privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies
BEN L. KEDIA
WANG PROFESSOR AND DIRECTOR
Robert Wang Center for International Business
220 Fogelman Executive Center
The University of Memphis
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c. clay dibrell
Assistant Professor of management
college of business
oregon state university
200 bexel hall
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PAULA D. HARVESTON
ASSISTANT PROFESSOR OF MANAGEMENT
BERRY COLLGE
MT. BERRY, GA 30149-5024
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*Contact Person
Paper submitted to: Journal of Business Venturing
privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies
aBSTRACT
The impact of the intermediary factor markets of production and the entrepreneur has largely been underestimated and unexplored in the context of transition economies. Drawing upon economic market transition and entrepreneurship theories, a theoretical framework of the transition process from a command to a market economy is proposed of the interdependent relationships of transition policies, intermediary factors of production, and entrepreneurship.
KEYWORDS: Transition Economies; Entrepreneurship
privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies
As once protected markets are opening to international competition and increasing worldwide consumer expectations, privatization and economic liberalization have become a focal area of attention in many national markets (Business Week, 1997; Cavusgil, 1997; Filatotchev, Wright, Buck & Zhukov, 1999). Many nations with transition economies are attempting to increase their national competitiveness through such processes as privatization of state owned enterprises (SOEs) and/or the use of economic liberalization (e.g., lessening of tariffs, industry regulations, etc.) to spur economic growth and development as a complement to privatization.
These economic policies are potent tools for governments and are necessary but not sufficient in moving a nation through the transition process toward a competitive market. As shown by Russia and other countries that continue to falter in their transition process (Gaddy & Ickes, 1999; Kingston-Mann, 1999), some countries are missing key factors that are critical to their successful transition. Other countries that have successfully completed the transition process such as Singapore (Gilbert, 1996) demonstrate the importance of investing in intermediary factors of production or intermediary factors of production to create a conducive environment for entrepreneurial growth, as the development of entrepreneurial firms provides a key underpinning for transition to a market economy (Loveman & Johnson, 1995; Mann, 1994). Hence, the development of the intermediary factor markets of production and the role of the entrepreneur at each phase of the transition process is necessary for effective economic progress. Indeed, the impact of the intermediary factor markets of production and of the entrepreneur have been underestimated and unexplored in this context. Thus, the purpose of this research is to conceptually explore the intermediary factor markets of production and the role of the entrepreneur in transition economies.
From this perspective, we will address the following research questions. As a government attempts to implement a privatization and liberalization agenda, how do the intermediary factors of production influence the transition process? Likewise, what role does the entrepreneur play in stimulating economic progress? In addressing this research agenda, the article is organized into five sections with propositions being developed throughout the paper. The first section consists of an overview of the privatization and economic liberalization literature. The second section describes the intermediary factors of production, while the third introduces the role of the entrepreneur. The fourth section discusses implications of the model for researchers and national policy-makers and future research needs closing with the conclusion.
PRIVATIZATION AND ECONOMIC LIBERALIZATION
Often researchers in this area describe privatization and economic liberalization as interchangeable processes. For example, some researchers argue that economic liberalization such as deregulation and contracting-out of public services to private providers should be studied together with privatization (e.g., Ricupero, 1997; Silberman, Weiss & Dutz, 1994); whereas, other scholars suggest that economic liberalization should be considered as a separate element (e.g., Bullis, 1998; Patel, 1998). Likewise, scholars who focus on the market shock approach (e.g., Feigenbaum & Henig, 1997) maintain that privatization and economic liberalization are one component as extensive levels of privatization of SOEs are executed in association with relatively moderate levels of economic liberalization. Conversely, writers of the gradual approach split this component into two distinctive components of privatization and economic liberalization, as this economic policy is associated with minor to moderate levels of privatization and extensive levels of economic liberalization (e.g., Manakkalathil & Chelminski, 1993; Rosefielde, 1995). As this research encompasses both market shock and gradual approaches, we take the position that privatization and economic liberalization are separate but complementary elements in the transition process of creating more competitive national markets. Thus, one economic policy is not treated as being more effective than the other since there are a number of nation states that have implemented both market shock and gradualistic economic policies with a high degree of success in their transition process (e.g., Poland, Hungary, India, China).
There are many definitions of privatization in the extant literature (e.g., Ricupero, 1997). For example, Heald and Steel (1981) delineate three components of privatization that include, 1) the privatization of financing a service, which is still being provided by the public sector; 2) the privatization of production, which continues to be financed by the public sector; and, 3) transfer and purchase of property and financing rights from the public sector to the private sector. Similarly, a basic definition of privatization is “transferring productive industries out of the public sector and into private ownership” (Ricupero, 1997: 412) or the transfer of public assets to the private sector (Park, 1998). Building upon Ricupero and Park’s works, we view privatization as the transferring of ownership of a state owned industry or enterprise from the public sector to the private sector.
