Varieties of Capitalism in Central and Eastern Europe

Nina Bandelj Department of Sociology Princeton University Varieties of Capitalism in Central and Eastern Europe For presentation at the Society of Comparative Research Graduate Student Retreat, May 9-10, 2003 * * This write-up is a part of the last chapter of my dissertation Embedded Economies: Foreign Direct Investment in Central and Eastern Europe. For context, I included the abstract of the dissertation in the Appendix.

Two major processes of social change have been consequential during the past decade: globalization and transition from state-socialism. Much has been written and speculated about the complexity and significance of each of these two transformations. It is surprising, however, that we know little about how they shape each other. How are places undergoing social, economic and political transformation affected by global flows of commodities, capital and culture? The point of departure in my dissertation, Embedded Economies: Foreign Direct Investment in Central and Eastern Europe, is precisely the intersection of the global and local transformations. I examine the establishment and operation of foreign investment markets in the transition countries of Central and Eastern Europe in the first decade after 1989. Specifically, I analyze the variation in foreign direct investment (FDI) flows and transactions over time, across and within countries, and by organizational cases. 1 I argue that studying FDI means analyzing embedded economies examining how economic institutions are socially constructed and how economic action, as a relational social process, is shaped by networks, institutions, politics and culture. Studying foreign direct investment is also fundamentally linked to examining property transformation in post-socialist Europe and thus to an 1 Foreign direct investment (FDI) is investment made by a company in the investor country into a foreign, host country. It can take a form of acquisition of already existing host firms or establishment of new companies in the host country, referred to as greenfield investment. FDI is a crucial medium through which national economies become inter-connected on a global basis. 2

investigation about a creation of capitalism. In this paper, I draw on my findings about the processes of foreign direct investment in Central and Eastern Europe after 1989 to begin charting a territory for an analysis of the varieties of capitalism in post-socialist Europe. I suggest that the role of states in and the interweaving of political power and economy, presence of informality in economic sphere, and influence of foreign investors as property owners, characterize the capitalist arrangements in Central and Eastern Europe. However, these factors are differentially prominent in individual countries (or clusters of countries), contributing to varieties of post-socialist capitalism. Varieties of Capitalism Marx and Weber were concerned with the origins and character of modern capitalism, assuming that the destination was given and singular. Economists in the neo-classical tradition coming to Eastern Europe right after 1989, proposing grand plans for re-design of institutions, likewise assumed that there is one destination to capitalism, and one best way to get there. In contrast, contemporary sociological examinations of capitalist institutions begin with the observation that there are different paths leading towards capitalism. These do not only depend on the endowments of economic actors but also on institutionalized patterns of authority and organizational 3

logics, which are historically developed and resistant to change. Institutional blueprints guide which actors are constituted as legitimate economic participants, and how they relate to each other as well as to the state. States also are a product of history and may have different legitimate roles in economic decision making across societies (Biggart and Guillen 1999: 740). Thus, networked small business firms might be the core pattern of economic organization in Taiwan, chaebol based on patrimonial principle in South Korea, and foreign multinationals linked to international technology and marketing channels in Spain. The debate over societal foundations of economic organization is also present in political science. It probably has its foundations in Ronald Dore s (1989) analysis of the British and Japanese factories, but was revived by Michel Albert (1993) who identified two variants of contemporary capitalism: Anglo-American" and "Nippo-Rhenish" models (Berger 2000). His research was followed by several studies examining the specificities of the German, Japanese, French, and other national models (Berger and Dore 1996; Couch and Streeck 1997; Hall and Soskice 2001; Hollingsworth and Boyer 1997; Soskice 1991, 1999; Streeck 1992). The underlying premise of these studies is that firms (as well as other economic arrangements such as capital markets) are "social institutions, not just networks of private contracts or the property of their shareholders. Their internal order is a matter of public interest and is subject to extensive social regulation, by law and industrial agreement" 4

