Competition, enterprise performance and the investment climate
View Full Text (PDF)
Fields marked with an asterisk * are mandatory.
At the centre of transition is the challenge of reallocating resources and restructuring existing enterprises. This redeployment of resources can arise in two ways. The first is through the reallocation of labour and capital from lower to higher productivity firms and industries. Those firms with a supply capacity in excess of the likely market demand for their products tend to shed resources by laying off employees and by closing down plants. At the same time, those firms– including newly established ones– with market demands in excess of their supply capacity will seek to attract resources by recruiting new employees and by investing in new or second-hand plant and equipment. In fact, large shifts in output and employment across sectors have taken place since the start of transition. However, the available evidence does not indicate that labour is systematically flowing within countries from sectors with relatively low productivity and wages to those with higher productivity and wages as strongly as basic economic considerations might suggest.
The second way in which resources are redeployed is for existing firms to adapt to market demands and to restructure their activities. This restructuring can take many forms. Firms can adjust their activities by developing new products and by upgrading or discontinuing existing ones. Existing plant and equipment can be modified and their employees retrained to meet new production requirements. Firms can attempt to attract new customers and switch suppliers. They can change their organisational structure.
Restructuring activities can be combined with shedding resources that cannot be adapted to new uses and with attracting new employees and investing in new plant and equipment. The two ways of redeploying resources therefore potentially complement each other. However, since available evidence suggests that the sectoral redistribution of labour makes a limited contribution to productivity gains in transition economies, enterprise restructuring is particularly important.
This chapter examines how reforms affecting competition, soft budget constraints, ownership and the "investment climate" have affected the restructuring and growth of enterprises. It uses the results of the Business Environment and Enterprise Performance Survey undertaken by the EBRD in collaboration with the World Bank (see Annex 2.1 to Chapter 2 for a brief description). The chapter first examines the external factors that can influence the activities of the firms in the survey, such as the competition they face in product markets, the softness of budget constraints, their ownership structure and corporate governance, and their perceptions of the investment climate in the country. Second, it characterises the restructuring actions taken by firms, such as recruiting or shedding employees and developing new product lines or upgrading existing ones. Third, it reports on the overall performance of firms, as measured by growth in sales and in labour productivity. In addition to the survey findings, the chapter also draws on a comprehensive review of existing studies of enterprise performance in transition economies to check the robustness of the findings and toexamine issues on which the survey does not yield clear results.
Striking among our findings are the importance of competition, hard budget constraints and the investment climate to the restructuring and growth of enterprises in the survey. Importantly, competition has a strong but "non-linear" relationship to performance. Firms reporting the presence of one to three competitors have developed new products with greater frequency and have much higher sales growth than either firms with a monopoly or those that face strong competition. These findings support the "Schumpeterian" view that strong economic performance is associated with some market power gained through innovation. Firms operating in countries that impose hard budget constraints and that have more favourable investment climates also perform more strongly.
Email to a friend
Printer Friendly
Please Enter Your Comment: |
Rate the Article |
|---|---|
|
|
You need to login for rating the article.
|
Most Rated Articles |
Most Emailed Articles |
Most Viewed Articles |
|---|---|---|
| * Top 3 Articles | ||
