 also had a substantial effect. (...)Their employment in 1981 was equal to 26% of total employment in 1970” (Baldwin and Gorecki 1991:316–317).

  12. It excludes old firms continuing under a new firm identifier.

  13. We could also notice that in this case the market share of firms recently entered is below that observed elsewhere. This could be due to a lower ability of new firms to impose themselves into the Russian footwear market; however the smaller impact of entrants is probably an effect of our very strict tests, which exclude firm continuations with different identifier to be considered as exit and entry. Other studies would consider them as exit/entry, obtaining a bigger market share for entrants.

  14. Some observations had to be excluded as the consequence of the requirements of specific tests.

  15. This method is largely used by these types of studies (e.g. Baldwin and Gorecki 1991; Mata et al. 1995; Boeri and Bellmann 1995).

  16. The first privatisation law of the Russian Federative Socialist Soviet Republic appeared on July 3rd 1991 (modified on June 15th 1992). It had been preceded in 1990 by a law allowing the lease of state owned firms; such law included a right of buying out by tenants. Therefore it is perfectly possible that in 1993 there were private firms, which had been created by the Soviet government. In many cases the state was retaining some shares in privatised firms and therefore they were in the regime of “mixed property”.

  17. The rate of entry penetration is “gross sales by entrants divided by total industry sales” (Geroski 1995:422). In our case it is: output by entrants divided by total-data-set output.

  18. In 1997 the penetration rate of firms with records was just 0.02%, in 1998 nil, and in the year 2000 0.1%.

  19. In using them we follow the presentations of Kiefer (1988), Bland and Altman (2004) and Berry and Lindgren (1996:501–505)

  20. Close down, change of industry and exit followed by spin offs or merger.

  21. Close down only.

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  1. Tanaka Business School, Imperial College, London, UK

    Gustavo Rinaldi

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Rinaldi, G. The disadvantage of entrants: did transition eliminate it? The case of the Russian footwear industry (1992–2000). Empirica 35, 105–128 (2008). https://doi.org/10.1007/s10663-007-9053-0

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