ASU Research E-Magazine: Taking Care of Business

When the Berlin Wall crumbled and fell, Eastern Europe was left standing in a pile of economic rubble. No longer guaranteed that their products would sell, firms throughout the former Soviet Union had to start from scratch—developing strategies, building markets, and reorganizing personnel.

Suddenly, businesses in the old East Bloc were faced with a free market. The government no longer automatically bought what they produced. But they had no experience in finding new markets. People began selling merchandise from trucks on street corners, from kiosks, or from company stores. They also looked west to develop new markets.

Peering through the fog of their expectations, many western economists criticized the privatization efforts of the eastern firms. They claimed that businesses were not restructuring, or that restructuring was occurring too slowly. They asserted that managers were unwilling or unable to make changes in their firms, and that owners were unable to discipline their managers.

Josef Brada disagrees. A professor of economics and director of the College of Business International Programs at Arizona State University, Brada says that westerners have allowed their own assumptions to cloud their analyses. In his new book, Corporate Governance in Central Eastern Europe: Case Studies of Firms in Transition, Brada presents case studies comparing domestically-owned companies in Eastern Europe with companies purchased by foreigners. His results contradict the earlier criticisms.

“Our experience is that if you look at the kinds of strategies that [foreign] firms follow, and the kinds of strategies that domestic firms follow, in many cases they are very similar,” Brada explains.

“The big difference you see is that firms owned by foreign multinationals have a much easier time implementing these strategies. First, because they have access to money, often from the parent company. Second, it’s a little easier for them to get the technology and knowledge needed to implement the changes.”

Brada, a Czech native, has been fascinated by Eastern European issues for most of his life. Currently, he edits a journal on Eastern European economics, manages a program for developing business education in Macedonia, and participates in ASU’s Global Executives Program (see sidebar). In addition to sharing his expertise with former Soviet businesses, Brada also enlightens westerners about Eastern European economics.

“I think you can put the countries into two groups,” Brada says. “There are those that have managed to liberalize their economies and also to stabilize them. In a second set of countries, those are still probably the most pressing issues—the countries that still have high rates of inflation, where the government is running large deficits, and countries where foreign trade may be a problem as well.”

These categories help Brada determine what issues to address for a particular country. For example, he can approach countries that have achieved stabilization and say, “Managers understand that prices are for real. They understand that they must make a profit with their enterprises or go under. How do you teach them to think about issues such as raising productivity, or looking for new markets?”

Brada says managers never had to deal with those kinds of issues before. “They understand what they have to do. But the practical aspects of doing it become very important. That’s where they need some outside help,” he adds.

In unstable countries, however, outsiders have to address broader issues and help politicians understand and identify the problems.

“The government may be running a deficit. Simply printing money and saying, ‘We don’t like inflation, so we’re going to impose price controls’ doesn’t deal with the problem in the long run,” Brada explains. “They stop inflation temporarily through price controls, but many of the negative consequences of inflation happen anyway.”

Brada says that there are two ways in which outsiders can help these businesses. The first is to validate what people already know.

“It’s not as if Eastern European managers are blind to what needs to be done,” he explains. “They do talk to one another. But when they talk, it’s often about mundane problems, not talk at a strategic level. It helps them when outsiders can come in and validate what they’re doing. It gives them the confidence that they’re able to develop the right kinds of solutions on their own.”

Brada says that westerners can also help by providing a broader perspective on what is happening.

“When in a crisis situation, your first thought is to avoid going under. This gets people involved in day-to-day kinds of issues,” Brada says. “If they simply continue dealing with day-to-day issues, and never get to the broader strategic issues, getting the enterprise to survive in the short run will not be good enough. They must start thinking about where they would like to be once staying above water is no longer the problem.”

This is no small task. Eastern European business faced a crisis with the advent of economic reforms in the early 1990s.

“Managers faced collapsing markets, because trade among these countries had decreased very rapidly after 1990. No one was buying the stuff they were producing. They had never dealt with those kinds of issues before,” Brada says.

“Most of them, because of their tradition and because they understood that the workers really had no other options, at least tried to keep the workers employed.”

Finally, governments began to develop privatization programs. And firms began thinking about what a private owner should provide.

“In many cases, a manager’s first response was to think, ‘Well, the owner should be someone with deep pockets. Our company needs more money,’” says Brada.

Occasionally, this did happen. Large foreign multinationals came in and bought out companies. But managers soon realized that money did not solve all their problems.

“Managers still faced a lot of pressure. The big multinationals wanted more efficient operations,” Brada says. “They didn’t want to keep on a lot of extra workers. They wanted better quality standards.”

Eastern European countries face similar challenges, but their solutions often differ. For example, Brada says that each country forged its own path toward privatization.

In the Czech Republic, most companies now are owned by investment funds founded by banks. In Hungary, most firms were sold to domestic investors or foreigners, with financial institutions less prominent. In Poland, the bulk of firms are new start-ups, so entrepreneurs play a greater role.

According to Brada’s research, no system of corporate governance is superior to the others, and no system is perfect.

Then again, American businesses are far from perfect, too. Brada suggests that foreign analysts stop judging Eastern European business practices against a standard of perfection. Instead, they should judge it against our own performance.—Diane Boudreau