Rybakov A.E., Mudrenko A.A., Lakey I.M.

Oles Honchar Dnipropetrovsk National University, Ukraine

ENTREPRENEURSHIP IN TRANSITION ECONOMIES

The establishment and growth of new enterprises is central to the transition process. This is because the change in economic system from communism to capitalism implies a reallocation of resources in which new firms have to be the main actors (see e.g., Olson 1992). Compared to other situations of major liberalization, existing firms are less well placed to be the engine of structural change because they are themselves institutions of the planning system and must also be subject to major reforms. Thus, while mainstream economists have emphasized the three pillars of the “Washington consensus” – stabilization, liberalization and privatisation – analysts such as Kornai, McMillan and Woodruff (2002) have instead argued that the creation of new firmswould be the primary mechanism of the transition.

However, the transition economies started their reforms with few legal, institutional and policy structures to provide the basis for an entrepreneurial market economy (see e.g. Verheul et al (2002), Chilosi 2001). To the contrary, the institutional environment has created numerous new barriers to entry, some conventional and others unique to transition. These have prevented entrepreneurs from fully exploiting the opportunities opened up by transition. Moreover, the institutional environment is evolving (Murrell 1996 and Spicer, McDermott and Kogut 2000) and the process of reform did not always enhance rapid or fundamental change. Indeed, in many countries the chaos associated with transformational reforms instead led to an entrenchment of the former elite in a new quasi–market environment (Boycko, Shleifer and Vishny 1995). The development of the entrepreneurial sector is sensitive to the institutional environment with a sharp distinction between the more market-oriented economies of Central and Eastern Europe and slower and more erratic pace of change in the former Soviet Union. Successful entrepreneurship depends not only on initial conditions in the transition economies but also on the speed and consistency with which the reform process has been applied.

Despite the unpropitious environment, we observe a remarkable expansion of the private sector in all transition economies. The average share of private sector output in GDP rose from virtually zero in 1989, at least in centrally planned economies like Czechoslovakia or the Soviet Union, to 62% in Ukraine in 2009.

Entrepreneurship and Economic Transition

To what extend can definitions of entrepreneurship be transferred from mature market economies to transition economies? Defining entrepreneurship for transition economies is not made easier by the fact that definitions of entrepreneurship vary in the literature, as other chapters in this handbook reveal. In this section, we discuss the distinctive character of entrepreneurship in transition and analyze how this might change as the transition process develops.

Entrepreneurship and Stages in Transition

The transition process can be divided into several stages that gave rise to different kinds of entrepreneurship. In the first stage, early transition, equilibration of supply and demand, manifested in adjustment of relative prices, opens up opportunities for mainly Kirznian type of entrepreneurs. This is a period of extreme uncertainty, as there is no previous market information. Channels of resource allocation face disruption as planning is abandoned, though nomenclature networks may provide some alleviation.

Macroeconomic stabilization, indicated by reduced inflation and a resumption of economic growth, removes extreme uncertainty and increases the incentives for Schumpeterian entrepreneurship. In this second stage, the price mechanism can be used to convey information about supply and demand and macroeconomic stability reduces business risks. This allows investments into longer-term projects and unmasks needs for new projects and technologies. In the third stage, market institutions become more developed and provide better mechanisms for resource co-ordination, information gathering and contract enforcement. Property rights enforcement relies less on physical threat or reputation and more on courts so resources are increasingly accessed through financial institutions and market exchange. At this stage, Schumpeterian entrepreneurship becomes more feasible.

The Functions of Entrepreneurship in Economic Transition

In this section, we identify the unique opportunities for entrepreneurship in transition economies. We thus discuss the heritage from planning and describe the reform process and its effect on entrepreneurship, drawing on the literature in comparative economics (see e.g., Gregory and Stuart 1995, Ellman 1994).

Transition Policies and Entrepreneurship

The transition process itself also influenced the pattern of entrepreneurship. In the early 1990’s, the established order broke down and the resulting macro-economic instability as well as some of the methods of privatisation chosen by policy makers in those crucial early years constrained entrepreneurship. Thus, the general business climate in the early years was recessionary and inflationary. Even in the least affected economies, like Poland or Hungary, GDP fell by up to 20%; in much of the former Soviet Union it halved using official statistics.

Privatization policy was also crucial for entrepreneurship. The bulk of new firms in the early years were probably created by the “small privatisation” – the sale of house, flats, shops, garages, restaurants etc. When SOEs were restructured for privatization or liquidated, their assets – plant and machinery but also less expensive and more versatile capital goods such as trucks or office equipment – were sold, often at fire sale prices. This factor was particularly significant in the more advanced transition countries like Poland.

Literature:

1. Casson M.C. The Oxford Handbook of Entrepreneurship / M.C. Casson. – Oxford University Press, 2005.