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competition was always there. But initially, firms run into niches and avoid domestic competitions. Early in the transition process, there aren’t many domestic firms that can challenge foreign competition. As the economies mature, however, there is more successful home-grown competition, and so domestic competition indicators heat up. High quality imports were always there, but high quality domestic production is a new phenomenon. Another factor is that the industrial structure is changing rapidly in the TEs: the share of industry is falling while services are growing rapidly. Manufacturing firms face more competition from abroad while many services are non-tradables.


Finance and financial constraints

Access to external finance has long been regarded as an important aspect of the business environment crucial for the creation, survival and performance of firms. The entrepreneurship and finance literature in the developed market economies has long emphasized the existence of financial constraints implying the inability of firms to raise external financing in order to fund all desired investments (e.g., Evans and Jovanovic (1989), Fazzari, Hubbard and Petersen (1988)). It may be argued that financial constraints facing firms in the transition countries are much more severe than in the developed market economies, by virtue of the fact that financial markets did not exist during the era of central planning. On the other hand, things may not be as simple as they appear at the first glance: it is well known that state-owned firms before the start of transition operated under so-called soft budget constraints. The footprints of these SBCs have been found well after the start of the transition process. For example, using data from Poland, the Czech Republic, Bulgaria and Romania covering 1994-1999, Konings, Rizov and Vandenbussche (2003) found greater financial constraints for firms in Poland and the Czech Republic than for firms in the less-financially-developed countries of Bulgaria and Romania. Such a cross-country pattern is explained by the persistence of SBCs in Bulgaria and Romania.

Despite a growing number of studies in the field, few authors provide a comprehensive picture of the financial development of and financial constraints in the transition region.


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