The defining characteristic of a transition economy is a shift to market-driven, private-sector economic activity. Kornai (1992, page 459) notes “…the revival of the private sector is among the most important changes that take place in the socialist system during the process of reform.” Private sector growth comes from two main sources: the privatization of formerly state-owned enterprises (SOEs) and the creation of new, private firms. In either case, the benefits of private ownership are found in the agency theory, corporate governance, and managerial incentive arguments of Jensen and Meckling (1976).

The performance of privatized and de novo enterprises is a natural empirical question. Privatization has been studied extensively, with consistent evidence that privatized firms in transition economies outperform SOEs. Djankov and Murrell (2002), and Havrylyshyn and McGettigan (1999) provide reviews of the transition economy privatization literature. Privatization in Slovenia is studied by Smith, et al. (1997) and Simoneti, et al. (2001). Empirical studies of impact and performance of new firms include Berkowitz and DeJong (2002), Winiecki (2003), and Thurik and Wennekers (2004), among others.