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=
p
p
odds
1
Greater the odds of an event, the greater the probability that the event occurs, where,
( )
=
p
p
1
log odds log
In the case of multiple predictors, as in our example, the equation for p is:
...... x b x b b
...... x b x b b
2 2 1 1 0
2 2 1 1 0
e 1
e
p
+ + +
+ + +
=
b
i
a measure of association between the predictors and the equation (log (odds)) for the occurrence
of an event that interests us.
b
i
> 0 positive association
b
i
= 0 no association
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4. THE RESULTS
In this section we present the empirical results. Results of the quantitative data are accompanied
by tables in Appendix I. Analysis of the quantitative results start with descriptive analysis, which is
followed by statistical methods of enquiry.
When asked the question: How likely are you to move away from the city in the next 3 years?,
our fndings show that respondents selected the following answers: 7,4% of our respondents selected
almost defnitely, 13,6% selected very likely, somewhat likely was selected by 22,9% of respondents,
43.6% choose not very likely, and not likely at all was selected by 12.6% of our respondents.
4.1. Demographics
When it comes to age, results show that 67% of the sample falls within 25-34 age group, 27,6% of
respondents belong to 35-44 group, and fewer than 10% of respondents are less than 24 years old.
Only 4,2% of respondents are older than 44. Our total sample is very close to being evenly distributed
between female and male knowledge and creative workers. Female workers are better represented in
the creative economy, but the difference is not statistically signifcant for our sample.
Although our selection criteria was primarily focused on occupation, and not on the highest achieved
level of formal education, it is worth mentioning that 66,7% of respondents completed a degree, and
15,3% of respondents completed postgraduate studies. Respondents who completed one or more
years of the university education comprise 15,2% of the sample, and 2,9% of respondents fnished
high school.
Results show that 12,9% of respondents receive net monthly income of less than BAM 500, and
21,2% of respondents have monthly income from BAM 500 to BAM 999.
It is notable that 41,7% of respondents receive net monthly salary/income between BAM 1,000 and
BAM 1,999 (approx. EUR 500 EUR 1.000), 8,3% of respondents have monthly income between
BAM 2.000 and BAM 2.999, 1.9% have income between BAM 3.000 and BAM 3.999, and only
1,7% of respondents have monthly income above BAM 4,000 (2.050 EUR). There is no signifcant
difference in income between male and female respondents.
4.2. Length of time lived in the city and neighbourhood
Survey data reveal that 86% of respondents lived in their city for 10 years or longer and 9,3% lived
in their city between 5 and 10 years. It is worth mentioning that 50% of all respondents have spent
their entire life in their city, that only 16,9% of people had a place of residence outside BiH, and only
0,2% respondents lived outside Europe. Results show that 21,4% of respondents have been living on
the same address all their life, additional 29% of respondents lived on different address in their city,
and 32,4% lived in another place in BiH.
4.3. Characteristics of respondents` households
Results for the household structure show that 17,9% of households are husband and wife (cohabiting
couple), 26% are husband and wife (or cohabiting couple) with children, and single people living
on their own represent 12,4% of the sample. Respondents in our sample who live with their parents
make 25,7% of our sample, and those who live with their friends or relatives represent 6% of our
respondents. Single parents make 1,4% of the sample. Our results show that 77% of respondents
choose to live in central part of their city, less than 2 km from their city centre. Households are
relatively modest in size, with only 8,3% of respondents living in households comprising of 5 or
more members, 11,9% respondents live on their own, and 26,4% live in households of two people.
Therefore, 38,3% of respondents live alone or with one more person, while 28,8% of respondents live
in households of 3 people, and 24,5 of them live in households of 4.
4.4. Employment status
Because of high levels of unemployment in BiH, we introduced a category of unemployed creative
and knowledge workers, i.e. respondents who are temporary out of work, but have experience in one
of these sectors. 14.3% of our respondents are unemployed, 11,7% are self employed / freelance, and
74.0% are employed. Regarding the employer`s category results show that 36,7% of respondents have
the government as an employer, 32,7% work for a privately owned company, 12,8% of respondents
work in NGO (non-governmental organizations), 8,5% are freelancers, 6,9% students, and 2,9% of
respondents are owners/partners in their companies.
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4.5. Job sector
Data on surveyed knowledge and creative workers show that 63,8% of the total number of 420 surveyed
knowledge and creative workers are employed by the knowledge sector, while 36,2% of respondents
work in creative industries. Respondents who work in engineering, new technologies, and research
and development (R&D) make 15,5% of the sample each, same as those working in management
and consulting jobs. College, university and HE teaching professionals make 11.2% of the sample,
workers in fnancial intermediaries 10.5%, legal and other business services 10.0%, marketing and
PR, advertising 7.9%, design, applied arts 4.8%, arts: music, fne art, literature, theatre 4.5%, ICT
software 4.3%, architecture 3.3%, TV and radio 2.1%, new product development 0.7%, creative
crafts 0.7%, newspapers, printed media / publishing, books, web 6.4%, video, flm, photography
1.0% , music production 0.7%, and art dealers and ICT professionals working in the hardware sector
represent 0,5% of the sample, each.
4.6. Reasons for living in their city
Deciding on four most important reasons for living in their city, respondents gave the highest response
to personal connections. In the questionnaire, reasons were ranked from 1 to 4, reason marked with
number 1 being the most important, and reason 4 the least important. We converted values for our
calculations, giving value 4 to previous value 1, value 3 to previous value 2, and so on.
According to results in Table 1(Appendix), the highest score has the variable `the family lives here`,
25,57% of the total sum of scores, 14,8% is score for `born here`, 12,68% for `proximity of friends`,
and 11,6% for `studied here`. Cumulatively, 64,65% of the total sum of scores belongs to: respondents
having family in the city, being born in the city, proximity to friends and studied in the city. Apart
from links to family and friends and employment, relatively high response rate of 7,71% of the total
sum of scores was given to size of the city.
4.7. Demographics and likelihood of moving away
Results in this section provide us with basic demographic characteristics of the sample in relation of
how likely are respondents to move away in the next three years.
We use term `mobility subgroups` to describe groups of respondents who are `somewhat likely to
almost defnitely` to move away from their city in the next three years, therefore belonging to `the
more mobile subgroup`, and respondents who are `not too likely to not likely at all` to move away
from their city in the next three years, therefore belonging to `the less mobile subgroup`.
We found that signifcant variation exists in observed and expected values between mobility
subgroups in terms of the respondents` age with (3, n=420)=17,457, p< ,01. Respondents from the
more mobile subgroup are in higher percentages younger than 34 years, and their age has a medium
effect on the likelihood of them moving away from their city Cramer`s V (3, n=420)=0,204, p< ,01,
while their gender does not play a signifcant factor. A signifcant variation exists between mobility
subgroups in relation to their monthly income, with (3, n=420) = 10,713, p< ,05. It is noteworthy
that 42,4% of respondent from the more mobile subgroup have wages below 999KM, and only 27,5%
from the less mobile subgroup have wages in that bracket. The size of the respondent`s household
signifcantly affects likelihood of respondents moving away. Results demonstrate that 55,7% of
respondents from the less mobile subgroup live in nuclear or single parent families. Data show that
16,5% of respondents from the more mobile subgroup live on their own (10,1% from the less mobile
subgroup), 29% of them live with their parents (25% from the less mobile subgroup), and 16,5%
live in extended families or with their friends or relatives (12,4% from the less mobile subgroup).
Household size has a medium effect on the likelihood of respondents moving away from their city
Cramer`s V (4, n=420) = 0,194, p< ,01.
4.8. City features and likelihood of moving away
This chapter provides an overview of the city features in relation to the sample breakdown in two
mobility subgroups, as explained in demographics.
4.9. Social activities and likelihood of moving away
Results in Table 2 (Appendix) show that the most popular social activities for more than half of all
respondents, at least once a week, for both mobility subgroups are: going out to the pub/bar, visiting
coffee shops (during the day), walking around city centre, going to city parks and visiting friends.
Very popular in both groups is spending time with friends, what, at least once a week, practice 64,1%
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respondents from the more mobile subgroup, and 66,9% from the less mobile subgroup.
Without statistically signifcant differences, results show that 74,5% of respondents from the more
mobile, and 69,5% from the less mobile subgroup are going to movies, theatre and/or concerts at
least once a month, while 63.1% of respondents from the more mobile subgroup, and 69,5% the less
mobile subgroup visit restaurants once a month. Respondents from both mobility subgroups almost
equally, with little over 78%, practice excursions in parks or peripheral green areas at least once a
month.
The Chi-square test shows signifcant variations between mobility subgroups for observed and
expected scores for variables: going to museum and/or art gallery, going to a night club, going
to a festival (when happening in the city, participating in religious activities, and participating in
community work. Respondents from the more mobile subgroups more often go to museum and/or art
gallery, go to a night club, and go to a festival (when happening in the city), while respondents from
the less mobile subgroup more often participate in religious activities, and participate in residents
associations. It strikes our attention that nearly 90% of respondents from both mobility subgroups
never participate in political activities, and over 50% of all respondents almost never participate in
religious activities or community work.
4.10. Leisure amenities and likelihood of moving away
In distributed questionnaire there were 13 independent variables relating to satisfaction with leisure
amenities offered in the city, with a scale of fve choices: very satisfed, satisfed, neither, dissatisfed,
and very dissatisfed. For our analysis, we aggregated scores of fve into three choices: very satisfed
to satisfed, neither, dissatisfed to very dissatisfed. In that way we were able to use Chi-square to test
signifcance of the relationship between mobility of respondents and their satisfaction with leisure
amenities.
Results in Table 3 (Appendix) show that approximately more than 50% of all respondents are
very satisfed or satisfed with quality of public spaces (plazas, parkas, etc), quality and range of
restaurants, quality of bars and cafs, and quality of cinemas. Highest scores of very satisfed to
satisfed respondents have variable quality of cinemas, 63.0% of respondents from the more mobile,
and 74.2% from the less mobile subgroup, and for the variable quality of bars and cafs 46.7% of
respondents from the more mobile, and 62.3% from the less mobile subgroup are very satisfed to
satisfed.
The largest percentage of dissatisfaction is recorded for the city architecture/relevant monuments,
with 60.3% respondents from the more mobile subgroup, and 39.8% respondents from the less mobile
subgroup being dissatisfed to very dissatisfed.
Statistically confrmed differences between two mobility subgroups are identifed for observed and
expected values for variables: quality of public spaces (plazas, parkas, etc), quality and range of
art galleries/ museums, quality of bars and cafs, quality of cinemas, quality of shopping areas,
architecture of the city/relevant monuments, and quality and range of ftness centres, with more
mobile subgroup being in larger percentages dissatisfed to very dissatisfed.
4.11. Public services and likelihood of moving away
When it comes to public services, results in Table 4 (Appendix) show the highest percentages of
respondents, 85,9% from the more mobile, and 80.1% from the less mobile subgroup, are dissatisfed
to very dissatisfed with a number of bicycle lanes, while 82.6% respondents from the frst, and 72.5%
from the second subgroup are dissatisfed to very dissatisfed with the quality of tourist attractions.
High percentages of dissatisfed to very dissatisfed respondents are also recorded for social security
(69.6% for the more, and 53.4% for the less mobile subgroup), quality of health services (65.8%, and
50.8%), quality of the university education (60.9%, and 45.3%), safety on the streets (56.0%, and
50.4%), police services (57.6%, and 43.2%), the quality of the high school and elementary school
education (50.5%, and 39.4%), and municipal police services (46.7%, and 39.4%).
Statistical signifcance is confrmed by the Chi-square test for differences between the more mobile
subgroup and the less mobile subgroup regarding quality of public transportation system, police
services, number of bicycle lanes, quality of tourist attractions, social security, quality of health
services, quality of the university education, and quality of the high school and elementary school
education, with the more mobile subgroup being signifcantly more dissatisfed to very dissatisfed
with public services offered in the city, than the less mobile subgroup.
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4.12. Environmental aspects and likelihood of moving away
Results in Table 5 (Appendix) show that the highest percentages of respondents, 75,5% from the more
mobile, and 75,4% from the less mobile subgroup, are dissatisfed to very dissatisfed with levels of
use of bicycles as a means of transport, while 64,7% respondents from the frst, and 67,4% from the
second subgroup are dissatisfed to very dissatisfed with tidiness and cleanliness of rivers and river
banks.
Regarding environmental aspects of their city, high percentages of dissatisfed to very dissatisfed
respondents are recorded for the recycling collection services (65,8% for the more, and 59,7% for the
less mobile subgroup), traffc congestion (64,1% and 65,7%,), availability of parking space (59,2%,
and 62,7%), quality of children playgrounds (56,5%, and 56,8%), pavement condition of city streets
and sidewalks (47,8%, and 44,9%), and air pollution (47,3%, and 38,1%). Statistically signifcant
difference between mobility subgroups is recorded only for tidiness and cleanliness of rivers and river
banks, where the less mobile subgroup is more dissatisfed with a state of riverbanks and cleanliness
of rivers, (2, n=420) = 5.841, p< ,05.
4.13. Issues of concern and likelihood of moving away
In distributed questionnaire, there were 26 independent variables relating to issues of concern related
to the societal and economic factors of the living environment, with a scale of fve choices: not worried
at all, not worried, not particularly worried, somewhat worried, and very worried. For our analysis,
in order to use the Chi-square test to determine signifcance of the relationship between mobility of
respondents and their concern with the societal and economic factors of the living environment, we
aggregated scores of fve into three choices: not worried at all to not worried, not particularly worried,
and somewhat worried to very worried.
Generally speaking, results in Table 6 (Appendix) show that respondents from both mobility subgroups
are noticeably concerned about most of the issues of the living in their city. The highest rate of
response in somewhat worried to very worried category respondents gave to availability of jobs,
94.6% from the more mobile, and 94.1% from the less mobile subgroup, while 84,8% respondents
from the frst, and 77,5% from the second subgroup are somewhat worried to very worried with the
quality of university education.
Results show that, regarding issues of concern, high percentages of somewhat worried to very worried
respondents are also recorded for the quality of medical services (85,9% for the more, and 77,1% for
the less mobile subgroup), behaviour of traffc participants (81,5% for the more, and 78,4% for the
less mobile subgroup), drug problems (81% and 76,3%), aggressive/anti-social behaviour (80,4%,
and 76,3%), lack of bicycle lanes (81.5%, and 72.9%), the quality of secondary and elementary
education (78.3%, and 69.1%), lack of sidewalks (76.1%, and 69.9%), homelessness (70.1%, and
61.0%), illegal construction (77.7%, and 55.9%), availability of recreation for children (67.4%, and
58.9%), the quality of kindergartens (62.5%, and 61.0%), and air pollution (60.3%, and 57.2%).
Statistical signifcance is confrmed by the Chi-square test for differences between the more mobile
subgroup and the less mobile subgroup for issues of concern regarding: availability of recreation for
teenagers, availability of affordable housing, availability of recreation for seniors, amount of graffti,
maintenance of trees and green areas, illegal construction, lack of sidewalks, quality of medical
services, and appearance of building facades and shop window, with the more mobile subgroup being
signifcantly more somewhat worried to very worried, than the less mobile subgroup.
4.14. Cost of living and likelihood of moving away
In the questionnaire, there were 6 independent variables relating to cost of living in the city with a
scale of fve choices: very expensive, expensive, average, cheap, and very cheap. For our analysis,
we aggregated scores of fve choices into three: cheap to very cheap, average, and very expensive to
expensive.
Results in table 7 (Appendix) show that the overall perception of all respondents is that their city is
either very expensive or expensive city for all basic facilities and services listed. It is remarkable that
for the variable general cost of living not a single one respondent from either mobility subgroups
choose option cheap to very cheap.
The highest proportion of respondents, 97,3% from the more mobile, and 92,4% from the less mobile
subgroup, perceives housing cost (mortgage, rent) to be very expensive to expensive, while 94%
of respondents from the frst, and 82,2% from the second mobility subgroup perceives general cost
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of living to be very expensive to expensive. Other costs are also perceived to be very expensive to
expensive: cost of food and beverages (basic consumables) (86,4% for the more, and 75% for the less
mobile subgroup), cost of basic services related to the house (water, electricity) (84,2%, and 78%),
cost of leisure activities (63%, and 53,8%), costs of education and training (59,8, and 47%), and
transportation costs (54,3%, and 36,9%).
More mobile subgroup perceives certain costs of living higher than the less mobile subgroup.
Statistical signifcance is confrmed for variables: costs of education and training (2, n=420) =
6.862, p< ,05, transportation costs (2, n=520) = 12.956, p< ,01, and general cost of living (2,
n=420) = 13.096, p< ,01, with the more mobile subgroup perceiving those costs very expensive to
expensive in larger percentages.
The most striking result is that not one respondent from the more mobile subgroup perceives housing
cost as being cheap or very cheap, and that 94% of respondents who are somewhat likely to almost
defnitely to move away from their city considers them as being very expensive to expensive.
4.15. Tolerance and likelihood of moving away
In distributed questionnaire there were 5 independent variables relating to issues of tolerance, with a
scale of fve choices: strongly agree, agree, neither, agree, and strongly disagree. For our analysis, we
aggregated scores of fve choices into three: strongly disagree/disagree, neither, and agree/strongly
agree.
Results in Table 8 (Appendix), show that 67,4% of respondents from the more mobile subgroup,
and 61,4% from the less mobile subgroup, strongly disagree to disagree that their city accepts the
gay population, and 55,4% from the more, and 54,7 from the less mobile subgroup of respondents
strongly disagree to disagree that their city accepts the minority religious and ideological groups.
There is a signifcant difference in responses between members of the more and less mobile subgroups
for three variables: agreeing that city is welcoming place to people from other countries, agreeing that
their city accepts all ethnic groups, and agreeing that their city accepts the differences between rich
and poor. Respondents who are somewhat likely to almost defnitely to move away from their city
signifcantly more strongly disagree to disagree to statements of tolerance regarding their city.
4.16. Factor analysis
We divided issues of concern listed in Table 6 in the Appenix (Issues of concern and likelihood of
moving away) into two groups of factors, cultural/societal factors, which represent social milieu of
their city, and economic factors, which are more directly infuenced by the amount of public funding.
We use factor analysis and in order to determine which factors, economic or cultural/societal, most
signifcantly impact respondent`s decision to move away from their city in the next three years:
Cultural/Societal Factors: Economic factors:
Amount of crime in the city
Safety
Amount of grafti
Drug problems
Homelessness
Aggressive/anti-social behaviour
Prostitution on streets
Behaviour of trafc participants
Air pollution
Demonstrations in the streets
Illegal construction
Presence of smugglers, dealers
Appearance of building facades and shop win-
dows
Availability of jobs
Availability of recreation for teenagers
Availability of afordable housing
Availability of recreation for seniors
Quality of university education
Quality of secondary and elementary education
Quality of kindergartens
Availability of public transportation
Availability of recreation for children
Maintenance of trees and green areas
Lack of bicycle lanes
Lack of sidewalks
Quality of medical services
Results in Table 9 show that Bartletts Test for the null hypothesis (correlations between variables equal
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to zero) is signifcant for given variables, therefore we proceed to extract factors which encompass
independent variables. Table 9: Bartletts Test
Bartletts Test
Bartletts Test of Sphericity
Approx. Chi-Square 4058,725
df 325
Sig. ,000
Table 10 displays communalities matrix data, with the amount of variability explained by the specifc
factors of the original variables (column Extraction).
Table 10: Communalities
Communalities
Initial Extraction
Amount of crime in the city 1,000 ,807
Safety 1,000 ,819
Availability of Recreation for teenagers 1,000 ,703
Availability of Affordable Housing 1,000 ,569
Availability of recreation for seniors 1,000 ,704
Availability of jobs 1,000 ,596
Quality of university education 1,000 ,743
Quality of secondary and elementary education 1,000 ,763
Quality of kindergartens 1,000 ,598
Availability of public transportation 1,000 ,446
Availability of recreation for children 1,000 ,652
Amount of graffti 1,000 ,525
Drug problems 1,000 ,574
Homelessness 1,000 ,613
Aggressive/anti-social behavior 1,000 ,565
Prostitution on streets 1,000 ,690
Behavior of traffc participants 1,000 ,565
Air pollution 1,000 ,512
Maintenance of trees and green areas 1,000 ,453
Demonstrations in the streets 1,000 ,605
Illegal construction 1,000 ,601
Lack of bicycle lanes 1,000 ,675
Lack of sidewalks 1,000 ,712
Quality of medical services 1,000 ,487
Presence of smugglers, dealers 1,000 ,579
Appearance of building facades and shop windows 1,000 ,612
Extraction Method: Principal Component Analysis.
Results in Table 11 show components 1 to 7 that can be considered for future analysis. The frst three
columns (Initial Eigenvalues ) are data for all factors, and in the other three (Extraction Sums of
Squared loadings) are data for those factors that meet the criteria to be retained.
Table 11: Total Variance Explained
Total Variance Explained
Comp-
onent
Initial Eigenvalues
Extraction Sums of Squared
Loadings
Rotation Sums of Squared Loadings
Total % of Var. Cumul. % Total % of Var. Cumul. % Total % of Var. Cumul. %
1 7,277 27,988 27,988 7,277 27,988 27,988 2,719 10,458 10,458
2 2,345 9,017 37,005 2,345 9,017 37,005 2,688 10,339 20,797
3 1,561 6,005 43,010 1,561 6,005 43,010 2,503 9,626 30,423
4 1,419 5,456 48,466 1,419 5,456 48,466 2,483 9,551 39,974
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5 1,353 5,205 53,671 1,353 5,205 53,671 2,211 8,505 48,479
6 1,151 4,429 58,100 1,151 4,429 58,100 2,059 7,920 56,399
7 1,061 4,080 62,181 1,061 4,080 62,181 1,503 5,782 62,181
8 ,917 3,526 65,706
9 ,846 3,256 68,962
10 ,813 3,126 72,088
11 ,748 2,878 74,966
12 ,701 2,696 77,662
13 ,627 2,411 80,073
14 ,579 2,225 82,298
15 ,560 2,153 84,451
16 ,520 2,000 86,450
17 ,463 1,780 88,231
18 ,455 1,749 89,979
19 ,412 1,586 91,565
20 ,388 1,491 93,056
21 ,362 1,391 94,448
22 ,346 1,331 95,779
23 ,319 1,228 97,007
24 ,303 1,167 98,174
25 ,262 1,008 99,182
26 ,213 ,818 100,000
Extraction Method: Principal Component Analysis.
Seven factors shown in Table 12 correlate to specifc independent variables. Therefore, we fnd that
individual factors are mostly correlated with:
Factor 1 (Fac1_antisocial) with: drug problems, homelessness, prostitution on streets
Factor 2 (Fac2_recreation): availability of recreation for teenagers, availability of recreation
for seniors
Factor 3 (Fac3_education): quality of university education, quality of secondary and elementary
education
Factor 4 (Fac4_cycling&walking ): lack of bicycle lanes, lack of sidewalks
Factor 5 (Fac5_revolt): amount of graffti, demonstrations in the streets
Factor 6 (Fac6_safety): amount of crime in the city, safety
Factor 7 (Fac7_architecture): illegal construction, appearance of building facades and shop
windows
Table 12: Rotated Component Matrix
Rotated Component Matrix
a
Component
Fac1 Fac2 Fac3 Fac4 Fac5 Fac6 Fac7
Amount of crime in the city ,183 ,152 ,046 ,064 ,045 ,859 ,066
Safety ,204 ,136 ,055 ,077 ,069 ,862 ,053
Availability of Recreation for
teenagers
,011 ,770 ,216 ,102 ,102 ,207 ,003
Availability of Affordable Housing ,042 ,666 ,058 ,105 -,051 ,054 ,323
Availability of recreation for seniors ,157 ,789 ,074 ,112 ,087 ,085 ,158
Availability of jobs ,345 ,361 ,187 ,008 -,212 -,068 ,511
Quality of university education -,001 ,133 ,807 ,116 ,007 ,035 ,243
Quality of secondary and elementary
education
,070 ,185 ,828 ,035 ,072 ,094 ,151
Quality of kindergartens ,105 ,294 ,646 ,114 ,215 -,009 -,156
Availability of public transportation ,040 ,346 ,287 ,318 ,348 ,122 -,070
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Availability of recreation for children ,095 ,612 ,366 ,263 ,198 ,035 -,161
Amount of graffti ,216 ,029 ,054 -,002 ,687 -,009 ,051
Drug problems ,691 ,060 ,083 ,142 ,199 ,159 ,035
Homelessness ,730 ,139 -,031 ,140 ,177 ,092 ,000
Aggressive/anti-social behaviour ,501 ,087 ,082 ,195 ,105 ,447 ,225
Prostitution on streets ,729 ,068 ,100 ,046 ,342 ,156 -,036
Behavior of traffc participants ,441 -,014 ,154 ,539 ,050 ,219 ,072
Air pollution ,311 -,044 ,278 ,460 ,196 ,290 -,034
Maintenance of trees and green areas ,104 -,007 ,321 ,357 ,439 ,134 -,039
Demonstrations in the streets ,209 ,090 ,040 ,123 ,730 ,050 ,036
Illegal construction -,032 ,132 ,116 ,465 ,232 ,160 ,523
Lack of bicycle lanes ,115 ,232 ,058 ,752 ,030 -,064 ,184
Lack of sidewalks ,124 ,256 ,053 ,782 ,070 ,066 ,085
Quality of medical services ,359 -,043 ,397 ,270 -,142 ,054 ,321
Presence of smugglers, dealers ,346 ,140 ,007 ,002 ,527 ,112 ,386
Appearance of building facades and
shop windows
-,085 ,144 ,164 ,226 ,366 ,187 ,580
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 14 iterations.
