PRODUCTION FUNCTION ANALYSIS: HOW WAR AFFECTS FACTOR SUBSTITUTION IN UKRAINIAN TRADE ENTERPRISES

The Russian invasion of Ukraine in February 2022 created an unprecedented natural experiment in economic resilience under extreme stress. Standard neoclassical production theory treats the elasticity of substitution between capital and labor as a technological constant. However, crisis economics suggests that extreme disruptions may force firms to discover previously unexplored technological possibilities. This study examines how war-induced factor market disruptions affected the elasticity of substitution in Ukrainian trade enterprises during 2019-2023. Using administrative data from 8,347 firms and system GMM estimation, we find a statistically significant increase in elasticity from σ = 0.835 pre-war to σ = 0.918 during 2022-2023 (9.9% improvement). Despite 31.4% employment reductions, firms achieved 20.1% labor productivity improvements through technology adoption and capital deepening. Instrumental variable analysis identifies technology adoption as the primary mechanism, with each 10-point technology increase corresponding to 0.089 percentage points of productivity growth. Firms achieved 75% of optimal factor reallocation within two years—dramatically faster than typical 5-7 year adjustment periods. Larger enterprises achieved σ = 1.047 versus σ = 0.864 for small firms. Findings demonstrate that extreme disruptions fundamentally alter production parameters, challenging stability assumptions. Rapid adaptation reveals substantial latent adaptive capacity emerging under existential pressure, providing crucial insights for crisis response policies supporting technology adoption and factor market flexibility.