Mass Privatization Program Research Articles

Internationalization of family firms-challenges and opportunities in Russia

The family firms (FFs), especially the small and medium-sized enterprises (SMEs), play an instrumental role in the economic spectrum of the Russian economy with respect to their contribution to income, output, and employment, ceteris paribus. The FFs not only contribute the domestic business activities but also make a significant contribution to international business. Ever since the launch of the mass privatization program (MPP) in Russia during 1992–1994 numerous disruptions on the business and economic landscape of Russia have emerged, and as a result, the FFs in Russia have been experiencing several new opportunities and challenges in the international market. However, it is noticeable that corporate regulatory, and corporate governance systems do not even clearly define the FFs. The current study explores the following research objectives. First, the motivation of internationalization of FFs in Russia; second, their process of internationalization, and third, the problems and challenges faced by the FFs. Different theoretical perspectives have been discussed to problematize and analyze the research objectives of the study. The current qualitative study is based on the semi-structured interview method. As many as ten FF entrepreneurs, representing five different industries, have been analyzed. The findings show that there is neither clarity nor unanimity of the very meaning and understanding of FFs in Russia. The lack of regulated bank credit and the existence of a complex taxation system dissuade the FFs from investing in new ventures and undertaking innovative activities. Similarly, the government’s directives to set up business operations at certain specified business facilities, at the exorbitant costs though, has created downward pressure on the profitability of FFs. Many FFs have initiated their international business activities owing to their growing linkages with the external contingencies, developed over time. Similarly, internationalization has increased the competitiveness of the FFs in the Russian domestic market too.

The Impact of Privatisation of Healthcare Equipment and Technology SOEs on Productivity in Africa

Upon the attainment of independence many African countries emerged with a new spirit of entrepreneurial governance and domestic industrialization. However with time, most of the state owned enterprises (SOEs) set up have been privatized largely because of mismanagement, huge deficits and operational inefficiencies created by many factors. In all material moments, the objective of divesture of SOEs was to stimulate efficiency, productivity and relieve the state of the huge financial burden they bring. Our study examines the methods of privatization of healthcare technology and equipment SOEs in Africa and their impact on post-divestiture productivity based on cases from Ghana, Nigeria, Tanzania and Kenya.We simultaneously collect and model privatization data from International Monetary Fund (IMF) and the World Bank relating to Ghana, Nigeria, Tanzania and Kenya. These were data submitted to the IMF and World Bank as part of the measures to implement the different forms of economic recovery and structural adjustment programs in the respective countries. Our empirical strategy follows the broader literature in estimating reduced form equations for firm performance as a function of ownership, while trying to account for potential problems of heterogeneity (observed and unobserved) and simultaneity bias. We note the insider/employee shareholding accounted for only 23.6 percent of privatization of healthcare equipments and technology manufacturing enterprises on average while mass privatization program accounts for 18.2 percent of the privatization mode. We note that each of these methods yield positive post divestiture labour productivity. However privatization of healthcare equipment and technology manufacturing enterprises by block sale to outside investors generated the highest form of labour productivity.

Was RASDAQ Doomed from the Start? A Preliminary Investigation

The re-opening of Bucharest Stock Exchange in November 1995 and the start of RASDAQ in October/ November 1996 were both prompted by the Mass Privatization Program results. RASDAQ was established as an alternative equity exchange where the bulk of the 6,000 privatized companies should be listed, according to the Romanian regulations related to privatization. The present paper will present a survey over RASDAQ covering the period since its start in November 1996 until the end of December 2013. It will also try to answer, in the end, what RASDAQ future might be taking into consideration the survey findings in combination with empirical investigations regarding the influence of Bucharest Stock Exchange over RASDAQ, the presence/absence of anomalies and the quality of listed companies. The findings implies that RASDAQ was rather a market preferred by those investors who were involved in the ownership concentration process and was only secondary considered as an alternative for portfolio investments. For the current period, the free float of a company, the transparency of the respective company and the ownership structure seems to be factors that play a role in the trading decision of portfolio investors. The findings also support the idea that despite the good intentions of offering a fair a transparent trading platform for million of shareholders, the combination of bad decisions and relax regulation created the mix of factors that eroded potential investors’ confidence in RASDAQ. The tainted image gained during the first period of its existence followed RASDAQ until the present with the unavoidable consequences of investors’ interest in continuous decline.