Values of Exp(B) = e
bi
, represent the ratio of the likelihood that someone leaves and stays in their
city. Ratios greater than 1 represent the motivating factor for leaving their city, with given statistical
signifcance. Therefore, our analysis returned three statistically signifcant variables (Table 13):
Fac4_cycling&walking, Fac6_safety, and Fac7_architecture in relation to likelihood that respondents
leave or stay in their city.
Table 13: Variables
Variables
B S.E. Wald df Sig. Exp(B)
95% C.I.for EXP(B)
Lower Upper
Step 1
a
FAC1_1 -,073 ,123 ,351 1 ,554 ,930 ,730 1,184
FAC2_1 ,137 ,127 1,162 1 ,281 1,147 ,894 1,472
FAC3_1 ,152 ,133 1,313 1 ,252 1,164 ,898 1,509
FAC4_1 ,405 ,138 8,552 1 ,003 1,499 1,143 1,966
FAC5_1 ,079 ,122 ,420 1 ,517 1,083 ,852 1,376
FAC6_1 ,262 ,127 4,282 1 ,039 1,300 1,014 1,667
FAC7_1 ,312 ,131 5,641 1 ,018 1,366 1,056 1,766
Constant -1,433 ,131 119,360 1 ,000 ,239
a. Variable(s) entered on step 1: FAC1_1, FAC2_1, FAC3_1, FAC4_1, FAC5_1, FAC6_1, FAC7_1.
5. DISCUSSION
Our research journey started with recognition that growth of the knowledge and creative economy
represents the main development strategy for developed, as well as for countries in transition. We
found that literature on knowledge and creativity is wide and varied, but lacks depth in terms of
human capital mobility as a factor of economic development. So far, reasons why human capital
migrates from place to place are being researched from behind, based on historical data, what is an
approach that lacks validity and purpose in the fast changing environment.
For cities in BiH, faced by prolonged and increasing emigration to developed countries, it is crucial
to determine key factors that could discourage emigration, and eventually encourage immigration of
high skilled people. Florida (2002) argues that key factors of human capital mobility are technology
available in the city, community`s tolerance to differences, and amenities and bohemian-like lifestyle
opportunities, while the ACRE research (Musterd et al., 2010) found that human capital in the EU is
more likely to stay in cities closer to their families and friends, regardless of other advantages. In the
following discussion refects upon the outcomes of the statistical hypothesis tests.
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H1) We fnd that the proximity to family and friends signifcantly impacts the choice of place of
residence of sampled knowledge and creative workers.
Our fndings show that reasons: the proximity to family and friends, being born in the city, and
studied in the city represent 64,65% of the total sum of responses, while 14,28% of responses are job-
related. In line with that, it is notable that 86% of respondents have been living in their city 10 years or
longer, and that 25,7% of respondents still live with their parents. Family and social networks are also
the key factor on choosing the place of residence for human capital in Dublin (Murphy et al., 2008).
Findings, that that the most practiced social activities for more than half of all respondents in their cities
is linked to the time they spend with their friends, confrm fndings of Glaeser & Redlick (2008) that
inopportune areas, such as cities in transitional countries, may not experience decline in social capital,
while human capital gradually deteriorates. Also, it seems that knowledge and creative workers in
Europe are generally more likely to settle in a city where they were born or where they studied, in near
vicinity to their family and friends, even when faced with a lack of career opportunities. This diverges
from fndings of Florida (2002), that technology (concentration and size of the high tech industries),
talent (concentration of highly educated people), and tolerance (tolerance to ethnic, racial, sexual, and
other minorities) are three most important environmental factors for creative class to settle in a city.
H2) Results confrm that the cost of living signifcantly infuence the decision of change of residence.
Respondents perceive costs of living in their city as either very expensive or expensive for all basic
facilities and services. Respondents who are more likely to move away from their city perceive costs
of housing, education and training, transportation and general cost of living higher than respondents
who are less likely to move away. Housing costs are perceived to be very expensive by 94% of
knowledge and creative workers, and by 97.3% of those who are more likely to move away from their
city. This could be the prime reason why over 1/4 of respondents still live with their parents.
The most expensive properties are in the city centre, what is also the most popular residential area for
creative and knowledge workers, since it is where the entire city buzz is and where most events take
place. Findings that more than 3/4 of respondents choose to live in the central part of their city, less
than 2km from the centre, are in line with arguments of Glaeser et al. (2004) that city centers are the
most desirable living places for skilled workers.
H3) We reject the hypothesis that the city features do not signifcantly impact human capital mobility.
Our analysis shows that lack of bicycle lanes, lack of sidewalks, amount of crime in the city, safety,
illegal construction, and appearance of building facades and shop windows are factors that signifcantly
impact perception of knowledge and creative workers about their living environment. Our results
confrm that urban amenities and street life culture attract knowledge and creative workers (Clark,
2003b; Florida, 2002; Glaeser et al., 2004). We fnd valid arguments of Glaeser et al. (2004) that four
key city amenities for human capital are: range of available goods and services, aesthetic features
of their city, quality and range of public services, and the quality and speed of transport in terms of
accessibility of services and jobs.
5.1. Social activities
Our fndings support argument of Florida (2002) that people are attracted to colourful places buzzing
with life, local streets and squares bustling with street-level culture and small scale events, places
where kids run around, where caf goers enjoy the small talk, and people have an opportunity to meet
and have a chat with no previously made arrangements.
Results show that knowledge and creative workers who speculate with the possibility of leaving
the city spend less time with friends, what supports the argument of Glaeser & Redlick (2008) that
people who are considering moving away tend to decrease their investments in social capital. More
mobile people also are signifcantly more frequent visitors to museums and art galleries, night clubs,
and festivals. They are, however, less likely to participate in religious activities and community work.
5.2. Leisure amenities
Our results show that city amenities signifcantly impact mobility of knowledge and creative workers
in BiH. This supports arguments (Clark, 2003a; Florida, 2002; Glaeser et al., 2004) that people
are attracted to vibrant places, with strong local culture, and abundance of amenities. The largest
percentage of dissatisfaction is recorded for the city architecture and monuments, what confrms
argument of Glaeser et al. (2004) that aesthetic features of the city are one of the key amenities. The
key city amenities are signifcantly more disappointing to those who are more likely to leave their
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city, especially the quality of public spaces, art galleries, museums, bars, cafs, cinemas, shopping
areas, city architecture, monuments, and the quality and range of ftness centers.
5.3. Public services
Our results show that knowledge and creative workers in BiH are very concerned about the range and
quality of public services in cities where they live. Knowledge and creative workers who are more
likely to leave their city are signifcantly more dissatisfed with the quality of public transportation
system, police services, number of bicycle lanes, quality of tourist attractions, social security, quality
of health services, quality of the university education, and quality of the high school and elementary
school education. This positively corresponds with arguments of Glaeser et al. (2004) that one of the
key amenities for human capital is the quality and range of public services. We also fnd arguments
of Clark (2003a; 2003) and Florida (2002), that creative cities have become tourist places for their
citizens, to be germane to the knowledge and creative community in BiH.
Our results confrm the argument that the quality of university and schools available in the city impacts
mobility of human capital (Glaeser et al., 2004). This contradicts the argument of Clark (2003) that
vicinity of good schools is not relevant, but that facilities for recreation and consumption have the
major impact on human capital mobility.
5.4. Tolerance
Our results show that over 60% respondents perceives that gay population is not well accepted in their
city, and over 50% considers that that their city does not accept the minority religious and ideological
groups.
Tolerance is not directly or widely discussed in literature regarding human capital mobility. Authors
note that highly educated workers are attracted to environment which is supporting pluralism of
thought (Amabile, 1998; Florida, 2002; Long & Fahey, 2000), but mostly presume that other people
are tolerant to new knowledge and new ideas. Florida (2002) places tolerance among three most
important city features that impact human capital mobility, since innovative ideas, new knowledge
and different lifestyles are more likely to take root in environments which are tolerant to new ideas
and unprejudiced towards developing trends, especially for changes in local culture and differences
in individual lifestyles.
Our results show that respondents who are more likely to leave their city are signifcantly more
critical towards issues of tolerance in their cities, especially towards the people from other countries,
different ethnic groups, and differences between the rich and the poor.
6. CONCLUSIONS
Existing literature in large proportion relates to developed countries, with questionable applicability
for transitional economies, especially for countries affected by recent wars and ethnic conficts. Our
main aim was to answer the main research question, relating to the impact of economic and societal
factors of the living and working environment in terms of choice of residence of knowledge and
creative workers in BiH.
An abundance of talented people, modern technologies and tolerant and opened society are factors that
predispose future city growth. Characteristics of a city are important for attracting and maintaining
human capital. Therefore, in the context of the cities in the SEE countries, attention has to be given to
mobility of human capital, especially young and highly educated people.
The SEE countries have slim chances to compete on the EU and worldwide markets if they fail to
develop its human capital base. Outbound migration of the best and brightest could considerably
increase once the SEE countries join the EU, further deteriorating the present pool of knowledge.
We found that local culture and social networks play very important role in economic development,
but there is a room for research in terms of quantifable causalities.
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Appendix I
Table 1: Four most important reasons for living in the city
Reason N Range
Min.
value*
Max.
value**
Sum of
scores
Mean
Std.
Error
Std. Devia-
tion
Sum of
scores /
Total sum
x 100
Family lives here 296 3 1 4 992 3,35 0,05 0,86 25,57%
Born here 181 3 1 4 574 3,17 0,08 1,10 14,80%
Proximity to friends 221 3 1 4 492 2,23 0,06 0,86 12,68%
Studied in the city 182 3 1 4 450 2,47 0,08 1,07 11,60%
Size of city 146 3 1 4 299 2,05 0,08 0,96 7,71%
Moved here because of my
job
52 3 1 4 170 3,27 0,15 1,05 4,38%
Good employment
opportunities
69 3 1 4 164 2,38 0,12 0,97 4,23%
Proximity to natural
environment
66 3 1 4 120 1,82 0,10 0,82 3,09%
Higher wages 46 3 1 4 116 2,52 0,16 1,07 2,99%
Moved here because of my
partners job
37 3 1 4 104 2,81 0,18 1,10 2,68%
Safe for children 47 3 1 4 100 2,13 0,15 1,03 2,58%
Housing quality 54 3 1 4 95 1,76 0,12 0,87 2,45%
Weather/climate 53 3 1 4 89 1,68 0,12 0,85 2,29%
Openness to different types
of people (in terms of race,
ethnicity)
14 2 1 3 26 1,86 0,23 0,86 0,67%
Good transport links 14 2 1 3 25 1,79 0,24 0,89 0,64%
Housing affordability 12 2 1 3 24 2,00 0,25 0,85 0,62%
Open minded and tolerant 13 3 1 4 22 1,69 0,31 1,11 0,57%
Housing availability 6 1 1 2 9 1,50 0,22 0,55 0,23%
tolerant to gay/ LGBT 6 1 1 2 8 1,33 0,21 0,52 0,21%
Language (able to
communicate with foreigners)
0 0,00%
Overall friendliness of city 0 0,00%
Diversity of leisure and
entertainment facilities
0 0,00%
Cultural diversity 0 0,00%
Diversity of the built
environment
0 0,00%
Presence of good universities 0 0,00%
Presence of good schools 0 0,00%
Total SUM 3.879 100,00%
* 1 - the least important (minimal value on the scale 1 to 4),
** 4 the most important (maximal value on the scale 1 to 4),
N Number of respondents who choose a given variable on a scale 1 to 4
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Table 2: Social activities and likelihood of moving away from their city
Likelihood of moving from
the city in the next three years?
Almost
never
At least
once a
year
At least
once a
month
At least
once a
week
Every
day
E5_1 Com-
mercial
exploitation
E5_2 Li-
censing
E5_3
Cross
licensing
E5_4 Prev.
against
imitations
E5_6
Blocking
patents
E5_7 Pre-
ventions to
be sued
E5_9
Time
E5_8 Repu-
tation
E5 _1
Commercial
exploitation
Corr. 1 .359
**
.365
**
0.09 0.103 0.186 0.046 0.165
Sig. 0.002 0.002 0.451 0.389 0.118 0.699 0,165
N 72 72 72 72 72 72 72 72
E5_2
Licensing
Corr. .359
**
1 .427
**
0.079 0.004 0.041 0.107 .263
*
Sig. 0.002 0 0.511 0.972 0.731 0.371 0.026
N 72 72 72 72 72 72 72 72
E5_3 Cross
licensing
Corr. .365
**
.427
**
1 .375
**
.393
**
.304
**
.327
**
0.219
Sig. 0.002 0 0.001 0.001 0.009 0.005 0.064
N 72 72 72 72 72 72 72 72
E5_4
Prevention
against
imitations
Corr. 0.09 0.079 .375
**
1 .535
**
.417
**
.320
**
0.145
Sig. 0.451 0.511 0.001 0 0 0.006 0.225
N 72 72 72 72 72 72 72 72
E5_6
Blocking
patents
Corr. 0.103 0.004 .393
**
.535
**
1 .653
**
.484
**
.243
*
Sig. 0.389 0.972 0.001 0 0 0 0.04
N 72 72 72 72 72 72 72 72
E5_7
Preventions
to be sued by
others
Corr. 0.186 0.041 .304
**
.417
**
.653
**
1 .444
**
0.214
Sig. 0.118 0.731 0.009 0 0 0 0.071
N 72 72 72 72 72 72 72 72
E5_9 Time
Corr. 0.046 0.107 .327
**
.320
**
.484
**
.444
**
1 .258
*
Sig. 0.699 0.371 0.005 0.006 0 0 0.029
N 72 72 72 72 72 72 72 72
E5_8
Reputation
Corr. 0.165 .263
*
0.219 0.145 .243
*
0.214 .258
*
1
Sig. 0.165 0.026 0.064 0.225 0.04 0.071 0.029
N 72 72 72 72 72 72 72 72
5. CONCLUSION
Inventiveness is no longer important only in the economy, but presents an important activity also at
universities and other research organisations. The pinnacle of scientifc research work is no longer
only publication of results but also economic exploitation of these results. Innovation and patenting
of inventions is becoming more and more important activity of universities and research institutions
as such and the income from sold patent license presents more and more important item in their
accounting items and fnancial reports.
In our opinion the results of this research are very important for drafting and applying research politics
at universities and other research organisations especially in the part in which we identify factors, that
have shown to be most restrictive in the procedures from birth to commercialisation of an invention.
Based on recorded obstacles these institutions will be able to direct their policies and measures into
removing or lessening these obstacles in the future, which will contribute importantly to a greater
effectiveness of scientifc research work.
First the result, according to which the average of patent application per employed is half lower at
universities compared to average of applications elsewhere employed researchers, has to be stressed.
These results can be explained by the fact that research at universities is still primarily focused toward
publication of scientifc achievements, which are basis for promotion in the academic career and
not into commercial exploitation of the academic know-how. The research has shown also other
important differences between the researchers, employed at universities, and those employed in other
research organisations (in our case these were mostly research institutes).
In the phase of generating the research idea the most hindering factor turned out to be technical,
professional and administrative support of the home institution. The employed at universities and
institutes see much greater obstacle compared to others in the reporting manner (on results and means
use), constraints and the pressure of the institutions and administrative and bureaucratic support of
institution. During the patenting and invention the most restrictive factors turned out to be: writing
a patent application, access to capital market and regulation of relations between the inventors and
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institutions with regard to awards arising from patents. During the period of implementation of a
patent in practice the most hindering factor turned out to be fnancial pretentiousness, access to capital
market and initial capital. With regard to the differences between the employed at universities and
institutes and others the least motivating factors among the employed at universities and institutes are
Founding own company and Realisation of know-how in cooperation with industry.
Based on results, acquired through the research, we can conclude that the Slovenian universities and
research institutions have still a lot of work to do in the feld of the increase of scientifc research
activity. Obstacles, which we have recorded in the research, are not to be understood and taken only
as problems, preventing universities and other research organisation greater commercialisation of the
scientifc-research achievements and know-how, but also as a new opportunity, which is offered to
them in this feld.
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ENTREPRENEURIAL BEHAVIOUR AMONG STUDENTS CASE STUDY OF UNIVERSITY OF
DONJA GORICA, PODGORICA, MONTENEGRO
Dragana Radevic
Centre for Entrepreneurship and Economic Development (CEED) and
University of Donja Gorica, Podgorica, Montenegro,
E-mail: dragana.radevic@udg.edu.me
Sandra Tinaj
University of Donja Gorica,
E-mail: sandra.tinaj@udg.edu.me
Abstract
Promotion of the entrepreneurial is one of the very important goals of Lisbon Strategy and is crucial for
generations of new jobs and economic growth in Europe. Entrepreneurial behaviour is representing philosophy
of development at the level of both individuals and the society. Entrepreneurship is not only a driving force for
economic development that involves the creation of new jobs, improve competitiveness and economic growth.
It also contributes to improved personal and self-fulflment, and achievement of social goals.
It is important to encourage entrepreneurship in all age groups. However, given that the students are a vital and
promising structure of society, with the most innovative and creative potential, strengthening entrepreneurship
among them is a must at any higher education institution. The subjects of this paper are, precisely, the factors
infuencing entrepreneurial behaviour among students. In the focus will be situational factors and their impact
on entrepreneurial orientation of students of young University (UDG) and their motivation towards this type
of mentioned behaviour. These are the following situational factors, the perception of social reality and the
current economic environment, family background, curricula and teaching activities in entrepreneurship,
promotion of good practice.
In of spite the mentioned survey, which will provide evidence of whether these elements have an impact on
entrepreneurial behaviour, and more importantly, impact on the motivation of students to this type of behaviour,
the subject of research will be, also, theoretical views with regard to these factors, with special emphasis on
the question of whether formal education, in general, affects and encourages young people like this type of
behaviour.
Keywords: Entrepreneurial, Higher education, Lecture, Curricula
1. INTRODUCTION
Education and scientifc activities are the social activities of public interest. These activities with
many and varied program activities and facilities condition and promote overall economic and social
development. Special role and importance in the social and economic development is the development
of entrepreneurship among young people. A special category of young people, who are carriers
structure changes in the economy and society, the dynamic trends and the overall development, are
students. The development of entrepreneurship among students is determined by various elements,
among which are dominant: the perception of social reality and the current economic environment,
family background, curricula and teaching activities in entrepreneurship, promotion of good practice.
Promotion of the entrepreneurial is one of the very important goals of Lisbon Strategy and is crucial
for generations of new jobs and economic growth in Europe. Entrepreneurship should be accessible
to all students, at all faculties and not only to those of economics or business studies. Entrepreneurial
University is the one with employees at all levels committed, and students of all faculties encouraged
to think and act as entrepreneurs. That is the only way to create society driven by knowledge, with
small companies dominating and being highly competitive.
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2. FACTORS INFLUENCE ENTREPRENEURSHIP
Entrepreneurship refers to individuals ability to turn idea into action, which includes creativity,
innovation and taking of the risk, as well as the ability to plan and manage projects in order to meet set
goals. The essence of this competence is ability to recognize the context in which an individual acts
and proactively respond to given opportunities. A small number of individuals are born entrepreneurs,
but studies show that education and training can signifcantly contribute to the development of
entrepreneurial views, knowledge and skills. Competence entrepreneurship implies
1
:
Knowledge of available opportunities in order to identify those that match personal,
professional and /or business activities of a person.
Skills, including: ability for cooperative and fexible work as a part of the team; be able to
identify personal strengths and weaknesses; ability of proactive reacting and positive reaction
to changes; ability to assess and take the risk when necessary and justifed.
Views, including disposition to take the initiative; positive attitude towards changes and
innovations; the willingness to identify areas where a person can demonstrate the full range of
entrepreneurial skills - for example at home, at work and in the community.
Entrepreneurial behavior carries expressed the need for innovation and the creation. Entrepreneurship
in this behavior has a built leadership, the need and opportunity to the forefront, to frst test new
ideas (their own or other people) and to generate change, because they see opportunity for new
breakthroughs and successes. He gazes into the future and a vision. Entrepreneur believes in a better,
different and therefore the maximum focus on people as the most important asset and resource, only
one of whose value increases the creative use, unlike all the other resources that are still using lower.
Phenomenon of entrepreneurship and entrepreneurial behavior are approached from different aspects.
Among the many approaches to entrepreneurship and entrepreneurs, especially interesting that those
who start from a psychological and personality traits of entrepreneurs. Authors Bartal and Mortin2
were engaged to research the character traits have entrepreneurs, as well as the factors that infuence
the development of entrepreneurial behavior. Although we have to mention that when it comes to
entrepreneurial characteristics that will indicate, the authors note the same and are attributed to
managers. Character traits that are recognized by:
Entrepreneurial characteristics that they identifed are:
Strong need for achievement;
Self-control;
Lucidity.
Based on the theory of these authors, the following factors infuence entrepreneurship:
Family environment (some studies have shown that most entrepreneurs coming from families
that are already engaged in some independent businesses, and that is only children or frst
children, are entrepreneurial oriented);
Economic and social environment;
Education (entrepreneurs are better educated than others, although very often less than the
managers);
Age (entrepreneurs are usually between 22 and 55);
Work experience (download a new venture initiated by entrepreneurial ventures);
Dissatisfaction with the business environment (entrepreneurs who start a business are often
motivated by dissatisfaction expressed business environment);
Negative experience (often entrepreneurship is the result of major changes such as marriage,
divorce, layoffs, etc.).
Positive impact (to start a new job individual, very often motivate by mentors, business
partners or others.).
1 Working program Education and training 2010European Commission, available at http://ec.europa.eu/education/
lifelong-learning-policy/doc28_en.htm ; 08.08.2011.
2 Bartol, K. M, Martin, D.C Management, McGrow Hill, Inc. New York, 1994.
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3. ELEMENTS AND THEORY OF ENTREPRENEURSHIP
What are the basic elements that defne entrepreneurship? Depending on the approach and the theory
of differentiate. Entrepreneurship is associated with different features or elements, some of them have
mentioned, we can add some. In the analysis of the characteristics that an entrepreneur needs to have,
and their recognition is important to us, because of the development of the same among the students.
Most authors repeat same characteristics: take the risks, self-initiative, self-confdence, adaptability,
perseverance and others. Interesting is the attitude that Peter Drucker mentioned
3
, entrepreneurship
is a special feature of any individual, institution or company. It is not a personality trait: for thirty
years I have seen people of various personal and character traits and types of temperament who are
equally well fnd their way in entrepreneurship. Entrepreneurship is a way of behavior rather than
performance.
Everything presented, so far, provides a basis for theory analyses of the so-called comparative
theory of entrepreneurship, although the scope of work does not allow the detailed analysis. The
comparative analysis starts from two basic characteristics of entrepreneurs personality: passive and
active response: passive and active change, so you will create four basic theoretical models
Table 1. Comparative theory of entrepreneurship
4
ENVIROMENT
Passive Active
Person
Passive
The theory of possessing the
most important essence: What is
important is the personality
The theory of necessity
Time makes a man
Active
The theory of the great fgures:
Personality does the time
The theory of joint action:
The orchestration of people is one
that is important.
In this paper we want to show the development of entrepreneurial behavior caused by environmental
and different infuence rather than only, personalities. This statement is especially important in case
of entrepreneurial behavior among young people. Because of this objective we think that is necessary
to underline the importance of entrepreneurial approach that is based on joint action, primarily
because this theory emphasizes that both the individual and the environment are important aspects
of the entrepreneurial function, which must never be neglected. This emphasis on understanding of
entrepreneurship as a two-phase (person and environment) and two-dimensional (active and passive
adjustment) process is particularly evident in the theories based on four C approach.
The theory of entrepreneurship based on the Four C, presented by Tropman and Morningstar, can
be understood through the four key concepts:
Characteristics (Characteristics) and
Skills (Competencies),
Conditions (Conditions) and
Context (Context).
This perspective includes the concept of psychological characteristics of properties; however it also
adds a level of such individual characteristics. The concept of capabilities suggests that there are
certain skills, behaviors that can be learned and that can be practiced. According to him, also there
are certain conditions - within families, within the company, within the community - that are more
favorable for the development of new ideas and introduce new products and new services. These are
partially given, however, and they can be shaped. Finally, there are certain contexts - the forces of
macro-environment, larger scale - which also may favor the entrepreneurial functions. Although less
affected, they can also be shaped, and their types can be used and exploited. Each of these elements
can beneft the development of entrepreneurship, but also can act against him. Some individuals may
not have the required features or they have enough or may have the right features but not the ability
or context or conditions may be negative.
3 Drucker, P., Inovacija i preduzetnitvo, NIP Privredni pregled, Beograd 1991. Str 51.
4 Tropman, J.E & Morningstar, G., Enterpreneurial System for the 1990s, Their Creation, Structure and Management,
Quorum Books, New York, 1989. page 9. by Pokrajac S. Inovacije i preduzetnitvo.
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4. UNIVERSITY AND ENTERPRENEURSHIP
The entire previous story so far represents a general or introductory story of entrepreneurial behavior,
elements of personality characteristics that infuence entrepreneurial behavior as well as theories that
speak to this issue. Entrepreneurship is one area in a matter of personality, while the other enabling
thing, and atmosphere. What are the incentives for students to entrepreneurial behavior and what is
the role of the University?
Different authors variously perceived infuences of formal education in this case the University on
the development of entrepreneurial behavior. Results of research at the University of Amsterdam,
Entrepreneurship, elections and performance - the role of higher education show that impact of
education on entrepreneurial performance is positive and signifcant. Author of the theory of career
socialization, Dyer, believes that despite a number of other factors, affects the educational experience
has infuence, in a way that will develop individuals career. There are those authors who argue that
formal education inhibit and stife creativity and entrepreneurship, especially with the unadjusted
means of learning, complex programs and inadequate access5.
