Challenges to Enterprise Performance in the Face of the Financial Crisis
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Challenges to Enterprise Performance in the Face of the Financial Crisis

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This report addresses the core components of enterprise activity, namely, the factors of production and the public infrastructure to support them. In the period just before the financial crisis, a number of elements, such as access to finance, skills and education of labor, and infrastructure emerged as important obstacles to enterprise growth. The aggregate level of enterprise activity and its productivity largely depend on the availability and quality of these components. The relative importance of these obstacles has evolved over time, reflecting structural reforms and progress in improving the business environment. Some of these constraints may have eased because of the crisis, but their presence during a period of economic growth suggests that there are important, unfinished structural reforms among countries in the ECA region.
This report explores the impact of these constraints on firm performance in 29 Eastern European and Central Asian countries. The results show that enterprises in the region face varying levels of pressure depending on their features, location, resources directly accessible to them, and characteristics of country governance and regulatory frameworks. The report takes stock of enterprise sector performance along these three key dimensions near the end of two decades of the transition process. It is therefore critical to understand where firms in these countries stand now in terms of their relative access to finance, labor markets and quality of labor, and infrastructure capacity.

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Published 10 June 2011
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EAN13 9780821388006
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A WORLD BANK STUDY
Challenges to Enterprise
Performance in the Face
of the Financial Crisis
EASTERN EUROPE AND CENTRAL ASIAWORLD BANK STUDY
Challenges to Enterprise
Performance in the Face
of the Financial Crisis
Eastern Europe and Central AsiaCopyright © 2011
The International Bank for Reconstruction and Development/The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
1 2 3 4 14 13 12 11
World Bank Studies are published to communicate the results of the Bank’s work to the development
community with the least possible delay. The manuscript of this paper therefore has not been prepared in
accordance with the procedures appropriate to formally-edited texts. This volume is a product of the sta ff
of the International Bank for Reconstruction and Development / The World Bank. The fi ndings, interpre-
tations, and conclusions expressed in this volume do not necessarily refl ect the views of the Executive
Directors of The World Bank or the governments they represent.
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ISBN: 978-0-8213-8800-6
eISBN: 978-0-8213-8801-3
DOI: 10.1596/978-0-8213-8800-6
Library of Congress Cataloging-in-Publication Data
Challenges to enterprise performance in the face of the fi nancial crisis : Eastern Europe and Central Asia.
p. cm.
Includes bibliographical references.
ISBN 978-0-8213-8800-6 -- ISBN 978-0-8213-8801-3
1. Industries--Europe, Eastern. 2. Industries--Asia, Central. 3. Business enterprises--Europe, Eastern. 4.
Business enterprises--Asia, Central. 5. Global Financial Crisis, 2008-2009. 6. Europe, Eastern--Economic
conditions--21st century. 7. Asia, Central--Economic conditions--21st century. I. World Bank.
HC244.C42 2011
338.50947--dc23
2011018824
4Contents
Acknowledgments ....................................................................................................................ix
Acronyms and Abbreviations .................................................................................................xi
Executive Summary ............................................................................................................... xiii
1. Overview .................................................................................................................................. 1
Introduction .......................................................................................................................... 1
Main Issues Refl ected in the Report ................................................................................. 2
Data and Methodology ....................................................................................................... 5
The Structure of This Report .............................................................................................. 5
2. Access to Finance .................................................................................................................... 7
Financial Sector Developments in the Eastern Europe and Central Asia Region ...... 8
Data and Methodology ..................................................................................................... 14
Financial Constraints ........................................................................................................ 15
Firm Survival ...................................................................................................................... 22
Understanding Foreign Bank Presence .......................................................................... 24
Conclusions ........................................................................................................................ 25
3. Infrastructure Bo lenecks ..................................................................................................29
Infrastructure in the Eastern Europe and Central Asia Region .................................. 30
Data and Methodology 31
Electricity: A Growing Concern ..................................................................................... 32
Telecommunications Usage on the Rise, but Access and Reliability
Remain Issues ............................................................................................................. 39
The Role of Regulation and Governance ....................................................................... 42
Conclusion .......................................................................................................................... 47
4. Labor: Challenges Ahead of the Crisis ............................................................................ 50
Recent Labor Market Developments in the Eastern Europe and
