SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Composition and Interests of Russia’s business lobbies: A test of Olson’s “encompassing organization” hypothesis.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Composition and Interests of Russia’s business lobbies:

A test of Olson’s “encompassing organization” hypothesis

HSE, April 2010

18.4.2010 HSE Conference

Bofit Discussion Paper 5/2010, available at www.bof.fi/bofit


Motivation

Special interest groups (lobbies) seek additional favors from local politicians at the expense of others (Grossman and Helpman 2001)

In reality, however, the externalities caused by lobby group actions differ, and some may even cause positive externalities

On business associations in less than perfectly functioning markets:– Doner and Scheider, 2000– Coates and Heckelman, 2003– Pyle, 2006 and 2009

Why are some lobby groups less benign in their external effects than others?



Olson’s hypothesis

Business lobbies have an interest to increase the welfare of their constituents, but …

Less-encompassing lobby groups with their constituents collectively representing a narrow range of sectors are more apt to seek policies (eg. subsidies, tariffs, tax benefits, and competition-limiting regulations) that impose costs on the rest of the society (Olson, 1982)

Basis for further analysis on collective action

Due to lack of data this intuitive result has never been formally tested !



We have a formidable dataset to test Olson’s hypothesis

Two surveys across the Russian Federation

Face-to-face survey with managers of 600+ industrial enterprises (spring and summer 2004)

Face-to-face survey with managers of 200 regional business associations (spring and summer 2004)



Surveys on business associations (n=145)


Summary statistics on regional associations

Mean Median

Number of sectors represented (14 listed, includes 7 industrial branches, transport, trade, communications, finance, healthcare, education, other)

7.43 8

Full-time employees 16.98 5

Years since founding 8.67 8

Founders – other business associations 0.428

Founders – individual(s), entrepreneur(s) 0.510

Founders – government (federal, regional, municipal) 0.228

Founders – unions 0.021

Founders – individuals formerly in government 0.620

Founders – former CP official 0.076

Members exclusively in single city 0.372

Located in Moscow 0.034

Located in St. Petersburg 0.048

Located in capital city of territorial subject 0.634


Surveys on firms, n=606

Summary statistics on firms

Members of regional association 0.394

Members of regional, multi-sector association 0.338

Members of regional, sector-specific association 0.079

Full-time employees (2004) 568.6

First registered after 1991 0.427

State or municipal enterprise 0.051

Influence of foreign shareholders (0-4) 0.020

Relative condition of ”material/technical base” (1-4, 2 is Russian average) 1.94

Level of competition in primary output market (1-5) 4.11

Major competitors include firms in other Russian regions (0, 1) 0.611

Major competitors include firms in other countries (0, 1) 0.294

Sell primary output to firms in other Russian regions 0.614

Sell primary output to firms in other countries 0.317

Sell primary output to Russian government (zakaz) 0.234

Sell primary output to firms that are part of same commercial group 0.127

Purchase inputs from firms in other Russian regions 0.642

Purchase inputs from firms in other countries 0.315

Purchase inputs from Russian government 0.072

Purchase inputs from firms that are part of same commercial group 0.114

Located in Moscow 0.036

Located in St Petersburg 0.031

Located in capital city of territorial subject 0.691

Sectoral representation – metallurgy 12.4

Sectoral representation -- machine building and metal working 17.7

Sectoral representation – chemicals 13.4

Sectoral representation -- wood processing and paper 13.0

Sectoral representation -- building materials 13.4

Sectoral representation – textiles 12.9

Sectoral representation -- food processing 14.9

8.4.2010 6HSE Conference


Setting the scene - survey results on the importance of business associations

Lobbying the local decision-makers is indeed an inportant function of the business associations (Table 3)

If a firm seeks to influence local legislation, it’s likely to do that both via business associations and through direct connections to decision-makers (Table 4)

Firms are more inclined to use business associations in politically more competitive regions (Table 5)



В КАКОЙ СТЕПЕНИ ВЫ СОГЛАСНЫ С УТВЕРЖДЕНИЕМ: ГОСУДАРСТВО ДОЛЖНО СОЗДАВАТЬ ОСОБЫЕ УСЛОВИЯ ДЛЯ РАЗВИТИЯ ПРИОРИТЕТНЫХ НАПРАВЛЕНИЙ ЭКОНОМИКИ (ЛЬГОТНОЕ НАЛОГООБЛОЖЕНИЕ, ПРЕДОСТАВЛЕНИЕ СУБСИДИИ И ПР.)

