5.1 Introduction

To a large extent, the success of the transition in East Europe depended on the ability of the former state-owned firms in the region to increase the efficiency with which they employed resources and to conform to the dictates of the market. While it is true that macroeconomic stabilization was a prerequisite for improved economic performance, without major improvements in the performance of the region s firms the best that stabilization could hope to achieve was equilibrium, characterized by stagnant output, low incomes and lack of international competitiveness. Only if productivity, profitability and competitiveness at the level of the individual firm improved could output grow, incomes increase and integration into the global economy begin.

At the start of the transition there was considerable scepticism that managers of state-owned enterprises would be up to the task of modifying the operations of their firms so as to respond effectively to the emergence of markets and hard budget constraints (Kornai, 1990; Lipton and Sachs, 1990; Phelps et al ., 1993). Once the privatization programmes began , concern shifted from the ability of managers to manage to the ability of the new owners to exercise adequate control over their firms through the available mechanisms of corporate governance (Boycko et al . 1995; Desai, 1996; Dittus and Prowse, 1994; Litwack, 1995; Stark, 1994). ^[2]

Unlike the macroeconomic outcomes of transition, which can be quantified by means of data on output, inflation, employment, the amount of property privatized and so on, changes in the behaviour of managers and in the way in which firms are run are less amenable to quantification (Bornstein, 2001). Indeed the changes are often so subtle that it is difficult either to establish objective criteria by which to judge change or to determine accurately whether such changes have taken place. Accepting this caveat, this chapter uses detailed case studies of a relatively large sample of firms to determine how managers and firms in three transition economies “ the Czech Republic, Hungary and Poland “ reacted to the transition, and to investigate whether some common patterns of behaviour were evident, particularly among firms that were judged to be adjusting successfully.

^[2] For a description of privatization programmes see Brada (1996). Hart (1995) provides a useful survey of corporate governance from both a theoretical and a practical standpoint.