Tag: FDI

Risks of Russian Business Ownership in Georgia

Image of Tbilisi at night representing risks of Russian business ownership in Georgia

This policy brief addresses risks tied to Russian business ownership in Georgia. The concentration of this ownership in critical sectors such as electricity and communications makes Georgia vulnerable to risks of political influence, corruption, economic manipulation, espionage, sabotage, and sanctions evasion. To minimize these risks, it is recommended to establish a Foreign Direct Investment (FDI) screening mechanism for Russia-originating investments, acknowledge the risks in national security documents, and implement a critical infrastructure reform.

Russia exerts substantial influence over Georgia. First and foremost, Russia has annexed 20 percent of Georgia’s internationally recognized territories of Abkhazia and South Ossetia. Further, it employs a variety of hybrid methods to disrupt the Georgian society including disinformation, support for pro-Russian parties and media, trade restrictions, transportation blockades, sabotage incidents, and countless more. These tactics aim to hinder Georgia’s development, weaken the country’s statehood, and negatively affect pro-Western public sentiments (Seskuria, 2021 and Kavtaradze, 2023).

Factors that may also increase Georgia’s economic dependency on Russia concern trade relationships, remittances, increased economic activity driven by the most recent influx of Russian migrants, and private business ownership by Russian entities or citizens (Babych, 2023 and Transparency International Georgia, 2023). This policy brief assesses and systematizes the risks associated with Russian private business ownership in Georgia.

Sectoral Overview of Russian Business Ovnership

Russian business ownership is significant in Georgia. Recent research from the Institute for Development of Freedom of Information (IDFI) has addressed Russian capital accumulation across eight sectors of the Georgian economy: electricity, oil and gas, communications, banking, mining and mineral waters, construction, tourism, and transportation. Of the eight sectors considered by IDFI, Russian business ownership is most visible in Georgia’s electricity sector, followed by oil and natural gas, communications, and mining and mineral waters industries. In the remaining four sectors considered by IDFI, a low to non-existent level of influence was observed (IDFI, 2023).

Figure 1. Overview of Russian Ownership in the Georgian Economy as of June 2023.

Source: IDFI, 2023.

There are several reasons for concern regarding the concentration and distribution of Russian business ownership in the Georgian economy.

First, it is crucial to keep Russia’s history as a hostile state actor in mind. Foreign business ownership is not a threat in itself; However, it may pose a threat if businesses are under control or influence of a state that is hostile to the country in question (see Larson and Marchik, 2006). Business ownership has been a powerful tool for the Kremlin, allowing Russia to influence various countries and raising concerns that such type of foreign ownership might negatively affect national security of the host country (Conley et al., 2016). Similar concerns have become imperative amidst Russia’s full-scale war in Ukraine (as, for instance, reflected in Guidance of the European Commission to member states concerning Russian foreign acquisitions).

Further, Russian business ownership in Georgia is particularly threatening due to the ownership concentration within sectors of critical significance for the overall security and economic resilience of the country. While there is no definition of critical infrastructure or related sectors in Georgia, at least two sectors (energy and communications) correspond to critical sectors, according to international standards (see for instance the list of critical infrastructure sectors for the European Union, Germany, Canada and Australia). Such sectors are inherently susceptible to a range of internal and external threats (a description of threats related to critical infrastructure can be found here). Intentional disruptions to critical infrastructure operations might initiate a chain reaction and paralyze the supply of essential services. This can, in turn, trigger major threats to the social, economic, and ecological security and the defense capacity of a state.

Georgia’s Exposure to Risks

Identifying and assessing the specific dimensions of Georgia’s exposure to risks related to Russian business ownership provides a useful foundation for designing policy responses. This brief identifies six distinct threats in this regard.

Political Influence

Russia’s business and political interests are closely intertwined, making it challenging to differentiate their respective motives. This interconnectedness can act as a channel for exerting political influence in Georgia. Russians that have ownership stakes in Georgian industries (e.g. within electricity, communications, oil and gas, mining and mineral waters) have political ties with the Russian ruling elite facing Western sanctions, or are facing sanctions themselves. For instance, Mikhail Fridman, who owns up to 50 percent of the mineral water company IDS Borjomi, is sanctioned for supporting Russia’s war in Ukraine. Such interlacing raises concerns about indirect Russian influence in Georgia, potentially undermining Georgia’s Western aspirations.

Export of Corrupt Practices

The presence of notable Russian businesses in Georgia poses a significant threat in terms of it nurturing corrupt practices. Concerns include “revolving door” incidents (movement of upper-level public officials into high-level private-sector jobs, or vice versa), tax evasion, and exploitation of the public procurement system.  For instance, Transparency International Georgia (2023) identified a “revolving door” incident concerning the Russian company Inter RAO Georgia LLC, involved in electricity trading, and its regulator, the Georgian state-owned Electricity Market Operator JSC (ESCO). One day after Inter RAO Georgia LLC was registered, the director of ESCO took a managerial position within Inter RAO Georgia LLC. Furthermore, tax evasion inquiries involving Russian-owned companies have been documented in the region, particularly in Armenia, further highlighting corruption risks. We argue that such corrupt practices might harm the business environment and deter future international investments.

Economic Manipulation

A heavy concentration of foreign ownership in critical sectors like energy and telecommunications, also poses a risk of manipulation of economic instruments such as prices. The significant Russian ownership in Armenia’s gas distribution network exemplifies this threat. In fact, Russia utilized a price manipulation strategy for gas prices when Armenia declared its EU aspirations. Prices were then reduced after Armenia joined the Eurasian Economic Union (Terzyan, 2018).


Russian-owned businesses within Georgia’s critical sectors also pose espionage risks, including economic and cyber espionage. Owners of such businesses may transfer sensitive information to Russian intelligence agencies, potentially undermining critical infrastructure operations. As an example, in 2022, a Swedish business owner in electronic trading and former Russian resident, was indicted with transferring secret economic information to Russia. Russian cyber-espionage is also known to be used for worldwide disinformation campaigns impacting public opinion and election results, compromising democratic processes.


The presence of Russian-owned businesses in Georgia raises the risk of sabotage and incapacitation of critical assets. Russia has a history of using sabotage to harm other countries, such as when they disrupted Georgia’s energy supply in 2006 and the recent Kakhovka Dam destruction in Ukraine (which had far-reaching consequences, incurring environmental damages, and posing a threat to nuclear plants). These incidents demonstrate the risk of cascading effects, potentially affecting power supply, businesses, and locations strategically important to Georgia’s security.