В КАКОЙ СТЕПЕНИ ВЫ СОГЛАСНЫ С УТВЕРЖДЕНИЕМ: ОРГАНЫ ВЛАСТИ СУБЪЕКТОВ ФЕДЕРАЦИИ ДОЛЖНЫ СОЗДАВАТЬ ЭКОНОМИЧЕСКИЕ БАРЬЕРЫ ДЛЯ ВВОЗА ТОВАРОВ ИЗ ДРУГИХ РЕГИОНОВ (РЕСПУБЛИК, КРАЕВ, ОБЛАСТЕЙ) И СТРАН С ЦЕЛЬЮ ПОВЫШЕНИЯ ЗАНЯТОСТИ, СОЗДАНИЯ БЛАГОПРИЯТНЫХ УСЛОВИЙ ДЛЯ РАЗВИТИЯ РЕГИОНА?

For firms

1 2 3 4 5 Total Average

Industrial policy 43 22 84 105 346 600 4.15

Import barriers 184 55 165 69 126 599 2.83

Attitudes toward free markets and government intervention: firms


Additional questions

В КАКОЙ СТЕПЕНИ ВЫ СОГЛАСНЫ СО СЛЕДУЮЩИМ УТВЕРЖДЕНИЕМ: НАШ РЕГИОН (РЕСПУБЛИКА, КРАЙ, ОБЛАСТЬ, ГОРОД) В ЦЕЛОМ ТОЛЬКО ВЫИГРАЕТ ОТ ВСТУПЛЕНИЯ В ВТО?

В КАКОЙ СТЕПЕНИ ВЫ СОГЛАСНЫ СО СЛЕДУЮЩИМ УТВЕРЖДЕНИЕМ: РОССИЙСКАЯ ЭКОНОМИКА В ЦЕЛОМ ТОЛЬКО ВЫИГРАЕТ ОТ ВСТУПЛЕНИЯ В ВТО

Attitudes toward free markets and government intervention: associations

For regional associations

1 2 3 4 5 Total Average

Industrial policy 4 4 15 32 90 145 4.38

Import barriers 53 16 34 23 19 145 2.58

WTO – good for region 21 22 49 18 11 121 2.80

WTO – good for Russia 24 24 58 23 15 144 2.87


Testing Olson’s hypothesis

Seek to explain the variation in associations / member’s attitudes by – variables proxing encompassingness (multi-sector / sector-

specific, n. of sectors represented/ founded by other association) – plus a rich set of control variables including

• association / firm specific variables • location, regional economic structure

Standard ordered probit regressions



Are less encompassing associations different?


Industrial policy

Import barriers

WTO and region

WTO and country

Number of sectors represented in membership -0.001 -0.070** 0.083** 0.049**

Founders include other business association(s) -0.794** -0.534** 0.327 0.291

Full-time employees (log) 0.036 -0.006 0.196* 0.101

Years since founding (log) -0.061 0.135 -0.339 -0.072

Membership from one city 0.201 0.222 0.420 0.045

Political competition in region 0.112 0.103 -0.057 0.056

Regional controls x x x x

Location controls x x x x

Founder controls x x x x

Number 135 135 113 134

Prob > chi2 0.0000 0.0000 0.0000 0.0000

Adjusted R2 0.0874 0.0791 0.0935 0.0534

Ordered probit by STATA, robust standard errors, adjusted for clustering at regional level

***, **, * significant at 1%, 5%, or 10%


Do members of less encompassing associations view things differently?


Industrial policy

Import barriers

Industrial policy

Import barriers

Member of multi-sector association 0.136 0.125Member of sector-specific association 0.355** 0.400** 0.284 0.501**

Full-time employees (log) -0.095** -0.028 -0.192** -0.117*

Founded in post-Soviet era -0.224** -0.042 -0.484*** -0.322*

State or municipal enterprise 0.521** 0.045 0.706 -0.362

Influence of foreign shareholders -0.123 0.018 -0.296** 0.022

Relative quality of capital equipment 0.061 -0.120** 0.254 0.046

Location controls x x x xSector controls x x x xRegional controls x x x x

Competitor and trade partner controls x x x x

Number of observations 579 579 234 234

Prob > chi2 0.0000 0.0000 0.0000 0.0000

Adjusted R2 0.0336 0.0263 0.0902 0.0615Ordered probit by STATA, robust standard errors, adjusted for clustering at regional level

***, **, * significant at 1%, 5%, or 10%

All firms Members


Conclusions

Less-encompassing associations view targeted government intervention more favorably

Also the members of the less-encompassing associations are more favorable to government intervention

Somewhat surprisingly, regional variation in political and economic environment does not help to explain the differences in attitudes.

We provide the first direct test confirming Olson’s view that lobby group composition and its interests are related



Thank you!

[email protected]

www.bof.fi/bofit

21.04.23 14

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Composition and Interests of Russia’s business lobbies: A test of Olson’s “encompassing organization” hypothesis.

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