Economic development implies that the efficiency of firms in developing countries starts approaching that of firms from advanced economies. Various development policies have been pursued to achieve this convergence. We test for this convergence in two economies that represent alternative models of implementing market-oriented development policies: the Czech Republic and Russia. Using 1992–2000 panel data on virtually all medium and large industrial firms in each country and accounting for endogeneity of ownership, we find that foreign ownership markedly improved the efficiency of firms, whereas domestic private ownership did not; domestic firms are not catching up to the (world) efficiency standard given by foreign-owned firms. This is due in part to a slower growth of efficiency in domestic firms over time. However, foreigners' acquisitions of more efficient domestic firms are also contributing to the gap. Domestic firms closer to the frontier are not more likely to catch up than firms farther from the frontier, although foreign firms do exhibit this behavior. The distance of Russian firms to the efficiency frontier is much larger than that of Czech firms. Nevertheless, after nearly a decade of reforms, neither model of development has resulted in convergence of domestic firms to the world standard.

We estimate returns to human capital during communism and the transition using data on 2,284 men in the Czech Republic. We show: (a) extremely low and constant rates of return to education under the communist wage grid and dramatic increases in transition, which do not differ by firm ownership, (b) radical changes in returns to several fields of study and “sheepskin effects” in both regimes, (c) identical wage experience profile in both regimes, (d) similar 1996 returns to human capital obtained in communism and in transition, and (e) changes in the interindustry wage structure. A decomposition of the variance of wages finds individuals' unobservable effects from communism to persist into transition, but most of the variance is due to unobservable effects introduced in the transition.