Influences on Deprivatized Companies
Since 1992, approximately 70,000 state-owned enterprises in Russia were privatized. The idea was to move from a centrally planned economy to a market system. In the late 1990’s a weak economy caused Russian voters great concern. Under pressure, politicians began promoting “deprivatization”. Under this policy certain past privatizations would be declared illegal and the transaction would be reversed. The company then would be either run as a state-owned enterprise company or sold to another party. But one current problem is that privatization legislation is nebulous about what could be termed a violation. Anything from a missing piece of paper in the original tender offer to investment requirements not being met might be ruled a violation (Brickley, Smith & Zimmerman, 2009, p. 92).
A privatized firm is a privately held company that doesn’t offer shares or stock to the general public. Essentially, the government has intervened to make a private market more public oriented. In that it will allow public investors to invest their time and money into the business. With the initiation deprivatization, managers of privatized firms will be very hesitant to make any decisions on investments. For Example: if an entrepreneur wanted to invest in the franchise of a privatized company, they must abide by the companies investment requirements. Even then, the privatized firm can still reject the investment opportunity due to absolute discretion. Two ways the company could result to government ramifications. First, the paper work for any further investments must be 100% complete, and accurate. Any information misleading, misguiding, or missing will result in government intervention. Secondly, by neglecting investment opportunity from those who qualify, and those who are rejected based on absolute discretion, might otherwise report the privatized company.
Foreign investors obviously fancied privatization in Russia based on the number of privatized firms in the 90’s. With the political promotion of deprivatization, foreign companies and investors will take a different perspective on the amount of risk involved. The market incentives do not out weight the risk associated with the investment. Two of the most likely risks associated with the proposed Russian economy are property rights and political stability. Both of which have governmentally influenced.
The response of the government was change the economic way of thinking, and acting. The Russian people were suffering from the change of a centrally planned economy to a market system, via privatization. When deprivatization is in place the economy will absorb the affects of a competitive market. Ultimately, supply-and-demand will adhere to the consumer; making products and services more affordable.
The firms and investors that are in compliance with the policy set forth by the Russian government, as well as the consumer market, will gain from the deprivatization of enterprise. Policy driven industry regulates the investment opportunities that influence the bottom dollar of the consumer market. The economy will have room for improvement based on the merit of good decision-making and government regulation. The majority of the Russian populous will be able to thrive, and corporate industry will still be able to make a profit.
Politicians would support deprivatization, in the long run, even if it initial caused a weaker economy. The reasoning is that deprivatization safeguards Russian territory and its market economy from foreign pillaging. Politicians want the country to be sustainable and investment friendly, but do not want to sell out any of their resources or undermine their people. By freely opening up the economy to an international investment friendly policy, the current local investment opportunities would need to adjust themselves to the competition.
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics & Organizational Architecture. (5th ed., p. 38). New York: McGraw-Hill Irwin.