Central Asia Region ................................................................................................... 51
Data and Methodology ..................................................................................................... 52
Labor Constraints in ECA ................................................................................................ 53
Responding to the Rising Skills Constraints ................................................................. 65
Eff ects of the Crisis on Labor ........................................................................................... 69
Conclusion .......................................................................................................................... 69
References .................................................................................................................................. 73
iii
4iv Contents
Appendixes ................................................................................................................................ 81
Appendix 1. Technical Notes and Data Tables .............................................................. 83
Appendix 2. Notes on Sampling and the Survey Methodology ............................... 120
Appendix 3. Summary of Obstacles Doing Business ................................................. 123
Boxes
Box 2.1. Eff ects of Easy Money ................................................................................................12
Box 2.2. Fixed vs. Floating—Example of Bulgaria and Poland ..........................................22
Box 3.1. Cost of Power Outages in Kosovo ...........................................................................37
Box 3.2. Progress in Armenia’s Telecom Sector ....................................................................41
Box 3.3. Weak Governance and Infrastructure Services: Ge ing Electricity
in Ukraine ...........................................................................................................................43
Box 3.4. Transport Constraints Tighten Across ECA ...........................................................46
Box 4.1. Strides in Labor Regulations .....................................................................................54
Box 4.2. Are the Trends Emerging from the BEEPS Data Consistent with Other
Sources? ..............................................................................................................................57
Box 4.3. Wages and Productivity Increases: Do They Refl ect Rising Skills and
Labor Shortages? ..............................................................................................................60
Box 4.4. Emigration and Brain Drain in ECA ........................................................................61
Box 4.5. Information Technology Use and Skills ..................................................................65
Box 4.6. Early Eff ects of the Financial Crisis .........................................................................68
Figures
Figure 2.1. Liquid Liabilities as a Share of GDP .....................................................................9
Figure 2.2. Foreign Controlled Banking Sector Assets ........................................................10
Figure 2.3. Access to Credit .....................................................................................................11
Figure 2.4. Foreign Claims as a Share of GDP ......................................................................12
Figure B2.1.1. Private Credit/GDP Change (2004–2007) vs. 2009 GDP Growth ..............12
Figure B2.1.2. Change in Foreign Bank Claims to GDP Ratio (2004-2007) vs.
2009 GDP Growth ..............................................................................................................13
Figure 2.5. Firm Perceptions of Access to Finance ...............................................................16
Figure 2.6. Demand for External Funding .............................................................................17
Figure 2.7. Predicted Probability of Access to Finance Being No Obstacle ......................18
Figure 2.8. Predicted Probability of Applying for a Loan ...................................................18
Figure 2.9. Predicted Probability of Access to Finance Not Being an Obstacle, by
Current Account Defi cit (Fixed Exchange Rate Regime) .............................................20
Figure 2.10. Predicted Probability of Defi cit (Crawling Exchange Rate Regime) ......................................20
Figure 2.11. Predicted Probability of Applying for a Loan by Current Account
Defi cit and Exchange Rate Regime .................................................................................21
Figure 2.12. Predicted Probability of Firm Exit Based on Firm Size ..................................23
4Contents v
Figure 2.13. Predicted Probability of Firm Exit Based on Firm Age ..................................23
Figure 3.1. Electricity as No Obstacle, 2005 and 2008 ..........................................................32
Figure 3.2. Electricity as No Obstacle by Region ..................................................................33
Figure 3.3. Power Outages vs. GDP Per Capita ....................................................................34
Figure 3.4. Breadth of Power Outages ..................................................................................35
Figure 3.5. Losses Due to Power Outages .............................................................................35
Figure 3.6. Losses Due to Power Outages by Income Classifi cation .................................36
Figure 3.7. Generator Use ........................................................................................................38
Figure 3.8. Telecommunications as No Obstacle, 2005 and 2008 .......................................39
Figure 3.9. Email Use vs. GDP Per Capita 40
Figure 3.10. Email Use vs. Labor Productivity .....................................................................41
Figure B3.3.1. Duration of Procedures for Ge ing an Electricity Connection in
Ukraine ...............................................................................................................................43
Figure 3.11. Outage Costs and Government Eff ectiveness .................................................44
Figure 3.12. Outage Costs and Control of Corruption ........................................................44
Figure 3.13. Internet Access and Government E ff ectiveness ..............................................45
