A Comparison of Domestic Demand and Export-led Growth Strategies for European Transition Economies

Despite the importance of the syndicated loan market as a source of international financing there is limited evidence on factors influencing syndicated loan pricing in European developing economies. Focusing in one particular region reduces the problem of cross-country heterogeneity and provides more specific policy recommendations for reducing the cost of funding for firms, in an environment where capital markets are less developed, and banks are seen as the main source of funding. This study investigates the determinants of syndicated loan spreads in a sample of 1004 syndicated loans from the Thomson One Banker database, granted to borrowers from 12 Central, Eastern and South-Eastern European countries. The results show that loan and country characteristics are the most significant determinants of syndicated loan spreads. Lenders seem to price loan characteristics in European transition economies in accordance with the existing academic literature – riskier loans are charged higher spreads. Augmenting the Thomson One Banker with the Worldscope database, we further find that borrower characteristics are generally significant determinants of syndicated loan spreads however their significance weakens once country characteristics are taken into account. Lender characteristics are found not to be significant determinants of syndicated loan spreads in European transition economies. The implication of these results is that governments of European transition countries have a major role to play in providing a macro-economic and legal infrastructure that will enable borrowing firms to get access to funding sources at lower spreads. Keywords: syndicated loans, spreads, emerging Europe, Thomson One Banker, Worldscope DOI: 10.7176/JESD/13-18-02 Publication date: September 30 th 2022

1. Introduction Study of the capital structure and the effects of financial leverage in the so-called transition economies is still a matter of current interest. This problem is differently manifested in every country, depending on numerous factors (Thalassinos and Kiriazidis 2003; Thalassinos, Kiriazidis and Thalassinos 2006). The most important ones are the completeness of privatization process, the level of progress in capital market development, availability of various financing sources, the level of investor protection, legal stability and management quality. Each of these factors could affect certain firms with different intensity, depending on the country. The differences between developed and developing markets are significant (Thalassinos 2007; 2008). In contrast to developed markets, undeveloped markets are characterized by insufficient information transparency, poor functioning of primary market, low liquidity of secondary market and slow adjustment of prices to new information signals (Thalassinos et al., 2010). Under such circumstances, company management is often faced with inflexible capital structure, dominantly composed of capital and credit sources. Therefore, it is logical that usual capital structure determinants are differently manifested. The importance of studying the peculiarities of capital structure choices of companies operating in emerging and transition economies was highlighted for the first time by Cornelli, Portes and Schaffer (1998). In the last decade, a significant number of studies emerged aiming to explore the unique features of capital structure choices in Central and Eastern European (CEE) countries. However, to the best of the authors' knowledge, no empirical research concerning the impact of various firm-specific factors on capital structure choices of listed firms has been conducted in case of Serbia. Although Serbia, as one of European transition economies, shares many geographic and historical characteristics with other transitional European countries, the Serbian economy shows unique characteristics in terms of regulatory and infrastructure environment, development of financial market as well as the economic structure. The aim of this paper is to fill this gap in the literature by exploring the case of capital structure determinants in the Republic of Serbia. This study explores the factors determining capital structure choice of Serbian firms listed on the regulated market fragment of the Belgrade Stock Exchange in the period 2008-2011. More specifically, we try to answer whether firm-specific determinants that have been recognized in Central and Eastern European corporate settings are similarly leverage-correlated among Serbian companies. The contribution of the paper is two-fold and is reflected in extending the existing empirical literature to financial policy determinants in emerging and transitional economies and broadening the possibilities for cross-country comparison in the field of capital structure determinants. The structure of the paper is as follows. In Section 1 we give an overview of relevant theoretical and empirical evidence concerning capital structure determinants in European transitional economies. The data collection and research method are presented in Section 2. In Section 3 we discuss the empirical results of our study. Final Section provides conclusions, emphasize some limitations of the study and propose the objectives of future research. 2. Capital Structure Research in European Transition Economies Capital structure determines how a firm finances its operations and growth by using different sources of funds--debt and equity. Since the appearance of the seminal paper by Modigliani and Miller (1958), economic literature has recognized two important competitive theoretical models that aim to explain the capital structure decisions: the pecking order hypothesis and the static trade-off model. The first one finds its corner-stone in asymmetric information, while the second one is based on the existence of tax benefits associated with debt use, bankruptcy cost and agency cost. …