In the theoretical review of the entrepreneurship, the frst part, we saw that having a certain education,
skills, ways of thinking and initiatives necessary to becoming entrepreneurial behavior. In process
of development and promotion of education, skills, development of certain ways of thinking and
initiative is role of University when we talk about the development of entrepreneurial behavior among
students.
Expert team who was working on the document Entrepreneurship in higher education, especially
within non-business studies that is related on the whole EU level conclude6: At higher education
level, the primary purpose of entrepreneurship education should be to develop entrepreneurial
capacities and mindsets. In this context, entrepreneurship education programmes can have different
objectives, such as: a) developing entrepreneurial drive among students (raising awareness and
motivation); b) training students in the skills they need to set up a business and manage its growth; c)
developing the entrepreneurial ability to identify and exploit opportunities. Graduates start-up is one
of a range of possible outcomes.
Based on same document high education have to put stress on on enterpreneurial education.
Entrepreneurship education should not be confused with general business and economic studies;
its goal is to promote creativity, innovation and self-employment, and may include the following
elements
7
:
Developing personal attributes and skills that form the basis of an entrepreneurial mindset and
behavior (creativity, sense of initiative, risk-taking, autonomy, self-confdence, leadership,
team spirit, etc.);
Raising the awareness of students about self-employment and entrepreneurship as possible
career options;
Working on concrete enterprise projects and activities;
Providing specifc business skills and knowledge of how to start a company and run it
successfully.
5. DEVELOPMENT OF ENTREPRENEURIAL BEHAVIOR CASE STUDY UDG
Looking at the situation regarding the development of entrepreneurship in universities, the situation
leaves a lot of space for improvement. The document Entrepreneurship in higher education, especially
within non-business studies concludes that In many countries entrepreneurship in non-business
studies is a very new issue. In general terms, entrepreneurship is not yet suffciently integrated into
the curriculum of higher education institutions. The situation seems to be more positive in only few
countries (such as Germany), while the spread of entrepreneurship is particularly weak in some of the
Member States that joined the EU in and after 2004. Data from some European countries show that
5 Plaschka, P. R. and Welsch, H. P. Emerging Structures in Entrepreneurship Education: Curricular Designs and
Strategies, Entrepreneurship Theory and Practice, 1990. Vol. 14, Issue 3: 55 71.
6 Entrepreneurship in higher education, especially within non-business studies, page; http://ec.europa.eu/enterprise/
policies/sme/promoting-entrepreneurship/education-training entrepreneurship/higher-education/index_en.htm;
10.09.2011.
7 Entrepreneurship in higher education, especially within non-business studies, page; http://ec.europa.eu/enterprise/
policies/sme/promoting-entrepreneurship/education-training entrepreneurship/higher-education/index_en.htm;
10.09.2011, page 11.
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the majority of entrepreneurship courses are offered in business and economic studies (for instance
in Spain and in the UK). In the Western Balkans, there are some pilot projects for development of
entrepreneurship in universities but this is still in the beginner stage. If we analyze the general situation
regarding the study of entrepreneurship at universities in Montenegro, we can say that the module
is taught only in the economic and business oriented studies. A strategic document8 that provides
guidance for entrepreneurial learning provides that universities have a major role in the development
of entrepreneurship. Document refers that most students of the Faculty should have the opportunity to
learn more about their operations relevant to their area of study. It should explore the possibilities for
self-employment, as well as details related to the establishment of small businesses. Students should
be able to learn how to create a business plan and to explore the basic principles of marketing, fnance
companies, company ethics and customer relations. Faculties should maintain a close relationship
with local businesses and employers associations. Experienced managers of companies should be
invited to visit universities to discuss their work with students, and with them should be invited and
those who recently founded his own company. It is relevant to mention the initiative of the South East
European Centre for Entrepreneurial Learning (SEECEL) which aims at developing the curriculum
for entrepreneurial university in the region. It turned out that the main problem (both in the European
Union and South East Europe countries) is the lack of personal commitment, interest and the lack of
support of decision makers in these institutions.
University of Donja Gorica is a good example of entrepreneurship study in the business and non
business studies. UDG is a new private university in Montenegro, with frst faculties established
in 2007. UDG was founded in 2007 as the result of entrepreneurial idea which was developed over
the years by two distinguished university professors. UDG currently offers undergraduate studies
at six faculties: the Faculty of International Economics, Finance and Business; the Faculty of Law;
the Faculty of Information Systems and Technologies, the Faculty of Arts, the Humanities and
Polytechnic. Besides these undergraduate programs, UDG also offers different Specialist and Master
programs.
At the University of Donja Gorica entrepreneurship development through the required examination
Entrepreneurship within the Faculty of International Economics, Finance and Business, Faculty of
Information Systems and Technology and Polytechnics and the elective course Entrepreneurship
in the Humanistic studies. The exam organized through three generations and organization of
examination covered follow segments:
Theoretical lessons;
Preparation of business plan;
Team work on project;
Drafting the essay;
Organization tribune and lecture with known entrepreneurs (local and international level)
How do students react to these segments of the exam, and that woke up the largest segment of the
entrepreneurial orientation, which elements of economic and social life are recognized as motivating,
research conducted among 35 students has shown us. Students were asking on the questions; whether
the entrepreneurial way of thinking relevant to your professional development, whether social and
economic environment stimulating enough to entrepreneurial behavior, have you gained during the
teaching certain skills, as well as the element in the case believe the most successful9 and others.
The general conclusion of result of questionnaire is that the organization of exam Entrepreneurship
on the UDG has positive implications for entrepreneurial behavior and thinking among students.
Students have a positive attitude when it comes to entrepreneurship. Specifcally, all students believe
that the entrepreneurial way of thinking and acting can improve their future professional and personal
development. However, most students (28 of 35) states that social environment is not stimulating
enough for entrepreneurship development. On the other hand, seven students said that encouraging
entrepreneurship identifed: all around me, especially through a number of different events (they
mentioned most of the events on University), in business meetings and interviews with successful
entrepreneurs, as well as the teaching of the UDG. Also, most students (23) think that the economic
environment is not enough supportive for the development of entrepreneurship among young people.
However, 12 students said that there is such kind of incentives, and given as an example: incentives in
8 Strategy for lifelong entrepreneurial learning 2008-2013. page 7.
9 Students were explained by the most successful element, one that has awakened in them the highest degree of interest
in entrepreneurship.
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information technology and tourism, Entrepreneurship forums and exchange of entrepreneurial ideas
to the UDG-in, Business Incubators in Bar and Podgorica, School of Entrepreneurship for Youth to
the UDG, a company that invest in business ideas of students, the European forums.
Graph 1. Encouragement of social and economic environment (absolute values)
Based on the graphic, we see what we have previously stated and that is that students feel that the
economic and societal environment is not supportive enough for the development of entrepreneurship
among young people.
6. SITUATIONAL FACTORS AND THEIR IMPACT ON ENTREPRENEURIAL BEHAVIOUR
The subject of research among students UDG was, what are the perceived situational factors, perceived
by students as important for their entrepreneurial behavior. Our aim was to check how these elements
of the educational process, as well as other characteristics of the university environment, family
environment, and their perception of economic and social environment, infuence the direction towards
entrepreneurship. In the fnal analysis, we wanted to collect data relevant to answer the question
whether the feld of entrepreneurship continues to be the same students pursuit of entrepreneurial
behavior and what are the elements that are viewed as the most successful that is covered with the
lecture. Most successful element is one that has awakened in them the highest degree of interest in
entrepreneurship.
The family is recognized as a motivator and an important element in the development of entrepreneurship
among young people.
From 26 to 35 students in their families has someone who is recognized as entrepreneurs and 22 of
them considered that the family had an impact on their entrepreneurial mindset. These impact on the
thinking of students is refected in the desire to after college start their own business or continue an
existing, learning about how business and lifestyle, encouraging autonomy, accountability and risk,
grit and determination, transfer of experience and their motto If you do not try you never know
whether you will succeed.
Graph 2. Do you think that your family infuenced the entrepreneurial way of thinking?
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When it comes to attendance Entrepreneurship lecture, 35 students found that this case was a positive
infuence on the development of their entrepreneurial way of thinking. In addition, all students stated
that during the teaching of entrepreneurship have gained some entrepreneurial skills. The most
successful element of the issue in entrepreneurship among students who woke up the highest level
of interest in entrepreneurship, and they desire to have entrepreneurial skills, to gain knowledge
and future-oriented entrepreneurship is: visits of successful entrepreneurs (frst ranked response) and
business plan (second-ranked response). The smallest impact was making paper. It is interesting that
all the students agreed that the promotion of good entrepreneurial practices, the right way to motivate
student to this way of thinking and acting.
Promoting positive practices in teaching are considered a good way to motivate the entrepreneurial way
of thinking. In order to improve the existing education students in the Entrepreneurship highlighted
several practical tasks, more frequent visits and visits of successful companies, while fve students
said that nothing would lever in the previous mode of delivery. Table 2. showing all the answers of
students and evaluation of the same.
Table 2 Promoting Entrepreneurship
More practical tasks so that students fnd a practical solution to the problem and to become
familiar with the procedures of business registration
7
More companies visits 6
It would not change anything, everything is great 5
More visits and lectures of successful entrepreneurial 4
By creating a business plan 2
Literature 2
Theoretical lectures 2
Students do not understand the subject too seriously 2
Making the essay did not have a large effect, it needs more attention and time to devote to the
business plan and starting a business
2
It is necessary to ask specifc questions that are based on literature and work in class
1
Way of lectures, less slides more or less a communication
1
Make clear that this is a very important subject for their further study as a way of thinking 1
Total 35
Students recognized the main barriers to the development of entrepreneurial culture among young
people in the current social environment. Describe its impact in the media more to promote policies,
rather than entrepreneurship, which negatively affects the whole society, especially the youth. They
said that people, generally do not recognize importance of entrepreneurial behavior, do not children
brought up in this spirit.
7. CONCLUSION
University has an important role in the development of entrepreneurship among students. The
atmosphere in the university environment can be very stimulating for the establishment and expansion
of entrepreneurial ideas. All the surveyed students recognize the importance of entrepreneurship,
students are aware of the importance of having entrepreneurial skills. In addition, a very important
element of entrepreneurial behavior is the family. The family may affect the independence, initiative,
enterprise behavior of children. In addition to this economic and social environment as well as
the perception of entrepreneurs and appropriate promotion, can enhance students entrepreneurial
behavior. Students fnd that UDG is a positive atmosphere regarding entrepreneurship, recognizing
the importance of the many events that aims to awaken in them the entrepreneurial way of behavior,
while the economic and social environment was recognized as not supportive.
Given the specifcity of the concept of teaching entrepreneurship at the University of Donja Gorica,
through this research, we get the relevant answers and explanations regarding the connection
between entrepreneurial orientation of students and development of entrepreneurial culture among
the population, with a general stimulating atmosphere during the study, the social environment,
curriculum and ways of working and learning with them. Students in most cases prefer learning about
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entrepreneurship through affrmative case studies and practical training.
As part of this study was done reviewing the current scope and content of entrepreneurship education
and entrepreneurial atmosphere at the University of Donja Gorica with a view to their expansion and
intensifcation. It is useful to consider how student evaluate the organization of exam Entrepreneurship,
where they see the essential elements for the further development of entrepreneurship among young
people and where the barriers. Education in entrepreneurship at universities empowers young people
to think this way and should be further nurtured. University of Donja Gorica will continue to work, is
fnding opportunities to increase the volume and quality of learning activities in which students were
the subjects of the educational process, including creating conditions for the participation of a number
of students in the entrepreneurial-business project, to create an entrepreneurial and business projects
and their implementation as well as improvement of practical training related to entrepreneurship,
which is recognized as essential.
Reference
1. Bartol, K. M, Martin, (1994)D.C Management, McGrow Hill, Inc. New York;
3. Drucker, P., Inovacija i preduzetnitvo, NIP Privredni pregled, Beograd 1991
4. Liithje, C. and Franke, N., The Making of on Entrepreneur: Testing a Model of Entrepreneurial Intent
among Engineering Students at MIT, R & D Management; 2003;
5. Sullivan R., Entrepreneurial learning and mentoring, International Journal of Entrepreneurial Behavior
& Research, Vol. 6; 2000;
6. Tropman, J.E & Morningstar, G., Enterpreneurial System for the 1990s, Their Creation, Structure and
Management, Quorum Books, New York, 1989;
7. Plaschka, P. R. and Welsch, H. P. Emerging Structures in Entrepreneurship Education: Curricular Designs
and Strategies, Entrepreneurship Theory and Practice,. Vol. 14 1999.;
8. Radevic D. And Tinaj S. Entrepreneurial University case of Montenegro, Skoplje 2010
9. Veselin Vukoti, Entrepreneurship system philosophy With entrepreneurship into new millennium, CID
Podgorica, 2001
10. Entrepreneurship in higher education, especially within non-business studies (available at) http://ec.europa.
eu/enterprise/policies/sme/promoting-entrepreneurship/education-training entrepreneurship/higher-
education/index_en.htm;
11.Oslo Agenda for Entrepreneurship Education, 2006 (available at http://ec.europa.eu/enterprise/policies/
sme/fles/support_measures/training_education/doc/oslo_agenda_fnal_en.pdf);
12. Working program Education and training 2010 European Commission, (available at) http://ec.europa.
eu/education/lifelong-learning-policy/doc28_en.htm;
13. Strategy for lifelong entrepreneurial learning 2008-2013.
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WOMEN ENTREPRENEURSHIP IN A FASHION INDUSTRY
Katja Rakui Cvrtak
University Centre for Professional Studies, Livanjska 5, 21000 Split, ,
E-mail: krakusic@oss.unist.hr
Senka Borovac Zekan
University Centre for Professional Studies, Livanjska 5, 21000 Split,
E-mail: sborovac@oss.unist.hr
Danijela Perkui Malok
University Centre for Professional Studies, Livanjska 5, 21000 Split,
E-mail: dperkusi@oss.unist.hr
Abstract
INTRODUCTION
The importance of entrepreneurship has been widely recognized as an impulse to economic growth and their
essential contribution to the economy. Today, the business environment is changing more rapidly. Competition
in almost every industry has become more intensive. Considering the above, companies are becoming aware
of the importance of adjusting their businesses to the target market in the best possible way in order to stay
competitive.
Entrepreneurship in the feld of fashion is a topic that, unfortunately, has not been targeted by a substantial
number of authors. Entrepreneurship in the fashion industry represents a great challenge since the fashion
business environment consists of many actors who are competing for the same market share. It is dominated
by big players of the industries who put upon trends, and drive consumer preferences and the fashion core
on a global scale. However, there is a great variety of small actors who compete in the fashion industry and
contribute original concepts and ideas into the industry and they are the subject of this research.
Many fashion design entrepreneurs, who want to compete by running their own brands, are faced with many
challenges including personal challenges and a variety of external obstacles. Running a stable venture within the
fashion industry may be very complex and demanding, especially in a frst few years of a new entrepreneurial
venture. Very often additional barriers occur when it comes to women entrepreneurs. In many countries women
decide to enter the business because of necessity, for example, when they stay out of job, instead of recognized
market opportunities. However, there are many examples of successful women entrepreneurs, especially in
demanding fashion industry who continuously succeed to run successful ventures.
RESEARCH METHOD
This article seeks to analyze the factors of signifcant infuence on the entrepreneurship in a fashion industry,
with special emphasis on the characteristics of womens entrepreneurship and the challenges that women
face when starting ventures in the fashion industry. The authors will use the case study method to present the
examples of successful women entrepreneurs who continuously succeed to cope with the challenges of the
fashion industry. Selected case studies will show successful business strategies for managing small business
ventures in the selected industry.
RESULTS
The results of this study will be used in two ways. Firstly, the results will give clear guidelines to all business
women, as well as those wishing to engage in entrepreneurship, what are the most common diffculties that
they face in running their business as well as clear guidance on how to deal with them. Furthermore, this work
will greatly contribute to the students of vocational studies in connecting and applying the knowledge they
gained at the entrepreneurship course on the real life economy and even maybe encourage them to start their
own businesses.
Keywords:Women entrepreneurship, fashion industry, business strategies
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1. INTRODUCTION
Aims and Objectives
This article seeks to analyze the factors of signifcant infuence on the entrepreneurship in a fashion
industry, with special emphasis on the characteristics of womens entrepreneurship and the challenges
that women face when starting ventures in the fashion industry. Also, through the example of a
successful women entrepreneur, Neda Makjani Kuni, who established and lead a fashion company
MAK, will try to present all the prerequisites that need to be fulflled in order to achieve a successful
fashion business, looking at the characteristics of the entrepreneur, characteristics of the people who
work there, and external factors that have a signifcant impact on company.
Methodology
Empirical information in this work was collected through a qualitative approach in order to
gain a deeper understanding of the topic. Various conversations were performed in person with
fashion designers, consultants and institutions. The selection of people was done in respect of the
different backgrounds and experiences in the feld of fashion and creative industry and the feld of
entrepreneurship with an emphasis on women entrepreneurship. For the purpose of writing this paper,
the authors used the method of cases. Case study research excels at bringing us to an understanding
of a complex issue or object which can extend experience or add strength to what is already known
through previous research. Throw this case study the authors tried to emphasize detailed contextual
analysis of a Croatian fashion company and the experiences of it owner, successful women entrepreneur
in the feld of fashion industry.
Findings
There is a need for stronger women networking, sharing information and knowledge in the world of
global competition which is particularly present in fashion industry. Competitiveness in the fashion
industry can only be achieved by continuous investment in technology that will deliver greater
productivity and result in higher quality products. Innovation, creativity and product design are
becoming the key prerequisite for success. None of this would result in success without proper market
segmentation and orientation on proftable market niches.
2. ENTREPRENEUR AND ENTREPRENEURSHIP
The importance of entrepreneurship has been widely recognized as an impulse to economic growth
and their essential contribution to the economy. An Entrepreneur can be defned as a person who
identifes an opportunity or new idea and develops it into a new venture or project (Davidsson, 2006.).
Being an entrepreneur is a very challenging job and requires knowledge, intuition and skill. The
entrepreneur sets up a business to generate value, whether value can mean a fnancial, social or
emotional outcome.
Entrepreneurs are acknowledged as being the driving force behind innovative change in our society
and the fashion industry is no exception. According to defnition above, it can be concluded that
fashion entrepreneur can be defned as someone who sets up a new fashion venture, or starts a new
fashion label. To achieve this, the fashion entrepreneur needs to be able to notice business opportunities
and determine customer needs by coordinating resources to design, manufacture and supply fashion
products or provide a service (Burke, 2008).
The fashion entrepreneur is the key, innovative person managing the entrepreneurial process. This
usually involves planning, organizing, directing and controlling the input of suppliers, contractors
and the design team members, together with accepting the associated business risks. The key words
from these explanations are; innovation, opportunity, new venture, enterprise, management and risk
taking (Burke, 2008).
According to OECD-Eurostat, Entrepreneurship is even higher on the policy agenda today than in the
past, as governments look for remedies and ways out of the economic crisis (http://www.oecd.org).
Entrepreneurs contribute to society in different ways for instance as creators of jobs and as a stimulator
of economic growth (Davidsson P., 2006). Despite the rapid growth of women in professional and
managerial jobs, the gender gap in entrepreneurship remains signifcant. On average, men are 50
percent more likely than women to become entrepreneurs. Compared to men, women entrepreneurs
use smaller amounts of start-up capital, smaller proportion of equities, and more bank loans. Also,
women-owned businesses tend to be smaller and to grow more slowly than those owned by men,
suggesting gender-based differences in the value attached to business expansion (Minniti & Arenius,
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April 29, 2003).
There are more women than men in the world, but in the economy, according to offcial sources of
information and indicators, represents minority everywhere in the world. Minority status of women
in the economy is different, depending on the work that women perform. Fewer women run business
ventures, especially those technological intensive. Women are even better than men in the perception
of entrepreneurial environment and spotting a business opportunity, but the possibility of realizing
their entrepreneurial opportunities are signifcantly reduced due to a limited access to fnancial
resources and insuffcient support in the organization of family life (MINGORP, 2010.).
In Croatia, women are unfortunately entering the business, still in most cases out of necessity, for
example, when they stay out of work, not from the identifed market opportunities. After all data on
this are clear, on an entrepreneurial venture of women coming ventures 2.5 men (www.glas-slavonije.
hr, 2011).
Table 1. Structure of number of employees, total revenue and proft of companies (women entrepreneurship and other
companies)
Companies 2002. 2006. 2007. 2008.
Number of
employees
Women
entrepreneurship
7,0% 10,9% 13,0% 13,0%
Other businesses 93,0% 89,1% 87,0% 87%
Total revenue
Women
entrepreneurship
6,5% 6,4% 10,5% 11,1%
Other businesses 93,5% 93,6% 89,5% 88,9%
Proft
Women
entrepreneurship
4,0% 7,9% 9,3% 9,3%
Other businesses 96,0% 92,1% 90,7% 90,7%
Source: Research of a Croatian association of business woman KRUG, 2009.
In the table attached below, it can be noticed that the business managed by women are prospering
slightly, but still presents a considerable minority according to other businesses.
3. ENTREPRENEURSHIP IN THE FASHION INDUSTRY
Entrepreneurship in the feld of fashion is a topic that has unfortunately not been targeted by a
substantial number of authors. However, economists have given it very little attention, tending to
view it as, at most, a curious aspect of demand theory rather than as an important and interesting
phenomenon in its own right. However, the argument for a positive valuation of fashion derives not
from comparison of economies with and without fashion, but from reconsidering the value of these
destabilizing dynamics and their value in a world of plenty and uncertainty.
As Renzo Rosso, creator of Diesel, stated: Fashion is inspiration, creativity and intuition. But it is
also organization, strategy and management. These two apparently contrasting sets of elements have
to come together to ensure the success of a business idea. The challenges of a fashion entrepreneur
can be differentiated between specifc industry challenges and personal challenges. The fashion
design entrepreneur as the heart of the company has to balance creativity and a hard fact managerial
approach, as well as to consider industry related aspects. Fashion is ephemeral, dangerous, exciting
and unfair. The fashion industry is an unpredictable and hypercompetitive market with short product
life cycles (Saviolo & Testa, 2002).
There are many reasons why people follow fashion. First, they do so for attention, as a form of social
communication through commodity signaling and demand for novelty. Second, following fashion
is a cognitive effciency, a way to economize on choices that are diffcult or expensive to reverse.
Third, it is fun, since being fashionable has its rewards when you get it right. Yet following fashion
can still be messy and expensive, as fashion cycles cause the consumption abandonment of clothes,
music, furnishings, appliances, cars, and so forth, long before those goods are physically worn out
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or fully depreciated. Each fashion cycle begins with the origination of a novel, attention-arresting
idea adopted by a network of individuals, which induces each to reorganize their own consumption
systems. In modern economics, the standard view is that fashion is irrational and ineffcient. From a
Schumpeterian or a Hayekian perspective, however, it seems to play a more positive role in stirring
consumers to action that results in the growth of experience and knowledge. Fashion is consumer
entrepreneurship, and has the same class of dynamic externalities as business entrepreneurship. Just
as an increase in the strength of competition may prompt decision-makers to explore new ways of
increasing productivity, so may a change in the relative competitive strength between status-conscious
consumers force them to rethink their consumption choice. Ongoing economic growth requires not
just entrepreneurship and risk-taking from producers, but also from consumers, who must fnd the
will to buy, learn, and take risk (Potts, 2007.).
It is a subjective market with the need to be cutting-edge and relevant in terms of the creativeness
(as Jones 2008 cites Crewe and Beaverbrook 1998). Subjective in the sense that fashion is based to
a great extent on individual preferences and the taste of people. Fashion is a part of peoples social
life and as an object of cultural value accounts for the well-being of people. Fashion is embedded in
peoples minds in their leisure and working time as a way to express identity.
The fashion companies have to focus on the unique selling proposition of the products and on the
differentiation from competitors. A fashion company needs an innovative business idea and a unique
design language to capture the attention of customers that have an infnite choice of different products
from upcoming fashion companies. As Bruce et al (2002) expressed: Design matters. In a world
where customers have increasing choice about what they buy and from whom, what makes them
choose one product or service over another? In a word it is design (Bruce & Bessant, 2002).
One of the most powerful elements in fashion is time. Apparel is developed for different seasons,
special events and for different times of the day (Jones, 2005). High fashion designers are working
according to the traditionally fashion industry calendar, which is divided into two major seasons
spring/summer and autumn/winter (Jones, 2005). The whole fashion industry has arranged its
business around this standard, it is visible for instance in the timing of fashion shows, which take
place two times a year.
Every company has naturally its own fashion cycle, whereby fashion design entrepreneurs mostly
follow the international rhythm presenting two major collections a year to be part of the fashion
business on a professional base. Managing the cash fow is especially a challenge in the fashion
industry with its seasonal schedule. Due to the seasonality, the forecasting of the order volume is
another challenging aspect. If a designer is new on the market, it is diffcult to indicate how many
clothing pieces will be sold. Establishing a sustainable company is hard since developing and
producing a collection has to be pre-fnanced. A fashion designer gets the revenues back when selling
the clothes but the next collection has to be started already in the meanwhile. Designers have to pay
for the production costs of the clothes upfront. In the fashion design industry it is relatively easy to
start up in contrast to other industries. The barriers to entry depend on the dimension of the venture,
but for a small label it is possible to start basically with a sewing machine, compared to the clothing
business where expensive machines are required (Burke, 2008).
