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Defensive and Strategic Restructuring of Firms during the Transition to a Market Economy

  • Polona Domadenik


  • Janez Prašnikar


  • Jan Svejnar


We develop a theoretical framework and provide empirical estimates of the extent of several forms of restructuring in 130 privatized firms in a model transition economy (Slovenia) during the 1996-1998 period. In view of the institutional developments in the transition economies, we divide restructuring into defensive (related to short-term cutting costs) and strategic (focused on increasing revenues through investment). Using predictions from the theoretical framework, we estimate a firm-level labor demand equation to test defensive restructuring and an augmented investment equation to assess strategic restructuring. The labor demand estimates point to relatively slow defensive restructuring, while the investment model estimates indicate the presence of credit rationing and bargaining in most types of soft investment. We do not find support for the hypothesis that firms treat expenditures on employee training as investment, but there is evidence that they behave similarly as those from developed countries in that they display features of profit maximizing behavior.

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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 541.

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Length: 39 pages
Date of creation: 01 Feb 2003
Date of revision:
Handle: RePEc:wdi:papers:2003-541
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  1. Jan Svejnar, 2001. "Transition Economies: Performances and Challenges," William Davidson Institute Working Papers Series 415, William Davidson Institute at the University of Michigan.
  2. Lubomír Lízal & Jan Svejnar, 2002. "Investment, Credit Rationing, And The Soft Budget Constraint: Evidence From Czech Panel Data," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 353-370, May.
  3. Blanchard, Olivier & Rhee, Changyong & Summers, Lawrence, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 115-36, February.
  4. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-country Survey," William Davidson Institute Working Papers Series 376, William Davidson Institute at the University of Michigan.
  5. J. Stiglitz, 1999. "Whither Reform? Ten Years of the Transition," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 7.
  6. Lubomir Lizal & Miroslav Singer & Jan Svejnar, 2001. "Enterprise Breakups And Performance During The Transition From Plan To Market," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 92-99, February.
  7. Saul Estrin, 2002. "Competition and Corporate Governance in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 101-124, Winter.
  8. Nandini Gupta & John C. Ham & Jan Svejnar, 2000. "Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic," William Davidson Institute Working Papers Series 323, William Davidson Institute at the University of Michigan.
  9. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  10. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  11. Wendy Carlin & John Van Reenen & Toby Wolfe, 1995. "Enterprise restructuring in early transition: the case study evidence from Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 427-458, December.
  12. Charles P. Himmelberg & Bruce C. Petersen, 1991. "R&D and internal finance: a panel study of small firms in high-tech industries," Working Paper Series, Macroeconomic Issues 91-25, Federal Reserve Bank of Chicago.
  13. Gabor Korosi, 1998. "Labour Demand During Transition in Hungary," William Davidson Institute Working Papers Series 116, William Davidson Institute at the University of Michigan.
  14. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  15. Simeon Djankov & Peter Murrell, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 739-792, September.
  16. repec:fth:harver:1491 is not listed on IDEAS
  17. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  18. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  19. Chandler Jr. , Alfred D., 1993. "Organizational Capabilities and Industrial Restructuring: A Historical Analysis," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 309-337, June.
  20. Stephen Bond & Costas Meghir, 1990. "Dynamic Investment Models and the Firm's Financial Policy," CEPR Financial Markets Paper 0013, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  21. Shirley, Mary & Walsh, Patrick, 2000. "Public versus private ownership : the current state of the debate," Policy Research Working Paper Series 2420, The World Bank.
  22. Alan Bevan & Saul Estrin & Mark E. Schaffer, 1999. "Determinants of Enterprise Performance during Transition," CERT Discussion Papers 9903, Centre for Economic Reform and Transformation, Heriot Watt University.
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