Firm Growth and Survival in a Transition Country: Micro Evidence from Slovenia

This paper investigates the determinants of firm survival and growth in Slovenia, a country in transition from a plan to a market economy. Firm growth (measured using employment) and firm survival (the probability of remaining in activity) are estimated using firm level data for the years 1994 to 1998. Both the OLS and the Heckman selection correction models are used to estimate a basic model of firm growth adjusted to analyse the specific context of transition. The performance of Slovenian firms that survived from 1994 until 1998 is studied using firm and industry pre-transition conditions so as to understand what type of firms best survived and performed in the transition process. Firm performance is assumed to be a function of several factors including initial firm size, ownership, firm innovation, trade orientation, capital intensity, firm financial constraints, firm costs and profitability, sunk costs or minimum efficiency scale, and market structure. Evidence suggests that, in Slovenia, during the first four years of transition, private and foreign owned firms, whose activity involved foreign trade, and potentially more capital intensive, grew the fastest. Small firms grew more than medium firms did, and also did large firms. Large firms or those with initial positive profits were more likely to remain in activity whilst firms with ill financial health, high costs, or involved in foreign trade were more likely to close down. This suggests that firms that are trading internationally are exposed to more competitive pressure and therefore are more likely to fail, however, once they survive they will also have a superior growth performance. It may also indicate that firms in Slovenia face hard budget constraints.