Central and Eastern Europe: Greater Influence from External Capital Providers Boosts Corporate Labour Productivity

The productivity of businesses in Central and Eastern Europe has increased considerably over the past few years. According to a recent ZEW study, this development is related to the increased tendency of Central and Eastern European businesses to tap international capital markets to finance their investments.

Businesses with a low labour productivity are more likely to reduce staff if they use equity or debt capital as a major source of finance, i.e. if external capital providers - creditors and investors - play an important part. However, the reduction of staff is a means to increase labour productivity.

Given the productivity deficits, such a measure seems to be indispensable. Slovenia, which takes the lead in Eastern Europe in terms of labour productivity, merely achieves 21 per cent of Britain's labour productivity. The productivity levels of Hungary, Poland, and the Czech Republic range between 15 and 16 per cent, as measured against Great Britain.

After the fall of the Iron Curtain, Central and Eastern European businesses had yet no access to the capital markets and credits in the Western sense. That radically changed in the 1990s: Central and Eastern European businesses increasingly recorded high revenue growth rates. However, the high profit margins generated at the beginning did apparently not suffice to finance all necessary investments. Their debt levels grew rapidly. Between 1993 and 1995, the average debt-to-equity ratio was 37 per cent, while, as early as in the years from 1996 to 1998, it climbed to 48 per cent. The ratio is particularly high in businesses from Estonia (61 per cent) and the Czech Republic (57 per cent). The major share of the debt capital that is provided to the businesses is confined to periods of no longer than one year. This increases the leverage of creditors on businesses.

A comparison of the various forms of financing shows that financing through retained and current earnings clearly prevails. Between 1996 and 1998, about 59 per cent of investments were financed internally, 35 per cent with debt capital and merely six per cent by issuing shares or direct investments. In the first years of transformation, equity financing was even more important among all Eastern European EU candidate countries. Poland is the only country whose use of equity financing grew throughout the reform process.

Contact

Dr. Jens Köke, E-mail: koeke@zew.de