Putin's Russia: Is It a Doable Project?

Demokratizatsiya, Winter 2004 by Beliaev, Mikhail

Effects of Policy Factors on Regional FDI Inflows

Table 3 presents the estimation of models for regional FDI inflows. The restricted sample excludes Sakhalin (which has hosted a large FDI project in the natural gas production), Moscow City, St. Petersburg, and the region of Tyumen.

The estimates demonstrate a significant positive effect of the share of the independent mass media in a regional media market (MEDIA) on FDI inflows. The estimated elasticities are 1.6 and 1.9 for the full and restricted samples, respectively. This means that an increase in the share of the independent mass media by 1 percent corresponds with an additional 1.6-1.9 percent of FDI inflows in the region. Figure 2 illustrates the relationship between the independence of the mass media and FDI inflows.

The model for the full sample indicates that the effect may turn negative after a certain threshold. However, as the estimation for the restricted sample confirms, this non-linearity has appeared solely because Moscow City, a positive outlier on the strength of the independent mass media and GRP per capita, attracted considerably less FDI in 1999-2001 than one may expect, given the high potential of the region.

The effect of the interactive term does not appear significant; but, when it enters the model, the strength of electoral mandate for the regional head executive turns significantly negative. A possible explanation is that the effect of governor's electoral mandate may be marginally negative, when the popular support is not accompanied by the control over mass media and economic liberalization. Advances in privatization appear to be weakly associated with larger FDI inflows (?-ratio of 1.94, significant at the .1 probability level in the model, estimated on the restricted sample).

These findings hardly can be interpreted as empirical support for the hypothesis of "Putin's project." Moreover, we see that freedom of press is associated with higher FDI inflows. The relationship between the effects of political and economic liberalization on FDI inflows becomes apparent, when the model with MEDIA, PRIV_LAG, and controls is estimated on a restricted sample split on the strength of the governor's electoral mandate in two parts with 50 percent as the cutting point (table 4). The level of privatization appears to be a crucial factor for FDI attraction in the regions where elections have been highly competitive. In the rest of the country (forty-three regions), political liberalization seems to generate incentives for regional policy-makers to make the business environment more auspicious for foreign investors.

Effects of Policy Factors on SME

Which factors influence the environment for small entrepreneurs? Table 5 presents the estimations based on the full and restricted samples. The latter sample does not include Moscow City or St. Petersburg, two regions with the highest number of small enterprises per capita and most liberalized mass media, and Tyumen, which is distinguished by vast natural resources and high GRP per capita.