Most European transition countries have fixed or highly managed flexible exchange rate regimes. This exchange rate rigidity is sometimes argued to worsen the trade balance by keeping the currency overvalued. However, there is no unambiguous evidence that currency depreciation/devaluation positively affects trade balance and leads towards the adjustment, even in the short-run. Therefore, we examine the effect of real effective exchange rate (hereafter REER) on trade balance in European transition economies over the period 2000-2015. By using fixed effect model for static and generalised method of moments for dynamic estimation, we find that there is an adverse effect of the REER on trade balance in European transition countries over the period 2000-2015. Namely, depreciation of REER deteriorates trade balance in European transition countries, which could be explained by high import dependence and low export capacity. This implies that policymakers in European transition countries should not use exchange rate policy to improve trade balance. This is important in the light of their accession towards European economic and monetary integration, implying that these countries should focus more on using fiscal, rather than monetary (and exchange rate), policy to adjust trade balance, which is one of the required real convergence towards the EU standards.

Foreign direct investment in European transition economies—The role of policies

The main objective of this paper is to investigate the impact of the investment environment on FDI in transition economies in Europe, through the usage of dynamic panel methodology, due to the persistence of the endogeneity issues. Further, three main factors have been determined affecting the FDI in 15 developing countries through the time span 2009–2016 as Control of Corruption, Political Stability and Absence of Violence/Terrorism and Distance to frontier score (Doing Business) having positive and significant effect on attracting FDI in these transition countries. Also as pull factors are used GDP per capita, profit tax rate showing positive and significant effect on FDI flows, while unemployment rate was positive but does not have a significant role in the attraction of FDI flows in European transition countries. In addition, to our best knowledge this paper is among the first that attempts to investigate this relationship in this set of countries by employing the dynamic panel methodology using differenced GMM model as well as employing Distance to frontier score (Doing Business) as one of investment environment factors that impact FDI flows for this set of 15 countries. Furthermore, such findings will contribute to the existing literature by using these instruments to measure their impact on FDI attractiveness on European transition economies.

The paper reviews labor market developments in the transition economies of Europe and Central Asia. It argues that the scarcity of productive job opportunities and the growing labor market segmentation are the two main labor market problems facing the transition economies. In the European transition economies the lack of jobs has led to persistent open unemployment. In the Commonwealth of Independent States (CIS) it has led to hidden unemployment (underemployment and low productivity employment). Unemployment in the European transition economies is supported by the developed social safety net. In contrast, in the CIS for most workers unemployment is not an affordable option. They either stick to their old, unproductive jobs in unrestructured enterprises, or work in the informal sector, or resort to subsistence agriculture. Thus, underemployment in the CIS is a mirror image of unemployment in the European transition economies. Accordingly, the high employment-to-population ratios in many CIS countries do not necessarily signify favorable labor market performance. Instead they often indicate delayed enterprise restructuring, the maintenance of unsustainable jobs in uncompetitive firms, and the existence of a large informal sector as an employer of last resort. Labor market segmentation has been caused by a sharp increase in earnings differentials and the attendant increase in the incidence of low-paid jobs, by the polarization of regional labor market conditions, and finally by the growth of the informal sector offering casual, low-productivity jobs. Labor market segmentation and accompanying inequalities are more pronounced in the CIS than in the European transition economies.

PurposeThis paper seeks to illustrate the development of corporate governance issues in the transition economies of Central and Eastern Europe (CEE) and to analyze if codes based on directives or standards are better for these economies.Design/methodology/approachA chapter about corporate governance codes and the respective (dis)advantages of directives and standards starts the paper. Then common European and specific transition economies' corporate governance problems followed by a discussion of directives versus standards for CEE countries are described.FindingsThe paper finds that historical development of the transition economies in CEE leads to specific corporate governance problems such as high court delays, corruption and immature institutional investors. The introduction of corporate governance codes for these economies seems useful but should not rely on broad standards but on legally enforced binding rules accounting for the discussion of directives versus standards.Research limitations/implicationsResearch on the weaknesses of legal systems in transition economies is mainly verbally argued and needs more empirical backing. The discussion of directives versus standards is limited as we live in a world of flux – standards are becoming directives over time.Practical implicationsThe paper argues against the blindfold implementation of corporate governance codes of other countries and argues for country specific solutions keeping in minds the different effects of directives and standards.Originality/valueThe paper opposes the mainstream thinking that corporate governance codes are the ultimate ratio for transition economies in countries of CEE.