New ventures need an adequate amount of capital to survive. A large number of businesses fail
due to lack of enough fnance backing the venture. There are further diffculties for small fashion
businesses. Due to the small quantities of clothing pieces they are at the back of the queue when it
comes to manufacturing. Fashion entrepreneurs usually have diffculties in accessing fnancial support
because the business ideas are often considered to be high-risk investments and the margins are low.
Additionally the value of a creative product is diffcult to measure; the success of a collection mainly
depends on the valuation and personal taste of the customers. Hence it is diffcult to indicate the
proft of a fashion business. It is hard for a fashion entrepreneur to predict the return on investment,
which makes it less attractive to banks and investors. Investors or even business angel investors invest
only if they see a large growth potential. Banks refrain from fnancing fashion entrepreneurs when
they determine that the business and entrepreneurial skills of a designer are insuffcient (http://www.
entrepreneur.com).
3.1. Fashion Entrepreneurs Portfolio of Skills
The tasks of a fashion designer vary from company to company but as an entrepreneur, a fashion
designer needs a large set of skills. It is a leave-taking from the traditional designer role into the
balancing act of two elements - creativity with business skills and art with commerce. While they are
often very confdent about their creative work, they lack confdence entering the world of business.
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Management, marketing, accounting and fnancing have to be considered as weak points of fashion
entrepreneurs. Several factors can infuence and challenge the foundation and growth of a fashion
design company: individual network, personality, education, personal background, attitude, role and
behavior of a fashion design entrepreneur (Burke, 2008).
Like in any other industry, entrepreneurship in the fashion industry combines the creation and
management of a venture with the specifc aspects of the industry, in this case fashion. As Dickerson
stated to the point: The constant in fashion is change(Dickerson, 2003). Also, Drucker pointed out
that there is the need for continuous innovation, which is very typical for fashion industry (Drucker,
1985).
Firstly, the design part consists of the aesthetic and technical product development process and the
business part includes the business strategy and management of the label. Fashion entrepreneurs must
be continuously innovative in their sphere of activity; fashion can be copied but not innovation. A
fashion design entrepreneur is the key person that manages the entrepreneurial process and sets up a
business to integrate their design ideas into the marketplace (Burke, 2008).
There is an increasing recognition by the fashion industry that entrepreneurial and small business
management skills are an essential component of the fashion entrepreneurs portfolio of management
skills, together with leadership, team building, communication and networking.
To become a successful fashion entrepreneur you need innovation to be able to identify opportunities
in a climate of ambiguity and chaos, together with passion and enthusiasm for your products to
encourage you to constantly improve your products features. You also need determination and
persistence to drive your ideas through the many obstacles and challenges you come up against. In a
competitive market, it is not suffcient only to be creative, it is also important to be entrepreneurial with
small business and project management skills and to be able to build a network of useful contacts. The
technical skills refer to the technical knowledge you need to design and make your products. Every
profession has its unique range of technical and trade skills and, as a fashion apprentice, it will be
necessary to learn trade to be able to produce professional products so that the venture and products
are commercially viable.
Fashion design entrepreneurs have to be aware and in charge of all the different felds of the business:
Research (market research, trend research, consumer behavior)
Product development (aesthetically, qualitatively and technically)
Sourcing
Production
Marketing
Distribution
Sales
General management (business strategy, direction of the brand, positioning, pricing, corporate
identity) (Burke, 2008).
Table 2: Fashion Entrepreneurs Portfolio of Skills shows a structured subdivision of the key fashion entrepreneurship
topics subdivided into their component parts.
Fashion Entrepreneur
Fashion Industry Entrepreneur Traits Starting Your Own Business
Small Business
Management
Technical Skills Creativity, Innovation Etc Business Plans Source Of Finance
Opportunities Spot Opportunities Registration Accounts
Design And Manufacturing Networking Skills
Market Research, Trend
Research
Small Business
Management Skills
Retail And Distribution Risk Management Marketing And Branding Project Management
Supply Chain Management Sales And Negotiation Leadership And Teamwork
Source: Burke, S. (2008) Fashion Entrepreneur, Starting your own fashion business, Burke Publishing, UK
It seems to be one of the most challenging tasks to be capable to balance and manage the two different elements.
Jones (2008) cites in her article Yohji Yamamoto: Fashion consists of both commerce and creation. You
need to fnd the right balance, if not you cannot continue (Jones, 2005). Fashion entrepreneurship has been
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the driving force in developing the fashion industry but, as a profession and an academic syllabus, it is still
relatively new and has yet to formally establish a defning Portfolio of Skills.
Founding an own label is often considered as the highest creative goal a fashion designer can achieve. In day-
to-day work as an entrepreneur, design is only a fraction of the whole. Much more time consuming are all the
other aspects that have to be managed, which requires a large commitment of time and energy. A great stamina
and openness is needed to accept this fact and to get along with it. If a company consists only of one person
or a small team, lack of time is an eminent challenge. Designer Paul Smith stated: The biggest mistake of
beginners leaving the school is to believe that they are able to establish a label right away, with all the different
felds which are connected to it. The creation of an interesting collection is only one aspect among several
others, which are necessary to build a successful brand. (Jaeger, 2009).
4. CASE STUDY OF SUCCESSFUL WOMAN ENTREPRENEUR IN A FASHION INDUSTRY
4.1. Introduction to a company MAK
Neda Makjani-Kuni (1959, Split) by profession professor of Special Education and Rehabilitation, but
by life obsession a fashion designer. So however, she chose designer profession and founded MAK
in 1986 as a small tailors trade and stepped through the small door of the mens business world,
applying the learning-by-doing system. Despite having not completed the faculty of design, she has
constantly been professionally developing, reading and following the fashion world, as well as the
latest improvements in design and materials. Successfully balancing between the roles of a mother
and a businesswoman, she succeeded to establish the fashion house MAK with her own ideas and
forces. MAK employs about 60 employees. Design studio and production facilities are located in
the most modern technology and modernly equipped textile workshop in the area of Dalmatia, and
presents one of the most popular Split and the Croatian company with a tendency of further business
expansion.
She entered in this business for the love of the profession who has followed her since childhood.
Key features that make the successful entrepreneur should have frstly covering order, work and
discipline, which should actually be a life philosophy. In addition, very important are persistence
and knowledge of their work and above all, love the job you are doing and being a good team player.
Women entrepreneurs should also continue to be confdent and sure in herself and her plan. It is also
extremely important to ongoing education and awareness about the important events related to the
job.
Apart from the qualities and vision of entrepreneurs, very appreciable are the people who make the
company. Good team and the respect of the employees are another important factor for success.
There should be widened a positive energy, and a great respect and tolerance. In the company few
employees work there for almost 18 years. Very often in these companies, is not exclusively dealing
only with fashion and designing. Unlike the worlds great drives with full teams of employees, in
small frms a person must have knowledge of different jobs, such as creator, designer and tailor, as it
is otherwise signifcantly diffcult to survive, because for all whom work for the company must have
some kind of control. In the fashion business like this, it is very important to have a professional and
dedicated team that work together to achieve good results, so that the brand was distinctive and that
the company would go ahead. There are lot professions that need to be obtained like technologists,
engineers, managers, designers...
It is important to constantly improve, educate yourself and constantly strive to be among the best and
be informed about important events, as well as institutional support that are available. Also, great
attention should be paid to technology that is continuously progressing. To have a perfect production,
each year there is a need to invest in facilities and renewal of existing machines, and the drive to
modernize the procurement of new machinery which is very important for the design.
Great importance is attached to the product quality. They are very important materials, which must
be especially good and precise stitching and such that the jacket, skirt or pants speak the language.
Semi-fnished product is absolutely not acceptable. Today, if the product is not superior, you cannot
compete with anyone given the large number of world famous brands. The market may also fnd a
lot of no-name products, but competitive price, which also represents another form of signifcant
competition.
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4.2. TARGET MARKET
In the fashion business is very important to carefully select and understand target market and
appropriately adjust to it. Company MAK has found a chance to meet a segment of businesswomen.
There was a lack of supply in the market, even in international brands offer, especially for women
who wear a larger size, in which in some way can be seen as discrimination and humiliation of
women. The company recognized that as their target group and addressed them with their collections.
These are the business women who were diffcult to fnd appropriate clothing in this region, including
making the creation of larger sizes. These women have recognized and selected MAK as their brand.
MAK is a company that is recognized on the market for the variety of available and excellent design
jackets, raincoats, coats, trousers and skirts. In particular, a great attention is dedicated to the quality
of materials and quality of products performance in order to keep customers satisfed. Fashion house
MAK puts a woman at the center of attention, and seeks to adapt to her needs in the best possible way.
Profle of represented company clients are mostly business women from age 20 onwards.
MAK produces several renowned fashion lines:
fashion line for businesswomen
line of cocktail dresses
casual sports line
atelier line that occurs in association with many celebrities in pop music and media scene in
Croatia
The company attaches great importance to every customer. Division of MAK fashion lines according
to the profle of women who wear them can be classifed as a business line that includes two collections
- Basic (size 36 up to .44) and Lady (size.46 up to.52 and more). With a business line, MAK has Arty
Chic line of cocktail of models and dresses, atelier and the line that occurs in association with many
celebrities in the media scene in Croatia. Also, the company offers certain types of personalized
products in the form of business uniforms and offer conceptual design and implementation of
agreed projects for hotels, restaurants, banks, business houses and travel agencies. Specifcity in the
development of business uniforms and suits is that there is no prototype, but is only done according
the clients wishes.
4.3. MARKETING MIX
Major role for the successful business has carefully created a marketing mix. As noted above, a great
attention is given to the product, its quality and adaptability to the customer The product has to be
extremely good, and if necessary, be further adjusted to the customer in the form of small fxes to
better ft the customer. Most products are distributed through the companys own sales fashion salon
network in the center of major cities, and part throw a partners network whose bid is in line with the
companys image, such as Concept stores in Zagreb, Karlovac and Zadar. Special attention is invested
in quality service and personalized approach to each client, and the most important is that every
woman feels special and gets the product that best suits her. For this reason, it is also a lot invested
in quality personnel.
When it comes to promotions, the Company mostly relies on fashion shows and related media events,
investing in the catalog, the classic forms of advertising in the media that the target group follows, and
if necessary, in the forms of sales promotion like coupons, discounts and so on. In recent times, it is
also investing in newer forms of advertising, such as various forms of Internet marketing. Here above
all, we can sort out a comprehensive website that is a very good source of information for all interested
in a company. Also more attention is given to creating a profle on the famous forms of social media
in order to achieve an interactive contact with clients, thus opening up many new possibilities in
communication with the target market and assist in achieving a personalized relationship of clients
with the company and brand.
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4.4. ENTREPRENEURSHIP INFRASTRUCTURE
Furthermore, considerable attention is needed to add to the importance of supporting institutions that
can provide assistance and incentive companies in their business. The owner of MAK is a long-time
president of the Association Section of Textile Craftsmen Split-Solin and president of the Textile
Guild of the Chamber of Crafts of Split-Dalmatia County. It is also a member of the Section of textiles,
leather and fur at the CCTC and a member of association of Croatian business women KRUG,
where advocates for womens entrepreneurship in particular and womens equality in employment.
These supporting institutions are the source of information and knowledge that can help improve the
business, and a mutual place for exchange of experiences that contributes to an even greater positive
synergy effects.
Special attention has lately given to encouraging womens entrepreneurship. Ministry of Economy,
Labour and Entrepreneurship, the Croatian Bank for Reconstruction and Development and the Croatian
Agency for Small Business (CASB) closed the circle, whose interest is to encourage women to more
easily move into their own business. Reasons for lower participation of women in entrepreneurship
lie, among others, the traditional views about the role of women in society as well as diffculties in
accessing fnancial resources and insuffcient contacts. Women often feel a lack of understanding of
the social environment and lack confdence when it comes to engaging in entrepreneurial ventures and
the risk of opening their own businesses. Many projects were introduced, such as EntrepreneurSHEp
Croatia which aims to jointly contribute to promoting the development of women entrepreneurship
in Croatia which is still underutilized. The Network of womens entrepreneurship ambassadors will
help in increasing womens capacity to create vision, strengthening confdence in setting up and
creating a successful business. Support to women entrepreneurs are provided in the form of payment
of certain amounts of money, providing guarantees for loans to entrepreneurs, access to affordable
loans, subsidies to the cost of kindergarten, etc.
5. CONCLUSION
Fashion facilitates an economic growth, but it can also be concluded that the fashion industry
is very challenging and demanding, and it takes a lot of knowledge and organization in order to
achieve a successful business. Fashion cycles work to periodically loosen accumulated constraints
on the demand side, facilitating economic growth and personal development. Fashion is part of how
economies evolve, not of how they decay. This is particularly challenging for small businesses, and
even more so for those who are led by women. Entrepreneurs in this regard particularly highlight the
need for stronger networking of women at all levels and exchange of information and knowledge.
They stress that womens entrepreneurial initiatives deserve support national, regional and local
authorities, international organizations and projects, and need to be extracted, and to help measure
their effects. On the one side it is necessary to build a quality team and relationships within the
company, and on the other, company relationship with its customers, constantly listening them and
adapting to new demands and trends. Competitiveness in the fashion industry can be held only by
insisting on investments in technology that enables higher levels of productivity and product quality
with key innovation, creativity and design. It is very important properly segmenting the market;
successfully identify proftable market niches and the orientation of the expanding base of satisfed
and loyal customers with products adapted to the requirements thereof.
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Dickerson, K. G. (2003.). Inside the Fashion Business, . New Jersey: Pearson Education.
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Thesis. University of Boras, Swedish School of Textiles.
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Republike Hrvatske, Ministarstvo gospodarstva, rada i poduzetnitva.
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Saviolo, S., & Testa, S. (2002). Strategic Management in the Fashion Companies, Etas. RCS Libri, Milan.
Schumpeter, J. A. (1934). The Theory of Economic Development. Cambridge: Harvard University Press.
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VIJESTI=136776 (Pet Slavonki - ambasadorice Mree enskog poduzetnitva)
Part Four:
Strategies and business development
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THE TESTING OF STRATEGIC MODEL OF POSITIONING OF A NEW PRODUCT OF A SMALL
ENTERPRISE OF A COUNTRY IN TRANSITION ON THE GLOBAL MARKET
Neven eri
University of Split, Faculty of Economy, Croatia
E-mail: nevseric@inet.hr
Ivana ili
College of ibenik, Croatia
E-mail: ivana082@yahoo.com
Stjepan Kalini
University of Split, Faculty of Economy, Croatia
E-mail: stjepan.kalinic@gmail.com
Abstract
Globalization and contemporary communication standards on the global market present a particular challenge
for a small enterprise of a country in transition. The possibility of continuity of growth in sale of original and
competitive products account for the efforts exerted in making a strategic model of a new product positioning
in the aimed niche on the global market. What are the key variables to which a small enterprise needs to pay
attention in order to position itself in an acceptable niche of the global market?
The problem in the practice of commercialization is also national administrative barriers. Even these barriers
are indirectly imposed by international corporations by conditions that economic integrations stimulate to
future members. The aim of these regulations is to weaken the potential new competition on the global market.
Small enterprises are also faced with offensive aggressive strategies of prolongation of life expectancy of more
inferior products of similar purpose ruled by multinational corporations through the economy of volume. Even
in a situation where big corporations are not present on the national market, they effectuate their operation
by political lobbying or through the chosen national frms. The development of new products for the sake of
commercialization on proft-limited, national markets of the countries in transition is rarely economically
justifed.
The development and commercialization of new products on the global scale are necessity, because of
the narrowing of potential for sales on the national market, the alternative in recession is the decrease in
employment and production. The authors have predicted the testing of suggested strategic model of positioning
of a particular new product (home-made lasting cake- souvenir) of a small enterprise from the Republic of
Croatia on the global market. It is a high quality product which has a limited number of competitors in the price
class on the global market. Several market tests have been carried out with rigorous criteria which it has been
concluded that the relation between the price and the quality of the product is especially competitive, while
there is the demand.
Branding system for creating a recognizable, in this case, exclusive brand, presupposes the continuity of
activities and investing in the brand in order to develop it to the appropriate level when the sale of the product
from the phase of introduction to the market passes to the phase of growth.
The expected scientifc contribution of the works consists in accepting or rejecting the basic hypothesis:
Strategically model of exclusive sub segmentation of the new product of a small enterprise of a country
in transition on the global market is effectively realizable on the tactical platform: logistics for providing
materials, E-marketing- E-commerce Branding- Elimination of organization incongruity.
Keywords: logistics, E-marketing, E-commerce, Branding, Elimination of organization incongruity
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1. INTRODUCTORY REMARKS
Globalization and modern communication standards represent a constraint, but also the possibility
for survival and growth of small business enterprises in transition countries. The potential continuity
of sale growth of the original, national, competitive and globally recognized products will justify
all marketing efforts and funds invested. Partial experience represents a research challenge, aimed
to design widely applicable strategic model of new product positioning in the targeted niche in the
global market. In such a scientifc approach it is possible to identify and evaluate key variables on
which a small company from a country in transition needs to pay special attention to be positioned
in the targeted niche on the global market. Croatia is an example of a country in transition which
has valuable indigenous agricultural products utilizable for the production of original, specifc, food
products for the global market. Taking into account the trends of those products in the context of
the prices they achieve, this resource should be given more attention. As at the institutional level as
on the local, especially considering the untapped potential and complexity of economic problems
conditioned by recession in the recent years. The purpose of this paper is to point out this possibility
for many small enterprises in the transition countries.
The Republic of Croatia is a way behind in implementing the protection of indigenous species of
agricultural varieties of olives, grapes, carob, ect. These, and other, indigenous species have potential
for the design of new food products of recognizable national brands. The core of this problem is
the lack of partial protection of indigenous crops. This is a potential platform of organic production
development, which would have all the necessary prerequisites for the creation of new food products
of globally recognized brand. Setting up the production of such products under national surveillance
would allow, at the fnal, realization of the complex market prices due to high standards of product
quality. This would encourage the growth of production of indigenous crops, and additional
investments in agriculture. Considering that in the Republic of Croatia still does not happen, the
idea of implementation branding of indigenous agricultural products through the national image of
Croatia is yet absent. Only at the fall of 2010 at the initiative of the Community of olive oil mills and
olive planters of Republic Croatia brand of Zlatna Oblica is protected , brand that cover 90% of the
total olive growing in the Croatian coastal region. Olive oil produced from those olive varieties in
the chemical composition is superior to other olive oils due to specifc microclimate conditions of
climate, limestone formations and the evaporation of sea water into the atmosphere. Just that olive
oil, produced from the Zlatna Oblica, is the foundation of authentic and original product, homemade
cakes Diocletians Wreath whose market potential was the subject of research in this paper. Product
Diocletians Wreath is an example of creative marketing story about use of indigenous agricultural
products in the creation of long-lasting cookies that meets the criteria of national souvenirs. That story
is a marketing and branding platform for high-quality range of ecological agriculture. Finally, in this
case study, through research is recognized the potential of creating an improved model of the strategic
positioning of new products of small enterprises in the country in transition to the demanding global
market.
2. EXPLICATION OF THE RESEARCH PROBLEM
Preliminary research conducted in-depth interviews with company representatives of indigenous
domestic cakes Diocletians Wreath pointed to inconsistencies in organizational marketing and
managerial terms. Possible justifcation for these omissions is the fact that their core business
is processing olive oil, and the idea of creating this new product was created by accident.
Commercialization of this product was not preceded by any market analysis and during the product
development of Diocletians Wreath, many important stages of that process were ignored. The
consequence is the inability to meet the expressed demand for new product on global market. Moreover,
carrying out a pre-test, for the purposes of this study, showed that customers rated the product very
attractive considering the originality and the relationship between price and quality (retail price per
kilogram of cake Diocletians Wreath is about $ 200). Competitive benchmarking cannot be executed,
given that at the global level there cant be found indigenous products of similar price and quality
(they are much more expensive.), and the proposed innovated strategic model is based partly on a
generic benchmarking. Complexity of the business case and market and marketing potential is further
indicated by the fact realized during the in-depth interviews with representatives of manufactures. All
potential B2B customers in foreign markets that are contacted in various ways by the manufacturer,
or otherwise obtain information about product, were buying the product impulsively, and they later
claimed additional amounts. Unfortunately, this was often not possible due to the lack of an effcient
system of procurement of required raw materials. A separate research showed lack of high quality raw
materials on the local market on which the manufacturer of cake is directed. Ecologically-grown citrus,
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required for continued production of Diocletians Wreath at the local market supply is inadequate.
On the broader Dalmatian market production of indigenous agricultural products (for this purpose)
is fractionalized into many small producers. Research has found that there are no organized channels
of their delivery. Recognizing the weakness identifed in a particular business case we evaluated the
necessity of improving the existing models of product management Diocletians Wreath to ensure
conditions of growth of production and sales of the product.
The basic hypothesis of the research
The basic hypothesis; H0, of the research states: Considering previous business experience with
new native food products, the existing model of product management cannot ensure the growth of
production and sales, and existence of that product on the market is questioned.
Auxiliary hypotheses are as follows:
H 1: without creating innovated logistics system of high quality raw material supply, future production
of indigenous food products is uncertain;
H 2: E-marketing is appropriate and economically valid platform for promotion and increase of sales
of new food products for small business with limited marketing budgets;
H 3: E-commerce platform is an effcient distribution of new food products on global markets;
H 4: Effective brand management of new food product is a precondition for achieving higher selling
prices at the global marketplace;
H 5: Organizational alignment and balancing of all business function of a small company by the
standards of the global market is an assumption of production continuity of new food products;
3. RESEARCH PROBLEM EXPLICATION
The research included testing of the existing model of a specifc new product positioning, Diocletians
Wreath, on the global market. The study was conducted in-depth interviews with representatives of
manufacturers and with relevant random sample of previous customers, and potentional buyers of
Diocletians Wreath. Potentional buyers included in the sample are the subjects that in carried-out
pre-testing clearly voted affrmatively on the issue of purchase interest, no matter what their sample
was not delivered, but the product is presented in story board model. Todays economic reality on the
global market has obvious repercussions on the commercialization of new products of the majority
of small business from the countries in transition. These companies are focused on the global market
due to the limitations of national markets in transition countries. Total potential sales of new products
in small national markets can rarely justify the necessary investment in the development of these
products. This fact was the reason why the company that manufactures Diocletians Wreath skipped
certain phases during the product development. The consequences are the negative repercussions
related to the growth of manufacturing and selling of the product. Based on the identifed weaknesses,
improvements of the product management models have been offered. Same are a platform to create
an effective commercialization strategy and positioning of new food products of small enterprises on
the global market. Problems of operational nature, which were confrmed in the study, are evident.
Same result in an imbalance of the business functions of a small business. For all these problems the
owners of small business are in a dilemma of continuing withdrawal of the global commercialization
of Diocletians Wreath.
4. RESEARCH RESULTS
The main fndings of this research resulted in order to resolve dilemma which is connected to the
existing operational management of the new food product:
1. The existing experience is based on the distribution system, which shows some
obvious weaknesses. The former consumers expressed some skepticism, because of the
continuity in supplying the product through the year. Inadequate effective supply chain system
of the product components is the main problem of the growing sales of Diocletians Wreath,
but also maintaining the customer satisfaction in despite and determining value of product
for additional price. In that context it is necessary to make total logistic system which will
assure continuous production of the Diocletians Wreath all year around, but also the effcient
distribution of total product which is aligned with purchase inquires.
2. Modest marketing which is based on the national publicity is insuffcient for effective
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global commercialization of new food product. In this regard E-marketing is effective
communication platform for targeted segments on the global market. E-marketing allows
co-branding of new product with original indigenous and specifcity of its country such as
indigenous ecological agricultural products components of new food product.
3. E-commerce, for the small enterprise, is acceptable as distribution model of a new
food product, according to synergistically effciency of E-marketing, and the fact that the
Diocletians Wreath production is not in core business of the small enterprise. Such trading
model is recommended because of many potential segments where they can become permanent
customers on the global market, such as catering companies wider range, businesses for
representation, the representative bodies for business gifts etc.
4. The indigenous branding of the national food product should be based on the co-
branding elements that produces fnal product indigenous food product with ecological
stamp.
5. The organizational system of the small enterprise should be improved, so all business
functions must be aligned, connected, and together contributes to effcient business and core
business.
5. THE RECOMMENDATION FOR IMPROVING THE MANAGEMENT MODEL OF THE NEW
FOOD PRODUCT
On what should be based improved strategic management model and the positioning of indigenous food
products? Nowadays, innovative solutions, user friendly characteristics, distribution, and consolidation
of recognized product and its origin country, represents imperative for effcient management model
of the new product on the global market. (Aaker, 2001) However, small enterprises are fraught with
the problems and barriers that occur in the commercialization of specifc product in competitive
environment. The corporative behavioral regulations are also present on the markets in transitional
countries. A large chain store focuses on the economy of scale, and highly valued indigenous products
are competitive. These products sometimes indicate unacceptable food product quality, and which are
massively wanted on the market. Therefore, large, fnancially strong companies see the problem in
branding the components of such products. The linkage between corporate capital and government
structures, in this proven research, is still worrisome state of corruption, which is fundamental
problem on the markets of the transitional countries. Branding of the indigenous agricultural sorts and
products is still just consequence of individual efforts of small producers and community produces
in these markets. On the global market, multinational corporations attempt to maintain control of
commercialization activities of successful products of small enterprises in transitional countries, so
in that way it wont discomft price and quality ratio, and established standards. These premises
clearly illustrate the problem of global commercialization of new indigenous agricultural products
of exceptional quality, which are originated from transitional countries. Administrative barriers of
economical affliations are also problems. On the example of the Republic of Croatia, this problem
should be solved by joining the European Union. (eri, 2003) Small enterprises are faced with
offensive and aggressive strategies that are extending lifetime with quality of inferior products with
similar usage of multinational corporations who manages the economy of scale. However, new
imperative for the future sales growth will be the effective strategic management model of new
products on the global market.
