Institutional Change and Firm Creation in East-Central Europe: An Embedded Politics Approach

Abstract

A central debate about the transformation of post-communists countries is how the process of institution building impacts firm restructuring and creation. This debate has largely been dominated by approaches that emphasize either the depoliticization of institutional designs or the determining impact of pre-existing social structures. These views, however, have serious problems explaining one of the key comparative developments in East-Central Europe – the strong economic growth in Poland and the demise of the Czech Republic in the 1990s. This paper explains these differences by offering an alternative, embedded politics approach that views firm and institutional creation as intertwined experiments. Czech attempts to implant a depoliticized model of reform impeded the necessary reorganization of socio-political networks, in which firms are embedded. Poland facilitated institutional experiments not only in the ways it promoted negotiated solutions to restructuring, but also in the ways it empowered sub-national governments. The study utilizes data on manufacturing networks, privatization, bankruptcy, and regional government reforms collected over the past six years.