Factors of successful protection from pressure on business

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FEDERAL STATE AUTONOMOUS EDUCATIONAL INSTITUTION FOR HIGHER EDUCATION NATIONAL RESEARCH UNIVERSITY HIGHER SCHOOL OF ECONOMICS

Master thesis

MASTER THESIS TOPIC

Factors of successful protection from pressure on business

Field of study 01.04.02 Applied Mathematics and Informatics

Master's programme “Applied Statistics with Network Analysis”

International laboratory for Applied Network Research

Stepanov Grigoriy Romanovich

Reviewer

Candidate of Sciences (Phd),

Associate Professor

Zangieva Irina Kazbekovna

Scientific Supervisor

Candidate of Sciences (Phd),

Senior research fellow

Kazun Anton Pavlovich

Moscow 2020

Table of contents

Introduction

Section 1. Literature review

1.1 Property rights and “damage” concept formalization

1.2 Strategies of property right protection

1.3 Case study of state-government relations

1.4 Literature review conclusion

Section 2. Methodology

2.1 Research design

2.2 Data collection

2.3 Key variables creation and variables selection procedure

2.4 Data analysis methods

Section 3. Data analysis

3.1 Exploratory data analysis. Feature engineering

3.2 Relationship analysis

3.3 Modelling

3.4 Data analysis conclusion

Conclusion

REFERENCES

APPENDIX

Attachment 1

Attachment 2

Attachment 3

Attachment 4

Attachment 5

business protection model business damage

Introduction

Contradictions between businesspeople and official government interests exist in objective reality[See Szakonyi, 2018; Markus, 2012]. However, healthy development of most of the modern economies is impossible without business development, so both sides should maintain a balance of interests in order to achieve general social welfare. On the other hand, the situation in which one side has more power and is able to impose its' interest despite the interests of the opposite side is possible. As classic dilemma of a political system states: «a government that is strong enough to protect property and enforce contracts is also strong enough to confiscate the wealth of its citizens» [Locke, Weingast, 1993, cit. by Frye 2004].On the other side of government - business power balance, weak states cannot provide enough guarantees for economic agents' that their activities and incomes will be protected.

Unfortunately, thesis about the government-business power balance being far from the equilibrium can be easily illustrated by the Post-Soviet period of Russian history. In political and economic sense Russian state have underwent a long path from the weak state in the early 1990 to the strong state in the beginning of 21 century [Yakovlev, 2005]. Talking about this phenomenon in terms of “business capture and state capture”, the nature of business-state relations in Russia have undergone several sharp changes since the fall of the Soviet Union in 1991 [Yakovlev, 2005]. After the rise of capitalism weak state could not provide private businesses with enough means of property rights protection. This fact brought to the spread of so-called “wild capitalism” and especially,violent entrepreneurship[for details, see Volkov, 2012] which is the variation of destructive entrepreneurship phenomena. According to theory, such type of entrepreneurship does not create anything new or redistribute wealth, but artificially reduce it by destroying created goods [see Zoltan et all, 2010, p.1]. This was true for regional enterprises as government had not enough resources to intervene [Yakovlev, 2015]. Later, government proposed the mechanisms of property rights protection only for several federal-level businesses in order to maintain power among the members of oligarch-elites, who had enough resources to influence the political system [Yakovlev, 2005]. In the second half of the 2000's the course of Russian government had changed on strengthening the state apparatus and creating “stable power vertical” [Yakovlev, 2005]. Considering such drastic change in government orientation, fully functioning business interests protection system have not been properly formed.

However, a large number of measures have been taken in order support the business in recent years. In order to present the interest of business and create property rights protection mechanisms, several governmental and non-governmental organizations have appeared since late 90-s[for instance, see Yakovlev, 2005 for the business associations origins description], including business associations and industry self-regulatory organizations. Official business ombudsman office was founded in 2012, which main goal was to provide an effective channel of communication between business and government in different levels. The problem of business property rights violation is constantly raised by representatives of the central government [in order to get more information, see “Violent pressure defense news articles” where the number of reports published in mass media resources on this topic were collected]. Moreover, mass media resources themselves(including newspapers, radio, TV, and internet sources) have undergone an intense development since early 00-s. Thus, entrepreneurs themselves have much the greater variability in choosing means of property rightsprotection [to see how social media can be used in order to draw attention to the problem see “An interview with founder of “DO-DO Pizza” in the links section].

Thus, it would be incorrect to say that creation of a successful business in Russia is impossible, since many successful enterprises appeared in the Post-Soviet period. However, the situation of continuous business - government power disbalance can create additional threats to business owners, lowering the incentives for creating and running a business. According to latest business ombudsman surveys,there is an opinion that it is unsafe to do business in Russia (84% interviewed entrepreneurs and 69% interviewed experts have chosen this option in 2019; 94% interviewed entrepreneurs and 67% interviewed experts have chosen this option in 2018) [Business Ombudsmen's annual report to the president].