Figure 3.14. Internet Access and Control of Corruption .....................................................45
Figure B3.4.1. Transport as No Obstacle, 2005 and 2008 46
Figure B4.1.1. Labor Regulations vs. GDP Per Capita .........................................................55
Figure B4.1.2. EPL Rigidity vs. Innovation ............................................................................55
Figure 4.1. Skills and Education of Labor as No Obstacle, 2005 and 2008 ........................56
Figure 4.2. Skills and Education of Labor as No Obstacle by Income Classifi cation ......57
Figure 4.3. Skills and Education of Labor as an Obstacle vs. Labor Productivity ...........58
Figure B4.3.1. Productivity and Wage Growth in Poland 2004–2008 ................................60
Figure B4.3.2. Productivity and Wage Growth in Ukraine 2004–2008 ..............................60
Figure B4.4.1. Workers’ Remi ances (% of GDP), 2008 .......................................................61
Figure B4.4.2. Skills and Education of Labor as No Obstacle vs. Remi ances ................62
Figure B4.4.3. Skills and Education of Labor as No Obstacle and Emigration of the
Tertiary Educated .............................................................................................................62
Figure 4.4. Skills and Education of Labor as an Obstacle vs. Unemployment .................63
Figure 4.5. Skills and Education of Labor as an Obstacle vs. Unemployment of
Tertiary Educated ..............................................................................................................64
Figure 4.6. Skills and Education of Labor as an Obstacle vs. Unemployment of
Secondary Educated ..........................................................................................................64
Figure 4.7. Provision of Training by Region .........................................................................66
Figure 4.8. Provision of Training by Income Classifi cation ................................................66
Figure 4.9. Skills and Education of Labor as an Obstacle vs. Provision of Training .......67
Figure B4.6.1. Firms Planning to Downsize ..........................................................................68
Figure B4.6.2. Skills and Education of Labor as No Obstacle and Plans to Downsize ...68
444vi Contents
Tables
Table 2.1. Foreign Banks in ECA Countries during the First 10 Years of Transition ......24
Table 4.1. Employment Elasticity of Growth 2004–2008 ......................................................52
Table 4.2. Cross-Regional Comparison: Labor Regulations and Skills and
Education of Labor as a Major or Very Severe Obstacle, 2008 (percentage of
respondents) .......................................................................................................................53
Table 4.3. Skills and Education of Labor as an Obstacle to Doing Business
(relative ranking among 14 obstacles) ............................................................................56
Table A1.1. Regression Controls: Summary of BEEPS-Based Control Variables .............86
Table A1.2. Results from Probit Regression of Firm Exit on Enterprise
Characteristics ....................................................................................................................98
Table A1.3. Probit Models, Financial Constraints Analysis ................................................99
Table A1.4. Comparison of Balanced BEEPS Panel and Full Sample, BEEPS 2002,
2005, and 2008 ..................................................................................................................101
Table A1.5. Regressions on the E ff ects of Power Outage Costs on Labor
Productivity Based on Varying Firm Characteristics .................................................106
Table A1.6. Regressions on the E ff ects of Power Outage Costs on Productivity by
Firm Productivity Quintile .............................................................................................107
Table A1.7. Regressions on the E ff ects of High-Speed Internet Access on Firm
Productivity Based on V107
Table A1.8. Regressions on the E ff ects of Email Use on Productivity by Firm
Productivity Quintile ......................................................................................................108
Table A1.9. Regressions on the E ff Access on
Productivity by Firm Productivity Quintile ................................................................108
Table A1.10. Regressions on the E ff ects of Power Outage Costs in Countries with
Good Governance, Good Control of Corruption, and Good Government
Regulation on Labor Productivity ................................................................................108
Table A1.11. Regressions on the E ff ects of High-Speed Internet Access in
Countries with Good Governance, Good Control of Corruption, and Good
Government Regulation on Labor Productivity .........................................................109
Table A1.12. Marginal Eff ects of Generalized Ordered Logit Models of the Eff ects
of Various Firm Characteristics on Electricity Perceptions ......................................109
Table A1.13. Regression Results for World Governance Indicators on Power
Outage Costs and Access to High-Speed Internet ......................................................110
Table A1.14. Estimated Power Outage Costs and Access to High-Speed Internet ........110
Table A1.15. Marginal Eff ects of Primary Variables on Labor Regulations as No
Obstacle and Major Obstacle (General Ordered Logit Models) ...............................115
Table A1.16. Marginal Eff ariables on Skills and Education of
Labor as No Obstacle and Major Obstacle (General Ordered Logit Models) ........116
Table A1.17. Results of the Innovation and ICT Use Logit Models .................................117
Table A1.18. Regression Results of the Training Logit Models ........................................118
Table A1.19. Regression Results of Labor Productivity Models .......................................119
Table A1.20. Regression Results of the Professionalism of Labor Model .......................119Contents vii
Table A2.1. Sample Summary 2005 and 2008 ......................................................................122
Table A3.1. Problems Doing Business: Ranking of Problems 2008 ..................................123
Table A3.2. Problems Doing Business: Ranking of Problems 2005 124
Table A3.3. Factors that are Not a Problem Doing Business, Percentage Point
Changes and Statistical Signifi cance ............................................................................125