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Figure 1: The recommendation of innovative model
Source: authors, on the basis of the conducted research, spring 2011.
6. CONCLUSION
The global market in the spite of exceptional receptive capacity of the original new products in price and
quality ratio is not assured for the effcient positioning, in acceptable niche. The main characteristics
of such product which differentiated it in comparison with similar products which are distributed
by the multinational companies, represents a base for designing a new management model of the
product. Nowadays, the corporate regulation models are present on the partial markets in transitional
countries, and may have a negative repercussion on the logistical system of the small enterprises. If
the same system works as the improvisation, which is unfortunately very often in small enterprises
in transitional countries, it could lead to market failure in despite of the competitive characteristics
of the new product. The strategic model by exclusively sub-segmentation of the new food product of
a small enterprise from a country in transition on the global market is effectively implemented on a
tactical platform consisted of raw material logistic assurance for branded product, promotion based
on E-marketing, distribution based on E-commerce, and feedback in order to eliminate organizational
inconsistency.
For the logistical system it is necessary to assure the continuum of supplying raw materials indigenous
eco-agricultural products, and establish an effcient fow distribution channel of the targeted market
segments in the global market. For this food product it is important to comply with criteria and
conditions on the markets of the European Union and United States of America. In that case our
food product could be easily traded on such markets. Partially, problem could be related to national
determinants and its regulations whose are regulating distribution of food products. The attitude of
the national government legislation is unadoptable to encourage the export of the Croatian products,
and is obvious for the new Croatian food product.
Small enterprises in transitional countries do not have suffcient funds for market budgeting,
so for proper communication on target global market segments are required. Due to these facts a
conservative promotional model cannot lead to success. The acceptable marketing solution is
E-marketing. Originality and developing of a new effcient concept and an excellent CEO imply a
successful realization of such communication system on targeted market in despite of the lower costs
of such communication system. An attractive visual solutions and multimedia applications, such as
E-marketing, could assure qualitative information about specifcs and originality of food product. E-
Marketing application which quality level is nor appropriated, could not assure success.
For such inappropriate developed E-Marketing system, it makes sense to develop an E-commerce
system. So, in this case the exclusive food product could be qualifed as national souvenir. According
to market testing of its organoleptic characteristics and its exceptional quality it incorporates and
strengths the image of such product. For this product it is appropriate sub-segmentation strategy
in frst phase of the global commercialization. E-commerce is good solution for sub-segmentation
strategy, in case of small enterprises, until it reaches a stage of rapid sales growth. In that case should
be invested, parallel, in brand strengthening and in targeting exclusive distributors on the targeted
national markets. For this phase it is necessary to execute and redesign total logistic system, according
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to specifc market cognitions.
The branding system, in order to create recognizable, exclusive brand of the indigenous food product,
assumes activity ant its continuity and investments in such brand. So, in that way brand could be
developed by the level which will assure the continuity of sales growth on the global market.
Finally, the lack of organizational system that could resolve existing discrepancies and imbalances
business functions of the small enterprises, according to standards of the global markets, was the
pattern food product, and also matter of this research. The rejection of the system determinants,
regarding to their economic justifcation, or unjustifable does not resolve the problem, from the
aspect of the business owner, it just prolong it. Market testing that had been conducted indicates on
the justifability of the commercialization of new food product on the global market. With delaying
and aligning standards that are allocated presents a potential risk of subsisted market of new food
product, where is additional interest on the global market occurred.
Reference
Aaker, D. (2001). Strategic Market Management. 6th Ed. John Wiley & Sons, Inc. New York
Aaker, D. (1991). Managing Brand Equity. The free Press. New York
Chaffey, D. Mayer, R., Johnston, K., Ellis Chadwick, F. (2003). Internet Marketing
Strategy, Implementation and Practice. Prentice Hall. New Jersey
Peter, J.P. Donnelly, J.H. (2004). Marketing Management: Knowledge and Skills. 7th Ed.
Irwin. Burr Ridge
Piercy, N.F. (2002). Market-led Strategic Change: A Guide To Transforming the Process of
Going To Market. 3rd Ed. Butterworth-Heinemann. Oxford
eri, N. (2003). Importance of remodeling of marketing strategies for the market in the
countries in transition. 5th International Conference Enterprise in transition. Ekonomski fakultet Split. Split
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PROCESS-ORIENTED ORGANIZATION OF PUBLIC UTILITY COMPANIES HAVE BETTER
BUSINESS PERFORMANCE THAN FUNCTION ORIENTED ORGANIZATION
Ivan Peronja
University of Split, University Center for Professional Studies, Croatia
E-mail: iperonja@net.hr
Anita Krolo Crvelin
University of Split, University Center for Professional Studies, Croatia
E-mail: akroloc@oss.unist.hr
Abstract
Abandoning the traditional functional model of business organization and implementing the concept of process-
oriented organization, managements of companies engaged in public utility operations can signifcantly
improve business performance. Traversing to process-oriented organization and business process management
within the company contribute to a clear division of responsibilities. In such a way that the owners of single
process, the core process, support process or management process is appointed. Also, thus during the course of
an action is shortened which makes the overall operations more effcient. The entire organizational structure
is more fexible. It is more easily and quickly adaptable to external changes in the environment that are not
under the control of management. This contributes to lower number of hierarchical levels in an organization
that should be shallow but with a very developed lateral communication. Organizational structure takes on the
characteristics of the process-oriented one. It is done by combining managerial and non-managerial activities,
training and education of employees, grouping employees in teams and by developing multiple competencies.
Process-oriented organization creates a competitive advantage over the slow traditional organizational structure
through implemented business process management. In transitional countries, awareness and knowledge of the
importance and benefts of implementation of the process concept in an organization is very small, so it is high
time traditional organizations started leaving the functional model and building process-oriented organization.
Today, in modern times, when changes in business environment are more frequent and increasingly demanding,
it is not possible to operate without a developed IT support. The degree of development of IT support affects
the timely elimination of bottlenecks in the business, rationalization of operations, transparency of business
processes and cost savings in human resources. Automation of business processes, rationalizes the number
of executors of an action, which creates fnancial requirements for implementing a new system of rewarding
employees. The concept of process-oriented organization of public utility company is based on the changes.
A great degree of fexibility that exists in these organizations enables the various business units to create their
own solutions for conducting business and to carefully monitor and record the process effciency. Changing
approach to business and implementing process changes, sharing the ideas about the processes as well as the
results lead to the basis of management, and this is precisely the knowledge and organizational learning. The
aim of the organization of public utilities is to make them more fexible, easier, cheaper and more effcient
through the various functions of expertise. All these changes should be accomplished through a management
process that must be planned and in long-term build on one-time change of organizational structure. Top
managers in utility companies should be named the owners of certain processes, and authorized to work and
budget. Thus the business focus is corrected the focus of process measurement systems become process goals.
Possible further success may be based on compensation policy of the selected company. After completing the
organizational and functional redesign of the selected utility company, it can be said that the organizational
culture that is now radically changed, and that in the middle of business are teamwork business and end-
user satisfaction, rather than hierarchy managerial authority. After all changes are made, the chosen utility
company becomes process-oriented enterprise whose management structure is in balance with its key core
process management. Thanks to such changes benefts for the company are numerous, and it is refected in
better overall business performance.
Keywords: organizational structure, business process management, business processes, public utility
companies, process-oriented organization.
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1. THE CHARACTERISTICS OF ANALYSED PUBLIC UTILITY COMPANIES
The basic mission of public utility companies is meeting customer needs of the population in a certain
area. Therefore, it is not the proft, but the satisfaction of the users of public services that is the measure
of success. Public utility companies are still largely the ownership of the local government and self
- government, depending upon the territorial organization of the country. Our research analyses a
sample of public utility companies whose founder and majority owner is the City of Split. A total
of ten utility companies have been analysed, nine of which are exclusively services companies and
one is a productive enterprise. All of the observed companies use budget funding and co-fnancing
of joint business activities and only one is entirely market-oriented and does not use budget funding.
Public utility companies have many advantages, one of the most important one being a better market
position in respect to the competition. Public utility companies use their dominant position and a
market niche to better satisfy and fulfl the demands of their users. Nevertheless, there is a downside
to having a dominant position and it has to do with satisfying momentary political interests of majority
owner who often, for populist reasons, set the service or product price well below its real market
price wittingly accumulating a loss compensated through political loyalty of end users. Unlike the
traditional functional organization, process-oriented public utility companies are characterized by
an increased fexibility, lower business expenses, a simpler and shallower management based on
micro-managers, that is, on process owners responsible for all business related ventures, a developed
IT support system, a simple and fexible possibility of improving information fow, a short-term
possibility of multiple enhancing service and production capacities with an emphasis on developing
and upgrading support (not core) processes. The central fgure in the business process is the man
himself which means the dynamic of the process is determined by the weakest link in the production
of the service chain.
In public utility organizations the signifcance and investment in development and process upgrading
can be shown as following:
operative processes
support processes
management processes
direction fnding processes
The order of the above process activities appears in all the observed organizations and has been
confrmed during data acquisition process.
Figure 1. Business workfow in a function-oriented organization
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2. THE COMPONENTS OF THE BUSINESS PROCESS MODEL IN PUBLIC UTILITY
ORGANIZATIONS
Every business process model describes the workfow strategy of all business processes taking place
inside an organization. Particularly important is consumer presence and involvement in the business
process because their feedback is key when it comes to improving the overall business performance,
and from the process point of view it helps to locate and remove bottlenecks in production and service
type activities. Of course, it is not necessary for consumers to be the end users of the products and
services, internal consumers can also give input (employees, contractors etc.).
Each business process models is defned by its goals, activities and sub-processes, resources,
information, owners and challenges (Buble, 2010).
Business goals in the observed business organizations are to be reached by adapting a process
approach and require a radical re-designing of business activities which requires resources (three
months minimum), fnancial assets and suffcient knowledge and skills of available human resources.
Transforming input into output in order to better satisfy the needs of end users is dependent upon the
available production and service capacities and other basic resources, stagnations and breakdowns
and feedback.
Resources in the observed public utility companies, a lack of knowledge and skills was noted in a
part of human resources management regarding IT, unsuitable age and educational structure, a low
internal and external employee fuctuation rate, an undeveloped personnel selection, training and
motivation system of employees. Financial, material and technical resources are satisfying, as in
most of the observed organizations. The human and IT potential represent the main limiting factor of
improving process business.
Information essential to business activities is available to the majority of those involved in the business
process with notable time delays due to insuffcient IT implementation which later causes a fnancial
expense and a burden for fnancial indicators. In process oriented organizations communication is
immediate, timely and very shallow making it possible for such systems to have a lateral way of
communicating and an information fow on the same level inside the chain of business activities
(Bosilj Vukui, Hernaus, Kovai, 2008).
Business process owners have a micro-managerial role, assuming a model of business already exists.
They are responsible for making sure all business activities (all sub-process and whose beginning,
course, the ending and process) whose duration can be easily determined inside the chain are done
properly. Owners who have been assigned business processes in public utility companies are often in
charge of effectively managing processes arranged in groups of technical, fnancial and personnel
activities. The owners assigned for a business process have a key role in the concept of Business
Process Management.
Figure 2. An overwiev of process- oriented activities in public utility companies
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3. RESEARCH RESULTS
In the observed utility organizations which have partially or entirely implemented the concept
of process oriented organization an improvement of both fnancial and non-fnancial business
performances is clearly visible. Knowing that fnancial and accountancy criteria are only one way
of measuring the total performance of decision makers, during the analysis and the observation of
business organizations, special attention has been paid to non-fnancial criteria and performances due
to demands of todays age of technology.
Particularly focus was placed on customer satisfaction, service providers innovation, product and
service quality and product effciency and on main carriers of business activities (Kaplan, Atkinson,
1998). It would be fair to conclude that the importance of improving the non fnancial performance
is the true indicator of progress in achieving long-term goals, superior to short-term fnancial
criteria. Some of the observed organizations have a quality system implemented which additionally
strengthens process business. All stagnations are noted, efforts are made to remove or minimize the
manipulating factors which occur during various business activities and important feedback is sent to
the management. This feedback later becomes the basis for the planning of the removal of bottlenecks
and eventual parallel strengthening of one or a group of activities for which there is reasonable doubt
they might be negatively infuencing the effectiveness of the entire process (Prahalad and Hamel,
1990). Utility companies whose business organization is traditionally function-oriented continue doing
their business through three basic sectors: technical, fnancial and personnel sector. The functioning,
grouping and communicating inside such an organization is vertical which leads to a great loss of
time in transferring operational information and a great deal of delays. We have come to a conclusion
that companies which have adopted process-oriented business and have arranged their activities
according to logical order of business activities have longer operative lines, lesser delays, faster and
more effective information fow and a well defned distribution of assignments and responsibilities for
each business activity. A direct connection has also been confrmed between the activities undertaken
by the process management and the success of the business performance. All the results resulting as
outputs in the process business can be quantifed, bottlenecks are easily notable and, when needed,
can be temporarily removed creating inexpensive parallel systems which do not require additional
resource involvement. The characteristics of process-oriented business organizations are evident in
the business activities dynamics, determined by the slowest link in the chain which sets the dynamics
of the entire system.
In the short run, by creating parallel processes, the output capacity for the end consumer can be
greatly multiplied This is due to the fact that the use and the need for products and services depends
very much on the season. All of the above mentioned contributes to a larger organizational fexibility
which is then more capable to adjust to market demands and changes.
Managing business processes in process-oriented companies in a rational and effective way and using
human resources as the basic group around which process teams are organized, can have a direct
infuence on the business performance. A direct connection between BPM and business processes and
a double indirect connection between BPM and human potentials and human potentials and business
performances has been noted.
Other confrmed advantages of process oriented companies include fast feedback, a shallow and
timely communication between all participants in the process, an overall lesser business expenses, a
better motivation and compensation system. Emphasis is placed on improving support processes. A
developed IT system allows a basic support to everyone and to all types of business processes during
business activities. The weakest link is easily detected and the entire business activities system rests
on small homogenous teams whose owners have a micro-managerial role and have to be in constant
contact with the users, and the infuence of the rigid division of managerial functions into three basic
levels is not that strong.
The total business expenses of abandoning the traditional function-oriented organization and switching
to process-oriented organizations have been reduced by 25 to 40 %.
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Figure 3. The connection between business process management and business results
4. CONCLUSION
Comparing the business of public utility companies whose work is done entirely through function,
that is process-oriented organization, it has been confrmed what was thought before analysing
the advantages and disadvantages of each business organization concept. Analysing all the
indicators available, taking into consideration all available resources of each organization, market
idiosyncrasies, activities organizations undertake, the ownership structure, a broader social and
economic signifcance, the specifcs of internal and external surrounding, the conclusion can only be
the following: there is no economically justifed reason why all organizations shouldnt implement
the process business concept, contributing in such way to a higher effectiveness and fexibility of
the organization, improving fnancial and non-fnancial business performances, achieving a more
dominant and recognizable role among its end users. The only threat in the business of public utility
companies, which does not actually depend on the type of business involved, has to do with pleasing
political interests of the majority owner who scarifes economic business principles in order to give
irrational short-term pleasures to potential voters which fnally leads to creating losses and creating
negative business practices.
Reference
Buble, M., (2010). The infuence of organizational variables on the business process improvement programme.
Split, Ekonomski fakultet Split
Bosilj Vuki, V., Hernaus, T., Kovai, A., (2008). Business approach management: organizational and IT
approach . Zagreb, kolska knjiga
Kaplan, R.S., Atkinson, A.A. (1998). Advanced Management Accounting. New Jersey, Prentice Hall
Buble, M., (2006). Management, Split, Ekonomski fakultet Split
Prahalad, C.K., Hamel, Gary (1990): The core competence of the corporation, Harvard Business Review, Vol.
68, No. 3, pp.79-91.
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STRATEGIC MANAGEMENT OF ENTREPRENEURIAL CULTURE
Milica Paunovi
College of Management and Business Zajecar
milica.paunovic@fmz.edu.rs
Anelija Plavi
College of Management and Business Zajecar
andjelija.plavsic@vsmbz.edu.rs
Abstract
The success of any organization, in addition to achieving planned company goals by an adequate strategy,
is refected in how others see the organization. This implies the existence of specifc entrepreneurial culture,
which is refected as a set of values and beliefs of employees, as well as the image of the company to the public.
Entrepreneurial culture is an essential element that is an invisible link that connects the company and its
employees. Only with its compliance with other elements of the organization and implementation of appropriate
strategy, it enables the effcient and effective operations.
Keywords: strategy culture, organization ,values, beliefs
1. INTRODUCTION
When we say culture that an organization possess, we are referring to a wider range of appearance and
phenomena such as social phenomena related to the education system, the dominant values in society,
the legal system, human rights and customs of the people that are manifested in organizations.
Culture of a company must be as fexible on the one hand, and sensitive to cultural differences that
members of the organization are faced with outside the organization. Modern business requires a way
of doing business outside the borders of the mother country so it is necessary to meet other cultures.
If you ignore the impact of culture on business in another country then it leads to unsuccessful
negotiations and a negative operating result.
Because of this it is necessary to modern strategic management culture.
2. THE ORGANIZATIONAL CULTURE CONCEPT
Every organization has an invisible quality - a certain goal, the character, the way of doing things -
which may be stronger than any person or formal system.
Just ten years ago, the word culture is used in conjunction with theater, art galleries and the like.
However, in recent years we are increasingly talking about corporate or organizational culture, and
many authors suggest that the only thing that is common to all successful companies is very distinctive
organizational cultures. (Mihailovic, D., 2000, p.133)
Culture can be defned as the characteristic beliefs and behaviors that exist within the organization.
Corporate culture is a set of formal and informal behavior, which the company has adopted as its way
of doing things. The formal part will include a formal written statement of values and organization
chart. Informal parties concerned with how the work is done - whether through written procedures
or through direct communication. Basically, organizational culture is described as a peculiarity or
characteristics of an organization, or simply as the way things are arranged in the organization.
(Jovanovic-Bojinov, M., Zivkovic, M., Cvetovski, T., 2003, p. 290).
The main characteristics of culture are:
It is acquired (no genetic or biological origin).
It is divisible (culture is a social, not a single category and as such has been developed and
divided into individual members of society).
It is trans-generational (passed from generation to generation).
It is symbolic (based on a human characteristic of presenting one thing with the help of others).
It is adaptive (based on the ability of humans to adapt to environment and events).
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Principled (a general form of acceptable behavior based on the non-standardized) principles
Communication (facilitates communication and contributes to greater closeness between experts
in a culture)
Differentiation (includes members of different cultures which often have different representations
or beliefs about the same thing)
Cumulative (the culture has opened and tentatively character and is in constant process of
shaping, and each generation adds something, and leaves its own stamp on culture)
Dynamics (culture is subject to change over time) (Jovanovic, M., 2004, p. 158).
National culture, customs and social norms of the country in which the organization operates are also
shaping the organizational culture. In other words, the culture of the larger society affects the culture
of the organization that operates within it.
Figure 1. Methods of maintaining organizational culture
Source: M.Jovanovic-Bojinov, M.Zivkovic, T. Cvetovski, 2003., P.. 313
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Culture can be seen as an iceberg, or with the iceberg we can seen its top, and we do not fnd the way
it was created (Figure 2).
Figure 2. The iceberg model
Source: M. Jovanovic-Bozinov, M. Zivkovic, T.Cvetovski, 2003., p. 299
3. MANAGEMENT OF THE ORGANIZATIONAL CULTURE
Given that cultures arise and manifest itselves in different ways in different organizations, we can
not say that one culture is better than another, only that it is different in certain ways. Cultures evolve
over time.
In other words, it means that there is no ideal culture, but only the appropriate culture. Managing
of the organizational culture is one of the important areas of governance, and corporate management,
and it can be said it includes three major activities:
creation,
maintenance and
change of the organizational culture. (Jovanovic-Bojinov, M., Zivkovic, M., Cvetovski, T.,
2003, p. 309)
In order to have a successful management of the organization, it is needed to manage the organizational
culture in an appropriate way. This means covering the following activities:
creation;
mastering and
cultural change.
The very process of creating a culture consists of several stages. It moves from an idea in mind of
the founder, who shares his vision with closest associates, and then transfers it to other employees.
Mastering the culture means putting collective goals above own goals, and the integration of each
individual in the group. The fnal stage is a change of culture and this stage requires a lot of time.
Change process itself is viewed in the fgure below (A. Hadzic, 2006, p.150).
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Figure 3. The organizational culture changes process
Changing culture is not an easy task, requiring complex and time-consuming procedures. The mere
change in organizational culture takes place through the following phases:
Diagnosis - in this initial phase the values and attitudes in the company have to be determined,
which is usually done through quantitative and qualitative research methods;
Planning-determining the desired attitudes and values and their incorporation into the vision
and strategy of the company;
Analysis - defning the differences between existing, prevailing values and those that intend
to achieve;
Implementation - changes in values and attitudes, ie, forming the desired culture.
4. STRATEGIES TO CHANGE ORGANIZATIONAL CULTURE
In order to align the organizational culture with strategic initiatives, the existence of coherence between
stretegies and culture is very important. Since culture has an enormous effect on implementing the
strategy, they have to be in a kind of harmony. This is shown in Figure 4.
Figure 4. Accordance of strategy with culture
I
m
p
o
r
t
a
n
c
e
o
f
c
u
l
t
u
r
e
s
e
l
e
m
e
n
s
0
5,0
5,0 0
Accordance with the
suggested st rategy
Ini tiating change
of cul ture
Explicit inclusion
of culture into t he
strat egy t hat is
being conduct ed
Considering
other factors
besides cul ture
Paying little att ention
to t he cultures
elements is needed
(M.Milisavljevic, 2005, p.459)
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The picture shows the elements of culture that infuence the conducting of the strategy, and this
infuence is ranked from 0 to 5. On the other hand, the accordance of strategy with culture is shown,
also ranked from 0 to 5. On the basis of two parametres, there are four possible situations:
If the sum of these two factors is high, culture and strategy are in great harmony. In such
situation, the companys management is expected to clearly and precisely include culture in
the process of strategy conducting.
If the sum of these two factors is low, this can lead to two possible situations: harmony is in
danger, which will require certain changes in culture; or culture is not so much important, and
therefore not paid too much attention to by the management of the company.
If the sum of these two factors is somewhere in between (neither high nor low), attention is
focused on other, more relevant factors of the strategy.
Great interdependance between culture and strategy forces the management to pin down all
the relevant factors whose change is important for the implementation of the planned strategy.
We can conclude that the accordance of culture with strategy is inevitable. However, if there is no
accordance, the company has the following options at its disposal:
it can ignore culture, which is risky;
it can manage culture by changing the way the strategy is being applied and thus try to
harmonize it with culture;
it can modify culture and make it adapt to the strategy, which is also risky because changing
culture takes time and
it can adapt the strategy to culture; this is the method used by those companies that use
strategies of external growth. (M.Milisavljevic, 2005, str.459)
In addition to this, one must answer the following questions:
What are the elements of a new culture that must be implemented to make the organization
successful?
What are the key elements of the existing culture?
What are the new habits we need to create in the organization to draw from the old to the new
times? (Simic, I., Management,, 2008, str.356)
The speed at which the organization changes the culture depends on how you answer these three
questions:
1. What are the key elements of a new culture that the organization should adopt to be successful?
What are three or four key peculiar characteristics which new organization should have? Otherwise,
the new employees on their frst day on the job should be able to hear this phrase and easy to understand
the implications for their behavior. For example, company can tell employees that the three basic
characteristics are:
treating people with respect,
reliability,
provision of customized / fexible customer service.
2. What are the key elements of the old organizational culture?
There are two groups of characteristics that are particularly important when the organization is trying
to change organizational culture. First are the characteristics thatare in strike that comply with new
initiatives. They will become a part of a personality of a new culture. Second, there are those that
organization needs to leave behind.
For the organization it is important to face the truth of what they should left behind. Many organizations
are trying to move towards a culture that has been led with goal, in faster steps. This situation could
mean that the emphasis on giving recognition, family style of a culture and so no longer ft into the
new tendencies. This change is painful to do. Trying to avoid facing the issues will only worsen the
situation.
The organization must bury the old culture. Every culture that had ever been studied had some form
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of funerary rituals. There must be a reason for it. It gives people a chance to say goodbye. It marks the
end of the old ways of life and start a new life for people affected by the death. The funeral is not the
end of mourning, because it takes more time.
An organization needs to respect the past. We should not carelessly offend these people suggesting
that the old way of doing things was not good. They are very sensitive to the past, especially during
the time they leave it behind.
3. What are the new habits you need to create in the organization so that it could move from the old
to the new modus operandi?
We need to create new patterns of behavior that match the new key features that an organization
develops. This problem is what we have in mind when using the term walk and talk. Answers to
the frst question are speech - talk. This is the place where we shape and reinforce what we say
is important in the new culture. Answers to the third question is directed to walk - walk. Do you
behave in ways that are consistent with what you say is most important? The organization needs to
change as much as possible visible (external) symbols . We need to change the names, colors, logo,
dress code, rewarding, plans and everything else for what was thought to be tangible (real) symbols
of new way of functioning.
It is necessary to change the language. This is one of the most important elements of culture. If
the organization come up with a new set of words that highlight new features, it will gain peoples
attention.