Mass Privatization, State Capacity, and Economic Growth in Post-Communist Countries

Why did the transition from socialism to capitalism result in improved growth in some countries and significant economic decline in others? Scholars have advanced three main arguments: (1) successful countries rapidly implemented neoliberal policies; (2) failures were not due to policies but to poor institutional environments; and (3) policies were counterproductive because they damaged the state. We present a state-centered theory and empirically demonstrate for the first time one of several possible mechanisms linking neoliberal policies to poor economic performance: mass privatization programs, where implemented, created a massive fiscal shock for post-communist governments, thereby undermining the development of private-sector governance institutions and severely exacerbating the transformational recession. We performed cross-national panel regressions for a sample of 25 post-communist countries between 1990 and 2000 and found that mass privatization programs negatively affected economic growth, state capacity, and property rights protection. We further tested these findings with firm-level data from a representative survey of managers in 3,550 companies operating in 24 post-communist countries. Within countries that implemented mass-privatized programs, newly privatized firms were substantially less likely to engage in industrial restructuring but considerably more likely to use barter and accumulate tax arrears than their state-owned counterparts.

Evaluation of Mass Privatization in Bulgaria

The mass privatization (MP) program in Bulgaria was implemented in 1996–1997. Following programs in countries like the Czech Republic, more sophisticated regulatory bodies were put into place to prevent the kind of abuses observed elsewhere. This study finds that Bulgaria avoided some of the extreme problems that manifested themselves in these other countries, but there were still serious problems of dilution of shareholder value. We find that dilution in Bulgaria is similar in both MP firms and non-MP firms. After a number of years have passed, MP firms have performed better than firms privatized by other means or firms that were never privatized.

The Choice of Ownership Structure: Evidence from Russian Mass Privatization

In a comprehensive data set of 530 Russian manufacturing firms we observe high and gradually decreasing ownership stakes of firm insiders, i.e. managers and workers. We estimate the determinants of the decision to privatize a firm in the mass privatization program (1992-94) and of the resulting initial ownership distribution. For estimating the latter we use a tobit model with sample selection. The paper presents empirical tests for predictions of the model of ownership choice in insider privatization by Aghion and Blanchard (1998). In particular, we find that collusion among workers is important in their decision to sell shares to outsiders and raises their stake. Also, firms in financial distress show a higher incidence of insiders selecting the option of privatization leading to high insider ownership. This can be explained by the desire of insiders to insure against unemployment by acquiring more shares in those companies. No evidence is found of a sequencing in privatization according to the performance of firms before privatization.

The choice of ownership structure: Evidence from Russian mass privatization

We use a large data set of Russian manufacturing firms to describe the ownership structure in the Russian industry at the end of the mass privatization program in 1994 and its subsequent evolution. The data shows a high, but gradually decreasing ownership stakes of firm insiders (managers and workers). We estimate the effect of a wide range of firm characteristics on the decision to privatize, the initial ownership structure after privatization, and on subsequent changes of ownership stakes. We test and find support for several predictions of the model by Aghion and Blanchard (1998). For example, collusion among workers makes them more reluctant to sell shares to outsiders. Firms in financial distress show a higher incidence of insiders selecting the option of privatization leading to high insider ownership. This can be explained by their desire to insure against unemployment in the case of restructuring by outsiders. No evidence is found of a sequencing in privatization according to the performance of firms before privatization. A methodological novelty of this paper is the application of a tobit model with sample selection to the choice of ownership stakes.

Investment Strategies Applied During the Mass Privatisation Wave in Central and Eastern Europe: The Case of Bulgaria

The aim of this paper is to look at the results from the mass privatisation in Bulgaria as one of the basic pillars of structural reform. A database from the first wave of the mass privatisation was used for the secondary analysis of the investment strategies of the Bulgarian privatisation funds. We grouped the 82 Privatisation Funds registered in Bulgaria in 4 groups according to their invested capital: Large Funds, Medium, Small and Micro Funds, and we analysed their investment strategies, employed during the three auctions for mass privatisation. Particular attention was paid on the analysis of their industrial and locational participation, along with their interest in firms of different size and varying control opportunities. A typology of privatised firms by size, main shareholders, market share and industries reveals a complex picture of restructuring of ownership and industrial linkages. Special attention is placed on the analysis of the use of specific financial instruments, such as privatisation bonds. Our comparrison of the mass-privatisation programmes in Poland, the Czeck Republic, Russia and Bulgaria reveils similarities and unique features in each country.

