While western Europe has been restructuring its industries into smaller production units, the average establishment size for most countries in eastern Europe has increased
dramatically. As McDermott and Mejstrik (forthcoming) and Grachev et al. (forthcoming) emphasize, countries in Eastern Europe, as well as the Soviet Union, chose to push the mass production paradigm to its logical and perhaps fatal limits.1 1 It should take into consideration that the division of
labor is not as developed in the Soviet economy as in western countries. Firms are not specialized and produce almost everything they need because of shortages and
supply uncertainties. That is one of the reasons the USSR has mostly large firms. But in comparison with big western
26
Stylized Fact 9: Small firms in Eastern Europe were systematically eliminated.
For example, in his study of East Germany included in this volume, Hans-Gerd Banasch finds a drastic concentration of economic assets has taken place. While there were 11,523 establishments in East Germany in 1971, this number had been reduced through the Kombinate system to 349 by 1987. Similarly, the share of employment accounted for by small firms in
Czechoslovakian manufacturing fell from 13 percent in 1956 to 1.0 percent in 1986 (Table IV). The mean number of employees per establishment tripled from 1,121 in 1956, to 3,102 by 1988.
As Marius Hiricovsky pointed out at the conference, the current monopolistic situation in Czechoslovakian economy has no
historical precedent. This shift in the firm size distribution towards extreme concentration was a conscious policy decision that had more to do with ownership and political control by the party than economics.
Table V illustrates the fact that in 1948, 33.4 percent of the Czechoslovak economy was in the private sector and an addi
tional 1.1 percent was individually owned. By 1985 the share of firms in the private sector had decreased to 0.6 percent of the total economy. On the other hand, the socialist sector
accounted for 97.2 percent of output, with the state sectors accounting for 87.5 percent and the cooperatives accounting for
firms, many production units have not reachd the upper limits of effective mass production (the amount of cars produced in the USSR can be compared with that of a single Japanese corporation).
27 Table IV
Composition of the National Income (percentages’) in Czechoslovakia, 1948-1985
1948 1960 1970 1980 1985
National Income 100.0 100.0 100.0 100.0 100.0
From the socialistic sector 65.5 93.4 95.9 97.4 97.2
State owned firms 62.9 81.8 86.3 87.5 87.5
Cooperatives 2.6 11.6 9.7 9.9 9.7
From private (individual)
firms * 1.1 5.0 3.3 2.1 2.2
In the private sector 33.4 1.6 0.8 0.5 0.6
One person or one family firm
(Tschechoslowakei in Zahlen und Fakten. Presseagentur Orbis, Prague, 1988)
28
Size Distribution of Firms in Czechoslovak manufacturing Table V
Year
Employment Size Classes
less than 500
501-1000
1001 2500
2500-5000
500
and more
1956 13.0 19.7 35.9 15.5 15.9
1976 1.8 7.9 34.0 31.2 25.1
1985 1.2 7.4 33.1 32.5 25.8
1986 1.2 7.4 34.5 31.6 25.1
1988 1.0 8.0 35.0 30.0 25.0
1989 * 9.8 2.2 14.6 19.5 53.9
* - State enterprises as of April 1, 1989
Source: Statistickä rocenka CSSR (CSSR Statistical Abatract for the respective years)
1989,1990 the materials of Federal Office of Statistics
29
87.5 percent and the cooperatives accounting for 9.7 percent.
Similar trends can be observed in all of the eastern European economies, as well as in the Soviet Union.
During the same period the percentage of employment in enterprises employing more than 5,000 increased by 74 percent.
This trend towards industrial concentration appears to be
continuing. By 1989 the share of employment in the largest firm size category increased to 53 percent of total manufacturing employment.
Table VI illustrated the extent of the presence of large establishments in the manufacturing industries in the GDR, FRG and the U.S. The share of manufacturing establishments (plants) in the GDR with more than 500 employees was almost ten times as great as in the FRG. While only 10 percent of the plants in the U.S. have over 500 employees, in the GDR 40 percent of the
plants have over 500 employees. Similarly, while in the U.S.
and the FRG about 88 percent of the plants have less than 100 employees, only 18 percent do in the GDR. In terms of
employment the figures are even more revealing. While the U.S.
has 70 percent of employment in plants with more than 500
employees, the GDR has 80 percent, and the FRG only 50 percent.
