22 European J. International Management, Vol. 2, No.

1, 2008

Gaining competitiveness through trust:

the experience of Russia

Andrei Kuznetsov*
Lancashire Business School,
University of Central Lancashire,
Greenbank Building, Preston, PR1 2HE, UK
Fax: +44 1772892907 E-mail: akuznetsov@uclan.ac.uk
*Corresponding author

Olga Kuznetsova
Manchester Metropolitan University Business School,
Aytoun Building, Aytoun St.,
Manchester M1 3GH, UK
Fax: +44 161 2476307 E-mail: o.kuznetsova@mmu.ac.uk

Abstract: This paper seeks to reveal the potential of the concept of national
competitiveness as a practical analytical tool. The paper offers suggestions on
how research on national competitiveness can contribute to setting targets for
socio-economic agenda in transition economies with special focus on Russia.
We start by stressing the importance of the institutional context as an element
of national competitiveness and then concentrate on generalised trust.
We analyse the situation with generalised trust in modern Russia and suggest
that the development of corporate social responsibility is the most credible
remedy for the deficiency of trust and, eventually, to competitiveness, in the
short term.

Keywords: national competitiveness; social trust; institutions; corporate social

responsibility; Russia.

Reference to this paper should be made as follows: Kuznetsov A. and

Kuznetsova, O. (2008) Gaining competitiveness through trust: the experience
of Russia, European J. International Management, Vol. 2, No. 1, pp.2238.

Biographical notes: Andrei Kuznetsov is Professor of International Corporate

Social Responsibility at the Lancashire Business School, University of
Central Lancashire, UK. His research interests include corporate governance,
post-communist transition and global competition. He has more than
80 publications, including journal papers as well as Russian Corporation:
The Strategies of Survival and Development and Foreign Investment in
Contemporary Russia: Managing Capital Entry. He is on the editorial board of
the Journal of East-West Business. He holds a PhD from the European
University Institute, Florence and the Financial Academy, Moscow.

Olga Kuznetsova is a Senior Lecturer in International Business at the

Manchester Metropolitan University Business School, UK. She is the author of
numerous papers on post-communist transition published in international
journals. She received her PhD from the Financial Academy, Moscow.

Copyright 2008 Inderscience Enterprises Ltd.

 Gaining competitiveness through trust: the experience of Russia 23

1 Introduction

In the last two decades national competitiveness has been the centre of attention of both
scholars and politicians and has proved to be instrumental in focusing the minds of
academics, businessmen and politicians on the institutional and systemic components
of economic growth and national well-being that other indicators, like GDP or GDP
growth, cannot reflect on their own.1 Competitiveness becomes an issue when and if the
nation seeks to ascertain its position in the world economy. This turns every strength or
weakness in the performance of the national economy vis--vis the rest of the world into
a competitive advantage or disadvantage. The multiplicity of parameters that influence
competitiveness requires a synthetic analytical approach capable of taking into account a
wider socio-economic picture transcending conceptual boundaries.
This paper offers suggestions on how research on national competitiveness can
contribute to setting targets for socio-economic agenda in transition economies, with
special focus on the case of Russia. In pursuing this we will address three interrelated
issues. First, we will argue that national competitiveness is an interdisciplinary field of
study and, therefore, its origins can be best understood through integrating traditional
approaches with institutional, social capital and generalised trust theories. Second,
we will highlight the importance of rebuilding generalised trust and credibility as
building blocks of national competitiveness and look at the role that corporations can
play in increasing the competitiveness of the national economy through their contribution
to social capital. Third, the activities of Russian firms in terms of corporate social
responsibility will be examined as possibly the most promising form of catching-up, in
terms of national competitiveness, in the short term. The intention is to present national
competitiveness as a multifaceted phenomenon that has its roots as much in the social
system of production as in the economic set-up and, thus, to propound that national
competitiveness may be influenced by measures targeting the socio-economic
environment.
The next section reviews the interdisciplinary credentials of the concept of national
competitiveness and highlights the importance that theory increasingly attributes to the
role of the so-called social system of production. We then proceed to the analysis of
generalised trust and social capital as key elements of national competitiveness.
This section is followed by the description of the relations of social trust in modern
Russia and a section that investigates options of how trust can be re-established with a
particular focus on corporate social responsibility. We conclude in the final section.

2 The multidisciplinary view on national competitiveness

We share the opinion of those authors who view national competitiveness as an input
into the countries production process that contributes to the wealth of the nation
(Zinnes et al., 2001, p.316). It follows that increasing national competitiveness is a way
for nation-states to attain economic growth and improve the well-being of the people.
For transition economies, both objectives have particular importance. In the course of
post-communist reforms they have experienced serious set-backs, both in terms of
economic performance and the standards and quality of life. Recuperating from these
losses is still an issue for some of them. For example, in the period from 1990 to 2004,
Russias ranking in the UN sponsored Human Development Index had slipped by more
24 A. Kuznetsov and O. Kuznetsova

