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Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises

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  • Lubomir Lizal

Abstract

The paper analyzes investment behavior of industrial enterprises in the period immediately following price and foreign trade liberalization in the Czech Republic. It also focuses on the effect of "soft" macroeconomic environment on the microeconomic decisions. A dynamic investment function with symmetric adjustment cost function based on the Euler equation has been estimated. The derived and estimated investment function accounts for export sales in order to determine whether firms evaluate production for domestic and foreign markets differently, i.e, use the advantage of an undervalued currency. The estimation was conducted on two-year firm-level panel data from 1992 and 1993. The first major result of the empirical analysis suggests that there is no evidence that firms treat domestic sales and exports differently in the context of the adjustment cost function. The second remarkable finding contradicts the common view that firms in the transitional environment have short-term horizons. Both these findings could be interpreted as strong evidence against the idea of economic policy helping firms within a temporary soft macroeconomic environment. No evidence was found against the applicability of the constant returns to scale assumption on the Cobb-Douglas production function within the analyzed framework.

Suggested Citation

  • Lubomir Lizal, 1999. "Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises," William Davidson Institute Working Papers Series 235, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1999-235
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    More about this item

    Keywords

    investment; enterprises; adjustment costs; tansition; soft budgeting;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F19 - International Economics - - Trade - - - Other
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform

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