Having examples both of “winners” and “losers”, the question why some enterprises are able to survive the cases in which the interests of business and government collide arise.In practice, since private organizations still something more that the victims of the circumstances, they can efficiently react to the institutional environment changes through their key stakeholders [for instance, see Markus, 2012]. Thus, the outcome of cases implying the collisions of business-government interests depends not only on external to entrepreneur or enterprise factors but also on a set of characteristics that can be changed due to the actions of the entrepreneur. The sets of such actions are called strategies and widely discussed in the literature [Szakonyi, 2018; Markus 2012; Yakovlev 2015]. The strategies can be broken down to single facts, or factors, the provision of which implies the realization of chosen defense strategy.However, most studies focus primarily on one type of strategy per article (mainly political strategies) and do not consider all factors that may affect the outcome of a case [Markus 2012; Acemoglu, 2016, and others.].

The main aim of present paper is to conduct an exploratory research on what factors may influence the general outcome of the case in which the interests of government and business actors collide, based on Post-Soviet Russia experience. Other words, which characteristics the enterprise or the entrepreneur should have in order to increase the chances to reduce or even avoid the damage in disputes with unequal distribution of power.

The first part of the paper is devoted to literature review. The main goal of this section is to define the set of characteristics that will serve as a basis of further data collection. Other words, it is crucial to know what data should be parsed in order to explain “winning” or “losing” conditions. In the first part of literature review I will provide extended overview of different property rights approaches. This concept will formalize the “damage” definition and allow to move to the topic of business self-protection strategies.The second part of literature review will be devoted to analysis of previously held researches from different countries on this topic.In the methodological part I will describe the chosen research design and the main sources of data collection, considering their advantages and disadvantages. The next step will be defying the form of a final set of data and provide grounding for data analysis methods choice.In data analysis part I will describe key findings and the general logic of the analysis. Finally, in conclusion section the final interpretation of achieved results will be described in form of recommendations for business entities.

The motivation behind the present research is very straightforward: since the problem of the research is a real-life problem, there exists a group of people interested in solution of this problem. In this case, the guidelines on how to reduce damage during business - government collisions can be useful for the business community because the costs of the case can be treated as additional costs and considered to be undesirable for any business. On the other hand, present paper can provide data-driven framework for further studies on this topic and reveal additional insights, which previously were not found because of theoretical constraints.

Section1. Literature review

Returning to the political dilemma, stated in the introduction above, such definition as “strong enough to protect property and enforce contracts … and to confiscate” is worth paying attention. What does it mean “strong enough”? In original article authors provide clear description of what state agents “power” depends on. Considering the problem of business-state interactions in terms of property rights (PR) approach, Locke and Weingast defines the source of government agents' power through their unique institutional position, allowing them to regulate an access to PR of certain actors. However, this statement is true only under conditions of absence of specific institutional mechanisms restricting government agents' actions that are conditioned only by their selfish interests, such as authoritarianism or dictatorship. According to the previously mentioned dilemma, in case of “strong state” it is highly possible for institutional imbalance to appear. In conditions, close to “unlimited government” the violation of property rights by players with institutional position, allowing to realize more power, is possible and highly likely to occur. As a result of such imbalance, disfunction of property rights institution can occur [Sakaeva, 2012; Frye, 2004], because of the mismatch between expectations of economic actors of the outcomes of their activities and the actual results. Indeed, entrepreneurship itself relates to a certain level of risk and possibility of unfair advantage over business entities adds extra threats.

What can be done to receive a damage to entrepreneur or the enterprise? The answer is to alienate it from the outcome of activity. The right to own the result of business activity is stated by property rights. Being one of the central concepts in economic theory, property rights has various definitions. However, main features of property rightsdefinitionremain the same through these approaches.

According to Frye,«property rights are typically treated as a bundle of rights that include the power to consume, obtain income from, and alienate assets, such as land, labor or capital» [Frye, p.5, 2004].Thus, “actor-resources” part of property rights is essential. Property rights are used to be seen as an essential part of «successful economies» as they «grant decision making over valuable resources and” appear to be” the basis of investment and market exchange»[Libecap, 2018, p.1].

The nature of property rights also can be explained from the historical institutional changes standpoint. From such perspective property rights can be perceived as institutional elements with political nature in its core [Libecap, 2018] and should be perceived only through the prism of property rights establishment and coercion processes. Thus, the matter of key importance here is legality of exiting economic relations [Sakaeva, 2012]. Following the famous definition of the state as “organization of organizations”, given by North [North et al, 2009], governmental agents are able to distort PR in accordance with their private interests [Libecap, 2018]. However, property rights as a part of institutional structure resolve the problem of governmental open access to resources by defining private and governmental responsibility areas [Libecap, 2018, p.1-2]. As Haber wrote, “The self-enforcing nature of the institutions that underlie limited governments solves the commitment problem. Precisely because the government cannot act in an arbitrary manner, asset holders will invest” [Haber, 2002, p.14].

