Cross-Industry Analysis of Russian Enterprise Performance: Do Concentration and Diversification Matter?

Abstract

This paper studies and quantifies the influence of industry localization and regional economic diversification on firm performance in different industries. The main idea is that industry localization and regional economic diversification improve enterprise performance and the influence might be found for most industries. In this paper, the Ellison-Glaeser index is applied to measure localization effects and the Herfindahl-Hirschman index is used to measure diversification. The dataset consists of 650,000 observations and approximates the full set of Russian real sector commercial companies in 2017. All companies were aggregated into eight groups by respective industry. Firm performance is measured via sales margin and net profit margin. Since the performance is highly dispersed, the regression analysis includes both OLS and quantile regression (QR) models for each group. It was found that the Mining industry had been affected neither by localization nor by diversification. Localization effects are significant and positive for Agriculture, Fishing, and Forestry; Wholesale, Retail and Food Services; Manufacturing; Transport; and IT, Broadcasting, and Telecommunication. The increase in profitability for them ranges from 1% to 4% per 0.1 change in the Ellison-Glaeser index. Localization is harmful for Construction, and Services and Minor Industry companies (7-fold drop in sales margin for Construction). Diversification is significant and decreases the sales margin of all the companies, and the effect ranges from 1.01% to 1.22% per 0.1 change in the HerfindahlHirschman index. These findings hold despite the choice of analysis tool (QR versus OLS); however, the study of different quantiles sheds light on the effects specific for some industries.