Enterprise Breakups and Performance During the Transition from Plan to Market

Abstract

Using firm-level data, we estimate the effects of the major wave of 1991 breakups of Czechoslovak state-owned enterprises on the subsequent performance of the "master enterprises" and spun-off divisions. We estimate the performance effects of spinoffs by comparing the performance of enterprises that remained intact throughout the 1990-1992 period to the performance of the master enterprises that experienced spinoffs and the newly spun-off subsidiaries. Our estimates suggest that the breakups had a significant immediate effect on the productive efficiency and on the profitability of industrial firms in 1991, and that the effect became much less significant in 1992. The effect is a negative function of the size of the spinoff, being positive for small to slightly above average-sized spinoffs and negative for very large ones. We cannot reject the hypothesis that the estimated effect was identical for the spun-off subsidiaries and the master enterprises that experienced the spinoffs. Our 1991 estimates suggest that the large firms created under the centrally planned system suffered from inefficiencies that were alleviated by the breakups. The 1992 estimates are consistent with increased competition and the appropriation of profits by managers.

Transition Economies: Performance and Challenges

“…Breakups of small, average and somewhat above-average size enterprises appear to have increased efficiency of both the remaining master enterprises and the spun-off units (Lizal, Singer and Svejnar, 2001). Some of the broken-up firms were then privatized.…”

The Effects of Privatization and Competitive Pressure on Firms' Price-Cost Margins: Micro Evidence from Emerging Economies

“…Simply transferring the state sector to the private sector without first breaking-up these large firms could lead to substantial market power in firms in pursuit of profit maximization at the expense of social welfare. Lizal, Singer and Svejnar (2001) study the effects of enterprise break-ups in Czechoslovakia and point out the important countervailing effect brought about by increased competition stemming from the break-ups of large firms with monopolistic power and from the opening up of the formerly planned economies to world trade.…”

A survey of enterprise reforms in China: The way forward

“…The encouragement of both domestic and international competition in the product market has been identified as being a very important aspect to facilitate the reforms of China's SOEs (World Bank, 1996;Lizal, Singer, & Svejnar, 2001). …”