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Efficiency and Market Share in Hungarian Corporate Sector

  • Laszlo Halpern
  • Gabor Korosi

One of the major tasks facing a transition economy is to create the competitive environment of a properly functioning market economy. It is widely believed that competition has a positive effect on efficiency, but the theoretical and empirical support is quite scarce. The objective of this paper is to investigate the link between competition and efficiency for the Hungarian corporate sector during various phases of the transition process. We employ frontier production functions for exploring differences among groups of firms, and for identifying the typical adjustment process of each group separately throughout the transition period until 1997. Groups are defined according to industries, size, and ownership. The estimated production functions indicate a gradual improvement in efficiency and a shift from decreasing to increasing returns to scale due to a growing share of small firms entering higher returns regimes. Market share can be explained by the degree of internal and external competition and by the efficiency of the firm. Transitional recession in 1990-1 was followed by a fast consolidation period, with rapidly increasing firm level efficiency and improving returns to scale. This consolidation period ended in 1994-5, after that mean firm level efficiency only changed slowly. Massive investments largely increased the market share of the better performing firms and sectors, resulting in rapid economic growth. However, this economic growth may become vulnerable if productive efficiency fails to improve faster.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 333.

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Length: pages
Date of creation: 01 Jul 2000
Date of revision:
Handle: RePEc:wdi:papers:2000-333
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  1. Aghion, Philippe & Blanchard, Olivier J & Carlin, Wendy, 1994. "The Economics of Enterprise Restructuring in Central and Eastern Europe," CEPR Discussion Papers 1058, C.E.P.R. Discussion Papers.
  2. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  3. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
  4. Nickell, Stephen & Nicolitsas, Daphne & Dryden, Neil, 1997. "What makes firms perform well?," European Economic Review, Elsevier, vol. 41(3-5), pages 783-796, April.
  5. S Estrin & P Hare, 1992. "Firms in Transition: Modelling Enterprise Adjustment," CEP Discussion Papers dp0089, Centre for Economic Performance, LSE.
  6. Kalirajan, K. P., 1997. "A measure of economic efficiency using returns to scale," Economics Letters, Elsevier, vol. 56(3), pages 253-257, November.
  7. Otto, Glenn, 1999. "The Solow Residual for Australia: Technology Shocks or Factor Utilization?," Economic Inquiry, Western Economic Association International, vol. 37(1), pages 136-53, January.
  8. Hay, Donald A & Liu, Guy S, 1997. "The Efficiency of Firms: What Difference Does Competition Make?," Economic Journal, Royal Economic Society, vol. 107(442), pages 597-617, May.
  9. Brown, J David & Earle, John S, 2000. "Competition And Firm Performance: Lessons From Russia," CEPR Discussion Papers 2444, C.E.P.R. Discussion Papers.
  10. Laszlo Halpern & Gabor Korosi, 1998. "Corporate Structure and Performance in Hungary," William Davidson Institute Working Papers Series 187, William Davidson Institute at the University of Michigan.
  11. Brada, Josef C & King, Arthur E & Ma, Chia Ying, 1997. "Industrial Economics of the Transition: Determinants of Enterprise Efficiency in Czechoslovakia and Hungary," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 104-27, January.
  12. Konings, Jozef & Repkin, Alexander, 1998. "How Efficient are Firms in Transition Countries? Firm-Level Evidence from Bulgaria and Romania," CEPR Discussion Papers 1839, C.E.P.R. Discussion Papers.
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