In stark contrast to the U.S., where 27 percent of employees are in plants with fewer than 100 employees, there is an almost complete lack of employment in small firms in the GDR (1.1
percent).
A recent counterexample to this trend in eastern European industrial concentration can be found in Hungary. Between 1950 and 1980 the number of state-owned enterprises declined from
30
Table VI
The Small-Firm share of manufacturing establishments compared among the GDR, FRG, and US
share of establishment share of employment
GDR (1987)
FRG (1986)
US (1982)
GDR (1987)
FRG (1986)
US (1982)
Fewer than
500 Employees 60% 97% 90% 20% 50% 30%
Fewer than
100 Employees 18% 86% 88% 11% 20% 27%
Source: DDR, Statistisches Jahrbuch der D D R . 1988
FRG, Statistisches Bundesamt, Fachserie 4 Reihe 4.1.2.
USA, Census of Manufacturing, U.S.
Department of Census, Bureau of Census 1982
31
1,425 to 7 0 0 . Since then the number has increased by 50 percent. In 1 9 8 7 1 ,0 4 3 state-owned enterprises employed 1,258,000 workers and produced 80.3 percent of industrial
output. There are also 1,392 industrial cooperatives accounting for 6.1 percent of industrial output. The majority of their 3,973 establishments have less than 500 employees accounting for 95.7 percent of employment. Non-industrial organizations employ 218,000 workers and operate 16,667 establishments.
Although these organizations are only semi-autonomous, under the special Hungarian circumstances they function like small businesses. On the basis of these figures, 34 percent of
manufacturing employment can be considered as working in small establishments (Roman, 1990). However, this still puts the share of small establishments below countries like the United Kingdom and France.
In Poland as pointed out by Loveman in this volume, where reforms have been instituted during the 1980's, the presence of private manufacturing firms has increased significantly.
Between 1985 and 1988 the number of small manufacturing firms increased by 11 percent from 207,000 to 231,000. For the
economy as a whole in 1988 there were 1,287,000 new firms.
Entry and exit of small firms in Poland also exhibits a high rate of turbulence. In January of 1990, 22,321 new firms were established and 18,090 exited. In other words about 2.7 percent of the total number of firms are replaced each month (Gwiazda, 1990) .
The Soviet Union may have one of the most concentrated economies in the world according to the Economist: "(m)any of
32
what are the most basic goods in any economy - polypopylene, stainless-steel pipes, concrete mixers - are produced entirely or almost entirely not merely by a single organization but by a single factory. Between 30 percent and 40 percent of the value of Soviet goods are produced on single sites.”1 However, with the economic reforms under Perestroika a new entrepreneurial sector, called cooperatives, has been introduced into the economy. According to Grachev et a l . in their contribution to this volume, in 1990 there were 250,000 cooperatives
registered, employing 5.5 million people (4 percent of the labour force), and producing 40 billion rubles of goods and services. On average these cooperatives are small firms with 23 employees and can be found in almost all sectors of the
economy, including the high tech sector.
The best example of high technology development is the DOKA-Center organized in May of 1987. The DOKA-Center is an '•independent” , self-supporting R&D facility. The Center has 32 full time employees and more than 2,500 skilled professionals from 17 cities working on a contract base. It is also a profit center with 52 percent of profits channeled back into R&D. The DOKA-Center is an attempt to create in Zolenograd (outside of Moscow) a technological agglomeration similar to that in
western countries. In the Spring of 1990, the Soviet Government had identified small business in high-technology development as an integral ingredient to shifting the firm size distribution.2 1 "The Best of all Monopoly Profits...," The Economist,
August 1990, p.63.
2 While in market economies, especially in the United
States, small firms have access to new technology, in the USSR small firms do not.
33
Given the fact the eastern European economies are in the process of changing the ownership structure and political ad
ministration of the economy, the floodgates are open to redi
rect the size distribution toward smaller firms. The
restructuring of these economies away from large firms toward smaller ones has two aspects. The first is to downsize the existing large-firms sector in order to facilitate smaller
establishments. The second is to create an economic environment that is conducive to entrepreneurial activity and to institute a network that will provide the infrastructure for promoting and financing new firm entry. As we have noticed in Poland, where the majority of political and administrative barriers hindering the development of small firms have been removed, new problems arise. These could have been predicted from the
experiences in the U.S. — liquidity constraints (stylized fact number 8), and a lack of consultants and other institutional support. Perhaps one of the most important lessons that we can learn from the anglo-saxon countries is that deregulation and wage cutting in the labor market alone will not lead to a healthy small firm sector.
