Ural Federal University: The Planned Economy Impacts Modern Enterprises

A team of scientists from Russia and France studied the relationship between the legacy of the planned economy and the modern location of firms. An empirical evaluation of more than 76,000 Russian and Soviet enterprises showed that companies established during the planned economy, despite their characteristics, do not differ from modern firms with respect to their sensitivity to key location factors such as human capital, market potential, and others.

The study also showed that there are industry specifics in factors influencing location. For example, high-tech companies are particularly sensitive to the level of human capital in the region when choosing a location. The findings are published in the journal Post-Communist Economies.

“I think many people are well aware that during the Soviet Union’s planned economy, the location of companies was largely determined by social need and political factors. In this regard, many modern studies point to the “inefficiency” of such location. In a free market economy, this decision is usually determined by the economic profitability of this or that location – market factors. And as these factors change, a firm can often change its location. For example, very often production is moved from developed to developing countries because of more available labor or softer government control,” says Andrey Pushkarev, a researcher at the UrFU School of Management and Interdisciplinary Studies.

Russia is a unique country in this regard, with a long period of a planned economy and only recently transitioned to a market economy, the researchers said.

“The study reveals a particular pattern of placement of Soviet enterprises operating today. However, a deeper analysis revealed: such enterprises tend to be special in their own right. They are substantially larger than most modern enterprises and represent certain industries. If we take these factors into account, there is no difference in the location of firms inherited from the Soviet period and modern firms,” explains Oleg Mariev, head of the Department of Economics at the UrFU.

The authors also assessed the specifics of company location in single-industry towns. Statistics show that firms from the Soviet period are much more likely to be located in such cities as compared to modern firms. However, the main factor in this location is the size of the firm, not its affiliation with the planned economy.

“Our results demonstrate the independence of the long-term persistence of the geographic pattern of firm location inherited from the Soviet period from factors operating at the level of individual firms. On the contrary, we find that agglomerations created during the Soviet period play a critical role. For most firms, being in such a “historically established” agglomeration has advantages that outweigh purely market forces. In other words, today’s firms are likely to continue following the geographic location path paved by Soviet enterprises. And while this placement may not be optimal in a global sense, it will take a long time and large amounts of investment to change it,” says Andrey Pushkarev.

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