133 2005ss elisagaleotti1

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Published on January 9, 2008

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THE PRIVATIZATION OF GLASS COMPANIES IN CZECH REPUBLIC:  THE PRIVATIZATION OF GLASS COMPANIES IN CZECH REPUBLIC Elisa Galeotti – 3.5.2005 1. INTRODUCTION, LITERATURE REVISION AND RESEARCH HYPOTHESIS:  1. INTRODUCTION, LITERATURE REVISION AND RESEARCH HYPOTHESIS It is widely know from the literature that the state-owned enterprises are less efficient than the private enterprises because of the lack of incentive and the different interests that managers and owners have. “The privatization process is expected to improve efficiency in state-owned enterprises changing the ownership and the incentives, but the transfer of assets is a necessary, but not a sufficient condition for increasing efficiency and changing the managerial incentives. To be successful, privatization should result in effective mechanism of corporate governance” (Hashi, 1998). Corporate governance, that arises from the separation of ownership and management and in an incomplete contract world (Shleifer and Vishny, 1997; Zingales, 1997), after privatization depends on the specific method of privatization used, on the specific ownership structure created in the process and on the country institutions and legal framework. The last condition is particularly important in the transition countries that suffered from soft budget constraints (Kornai, 1980 and 1992). The aim of this research is to analyze the effects of privatization and of ownership on company performance in the glass sector in Czech Republic. RESULTS OF FIRST EMPRICAL STUDIES ABOUT EFFECTS OF PRIVATIZATION AND CORPORATE GOVERNANCE IN CZECH REPUBLIC AND CENTRAL EUROPE Pohl et al., (1997) analyze data about 6300 firms in seven Central European countries (data up to the end of 1995) and show the importance of fast privatization in encouraging firm restructuring: the privatization method is not so important for them, even if case privatization might speed restructuring. Frydman et al. (1999): using a sample of 188 countries they analyze data from 1990 to 1993. Frydman et al. found that privatization to outsider, but not to insider, has significant effects on revenue performance: privatization increases efficiency when after the company is controlled by outsiders, not by insider owners (mangers and employees). The positive effect of privatization is limited to some performance measure and disappears when other performance measures are used. Limits of their studies: their conclusions are based on short-term data. Conclusions of Pohl et al. denied by facts in Czech Republic and other countries. Slide3:  RESULTS OF LATER EMPRICAL STUDIES ABOUT EFFECTS OF PRIVATIZATION AND CORPORATE GOVERNANCE IN CZECH REPUBLIC AND CENTRAL EUROPE Weiss and Nikitin (2004) analyze data from 1993 to 1997 of Czech privatized firms Lízal and Švejnar (2002) analyze data about 4000 medium and large industrial firms in Czech Republic in the 1992-1998 period. The results of their studies are similar: foreign ownership improves the long-term performance of the former state-owned enterprises, while privatization to domestic owners has a negative long-term effect on profit, insignificant effect on production, value added, employment, labor productivity and costs per unit of production. Lízal and Švejnar conclude that their study provides strong evidence for the hypothesis that foreign ownership improves corporate performance, but very low support for the hypothesis that privatization to domestic owners improves performance. Last studies about the effects of privatization recognize that the method of privatizion matters and that privatization may fail, if the legislative and institutional framework does not work properly (Mejstřík, 1999; Nellis, 1999). The research about the impact of privatization on enterprise efficiency leads my first group of research hypothesis that I will investigate in the glass sector in the Czech Republic. 1a: "The method of privatization cannot predict the long-term performance of the company, but has an impact on the short-term performance of the company“ 1b: "The method of privatization and the resulting ownership structure have a impact on the long-term performance of the company“ Many studies point out the positive effects of foreign investors in the economy and in the privatization process, especially in the transition countries that were characterized by lack of capitals and obsolete machinery and production methods. Foreigner investors bring capital, knowledge, technological know-out, experience, corporate governance practices, network sales in the world. It is usually believed that foreign investors generate positive externalities to the domestic firms through a transfer of know-out and technology. The positive externality generated by foreign investors however may vanish if the increased competition from foreign firms leads to a reduction in the production of the domestic firms, which may lead to an increase in the average costs of the production (Konings, 2001). Konings (2001) has analyzed, using panel data, the effects of foreign investments on the productivity performance in Bulgaria, Romania and Poland: Konings found