than 20 places. Mass poverty and serious imbalances in the economic and social sphere
leave many transition countries with the prospect of plunging into the vicious circle of
selective growth and semi-stagnation characteristic of many under-achieving countries of
the world.
Despite the attention that the economic and business literature has been paying to the
concept of competitiveness, there is no consensus about factors affecting national
competitiveness or, indeed, on the meaning of the term. Krugman (1994) famously
rejects the notion of competitiveness as largely meaningless because often this term is
used to describe rivalry between states for status and power rather than the development
of production forces and their impact on the standard of living. The majority of authors,
however, are more permissive but disagree on its various aspects. The long standing
tradition among economists has been to associate competitive advantages with factor
endowment and the relative costs of labour and capital (Freeman, 2004). Yet, the success
in the world market of countries like the USA, Germany and Japan in the last few
decades of the 20th century demonstrated the possibility of combining high relative
prices and labour costs with improved export performance based on superior technology
and better quality (Fagerberg, 2002). The analysis of this phenomenon has led to the
emergence of a new influential approach to the examination of international
competitiveness that establishes a link between competitiveness and the so-called social
system of production that comprises the state, business and civil society. It includes such
institutions as the educational system, the system of industrial relation, work organisation
and other socio-political factors contributing to the synergies between associations,
groups and strata constituting the modern industrial society (Sabel and Zeitlin, 1997;
Hollingsworth and Boyer, 1997; Hall and Soskice, 2001). In a way this concept is a
powerful intellectual superstructure that has incorporated the findings in such burgeoning
research areas as collective action (Olson, 1971; Sandler, 1992), new institutional
economics (North, 1990), social capital (Coleman, 1988; Fukuyama, 1995; Rose, 1998)
and the national system of innovation (Freeman, 2004; Archibugi and Michie, 1997).
The important contribution of the theory of the social system of production is in
making a distinction between different qualities of economic growth (for further debate
see Thomas et al., 2000). It is asserted that the world moves from rigid and hierarchical
structures towards a more flexible system of production that requires a large degree of
cooperation and trusting relations in the society, the presence of highly developed forms
of collective nature (trade unions, trade associations, etc) and institutions that facilitate
trust among stakeholders. As a result some theorists believe that social factors leading to
a cooperative effort provide the greatest competitive advantage and that regions become
dominant in certain products not because of factor endowment but because of action
frameworks (institutions) that enable them to coordinate, in coherent fashion, ensembles
of economic practices leading to successful products (Storper and Salais, 1997, as
quoted in Biggart and Beamish, 2003, p.457. See also Hall and Soskice, 2001;
Hanck et al., 2007). It is important to note that the move to this new system of
production and greater competitiveness is not guaranteed: it will not happen in countries
in which the bond between the economy and the civil society is weak. Countries that fail
to achieve flexible production will still show economic growth but will lag behind their
more competitive rivals.
While the issue of quality of economic growth has been the centre of attention for
some time now, little has been said about the options open to transition countries.
Yet, they face a difficult choice, probably Russia in particular. From the era of state
 Gaining competitiveness through trust: the experience of Russia 25

socialism Russia has inherited a very inflexible system of production firmly rooted in the
principles of Fordism. The first decade of post-communism has done little to change
the situation. In a few areas in which Russian producers seek to achieve some position in
the world market, they rely on the cheapness of domestic labour and resources rather than
quality of product and service, as crude oil and natural gas account for two thirds of the
value of Russian exports. According to the modern understanding of competitiveness, if
maintained, this strategy may lead the economy into a blind alley. Yet, the restoration and
development of social capital and social trust in Russia and other post-communist
countries as a way to increase national competitiveness have not yet received attention
they deserve from academics, politician and businessmen.2

3 Generalised trust as a foundation of national competitiveness

In the last 20 years in social sciences there has been a noticeable change in attitude
towards the restrictive postulates of neo-classical economics that seeks to explain
economic processes on the basis of self-interested behaviour and personal utility
maximisation of economic agents. The new institutional economics, economic sociology
and numerous economic and business historians have submitted analytical arguments and
factual evidence supporting the thesis that in reality this individual behaviour is strongly
influenced by social factors, the organisation of the society, its values, culture, etc,
together acting as institutions that provide the procedures and routines that allow to
resolve economic conflict and thus offer a solid and cost-effective foundation for market
transactions.
Institutions contribute to economic processes by providing economic actors with
universal and explicit rules that allocate responsibility and set up behavioural boundaries
(North, 1990). Institutions are means of economic coordination. They supply the
infrastructure that is necessary to promote, support and simplify market exchanges and to
provide them with stability and continuity. Institutional constraints, therefore, together
with constraints identified by traditional economic theory, should define the potential
wealth maximising opportunities of economic agents (North, 1997). In this context the
domestic institutional setup becomes a resource contributing to national competitiveness
and economic growth. One of the disadvantages of this concept, which mostly deals with
intangible categories like custom, tradition, conventions, is that measuring this resource
and its contribution to the economy is very problematic. Those authors who seek to trace
the link between institutions and economic performance have to rely on proxies
(Knell and Srholec, 2004; Kuznetsov and Kuznetsova, 2003). Encouragingly, they
usually find some positive correlation between the development of institutions,
competitiveness and economic growth. Nonetheless, the desire to reveal in greater detail
the mechanism through which institutions deliver their impact on the economy has led to
researchers focusing their attention on certain specific elements of the institutional
framework. One of the most prominent is social trust.
The perception of trust determines the cost and efficiency of any transaction
that includes elements of risk (Arrow, 1973; Dasgupta, 1988). Following Hosmer
(1995, p.393) we define trust as the reliance by one person or organisation upon a
voluntarily accepted duty on the part of another person or organisation to recognise and
protect the rights and interests of all others engaged in a joint endeavour or economic
exchange. The relation between institutions and trust is as follows: institutions reduce
26 A. Kuznetsov and O. Kuznetsova

transaction costs in as much as confidence in the ability of institutions to enforce