(Crouch and Streeck 1997:37). National markets then differ systematically according to the kinds of resources and frameworks that the national models provide. For Soskice (1999), the basic differentiating factor is institutional configuration of production regime, which is defined by four patterns: 1. the sets of rules and institutions regulating the industrial-relations system, 2. the educational and training system, 3. the relations among companies, and 4. the system of corporate governance and finance. In Soskice's categories, there are two broad types of production regimes: business-coordinated market economies (e.g. Germany, Japan, Korea, Sweden) and liberal market economies (e.g. the United States and Britain). Overall, contributors to the varieties of capitalism literature hold that the different institutional configurations, or production regimes, generate systematically different economic performances and allow countries to pursue multiple paths to economic development. Varieties of Capitalism in Post-Socialist Europe Although not directly responding to the varieties of capitalism literature, several scholars of post-socialist transformations have advocated variability in the transformations, rather than a monolithic transition, to capitalisms in Central and Eastern Europe. The researchers identified several different types of capitalisms emerging in Central and Eastern 5

Europe: a distinct form based on recombinant property (Stark 1996), political capitalism (Staniskiz 1991), and capitalism without capitalists (Eyal et al. 1998). One of the most prominent statements on the transformation of economic arrangements in Eastern Europe is David Stark s idea of recombinant property. According to Stark, the transformation of property rights in Hungary involved a formation of novel property forms based on inter-enterprise ownership. These structures of institutional cross-ownership originated in the informal reciprocity arrangements established during the socialist period. Thus, Stark s analysis is grounded in the idea of pathdependency of economic transformation in Eastern Europe. Moreover, Stark s analysis forwards a claim that recombinant processes are resulting in a new type of mixed economy as a distinctively East European capitalism (1996: 995), akin to economic organization in Asia. In a later version of that argument, in a book with Laszlo Bruszt, the authors explain: Defying the forced dichotomy of market versus hierarchy, [actors in post-socialism] create new property forms that blur the boundaries of public and private, blur the organizational boundaries of firms, and blur the boundaries of the legitimating principles through which they claim stewardship of economic resources (Stark and Bruszt 1998: 7). While widely accepted within the academic circles, Stark s thesis also generated criticism. Fligstein (1996) takes up Stark s argument that the 6

specific form of cross-institutional ownership is akin to the economic organization in Asian societies and points out that Stark only draws out one line of that thought: the fact that Asian firms seem to have unique social structures that he characterizes as networks. But he ignores the great variation in those structures and how they work. He also ignores that states have played interesting and complex roles in the generation of these social structures (Fligstein 1996: 1080). In a more forceful critique, along the lines identified by Fligstein, Hanley, King and Janos (2002), in an article published in the American Journal of Sociology argue that the recombinant property thesis is empirically incorrect (p.130). Using the case of Hungary, as did Stark, the authors find that private property has emerged as the predominant category of ownership in contrast to the pre-eminence of recombinant property proposed by Stark. Hanley et al. trace the transformation of property to the actions of the Hungarian state and the pressures from the international agencies, such as the IMF and EU. According to the authors, While there is no doubt that the Hungarian state has experienced considerable erosion in its ability to influence economic activities since becoming integrated into world markets, the analysis presented here has demonstrated that government officials in that country retained significant capacity to shape economic developments through the allocation of ownership rights over state- 7

enterprises (2002: 162). The process of privatization enabled state actors to exert significant role in the development of the post-socialist economy. My dissertation findings corroborate Hanley et al. s point about the significant role of states, by tracing how they create markets in postsocialism. Across eleven countries 2 significant direct engagement of host states as market agents was a key turning point in the growth of FDI activity in Eastern Europe, significantly more influential than the economic indicators and democratic order. However, my cross-country comparative approach also highlighted the liability of generalizations about the role of states in post-socialism, as the size of the state sector varies across the region (see Table 1). By 2000, in some East European countries, Hungary included, the private sector share in GDP is at 80 percent, which is comparable to that in the United States (Tanzi 1999). In contrast, some other countries, while decreasing state ownership substantially after 1989, have nevertheless maintained relatively large state sectors. Therefore, continued state ownership may be one source of variation in economic arrangements across the region. This variation also has implications for the recombinant property thesis. It is more likely that, ceteris paribus, the blurring of boundaries between private and public will be present in a society with larger state sector, such as Slovenia, Croatia, Latvia and Romania. 2 Bu lgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia. 8

