Enterprise Restructuring in Industry

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 29th 2005

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

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. 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. 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. 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. 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. 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. ENTERPRISE PERFORMANCE AND RESTRUCTURING IN BELARUSQuantitative 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.