FS IV 93 - 16
The Recreation of Entrepreneurship in Eastern Europe:
Neither Magic nor Mirage
Hans-Peter Brunner
July 1993
ISSN Nr. 0722 - 6748
Forschungsschwerpunkt Marktprozeß und Unter- nehmensentwicklung (IIMV) Research Unit
Market Processes and
Corporate Development (IIM)
The Recreation of Entrepreneurship in Eastern Europe: Neither Magic nor Mirage
The article evaluates revitalized entrepreneurial potential through the lens of four stylized development strategies in Eastern European countries. Three of these strategies either were implemented already or are in the process of being implemented. The evidence pre
sented relates each strategy to measures of industrial turbulence and to measures of structural transformation of industries. A high degree of turbulence and a diversified but integrated industrial structure are deemed to be conducive for the development of entre
preneurial initiative in the transforming economies. For both the East German high-tech, high-wage transformation, and the Polish low-tech, low wage transformation to succeed, it is necessary to pursue industrial policies that further the diversification and integration of the industrial base in the respective countries.
ZUSAMMENFASSUNG
Der Wiederaufbau des Unternehmertums in Osteuropa ist weder Magie noch Luftschloß
Deutschland und Polen werden grundsätzlich verschiedene Strategien der wirtschaft
lichen Transformation der ehemaligen sozialistischen Volkswirtschaften verfolgen.
Während man in den neuen Bundesländern eine radikale Hoch-Technologie, Hochlohn Strategie umzusetzen versucht, muß Polen versuchen, die Transformation mit einer gra
duellen Niedrig-Technologie, Niedriglohn Strategie zu bewerkstelligen. Die vorliegende Arbeit zeigt anhand von Indikatoren dynamischer und struktureller Veränderung in den Industrien, daß bislang in beiden Fällen keine nennenswerte Strukturanpassung an die vorgegebenen Muster westlicher Industriegesellschaften ersichtlich ist. Der Autor zieht die Schlußfolgerung, daß weder die bisherige ostdeutsche 'Nukleusstrategie' noch die 'Privatisierungsstrategie' osteuropäischer Prägung ausreichende Anreize für das Wieder
aufleben unternehmerischer Kreativität bieten können. Vielmehr befürwortet der Verfas
ser eine 'evolutorische' Transformationsstrategie, die das institutionelle Vakuum füllen kann, das die gescheiterte 'kapitalintensive' Industrialisierungsstrategie der ehemaligen Ostblockstaaten hinterlassen hat. Nur in einem ensprechenden institutionellen Rahmen kann sich ein marktwirtschaftlich orientiertes Unternehmertum auf Dauer etablieren.
I. Introduction: Developing entrepreneurial potential
Pre-World War II historical accounts of industrial competitiveness, particularly of the southern parts of eastern Germany and the heavily industrialized central regions of Czechoslovakia, speak vividly of the presence of a strong entrepreneurial culture.1 Revi
talization of this entrepreneurial potential in Eastern European can serve as the leverage to open the door to international competitiveness and a comparatively high living stan
dard. The door itself rests upon the fulcrum of technological change both within and sur
rounding modern economies. The spread of microelectronic technologies has drastically shortened product cycles in many, if not all, key industrial sectors. The achievement of international competitiveness rests increasingly on the ability of entrepreneurs to combine increasing amounts of capital with advanced technological knowledge and capabilities.
This tendency is reflected in the shift away from unskilled, labor-intensive production toward more capital-intensive, and technology- and skill-intensive as opposed to simply labor-intensive production set-ups in industrial sectors with growing global markets.2 After introducing four stylized strategies for developing Eastern Europe's entrepreneurial potential, I move in this paper to a detailed description of the achievements of industrial policy to date with respect to a) sectoral concentration and the size distribution of firms, and b) structural transformations of industries. I consider the observation of productivity (branch composition), market competition (structure), and the survival rates of various kinds of firms (turbulence) combined with the intensity of entiy, as central to any effort at estimating the entrepreneurship development potential of each of the three materialized transformation strategies in Eastern European economies. In the absence of reliable, comprehensive information on changes in innovative and networking capabilities of Eastern German and Polish firms, the dynamics of structural change provide an early indication for the development of the entrepreneurial basis upon which an economy's competitiveness ultimately hinges.
For details refer to the historical accounts in Ivan T. Berend and György Ranki, Economic Development in East-Central Europe in the 19th and 20th Centuries (New York: Columbia University Press, 1974), especially chapters 6 and 12. Rüdiger Schiller and Axel Dahre- möller, "Existenzgründungen in den neuen Bundesländern: eine erste Zwischenbilanz", (paper delivered at the 36th ICSB world conference, Vienna, 25 June 1991), mention that at the end of World War II, 2.3 million people were self-employed in an area that later became East Germany.
Ashoka Mody and David Wheeler, Automation and world competition: new technologies, industrial location, and trade (New York: St. Martin's Press, 1990), and Hans-Peter Brunner, "The development experience and government policies: lessons for Eastern Europe?" In Small Firms and Entrepreneurship -- An East-West Perspective, eds. Zoltan Acs and David Audretsch (Cambridge: Cambridge Univ. Press, 1993).
In my case study, I will be able to compare the experience of the former socialist economies of Poland and East Germany to the 'capital' strategy of the last 40 years. The 'privatization' and 'nucleus' strategies are just now in the process of being implemented.
Thus, actual experience is incomplete at best, and any analysis of the potential of each of the latter two strategies for promoting entrepreneurship must rest on preliminary data.
Nonetheless, I will attempt to compare the recent and ongoing experience of the Polish and eastern German economic transformation to the stylized privatization and to the nucleus strategy.
At the end of my paper, I will draw conclusions as to the 'evolutionary' strategy's poten
tial for succeeding in tapping Eastern Europe's entrepreneurial potential for the restora
tion of its economies to international competitiveness. Entrepreneurial potential is there, but its realization cannot be taken for granted. History tells us that entrepreneurship in Eastern Europe is not a mirage, but neither does the invisible hand of perfectly competi
tive markets lead to the magic rise of the entrepreneurial phoenix from communism's ashes.
II. Entrepreneurship
A discussion of entrepreneurship and its development potential in Eastern Europe requires an upfront definition since the term itself is rather fuzzy and means different things to different people. In the Schumpeterian sense an entrepreneur is one who eco
nomically performs acts of creative destruction. The emphasis in my paper is on the traits of the entrepreneurs which grasp new technological ideas or information, and transform them into commercially viable products. Relevant entrepreneurial traits are those of a Knightian risk taker mastering the uncertainty of innovation.