Sanctions and Sanction Evasion

Russian-owned businesses in Georgia face risks due to Western sanctions as they could be targeted by sanctions or used to evade them. Recent cases, like with IDS Borjomi (as previously outlined) and VTB Bank Georgia – companies affected by Western sanctions given their Russian connections – highlight Georgia’s economic vulnerability in this regard. Industries where these businesses operate play a significant role in Georgia’s economy and job market, and instabilities within such sectors could entail social and political concerns. There’s also a risk that these businesses could help Russia bypass sanctions and gain access to sensitive goods and technologies, going against Georgia’s support for international sanctions against Russia. It is crucial to prevent such sanctions-associated risks for the Georgian economy.

Assessing the Risks

To operationalize the above detailed risks, we conducted interviews with Georgian field experts within security, economics, and energy. The risk assessment highlights political influence through Russian ownership in Georgian businesses as the foremost concern, followed by risks of corruption, risks related to sanctions, espionage, economic manipulation, and sabotage. We asked the experts to assess the severity level for each identified risk and notably, all identified risks carry a high severity level.


Considering the concerns detailed in the previous sections, we argue that Russia poses a threat in the Georgian context. Given the scale and concentration of Russian ownership within critical sectors and infrastructure, a dedicated policy regime might be required to improve regulation and minimize the associated risks. Three recommendations could be efficient in this regard, as outlined below.

Study the Impact of Adopting a Foreign Direct Investment Screening Mechanism

To effectively address ownership-related threats, it’s essential to modify existing investment policies. One approach is to introduce a FDI screening mechanism with specific functionalities. Several jurisdictions implement mechanisms with similar features (see a recent report by UNCTAD for further details). Usually, such mechanisms target FDI’s that have security implications. A dedicated screening authority overviews investment that might be of concern for national security and after assessment, an investment might be approved or suspended. In Georgia, a key consideration for designing such tool includes whether it should selectively target investments from countries like Russia or apply to all incoming FDI. Additionally, there’s a choice between screening all investments or focusing on those concerning critical sectors and infrastructure. Evaluating the investment volume, possibly screening only FDI’s exceeding a predefined monetary value, is also a vital aspect to consider. However, it’s important to acknowledge that FDI screening mechanisms are costly. Therefore, this brief suggests a thorough cost and benefit analysis prior to implementing a FDI screening regime in Georgia.

Consider Russian Ownership-related Threats in the National Security Documents

Several national-level documents address security policy in Georgia, with the National Security Concept – outlining security directions – being a foundational one. Currently, these concepts do not specifically address Russian business ownership-related threats. When designing an FDI screening mechanism, however, acknowledging various risks related to Russian business ownership must be aligned with fundamental national security documents.

Foster the Adoption of a Critical Infrastructural Reform

To successfully implement a FDI screening mechanism unified, nationwide agreement on the legal foundations for identifying and safeguarding critical infrastructure is needed. The current concept for critical infrastructure reform in Georgia envisages a definition of critical infrastructure and an implementation of an FDI screening mechanism. We therefore recommend implementing this reform in the country.


This policy brief has identified six distinct risks related to Russian business ownership in several sectors of the Georgian economy, such as energy, communications, oil and natural gas, and mining and mineral waters. Even though Georgia does not have a unified definition of critical infrastructure, assets concentrated in these sectors are regarded as critical according to international standards. Considering Russia’s track record of hostility and bearing in mind threats related to foreign business ownership by malign states, this brief suggests regulating Russian business ownership in Georgia by introducing a FDI screening instrument. To operationalize this recommendation, it is further recommended to consider Russian business ownership-related threats in Georgia’s fundamental security documents and to foster critical infrastructural reform in the country.


Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Investing, Producing and Paying Taxes Under Weak Property Rights

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Oil majors often choose to operate in countries with weak property rights. This may appear surprising, since the lack of constraints on governments may create incentives to renege on initial promises with firms and renegotiate tax payments once investments have occurred and, in the worst case, expropriate the firm. In theory, backloading investments, production and tax payments may be used to create self-enforcing agreements which do not depend on legal enforcement. Using a new dataset covering the universe of oil majors’ assets that started production between 1974 and 1999, we indeed show in a recent CEPR Working Paper (Paltseva, Toews, and Troya-Martinez, 2022) that investments, production and tax payments are delayed by two years in countries with weak institutions relative to countries with strong institutions. Extending the dataset back to 1960 and exploiting the transition to a new world oil order where expropriation became easier, allows us to interpret our estimates as causal. In particular, prior to the transition expropriations were not feasible, due to the omnipresent and credible military threat imposed by the oil majors’ countries of origin. As the new order sat in, a new equilibrium emerged, in which expropriations became a feasible option. This transition incited an increase in expropriations and forced firms to adjust to the new reality by backloading contracts.

The Hold-up Problem

In December of 2006, when the oil price was climbing towards new heights, the Guardian reported that the Russian government was about to successfully force Shell into transferring their controlling stake in a huge liquified gas project back into the hands of the government. While officially this was motivated by environmental concerns surrounding the Sakhalin-II project, most observers agreed that this might be considered a textbook example of the hold-up problem faced by oil firms when investing in countries with limited constraints on the executive. At its core, the hold-up problem refers to the idea that the government may renege on the initial promise and appropriate a bigger share of the pie once investments have been made. Obviously, this is not an oil-specific issue and concerns any type of investment in countries with weak property rights. Academics, who worked on resolving these issues, suggest the use of self-enforcing agreements (Thomas and Worrall, 1994). These agreements use future gains from trade (as opposed to third-party enforcement) to incentivize the governments not to expropriate. And while the theoretical literature has prolifically developed over the last 30 years (Ray, 2002), to the best of our knowledge no empirical evidence has been provided on the use and dynamic patterns of self-enforcing backloaded contracts.

Data and Sample

In Paltseva, Toews and Troya-Martinez (2022), we rely on micro-level data on oil and gas projects provided by Rystad Energy, an energy consultancy based in Norway. Its database contains current and historical data on physical, geological and financial features for the universe of oil and gas assets. We focus on the assets owned by the oil majors (BP, Chevron, ConocoPhilips, Eni, ExxonMobile, Shell, and Total) using all assets that started production between 1960 and 1999, leaving us with a total of 3494 assets. An asset represents a production site with at least one well, operated by at least one firm, and with the initial property right being owned by at least one country. Being able to conduct the analysis on the asset level is particularly valuable since it allows us to control for a large number of confounding factors and rule out several alternative explanations of our main finding.

