Meyer (2001a)

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Meyer (2001a) - International business research on transition economies

“The essence of economic transition from “plan to market” is the replacement of one set of institutions governing economic activity by a different one”

Institutional foundations affect strategic decisions, so western firms will have a challenge in helping transition economies become market-based, rather than planned economies.

Enterprises in planned economies were built to serve socialist and state requirements, notably quantitative targets. The transition sets different goals, essential changing the meaning of their existence.

Mass privatisation meant firms were put on the stock market, but the lack of an institutional framework (such as routines, procedures and knowledge) meant that corruption was prevalent and caused a failure of the market.

The lack of institutions and rules to enforce control raises transaction costs and thus reduces the chance of a successful partnership or joint venture. The resulting co-ordination failure led to the recession in the 1990s.

The voucher system of share distribution has resulted in a lack of corporate governance, as the ownership is too dispersed or in the hands of an investor, who is also owned by the bank, so there is no clear owner and so no clear rules or objectives.

The most visible consequence of a failing market is the barter trade

Western partners have to deal with a firm which has unclear goals, procedures, regulations and leadership, inexperienced bureaucracy and non-transparent accounting systems and weak enforcement of property rights.

The strain of internalisation caused the rise of informal exchange networks.

The author comments that Peng and Heath’s discussion of informal networks is useful, but that the personal networks built may not necessarily reflect the firm’s goals. “Restructuring networks to serve the needs of a market economy is thus an essential component of transformation”