The Integration of East German Firms into the Western Market Economy

Before 1989 the East German economy was protected from global competition by the Wall. When the borderline was opened East German firms were exposed to the competition within the European Common Market from one day to the next. For East Germany the privatization of the state-owned industry was a “shock therapy”, and it illustrates the consequences of a rapid integration of a society into global markets which was previously a niche society. The paper explores the method of privatization and its severe consequences for the economic and social structure of the East German society, and for the ownership and the governance structure of East German firms. The result is a surprising symbiosis between (West German) owners and the East German management, thereby reducing the principal-agent problem. This problem, which states that owners have difficulties to exercise an efficient control over the firm, is prevalent in other Eastern European countries.