Determinants of industrial restructuring in the pre-accession transition economies: the case of Czech Republic, Hungary and Poland

In this paper we have investigated the impact of changes in demand and supply conditions and government policy instruments on output and employment responses at industry level. The output response seems to be in line with the general expectation: firms respond positively to changes in domestic or foreign demand (and the industry output increases too). Unit labour costs seem to have a negative impact while investment activities have a positive impact on the response. Government policy instruments, on the other hand, do not seem to impact the output response of firms (and thus of industries). We have measured industrial restructuring in a particular way: the absolute value of changes in the relative share of each industry in total manufacturing employment, i.e., restructuring is the outcome of the intervention by the firms’ management irrespective of whether it has resulted in a reduction or an increase in employment (and whether the reduction in employment has been the outcome of passive or active restructuring). Had we not used the absolute value of change, the implication would have been that a decrease in demand, e.g., would have slowed down the restructuring process. Given our definition of restructuring, we have shown that adversity forces firms’ managers to react. A decline in domestic demand or exports, an increase in labour cost, and a decline in profitability will all lead to restructuring. The relationship is stronger in some countries than others and depends on the functional form used. Again, government policy instruments do not seem to have a strong impact on the process. This will support the view that the ultimate motives for firms to lobby governments (sometime successfully) to use their resources in an attempt to speed up the restructuring process through beneficial taxes and subsidies are to maintain the status quo and postpone the painful restructuring process.