Training Strategies and Skill Development Amid Weak Institutions : Evidence from Russia

How do firms decide between different strategies for acquiring highly skilled workers? Ronald Coase (1937) famously argued that firms face trade-offs between “making” required inputs within the firm and contracting with outside actors to “buy” them. Similar trade-offs abound in deciding between in-plant training and outsourcing to either public or private, third parties. Existing theory on firms' training strategies is premised on the ability of firms to solve a fundamental commitment problem, which retards cooperation between firms and other actors. Only with a strong civil society – employers' associations and labor unions – or free, transparent and efficient market mechanisms is cooperation possible. Contemporary Russia presents a puzzle to this work. On the one hand, firms increasingly make costly co-investments with state-run schools and outsource training to private third-parties. On the other hand, civil society and judicial institutions are weak in Russia, making it difficult for firms to punish counterparties, at the same time that its markets have failed to fully make the transition to free and transparent capitalism. This paper argues that absent strong civil society and free, transparent markets, firms can overcome commitment problems and work with third-parties so long as their regional governments have strong state capacity and are politically accountable. The former assures firms that central, regional authorities can monitor school officials and private-third parties to ensure agreements are honored, while the latter creates incentives for regional authorities to do so. These theories are tested on original survey data covering 690 firms in 12 Russian regions