Milan, February 2014 IER Determinants of Firm Performance and Growth during Economic Recession: The Case of Central and Eastern European Countries Anže Burger Jože Damijan Črt Kostevc Matija Rojec

Milan, February 2014 IER Motivation Current financial crisis hit CEEC countries harder than EU15 members: -from unemployment increased by 2% points on average more in CEECs than in EU15 -from 2007Q4-2013Q3 investment fell by 1,9% points on average more in CEECs than in EU15 -from the total value added of CEECs’ non-financial corporate sectors decreased on average by as much as 10.4 % points while that of old EU member states by only 1% point Our main interest is to study whether the dynamics of CEEC firms employment and investment are different: -across firms with different size, age, export intensity, ownership, industry and business cycle -across countries with different levels of development, size, openness, FDI stock, current account balance, development of financial markets, and distinct dimensions of institutional quality

Milan, February 2014 IER Main results Old and especially small old firms are more responsive to cyclical shocks in terms of employment Old and especially small old firms are more responsive to cyclical shocks in terms of employment Employment adjusts less intensively to shocks in exporters and foreign-owned firms Employment adjusts less intensively to shocks in exporters and foreign-owned firms In booms employment is more reactive to shocks than during recession In booms employment is more reactive to shocks than during recession More developed countries and larger domestic markets exhibit lower sensitivity of employment and investment to business cycles. More developed countries and larger domestic markets exhibit lower sensitivity of employment and investment to business cycles. Better functioning capital markets are associated with greater sensitivity of both variables. Better functioning capital markets are associated with greater sensitivity of both variables. Inward as well as outward FDI both lower the cyclical responsiveness of employment and investment. Inward as well as outward FDI both lower the cyclical responsiveness of employment and investment. Exports exhibit positive correlation with the responsiveness of employment and investment, but these exports only relate to arms-length trade. Exports exhibit positive correlation with the responsiveness of employment and investment, but these exports only relate to arms-length trade. The quality of legal institutional environment is positively correlated with the employment sensitivity to shocks but it has no discernible effect on investment sensitivity. The quality of legal institutional environment is positively correlated with the employment sensitivity to shocks but it has no discernible effect on investment sensitivity. Political and economic institutions make employment more stable over the cycle. Political and economic institutions make employment more stable over the cycle.

Milan, February 2014 IER Methodology Panel VAR approach (Love and Zicchino, 2006): Panel VAR approach (Love and Zicchino, 2006): where we control for firm-specific (f i ) and country-time specific heterogeneity (d ct ) and covariates are: SKB: sales to capital ratio – proxy for capital productivity and external demand shocks CFKB: cash flow per unit of capital – indicator for internally available funds and financial factors LKB: employment to capital ratio IKB: investment in fixed assets per capital stock For identification we use Cholesky causal ordering: SKB, CFKB, LKB and IKB. Impulse response functions with confidence intervals obtained by Monte Carlo simulations. Impulse response functions with confidence intervals obtained by Monte Carlo simulations. Variance decompositions Variance decompositions Metaregression on coefficients from different country-groupings to identify country-level determinants of firms’ employment and investment sensitivity on shocks Metaregression on coefficients from different country-groupings to identify country-level determinants of firms’ employment and investment sensitivity on shocks

Data AMADEUS database AMADEUS database 9 CEEC countries: BG, CZ, HR, HU, MK, PL, RO, SI, SK 9 CEEC countries: BG, CZ, HR, HU, MK, PL, RO, SI, SK Resampled to match Eurostat Structural Business Statistics industry-size firm population structure Resampled to match Eurostat Structural Business Statistics industry-size firm population structure Unbalanced panel of 1,7 mi firms and 6,2 mi obs. Unbalanced panel of 1,7 mi firms and 6,2 mi obs. Country-level variables from WDI database and Kunčič (2014) Institutional Quality Dataset for legal, economic and political institutions Country-level variables from WDI database and Kunčič (2014) Institutional Quality Dataset for legal, economic and political institutions Milan, February 2014 IER

Milan, February 2014 IER Small vs. large firms Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 SMALL FIRMS (less than 10 employees) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.148(2.625)***0.357(1.837)*0.575(6.278)***-0.001(-0.821) CFKB(t)0.005(1.404)0.066(4.473)***-0.003(-0.384) (-0.547) LKB(t)0.0004(2.879)***0.001(0.750)0.302(49.245)***-1.16E-05(-0.644) IKB(t)0.0004(1.148)0.006(4.469)***-0.004(-1.615) (-0.637) N obs.1,514,656 LARGE FIRMS (at least 10 employees) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.056(3.160)***-0.024(-0.261)3.11E-05(4.639)***0.004(1.906) CFKB(t)-0.004(-1.207)0.115(1.899) (1.724)-0.002(-1.239) LKB(t)0.023(1.750)*-0.014(-0.497)0.0001(1.488)0.002(1.454) IKB(t)0.0003(0.762)0.0004(0.170)7.54E-06(2.417)** (-1.067) N obs.490,698

