Eastern European Transition Economies Research Articles

The Wage Premium of Foreign Ownership: Evidence from European Mergers and Acquisitions

AbstractThe authors provide evidence on the impact of foreign ownership on labor market outcomes analyzing pay differences between foreign-acquired and domestically owned firms. For this purpose, they use firm-level data from 16 European countries over the time period 1999–2006. Combing propensity score matching techniques with difference-in-differences (DID) estimators the authors estimate positive wage premia of cross-border merger and acquisitions (M&As), suggesting that foreign-acquired firms exhibit higher short-run (postacquisition) wage growth than their domestic counterparts. The observed wage disparities are most pronounced for low paying firms (with average wages below the median) which are typically located in Eastern European transition economies.

Creating organizational innovations in countries in transition using Finnish change laboratory: A case study from Serbia

The Finnish Change Laboratory intervention method has been used in several Western countries to support innovation and learning within organizations. This study explored the applicability of the Change Laboratory method to work activities in Eastern European transition economies. The case of a Change Laboratory project at a Serbian publishing house was examined and discussed. The Change Laboratory led to a clear break from previous models and resulted in a new, much more efficient model of work organization based on teams. The studied publishing house can be characterized as an innovator within a relatively laggard industry. This characteristic increased the Serbian publisher?s potential for developing ?learning partnerships? with publishing activities in EU Member States. These ?learning partnerships? enabled appropriate Western concepts to be found that could be used as stimuli to develop a new model of work for the publishing house during the Change Laboratory.

On the determinants of credit rationing: Firm-level evidence from transition countries

Using survey data for firms from Eastern European transition economies we investigate the determinants of credit rationing. Our rationing definition incorporates firms whose loan application was rejected, but also ‘discouraged’ potential borrowers. We employ a bivariate probit with censoring, approach that accounts for the underlying selectivity since rationed firms are a subset of those without a loan. We include firm-specific attributes related to the alleviation of informational asymmetries, and therefore expected to affect credit rationing. We find that credit rationing depends on firm size, profitability, sales growth, ownership type, legal status, sectoral heterogeneity and the country-specific level of domestic credit.

The Real Exchange Rate Fluctuations Puzzle: Evidence For Advanced And Transition Economies

This paper tries to analyze the sources of the real exchange rate fluctuations for a set of advanced economies and Central and Eastern European transition economies. To address this, in a first step, we compute two measures of the share of the variance of the real exchange rate accounted for movements in the relative prices of traded goods between the countries. One measure is based on R2 coefficient and the other one is based on the mean-squared error (MSE) of the changes in the real exchange rate. In a second step, we estimate structural (identified) vector autoregression (SVAR) models, and decompose real and nominal exchange rate movements into those caused by real and nominal shocks. In a third step, we complete previous ones with an impulse-response analysis. Three central messages are derived from results: (1) for transition economies, under regimes of managed nominal exchange rates, the relative price of non-traded goods explain a large percentage of the variance of the real exchange rate; (2) there is evidence of instability in the variance decomposition of the real exchange rates for advanced economies across samples, and (3) as result of diverse fiscal and monetary policies in transition economies, real exchange rates in some economies are driven mostly by real shocks while in others are driven mostly by nominal shocks.

Behind the Eastern-Western European Convergence Path: The Role of Geography and Trade Liberalization

This paper proposes a 2-country 3-region economic geography model that can account for the most salient stylized facts experienced by Eastern European transition economies during the period 1990-2003. In contrast to the existing literature, which has favored technological explanations, trade liberalization and factor mobility are the only driving forces. The model correctly predicts that in the first half of the period trade liberalization led to divergence in GDP per capita, both between the West and the East and within the East. Consistent with the data, in the second half of the period, this process was reversed and convergence became the dominant force. We suggest that the initial East-West divergence would have been mitigated in the presence of significant migrations within the East.

Ownership Concentration, Institutional Development and Firm Performance in Central and Eastern Europe

This paper analyzes the relationship of ownership concentration and firm performance in the context of different institutional environments in 28 Central and Eastern European transition economies. Using the BEEPS data for the period from 2002 to 2009 we find an inverted u-shaped relation of ownership concentration and firm performance for those firms that operate in non-EU-member countries as well as those firms that are situated in less developed legal systems according to Freedom House ratings. We interpret these findings as evidence for a classic agency problem in the lower part of the ownership concentration distribution that is dominated by a ‘private benefits of control’ problem with rising ownership concentration.

