On entry of new firms in socialist economies: Evidence from Bulgaria

Abstract

AN IMPORTANT PART of recent attempts at 'restructuring' in East European economies has been the desire of reformers to stimulate the entry of new firms (economic units), as well as more diverse forms of economic organisation. However, the role that the new firms are to play is not well defined. At a minimum, they are expected to help meet consumer demand, which has been notoriously neglected by the large state enterprises. More ambitious claims are that, combined with procedures for the exit of loss-making firms, they will create a competitive dynamic, spurring large state firms to greater efficiency or replacing them. To Westerners, policies to foster the entry of new firms often appear indicative of broader shifts in economic policy-away from centralised, state control of resource allocation and towards decentralised market allocation. Unfortunately, the partial nature of available data' in sometimes fast-changing situations makes it difficult to evaluate the real impact of new firm entry on the functioning of previously centrally planned economies or to draw any general conclusions about the relationship between the evolution of other reform policies and the potential of new firms to generate significant economic benefits. For example, Nuti (1989) describes and evaluates new laws designed to promote the expansion of a new cooperative sector in the USSR and McIntyre (1988a) provides an informative account of earlier proposals concerning new firms and their outcomes in Bulgaria. Most work perhaps has appeared for Hungary, with a host of studies, including Laky (1984), Revesz (1986) and Falus-Szikra (1985), examining diverse facets of the emergence of new firms.2 However, authors seldom attempt to evaluate the impact of the new sectors on the overall functioning of the economy.3 In this paper we attempt to present a total picture of entry in Bulgaria that is both more current and more complete than other accounts. In particular, whereas under previous reforms new 'firms' in Bulgaria in fact have been mainly relatively independent units within existing large state-owned enterprises, more recent measures provide for diverse forms of economic organisation. As a basis for this study we have assembled data culled from various official sources, both published