Moreover, there are three advantages of focusing our analysis on the oil and gas sector in general and the oil majors in particular. First, the sunk investments in the development of oil and gas wells are enormous, making the hold-up problem in the oil sector particularly severe. Second, oil majors have been around for many years since all of them were created before WWII. This provides us with a sufficiently long horizon to capture backloading over time. Third, the majors are simultaneously investing in many countries which provides us the necessary cross-sectional variation in institutional quality. To differentiate between countries with weak and strong institutions, we use a specific dimension from the Polity IV dataset measuring the constraints on the executive. The location of all the assets disaggregated by firm as well as a binary distinction in a country’s institutional quality is shown in Figure 1.

Figure 1. Spatial distribution of assets and institutional quality

Note: Location and ownership of assets are provided by Rystad Energy. The executive constraint indicator is taken from Polity IV and we use the median from the period 1950 to 1975 to define whether the country is considered to have strong or weak institutions. The cut-off of 5 implies that roughly 1/3 of the countries are defined as having strong institutions and roughly 50% of all the assets which started operation between 1950 and 2000 are located in countries with weak institutions.

A Stylized Fact

For the empirical analysis, our variables of interest are investment, production and tax payments normalized by the respective asset-specific cumulative sum over a period of 35 years. The resulting cumulative shares are depicted in Figure 2. We focus on physical production which, in addition to being considered the most reliable measure of an asset’s activity, does not require discounting. Real values of investment and tax payment depict a very similar picture. Most importantly, the dashed lines illustrate that 2/3 of cumulative production shares are reached approximately two years earlier in countries with strong institutions, in comparison to countries with weak institutions. The average asset size does not differ significantly between these groups. Such delays are costly for countries with weak institutions. Our back-of-the-envelope calculation suggests that the average country loses around 120 million US$ per year due to the delayed production and the respective tax payments. We confirm that the two-year delay cannot be explained by geographical, geological or financial confounders such as the location of the well, fuel type or contract features.

Figure 2. Years to reach 66% of cumulative flows in 35 years

Note: We use the Epanechnikov kernel with an optimally chosen bandwidth to plot the cumulative production over the 35-year life span of the asset. We group countries into two groups with weak and strong institutions according to Polity IV. This figure contains assets that started producing between 1975 and 1999.

The Transition to a New World Order

To push towards a causal interpretation of the results, we exploit the global transition to a new world oil order. This change affected the probability of expropriations in countries with weak institutions while leaving countries with strong institutions unaffected. In particular, the post-WWII weakening of the OECD members as political and military actors provides a natural experiment of global proportions. Expropriations are first viewed as impossible due to the military threat of British, French and US armies, and then become possible due to a global movement aiming at returning sovereignty over natural resources to the resource-rich economies. In the words of Daniel Yergin (1993): “The postwar petroleum order in the Middle East had been developed and sustained under American-British ascendancy. By the latter half of the 1960s, the power of both nations was in political recession, and that meant the political basis for the petroleum order was also weakening. […] For some in the developing world […] the lessons of Vietnam were […] that the dangers and costs of challenging the United States were less than they had been in the past, certainly nowhere near as high as they had been for Mossadegh, [the Iranian politician challenging UK and US before the coup d’etat in 1953], while the gains could be considerable.” Consequently, the number of expropriations has grown substantially since 1968, marking the transition to a new world order (Figure 3). However, Kobrin (1980) finds that even during the peak of expropriations in 1960-1976, only less than 5 % of all foreign-owned firms in the developing countries were expropriated. We suggest that this is, at least partly, thanks to the use of backloaded self-enforcing contracts.

Figure 3. Transition to a new world order

Note: Data on firm expropriations across all industries from Kobrin (1984).

Indeed, focusing on the years around the transition to the new world oil order, we show that there have not been any differences in investment, production or tax payments dynamics between countries with weak and strong institutions in the early years of the 1960s. But investment, production and the payments of taxes started experiencing significant delays after 1968 in the countries with weak institutions, using countries with strong institutions as a control. Intuitively, the omnipresence of a credible military threat in response to an expropriation served as an effective substitute for strong local formal institutions and eliminated the need for contracts to be self-enforced and backloaded in countries with weak institutions. Once this threat disappeared, contracts had to be self-enforcing and investment, production and tax payments had to be backloaded to decrease the risk of being expropriated by the governments of resource-rich economies. Theoretically, these initial differences in contract backloading between countries with strong and weak institutions should disappear in the long run, because the future gains from trade need to materialize eventually. We confirm empirically that this point is reached on average 20 years after firms start a contractual relationship with a country.


We provide evidence that oil firms seem to backload contracts in countries with weak institutions. We show that such backloading appears in the data during the transition to a new world order since 1968, when firms were in need of a new mechanism to deal with weak property rights and the risk of expropriations. We estimate the cost of such delays to be around 120 US$ per country and year. While this cost is high, it is important to emphasize that in the absence of such backloading, forward-looking CEOs of oil majors would often choose not to invest in the first place, since they would anticipate the severe commitment problems (Cust and Harding, 2020). Thus, as a second-best, the cost of the backloading may be marginal compared to the value added from trade when oil majors are willing to invest in countries with weak institutions and questionable property rights.



Gender Gaps in Wages and Wealth: Evidence from Estonia

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This policy brief introduces two related papers examining two types of gender gaps in Estonia. First, it presents the work of Vahter and Masso (2019), who study the wage gender gaps in foreign-owned firms and compare this gap with the situation in domestic ones. Then it summarizes a paper of Meriküll, Kukk, and Rõõm (2019), who focus on the wealth gender gaps and highlight the role of entrepreneurship in this gap.

Gender inequality is not only a moral issue. An extensive literature has highlighted the cost of gender inequality in terms of economic (in)efficiency. Most of the academic work has, however, focused on either the US and Western Europe or developing countries. Research focusing on systematic gender disparities in Eastern Europe is rather scarce. Yet, there is much to be learned from this region. The purpose of the FROGEE (Forum for Research on Gender in Eastern Europe) project is to study several issues related to gender inequality in former socialist countries.

This policy brief summarizes two papers presented at the 2nd Baltic Economic Conference at the Stockholm School of Economics in Riga, on June 10-11, where a special session on gender economics was held with the support of the FROGEE project. The event, organized by the Baltic Economic Association (see balticecon.org), gathered more than 85 researchers from the Baltics and all over the world. These two papers focus on Estonia, one of the most successful economies among the transition countries, where however the gender wage gap is among the largest in the European Union.

Firm ownership and gender wage gap

An important source of wage inequality originates in firm-specific pay schemes (see for instance Card et al. 2016). Understanding the characteristics of firms associated with a gender pay gap is thus a necessary step to design relevant policy responses. In a paper entitled “The contribution of multinationals to wage inequality: foreign ownership and the gender pay gap”, Jaan Masso and Priit Vahter, both at the University of Tartu, compare the situation in foreign-owned firms with domestic ones. The fact that foreign-owned firms provide on average higher wages to their employees is well documented. However, the question of whether this premium differs between men and women remains largely overlooked.

