8 to manipulation and more transparent to an outside observer, but also more future-oriented and unpredictable on the basis of past history.1<sup>7</sup> To capture new sources of revenues or to regain the disappearing ones is a matter of entrepreneurial, risk-taking activity even in mature economies. As _The Financial Times_ put it, "costs are essentially static, since they encapsulate the past history of the company. Revenues are dynamic, reflecting the ebb and flow of economic activity, customer preference and pricing signals."'<sup>8</sup> These characteristics of costs and revenues are particularly true in the environment of transition, where the gross cost inefficiencies of the past are easily identifiable, as are, most often, -- their most obvious remedies. On the other hand, skills required to restructure most companies when their old markets have collapsed, imports have introduced overnight competition from the most advanced world producers, and buyers have become more careful and demanding -- are not that different from those needed to start a new business; within some additional constraints (such as the existing labor force or the already available machinery), the post-communist firms must reinvent their products and find markets in which they can be sold The evaluation of revenue performance of state and privatized firms alike must recognize the significant downward pressure that the early stages of transition put on revenues and employment. First, the very size of these firms was often not dictated by economic calculation;"<sup>9</sup> second, the loss of some markets (such as COMECON) and/or the marketization of the remaining activities forced most of them to discontinue slow-selling products, spin off less productive assets, shed inefficient operations, and cut employment.<sup>20</sup> This restructuring is common to state and privatized firms, and we view the resulting drop in revenues and employment as a necessary consequence of past distortions: we refer to it as the _transition_ or _marketization effect_ that all

**17** We analyze differences in the way state and privatized finns approach uncertainty and risks inherent in restructuring of their activities in a forthcoming paper.

**18** "It's the revenues, stupid," _The Financial Times,_ Dec. 27, 1996. The focus on revenues could distort our performance comparisons if the superior revenue.performance of privatized firms could be attributed to mergers or acquisitions. There is, however, no evidence of any mergers or acquisitions in our sample. We examined the annual revenue changes of all privatized firms in the sample, and for all those that increased their revenues by over 25% within a single year, we evaluated the employment changes. The _highest_ annual employment increase among those firms was about 18%, and it was a small firm that increased its employment from 176 to 209 employees -- hardly a merger-generated growth. The next highest annual employment increases among the same group of finms were 14.5% and 2.5%, respectively, indicating no major mergers or acquisitions in our sample. Another distortion could have been introduced if state firms were more likely than privatized companies to split or otherwise contribute a part of their assets to other entities. On this question we have direct evidence and it excludes such possibility: 20 privatized firms and only 11 state firms contributed some portion of their assets to other entities, and the effects of these contributions on employment and revenue measures used in our equations were approximately similar for state and privatized firms.

19 Enterprises in Eastern Europe tend, on average, to be larger than those in comparable developed market economies; see Komai (1992).

20 Balcerowicz, Gray and Hashi (1997) document the staggering decline of output and employment in the initial stages of transition.