Table 1. Economic Indicators in Eleven Central and East European Countries Bulgaria Croatia Czech Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Gross National Income 5,950 8,440 14,550 10,020 12,570 7,870 7,610 9,280 6,980 11,610 18,160 per capita (%PPP) Private sector share 70 60 80 75 80 65 70 70 60 80 65 in GDP (%) Private sector share 65 a 56 65 75 81 b 70 a -- 72 62 b 75 55 a in employment (%) Asset share state 20 6 28 0 9 3 39 24 50 49 42 owned banks (%) Foreign banks in 71 46 40 57 79 57 46 63 64 56 21 all banks (%) FDI stock as percent GDP 2000 28 18 44 76 44 30 22 18 19 19 17 Expenditure on health 7.4 b 13.5 10.8 b 12 11.4 d 10.5 b 11.1 a 9.9 b 5.9 c 9.6 13.5 and education *% GDP) Estimated Size of 20-40 11-25 b -- 30 20-25 40 21-27 16-19 35-50 15 17-30 Informal Economy** Unionization Rate (%) 30 45 30 15 20 30 15 15 50 40 41.3 Estimated share of 18 4 1 19 15 35 22 18 44 9 1 population in poverty (%) Prevalence of MEBOs ++ ++++ + + ++ ++ +++ +++ +++ ++ ++++ in privatization Political Capitalism ++ ++ + + + + + ++ ++ ++ ++ Note: Numbers are for 2000, unless otherwise noted. Source: EBRD 2001, * World Bank Indicators (2001), **Freedom House (2002) a 1999 b 1998 c 1997 d 1996 ^Data from: Lado, Maria (2002), Industrial Relations in the Candidate Countries, European Industrial Relations Observatory On-line, www.eiro.eurofound.ie. All figures are estimates except trade union density in Slovenia; the figures refer to different years between 1999-2001; Also from Jasna Petrovic, editor in chief of the International Confederation of Free Trade Unions in Central and Eastern Europe (ICFTU in CEE) Network Bulletin http://multinationalmonitor.org/mm2002/02may/may02interviewpetrovic.html 9

Furthermore, my analyses also show that the role of states in the economy in Eastern Europe is strongly mediated by pressures from international organizations, in particular, the European Union, International Monetary Fund, the World Bank and a range of credit rating agencies, which evaluate the post-socialist states and the effectiveness of their reforms, where effective means in accordance with the neoliberal Washington Consensus. For example, World Bank Transition Newsletter, informing the world about the status of transition economies, summarized the following evaluation of Slovenia in 1996: Slovenia has received the highest initial credit rating of any country in transition Moody's has rated it at A3, while IBCA and Standard & Poor's have given it A ratings But while the rating agencies praised Slovenia's macroeconomic management, they stressed the need to restrain wage costs, accelerate privatization, and reform the pension and health care systems. This evaluation clearly advocates the neoliberal way as the right way in transition, whereby tight monetary policy, restricted fiscal policy and export led growth necessitate low social security expenditures and privileging price control beyond wage growth. Tracing how post-socialist states yield to external pressures, my study is in line with others proposing that integration into global and regional markets has diminished the regulatory autonomy of post-socialist states 10

(Amsden, Kochanowicz, Taylor 1994). At the same time, these findings go against the research in economic sociology doubting that globalization exerts significant convergence pressures on domestic economies (Fligstein 2001, Guillen 2001). To consolidate these findings, I suggest that we need to allow for the possibility that some states may not preserve their unique institutional arrangements, because they are in a structurally weak position, or because they are in the period of institutional re-building and the global world society is a source of legitimate models (Meyer et al. 1997), or both. But while I find clear evidence for the convergence of institutions at the level of states (Meyer et al. 1997), the empirical evidence is also strong for the differentiation between the formal institutions and the actual economic activity in practice. The presence of informality in transforming East European economies looms large. I find that while we can trace a significant change in formal institutions adopted by post-socialist states, the informal logics of practice retain vestiges of the socialist past, where the formal features of a command economy with a centralized allocation were in practice complemented by a set of informal reciprocity arrangements that helped firms maintain production despite shortages (Kornai 1992). Moreover, because of general bureaucracy of the system, which could not satisfy all social needs, informal mechanisms were used to compensate for it (Lomnitz 1988). The post-socialist societies thus face a challenge of reforming not only formal but also informal institutions. And as Douglass North stated, 11