A potential channel linking firm ownership and gender wage gap is the transfer of management practices from the home country of the investor to the affiliate. The great majority of FDI in Estonia originates from Finland and Sweden, two countries that regularly top international rankings on gender equality and that have set the fight against gender inequality as a top priority. Observing a lower level of gender wage gap in firms owned by Swedish and Finnish capital would suggest the existence of such a mechanism, even if there is evidence that Scandinavian countries do not stand out in a positive way when it comes to women in the top of the distribution (see for instance Boschini et al., 2018, and Bobilev et al., 2019).

On the other hand, Goldin (2014) has shown that a large part of the gender wage gap in the US can be explained by differences in job “commitment”: firms disproportionately reward workers willing to be available 24/7, more flexible regarding business trips, spending longer hours in the office, etc. Such workers happen to be more often men than women. Multinational firms may require such commitment and flexibility to a larger extent than domestic firms, due for instance to their higher exposure to international competition. This would imply a larger gender pay gap in foreign-owned firms compared to local firms.

To investigate this issue, Masso and Vahter (2019) rely on Estonian administrative data, providing information on the whole universe of workers and of firms in the country between 2006 and 2014. This matched employer-employee dataset allows to track the wage of individuals over the years, but also to compare wages both across and within firms. It thus becomes possible to estimate the gender wage gap at the firm level (controlling for relevant individual-level factors affecting wages, such as age and experience), and then to check whether this measure systematically differs between domestic and foreign-owned firms.

However, simply comparing the gender pay gap between these two types of firms could lead to spurious conclusions. Foreign-owned firms have on average different characteristics than domestic ones: they do not operate in the same sectors, they do not have the same size nor the same productivity. To overcome this issue, the authors rely on a matching method: for each foreign-owned firms, they match a domestic firm with similar (observable) characteristics.

They find that in domestic firms, women are on average paid 19% less than men, even after accounting for many other factors associated with wage. In foreign-owned companies, both men and women are better paid. However, both genders do not benefit from the same premium: men are paid roughly 15% more in foreign-owned firms, whereas the premium for women is only 5.4%. This difference implies an even larger gender wage gap in multinational firms. To illustrate the economic significance of these results, for a man and a woman earning a monthly wage of 1146 euros (the average gross wage in Estonia in 2016), the premium for switching from a domestic to a foreign-owned firm is respectively 171 and 62 euros. Further, they provide some evidence that lower “commitment” is associated with a stronger wage penalty in foreign-owned firms. All in all, these results suggest that there is not necessarily a relationship between a multinational wage policy (especially in its gender wage-gap dimension) and the gender norms prevailing in its country of incorporation.

Gender and wealth gap

The vast majority of academic papers studying gender inequality focuses on the wage gap. But gender inequality can affect other types of economic outcomes, such as labor force participation, unemployment duration, or wealth. The latter is of particular interest since wealth can greatly contribute to empowerment. Merike Kukk, Jaanika Meriküll and Tairi Rõõm, all at the Bank of Estonia, extend the literature with a paper entitled “What explains the Gender Gap in Wealth? Evidence from Administrative Data”. This paper is one of the first to study the gender wealth gap in a post-transition country. The literature on the gender wealth gap is rather scarce because of a lack of suitable data: wealth measures are often computed at the household level, while individual-level data is necessary for such a study.

The main aim of this paper is to depict a precise portrait of this phenomenon in Estonia. In particular, the authors do not simply estimate the overall wealth gap but investigate the magnitude of the gap across the wealth distribution. In other words, is there a difference between the poorest men and the poorest women? Or on the other side of the distribution, are the richest men more wealthy than the richest women?

For this purpose, Kukk, Meriküll and Rõõm combine administrative individual-level data on wealth with survey results. The administrative data are generally considered of much better quality than the other, but they do not provide a lot of additional information on individuals. On the other hand, survey data provide a wealth of information about individual characteristics. Merging allows getting the best of both worlds. Regarding the methodology, the authors use unconditional quantile regression to track gender differences at different deciles of the wealth distribution. They further decompose this “raw” gender gap into two components: the “explained” part, i.e., the part of the gap resulting in differences in characteristics between men and women (demographics, education, etc.), and the “unexplained” part.

This study estimates the raw, unconditional gender wealth gap in Estonia to be 45%, which is of similar magnitude as in Germany. Interestingly, this difference is essentially driven by differences in the top of the distribution: there is a large gap between the richest men and the richest women. This “raw” difference is however explained by a single variable: self-employment, as men are much more likely to have business assets than women. Once controlling for the entrepreneurship status, the wealth difference between the richest Estonians becomes insignificant. This suggests the need to support policies encouraging female entrepreneurship and to remove barriers particularly affecting women. For instance, the literature has previously pointed out that women have less access to external sources of capital than men (e.g., Aidis et al., 2007). Such distortions can ultimately result in a wealth gap at the top of the distribution, as documented by this paper.

In addition, the literature has proposed several mechanisms that could result in gender-specific patterns of wealth accumulation. The simplest channel is through the wage gap, as it can be seen as the accumulation of the wage gap over time (e.g. Blau and Kahn, 2000). The authors thus compare the gender gaps in wealth and income. They uncover a strong wage gap, with men earning significantly more than women starting at the 6th decile: the higher we go in the income distribution, the larger the wage gap. How to reconcile this finding with the absence of a wealth gap conditional on entrepreneurship status? A possible explanation suggested by the authors is that women simply accumulate wealth better than men do.


These two papers illustrate two different mechanisms explaining gender-specific economic outcomes. The larger wage gap observed in multinational companies can be explained by a stronger commitment penalty for women, mostly because of childcare. This asks for two potential policy interventions. First, the development of childcare could facilitate the reduction in the “commitment gap” that disrupts women’s careers. Second, institutions could support a more flexible repartition of childcare responsibilities. Note however that Estonia already has the longest duration of leave at full pay (85 weeks), and that this leave can be freely split between parents. As for the wealth gap at the top of the wealth distribution, it can to a large extent be explained by the entrepreneurship status. This difference could partly be explained by differences in preferences and risk-aversion, which would require long-run policies to be mitigated. But in the short run, there is room for specific policies supporting female entrepreneurship and removing barriers particularly affecting women, such as a tighter credit constraint.