that only in Poland, the more advanced country in the analyzed countries, foreign firms perform better than domestic ones and this could be explained by the fact that it takes time for ownership to have an effect on the performance, as restructuring and investment need time to show their effects. Moreover he found negative or no spillover effect of foreign investment on domestic firms. Djankov and Hoekman (1999) analyze the impact of foreign investment on productivity performance of firms in Czech Republic using data from 1992 to 1996: they conclude that foreign direct investment has a greater impact on total factor productivity in the firms in Czech Republic than joint-venture and domestic firm without a foreign partner have the lowest TFP. Slide4:  Also sectoral studies have usually optimistic conclusions: Worrall et al.(2003), with a sectoral study in the automotive industry: "Given the economic stagnation and dramatic decline in car production experienced within the East Bloc in the 1980s, only substantial FDI inflows could have brought such a profound transformation in revitalising both the automotive and components industry, and provided much-need technology transfer simultaneously...However, the economic slowdown, market volatitlity and uncertainty experienced between 1999-2000 draws into question the long-term future of the region's auto industry" (Worrall et al., 2003). Pavlínek (2004) is less optimistic: he analyzes the effects of FDI on regional development studying the Czech automotive components industry and concludes that FDIs have potential positive effects on affected companies and on economic development, but its effects have been very uneven sectorally and geographically. According to him, FDIs have positive or negative effects depending on the type of economic activity and on the strategy pursued from the particular foreign investor in different local and regional conditions. A part of the literature on FDI is focused on the question if foreign investors prefer firms with certain features, for example large and profitable companies. If this is true, the best performance of domestic firms could not be explained by the presence of the foreign investor, but it would be due to a selection process of foreign investors. Dahlquist and Robertsson (2001), using data on Swedish firms for the period 1993-1997, conclude that foreign investor prefer large firms, firms paying low dividends and firm with large cash positions on their balance sheets. Foreign investors would prefer large firms because large firms are more transparent and it is easier for foreign investors to get information about them. The authors find a positive relation between foreign ownership and transparency of the firm. The research about the impact of foreign investor on enterprise efficiency leads my second group of research hypothesis that I will investigate in the glass sector in the Czech Republic. 2a: "Foreign investors improve the efficiency of privatized firms“ 2b: "Privatized firms with a foreign investor (that entered the company during or after the privatization process) have a higher economical performance than the domestic firms" 2. THE GLASS SECTOR :  2. THE GLASS SECTOR 2.1 Data description and CSO classification Standard Classification of Production, issued by the CSO: the glass industry is included in the DI subsection as a part of the section D - Processing industry, which is identical with the section 26 (Industrial Classification of Economic Activities (CZ-NACE)) named "Other Non-Metallic Mineral Products and Related Works". The industry of glass, ceramics, china and building materials (Industrial Classification, section 26) includes productions of glass, ceramics and building materials of various types and utilization. 26.1 (subsection of 26) consists in the "production of glass and glass products" DESCRIPTION OF MY SAMPLE I analyze in my research the firms in the sector 26.1 that were privatized (I do not consider the new firms) The sample of my research is affected by the current availability of data. I had to exclude some glassworks for which I did not find enough information. Some glassworks that died soon after the fall of Communism and their privatization probably followed the same destiny. However, since the main method of study used in this research is the case-study approach, I believe that the sample is significative. SOURCES OF FINANCIAL DATA AND INFORMATION ABOUT GLASS COMPANIES Companies annual reports, Magnum Database, books and articles about the glass sector, the Aspekt Reports, NPF, personal interviews with managers and owners and questionnaires that I have prepared and send to current and previous managers, to members of the company Boards or used as a trace during the personal interviews I was able to realize. SOURCES OF SECTORAL DATA Association of the Glass and Ceramic Industry of the Czech Republic and estimates of the Czech Statistical Office. 2.2 An Economical Overview of the Overall Glass Sector :  2.2 An Economical Overview of the Overall Glass Sector Source: The Association of the Glass and Ceramic Industry of the Czech Republic, 2001 and 2003 Glass production and revenues from sales of own products and services in sector 26.1 has increased in the 90s and in the last years Most of glass production in CR is exported The trend of price indeces shows two crises that the glass sector experienced: one in 1997, one after 2001. 