While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide "legitimacy" to a set of rules, revolutionary change is never as revolutionary as its supporters desire and performance will be different than anticipated. And economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement. (North 1993) What we see in Eastern Europe is the simultaneity of convergence and divergence in globalization outcomes. Whether increasing international movement of capital, people and culture makes the world more homogenous, is one of the key issues in globalization studies, but much empirical work conducted on the subject has found divergent results. My study contributes to this literature by substantiating that global processes encourage both convergence and divergence. This is in line with Zelizer s (1999) proposition that, the economy operates at two levels: seen from the top, economic transactions connect with broad national symbolic meanings and institutions. Seen from the bottom, economic transactions are highly differentiated, personalized and local, meaningful to particular relations. No contradiction therefore exists between uniformity and 12

diversity; they are simply two different aspects of the same transaction. (Zelizer, 1999: 212) Moreover, Guillen (2001a: 235) identifies that, in fact, the divergent findings in globalization studies are "primarily due to the various levels of analysis at which different researchers operate". To deal with this issue, my study examined both the national level policies and organizational practices. Therefore, it did not only illuminate how homogenization and diversification happen concurrently but it also identified decoupling as the process that sustains their simultaneity. While investigating the role of states, international institutions and informal practices in economic transformation, my study most directly emphasized the role of foreign investors in shaping the Central and East European economies, investigating the confluence of post-socialist transformations and economic globalization and its consequences. What is the role of foreign investors in shaping the variety of capitalism in Central and Eastern Europe? Some have argued that foreign investors have penetrated the postsocialist economies so deeply that they may be a large constituency of the new post-socialist elite in Central Europe (Eyal et al. 1998). Counting foreign investors among the domestic elite, this has serious implications for their role in shaping the development of these economies. In fact, as Hanley et al. 13

(2002: 159) report, in 1992 the Hungarian government placed firms in the energy, telecommunications, finance, and basic industry into the category of long-term state ownership, but by 1999, foreign multinationals had assumed control of two-thirds of these enterprises. The authors conclude, within 10 years of the collapse of state socialism, control of key sectors of the economy had been ceded to foreign multinationals. Hungary is not an isolated case. As reported by the European Bank for Restructuring and Development, the ownership structure of the financial sectors in Eastern Europe in 2001 is as follows. In Bulgaria, 85 percent of the banking sector is foreign owned. In Croatia, foreign-controlled banks now account for over 80 percent of banking assets. In the Czech Republic, the banking sector is dominated by a small number of foreign-owned banks that account for over 90 percent of banking assets. In Poland, the majority of assets in the banking sector are controlled by foreign owned banks. In the Romanian banking sector, about 55 percent is foreign owned. In Slovak Republic, the largest bank in terms of assets was sold to Erste Bank of Austria, the second-largest bank was sold to [an] Italian banking group (EBRD 2001: 126-197). These statistics point to the pervasiveness of foreigners as owners of the strategic sectors in post-socialist economies, which may have important consequences for national development. While foreign ownership of strategic assets is a by-product of the simultaneity of the regional transformation with the rise in neoliberal 14

pressures of international organization and globalization, still not all of East European economies are equally penetrated by foreign investment. The degree of such penetration may be a source of another variation in the types of capitalisms consolidating in these countries. Which economies are more highly subject to FDI? As empirical analyses point out it is not merely the economic and political stability of those countries that matters. Overtime flows are mostly subject to the choices made about property reform in the first formative years of transformation. Indeed, privatization strategies employed in Central and Eastern Europe showed tremendous diversity, ranging from direct sales for cash by auctions or tenders; management and employee buyouts (MEBOs); voucher schemes whereby citizens acquired coupons for a small price, which they subsequently exchanged for shares in companies; or programs of citizen grants, whereby a segment of the population or sometimes every citizen was awarded some number of free certificates, which they could exchange for property rights. Overall, I have distinguished the privatization approaches by how open they were to the participation of outsiders (Table 2). Outsiders include those without former communist-party links, those who were not managers or employees in targeted companies, or foreign investors. Evidence shows that those countries that were more open to participation of outsiders in the privatization process have, by 2000, accumulated higher FDI stocks than others (Figure 1.). 15