  • Aidis, R., Welter, F., Smallbone, D., & Isakova, N. (2007). Female entrepreneurship in transition economies: the case of Lithuania and Ukraine. Feminist Economics13(2), 157-183.
  • Blau, F. D., & Kahn, L. M. (2000). Gender differences in pay.  Journal of Economic perspectives14(4), 75-99.
  • Bobilev, R., Boschini, A., & Roine, J. (2019). Women in the Top of the Income Distribution: What Can We Learn From LIS-Data?. Italian Economic Journal, 1-45.
  • Boschini, A., Gunnarsson, K., & Roine, J. (2018). Women in Top Incomes: Evidence from Sweden 1974-2013. IZA Discussion Paper No. 10979 .
  • Card, D., Cardoso, A. R., & Kline, P. (2015). Bargaining, sorting, and the gender wage gap: Quantifying the impact of firms on the relative pay of women. The Quarterly Journal of Economics131(2), 633-686.
  • Goldin, C. (2014). A grand gender convergence: Its last chapter. American Economic Review104(4), 1091-1119.
  • Meriküll, J., Kukk, M., & Rõõm, T. (2019). What explains the gender gap in wealth? Evidence from administrative data. Bank of Estonia WP No. 2019-04.
  • Vahter, P., & Masso, J. (2019). The contribution of multinationals to wage inequality: foreign ownership and the gender pay gap. Review of World Economics155(1), 105-148.

Resource Discoveries, FDI Bonanzas and Local Multipliers: Evidence from Mozambique

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Giant oil and gas discoveries in developing countries trigger FDI bonanzas. Across countries, it is shown that in the 2 years following a discovery, the creation of FDI jobs increases by 54% through the establishment of new projects in non-resource sectors such as manufacturing, retail, business services and construction. Using Mozambique’s gas driven FDI bonanza as a case study we show that the local job multiplier of FDI projects in Mozambique is large and results in 4.4 to 6.5 additional jobs, half of which are informal.

Natural Resources, FDI Job Multiplier and Economic Development

Large resource wealth has for several decades been associated with a curse, slowing economic growth in resource-rich developing countries (Venables, 2016). More recently, this wisdom has been questioned by several studies. Arezki et al. (2017) point out that giant discoveries trigger short-run economic booms before windfalls from resources start pouring in. And Smith (2017) provides evidence for a positive relationship between resource discoveries and GDP per capita across countries, which persists in the long term.

In a new paper (Toews and Vézina, 2018) we contribute to this research by showing that giant oil and gas discoveries in developing countries trigger foreign direct investment (FDI) bonanzas in non-extraction sectors. FDI has long been considered a key part of economic development since it is associated with transfers of technology, skills, higher wages, and with backward and forward linkages with local firms (Hirschman, 1957; Javorcik, 2015). Using Mozambique, where a giant offshore gas discovery has been made in 2009, as a case study,  we estimate the local multiplier of FDI projects. We find that the FDI job multiplier in Mozambique is large, highlighting the job creation potential of FDI in developing countries.

Resource Discoveries and FDI Bonanzas

In our study we focus on jobs created by FDI bonanzas triggered by resource discoveries. Multinationals might invest in countries being blessed by giant discoveries for a variety of reasons before production starts. First, they might expect to benefit from the decisions of oil and gas companies to increase investment in local infrastructure and to increase demand for local services provided by law firms and environmental consultancies. Second, multinationals may also expect governments and consumers to bring forward expenditure and investment by borrowing. Finally, multinationals might invest since particularly large discoveries have the potential to operate as a signal leading to a coordinated investment by a large number of multinationals from a variety of industries and countries.

Using data from fDi Markets we show that, indeed, FDI flows into non-extraction sectors following a discovery. FDI increases across sectors and by doing so creates jobs in industries such as manufacturing, retail, business services and construction. Using Mozambique as a case study we show that following the gas discovery, multinationals decided to invest in Mozambique triggering job creation in non-extraction FDI to skyrocket (see Figure 1).

Figure 1. FDI Bonanza in Mozambique

Source: Author’s calculations using fDiMarkets data.

FDI Job Multiplier

Using the FDI bonanza in Mozambique as a natural experiment, we proceed by estimating the FDI job multiplier for Mozambique. The concept of the local job multiplier boils down to the idea that every time a job is created by attracting a new business, additional jobs are created in the same locality. In our case, FDI jobs are expected to have a multiplier effect due to two distinct channels. Newly created and well paid FDI jobs are likely to increase local income and in turn the demand for local goods and services (Moretti, 2010). Additionally, backward and forward linkages between multinationals and local firms increase the demand for local goods and services (Javorcik, 2004).

Using concurrent waves of household surveys and firm censuses we estimate the local FDI multiplier for Mozambique to be large. In particular, we find that every additional FDI job results in 4.4 to 6.5 additional local jobs. Due to the combined use of household survey and the firm census we are also able to conclude that only half of these jobs are created in the formal sector, while the other half of the jobs are created informally.


Our results suggest that giant oil and gas discoveries in developing countries lead to simultaneous foreign direct investment in various sectors including manufacturing. Our results also highlight the job creation potential of FDI projects in developing countries. Jointly, our results imply that giant discoveries do have the potential to trigger extraordinary employment booms and, thus, provide a window of opportunity for a growth takeoff in developing countries.


  • Arezki, R., V. A. Ramey, and L. Sheng (2017): “News Shocks in Open Economies: Evidence from Giant Oil Discoveries,” The Quarterly Journal of Economics, 132, 103.
  • Hirschman, A. O. (1957): “Investment Policies and “Dualism” in Underdeveloped Countries,” The American Economic Review, 47, 550 – 570.
  • Javorcik, B. S. (2004): “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages,” American Economic Review, 94, 605 – 627.
  • Javorcik, B. S. (2015): “Does FDI Bring Good Jobs to Host Countries?” World Bank Research Observer, 30, 74 – 94.
  • Moretti, E. (2010): “Local Multipliers,” American Economic Review, 100, 373 – 377.
  • Smith, Brock. “The resource curse exorcised: Evidence from a panel of countries.” Journal of Development Economics: 116 (2015): 57-73.
  • Toews and Vézina, (2018): “Resource discoveries, FDI bonanzas and local multipliers: An illustration from Mozambique” Working Paper.
  • Venables, A. J. (2016): “Using Natural Resources for Development: Why Has It Proven So Difficult?” Journal of Economic Perspectives, 30, 161 – 84.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Important Policy Lessons from Swedish-Russian Capital Flows Data

A recent study of capital flows between Sweden and Russia provides many policy lessons that are highly relevant for the current economic situation in Russia. In line with studies on other countries, bilateral FDI flows were more stable than portfolio flows, which is important for a country looking for predictable external sources of funding. However, much of the FDI flows came with trade and growth of the Russian market. The sharp decline in imports and fall in GDP is therefore bad news also when it comes to attracting FDI. The conclusion is (again) that institutional reforms and reengaging with the West are crucial policies to stimulate both the domestic economy and encourage much-needed FDI.

