Showing papers by "Simeon Djankov published in 1997"

Determinants of the export structure of countries in Central and Eastern Europe

Abstract: The growth in exports from Central and Eastern Europe to Western markets suggests that entrepreneurs have responded to changed incentives by restructuring their production to capture new markets. The absence of change in the structure of exports, however, suggests that these restructuring efforts have not been significant. This article analyzes the magnitude of the change in export structure across the Central and Eastern European countries in 1990-95, focusing in particular on trade with the European Union. It finds that imports of intermediate inputs and machinery are an important determinant of the changes in export structure. Sourcing of inputs from abroad is a major factor underlying the expansion of exports to the European Union. Outward processing (subcontracting) arrangements and foreign direct investment have a smaller impact. Except for Poland, inflows of foreign direct investment are statistically insignificant or negatively associated with measures of revealed comparative advantage. This suggests that foreign investors have chosen sectors in which the Central and Eastern European countries were not relatively specialized under central planning.

Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options

Abstract: Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, and Slovenia. Because privatization methods show similar results, the extent of restructuring is compared across firms in the seven countries and used for determining which country.Measures of restructuring are examined, including profitability, proportion of the firms with a positive operating cash flow, average operating cash flow as a percent of revenue, growth of labor productivity, growth of total factor productivity, and growth of exports. Econometric analysis was also used to identify the government policies that most encouraged firms to restructure.

Ownership and Corporate Governance: Evidence from the Czech Republic

Abstract: The Czech Republic's mass-privatization scheme improved the management of privatized firms by concentrating ownership. And contrary to expectations, banks with an (indirect) equity stake in a privatized firm have a positive influence on the firm's corporate governance. The Czech Republic's mass-privatization scheme changed the governance of many firms in a short time. Claessens, Djankov, and Pohl show that mass privatization was effective in improving firm management because of the concentrated ownership structure that resulted. For a cross section of 706 firms for the period 1992-95, they find that the more concentrated the firm's ownership, the higher the firm's market valuation and profitability. Large ownership through bank-sponsored investment funds and strategic investors appears to be particularly important in improving corporate governance and turning firms around. They find no evidence that market valuation or profitability were lower for firms in which investment funds sponsored by a firm's main bank represented a large ownership stake. It is often argued that the firm's main bank having (indirect) ownership control could represent a conflict of interest. The empirical analysis here shows, quite the contrary, that such indirect ownership control has a significant positive influence. On balance, banks that had an (indirect) equity stake in a firm have a positive influence on the firm's corporate governance. This paper - a joint product of the Office of the Regional Vice President, East Asia and Pacific, and the Finance and Private Sector Development Division Division, Europe and Central Asia, and Middle East and North Africa Technical Department - was presented at the International Symposium on Capital Markets and Enterprise Reform in Beijing, November 8-9, 1996.

Determinants of Intra-Industry Trade between East and West Europe

Abstract: The share of intra-industry trade (IIT) in total trade between Central and East European nations and the EU is among the highest of all the EU’s bilateral trade flows. IIT is broken down into horizontal and vertical components and the determinants of each is investigated. Vertical IIT (exchange of similar goods of different quality) is found to account for 80-90% of total IIT and is positively associated with product differentiation, labour intensity of production, economies of scale, and foreign direct investment (FDI). Controlling for country effects, a statistically significant positive association is found between horizontal IIT (the exchange of close substitutes of similar quality) and FDI, product differentiation, and industry concentration; a significant negative relationship is found for scale and labour intensity. These results do not hold if country effects are not controlled for, suggesting that country-specific factors are key determinants of horizontal IIT. The estimation results are more robust than those in previous studies, reflecting the specific characteristics of the endowments of, and ongoing restructuring process in, transition economies.

Ownership and Corporate Governance : Evidence from the Czech Republic

Abstract: The Czech Republic's mass-privatization scheme changed the governance of many firms in a short time. The authors show that mass privatization was effective in improving firm management because of the concentrated ownership structure that resulted. For a cross section of 706 firms for the period 1992-95, they find that the more concentrated the firm's ownership, the higher the firm's market valuation and profitability. Large ownership through bank-sponsored investment funds and strategic investors appears to be particularly important in improving corporate governance and turning firms around. They find no evidence that market valuation or profitability were lower for firms in which investment funds sponsored by a firm's main bank represented a large ownership stake. It is often argued that the firm's main bank having (indirect) ownership control could represent a conflict of interest. The empirical analysis here shows, quite the contrary, that such indirect ownership control has a significant positive influence. On balance, banks that had an (indirect) equity stake in a firm have a positive influence on the firm's corporate governance.(This abstract was borrowed from another version of this item.)