Summing all general traits up, property rights can be divided by two general aspects: resources access rights (resources access and activities access rights, define “actor-resource” relations) and income distributions rights (define “actor-actor” relations about the income from the economic activity and formalize it) [Radaev, 2001, p.113-114].Markus [Markus, 2012] in his paper “Secure property rights as a bottom-up process” use the same basis for the PR definition.The author highlights the following:

1) “The right to use and manage assets”;

2) “The right to derive income from assets”;

3) “The right to transfer [income] to someone else” [Markus, 2012, p.243].

Again, speaking in institutional approach terms, it seems like property rights also can be treated asan essential part of the “rules of the game” having both economic and political nature [Frye, 2004]. As Stiglitz states:

“Standard neoclassical theory argues that for a market economy to work well (to be Pareto efficient), there must be both competition and private property (the "Siamese twins" of efficient wealth creation). Both are required, and clearly, if one could wave a magic wand and instantaneously institute both, one would presumably do that” [Stiglitz, 1999, p.5].

Indeed, the point here is that without clearly stated and well-executed property rights rightsholders (or economical actors or, simply speaking, businessmen) will have less chances to be fairly rewarded by their activities, which leads to loss of the incentives to continue economic activity [Frye, 2004, p.6]. The biggest issue here is that PR heavily connected with such factors, as the clarity of allocation, the ease of alienability[Frye, p.6, 2004].North and Thomas [North and Thomas, 1973] provide evidence that in a more complex economical system only the state can be the most effective property rights regulator due to the overall system complexity. Returning to the basic property rights dilemma, the whole PR-security system should be well-balanced and well-regulated in order to prevent governmental agents to interrupt the private sector.

In many papers, devoted to different aspects of business-government relationships, a little attention is paid to the definition of property detached from the context. More often the definition itself is replaced by the description of PR from the functional standpoint [for instance, see Razo, 2015, p.2] or by role PR play in the given/benchmark economies [see Szakonyi, 2018, p. 324]. These facts allow to conclude that there are a little of dispute among social scientists about the nature of PR themselves but the question about how this phenomena should be perceived by the researcher (including general theoretical framework of business-state relationship, the functional role of PR in these relationships etc.) arise a number of important questions.

Thus, despite the fact PR being as one of the most important and basic concepts in social sciences, it still has mainly applied role and should be analyzed in its functional context.Moreover, analyzing property rights in terms of its functional significance [Sakaeva, 2012, p.99]the essence of business-state relations can be revealed in more details. Therefore, it is important to establish the functional relationship between property rights and incentives for entrepreneurial activity.

On the one hand, business activity can be stated as “independent activity, performed at one's own risk, aimed at systematically deriving a profit …”[Civil Code of the Russian Federation, 2, 1]. On the other hand, following Schumpeter's logic that was confirmed by a number of studies, entrepreneurial activity can be motivated not only by financial outcomes but much wider incentives structures [see Licht, Siegel, 2005]. For instance, entrepreneurial activity can be explained byjoy of creating and will to conquer [Schumpeter, by Licht, Siegel, 2005], different systems consisting of sub-dimensions (such as «innovation, proactiveness, risk taking» [Licht, Siegel, 2005, p.7]) or socio-cultural context [see Licht, Siegel, 2005, p.7].Taking into consideration the fact that the explanation of nature of entrepreneurial activity is far from the aim of this research, I summarize all these approaches and state that entrepreneurial activity should maximize the expected outcome of activity, provided by motivational structure.This motivational structurecorresponds to the goals entrepreneurs define as important in order to maintain and develop business. At the same time motivational structure can both fit and not fit the economic reality requirements. In case when motivational structure do not contradict these conditions, the enterprise is able to succeed. In other case, it is highly unlikely due to the management failures.At the same time, it is naturally to assume that regardless of the nature of outcomes fulfillment of motivational structure needs leads to the at least keeping a business alive. Thus, entrepreneurs' actions bring more potential profits to the firm.

However, business activity always should includean assumption of unpredictability. According to N. Fligstein, contemporary markets are often treated as an area with high level of uncertainty and “murkiness” and all entrepreneurs can do about it is to “… construct an account of the world that interprets the murkiness motivates and determines courses of action, and justifies the action decided upon. In markets, the goal of action is to ensure the survival of the firm. No actor can determine which behaviors will maximize profits (either a priori or post hoc), and action is therefore directed toward the creation of stable worlds” [Fligstein, 1996, 659]. Thus, one of the main goals of entrepreneur is to understand general rules of the game and reduce unpredictable component and provide the greater amount of control over market situation as a whole and PR in particular [Fligstein, 1996].

