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in the transition economies. The BEEPS consist of a series of 3 snapshots of virtually all transition economies in 1999, 2002 and 2005 and covers random and representative samples from these countries. In addition, its last wave contains firm level data from a number of developed market economies, which makes it possible to directly benchmark TEs against these economies.

Our analysis of firm growth, sectoral changes and changes in size distribution of firms provides a clear picture of the convergence process. Overall, the BEEPS data show a faster growth of firms in the TEs compared with the developed market economies. The pattern of growth at the country, sectoral and firm level shows more rapid growth in the private and especially new private sectors, movement in the size distribution of firms towards the pattern of large numbers of small firms as seen in developed market economies, more evidence of convergence in the EU8 members than in the poorer TEs, as well as evidence of Kuznet-Chenery type structural change across sectors.

We see clear signs of convergence of the TEs to the developed market economies of the EU across the two dimensions of the business environment that we investigate in detail, competition and finance. In terms of competition and market structure, the EU8 members are furthest along in this process, with the SEE and CIS countries following. We offer an interpretation in terms of an initial move by firms into niches to exploit local market power and avoid domestic competition. Later in transition, there is more entry and domestic competition becomes stronger. In finance, there are again clear signs of convergence, albeit incomplete. We find some evidence that the gaps may be related to within-country duality in TEs (developed urban vs. undeveloped rural) that we do not observe to the same degree in the developed EU countries. Our decomposition analysis suggests that structure of financing received by firms in TEs is related to the observed characteristics, and the main difference remaining between TEs and developed market economies is a lower autonomous reliance on bank financing in the former (unrelated to observable firm characteristics) and correspondingly higher reliance on retained earnings. The increasing reliance on retained earnings in TEs that we observe in the BEEPS surveys over time is not a sign of reversal; rather, it represents a “maturation” of the


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