Handbook of Institutional Approaches to International Business
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Handbook of Institutional Approaches to International Business

Edited by Geoffrey Wood and Mehmet Demirbag

Expertly written by leading scholars from a range of different starting points, this compendium presents a synthesis of recent work relating to institutionally-informed accounts from transitional and emerging markets, as well as from mature economies. It specifically focuses on the linkage between institutions and what goes on inside firms, and the relationship between setting, strategic choice and systemic outcomes.
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Chapter 19: Explaining Persistence of Dysfunctionality in Post-Communist Transformation

Martin Upchurch


Martin Upchurch 19.1 INTRODUCTION Spatial and socio-political variants continue to exist within post-Communist transformation states. Marketization, privatization and liberalization have sometimes stalled or been delayed, and in some transformation countries the role of the state in maintaining control over the production and distribution of goods and services remains strong. Most importantly, two key aspects of market failure are evident across the transformation states. First, predictions from orthodox economists of economic convergence with the West have failed to materialize. Second, crime, corruption and informal working persist and in many cases have become more prominent in both absolute and relative measurement. As such the market appears ‘dysfunctional’, exhibiting continuing inefficiencies. Dysfunctionality, and its persistence, is thus characterized by inefficient forms of market regulation, the lack of regard for the rule of law, together with continuing problems of crime, corruption and state capture models of governance. It is argued in this chapter that the persistence of dysfunction is a consequence of the adoption of a particular model of labour exploitation. The associated poor business ethics and weak standards of corporate governance are a consequence of the combination of market liberalization, dependence on labour exploitation for comparative advantage, and the abandonment of oneparty authority over control of industrial production. This chemistry of events allowed rapacious rent-seeking by individuals well placed to benefit from the newly deregulated regime (Filatov 1994). In turn, this has created political and economic space for the informal economy to grow and mafia crime and corruption to flourish. The chapter reviews...

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