more productive and therefore more likely to export, the bigger Russian firms are undoubtedly responsible for most of the exports.

The North Caucasus is the most concentrated Russian region in terms of export markets. Figure 26 **Error! Reference source not found.** shows export market concentration according to the Herfindahl‐Hirschman Index. The North Caucasus relies on two export markets, those for construction and transportation (see also Table 6). The Volga region has the lowest concentration index; it is most diversified. Concentration is inevitable for some products, since most Russian services exports went to either Ukraine or the EU (2010 data).

Disaggregated, the Moscow region is the most diversified and the Arkhangelsk and Pskov regions the least. **Error! Reference source not found.** shows the five most diversified smaller regions (panel A) and the five most concentrated (panel B). The Nizhni Novgorod region is highly diversified—not surprising, because it adjoins the Moscow region. Yet regions more distant from the capital, such as Omsk and Voronezh, also have low concentration levels.

Among the most diversified regions, each has its own comparative specialization due to geographical endowments and development patterns. **Error! Reference source not found.** shows the Location Quotient index, which uses exporter revenue data. The index measures the extent to which each region has relatively high productivity compared to the national average. The pattern of specialization clearly differs by region. For instance, the Northwest has an obvious comparative advantage in administrative support activities and Siberia in financial and insurance services, followed by transportation. The Central region has high relative productivity in health, distribution, finance, and real estate. The Ural region scores high in information and communication services. The fact that each region has its own specialization suggests that services policies will affect each region to a different degree.

Russian regions also profit from foreign direct investment (FDI) in services, which makes services firms that provide inputs to goods manufactures more productive. For instance, Arnold et al. (2012) found that foreign presence in services firms brings productivity gains to manufacturing firms. The data allow only for analysis in terms of number of firms that receive FDI. Figure 27 shows that two types of FDI can be traced: (1) FDI in firms that have a global ultimate owner, and (2) foreign investment in domestic firms. In both cases, foreign investors own more than 50 percent of the recipient company. In Russia, FDI goes overwhelmingly to services, with only a small amount invested in manufacturing. Within services, most FDI goes to the distribution sector, followed by construction services and transportation.

The countrywide distribution of FDI recipients is largely similar in each region. Table 10 shows the distribution of FDI firms across regions in Russia and illustrates that distribution, construction, and other important sectors have a similar distribution of FDI recipient firms as Russia as a whole. Transportation, however, has low distribution shares in the Central region but relatively high shares in the Northwest, South, and Far East regions.

**Box 2: FDI, Growth, and Regional Convergence**

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