III. Stylized strategies for developing entrepreneurial potential
Four possible strategies for entrepreneurial development are indicated by history and logic:
a. the ’capital' strategy
This economic development strategy is based on the concentration of economic assets with the intent of exploiting economies of scale. The strategy underlies the idea of growth by investment in capital goods, which was propagated and developed by promi
nent economists in the 1940s and 1950s. In his late work Capitalism. Socialism and Democracy. Schumpeter predicts the demise of the innovative small firm and the arche
typical entrepreneur. Instead, the large-scale establishment is capable of concentrating enough economic resources for routine production of innovations. According to John
product of the matchless ingenuity of the small man forced by competition to employ his wits to better his neighbor. Unhappily, it is a fiction."
Today we recognize the fallacy of this argument. According to Roman 4 "Centrally planned economies prefer large organizations due both to economic and political consid
erations. They overestimate the significance of economies of scale, in particular the size of the enterprises, neglecting both the emerging diseconomies [of scale] and the potential of small business." Thus the capital strategy denies the (innovative and informational) role of the entrepreneur in a modern economy. It is precisely the implementation of this capital strategy for approximately the last 40 years by Eastern European governments that prevented exploitation of their economies' entrepreneurial potential. This strategy neither furthered entrepreneurial activities nor developed concentrated economic resources for 'routine' production of innovations, if that is not a contradiction in terms.
Without further elaboration, today we know what happened to the competitiveness of the former socialist economies as a result of the denial of the entrepreneurial role in innovation.
b. privatization of state enterprises
This strategy is currently being advocated by neoclassical economists who are experts on Eastern Europe. The emphasis here is on the attempt to deconcentrate control of an economy's existing productive resources through private entry into developing domestic markets. Implicit in this approach is the assumption that profit maximization and market- mediated exchange by a large number of independent private agents quickly solve the informational and coordinative deficits so prevalent in socialist, centralist economies.5 Emerging, yet largely unregulated markets are deemed to be better than planners in adjusting supply and demand, because they rely on adequate price information. Lange, in the course of the famous debates over "economic calculation" with Mises, convincingly demonstrated that in theory socialism could match demand to supply just as well as capitalism and meet the range of static conditions required for Pareto optimality.
John Kenneth Galbraith, American Capitalism (Boston, MA: Houghton Mifflin, 1956), p. 86.
Zoltan Roman, "Strengthening Small and Medium-Sized Enterprises in Eastern European Economies," paper presented at the UNDPZUNIDO Workshop, Trieste, Italy, November 27-30, 1990, p. 1.
The theoretical shortcomings of neoclassical assumptions with respect to informational imperfections which are symptomatic for economies in transition, are clearly summarized in Peter Murrell, "Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?" J. of Economic Perspectives. 5 no.4 (Fall 1991), pp. 59-76.
That old debate, which in a way is succeeded by today's privatization debate, missed the crucial difference between socialist and capitalist economic performance: In capitalist economies competitive product markets allow for continuous reorganization of industrial structures, through a sequence of random (product) trials by firms and systematic, com
petitive elimination of errors. I argue in this paper that the privatization strategy, although a necessary ingredient in Eastern European reforms, does not endogenously create the capitalistic economic organization most conducive to this continuous struc
tural reorganization.6 The rapid appearance of entrepreneurship is not due to magic.
c. the ’nucleus' strategy
A nucleus strategy of industrial transformation exogenously creates islands, or nuclei, of excellence in a sea of mediocrity. Grabher calls them 'cathedrals in the desert'.7 It is a fast-paced strategy of constructing from scratch such cathedrals with the hope that they may serve as nodes for the dynamic transformation of a technically inefficient, uncom
petitive economy into a technically efficient, internationally competitive economy. The idea behind the strategy is that growth centers induce further growth so that whole clusters of excellence appear. This is the strategy that is being implemented in the process of the Eastern German transformation and unification with West Germany.
Moreover, this strategy typically is connected with the large-scale breakup and dissolu
tion of state-owned firms that have been taken over from vanished communist regimes.
This strategy is not the most conducive to the creation of entrepreneurial seedbeds.8 The establishment of new production units ex nihilo, mostly as a subsidiary operation of a larger conglomerate firm headquartered let us say in Western Germany, does not presup
pose the localized interfirm networks, characteristic of rapidly innovating capitalist economies. Both the factor market and the product market space is controlled and, more importantly, remains controlled by the dominant corporate unit located outside the region or country.
The reason for this failure lies in the increasing importance of positive loops and threshold effects in information and knowledge-based production. See W. Brian Arthur, "Positive Feedbacks in the Economy," Scientific American (Feb. 1990), pp. 92-99. Initially the entrepreneurial basis develops quite disjointly and sporadically. It has to reach a certain critical mass, or surpass a threshold, so that networking and spillover effects in terms of learning, innovation, productivity and growth take effect. Only then has an entrepreneurial culture been established. If a critical threshold is not established, due to the prevailing economic environment, an entrepreneurial basis might simply not develop at all.
Gemot Grabher, "Eastern Conquista -- The 'Truncated Industrialization' of Eastern European Regions by Large West European Corporations," in Regional Development: A Contemporary Response, eds. H. Emste and V. Meier (London: Bellhaven, 1992).
For the theoretical argument see again Arthur, "Positive Feedbacks..."
Moreover, the economic incentive structure is set in order to attract outside investment without the requirement of any integrative efforts by the attracted firms. Typically, capi
tal-intensive subsidiary production units are established with generous investment subsi
dies and tax advantages that help the investor to absorb relatively cheap, localized factors of production, such as unskilled labor, without the necessity to develop autonomous technological and managerial potential surrounding the locale of investment. Not surpris
ingly, cathedrals in the desert tend to be concentrated in those industrial sectors, which have matured, and produce relatively undifferentiated, homogeneous products and where technological advance is rather slow. It is in those sectors that firms have sufficient mastery over their technology to be able to 'delocalize' production in regions that offer localized advantages, i.e., investment subsidies or low labor costs. As a result this strategy delays the rapid reorientation of an economy from a relatively labor intensive, or capital intensive, or both, production base, to one that is relatively capital intensive and skill intensive.
d. the 'evolutionary' strategy
This is the strategy which offers the best chance to unleash the entrepreneurial potential of Eastern Europe. The evolutionary strategy has to be modelled mainly on the experi
ence of those economies in the OECD and East Asia, whose success hinged substantially on the utilization of their entrepreneurial potential. To exploit this potential these economies relied on a continuous reorganization of industrial structures, through a sequence of random trials by firms and systematic, competitive elimination of errors.
