TeliaSonera Institute Discussion Paper No 5 Exploring Entrepreneurship and SME Development in a Post Soviet Context By Friederike Welter1 October 2006 1 Friederike Welter is Professor of Small Business Management and Entrepreneurship at University Siegen, Germany and TeliaSonera Professor in Entrepreneurship at the Stockholm School of Economics in Riga, Latvia. This paper is an updated and extended version of Professor Welter’s Inaugural Lecture at the Stockholm School of Economics in Riga March 17, 2005. Table of Contents 1.   Introduction .................................................................6 2.   Facets of Entrepreneurship in a Post Soviet Context ...............................6 2.1 Is Entrepreneurship Unproductive? ............................................7 2.2 An Ethical Dilemma.........................................................8 2.3 Proprietors or Entrepreneurs? The Development Potential of Entrepreneurship ......9 3.   The Embeddedness of Entrepreneurship in a Post Soviet Context...................10 3.1 The Historical Context for Contemporary Entrepreneurship Development .........11 3.2 A Soviet Legacy? ...........................................................12 4.    Challenges for Entrepreneurship and Small Business Development   in a Post Soviet Environment ..................................................14 References ......................................................................17 Acknowledgements In writing this paper, I have drawn on results from several projects conducted jointly with colleagues in Central and Eastern Europe. My thanks for our longstanding research cooperation go to David Smallbone, Elena Aculai, Alexander Chepurenko, Nina Isakova and Anton Slonimski and Natalja Schakirova. ISBN 9789984391298 © Stockholm School of Economics in Riga Exploring Entrepreneurship and SME Development in a Post Soviet Context  Foreword This is the fifth of the TeliaSonera Institute Discussion Paper series. The Institute, which is located at the Stockholm School of Economics in Riga and is generously supported by TeliaSonera, aims to promote applied economic research in areas such as entrepreneurship, regulation, and many other aspects of market economies. This Discusion Paper, on Exploring Entrepreneurship and SME Development in a Post Soviet Context by the holder of the TeliaSonera Professorship at SSE Riga, Friederike Welter, and is an extended version of her Inaugural Lecture given on March 17, 2005. The first four Discussions Papers were entitled: Venture Capital in Latvia, Entrepreneurship in Latvia, the New EU Regulatory Framework in Electronic Communications, and Women and Entrepreneurship in Latvia, respectively. Copies of the Discussion Papers can be ordered from the SSE Riga library. Anders Paalzow Alf Vanags Rector, SSE Riga Director, BICEPS  Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context  1. Introduction 2.1 Is Entrepreneurship Unproductive? This discussion paper is concerned with entrepreneurship and the development of small and Often, new and young firms in transition countries rely on specific strategic responses in order mediumsized enterprises (SME) in Central and Eastern European (CEE) countries, where to finance more capital intensive businesses or to exploit opportunities. Networking is one of the the transition from a socialist command economy towards a marketbased system opened up patterns commonly used to enter markets, to find customers and to develop markets, to get access enormous possibilities for private entrepreneurs. Since the early 1990s, private entrepreneurship to scarce resources, to recruit employees, or to cope with the bureaucratic requirements of a highly gained ground, and the same applies to research on new and small enterprises [e.g., Aidis (2003, unstable environment [cf. Smallbone and Welter (2001a), Welter and Smallbone (2003) for more 2006), Aidis et al. (2007), Djankov et al. (2005), Dombrovsky and Uebele (2005), Lageman (1995), examples], as the following cases illustrate. Konstantin, owner of a personnel recruitment agency McIntyre and Dallago (2003), OECD (1996), Pfirrmann and Walter (2002), Sauka and Welter (2007), in Moscow, uses networking contacts for personnel recruitment. He states that “This is a typical Smallbone (1997), Smallbone and Welter (2001a, 2001b, 2003, 2006a, 2006b), Welter (1996, 1997, Russian way“, meaning that entrepreneurs recruit a person rather than someone to fulfil a specific 2005), Welter and Smallbone (2003), Welter et al. (2004, 2006)], although some authors consider function. entrepreneurship research in CEE still to be a very young field [Meyer and Peng (2005)2]. In this paper I will discuss some facets of entrepreneurship in a post Soviet (or transition) context, outline Party membership often proved helpful in establishing contacts which assisted entrepreneurs important factors influencing entrepreneurship and small business development and review some during the transition period in setting up their business. One such example was reported in Welter of the policy issues involved in fostering entrepreneurship development. The paper draws on the and Smallbone (2003): THW is a private company, which commenced trading in 1992. Its core results of several research projects I have undertaken in CEEs together with David Smallbone from activities involve selling welding equipment and related services, particularly instructing/training Kingston University in the UK and colleagues from various countries. customers in the use of equipment, which is sold as part of the purchase package. The owner originally worked in a welding institute. He was also a leader in the Young Communist League and then an instructor. He was able to use his political connections with former YCL colleagues to get the business started, because one of his former colleagues was a leader of a bank, thus allowing the 2. Facets of Entrepreneurship in a Post Soviet Context entrepreneur relatively easy access to credits. Moreover, his connection with the welding institute means that his company was able to obtain materials at slightly lower than the market price. Is entrepreneurship different in a post Soviet context? While the basic principles governing entrepre- neurship can be assumed to be the same regardless of country, there may be differences in the nature Networking often is coupled with gifts, where it involves people outside the kinship group. Consider of and forms of entrepreneurship. Some research has tended to label entrepreneurship and small this case from Uzbekistan, where a female entrepreneur opened a detergent company in 1995 [cf. business in a post Soviet context as being more unproductive and consisting mainly of proprietors, Welter (2005)]. She needed to register with the Standards Office, acquire a license and have permits who enter entrepreneurship because of necessity [e.g., Scase (1997, 2003)]. The picture emerging here from local government, the local environmental health office and the fire office. In order to speed is one where entrepreneurship is an activity which does not create and add value to an economy and up the process, the entrepreneur paid bribes in form of presents, e.g., flowers and candy for woman, society, thus often viewed by governments and public with suspicion. The following sections will ex- brandy for man. She accepts these ‘shadow expenditures’ as part of doing business. Being an Uzbek plore facets of entrepreneurship in a post Soviet context in more detail. woman, it was not openly suggested how much she should pay but she chose to offer presents to ‘oil the wheels’ of the process. She thinks male officials are more open about the amount of bribes There are some typical patterns of entrepreneurial behaviour to be observed in a transition context. required from male entrepreneurs. This includes a mixture of typical strategically behaviour of new and young entrepreneurs (such as selffinancing), but also patterns which are distinctive in a transition context: serial and portfolio en- This kind of networking behaviour is both a source of resources as well as of practical skills in trepreneurship, where entrepreneurs either open one business after the other or own several ventures, “keeping personal contacts, fixing things, knowing ways of settling problems” [Ledeneva (1998: a strategy of broad, but often unrelated diversification, networking and avoidance behaviour [Small- 184)]. In this regard, several authors have described how in a fragile environment where institutional bone and Welter (2006a)]. In the following two sections, I am investigating the possible dilemmas that trust is lacking and norms are unstable or unfamiliar individuals use social contacts and individual two of these strategies, namely networking and ruleavoiding behaviour, may pose for entrepreneur- networks dominated by mutual trust in order to pursue business [e.g. Manolova and Yan (2002), ship development in a post Soviet context. I explore the question whether these behavioural patterns, Peng (2000), Smallbone and Welter (2001a, 2006a), Welter and Smallbone (2003), Welter et al. which show enormous adaptive capabilities of entrepreneurs in dealing with environment, are to be (2004), Yan and Manolova (1998)]. These reciprocal contacts assist in solving diverse business assessed as positive or negative for longterm entrepreneurship development. problems. Entrepreneurs draw on persons and contacts they know and they trust. However, in the long run such behaviour might restrict business development and growth, as entrepreneurs limit themselves to doing business within a known circle. Peng (2003: 279) emphasises that “Especially 2 The authors reviewed several journals prominent in international business studies, concluding that “Only recently have scholars begun to analyse the determinants of new firm establishment (Puffer and McCarthy 2001, Batjargal when the informal enforcement regime is weak, trust can be easily exploited and abused”. 2003) and their survival (Lyles et al. 2004).” [Meyer and Peng (2005: 602)]. However, this assessment is mainly a result of that they only included peerreviewed journals in international business studies, neglecting small business and entrepreneurship journals and other publication outlets, where research on transition economies in Central and Eastern Europe has been prominent since the mid1990s.  Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context  2.2 An Ethical Dilemma What is the conclusion to be taken from these examples? Obviously, in some transition contexts bribes and presents are accepted as ‘usual’ business norms; and entrepreneurs recur to defiance strategies Deficits in the regulative environment encourage entrepreneurial reactions, which are non pro- in (openly) ignoring marketbased norms and values [Oliver 1991). If in hostile environments ductive from a macro economic point of view because they do not contribute to overall economic businesses want to thrive and grow, they apparently have to rely on illegal and unethical behaviour, development, but ensure enterprise survival, thus they are rational from the entrepreneur’s point of which benefits this single firm but is detrimental to overall economic development in the long run. view [Peng (2000), Smallbone and Welter (2001a)]. Entrepreneurs recur to ruleavoiding behaviour The problem here is breaking the vicious circle, where initially, many firms survive and grow by in order to cope with unforeseen pressures in a dynamic and unstable environment. ‘Typical’ avoid- using a networkbased strategy based on personal trust and informal agreements among managers ance behaviour includes, e.g., tax avoidance through setting up a second business and transferring and officials in order to overcome institutional uncertainties [Peng and Heath (1996)]. This only payments between businesses, or to splitting payments to employees into a minimum wage part, will happen if transition economies move from a relationshipbased, personalized transaction which is paid officially, and bonus payments ‘under the table’ [Welter and Smallbone (2003)]. All structure to a rulebased, impersonal exchange regime where “unfamiliar parties, who would have this is done in order to preserve the financial resource base of the enterprise in a business environ- been deterred from transacting before” [Johnson et al. (2000)] can rely on third party enforcement ment where new and small firms experience major difficulties in accessing external finance. rules and thus enter business relations with each other. However, ruleavoiding behaviour poses an ethical dilemma to entrepreneurs (and societies) which few, if none transition research studies so far have discussed. The conflict is between the 2.3 Proprietors or Entrepreneurs? The Development Potential of Entrepreneurship type of behaviour, which the formal institutional environment requires and the behaviour, which is necessary to survive as entrepreneur. This is illustrated in several case studies collected by the Scase (1997, 2003) classified most small businesses in Central and Eastern Europe as proprietorship author and David Smallbone during joint research projects since the mid1990s [cf. Smallbone and not entrepreneurship. He argues that these activities, although offering employment and et al. (2001), Smallbone and Welter (2001a, 2006a), Welter and Smallbone (2003), Welter et al. providing income to the owner and employees, in case there are any, these proprietors cannot (2004, 2006)], indicating that the prevailing social norms in a transition context do not trigger contribute to economic development, as they use business income mainly for personal use instead enforcement of the ‘officially’ prescribed formal behaviour. of reinvesting it. In this regard, proprietors might be seen as noninnovative entrepreneurs owning nongrowthoriented businesses, while genuine entrepreneurs would be the ones being creative and The following quotes from cases illustrate this dilemma in more detail. On the one hand, take growthoriented. Distinctions such as entrepreneurs out of economic need or because of a desire Natalja, owning a small, successful travel agency. She has never paid taxes, because her balance to be independent [Bögenhold (1987)] or the necessity versus opportunitybased entrepreneurship sheets have not shown any profits. The price for ‘noninterference’ of the local tax inspectorate is categories of the Global Entrepreneurship Monitor (GEM), based on the motives given for setting “four fully paid tourist vouchers per year for a particular tax inspector who is the firm’s protector.” up a business, use motives to identify the growth and development potential of entrepreneurs. However, Smallbone and Welter (2003, 2006a) have questioned the applicability and usefulness of On the other hand, entrepreneurs are aware of the dilemma connected with their bribing and ac- such distinctions in a transition context. ceptance of violating norms. For example, Olga, the owner of a small advertising and information firm, refers to the Russian labour legislation as outdated, which forces her from time to time to vio- Consider this small business owner, who opened up a knitwear factory in Chisinau, Moldova, which late its regulations: “But I have no choice: if I comply with all of its articles, I will be unable to develop as borders Romania and Ukraine, and which is one of the poorest countries in Europe (Smallbone and fast as is required by the market.” Viktor, publishing entrepreneur, takes a poor view of unofficial pay- Welter 2003). This entrepreneur previously worked in a stateowned company as engineer. When ments which however, according to him, are normal business conventions in his trade: “In Moscow, the transition process started, he was put on administrative leave. In order to earn an income for his the entire book world is pervaded with crime; the entire book trade is performed by ‘nonregistered’ family, he decided to open a knitwear business, as this had been his parttime activity for some time. down payments.” He also mentioned the need to know people, including criminals, in the trade in Moreover, such a business did not need many resources. In terms of the concepts outlined above, this order to survive and grow. Nicolai, who owns a construction firm in Russia, explains that “(..) in Rus- entrepreneur would certainly be seen as a proprietor and a necessitybased entrepreneur. However, sia, it’s just impossible to do fair business here. No tax reduction will help. Entrepreneurs in Russia have his initial survival orientation quickly was replaced by growth aims. He used a diversification the brains of thieves. It will take generations before civilized businessmen emerge in Russia.” strategy, where he bought shirts in Poland and Belarus as shuttle trader, to overcome periods of low demands for his knitwear. When we interviewed him in 1999, he clearly expressed several ideas of Interestingly, Ain, managing director of a wholesale company in Estonia, who uses business and how to develop his business further, but also pointed out the restrictions to business development social networks (Rotary Club) for his business, concedes a public influence on his networking in a Moldovan environment. Although starting his venture out of necessity, his later story clearly behaviour: “Top managers in Estonia need to be politically correct at all times since their behaviour illustrates the development towards a more opportunitybased firm. is noticed (e.g. by press) and they are always representatives of their companies so their public image reflects on their firms.” 10 Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context 11 Regarding the proprietorentrepreneurship distinction, Smallbone and Welter (2006a) note that affecting entrepreneurial activity and success.” Such external influences on entrepreneurship such a distinction is not unique for a transition country, but rather a common characteristic of gain particular importance in fragile and dynamic environments such as new sectors or during many small firm owners in market economies, explaining the low growth rate in small firms. They the transformation period in Central and Eastern Europe. In this context, institutional forces suggest to see this issue as part of a wider discussion around the role of entrepreneurship and influence the nature and pace of entrepreneurship. This takes on special importance, when small business in economic development, rather than being viewed as a specifically transition issue. comparing entrepreneurial behaviour in different contexts. In the following sections, I briefly The authors also argue against other classification attempts such as the categories introduced by will outline and discuss some important conditions for entrepreneurship in a post Soviet context, GEM. Although such approaches attempt to understand entrepreneurs according to the motives for in order to illustrate its embeddedness. entering entrepreneurship, as these are purported to indicate later growth prospects and business development paths, empirical evidence here is not conclusive: While some studies confirming a relation between initial business motives and later business development [e.g., Wiklund (2001)], 3.1 The Historical Context for Contemporary Entrepreneurship Development others concluding that initial startup reasons are not a reliable predictor of later business growth [e.g., Dahlquist and Davidsson (2000), Solymossy (1997, 2005)]. Three main factors are important in explaining today’s level of entrepreneurship and the starting conditions in the early 1990s: the state of presocialist entrepreneurship development in connection This lead Smallbone and Welter (2006a) to question the applicability of such concepts in a transition with the personal background in entrepreneurship and entrepreneurship developments during Soviet context, the more as such dichotomies neglect the specifics of the context for entrepreneurship, times [cf. Mugler (2000), Smallbone and Welter (2001a), Welter (1996)]. which results in highly qualified people entering entrepreneurship because they lost their jobs: “As a result, many entrepreneurs in transition environments are well equipped to identify and exploit For example, in countries such as Poland, Czechoslovakia and Hungary, a strong prewar tradition in opportunities as they emerge over time, even if the initial reasons for becoming an entrepreneur private entrepreneurship existed. Russia on the other hand always was dominated by state and bu- in the first place can reasonably be described as ‘necessity’.” Moreover, the authors emphasise that reaucratic entrepreneurship. Prewar industrialisation traditions helped in upholding entrepreneurial entrepreneurship also is influenced by the learning experiences of individuals. Learning can result in traditions. For Central European countries, various studies have estimated that the offspring of preso- changing motivations and business aims, it can contribute to growth intentions even in cases where cialist entrepreneurs accounted for between 25 and 40% of all private entrepreneurship during early entrepreneurs initially were only interested in survival and earning incomes for families; it can transition [Lageman (1995: 114)] whilst in a 1997 survey in Ukraine, Belarus and Moldova, ‘family result in entrepreneurs identifying new opportunities and becoming more confident and also more background’ was only mentioned by a handful of respondents [Smallbone and Welter (2001a)]. In innovative as they develop their own entrepreneurial capabilities alongside the business. To sum Hungary, prewar entrepreneurs and their offspring had either been (partly) selfemployed in the sec- up, entrepreneurship in a post Soviet context is neither proprietorship nor simply necessitydriven, ond economy, or they had often occupied leading positions in state enterprises during the socialist pe- but the reality is more complex, showing a diverse picture of people setting up businesses for a riod [Szelenyi (1988)]. This appears to confirm a thesis modelled on Max Weber’s research stating that variety of reasons, which include ‘push’ as well as ‘pull’ factors. cultural entrepreneurial traditions could be transported via highlevel professional positions, where individuals ‘parked’ their entrepreneurial skills, but they were also able to practise insofar as they were allowed to practise autonomous decisionmaking involving limited risktaking [Szelenyi (1988)]. 3. The Embeddedness of Entrepreneurship in a Post Soviet Context As regards the context during Soviet times, Poland and Hungary started early on reforms, allowing for both some private ownership of firms and various forms of private entrepreneurial activities and Entrepreneurship is influenced by a variety of factors. We can distinguish between factors of managerial freedom within state enterprises [e.g., Welter (1996), OECD (1996)]. For example, Poland influence on the macro level (e.g. the political, juridical and economic framework, cultural (re)introduced private craft enterprises in 1972, some years later the government allowed for socalled norms and religious traditions), on the meso level (e.g. business associations, industryspecific Polonia enterprises, i.e., joint ventures of Polish emigrants; and at the beginning of the 1980s it legally practices and codes of conduct, standardization and trade unions) and on the micro level guaranteed the existence of private enterprises. Hungary experimented with various forms of private such as personal beliefs and values, educational background and professional experiences and ownership, mostly within the framework of state enterprises, where employees were allowed to use network support (potential) entrepreneurs can draw on. Most entrepreneurship research tends machines and resources to manufacture for their own use, although most of these forms did not work to focus on individual and micro level influences. Only recently there has been a shift towards out in the way the government intended to. linking entrepreneurship to the overall institutional framework. For example, Solymossy (2005) argues for a shift away from considering personal influences such as motivations towards other, On the other hand, in countries such as Czechoslovakia, the Baltic Soviet Republics and the other So- environmental factors and a need to analyse how they influence the process of entrepreneurship: viet republics no form of entrepreneurship was allowed; and respective reforms only began with Gor- “This approach parallels current progress in the entrepreneurship field; there has been a movement bachev in the mid1980s. Here as well as in early reform countries, where the legal private sector had to away from focusing only on the entrepreneurial individual and increasing focus on other factors fight political modes restricting, e.g., the number of employed persons within a private firm, socialism 12 Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context 13 contributed to the emergence of the socalled second economy [Dallago (1990)]. ‘Entrepreneurial’ Nevertheless, some researchers are highly critical, regarding the potential of a Soviettype system behaviour in such environments was mainly restricted to illegal activities such as moonlighting, the to produce entrepreneurship at all [e.g., Dallago 1997, Scase (2003)], whilst others [e.g., Rehn unofficial use of state machinery for private aims and tolerated theft at the working place [Dallago and Taalas (2004)] emphasize the entrepreneurial nature of everyday life in a Soviet context, (1990), Smallbone and