In a recent paper (Becker 2016), I take a detailed look at the trends and nature of bilateral capital flows between Sweden and Russia over that last 15 years. Although the paper focuses on the capital flows of a relatively small country like Sweden with Russia, it sheds some light on more general theoretical and empirical issues associated with FDI and portfolio flows that are highly relevant for Russia today.

Measuring Bilateral FDI

One general qualifier for studies of bilateral capital flows is however the reliability of data; Not only is a significant share of international capital flows routed through offshore tax havens which makes identifying the true country of origin and investment difficult, but also many investing companies are multinationals (MNEs) with operations and shareholders in many countries so it is hard to have a clear definition of what is a “Swedish” or a “Russian” company. In addition, when different official data providers, in this case Statistics Sweden (SCB) and the Central Bank of Russia (CBR), report capital flows on the macro level, there are large discrepancies.

Private companies also gather company level data on FDI that can be aggregated and compared with the macro level FDI data. This data is on gross FDI flows and should not be expected to be the same as the net macro level FDI flows data but is a bit of a “reality check” of the macro data.

Figure 1. Average annual FDI flows

Fig1Sources: SCB, CBR, fDi Market, MergerMarkets

The reported annual average flow of FDI from Sweden to Russia varies from around USD500 million to USD1.2 billion depending on the data source. Russian flows to Sweden are rather insignificant regardless of the source but the different sources do not agree on the sign of the net flows (Figure 1).

The differences between data sources suggest that some caution is warranted when analyzing bilateral FDI flows. With this caveat in mind, there are still some clear patterns in the capital flows data from Sweden to Russia that emerge and carries important policy lessons in the current Russian economic environment.

FDI vs. Portfolio Investments

There is a large literature discussing the distinguishing features of FDI and portfolio flows (see Becker 2016 for a summary). Some of the key macro economic questions include which type of flows provides most international risk sharing; are most stable over time; or most likely to contribute to balance of payments crises when the flows go in reverse. In addition, there are potential differences in terms of the amount of international knowledge transfers and how different types of capital flows respond to institutional factors.

Figure 2. FDI and portfolio investments

Fig2Source: SCB

Figure 2 shows that FDI has been much more stable than portfolio flows in the years prior to and after the global financial crisis as well as in more recent years. Although all types of capital flows respond negatively to poor macroeconomic performance, and the stock of portfolio investments swing around much faster than FDI investments, i.e., portfolio flows go in reverse more easily and can contribute to external crises. This makes FDI a more preferable type of capital flow for Russia.

FDI and Trade Go Together

Since FDI is a desired type of capital flow, it is important to understand its driving forces. The first question to address is whether FDI and trade are substitutes or complements. Since the bulk of FDI comes from MNEs that operate in many countries, we can imagine cases both when FDI supports existing trade and cases when it is aimed at replacing trade by moving production to the country where the demand for the goods is high.

In the case of Sweden and Russia, the macro picture is clear; FDI has increased very much in line with Swedish exports to Russia (Figure 3). Both of these variables are of course closely correlated with the general economic development in Russia, but even so, the very close correlation between FDI and trade over the last 15 years suggests that they are compliments rather than substitutes.

Figure 3. Swedish Exports and FDI to Russia

Fig3Source: SCB

Most FDI is Horizontal

FDI flows are often categorized in terms of the main motivating force for MNEs to engage in cross-border investment: vertical (basically looking for cheaper inputs), horizontal (expanding the customer base), export-platform (producing abroad for export to third countries) or complex (a mix of the other reasons) FDI.

Looking at the sectoral composition of FDI from Sweden to Russia (Figure 4), most investments have come in sectors where it is clear that MNEs are looking to expand their customer base. Even in the case of real estate investments, a large share is IKEA developing new shopping centers that host their own outlets together with other shops. Communication and financial services are also mostly related to service providers looking for new customer. Only a small share is in natural resource sectors that would be more in line with vertical FDI, while there are very few (if any) examples of MNEs moving production to Russia to export to third countries.

Figure 4. Sectors of Swedish FDI to Russia

Fig4Source: SCB

Policy conclusions

The above figures on bilateral capital flows from Sweden to Russia carry three important policy messages: 1) FDI is more stable than portfolio flows; 2) Trade goes hand in hand with FDI; and 3) FDI to Russia has mostly been horizontal and driven by an expanding customer base.

In the current situation where Russia should focus on policies to attract private capital inflows, the goal should be to attract FDI. Instead, the government is now looking for portfolio inflows in the form of a USD3 billion bond issue. But FDI is a more stable type of international capital than portfolio flows and also come with the potential of important knowledge transfers both in terms of new technologies and management practices.

However, as we have seen above, FDI inflows have in the past been correlated with increased trade and an expanding Russian market. In the current environment, where imports with the West declined by 30-40 percent in the last year, GDP fell by around 4 percent, and the drop in consumers’ real incomes have reached double digits in recent months, it is hard to see any macro factors that will drive FDI inflows.

Instead, attracting FDI in this macro environment requires policy changes that remove political and institutional barriers to investments. The first step is to fulfill the Minsk agreement and contribute to a peaceful solution in Ukraine that is consistent with international laws. This would not only remove official sanctions but also provide a very serious signal to foreign investors that Russia plays by the international rulebook and is a safe place for investments from any country.

The second part of an FDI-friendly reform package should address the institutional weaknesses that in the past have reduced both foreign and domestic investments. It is telling that many papers that look at the determinants of FDI flows to transition countries include a ‘Russia dummy’ that is estimated to be negative and both statistically and economically significant (see e.g. Bevan, Estrin and Meyer, 2004 and Frenkel, Funke, and Stadtmann, 2004). One factor that reduces the significance of the ‘Russia dummy’ is related to how laws are implemented. Other studies point to the negative effect corruption has on FDI.

Reducing corruption and improving the rule of law are some of the key reforms that would have benefits far beyond attracting FDI and has been part of the Russian reform discussion for a very long time. It was also part of the reform program that then-President Medvedev presented to deal with the situation in 2009 together with a long list of other structural reforms that would help modernize the Russian economy and society more generally.

As the saying goes, don’t waste a good crisis! It is time that Russia implements these long-overdue reforms and creates the prospering economy that the people of Russia would benefit from for many generations.


