Path dependence and contractual relations in emergent capitalism: contrasting state socialist legacies and inter-firm cooperation in Hungary and Slovenia - organizational psychology research; includes statistical tables

Organization Studies, Jan, 2003 by Laszlo Czaban, Marko Hocevar, Marko Jaklic, Richard Whitley

Abstract

Inter-firm relations vary significantly between capitalist economies as a result of institutional differences, especially in terms of trust and mechanisms ensuring adherence to contractual commitments. The transformation of the state socialist economies in Eastern Europe might be expected to destroy the pre-1989 relationships between suppliers and customers and generate new types of connections. This study of 18 Hungarian firms and eight Slovenian firms found significant differences between the ways companies transformed and/or preserved the way they managed their supplier-customer relationships. These differences were mainly due to the differences between the legacies of state socialism, the mode of the macroeconomic transformation and the general business environment in the two countries. This study also shows that unlike the Japanese firms studied by Sako, firms in Eastern Europe show contradictory behaviours if Sako's indicators of trust are applied.

Keywords: contractual relations, trust, Hungary, Slovenia, societal transformation, path dependency

Introduction

The economic success of Japan in the postwar period and various new forms of market coordination in European regions have increased academic and business interest in the ways that firms manage relationships between themselves. Variations in inter-firm relations between market economies are often seen as being closely related to differences between societal institutions, such as the state, legal system, financial system and to some extent labour organization. These inter-firm linkages have been studied on a number of dimensions (e.g. Clark 1979; Dore 1986; Morris and Imrie 1991; Thoburn and Takashima 1992; Sako 1992; Lane and Bachmann 1996) that have been combined into two ideal-typical forms of market organization: Arms' Length and Obligational Contractual Relations (ACR and OCR respectively). Although this contrast can be seen as presuming too high a degree of internal coherence and too strong an opposition between these types, it does offer a useful starting point for comparing the ways that firms manage th eir relations with their suppliers and customers in various countries.

Briefly, ACR is characterized by independence, short-term commitments, focus on prices and contractual details, low trust between suppliers and customers as well as little risk-sharing, while the OCR is characterized by symmetrically opposing values. According to Sako (1992), ACR relationships tend to characterize Anglo-Saxon economies and OCR the postwar Japanese one, although they are not of course universal within these countries. In the present paper we analyse the characteristics of customer-supplier relations in two East-Central European countries, Hungary and Slovenia, with the dimensions that make up these two ideal types in order to explore how differences in their state socialist legacies and transformation processes have generated variations in them.

Hungary and Slovenia are useful examples to analyse these issues in Eastern Europe, because of their considerable differences in the nature of the late state socialist regimes and in the transitional paths these countries followed. In Hungary, some decentralization of decisions to enterprises had already taken place in the late 1960s, and companies developed some market-type behaviour state socialism, especially in the 1980s. However, Hungary remained in the Council for Mutual Economic Assistance (CMEA) and in practice the party-state retained considerable de facto control over enterprise behaviour.

Slovenia was the most developed republic of former Yugoslavia, having about twice as high per capita GNP as the Yugoslavian average. Firms here were heavily oriented to exports to OECD markets as well as serving the domestic Yugoslav market. Relatively little trade was conducted with the CMEA countries (Mencinger 1995). Due to the introduction of 'market socialism' Slovenian companies enjoyed more autonomy from the central state than Hungarian companies. They were, though, much more integrated with their local communities, and typically had close connections to local officials and banks.

The two countries are different in economic structure, too. Per capita GNP is substantially higher in Slovenia than in Hungary, even in terms of purchasing power (EBRD 1997). While the Hungarian economy is dominated by large companies in quasi-monopolistic positions, in Slovenia, though there are large, monopolistic companies, the smaller firms play an important role. As Hungarian industrialization was based on urban centres, firms tend to be 'national' companies, while in Slovenia, due to the multi-centre industrialization after the 1950s, the local identity of firms is an important factor in their development (Jaklic 1997). Furthermore, although there are some important firms in Slovenian heavy industry, these sectors play a more important role in the Hungarian economy.

In the next section we summarize some of the major differences between dominant types of enterprise in the late state socialist period as a result of these and other contrasts in the political economy of the two countries and explore how they led to different kinds of inter-firms connections becoming institutionalized. We then summarize the main features of the transformation process since 1990 in each country and consider how we might expect these to affect firm behaviour. In the rest of the paper we report the results of interviews with top managers of major enterprises in Hungary and Slovenia dealing with supplier and customer relationships, and consider their implications in the light of the considerable variations in dominant institutions, enterprise type and changing contexts.