Welter (2001a)], although some functions in state firms such as the tolkach which lead them to understand bargaining and bartering in order to cope with shortages as who was responsible for securing resources [Kerblay (1977), Harter (1997)], had entrepreneurial ele- Soviet entrepreneurial activities. Others suggest a more differentiated approach by assessing the ments because they allowed for limited decisionmaking. potential of different categories of activities [e.g., Welter (1996)]. Interestingly, there appears to be an influence of illegal entrepreneurial activities on today’s entrepre- At a first glance there appears to be but few development potential in rentseeking and mainly neurs. A paper by Dombrovsky and Welter (2006) shows for Latvia that 25 percent of all respond- shortterm oriented illegal activities as dominated the entrepreneurial spectrum in countries such ents reported that some relative of theirs was an entrepreneur during the Soviet times. While this is as Czechoslovakia and the Baltic states, where entrepreneurship was forbidden. Similarly, parttime understandably lower than the percentage of respondents reporting a relative being an entrepreneur entrepreneurial activities, which mainly were aimed at providing additional incomes such as the after independence (37%), the implications, nevertheless, are remarkable. This implies that there were Hungarian innerfirm economic brigades, might be expected to vanish in a marketbased economy. substantial underground profitseeking activities in the Soviet Union, which underlines the proposi- Scase explains this in terms of the proprietorship nature of such activities, where the motives for tion put forward by Rehn and Taalas (2004) namely that Soviet entrepreneurship is a complex phe- taking up and continuing such activities were often rooted in past experiences of state socialism, nomenon and has to be interpreted in its everyday context. It also underlines in the light of an ongoing namely a quest for personal autonomy. Proprietorship offered personal autonomy [Scase [2003: discussion of the antecedents of entrepreneurship in a transition context, a need to take the ‘historical’ 69)]: “Even under state socialism, informal patterns of trading were not only the mechanisms dimension into account and to look at entrepreneurship in its social and historical context. for acquiring additional economic resources, but also the means according to which individuals could express a certain degree of psychological independence and personal autonomy.” 3.2 A Soviet Legacy? Aidis and van Praag (in press) analyse whether illegal entrepreneurship experience can be a predictor for the level of business performance and motivations of private ‘legal’ business In this section I will turn to discuss possible cultural influences on entrepreneurship development owners in a transition context, expecting a positive relationship. Illegal entrepreneurship is in a post Soviet context, asking whether there is a Soviet legacy influencing contemporary patterns considered a means to obtain tacit knowledge and contacts which would help entrepreneurs in of entrepreneurship. Some see a Soviet legacy in the ‘homo sovieticus’, who is characterised by the transition period to overcome institutional deficits. Their results indicate for Lithuania that a lack of initiative, risk propensity and a weak responsibility for his/her actions, all of which illegal entrepreneurship cannot be associated with business performance in general. However, as appear to contradict characteristics of an idealtype entrepreneur. There has been a controversial there is strong evidence for a positive relationship between any illegal experiences and intentions debate around the extent to which Soviet society fostered this ‘homo sovieticus’ and how this to continue and grow a business, they conclude that illegal entrepreneurial experiences can be might have affected entrepreneurship in the transition process. It very much resembles the understood as a signal for a source of motivation. ‘nature’ versus ‘nurture’ debate of entrepreneurship teaching. Soviets themselves recognised this phenomenon [cf. the manifold descriptions in the novel written by Sinovjev (1987)]. During the Independent entrepreneurial activities, such as the legal craft firms in Poland or private economic transition period, most researchers saw individual behaviour as resulting mainly from situational cooperatives in Hungary, might have shown more potential to develop into marketbased influences compared to attitudinal ones [e.g., Shiller et al. (1992)], thus rejecting the influence entrepreneurial ventures. However, their owners often had problems in adapting to market of ‘mentalities’. conditions, in particular because during socialist time, they often held monopolies on their respective markets [cf. Smallbone and Welter (2006a)]. Nevertheless, this is less a signal for a Another discussion centres on the potential of entrepreneurial activities as carried out during the specific Soviet mentality as more an indicator for a lack of management knowledge. socialist period to ‘breed capitalism’ [Kornai (1992)]. Even though the transformation process changed the rules for entrepreneurs, some forms of entrepreneurship and entrepreneurial activities Entrepreneurial activities within state organisations as well as party membership or membership survived, contributing a distinctive experience of entrepreneurship into the transition period. n in communist youth organisations fostered the development of the socalled nomenclature this context, some studies illustrate the influence of illegal entrepreneurial experience on today’s businesses during the transition period [Smallbone and Welter 2001a), which mainly is based entrepreneurship. For example, Earle and Sakova (1999) find that owning a sidebusiness in the on their links and connections within the socialist system. During the first years of transition, pretransition year of 1988 increased the probability of private business ownership in transition all over Eastern Europe both government officials and party members were quick to privatise context in six countries, namely Bulgaria, Czech Republic, Hungary, Poland, Russia and Slovakia. state enterprises, often in order to keep their influence, but also to realise opportunities [e.g., for Given that entrepreneurship was forbidden in four of them, namely Bulgaria, the Czech and Hungary Voszka (1991, 1994)]. Slovak Republics and Russia, this appears to confirm the seedbed hypothesis. 14 Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context 1 Overall, only few studies have been conducted in order to analyse Soviet legacies. The examples different fields of support. In a transition context, such a direct approach would be necessary in the of ruleavoiding behaviour as illustrated above would let us assume there is a Soviet legacy, which early years of the transition because of system failures, e.g., in the financing system. Besides, direct sometimes is referred to as the ‘legacy of noncompliance’ [Feige (1997: 28)]. Several studies on approaches are the easiest to design and implement at least in a superficially way. An indirect policy transition economies [e.g., Gustafson (1999), Smallbone and Welter (2001a)] indicate that an and support strategy would be more important in the long run because of the need to adjust the inadequate formal institutional framework during the transition period often reenforced existing institutional framework as a whole. Most transition countries therefore understandably opted for norms of behaviour. However, most researchers would accept that there is a legacy in learned the direct approach as an evidence of the immediate needs of new entrepreneurs in the first stage of behaviours, which might result in entrepreneurs being used to working around the rules. One transition. To a certain extent however this emphasis on direct support also appears to be a result of such example concerns the parallel circuits [Kerblay (1977)] of the Soviet period, which were multilateral and bilateral aid offered to countries in transition [Bateman (2000a, 2000b)]. network relations set up by the socalled tolkach between state enterprises in order to shift and obtain such resources as were required to fulfil plan goals. Of course, such activities were illegal in Therefore during the transition process in CEE we can observe different time patterns in SME the Soviet system; but the state tolerated them – as it tolerated some of the illegal entrepreneurial support and entrepreneurship policies. Initially, most transition economies introduced support activities, which later on often became the ‘seedbed’ for entrepreneurship development. measures aimed at individual entrepreneurs and their ventures, in order to level the playing field for new and small ventures. Increasing political awareness of the importance of entrepreneurship characterises a second phase, which resulted in overall national programmes or strategies being drafted and a shift towards the general conditions relevant for economic development. Governments 4. Challenges for Entrepreneurship and Small Business then should (ideally) concentrate on designing an integrated strategy of indirect and direct support Development in a Post Soviet Environment3 aimed at developing entrepreneurship and SMEs. Given the strong impact the context and environment have on entrepreneurship development, I Today, we can observe different policy agendas in CEEs depending on the respective state of finally turn to review some of the challenges in developing entrepreneurship and small business in transition [Smallbone and Welter (2001b, 2006b)]. In socalled ‘early stage transition countries’, a post Soviet environment. Most would agree on that entrepreneurship has a potentially important examples of which include Belarus, Ukraine, Moldova, most of the Central Asian republics and role to play in the transition process [Smallbone and Welter (2001b)], as it can contribute to the parts of Russia, entrepreneurs’ main problems arise from an inadequate legal frame and overall wider social change and democratisation of society; it can create employment possibilities and lacking institutional infrastructure