Most European economies in transition are engaged in public sector reform aimed mainly at replacing the previous fiscal system subordinated to the central plan with a system where fiscal instruments can make a distinct contribution to stabilization, equity, and efficiency. This paper examines past progress and future tasks in major reform areas: taxation, subsidies, social security, public investment, public enterprises, government debt, and intergovernmental relations. An overview of the fiscal reform process suggests that the contraction and restructuring of government operations are not likely to materialize soon and that there is a serious risk of widening fiscal imbalances during the transition.

Most European economies in transition are engaged in public sector reform aimed mainly at replacing the previous fiscal system subordinated to the central plan with a system where fiscal instruments can make a distinct contribution to stabilization, equity, and efficiency. This paper examines past progress and future tasks in major reform areas: taxation, subsidies, social security, public investment, public enterprises, government debt, and intergovernmental relations. An overview of the fiscal reform process suggests that the contraction and restructuring of government operations are not likely to materialize soon and that there is a serious risk of widening fiscal imbalances during the transition.

Fiscal Reform in European Economies in Transition

Despite the global downturn since 2008, the growth in BRICS countries as a group is least hampered as compared to the growth in the world, in general, and developed countries, in particular. Is it due to the strong domestic demand factors or external factors is an empirical question to be answered. Further, some economists are promulgating for a new development strategy of domestic demand-led growth. Hence, this article tries to examine the role of domestic and external demand to growth in BRICS countries. Domestic investment is taken to explore the impact of domestic demand on growth, while export and import variables are used to investigate the role of external demand in economic growth. To cater to the objective, causality analysis is done among exports, imports, domestic investment and economic growth using the vector auto regression analysis. Generalized impulse response functions are plotted to get an insight of dynamic interrelationships among these variables. The results are country-specific and mixed evidence of export-led and domestic demand-led growth is found depending on the individual countries of BRICS.

Marketing Challenges in Transition Economies of Europe, Baltic States and the CIS is a collection of conceptual and empirical articles on the developments of markets, marketing orientation, and marketing strategy in the transition economies of Eastern and Central Europe, the Baltic States, and the CIS. This unique book includes conceptual frameworks and research studies that will illuminate topics, such as marketing institutional development, marketing orientation, and foreign direct investment to help you gain a better understanding of the current and future roles of marketing in transition economies.

The article evaluates and attempts to draw some lessons from the recent initiatives aimed at stimulating regional cooperation among transition economies in Northern, Central, and South-Eastern Europe. Although these initiatives varied significantly in their scope, objectives, and domain of activity, the author highlights the common elements and discusses both their major achievements and greatest weaknesses. The author then relates these initiatives to the recent theoretical debate on regionalism, the main conclusions in the empirical literature, and the most important policy issues concerning current integration processes and eu enlargement. The role of subregional economic cooperation among transition economies is examined within the context of the problems posed by the variable speed integration policies of the European Union. The general conclusion is that the overall experience of regional cooperation among European transition economies has, on balance, been positive, though clear limitations and many unresolved questions remain. (For acronyms see page 323.)

PurposeThe last two decades have been characterised by a rise in income and wage inequality in a wide range of countries, including European transition countries. The rise in globalisation is one major factor explaining this increasing wage inequality. International trade and FDI have increased significantly since the beginning of transition and the purpose of this paper is to focus on whether FDI plays an important role in explaining the pattern of wage inequality in selected transition countries.Design/methodology/approachA cross-country empirical investigation has been conducted using two alternative measures of wage inequality: the Gini coefficient and the Theil index. Several model specifications and estimation strategies have been employed to obtain consistent estimates and to check for the robustness of the results.FindingsThe results indicate that a rising share of inward FDI in gross domestic product (GDP) increased wage inequality in transition economies, though its overall effect was relatively small. Considering the long run, there is no clear evidence of a concave relationship between FDI and wage inequality, which may be a consequence of the relatively low levels of FDI in many transition countries.Practical implicationsInwards FDI has made a small contribution to increasing wage inequality in European transition economies. However, its overall beneficial effects on labour markets in these countries suggest that rather than restricting FDI governments should target increasing the supply of skilled labour.Originality/valueThis new empirical evidence supports the hypothesis that an increased inward FDI stock as a share of GDP increases wage inequality in transition economies, however, this relationship is a complex one. Differences in average wages, wage differentials, employment shares of skilled workers and relative size of the foreign-owned sector are all likely to be important for the behaviour of wage inequality.

Real Output and Prices Adjustments Under Different Exchange Rate Regimes