By Somik Lall and Ufuk Akcigit
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.
Foreign investment without competitive pressure
Foreign capital can raise productivity and bring in new technology. But not all investment has the same effect. Much of Ukraine’s FDI comes through tax havens and appears to reflect round-tripped domestic capital. These firms perform worse and create fewer jobs than those backed by genuine foreign investors.
Industries with tax-haven FDI also see less new-firm entry (27 percent lower than industries with other types of foreign investment).
The core challenge and its solution
The central problem is clear: Ukraine’s economy isn’t rewarding firm performance. Not nearly enough. New firms find it hard to scale. Stronger firms do not always grow. Weaker firms stay in place.
The solution is creative destruction: it’s a cycle through which new, productive firms enter and grow, while less efficient firms exit. This keeps markets competitive and ensures that resources move toward better uses.
Our study used data to model how this cycle has changed. Findings show that young firms enter the market at lower rates. Most remain small. Even firms that improve their productivity often fail to expand. At the same time, the largest firms, many of them politically connected or state-owned, hold onto market share while growing slowly and investing little in innovation.
Creative destruction depends on a system that allows performance to guide outcomes. That system has weakened. The result is an economy that grows slowly and distributes opportunity unevenly.
What reform looks like
The study tested two policy paths using a Schumpeterian model adapted for Ukraine.
First, a simulation that targeted support for small and young firms – tools like credit access, startup incentives, or entry subsidies. Second, a simulation that limits the power of incumbents. These include stronger competition rules, SOE restructuring, and removal of regulatory advantages for connected firms.
The second strategy delivered better results. When incumbents lost protection, the system became more responsive. Productive firms scaled more quickly. New firms entered more often. Innovation increased. Resource allocation improved.
Support for new firms worked best only when domestic markets were also open. Without that, small firms remained boxed in. They entered, but did not grow.
A tipping point for Ukraine
This is an important moment for Ukraine. The country can shift toward a more dynamic economy shaped by innovation and performance. That shift starts with policies that open markets, enforce competition, and realign incentives.
Other countries have taken this path. West Germany’s recovery after World War II included not just aid, but bold antitrust reforms. The breakup of industrial monopolies expanded innovation and increased productivity. Korea and Poland also followed growth strategies built on firm turnover and stronger institutions. Ukraine holds the same potential – to use this recovery and build an economy that moves, adapts, and delivers. Creative destruction—the Schumpeterian model—makes that possible.
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