Analyzing the efficiency of Russian firms

Purpose - Did the Soviet development strategy of according high priority to firms in heavy industry give these firms an advantage during Russia's transition to a market‐oriented economy? This paper seeks to answer this question. Design/methodology/approach - To document industry variation in efficiency between priority and non‐priority sectors, the paper uses firm‐level data collected in 1992 and 1995 to estimate a stochastic frontier production function for 11 industries. It then aims to investigate which firm characteristics contributed to variation in technical efficiency between 1992 and 1995. Findings - Firms in low‐priority sectors exhibited higher efficiency in 1992 than firms in high‐priority sectors; by 1995, efficiency differences diminish. Efficiency gains were relatively higher in industries which experienced the largest percentage output declines. Non‐state ownership tends to improve efficiency, but the ownership effect varies by industry and over time. The paper rejects the hypothesis that export experience increases efficiency, and this result is especially strong in 1995. Location in Moscow proved to be a positive factor, and the benefit grew over time. Research limitations/implications - Panel data were not used because near‐hyper‐inflationary conditions and changes in capital valuation methods make it impossible to accurately adjust output and capital values between 1992 and 1995; and because firms that divided into multiple units or changed industry classification between 1992 and 1995 would need to be dropped, reducing sample size considerably and making industry‐level analysis impossible. Practical implications - The paper provides a baseline for analyzing the impact of the transition on the performance of Russian manufacturing firms. It evaluates the influence of location (capital city effect) on firm performance, and demonstrates that privatization alone is not sufficient to improve efficiency. Originality/value - This is the first study to examine the initial impact of transition on the efficiency of Russian firms across 11 industries, with focus on differences between former priority and non‐priority sectors. The results underscore the magnitude of structural dislocation caused by planners' preferences in the former Soviet economy.