Whilst I’m sure most organizations attempt to plan and hedge the risk of economic downturns, their effectiveness is variable to say the least. A recent study from researchers from the Higher School of Economics, in Russia, attempted to delve into what separates the best from the rest.
The researchers analyzed the Russian economy during the recent global financial crisis. The Russian economy was complicated by the geopolitical situation. The study aimed to examine the microeconomic situation as well as the macroeconomic consequences of a recession to help companies better mitigate the impact a recession has. The analysis suggests that the most effective hedging strategy is to attract foreign capital.
The researchers analyzed the impact of foreign capital on the competitiveness of over 1,000 Russian companies over a ten year period from 2004. They utilized quantile regression techniques to account for the heterogeneity of the subjects, with the sample typically consisting of medium and large companies.
“The advantage of foreign ownership in non-crisis years was confirmed in previous studies. Comparatively speaking, the results suggest that during periods of economic growth, access to foreign equity is not the only condition for superior performance. That said, our results demonstrate a completely different picture during recessions, where linkages with foreign partners alleviated the impact of the recession in host countries,” the authors say.
Recessions are extremely influential for companies, with the negative consequences ranging from a fall in revenue to subsequent reductions in investment across the board, whether on new equipment, new products and additional staff.
The researchers believe that their findings should be acted upon by policy makers, who should do all they can to encourage foreign capital into the economy to provide a buffer against recessions, but especially those in emerging economies.