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business sector, as new private firms rely less on informal and family sources of finance and more on retained earnings, to a similar extent observed in privatized firms in TEs. The other major trend over time has been the large decline in state financing of SOEs, which we take as a sign of harder budget constraints.

The analysis of restructuring and innovation activity shows that the scale of these processes is as high or higher in the TEs as in the DMEs, in line with convergence patterns. We also find, somewhat unexpectedly, an inverse U-shape pattern of restructuring in the transition countries between 1999 and 2005, with the peak of restructuring occurring in 2002 and not in 1999 or 2005. We relate this finding either to the standard pattern of firm development (most sampled firms are new private firms, established after the collapse of socialism) or to the largely common timing of transformational recession and the resumption of growth in TEs. With respect to ownership, our analysis suggests that state-owned firms are the least active in restructuring and innovation activities, followed by privatized enterprises and new private firms. We did not find any significant effect of market structure on restructuring. This may be related to the fact that the market structure, an exogenous factor at the start of transition, has already adjusted to the market environment in most of the TEs, suggesting convergence. Our results, however, suggest that highly elastic demand is associated with less restructuring of firms. Finally, the BEEPS data provide evidence that restructuring is positively associated with external financing. The impact of access to external financing is, interestingly, quantitatively as qualitatively very similar in both the developed market economies of the pre-2001 EU members and in the TEs.


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