Economic liberalization can be defined as the process of removing constraints to both domestic and global trade (Heald & Steel, 1981; Kay, Mayer & Thompson, 1986). For instance, economic constraints can take the form of trade tariffs, subsidy programs, taxes, macro-involvement of the government with private industry, etc. The underlying logic of these economic constraints is to protect domestic industries from competitive market forces. One meaning of economic liberalization is the relaxing of governmental regulations that prevents private firms from entering a market (Heald & Steel, 1981). Likewise, Kay, Mayer, and Thompson (1986) argue that economic liberalization is the removal of regulations to increase competition in monopolistic industries. Building upon these definitions, we treat economic liberalization as the removal of internal and external governmental barriers to competitive trade within industries and markets and that this component should be viewed as a separate but complementary element along with privatization for use in a nation's transition process.
Market Transition Approaches
For a government to push its national economy from a command economy to a market economy, there are two basic or core approaches to implementing privatization and economic liberalization that could be employed: gradual and market shock (Gabrisch & Laski, 1991; Kotler, Jatusripitak & Maesincee, 1997). A gradual approach is an incremental approach by a nation to slowly and steadily formulate and implement privatization and economic liberalization reforms while learning from their own mistakes and through the mistakes made by other nations (Park, 1998). Conversely, market shock is the immediate introduction of vast privatizations of SOEs and economic liberalization of markets. Market shock is a turbulent, discontinuous change to a national economy that reverberates throughout a nation and may result in social unrest (Gabrisch & Laski, 1991). Either approach can lead to a successful transition from a command economy to a market economy (Naughton, 1995; Shama & Merrell, 1997). The following sections provide a more detailed analysis and include examples of each approach.
Gradual Approach. Governments that employ the gradual approach conduct it on a limited bases in a few industries, while the government learns from the process of privatization and economic liberalization (Park, 1998). In the process of implementing a gradual policy on a constrained basis, there typically will be an outcome of an economy that consists of a policy of extensive levels of economic liberalization and minor to moderate levels of privatization. This type of privatization consists of a small portion of the economy being opened as compared to a majority of the economy that is still being planned. The constrained, enabling market provides the linkage or transition phase between the command or monopolistic market to a competitive market, as some firms are allowed or enabled to compete with fewer barriers to trade, while economic liberalization is implemented. However, these same firms are constrained, since they are limited to only government targeted industries.
For instance, Dutt (1997) provides a historical perspective of the gradual approach adopted by India since gaining independence from the British in 1950. Prior to major reforms in 1991, the public sector grew from approximately ten percent in 1960 to approximately over twenty-five percent of the gross domestic product by the late 1980s. Moreover, this interventionist theme is demonstrated by the rapid influence of SOEs in India. In 1978, the Indian government controlled slightly more than sixty percent of all industrial productive capital, and in 1990, it still operated seven of the ten and sixteen of the top twenty-five largest industrial units. In addition to the rapidly expanding SOEs, the Indian government continued to increase regulations and was noted as having one of the highest sets of tariffs in the world.
Since the initiation of major reforms in 1991, the Indian government has attempted to gradually rollback state interventionism through extensive levels of economic liberalization and minor to moderate levels of privatization (Dutt, 1997). The flow of foreign capital inflows and foreign investment has greatly increased with the drastic reduction of restrictions. The economic liberalization program has taken hold in the banking industry with increased consumer credit available and more flexible monetary policies authorized by the government (Irani, 1994). However, the privatization of SOEs has been almost non-existent and the size of the public sector instead of decreasing has maintained its pre-reform size (Dutt, 1997). Thus, India has increased economic liberalization in a few industries such as the finance sector but has done little in the area of privatizing SOEs. In sum, we propose the following propositions:
Proposition 1a:Governments following a gradual market transition policy will likely undergo extensive levels of economic liberalization and minor to moderate levels of privatization resulting in a constrained, enabling market.
Proposition 1b:Governments following a gradual market transition policy will likely progress from (1) a monopolistic market to (2) a constrained, enabling market, and lastly (3) to a competitive market.
Market Shock Approach. The market shock approach involves a radical change of the present command market system that results in the rapid privatization of many large SOEs over a short period (Jones, 1997). A market shock approach provides for greater economic participation on a national level by the public (compared to a more micro approach involved in the gradual approach), through selling of SOEs. However, the government still attempts to coordinate the rate of privatization and economic liberalization in the economy by timing when transfer of SOEs will occur and by leaving moderate to extensive levels of barriers to competition in place, while the private ownership takes control of the transferred SOEs. Hence, under shock therapy or market shock the government still maintains some control of the economy through privatization and economic liberalization resulting in a coordinated, participatory market.
For example, Poland successfully implemented the market shock approach by applying rapid change through extensive levels of privatization and moderate levels of economic liberalization. The Polish government placed the greatest emphasis on SOEs privatization, with added inducement of economic liberalization to assist in attracting foreign direct investment directed toward the purchase of SOEs (Kotler, Jatusripitak & Maesincee, 1997; Winiecki, 1993). Thus, they used extensive levels of privatization, complemented by economic liberalization to assist in making a strong transition from a command economy towards a market economy.
