DATA INTEGRATION TO STUDY THE ENTERPRISE GROUP STRATEGY IN UKRAINE

1. DATA INTEGRATION TO STUDY THE ENTERPRISE GROUP STRATEGY IN UKRAINE Olga A. Vasechko Scientific and Technical Complex for Statistical Research, 3, Shota Rustaveli Str., Kyiv, Ukraine E-Mail : O.Vasechko@ukrstat.gov.ua Michel Grun-Réhomme, Université Paris 2, ERMES-UMR7181-CNRS, 12 Place du Panthéon, 75005 Paris, France E-Mail : grun@u-paris2.fr

2. Plan • The issue • Suggestions • Basic information and the retrospective • The models • The results for total population and non-offshore • The findings • Conclusion

3. The issue (1) • Large businesses and enterprise groups (EG) have a big impact on GDP formation and the level of employment. • Recent theoretical and empirical researches tend to look at multinational enterprises as the main type of EG from the point of view of economically advanced countries. • The dynamically developed emerging economies also face similar questions of EG.

4. The issue (2) Basic issues of EG statistics in Ukraine are regarding to: • Definition of observation unit • Legislative base to provide the common framework of statistics of EG • Statistical register of EG • Sources of actual information Statistics of Enterprise Groups in Ukraine, International Conference of Globalization and Challenges for Official Statistics/ UNO-Eurostat-EFTA, Kiev, Ukraine, 3-6 July 2007. Administrative and Statistical Registers in Business Statistics of Ukraine, Baltic-Nordic Conference on Survey, 2-7 June 2007, Kuusamo, Finland. Quality Measurement of a Register for Structural Business Survey: Application to Ukrainian Data / European Conference on Quality and Methodology in Official Statistics. – Mainz, Germany, 2004. • Data integration and modeling

5. Suggestion (1) In the case of data absent to study EG indirectly we can suggest that: • The dominant pattern of EG is the Transnational Group, which is multinational. • The reasons and consequences of multinationals' activities closely connected to FDI. • FDI is defined as investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. • FDI relationship consists of a parent enterprise and a Ukraine affiliate which together form a multinational. • To study multinational strategies we can use all types of statistics regarding the main foreign investors that could explain the motivation and tendencies of their policy.

6. Suggestion (2) • Using available data we study actual strategies of EG in Ukraine. • We revise the question: Why do the multinationals invest in Ukraine and what are their strategies and FDI patterns?

7. Basic information and the retrospective (1)

8. Basic information and the retrospective (2) The main vectors of impact on large business in Ukraine

9. Basic information and the retrospective FDI percentage by the types of activities, 2006

10. Basic information and the retrospective (4) FDI elasticity in Ukraine

11. The modelsVariables A database contains 87 countries, which significantly invested to Ukraine during the year 2006. First, to explain FDI patterns into Ukraine we dispose of 10 exogenous variables, 7 quantitative: export, import, volume of investment from Ukraine, distance between the examined country and Ukraine, GDP of the per capita proper country, ratio of VAT rate of country-investor to Ukraine, ratio of corporate income tax rate. 3 binary variables: English-speaking countries, Russian-speaking countries and countries that are offshore. Second, to explain the patterns both of production-oriented and distribution-oriented FDI • additional variables: consumer input export and import for sub-contract processing and to precise new tendency 1 binary variable: FDI in financing. Finally, to precise directly the FDI strategies of developed economy investors and to display indirectly the offshore strategy we have examined non-offshore only.

12. The modelsData sources • The data on investment and import into Ukraine, export from Ukraine, offshore are collected by the State Statistics Committee of Ukraine. • GDP per capita we calculated using Ukrainian and World Bank statistics. • A tax ratio we took from KPMG's Corporate and Indirect Tax Rate Survey 2007. • A distance from Ukraine was made with Internet calculator as the distance between the capitals.

13. The modelsTypes of models • The generalized log linear model • Qualitative model with logistic regression • Bivariate ordinal probit model

14. The modelsThe generalized log linear model

15. Results (1):The generalized log linear model °significant at the level 10% , * at the level significant for 5%, ** significant at the level 1%. • The transformation of VAT and tax variables in logarithm gives very similar result. • Model is robust. • The FDI diminishes with the distance and the size of VAT, and grows with the GDP and the investment from Ukraine.

16. The modelsLogistic regression

17. Results (2):Logistic regression

18. Results (3):Logistic regression • Distance, investment and GDP: identical to the linear model. • Import growths with FDI. • The tax variable is not already significant. • 83.3% of concordant pairs. • The tests (Wald, score and coefficient of verisimilitude) are meaningful in the threshold size p <0,0001.

19. The modelsBivariate ordinal probit model • To define what characteristics of countries and import are the most considerable in probability of more or less meaningful FDI. • Bivariate model, which estimates the import and FDI simultaneously, allows checking endogeneity of import to FDI. • It gives robust results, with respect to estimation of probabilities of FDI level. • The FDI level can reflect the impact of unobserved characteristics too.

20. The modelsBivariate ordinal probit model Y corresponds to the variable of FDI with 4 modalities Z designates the variable of import

21. Results (4):Bivariate ordinal probit model(equation of FDI)

22. Results (5): • The variable of import is endogenous. • The unobserved factors can also explain FDI and import, for example: • Public policy like any close ties between EG and the government. - Family controlled EG. • Bilateral relations, etc.

