Analyzing the Technical Efficiency of Russian Firms : 1992-1995

When Russia’s transition to a market-oriented economy began in 1992, detailed information about firm-level performance was not available, but there was widespread expectation that firm efficiency had to improve for the transition to succeed. Where were efficiency gains likely? Where were they needed? Did the Soviet development strategy of according high priority to firms in heavy industry give these firms an advantage during the first stage of Russia’s transition to a market-oriented economy? That is, were firms in heavy industry more likely to exhibit industry best-practice production methods? Using firm-level data collected in 1992 and 1995 from Goskomstat, the state statistical agency, we estimate a stochastic frontier production function for eleven industries with inefficiency effects related to ownership, export experience, and location in Moscow. We find that in 1992 firms in priority sectors exhibited higher inefficiency than firms in non-priority sectors; by 1995, differences diminish. Our results generally support the proposition that non-state ownership improves efficiency, but the ownership effect varies by industry and over time. We reject the hypothesis that export experience increases efficiency during the initial stage of Russia’s transition, and this result is especially strong in 1995. Location in Moscow proved to be an extremely positive factor, and the benefit grew over time