Why there is less entrepreneurship in
transition countries?
Claudia Badal
UCL
Outline
• Oxford Dictionary Definition
• Importance of Entrepreneurship
• Characteristics of central planning
• Challenges of Start-up firms
• Barriers of Entry
• Entrepreneur characteristics
Oxford Dictionary Definition
entrepreneur ”a person who sets up a business or
businesses, taking on financial risks in the hope of
profit”
• At the macro level entrepreneurship is seen as a driver of
structural change and job creation. At the micro level
entrepreneurship is the engine behind the formation and
subsequent growth of new firms
Importance of Entrepreneurship
The importance of entrepreneurship for economic development has become
widely acknowledged (Schumpeter 2008 [1934]; Baumol 1990; Wennekers and
Thurik 1999; Van Stel et al. 2005; Minniti et al. 2005; Minniti and Lévesque 2008)
to generate and disseminate innovations and create jobs
fill in market niches
increase competition and consequently promote economic efficiency
Entrepreneurship plays an important role in transition countries in facilitating the
shift from a centrally planned toward a market-based system.
“Invention and entrepreneurship are at the heart of national advantage and
country competitiveness” (Porter, 1990)
Characteristics of Central planning
• had a marked preference for industry, especially heavy industry and
tended to neglect services.
• organized very high rates of investment, both in physical and human
capital.
• was no need for a financial system to allocate savings to investment
(done by the plan, usually without assigning a value to time).
• no need for the legal and institutional framework underpinning a
market economy.
• Need for changes in Institutions and Policies
Challenges of Start-up companies
• Difficulties at start-up level
• common problems for new ventures is raising sufficient funding enabling them to launch
and operate businesses successfully
• finance availability and cost have been cited as one of the major constraints for
entrepreneurship
• The lack of credit history and of credible reputation distinguishes start-ups from
established firms, creating a disadvantage for the former when it comes to the issue of
funding
• Given small scale of entrepreneurial projects and a higher asymmetry in information and
higher risk, financial institutions find it costly to monitor small businesses, even if
advances in technology (including the risk scoring techniques) imply that the banking
sector is capable to handle the entrepreneurial finance better than in the past
• The relative difficulty of start-ups in accessing finance is likely to be aggravated by a
weak business environment, in particular by inadequate legal frameworks and
underdeveloped financial systems
• Given very limited access of entrepreneurs to international financial markets, they are
particularly sensitive to institutional constraints in domestic countries.
Barriers of Entrepreneurship
• Geographical disadvantage: some transition countries benefit from there approximates to Europe and
could join therefore the EU, which provides help and funds for Entrepreneurships. Other states
remain hybrid systems with the remnants of central planning alongside elements of market regulation
• Macroeconomic instability
• Bureaucracy: how many days does it take to open a business
• Level of corruption: Over regulation and interference in the private sector further led to increased
levels of corruption.
• Culture : negative attitude towards private business owners and entrepreneurs inherited from the
values propagated by the centrally planned system
• No government incentives for entrepreneurs : high level of taxes, the frequent changes to tax
policies, the ambiguity of tax policies and/or the general regulatory environment
• Informal barriers such as the implementation of regulations especially property rights, bureaucracy,
corruption and unfair competition from a large informal economy are also often mentioned as barriers
to private business development
• lack of developed business infrastructure and support services leads many business owners to
depend on business assistance through private networks
• transfer of illegal entrepreneurship experience to legal forms of private enterprise under the current
market-oriented regimes
• Moral hazard problems and the risk of opportunistic behaviour are especially high because of greater
imperfection of the legal framework and less effective application of the law.
Time required to start a business > days by
country
2006
Rank Country Days
172 Australia 2 days
168 United States 5 days
143 Latvia 16 days
119 Czech Republic 24 days
109 Russia 28 days
Entrepreneurs characteristics
• many business owners in transition countries used quite rudimentary and
primitive business methods but still obtained profitable results
• business owners also exhibit skepticism towards the national government in
terms of their ability and/or willingness to support private business
development tend to adopt a passive rather than pro-active attitude
• lack experience with income and profit tax or private business legislation
• tend to be more progressive and market oriented than the general population.
In that sense, they are greater supporters of market oriented changes and
reform
Self-employment as a share of total
employment, selected
transition economies, (percentage)
