Institutional Change and Firm Creation in East-Central Europe: An Embedded Politics Approach

Abstract

A central debate about the transformation of post-communists countries is how the process of institution building impacts firm restructuring and creation. This debate has largely been dominated by a tabula rasa view that emphasizes depoliticized models of epochal change and a continuity view that emphasizes the determining impact of pre-existing social structures. These views, however, have serious problems explaining one of the key comparative developments in East-Central Europe the strong growth in Poland and the virtual economic collapse of the Czech Republic, once the star of both the tabula rasa and continuity views. This paper explains these performance differences by offering an alternative, embedded politics approach that views firm and institutional creation as intertwined experiments to reorganize existing public-private relationships. In this view, Czech attempts to implant a depoliticized model of reform impeded the necessary reorganization the socio-political networks, in which firms are embedded. In contrast, Poland facilitated institutional experiments not only in the ways it promoted negotiated solutions to restructuring, but also in the ways it empowered sub-national governments. The study utilizes data on manufacturing networks, privatization, bankruptcy, and regional government reforms collected over the past six years.