Ownership Concentration, Institutional Development and Firm Performance in Central and Eastern Europe

This paper analyzes the relationship of ownership concentration and firm performance in the context of different institutional environments in 28 Central and Eastern European transition economies. Using the BEEPS data for the period from 2002 to 2009 we find an inverted u-shaped relation of ownership concentration and firm performance for those firms that operate in non-EU-member countries as well as those firms that are situated in less developed legal systems according to Freedom House ratings. We interpret these findings as evidence for a classic agency problem in the lower part of the ownership concentration distribution that is dominated by a 'private benefits of control' problem with rising ownership concentration.

A Critical View of the Institutional Solution in Economics

Institutionalism is the solution at hand when the expected correlations fail to work. The analytical framework is henceforth enriched with institutional pillars such as stable political structures, lack of corrupt practices, well-specified property rights, low-cost enforcement of contracts, etc. This paper’s thesis is that institutionalism has its own limits circumscribed by the original view of the logic of economic inquiry based on causation. Ignoring the external circumstances of the social whole by virtue of ceteris paribus postulation creates an epistemic vacuum as regards the most part of our understanding of economic evolutions. In guise of a practical corollary, the paper ends with a casuistic illustration from Eastern European transition economies and concludes that the uncertainties of transition, neither more obscured, nor more difficult than of any other historical system, are left as much puzzling in orthodox as in institutional recipes.

When experience meets national institutional environmental change: foreign entry attempts of U.S. firms in the Central and Eastern European region

AbstractWe develop an institutional change perspective to examine the tension that can exist between evolving external environmental influences and internal organizational influences on foreign entry attempts. Using data on the entries of 215 U.S. public firms made into 11 Central and Eastern European transition economies during the period of 1990–2003, we find that shifts in national institutional environments, from a socialist to a market economy, reduce the extent of challenges encountered to make a hierarchical entry, which leads to an increase in foreign hierarchical entry attempts but not necessarily to a decrease in relational entry attempts as institutional transformation. We find evidence of inertial influences as experienced entrants tend to follow their previous decisions when making subsequent entry attempts. Further, they are less responsive in their foreign entry strategies to the institutional transformation in a given host country than inexperienced firms. We also find that the experience gained from relational entries results in more hierarchical entry attempts, but hierarchical entry experience results in fewer relational entry attempts. Copyright © 2009 John Wiley & Sons, Ltd.

Structure and performance of the service sector in transition economies1

AbstractThis paper examines the performance of the service sector in the Eastern European transition economies during the 1997–2004 period. The performance of the service sector as a whole and of its sub‐sectors is very heterogeneous within the region. Service sub‐sectors that are information and communications technology producers or users and those using skilled labour more intensively exhibit the highest labour productivity growth. Our estimates show a positive and significant effect of liberalization on service labour productivity growth that is stronger for sub‐sectors that are more distant from the technological frontier. Service liberalization is also shown to have a positive effect on labour productivity levels and growth of downstream manufacturing industries.

HRM in Transition Economies: The Case of Serbia

HRM in Transition Economies: The Case of SerbiaWhile the convergence vs. divergence debate has gained broad recognition among both HRM scholars and practitioners, it seems that a closer insight into current HRM developments in the South Eastern European transition economies has yet to be achieved. This paper, therefore, aims to highlight current HRM practices in Serbia and address possibilities for implementing the North American HRM model in a highly incompatible cultural setting. Investigation of HRM practices in Serbia is based on the "CRANET survey on Strategic International HRM" (Brewster et al., 2004) and on interviews with the HR managers of 38 randomly selected companies operating in Serbia. The Serbian national culture has been included a priori in the initial research design as an explanatory variable. Research findings suggest that both the incompetence of HR managers and professionals, as well as a slow-moving transition, need to be carefully considered to explain the distinctiveness of HRM in transition economies. On the other hand, national culture seems to be a key obstacle to the achievement of full convergence of performance appraisal and performance-related pay.