Again, in order to maximize incentives, entrepreneurs' actions should be aimed at maximizing both inner stability and market stability connected with firm activity. Inner stability assumes the best organizational forms allows firm to perform the best they can in competitive markets and rely more on informal conceptions shared among workers and key stakeholders. On the other hand, market stability may be treated as a broader concept including all four institutional elements: property rights (PR), governance structures (both laws structures (LS) and informal structures (IS)), conceptions of control (CC) and rules of exchange (RoE) [Fligstein, 1996, 658].

According to Fligstein, in stable markets all institutional elements are usually taken from market leaders (usually - biggest and richest firms) [Fligstein, 1996].Even though there is always a chance of markets to become unstable again, while market leaders are able to deal with murkiness of the environment, the general frame can be the same for all the firms in stable markets.

However, all these variables belong to different levels of institutional structure. Radaev [Radaev, 2001, 114-115] states that institutional elements, such as property rights, governance structures and rules of exchange meet motivational structure (MS) of actors and then objectivates through conceptions of control.

The most important part of incentives structure definition begins from understanding what factors can influence all the institutional elements since both government and business have their own incentives to influence the variation of these factors.The first element is property rights.

Markus [Markus, 2012, p.243-244] distinguish two orthodoxy approaches in PR-security research studies. First, the approach called “strategic interaction” is closely connected to classical Olsonian metaphor of “roving bandit - stationary bandit” [Markus, 2012, p.243]. Olson argues, that authoritarian government arises in order to maximize the private benefits by using methods of violent entrepreneurship [Olson, 1993]. The difference between bandits in their classical sense and government in this case is that the latter rely not on violence itself (“War-Making strategies”) but on protecting people from external threats (both in physical and legal field), “State-making strategies” [Olson, 1993; Tilly, 1985]. Democracy, however, represents the most developed and efficient (in economic, military and political terms) form of government. It occurs when there are exist several rules with approximately the same amount of resources. Thus, it is more profitable for them to cooperate and share increased benefits [Olson, 1993]. Government here can be seen as a system of separated organizations with own interests and goals [North et. All 2009]. Business-government relations, thus, are based on long-time cooperation: government need to reduce the pressure on business in the current period in order to maximize own revenue in long-run [Markus, 2012].The weak point of such theory is an assumption that economical wealth of the business and property rights themselves depend only on fiscal rationality of the ruler.

The second approach, called by Markus `state commitment' paradigm, is based on the assumption that business-state relations, which are originally imbalanced by nature, are regulated by institutional constraints [Markus, 2012, p.244]. Government, obviously possessing more power gain resources from business. Property rights, in this case, can be seen as regulatory mechanism which helpsgovernment to “reassure” business by providing guarantees [Markus, 2012, p.244]. Scientists, however, argue about the methods of establishing these guarantees.

One of the possible answers can be provided by credible commitment approach. Indeed, why should entrepreneurs believe government actions and statements in shortrun? More than that, from the credible commitment approach point, even in perfect situation there is still a chance of PR being violated by government agents because these actors can actually influence PR according to their own interest.

“Property rights are often weak because economic activities involve time-inconsistent exchanges between state and private agents.More precisely, laws and policies often promise benefits in the future for changes in behavior today. … ” [Frye, 2004].

The answer is, necessary level of trust can be obtained by certain restrictions, which create conviction that businessmen economic activity would be safe. Frye argues, that the system of independent institutions, such as independent courts, may impose costs on government agents and provide the greater security of private capital [Frye, 2004, p.8-9] and benefits for both government and business. Taking into account such system, businesspeople can be sure that in case of violation of PR by state agents, violators themselves would be punished.

The followers of social - trust approach criticize institutionalists for their heavy structure-orientation and provide more psychological explanation of PR regulations [see Sakaeva, 2012; Markus, 2012].Following the way of understanding investment behavior on micro-level of individual investment incentives, scientist understand PR-security level as highly correlated with either general social trust level or civic participation.

However, all these approaches were heavily criticized [Markus, 2012] because they are considering business as a limp puppet in hand of either government or institutional structure. On the contrary, the number of researches argues that business actors can influence PR-protection and political decisions not only in developing countries, but also in countries with developed economies [Szakony, 2018, p.324]. All that will vary is the set of strategies [Szakony, 2018, p.324].

The number of studies has developed approaches in which business is seen more like a rightful player rather than the victim of circumstances. The key difference in these approaches is in assumption about independent business actors should be treated not just as elements of the system, heavily dependent on government rationality or institutional imperfection itself, but as independent actor, who can not only provide their reaction to the changing institutional environment, but perform deliberate actions in order to protect its interest and protect business from governmental and individual threats imposition. In fact,in the same happened with the definition of the state when it was considered as organization of organizations with particular agents acting in their own interest[North, et all, 2009].

