# **DETERMINANTS FOR FIRM SURVIVAL IN RUSSIA**

The comparative analysis of slumps and surges using the UNIDO dataset indicate that the Russian economy exhibits significantly deeper and longer slumps than other economies. But should these features of the Russian economy be of concern? One answer is that these macroeconomic features of the economy may have specific microeconomic consequences. Slumps may slow or halt firm growth, may force the exit of relatively efficient, newer firms and hinder the allocation of resources from less efficient firms to more efficient ones. To see if these concerns are warranted, this section focuses on identifying and describing the link between firm exits and surges and slumps, sectorlevel competition the role firm-level productivity plays into firm mortality.

Given the pattern of deep and long slumps discovered in the previous analysis there is particular emphasis on these results to identify and explain the implications of these slumps on firm mortality. For that reason, only the following findings, out of many, are highlighted and discussed here:<sup>16</sup>

1. More productive firms are relatively less likely to exit than less productive ones. Productivity is more of a factor in improved firm mortality during surges than slumps;

2. Older firms are relatively less likely to exit than younger ones. The age of the firm is also more of a factor in improved firm mortality during surges than slumps; and 3. In sectors where competition is less intense, unproductive firms are less likely to exit than in sectors where competition is more intense.

On average, the likelihood of surviving the ups and downs of the Russian economy improves if a firm is more productive than others, holding for all other factors.<sup>17</sup> The data however, also provide a slight nuance to this result. Being more productive improves the odds of survival during more so surges than during slumps. This nuanced finding supports the conjecture that during a surge (a boom) started by an expansion of demand for goods, the intra-sectoral reallocation of resources between firms will favor those that are more productive. To respond to increased demand, firms expand the purchase of their inputs to increase production. Expanded demand for inputs raises prices for inputs. In this situation, the least productive firms, which by definition are already burdened with higher costs of production, are unable to stay in the market as higher input prices further raises their costs and these cannot be recuperated with higher prices. This forces uncompetitive firms to exit even during economic booms.<sup>18</sup> This finding is good news for the Russian economy. If during surges emerging, more efficient firms enter to present new products to new markets, this dynamic could serve as the basis for economic diversification. However, issues arise during the long and deep Russian economic slumps that were described in previous sections.

> 16 The econometric results are displayed in Tables A17, A18 and A19 of the Annex.

> 17 See Tables A17, A18 and A19 of the Annex where the variable **ln(value added per worker)** serves as a productivity measure.  In all cases, the coefficient for this variable is negative and statistically significant at the 99 percent level.

> 18 This is consistent with a heterogeneous firm-model of Melitz (2003).

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