PRIVATISATION AND RESTRUCTURING OF FIRMS IN POSTPRIVATIZATION PERIOD

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PRIVATISATION AND RESTRUCTURING OF FIRMS IN
POST-PRIVATIZATION PERIOD

• A LESSON LEARNED FROM SLOVENIA

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Presentation Outline

• Introduction
• Theoretical models of investment
• Institutional framework in Slovenia
• Empirical specification
• Results
• Discussion and implications

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Introduction to the research question

• ISSUES
• The effects of privatization on firms
  performance.
• Insider vs. outsider owned firms. Which group of
  owners is more efficient?
• The importance of initial conditions and trade
  orientation

The main hypothesis The process of restructuring
of Slovene firms was affected by uderdeveloped
institutional structure.
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Model of Restructuring
INSTITUTIONAL FRAMEWORK
FIRM-LEVEL CHARACTERISTICS
RESTRUCTURING
DEFENSIVE
STRATEGIC
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Theoretical models of investment

• Neoclassical models of factor demand
• Static models

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Theoretical models of investment, cont.

• Dynamic models
• Introduction of adjustment costs
• Labor demand (cost minimization)
• Capital demand (Euler equation)

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Theoretical models of investment, cont.

• Reduced form models
• Error-correction model
• long-term equilibirum is achieved through short
  term adjustment process (ADL dynamic regression
  model) ? advantage separates short and long run
  effects
• Neoclassical (accelerator) model
• simple and widely used but as such subject to
  the Lucas critique

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The supply side of capital The role of financial
constraints

• The standard model of investment ? no role for
  implementing various types of financial policy
• The irrelevance hypothesis fails in the presence
  of informational asymmetries, costly monitoring
  and contract enforcement problems

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The supply side of capital The role of financial
constraints, cont.

• Two main points
• Unless loans are fully collateralized, external
  finance is more costly than internal finance
• The premium on external finance is an inverse
  function of a borrowers net worth, ceteris
  paribus

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The evolution of institutional framework
The process of transition in Slovenia

• Evolutionary path characterized by stabilisation
  policy with restrictive monetary and fiscal
  policies
• Floating exchange rate
• Relatively slow process of ownership
  transformation and gradual changes in
  implementing market environment
• Export demand as the most important factor of
  growth

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The evolution of institutional framework, cont.
BUT

• Microeconomic reforms have been proceeding slowly
  impeding corporate restructuring.
• Some of reforms (i.e. on the labor market)
  havent even started yet.

The further development of market and
institutional structure represents one of the
most important factors for future growth.
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The Bargaining Over Excessive Cash Flow
Wages
Total revenues -material costs -depreciation -tax
?
Investment
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Empirical specification

• Standard models augmented by
• Internal funds hypothesis
• Bargaining hypothesis
• Ownership structure
• Supervisory board structure
• Privatization method
• Trade orientation
• Industry region

Firm-level characteristics
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Fixed and Soft Capital Investment
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Sources of investment in fixed capital
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Sources of investment in RD
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Sales and expenses for marketing
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Data
SAMPLE 157 Large and Medium-Sized Slovene
Firms In 2000, the average firm in the sample
employ 538 employees, has labor costs that
constitute 85 of value added, achieves a ratio
of sales to tangible capital of 2.8 and sells 58
of its production on domestic market. PERIOD
1996-2000 SOURCE Questionnaires Agency of
Payment
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Data, cont.
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Evolution of ownership structure
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Supervisiory Boards Structure
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Managerial Characteristics
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Results

• Labor demand
• Short run elasticity (L/TS) 0.1
• (L/W) -0.2
• Long run elasticity (L/TS) 0.1
• (L/W) -0.3
• Investment in fixed capital
• Cash flow hypothesis confirmed in the short run,
  while the accelerator effect prevails on the long
  run.

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Results, cont.

• Investment in RD
• Current sales have a pprofound impact, while
  cash flow effect is smaller than in the case of
  fixed investment.
• Investment in marketing
• Adjust quickly to desired level. Accelerator
  effect is weaker comparing to RD investment, but
  cash-flow effect is significant. Bargaining
  hypothesis confirmed (Elasticity of
  investment/W0.27)

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Results, cont.

• Investment in training
• Credit constrained hypothesis is weakly
  supported. ECM fails.
• Ownership and Supervisory Board characteristics
  market orientation
• Do not play any significant role

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Discussion and Implications

• Limited defensive and relatively successful
  strategic restructuring
• Lack of institutional reforms (especially on
  labor and capital markets)
• State should withdraw from economy faster and
  abandon its paternalistic role

LESSON LEARNED Dont give a chance to state
funds to govern the economy