Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

Russian Company Town: Criteria and Diversification Results

Irine S. Antonova, National Research Tomsk Polytechnic University, Tomsk, Russia, [email protected] Olesya A. Negodina, National Research Tomsk State University, Tomsk, Russia, [email protected] Danil D. Vavilov, National Research Tomsk Polytechnic University, Tomsk, Russia, [email protected]

Abstract

The result of company town concept analysis and systemising shows the absence of distinguishing criteria in international theory. In Russian theory and practice otherwise it is defined three approaehes to the criteria definition. Taken into consideration these practices and the considerable difference between company towns the authors offer the following distinguishmg factors of company town: township-forming enterprise, industry structure, human resource allocation, financial resource allocation, corporate social responsibility, and town location relative as additional external element common to most company towns. The analysis of the faetors on the basis of Yurga socio-economic wellbeing data concludes that the company town has still strong influence from township-forming enterprise in spite of economy diversification results, including core industry reduction in production and employment rates. The main element of the influence is a thermal power station on the balance of the township-forming enterprise that serves the needs of citizens, so we eonsider it as the part of corporate soeial responsibility concept.

Keywords: Company Town, Criteria, Township-forming Enterprise, Diversification;

Introduction

Company towns have long history of its foundation and development. In Russia company towns began to appear in the epoch of Peter I on the basis of cloth manufactures and ironworks located near Moscow and in the Urals. During the last centuries the number of company towns in Russia had been greatly enlarged by Kemerovo region mining towns (Yurga, Angero-Sudginsk, Procopyevsk, Salair, Tashtagol, Gurievsk, Topky, Yashkino, Sheregesh), Ural metallurgy towns in Sverdlovsk, Chelyabinsk and Magnitogorsk regions, Moscow region rustic craft towns (Gzhel, Gus-Khrustalny, Pervomaisky), textile towns of Vladimir and Ivanovo regions, timber towns in Arkhangelsk region. Currently the official Hst contains 313 company towns in Russia inhabited by 11% of population. The other eountry that is closely associated with such a type of settlements is the USA. That country has both successful and unsuccessful pages of company towns history including Lowell textile town founded in 1820s in Massachusetts, G.M. Pullman’s “un-American” model town (Pullman, Chicago) for the sleeping carriage production that was researched by Morgan (1954) and continued by Green (2012), Silicon Valley towns prosperity and Detroit bankruptcy, which still introduces considerable interest of scholars all over the world. Over 2500 eompany towns of the USA are inhabited by 3% of the population but influence dramatically on the economy of the country.

The company town concept

International scope on the concept and distinguishing criteria The result of the concept analysis m the publications shows that the scope of international researches has changed from historic and social questions in the researches conducted by Landis (1938), Allen (1966), Lucas and Tepperman (2008) to socio-economic wellbeing taken into consideration m a research studies by Bebbington et al (2008), Tonts et al (2012), Shann (2012), Litflewood (2014) and Chapman et al (2015). Allen (1966) had allocated the rise and declining stages of a company town, Landis (1938) conducted the comparison analysis of cultural changes of iron mining towns. Tonts et al (2012) fulfilled a cross-sectional analysis of socio-economic performance of small mining towns in Western Australia. The core problem of the socio-economic wellbeing and development that is currently under consideration is “paradox of poverty in the midst of resource abundance” that is

2181 Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

mentioned by Bebbington et al (2008) and Tonts et al (2012). Nevertheless the company town concept is still under consideration. Whereas the company town is correspondent to the definite industry: iron mining by Landis (1938), automobile by Hill (1987), railway by Drummond (1995), mining by Tonts et al (2012) and Shann (2012), textile industry by Hodges and Frank (2014), timber by Scott and Bennett (2015). All these settlements are charactenzed by the same problems of employment and corporate social responsibility (CSR) considered by Bebbington et al (2008), education in a research study by Forsey (2015), ecology and sustainable development analyzed by Lai and Lome (2006) as well as by Yuan and Xue (2009). Basically the researches consider the example of one or some company towns to illuminate the problem. But there are still no clear distinguishing criteria for the company town in intemational researches.

