Critical mass effect and restructuring in the transition towards a market economy

Restructuring firms in a transition economy produces a sort of network exte rnality, in that the profitability of restructuring depends on the number o f firms that already adopted this strategy. We investigate under what condi tions a 'critical mass' exists, i.e. a situation in which such externality is positive, and restructuring spurs imitation, possibly leading to the eve ntual transformation of the whole economy. We find a critical mass effect w hen the main effect of restructuring is an increase in value added (i.e., a ggregate demand) rather than an increase in the firm's ability to compete a gainst rival home firms. The critical mass case becomes the typical one whe n competition spurs firms' efficiency. (C) 2000 Elsevier Science B.V. All r ights reserved. JEL classification: P30; P31; C73.