contracts and enforce property rights makes it unnecessary to meet the cost of building
the specific relationship of trust between individual members of the society, organisations
and firms (Uzzi, 1997). Using the terms introduced by Yamigishi and Yamigishi (1994),
institutions make it possible to arrange transactions on the basis of generalised trust
rather than particularised trust, i.e., they create the environment in which participants in
a transaction by default have reasonable trust in most people rather than only the people
they know personally. Consequently, generalised trust promotes and facilitates
coordination and cooperation for mutual benefit. The important feature of generalised
trust is that it is rational and in this sense it fits the postulates of traditional economics.
In fact, and this observation has particular implications for the situation in transition
economies, generalised trust can become a sustainable feature only under circumstances
in which acting trustfully does not mean acting irrationally. This type of trust is only
possible in the presence of institutions that, in an arranged fashion, allow gathering valid
information on economic actors, monitor their performance and penalise opportunistic
behaviour. It is evident that there is nothing automatic about achieving the state of
generalised trust and not every economy may be in a position to reap benefits associated
with it.
Research in the field leaves no doubt that those nation states that lag behind in terms
of social trust lose out in international competition. Emphasising the eminence of the
category of trust, Bok (1979) argues that when trust is destroyed, societies falter and
collapse. Rose (1998) maintains that the presence of trust and tolerance makes a
difference between modern and anti-modern societies. In a modern society formal
institutions operate in an impartial manner consistent with the rule of law, providing for a
transparent, stable and predictable economic environment. In an anti-modern society the
same institutions are partial and corrupt; laws are abused for the benefit of informal
alliances with a detrimental effect to economy and business.
By contrast, there is evidence that many of Western Europes economically
successful regions are characterised by particular forms of relationships between
companies, employers and employees that emphasise cooperation, trust, networking,
social cohesion and inclusion (Hudson, 1999). Humphrey and Schmitz (1998, p.32) has
gone as far as identifying trust as the missing factor that explains why some countries
or regions develop rapidly and others lag behind. Knack and Keefer (1995, 1997),
La Porta et al. (1996), by looking at a variety of national cases, reveal a positive
association between generalised trust and rule of law in the society and economic growth
and levels of investment. Putnam (1993) and Fukuyama (1995) arrive at similar
conclusions. Probably the most ambitious project was undertaken by Inglehart (1997).
He uses data on economic growth in 43 countries between 1960 and 1989 and compares
them with psychosocial measures dealing with trust and other popular attitudes and
values. In this analysis trust successfully establishes itself as a statistically significant
independent variable.
These findings do not convince everybody. We share the concern of authors who
believe that the methods used to obtain the results quoted earlier could not be entirely
reliable because of the measurement problems when dealing with psychosocial variables
(see Moore, 1999; Uslaner, 1999, on issues with measurement). Therefore, there is
probably not enough verification to ascertain a causal link between generalised trust and
national competitiveness, i.e., to establish to what extent economic success can be
attributed to trust as a factor of economic development. However, there is enough
 Gaining competitiveness through trust: the experience of Russia 27

evidence that trusting societies are more successful economically to warrant a closer
investigation of the relations of trust in Russia.

4 Social trust in Russia

Historically, due to its geographical vastness and multi-ethnicity, Russia was evolving as
what sociologists call a low-trust society; one in which strong family ties are coupled
with an equally strong distrust of unrelated members of the wider community
(Hansen and Teague, 2005, p.669). The communist regime did little to change
the situation. In fact, some authors claim that it created the economy of distrust
(Rose et al., 1997; Raiser, 1999). Double standard had spread as a relational norm
across the society as a reaction to the rigidities of the official Soviet economic and
political system with its emphasis on technological and social determinism, leaving very
little space for the human factor. To compensate for this, certain structural, cultural and
ideological patterns came into existence to provide an informal second layer of relations
in the society (Puffer and McCarthy, 2007). As a result the Soviet production system
relied on informal arrangements and networks almost as much as on the formal ones
(Popova and Srensen, 1996).
The earlier stages of market reforms caused events that contributed to the growth of
mutual suspicion between the people, big business and the state (Hedlund, 1999).
It cannot be ignored that the societal acceptance of the market system is still an issue in
Russia, and one of the reasons why this is so is that corporations have failed to acquire
the necessary status of legitimacy and respectability with the vast strata of the society.
The early years of big corporations in Russia are tainted with stigma of fraud, corruption
and the trauma of what many Russians believe was an unfair privatisation (Table 1).

Table 1 The views of Russians on economy and business

The share of respondents supporting

the statement (%)
2003 2004 2005 2006
The results of privatisation should be revised 77 78 77 72
(fully or in part)
The actions of Russian business tycoons are detrimental to 49 53 49 44
the interests of Russia
My attitude towards the people who made fortune in the 28 33 28 29
last 1015 years is anger, contempt, hate
Source: Compiled from Levada-Centre Obshestvennoe mnenie 2004:
Privatizatsiya, vlast i bizness (Public Opinion in 2004:
Privatisation, Authorities and Business) and Obshestvennoe
mnenie 2006: Privatizatsiya, vlast i bizness (Public Opinion in
2006: Privatisation, Authorities and Business). Available online at
http://www.levada.ru/sborniki.html

The results of opinion polls are very telling (for an overview of Russian public opinion,
see Pipes, 2004). The people see oligarchs as usurpers of public wealth and politicians
as their accomplices. Politicians are wary of oligarchs political aspirations while the
28 A. Kuznetsov and O. Kuznetsova

latter fear state interventionism. When the government tries to fight economic crime this
causes suspicion that they are picking on political opponents; when big business starts to
spend a lot of money on charity politicians suspect that oligarchs seek to create an
alternative political powerbase.
One of the most devastating effects of the lack of generalised trust has been the
criminalisation of the Russian economy. It takes many guises. One feature is public
tolerance towards tax evasion and other forms of fraud that is directly fed by common
suspicion that state bureaucracy misapprehends funds. A survey revealed that as late as
2005 about a quarter of Russians believed that evading taxes was appropriate
(Levada-Centre, 2006). In another survey more than a half of respondents did not
condemn tax dodgers or were indifferent to them (Interfax, 01.11.2004). Another
consequence is that without proper institutional safeguards economic agents are not
encouraged to behave fairly because self-interested behaviour, with its focus on cutting
costs, meets no limits (Barry, 1998; Nellis, 1999). This pushes managers and
entrepreneurs to adopt a one shot business strategy which entices them to defect from
agreements and defy cooperation. Finally, the moral standards of business have suffered
in the atmosphere charged with the sensation of abounding opportunities for quick, if
unscrupulous, enrichment caused by the ownership vacuum that was produced by the
dismantling of the socialist state. This ambience of permissiveness made it easier for
organised crime to capture numerous businesses, weakening social trust even further.3
The original response by the business community to the deficit of generalised trust
was the tendency to substitute networking and other informal arrangements for the
market. These networks emerge as a form of protection of insiders interests. This trend is
counterproductive, however. It contradicts the nature of market relations and eventually
undermines national competitiveness by creating two distinct cultures of trust and
social capital, one for relations with insiders and another for relations with outsiders
(Schrader, 2004). On the one hand, informal relations create zones of trust within the
general environment of distrust, thus reducing transaction costs. On the other hand, by
their nature networks, in particular informal, seek to maintain exclusiveness. In the
Russian context, as some surveys show (Radaev, 2004), networking often does not mean
getting better knowledge of business partners and their needs but rather pursues the goal
of conspiring against outsiders and avoiding legal control over financial and other
transactions. As business networks strive to resolve any problems internally, they may
prove to be more flexible than available formal methods but often at a considerable social
cost, for example, poor disclosure of information, price fixing, etc., thus compromising
the fundamentals of the mechanism of market distribution.
The realisation that trust is an issue that jeopardises the prospect of national economy
is present in Russia. One leading Russian economist calls the restoration of trust the
principal issue of our time in the country (Shastitko, 2003), whilst the media quotes the
Economic Development Minister, stating: The gradual slowdown of the economic
growth pace we are witnessing now is due to the slowdown of reforms and low level of
trust between business and authorities (Johnsons Russia List 9039, 28/01/05). Changing
the situation with trust is not a straightforward task, though.
Literature suggests two possible solutions to a crisis of confidence of this type:
greater interventionism on the part of the state or a conscious change in the behaviour of
corporations (Hellman, 1998; Holmes, 1997; Kornai, 1992; Lynch, 2002; Robinson,
2000). By international standards the economic involvement of the state in Russia is
already very high and the relations between big business and the state, as the
 Gaining competitiveness through trust: the experience of Russia 29