Table 2. Privatization Strategies Country Bulgaria Croatia Czech R. Estonia Hungary Latvia Lithuania Poland Romania Methods of Privatization MEBOs* direct sale vouchers Openness to Outsiders MEBOs vouchers 0 vouchers direct sale 1 direct sale vouchers 2 direct sale MEBOs 2 direct sale vouchers 2 vouchers direct sales 1 MEBOs direct sale 1 MEBOs direct sale 1 1 Slovakia MEBOs vouchers direct sale 1 Slovenia MEBOs vouchers 0 Source: EBRD 2001 *Management employee buyouts 16

Figure 1. Prevalence of MEBOs in Privatization and Foreign Investment 80 70 FDI stock as % GDP (2000) 60 50 40 30 20 10 0 0 1 2 3 4 5 Prevalence of MEBOs (0-low, 5-high) The examination of property-rights transformations in a broadly comparative perspective is highly consequential for claims about the variety of capitalism emerging in Central and Eastern Europe, including the political capitalism thesis (Staniszkis 1991, Hankiss 1990) and argument about transition to capitalism without capitalists (Eyal, Szelenyi and Townsley 1998). According to Staniszkis, early privatization in Poland was not a result of the expansion of the traditional private sector, but was a peculiar linkage of political power and capital (1991: 128). Staniszkis reports that in 1987, there were 80 firms owned by the communist party officials and by 1990, just a month after the first post-socialist noncommunist Prime Minister Mazowiecki initiated economic reforms, there were more than 40,000. According to Staniszkis, this illustrates that the process of privatization 17

benefited the former communist elite. The former nomenklatura used its political power to enact privatization laws that enabled them to convert their former positions into new forms of post-communist privilege, and thus private wealth. The result was a creation of political capitalism. In their examination of transition to capitalism in Central Europe, Eyal, Szelenyi and Townsley (1998) find no evidence in favor of the political capitalism thesis. Instead, they argue that no meaningful class of property owners has been created in post-socialist Central Europe. According to the authors, the institutions of market economy preceded the formation of propertied class, resulting in a formation of capitalism without capitalists. Instead of real capitalists, Central Europe has generated webs of crossownership, self-ownership and ineffective small shareholding via investment funds connected with state-owned banks. Because property was fully socialized (p.4.) and there was no propertied capitalist class in East-Central Europe (unlike in historical formations of capitalism that Marx and Weber write about), the key actor in transformation, according to the authors, is broadly defined intelligentsia which is committed to the cause of bourgeois society and capitalist economic institutions (p.1). Are there any capitalists in the new Central European capitalism? The only really distinct owners are, the authors conclude, firstly, the state and, secondly, foreign capital. Furthermore, managerial ownership, or the management buy-out of state-owned firms, is not the major story in 18

post-communism. Indeed, the majority of corporate and industrial manages have acquired no business property at all (p.14). My study provides empirical evidence that uncovers the limits to these claims. In fact, Eyal, Szelenyi and Townsley examine only Hungary and the Czech Republic (with some reference to Poland), which, as it turns out in a broader cross-country comparison, are substantially different from other countries. In other countries foreign ownership is less, state sector is larger, managerial and employee ownership is more substantial and acquisition of property by (or related to) ex-communists ( political capitalism ) is greater. The story of capitalism without capitalists is not a story of post-communism in Central and Eastern Europe. Admittedly, as all the authors rightfully acknowledge the post-socialist transformations are not complete. The scholars are describing something that has not yet taken its full shape and this has its liabilities. Beyond this caveat, however, the limits to all of the propositions about the varieties of capitalism in Eastern Europe lie in the lack of (or narrowness of) their comparative approach. Quite paradoxically, while recognizing the variety of post-socialist pathways, these studies still make claims about a unique variety (not varieties) of post-socialist capitalism in Central and Eastern Europe. In contrast to these studies, the embedded economies approach to the varieties of capitalism implies that to determine a distinct quality of the system of economic institutions in Eastern Europe (or lack thereof), we need 19