We need to create new rituals that will enhance the new key features. Change forms of meetings,
change the way you use voice mail or e-mail, add celebrations of new successes, honor the heroes of
culture. (Simic, I., Management,, 2008, p.357)
We need to create new habits. Habits require repetition in order to inculcate. It is necessary to fnd
numerous ways to replicate the new behaviors. It is necessary to attract as many people as possible who
would put forward this new behavior. For organizations, it is important to remember this sequence:
determine what is important,
behave accordingly to it,
turn attention to it and
reward it.
5. THE INTERACTION OF NATIONAL AND ORGANIZATIONAL CULTURE
The relationship between national and organizational culture is very complex. Although national
culture affects organizational culture and the behavior of members of the organization, the ways in
which this is achieved are still not clear enough. The reasons lie in the fact that different national
cultures in various ways and in varying degrees infuence certain otganizations. It is this fact that
justifes the different opinions of those authors who have explored further the relationship of national
and organizational culture.
There is a conventional understanding of the relationship of national and organizational culture that
is characteristic to those authors who believe that national culture does not have signifcant impact
on organizational culture, or that the so-called strong organizational culture is in the state to annul or
eliminate the effect of national culture.
However, certain scientifc studies have shown that, in terms of relations between national and
organizational culture, there is the reverse situation, respecting that national culture have a signifcant
impact on organizational culture. Thus, for example, Hofstedes study found that cultural values which
employees have brought into the organization can not be easily changed. Research conducted by
Andre Laurent have confrmed these Hofstedes conclusions. The results of his research has actually
shown that organizational culture does not diminish ncionalne differences between employees. And
not only does not diminish them, but it reinforces them. (Nikolic, S., fourth edition, p.165)
These and many other examples clearly show that the management in terms of internationalization
of business, must have different approaches to managing organizational units located in different
countries and in different national cultures. This is due to the fact that different national cultures in
various ways infuence the organizational culture, respectively on behavior of specifc members of
the organization.
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Due to the large impact of national on organizational culture, it is possible to speak of specifc types
of organizational cultures that exist within different national cultures. A signifcant contribution
to identifying the cultural specifcities of individual organizations, located in different national
institutional framework, have been given by Fons Trompenaars. The author, in 1994, based on two
continuum: gender orientation - orientation towards hierarchy and orientation to people - orientation
to the task, has defned four types of organizational culture, which fgure in the different national
cultures. These are:
incubator culture.
family culture
directed missile culture and
Eiffel Tower culture.
Source: S. Nikolic, p. 166
6. CONCLUSION
Every organization has a specifc program or method, or a strategy by which it achieves its planned
objectives. What particularly emphasizes the specifc organization is its specifc culture. In recent
years, many articles and books had been written on culture in organizations. This culture is usually
called corporative or organizational culture.
For culture is said to be moral, social and behavioral norms of an organization that are based on beliefs,
attitudes and priorities of its members. Culture is a complex pattern of beliefs, expectations, ideas,
values , attitudes and behaviors shared by members of an organization. If there are no appropriate
choices that will create a culture, then there is a dysfunctional behavior. The conclusion that inevitably
comes from all that had been said is that managers and all employees must not ignore the culture, but
they have to infuence its development and improvement.
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Reference
Hadzic A, Organizational structuring of companies subject to its development strategy and business policy,
PhD thesis, Banja Luka, 2006, Pan-European University Aperion, Faculty of Business Economics
Mihajlovic, D., Psychology in the organization, Belgrade, 2000.
Jovanovic-Bojinov, M., Zivkovic, M., Cvetovski, T., Organizational Behavior, Belgrade, 2003.
Jovanovic, M., Intercultural Management, Belgrade, 2004.
Mihajlovic, D., Psychology in the organization, Beograd, 2000.
Kukulea, S., Fundamentals of the theory of organizational systems, Belgrade, 1972.
Nikolic, S., Organization of Companies, Fourth Edition
Simic, I., Management, Nis, 2008.
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THE NETWORKING STRATEGIES CONTRIBUTION TO THE SMALL AND MEDIUM SIZED
ENETERPRISES PERFORMANCES
Biljana Predi
University of Ni - Faculty of Economics, Republic of Serbia
E-mail: biljana.predic@eknfak.ni.ac.rs
Danijela Stoi
University of Ni - Faculty of Economics, Republic of Serbia
E-mail: danijela.stosic@eknfak.ni.ac.rs
Abstract
In the modern business environment, a typical enterprise is a small or a medium sized (SME) one. Not only their
number, but also the contribution to the employment and value generated are the indicators of how important
they can be to a national economy. Thats way the competitiveness of the small and medium sized enterprises
sector is crucial to the competitiveness of the economy as a whole. However, in building, maintaining and
improving their competitiveness, small and medium sized enterprises are faced with certain obstacles. The
smaller size of small and medium sized enterprises is one of the main sources of the barriers that these
enterprises are faced with in realising higher business performances. Overcoming the barriers and improving
competitiveness on that basis more often requires for small and medium sized enterprises to network either
mutually or with big companies. Small and medium sized enterprises can improve their competitiveness by
creating and maintaining the network of relationships with other market participants. These network-like
structures can be an adequate frame for small and medium sized enterprises to access the needed resources and
competences. Basic logic that underlines the networking strategies is the idea that the cooperation is needed in
order to compete in the modern economy. The aim of this paper is to show possible effects of the networking
strategies, and to examine the realisation of these effects in a case of small and medium sized enterprises
clustering. In order to test the impact of the clustering on small and medium sized enterprises performances
the Niava District Textile Cluster has been chosen. This particular cluster has been chosen because the Niava
District was once known for its developed textile industry. However, this district, as well as its textile industry
is now underdeveloped, so there is a clear need to examine the effectiveness of certain existing business models
developed for their recovery. The dynamic of cluster members growth and development indicators during the
four year period shows that some improvements have been achieved. Nevertheless, further statistical analysis
does not confrm the existence of positive effects of this cluster on its members business performances, i.e.
their growth and development. The short clusters lifespan, effects of the world economic crisis and the most
important the inadequate structure and the support of the examined cluster are seen as the main reason for
this positive effects absence.
Keywords: clusters, networking, SMEs, growth and development, competitiveness
1. INTRODUCTION
Small and medium sized enterprises (hereon SMEs) comprise a majority of the enterprises in the
Republic of Serbia, as well as in the EU countries. Out of all enterprises in the EU and in the Republic
of Serbia 99.8% (Eurostat, 2011a, p. 11) and 99.4% (Statistical Offce of the Republic of Serbia,
2011a, p. 14) are the SMEs, respectively. Both in the EU and in the Serbia about two thirds of
employees are employed in the SMEs (Eurostat, 2011a, p. 11; Statistical Offce of the Republic of
Serbia, 2011a, p. 14). Also, a half, or more than a half of gross value added is generated in the SMEs
(Eurostat, 2011a, p. 11; Statistical Offce of the Republic of Serbia, 2011a, p. 15). These fgures
illustrate the importance of the SMEs for one economy. So, the growth and the development of these
enterprises can be a signifcant impulse for the growth and the development of the economy as a
whole. Anyway, in realising their growth and development goals, the SMEs are faced with certain
barriers that are mostly sourced in their smaller size. These barriers are mostly fnancial, but also
technical, and commercial in their nature.
The growth and the development limitations sourced in their smaller size are the impulse for the SMEs
networking either with the big companies, or with each other. As a way for overcoming the barriers
that they are faced with, the networking strategies can be the best way for the SMEs to realise their
growth and development goals and to improve their competitiveness. In that sense, the goal of this
paper is to identify the importance that networking strategies can have for the SMEs performances,
i.e. for developing, maintaining and improving of their competitiveness, and to analyze the practice
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and the effects of the textile SMEs networking in the Niava District. High unemployment is one
of the key problems in the Serbian economy, and especially in certain administrative districts in the
Serbian territorial organization. The need to examine whether the business models that can contribute
to the improvement of the SMEs performances are implemented, and how they are implemented
in the local business practice is becoming more and more important in the set of efforts aimed at
resolving the issue of high unemployment. Given the signifcant contribution of the SMEs to the
employment growth (The European Commission, et al., 2007, p. 38; Audretsch et al., 2009, p. 19;
Eurostat, 2009), one should expect that the improvement of the performances and the competitiveness
of these enterprises can help to reduce the high unemployment rates in the Republic of Serbia and its
Niava District. The unemployment rate in the Republic of Serbia has been constantly increasing in the
2008-2011 period (Statistical Offce of the Republic of Serbia, 2009, 2010, 2011b; Republiki zavod
za statistiku, 2011), and it is considerably higher if compared to the average unemployment rate at the
EU27 level. The unemployment rate in Serbia in April 2011 amounted to 22.2% (Republiki zavod
za statistiku, 2011), being at its maximum level in the last fve years. The registered unemployment
rate in Serbia is 12.7 percentage points higher than the average unemployment rate in the EU27
member states that in August 2011 amounted to 9.5% (Eurostat, 2011b). In the general environment
of high unemployment the position of the Niava District regarding this issue is even worse. The
unemployment rate in the Niava District is following the overall growing trend, and is above the
average unemployment rate in the Republic (Statistical Offce of the Republic of Serbia, 2009, 2010,
2011b). Regarding the unemployment rate, the Niava District is at the top of the districts with the
highest unemployment rates in Serbia. The unemployment rate in the Niava District in 2010, as well
as in 2009 was as much as 7.7 percentage points above the average unemployment rate in Serbia
(Statistical Offce of the Republic of Serbia, 2010, 2011b). In addition to the higher unemployment
rates, the fact that the average salary in the Niava District is lower than the average salaries at the
national level indicates that the Districts competitiveness is undermined (Statistical Offce of the
Republic of Serbia, 2011c). The analysis of the SMEs networking practice in the Niava district is
supposed to indicate the potential, but also the realized contribution of the certain networking strategies
to the performances of the networked entities. Assuming that the improvement of the labour-intensive
sectors performances is particularly important for the reduction of the high unemployment, and a
long tradition of the textile industry in the Niava district, the Niava District Textile Cluster has been
selected for the assessment of the practice and the effects of the SMEs networking.
After presenting certain basic characteristics of the SMEs performances and the barriers for their
improvement, the term and the business networks possible contribution to the business competitiveness
of its members will be analyzed. Special attention will be paid to the analysis of the effects that certain
types of networking strategies can have on the competitiveness improvement, and thus on the SMEs
growth and development. In order to examine the actual contribution of the clustering to the textile
SMEs performances in the Niava District, the methodology and the results of the research will be
presented in the second part of the paper. After analyzing the results, certain conclusive remarks and
recommendations for the improvement of the SMEs cluster networking in the Niava District will
be presented.
2. THE IMPORTANCE AND FORMS OF THE SMES NETWORKING STRATEGIES
Barriers for the performances improvement and for the SMEs growth and development are mostly related to
their size and the fact that the resource base and the organizational capacity of these enterprises are limited
both in quantitative and qualitative terms (Predi and Stoi, 2011). The endangered liquidity and other fnance
related challenges, the evident need for training the managers and other employees, outdated technology,
regional imparity regarding the IT and technological capacity (with the obvious lagging of the SMEs from
the Eastern and Southern Serbia region), an unsatisfactory level of compliance with the requirements of the
quality standards, and the low level of R&D activities are some of the basic characteristics of SMEs functioning
in the Republic of Serbia (Republika agencija za razvoj malih i srednjih preduzea i preduzetnitva,
2009; Nacionalna agencija za regionalni razvoj, 2010, 2011). Also, the SMEs productivity is lower than
the average productivity in the economy as a whole (Eurostat, 2011a; Statistical Offce of the Republic of
Serbia, 2011a).
One of the possible ways for the SMEs to overcome the shortcomings of their smaller size are the
strategies of networking. The underlining idea of networking is to cooperate in order to compete
more effectively. Creating a network-like structure of relationships may be easier, faster and/or more
cost effcient way of building, maintaining or improving the competitiveness of these enterprises.
Business networks are more or less complex structures of business and other entities and their mutual
relations (Kambil and Short, 1994; Holmlund and Trnroos, 1997; Podolny and Page, 1998; Yeh-
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Yun Lin and Zhang, 2005; van Liere, 2007; Aoyama et al., 2010). Relations between the members of
the business networks include multidirectional informational, fnancial and material fows between
related parties, so these relationships are more substantial and complex than purely transactional ones
(Holmlund and Trnroos, 1997). The development, maintenance and improvement of the business
networks relationships are based on the reciprocity in the exchange (Powell, 1990), trust (Johnston
and Lawrence, 1988; Holmlund and Trnroos, 1997; Podolny and Page, 1998; Child, Faulkner and
Tallman, 2005) and partners commitment to the relations (Dore, 1983; Anderson and Weitz, 1992).
A business network, as a platform for competing in modern environment, provides access to the
resources, competencies, technology and knowledge located outside the boundaries of an individual
company (Henderson, 1990; Powell, 1990; Podolny and Page, 1998; Gulati, Nohria and Zaheer,
2000; Child, Faulkner and Tallman, 2005; van Liere, 2007). A business network can be a framework
for members to jointly perform their business activities, for costs and risks sharing and, therefore,
for achieving higher levels of the effciency and the effectiveness, the economies of scale and scope
along the entire value chain (Powell 1987; Johnston and Lawrence, 1988; Gomes-Casseres, 1994;
Kumar, 1996). For its members, the business network may be an important internal supply and/or sale
market (Dore, 1983).
The basis for the competitiveness improvement through cooperation has been looked upon in different
theories and concepts. Although different, the theoretical frameworks explaining the cooperation motives
do not have to be seen as mutually exclusive. Moreover, the multi-dimensional nature of doing business
requires a comprehensive analysis of the cooperation motives. In this sense, the cooperative arrangements are
seen as a way for companies to respond to the external challenges in situations where there is no an internal
potential to respond appropriately by the eclectic theory of motivation for cooperation (Child, Faulkner and
Tallman, 2005). In the environment of dynamic changes, globalized supply and demand which intensifes
the competition and makes the consumers more demanding, business networks are becoming increasingly
an important frame for building, maintaining and improving the business competitiveness (Ohmae, 1989;
Powell, 1990; Snow, Miles and Coleman, 1992; Kumar, 1996; Child, Faulkner and Tallman, 2005).
By providing the opportunity to realize the benefts of the bigger size, based on the of resources and skills
networking, as well as carrying out joint activities, with no loss of independence and fexibility typical
for the small companies, business networks are one way for the SMEs to overcome the barriers that they
are faced with in achieving their growth and development goals. For the SMEs, a membership in business
networks can be a way of improving the organizational knowledge given the fact that business networks can
be a frame for various aspects of the organizational learning to take place (Child, Faulkner and Tallman,
2005, pp. 275-279).
The SMEs networking is a complex phenomenon with a numerous forms of manifestation, different
structures and motivation base. Depending on the size of the networking partner, the SMEs can
follow the strategy of mutual networking, or the strategy of networking with the big companies.
Direct competition with large companies often is not the best way for the SMEs to improve their
performances. Instead, the better way to improve their competitiveness is to become a part of some
kind of vertical business network by partnering with big companies (Predi and Stoi, 2011).
Networking with big companies can be a chance for small ones to modernise themselves and to realise
their growth and development goals by reaching the selling and procurement markets, and also a form
of a needed technical support (Taymaz and Kiliaslan, 2005). In a network with a dominant partner, which
is characterized by the stable and secure sale and cash fows (Child, Faulkner and Tallman, 2005), the
SMEs can fnd a solution for their liquidity problem, and, sometimes, even for their survival.
The SMEs mutual networking in a form of horizontal or vertical cooperation can be a base for their
competitiveness improvement (ibid). Horizontal cooperation should contribute to the economy of
scale and scope, while the vertical cooperation should be a frame for the positive effects of the
specialisation based on the core competences of the each of the vertically connected partners. By
networking with each other the SMEs can improve their position relative to the Porters fve competitive
forces (Porter, 1980) by creating a critical mass of resources and competences. Thus mutual connected,
the SMEs can overcome the shortcomings of their smaller size and as a group of networked partners
they can become stronger negotiators and competitors. Also, the SMEs mutual cooperation can be a
base for lowering the resource dependence from the environment and therefore for improving their
competitive position. One of the most common forms of the SMEs mutual networking is clustering.
Porter (1998, p. 78) defnes clusters as a group of interrelated frms located in a limited geographic
area. Cluster members are parts of a same supply chain (input providers, producers, distributors),
but can also be from related industries. The networked members value chains create clusters value
system that becomes a joint assets and a source of a clusters competitiveness. Clusters can contribute
to the productivity and innovation capabilities of its members, and also can intensify the competition
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by facilitating the new business formation (ibid, pp. 81-84). The geographical proximity of the cluster
members is the basis for realizing the agglomeration effects, i.e. the enhancement of the cost effciency through
carrying out activities in a limited area (Pandit and Cook, 2003). The geographic concentration of the cluster
members indicates the concentration of the resources supply and demand, facilitates the development of trust
and the transfer of knowledge, and also the establishment of specifc infrastructure and institutional support
to the cluster members (Porter, 1998; Pandit and Cook, 2003; Karaev, Koh and Szamosi, 2007). Easier
access to the resources and to the selling market can be the main impetus to the SMEs growth and development.
The clusters reputation can be a substitute for the missing corporate reputation, since the SMEs in most cases
do not have a developed reputation (at least not one widely known). The transfer of the clusters image
to its members (Pandit and Cook, 2003) is one of the possible basis for improving their performances and
competitiveness. Clusters reputation can contribute to the SMEs internationalization goals (Zyglidopoulos,
De Martino and McHardy Reid, 2006). The reputation that certain cluster has is its members common
property and a resource that competitors outside the cluster can hardly imitate. Given the described clusters
characteristics and the possible clustering effects, it is reasonable to expect that this model of SMEs mutual
networking can have certain contribution to the improvement of the SMEs performances.
3. The Niava District Textile Cluster
With an idea to help improving the competitiveness of the textile SMEs in the Niava District, the
Niava District Textile Cluster (NDTC) was founded in the 2008. The intention was to improve
members market position by reducing the shortcomings of their smaller size and developing a
recognizable textile brand. This business network was founded by the textile enterprises located in
the Niava District
1
. As a framework for networking and, on that basis, for improving the competitiveness of
its members, this cluster is an organized association of companies whose representatives are members of the
clusters Assembly, the Managing Board and the expert boards. At the time when this study was realized
the total number of cluster members was 46. Except one member (Nitex), all other cluster members
are the SMEs with 30 employees, on average. It is important to notice that, except one, all of the
cluster members are located at the same phase of the value generation chain production of the fnal
goods. Input suppliers or service providers
2
are not cluster members, although the cluster was initially
designed as a framework for developing both the horizontal and the vertical connection between the
value creators. Furthermore, the NDTC is located in a university centre but, still, no academic or
research institution support the clusters activities.
The main motives for joining the cluster (Figure 1) lead to a conclusion that the clusters members
need an overall business support. The main areas of the needed support refer to marketing (market
research, promotion, selling), production (technology), fnance (joint investment, information about
credit lines and funds and other fnancing sources), research and development (knowledge transfer
and innovations).
Figure 1: Networking motives for the Niava District Textile Cluster members (based on the Clusters internal
documentation)
1 Niava District is divided into 6 municipalities and the City of Ni, which is divided into 5 municipalities. The
municipalities of the District are: Aleksinac, Svrljig, Meroina, Raanj, Doljevac, Gadin Han. The municipalities of
the City of Ni are: Medijana, Nika Banja, Palilula, Crveni Krst, Pantelej.
2 Only one of the members is provider of associated services, i.e. equipment maintenance.
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4.METHODOLOGY
In order to analyse the cluster members performances and to assess the NDTC contribution to the improvement
of their competitiveness, the sample of 12 cluster members has been chosen. In forming the sample we were
limited by the available data the data that were the basis for following the dynamic of the chosen indicators
in the period before (2006/2007), and the period after (2008/2009) joining the cluster. Besides the internal
documentation of the Niava District Textile Cluster, as a data source for calculations, graphical illustrations
and related analysis, The Register of the Financial Statements and Data on Solvency of the Legal Entities
and Entrepreneurs has been used. This Register can be found at the offcial web site of the Serbian Business
Registers Agency (2010). The structures of the sample and of the cluster as a whole show similarity, as it can
be seen from the Table 1. Therefore, the sample has been taken as a representative one.
Table 1: Comparative review of the samples and the clusters structure
Average num-
ber of employ-
ees
Export (%) Product range (%)* Age (%) Lohn jobs (%)
Yes No W W K
Up to 5
years
5-10 >10 Yes No
Sample 32 66 33 30 30 30 10 42 33 25 23 77
Cluster 30 46 54 29 24 13 10 38 14 34 37 63
*Confection: Women and Men - WM; Women - W; Kids - K; Men -
Results obtained on the basis of: The Niava District Textile Clusters internal documentation
The clusters contribution to the SMEs performances has been assessed by analyzing the networked
enterprises indicators of growth and development. Namely, because of their resource poverty
(Welsh and White, 1981, p. 18) the SMEs are faced with certain problems in the feld of measuring
their own performances. When they do measure them, SMEs are largely focused on monitoring the
fnancial and, eventually, the operational performances (Hudson, Lean and Smart, 2001; Davig, Elberth
and Brown, 2004; Garengo and Bernardi, 2007; Cocca and Alberti, 2010). The problem of lacking the
data that could be the basis for a holistic analysis of the SMEs performances methodologically has
focused the assessment of the NDTC contributions to its members performances on the monitoring
and evaluation of their growth and development indicators. Namely, Serbian enterprises have a legal
obligation to determine and to submit data on this indicators value, so this data can easily be found
in the mentioned Register of the Financial Statements and Data on Solvency of the Legal Entities
and Entrepreneurs (The Serbian Business Registers Agency, 2010). This assessment of the clustering
contribution to the SMEs performances has been based on the assumption that the improvement of
the performances leads to the growth and development of these enterprises.
The growth and the development of the NDTC members have been analysed on the basis of the
dynamics of the chosen indicators. Changes of the total assets, number of employees and operating
income have been chosen as the adequate indicators of the NDTC members growth. Namely, the
Serbian Accounting and Auditing Law (National Assembly of the Republic of Serbia, 2006) defnes
the operating assets, number of employees and operating income as criteria for determining the size
of the enterprises. Therefore, the value changes of these criteria indicate the enterprises size change,
i.e. their growth. Back to the NDTC members growth assessment, it can be noticed that the value
of the total assets, not the operating assets as the Accounting and Auditing Law suggests, has been
chosen as a growth indicator. This was done due to the available data. So, before judging the growth
of the NDTC members on the basis of the total assets dynamic, instead of following the value of the
operating assets, the relevance of the chosen indicator had to be assessed. According to the offcial
form of the Financial Statements prescribing the rules on the content and the layout of the fnancial
statements (The Serbian Register Agency, 2011), the Total assets position (AOP 024) includes both
the Operating assets (AOP 022), and the Loss above equity (AOP 023). Thus, the value of the total
assets can be a substitute for the operating assets value only if there is no loss above equity. Closer
review of the data that refer to the chosen sample of the NDTC members showed that except in the
case of one cluster member (enterprise number 9
3
), in other enterprises there is no loss above equity
registered during the entire analysed period. Bearing this in mind, it has been concluded that the value
of the total assets can be an adequate basis for the operating assets dynamic analysis.
Relative to the other available data, the net proft is the most complete indicator of the business
success. So, the dynamic of the NDTC members net proft has been accepted as an adequate indicator
of their development. Assessment of the NDTC members growth and development has been based
upon the yearly dynamic of the chosen indicators during the period between 2006 and 2009. The
3 This enterprise has registered loss above equity only in one year of the analysed period. In this year the loss above
equity of this enterprise was 11% of its total assets value.
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members growth and development indicators were followed during the 2008 and the 2009 because
these were the years of the NDTC most active engagement in realising its support activities. The two
previous years, i.e. the 2006 and the 2007 were chosen as years that have preceded the period of cluster
membership. In order to achieve a higher comparability level of the results obtained, the fnancial indicators
values, which are given in the RSD by the used data sources, have been expressed in the EUR values. The
values have been recalculated on the basis of the average exchange rate in the year which the indicators relate
to (Narodna banka Srbije, 2010). In order to examine if there was a NDTC membership contribution
to the growth and the development, the values of those indicators have been grouped into two time
series one referring to the period before (2006/2007), and the other to the period after (2008/2009)
the analysed enterprises have joined the cluster. In order to determine whether the differences in the
indicators levels before and after entering the cluster are statistically relevant the data were analysed
by using an appropriate statistical test. For the purpose of choosing the statistical test, the hypothesis
about the normality of the data distribution for all chosen indicators has been tested. The results
have shown that the data do not have normal distribution for the both data series regarding all
chosen indicators (p < 0.05). The results from the two periods (2006/2007 vs. 2008/2009) have been
therefore compared using the nonparametric Mann-Whitney test. Conventional probability value p <
0.05 has been considered signifcant.
5. RESULTS
Table 2 shows the total assets by enterprises the NDCT members, and the average total assets values
by years of the analysed period.
Table 2: The total assets by enterprises and the average total assets for the sample, per annum of the 2006-2009 period
Enterprise
Year
2006 2007 2008 2009
1. Balextra 101
*
148 143 104
2. Cameleon 48 142 191 181
3. David 275 279 303 310
4. Kassker 354 427 642 727
5. Raneli 193 240 419 403
6. Statex 364 363 357 313
7. VK Group 513 787 1259 1489
8. Vogeli 114 188 329 384
9. Alter ego 151 215 275 322
10. Hajdi Baby 188 285 414 393
11. Pearac 698 819 839 683
12. Pepeljuga 8 11 17 15
X SD 250.58 202.54 325.33 247.63 432.33 339.19 443.76 387.99
Results obtained on the basis of: The Register of the Financial Statements and Data on Solvency of the Legal
Entities and Entrepreneurs
*
in 000 Euros
It can be noticed that the average total assets value is increasing during the entire analysed period.