imprisonment of one leading oligarch (the former owner of the oil giant Yukos Mikhail
Khodorkovsky) and the voluntary exile of a few others (Boris Berezovsky, Vladimir
Gusinsky to mention just two) demonstrate, are tense. It does not help that the quality and
efficiency of state governance in Russia are not high. According to the World Bank
Worldwide Governance Indicators, Russia is way behind most industrialised countries in
terms of the six key dimensions of governance: voice and accountability, political
stability and absence of violence, government effectiveness, regulatory quality, rule of
law, control of corruption (Kaufman et al., 2007). Worryingly, there has been no
improvement in governance since the indicators were first compiled in 1996.
As history shows, a rational and pragmatic response by big firms to the attempts of
the state to increase control usually takes the shape of pursuing policies that raise their
legitimacy with the state and the society in order to safeguard some space for the
freedom of action in the pursue of profit (enlightened self-interest) where legitimacy is
a generalised perception or assumption that the actions of the firm are desirable, proper or
appropriate within the existing social system of norms, values, believes and definitions.
Corporate legitimacy is the greater the closer the behaviour of the firm (or rather the
reading of this behaviour by the society) adheres to the norms that are currently socially
desirable and expected. Evidently, legitimacy and social trust are positively correlated.
We suggest that self-interested behaviour by firms seeking to build up own legitimacy
has a potential of making a major contribution to the process of restoring/establishing
social trust through the type of activities that fall in the domain of Corporate Social
Responsibility (CSR).

5 Restoring generalised trust

5.1 Corporate Social Responsibility as a social contract

CSR, as a concept, mandates that the corporation has not only economic and legal
obligations formalised in laws, regulations, statutes, etc, but also certain responsibilities
to the society that extend beyond these normative obligations (McGuire, 1963).
In other words, CSR implies the existence of an implicit social contract in which business
is accountable to societys expectations or demands.
CSR is closely linked to legitimacy in as much as the latter describes deliberate
adherence to socially accepted and expected behaviours. Research shows that the state
can be expected to interpret socially responsible behaviour as a sign of competence on the
part of corporations (Gabarro, 1978), which can be used as a rationale for reducing that
states control of the economy. The concept of CSR expresses something very important
and fundamental about the relationship between business and society. To illustrate this
point it is interesting to look at the position of Friedman (1962), who is usually seen
as an opponent of the idea of CSR: famously, he is credited with the dictum
The only social responsibility of business is to increase profit. However, Friedman
justifies his position by reference to the interests of the society. In doing so he, in
effect, subscribes to the fundamental postulate of the concept of CSR, namely, that the
industry has an obligation to take actions that are desirable in terms of objectives and
values of society. In other words, de facto, Friedman accepts the thesis that business has
responsibility towards the society, although his understanding of this responsibility
differs markedly from standard texts on CSR.
30 A. Kuznetsov and O. Kuznetsova

Originally associated above all with philanthropy and charity, currently CSR has
evolved into something far more strategic and central within the array of activities of the
modern corporation. In a nutshell, modern CSR is characterised by three major trends
(Nelson, 2004):
For leading companies, CSR is moving from the corporate margins to the
mainstream, to cover not only philanthropy, but rather how a company manages the
totality of its impacts on and contributions to society.
CSR is moving to greater accountability and transparency to more stakeholders
through various forms of stakeholder engagement that include, but go beyond public
reporting.
Corporations leaders in CSR are moving from a compliance-based mindset to
asserting CSR as one of their major values.
To establish the link between CSR and national competitiveness it is necessary to realise
that when big corporations take an active stance in terms of CSR this creates foundations
for progress in the development of cooperative social relations of production and thus
contributes to generalised trust. In the words of Heal (2005), the contribution of CSR to
economic performance is that it helps the market to align corporate profits and social
costs. This contribution may come about in a number of ways, two of which, we believe,
are especially relevant to the situation in Russia. These are the projection of the
positive image of corporations and, in particular, removing strains in relations between
corporations and their stakeholders.
In respect of the first aspect, the literature is resolute in stressing the role of caring
relations as a necessary condition for developing trust, as there is no trust without care
(Rose, 1998). By definition, CSR is very much about the provision of care or at any rate
about creating a caring image of big business. In Russia there has been an enormous
deficit of manifested care on the side of both the state and business. The origins of this
situation can be traced back to the mid-1990s, when political and business elite sought to
channel the reforms in the direction that allowed them to retain concentrated rents for
themselves, while imposing high costs on the rest of the society (Hellman, 1998).
The collection of social payments and taxes was obstructed by employers throughout the
1990s. In 1994, to take one typical year, the Pension Fund of the Russian Federation
managed to raise only two-thirds of the expected payroll contributions, whilst territorial
medical insurance funds managed to collect just 3035% of projected total. Mending this
void of care through CSR would certainly be a step in the right direction from the point
of view of establishing generalised trust.
The other aspect is the capability of CSR to influence relations between corporations
and their stakeholders. In conceptual terms, by engaging in CSR corporations send out a
signal that in their attitude to stakeholders they are moving from viewing them as subjects
to be managed towards more of a relational view of companystakeholder engagement,
where there is place for consideration of mutuality and interdependence (Andriof and
Waddock, 2002). This change in interaction between the corporation and stakeholders
can be expected to have a direct impact on one important component of generalised trust,
namely, the belief that the interests of the trustee (in this case the firm) encapsulate the
interests of the trustier (stakeholder). As Hardin (1993) notes, trust depends not so much
on ones own interests as it does on the belief that such interests form part of the trustees
interests. We suggest that the emphasis that CSR places on acknowledging the rights and
 Gaining competitiveness through trust: the experience of Russia 31