Explaining bank distress in Eastern European transition economies

This paper considers the joint role of macroeconomic, structural and bank-specific factors in explaining the occurrence of banking problems in the nineteen Eastern European transition countries over the last decade. With data at the individual bank level we show, using a discrete time survival model, that all three factors interact in their impact and have a rich dynamic profile, which underlines the highly volatile cycles challenging the stability of banks in this region. A fragile funding basis accompanied by high exposure to market risk in an environment of reforms and macroeconomic disturbances is the typical precursor of bank distress.

Exchange Rate Regimes, Foreign Exchange Volatility, and Export Performance in Central and Eastern Europe: Just another Blur Project?

AbstractThe authors attempt to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies, as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export flows are studied. To this end, the authors first analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and, second, they use these changes to construct the dummy variables that they include in their export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specific periods.

Does Economic Integration Affect the Structure of Industries? Empirical Evidence from the CEE

In this paper we study the impacts of regional integration on the structure of industries in the Central and Eastern European (CEE) transition economies. Our empirical analysis is based on the economic geography framework, which is able to predict not only the industry location after integration, but also to capture other general equilibrium effects, such as transition to market economy, which turn out to be highly significant in the CEE. Our empirical results complement previous findings that industry location is strongly related to economic integration. We also find that CEE integration of the Council on Mutual Economic Assistance (CMEA) has distorted the industry location pattern predicted by the underlying economic geography theory. These distortions are higher in those regions that were more integrated in the CMEA. Our ex-ante simulation results suggest a convergence in regional specialisation after CEE integration with the EU.

Competition and contestability in Central and Eastern European banking markets

Purpose – This study sets out to examine the evolution of competitive conditions in the banking industries of 14 Central and Eastern European (CEE) transition economies for the period 1993‐2000.Design/methodology/approach – The basis for the evaluation of competitive conditions is the extant oligopoly theory in the new industrial organization literature, specifically, the competition model developed by Panzar and Rosse.Findings – The results of the competition analysis suggest that the banking markets of CEE countries cannot be characterized by the bipolar cases of either perfect competition or monopoly over 1993‐2000 except for FYR of Macedonia and Slovakia. That is, banks earned their revenues as if operating under conditions of monopolistic competition in that period. An analysis of changes in competitive structure shows a higher degree of competition in the later years of the sample period. Large banks in transition countries are found to be operating in a relatively more competitive environment compa...

Explaining Real Exchange Rate Fluctuations

This paper attempts to explain the sources of real exchange rate fluctuations for a set of advanced economies and Central and Eastern European transition economies. To that end, we first estimate structural (identified) vector autoregression (SVAR) models, and decompose real and nominal exchange rate movements into those caused by real and nominal shocks. We then complete the previous step with an impulse-response analysis. There is evidence of instability in the variance decomposition of the real exchange rates for advanced economies across samples, with a growing importance of nominal shocks. Nominal shocks are also important in some transition economies.

The sociodemographic patterning of health in Estonia, Latvia, Lithuania and Finland

Public health problems in the Baltic countries are typical of Eastern European transition economies. A common assumption is that the economic transition has been particularly difficult for previously disadvantaged groups, and comparative research on the health differences between sociodemographic groups in the Baltic countries is therefore needed. This study compared associations of health with gender, age, education, level of urbanization and marital status in three Baltic countries and Finland. The data were gathered from cross-sectional postal surveys conducted in 1994, 1996, 1998 and 2000 on adult populations (aged 20-64 years) in Estonia (n = 5052), Latvia (n = 4290), Lithuania (n = 7945) and Finland (n = 12796). Three self-reported health indicators were used: (i) perceived health, (ii) diagnosed diseases and (iii) symptoms. The prevalence of less-than-good perceived health (average, rather poor or poor) was higher in the Baltic countries (men 66-56%, women 68-64%) than in Finland (men 35%, women 31%). The odds ratios (with 95% confidence intervals) of less-than-good perceived health among the low educated compared to the highly educated in Estonia, Latvia, Lithuania and Finland were 2.03 (1.49-2.77), 2.00 (1.45-2.76), 2.27 (1.78-2.89) and 1.89 (1.61-2.20) among men, and 3.32 (2.43-4.55), 2.77 (2.04-3.77), 2.07 (1.61-2.66) and 1.89 (1.63-2.20) among women, respectively. Diseases and symptoms were also more common among the lower educated men and women in all four countries. However, urbanization and marital status were not consistently related to the health indicators. The Baltic countries share a similar sociodemographic patterning of health with most European countries, i.e. the lower educated have worse health. The methodological considerations of this study point out, however, that further research is needed to support public health policies aimed at the most vulnerable population groups.

