Successful transition to a market economy: an interpretation from organizational ecology theory and institutional theory

Abstract

This article investigates the rationales for the successful economic transition in a transition country through the lens of organizational ecology theory and institutional theory. Initially, the new private sector emerges and survives because of “legitimacy spillovers” from the legitimized transitional mixed sector and some market-oriented identity overlap. Over time, as the private sector builds its own legitimacy, it competes with the state and the mixed sector and challenges their existence. Finally, the Schumpeterian “creative destruction” process replaces the old out-of-date sectors with the new dominant sector. Consistent with organizational ecology theory, the evolution and dynamics of the three economic sectors take place through their interactions, which determine the emergence, prominence, decline, and exit of firm populations in each sector. Depending on whether a centrally planned or market-oriented political legacy plays the dominant role in the regional environment where the transition takes place, local institutions play a moderating role in stimulating or hindering this evolution process. Empirically, we test this mechanism using census data for firms operating in Vietnam between 2000 and 2013, applying Blundell and Bond’s generalized method of moments (GMM) estimation technique and the piecewise exponential hazard model to study the interaction effects of economic sectors in terms of profitability and survival.

Ownership, innovation, and variable institutional quality

“…SOEs, acting as agents of the government, provide an important channel for the State to regulate the economy and society (Xu, 2011). As transition processes (re-)establish market institutions, private entrepreneurship is promoted, and POEs, whose productive capabilities are aligned with market requirements, become the dominant organizational form (Tran & Santarelli, 2021). In the following sections, we analyze the influence of state and private ownership on firm-level innovation activities by combining the perspectives of RDT, AT and IT.…”

“…In theory, transition processes gradually eliminate, integrate, or transform state-based organizational forms, replacing them with private enterprises through processes of privatization. However, the extent to which the new private organizational form survives and thrives is dependent upon its "ideological fit' with the environment (Tran & Santarelli, 2021), its ability to attract "constitutive legitimation" from the government (Carroll & Khessina, 2019) and whether it is able to win the "diffuse competition" for limited space and resources in the marketplace (Bogaert et al, 2016). POEs face not only liabilities of newness and smallness but also legitimacy issues.…”

“…Finally, where successful, institutional restructuring is seen to alleviate regulatory pressures (Li et al, 2013) and accelerate privatization (Grosman et al, 2016). In a recent study of economic transition in Vietnam, Tran and Santarelli (2021) suggest that, as institutional quality improves, the private sector can build legitimacy that enables it to effectively compete with the established state sector.…”

“…Several studies have observed that financial benefits accrue to those POEs who can manage environmental dependency and obtain “ideological fit” by engaging in politically directed actions aimed at developing long‐term cooperative linkages with government (Hillman, 2005; Hillman et al, 1999; Meznar & Nigh, 1995; Peng & Luo, 2000). Extensive interactions with government‐affiliated bodies, including SOEs, enable POEs to transfer centrally‐planned productive capabilities to their market‐oriented product system (Tran & Santarelli, 2021), to lobby government for policy advantages (Liu et al, 2018; Schuler et al, 2002), to overcome their resource barriers and access new markets (Inoue et al, 2013), and to accelerate the absorption and utilization of knowledge embedded in external innovations (Feldman & Kelley, 2006; Gonzalez & Pazo, 2008).…”

“…Finally, where successful, institutional restructuring is seen to alleviate regulatory pressures (Li et al, 2013) and accelerate privatization (Grosman et al, 2016). In a recent study of economic transition in Vietnam, Tran and Santarelli (2021) suggest that, as institutional quality improves, the private sector can build legitimacy that enables it to effectively compete with the established state sector. The consequent market selection process reduces reliance on the government and SOEs for “legitimacy spillovers,” opportunities, and resources, enabling POEs to generate entrepreneurial initiatives and spur innovation.…”