Being often associated with resource extraction industries as in the researches conducted by Hayter (2000), Tonts et al (2012) and Shann (2012) company town has diversity of definitions. One of the earliest definition was given by Davis (1931) as “communities inhabitant solely or chiefly by the employees of a smgle company or group of companies which also owns a substantial part of the real estate and houses”. The company ownership as a central part of the concept is underlined by Lucas and Tepperman (2008), Green (2012) as well as Littlewood (2014). High variability of types, difference of company towns in commodity, company structure and location are instantly under consideration and could be found in Hayter (2000), Tonts et al (2012). Littlewood (2014) is naturally pointing out the overlap or blurred boundaries between such terms as “company town”, “resource town” and “mining town”, which are seems to be very close but have specific features. According to AbdelDRahman (2000) company towns “is formed by a developer and has a single firm”. So, a smgle firm or a group of firms in a chain is a necessary and sufficient condition for a settlement to be a company town. Summarizing all these ideas, in the article the company town is considered as socio- productive complex with one or a group connected companies becoming core urban, social and system factor of the settlement development.

Russian scope on the concept and distinguishing criteria In Russia the company town development is correlated with urgent survival problems of such settlements. At least 1/5 of the company towns from the official list are in the most difficult socio­ economic situation. That is 75 settlements where city-forming enterprise is under bankruptcy. These circumstances make the authority develop clear distinguishing criteria of the company towns. However, the legislation does not lead to unambiguous interpretation of the considered concept, because it only serves as justification of state financial support. This statement is confirmed by the fact that the official number of company towns is constantly changing: from 335 in 2009 to 313 m 2015.

The analysis of the legislation and researches on the topic allows concluding the following criteria approaches: 1. The status o f township-forming enterprise. This approach had been dominated before 2009. The status of city-forming enterprise according to the Russian Federal law “On insolvency (bankruptcy)” of 26.10.2002 supposes to meet the following: the company employs at least 25% or over 5000 people. It should be pointed out that the employment rate calls for at least 50% in the predated legislation of 18.01.98. To underline, the core element of the approach is “employment rate” with vanety of rates between 25-50%. 342 settlements met these criteria m 2009. 2. The separate distinguishing criteria allowed determining the status o f the company town. This approach had been dominated during 2009-2014. Within this approach the core elements were the industrial production of one company or several connected companies and tax revenue from them as well as the “employment rate” that was still under consideration. The first one should be over 50% of town production; the second one should exceed 20% (or even 50% in other resources) to confirm the status of the company town. 335 settlements met these criteria in 2009-2014. 3. The criteria set and values manipulation in accordance with the state financial strategy. This approach has been dominated since 2014 up to the present. In companson with the previous approaches, it considers the type of the settlements: it should be only municipal urban district

2182 Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

or urban settlement with more than 3 000 people. The core element of the approach is “employment rate” that is specified as average staff number of largest companies (several companies within the same industry sector) over 20% of the settlement. Moreover the company town should be involved hi mining except oil and gas according to Russian Government Resolution 29.07.2014. This approach does not reject the previous ones and stated that all company towns m the official list before 2014 remain in it. The most significant part of the approach is the classification of towns in accordance with its socio­ economic wellbeing. It was motivated by the shnnkmg public financial support. 313 towns currently meet these criteria (in 2015).

The method Thus, we conclude the focus gradual shift from the township-forming enterprise to the company town in general with the set of criteria under some vanability. Moreover the critena that have a specific numeric expression (25% of the economically active population or 50% of total industrial production) cannot definitively distinguish a company town. Because the company that employs 24% of town population, accounts for 49% of total town industry, and allocates 19% of total tax revenues has the right to be in the official company town list. Another disadvantage of the considered criteria is the static nature describing only current situation. In this case what matters is the degree of influence of these factors on the socio-economic wellbeing of the town. Taking all these mto consideration, the authors offer two step-method of company town distinguishing. The first step is to highlight main factors of dependency between a town and a company, and the second step is to explore the factors in the dynamics.

