Business environment and enterprise behaviour in East Germany compared to West Germany and central Europe

This paper examines institutional differences between the former East and West Germany and four central European transition countries (the Czech Republic, Hungary, Poland and the Slovak Republic). Using enterprise survey data we show that the quality of both formal and informal institutions in East Germany still differs from West Germany. In addition, central European transition countries are shown to have closed the gap in institutional quality with East Germany in many areas. We also show that enterprises in the central European transition countries have compensated for country level institutional deficiencies by focusing on company-level innovation and investment in human capital. Meanwhile, East German enterprises report investments in new products and processes as well as in skills well below the level of not only West Germany but also the central European transition countries.