Co-Operative Business Strategies in Eastern Europe

Abstract

This paper discusses the mechanisms of corporate governance in a centrally planned economy, following Kornai’s classical work on the Socialist system. We evaluate the role of different co-ordination mechanisms used in central and east European countries. A critical analysis of the five co-ordination mechanisms proposed by Kornai (bureaucratic, market, self-governing, ethical and family co-ordination) reveals well established institutions in East European societies and their failure to facilitate efficient economic transactions. A model of corporate governance in a socialist economy is proposed. An examination of managerial strategies in the centrally planned economies considers the dynamic system of negotiation and bargaining between firms and governmental agencies that characterised the system in the past. The uncertainty of outcomes of these former negotiation practices is compared with the uncertainty of the business environment during the current transition period. A thorough discussion of the elements of business environment in transition economies is based on the work of Frydman and Rapaczynski (1994), which highlights the contradictions in the effort of governments to design markets. The macro-economic instability as a result of these efforts is discussed as a major factor in determining firms’ strategic responses. Business risks in Central and Eastern Europe are compared with business risks in developed market economies. Intra- and inter-firm dependency on resources and information is highlighted as an important factor determining managerial strategies and relationships. The concept of business networks is introduced as a strategic solution to high risk, uncertainty and dependency. The evolution of business networks is linked with the former professional and political structures, used as a vehicle for information supply, influence on decisions, and the control of behaviour. The vertical subordination in decision making and the top control of information from the past, has generated a framework for the establishment of new co-operative relations. A secondary analysis of published business case studies from Poland, Hungary, the Czech Republic, Slovakia, Bulgaria, Romania, Latvia, Estonia and Lithuania is conducted. Some of the findings show that the main risks that companies face are related to inadequate information, rapid changes with uncertain implications, lack of (or inability to identify) alternative solutions and contradictory objectives that have to be satisfied. The co-operative strategies of managers aim to increase the information supply about market opportunities, and to secure financial resources from government funds or banks. These strategies are facilitated by former links and relationships but are applied at the cost of reaffirming former dependencies.