The factor of company town distinguishing here is considered as the reason, the driving force of company town distinguishing, which determines the company town features. The criterion in this case is the specific character of the factor, expressed mainly numencally. The dynamic analysis of the company town distinguishing factors will finally allow concluding about economy diversification degree of the company town. The conducted research of international and Russian experience consents to differentiate the following factors: industry structure and output, financial resource allocation, human resource allocation, corporate social responsibility and location relative from diversified centers. The relations of the given factors are depicted at fig. 1.

Company town diversification results Development of the company town got officially shortlisted in 2010 is based on the Complex investment plan of company town modernization. The result of this modernization must be economy restructuration gaining the diversified economy structure. Yurga, Kemerovo region was among those 27 towns that were state-funded in 2010 following the principles of private-public partnership. So, Yurga has significant results in it. The analysis of the socio-economic wellbeing in Yurga m 2011- 2014 shows the following.

The growth of Yurga socio-economy wellbeing indicators in 2011-2012 gave a way to a sharply negative trend in 2013 with a slight recovery in 2014. The positive dynamics was based on the favorable market conditions in the country. In 2011 the index of physical volume of industrial production amounted to 122% (12 billion rubles) with a turnover of 7 billion rubles. In 2012 the index was at the level of 103% (14 billion rubles) and a turnover came to 8 billion rubles. However m 2013 the dynamics of economic wellbeing indicators had already acquired a negative character. Town location relative

CorpoMlc tocoil ropOQC^lity Induttry itmclure To^tulijp- Axminp* couaprcic Huniun resource* Financul лешигсе ■llocatiua allix-alion

Fig. 1 Factors of company town distinguishing

2183 Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

Company town socio-economic wellbeing In 2013 the index of industrial production as well as the turnover decreased to 75%. By the end of 2014 the index considered inflation had almost approached to 100%. This tendency is observed in manufacturing output while electricity, gas and water output has changed slightly (fig. 2). The manufactunng rate in total output decreased slightly from 88% in 2011 to 84% in 2014. The output reduction has occurred in iron and steel (14% in 2011-2014 from 3682 to 4186 million rubles) and m machines and equipment (the growth by 26% in 2011-2012 has resulted in the total reduction on 84% in 2011-2014 fl'om 3218 to 510 million rubles). At the same time mineral product output has shown the increase of 51% in 2011-2014 (from 1912 to 2894 million rubles). These changes show the priorities moved toward more diversified economy structure of the company town Yurga.

* Industrial prothuriion index

*Corc mihutry prmluc(Kii) index Tdwnship'fonning I'incrpnac rale

** NflQ'Cotc industry rate

Fig. 2 Yurga diversification indexes in 2011-2014

In spite of the overall tendency of real income growth of the population in 2011-2014 the real income of a specific economic activities differs. Whereas the salary increase in recycling of secondary raw materials m 2011 consisted of almost 140%, m extraction of minerals excepting fuel - 62%, in 2012 these industries showed the considerable reduction up to 0% and 55% respectively. The main leaders in salary growth in 2012 were forestry (by 23%), public administration (by 24%) and financial sector (by 20%). The most significant increase in the average wage in 2013 was observed in education (by 30% in comparison to 2012), in 2014 - the activity of hotels and restaurants (by 22% in comparison to 2013). Traditionally, the highest salary in 2014 is in the financial sector (31 thousand rubles per month) and public administration (38 thousand rubles per month). Moreover one of the most paid jobs in 2013 and 2014 are in non-metallic mineral products production - more than 40 thousand rubles per month that should be compared with the average wage in Yurga in 2014 amounted 20946 rubles per month.

