5.3 Framework for restructuring

The business strategies that any firm selects and its ability to implement them are both path dependent and reflect the firm s past environment and its business decisions and their outcomes . In transition economies, where all firms faced major and relatively similar changes in their external environment and internal organization, such path dependence was both striking and particularly important in determining how firms undertook their restructuring.

Figure 5.1 illustrates the path-dependent relationship between a firm s response to the early stages of transition and its ability to develop and implement a coherent set of measures for restructuring and survival. At the onset of transition a firm s behaviour was conditioned by its macroeconomic and business climate, by firm-specific factors such as debt, technology, dependence on foreign markets and so on, as well as by the shocks emanating from the early transition measures, including the emergence of markets for the firm s inputs and outputs, changes in managerial responsibilities and the possible imposition of hard-budget constraints.

Figure 5.1: Path dependence of firms responses to transitions

How firms responded to these short-term shocks proved to be critical for their long-term survival, in that the quality of their short-term responses determined their ability to restructure themselves in the longer term. For example an inadequate short- term response could saddle a firm with debts and strangle its cash flow, making it unlikely to be selected for accelerated privatization and rendering it unattractive to foreign investors. On the other hand the existence of business contacts between East European and foreign firms in the pretransition period often facilitated either a strategic investment by a Western firm once the privatization laws permitted it or the creation of a strategic alliance between the two firms. Thus short-term responses helped to determine who a new firm s owners would be and the degree of autonomy they would grant to managers. They also helped to determine the access the firm would have to outside funds for restructuring and other vital resources such as skilled managers and qualified workers. At some point short-term responses would begin to cumulate into a long-term trend, so the sooner a firm was able to tailor its short-term behaviour to its long-term strategy, the more likely it was to be successful.