The Communist Legacy

Philip Schnorpfeil / Lutz Johanning - September 15, 2021

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The clash between capitalism and communism was a major social and political episode of the 20th century. With the fall of the BerlinWall in 1989, this ideological struggle appeared to be over. 30 years later, however, vast disparities still delineate the IronCurtain, such as in individuals’ beliefs about the right level of governmentalredistribution. A new study examines the role of lingering communist ideology for present-day corporate decision-making as a yet unexplored element of the Soviet-communist legacy.

Former East Germany as a “laboratory”

The study focuses on formerly communist East Germany. After Germany’s partition following World War II until the fall of the wall, people to the west of the Inner German border lived in a free-market democracy; East Germans instead were exposed to a doctrinaire communist party. These differential experiences may have shaped local norms, which in turn guide economic choices even decades after exposure to the doctrine.

Two corporate choices in particular relate to central aspects of the communist doctrine. First, de facto job security was at the core of the regime’s social policy and propaganda. Many East Germans today view job security as the hallmark of German Democratic Republic (GDR), i.e., former East Germany, policy. The authors hypothesize communist norms increase hesitation toward dismissals, dampening fluctuations in employment. Second, living through communism ensured substantial exposure to antifinance rhetoric, which has manifested in present-day skepticism toward outside finance.

West German-influenced firms in East Germany shun communist norms

The study exploits localized variation in the extent to which East German firms are subject to West German influence to gauge imprints of the communist doctrine. The way to think about the analysis is as follows: consider two firms in East Germany that seem identical—same size, age, industry, asset structure, etc. Importantly, these two firms are located in the same zip code. Now, the only observable difference is that one of the two firms has a CEO from West Germany, while the other firm has a local, i.e., East German, CEO. The firm with the West German CEO makes decisions inconsistent with the norms set forth by communism, i.e., it relies less on internal finance and experiences greater changes in employment. Multiple tests then demonstrate that West German CEOs actually change corporate behavior, rather than merely head firms that differ in their behavior.

Communist norms still drive corporate behavior

While the study’s results suggest a role for Cold War-era doctrine, we exploit spatial variation in GDR-propaganda resistance to corroborate communist norms as a driver of corporate behavior. Based on a theory from social psychology, it shows, among other things, that in East German regions with anticommunist beliefs prior to the imposition of communism, communist norms were conveyed less successfully. In these regions, then, firms’ behavior today reflects communist norms less, consistent with a role for ideological imprints.

Ideology also accounts for differences between East and West Germany

Finally, we examine whether the within-East Germany results extrapolate to between East and West Germany, in line with ideological imprints. The setup of the analysis is as follows: we compare two similar firms today, located close to the former Inner German border; however, one firm is located in what was West Germany, while one firm has its headquarters in the former GDR. Based on an analysis of hundreds of thousands of firms, we find that the East firm behaves consistent with communist norms relative to its western neighbor.

Literature reference

• Schnorpfeil, P./Johanning, L. (2021): Communist Imprints and Corporate Behavior, June 28, 2021, available at Social Science Research Network: https://ssrn.com/abstract=3875479 or http://dx.doi.org/10.2139/ssrn.3875479