Management challenges in privatization acquisitions in transition economies

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Abstract

Large-scale privatization has been at the core of economic reform in most transition economies, except China, since 1990. Privatization creates special challenges for multinational investors acquiring firms in the process. Such acquisitions differ from conventional acquisitions due to the constraints imposed on strategic action by the privatization context, the depth of subsequent restructuring, and the necessary sensitivity to the local context and the societal changes associated with systemic transition. This paper reviews privatization experiences in Central and Eastern Europe and the former Soviet Union with the aim of identifying key issues for managers operating in transition economies.

Introduction

One of the most significant socio-economic challenges at the onset of the new millennium is the transformation of post-socialist organizations to enterprises that can meet the challenges of the predominantly capitalist world economy. Multinational enterprises become directly involved in this transition process when establishing operations in one of the former socialist economies, especially when acquiring local businesses. They face a distinct institutional environment, which pre-determines the strategic opportunities for businesses and limits transferability of Western business strategies and organizational concepts (Peng, 2000; Hoskisson, Eden, Lau, & Wright, 2000).

Strategies observed in transition economies differ from those in developed economies, and strategies applied successfully in one country may fail in another. Corporate strategies in transition economies and other emerging markets can therefore be explained only by incorporating the specific institutional context in the analysis. This creates challenges that are fundamentally different from Western experiences for managers of both local firms and foreign business partners.

A special challenge is the acquisition and subsequent integration of formerly state-owned enterprises. Acquisitions frequently fail to achieve the declared goals, even within or between mature market economies (e.g., Scherer & Ravenscraft, 1987). Management scholars have analyzed the challenges of post-acquisition management, notably conflicts of corporate culture (e.g., Cartwright & Cooper, 1993), trade offs between strategic and cultural integration (e.g., Birkinshaw, Bresman, & Håkanson, 2000) and between speed and synergies (e.g., Empson, 2000). In transition economies, these challenges are even more daunting as acquisition managers operate in an unstable institutional context, and become entangled in the social and cultural aspects of the transformation from socialism to capitalism.

Few studies have analyzed privatization acquisitions from a strategic management perspective (Uhlenbruck & de Castro, 1998, Uhlenbruck & de Castro, 2000). This paper presents an eclectic perspective of privatization-related acquisitions in transition economies. It outlines the managerial challenges at different stages as observed in Central and Eastern Europe (CEE), by drawing on and complementing the widely dispersed literature on privatization and foreign direct investment in transition economies.

The paper takes the perspective of the acquiring firm and is addressed to both managers and scholars interested in this process. I first explain the concept of privatization acquisition and outline the process from the negotiations to the restructuring and integration of the firm. Next, I discuss how the negotiation process itself affects the firm directly, and indirectly by creating lasting constraints on post-acquisition strategies. Then, I analyze the transformation of the acquired firm in relation to the associated resource transfers and learning processes. The main insights are presented in form of propositions, each complemented with the implications for managers involved with privatization from a foreign investor perspective.

Section snippets

Privatization acquisition

Many multinational firms pursue local markets in CEE, while others, fewer in number, aim at utilizing lower factor costs, especially low cost technical staff close to key West European markets (Meyer, 1998). Investors expect considerable long-term growth in demand, especially as the income of the middle class, their prime customers, grows faster than the average (Batra, 1997). When entering these new markets, an acquisition can be a key strategic move, providing local brands, market knowledge

The negotiation process

Investors acquiring a hitherto state-owned business unit are confronted with national politics. From their perspective, it is a case of ‘mergers and acquisitions’; yet buying a firm from the government results in a number of peculiarities, starting with the negotiation process. With under-developed stock markets, the valuation of firms is difficult. Moreover, the local partners are manifold and have diverse objectives, which may not always be compatible with those of profit-oriented investors.

Restructuring strategies

Firms have very different ‘dominant logic’ in socialist and capitalist societies (Newman, 2000). In socialist regimes, the overriding objective was plan-fulfillment. The incentives created by central planning led, however, to severe distortions, such as the production of large volumes of standardized, low quality products, lack of concern for consumer demand, and disregard for externalities of any kind, especially for the environment. With the objective of ensuring full employment, firms

Conclusion

Privatization acquisitions are shaped by the institutional context. Managers design corporate acquisition and post-acquisition strategies under the institutional constraints imposed by transition. Hence, they need to understand the dynamics of the privatization process, which in turn conditions the post-privatization institutional context. Affiliates with inheritances from a state-owned firm are sensitive to the political context and have to manage their relations with authorities and with the

Acknowledgements

I wish to acknowledge stimulating comments on earlier drafts of this paper by the editor David Schweiger as well as many friends and colleagues from business and academia, especially Peter Krag, Lars Ohnemus, Klaus Uhlenbruck, Snejina Michailova, Mike Peng, Jens Gammelgaard, Camilla Jensen, Yelena Kaluyzhnova, Danchi Tan and Tina Pedersen. An early version of this paper was presented at the 11th International Conference on Comparative Management, Kaohsiung.

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