Ownership change in employee-owned enterprises in Poland and Russia

Abstract

This thesis discusses employee-owned enterprises (EOEs) in Poland and Russia, asking: 1.What are the benefits of and shortcomings of employee ownership in transition economies? 2.Will employee ownership be a permanent arrangement? Employee ownership literature and special aspects of EOEs in transition economies are reviewed.According to the literature survey, when shares are freely tradable, most problems associated with Yugoslavian-type enterprises should vanish.The remaining problems are employee risk-aversion as owners, decision-making problems arising from diverse preferences, and greater costs in obtaining external financing.In transition processes the advantages of insider privatization are clarification of property rights, speed and lowered costs, and employee participation in the privatization process.A major obstacle is insufficient funds for financing investment and restructuring. Insider privatization was used in Poland and Russia as a privatization method due to political necessity.Insiders inherited a strong position - without their cooperation privatization could not have been carried out.In practice, firm success seems to depend more on the environment the firm is facing than particular ownership structures.The low level of investment may follow from the conditions of high uncertainty and lack of capital, rather than from particular ownership effects.On the other hand, there is evidence that EOEs respond to market signals in a normal way, eg by increasing investment in conditions of improved profitability and reducing work force in recession.A common feature for Polish and Russian insider-owned enterprises is that control over the enterprise is concentrated to the hands of managers.This may have devastating effects on EOEs when managers are inclined to asset stripping and rent seeking instead of increasing market value. In examining the contention that insider privatization could be used as a temporary path to other property structures, the paper discusses the implications of share trade.Applying a take-over model adapted from Grossman and Hart (1980) and Shleifer and Vishny (1986), the writer suggests that the private benefits insiders enjoy may hinder ownership change.This is especially the case when the private benefits of control are large for managers large compared to the potential security benefits.On the other hand, concentration of shares to managers and large investors may increase the probability of ownership change.Indeed, this appears to be consistent with what is actually happening.Hard budget constraints and further development in bankruptcy institutions are recommended as ways to promote selection towards more efficient ownership structures.