Government agencies and parastatals supported these acts of creative destruction by casting an extended, effective network of firm support structures over the whole indus
trial economy. As a result these newly industrialized nations of East Asia are now characterized by industrial diversification, a high degree of turbulence, and localized inter-firm networks that have informational properties conducive to entrepreneurial activities (i.e. the mastery of innovation).
From detailed historical descriptions of the economic development process in the newly industrialized countries (NICs) of East Asia it has been shown that the sectoral produc
tion structure of the NICs has become more similar to those of the developed market economies, or OECD countries.9 Between 1963 and 1989 the growth rate of production
Bart Verspagen, Uneven growth between interdependent economies -- an evolutionary view on technology gaps, trade and growth, Ph.D. diss., University of Limburg, Maastricht:
University Press, 1992, p. 68. Hans-Peter Brunner, "The development experience and government policies: lessons for Eastern Europe," points to the increasing relative capital and skill-intensity of those industrial sectors in NICs and newly industrializing economies, which figure as the most important (higher-tech) growth sectors of OECD countries. For the study of detailed data on the structure ow world industrial growth and trade, see R. Summers and A. Heston, "The Penn World Table (Mark 5): An Expanded Set of
in developed market economies was strongest in those (3-digit ISIC) manufacturing sectors which generally are considered as having a high degree of technological intensity:
electrical machinery, instruments, chemicals, machinery and transport goods. The newly industrializing countries of East Asia were able to narrow their gap to the developed market economies, by growing even faster in precisely these sectors.10
Empirical studies, for example in the former West Germany, have established a close connection (positive spillover effects) between high industrial growth and above-average growth in service sectors on a regional basis.11 In the case of West Germany the intrare
gional spillover was strongly positive from industry to services and trade, and a relatively weak relationship existed from the construction sector to the trade sectors. The con
struction industry did respond strongly with growth in regions of strong industrial growth, however. Experience in newly industrializing economies suggests as well that the service and trade sector is dependents on a well-developed industrial sector, not vice versa.
In the process of narrowing their development gap, East Asian newly industrializing economies increasingly relied on the growth of small and medium size manufacturing firms precisely in those sectors assumed to produce with relatively high capital and skill intensity.12 In the process of this economic transformation newly industrializing econo
mies approached firm size distributions prevalent in OECD countries.
Turbulence as a combined measure of entry and exit of firms is increasingly used as an indicator for technological renewal. Studies by Baldwin and Gorecki13 have shown that
International Comparisons, (1950-1988)," The Quarterly J. of Economics 16 (1991), pp.
1-41; Lynden Moore, The Growth and Structure of International Trade Since the Second World War. Brighton, Sussex: Wheatsheaf Books, 1985; and Chad Leechor et al., Structural Changes in World Industry: A Quantitative Analysis of Recent Developments.
World Bank Technical Paper, Washington DC: World Bank, 1983.
On innovation, sectoral distribution, and small and medium size firms in the United States, I refer to Zoltan Acs and David Audretsch, Innovation and Small Firms (Cambridge MA:
MIT Press, 1990).
Franz-Josef Bade, "Sektorale Entwicklungszusammenhänge (Sectoral development interactions)," in Beschäftigungsdynamik und Regionalentwicklung, ed. Hans-Jürgen Ewers et al. (Berlin: Schriften des Vereins für Socialpolitik, 1993). See also John B. Hall,
" Sectoral transformation and economic decline: views from Berkeley and Cambridge,"
Cambridge J. of Economics 15 (1991), pp. 229-37.
see Brunner, "The development experience and government policies."
John R. Baldwin and Paul K. Gorecki, "Entry, Exit and Productivity Growth," in Entry and Market Contestability: An International Comparison, eds. P.A. Geroski and J.
Schwalbach (Oxford: Basil Blackwell, 1991).
technological know-how, whereas firms that leave a sector generally produced at below average productivity. This confirms that in a world of rapid changes in the international economic environment and in competitive relations the replacement of outmoded organi
zations by new, more often small firms appears to be a change in favor of innovation.14 So far the transformation processes in Eastern Europe have not been observed to take place along the nexus of productivity (branch composition), market competition (size structure), and the survival rates of various kinds of firms (turbulence) combined with the intensity of entry and of entrepreneurial activity. The observed structural characteristics and shifts in OECD and newly industrializing countries reflect the utilization of those economies' entrepreneurial potential for their productivity and income growth and for their competitiveness on world markets.
IV. The entrepreneurial legacy of the 'capital' strategy in the socialist economies of Poland and East Germany.
Conversely, structural and organizational inertia stifles the innovative potential of an economy (entrepreneurship), as sharply demonstrated by the Eastern European experi
ence until 1989.15 That is to say that a strategy that puts its bets on the renewal and pro
ductive adaptation of large, oligopolistic firms from within in response to rapidly chang
ing environmental-technological conditions is doomed to failure. The Eastern European experience until 1989 provides the casus belli.
Eastern Europe represents the single most successful case of the implementation of an industrial policy that sought to centralize economic power, and thus to eliminate market competition. The (destructive) effectiveness of these policies becomes clear from figures on industrial structure, particular when compared with those in OECD countries, i.e the former West Germany (Table 1).
In Poland the rigidity of the centralized, planned economic system found its exception in considerable liberalizing influences in favor of small businesses. The system allowed the continued existence of (private) handicraft production and retailing.
Peter Murrell, The Nature of Socialist Economies. (Princeton: Princeton Univ. Press, 1990), p. 223, makes this point very clear: "... the socialist countries perform less well on product innovation than on process innovation and have a comparative disadvantage in sectors in which there is a large amount of entry of new firms."
Ibid. "This book's results show that the real difference between capitalism and socialism is that the latter, ..., does not possess a mechanism that is able to generate new institutions,select the productive ones, and foster their growth."