Both “strategic interaction” and “state commitment” approaches were criticized by Markus because first, “state appears curiously bifurcated: the government is either omnipotent or atrophied” [Markus, 2012, p.245] and second, PR is used to be treated as exclusively political phenomena [Markus, 2012]. The author argues, that in real world a) governments sometimes can be weak and lack of PR-security (including the possibility of private expropriation) and b) PR security process depends not only on macro-level developments (such as institutional processes and governmental decisions) but should be seen in more micro-level, such as independent firms interactions or business alliances activities, especially in transitional periods [Markus, 2012].The idea here is that in situation of lack of governmental control over PR-security, business can create independent regulatory institutions in order to impose costs on governmental agents and prevent PR violation. Such roles are usually played be alliances.Alliances are defined as both institutionalized or not institutionalized “groups with common interests in which they are aware”which are able to accumulate and utilize resources [Markus, 2012, p.249].Thus, PR should be seen more like bottom-up process, where regulatory initiatives can be formulated by business itself and provide “more security to companies with stakeholders aliences” [Markus, 2012] as “organized groups from business, labor, government agencies and political parties will try to affect the constitution of property rights”[Fligstein, 1996].Defensive practices can be copied, developed and replicated by both business alliances and state agents that provide stability of the defensive mechanisms [Markus, 2012].

However, Markus have not taken into account the fact that even governments with the dominant volume of power over property tights (basically, authoritarian or dictatorship regimes) sometimes have to provide more freedom to business in order to gain profit in longrun. In this case, government should reduce its own control over PR. Such actions are not desirable for state agents because of the loss of control over system itself but inevitable for the economy development in the longrun. The common solution in such cases is crony capitalism [Haber, 2002].

The term “crony capitalism” was introduced by Paul Krugman at the end of XX century [Ivanovic, 2017, p.41]. This phenomenon was discovered in East Asian countries during the study of 1997 economic crisis [Ivanovic, 2017, p.41] under the hypothesis that crony capitalism can be the reasons of economical failures. Later, however, such researchers as Kruger and Haber [Ivanovic, 2017] found out that there is no real connection between crony capitalism and crisis cycles. However, the question why crony capitalism still can be competitive in modern markets became the central problem for later studies.Since then,crony capitalism was found in different political and economic contexts such as countries of Latin America [see Haber, 2002; Barros, 2003], East Asia [Haber, 2002; Razo, 2015, Kang, 2002], Europe [see Ivankovic, 2017 for Croatia] and USA [Salter, 2014]. The analysis of crony capitalism using methods of social networks can be seen in [Razo, 2015].

Crony capitalism is a system, in which unlimited government (more often, under condition of dictatorship regimes)can maintain competitive economy for those businesses, which owners have close links with governmental agents. Another words, in crony capitalism there is a selective PR protection mechanism governmental agent provide in exchange for the part of business income [Haber, 2002; Razo, 2015].The whole system works because in crony capitalism are usually based on businessmen personal affiliation with government authorities, which make state commitment even more credible [Rezo, 2015]. Unlike the system of independent institutions, reviewed by Markus, in this case government create a system of informal institutions, which allow selected actors to impose their interests with high probability of being heard by authorities. All that informal mechanisms include corruption, drawbacks and loyalty to the government [Razo, 2015].

However, crony capitalism as a form of property rights establishmenthas been heavily criticized by researchers because it restricts the distribution resources by providing political elites with drawbacks, heavily depends on personal connections and particular government and shifts the distributions of the income [Rezo, 2015]. Finally, according to the crony capitalism analysis, provided by Krueger, there is a little difference between enterprises under the crony capitalism system and state enterprises in terms of economic efficiency [by: Haber, 2002].

However, there are both legislative structures (LS) and governmental inference (GI) that can restrict an optimal PR distribution. At the same time, this unfair inference can be corrected by informal structures (IS) since studies such as [Markus, 2012] shows us how business can react to creation of intentional institutional imperfections. On the other hand, crony capitalism researchers showed us how government can behave in case of over excessive restriction of economic agents. Informal structures still should be considered in connection with legislative structures and governmental inference since the number of informal strategies of protection of property rights still can be limited by the government and appears as a response to these restrictions. Thus, IS acts as a “correction coefficient” for the imperfect institutional situation.

Finally, after property rights establishment the rules of exchange should bedefined. Radaev [Radaev, 2001] states that rules of exchange are “provide the interaction order between independent firms and businesses. These rules regulate the choice of business partners, the nature of business relations and the order of transactions execution” [Radaev, 2001]. For example, in property rights violation case, firms can reject to carry out transactions without the support of third-party organizations [Razo, 2015].

Thus, we have got an analytical schema for the future research. Again, the damage to the enterprise can be formulated as alienating of the enterprise or the entrepreneur from the product of its' activity. However, by using both legislative (LS) and informal structures (IS) theamount of receiving damage could be reduced in business-government disputes under the condition that state-business power balance is not in equilibrium.Thus, firms can try to interfere and increase PR protection but still will be restricted in business activity.