Mass privatisation and the post-communist mortality crisis: a cross-national analysis

During the early-1990s, adult mortality rates rose in most post-communist European countries. Substantial differences across countries and over time remain unexplained. Although previous studies have suggested that the pace of economic transition was a key driver of increased mortality rates, to our knowledge no study has empirically assessed the role of specific components of transition policies. We investigated whether mass privatisation can account for differences in adult mortality rates in such countries. We used multivariate longitudinal regression to analyse age-standardised mortality rates in working-age men (15-59 years) in post-communist countries of eastern Europe and the former Soviet Union from 1989 to 2002. We defined mass privatisation programmes as transferring at least 25% of large state-owned enterprises to the private sector within 2 years with the use of vouchers and give-aways to firm insiders. To isolate the effect of mass privatisation, we used models to control for price and trade liberalisation, income change, initial country conditions, structural predispositions to higher mortality, and other potential confounders. Mass privatisation programmes were associated with an increase in short-term adult male mortality rates of 12.8% (95% CI 7.9-17.7; p<0.0001), with similar results for the alternative privatisation indices from the European Bank for Reconstruction and Development (7.8% [95% CI 2.8-13.0]). One mediating factor could be male unemployment rates, which were increased substantially by mass privatisation (56.3% [28.3-84.3]; p<0.0001). Each 1% increase in the percentage of population who were members of at least one social organisation decreased the association of privatisation with mortality by 0.27%; when more than 45% of a population was a member of at least one social organisation, privatisation was no longer significantly associated with increased mortality rates (3.4% [95% CI -5.4 to 12.3]; p=0.44). Rapid mass privatisation as an economic transition strategy was a crucial determinant of differences in adult mortality trends in post-communist countries; the effect of privatisation was reduced if social capital was high. These findings might be relevant to other countries in which similar policies are being considered.

Social Costs of Mass Privatization

According to leading economic theorists, creating capitalism out of communism requires rapid privatization. In this article we empirically test the welfare implications of privatization policies in Post-Soviet countries by using cross-national panel mortality data as an indicator of social costs. We find that rapid privatization - whether measured by a novel measure of mass privatization program implementation or Enterprise Bank for Reconstruction and Development privatization outcome scores - is a critical determinant of life expectancy losses, and that when privatization policies are reversed, life expectancy improves. Using selection models, we show that endogeneity understates the social costs of rapid privatization.

Changes in Ownership Concentration in Mass Privatised Firms: evidence from Poland and the Czech Republic

We analyse the changes in ownership concentration in firms included in two mass privatisation programmes in Poland and the Czech Republic. We find that despite important differences in the design of the two privatisation schemes and despite different quality of regulatory environments, the ownership structure emerging 4–5 years after the initial distribution of assets is remarkably similar in the two countries. Ownership concentration defined as the share of the largest equity holder has significantly increased. Exploring the determinants of ownership concentration, we check whether such revealed preference for higher participation in firm equity does not hide different motivations and behaviour of investors. Our results reveal interesting differences between the two countries: in the Czech Republic the increase in ownership concentration was less likely in poorly performing firms, while in Poland the quality of past performance did not affect investors' willingness to increase their holdings. This contrasting result may reflect the difference in the quality of laws and regulations in Poland and in the Czech Republic. In the Czech Republic, where tunnelling was a common practice in the period covered by our study, shareholders increasing their stakes in a company could have been motivated by the objective of extracting value rather than by the willingness to impose a specific direction on the way the firm is managed. This might explain why they prefer to increase their control in those companies which perform well rather than those that perform poorly.

Privatization and State Capacity in Postcommunist Society

Economists have used cross-national regression analysis to argue that postcommunist economic failure is the result of inadequate adherence liberal economic policies. Sociologists have relied on case study data to show that postcommunist economic failure is the outcome of too close adherence to liberal policy recommendations, which has led to an erosion of state effectiveness, and thus produced poor economic performance. The present paper advances a version of this statist theory based on a quantitative analysis of mass privatization programs in the postcommunist world. We argue that rapid large-scale privatization creates severe supply and demand shocks for enterprises, thereby inducing firm failure. The resulting erosion of tax revenues leads to a fiscal crisis for the state, and severely weakens its capacity and bureaucratic character. This, in turn, reacts back on the enterprise sector, as the state can no longer support the institutions necessary for the effective functioning of a modern economy, thus resulting in deindustrialization. Using cross-national regression techniques we find that the implementation of mass privatization programs negatively impacts measures of economic growth, state capacity and the security of property rights.

