Slumps, however, temper this positive news. Productivity is expected to be equally important in the survival of firms during both slumps and surges. However, the Russian data indicate that this is not the case.<sup>19</sup> Part of the explanation may be that the dynamics for slumps are dissimilar to those described for surges. The empirical results may just be a reflection of that fact.<sup>20</sup> Nevertheless, while the dynamics may be different, in healthy, competitive economies, productivity is equally important to the survival of firm in the ups and downs. In Russia, during the long and deep slumps, other factors are important in determining the survival of firm.

The age of the firm plays a more significant role during slumps than in surges. Older firms are less likely to exit the market.<sup>21</sup> Regardless of their relative productivity, older, incumbent, firms will remain in the market.<sup>22</sup> This finding, when coupled with the discovery that Russian slumps are more frequent, longer and deeper, there is cause to whether this premium on incumbency and age is an adaptation, a not very healthy one, to the nature of Russian slumps. Incumbents are often not the champions of change and innovation that must be the basis for economic diversification.

The last finding also suggests that firms in less competitive sectors are more likely to survive than would otherwise be the case. This result reinforces the incumbency premium and has implications for the allocative efficiency of the economy. The staying power of relatively inefficient firms in uncompetitive sectors is a problem. Indirectly, these incumbents affect the entrance of new firms, by holding on to the resources that young, emerging, possibly more productive, firms could employ to grow.

Based on the benchmark of health of Russian economic dynamics, namely, whether relatively productive firms stay in the market and grow while inefficient ones exit, there is some room for both optimism and for pessimism. Economic surges reward productivity. On the other hand, the staying power of inefficient, incumbent firms hints at a problem, however.

19 The reader can see in Tables A17, A18 and A19 of the Annex that the coefficient for the interaction term between productivity and slump or surge ( **surge/slump × ln(value added per worker** ) is always negative and statistically significant at the 99 percent confidence level. Since a surge is coded as value=1, the coefficient of this interaction term indicates that during surges, being more productive is more important than during slumps (coded as value=0). If productivity had been as equally important to firm survival during slumps as in surges, the coefficient for this interaction would have been zero.

20 Unlike surges, in slumps demand falls and prices fall; the most efficient firms can meet these prices cuts because they are lower cost producers and survive the slump. During slumps, within sector resource allocation may not be as important in survival as it is in surges. Thru slumps, firms are releasing resources as demand shrinks and this would likely force input prices to drop as well.

> 21 See Tables A17, A18 and A19 of the Annex where the coefficient for the variable **age** , in all cases, is negative and statistically significant at the 99 percent level.

22 In the regression displayed on Tables A17, A18 and A19 of the Annex, the reader will note that the coefficients for the size categories ( **small, medium and large** ) are statistically significant and negative. However, to determine the complete effect of size on the likelihood of survival, the coefficients to all of the interaction terms with age must be considered. Once all coefficients are summed for each size category, they add up to zero, indicating that while there are benefits to being small, medium or large in comparison to a microenterprise (the omitted category absorbed by the constant), there is no statistical difference between being small, medium or large.

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