Market Competition and Firm Performance in Russia

The report is based on the test, which measures whether foreign and domestic product market as well as domestic factor market competition affect firm efficiency, using a 1992‐1998 panel of 14,961 Russian industrial firms, covering 75 percent of industrial employment in 1992. The results provide strong evidence that domestic product market competition, import competition, and local labor market competition have strong positive effects on firm efficiency. The impact of liberalization appears only gradually in the domestic product market, taking about four years to attain 90 percent of the long‐run value, but we find no such lags with respect to import competition or labor market competition. The degree of local competition appears to have more of an effect than national competition, suggesting that markets are geographically segmented. Better transportation infrastructure appears to turn potential product market competition into actual competition, while at the same time reducing firms' monopsony power on the labor market by facilitating worker mobility across municipalities. We also find that non‐state firms outperform state enterprises, even after controlling for selection bias in the determination of ownership. The results suggest that a reduction in import barriers, investment in transportation infrastructure, and elimination of interregional administrative trade barriers would stimulate industrial growth.