In Discussion Paper No. 1135, Research Associate Irena Grosfeld and Research Fellow Gérard Roland survey the existing evidence on enterprise restructuring in Poland, Hungary and the Czech Republic. To interpret this evidence, they introduce a distinction between two types of restructuring: defensive and strategic. Defensive restructuring essentially means taking measures that seek to reduce costs and scale down enterprise activity. These measures are `defensive' in the sense that 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.

The existing evidence suggests that, despite differences in national policies, there has been significant restructuring activity in all of these countries. Adjustment measures have mainly been defensive in nature while the extent of strategic restructuring has been much more limited. Significant investment only takes place in firms privatized and with foreign owners or through retained earnings. The authors examine the reasons managers of state-owned enterprises might have been forced to be more active than expected in restructuring their enterprises. They argue that it is due to increased product market competition combined with the hardening of budget constraints. Both contributed to the change in the perceived incentive structure for managers. In addition, the general change in expectations and prospects for individual firms to be privatized reinforced the drive for manager-led defensive restructuring. More profound strategic restructuring requires effective corporate governance which depends both on changes in the ownership structure and the establishment of a modern financial system. The authors review progress on these fronts and stress the weak points and comparative advantage of different countries.

Defensive and Strategic Restructuring in Central European Enterprises
Irena Grosfeld and Gérard Roland

Discussion Paper No. 1135, March 1995 (IO/FE)