Petty Capitalists and Globalization: Flexibility, Entrepreneurship, and Economic Development

7. They Were Promised a Rosegarden: Reunification and Globalization inSmall- and Medium-size Firms in Eastern Germany

7 They Were Promised a Rosegarden: Reunification and Globalization in Small- and Medium-size Firms in Eastern Germany Hans Buechler and Judith-Maria Buechler This chapter explores the impact of global competition on enterprise structure, technological development, and marketing strategies in small and medium-sized manufacturing and service firms in Sachsen-Anhalt, eastern Germany. Our focus on the trajectories of specific firms reflects our belief that in order to predict the future success of firms under capitalism, it is a mistake to focus too narrowly on the general contrasts between economic systems such as capitalism and communism, and more productive to examine variations in the position of persons and productive units over time within these systems. We will examine the ownership patterns, background of the firms and the managers, workforce and firm structure, as well as product and market development of firms of different size and elucidate how they have been influenced by globalization and their differential insertion into the western German-dominated economy. Here, we will concentrate on formally constituted firms ranging from a handful of employees to firms and parts of firms with a few hundred workers but whose parent companies employ well over a thousand workers. By focusing on this segment of the continuum of 121 firms of different size, we do not mean to imply that they constitute a homogeneous category. The largest firms in our sample, but to an extent even some of the smaller ones, share some characteristics with large-scale multinationals. The smaller ones also share some characteristics with informal productive units and some of the firms in this segment of the continuum have emerged out of informal moonlighting operations or are reverting to such practices . However, as we will seek to demonstrate, all the firms included in our analysis have much in common. The commonalities and differences will become apparent through an internal comparison of the larger and the smaller firms in our sample followed by a comparison between the two subsegments. The Historical Context The Communist System of Production The pre- and post-Wende trajectories of these firms can only be understood in the context of the general economic climate in the GDR (German Democratic Republic) and its dissolution after 1989. The GDR economy was characterized by a hierarchical system of conglomerates composed of related industries tied to a centralized redistributive system wherein shortages and compensatory hoarding of all inputs including labor further aggravated scarcities (see Kornai 1992). Firms were not subject to hard budget constraints. Rather, the state allocated resources and bailed out inefficient units depending on their perceived importance to the economy. Specifically, this meant that the state fostered export-orientation to offset large credits and imports from the west, mainly the Federal Republic of Germany. Each conglomerate, and within it each industry and each factory, engaged in constant maneuvering to gain access to scarce resources. This involved long-term planning at the local level to request inputs. Since access to these inputs was uncertain, each economic unit: collective, conglomerate, and factory attempted to be as independent as possible through vertical integration of the productive process, for instance, by having elaborate repair facilities. It was important to be able to do everything including, if necessary, manufacturing machine parts or even equipment yourself. To offset the perennial shortages a vast secondary economy was brought into play that entailed the exchange of inputs, goods, and services among productive units 122 Hans Buechler and Judith-Maria Buechler and among individuals. These transactions included a large black market for untaxed services by moonlighting artisans that was fully tolerated by the state. In addition to the state conglomerates and the highly dependent agricultural collectives,1 the GDR tolerated a dwindling private sector composed mainly of artisans and retail trade firms. In 1976, there were still 85,000 artisan firms and 40,000 retail trade firms, but their number sharply declined thereafter (Pickel 1992:11).2 In contrast to other Eastern European economies where smallscale firms were often indistinguishable from activities in the shadow economy, small firms in the GDR were highly regulated. The legal framework included guild-like skill requirements: apprenticeships, master classes, and the completion of a master piece at the end of the training period. They were under constant price and income surveillance and were disadvantaged in terms of access to all but basic commodities such as flour. In spite of the fact that small-scale private businesses could not...