Why there is Less Entrepreneurship in Central and Eastern Europe, Compared with other Emerging Economies
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Introduction
The Central and Eastern European countries were greatly affected by an era of declining recession, stagnation and performance in the late 1970s and 1980s. Since 1989, the communist system of economy collapsed, ushering the new era of liberal economy. The previous system was created on administrative and hierarchical way of categorizing production combined with comprehensive surveillance and monitoring of economic actors (Pissarides, Singer and Svejnar 2003). However, the new system created a market economy with a substantial part anticipated to be played by entrepreneurship. In addition, the structures focussed on privatization, liberalisation and stabilisation of the existing companies (Aidis, Estrin and Mickiewicz 2008). However, since the 1990s, there has been a lower level of entrepreneurial activities in Central and Eastern European (CEE) countries as compared to the emerging economies. Recent researches indicate that some of the factors that limit entrepreneurial enthusiasm in these countries include lack of protection of property rights, corruption, social norms, and effects of communist organization, attitude and lack of adequate finance (Pfirrmann and Walter eds. 2012). Similarly, they are low adoption of an informal system of finance as compared to emerging economies in Asia and Latin America, business finances is easily accessible from both formal and informal means. The paper will examine the facts behind the low entrepreneurial level in the CEE as compared to the emerging economies.
Effects of Communism on Entrepreneurship
The collapse of communism economic structures created new chances for entrepreneurship in these countries. However, the traditions of the old era of socialism were in several manner was not encouraging. Many factors in the process of reform did not create a conducive environment for entrepreneurship. First, entrepreneurs faced a major challenge with regard to accessibility of capital from both informal and formal sources. Access to finance was very essential for new entrepreneurs, hence; they must seek it through loans from financial institutions, their savings or family members (Pissarides, Singer and Svejnar 2003). Currently, emerging economies such as China, India, Brazil and Argentina have a high score rate that CEE with regard to access of both informal and formal credit facilities. According to Roberts and Zhou (2000) available of informal finances has been a key factor in the promotion of entrepreneurship in emerging economies. However, in the CEE, all these sources were unavailable in the economy. Under the socialism structures, persons were not allowed to accrue wealth and financial assets because the government held all properties (Roberts and Zhou 2000). In this regard, this provided a major challenge to new entrepreneurs.
Furthermore, the monetary markets were absent at the beginning of the transition period and has been significantly slow in certain areas. According to a research by Estrin and Mickiewicz (2011), the reform process in non-bank commercial organizations and securities market was slow by 1995. Additionally, by the same period, only five nations had managed position three for the capital market index and the condition did not recover until the 2000s. This is the minimum threshold for effective reforms. In countries such as Slovenia and Slovakia and Russia, the conditions had even become worse. Only countries such as Hungary and Poland had recorded improvement in the reforms (Estrin and Mickiewicz 2011). Facts indicate that many banks were not comfortable in lending private companies while others did not have the capacity to fund entrepreneurial organizations.
On the other hand, several states owned financial institutions were constantly favouring firms owned by the state at the expense of private enterprises. Most notably, at the beginning of the liberalization process, new enterprises were rarely funded by banks (Aidis, Estrin and Mickiewicz 2008). Furthermore, they faced barriers related to administrative fees, legal enforcement an existence of additional legal payments. Economies that were previously under the Soviet Union had no or little experience of a liberal economy. Therefore, laws and other institutions that support liberalization were to be initiated from scratch (Pfirrmann and Walter eds. 2012). Entrepreneurs in the CEE, relative to emerging economies complained about the high level of taxes, which affected their ability to conduct successful businesses. Due to inefficiencies in system of collecting taxes, the cost of operating entrepreneurship businesses was quite high (Johnson, McMillan and Woodruff 2000).
Socio-cultural Factors
Socio-cultural factors are very crucial because they determine the economic traits and attitudes of the people as well as entrepreneurship. Pfirrmann and Walter eds. (2012) argued that socialism era left a heritage of norms and values that are not favourable to entrepreneurship. Literature refer to this tradition as a ‘bloc culture since it installed a feeling of conformity, dependence, extremisms, and rigidity over innovation, tolerance, individualism and self-reliance (Pfirrmann and Walter eds. 2012). In most cases, the norms established in the socialism period were accepted because they offer a way of collective adaptation to the dominant social and economic situation. Therefore, although socialism normally enhanced cooperation and trust, the predominant environment of monitoring and surveillance of the people created distrust, which became extremely entrenched in the social attitudes and values (Roberts and Zhou 2000).
Consequently, values that that key to entrepreneurship that are founded on mastery and autonomy were not adopted in the post-socialism era as compared to emerging economies especially in India and China (Aidis, Estrin and Mickiewicz 2008). Moreover, since most of the CEE countries were governed under authoritarian rule, trust was eroded in proper governance and the economy. Many factors of entrepreneurship depend on social setting and cooperation (Estrin and Mickiewicz 2011). Therefore, trust is a crucial feature in the development of entrepreneurship in the society, but this was not nurtured in the post-socialism period in CEE as compared to the emerging nations.