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Put Figure 1 here
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Figure 1 is a graphical illustration of the privatization and economic liberalization interaction in relation to the gradual and market shock approaches. Therefore, we suggest the following propositions:
Proposition 2a: Governments following a market shock transition policy will likely undergo extensive levels of privatization and minor to moderate levels of economic liberalization resulting in a coordinated, participatory market.
Proposition 2b:Governments following a market shock transition policy will likely progress from (1) a monopolistic market to (2) a coordinated, participatory market, and lastly (3) to a competitive market.
Figure 1 is a reflection of proposed paths of transition that a nation could follow to have greater competitiveness. For instance, Cuba and North Korea could be considered to reside in quadrant 1 due to their command economy policies (Kim, 1994). For quadrant 2, Chile is a good example of how a nation has been involved in extensive economic liberalization in several industries but still maintains control over some SOEs and is now involved in privatizing several SOEs (Pilling, 1994). The Czech Republic is a representative nation for quadrant 3, as the Czech Republic is in the process of privatizing many of its large SOEs, while keeping a relatively moderate economic liberalization plan of action (Kmetz, 1997). For quadrant 4, the United States and the United Kingdom both have consistently extensive levels of privatization and economic liberalization to create a highly competitive market (Miller, 1997).
As demonstrated in Figure 1, the levels of privatization and economic liberalization will influence a nation's path to a competitive marketplace (Czinkota & Ronkainen, 1999), leading to internationally competitive firms (Porter, 1990). An underlying assumption of this model is that a state of equifinality exists. Specifically, a nation could position itself by either adopting a gradual approach (i.e., minor to moderate levels of privatization and extensive levels of economic liberalization) or a market shock approach (i.e., extensive levels of privatization and minor to moderate levels of economic liberalization) and still be able to achieve the goal of creating a domestically competitive market leading to internationally competitive firms. However, neither the gradual nor the market shock approach is likely to be effective without the intermediary factors of production being developed.
INTERMEDIARY FACTORS OF PRODUCTION
Every national economy possesses factors of production, which vary based upon levels of development that are essential for firms to compete in any industry. In transition economies, intermediary factor markets are typically not developed nor evenly distributed across the country. These intermediary factors of production develop as the country develops economically and may in fact help spur the country through market transitions along the privatization and economic liberalization path by facilitating the development of entrepreneurial firms.
The factors of production are often thought of as consisting of land, labor, capital, infrastructure and natural resources. We follow Porter’s (1990) contention that the factors of production are more than just resources and depend on the levels of specialization and economic advancement (basic versus advanced factors) in a country. In certain types of national economic conditions, factor markets have resources with specific levels of usefulness in terms of generalized to specialized and levels of basic to advanced.
Thus, we propose that at the most basic level, where privatization and economic liberalization are minor and market activity is planned by the government and implemented by SOEs, intermediary factor markets are basic generalized. That is, factors are natural and indigenous to the country. For example, factors that are inherited by a country include physical resources such as land, mineral deposits and climatic conditions that cannot be altered. Other resources such as the human resources of the country are typically basic and undeveloped with workers limited in terms of their knowledge, skills, and abilities. Thus, the workforce is typically limited to working in jobs that require physical labor (e.g., ditch digging, harvesting crops) as opposed to working in specialized fields or positions (e.g., computer analyst or programmer, laboratory assistant) that require more developed skills, knowledge and abilities.
As governments attempt to move their nations through the transition process to a higher level of economic development, intermediary factor markets need to be developed. In the former case, factor markets should be developed from basic generalized to advanced generalized. Advanced generalized intermediary factor markets can be characterized as having developed the basic components that can be utilized across industries necessary to attain some level of competitive advantage.
Generalized components include factors that affect the entire economy of a country such as infrastructure. The development of roads and bridges to increase access and flow of good and services, the implementation of an advanced telecommunications system to facilitate efficient communication, or the development of an educational system to produce a more skilled labor force are examples of the development of an advanced generalized intermediary factor market. A distinguishing characteristic for this type of factor market is that it can be utilized by firms in a variety of industries. Based on the previous arguments, we propose:
Proposition 3a:Successful implementations of transition policy (i.e., gradual or market shock) will likely transform or generate intermediary factors of production that will create an environment conducive for the growth of entrepreneurship.
However, intermediary factor markets by themselves are not sufficient for the transition process to proceed. Without entrepreneurship taking form in a transition market, potential engines of economic growth are left dormant, as entrepreneurship has been linked to the successful transition of nations (Gibb, 1993; Lane, 1995; Mann, 1994; Roman, 1991). Conversely, entrepreneurship without the intermediary factors of production will likely be insufficient to move the national economy forward. Hence, together both of these components in conjunction with an implemented transition policy (i.e., gradual or market shock) are complementary and sufficient together. Therefore, we predict: