Sholomitskaya_Summary_20180823 (Структура заимствований нефинансовых корпораций и реальное накопление в российской экономике)

National Research University Higher School of EconomicsElena SholomitskayaNON-FINANCIAL CORPORATIONS’ BORROWINGAND THE REAL CAPITAL ACCUMULATIONIN THE RUSSIAN ECONOMYEconomic sciencesPhD Dissertation SummaryAcademic Supervisor:Revold Entov, ProfessorJEL: E22, G31Moscow – 2018Problem description. The real capital accumulation is one of the channelsthrough which the financial sector influences the economic growth.

The process ofcapital accumulation begins at the microeconomic level, i.e. at the firm level, andits results are observed at the level of the economy as a whole. Therefore,understanding of the phenomena, arising at the firm level and affecting the capitalaccumulation, should contribute to the formulation of the adequate economicpolicy on supporting enterprises and industries in order to use the opportunities forcatch-up growth in Russia.The Russian economy, which had gone through the transition to the market,transformational recession and subsequent recovery, is still under the conditionsthat are not entirely market-based, if compared to those in developed countries.The active role of the state and the imperfections of market mechanisms affectedthe behavior of Russian firms, whose features make them different from aconventional representative firm that appears in typical economic models, designedfor developed market economies.

Therefore, while the thesis is based on traditionalneoclassical model, we incorporated some features of the Russian economy. Thisalso stresses on the significance of the research.Russian companies quite actively use loans as a source of funding. At thesame time, the transformation of financial flows into fixed capital is unstable andto large extent unclear process.

After 2012-2013 there were significantdisproportions in the dynamics of credit and real capital flows. Both internal andexternal corporate debt steadily grew with high rates until 2015, while the growthrates of investments in fixed capital were close to zero.Fixed capital investment is a form of investments which contributes to theformation of new assets, i.e.

the real capital accumulation. Another form ofinvestments is investment in the acquiring of other companies, and these two typesof investment expenditures differ from each other from the firm's point of view and2fundamentally, since they affect economic growth through different channels: thefirst form – through capital accumulation at the level of the economy as a whole,and the second one – through reallocation.Investing in fixed assets is not always the main purpose for attracting loansby Russian companies.

Large corporations attract much funds to acquire othercompanies in the industry, including direct competitors to increase their ownmonopoly power. Such a policy often aims at benefiting from the anticipatedgrowth in the value of the company due to the expectations of rising prices for itsproducts. Besides this, acquiring companies can be the part of empire-buildingstrategy. Since the decisions on investing in fixed assets either in existing assets,i.e. other firms, are interrelated at the firm level, especially through the issue offinancing, we consider them together within one framework of this study.Our goal was to take into account the pecularities of the the Russianeconomy as much as possible, special attention will be paid to the role ofgovernment participation in the corporate sector. There is a discussion in theacademic literature on whether the state eliminates market “failures” or, on theopposite, distorts the efficient allocation of resources and crowds out privateinvestments.

Our hypothesis is that the active participation of the state in thecorporate sector functioning can facilitate the crowding out of private investmentsby “quasi-state” companies, or in other words, investments by companies withgovernment participation in capital, under the conditions of limited financialresources. This may be amplified by directing substantial funds to conducting largecorporate transactions aimed at the redistribution of assets and empire-building.Review of selected literature. Capital accumulation and the investmentdynamics in the Russian economy were analyzed in the works of V.

Bessonov, I.Voskoboynikov, L. Grigoriev, E. Gurvich, R. Kapelyushnikov, E. Nazrullaeva, A.Radygin, Yur. Simachev, S. Stepanov, R. Entov. At the same time, although3investments are considered in the context of their debt financing, the understandingof the links between these processes is vague, mostly due to the lack of the relevantdatabase (with dynamic data) at the firm level. The transformation of credit flowsinto real capital flows and the related constraints are still not sufficiently explored.Among the international studies, devoted to the issue of the determinants ofcorporate investments, the most important are the ones by P.

Clark, S. Myers, M.Jensen, S. Fazzari, R. Hubbard, S. Gilchrist and K. Hammelberg, C. Hennessey, O.Lamont, J. Stein. For example, Fazzari et al. [1988] showed that the company'sown financial resources have a significant impact on investment. The impact of thedebt burden also matters. Lamont [1995] shows that accumulated debt can generatethe problem of debt overhang depending on economic conditions. Therefore itsimpact on investment and macroeconomic dynamics is exacerbated during thecrisis and post-crisis periods, and we are demonstrating this effect for the Russianeconomy.Investments in the form of mergers and acquisitions were examined in theworks of B.

