Poltical Connections and Investment Activity of Russian Firms: Survey Experiment Results

Andrei Yakovlev (Higher School of Economics)
Denis Ivanov (Higher School of Economics)

Abstract: Connections between business and bureaucrats are generally seen in the literature as a source of rents and a barrier to economic development. But practically all cases of successful catching up development realized in the 20th century involved, at their initial stages, preferences to entrepreneurs who had connections with the ruling political elite. In this paper we follow the logic of the “limited access orders” framework proposed by North, Wallis and Weingast (2009, 2013), arguing that connections between business and state officials are inevitable at early development stages of a market economy – since without sources of rents elites in LAOs would not be able to restrain violence and maintain political stability. The main question is about applying these rents: are they being squandered on the elite’s personal consumption or used for productive purposes? To determine how important are connections to bureaucrats for Russian entrepreneurs we used list experiment design within large-scale survey conducted in 2017 among 21,000 Russian firms. We found that 29% of entrepreneurs consider personal connections with regional and municipal bureaucrats as an important factor of their business development. Firms that made fixed capital investments in 2016 consider personal connections to bureaucrats to be more important: 37% say so among them vs. 27% among non-investing firms. An additional test revealed that connections with bureaucrats are significantly less important for successful business operation in Russian regions within the top tier of the 2015 investment climate rating, i.e. those with a low level of administrative costs of doing business (around 18% in this subsample vs. 29% in the overall sample).

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