to examine how states, pre-existing institutions, international organizations, cultural understandings and actions of political and economic elites promote a unique blend of property rights, governance structures and rules of exchange. Moreover, examining substantive varieties of embeddedness, this approach allows for the possibility that there is not only one variety of East European capitalism, but that the variation across individual countries (or clusters of countries) within the region is substantial. What may be some points of similarity and sources of difference across the region? All the post-socialist countries of Central and Eastern Europe shared a particular state-socialist past of centralized economy with communist party rule. After the fall of the Berlin Wall, these countries started reforming their economic and political regimes, establishing institutions necessary for market exchange and democratic governments. Although many Western analysts have come to the region right after 1989 with advice on how to re-vamp the economic arrangements so markets can emerge, in hindsight it was rather unrealistic to expect that the transformations that took decades in other parts of the world, would arise in a matter of a few years. Primarily, this was because the mere presence of rational self-interested actors and the absence of party-state interference were not sufficient for markets to emerge. In fact, the notion of emerging markets carries the bias of neoclassical theory. Markets needed to be created, because they can operate only when the required political, legal, economic and social institutions of a market economy 20

exist. This market creation was carried out by political entities: new parties, new governments, new nation-states with their privatization and economic restructuring agencies. Because of these historical conditions, the role of politics and political influences on economic activities (sometimes in terms of converting ex-communists into the new bourgeoisie in a political capitalism manner) may be generally more pronounced in the post-socialist countries than in Western developed economies. Beside the fact that the reforms were implemented very quickly, the basic outlines of institutions in Central and Eastern Europe were also being laid down in a specific context of increased economic integration on a global scale and rising legitimacy of the neoliberal discourse carried by international agencies, such as the IMF, World Bank, or UN Conference on Trade and Development. These pressures created particular conditions in which liberalization of economies needed to happen simultaneously with the creation of market institutions. Thus, the foreign capital might be more prevalent in all of the post-socialist countries than it would have been should the transition occur in a different historical period. In addition, almost all Central and East European states, upon the fall of communism, set out to join the regional association of the European Union. The application for membership involved re-forming their emerging institutions along the lines of the aquis communitaire, the EU legislation. The new institutional arrangements were thus implemented from outside 21

and sometimes did not reflect the political will of a country. This leaves a possibility that formal rule in post-socialism will be substantially decoupled from the actual practice and that the level of informality and thus the size of the informal economy may have a substantial role in all of these countries. Beside these similarities, which provided the broad context for transition, the specific circumstances of each of the Central and East European countries may create substantive varieties in their post-socialist economic arrangements. The broad contextual forces will be mediated by these countries histories before and during state-socialism, their pre-existing institutions, their national cultures and current political structures and domestic interests. All of these forces will contribute to a variety of outcomes in economic organization. For example, two smallest countries in Central and Eastern Europe, Estonia and Slovenia may seem to have much in common. Both these countries, after a long period of communist rule and redistributive economies, emerged as independent states in 1991 after being member republics of large federal and multiethnic states, the Soviet Union and Yugoslavia, respectively. Both were highly developed compared to federal average and also instrumental in starting the processes of disintegration of these federations. Both of these states were among the first to successfully complete the EU negotiations. 22

However, despite these similarities the two countries took very different approaches to market-transition. Estonia embarked on a radical market based reform, whereas Slovenia has chosen more gradual and selective reforms. Estonia was eager to liberalize the economy and open itself freely to foreign investment. During privatization it relied on the direct sales through auctions to outside bidders with a very liberal foreign direct investment regime. Also, Estonia adopted a unilateral free trade regime with zero tariffs across the board, making it one of the most open economies in the world, together with Hong Kong and Singapore (Feldmann and Sally 2002). Slovenia, on the other hand, was part of former Yugoslavia where the command economy was more decentralized, more highly integrated with the West, and was organized by, so called, workers self-management. This organization left a mark on the preferred method of privatization in Slovenia, which were management and employee buyouts, greatly limiting the involvement of foreign investors. By 2000, Slovenia received only 17 percent of GDP in its FDI stock while in Estonia this number was at 76. Generally, Slovenia has chosen a more gradual privatization rate, so that by 2000, 45 percent of all employed were still in the public sector, while in Estonia this number was one third lower. Inflation rate is higher in Slovenia, but unemployment is higher in Estonia. Unionization rate in Slovenia is about 40 percent while less than 15 percent of Estonian workforce is unionized (Table 2). In spite of these differences, both countries offer a good standard of living 23