After the more intense growth during the frst two years of the period (2007, 2008) the average values
of the total assets continued to increase with less intensity (Figure 2).
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Figure 2: The average value of the total assets for the sample of the NDTC members during the 2006-2009 period
As it was mentioned before, during the relevant period, besides one, no other of the analysed NDTC
members have registered loss above the equity. Bearing that in mind, the recorded growth of the
average value of the total assets can be contributed to the growth of the average value of the operating
assets of the cluster members.
The total assets values for the analyzed enterprises have been grouped into two data series in order to
determine the relation between the average values of the total assets in the period before (2006/2007)
and the period after (2008/2009) joining the cluster. Comparative analysis of the average values of
the total assets in the period before and the period after joining the cluster shows that the total assets
increased in the later (Figure 3). This difference in the total assets value can lead toward a conclusion
that cluster membership contributed to the growth of the total assets of the NDTC members. Testing
this conclusion required a test of statistical relevance of the recorded difference to be taken. Even
though its obvious that the total assets increased in the period after joining the cluster, Mann-Whitney
test shows that this difference in average values is not statistically signifcant (p=0.078).
Figure 3: The average values of the NDTC members total assets before (2006+2007) and after joining the cluster
(2008+2009)
The value of one of the criteria which determines the size of an enterprise operating assets (or the
total assets in this case) is constantly increasing during the analysed period. Based on this criterion
only, the NDTC members grew in the period after they had joined the cluster.
The number of employees by enterprises, as well as the average number of employees in the sample
is shown in the Table 3.
Table 3: The number of employees in the analysed enterprises and the average number of employees per annum of the
2006-2009 period
Enterprise
Year
2006 2007 2008 2009
1. Balextra 17 19 24 26
2. Cameleon 11 15 28 41
3. David 48 57 63 67
4. Kassker 50 45 45 44
5. Raneli 7 7 14 20
6. Statex 22 23 22 18
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7. VK Group 28 40 69 83
8. Vogeli 18 18 29 32
9. Alter ego 11 27 35 19
10. Hajdi Baby 17 23 20 22
11. Pearac 7 10 9 7
12. Pepeljuga 1 1 3 2
X SD 19.75 15.47 3.75 16.38 30.08 20.20 31.75 23.78
Results obtained on the basis of: The Register of the Financial Statements and Data on Solvency of the Legal
Entities and Entrepreneurs
During the entire analysed period the average number of employees is rising. As it was the case with
the average value of the total assets, after the more intense growth during the 2007 and 2008, the
growth of the average number of employees is slower in the rest of the period (Figure 4).
Figure 4: The average number of the employees in the NDTC members during the 2006-2009 period
Once again the average value of the indicator is higher in the years after entering the cluster, relative
to the years before joining the cluster (Figure 5). So, when it comes to the number of employees as
a criterion of a size, it can be stated that the NDTC members grew after they had joined the cluster.
However, Mann-Whitney test shows that the difference in these average values is not statistically
signifcant indicating that the cluster membership was of no importance for the recorded employment
growth (p=0.095).
Figure 5: The average number of the employees in the NDTC members before (2006+2007) and after (2008+2009)
joining the cluster
The third size indicator is the average yearly value of the operating income. The values of this indicator
by enterprises and the average values for the sample are shown in the Table 4.
Table 4: The operating income by enterprises and the average operating income during the 2006-2009 period
Enterprise
Year
2006 2007 2008 2009
1. Balextra 104
*
120 161 139
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2. Cameleon 44 133 169 190
3. David 228 257 300 259
4. Kassker 211 346 378 400
5. Raneli 672 621 717 580
6. Statex 249 438 345 292
7. VK Group 649 1053 1464 1645
8. Vogeli 111 272 464 444
9. Alter ego 234 302 275 83
10. Hajdi Baby 196 232 206 173
11. Pearac 43 56 74 116
12. Pepeljuga 14 15 18 10
X SD 229.58 217.23 320.42 285.17 380.92 388.68 360.92 436.37
Results obtained on the basis of: The Register of the Financial Statements and Data on Solvency of the Legal
Entities and Entrepreneurs
*
in 000 Euros
During the frst two years of the period (2007, 2008) the average value of the operating income had
increased (Figure 6). This growth was stopped during the 2009 when the 5% drop of the average
operating income was registered.
Figure 6: The average value of the operating income of the NDTC members during the 2006-2009 period
Although there is an evident difference in the average value of the operating income in the years
after the analysed enterprises have joined the cluster, relative to the period before entering the cluster
(Figure 7), the Mann-Whitney test once again shows no statistically relevant difference in those
average values (p=0.409).
Figure 7: The average value of the operating income of the NDTC members before (2006+2007) and after (2008+2009)
joining the cluster
Compared to the other available data, net proft is the most complete indicator of the companys
business success. As the whole business activity of an enterprise can be seen through the prism of
its net proft, the dynamic of this indicator has been chosen as a base for assessment of the NDTC
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members development in the analysed period. Table 5 shows the net proft by enterprises and the
average net proft for the sample per annum of the analysed period.
Table 5: Net proft by enterprises and the average net proft during the 2006-2009 period
Enterprise
Year
2006 2007 2008 2009
1. Balextra 2.80* 4.65 4.41 2.71
2. Cameleon 0.25 36.31 25.41 2.40
3. David 2.38 2.65 4.87 4.59
4. Kassker 1.59 5.39 0.94 4.60
5. Raneli 30.74 22.96 28.28 21.33
6. Statex 2.21 3.38 5.35 1.64
7. VK Group 101.87 279.77 312.41 115.61
8. Vogeli 1.50 5.41 4.75 23.47
9. Alter ego 0.08 2.14 0.76 0
10. Hajdi Baby 4.78 6.41 3.38 1.16
11. Pearac 8.14 11.05 0.06 0.19
12. Pepeljuga 1.40 0.47 0.22 0.56
X SD 13.15 29.17 31.72 78.80 32.57 88.64 14.86 32.73
Results obtained on the basis of: The Register of the Financial Statements and Data on Solvency of the Legal
Entities and Entrepreneurs
*
in 000 Euros
Similar to the operating income dynamic, after an initial growth during the 2007 and 2008, the average
value of the net proft has been decreasing since 2008 (Figure 8).
Figure 8: The average net proft of the NDTC members during the 2006-2009 period
Values of the average net proft grouped into two time series show that the average net proft had
increased in the period after the analysed enterprises had entered the cluster (Figure 9). As it was
the case with the indicators of growth, the Mann-Whitney test shows no statistical relevance of the
recorded difference in the net proft average values (p=0.477).
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Figure 9: The average net proft of the NDTC members before (2006+2007) and after (2008+2009) joining the cluster
6. THE RESULTS ANALYSIS
Assuming that the performances improvement would be refected into the growth and development indicators
dynamic, the contribution of the cluster networking to the set of the SMEs performances has been evaluated
on the basis of the growth and development of these enterprises in the period before and after joining the
cluster. The presented dynamic of the total assets (the operating assets) and the number of employees
shows that the sample enterprises have constantly grown in terms of these two indicators of size
during the analysed period (2006-2009). When it comes to the operating income value, as the third
criterion of the size, after an initial growth during the 2007 and 2008, this indicator has decreased in
the last year of the analysed period.
It can be assumed that the income drop has been mostly caused by the effects of the economic
crisis and especially by the reduced consumers buying power which affected the clusters members
market. Even though a certain growth has been achieved, most of the sample enterprises have not
still changed their size status, except one enterprise that has become medium sized, while all other
remained in the group of small enterprises. Regarding the development of the NDTC members, it
has been judged upon the dynamic of the members net proft. Similar to the operating income, the
average net proft has increased during the 2007 and 2008. During the 2009 the economic crisis
affected the cluster members operations and led to the drop in the realised net proft.
In order to examine the NDTC contribution to the recorded dynamic of the analysed indicators, the
values of each of the analysed indicators have been grouped into two time series referring to the
period before and the period after joining the cluster. This analysis shows that the enterprises grew in
terms of all tree growth indicators in the period after they had joined the cluster, relative to the period
before (Table 6). Also, as the value of the average net proft is higher in the period after entering the
cluster, it can be stated that the NDTC members did develop their businesses after they had become
cluster members. Still, Mann-Whitney test shows that these differences in average values are not of
any statistical importance.
Table 6: Summary of the indicators values before and after joining the NDTC
Before joining the NDTC
(2006/2007)
Afer joining the NDTC
(2008/2009)
Total n 12 12
Total assets 287.96 438.0
Number of employees 21.75 30.92
Operating income 275.0 370.92
Net proft 22.43 23.71
Results obtained on the basis of: The Register of the Financial Statements and Data on Solvency of the Legal
Entities and Entrepreneurs
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Although the increase in all chosen indicators of the growth and the development (total assets, number
of employees, operating income, and net proft) in the period after joining the cluster is evident, the
statistical (Mann-Whitney) test shows that these increments are not of any statistical importance. The
Mann-Whitney test results suggest that cluster membership did have no effect on the growth and the
development of the NDTC members.
A possible explanation of the fact that no evidence of statistically important difference was found
could be the short period between the establishment of the NDTC and the measurement of the chosen
indicators levels. It can be argued that none of the possible positive effects of the cluster membership
can be realised in the given time frame. At the same time, the existence of the positive differences in
the levels of the measured indicators, could call for further analysis of the cluster contribution to the
growth and the development of its members. But, the organisation and the pool of the NDTC support
activities are more probable reasons for failure of this cluster in trying to help its members to improve
their market position and competitiveness. As it was mentioned earlier, the NDTC members need an
overall business support along the entire value chain. On the other hand, a closer examination of the
NDTC support activities reveals that the clusters support to its members was limited on the marketing
support. Moreover, even the support related to marketing was restricted to helping in organising fair
presentations, conducting sales promotion activities (printing catalogues and other publications) and
other forms of communicating with the environment. The help in the market research activities,
in defning the positioning strategies, and in the development of the recognizable brand, although
proclaimed, these forms of support were left out the marketing support that cluster members had
received.
Limited scope of the support that the NDTC did provide for its members was not enough to back
their growth and development goals. Moreover, the possible effects of a vertical networking were
not realised due to the fact that almost all the NDTC members are located at the same phase of the
value generation chain production of the fnished goods. A cluster that does not connect successive
members of the supply chain has a limited potential in ensuring an internal supply and selling
market. Moreover, when all the clusters members are producers of fnished goods, the effects of
complementary competencies can not be expressed. Spreading the scope of the NDTC support along
the value chain (to the production, human resources, fnance, research & development), but, also,
spreading the cluster itself along the supply chain (to include suppliers, service providers, marketing
channels) could lead to the realisation of the cluster networking positive effects.
7. CONCLUSION
The SMEs participation in the total number of the enterprises, employment and gross value added
generation shows the importance of these enterprises for a national economy. But, the possibilities for
the SMEs growth and development are limited, mostly because of their smaller size. Creation of the
network-like structure of relationships with the partners of a same, or a bigger size becomes a way
for these enterprises to overcome the barriers that limit the potential for improved performances and
competitiveness. The theoretic considerations of the networking logic indicate that the networking
strategies can be an important way for the SMEs to improve their competitiveness.
Clusters as a form of mutual networking of the textile SMEs in the Niava District are supposed to be
a way to improve the competitive position, but often also a way for these enterprises to survive the
competitive pressure. The former big textile companies in the South Serbia region didnt survive the
transition process. Non-existence of the big leaders which would pull the growth and the development
of the related SMEs indicates the necessity for SMEs mutual networking in order to improve their
performances and competitiveness. However, although both the theory and the international practice
affrm the networking strategies as a way of the SMEs growth and development, the results of the
study undertaken indicate that the domestic practice shows some problems in understanding and
implementing these strategies.
Overcoming the operative barriers and improving the competitiveness of the SMEs were the main
motives for forming the Niava District Textile Cluster. Still, the expressed need of the cluster
members for an overall business support was not fulflled. Exclusively horizontal networking, one-
dimensional clusters support activities and the negligence of the academic potential of the region
are possible reasons for the absence of the clusters contribution to the performances, and therefore
to the growth and development of its members. But, this absence of the clusters contribution can
also be explained on the base of the short period of clusters existence and the fact that the period
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that has been analyzed as a period of cluster membership is at the same time the period of the world
economic crisis manifestation. Nevertheless, it seems like the structural shortcomings and narrow
base of the clusters support activities cannot be annulled by the characteristics of the analyzed
period. Crisis or not, the question is whether there can be any positive contribution of the cluster that
is organized like the analyzed cluster is, and the cluster which only form of support is limited to the
local promotion. Moreover, solving the specifc problems of the SMEs asks for a wider institutional
base. This primarily refers to the need for a broader support that academic institutions located in the
city of Ni can give to the cluster. Staff training, knowledge, information and modern management
practice transfer are some of the areas in which help of the academic institutions can back the SMEs
business performances, their growth and development.
Clustering is becoming a signifcant form of the SMEs mutual networking in the Niava District
(Ministry of Economy and Regional Development, 2010). The results of the conducted research of
the NDTC contributions to the performances, i.e. growth and development of its members suggest
that the realisation of the full clustering potential presuppose an adequate clusters structure, and
a well targeted range of the clusters support. In the process of structuring the business networks
in general, and of clusters as well, it should be kept in mind that the realisation of the effects of
the members value chain complementarities requires an adequate range of vertical connections and
cooperation. Therefore, the cooperation should exist with downstream and upstream members of
the supply chain, in addition to the horizontal SMEs relations established in order to solve common
problems. Recognizing the more prominent focus of the economic entities to the certain value chain
activities, and, thus, the greater interdependence and complexity of the value generating process
it becomes clear that the completion of the value that will be delivered to the consumer requires
cooperation along the entire supply chain. When it comes to the business networks that are organized
like the analyzed cluster is, the spectrum of the clusters support should be defned on the basis of
the cluster members identifed needs and requirements. The narrow focus of the support activities
will not contribute to the cluster members performances when their competitiveness is endangered
in multiple ways. It is therefore necessary to extend the clusters support, or at least to focus it on the
support needed to overcome those problems that are in the core of the weakened competitiveness.
Anyway, the support must be based on the users, i.e. cluster members real needs.
Using the research and development potential should be one of the pillars of the SMEs clusters that
are located in the university centres. The transfer of knowledge, support to the innovation activities
and help in defning solutions to the specifc problems are some of the possible academic communitys
contributions to the improvement of the cluster members competitiveness. The University of Ni,
with its thirteen faculties with more than 1,500 professors and associates, and with about 30,000
students (University of Ni, 2011), is an important scientifc and research potential of the region.
Cooperation with the faculties in organizing various training programs for employees and managers,
then, in joint realization of the research and development projects aimed at specifc SMEs needs, as
well as the recruitment of skilled labour force are some of the areas of the cluster members-academic
community needed cooperation.
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WORKING CONDITIONS AND EFFICIENCY
IN MANUFACTIRING ENTERPRISES OF THE SPLIT-DALMATIA COUNTY (REPUBLIC OF
CROATIA)
Mario Bogdanovi
Faculty of Economics, University of Split, Republika Hrvatska,
E-mail: mario.bogdanovi@efst.hr.
eljko Mateljak
Faculty of Economics, University of Split, Republika Hrvatska
E-mail: zeljko.mateljak@efst.hr.
Abstract
Organisational effciency of an enterprise depends on the workers attitude and the existing working conditions.
Therefore good working conditions lead to good attitude to work and regularly result in numerous benefts:
higher productivity, better capacity utilization, higher coeffcient of inventory turnover, shorter inventories
period, reduced scrap, shorter production cycle, shorter delivery time, shorter delays, minimized idle run in
production process, improved work energy and health in workers, lower rate of absenteeism, lower costs due
to injuries at work and occupational diseases, lower rate of sick leaves, reduced fuctuation costs, and better
work satisfaction and motivation in general.
This paper presents a research into basic elements of working conditions (temperature, humidity, airing, lighting,
noise, vibrations, radiation, cleanliness, colours, tidiness and organization of the workplace, and other important
conditions mentioned by the surveyed workers)and organizational effciency (product and service quantity and
quality, utilization of available human and capital resources, ability to predict problems and ways of solving
them, workers familiarity with innovations, adaptability to changes, workers adaptability in contingencies)in
manufacturing enterprises of the Split-Dalmatia County (Republic of Croatia). Measuring of work conditions
was carried out by a six-scale (0-5) Likert-type questionnaire, whereas perceived organizational effciency was
measured by a fve-scale (0-4) Likert-type questionnaire. The research was carried out on the sample of seven
manufacturing enterprises from different industries with the total of 144 respondents.
The analysis of results was carried out on two levels:
Overall working conditions in all the surveyed manufacturing enterprises (determining descriptive
data, arithmetic means and standard deviations, and correlating each element of working conditions to
organizational effciency).
Working conditions in each of the seven manufacturing enterprises to determine specifc working
conditions statistically signifcant for a particular industry.
The research results determine the frequency of particular positive and negative working conditions in
manufacturing enterprises of the Split-Dalmatia County as well as statistically signifcant correlations of
particular working conditions to organizational effciency at two analysis levels (overall for all enterprises and
for each one in particular).
Keywords: working conditions, organizational efficiency, manufacturing enterprises, Split-Dalmatia County,
Republic of Croatia.
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1. INTRODUCTION
Correlation between working conditions and business results (organizational effciency) and the
impact of working conditions on organizational effciency have been researched in terms of different
contents of working conditions in companies. Namely, the concept of working conditions has a wide
content. Thus, for example, the research of working conditions can focus on detrimental and benefcial
factors infuencing performance which can be divided into three groups:
Objective physical-chemical working conditions that have a direct impact on human body
such as temperature and its oscillations (cold, heat), air humidity, lighting, vibrations, air purity
and pollution (fumes, dust, dirt), noise, radiation (ultraviolet, x-ray, radioactive, magnetic
and other forms of radiation originating from equipment, e.g. in welding), lighting, available
space, cleanliness of materials to be processed, suitable tools and appliances, cleanliness and
tidiness of the work area, etc. (Rasanen et al., 1997; Bulat, 1976; Stevenson, 2009; Fischer et
al. 1998; Gavhed and Toomingas, 2007; Kroemer and Grandjean, 2000; Drobac, 2006; Saurin
and Ferreira, 2009, Slack et al., 2010)
Psycho-physical working conditions by which the worker responds to performance
requirements referring to the effect on human physiology (static work, dynamic work, physical
work, intellectual work) and referring to repetitive activity of the same group of muscles,
to holding and carrying objects, walking, cognitive-emotional engagement that can result in
stress, etc. (Cf. Rasanen et al., 1997.; Bujas, 1964.; Platonov, 1966.; Laird and Laird, 1964.).
Psychosocial working conditions that indirectly affect human organism and are infuenced
by the working group. These may be: conficts between co-workers, conficts between
subordinates and superiors, perception of job insignifcance, competition between co-workers,
perception of work (dis)organisation, job (in)security, job content, social conditions of work,
way of work planning, perception of workspace (in)convenience, e.g. colours, music, spatial
layout, feeling of alienation and monotony, feeling of frustration and irritation, lack of trust
between employees, and generally poor working and psychosocial climate and corporate
culture resulting in reduced or wrong motivation (Laird&Laird, 1964, Cohen et al., 1992;
Stevenson, 1993; Rasanen, 1997; McCormick and Ilgen, 1996.; Petz, 1987.; Greenberg and
Baron, 1997; Frieling at all, 1997, Laitinen et al., 1998; Fredriksson et al, 2001; Skargren and
Oberg, 1999; Ostry et al., 2001; Bokovi, 2006, Jablonska et al., 2006).
Besides the above mentioned working conditions there are also those that can be classifed over all
the three categories, such as: stressful job (various forms of stressors), workspace tidiness, working
time (long hours and tiredness of commuters), shift work and night work, (im)possibility of rest and
total regeneration of employees, teamwork, safety at work, job security, equality of blue-collar and
white-collar workers, occupational and health safety, ethical-legal protection (violation of employees
rights may result in stress, resistance and lower productivity), strain due to inconvenient appliances,
tools and other equipment (Veljovi et al., 2006; Cigula et al., 2002).
Good working conditions are indispensable in living and working improvement systems and beside their
ethical dimension they lead to optimal effort in workers which causes increased labour productivity (Bulat,
1976). Consequently, it is obvious that working condition are a complex issue undoubtedly affecting labour
effciency. Therefore it is important to determine which are they and how to treat them in order to improve
organizational effciency.
The aim of this research was to determine the correlation between working conditions and organizational
effciency, and to determine which working conditions are vital for effciency in a particular industry.
In accordance with this aim, the research problems were defned in the following way:
What is the correlation between working conditions and organizational effciency in
manufacturing companies of the Split-Dalmatia County in Republic of Croatia?
Which are the crucial (statistically signifcant) working conditions in manufacturing companies
from different industries (manufacturing of car parts, metal processing, textiles, shipbuilding,
fsh processing, manufacturing of dairy products, alcoholic and non-alcoholic beverages)?
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2. RESEARCHING CORRELATION BETWEEN WORKING CONDITIONS AND
ORGANIZATIONAL EFFICIENCY IN MANUFACTURING ENTERPRISES OF THE SPLIT-
DALMATIA COUNTY
2.1. Research method
The starting point of this research was that working conditions in manufacturing enterprises could
be examined by a comprehensive questionnaire. For that purpose a questionnaire was created
dealing with physical working conditions (see Appendix 1). It was also assumed that organizational
effciency could be validly measured as perceived organizational effciency, and for that purpose an
already tested and for manufacturing enterprises adapted questionnaire was used (Domovi, 2000,
Bogdanovi, 2010, see Appendix 2). Socio-demographic characteristics of respondents were also
collected, suc as sex, age, qualifcations, position within the organization hierarchy, and net monthly
salary (see Appendix 3).
The starting hypothesis was that there was positive and signifcant correlation between good working
conditions and organizational effciency, while there is negative and signifcant correlation between
poor working conditions and organizational effciency. To determine this correlation it was necessary
to carry out the correlation research. Working conditions were measured on the Likert-type scale
(0-5), while organizational effciency was measured on the Likert-type scale (0-4). Reliability of
the internal consistency type of organizational effciency was preliminarily determined on Croatian
manufacturing enterprises, which was high, i.e. alpha=0.97 (Bogdanovi, 2010), and on the
smaller sample of manufacturing companies in the Split-Dalmatia County it was a bit lower but
satisfactory alpha=0.85. Using questionnaires as measuring instruments physical working conditions
were determined in various enterprises of the Split-Dalmatia County as independent variable and
organizational effciency as dependent variable.
2.2. Procedure and respondents
The questionnaire was sent to target enterprises. Also, where it was possible the researchers personally
communicated with them in order to get an insight into real working conditions in the particular
industry. The research comprised 144 respondents from seven manufacturing companies in the Split-
Dalmatia County of whom 68% were males and 32% females. Their age structure was: 15% were
19-30, 16% were 31-40, 42% were 41-50, 24% were 51-60, and 3% were above 60. The dominant
age group was 41-50. In terms of qualifcations their structure was as follows: 5% with elementary
education, 72% with secondary education, 9% with two-year post-secondary school qualifcations,
and 14% with university qualifcations. In terms of organisational positions 69% were blue-collar
workers, 27% were white-collar workers and 4% were managers. In terms of salary their structure
was: 24% under 3,000 kunas, 52% between 3,000 and 5,000 kunas, 19% between 5,000 and 7,000
kunas, 3% between 7,000 and 9,000 kunas, 1% between 9,000 and 11,000 kunas, and 1% between
11,000 and 13,000 kunas. The dominant salary range among respondents was 3,000-5,000 kn.
3. RESULTS AND SHORT DISCUSSION ON THE EMPIRICAL RESEARCH RESULTS
3.1. Samle characteristics
The research comprised manufacturing companies in the Split-Dalmatia County in the Republic of
Croatia (N=7). The sample structure in terms of the number of respondents is shown in the Table 1.
Table 1. The structure of the sample with respect to the number of respondents
Name company Frequency Percent Valid Percent Cumulative Percent
AD Plastik 16 11,1 11,1 11,1
Adriacink 18 12,5 12,5 23,6
Galeb Omi 18 12,5 12,5 36,1
Brodotrogir 41 28,5 28,5 64,6
Sardina Postira 20 13,9 13,9 78,5
Mljekara MILS 18 12,5 12,5 91,0
Dalmacijavino 13 9,0 9,0 100,0
Total 144 100,0 100,0
Source: research date
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In terms of size the manufacturing companies comprised in the survey are classifed in compliance with
the Croatian Accounting Law (NN, 109/07). Consequently, three companies are of medium size (50-
250 employees), while four companies are large (more than 250 employees). The share of respondents
follows the size of the company therefore companies with the largest number of respondents are
also of the largest size and vice versa (e.g. 28.5% of respondents are employees of Brodotrogir,
the largest company among seven, while 9% of respondents are employees of Dalmacijavino, the
smallest company among them).
3.2. Working conditions and effciency of surveyed companies
In response to the frst research problem, i.e. the question concerning the general correlation of
working conditions and effciency of the surveyed companies, correlation analysis was carried out,
whose results are presented in the Table 2.
