Do Market Pressures Induce Economic Efficiency ?

The Slovenian transition represents a slow but steady liberalization of constraints on competition. Using a unique longitudinal data set on all manufacturing firms in Slovenia over the period 1994-2001, this study analyzes how firm efficiency changed in response to changing competitive pressures, holding constant firm attributes. Results show that the period was one of atypically rapid growth of total factor productivity (TFP) relative to levels in OECD countries, and that the rise in firm efficiency occurs across almost all industries and firm types: large or small; state or private; domestic or foreign-owned. Changes in firm ownership type have no impact on firm efficiency. Rather, competitive pressures that sort out inefficient firms of all types and retain the most efficient, coupled with the entry of new private firms that are at least as efficient as surviving firms, prove to be the major source of TFP gains. Market competition from new entrants, foreign-owned firms, and international trade also raise firm efficiency in the industry. Results strongly confirm that market competition fosters efficiency. World Bank Policy Research Working Paper 3189, January 2004 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. ______________________________ a Iowa State University b World Bank Partial support form the World Bank research project RF-P064129-RESE-BBRSB, as well as the William Davidson Institute at the University of Michigan is gratefully acknowledged. The paper would not have been possible without tremendous help in obtaining the data from The Statistical Office of Slovenia and the Agency of Slovenia for Public Statistics and Services. Helpful comments and advice were provided by Mićo Mrkaić, Matija Rojec, Marko Simoneti, and Andreja Peterca. Tomaž Rejec and Jakob Tomše provided excellent assistance in setting up the data sets, and Donna Otto in preparing the manuscript.