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

As a consequence of this privatization model a variety of ownership patterns developed in Hungary: foreign firm-owned firms, foreign and Hungarian portfolio investor-owned firms (mainly from 1995), manager-owned firms, state-owned firms, bank-owned firms (mainly until 1994-95) and employee-owned firms (a marginal ownership form) and various mixtures of these basic forms. In those firms where dominant owners emerged (state-owned firms, foreign firm-owned firms and manager-owned firms) owners exercised a close supervision on the management of the firms, retained veto power on and informally influenced strategic issues such as closures and investment, appointments, and new product introduction. In the early 1990s it was a common practice in state-owned companies, especially in those companies in severe financial difficulties, for the representatives of the state owners to become involved even in operational issues. By the middle of the 1990s, the state owners' control on strategic issues eased, while in foreign firm-owned companies, especially on issues such as new product introduction, prioritizing business partners and banks increased somewhat compared to the early 1990s (Whitley and Czaban 1998).

In Slovenia, partly because of the strong legacy of self-management, legislation on privatization was implemented only in 1995, and in practice privatization meant a combination of distribution of assets and subsidized sales. This transfer of ownership resulted in a highly fragmented ownership structure, with an overwhelming dominance of internal owners, particularly because outside owners are predominantly portfolio investors. This ownership structure was advantageous to the development of inside control so that the senior management of most Slovenian firms exercised a high degree of control over strategic issues, with the exception of board appointments and dividend policy.

The bad loan portfolio inherited by the new commercial banks and the newly accumulated non-performing loan stock created an interlocking relationship between the banking sector and companies in the early 1990s in both countries, which was, as noted above, already present in the former Yugoslavia. This interlocking relationship did not however persist. Banks were reluctant to lend to companies on terms which made borrowing financially feasible because of the heavy weight of non-performing loans in their lending portfolio and the high risks due to the breakdown of traditional relationships. Additionally, the profitability and the capital of the banks were insufficient to reduce the bad loan portfolio to a manageable level through writing off some of these loans, or to accumulate sufficient risk provision. As this situation threatened the insolvency of the banking sector, governments in both countries introduced bank consolidation programmes, in which classified loans were removed from the banks' balance sheets and strict regulations, such classification and risk-provision rules for investments, were introduced. These changes made banks' stakeholding in companies expensive.