Table 1: Poland and East(ern) Germany compared with West(ern) Germany
F ir m s i z e ( p l a n t ) E n t e r p r i s e s E m p lo y m e n t
POLAND i n d u s t r y
Y e a r
1 9 8 9 1 9 9 1 1 9 8 9 1 9 9 1
6 - 1 0 0 1 2 0 3 2 0 . 0 « 2 1 1 9 3 0 .1 % 5 6 1 7 5 1 .4 % 1 3 2 1 0 0 4 .0 %
1 0 1 - 1 0 0 0 3 8 0 5 6 3 .3 % 4 2 3 4 6 0 .1 % 1 3 3 7 5 1 2 3 3 .3 % 1 3 2 9 0 0 0 4 0 .1 %
1 0 0 1 - 1 0 0 0 1 5 .6 % 6 9 6 9 .9 % 2 6 2 3 4 3 6 6 5 .3 % 1 8 5 0 7 0 0 5 5 .9 %
T o t a l 6 0 0 8 1 0 0 .0 % 7 0 4 9 1 0 0 .0 % 4 0 1 7 1 2 3 1 0 0 .0 % 3 3 1 1 8 0 0 1 0 0 . 0 %
- 5 ' 3 1 4 7 7 7 6 0 8 8 2 3
E a s t ( e r n ) GERMANY i n d u s t r y Y e a r
1 9 8 7 6 / 1 9 9 2 1 9 8 7 1 9 9 1
2 0 - 1 0 0 6 4 2 1 3 .8 % 3 8 0 8 6 7 .2 % 3 3 8 2 1 1 .0 %
1 0 1 - 1 0 0 0 1 9 3 8 5 6 .5 % 1 6 9 6 2 9 .9 % 7 4 8 5 2 4 2 3 .2 %
1 0 0 1 - 8 4 3 2 4 .5 % 1 6 1 2 .8 % 2 4 4 8 3 4 8 7 5 .8 %
T o e a l 3 4 2 3 1 0 0 .0 % 5 6 6 5 1 0 0 .0 % 3 2 3 0 6 9 3 1 0 0 .0 % 1 7 5 9 0 0 0 1 0 0 .0 %
- 1 9 9 2 0 9
W EST( e r n ) GERMANY m i n i n g a n d p r o d u c i n g i n d u s t r y ♦ Y e a r
1 9 8 7 1 9 9 0 » * 1 9 8 7 1 9 9 0 * ♦
2 0 - 9 9 3 1 6 7 8 7 1 .8 % 3 3 3 3 1 7 1 .4 % 1 2 5 3 5 0 7 1 7 .7 % 1 3 4 4 3 4 9 1 7 .9 %
1 0 0 - 9 9 9 1 1 4 2 3 2 3 .9 % 1 2 2 S 8 2 6 .3 % 3 0 5 1 5 6 6 4 2 .9 % 3 2 8 6 0 2 3 4 3 .8 %
1 0 0 0 - 1 0 0 2 2 .3 % 1 0 5 8 2 .3 % 2 8 0 1 1 9 9 3 9 .4 % 2 8 7 3 8 4 3 3 8 .3 %
T o t a l 4 4 1 0 3 1 0 0 .0 % 4 6 6 7 7 1 0 0 .0 % 7 1 1 1 2 7 2 1 0 0 .0 % 7 5 0 4 2 1 5 1 0 0 .0 %
1 - 1 9 5 5 9 5 4 3 6 3 3 6 6
N o t e s : * I n c l u d i n g a p p r e n t i c e s f o r f i r m s > 2 0 e m p l o y e e s , e x c l u d e s e m p l o y m e n t i n e n e r g y p r o d u c i n g i n d u s t r y .
* * A s o f S e p t . 3 0 . 1 9 9 0 .
S o u r c e s : I n d u s t r y S t a t i s t i c s . C e n t r a l S t a t i s t i c a l O f f i c e . W a r s a w . 1 9 9 0 a n d 1 9 9 2 : S t a t i s t i s c h e s J a h r b u c h d e r DOR. B e r l i n ( e a s t ) . 1 9 8 9 :
S t a t i s t i s c h e s J a h r b u c h d e r B u n d e s r e p u b l i k D e u t s c h l a n d . W i e s b a d e n . 1 9 8 9 a n d 1 9 9 2 .
Second, the central control over the planned economy weakened in the 1970s and 1980s, thus allowing opportunities for underground private economic activity.16 This partial, tolerated privatization is reflected in the increase in industrial private employment as shown in Figure 1.
In the former East Germany (GDR) waves of rapid socialization of enterprises were only separated by periods of somewhat slower socialization or concentration in combines.
Thus the continuous decline of private or semi-private employment in the GDR (Figure 2). In the GDR employment became very concentrated in a small number of large enter
prises, or combines.
Eastern European industrial structure was based on the idea of reaping economies of scale (even in 'routine' innovation) from the production of mass products.17 The static perception of advantages from economies of scale by Eastern European planners are also reflected in their abhorrence of the dynamics of change of industrial structure.
Both entry and exit rates for enterprises were virtually nil18 Giant enterprises were founded or merged by central or local authorities by decree in response to non-economic pressures. For example East Germany linked manufacturing establishments in a system of combines so that the task of sifting and redirecting the flow of information at the top of the command structure was simplified. In essence a combine was responsible for virtually all of the plants within each major industrial sector.19
Simon Johnson and Gary Loveman, "The Implications of the Polish Economic Reform for Small Business: Evidence from Gdansk", Mimeo 1991, p. 276.
William Easterly, " Distortionary Policies and Growth in Socialist Economies," in Reforming Central and Eastern European Economies: Initial Results and Challenges, eds.
Vittorio Corbo et al.(Washington DC: The World Bank, 1991), p. 178.
According to Rainer Schwarz,"Über Innovationspotentiale und Innovationshemmnisse in der DDR-Wirtschaft," Juli 1991, this is somewhat of an overstatement. New production and research units of 'Kombinate' were created in response to technological pressures.
These entries were the result of administrative fiat, however, and can not be compared to entries which represent the response to market and technological opportunities in western economies. After all, the number of administrative entries in the East German economy remained far below comparable numbers in market economies. Most tellingly, there existed no statistics in eastern European countries on exit and entry of productive units.
David Audretsch, "Industrial Policy and International Competitiveness: The Case of Eastern Europe," in European Competitiveness, ed. Kirsty Hughes (Cambridge: Cambridge Univ. Press, 1993).