Jovanovic and P.L. Rousseau, R. Morck and D. Wolfenzon, A.Spearot, V. Maksimovich, G. Phillips, M. Warusawitharana. Jovanovic andRousseau [2002] were among the first who proposed to consider investing inmergers and acquisitions as conceptually equal to investments in used capital(purchase of assets in the secondary market). The application of this concept givesus basis for studying the real capital accumulation and mergers and acquisitionsunder the framework of one model.We pay special attention to the empire-building phenomenon.

This topic hasbeen actively developed in the academic literature since the late 1950s ([Baumol,1959]), many works appeared in the 1980s and 1990s ([Amihud, Lev, 1981],[Rhoades, 1983], [Stulz, 1990], [Hart, Moore, 1995]). After 2000 there was anumber of works devoted to empire-building strategies and the contract4weaknesses, which cannot solve this issue, analyzing them in the framework oftheoretical models (e.g., [Kanniainen, 2000]) or searching for the empiricalevidence for the existence of empire-building motives ([Masulis et al., 2007]).The most relevant for the problems, raised in the thesis and investigating therole of the state in the corporate sector activity, are those done by A. Schleifer, R.Vishny, J. Kornai, E. Perotti, L.

Chernykh, and for the Russian economy – by T.Dolgopyatova, J. Pappe, C. Sprenger, A. Yakovlev. For examole, Dolgopyatova[2015] and Sprenger [2010a, 2010b] are considering the process of expanding stateparticipation in the Russian economy since the mid-2000s. A comprehensiveanalysis of this kind of “renationalization” as a result of “government-initiatedtakeovers” is carried out in the paper by Chernykh [2011].

The main result of herresearch is that the acquisitions of other companies carried out by state-ownedcompanies in Russia do not depend on the profitability of the target company.However, in this work, investments in acquisitions are considered from the point ofview of the target company’s features, while we consider from the point of view ofthe acquiring company’s characteristics. The role of government participation inthe company's capital is described by Perotti [2014], where he discusses the easierthan for other market participants access of such companies to loanable funds.In order to analyze the dynamics of investments at the macroeconomic level,we apply a structural vector autoregressive model with sign restrictions.

Thismodel is used as a tool for analyzing the impact of shocks on variousmacroeconomic indicators in [Uhlig, 2005], [Mountford, Uhlig, 2005], [Enders etal., 2008], [Vargas-Silva, 2008], [Malick, Sousa, 2013]. Examples of studies usingthis econometric approach for analyzing the Russian economy are [Deryugina,Ponomarenko, 2011] and [Deryugina et al., 2015]. Factors affecting Russianinvestment in fixed assets are considered, for example, by Lomivorotov [2014](along with other macroindicators), while Gurvich and Prilepsky [2016], as well as5Shirov et al.

[2015] draw attention to the fact that after 2014, the dynamics ofinvestment was under the significant influence of sanctions against Russia. We willpay special attention to this issue as well, studying the role of foreign borrowingsof non-financial corporations for investment.By the present moment there’re quite a lot of different theories of investmentbehavior, explaining these or those phenomena, and a significant amount ofempirical evidence is accumulated. However, the question of whetheroverinvestment and underinvestment can arise under the same conditions, and ifso, for what reasons, doesn’t have the clear answer.

Our approach is to consider thevarious forms of investment simultaneously and in the context of their financing.Moreover, the number of studies, providing the empirical evidence on investmentbehavior of Russian companies, is quite small (e.g., [Kapelyushnikov, 2005],[Lazareva, Rachinsky, Stepanov, 2008]). Taking into account the changes, whichoccurred in the Russian economy over the past few years: the transition fromsteady economic growth to a weaker dynamics and even stagnation, the increase ofstate participation – makes it necessary to obtain relevant estimations, whichreckon in these changes.The object of the research and definition of key terms.

The objects of theresearch are investments in fixed assets at the firm level and the level of theeceonomy as a whole (aggregate investment), as well as firm investments inmergers and acquisitions, and factors that influence the investment behavior,causing underinvestment, overinvestment, and the transition from one state toanother.