Market Update: We break down the business implications, market impact, and expert insights related to Market Update: Ukraine’s Economy Needs to Make Room for Newer, More Productive Firms – Full Analysis.
When Ukraine begins rebuilding after a brutal war, the focus may fall on roads, bridges, and other infrastructure. But beneath the surface lies a more complex question: how to restart the economic engine in a way that encourages new ideas, competitive firms, and stronger growth?
We and our colleagues Furkan Kulic and Solomiya Shpak explored the question in our recent paper, Engineering Ukraine’s Wirtschaftswunder. Our research provides the clearest picture yet of what holds back the Ukrainian economy. Drawing on firm-level data from the past 25 years, the paper shows that Ukraine’s economy has drifted into a low-dynamism equilibrium. In simpler words: strong businesses face roadblocks, weak businesses survive too long, and the result is an economy that delivers far below its potential.
This moment offers a choice. Policymakers can create space for new entrants and productive firms. Or they can preserve a system that rewards incumbency and discourages change. The long-term effects of either path will shape Ukraine’s growth for decades.
“Postwar periods create space to reset the rules. Ukraine can use this moment to build a more open and competitive economy.”
A Business Landscape That Stalled
In the early 2000s, Ukrainian firms showed real momentum. Young businesses entered the market, scaled quickly, or exited altogether. Economists called this process “up or out.” It mirrors the business environment in high-performing economies like the United States.
After 2008, that cycle broke down. Fewer firms entered the market. The ones that did often stayed small. Market concentration rose. By 2019, the top four firms in manufacturing industries accounted for over 50 percent of total sales, compared to about 44 percent in the United States.
When Productivity No Longer Leads to Growth
Between 2002 and 2007, firms that became more productive also expanded employment. After 2014, this link weakened. Many firms improved efficiency but did not grow.
The feedback loops that anchor firm growth (capital, talent, and investment) have weakened. Jobs remain in low-productivity firms. Innovation no longer guarantees expansion. A productive economy relies on the ability of stronger firms to scale. Sadly, that mechanism has broken down.
Market Power Without Performance
Large firms increasingly stay on top through relationships rather than results. Our study finds that state-owned enterprises (SOEs) grow more slowly and innovate less. Still, as counterintuitive as it sounds, they retain market share. This is because state-owned enterprises also play a central role. SOEs remain concentrated in low-productivity sectors. Between 2014 and 2019, only 1 percent of SOE sales came from firms in the top productivity tier. SOEs crowd out more dynamic private businesses.