Comparison between the Priuate Sectors in Poland and the COR
700 r-
500 /
500 I-
Z X-A
400
300
\ /
200 I ... . ■ , I ■ ■ . . i ■ , , , I
1950 1355 I9 6 0 1955 1970 1975 1980
f l a r
Figure i i'fon-aqricuitural private employment in Poland 1949-62 2000
1800 1500 - 1400
1200 -
1000
300 -
1\
3 500
* *\ Yx 100
200
privat? employment
private and semi-private employment
. l L. i i i L, i
1952 1955 I960 1985 1970 1975 1980
Year
Fig u r e 2 .^an-agric’jiiurai private and semt-priuate emo io vment in the G DR.
1952-32
Note: semi-private employment means employment in minority state-owned firms.
Source: Andres Aslund, Private Enterprise in Eastern Europe (Oxford: Macmillan, 1985), pp. 217-18.
Entry of small manufacturing firms outside such combines was choked off. The flip-side of entry, exit was equally absent from the economic landscape of Eastern Europe with the existence of the soft budget constraint.
V. The potential of the 'nucleus' strategy in the new 'Länder' in Germany.
With the economic union of the former German Democratic Republic (GDR) and the Federal Republic of Germany (FRG), virtually over night an Eastern economy switched from a command system, or the failed 'capital' strategy, to a strategy of compressed transformation of an economy based on social market principles. The major macroeconomic and social changes of July and October 1990 were most prominently the introduction of a stable new currency, the Deutschmark, and the copying of the West- German legal system, which meant the recognition of private ownership and of West German social security arrangements. Furthermore, the transfer of West German labor market regulations and extension of the federal financial structure as well as the western banking system meant the overnight establishment of labor and capital markets. Eco
nomically this overnight shift meant the complete and immediate opening of the domestic market of the former GDR to foreign competition, particularly to West German and Western European competition. It also meant the rapid introduction of high West German working standards, pay-scales and social security benefits in an economic system that utilized its productive resources at a third of Western efficiency.20
The consequences of the rapid opening of the protected, controlled Eastern German economic system to the world market should have been expected: whereas during the Great Depression of 1932 German industrial production reached 59 percent of its previ
ous peak of 1928, Eastern German industrial production in December 1990 fell to a level of 45 percent of production in 1989. And according to recent estimates by the German Ifo-Institute, in December 1991 that level was as low as 33 percent of the 1989 produc
tive output.21 It is only through massive infusion of capital into Eastern Germany by Western Germany, that great human hardship is being avoided.22
20 For an early extensive, neoclassical analysis of these changes see George A. Akerlof, "
East Germany in From the Cold: The Economic Aftermath of Currency Union," Working Paper, Institute for Policy Reform, Washington, June 1991. Gerlinde Sinn and Hans- Werner Sinn, Kaltstart (Jumpstart) (Tübingen: J.C.B. Mohr, 1991), put East German productivity as low as one sixth of West German.
Kurt Hübner, "Das Kopieren des Westens ist ein Weg in die Sackgasse," Der Tagesspiegel, 13 December 1991.
It is estimated that between 1990 and 1995 the public subsidization of and investment in the eastern part of Germany will amount to about 500 billion dollars. On a per capita basis each East German is supported by 31,250 $. If a developing country like India were to receive equivalent per capita aid, lets say over the next decade, this would mean the
The aim of Germany's radical transformation is to set the productivity mark for the Eastern German economy as high as it is for Western Germany in the hope that all privatized, surviving production units and those that are newly entering the market will immediately aim for that high mark. The rapid build-up of capital intensive production sites, employing locally abundant personnel at high Western wage levels, then induce high rates of economic growth.23 That strategy however, will not succeed in this form, and it needs to be altered in several significant ways.
Internationally competitive economies have easy access to cutting edge technological information. For one, they have continuously invested in building technological capacities that enable firms rapidly to translate technological changes into productivity advantages.
Second, firms are part of logistical and informational networks comprised of enterprises, R&D units, differentiated supplier and buyer markets, and a host of governmental or semi-public institutions and associations, sometimes at a regional or national level and for larger firms often at an international level.
Starting in 1990, the German government in cooperation with regional governments in Eastern Germany and with private sector associations has instituted several programs for developing technological capabilities in the new 'Länder'. These programs aim at the de
velopment of a more congenial research environment, which when compared to Western Germany lacks cohesiveness and depth. Federal programs are complemented by some administered by the European Community.
The German economic ministry started funding a program of 21 technology transfer and innovation support agencies or centers in the new 'Länder'. Eight additional such tech
nology support and information centers are sponsored by industry organizations.
Furthermore, there is another program that offers support to research and development organizations in eastern Germany. Many of those organizations are newly constituted former R&D units of East German combines. Research projects of western German small and medium-sized firms are eligible for substantial federal subsidies under the program,
investment of approximately 26 trillion $ (26,000,000,000,000). Obviously such a strategy is unrealistic for most parts of the world that would need it. And here I point again to the uniqueness and to the essence of the Eastern German 'nucleus' strategy: It has at its core the rapid transfer of western standards to centers or nodes of excellence in a sea of mediocrity. These centers, established at high cost, then are stimulated to infuse the entire economy within a short time with high standards of production and productivity.
Sinn and Sinn, p. 126, call this the 'high-wage-high-tech" strategy. They put the analogy as follows: East Germany was famed for the homegrown inefficient car, called Trabbi. The nucleus strategy applied to the Trabbi means that from now on those old cars are no more allowed on the road. Unless one drives a new Mercedes, one has to stay home. Extensive transitional periods, which ease out one car to gradually introduce another, are largely absent in such a model.
research tasks.
A third program sponsors entry of'technology oriented' firms. Technology oriented firms are defined as those which enter a market based on innovative production processes or products. If Murrell is correct in that former socialist economies were uncompetitive in industrial sectors which in OECD countries are characterized more by product than by process innovations, under conditions of high turbulence, one would expect technology oriented subsidies to have a significant impact on the transformation process in these very sectors.24
The data from the yearly innovation survey, which the German ifo-Institute administers every year in West Germany and since 1990 in Eastern Germany as well, points to sig
nificant increases in both product and process innovation in firms of the new 'Länder'.25 In 1990, 36 percent of firms had a product innovation, the number was 59 percent in 1991. With process innovations the increase was even more marked, from 22 to 46 per
cent (Table 2). Comparable Western German figures are 68 percent for product and 64 percent for process innovations.
These numbers have to be interpreted with caution, since the industrial base of Eastern Germany shrank dramatically from 1990 to 1991, with the less productive and innovative firms more likely to have disappeared. But some trends appear nonetheless to be valid.
