Essays on Firm Boundaries and Firm Organization in Transition countries

For a long time economic theory argued that the level of economic development depends on the allocation of production factors both between and within economies. However, it is rarely underlined that allocation depends on organizational decisions and management, especially on organizational decisions within and across firms. Understanding such decisions through both empirical studies and theory is highly important. It may enable us to understand the microeconomic roots of macroeconomic patterns. This thesis conducts at the empirical analysis of organizational decisions that may potentially influence aggregate performance. It shows connection of the organizational decisions with both the economic environment and firm characteristics. The focus is on transition countries, after the massive privatization period. The reasons are threefold: i) essential differences that emerged in performances of countries with similar heritages and starting points ii) the need to quantify the impact of “complementary” reforms after privatization iii) the mis-match between the expectations and the results of building a market-oriented environment. Following a first chapter overviewing the economic context, theoretical positioning and empirical framework, the thesis contains four studies. The first two studies (Chapter 2 and Chapter 3) are devoted to firm boundaries decisions as one of the key organizational decisions. By using the cross-section data of the EBRD-World Bank Business Environment Enterprise Survey (BEEPS III) and utilizing the predictions of Antras and Helpman's global sourcing modelling, I study the industry-level incidence of integration and firm-level decisions to redefine firm boundaries. Both studies highlight the importance of both technological and institutional factors. Moreover, the second study presents the firm-level perspective and highlights the importance of firm propensity to change. The third study (Chapter 4) is focused on changes of internal firm organization and their connection with international trade liberalization. It provides preliminary answers to the following questions: (i) what drives flattening decisions, and (ii) whether flatter structures may be associated with a higher degree of control. By using the Management, Organization and Innovation (MOI) Survey, this study provides new evidence on the positive connection between increased competition from imports and firm flattening in transition countries. It also suggests that flattening may have more centralization features than is usually assumed. The fourth study (Chapter 5) explores the connection between management quality and corruption. By using the BEEPS V cross-section data, I underline the general negative connection between the management quality and different kinds of corruption over the period 2011-2014. However, the results also indicate the existence of idiosyncratic links between corruption and quality of management in some transition countries. As a result, the thesis contributes to the literature by advancing the state-of-the-art knowledge on firm organization in transition countries over the period 2005-2014. First, it identifies significant differences between country groups, namely EU and non-EU transition countries. The differences are persistent and characteristic for all the types of organizational change considered in the thesis, as well as the link between management and corruption. In particular, in non EU-transition countries, these differences are due to country-level and firm-level idiosyncrasy. Second, the thesis evidences that, regardless of numerous reforms of the business environment, firms in transition countries are rarely subject to organizational changes. However, a small number of firms subject to organizational changes significantly out-perform their counterparts. Consequently, it is important to understand what features of the economic environment or characteristics of firms prevent such efficiency-enhancing changes. Third, the thesis shows that firms in transition countries differ in their internal organizational structures, which they adjust to changes in product market competition. However, the intensity of these adjustments is heterogeneous across countries and industries. Fourth, a negative connection between management quality and corruption indicates that further simplification of business regulations and anti-corruption measures would unquestionably enhance the quality of management in EU transition countries both at the firm and at the country level. However, similar measures are not equally efficient for non-EU transition countries, because the link is idiosyncratic in these countries at the firm level. This thesis provides new evidence on the significant role of contractual links, technology complexity, product market competition and corruption in explaining the gap between micro-behavior and macro-objectives. However, the results put forward the need for i) a bottom-up approach, with firm behavior being analyzed and considered as an underlying force of aggregate and international performance, and ii) theories that account for firm organizational adjustments, because such adjustments may significantly alter our understanding of international trade gains and the channels through which efficiency enhancing reforms act and affect industrial reorganization.