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Economic restructuring in Central European enterprises.

A discussion paper published by the Center for Economic Policy Research, London, England, interprets the evidence on enterprise restructuring in Poland, Hungary and the Czech Republic.

In Defensive and Strategic Restructuring in Central European Enterprises, authors Irena Grosfeld and Gerard Roland report that despite differences in restructuring policies, the pattern of observed restructuring appears similar in the three countries. Contrary to initial expectations, managers of state-owned enterprises, or SOEs, have engaged in significant adjustment activities.

The paper introduces the distinction between defensive and strategic restructuring. Defensive restructuring essentially means taking measures that seek to reduce costs and scale down enterprise activity. This includes cutting obsolete production lines, shedding labor and getting rid of nonproductive assets. These measures are considered defensive, because their primary goal is the immediate survival of the enterprise.

Strategic restructuring is based on a thoughtful business strategy developed in response to a need for a profound redeployment of assets. It implies the introduction of new product lines, new processes, new technologies and new investments. This type of restructuring requires substantial entrepreneurial skill and imagination, good judgment about investment opportunities and adequate incentives. It also requires sources of finance for the new products.

According to the authors, the existing evidence suggests that, despite the differences in national policies, there has been significant restructuring activity throughout all countries under review. It appears, however, that the restructuring measures have been defensive in character.

Even though privatization has advanced faster in the Czech Republic than in Hungary, there are significant problems with the corporate governance of banks and investment funds in the Czech Republic.

What is lacking so far for strategic restructuring in all the countries are intermediaries to play the role of venture capital funds. In such funds, the provision of capital is correlated with strategic guidance and managerial expertise, two factors necessary to speed up strategic restructuring. The emergence of such investors will be favored by political stability, credible privatization policy and an active and liquid stock market.

The distinction between the two types of restructuring appears particularly useful if we try to analyze the existing evidence concerning enterprise restructuring in the Czech Republic, Hungary and Poland.

The authors note that some enterprises are apparently doing well and trying to adjust to new market pressures. Most hope to achieve this adjustment by reducing the size of the workforce, closing unprofitable facilities and selling or leasing nonproductive assets. On the strategic side of restructuring, the measures most commonly taken are the establishment of a marketing department and alterations in the product mix.

When investment occurs, it is generally through retained earnings. Only firms sold to foreign owners have undergone major investment programs.

According to the report, 1993 figures showed there were 60,000 private companies considered legal entities in the Czech Republic, 85,600 in Hungary and 81,510 in Poland. The share of the private sector in gross domestic product and employment was 60% of GDP and 47% of employment in the Czech Republic; in Hungary, 51% of GDP and 61% of employment; and in Poland, 47% of GDP and 57% of employment.

The authors explain, "The three economies have already profoundly changed due to the appearance of a large private sector. The importance of the private sector is growing and its development should be of primary concern for central Europeans.

"One cannot underestimate the importance of the perspective of entry in the European Union as an instrument to stabilize expectation in the right direction."

In its conclusion, the report addresses the EU's role in encouraging further progress in strategic restructuring in Central Europe.

"We have already emphasized the important role of prospects for future entry to focalize expectations. From the point of view of this study, it is very important to emphasize the potential contribution of training programs in order to help the setting up and consolidation of financial systems. As emphasized in this paper, the scarcity of managerial and intermediation skills is a real constraint to restructuring. In Poland, for example, there is a very useful program that "twins" Polish banks with Western banks, with the latter providing training and transferring necessary know-how for restructuring. Positive efforts in this direction should be intensified."

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