1.2 Strategies of property right protection

In order to understand how exactly private companies can resist institutional imperfections and secure their incomes, a number of important concepts about PR-protection strategies will be discussed.

As it was stated in [Yakovlev, et all, 2014, p.188], “in more institutionalized settings, the normal reaction of a businessman encountering illegal pressure from law enforcement officers” or other entrepreneur “is to go to court”. However, in institutional incomplete environment court system can be heavily affiliated with law enforcement officers, thus, there is a little chance for entrepreneur to win in courthouse.

Talking about political-interactions strategies, Szakoniy [Szakoniy, 2018] provided very clear and simple classification in his paper called “Businesspeople in Elected office”. due to the lack of control over property rights, businesspeople are able to realize direct or indirect political strategies in order to achieve their goals [Szakonyi, 2018]. Indirect strategies, such as donations to campaigns of exact politicians or lobbying their interests in business community, do not assume the direct connection with political figures and include generally supporting functions [Szakonyi, 2018]. On the other hand, direct strategies can provide the stronger guarantee of ones' firms' interested to be taken into account `blurring the line between politicians and firm executives' [Szakonyi, 2018]. This last type of strategies assume members from board of directs of exact firms to be elected in political offices and gaining direct access in political branch [Szakonyi, 2018]. However, political engagement seems to be fair not only for both developing and developed economies [see Acemoglu 2016 and Amore D., 2013 for USA and Denmark respectively].

The key advantages businesspeople can take from these strategies are [Szakoniy, 2018]:

a) Creation of close personal ties with politicians and bureaucrats in case of direct strategies realization;

b) Gain power to influence political apparatus (such like lobbying self-interests while reforms acceptance);

c) Obtain good image for the represented business (for instance, to achieve greater creditworthiness in banks);

d) In case of study of Russia, a place in parliament increase financial returns.

Thus, political field is seen more like a “marketplace” for businesspeople, who compete for gain as much bonuses as possible [Szakoniy, 2018, p.324]. However, more applicants participate in a “race”, less profitable become the prize as “winning firms encounter other potential rent-seekers who have won a seat in a parliament, they find it more difficult to carve out private benefits” [Szakoniy, 2018, p.323].

Despite the fact that Szakoniys' typology provide wide opportunities for empirical research, it seems like the author described only part of the possible solutions of imperfect institutions problems. The wider range of strategieswas described in [Yakovlev et all., 2014]:

Indeed, in personal private strategies level an entrepreneurship faces a dilemma whether to pay directly (for instance, using bribes) or seek for political patronage. However, researchers state that in Russia only “payment” strategy is achievable for medium and small business due to the lack of political resources [Yakovlev et all., 2014, p.188].

Using social capital, entrepreneur can use a range of individual public strategies that means seeking for attention of public or political elites to the problem through mass media.

Finally, as it was stated in [Markus, 2012], entrepreneurs can organize both personalized organizations with a narrow membership base and depersonalized organizations with a wide membership base in order to prevent violent pressure. Such organizations can not restrict government itself but are able to signalize to the political elites about the possibility of predatory behavior of state agents [Yakovlev, et all. 2014].

In network research of Crony Capitalism of Razo [Razo, 2015] states that there is can be a network of third-party's organizations, which create overlapping protection network. This network can propagate risk of state agent's predatory behavior to other actors in the economy such as they cannot invest in the next period [Razo, 2015. P.15-16]. Such type of scheme is very close to collective strategies, proposed in [Marcus, 2012] and [Yakovlev et all, 2014].

1.3 Case study of state-government relations

The aim of this section is to review previous studies of cases involving unequal government-business power distribution in order to draw basic theoretical and methodological approaches of studying the problem.

First cases could be drawn from a number of European states, which have entered the period of political instability by the end of the 20-th century. Among others,Croatia have alsofaced with the situation of political instability during the transition to capitalism in 90's. Moreover, the privatization and transition processes have led Croatia to the appearance of crony capitalism system, which broke up in 2010-s. The paper “The political Economy of Crony Capitalism: A Case Study of the Collapse of the Largest Croatian Conglomerate” is devoted to the topic of life-cycle of Croatian crony capitalism system and can be helpful to the present study in terms of searching for interesting insights of how state-business evolve in imperfect institutional situations.