2.3 An economical overview of the glass sector's segments :  2.3 An economical overview of the glass sector's segments It is important to distinguish glass segments “Flat and architectural glass”, “Container glass” and “Glass fibres” are called the “Industrial Glass” Glass production in the industrial glass has grown much more than in the hand-made glass segments Revenues in the industrial glass sector were similar to the revenues in the hand-made glass sector at the beginning of 90s but they has increased strongly during the 90s, while revenues in the hand-made glass sector has remained stable Source: The Association of the Glass and Ceramic Industry of the Czech Republic, 2001 and 2003 2.4 An Overview of the Privatization Process of Glass Companies by Segment and their Current State :  2.4 An Overview of the Privatization Process of Glass Companies by Segment and their Current State The Structure of the Glass Industry by Privatization Method   Foreign investors entered in Czech companies through the privatization process in only two glass segments, in the "Flat and Architectural Glass" and in the "Container Glass“. These two glass sectors in 1991 had similar amount of revenues from the sales of own products and services than the "Utility and Lighting Glass Sector", but the amount of revenues has rapidly increased with respect of the other glass sectors. Foreign investors entered in the glass segments of industrial glass, machine-made glass for which technology and automatization can have a very big impact on economic performance. Glass companies in the "Utility and Lighting Glass", a sector that has low possibility of automatization (especially concerning the hand-made glass) and increasing of labour productivity, were privatized mainly with direct sale to individuals, with voucher privatization, with restitution and only to domestic owners. Slide9:  List of Companies by Privatization method Voucher privatization-Bižuterie Česká Mincovna a.s, Crystalex a.s., Jizerské Sklo, a.s., Liglass, a.s., Moravia Glass a.s., Preciosa - Lustry, a.s., Saint-Gobain Vertex, a.s., Severosklo, a.s., Sklárny Kavalier a.s., Sklo Bohemia a.s. (10) Direct sale to domestic companies-Desenské sklárny Desná s.p., České perličky Zásada s.p., Sklárny BOHEMIA, a.s., Sklárny Moravia a.s., Skleněná bižuterie, a.s., Union Lesní Brána, a.s., Vitrablok a.s., Vsetínské sklárny společnost sro, Železnobrodské sklo a.s. (9) Direct sale to individuals-Estrela a.s., FORMSKLO s.r.o., Jablonecké sklárny, s.r.o., Jihlavské sklárny Bohemia a.s., Libs Glass, kom. spol. (bought by Libochovické sklárny a.s. in 1997), MOSER a.s., SILKA BIŽUTERIE s.r.o., Sklárna Novosad & Syn Bohemia Harrachov Czech Republic, s. s r.o, Sklárny Chřibská, Black & spol., s.r.o., Sklostroj Turnov CZ, s.r.o., VITRUM, spol. s.r.o. (11) Joint-venture with foreign investors-Avirunion, a.s., STÖLZLE - UNION s.r.o, Glaverbel Czech, a.s., Vetropack Moravia Glass a.s. (4) Public tender-ASTIR spol, s.r.o., Osvětlovací sklo – LARES, spol. s.r.o., SKLÁRNA JANŠTEJN s.r.o., Rapotínské Sklárny a.s., Jablonecká bižuterie – Silka a.s. .(5) Restitution claim-J. Blažek Sklo Poděbrady s.r.o.(1) Restitution with payment-BERANEK, spol. s r. o., Rückl Crystal a.s, Technosklo, s.r.o. (3) Transfer to NPF-EGERMANN-EXBOR, státní podnik, Košt´anské sklárny a pánvárny, a.s. (2) Total nr. of companies (45) Note: I did not include some companies for lack of information: the company Caesar Crystal s.r.o., Světlá nad Sázavou, was separated from Sklo Bohemia s.p. and privatized in 1994. Since the company refused to give me any information and I did not find its privatization method, I decided not to include it in the sample. From the information available in the Business Register, however it appears that this company, still living, is Czech-owned. Other companies for which I did not find information about their privatization method are Preciosa a.s. (the company gave me information about the restructuring process but did not want to give me any information about the ownership-relationships and the privatization method), GLASS TV COMPONENTS a.s. (this company went bankrupt and was bought by STV Glass, a.s. that continues its production). Preciosa a.s. is currently a living company, while GLASS TV COMPONENTS a.s. is officially dead since 3.4.2004: it was founded with the transformation of part of the state-owned company OSVĚTLOVACÍ SKLO, s.p. and transformed in joint-stock company on 1.5.1992. The owners of the company after the privatization are unknown. Other two glassworks for which I did not find enough information are HUŤ JAKUB and Sklárna Klára (the last was founded in 1907, it was privatized in the 90s and changed owners severasl times). Current State of Companies in the Glass Sector by Privatization Method, as by 31.12.2003 :  Current State of Companies in the Glass Sector by Privatization Method, as by 31.12.2003 The number of dead companies without a successor and the number of companies now in bakrupt or in liquidation does not show the number of companies that passed the bankrupt procedure and that overcame it, with the arrival of a new owner (for example