Evaluation of Mass Privatization in Bulgaria

The mass privatization program in Bulgaria was implemented in 1996-97. Following programs in countries like the Czech Republic, more sophisticated regulatory bodies were put into place to prevent the kind of abuses observed elsewhere. This study finds that Bulgaria avoided some of the extreme problems that manifested themselves in these other countries, but there were still serious problems of dilution. Dilution is similar in both mass privatization firms and nonmass privatization firms. Dilution is associated with positive performance, suggesting that more concentrated ownership has had some benefits. Even after a number of years have passed, mass privatization firms have performed less well than firms privatized by other means.

Impact and Significance of State-Owned Enterprise Restructuring in China

The transformation of China's state-owned enterprises (SOEs) over the past decade has resulted in remarkable changes to the structure of the Chinese economy. Gaizhi, the Chinese term meaning transforming the system, has become a major phenomenon in most parts of the country and in many cases has involved privatization. The term gaizhi is used to describe any form of structural change to a firm, including public offering of shares, internal restructuring, bankruptcy and reorganization, employee shareholding, open sales, leasing and joint ventures. Unlike the mass privatization programs that occurred in Eastern Europe and the former Soviet Union, the Chinese government's gaizhi programs have been gradual and low-profile. However, the significance of the Chinese reform should not be underestimated. Based on a 683-enterprise survey conducted in 11 cities in 2002,1 this paper reviews the trends of privatization, discusses the forms of gaizhi, analyzes the issues emerging in the process of gaizhi, especially the handling of state and land-use rights and re-employment, and compares firm performance before and after gaizhi. The aim of this paper is to give the reader an overview of the restructuring process in China, and to analyze some of the key issues. Several key conclusions have emerged from the study. First, restructuring has become more oriented towards privatization over recent years. Privatization here means an increase in the share of ownership held by private investors. Second, the so-called loss of state assets has occurred mainly in the form of * We are grateful for the useful and constructive comments made by the two anonymous referees and to the editors of The China Journal for providing additional insightful comments and relevant references. We thank the International Finance Corporation for allowing us to use the survey data in this paper. The views expressed in this paper are ours. 1 The authors are principal researchers in this survey. The survey adopted a research strategy that combines structured questionnaires distributed to firms selected by random sampling with face-to-face interviews with government officials and enterprise management selected to provide insights into the privatization process and its outcomes. While the sampling provides quantitative data, the interviews reveal rich qualitative information regarding different government policies and various problems that have been encountered in gaizhi.

Explaining Postcommunist Economic Performance

This article critiques neoliberal transition theory from a neoclassical sociological perspective. Neoliberals argue that postcommunist economic failure is the result of inadequate adherence to neoliberal precepts. This paper argues that the neoliberal policy package of Shock Therapy (consisting of the radical transition to a market economy through rapid and extensive price and trade liberalization, stringent monetary and fiscal stabilization, and the implementation of a mass privatization program) creates severe supply-and-demand shocks for enterprises, inducing firm failure. This leads to a fiscal crisis for the state, and an erosion of its capacity and bureaucratic character. This in turn reacts back on the enterprise sector, since the state can no longer support the institutions necessary for the effective functioning of capitalist economies. The neoliberal theory is tested against a neoclassical sociological theory by examining the experience of 12 postcommunist countries and two reform Asian communist countries.

Operating Performance of Privatized Companies in Transition Economies - The Case of Poland, Hungary and the Czech Republic

We examine operating performance of 154 Polish, Hungarian and Czech companies that were fully or partially privatized between January 1990 and December 1998. Overall, our results are different from results of similar studies on operating performance of companies privatized in developed and other developing countries (Souza and Megginson, 1999; Boubakri and Cosset, 1998). For example, privatized firms in our sample did not manage to increase profitability, and significantly reduced efficiency and output in the post-privatization period. Enterprises privatized through mass privatization programs (Czech SOEs) achieved lower profitability in the post-privatization period compared to their counterparts privatized through case-by-case method. Czech companies have also maintained much higher bank borrowings after privatizations then their Polish and Hungarian counterparts. We further document that private sector IPOs underperform their privatization counterparts in terms of profitability, efficiency, capital investments and output. Finally, firms' size does not seem to influence key performance measures in selected countries.