to its people, and both are among the most economically successful of the transition countries invited to join the EU in May 2004. The fact that both Estonia and Slovenia have restructured their economies successfully but in very different ways, resulting in two substantially different social organizations of economies, implies that there is no one way of market organization that produces more efficient outcomes (Orru, Biggart and Hamilton 1997, Biggart and Guillen 1999, Fligstein 2001, Guillen 2001b). As for the role of FDI in an economy, Estonia and Slovenia, among the eleven countries included in my dissertation, stand at two opposite ends on a continuum, with the highest and the lowest levels of relative FDI stock, respectively. While I have not dealt with the consequences of foreign investment for economic development in post-socialism, the examination of the substantive varieties of market organization found in Central and Eastern Europe offers an important insight for future research on this topic. It suggests that the role of FDI for economic restructuring may not be as uniform and as equally consequential as the international organizations and neoclassical approach promote it to be (Figure 2.). After 1989, the International Monetary Fund, the World Bank, the United Nations Conference on Trade and Development, and the European Bank for Restructuring and Development, promoted FDI as the catalyst in the economic restructuring in Central and Eastern Europe. In their view, without massive inflows of foreign capital, successful transition [from 24

planned to market economies] in Central and Eastern Europe is unlikely (Schmidt 1995: 268). As a catalyst in the transition from state socialism, FDI was expected to affect key macroeconomic indicators, such as the balance of payments and employment. Moreover, foreign investors would bring financial, managerial, and technological resources that induce corporate restructuring in formerly state-owned enterprises (Meyer 1998). However, based on the findings of my study the relationship between FDI and development may not be as linear as expected (Figure 2). Future research of the effects of FDI for national development would benefit from understanding this economic process as an integral part of substantively different embedded economies, whereby divergent types and various intensities of foreign capital involvement may yield sustainable outcomes. Figure 2. Economic Prosperity and Foreign Investment 20,000 18,000 16,000 GNI per capita ($PPP) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0 10 20 30 40 50 60 70 80 FDI stock as percent GDP (2000) 25

The final question worth posing is whether we are really observing established forms of market organization, i.e. varieties of capitalism, in Central and Eastern Europe or whether these transition countries are still in transition. Reforms are still ongoing in many areas, and EU accession may affect these countries in yet another way, as might the developments at the global level. Hence, there is no clear answer. If anything, the changes that have happened in the past dozen years have made us aware of the liabilities of grand predictions for the future. But while the substantive variety of the economic organization is uncertain, what I hoped to have shown in my dissertation is that our understanding of it will be seriously impaired if it doesn t pay attention to the specific configurations of social structures, power distributions and cultural understandings that not merely impinge on it, but make it possible. 26

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Appendix: Dissertation Abstract Investigating market transition in a comparative perspective, the dissertation examines sources of variation in foreign direct investment (FDI) in post-socialist countries of Central and Eastern Europe. While previous research on FDI emphasizes the importance of efficiency accounts based on individual rationality, my approach conceptualizes FDI as a relational social process. I argue that FDI flows and transactions are socially constituted and shaped by institutions, power struggles, social networks and cultural understandings. To situate the study in its regional context, Chapter 2 provides overviews of post-socialist transformations and FDI in eleven Central and East European countries included in this study. Chapter 3 traces over time variation in FDI across these countries and finds that longitudinal country trends are little affected by economic forces privileged in traditional studies. Rather FDI is shaped by the actions of host states, which create markets by directly engaging as sellers of state property. State actions are shaped by external isomorphic pressures and path-dependency of domestic institutions. Chapter 4 examines cross-sectional variability in FDI flows in investor-host country dyads. I find that, net of economic potential and political risk of host countries, trade and migration flows between investors and hosts, political alliances between countries as well as shared cultural ties significantly structure FDI, substantiating the embeddedness of macro-economic processes. Chapter 5 shifts 30

the analysis to the organizational level and asks what influences the realization of FDI attempts. Using cases of FDI transactions, I argue for an understanding of economic action as practical action. FDI efforts are not simply a matter of rational efficiency maximization but are structured by business connections, personal ties, pre-conceptions about transaction partners, political alliances and struggles for power. The embeddedness and uncertainty contribute to substantive and procedural variability in economic action, beyond profitmaximizing means-ends calculations. This research advances the economic sociology by proposing a conceptual framework that accounts for the multi-dimensionality of social forces that structure economic action. It argues for an investigation of substantive varieties of embeddedness at micro and macro-levels. Examining the creation and operation of markets in post-socialist Central and Eastern Europe, the dissertation also contributes to a comparative study of capitalisms. 31