OBJECTIVES:After 20 years of transition from an economy integrated in an exchange scheme of planned economies towards an open market economy based on the ideas of competition, we ask whether East German firms succeeded in finding their place in the international division of labour. We concentrate on the question, to what extent the increase in product specialisation has helped to foster productivity growth.

DATA / METHODS: Statistics Germany asks manufacturers in its “Production Census“ to classify their output according to the European PRODCOM-list, which includes about 6000 products. We have matched this output information on a firm level to information on manufacturers‘ performance from the „Cost Structure Census“, yielding a data set of  a panel of roughly 7700 manufacturing German firms with about 3000 establishments in East Germany and more than 10,000 establishments in West Germany. We compare the development of product diversification and productivity in east and West German firms, asking whether East German firms have achieved a degree of specialisation, which is comparable with this of their West German counterparts. For the analysis we distinguish between three post-communist periods, 

1991-1995: period of disturbance,

1995-2001: period of adaptation,

2001-2006: period of specialisation.

We use the combined information on the product range, production and employment to study the impact of a changing product range on productivity.

To separate the impact of product policy from those of other determinants of productivity we employ a decomposition approach suggested by Nopo (2004) as a nonparametric extension of the widely-used Oaxaca-Blinder decomposition (Blinder 1973; Oaxaca 1973). We decompose the observed “raw” productivity differences between firms with a given number of products into a “structural“ and a “behavioural“ component. The former contains the part of the raw difference attributable to the different composition of the firms with regard to employment size and sector. The latter is the “pure” productivity difference between the firms of comparable product range, size and sector. 

EXPECTED RESULTS: With the increasing openness of the world economies there is prove of a rising product specialisation in most market economies. Not surprisingly, also in both parts of Germany after the period of disturbance we can observe a rising product specialisation beginning in 1995. Moreover, the process of concentration on a diminishing number of products has been considerably stronger for East German firms compared with their West German counterparts. This can be explained by the increasing integration of East German firms into the international division of labour. Already in 2001 East German firms which are comparable with West German firms with respect to size and type of product do not show any significant differences in product diversification compared with West German firms. However, there exist still are remarkable deficit of the East German economy with respect to large companies.

CONCLUSION: While it seems that East German firms achieved a degree of specialization similar to West German comparable firms, the impact on productivity is still an open question.