Effect of enterprise break-ups on performance: case of Former Yugoslav Republic of Macedonia

Do enterprise break-ups improve or worsen the performance of the spun-off subsidiaries and/or the remaining master enterprises? The authors use the fact that Macedonia is a specific case among transition economies where a large number of break-ups occurred at the beginning of privatisation in order to answer this question. Using firm-level data, they estimate the effects of the break-ups of enterprises on the subsequent performance of the "master enterprises" and spun-off divisions during the period of privatisation. They estimate the performance effects by comparing the performance of enterprises that experienced spin-offs and the newly established subsidiaries to the performance of enterprises that remained intact (control set of other firms).

Major results are the following:

• there are systemic effects of break-ups on performance
• the break-ups in Macedonia were not guided by efficiency or performance goals but rather managerial self-interests
• looking at all measures, the newly established subsidiaries perform worse, while the master enterprises seem to vary between being intact or (less) harmed
• as for value added per labour, both types seem to be harmed, although the safe instruments suggest that the negative effect was not always affecting the master enterprise
• regarding total costs per labour, both master enterprises and subsidiaries do not differ significantly from the control group of other firms
• however there are signals that the subsidiaries could slightly cut total costs per labour while the masters could increase their spending
• the subsidiaries have lower total costs per labour compared to the control group and master enterprises
• both master enterprises and subsidiaries are not different from the control group in terms of profit per capital although the subsidiaries seem to be negatively affected
• the masters benefited from the split in terms of sales per labour compared to the control group while the subsidiaries were most likely harmed.<\UL>

  The authors conclude that there is strong empirical evidence that there was tunneling or asset stripping. This means that the master firms kept more capital than the common portion would be for that type of firm. In addition, an alternative of labour shedding that is also in line with the institutional setup of Macedonian privatization was in place - the master enterprises shed unwanted labour using overstaffed subsidiaries.