Enterprise Breakups and Performance During the Transition

Abstract

In this paper we estimate the effects of the 1991 breakups of Czechoslovak state owned enterprises (SOEs) on subsequent performance of the master enterprises and the spun-off units. Our analysis is based on quarterly and annual data of Czechoslovak industrial enterprises. We estimate the performance effect of a spinoff by comparing the performance of enterprises that were present throughout the 1990-92 period but did not experience any spinoffs to the performance of (a) master enterprises that experienced spinoffs and (b) the newly spun off subsidiaries. Our estimates suggest that the breakups had a significant immediate (1991) effect on productive efficiency and profitability of industrial firms. The effect was positive for small to slightly above average size spinoffs and negative for large ones. One also cannot reject the hypothesis that the estimated effect of spinoffs on performance was identical for the spun off subsidiaries and the master enterprises that experienced the spinoffs. Our 1991 estimates hence strongly suggest that the large firms created under the centrally planned system suffered from inefficiencies that were alleviated by the breakups of these firms into smaller units.