What are the consequences of conducting trade with transitional Russia? This paper takes a look at possible consequences for trade when trade contracts cannot be fully enforced across international borders. It investigates the possibility of improved stability in trade by taking into account the incentive constraints of importers as well as exporters. The paper looks into stability determinants in Norwegian data on exports of fish to Russia in the years 1996-2004. The goal of this paper is to investigate the consequences for bilateral trade of the difference in institutional design between Russia and Norway. There is no doubt that the economic institutions of Norway and Russia are dissimilar in many ways. Some times one can discover that an institution typical of the one country lacks a counterpart in the other country - defined property rightsto real estate is one example.
In international trade an individual or a firm from one country that wishes to do trade in another country must learn the ”rules of the game” in the country he wishes to do business. For the case of Norway and Russia, a Norwegian firm will have to learn to use such institutions as the Russian judicial system to enforce contracts. In some circumstances the Norwegian firm will discover that the Russian counterpart of a Norwegian economic institution such as property rights enforcement is not taken care of by the same authority as in Norway. Such a learning process is bound to take time. Until two counties have an extensive history of bilateral trade one cannot expect firms from one country to benefit from the institutions of the foreign country to the same degree as firms who are from this foreign country and to whom these institutions are familiar. When one or both sides in international trade experience higher transaction costs than they would conducting domestic trade because their market institutions differ from the institutions of their partner - I choose to speak of institutional incompatibility.
The concept of institutional incompatibility is interesting in connection with Norwegian-Russian trade. Institutional barriers to entry are high on the agenda of firms with interests in Russia, but there has been done little research in this field. For example 66,2 % of the respondents in the Norwegian Confederation of Enterprise’s survey found activity related to the Russian market ”hard, but not impossible”. Furthermore the most significant barriers to working in Russia after government bureaucracy were corruption, language and communication and Russian business culture. The barriers experienced by Norwegian firms are of grave significance, since they effectively block participating in the wide range of contract enforcement measures employed by Russian firms.
To illustrate the possibility of strategic action on behalf of Norwegian exporters I use chapter 2 to set up a simple model of Norwegian export flows to Russia. The main contribution of this model is to point out a new dimension of the fact that there are two ends to the deal also in international trade. In the model, trade stability is effected by firms’ decision on whether to stick with their current partner or to engage in search activity. This decision depends on a cost-benefit analysis of the two alternatives. The results show that under the assumption of incomplete contract enforcement stability in trade relations can be explained among other things as a function of a firm’s export price relative to the mean export price of the given product. We also find that the existence of sunk entry costs into the export market reduces stability. This result is in clear opposition to prevailing trade theory of sunk costs. Despite it’s ambition the model remains crude and subject to future improvements.
In chapter 3 I investigate whether or not the predictions made by the theoretical model have empirical support by running a series of regressions on a micro level data set of Norwegian seafood exports to Russia. The implied price-stability relationship is found consistent with the data and the coefficients of relative price and squared relative price remain significant throughout a series of regressions.
There is some evidence that reduced search costs increases stability. However the distinction between out of market search costs and in market search costs is not drawn in the empirical treatment and the positive effect of a firm’s experience in the Russian market may be a result of learning the rules of the game and utilization of strategic pricing rather than reduction in out of market search costs through learning. Furthermore improved stability is closely associated with time. As the years pass trades seem to become increasingly stable. On these grounds it is tempting to draw the conclusion that as firms come to know the market and the rules of the game, they increasingly price in a binding way - increasing stability.
Alternatively we might be witness to a tâtonnement process in a maturing market where exporters offering disequilibrium prices fall out of the market and reenter offering prices closer to equilibrium. Elaborating such an approach could explain both the price convergence and increasing stability observed in the data. This paper focuses on the need for Norwegian firms to strategically handle differences in institutional structure between Norway and Russia. The formal model shows that strategic thinking could influence trade stability and that this line of research should not be ignored. The empirical analysis finds support for the ideas laid out in preceding chapters.