  • Becker, T, 2016, “The Nature of Swedish-Russian Capital Flows”, SITE Working paper 35, March.
  • Bevan, A, Estrin, S & Meyer, K 2004, “Foreign investment location and institutional development in transition economies”, International Business Review, vol. 13, no. 1, pp.43-64.
  • Frenkel, M, Funke, K & Stadtmann, G 2004, “A panel analysis of bilateral FDI flows to emerging economies”, Economic Systems, vol. 28, no. 3, pp. 281-300.

Governance Quality as a Determinant of FDI: the Case of Russian Regions

20140626 Governance Quality as a Determinant of FDI Image 01

This brief highlights the results of a study of the effect of poor governance quality on foreign direct investment in Russia. Using a survey of businesses across forty administrative districts, we find that a higher frequency of using illegal payments and a higher pressure from regulatory agencies, enforcement authorities, and criminals, negatively affect foreign direct investment (FDI). We find that moving from average to top governance quality across Russian regions more than doubles the FDI stock.

What are the reasons for the large heterogeneity in investment across cities, regions, and countries? Why do some of them prosper while others struggle in attracting investors and developing in the long term? This brief summarizes a study (Kuzmina et al, 2014) where we explore how quality of governance affects a specific type of investment – foreign direct investment (FDI). FDI is a very important source of economic growth, especially for developing countries. It allows them to overcome the local deficiencies in capital, technologies, and expertise, and has strong and long-lasting effects on growth – through both direct and spillover channels. Analysis of the determinants of FDI is popular among academic researchers, however, the existing empirical research, especially the one based on cross-country variation in governance quality, is not entirely convincing.

FDI Inflows in Russian Regions

During the first decade of transition in 1990s, the inflow of FDI to Russia was low compared to the Eastern European countries and other emerging economies. However, this changed dramatically around 2003. As oil prices surged FDI flows into Russia increased ten-fold within just a few years. As Figure 1 shows, a maximum of $74.8 billion was achieved in 2008 (corresponding to 4.5% of the country’s GDP), and Russia became one of the top countries in the world for inward FDI. By 2006, FDI inflows to Russia in per capita terms had surpassed FDI into China.

Figure 1. Foreign Direct Investment in Russia 1992-2012
Notes: This figure plots the evolution of FDI in Russia in 1992-2012. The blue line measures net inflows in current US$ billions (the scale corresponds to the left axis), and the red line measures net inflows as the percentage of GDP (the scale corresponds to the right axis). The data come from the World Bank(http://databank.worldbank.org/).

Nevertheless, the stock of FDI in Russia has remained substantially lower than in some comparable middle-income countries. The accumulated stock of FDI as a share of GDP (PPP) in Russia was 21% in 2013. This is only slightly more than in Ukraine (18%), and significantly less than the 28% in Brazil and the 30% in Poland. The stock of FDI in 2012 was distributed mainly between manufacturing (32%), real estate (15%), mining and quarrying (15%), and financial services (13%). Given the diversity of Russian regions in terms of natural, economic and institutional conditions, we also observe a substantial heterogeneity of FDI across Russian regions. The accumulated stock of FDI per capita is only $0.32 in the Republic of Karachaevo-Cherkessia, while it reaches a substantial $30,371 in the Sakhalin region. The average regional accumulated stock is just above $1,000 per capita. In terms of total stock, Moscow City is the leader with more than $39 billion of accumulated FDI.

An important feature of FDI in Russia is a significant share of so-called round-tripping investments. In 2012, $7.5 billion out of $18.5 billion of inward FDI in Russia came from offshore financial centers, with the most important OFC being Cyprus that delivered around 80% of total offshore investments. On overall, about half of total inward FDI stock in Russia comes from offshore countries.

There are several reasons behind the significant role of offshores in external Russian transactions. The traditional cause for using offshore financial centers (OFC) in developed countries is tax avoidance. While profit concerns are relevant for Russian law-abiding entrepreneurs, there are also other important reasons that force them to use offshore shells for their Russian-based enterprises. The possibility to get cheaper international financing and some other financial services for large Russian companies is important for large companies. On the other hand, underdeveloped institutions and poor property right protection are often referred to as the main driving forces for small and medium sized companies to go offshore (Ledyaeva et al., 2013; Kheyfets, 2013).

Given the importance of round-tripping investments in the Russian economy and the differences in incentives behind regular FDI and the one from offshores, we need to distinguish between these two types of investments when studying their determinants. On the one hand, poor regulatory governance might be a reason for the higher volumes of round tripping investments, but on the other hand, they might be a reason for the low attractiveness for true foreign investments.

Diversity of Quality of Governance across Russian Regions

The stable macroeconomic environment in Russia over the last decade has benefited Russian regions in attracting FDI. The diversity of Russian regions in various institutional aspects is, however, recognized in many studies. Yakovlev and Zhuravskaya (2007) report substantial differences in the speed of regulatory reform in twenty Russian regions over 2002-2005. A recent subnational survey of firms in 37 Russian regions by the World Bank indicates significant differences in the list of the most severe obstacles for firms’ performance across regions (World Bank, 2013).

The governance quality data in our study come from the Index of Support (“Index Opory”) survey conducted in 2011. This is a survey of directors of small and medium Russian firms that was collected by the Eurasia Competitiveness Institute (a not-for-profit think tank) and Opora Rossii (a non-for-profit organization that supports small business). It includes about 6000 firms and is designed to be a random sample of small businesses, stratified by size, location (urban or rural), and industry (with about two thirds from agriculture and manufacturing industries, and the rest from infrastructure and services).

Our data cover 40 regions. The surveyed regions are the most developed ones and their economic weight corresponds to 84% of total FDI stock and 83% of GDP in 2011.

All respondents of the survey were asked to answer a set of questions related to regional infrastructure, availability of labor, capital, and intermediate goods, and the absence of administrative pressures. Their answers were then aggregated within regions and all regions were ranked according to each criterion. We use the data coming from the administrative pressure section of the survey. The surveyed regions are ranked according to the average answers on questions reagrding the frequency of firms in the region using illegal payments to officials (Bribes to Officials), the frequency of firms facing abuse on the side of inspection authorities (Inspection Agencies Pressure), the side of enforcement authorities (Police Pressure), and the criminal community (Criminal Pressure).

To give a few examples, the top regions in terms of governance quality are Belgorod and Astrakhan Regions, as well as Stavropol and Krasnodar Territories. For example, the Belgorod region is ranked first in terms of police pressure, second in terms of bribes to officials and criminal pressure, and sixth in terms of inspection agencies pressure. This makes it the top region overall. The Kaluga region, which is commonly viewed as one of the best regions to invest in, in Russia, is ranked fifth overall, achieving some of the best positions in all indicators except for bribes to officials where it is somewhere in the middle (ranked 16th). To give a comparison, Moscow City ranks 27th overall. Leningrad, Irkutsk, Voronezh, Ryazan, and Rostov Regions take the bottom five places.