The small firm sectors in eastern Europe face three choices. First, they can ask for support and protection from the state. Second, small firms can join with large firms as subcontractors (Kooij, 1991). Third, small firms can look for other small firms to build a joint support system. By forming communities or agglomerations, small firms can overcome the kind of deficiencies which they face as individual market agents acting entirely on their own. Again there is a wide
34
variety of historical and modern communal support systems, ranging from cooperatives to industrial districts, employee ownership, science parks, craft combines, and ad hoc co
operation. What makes this type of supportive institution
especially interesting is that they have been spreading in the west in recent years. Effective forms of communal organizations that exhibit strong forms of cooperation and competition can be found in the garment district in New York City. In these
support systems, while long run competition is intense, short run competition is replaced with cooperation.
The most promising form of small firm communal support systems in eastern Europe appears to be the cooperative.
Indeed, we have seen this form of support already working in Hungary (Roman, 1990) and the USSR (Grachev et al.,
forthcoming). This form of organization can accomodate both traditional small firms and high technology development.3 Moreover, the cooperatives are already an existing form of organization, and new systems are difficult to implement.
V. Conclusion
The industrial restructuring that has taken place in Japan and the U.S., the ongoing restructuring in western Europe, and the emerging restructuring in eastern Europe (Perestroika), suggests that nothing less than a fundamental shift in the social and political institutions supporting mass production in 3 In the USSR a new form of organization "Butec" (the
association of firms that are not under central control who have bought out their assetts from the state) is growing. We would like to thank Svetlana A. Smirnova for pointing this out.
35
this century is transpiring. While these changes were accommodated in the West at great cost, i.e. 30 million
unemployed in OECD countries for the better part of a decade (FitzRoy, 1990), the impact that restructuring will have in eastern Europe is unknown. The re-emergence of small units of production in general, and of small firms in particular, in the world economy has left eastern European economies with a new and as of yet untried, social experiment. We believe that only by completely abandoning the existing social and political structure will these economies be able to restructure. In fact this has been started with the elimination of the communist party monopoly in Czechoslovakia, Hungary and Poland, the
unification of the two Germanies, and Perestroika in the Soviet Union.
While the U.S., Japan, and western Europe faced a
difficult task of restructuring, the problems of eastern Europe are multiplied three fold. First, their economies must
regenerate a small firm sector. Second, they must create smaller establishments in their large firm sector by (1)
encouraging entrepreneurship (Puchev, 1990), and (2) breaking up the existing combines to create smaller units. Third, they must institute a system of private property. The problem is complicated by the fact that they lack both the entrepreneurial talent to create small firms and the managerial skills to
create decentralized large firms.
Thus, with the beginning of the elimination of interior barriers, new firm entry has begun to play an important role in the rejuvenation of markets in eastern Europe. It is worthwhile
36
noting that entrants need not be large or long-lived. And they need not unduly disrupt the position of those market leaders that adopt quickly to the changes initiated by such entrants.
What occurs in response to entry is a fundamental restructuring of product and production processes (Geroski, 1990). Our
conclusion, then, is that entry (de novo, diversified, self employment, foreign) is a highly specific tool of industrial restructuring.
Finally, one of the most striking findings from the U.S.
experience is that small-firm turbulence, or simultaneous entry and exit, is more than one-third greater under the
entrepreneurial regime than under mass production. While much attention has been directed in the popular press and by policy makers on both sides of the Atlantic about the desirability of fostering a vital sector of highly innovative small firms in new high technology industries, the stylized facts already established about small firms strongly suggest that associated with such markets is a high rate of turbulence. That is, any policy-maker advocating programs designed to encourage small entrepreneurial firms in new high-technology industries should also recognize the accompanying firm failure, and (at least temporary) job displacement and unemployment. The experience of the U.S. suggests that while such industries may be the engines
for generating innovative activity and perhaps ultimately employment growth, extensive turbulence is apparently
intricately entwined with industries under the entrepreneurial regime.
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