Learning from the General Principles of Company Law for Transition Economies: The Case of Bulgaria

This Article examines the development of company law in Bulgaria. Like Russia and other Eastern European nations such as Czechoslovakia and Poland, Bulgaria engaged in mass privatization. The Bulgarian Big Bang was in 1998 and over a thousand firms were listed on the Bulgarian Stock Exchange. Similar to several other Eastern European transition economies, the Bulgarian market suffered after its opening from mass expropriation of minority shareholder wealth. Two-thirds of all Bulgarian firms were de-listed within three years (1999-2001) of their first trading on the Bulgarian Stock Exchange. Since 2002, however, the Bulgarian market has made a strong recovery. The focus of this Article is on changes in two particular areas of the company law - preemptive and appraisal rights, and their linkage to the turnaround in the Bulgarian market. The old (1999) Bulgarian company law did contain both provisions, but despite these legal protections, more than 80% of the de-listed firms went private without any compensation given to their minority shareholders. The remaining firms were de-listed via tender offers for minority stakes, which occurred at about 25% of fair value, on average. Company law changes that became effective in 2002 kept preemptive and appraisal rights in place, but changed their nature as well as the required regulatory approvals. After company law changes became effective in 2002, the health of the Bulgarian stock market improved dramatically. Tender offers for minority shares decreased in number. Those that did occur began to be at premiums to market value similar to those observed in developed markets. The concentration of ownership in Bulgarian firms began to decrease and liquidity, as measured by the amount of shares traded, began to increase. The valuation of shares also increased markedly. The changes in company law reflect guidance in the Principles of Company Law for Transition Economies. As the authors of the Principles argued, laws must fit the institutional environment of the transition economy. Those laws directly imported from developed markets may fail in transition markets. Consistent with the Principle V, the changes in the Bulgarian law effective in 2002 placed primary emphasis on the protection of minority shareholders. Changes shifted the reliance away from market prices, judges, and required actions by minority shareholders. They increased reliance on bright line rules, and on the automatic creation of transactional options such as veto power and share purchase.

Governance, organizational capabilities, and restructuring in transition economies

This paper focuses on the links between governance, firm capabilities and restructuring following the large-scale privatization process in Central and Eastern European transition economies using an integrative approach. Restructuring in these countries has been motivated by political and institutional changes and less so by market forces. Accordingly, political processes have produced political solutions such as “give-away” privatizations to insiders. These privatizations, in contrast to divestitures to outside owners, have realized less substantive restructuring because non-market incentives, such as too much managerial equity ownership, have created managerial entrenchment. In addition, we propose a connection between governance and organizational learning suggesting that learning is inhibited by excessive managerial ownership and lack of board knowledge regarding its oversight function. Furthermore, this entrenchment and poor board functioning may be perpetuated in financial-industrial groups, which have emerged as substitutes for market intermediaries in emerging economies. Thus, we propose that outside ownership involvement and the development of organizational capabilities may facilitate restructuring in the Central and Eastern European context. Our theoretical arguments are supported by case study evidence from transition economies.

Bridging 'the Great Divide': Countering Financial Repression in Transition

The large and widening gap between economic performance in Eastern European transition economies and those of former Soviet Union has been dubbed the Great Divide by Berglof and Bolton (2002). This paper provides a rationale for gap based upon concept of financial repression. The magnified effects of transition to market can be attributed to government manipulation of financial markets in these countries, with divide defined by length of time that governments relied upon financial-market manipulation to finance government fiscal policy. Policies undertaken to assist in financing government expenditures caused financial repression and financial fragmentation, to use terms introduced by McKinnon (1973). After an introductory section, I introduce a theoretical model of real and financial sectors in transition. The dynamic path to equilibrium from transition is derived. It is shown to have a tendency toward output contraction and hyperinflation when government policies promote financial repression. In third section this hypothesis is examined with macroeconomic data from Ukraine for period 1992 - 2001. This data is consistent with hypothesis, although other factors (e.g., recession in trading partners) are also shown to be important.