Financial resource allocation During the period under consideration the structure of investments has changed toward the reduction in township-forming metallurgy industry and growth in wholesale and retail trade (fig. 3). On the one hand, in 2011 the investment rate into fixed capital of metallurgy was over 62% whereas in 2014 it counts only a little over 11%. On the other hand, the investment rate in fixed assets in the wholesale, retail, repair etc. has increased from a little over 2% in 2011 to 47% in 2014. The latter is a reflection of the obvious steps to diversify the economy of the town. These changes obviously lead to the Yurga economy restructuration and township-forming industry reduction.

2184 Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

‘ missclanious

* electricity and atcr

^transpon and communication

^ wholesale and retail liadc, repair of motor vehicles and motorcy cles, household goods and personal ilems machine and equipment

* metal products and mctalurgy

^ non-metal mineral products 2012 2013 2014

Fig. 3 Yurga investment structure in fixed assets in 2011-2014

Township-forming enterprise Being officially shortlisted in company towns in 2010 Yurga had the chain of industries with core enterprise entitled “Yurginsky machine-building plant” or “Yurmash”. In 2011-2012 the company had successfully modernized its funds invested in equipment more than 350 million rubies. But by 2013 due to macroeconomic factors, reducing consumption, the decline in coal pnees, the reduction of coal-mmmg investment projects on equipment acquisition. These factors had effected considerably on socio-economic wellbeing of the town and on the enterprise in particular. The output of the “Yurmash” decreased by 50%, and the average salary - by 25%. In 2013-2014 the number of employees decreased by more than 30% (1700 people). All these were led to emergency coordination of Yurga thermal power station balanced on the “Yurmash”. All these items allow concluding the strong dependence between the township-forming enterprise and the town even in reduction of output and staff number of the company. In general the decline of machinery and metallurgy industnes (the core industries of Yurga) from 51% in 2011 to 12% in 2014 became the result of both Yurga diversity strategy and state economic slowdown observed in 2013-2014.

Human resource allocation and corporate social responsibility According to Yurga investment program in 2011-2014 it was created 1962 jobs. Core industry employment rate is constantly slow down from 5727 people (15% from the total) in 2011 to 3970 (11% from the total) in 2014 (fig. 4). Non-core industry employment rate is nsing conversely. These factors conclude in Yurga status change from a single-industry town to diversified industry.

• Emplo^'mcm m lovsTi economy

^Emplriyntcnt m core indiutry

~Emp!a\mcnl m small business

Fig. 4. The dynamics of people employed in company town Yurga in 2011-2014

Corporate social responsibility (CSR) of a township-forming enterpnse is considered here as apparent qualitative factor of company town distinguishing. The basic elements of CSR of “Yurmash” are: recreation (staff, children and pensioners vouchers, rent of gym and swimmmg pools, sports events); young specialist support (lump sum cash payments applying for a job, higher wages in the first 6 months at work, professional skill competitions); marriage, birth and education support (lump sum payments at first mamage, at birth of children, at pregnancy and maternity); disability support (“veteran of labour” payments, retirement lump sums, food packages for pensioners); financial

2185 Innovation and Sustainable Economic Competitive Advantage: From Regional Development to Global Growth

support in different needs.

Nevertheless, the most important thing in CSR here is the impaet of social assets on the town economy. The example of such assets is Yurga thermal power station balanced on the “Yurmash”. The presence of this power station makes firm boundaries between the town and the company and becomes actually the only distinguishing criterion to which Yurga still satisfies.

Conclusion

To underline the conducted research it should be pointed out that all company towns have its character features and that makes them different and difficult to compare. Nevertheless, in this article the authors distinguish the following factors: core enterprise (or chain of enterpnses), economy structure, human resource allocation, finance resource allocation, and corporate social responsibility. The given criteria should be analyzed in dynamics to show the economy diversification process. This process is considered by us as natural process of town development aiming to dispose of the single- industry dependence.

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