the glasswork Rapotínské Sklárny a.s. declared bankrupt on 20.12.2000 and it was bought in 2003 by the company RapoSklo, spol. s r.o., founded on 11.4.2001 by Italian investors; another example is represented by the company Sklárny Bydžov a.s. that died officially on 1.10.2002 and it was bough by the company BL, spol. s.r.o. that continues now its production and has also bought the name of the glassworks) or with the effort of the old owner (for example the company (J. Blažek Sklo Poděbrady s.r.o. went through the bankrupt procedure and overcame it with a successful invention of a new glass product). Slide11:  Some comments to the table “Current State of Companies in the Glass Sector by Privatization Method, as by 31.12.2003” Only 1 company died without successor Most of the companies privatized with direct sale to domestic companies are still owned by domestic owners Almost half of the companies privatized with direct sale to individuals are now in bankrupt or in liquidation The companies privatized with joint-venture are now fully owned by foreign investors Companies privatized with restitution are fully owned by domestic owners STABILITY IN THE NATIONALITY OF OWNERSHIP companies privatized by a domestic owner are still owned by a domestic owner companies privatized with a foreign investor are still owned by a foreign investor HIGHER EFFICIENCY OF COMPANIES COMPARED TO DOMESTIC OWNERS IN THE LONG RUN Slide12:  I will analyze the glass industry in the Czech Republic according to the privatization method: since the glass companies included in my sample have been privatized in different years, this group analysis does not want to see the effects of different privatization methods, that will be in more detailed analyzed with the case studies, but can be considered as an exploratory analysis. This analysis has the aim of giving some hints about the characteristics of companies privatized with different methods. Because of the lack of data the number of companies analyzed here is inferior to the number of companies analyzed in the previous section. Again this analysis includes only privatized companies. I put together companies privatized with methods that result in similar forms of corporate governance and ownership structures: the four groups of privatization method result the following: Voucher privatization Direct sale to domestic company Joint-venture or sale to foreign investor Sale to individuals or restitution with payment 2.5 The Structure of the Glass Industry After the Privatization: an Economical Analysis of the Privatized Glass Companies COMMENTS TO THE FIGURE Using total sales as a measure of size of the company, it appears that in 1994 foreign investor bought shares in the biggest companies; The second biggest companies were privatized with voucher privatization; The small-medium companies were bought with direct sale from domestic companies and the smallest companies were sold to individuals or returned to individual owners. Slide13:  We saw that foreign investors entered in Czech companies through the privatization process in only two glass segments, in the "Flat and Architectural Glass" and in the "Container Glass". All the four companies in the glass sector privatized with a foreign investor were privatized before 1994: Glavunion a.s. (today Glaverbel Czech, a.s.) on 22.3.1991, Avirunion, a.s. in 1993, STÖLZLE - UNION a.s. (today STÖLZLE - UNION s.r.o.) on 8.7.1992 and Vetropack Moravia Glass a.s. on 22 October 1991 Together the “Flat and Architectural Glass" and the "Container Glass" in 1991 had similar amount of revenues from the sales of own products and services than the "Utility and Lighting Glass Sector", as shown in a previous graph, but this amount of revenues has rapidly increased with respect of the other glass sectors. These information seem to support the idea that foreign investors entered during the privatization in big glass companies producing Industrial glass, characterized by the possibility to apply technology investments and innovation. The quick privatization of companies in the Industrial glass sector with foreign investors has allowed this glass subsector to increase rapidly the total revenues from sales of own products and services. Slide14:  Data about employment in 1994 are available only for companies privatized with voucher privatization or with foreign investors. There is a wider dispersion among companies privatized with the voucher privatization than with a foreign investor, even if the number of employees in companies privatized with foreign investors is still quite high Companies privatized with voucher privatization still show the highest dispersion in employment, with the maximum number of employees in Crystalex a.s. (3230 employees) and the minimum number in Liglass a.s. (186 employees). Companies privatized with other method show a similar decreasing trend: companies privatized with foreign investor have the second place in terms of employment, followed by companies privatized with direct sale to domestic companies and then by companies privatized with sale to individuals or with restitution with payment. In 2002 we can observe a reduction of differences in employment among the living companies.

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