Milan, February 2014 IER Young vs. old firms Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 YOUNG FIRMS (less than 10 years old) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.161(2.414)**0.461(1.924)*3.15E-05(1.734)*-0.002(-0.430) CFKB(t)0.006(1.540)0.061(3.808)***-3.96E-06(-1.936)* (-0.620) LKB(t)0.004(2.091)**-0.003(-0.636)0.0001(1.441)0.001(0.945) IKB(t)0.0001(0.414)0.004(3.702)***-4.53E-07(-0.971)3.79E-05(0.156) N obs.972,580 OLD FIRMS (at least 10 years old) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.110(2.425)**-0.200(-2.313)**0.0001(1.727)*0.004(1.063) CFKB(t)-0.003(-1.168)0.143(3.296)***4.53E-05(10.295)***-0.001(-0.988) LKB(t)0.019(2.042)**-0.062(-4.304)***0.0002(0.984)0.001(1.204) IKB(t)0.001(1.133)0.008(4.772)***1.54E-05(2.123)** (-1.238) N obs.943,234

Milan, February 2014 IER Old small firms Response of ↓Response to → YOUNG FIRMS (less than 10 years old) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.161(2.414)**0.461(1.924)*3.15E-05(1.734)*-0.002(-0.430) CFKB(t)0.006(1.540)0.061(3.808)***-3.96E-06(-1.936)* (-0.620) LKB(t)0.004(2.091)**-0.003(-0.636)0.0001(1.441)0.001(0.945) IKB(t)0.0001(0.414)0.004(3.702)***-4.53E-07(-0.971)3.79E-05(0.156) N obs.972,580 OLD FIRMS (at least 10 years old) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.110(2.425)**-0.200(-2.313)**0.0001(1.727)*0.004(1.063) CFKB(t)-0.003(-1.168)0.143(3.296)***4.53E-05(10.295)***-0.001(-0.988) LKB(t)0.019(2.042)**-0.062(-4.304)***0.0002(0.984)0.001(1.204) IKB(t)0.001(1.133)0.008(4.772)***1.54E-05(2.123)** (-1.238) N obs.943,234 OLD SMALL FIRMS (at least 10 years old firms with less than 10 employees) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.105(1.726)*-0.065(-2.049)**0.640(4.628)*** (-0.531) CFKB(t) (-0.119)0.140(7.919)***0.036(4.444)*** (-0.906) LKB(t)0.003(1.935)*-0.015(-4.954)***0.329(28.954)***4.53E-05(0.913) IKB(t)0.001(0.874)0.012(5.889)***0.003(0.794) (-0.859) N obs.679,566

Milan, February 2014 IER Exporters vs. non-exporters Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 EXPORTERS SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.121(2.698)***-0.326(-1.952)*-0.366(-2.503)**0.127(1.120) CFKB(t) (-0.102)0.018(2.088)**0.067(2.029)**0.001(0.285) LKB(t)0.001(2.753)***-0.010(-4.203)***0.075(2.654)*** (-0.756) IKB(t)-0.003(-2.236)**0.019(3.765)***-0.051(-1.901)*0.008(0.853) N obs.94,552 NON-EXPORTERS SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.193(9.272)***0.090(3.745)***-0.335(-4.572)***0.045(3.012)*** CFKB(t)0.014(4.370)***0.012(0.680)0.062(3.689)***-0.013(-1.778)* LKB(t)-0.001(-0.830)0.007(4.006)***0.047(5.308)***0.004(6.465)*** IKB(t)0.002(2.250)**0.010(4.375)***0.011(1.268)0.010(2.954)*** N obs.132,882

Milan, February 2014 IER Foreign-owned vs. domestic firms Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 FOREIGN OWNERSHIP SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.309(11.243)***-0.001(-0.012)0.042(0.783)0.001(1.258) CFKB(t)0.004(2.975)***0.111(6.318)***-0.007(-0.429)0.0002(0.720) LKB(t)0.007(2.506)**-0.017(-2.099)**0.107(1.698)*0.002(2.257)** IKB(t)0.002(1.051)-0.030(-1.354)0.005(0.914)-0.001(-4.737)*** N obs.58,091 DOMESTIC OWNERSHIP SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.231(2.307)**0.312(0.832)3.22E-05(1.884)*-0.033(-1.474) CFKB(t)4.85E-05(0.010)0.239(3.604)***1.82E-05(1.778)*-0.009(-1.907)* LKB(t)0.016(2.719)***-0.108(-4.697)***0.0001(1.393)0.004(0.395) IKB(t) (-1.063)0.013(6.811)***7.28E-06(2.359)**0.001(0.633) N obs.621,355

Milan, February 2014 University of Ljubljana Industry vs. services Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 INDUSTRY SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.041(3.067)0.147(2.989)***0.043(2.105)**-0.021(-1.223) CFKB(t)0.007(2.643)***0.045(2.459)**-0.002(-0.968)-0.003(-1.239) LKB(t)0.003(3.866)***0.006(1.961)**0.027(2.084)**0.0001(0.222) IKB(t)0.0003(0.686)***0.002(1.104) (-0.548) (-0.370) N obs.312,596 SERVICES SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.160(2.789)***0.086(0.572)0.0001(2.775)***0.002(1.272) CFKB(t)0.003(1.034)0.096(6.040)***2.02E-05(1.746)*-0.001(-1.042) LKB(t)0.008(3.111)***-0.030(-4.742)***0.0001(1.648)*0.001(1.405) IKB(t)0.0002(0.517)0.007(7.330)***7.35E-06(2.358)** (-1.201) N obs.1,678,685

