Why Ownership Matters?: Politicization and Entrepreneurship in the Restructuring of Enterprises in Central Europe

Roman Frydman
Marek P. Hessel
Andrzej Rapaczynski, Columbia Law School


This paper, based on a study of mid-sized firms in the Czech Republic, Hungary, and Poland, examines the sources of performance differences between state and privatized firms, particularly those that may be due to politicization and differences in the degree of entrepreneurship. The paper presents inefficiencies in the cost behavior of state enterprises, but does not explain their inferior revenue performance, which is independent of the degree of state involvement. The paper also documents that the lower average revenue performance of state firms is accompanied by lower variance. The authors associate these differences with different attitudes toward risk and different degrees of accountability of the persons in control of state and privatized firms. The paper examines the impact of managerial turnover on revenue performance, as well as other differences between the managers of state and privatized firms, and concludes that the more entrepreneurial behavior of privatized firms is due primarily to the incentive effects, rather than the human capital effects, of privatization.