Determinants of firm performance and growth during economic recession: The case of Central and Eastern European countries

Abstract

The crisis has hit the corporate sectors of the new EU member states from Central and Eastern European countries (CEECs) more than those of most old EU member states. Taking full account of firms' heterogeneity, the paper analyses what kind of CEECs firms' characteristics make some of them more resilient to crisis than the others. Using panel VAR system on a large firm-level dataset we estimate the responses of firms' employment and investment to cyclical demand shocks and financial shocks. Controlling for industry, time and country differences, we split firms according to size, age, export status, foreign versus domestic ownership and pre-vs. during crisis growth in order to compare firms' responses between distinct splits. We find that cyclical drop in demand decreases firms' employment in subsequent periods but there is substantial heterogeneity among different types of firms. Old and especially small old firms react more swiftly, whereas downward adjustment in employment is less severe in exporters and in foreign-owned firms. On the other hand, investment does not respond to demand shocks per se, but to free cash flow component of the business cycle. It is large young firms that are the most and small young firms that are the least responsive to financial shocks in terms of investment activity. In contrast to employment adjustments, exporters adjust their investment activity to cash flow availability to a larger extent than non-exporters. Differences in country specific settings also show important impact on firms' resistance to crisis. The quality of legal institutional environment in a country is positively correlated with the employment sensitivity to shocks but it has no discernible effect on investment sensitivity. On the other hand, political and economic institutions make employment more stable over the cycle.

Investment behavior of MSMEs during the downturn periods: Empirical evidence from Vietnam

“…Specifically, firms with larger employment sizes and external finance reduced productive investment more than other firms, but firm age and other characteristics were not significantly related with the magnitude of decrease in productive investment. These results are consistent with and add new elements to those results concerning investment behavior during the crisis that were obtained by Kolasa et al (2010) from Polish firm data and differ slightly from the results obtained by Burger et al (2017, p. 586) from Central and Eastern European firm data. Apart from changes in investment from normal times to the period of downturn, the present paper highlights that the longer-term relationship between productive investment and various firm characteristics over the entire data period is consistent with the common finding in the literature that younger, larger, formal, and exporting firms with more favorable access to external finance invest more.…”

“…The sample includes not only small family businesses using owners' houses as workshops or factories but also relatively large firms of different ownership types, such as joint stock, private limited businesses, partnerships, and collectives. Among those characteristics found important in the studies by Kolasa et al (2010) and Burger et al (2017) , foreign ownership is the only characteristic missing in the data from Vietnamese MSMEs.…”

“…However, not all emerging-market firms are able and willing to invest, especially during periods of economic downturn when firms tend to face financial constraint. Using firm-level data from EMEs in Central and Eastern Europe, Kolasa et al (2010) and Burger et al (2017) revealed that domestic firms, younger firms, smaller firms, export-oriented firms, and service-sector firms tended to cut investment more drastically than foreign-owned, older, and larger manufacturing firms during the global financial crisis (GFC) of 2007/2008, which was said to be the worst financial crisis since the Great Depression of the 1930s until it was dwarfed by the COVID-19 crisis. This finding raises a question as to whether it applies to any other EMEs in East Asia, if not in Europe.…”

Effects of dynamic variables on industrial output in one of the world’s fastest-growing countries: case evidence from India

“…In an analytical research, Heshmati and Rashidghalam [25] examined the determinants of the performance of manufacturing and service sectors in one of the largest economies in East Africa, such as Kenya, by administrating the ordinary least square and Cobb-Doglous production estimations for the World Bank's Enterprise Survey's database. Moreover, recent studies by Burger et al [11] in Central and Eastern European countries and Ajmair and Hussain [4] in Pakistan have used VAR system for different periods to find the determinants of manufacturing growth. But the present study adds value by using the appropriate econometric tools such Johansen Co-integration and Granger Causality to understand the long-run relationship among these dynamic variables and the direction of causality among those variables.…”

Inter-Relationship Between Firm Growth and Profitability in a Context of Economic Crisis

“…However, the effect in period of economic crisis is still unclear. The combination of firm strategies such as exports and innovation could help firms in managing unfavourable economic conditions (Burger, Damijan, Kostevc, & Rojec, 2017). Export and innovationoriented companies are expected to exhibit better resistance to economic recession.…”