Managers, Incentives and Corporate Performance: Evidence from the Czech Republic

Abstract: We study the effect of changes in management and the use of equity incentives on firm performance and market valuation using a cross-section of 706 Czech firms over the 1993-97 period. As these firms have exogenously determined ownership structures, we avoid the simultaneity problem often present in studies for transition economies where either existing managers become owners or new owners replace existing managers. And, as there were few managers in the Czech Republic with market-economy skills, we avoid the selection problem often present in studies for market economies where new managers may be better suited than existing managers to manage the firm. Controlling also for initial conditions and sector-specific effects, we find that several measures of enterprise performance are positively related with the entry of new managers, particularly if those managers were selected by private owners (rather than by the government). Equity holdings by managers appear to have no effect on corporate performance. The results suggest that changes in human capital are more important in bringing about improvements in corporate performance than equity incentives.

Determinants of Performance of Manufacturing Firms in Seven European Transition Economies

Abstract: We document the operational performance of (former and current) state enterprises over the 1992-1995 period for seven countries in Central and Eastern Europe (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) using large samples of firm level data and a consistent methodology. We find that @ in the Czech Republic, Hungary, Poland, and Slovakia have the highest factor productivity growth and firms in Bulgaria and Romania the lowest, with firms in Slovenia in between. We find three factors which help explain the variation in firm performance: initial conditions (firm size, sector, and level of productivity), status of privatization, and quality of bank lending. Firms in tobacco, furniture, and paper improve faster than firms in other sectors, while firms in the textile, lumber, petroleum refining, rubber and non electrical machinery sectors improve slower than other firms. Firms with a lower initial level of factor productivity display higher productivity growth than other firms, suggesting convergence of productivity. Productivity growth is most often negatively correlated with firm size. Productivity growth is positively related to privatization in all countries, with firms privatized for two years displaying the most change. Finally, bank financing appears to have been increasingly allocated to more productive firms in all countries except Bulgaria and Romania.

The Restructuring of Large Firms in Slovakia

Abstract: This paper examines case study evidence of large Slovak firms chosen to represent a wide range of initial conditions, privatization techniques and success with restructuring. We document the ownership changes and restructuring actions of firms. We then re-examine several hypotheses about firm restructuring in the light of this new evidence. In particular, we show that the majority of Slovak firms have successfully restructured in the absence of foreign investors and government-led restructuring programs. The study also throws some new queries on the effectiveness of different privatization methods in enhancing corporate governance and improving access to skills and capital. We find that privatization to insiders through management- employee buy-outs did not hamper firm restructuring as the new owners (old managers) invested heavily in new technology, laid off substancial part of their workforce, sought foreign partnerships, and were prepared to sell controlling stakes to outsiders in return for fresh financial resources. The evidence also suggests that the mass privatization program did not result in weak corporate governance since it was followed by a rapid consolidation of ownership. Our findings support the view that the main objective for privatization programs should be the speedy transformation of ownership, not the selection of perfect owners.

On the Determinants of Enterprise Adjustment: Evidence from Moldova

Abstract: A survey of 192 Moldovan firms, most of which were privatized in 1992-94, is used to estimate the relative role of hard budget constraints, privatization, and human capital accumulation in enterprise restructuring. The data on Moldovan enterprises are particularly appropriate for this exercise due to the absence of significant contestability in the Moldovan market, and the seventy years of Soviet-style management. Restructuring is measured as employee layoffs, share of barter trade, time spent on government-related work, change in suppliers, and managers' per-ceptions of future growth opportunity of their respective firms. The analysis shows that hard-ened budget constraints and privatization provide proper incentives for managers to maximize profits, but do not fully account for subsequent enterprise restructuring. An additional condition for restructuring is that managers developed new skills in turning enterprises around.

Trade reorientation and productivity growth in Bulgarian enterprises

Abstract: Although the impact of international trade is usually analyzed at the macroeconomic level or at the industry level, the authors here explicitly restrict their analysis to the microeconomic level, the level of the firm. Specifically, they investigate the relative importance of integration with world markets as a source of productivity growth in Bulgarian firms, controlling for macroeconomic forces. They focus on the potential importance to economic growth of greater access (after trade liberalization) to global markets for designs, equipment, and intermediates. By buying intermediates and equipment, firms are allowed to improve their productivity and to learn by exporting to more mature markets. The changes that occurred in trade patterns after opening the economy provide one indicator of the manager's attempts to import better technology. The partial correlations suggest that firms that reorient their trade patterns, which is arguably the most appropriate measure of trade integration for transition economies, tend to have higher growth rates for total factor productivity (TFP).