interest of stakeholders rather than shareholders is of particular importance in Russia

because, at least in the short term, it can reduce the tension in the emerging national
system of corporate governance.

5.2 Corporate Social Responsibility and the national system of corporate

governance
Corporate governance has established itself as one of the fundamental institutes of
modern western democracy, acting as a guarantor of sustainable economic growth
(Sullivan, 2002), which, as we know, is a sign of international competitiveness. Systems
of corporate governance provide means that help to regulate, according to certain
established rules, economic conflict between investors in companies and managers,
facilitate information flows and procure a cost-efficient foundation for the growth of
publicly-held corporations. The prominence of different groups within the national
system of corporate governance depends on the ways in which corporations mobilise
capital. Typically, in literature, we find references to two alternative models, the
market-oriented system, built around the figure of the shareholder, and the continental
system, allowing for a variety of stakeholders. Each has its pros and cons, but, as
Moerland (1995) infers, it is impossible to say that one system is better than the other on
theoretical grounds as the optimisation of economic organisation leaves room for
multiple configurations.
An effective system of corporate governance based on the values of transparency and
accountability is essential for prosperous economic activity and national competitiveness.
It is evident that in any transition economy the creation of such a system has to be a
priority. However, by comparison with western countries, the Russian system is
notoriously frail and ineffective. Progress of CSR can be a partial solution to this
situation by creating the atmosphere of trust between managers-shareholders and
influential stakeholders. We attribute special importance to the relations between these
two groups because of the unique roles that they play in Russia as the following analysis
demonstrates. Once again, not surprisingly, we will see that legitimacy, trust and
cooperation emerge as recurrent themes.
The developments in Russia do not fit the standard conceptual framework
comfortably. Post-privatisation shareholders were lacking, in terms of accepted theory,
some central characteristics that were necessary to regard them as the primary constituent
of the firm (McAlister et al., 2003). Usually, shareholders are singled out on the
assumption that they are most likely to behave towards a corporation as responsible
owners on account of a combination of the economic risk and remuneration associated
with tying up certain assets in a particular type of investment.
This does not quite work in Russia. Individually, the majority of shareholders are in
possession of only an insignificant block of shares that has almost no value
(Atanasov, 2002). By acquiring it through privatisation they did not take any additional
risk, but equally, the prospect of remuneration was, and still is, quite illusory considering
the economic situation in the country. The necessary prerequisites for responsible
behaviour are missing: small shareholders-insiders are motivated more by their interests
as stakeholders-employees, i.e., maintaining the viability of their organisations, then as
investors-shareholders. This situation creates not only conceptual difficulties, but, more
importantly, has some serious practical implications. Small shareholders showed little
motivation to use their powers or fight for their shareholder rights. The awareness that
32 A. Kuznetsov and O. Kuznetsova

there is no mechanism in place on which they could rely for defending their rights plays
its role as well. Of hundreds of tradable stocks, only a few dozen large issues see some
trading. With little or no activity in most issues the disciplinary function of the securities
markets is next to paralysed. Consequently, in Russia, there is a sizeable gap between the
real assets of the firms and capitalisation,4 indicating that investors are preoccupied with
the safeness of their money. In this context it becomes apparent that the main issue of the
current Russian system of corporate governance is not so much the relationship between
investors and managers regarding the supply of finance to corporations as the rapport
between different categories of stakeholders around the allocation of existing assets of
privatised enterprises.
The same conditions that stipulated the weakness and apathy of the majority of
shareholders have placed senior managers in the exceptionally strong position
of dominant shareholders. From the outset their control of the firms was far in excess of
their share of ownership due to advantages inherent in the system. As pre-privatisation
incumbents they enjoyed privileged access to information, admission to important
networks and, critically, control over the financial resources of the firms. In an economy
stricken with shortage of funds, institutional chaos has opened to them an unrivalled
opportunity to use corporate assets for increasing their own block of shares and
preventing other parties from accumulating more shares. Consequently, Russian
corporations acquire many features of manager-owned firms but with a difference:
dominant insiders routinely loot companies, dilute shares of outsiders, fail to pay
dividends and mistreat shareholders in other ways because they feel threatened by the
general instability and uncertainty regarding property rights, inheritance rights, contract
law, judicial protection, personal safety, etc. (Kuznetsov et al., 2006).
Dominant shareholders, mostly top managers, experience considerable pressure to
increase their legitimacy with the society, but in the current environment self-interest and
self-preservation prevent them from easing up direct control over corporations and their
assets. Instead there are signs that they will seek to address the issue of legitimacy by
way of appeasing influential stakeholders: local communities and company employees.
Local communities acquired prominence following the administrative reforms
in the early 1990s with their focus on devolution of power and decentralisation.
Local governments have considerable powers, including the right to establish and levy
own taxes. These are known for their bias, volatility and populism, making them an
ingenious means of harassing local firms. Local authorities are also in control of business
subsidies that are very important for many firms.
At the same time the regional political elite also depend on the economic performance
of their territory because this defines their popularity with the electorate. It must be noted,
though, that local authorities face enormous difficulties in securing regional
development: while over two thirds of Russian live in cities more than 40% of towns in
Russia are mono-functional and the livelihood of population and the local budget depend
almost entirely on just one or two enterprises. Because of the slump in production in
almost every industry, with the exception of oil and gas extraction and processing and
some branches of metallurgy, mono-functionality has resulted in striking differences in
living standards across the country, with residents of small- and medium-sized
cities becoming poor to the extent that their living standards become almost identical to
those of the rural population, traditionally the most deprived group in Russia
(Zubarevich, 2003).
 Gaining competitiveness through trust: the experience of Russia 33

