The performance of politically connected firms in South East Europe: state capture or business capture?

ABSTRACT

This article investigates the effects of the political connectedness on the business performance of private sector firms in South East Europe. This question is relevant to contemporary ideas about the importance of ‘state capture’ in the region, and the article provides a new perspective on the nature and consequences of this phenomenon. Analysis of survey data reveals that political connections tend to undermine the business performance of connected firms, with a potential negative impact on the economic development of the countries concerned. It is argued that this process is better described as ‘business capture’ rather than ‘state capture’. The terminology is important as it suggests how policies might be used to manage this issue. The negative effect on business performance is substantial, especially in service sectors and in countries of the Western Balkans. The EU member states of the region are relatively immune from the negative effects of business capture.

KEYWORDS:

• Politically connected firms
• state capture
• business capture
• Southeast Europe

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Neopatrimonialism is a form of government in which personal connections and influence networks coexist with rational-legal forms of governance, and in extreme cases may form the dominant form of decision making with the aim of extracting resources from the state for private gain of politicians and government officials (see for example Bach, 2011).

2. This is the only other study of which I am aware that has used the BEEPS data to investigate the impact of political connectedness on business performance. However, the authors use different proxies for connectedness than I do, namely the ‘frequency of bribes and gifts’ and the ‘receipt of government contracts’. In my view, these represent imperfect measures of political connectedness compared to the one used in this study since bribes and gifts may be needed only by firms that are not politically connected (i.e. captor firms rather than influential firms defined by Hellman et al. (2003), while both connected and non-connected firms may receive government contracts.

3. It should be noted that the concept of business performance is multifaceted and, were robust data available, it might be possible to widen the research to cover alternative dependent variables such as profitability and market penetration indicators. However, since such data is not readily available, I would argue that reliance on employment growth of the firm is a reasonable working proxy, especially over a short three year period.

4. The firm’s sector is based on the firm’s main activity and product or service – the services sector includes wholesale and retail trade, construction and other services activities.

5. For example, the elasticity of employment growth with respect to size is equal to $[{\beta }_1+2{\beta }_2\mathrm{l}\mathrm{n}\left(\mathrm{s}\mathrm{i}\mathrm{z}\mathrm{e}\right)]$.

6. See: https://www.beeps-ebrd.com/data/2018–2020/.

7. In the BEEPS survey, question BMb5 asks whether the owner, CEO, top manager, or any of the board members is in a political position either in a formal political (appointed or elected) position, or another position of authority, for example in the judicial system, government bureaucratic or the military, with direct or potential influence over policy.

8. Since the employment growth is measured over three years, the coefficient on connectedness of −0.051 is divided by 3 to give an annual effect of −0.0166.

9. It should be noted that both negative and positive effects at the individual firm level, controlling for other determinants of firm performance, can be distortive of the overall allocative efficiency of the whole economy.