Clearly, there is a movement in the direction of Western German levels. Process innovations did catch up to product innovations, which may be an indication of the establishment of larger firms. A closer look at innovation activity by firm size categories reveals that in contrast to Western Germany medium size firms are the most innovative in products. In process innovations the large companies dominate, as is the case in Western Germany. Given the very low level of Eastern German industrial production, and the comparatively low level of both product and process innovation, this unusual innovative performance of middle sized firms has to be interpreted as the innovative weakness of large firms. The weakness of "cathedrals in the desert" in terms of product innovation may become apparent.
The overall size of these programs, however, remains small. In 1991 a mere 40 million Deutschmark was provided by the economic ministry for R&D in small and medium-size firms in eastern Germany. For more detailed descriptions of such programs refer to
"Forschungs- und Technologieforderung," Die Wirtschaft. Special section, no. 5 (1991), pp. 1-12. Bundesministerium für Wirtschaft, Wirtschaftliche Förderung in den neuen Bundesländern (Bonn, Aug. 1991). Also see article "Technologiezentren für Osteuropa,"
Der Tagesspiegel. Nov. 19, 1991, p. 31.
25 ifo-Schnelldienst. no. 15 (1992): pp. 3-9.
Table 2: Innovation in Producing Industry in Eastern Germany
Firm size distribution by employment (percent)
Firm size 1990 1991
Innovations
Product Process Product Process
1 -4 9 22% 17% 48% 43%
50-199 34% 18% 61% 49%
200 - 999 34% 19% 64% 41%
1000+ 40% 28% 53% 51%
All sizes 36% 22% 59% 46%
Note: innovations are significant changes in products or processes.
Source: Ifo Schnelldienst, no. 15 (1992), p. 4.
A very recent analysis of firm dynamics and performance in Eastern Germany reveals the below average productivity by firms which are either large or at least partially under Western German ownership, or both.26 Another study of the technology potential in one of the five new 'Länder' of eastern Germany, Brandenburg, reveals the absence of a large number of technology oriented medium sized enterprises to support the integration of larger firms into the region.27
In the light of the still very anecdotal nature of the available information on innovative activities and productivity change, what is necessary to gauge the potential (emerging) problem of the innovative missing middle resulting from the Eastern German industrial transformation strategy, is an evaluation of developments in industry structure, branch composition, and firm turbulence. This then gives a better indication of the potential of the 'nucleus strategy' for promoting the existing narrow entrepreneurial basis.
Do we see a convergence towards OECD (West German) patterns of market structure, branch composition and turbulence since 1989/90? To analyze changes in industrial structure and composition in East Germany I will use a) the firm database of the German Treuhandanstalt (or more simply 'Treuhand'), the agency responsible for privatizing the heritage of the East German economy, and b) other statistical surveys of the overall firm base, which include firm start-ups and closures not included in the decreasing Treuhand population.28
Initially, around mid 1990, the Treuhand had a stock of slightly over 10 600 firms (including 5 600 in industry), of which it has privatized about 55 to 60 percent by July of 1992, that is around 5 600 (including fewer than 2 500 industrial firms). At the beginning of the privatization process, industrial capacity (no. of firms) of the Treuhand is esti
mated to have been around 90 percent of the total. By mid 1992 the Treuhand's stock of firms of 4 340 is estimated to include less than 20 percent of the total of industrial firms of eastern Germany (2 445 of an estimated 15 000 for July 1992; see table 3).
Dietmar Harhoff and Konrad Stahl, Firm Dynamics in Eastern Germany - First Empirical Results, unpublished manuscript, ZEW Mannheim, March 1993. The results of this study are based on labor productivity of a October 1992 sample of 6541 firms in production, construction, services, and trade.
Horst Albach, Hoile Griinert and Rainer Schwarz, "Technologiepotential des Landes Brandenburg — Analyse und wirtschaftspolitische Empfehlungen," WZB Discussion paper
11 (Berlin, 1992), p. 93.
Dietmar Harhoff and Konrad Stahl, Firm Dynamics in Eastern Germany; German Institute for Economic Research (DIW), "Gesamtwirtschaftliche und unternehmerische Anpassungsprozesse in Ostdeutschland (Macroeconomic and entrepreneurial adjustment in East Germany)," Weekly Report no. 52 (1992).
Table 3: Industry Structure in Eastern Germany
Firm size employment
Firms (including non-industrial)
Non-Treuhand (10-15-92) All
(10-15-92)
nos percent
With Treuhand (6-30-92)
nos percent nos percent
- 19 63377 79.2 % 937 21.6% 62440 82.5 %
20-100 11609 14.5 % 1619 37.3 % 9990 13.2%
101-500 3824 4.8 % 1094 25.2 % 2730 3.6%
501-1000 460 0.6 % 160 3.7% 300 0.4 %
1001 - 326 0.4 % 126 2.9 % 200 0.3 %
79596 99.5 % 3936 90.7 % 75660 100.0 %
unclassified 404 0.5 % 404 9.3 % 0 0.0 %
Total 80000
100.0%
100.0 % 4340
5.4 %
100.0 % 75660
94.6 %
100.0 %
Firm size employment
Industrial firms
All With Treuhand Non-Treuhand
(7-92 est.) (7-92 est.)
nos percent
(6-30-92)
nos percent nos percent
- 19 9209 61.4% 409 16.7 % 8800 70.1 %
20-100 3808 25.4 % 963 39.4 % 2845 22.7 %
101-500 1474 9.8 % 724 29.6 % 750 6.0 %
501-1000 222 1.5 % 122 5.0 % 100 0.8 %
1001 - 161 1.1 % 101 4.1 % 60 0.5 %
14874 99.2 % 2319 94.8 % 12555 100.0 %
unclassified 126 0.8 % 126 5.2 % 0 0.0 %
Total 15000
100.0 %
100.0 % 2445
16.3 %
100.0 % 12555
83.7%
100.0%
In July 1992 the already privatized Treuhand firms plus those in Treuhand stocks accounted for about 40 percent of'industrial firms' in Eastern Germany. That is, another estimated 10 000 industrial firms may have sprung up in the new 'Länder', which were not part of the original stock of Treuhand plants but which are start-ups and investments.
The vast majority of those non-Treuhand start-up firms, around 8500, are very small (less than 19 employees).
