Foreign investments crucial for positive return on exports

December 07, 2017

Experts at Higher School of Economics (HSE) have shown that the availability of direct foreign investment is an important and necessary condition for positive return on exports for companies operating in foreign markets. Such companies consequently encounter a higher level of competition in terms of quality and intensity. Research results have been published in the Baltic Journal of Management: http://www.emeraldinsight.com/doi/full/10.1108/BJM-04-2017-0103

Scientists at HSE's International Laboratory of Intangible-driven Economy analyzed a sample of more than 1000 Russian joint-stock companies using open data from 2004-2014. They found that getting foreign owners to become shareholders, in cases where Russian companies lag significantly behind foreign competitors, is a mechanism for overcoming sunk costs and to facilitate the success of an export-oriented strategy for Russian companies. This is due both to a higher degree of diversification of funding sources as well as to participation in global value chains.

In recent years, there has been a positive trend in the competitiveness of Russia as a whole (since 2012, Russia has risen by 29 places and currently ranks 38 out of 137 countries in the Global Competitiveness Index). However, experts have drawn attention to a consistently low level of development of public institutions (83rd), financial markets (107th) and product competitiveness (71st) according to the Global Competitiveness Report 2017. Therefore, the need to research strategies aimed at increasing a company's level of competitiveness on the global market has become even more important. Global experience shows that internationalization strategies can be one of the most effective solutions for companies operating in emerging markets.

HSE experts analyzed Russian joint-stock companies using instrumental variables and panel data and generalized methods of moments (GMM-estimator). This approach was chosen based on the emerging endogeneity between exports and a company's performance. In other words, it is not always clear whether exports are the reason for a company's success, or vice versa.

'According to the results of the study, the advantages of relational capital for Russian companies, in particular foreign direct investments in the form of capital participation, can offset the poor quality of corporate governance and property rights protection, and lack of development in the institutional environment', explains study author, Anna Bykova.

The study revealed that financial constraints are being reduced due to cheaper and more accessible foreign credit resources from foreign partners, as well as due to their credit reputation. In addition, HSE experts have confirmed empirically that foreign direct investment can be considered a mechanism to increase the competitiveness of Russian enterprises in import substitution. This is thanks to the knowledge and technology acquired from foreign partners and their subsequent transformation into more competitive products.

This research was carried out by scientists at the International Laboratory of Intangible-driven Economy and was funded by the RSF grant, 'Competitiveness of Russian companies with regard to import substitution'.
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National Research University Higher School of Economics

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