Financial Sector Development in Transition Economies: Lessons from the First Decade

The first decade of transition witnessed rapid and tumultuous financial sector development. Although, few transition economies have reached the point where institutions and markets fulfill all the functions of market based financial intermediation, progress has been much more rapid than had been anticipated. In many countries, active market-oriented financial institutions function where there was only a state planning mechanism a decade ago. Initial experiences showed that bank privatization programs often failed to achieve independence from government control and from undesirable weak clients. It is now widely accepted that the participation of foreign strategic investors in banking is an effective way of meeting these goals Capital market development is complicated by the need to support the development of institutional infrastructure and regulatory mechanisms while at the same time avoid interfering in the markets. In many instances policy makers expected immature markets and institutions to accomplish unattainable goals. Equity markets cannot be effectively support mass privatization programs. There are still many missing pieces in virtually all of the transition country capital markets.

The Institutional Shareholder – Best Practice: the National Investment Funds’ experience

One of the most important achievements of the National Investment Funds’ Programme – the implementation of the Mass Privatisation Programme – is its input into the process of building a Polish corporate governance infrastructure. Experience in the creation and operation of corporate governance systems as accumulated by the National Investment Funds (NIFs) is a valuable source of knowledge on a group of shareholders in Polish companies that is continuously expanding and diversifying in terms of identity. The action model applied to the National Investment Funds made possible the collecting of the first Polish experiences regarding the behaviour of institutional investors in supervisory processes. In its turn, the positioning of the Funds in such a role matched observations of world trends where ownership functions are concentrating in the hands of institutional investors. The objective of this study is to demonstrate the experience of National Investment Funds in the context of the achievements of institutional investors acting in mature market economies in the realm of corporate governance. Experience accumulated by the NIFs shows that the process of building efficient corporate governance structures is not a simple task. Analysis of their achievements in safeguarding their interests from the point of view of the institutional investor has confirmed the importance of an active stance in this sphere.

The Evolution Trajectories of Voucher Funds: Towards Western-type Institutional Investors? The Case of the Czech Republic and Bulgaria

The implementation of similar mass privatization programs in the Czech Republic and Bulgaria led to the emergence of hybrid voucher funds. The contradictions stemming from this hybrid nature gave rise to the evolution of the funds' nature and of their place in the national ownership structure. The dynamics of this evolution is apprehended through a comparative study of the portfolios of a sample of funds between 1998 and 2000. We show how the interaction between the strategies of economic actors have shaped two transformation paths of the initial funds: holding companies on one hand and more ordinary collective investment vehicles on the other, the Czech and Bulgarian evolutions being divergent. We also discuss to what a degree these mutations bring these funds closer to Western-type institutional investors, showing that there is some convergence, but also the emergence of original forms.

Lessons from Corporatization and Corporate Governance Reform in Russia and China

This paper, a presentation to the Vietnamese authorities Hanoi October 2001 at the International Conference on Corporate Governance Development Vietnam, compares the history of enterprise policy reforms Russia and China. While Russia's privatization program was more rapid than that of other EE/CEE/CIS countries, China has embarked on a slower path of corporatization the context of a socialist market Russia's mass privatization program (MPP) created over 41 million private Russian shareholders via direct shareholdings individual firms or voucher investment funds, and 70% of the 76,000 privatizations under the MPP were sales of majority shares mostly to workers and other insiders (MEBOs). Mass privatization was conducted quickly despite nascent institutional reforms-in corporate governance, competition policy, accounting, and capital markets-to lock in transition to a private enterprise-based economy. But the subsequent loans-for-shares program, which the government gave controlling shares the largest/most attractive firms as collateral to financial industrial groups (FIGs) exchange for loans to budget, lacked transparency and raised serious concerns about equity, concentration of market power, and weak corporate governance incentives. Today, perhaps the key policy issue confronting the Russian authorities is the weak extent of inter-enterprise competition: many incumbent firms exercise market power based on vertical and horizontal structural dominance and new business start-ups face significant economic and policy barriers to entry. In China, the SOE sector has been the Achilles heel of the country's otherwise remarkable economic performance over past two decades. Since 1978, innovative, if often administrative, institutional reforms have begun to achieve Chinese goal of separating government from businesses. Privatization and corporatization of SOEs is occurring, mostly involving small and medium sized firms. Decentralization has engendered discretion to localities. But the Chinese State still maintains ownership/control of key enterprises. Under the socialist market economy government agencies attempt to carry out shareholder functions typically performed by private owners a market economy. For largest businesses, creation of holding groups the main form of restructuring. There is real progress some areas, but portions of the strategy are contradictory, producing unanticipated distortions and resource drains, spilling over to financial and social sectors, jeopardizing core elements of the overall economic reform program. The paper concludes by drawing several key lessons from the Russian and Chinese experiences, designed to facilitate progress Vietnam's own program of equitization.