The importance of company employees as stakeholders follows from the specific type
of the social organisation of production in the Russian enterprise that the literature
describes as essentially paternalistic. It evolved in the Soviet period when active and
committed core workers strongly identified their value with the society as well as their
own well-being with the enterprise they worked for. Accordingly, the relationship
between workers and managers developed into a long-term alliance strengthened by the
fact that for both categories the enterprise itself was more than just a place of work but a
medium of self-realisation.
Indeed, even after privatisation the preservation of the labour collective in general
and the core workers in particular rated high in the list of priorities of both state-owned
and newly-privatised enterprises in Russia (Kapelyushnikov, 1998). Preservation of the
mentality and spirit of paternalism has acquired new significance for managers in the
aftermath of privatisation; members of the work collectives as a group have become
important though divided shareholders in the firms where they work.

6 Conclusions

In this paper we sought to expose the potential of the concept of national competitiveness
to serve as a practical analytical tool. We started by stressing the importance of the
institutional context as an element of national competitiveness and then narrowed our
focus to generalised trust. We demonstrated that for corporations contribution to trust
takes the form of achieving and maintaining legitimacy with the society. We then
proceeded to the analysis of the situation with generalised trust in modern Russia and
suggested that the development of CSR presented itself as the most plausible remedy to
the deficiency of trust and, eventually, to competitiveness, in the short term.
A long-term solution will require a comprehensive modernisation of the institutional
framework as a whole (Sullivan, 2002). CSR is a viable immediate resolution because it
addresses the core of the issue of social capital in Russia by encouraging trust, and also
because this type of action is easy for corporations to get involved with because of the
historical and cultural reasons. The interest towards CSR on the part of the business
community is very prominent. In 2003 alone no less than six major international
conferences on CSR took place in Moscow. The same year President Putin called upon
corporations to increase their effort in the area of CSR at the annual meeting of the
Russian Union of Industrialists and Entrepreneurs; a call that has been repeated by him
many times since.
There is, however, a notable variance in the position of Russian companies towards
CSR. Those corporations that seek to attract financial resources from foreign and
international markets can be seen to be making an effort to project the image of a socially
caring business. Usually it is the handful of super large firms, operating in oil extraction
and other lucrative industries. By contrast, the hard core of industrial firms that enjoy no
exclusivity is far less committed. Our survey of 129 Russian industrial firms in
November 2004 reveals that almost half of the respondents believe that the conditions are
not yet right for them to take on more social responsibility (Kuznetsov et al., 2007).
Lack of financial resources is indicated as a major constraint. Firms also blame the state
and the legal system for not providing enough incentives (20% and 24% of respondents,
respectively). Characteristically, some managers are concerned that greater expenditure
by companies on CSR may encourage the state to increase taxes.
34 A. Kuznetsov and O. Kuznetsova

These results, in our opinion, prove the points that we made at the beginning of the
paper: social trust is a factor that influences corporate strategies; in Russia trust (in this
case between business and the state) is low. A survey by the Association of Managers
(2004) in Moscow reveals that many firms are reluctant to make public information on
CSR because this may provoke ill-favoured attention from a variety of parties, ranging
from self-interested bureaucrats to criminals. Evidently, presidential blessing for many is
not a sufficient impulse to acknowledge their involvement in the area of CSR.
Clearly, the belief that CSR will spontaneously emerge in contemporary Russian
conditions is misplaced (for further discussion see Kuznetsov et al., 2007). The
government must take the initiative and underwrite and guarantee consistent, fair and
enforceable rules and laws so that firms may follow their inclination towards CSR
without fear. In this way the state may start the virtuous circle, when showing some
trust may cause reaction that will endorse more trust. The importance of this process
cannot be overestimated, also in terms of national competitiveness. As soon as modern
business literature dared to look beyond the theory of comparative advantage and
introduced the idea of competitiveness of nations, it opened the gates for the appreciation
of institutions as critical influence on business development. In this paper it was possible
to touch only the top of the iceberg. The research agenda is broad and the
multidisciplinary nature of the concept of national competitiveness provides it with an
ideal placement to enrich both management and policy decisions.

Acknowledgments

The authors wish to thank the British Academy for the financial support of their research
project (grant LRG 35419).

References
Andriof, J. and Waddock, S. (2002) Unfolding stakeholder engagement, in Husted, B.,
Rahman, S., Waddock, S. and Andriof, J. (Eds.): Unfolding Stakeholder Thinking No. 1
Theory, Responsibility and Engagement, Greenleaf Publishing, Sheffield, pp.1942.
Archibugi, D. and Michie, J. (1997) Technology, Globalisation and Economic Performance,
Cambridge University Press, Cambridge.
Arrow, K. (1973) Information and economic behavior, lecture for the federation of Swedish
industrialists, 30 May 1997, Stockholm, Re-printed in Voprosy Ekonomiki 1995, No. 5,
pp.98107.
Association of Managers (2004) Information Bulletin, 23.04.2004, Available online at
http://www.amr.ru/pdf/Inf_23apr.pdf.
Atanasov, V. (2002) Valuation of large blocks of shares and the private benefits of control,
Paper presented at Tuck-JQFA Contemporary Corporate Governance Issues II Conference,
Tuck School of Business at Dartmouth, Hanover, NH, USA.
Barry, N. (1998) Business Ethics, Macmillan Press Ltd., London.
Biggart, N.W. and Beamish, T.D. (2003) The economic sociology of conventions: habit, custom,
practice, and routine in market order, Annual Review of Sociology, Vol. 29, pp.443464.
Bok, S. (1979) Lying: Moral Choice in Public and Private Life, Vintage Books, New York.
Coleman, J.S. (1988) Social capital in the creation of human capital, American Journal of
Sociology, Vol. 94, Supplement, pp.95120.
 Gaining competitiveness through trust: the experience of Russia 35

