Managers' Perceptions of Business Climates in Eastern Europe: The Interplay of Country and Industry

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With the fall of communism in Eastern Europe, American, Western European and Asian firms moved quickly to be among the first to establish business enterprises in that region. Their enthusiasm was appropriate given the strategic advantages which often accrue to "first movers" (Liberman & Montgomery, 1988; Wernerfelt & Karani, 1987). The foreign firms offered expertise and capital in exchange for access to markets, low cost labor and favorable economic conditions.

A number of articles have reviewed separately factors which contribute to the evolving business climate in Eastern Europe. These include, for example, studies of marketing issues (Joachinsthaler and Nueno, 1991; Shama, 1992), political and economic issues (Shama, 1991), or managerial issues (Shama, 1993). One limitation of such studies is that none, by itself, can provide an overall assessment of the business climate. In addition, analyses may be based on an authors' personal interpretations of interview data (Shama, 1993), raising issues of validity and replicability. This paper adds to the literature by simultaneously analyzing survey data from four states concerning six distinct issues in the external environment: economy, management, marketing, government, labor and finance. Data on perceived differences in business factors were gathered in late 1991 and early 1992 from Czechoslovakia, Hungary, Poland and Yugoslavia. (Data collection preceded the formal separation of Czechoslovakia into the Czech and Slovak republics and the fragmentation of Yugoslavia. References to Czechoslovakia and Yugoslavia in this manuscript refer, of course, to the former Yugoslavia and former Czechoslovakia.)

Differential Advantages of Eastern European Location

The identification and exploitation of sustainable competitive advantage (SCA) are widely regarded as central to successful strategic management (Barney, 1991; Reed & DeFelippi, R.J., 1991). Firm resources, including in some cases geographic location, is one of several classes of resources which organizations may seek to exploit for SCA (Barney, 1991). Sustainable competitive advantage may accrue to firms which are able to establish off-shore relationships early on to take advantage of lower labor rates, locational or other advantages (Fatehi-Sedeh & Safizadeh, 1989). However, a myriad of factors, including political and economic instability, low labor productivity or a weak infrastructure can negate expected advantages of foreign business activities (Valentine, 1988).


Potential product demand is a major consideration of firms contemplating foreign direct investment (Porcano, 1993). The populations of the Eastern Europe states in this study vary significantly from about 10.5 million for Hungary, to about 40 million for Poland. Other things being equal, demand in more populous states should be perceived more favorably by foreign firms because of their larger potential internal markets. Thus on the basis of population, Poland should be the most favorably perceived state and Hungary the least. However, the ethnic diversity of the Czechoslovakia and Yugoslavia populations, in comparison to the more homogeneous populations of Hungary and Poland, add another dimension to the situation (Held, 1992).


Politics is a major concern of firms considering foreign investment (Subranamian, Motwani and Ishak, 1993). Although definitions of the political risk construct vary, political stability is widely regarded as an important, if not the most important issue. Factors such as tax policy and labor policy are of less importance. The political situations in Yugoslavia and Czechoslovakia have been especially troublesome. However, all of the states have had to grapple with elements of the political climate such as legislation regarding privatization of state enterprises, compensation to rightful owners for assets seized under communism, taxation policies and similar matters (Held, 1992). …