According to Ivanovic, privatization period in Croatia can be divided to the three stages [Ivanovic, 2017. P 51]: political instability and privatization, crony capitalism escalation and the fall of crony capitalism system. First, the period of political instability comes in. Ivanovic states that after the Homeland War and the establishment of the Croatia independence there was a little idea abouthow the transition from centralized economy to market economy and from one-party to multiple-parties system can be achieved [Ivanovic, 2017]. Thus, due to such abrupt transition no necessary institutions have been provided. Thus, hiding behind the ideological assumption of economic decentralization, political elites have announced privatization of governmental property. This property, however, was distributed primary among the key political actors, who were directly connected to the president, Franjo Tudman, and the ruling political party, Croatian democratic union [Ivanovic, 2017. P.52]. Thus, the rise of crony capitalism in Croatia can be characterized by the imperfection of PR-security processes through disfunction of formal institutes and sole ownership ofkey enterprises by Presidents' family members and colleagues [Ivanovic, 2017, p.53].For instance, company Agrokor considers to be a symbol of Croatian crony capitalism system [Ivanovic, 2017].

Being found in 1976 as a flower growing company, Agrokor was obtained by the members of political elites in late 90-s and turned into the biggest private conglomerate in the country. The daughter of the first president and former prime minister became the key business partners of the company (the phenomenon was called “forward integration” or state over business). At the same time, obvious PR-distribution failure was conducted since Agrokor had more economical and political power than it should have: “Since the conglomerate was too strong economically, socially and politically, nobody controlled it. Neither the tax administration nor any other state agency supervised Agrokor. All major decisions were made by the owner without any formal procedure. There was no record of formal meetings of the board” [Ivanovic, 2017. P.56]. Thus, PR were heavily affected by both legislative structures and governmental institutions, held by Agrokor (or “backwards integration”, business over state).

Second, at the stage of mature crony capitalism both forward and backwards integration mechanisms escalated: there were several government-business and business-government changes during early 00-s. That is more important, such personal-driven system of preferences have driven to corruption[Ivanovic, 2017].However, since crony capitalism assumes the reduction of the government on the exchange to the rent, there were several positive consequences for the distinct members of business community. Despite all institutional imperfections, Ivanovic remarks that under crony capitalism a number of strategies have become available for the entrepreneurs in order to communicate with resource owners: “From 2003 to 2011 Agrokor acquired several bankrupted state-owned agro-conglomerates, heavily invested in their recovery and se- cured its position as the best and most important business partner of the government. Certainly, the fact that Prime Minister Sanader behaved as a strong leader was favorable for this development. It was easier to make a contract with him” [Ivanovic, 2017. P.55]. Assuming the fact, that under crony capitalism benefits are usually gained through personal ties, we can say that informal structures of Croatian entrepreneurs of this time included making connections with key political figures that help them or their enterprises survive.

The fall of such system appeared to happen in 2016, when Agrokor has exhausted its limits of economic growth and faced liquidity problems [Ivanovic, 2017]. According to the Ivanovic, despite the fact Agrokor provided the necessary economic growth in its best years, it still could not be comparable with the same rates of economic growth in other European countries with more democratic regimes [Ivanovic, 2017. P. 56-57]. Approximately at the same time the ties between business and state were ruined since EU membership restricted the degree to which government can intervene (the rule of law was respected to the greater extend)and the daughter of the former president was restricted for the decision-making process [Ivanovic, 2017]. Lately, all the key cronies were forced to leave their positions. Interesting enough, that the biggest Russian bank, Sberbank, was also the biggest creditor of Agrokor and lost a great amount of its investments after the fall of the company.

Crony capitalism relations can also be formed in such form of political instability when both business and government are powerful enough to resist each other and decrease transactional costs holding each other as mutual hostages. In 2002 paper “Transaction costs and crony capitalism in East Asia” D. Kang describes cases for Korea and Taiwan [Kang, 2002]. Since most of the Asian regimes are crony capitalism systems [Kang, 2002], Korea and Taiwan followed that way of development. In both countries governments had strong influence on financial and political sectors thus providing a great control over business [Kang, 2002]. In Korea, however, the government was held by consolidated and solid business sector, consisting of family enterprises, chaebol [Kang, 2002]. Thus, both sides have a little motivation to harm each other since both government and chaebol knew that will affect both sides: “This is analogous to a prisoner's dilemma: in PD both sides would prefer to defect, but they are restrained from doing so by the ability of the other side to respond in kind, and hence a form of stability ensues” [Kang, 2002, p.15]. Since the groups of cronies were relatively small and both sides were able to respond to the predatory behavior, transaction costs were lowered. In Taiwan, however, there was no strongly consolidated business community, like chaebol. Instead, extremely diverse business sector of small and medium size enterprises was limited from the ruling party influence for the several decades [Kang, 2002]. Since business, as heavily subsidized educational system, were one of the most efficient sources of social mobility, there were a little of government influence. On the other hand, however, it was unfavorable for Taiwanese government to let the new sources of political and economic power appear, so the opportunities for business were primarily reduced and most of the profits were spent on spheres under government control, such as military [Kang, 2002, p.24]. So, crony capitalism system of state-business relations can be found not only in heavily imbalanced relations when business or government have enormous power over each other, but also in case when both sides have enough power to constrain themselves.

