established to reduce administrative discretion and corruption, increase transparency and predictability and enhance incentives for accountability.

# **II.** STRUCTURAL DOMINANCE AMONG INCUMBENT **FIRMS**

At the national level, the degree of concentration of industrial output in Russia suggests an absence of a structural competitive problem. The average 4-firm concentration ratio (the sum of the market shares of the top four producers) is about 60%. For many industries, Russia and the United States have similar 4-firm concentration ratios, and the largest Russian manufacturing enterprises (measured by number of employees) are not unusually large compared to US firms. Indeed what is noteworthy is the lack of _small firms_ in Russia.' However, this aggregate-level analysis masks three underlying attributes of Russia's industrial landscape.

## 1. **Horizontal** Dominance

First, large Russian enterprises tend to be configured as single integrated multi-plant establishments, often located in or near a single city. In contrast, in industrialized economies a given enterprise usually has multiple establishments and they are located across domestic regions and often abroad. In Russia, products as diverse as trolley buses, potato-harvesters, motor scooters, and coal-cutting and tunneling machines--to mention only a few of hundreds--are manufactured only in a single enterprise in the whole of the country. On an establishment basis, the largest Russian enterprises are significantly _larger_ than their counterparts in other countries, including the United States. Reliance on conventional measures of national market share and concentration thus likely understate the true extent of horizontal dominance in many Russian markets. Data on 328 firms in a 1997 World Bank-Russian Academy of Science (WB-RAS) survey<sup>6</sup> reveal that the average market share at the oblast level is 43%. Recent data on concentration indicate that at the oblast level, the average 4-firm concentration ratio is above 95%.

In large part, the existing level of horizontal dominance in Russian manufacturing markets is a legacy of Soviet centralized planning. Horizontal integration is also increasing. But less so through _de novo_ expansion than through mergers and acquisitions. The recently announced mergers among aluminum companies and the earlier proposed mergers of oil companies are cases in point. Horizontal integration is also increasing through the creation of financial industrial groups (FIGs). The WB-RAS survey found that enterprises with higher market shares are more likely to be registered as members of a FIG; indeed, the average oblast market share of firms associated with a FIG was 53%, while the average oblast market share for firms not associated with a FIG was 42%.

Surprisingly, empirical investigation of the effects of horizontal dominance on the performance of Russian firms is exceptionally sparse. This is in contrast to the vast literature on this issue for many developed and developing countries, including transition economies. Arguably, this is due to the paucity of comprehensive data on Russian firms in the short period since the onset of reform; and what data do exist suffer from the fact that Russian financial accouniting practices diverge from International Accounting Standards. Rectifying this data vacuum and carrying out systematic empirical analysis of such data should be seen as a major challenge to the Russian authorities if policy-making in this area is to be strengthened. In one of the few empirical studies that have been undertaken, support can be found for the notion that, as in other countries, in Russia, the greater the level of market concentration the higher are industry profits.<sup>7</sup> The same study found that capital intensity is negatively related to profitability. Data from the WB-RAS survey indicate that firms with lower capital productivity are more likely to be registered as "dominant" (generally defined as having market shares above 35%--see below) by the Ministry of Anti-Monopoly Policy and Support for Entrepreneurship (MAPSE). Worker productivity also 2