for entrepreneurship and small business development. Empirical absorb some of the surplus labour from privatized ventures; it can create new business fields and results show that entrepreneurs in such countries often complain about high tax burdens, frequent contribute to the development of service and knowledgebased industries as well as to innovation. changes in the legal system and very bureaucratic entry and reporting rules [Smallbone et al. In this context, governments set the rules for entrepreneurship, as Solymossy (2005: 516) notes: (2001)]. Overall, governments in such environments play a low value on entrepreneurship, often “Regardless of whether initiated by push or pull motivation, an opportunity is required to establish seeing entrepreneurs as ‘cash cows’. For entrepreneurship to flourish in the long run, governments entrepreneurship. The opportunity must convey the hope of an economic profit….The ability will have to recognise the value entrepreneurs will add to their economies and societies, while to capitalize on opportunities is enhanced or retarded by governmental policies and resource entrepreneurs will have to learn to ‘behave’ accordingly to market rules. availability.” CEEs in a later stage of transition, for example the new member states of the European Union, In general, support for entrepreneurs and SMEs draws on different philosophies [cf. Welter face different challenges. Besides their preaccession preparations, which included raising the (1997)]: either governments tend to follow a more direct approach or they prefer an indirect one. knowledge level of private businesses concerning the implications of EUaccession, this refers to The latter concept is oriented towards improving the overall environment and framework for creating regional and local policies for fostering entrepreneurship and improving the effectiveness entrepreneurship while a direct approach is aimed at solving internal and external constraints of existing business support networks. at firm level. For example, with respect to financing problems of SMEs and new entrepreneurs an indirect approach would try to improve the financing system as a whole by strengthening the Overall, entrepreneurship development needs willing and capable entrepreneurs and an enabling banking system and orienting it towards entrepreneurs in small and new firms as a target group environment. In this context, an important challenge governments in CEEs face is the design while a direct approach would try to solve the individual firm’s financial problems by introducing of appropriate policies and support mechanism. Good or bad models for entrepreneurship and special credit lines. SME support in transition countries are difficult to identify because of the political, economic and cultural environments in different countries influencing the outcome of these programmes: The arguments used to justify entrepreneurship policies and SME support, play an important role „...there are considerable dangers in transposing institutional and organisational paradigms into in determining the respective approach. Sizerelated disadvantages and market failures are the different cultures with different ideologies and in different time frames. Western banking practice, standard – traditional – arguments in Western countries resulting in firmlevel pro¬grammes in for example, embodies several hundred years of incremental development of market economies 3 This section draws on Welter (1997). 1 Exploring Entrepreneurship and SME Development in a Post Soviet Context Exploring Entrepreneurship and SME Development in a Post Soviet Context 1 References through various stages, while the models of localenterprise development offered to Central and Eastern Europe have evolved over two decades or more. Furthermore, many of these models remain unproven; still others cannot yet be said to be fully successful even in the industrial Aidis, R. (2003): By law and by custom: Factors affecting small and mediumsized enterprises nations.“ [Gibb (1995)]. One problem which became apparent in many CEEs during the late 1990s during the transition in Lithuania. Tinbergen Institute Research Series, 316. Amsterdam: Thela resulted from a heavy reliance on donor support for financing business support infrastructures. As Thesis. soon as the outside assistance stopped, many of these centres failed to achieve financial viability Aidis, R. (2006): “From Business Ownership to Informal Market Traders: The Characteristics of and they consequently had to offer their services to profitable clients, leaving behind their original Female Entrepreneurship in Lithuania”, in Welter, F., Smallbone, D. and Isakova, N. (eds): Enter- target groups of new and small firms (Bateman 2000a). This sustainability question often resulted prising Women in Transition Economies. Ashgate, Aldershot, pp. 119142. from national governments’ limited budgets in spite of their (stated or actual) awareness of SMEs’ importance and their willingness to support SMEs. Donors could aggravate this when as Aidis, R. and van Praag, M. 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