FIRM PERFORMANCES WITHIN TRANSITION COUNTRIES: PRO-EU GROUP VS. PRO-RUSSIA GROUP

Abstract

Ex-USSR region, so called transition countries, has experienced rapid social and economic transition since the dissolution of USSR in 1991. Owing to the presence of EU (European Union), the region becomes to be highlighted as target countries for inbound FDIs, which weakens their traditional political and economic ties with Russia. Although this trend can cause their economic subordination to EU, it is no doubt that institutional transformation to market economy has been contributing to the economic growth of the transition countries. Transition countries are divided into two groups, i.e. pro-EU group and pro-Russia group, and it is fundamentally tackled which group of firms perform better while taking institutional factors into consideration. For this purpose, a game-theoretic model is constructed to scrutinize first if economic transition from communism to free market system becomes to affect firm behaviors in transition countries, second if the performance of firms in pro-EU group dominates that in pro-Russia group, and third, under which mechanism design, firms in the pro-EU group are able to leapfrog incumbents in EU. Empirical findings are to the followings. First, on average, the firm performance of pro-Russia countries turns out to dominate that of pro-EU countries. Second, within transition countries, the firm performance of service sector outweighs that of manufacturing sector. Third, informal payment practice significantly deteriorates the firm performance of pro-EU group. Fourth, the performance of state-owned firms in pro-Russia group is superior to that in pro-EU group. Henceforth, ideally it is desirable for transition countries to reinforce firm-level businesses with EU; however, in practice, it cannot be denied that they are still deeply dependent on Russian economy