Determinants of Firm Performance and Growth during Economic Recession: The Case of Central and Eastern European Countries

The crisis has hit the corporate sectors of the new EU member states from Central and Eastern European countries (CEECs) more than those of most old EU member states. Taking full account of firms’ heterogeneity, the paper analyses what kind of CEECs firms’ characteristics make some of them more resilient to crisis than the others. Using panel VAR system on a large firm-level dataset we estimate the responses of firms’ employment and investment to cyclical demand shocks and financial shocks. Controlling for industry, time and country differences, we split firms according to size, age, export status, foreign versus domestic ownership and pre- vs. during crisis growth in order to compare firms’ responses between distinct splits. We find that cyclical drop in demand decreases firms’ employment in subsequent periods but there is substantial heterogeneity among different types of firms. Old and especially small old firms react more swiftly, whereas downward adjustment in employment is less severe in exporters and in foreign-owned firms. On the other hand, investment does not respond to demand shocks per se, but to free cash flow component of the business cycle. It is large young firms that are the most and small young firms that are the least responsive to financial shocks in terms of investment activity. In contrast to employment adjustments, exporters adjust their investment activity to cash flow availability to a larger extent than non-exporters. Differences in country specific settings also show important impact on firms’ resistance to crisis. The quality of legal institutional environment in a country is positively correlated with the employment sensitivity to shocks but it has no discernible effect on investment sensitivity. On the other hand, political and economic institutions make employment more stable over the cycle.