Competition Law in Post-Central Planning Bulgaria

Abstract: This paper investigates the activities of the Bulgarian competition office, the Commission for the Protection of Competition, during 1991–5. Descriptive statistics are provided on the industry incidence of investigations, the types of behaviour that were investigated, and the frequency with which violations were found and penalties imposed. Although the Commission has attempted to concentrate its efforts in non-tradable sectors and target both cartel and abuse of dominance cases, the remedies that are imposed appear rather ineffective. Moreover, instead of hard core anti-competitive behaviour, much of the Commission’s activities have centred on ‘unfair’ competition (e.g. false advertising, trademark infringement, and the behaviour of ex-employees of specific enterprises). Recently proposed amendments to the law should go some way towards allowing the Commission to focus more narrowly on anti-competitive practices and to strengthen the deterrent effect of the law.

Politicians and Firms: Evidence From Seven Central and Eastern European Countries

Abstract: We document the changes in financing, employment, and operating efficiency that occur in over 6,300 manufacturing enterprises in seven Central and Eastern European countries (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, Slovenia). We then compare the relative performance of privatized and still state-owned enterprises. The sample allows us to test several propositions about the effects of privatization and stabilization (hard budget constraints) on enterprise behavior derived by Shleifer and Vishny (1994, 1996). Controlling for institutional differences and initial conditions we find that privatization is associated with significant improvements in total factor productivity and reductions in excess employment. Reductions in soft financing are associated with further productivity gains. The results yield significant support to the Shleifer-Vishny model.

The Failure of Government-led Program of Corporate Reorganization in Romania

Abstract: We provide the first comprehensive cost-benefit analysis of government-led reorganization programs for financially distressed firms in transition economies. The study is based on empirical evidence on the programs in Albania, Arinenia, Bulgaria, FYR Macedonia, Romania, Kazakhstan, Kyrgyz Republic, and Uzbekistan, with a particular focus on the Romanian program which is the only completed program to date. Our results indicate that the reorganization program failed to deliver any tangible improvements in the operational performance of firms. We also show that firms included in the program were faced with softer budget constraints than their comparators outside the program. Finally, we show that the cost of the program equaled three years of salaries for all workers in reorganized firms. The use of this money as severance pay for workers may have eliminated the pressure for government support and made it easier to liquidate or privatize firms. These findings question the feasibility for creating workable reorganization programs under government auspices.

Competition Law in Post-Central Planning Bulgaria

Abstract: This paper investigates the activities of the Bulgarian competition office, the Commission for the Protection of Competition, during 1991-5. Descriptive statistics are provided on the industry incidence of investigations, the types of behaviour that were investigated, and the frequency with which violations were found and penalties imposed. Although the Commission has attempted to concentrate its efforts in non-tradable sectors and target both cartel and abuse of dominance cases, the remedies that are imposed appear rather ineffective. Moreover, instead of hard core anti-competitive behaviour, much of the Commission's activities have centred on 'unfair' competition (e.g. false advertising, trademark infringement, and the behaviour of ex-employees of specific enterprises). Recently proposed amendments to the law should go some way towards allowing the Commission to focus more narrowly on anti-competitive practices and to strengthen the deterrent effect of the law.

Competition law in Bulgaria after central planning

Abstract: The authors investigate the activities of the Bulgarian competition office, the Commission for the Protection of Competition, for the years 1991-95. They provide descriptive statistics on the industry incidence of investigations, the types of behavior investigated, and the frequency with which violations were found and penalties imposed. Although the Commission tried to focus on nontradable sectors, and to target both cartel and abuse-of-dominance cases, the remedies they imposed appear to have been rather ineffective. Moreover, instead of focusing on hard-core anticompetitive behavior, much of the Commission's activity centered on"unfair"trade practices (such as false advertising, trademark infringement, and the behavior of ex-employees of specific enterprises). Many enforcement cases basically dealt with contract enforcement problems. Only a small percentage of cases concerned collusive practices that restricted entry/expansion, such as bid-rigging, price-fixing, and market allocation. And remedies for egregious violations of the law were not dire enough to give firms a strong incentive to abide by the law. Recently proposed amendments to the law should go some way toward allowing the Commission to focus more narrowly on anticompetitive practices, and to strengthen the law's deterrent effect.

Enterprise Performance and Managers' Profiles

Abstract: We study the effect of changes in management and the use of equity incentives on firm performance and market valuation using a cross-section of 706 Czech firms over the 1993-97 period. As these firms have exogenously determined ownership structures, we avoid the simultaneity problem often present in studies for transition economies where either existing managers become owners or new owners replace existing managers. And, as there were few managers in the Czech Republic with market-economy skills, we avoid the selection problem often present in studies for market economies where new managers may be better suited than existing managers to manage the firm. Controlling also for initial conditions and sector-specific effects, we find that several measures of enterprise performance are positively related with the entry of new managers, particularly if those managers were selected by private owners (rather than by the government). Equity holdings by managers appear to have no effect on corporate performance. The results suggest that changes in human capital are more important in bringing about improvements in corporate performance than equity incentives.