Dasgupta, P. (1988) Trust as a commodity, in Gambetta, D.G. (Ed.): Trust, Basil Blackwell,
New York.
Fagerberg, J. (2002) Technology, Growth and Competitiveness, Edward Elgar, Cheltenham.
Fox, M.B. and Heller, M.A. (2000) Lessons from Fiascos in Russian Corporate Governance,
Working Paper 99-012, University of Michigan Law School, Law and Economics, Ann Arbor,
Michigan, USA.
Freeman, C. (2004) Technological infrastructure and international competitiveness, Industrial and
Corporate Change, Vol. 13, No. 3, pp.541570.
Friedman, M. (1962) Capitalism and Freedom, University of Chicago Press, Chicago.
Fukuyama, F. (1995) Trust: the Social Virtues and the Creation of Prosperity, Hamish Hamilton,
London.
Gabarro, J.J. (1978) The development of trust, influence and expectations, in Athos, A.G. and
Gabarro, J.J. (Eds.): Interpersonal Behaviors: Communication and Understanding in
Relationships, Prentice-Hall, Englewood Cliffs, NJ, pp.290303.
Hall, P.A. and Soskice, D. (Eds.) (2001) An introduction to the varieties of capitalism, Varieties
of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University
Press, Oxford, pp.170.
Hansen and Teague (2005) Big business and the state in Russia, Europe-Asia Studies, Vol. 57,
No. 5, pp.657680.
Hanck, B., Rhodes, M. and Thatcher, M. (Eds.) (2007) Beyond Varieties of Capitalism. Conflict,
Contradictions, and Complementarities in the European Economy, Oxford University Press,
Oxford.
Hardin, R. (1993) The street-level epistemology of trust, Politics and Society, Vol. 21,
pp.505529.
Heal, G. (2005) Corporate social responsibility an economic and financial framework, Paper
presented at the Annual Conference of the Monte Paschi Vita., The Geneva Papers, Vol. 30,
No. 3, pp.387409.
Hedlund, S. (1999) Russias Market Economy, A Bad Case of Predatory Capitalism, UCL Press,
London.
Hellman, J.S. (1998) Winners take all: the politics of partial reforms in post-communist
transitions, World Politics, Vol. 50, No. 2, pp.203234.
Hollingsworth, J.R. and Boyer, R. (1997) Contemporary Capitalism: The Embeddedness of
Institutions, Cambridge University Press, Cambridge.
Holmes, S. (1997) When less state means less freedom, Transitions, Changes in Post-Communist
Societies, Vol. 4, No. 4, pp.6675.
Hosmer, L.T. (1995) Trust: the connecting link between organizational theory and philosophical
ethics, The Academy of Management Review, Vol. 20, No. 2, pp.379403.
Hudson, R. (1999) What Makes Economically Successful Regions in Europe Successful?
Implications for Transferring Success from West to East, EGRG, Working Paper 99/01.
Humphrey, J. and Schmitz, H. (1998) Trust and inter-firm relations in developing and transition
economies, The Journal of Development Studies, Vol. 34, No. 4, pp.3261.
Inglehart, R. (1997) Modernization and Postmodernization: Cultural, Economic, and Political
Change in 43 Societies, Princeton University Press, Princeton.
Kapelyushnikov, R. (1998) Chto skryvaetsa za skritoy bezrabotitsey?, in Maleeva, T. (Ed.):
State and Corporate Employment Policy, Carnegie Endowment for International Peace,
Moscow, pp.75111.
Kaufmann, D., Kraay, A. and Mastruzzi, M. (2007) Governance Matters: The Worldwide
Governance Indicators, World Bank Institute, Washington, Available at
http://info.worldbank.org/governance/wgi2007/home.htm
36 A. Kuznetsov and O. Kuznetsova

Knack, S. and Keefer, P. (1995) Institutions and economic performance: cross-country tests using
alternative institutional measures, Economics and Politics, Vol. 7, No. 3, pp.207227.
Knack, S. and Keefer, P. (1997) Does social capital have an economic payoff? A cross-country
investigation, Quarterly Journal of Economics, Vol. 112, No. 4, pp.12511288.
Knell, M. and Srholec, M. (2004) Emerging varieties of capitalism in central and eastern Europe,
Paper presented at the Managing the Economic Transition Network 13th Research Seminar,
March, Cambridge University, Cambridge, UK.
Kornai, J. (1992) The post-socialist transition and the state: reflections in the light of Hungarian
fiscal problems, The American Economic Review, Vol. 82, No. 2, pp.121.
Krugman, P. (1994) Competitiveness: a dangerous obsession, Foreign Affairs, Vol. 73, No. 2,
pp.2844.
Kuznetsov, A. and Kuznetsova, O. (2003) Corporate governance: does the concept work in
transition countries?, Journal for East European Management Studies, Vol. 8, No. 3,
pp.244262.
Kuznetsov, A., Kuznetsova, O. and Kapelyushnikov, R. (2006) Ownership structure and corporate
governance in Russian firms, in Mickiewicz, T. (Ed.): Corporate Governance and Finance in
Russia and Poland, Palgrave, London, pp.179193.
Kuznetsov, A., Kuznetsova, O. and Warren, R. (2007) CSR, Legitimacy and Institutions,
Management Research Education and Business Success: Is the Future as Clear as the Past?,
British Academy of Management (BAM), 2007 Conference Proceedings, [CD-ROM]
Warwick Business School, University of Warwick, Coventry.
La Porta, R., Lopez-de-Silanes, F.L., Shleifer, A. and Vishny, R.W. (1996) Trust in Large
Organizations, NBER Working Paper No. W5864, National Bureau of Economic Research,
Cambridge MA.
Levada-Cenre (2006) Ekonomicheskaya Situatsia, Available at http://www.levada.ru/
economic.html.
Lynch, A.C. (2002) Roots of Russias economic dilemmas: liberal economics and illiberal
geography, Europe-Asia Studies, Vol. 54, No. 1, pp.3149.
McAlister, D.T., Ferrell, O. and Ferrell, L. (2003) Business and Society: A Strategic Approach to
Corporate Citizenship, Houghton Mifflin, Boston, MA.
McGuire, J.W. (1963) Business and Society, McGraw-Hill, New York.
Moerland, P. (1995) Alternative disciplinary mechanisms in different corporate systems, Journal
of Economic Behavior and Organization, Vol. 26, No. 1, pp.1734.
Moore, M. (1999) Truth, trust and market transactions: what do we know?, The Journal of
Development Studies, Vol. 36, No. 1, pp.7488.
Nellis, J. (1999) Time to rethink privatization in transition economies?, Transition, Vol. 10,
No. 1, pp.46.
Nelson, J. (2004) The Public Role of Private Enterprise: Risks, Opportunities and New Models of
Engagement, Working Paper of the Corporate Social Responsibility Initiative, Kennedy
School of Government, Harvard University, Cambridge, MA.
North, D.C. (1990) Institutions, Institutional Change and Economic Performance, Cambridge
University Press, Cambridge.
North, D.C. (1997) The Contribution of the New Institutional Economics to an Understanding of
the Transition Problem, UNU/WIDER Annual Lecture, UNU/WIDER, Helsinki.
Olson, M. (1971) The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard
University Press, Cambridge, MA.
Pipes, R. (2004) Flight from freedom: what Russians think and want, Foreign Affairs, Vol. 83,
No. 3, pp.915.
 Gaining competitiveness through trust: the experience of Russia 37