Tables 1 and 3 reveal the convergence of the Eastern and Western German size structure in industry. Over two thirds of the firms are small in the new Länder of Germany (67.2 percent as compared to 71 percent in the old Länder). However, in absolute terms indus
trial capacity in the eastern part is only one tenth of that of the western part of Germany.
Notable is the relative abundance of very small firms with less than 20 employees in comparison to Western Germany.
A closer look at the dynamics in the sub-sample of Treuhand privatized and owned firms, which still accounts for two fifths of Eastern German industrial potential and consider
ably more than half of its industrial employment, leads to a more differentiated evaluation of structural convergence. Particularly during its early period of operation, the Treuhand arranged for spin-offs of smaller or medium size operational productive units from the huge sector-oriented combines which formed the industrial base of the former GDR.
Several thousand such firms were thus coming into existence during 1990 and the earlier part of 1991. Table 1 showed that there existed 3 423 industrial 'enterprises' in the GDR in 1987. The Treuhand stocks of firms swelled to 5 600 by the mid 1991 peak.
So, to a small degree the high percentage decline of large firms (-70 percent; see table 4) and of medium size firms (-60 percent) between mid 1991 and mid 1992 is still a result of spin-offs. A recategorization of firms occurred from large to medium, and medium to small size, although there was no change of ownership; they stayed with the Treuhand for sale or dissolution. The largest part of this shift down to the smaller size categories was simply the result of the steep decline of industrial employment, visible also in table 1.
High employment losses of large firms are somewhat counterbalanced by a lower rate of liquidation (12 percent). Treuhand firms with less than 20 employees faced the highest liquidation rate of 26 percent per year. However, these figures are somewhat misleading, since they do not reveal how many of the down sized large firms (recategorized as small and medium) are liquidated by parts. Clearly the elimination of very large firms en bloc creates a more visible unemployment push, which is politically less justifiable by the Treuhand. Smaller and medium firms can be dissolved in greater numbers with less pub
licity. It is interesting to note here that for the entire East German firm population, insol
vencies per year for 1991 and 1992 are estimated as low as 800-900 firms. Although I think this is a statistical underestimate, it is clear from the Treuhand figures that a good part of the insolvencies occur among Treuhand stocks.
Finn size net stock (6-30-91)
adjustments priv. repriv. public liqu. new net still net (after size reclassif.*
adjustments end stock (6-30-92)
All sectors unclassif. 216 75 0 40 28 0 16 57 70 41 15 126
-19 456 12 1 116 22 3 119 183 347 41 21 409
20-100 1499 8 4 447 75 12 272 681 872 52 39 963
101-500 1550 2 11 434 30 4 256 813 670 31 23 724
501-1000 344 0 5 71 0 2 59 207 118 1 3 122
1001- 399 0 19 40 0 10 41 229 93 3 5 101
Total 4404 97 40 1148 155 31 763 2170 2170 169 106 2445
All sectors unclassif. 100.0 % 34.7 % 0.0 % 18.5% 13.0% 0.0 % 7.4 % 26.4 % 32.4 % 19.0 % 6.9 % 58.3 %
-19 100.0 % 2.6 % 0.2 % 25.4 % 4.8 % 0.7 % 26.1 % 40.1 % 76.1 % 9.0 % 4.6 % 89.7 %
20-100 100.0 % 0.5 % 0.3% 29.8 % 5.0 % 0.8 % 18.1 % 45.4 % 58.2 % 3.5 % 2.6 % 64.2 %
101-500 100.0% 0.1 % 0.7 % 28.0 % 1.9% 0.3 % 16.5% 52.5 % 43.2 % 2.0 % 1.5% 46.7 %
501-1000 100.0% 0.0 % 1.5% 20.6 % 0.0 % 0.6 % 17.2% 60.2 % 34.3 % 0.3 % 0.9 % 35.5 %
1001- 100.0% 0.0 % 5.6 % 11.8% 0.0 % 2.9 % 12.1 % 67.6 % 27.4 % 0.9 % 1.5% 29.8 %
Total 100.0% 2.2 % 0.9 % 26.1 % 3.5 % 0.7 % 17.3 % 49.3 % 49.3 % 3.8 % 2.4 % 55.5 %
* size reclassification
All sectors unclassif. -2 1 1 0 0 0 13
-19 2 -5 3 0 0 0 164
20-100 7 125 -139 7 0 0 191 Note: Adjustment relate to firms previously not
101-500 6 39 306 -351 0 0 -143 in stock , statistical changes, inputs to .
501-1000 0 2 17 149 -168 0 -89 mergers.
1001- 0 2 3 52 79 -136 -136 Privatatized finns are those returned to
13 164 191 -143 -89 -136 0 tlieir pre-socialist owners.
Total
All sectors unclassif. -0.9% 0.5 % 0.5 % 0.0 % 0.0 % 0.0 % 6.0 % Public firms are those given to states o r .
-19 0.4 % -1.1 % 0.7 % 0.0 % 0.0 % 0.0 % 36.0 % cities.
20-100 0.5 % 8.3 % -9.3 % 0.5 % 0.0 % 0.0 % 12.7 %
101-500 0.4 % 2.5 % 19.7% -22.6 % 0.0 % 0.0 % -9.2 %
501-1000 0.0 % 0.6 % 4.9 % 43.3 % -48.8 % 0.0 % -25.9 %
1001- 0.0 % 0.6 % 0.9 % 15.3 % 23.3 % -40.1 % -40.1 %
Total 0.3 % 3.7 % 4.3 % -3.2 % -2.0 % -3.1 % 0.0
The process of creative destruction, the continuous elimination of unproductive firms in favor of more competitive ones, has not yet taken hold in Eastern Germany. The convergence towards Western German size structure is largely a result of employment losses of larger firms. As the still continuing overall decline in industrial employment indicated, the decline of large firm employment is not compensated so far by entry of very small firms.
The essence of the 'nucleus' or high-wage-high-tech strategy is rapidly to shift the econ
omy into the capital and technology intensive industrial sectors.29 Data on the precise sectoral distribution of the 9 200 small and potentially entrepreneurial firms is not yet available. Given the lack of entrepreneurial opportunity until 1990 and the technological backwardness of the former East Germany, it is an untenable assumption that the newly established small firms would produce in high proportions in the high-tech sectors.
