This paper was developed with financial support from the SBF Bourse de Paris and the New York Stock Exchange, and the assistance of George Sofianos, Bill Tschirhart, and Didier Davidoff is gratefully acknowledged. We appreciate comments received on this paper from Anthony Boardman, Bernardo Bortolotti, Narjess Boubakri, JeanClaude Cosset, Kathy Dewenter, Alexander Dyck, Ivan Ivanov, Ranko Jelic, Claude Laurin, Marc Lipson, Luis Lopez-Calva, John McMillan (the editor), Harold Mulherin, Rob Nash, John Nellis, David Newberry, David Parker, Enrico Perotti, Annette Poulsen, Ravi Ramamurti, Susan Rose-Ackerman, Nemat Shafik, Mary Shirley, Aidan Vining and three anonymous referees. Additionally, we appreciate comments received from participants at the NYSE/Paris Bourse Global Equity Markets conference (Paris, December 1998), the Harvard Institute for International Development Privatization Workshop (June 2000), the International Federation of Stock Exchanges' Third Global Emerging Markets Conference (Istanbul, April 2000), four World Bank and/or International Finance Corporation meetings, two OECD conferences (Paris and Beijing), the 1999 Conference on Privatization and the Kuwaiti Economy in the Next Century, the 1998 Financial Management Association meeting, the 1999 European Financial Management Association meeting, the Fondazione ENI Enrico Mattei (FFEM), the Swiss Banking Institute and Credit Suisse, and seminars at the City University Business School (London), London Guildhall University and the University of Oklahoma. All remaining errors are the authors' alone. Please address correspondence to: William L. Megginson Price College of Business 307 West Brooks, 205A Adams Hall The University of Oklahoma Norman, OK 73019-4005 Tel: (405) 325-2058; Fax: (405) 325-1957 e-mail:...

In Russia and elsewhere, proponents of rapid, mass privatization of stateowned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn’t happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive selfdealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the selfdealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy.

The issue of public versus private ownership turns on three questions: (1) does competition matter more than ownership? (2) are state enterprises are more subject to welfare reducing interventions by government than are private firms? And (3) do state enterprises suffer more from corporate governance problems than private firms? Even if the answers to these questions favors private ownership, we must still ask whether distortions in the process of privatization mean that privatized firms perform worse than state enterprises. Our review found greater ambiguity about the merits of private ownership and privatization in theory than in the empirical literature. Empirical research comparing private or privatized firms with a state owned counterfactual documented gains in most cases. JEL Codes: L32 Public Enterprises; L33 Boundaries of Public and Private Enterprise; Privatization; Contracting Out; D21 Firm Behavior; D23 Organizational Behavior; Transactions Costs; Property Rights; 3 1.

Ten years have passed since the publication of my book The Road to a Free Economy: Shifting from a Socialist System—the Example of Hungary (referred to hereafter as Road.) It was the first book in the international literature to put forward comprehensive proposals for the post-socialist transition. This paper sets

The capitalist and socialist societies of the 20 th century assigned firms different roles within their economic systems. Enterprises transforming from socialist to market economies thus face fundamental organizational restructuring. Many former state-owned firms in the transition economies of Central and Eastern Europe have failed at this task. These firms have pursued primarily defensive downsizing, rather than strategic restructuring, as a result of both internal and external constraints on restructuring strategies. Building on the organizational learning and resource-based theories, we analyze strategies available to management in privatized, former state-owned enterprises in transition economies to restructure their organization. Both internal forces promoting or inhibiting the restructuring process, and external constraints arising in the transition context are examined. A model and testable propositions are developed that explain post-privatization performance. Implications of our research point to the ways in which firms should manage and develop their resource base to transform to competitive enterprises.

We would like to acknowledge financial support of INSEAD and the University of Texas and the comments of Frank Dobbin and other members of the working group on the International Diffusion of Democracy and Markets. Andrew Spicer has been an important inspiration for The diffusion of economic ideas is often attributed to a homogenization of world culture that instructs policymakers, despite different national contexts, to adopt common policies. Our analysis below supports the broad contention of diffusion of privatization as an idea, while underscoring the heterogeneity, or “palace wars”, among ideological stances within an epistemic community. The results show that the diffusion of privatization as an idea was significantly affected by American-trained (and particularly Chicago-trained) economists in the adopting countries. Diffusion of privatization as an economic idea reflects less a learning or emulation of better policies, but the dynamics of discourse and ideology among knowledgeable individuals in a globally dispersed epistemic community. 2

the University of Miami is an important and timely project to study and make recommendations for the reconstruction of Cuba once the post-Castro transition begins in earnest. This is being accomplished through individual original research, work-study groups, and seminars. The project, which began in January 2002, is funded by a grant from the U.S. Agency for International Development. Research Studies The CTP produces a variety of original studies with practical alternative recommendations on various aspects of the transition process. The studies are available in both English and Spanish. The Spanish translations are sent to Cuba through various means.

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June 2001, sponsored by Phare ACE, and presentation on Transition Conference on June 24-26. I would like to thank Josef Brada and Jan Svejnar for valuable comments and suggestions. All errors are mine. The main factors influencing the probability of bankruptcy are analyzed on Czech Republic 1993-1999 firm data. Basic models of the bankruptcy are compared: neoclassical, financial and corporate governance. The corporate governance hypothesis does not receive support in the ownership but the indicator of voucher privatization supports it. The initial conditions from early 90’s were not the driving the financial distress. The voucher-scheme privatization results in poorer corporate governance. These firms are more likely to go bankrupt, ceteris paribus. On the other hand, former large SOEs are less likely to bankrupt than firms with a similar debt structure- this is an evidence of soft budget constraints. 1 Non-technical Summary Enterprises in financial distress are the most endangered ones. Firm level data from

oring shareholder. JEL Classification: D21, P31, C23 Keywords: privatization, methods of privatization, ownership, equity, performance of industrial enterprises, panel data Yuri Perevalov Institute of Economics Urals Department of RAS 29 Moskovskaja Ulitsa Ekaterinburg 620014 tel: (3432) 51-18-51 e-mail: perev@five.ru Ilja Gimadi Institute of Economics Urals Department of RAS 29 Moskovskaja Ulitsa Ekaterinburg 620014 tel: (3432) 51-04-11 e-mail: green@uran.ru Vladimir Dobrodey Institute of Economics Urals Department of RAS 29 Moskovskaja Ulitsa Ekaterinburg 620014 tel: (3432) 51-04-11 e-mail: green@uran.ru 3 NON-TECHNICAL SUMMARY Privatization became one of the most powerful strategies implemented by policy-makers all over the world to improve performance of enterprises. This course of action has a very good theoretical background. Many theories were developed why private firms should outperform state-owned enterprises (SOEs)