_institutionally-determined_ or _administratively-induced._ The need for policy intervention to deal with economic barriers generally arises only when such barriers are (a) chronically high and (b) in markets where there is already significant horizontal or vertical dominance; this is best decided on a case-by-case basis. For institutionally-determined or administratively-induced entry barriers, the case for policy intervention is more clear-cut.

# **Economic Barriers to Entry**

In certain industries, the technology fundamental to the production process naturally gives rise to economies of scale, where unit costs decline as output expands to meet market demand; in such industries these _scale economies_ are a barrier to entry since it is unlikely that multiple businesses can all attain the minimum efficient scale to be commercially viable. There are likely to be significant scale economies in certain segments of the infrastructure monopoly sectors in Russia (as elsewhere). However, in most of the manufacturing sector, scale economies are unlikely to be as pronounced relative to market demand and thus, absent policy-induced constraints, such economic barriers to entry are likely to relatively modest, and some in cases, relatively low. This is true in Russia as it is worldwide. _Product differentiation_ becomes an entry barrier when incumbent firms enjoy brand loyalty among consumers, making it difficult for potential rivals to become commercially viable because of the need to invest heavily in advertising and/or by charging significantly lower prices. Like many other transition countries, to date brand loyalty among Russian firms is not strong and product differentiation is unlikely to be an entry barrier. The advantages that come with the successful diffusion of _innovation_ can also serve to prevent new entry. Much depends on the embedded technological prowess of firms and on whether there is a patent system in place that helps to protect and reinforce that prowess through the granting of exclusive production and marketing rights. As in most transition economies, technological innovation is not a an impediment to entry in Russian industry, and there does not exist an effective patenting system. If anything, entrants displaying technological prowess have an easier time entering Russian markets. Finally, there is the case where _endowments of natural resources_ can act as an entry barrier. During an industry's development, firms that locate and exploit such deposits first will have a strategic market advantage over those seeking entry later (unless or until new resource deposits are discovered or the initial firms decide to license otherwise exclusive access rights). Norilsk Nickel is a case in point.

# **Institutional and Administrative Barriers to Entry**

Evidence from Russia suggests that the principal institutionally or administratively determined constraints on entry by the _de novo_ private sector are: (i) discrimination with regard to business licensing and registration; (ii) blocked access to (state-owned) warehousing and distribution channels; (iii) a harsh and uncertain regulatory regime (changing "rules of the game") with weak mechanisms for dispute resolution; (iv) difficulty in obtaining suitable business premises and real estate; (v) corruption and organized crime; (vi) poor access to seed capital and competitively priced bank credit; and (vii) a large tax burden, including high rates, multiplicity and complexity, and lack of stability, predictability and transparency. Many of these impediments have been (and in some cases still are) present in other transition countries in the region, including the Czech Republic, Hungary, Poland and Ukraine, especially in the early stage of the transition process. Although the empirical evidence of the impact of such barriers in Russia generally comes from surveys, there does not exist sufficient systematic data to determine the relative importance of each of these constraints; carrying out an empirical investigation to make this determination is critical for policy making.

**_Registration and_** _Licenses._ Although the business license process varies among Russia's regions, the average new business applicant must deal with 20-30 agencies and receive 50-90 approved

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