The Treuhand is not primarily involved in reforming state enterprises. Rather the agency is committed to selling off potentially viable firms to private bidders who have a direct stake in making their investments pay off. In the framework of the Eastern German trans
formation strategy one would expect a priori that firms in high-tech sectors are sold off more rapidly by the Treuhand, or those that seem a priori not viable in those sectors will be closed down more rapidly as well. An analysis of the changes in the stocks of Treu
hand firms by firm size and branch from June 1991 to July 1992 (table 5) makes apparent that dynamic or so-called high-tech industry sectors are not sold off at a much higher rate than is the overall industry average (44.5 percent). Of particular interest are machinery (37 percent), electronic and electrotechnical (50 percent), precision and optical instruments (44 percent), as well as transport industries (44 percent).
The average annual liquidation rate for all industries is 17.5 percent (table 5). High-tech sectoral rates are: machinery 13 percent, electronic and electrotechnical 23 percent, pre
cision and optical instruments 18 percent, and transport industries 10 percent. If anything becomes clear from table 5, it is that sectoral privatization and liquidation rates by the Treuhand are clustered around the mean (may be with the exception of leather, textiles, power, mining and communications industries, which are divested at a slower pace than average). Up to now the industrial transformation in Eastern Germany takes place with
out particular consideration of dynamic sectors (or for that matter any sector) and tech
nological opportunities. The fact that it has not been seriously debated as yet in Germany which sectors should and could receive special attention under these criteria underlines this point.
The German ifo-Institute classifies the following sectors as dynamic: Machine tools, electric and electronic, chemical, transport, communications, fine ceramics and porcelain, precision instruments.
Germany's 'nucleus' strategy of transformation has the visible result of first eliminating large and even medium size production units taken over from socialist East Germany.
The few larger investments of Western companies will for the time being remain cathe
drals in a deserted industrial landscape, which are waiting for the emergence of a con
stituency from the heap of newly established very small enterprises. A dramatic downsiz
ing and deindustrialization across sectors is unlikely to provide a fertile ground for the establishment of innovative medium-size, regionally anchored and integrated companies in internationally competitive high-wage, capital intensive, high-tech sectors. Given this already infertile industrial ground one would now hope for an economic incentive struc
ture that attracts resources of potential start-up firms from the less competitive to the more competitive high-tech sectors. Such an effort would in fact mean the adoption of a transformation strategy that significantly differs from the ongoing 'nucleus' strategy. A different strategy could considerably shorten the time necessary for the process of crea
tive destruction to begin to function properly in an internationally competitive environ
ment. Thus a switch in strategy should reduce the future costs of the transformation considerably.
V I. Entrepreneurship in Poland
Poland was the country which initiated the wave of economic transformation in Eastern Europe. On January 1, 1990 the so-called Balcerowicz Plan was launched. The plan pri
marily intended to stabilize the macroeconomy, and included monetary policy reform, currency reform, trade reform, as well as fiscal policy reform. It included a call for an end to the protection and subsidization of state-owned enterprises.
The aims of these adjustment programs are magically to improve the workings of markets by liberalizing prices, reducing subsidies and opening up the economy to world market competition. Efficient markets, however, operate only under conditions of stabil
ity. Thus adjustment programs in Eastern Europe also proceeded to stabilize economies by reducing budget deficits, controlling wage inflation and improving the trade balance. I argue here that these programs may well have been successful or may yet be successful in stabilizing an economy in the short run, but that the miraculous emergence of entrepre
neurship can not be assumed to be an automatic occurrence. According to Allsopp et al.,
"a microeconomic strategy is,..., in an imperfectly functioning economy, not only impor
tant in its own right, but a necessary condition for macroeconomic credibility as well."30 Christopher Allsopp et a t, "Economic Adjustment in Poland: Options for 1991 and Beyond -- Interim Report," Oxford University, mimeo, January 1991, p. 5.
Another argument for the dependence of macroeconomic stabilization on microeconomic behavior is given by Hansjörg Herr and Andreas Westphal, "Die Transformation von Planwirtschaften in Geldwirtschaften: Ökonomische Kohärenz, Mindestschwelle der Transformation, außenwirtschaftliche Strategien," Berlin: WZB Discussion Paper FS I 90-
Economic structures and institutions form and shape the extent and the efficiency of markets. Furthermore economic institutions determine the degree of uncertainty of the environment in which the entrepreneur applies his or her skills.31 It would be unfair not to mention the efforts of Eastern European Adjustment programs to introduce structural changes as well. As such the changes in financial, legal and ownership structures (privatization) are a significant attempt at setting the microeconomic parameters for markets. But, as we see particularly in the case of Poland, the absence of institutions that further domestic price and quality competition, and thus discipline firm behavior, can threaten the entire transformation process.
With the undervaluation of the Polish currency in the first half of 1990 (due to the devaluation in combination with stiff wage controls and price liberalization), the profit
ability of labor-managed firms increased dramatically. The absence of a credible com
petitive threat in the domestic markets, however, presented Polish enterprises with a soft price and quality constraint.32 Instead of improving products and selling them at lower prices in the face of competition, Polish labor-managed enterprises became preoccupied with preserving employment. Notwithstanding the fall in enterprise profitability in the beginning of 1991 and the resulting increase in exits from industries, the absence of a policy that would diversify industrial structures particularly through entry of small and medium-sized firms continues to hinder macroeconomic structural adjustment and pro
duces stagnation.
In my account of the history of the 'capital' strategy in Eastern Europe, the degree of monopolization and of capital intensity has been made apparent. It is this degree of monopolization which has not been reduced sufficiently as yet (I refer back to table 1 for Poland) as to make it more difficult for enterprises to raise prices. Another indicator of the persistence of old structures is the level of turbulence, that is the combined entry and exit of firms. Unfortunately, for Poland no reliable data on entry and exit behavior of firms are available for the last two years. For 1990 rough estimates indicate high volatil
ity among unincorporated firms.33 In that year on average 40 000 new enterprises were
9. In market economies only a stable money supply lets money function as wealth securing.
Under conditions of soft microeconomic budget constraints (soft price constraint) the scarcity of money cannot be guaranteed.
Douglass C. North, Institutions. Institutional Change and Economic Performance (Cambridge: Cambridge Univ. Press, 1990).
Christopher Allsopp et al., p. 2.
Until 1991 private sector enterprises in Poland were legally classified into three categories:© unincorporated firms -- sole proprietorships and partnerships — also known as 'natural persons'; (ii) incorporated firms, which are joint stock and limited liability
33