Entrepreneurial institutions and attitudes
A persons decision to start a business by establishing a new company is openly influenced by that persons attitude. The entrepreneurial characters, which are favourable to entry, relate to willingness and confidence to agree to take risks or failure. Various research findings revealed that when entrepreneurs in Central and Eastern Europe were compared to those in emerging economies, there were no significance differences in terms of the level of confidence (Estrin and Mickiewicz 2011). In this regard, this meant that they had the same self-confidence level with regard to their knowledge and skills. Nonetheless, with regard to fear-of-failure between the two groups of countries (CEE and emerging countries); there was a significant difference between the two. In CEE nations, the score was much lower which meant that entrepreneurs were less enthusiastic to take huge risks related to possible new business venture (Roberts and Zhou 2000). In emerging economies such as India, entrepreneurs had a huge score meaning that they were ready to take huge risks in their new ventures in business.
Pfirrmann and Walter eds. (2012) argued that the environment created by official institutions influences the attitudes and hence the tendency to begin new enterprises. Institutions have a substantial role in guiding and leading entrepreneurship to destruction, non-productivity or productivity. Due to the structure in the communist era, the CEE countries had relatively bigger government institutions, which featured pathetic rule of law as compared to the emerging economies such as Brazil and South Korea (Pfirrmann and Walter eds. 2012). In so doing, bigger state-run institutions normally negatively affect entrepreneurial actions because there are huge taxations. Consequently, high level of taxation may affect anticipated revenues on investments. Furthermore, increasing tax margin levels may decline incentives for prospective entrepreneurship by minimizing the possible gains and net anticipated return on investments (Johnson, McMillan and Woodruff 2000). Due to existence of huge state-run companies and business, in CEE, they are able to wipe out new entrepreneurs in the market relative to the emerging economies where state-run businesses are relatively lower.
Corruption
The issue of corruption covers both informal and formal companies and have a substantial effect on entrepreneurship. Aidis, Estrin and Mickiewicz (2008) suggested that corruption has a destructive impact on the activities of an entrepreneur as well as its growth as it raises the uncertainty levels. Moreover, corruption minimizes the gains in entrepreneurship. On the other hand, a weak system in the market facilitates corruption because it is a product of the frail justice system, property rights, unpredictability in state governance and non-transparent and excessive supervisory systems (Aidis, Estrin and Mickiewicz 2008). It can also be influenced by behavioural anticipations and social norms. A study by Johnson, McMillan and Woodruff (2000) revealed out that corruption is a major hindrance in entrepreneurial expansion in CEE countries. In countries such as Russia, the level of entrepreneurship is low because businesspersons depend on perennial corruption and illegal networks in their investments. In this regard, high corrupt networks in Russia have limited entrepreneurship as compared to emerging economies such as China (Johnson, McMillan and Woodruff 2000).
Conclusion
Evidences point out that the level of entrepreneurship in Central and Eastern European is lower as compared to emerging economies such as China, Brazil, India, South Korea and Argentina. Various factors contribute to this difference between the two economies (Estrin and Mickiewicz 2011). Some of these include the inheritance of socialism structures, social norms and cultures. In addition, CEE countries have witnessed the slow pace of adoption of entrepreneurial characters such as mastery, individualism and readiness to take huge risks (Pfirrmann and Walter eds. 2012). Furthermore, post-socialism systems have not created a favourable environment to encourage entrepreneurship.
References
Aidis, R., Estrin, S. and Mickiewicz, T., 2008. Institutions and entrepreneurship development in Russia: A comparative perspective. Journal of Business Venturing, 23(6), pp.656-672.
Estrin, S. and Mickiewicz, T., 2011. Entrepreneurship in transition economies: the role of institutions and generational change. The dynamics of entrepreneurship: evidence from the global entrepreneurship monitor data, pp.181-208.
Johnson, S., McMillan, J. and Woodruff, C., 2000. Entrepreneurs and the ordering of institutional reform: Poland, Slovakia, Romania, Russia and Ukraine compared. Economics of Transition, 8(1), pp.1-36.
Pfirrmann, O. and Walter, G.H. eds., 2012. Small firms and entrepreneurship in Central and Eastern Europe: a socio-economic perspective (Vol. 14). Springer Science & Business Media.
Pissarides, F., Singer, M. and Svejnar, J., 2003. Objectives and constraints of entrepreneurs: evidence from small and medium size enterprises in Russia and Bulgaria. Journal of comparative economics, 31(3), pp.503-531.
Roberts, K. and Zhou, C., 2000. New private enterprises in three transitional contexts: Central Europe, the former Soviet Union and China. Post-Communist Economies, 12(2), pp.187-199.