Determinants of Performance of Manufacturing Firms in Seven European Transition Economies

We document the operational performance of (former and current) state enterprises over the 1992-1995 period for seven countries in Central and Eastern Europe (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) using large samples of firm level data and a consistent methodology. We find that @ in the Czech Republic, Hungary, Poland, and Slovakia have the highest factor productivity growth and firms in Bulgaria and Romania the lowest, with firms in Slovenia in between. We find three factors which help explain the variation in firm performance: initial conditions (firm size, sector, and level of productivity), status of privatization, and quality of bank lending. Firms in tobacco, furniture, and paper improve faster than firms in other sectors, while firms in the textile, lumber, petroleum refining, rubber and non electrical machinery sectors improve slower than other firms. Firms with a lower initial level of factor productivity display higher productivity growth than other firms, suggesting convergence of productivity. Productivity growth is most often negatively correlated with firm size. Productivity growth is positively related to privatization in all countries, with firms privatized for two years displaying the most change. Finally, bank financing appears to have been increasingly allocated to more productive firms in all countries except Bulgaria and Romania.