Raiders, Property Rights, and Investment: Evidence from Russia's Regions
Abstract: How does uncertainty over property rights shape the investment decisions of firms in poor institutional environments? Existing works largely focus on the dangers firms face from the state. In canonical models, the state is unitary, implying that property rights can be secured by imposing strong institutional constraints on the state’s authority. Less well studied, however, are cases in which the state consists of myriad groups facing different degrees of constraint. Here, firms are threatened by less constrained elements of the state and by rival firms, who find state partners for predatory behavior. In this paper, we examine a concrete example: raiding “Russian style”. In Russia’s regions, firms often collude with law enforcement turning the weapons of the state against competitors and exposing them to hostile (often violent) take-overs. Drawing on existing work, we argue that in a regional environment where state-abetted raiding attacks on firms by other firms, firms should feel less secure in their property rights and less willing to invest. We also argue that this effect should be weaker for firms that are able to hide their assets and activities from others, thus making them less attractive targets. To test these arguments, we exploit regional level variation in the quality of institutions and in the extent of raiding. Specifically, we combine micro-level data from a survey of 1950 manufacturing firms in 60 Russian regions with a unique dataset of corporate raiding attacks across the Russian federation compiled by the NGO “Business Against Corruption”. Our main finding is that firms in regions in which raiding activity is higher are less likely to invest. We also show that certain types of firms – those willing to report their ownership structure, those with mobile assets, and those belonging to a business association – in regions with high levels of raiding are more likely to invest than other firms in the same regions.