# Introduction<sup>1</sup>

The EU11 countries made notable gains in economic and productivity growth in the years prior to the global financial crisis (2000-2007), with some of this growth translating into job creation.<sup>2</sup> However, the increase in jobs that took place was reversed by the crisis. Which firms created the most jobs prior to the crisis and how these jobs were affected by the crisis are highly topical questions among economists and policy makers trying to mitigate the effects of the crisis.<sup>3</sup> In the EU11 countries, the structural change in economic activities over the last two decades involved two different developments. First, after the break-up of the former communist bloc, economic activities were reorganized into market-based economic systems. Second, as in other middle income economies, economic activity shifted away from agriculture and manufacturing to services, where the average firm size was relatively small but the number of firms large (see, e.g., Pilat et al. 2009). These structural changes had an impact on how, where and what type of jobs were created.

After the vast majority of the EU11 countries successfully reorganized their centrally planned economies, they experienced varying degrees of success in creating productive jobs. Different levels of market regulations and entry barriers were crucial determinants explaining the differences in the economic structures across the EU11 countries. In general, countries that most successfully liberalized their economies, maintained macroeconomic stability, and improved the quality of their business environment and institutions were able to create the conditions for firms to flourish and to attract the largest amounts of FDI. This, in turn, contributed not only to the structural changes in these economies, but also to the job-creation process (see, e.g., Bevan and Estrin 2004, Pournarakis and Varsakelis 2004, Fabry and Zeghni 2006 Harding and Javorcik 2011, Jimenez et al. 2011, Crespo Cuaresma et al. 2012 and Tintin 2013).

The economic downturn induced by the financial crisis may have triggered yet another structural change in EU11 and, therefore, a clear understanding of the key industry- and firm-specific determinants of job creation is important for both policy makers and entrepreneurs. A focus on the institutional framework that supports the creation of new jobs should be especially informative for informing tailored and effective policy measures to counterbalance the process of job destruction.

> 1 The team is grateful for comments from Omar Arias, Jesus Crespo Cuaresma, Xavier Devictor, Doerte Doemeland, Hongjoo J. Hahm, Satu Kahkonen, Ismail Radwan, Carolina Sanchez-Paramo, Erwin H. R. Tiongson, and Charles Udomsaph. The paper was prepared for the EU11 Regular Economic Report (Issue 27) of June 2013 (http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/06/13/000350881_20130613080133/Rendered/PDF/7 83410REVISED0Box377338B00PUBLIC0.pdf). 2 The EU11 countries comprise Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia. 3 The issue of job creation and the broader constraints that affect the Europe and Central Asia region are analyzed in a forthcoming World Bank (2013) report on jobs. The analysis on this report builds on this work for the subset of EU11 countries.

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