There are two competition measures, which are included in the regression separately. Foreign competition is measured as a log of the ratio of import to total output of the firm’s 5-digit OKONH industry. Domestic competition is proxied by Herfindahl-Hirschmann concentration index in the 5-digit industry. Theory predicts that competition should have an inverted U-shape effect on innovations. To capture non-linearity of the effect, we also included in the regression the mean-subtracted square of the log of the import-output ratio. To measure domestic competition, we computed Herfindahl-Hirschman index for 5-digit OKONH industries and its square (also mean-subtracted). The index was constructed using data on firms’ production from the Registry of Russian firms. To escape reversed-causality interpretation, both measures of domestic and foreign competition were constructed for 1999.
Several firms’ characteristics are used as explanatory variables – availability of own funds to finance innovations (sum of four dummies that equal one if the firm has positive profit in 1995-1998), size of the firm (log of average employment in 1996-1998), dummies for firms with foreign-ownership of more than 10% and firms with federal government ownership. All these variables are constructed using registry of Russian firms.
The corporate governance index, which we use, was constructed by Guriev et al (2003) on the basis of the survey, which was also conducted by S. Tsukhlo. The survey included questions on relationships with minority shareholders, presence of external directors, producing reports using international accounting standards and so on. The corporate governance index is the first principle component of all these measures.