Restructuring and Efficiency in the Estonian Manufacturing Industry: The Role of Foreign Ownership

Abstract

As a result of the recent privatisation process, a large amount of foreign direct investments have moved into the transition economies. This inflow has undoubtedly left its imprint on the restructuring process of these countries. The purpose of the present paper is empirical analysis of the role of foreign owners in the restructuring process of Estonian manufacturing enterprises and their contribution towards raising efficiency in this industry. The authors' main hypothesis is that foreign ownership is generally instrumental in increasing efficiency at company level. The second hypothesis is that enterprises representing different forms of ownership use different models for restructuring. The authors compared the efficiency indicators of domestic and foreign-owned enterprises in the manufacturing sector, applying the pyramid of efficiency worked out by the British Institute of Management and the Centre for Interfirm Comparison. Firm-level data of the Estonian Statistical Office for the period 1995-1999 were used. The analysis led us to the conclusion that foreign enterprises do contribute to increasing efficiency at company level. The paper indicates, additionally, that foreign enterprises are mostly engaged in strategic restructuring. The reasoning here is that during the observation period the labour productivity of foreign enterprises increased due to sales growth. Moreover, foreign enterprises are more capital-intensive, pay higher salaries, are more export-oriented, have more assets per employee and a higher investment capability. Domestic enterprises, on the contrary, are more likely to use re-active restructuring. The most essential signal of re-active restructuring is the fact that the growth of these enterprises' labour productivity is achieved owing to a reduced number of employees, decreasing costs, and low returns on capital. However, there are some important signs, showing that domestic enterprises have also become engaged in strategic restructuring, which indicates that foreign investors motivate domestic enterprises to follow their strategy. Thus, while the use of their earlier model - reactive restructuring - can mean delays in regaining the lost advantages, then involvement in strategic restructuring will help domestic enterprises to conform to the environmental changes facing countries in transition. The results of the present paper indicate the relevance of foreign direct investment in speeding up restructuring of the manufacturing industry of Estonia.