Abstract
Strategic restructuring of firms through investment is key to a transition from plan to market. Using data on industrial firms in the Czech Republic during 1992-1998, we find that foreign-owned companies invest the most and cooperatives the least, that private firms do not invest more than state-owned ones, and that cooperatives and small firms are credit rationed. Given the large volume of nonperforming bank loans to firms and the high rate of investment of large state-owned and private firms, our findings also suggest that these firms operate under a soft budget constraint. Estimates of a dynamic model, together with the support for the neoclassical model, suggest that firms started to behave consistently with profit maximization.
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