Successful Transition to a Market Economy: An Interpretation From Organizational Ecology Theory and Institutional Theory

This paper 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 Finally, the Schumpeterian “creative destruction” process replaces the old out-of-date sectors with the new dominant sector.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.