1. 1 Enterprise Restructuring in Industry By Saul Estrin Adecco Professor of Business and Society, London Business School Notes for presentation at “Belarus:” Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth, June 29 th 2005

2. 2 Objective of Paper  Summarise finding from survey of Belarusian firms  Describe enterprise performance– profits, sales, exports, restructuring  Explain performance in terms of e.g. ownership, sector, location and firm size  Compare findings with those from other transition economies  Interpret findings and draw policy conclusions

3. 3 Outline of Presentation  Organising framework and empirical specification  Description of enterprise performance  Empirical analysis of enterprise performance  Interpretation of results and policy conclusions

4. 4 Organizing Framework  Draws on literature about the effects of privatization on enterprise performance e.g., Megginson and Netter, 2001 on developed and middle income countries Djankov and Murrell, 2002 on transition economies  Ideas of the literature can be summarised in two “hypotheses”

5. 5 Framework for Empirical Work Hypothesis 1 Privatized firms will perform “better” than state owned ones Reasons  Sharper incentives for managers  Superior corporate governance  Effective monitoring of management performance But  Depends on which firms were privatized  Depends on how firms were privatized – new owners  Depends on institutional environment – competition, property rights, hard budget constraints

6. 6 Framework for Empirical Work 2 Hypothesis 2 De Novo (DN) Firms will perform better than state owned firms (SOEs) or privatized firms (FSOEs) Reasons  No need to restructure  Firms created as market oriented institutions  Selection process in formation/survival of new firms implies managers/workers better But  May be small and not able to reap scale economies  May face financial constraints

7. 7 From Hypotheses to Testing Hypotheses suggests:  “Performance” depends on ownership (state, privatized, new firms) and a set of control variables which explain performance Therefore need to specify:  Appropriate measures of performance  Appropriate categories of ownership  Appropriate set of control variables

8. 8 Measures of Enterprise Performance No single “correct” measure,  Performance: profitability/ labour productivity  Efficiency – and growth in efficiency  Speed of enterprise adjustment – sales, employment, exports, exports to Western markets  Restructuring Short term (financial/property) Long term (strategic)

9. 9 Control Variables  Company size  Sector  Region  Presence of Joint Ventures (JVs)  Hardness of budget constraints  Impact of competition  Managerial quality  Extent of ownership of company shares by management (insiders)

10. 10 ENTERPRISE PERFORMANCE AND RESTRUCTURING IN BELARUS Quantitative Evidence of Restructuring – See Table 1  Firms large, even DNs  Export shares low. DNs export less, SOEs more  Exports to West low  Managerial turnover limited, especially in SOEs  JVs very rare  Overall, compared with Poland in 1994 or Russia in 1996, little evidence of restructuring

11. 11 Enterprise Performance 2 Performance Indicators:  Most firms expect growth in sales. Only minority expect growth in exports and profits – Table 2  Managers in SOEs and FSOEs more positive than in DNs  Profits and bank loans most important sources of investment funds. FD1 rare (Table 3)  DNs do less well from banks/capital market  Subsidies declining but still common. Mainly tax concessions, writing off arrears and targeted budget financing  Subsidies discriminate in favor of SOEs and FSOEs against DNs

12. 12 Enterprise Performance 3 Social Assets:  Levels of social provision by enterprise still extraordinarily high – almost no restructuring (Table 4) Qualitative Indicators of Restructuring:  Average level of restructuring very low (Table 5-8)  Privatized firms not doing more restructuring than state owned ones  DNs restructure less – because they do not need to!

13. 13 What Leads to Differences in Performance?  Four categories of performance variable Company performance/sales per workers (SL), profits/sales (PS)) Export performance (exports (EX), export growth (DEX), export growth to West (DEX1)) Changes in company performance (growth in sales (DSL), growth in employment (DEMP)) Qualitative measures of restructuring property (PR) and strategic (SR))

14. 14 Results Company Performance  No significant determinants of productivity except sector, monopoly power and perhaps managerial ownership  Privatized firms less productive  No significant determinants of profitability except sector  Privatized firms more profitable

15. 15 Results 2 Exports  Big firms exports more, increase exports more, increase to West more  Poor managerial quality (long service) reduces export performance  Exports levels associated with subsidy  No ownership effect except DNs export more  Export potential to West highest in timber, woodworking and food.

16. 16 Results 3 Changes in Enterprise Performance  Employment growth not related to company size, subsidy or competition  Insider owned firms reduce employment more slowly  No ownership effects on change of employment  Productivity growth associated with strategic restructuring and subsidies  Length of managerial experience service hinders productivity growth  Productivity growth slower in new firms

17. 17 Results 4 Restructuring  Restructuring not associated with firms size, joint venture, location, insider ownership  Competition and new management accelerate restructuring  Subsidies encourage property but not strategic restructuring  Privatized firms restructure less than state owned firms  Restructuring associated with growth in productivity and exports

18. 18 Implications of Results  Determinants of company performance are not those found for most other market transition economies – unconventional business environment  Privatized firms do not perform consistently better than state owned ones; higher profitability and productivity growth only. Usually no ownership effects identified.  New firms not usually superior in performance to current and former state owned ones, except in exports  Subsidies enhance some aspects of the recipient performance (e.g., exports, productivity growth, property restructuring)

19. 19 Policy Conclusions  Business environment not yet one in which private ownership and the creation of new firms can enhance company performance Low foreign involvement Little or no capital market disciplines on firms Continuation of soft budget constraints distort incentives Distortions in allocation favor SOEs Limited impact of market competition e.g., on restructuring or productivity

20. 20 Policy Conclusions 2  Implies need for major changes to business environment Level playing field between state owned and private firms, e.g., with respect to capital market access Tightening budget constraints and bringing competition to bear to force new behavior on managers Shake out long-serving managers Improve managerial incentive i.e., ownership Open economy to foreign investment, if necessary through JVs.