Men of Steel Meet the Market: Interpreting Firm Behavior in Russia's Metallurgy Industry

By Clark, Carol L.; Baglione, Lisa A. | Journal of Economic Issues, December 1998 | Go to article overview

Men of Steel Meet the Market: Interpreting Firm Behavior in Russia's Metallurgy Industry


Clark, Carol L., Baglione, Lisa A., Journal of Economic Issues


The transformation of industrial enterprises from formerly state-owned entities, operating within a centrally managed economic system, to relatively autonomous, market-oriented firms, making independent production and investment decisions, represents a cornerstone of Russia's transition plan. Indeed, such a transformation underlay the Chubais privatization program, as proponents of the plan argued that private ownership of industrial enterprises would ensure needed organizational and technological restructuring.

The results of the first stage of the privatization program suggested, however, that the transformation of industrial enterprises- far from being assured by a change in ownership - would be a more difficult, lengthy, and uncertain process than had initially been anticipated. This re-evaluation is linked to three broad trends. First, the inconsistent and unstable macroeconomic policies in the early transitional period helped to create an environment in which short-term survival (without a significant adjustment in how industry operates) became the sole objective of firms. Second, maintaining the Soviet model of enterprise paternalism served management's short-term survival strategy and thus strengthened the traditional employment relationship. The link between survival and paternalism was due in part to the overwhelming use of "insider" privatization, in which employees of a privatized firm received the majority of enterprise shares. In those cases, survival depended on the management team gaining the support of the workers' collective, and continued distribution of social benefits at the place of employment helped management achieve just that. Third, active restructuring requires financial resources; yet, it was precisely these resources that were difficult to come by in the early transitional period. Industrial enterprises faced difficulties securing funds for either long-term investment or working capital, as it was virtually impossible to raise equity capital in Russia's underdeveloped financial sector while debt finance remained scarce [Murrell 1996, 35; CCET 1995, 103].

With the beginning of the second stage of privatization and the articulation of a more consistent set of governmental policies, the macroeconomic environment changed.(1) Firm survival now required a different set of actions. As a consequence, some firms began to shift their attention from short-term actions to formulating strategies for long-term viability.

Given this general reorientation, certain patterns of response should emerge. In particular, one would expect that predictable patterns of response would manifest themselves along branch, market, and/or regional lines. It seems reasonable to expect that two industrial enterprises operating in the same branch of industry, in similar product markets with similar technology, and having chosen the same variant of privatization at the beginning of the transitional period would adopt similar approaches to the market. This would be expected because the two firms would possess similar incentives and capabilities and share the same basic external environment, namely sectoral conditions, technological constraints, customer and supplier characteristics, and macroeconomic shifts [Swaan and Lissowska 1996].

A detailed study of two steel factories relates a much different story, however. The management team at each factory did implement a consistent, broadly shared market strategy; however, each team's strategy differed significantly from the other [Baglione and Clark 1997]. Moreover, the difference in external strategies had implications for the transformation of the rules and norms governing labor-management relations at each firm, the range of production activities at the firm level, and the boundaries of the firms themselves. One of the interesting lessons from the case study is that restructuring was interpreted differently at the two firms, as their respective market strategies necessarily implied different objectives for the firms to achieve and different standards by which to evaluate performance. …

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