Worker Strikes in 1895-1914 and Why They Matter for Today

The common problem in this type of research is the reverse causality between the main variable of interest – quality of governance – and FDI. The effect of foreign investors might go through the better practices they bring to the host country or through the legal restrictions imposed on their business by the domestic jurisdiction in any country in which they decide to invest. To deal with the reversed causality problem in our study, we rely on an instrumental variable approach. As an instrument for governance quality in Russian regions, we choose the intensity of worker strikes in Russian provinces 1895-1914. We assume that the intensity of strikes in this period can be used as a proxy for the trust between the local businesses and the political elites, on the one hand, and ordinary people, on the other.

The choice of this period is not accidental. First, this was a period of unprecedentedly high growth of Russian industries. In 1887-1900, the production of many industrial goods and fuels in Russia increased by factor 3 to 5 in real terms; around five thousand kilometers of railroads were put in operations annually. Not surprisingly, the conflicts between workers, on the one hand, and management and owners, on the other, intensified in the 1890s. The police was an important instrument that managers and owners relied upon to keep control over the workers. The important link between local authorities and industrialists was formed to ensure the alignment between the interests of police and business owners. The formation of enforcement agencies was strongly influenced by this alignment, and this alignment in turn defines the level of trust between the elites and enforcement agencies, and the population.

Second, before 1897 no law regulated the duration of working hours in Russia. It was in discretion of the factory owners to establish the norms. On June 2, 1897 the first law governing working hours at a level well below the pre-existing level in Russian factories was signed into force. This law was an important first step towards improving the living conditions of Russian workers. With this law, workers could now claim their rights against the factory management. The factory inspections that were launched earlier, around 1882, were supposed to control the enforcement of labor regulation in general and the new labor law in particular. However, as conflicts between workers and capital owners and management dramatically intensified, these regulatory agencies were used to control workers and their organizations (Kupriyanova, 2000).

We interpret the intensity of strikes at the regional level as a measure of the revealed conflict between the state and the owners of existing businesses, or the local elite, on one hand, and the population on the other. In these conflicts, the enforcement and first regulatory agencies were used to secure the interests of small groups of local elites against interests of the broad population. In this way, we may rely on the intensity of strikes as an inverse proxy for the trust between population and local elites.

Modern research recognizes the importance of history for economic development. Nunn (2009) indicates several mechanisms that justify the projection of history onto modern life. For our study, two of these mechanisms are especially relevant. One is the historical root of modern formal institutions. The second is the effect of history on social and cultural norms. Aghion et al. (2010) suggest a mechanism of possible coevolution of trust and regulation: people in low-trust environments want more government interventions even though they are aware of the low quality of governance. For our study, the prediction of the study by Ahgion et al. (2010) – about the link between the trust and the quality of governance and their coevolution – is especially relevant.

One important issue about using our instrument is whether we can reasonably assume the preservation of some institutions or social norms through the two later dramatic changes in the Russian political regime. While there is evidence of institutional persistency, some aspects of institutions do change often. Acemoglu and Robinson (2006) address this question of whether changes in certain dimensions of institutions are consistent with overall institutional persistence. One of the results of their study is the possible persistence of the institutions that are essential for the allocation of resources in the economy despite the changes in the political regime. The essential condition for institutional persistence is the persistence of the incentives of those in power to distort the economic system for their own benefit. Therefore, as long as the incentives are preserved, the institutions may survive changes in the regime.

A number of empirical studies support this conclusion. To cite just one relevant study in the Russian context, Dower and Markevich (2014) show that the measure of conflict brought by the Stolypin land reform in Russian farmer’s communities about a hundred years ago explains current attitudes toward the privatization outcomes of the 1990s.

Results: Good Governance Matters for Non-Offshore FDI

Putting together data on the FDI stock in Russian regions, the level of governance quality in regions as of 2011, and some other controls, our results indicate that a higher administrative burden, a higher pressure of enforcement and regulatory agencies, a poor criminal situation and a higher level of corruption reported by the businesses in Russian regions contribute to a lower level of investments of foreign residents. Using the instrumental variable, which proxies the conflict between elites and people at the time when the regulatory agencies were formed a century ago, we can find the causal effect of governance quality on foreign investment. As an additional test, we study the effect of governance on offshore-related direct investments. We show that the sensitivity of offshore investments on governance quality is positive and non-significant. These results confirm our assumption that poor quality of governance decreases the reward of investments and is an important determinant of economic activity.

There is a straightforward policy application of our result. The improvement of governance quality alone, better compliance of regulatory agencies with existing legislation, is an important source of increases in the attractiveness of the regions for foreign investors. In particular, moving from average governance quality to the top increases FDI by 158%. This suggests that there are large returns to improving the quality of governance at the regional level, and this policy does not require a lot of budget spending which is especially important in modern Russia.


  • Acemoglu, D., and Robinson, J. (2006) “De Facto Political Power and Institutional Persistence”. American Economic Association Papers and Proceedings 96(2), pp. 325-330.
  • Aghion, P., Y. Algan, P. Cahuc and A. Shleifer (2010) “Regulation and Distrust,” The Quarterly Journal of Economics, vol. 125(3), pp. 1015-1049
  • Becker, S., Boeckh, K., Hainz, Ch. And L. Woessmann, (2011) “The Empire Is Dead, Long Live the Empire! Long-Run Persistence of Trust and Corruption in the Bureaucracy”, IZA Discussion Paper No. 5584
  • Dower, P., and A. Markevich, (2014) “On the Historical Origins of Resistance to Privatization in the Former Soviet Union”, Journal of Comparative Economics, forthcoming
  • Kheyfets, B. (2013) “De-offshorization of Economy: International Experience and Russian Specifics”, Voprosy Economiki, Issue 7 (in Russian)
  • Kupriyanova, L., (2000) The “labor problem” in Russia in the second half of XIX – early XX century. History of entrepreneurship in Russia. Book 2. Moscow (in Russian)
  • Ledyaeva, S., Karhunen, P., And J. Whalley. (2013) “Offshore Jurisdictions, (Including Cyprus), Corruption Money Laundering and Russian Round-Trip Investment”, NBER WP 19019
  • Nunn, N., (2009) “The Importance of History for Economic Development.” Annual Review of Economics, 1(1), pp. 65-92
  • Yakovlev, E., and E. Zhuravskaya, (2013). “The Unequal Enforcement of Liberalization: Evidence from Russia’s Reform of Business Regulation,” Journal of European Economic Association, 11(4), pp. 808–838.