One advantage of perceiving crony capitalism as an attribute of imperfect institutional conditions is that this phenomenon could be detected even in modern democracies. Thus, a greater number of evidences can be detected for the further analysis.

The paper “Crony Capitalism, American Style” written by M. Salter confirms this assumption. Salter [Salter, 2014] discuss the issue of crony capitalism elements in modern state-business relations in USA. The author states that unlike politically and economic developing countries, the elements of cronyism can be found in states with stable institutional system also.What differs here is the from actors try to get benefits from the state. Crony capitalism in developed countries appears not as an attempt of business to survive, but to provide more benefits to business enterprises. Salter provides the general overview on the cases of corruption in American government and discuss several cases of such big corporations as American International Group insurance company, American Crystal Sugar and Altria (former Philip Morris) [Salter, 2014.]. As a result, author defines “crony capitalism tookit”, which consists of methods which may be legal, but still provide selected business with unfair advantages. What is interesting, that these “crony capitalist methods” are very similar to Szakoniys' strategies typology [Salter, 2014. P.11].

First, business can make contributions to elected officed (indirect strategies). Providing historical data, Salter shows that investing in distinct industries or political campaigns may bring significant benefits to the companies. For instance, in 2013 - 2014 American Crystal Sugar, the biggest agricultural contributor, invested 1.8 million dollars to agricultural sector that returned in 280 million dollars subsidies the same year [Salter, 2014. P.14]. Moreover, less fortunate attempts to bribe a politician were revealed [see Salter, 2014. P.16 for California Democrat Senator case].

Second, heavy lobbying on Congress and rule-writing agencies (close to direct strategies) ae possible. The author mentions impressive amount of money business sector spend to lobbying its interests: for instance, “Business and trade groups also spent $28.6 billion from 1998 to 2010 on lobbying, compared with $488.2 million spent by labor--a nearly 60-to-1 advantage” [Salter, 2014. P.22]. Another case is lobbying on the Affordable Care Act, when business interest was threatened by the upcoming health care reform. “There were six registered healthcare lobbyists for every member of Congress” [Salter, 2014. P.25]. Thus, there is no doubt lobbying can bring profits to the business.

Finally, revolving door corruption, or personal connections between government agents and private sector should be taken into account. According to the article, three flows are important: from government to business lobbying, from government to industry, from industry to government [Salter, 2014].

The last thesis about importance of personal connections as a tool helping to gain unfair benefits under low corruption and institutionally stable conditions seems to be true not only in America. In paper “The value of local political connections in a low-corruption environment” M. Amore and M. Bennedsen reveal the causal effect of political power amount on the firms that are heavily affiliated with families of key political actors [Amore, Bennedse, 2013] in Denmark (which is considered to be one of the least corrupted countries, according to the Corruption Perception Index).The story behind this research is 2005 Danish local and administrative reform of municipalities focused on the reduction of the number of municipalities increasing their economical and administrative efficiency [Amore, Bennedse, 2013, p.8]. The data was gathered on companies three years before and three years after the reform and the chosen local politicians from the Danish Ministry of the Interior [Amore, Bennedse, 2013, p.9].Data analysis allow Amore and Bennedse state that those firms, which were connected with politicians before the reform and situated in merging municipalities in 2005 have increased their performance and profits in comparison with firms from not merging municipalities [Amore, Bennedse, 2013, p.18].

Yet it can be seen that despite the fact of theoretical differences in perception of crony capitalism as a historical state of state-business relations and an attribute of corruption, it still can be seen that in modern democracies such type of relations are usually proposed while the uncertainty periods, such as elections, legislation changes, etc. As a support of such thesis an article “The value of connections in turbulent times: Evidence from the United States” by Acemogly et. Al. can be presented. The general case here relates to personality of Timothy Geithner, who was U.S. Treasury Secretary from 2009 to 2013. The point here is that financial companies, which were connected to T. Geithner experienced an enormous rise of returns in 2008 (when T. Geithner was nominated) and fall of the value of companies in 2009, when the appointment was threatened by tax issues [Acemogly et. Al., 2015]. Assumptions about such behavior can be derived from the structural position of T. Geithner: holding office of 9-th president of Federal Reserve Bank in New York, he had a large personal network connection with number of key representatives of U.S. financial community [Acemogly et. Al., 2015]. In 2008, when the financial crisis seemed to be unavoidable, financial actors“expected Secretary Geithner's appointment to help financial firms led by executives he knew through existing professional and social connections” [Acemogly et. Al., 2015, p.371], what have increased the value of the enterprises. Another evidence of the importance of personal relations is the fact that after hiring T. Geithner to the Treasure Secretary position, the whole office changed to Geithner's former colleagues from New York Fed and Wall Street [Acemogly et. Al., 2015, p.390].