Organizational Ability and Firm Performance in Transition Economies: The Case of Egypt

Research into transition economies reveals that firms in countries that are transitioning from a socialist to a market orientation must overcome many challenges that are unique to their environment. These challenges call for organizational abilities targeted to the unique problems that firms in transition economies face. Using a two-stage data envelopment analysis, we quantify organizational ability for transition economy firms using Egypt as a test case. We validate our measure by relating organizational ability to firm performance. We also show that organizational ability has persistent qualities. We find that high-ability firms are positively associated with future firm performance, whereas low-ability firms are negatively associated. These results confirm our intuition that organizational ability is a significant driver of firm performance for a cross-section of firms in Egypt’s transition economy. In additional tests, we also investigate the determinants of organizational ability for transition economy firms. We show that low levels of government ownership and high-quality auditors are positively associated with greater organizational ability. In contrast, high levels of state ownership are negatively associated with organizational ability. We contribute to the literature on transition economies by showing that firms’ organizational ability helps firms overcome the specific challenges presented by economic transition.