Popova, J. and Srensen, O. (1996) Economic Reforms in Russia: A Network Perspective on the
Enterprises Relations to the Reforms, International Business Economics Research Paper
No. 2, Aalburg University, Aalburg.
Puffer, S.M. and McCarthy, D.J. (2007) Can Russias state-managed, network capitalism be
competitive?, Institutional pull versus institutional push, Journal of World Business, Vol. 42,
No. 1, pp.113.
Putnam, R.D. (1993) Making Democracy Work: Civic Traditions in Modern Italy, Princeton
University Press, Princeton.
Radaev, V. (2004) How trust is established in economic relationships when institutions and
individuals are not trustworthy: the case of Russia, in Kornai, J., Rothstein, B. and
Rose-Ackerman, S. (Eds.): Creating Social Trust in Post-Socialist Transition, Palgrave
Macmillan, New York, pp.91110.
Raiser, M. (1999) Trust in Transition, EBRD Working Paper No. 39, EBRD, London.
Robinson, N. (2000) The economy and the prospects for anti-democratic development in Russia,
Europe-Asia Studies, Vol. 52, No. 8, pp.13911416.
Rose, R. (1998) Getting Things Done in an Anti-Modern Society: Social Capital Networks in
Russia, Social Capital Initiative Working Paper, No. 6, World Bank, Washington DC.
Rose, R., Haerpfer, C. and Mishler, W. (1997) Getting Real: Social Capital in Post-Communist
Societies, Studies in Public Policies, No. 278, CSPP Publications, Glasgow.
Sabel, C. and Zeitlin, J. (1997) World of Possibilities: Flexibility and Mass Production in Western
Industrialization, Cambridge University Press, Cambridge.
Sandler, T. (1992) Collective Action: Theory and Applications, University of Michigan Press,
Ann Arbor.
Schrader, H. (2004) Social capital and social transformation in Russia, Journal for East European
Management Studies, Vol. 9, No. 4, pp.391410.
Shastitko, A. (2003) Contribution to the Round Table Discussion The Legitimacy of Privatisation
and Trust in the Society, Organized by the Liberal Mission Fund, Moscow, 14.10.2003,
Available online at http://www.liberal.ru/sitan.asp?Num=407
Shelley, L. (1997) The price tag of Russias organized crime, Transition: The Newsletter about
Reforming Economies, Vol. 8, No. 1, February, World Bank, Washington.
Storper, R. and Salais, R. (1997) Worlds of Production, Harvard University Press, Cambridge, MA.
Sullivan, J.D. (2002) Democracy, Governance and the Market, Center for International Private
Enterprise, Available at http://www.cipe.org/publications/fs/articles/article3162.htm
Thomas, V., Dailami, M., Dhareshwar, A., Kaufmann, D., Kishor, N., Lopez, R.E. and Wang, Y.
(2000) The Quality of Growth, Oxford University Press, Oxford.
Uslaner, E.M. (1999) Democracy and social capital, in Warren, M. (Ed.): Democracy and Trust,
Cambridge University Press, Cambridge.
Uzzi, B. (1997) Social structure and competition in interfirm networks: the paradox of
embeddedness, Administration Science Quarterly, Vol. 42, No. 1, pp.3567.
Yamigishi, T. and Yamigishi, M. (1994) Trust and commitment in the United States and Japan,
Motivation and Emotion, Vol. 18, pp.129166.
Zinnes, C., Eilat, Y. and Sachs, J. (2001) Benchmarking competitiveness in transition economies,
Economics of Transition, Vol. 9, No. 2, pp.315353.
Zubarevich, N. (2003) Russia: Case Study on Human Development Progress Towards the MDGs at
the Sub-National Level, Background Papers to the Human Development Report, UNDP,
New York.
38 A. Kuznetsov and O. Kuznetsova

Notes
1
For example, a country can have a high level of GDP only because of its natural resource wealth
or can have a low GDP growth rate only due to be close to its steady-state GDP (Zinnes et al.,
2001, p.316).
2
Two notable exceptions are the research project Competitiveness and modernisation of the
Russian economy under the auspices of the State University-Higher School of Economics
(the preliminary report is available on the web-page http://www.liberal.ru/98/doklad.pdf.) and
Honesty and trust: Theory and experience in the light of post-socialist transformation, the
Research Project and Focus Group at Collegium Budapest under Janos Kornai, 20012003.
3
According to Shelley (1997), organised criminals are in control of nearly half the Russian
economy.
4
At its peak before the 1998 collapse, the total stock market capitalisation of all Russian industry
only reached about $130 billion less than Intel Corp (Fox and Heller, 2000).