23. Complementaryresults (1) • We input 3 new variables: - export of semifinished goods for sub-contractsprocessing, - import of semifinished goods for sub-contractsprocessing, - investment in financial activity (in % of FDI for each country). • The similar results are likely for the 10 variables (for each type of model). The tax variable is not significant in explaining FDI. • The variables of export of semifinished goods for processing and investment financial are significant in explaining FDI.

24. Comparison of results, 200610 variables 13 variables

25. 8 6 l 4 n y 2 0 0 5 10 15 limp Subpopulations: offshore (23) and non-offshore (64)countries-investors For offshore countries, there are not any explicative variables from the 10 and 13 variables. Only a variable of finance is explicative with the positive meaning in the threshold of 10%.

26. Comparison of results, non-offshore, 200610 variables 13 variables

27. Findings (1) • The literature's benchmark distinction between horizontal and vertical FDI does not capture the growing diversity of strategies the multinationals use, particular, in emerging economy. • There is evidence of two subpopulations of the countries-investors: offshore and non-offshore. These two subpopulations behavior differently. • The variable of GDP per capita looks not so much significant for FDI coming in the Ukraine. • The variable of distance is significant at all for FDI. But it arises with negative sign for import. • The VAT ratio explains weak FDI of non-offshore only. But it can explain the EG’ strategy to invest through the import. • Production-oriented FDI consists of two patterns. One of them locates production in Ukraine because of low material and manual-labor cost (light industry). Another one makes outsourcing in Ukraine because of skilled-labor cost are low here (IT industry).

28. Findings (2) • Offshore factor plays essential role as well as CIS countries’ EG prefer to realize IT outsourcing through the offshore companies. • The variables of Russian and English speaking explain weakly EG strategy in Ukraine. • There is evidence for relation between FDI, import and explicative variable of the investment from Ukraine. This variable does not explain FDI directly, but through the import. Obviously, it explains, fist of all, the FDI activity not foreign but domestic EGs, who invest in other countries to import then in Ukraine. • The study did not confirm our suggestion about the production-oriented EGs importing a semi-finished input to future process. Instead of to import, EGs prefer to invest in order to export a semi-finished input to future process in the parent country. • Beside evidence of vertical FDI, there is a new pattern mostly arising through mixes of vertical and horizontal FDI (diversification) in Russian and Ukraine EGs, what we refer to as diagonal FDI. • A diagonal FDI pattern suggests an agglomeration of quite different activities with input of different types of production factors.

29. Horizontal and vertical integration in EG

30. Diagonal integration in EG

31. The key business of SCM includes the following areas: Mining and metallurgical activity Power energy activity Financial activity Additional activities The largest companies of SCM: Metallurgical Company Azovstal Еnakievо Metallurgical Works Joint Enterprise LLC Metalen Ferriera Valsider S.P.A. (Italy) Khartsyzskiy Pipe Plant OJSC Avdeevskiy Coke-Processing Works Krasnodonugol Northern Mining and Ore-Processing Plant Central Mining and Ore-Processing Plant Pavlogradugol “Komsomolets Donbassa” Mine Vostokenergo Tekhrempostavka Druzhkovskiy Machine Building Plant Kaolin Production (3 enterprises) Dongorbank First Ukrainian International Bank Ukrainian Joint Stock Insurance Company ASKA Ukrainian Joint Stock Insurance Company ASKA – LIFE Mobile Operator Life: LLC Astelit Optima Telecom Fixed-Communications operator PJSC Farlep-Invest Druzhkovka Ore Management - refractory and fire-clays Vesco - refractory and fire-clays Gefest – chain of gas stations Brewing Group “Sarmat” “Donbass Palace” Hotel Publishing Group “Segodnya” TV and Radio Company “Ukraine” Football Club “Shakhter” (Donetsk) System Capital Management Group Structure (SCM), the head of group is situated in Donetsk. SCM has a controlling interest over 90 enterprises, for which 160 000 employers work.

32. Findings (3) • In order to serve the financial flows there is always the banking structure in the centre of such group. • The last explicative variable of finance activity is very significant for FDI of all population and for two subpopulations • Ukraine is very attractive for financial activity as financial sector was not developed before. • Financial and banking enterprises arise due either horizontal FDI from developed economies or diagonal FDI (diversification) of Ukrainian and especially Russian groups. • Thanks to them, FDI is the source of different credits for businesses and consumers. The consumer credit system is quickly developing in trade and real estate.

33. The control of the kaolin production in the group System Capital Management, 2007 Offshore JSC SCM The head of the group SCM Limited UMG Limited JSC Ogneupornerud, 100% Sub - group 1, 100% Sub - group 2, 100% JSC Druzhkovsk, 90.6% JSC Vesko, 93.9% Ukraine

34. Conclusion • Indirect sources can be useful auxiliary information to study EG as a complex phenomenon. It needs to define the unit of observation. • The empirical findings acknowledge that despite Ukraine is very weak in business and investment freedom it becomes more and more attractive for FDI. • Obtained results suggest a marked difference in the FDI patterns and their evolution. Multinationals act in Ukraine as production-oriented and distribution-oriented FDI with growing variety. • These differences may be a source of both positive and adverse impacts on the Ukraine economy. • Lastly, we found evidence of diversified business of domestic EG and coming from emerging countries with a financial intermediary in the group's core. • We found statistically significant coefficients for some variables for their impact power on FDI strategies. • FDI patterns in Ukraine depend on both endogenous and exogenous factors.

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