Milan, February 2014 IER Pre-crisis vs. crisis years Response of ↓Response to → Full sample SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.140(2.878)***0.262(1.541)0.0001(2.907)*** (-0.121) CFKB(t)0.004(1.304)0.072(4.545)***1.92E-05(1.555) (-0.959) LKB(t)0.006(2.935)***-0.010(-1.212)0.0002(1.688)*0.0003(1.253) IKB(t)0.0003(1.106)0.005(4.912)***7.16E-06(2.261)** (-1.108) N obs.2,005,354 PRE-CRISIS YEARS ( ) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.159(2.741)***-0.137(-1.653)*0.0001(3.191)***0.008(3.253)*** CFKB(t)0.001(0.315)0.148(4.746)***2.25E-05(2.198)**-0.003(-2.705)*** LKB(t)0.013(2.757)***-0.063(-5.679)***0.0001(3.506)***0.002(3.517)*** IKB(t)0.0004(1.276)0.010(5.531)***4.33E-06(1.671)* (-3.099)*** N obs.1,130,745 CRISIS YEARS ( ) SKB(t-1)CFKB(t-1)LKB(t-1)IKB(t-1) SKB(t)0.036(2.644)***0.077(2.057)**0.0001(1.763)*0.0004(0.880) CFKB(t)-0.002(-1.029)0.014(1.888)*-1.15E-05(-0.228)1.54E-05(0.269) LKB(t)0.004(1.073)0.010(0.929)4.90E-05(1.149)-7.42E-06(-0.249) IKB(t)0.0003(0.576)0.003(1.659)*0.0001(2.368)** (-0.709) N obs.612,001

Milan, February 2014 IER Difference in impulse responses between exporters and non-exporters (exporters—non-exporters) Source: own calculations based on AMADEUS data.

Milan, February 2014 IER Difference in impulse responses between foreign- owned and domestic (foreign—domestic) Source: own calculations based on AMADEUS data.

Country level determinants of employment and investment responses to cyclical shocks VARIABLESSKB t-1 →LKB t CFKB t-1 →IKB t leveldiffleveldiff GDP p.c ***-2.508***-3.792***-3.741*** (0.333)(0.296)(0.627)(0.868) GDP ***-0.429***-0.325***-0.320** (0.0608)(0.0535)(0.114)(0.157) Market capital ***3.321***4.829***4.712*** (0.674)(0.600)(1.268)(1.762) inFDI stock ***-2.541***-1.988**-1.964* (0.451)(0.401)(0.849)(1.178) outFDI stock ***-1.474***-2.235***-2.153*** (0.208)(0.182)(0.390)(0.535) Curr. account ** (0.336)(0.299)(0.632)(0.877) Export of goods 3.823***3.690***4.793***4.694*** (0.690)(0.613)(1.298)(1.800) Constant -1.27e ***-1.59e (0.0201)(0.0274)(0.0379)(0.0804) Observations R-squared F(7, 500) / F(7, 246) Prob > F Note: Standard errors are in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Source: own calculations based on AMADEUS data.

Milan, February 2014 IER Institutional determinants of employment and investment responses to cyclical shocks VARIABLES SKB t-1 →LKB t CFKB t-1 →IKB t leveldiffleveldiff Legal inst ***1.361*** (0.0766)(0.0810)(0.142)(0.178) Political inst ***-1.740***-0.288**-0.250* (0.0660)(0.0655)(0.122)(0.144) Economic inst ***-0.515*** (0.0387)(0.0414)(0.0716)(0.0911) Constant 1.63e ***-7.31e (0.0230)(0.0401)(0.0425)(0.0882) Observations R-squared F(7, 500) / F(7, 246) Prob > F Note: Standard errors are in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Source: own calculations based on AMADEUS data.

Summary results Country-level determinants of firm employment and investment sensitivity: +: financial development, export flows (arms-length), legal institutions (only for employment resistance) ─: development, market size, inward and outward FDI stock, current account sufficit, political institutions and economic institutions (only for employment resistance) Milan, February 2014 IER

Milan, February 2014 IER Conclusions Using panel VAR we are able to consider the complex relationship between employment/investment opportunities and the demand shocks and financial situation of the firms, while allowing for a firm- specific unobserved heterogeneity (fixed effects) and controlling for country-year common shocks. Exporters are less sensitive to demand shocks in terms of employment but more sensitive to financial constraints in terms of investment. Foreign-owned firms are more resistant to fundamental and financial shocks in both employment and investment. Services exhibit more procyclicality in employment and investment than industry. Country development, market size, inward and outward FDI stock, current account sufficit, political institutions and economic institutions (only for employment resistance) make firms more resiliant to cyclical shocks in terms of employment and investment responses.

Milan, February 2014 IER Thank you!