Table 2. Means, standard deviations and correlations of individual working conditions and company
performance of Split-Dalmatia County with their statistical signifcance
Work conditions Mean (M)
Standard deviations
(s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,16 0,66 1,000 -
High / low temperature 2,81 1,25 -0,174 0,038
*
Bad (polluted) air 2,50 1,48 -0,288 0,000
**
Sultriness / high humidity 2,61 1,24 -0,198 0,018
*
Good lighting 3,06 1,61 0,272 0,001
**
Pleasant colours in the workspace 2,33 1,55 0,413 0,000
**
Noise 3,38 1,28 -0,078 0,355
Vibration 2,82 1,54 -0,211 0,011
*
Radiation 2,36 1,75 -0,218 0,010
*
Workspace cleanliness 3,17 1,37 0,368 0,000
**
Well arranged workspace 2,49 1,37 0,405 0,000
**
Organization of work 2,69 1,18 0,501 0,000
**
Untidiness 3,48 1,45 -0,259 0,002
**
Source: research date
Note: * correlations signifcant at p<0.05
** correlations signifcant at p<0.01
The Table 2. frstly shows the arithmetic means of measured effciency and working conditions.
Organizational effciency of the surveyed manufacturing companies proves to be average
1
, i.e. at the
level of M=3.16.
The arithmetic means of particular working conditions are M=2.33-3.48 and indicate that in the Split-
Dalmatia County the existing working conditions may be favourable and unfavourable. The standard
deviations of all working conditions are s=1.18-1.75 which indicates that variations may be quite
large, or that the perception of working conditions varies from company to company. Consequently,
in the course of further investigation working conditions were analysed in each of the companies as a
representative of a particular industry.
The unfavourable (poor) working conditions are averagely present (M=2.50-3.49) as: untidy working
space M=3.48, noise M=3.38, vibrations M=2.82, sultriness M=2.61, uncomfortable temperature
M=2.81, and bad air M=2.50. If these general results on poor working conditions could lead to any
conclusions, then such frequently mentioned poor working conditions should be purposely eliminated.
The only unfavourable working condition that was not mentioned to a disturbing extent (according to
criterion M<2.50) was radiation with M=2.36.
An insight into favourable working conditions showed especially low grading (<2.50) in: workspace
colours M=2.33, workspace tidiness M=2.49. Untidy workspace clearly indicates that organizational
environment is inappropriate in terms of tidiness, and with inappropriate colours (which is not so much
a question of cost as the concern of management) this may be seen as a connotation of negligence
2
,
which is surely one of the crucial reasons for average effciency in the surveyed companies (M=3.16).
1 Average is here derived from the school grades scale (1-5), which is the grade good ranging from 2.50 to 3.49.
2 This perception of working conditions could be confrmed by the personal experience of researchers when visiting
some of these companies.
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Working conditions averagely graded are: work organization M=2.69, cleanliness M=3.17, good
lighting M=3.17.
Naturally, these average results obtained for favourable working conditions also depart from the
optimum (M=5.00), therefore they should also be targeted for improvement.
Furthermore, the unfavourable working conditions presented in the Table 2 (excessive temperature,
bad air, sultriness, noise, vibrations, radiation, and workspace untidiness) are negatively correlated
with effciency in all the surveyed companies and are all statistically signifcant, except noise (r=-
0.078, p<0.05). Thus the correlation of noise with effciency proved to be almost zero, which could
be explained by the lack of disturbing noise in most of the surveyed manufacturing companies. The
highest negative correlation with effciency was shown by bad air (r=-0.288; p<0.01), workspace
untidiness (r=-0.259, p<0.01), radiation (r=-0.218; p<0.05) and vibrations (r=-0.211; p<0.05).
All the favourable working conditions (good lighting, pleasant colours, workspace cleanliness,
tidiness, and good work organization) were positively and signifcantly correlated with effciency,
and were all statistically signifcant. The highest positive correlation (r>0.350) with effciency was
found in: good work organization (r=0.501, p<0.01), pleasant colours in the workspace (r=0.413,
p<0.05), workspace tidiness (r=0.405, p<0.01), cleanliness (r=0.368, p<0.01). Good lighting also
proved to be an important factor of good productivity, although in terms of correlation it ranked only
ffth (r=0.272, p<0.01).
These general fndings on favourable and unfavourable working conditions and their correlation with
effciency may lead to some conclusions. In manufacturing companies of the Split-Dalmatia County
the working conditions proving to be highly correlated with good effciency are ranked as follows:
Good work organization. This proves to be the crucial work condition as it has highest
positive and statistically most signifcant correlation with organizational effciency (r=0.501,
p<0.01). The respondents graded this working condition with a suboptimal average grade
(M=2.69), which means that this condition absolutely has to be improved.
Pleasant colours in the workspace. Workspace in some manufacturing companies seems
to be quite poorly maintained, bleak and cheerless (which is the personal perception of
researchers when visiting these companies). The respondents recognized this by grading it
M=2.33. Pleasant colours are also positively and statistically signifcantly correlated with
effciency (r=0.413, p<0.01). This working condition could be improved at a relatively low
cost of regular maintenance using some pleasant colours instead of the standard ones.
Well arranged workspace (good ergonomic arrangement of the workspace, easily accessible
materials and equipment, work free of unnecessary effort, non-physiological positions
and tiredness due to repetitive activities of the same muscle groups) proves to be the third
statistically signifcant work condition in terms of correlation with effciency (r=0.405,
p<0.01). Unfortunately, according to the arithmetic mean (M=2.49) it is not at a satisfactory
level in the surveyed companies and should be improved.
Workspace cleanliness proves to be statistically signifcant and positive correlate of
organizational effciency (r=0.368, p<0.01). It can be generally stated that cleanliness increases
effectiveness and commitment. It can also indirectly affect effciency and in the surveyed
companies it was graded M=3.17. Cleanliness in food processing industry is a crucial working
condition, so this result would there be considered poor rather than average. Therefore this
working condition is to be treated with regard to the industry.
Good lighting proves to be statistically signifcant and positively correlated with effciency
(r=0.272, p<0.01), and in the workspace where appropriate lighting is to be provided to ensure
productivity it is also a crucial working condition. In the surveyed companies it was averagely
graded (M=3.06).
Bad (polluted) air (due to fumes, smoke in welding, dust, paint and varnish evaporation, bad
smells, poor ventilation, etc.) has the highest statistically signifcant negative correlation with
effciency in manufacturing companies (r=-0.288, p<0.01). In the surveyed companies it is
recorded at an average level (M=2.50).
Untidiness also has statistically signifcant negative correlation with company effciency
(r=-0.259; p<0.05). Untidy workspace with heaps of waste or materials lying about in a
disorganized manner or poorly maintained premises (e.g. broken windows, dampness, peeling
walls, defective machinery, etc.) may negatively affect company effciency. The respondents
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have also identifed this factor at a high level (M=3.48), which certainly calls for action.
Radiation, although not occurring in all companies, has a high weight in some of them (e.g. in
welding or caused by some appliances) so this factor also has statistically signifcant negative
correlation with effciency (r=-0.210, p=0.01). For all the surveyed companies it is relatively
low M=2.36, but with highest standard deviation s=1.75 (variating in different companies).
As already noted, this condition has to be considered partially, i.e. for those companies where
some kinds of radiation do occur.
Vibrations caused by machinery are also negatively correlated with effciency (r=-0.211,
r<0.05), although ranked only ninth, because employees in the surveyed companies were not
exposed to them unlike for instance forestry workers, ploughmen, or compressor workers.
Vibrations are recorded at a medium level (M=2.82) with a rather high standard deviation
s=1.54.
Sultriness/high humidity due to inadequate of entirely missing air conditioning (summers
in the Split-Dalmatia County are hot, which with high humidity can create discomfort) was
reported as a negative factor in some companies, so this condition proves to be statistically
signifcant and negatively correlated with organizational effciency (r=-0.198, p<0.05).
Overall sultriness was recorded at a medium level (M=2.61, with s=1.24), therefore it may be
concluded that where premises are air-conditioned this will not be a problem.
Temperature, i.e. excessive heat/cold has statistically signifcant negative correlation with
company effciency (r=-0.174, p<0.05), although not so pronouncedly as could be expected,
because in some companies premises are adequately heated and air-conditioned (M=2.81,
s=1.25).
Noise is statistically signifcantly correlated with effciency in overall results (r=-0.078, p>0.05)
which is to some extent surprising, because the fndings recorded in literature are contrary to
that. The probable reason for that may be the awareness of management and attention paid to
this problem, even though this factor is recorded at a medium level (M=3.38).
As has already been noted, the same working conditions are not equally important for effciency in
all the surveyed manufacturing companies because this primarily depends on the type of industry.
Therefore it was necessary to examine working conditions and effciency in each of the companies
belonging to a particular industry in order to determine which working conditions are important,
which are marginal, and which are statistically insignifcant. With the obtained results it is possible to
give recommendations to each of the companies (as the representative of a particular industry) about
the working conditions that should be upgraded to increase productivity.
3.3. Working conditions in particular enterprises and their effectiveness
This section presents the fndings on working conditions and effciency for each manufacturing company
with regard to the respective industry. In other words it responds to the second research problem:
Which are the crucial (statistically signifcant) working conditions in manufacturing companies
from different industries (manufacturing of car parts, metal processing, textiles, shipbuilding, fsh
processing, dairy, alcoholic and non-alcoholic beverages)?
The Table 3. shows the fndings for AD PLASTIK PLC, Solin.
Table 3. Means, standard deviations and correlations of individual working conditions and effciency of
enterprise AD PLASTIK PLC., Solin (production of parts for cars from artifcial materials) with their
statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,37 0,60 1,000 -
High / low temperature 2,25 1,39 -0,187 0,487
Bad (polluted) air 2,00 1,63 -0,460 0,073
Sultriness / high humidity 2,26 1,39 -0,157 0,560
Good lighting 3,25 1,62 0,269 0,313
Pleasant colours in the workspace 2,75 1,18 -0,085 0,754
Noise 2,44 1,37 -0,556 0,025
*
Vibration 2,69 1,45 -0,426 0,100
Radiation 2,93 1,39 -0,208 0,457
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Workspace cleanliness 4,00 1,10 -0,406 0,119
Well arranged workspace 3,07 1,10 -0,247 0,374
Organization of work 2,81 1,05 0,595 0,015
*
Untidiness 2,94 1,57 0,017 0,950
Source: research date
Note: * correlations signifcant at p <0.05
* * correlations signifcant at p <0.01
It is obvious that manufacturing of plastic car parts in AD PLASTIK PLC, Solin records signifcant
correlation of two working conditions with effciency:
Noise (r=-0.556, p<0,05) and
Work organization (r=0,595, p<0,05)
Consequently, for this company it is recommended to take action that will reduce noise and enhance
work organization. The employees stated the following problems related to the noise and organization
of the working process:
inadequately connected work areas,
pressure due to tight deadlines,
inadequate regulation of heating and air conditioning appliances.
They also complained about:
neon lighting,
excessive heat during summer
poor interpersonal relations,
inequality in rewarding and implementation of regulations.
The Table 4. presents the fndings for ADRIACINK PLC, Split.
Table 4. Means, standard deviations and correlations of individual working conditions and effciency of
enterprise ADRIACINK PLC, Split (metal production) and their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,43 0,37 1,000 -
High / low temperature 3,00 1,28 -0,306 0,217
Bad (polluted) air 2,89 1,23 -0,496 0,036
*
Sultriness / high humidity 3,06 1,16 -0,346 0,160
Good lighting 3,61 1,29 0,504 0,033
*
Pleasant colours in the workspace 3,61 1,04 0,589 0,010
*
Noise 4,00 0,84 -0,327 0,185
Vibration 2,89 1,37 -0,31 0,605
Radiation 2,61 1,94 -0,059 0,815
Workspace cleanliness 3,83 0,99 0,505 0,033
Well arranged workspace 3,72 1,07 0,333 0,177
Organization of work 3,18 0,88 0,637 0,006
**
Untidiness 2,67 1,19 -0,105 0,679
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
It is obvious that in the metal processing industry work conditions statistically signifcantly correlated
with company effciency are:
Bad air (r=-0.496, p<0.05),
Good lighting (r=0.504, p<0.05),
Pleasant colours (r=0.589, p<0.05),
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Work organization (r=0.637, p<0.01).
The employees stated the following problems related to:
bad air (poor ventilation in the plants, poor ventilation in general, especially when dealing
with acids, sultriness)
work organization (inadequate organization of the work process from preparation to
assembling, lack of space, occasional shortage of equipment)
The employees also complained about:
extreme heat in summer
lack of motivation due to low salaries
The Table 5. presents the fndings for GALEB PLC, Omis, which manufactures textile products.
Table 5. Means, standard deviations and correlations of individual working conditions and effciency of
enterprise GALEB PLC., Omis (textile manufacturing) with their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,27 0,54 1,000 -
High / low temperature 3,39 1,42 -0,453 0,059 (border)
Bad (polluted) air 3,28 1,49 -0,420 0,083
Sultriness / high humidity 3,28 1,67 -0,463 0,053 (border)
Good lighting 3,06 1,73 0,259 0,300
Pleasant colours in the workspace 1,59 1,73 0,428 0,087
Noise 4,00 1,46 -0,422 0,081
Vibration 3,67 1,68 -0,203 0,420
Radiation 3,18 1,94 -0,155 0,554
Workspace cleanliness 2,83 1,62 0,586 0,011
*
Well arranged workspace 1,94 1,55 0,256 0,305
Organization of work 2,67 1,37 0,338 0,170
Untidiness 4,22 1,26 -0,180 0,475
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
Here it is obvious that working conditions that are signifcantly correlated with company effciency
in the textile industry are:
Workspace cleanliness (r=-0.586, p<0.05), and
Two marginal (weakly signifcant)
3
work conditions:
Sultriness/high air humidity (r=-0.463, p=0.053)
Excessively high/low temperature (r=-0.453, p=0.059).
The workers complained about:
cramped workspace in the plant, too many people in a small area,
dampness, draught, excessive noise, dust, run-down premises,
lack of air-conditioning, need for at least better ventilation,
lack of resolution and agreement in management negatively affecting the work process and
workers who are expected to do the work disregarding conditions,
inadequate involvement and rewarding of employees, obsolete and run-down work chairs.
3 As the level of signifcance depends on the chosen criterion that in social research is most frequently defned on
the risk level of p<0.05, smaller deviations from the settled level are here termed as marginal or weakly signifcant
differences, as the settled statistically signifcant difference could have been e.g. the risk of p<0.055 or 0.75. Although
some norms have to be complied with, the term marginal/weakly signifcant difference denotes the difference which
de facto exists with a somewhat higher risk of making wrong general conclusions based on the sample.
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The Table 6. presents survey results for BRODOTROGIR PLC, Trogir.
Table 6. Means, standard deviations and correlations of individual working conditions and effciency of enterprise
BRODOTROGIR PLC., Trogir (production of ships) and their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 2,82 0,67 1,000 -
High / low temperature 2,93 1,08 -0,276 0,085
Bad (polluted) air 2,85 1,32 -0,405 0,009
**
Sultriness / high humidity 2,68 0,99 -0,228 0,157
Good lighting 1,98 1,42 -0,320 0,843
Pleasant colours in the workspace 1,41 1,29 0,434 0,006
**
Noise 3,29 1,15 -0,380 0,016
*
Vibration 3,10 1,46 -0,398 0,011
*
Radiation 2,63 1,46 -0,323 0,042
*
Workspace cleanliness 2,10 1,26 0,328 0,039
*
Well arranged workspace 1,80 1,23 0,486 0,002
**
Organization of work 2,20 1,27 0,363 0,021
*
Untidiness 3,66 1,56 -0,194 0,231
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
Working conditions signifcantly correlated with work effciency in BRODOTROGIR, which is
involved in shipbuilding, are:
Bad air (r=-0.405, p<0.01),
Pleasant colours (r=0.434, p<0.01),
Noise (r=-0.380, p<0.05),
Vibrations (r=-0.398, p<0.05),
Radiation (r=-0.323, p<0.05),
Cleanliness (r=0.328, p<0.05),
Tidiness (r=0.486, p<0.01),
Work organization (r=0.363, p<0.05).
The employees of BRODOTROGIR complained about:
lighting,
disposition of materials, tools, and cranes,
ventilation,
weather conditions (outdoor work)
poor work organization
noise, dust,
radiation (in the welding process)
welding and grinding without ventilation,
run-down machinery
polluted air
heat and cold
idleness, lack of discipline, disagreements among workers
excessive bureaucracy,
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low wages,
poor education of staff,
poor quality tools
inadequate safety
working hours (six hours during summer)
lack of coordination between working units
problems with purchasing of materials and tools
lack of working discipline.
The Table 7. shows the survey results for SARDINA POSTIRA Ltd, Postira.
Table 7. Means, standard deviations and correlations of individual working conditions and effciency of enterprise
SARDINA POSTIRA Ltd, Postira (production of fsh products) and their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,87 0,34 1,000 -
High / low temperature 2,75 0,85 -0,510 0,829
Bad (polluted) air 1,35 1,23 -0,010 0,966
Sultriness / high humidity 2,05 1,28 -0,014 0,952
Good lighting 4,42 0,90 0,095 0,698
Pleasant colours in the workspace 3,17 1,25 0,374 0,127
Noise 3,60 1,10 0,259 0,269
Vibration 2,15 1,60 0,002 0,994
Radiation 1,00 1,41 -0,439 0,060
Workspace cleanliness 3,84 0,83 0,356 0,135
Well arranged workspace 3,35 0,81 0,320 0,169
Organization of work 3,55 0,51 -0,017 0,943
Untidiness 2,80 1,24 -0,113 0,635
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
As shown in the Table 7, in this company there are no working conditions that are statistically
signifcantly correlated with effciency. In spite of such fndings, it is to be noted that the workers
complained about:
poor air-conditioning in the plant,
heat and cold,
noise,
dampness and sultriness,
hard physical work,
obsolete production equipment.
The Table 8. presents the survey results for DALMACIJAVINO Ltd, Split.
Table 8. Means, standard deviations and correlations of individual working conditions and effciency of enterprise
DALMACIJAVINO Ltd, Split (production of alcoholic and nonalcoholic beverages) and their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 2,50 0,41 1,000 -
High / low temperature 2,38 1,66 -0,045 0,883
Bad (polluted) air 1,77 1,09 0,391 0,186
Sultriness / high humidity 2,31 1,18 0,000 1,000
Good lighting 3,85 0,99 -0,204 0,505
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Pleasant colours in the workspace 2,35 1,85 0,353 0,237
Noise 2,46 1,39 0,253 0,405
Vibration 2,38 1,45 0,243 0,423
Radiation 2,15 1,82 0,539 0,057 (border)
Workspace cleanliness 3,54 0,88 -0,120 0,709
Well arranged workspace 2,08 1,12 0,180 0,556
Organization of work 2,38 1,19 0,548 0,053 (border)
Untidiness 3,92 1,32 0,000 1,000
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
It is obvious that in this company, which manufactures alcoholic and non-alcoholic beverages, there
are two working conditions of marginal statistical signifcance with effciency:
Radiation (r=0.539, p=0.057)
Work organization (r=0.548, p=0.053)
The employees in this company complained about:
lighting,
vibrations,
heat/cold,
lack of responsibility in senior management,
disorganisation, poor communication, obsolete technology, inadequate staff structure,
ventilation and air-conditioning.
The Table 9. shows the survey fndings for MLJEKARA MILS Ltd. Split.
Table 9. Means, standard deviations and correlations of individual working conditions and effciency of enterprise
MLJEKARA MILS Ltd., Split (production of milk and dairy products) and their statistical signifcance
Work conditions Mean (M)
Standard devia-
tions (s)
Efectiveness
(Pearsonov r)
Statistical signif-
cance (p)
Effectiveness 3,05 0,47 1,000 -
High / low temperature 2,61 1,20 -0,345 0,160
Bad (polluted) air 2,78 1,52 0,130 0,607
Sultriness / high humidity 2,50 0,79 -0,230 0,359
Good lighting 2,82 1,59 -0,034 0,897
Pleasant colours in the workspace 2,47 1,179 -0,031 0,906
Noise 3,56 1,04 0,002 0,995
Vibration 2,44 1,50 0,030 0,905
Radiation 1,83 1,76 -0,222 0,376
Workspace cleanliness 3,56 1,15 0,193 0,443
Well arranged workspace 2,18 1,19 -0,327 0,201
Organization of work 2,50 1,10 0,322 0,193
Untidiness 4,06 1,11 -0,274 0,270
Source: research date
Note: * correlations signifcant at p <0.05
** correlations signifcant at p <0.01
As can be seen from the Table 9., in this company, which manufactures dairy products, there are no
working conditions that are signifcantly correlated with effciency.
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However, the employees complained about:
obsolete equipment,
noise, vibrations, bad smells,
dampness,
low ceilings, poor ventilation, cramped workspace,
slippery foors.
poor interpersonal relations,
work organization.
As already noted, the surveyed enterprises belong to different types of manufacturing industries and
therefore it is possible to provide some recommendations for each industry in terms of particular
working conditions.
The results obtained in this study and its heuristic value reveal a wide possibility of research
concerning work rationalization
4
, involving technical, economic and psychosocial rationalization. It
is obvious that the reason for suboptimal competitiveness of Croatian companies can be attributed
to suboptimal working conditions and suboptimal work rationalization. Therefore any research into
working conditions will be seen as an important contribution to improvement of productivity and
effciency in manufacturing companies.
4. CONCLUSION
Working conditions are an important factor of effciency in each job. Therefore they are considered to
be a factor of productivity, which is one of the factors of company competitiveness. The correlation
between different working conditions and business performance, or organizational effciency, has
been investigated and proved in a large number of research studies. In those studies both harmful and
desirable elements were highlighted, which can be divided into three, or rather four basic groups:
a) objective physical-chemical working conditions, b) psycho-physiological working conditions, c)
psychosocial working conditions, d) mixed working conditions.
This research focused on the frst group of working conditions that may be called physical-chemical
working conditions. The aims of the research were to determine the correlation of working conditions
with organizational effciency, classify the conditions crucial for organizational effciency, and give
recommendations for their improvement on the sample of manufacturing companies of the Split-
Dalmatia company in Croatia. The aims of the study were achieved by determining statistically
signifcant correlations of working conditions with organizational effciency on two levels: a) overall
(including all the surveyed companies, and b) for each particular company as a representative of an
industry. In accordance with these aims the research problems were set, for which the responses are
here summarized.
The response to the frst problem, i.e. the issue of general correlation of working conditions
and effciency of all the surveyed manufacturing companies, was obtained by correlation
analysis. For all the surveyed manufacturing companies the following working conditions
were ranked as crucial for effciency:
Good work organization proves to be the key working condition due to its highest statistically
signifcant positive correlation with organizational effciency (r=0.501, p<0.01).
Pleasant colours in the workspace are statistically signifcantly and positively correlated
with effciency (r=0.413, p<0.01).
Well arranged workspace (good ergonomic arrangement of the workspace, easily accessible
materials and equipment, work free of unnecessary effort, non- physiological positions and
tiredness due to repetitive activities of the same muscle groups) proves to be the third statistically
signifcant work condition in terms of correlation with effciency (r=0.405, p<0.01).
Workspace cleanliness proves to be statistically signifcant and positive correlate of
4 Total work rationalization in companies involves : a) Technical rationalization (of the production process), b)
Economic rationalization (of other stages of reproduction, such as purchasing, fnance, sales), c) Social, or more
precisely psychosocial rationalization (of human resources). All the three kinds of rationalization can be considered
important elements of total work rationalization in an enterprise (cf. ugaj, 1996).
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organizational effciency (r=0.368, p<0.01).
Good lighting proves to be statistically signifcant and positively correlated with effciency
(r=0.272, p<0.01).
Bad (polluted) air (due to fumes, smoke in welding, dust, paint and varnish evaporation,
bad smells, poor ventilation, etc.) as an unfavourable working condition has the highest
statistically signifcant negative correlation with effciency in manufacturing companies (r=-
0.288, p<0.01).
Untidiness also has statistically signifcant negative correlation with company effciency
(r=-0.259; p<0.05) Untidy workspace with heaps of waste or materials lying about in a
disorganized manner or poorly maintained premises (e.g. broken windows, dampness, peeling
walls, defective machinery, etc.), as well as outdoor work that should be performed indoors
due to weather conditions may negatively affect company effciency.
Radiation, although not occurring in all companies, has a high weight in some of them (e.g. in
welding or caused by some appliances) so this factor also has statistically signifcant negative
correlation with effciency (r=-0.210, p=0.01).
Vibrations caused by machinery are also negatively correlated with effciency (r= 0.211,
r<0.05), although ranked only ninth, because employees in the surveyed companies were not
exposed to them.
Sultriness/high humidity due to inadequate of entirely missing air conditioning (summers
in the Split-Dalmatia County are hot, which with high humidity can create discomfort) was
reported as a negative factor in some companies, so this condition proves to be statistically
signifcant and negatively correlated with organizational effciency (r=-0.198, p<0.05).
Temperature, i.e. excessive heat/cold has statistically signifcant negative correlation with
company effciency (r=-0.174, p<0.05), although not so pronouncedly as could be expected,
because in some companies premises are adequately heated and air-conditioned.
Noise is not statistically signifcantly correlated with effciency in overall results (r=0.078,
p>0.05).
As all working conditions are not equally important in all types of manufacturing companies
(due to different manufacturing industries) the research into correlation of working conditions
with effciency was extended in terms of particular companies, which responded to the second
problem set in this study.
So the fndings for AD PLASTIK PLC, Solin (manufacturing of car parts) show that working
conditions statistically signifcantly correlated with effciency are: noise (negative correlation),
and work organization (positive correlation). Besides these, the workers also emphasized: lighting,
heat, poor interpersonal relations, and perception of inequality in rewarding and implementation of
regulations for all employees.
In the metal processing industry the fndings for ADRIACINK PLC, Split show that the working
conditions statistically signifcantly correlated with effciency are bad air (negative correlation), good
lighting, pleasant colours, and work organization (positive correlation). The employees complained
about bad air and work organization (inadequate organization of the working process from preparation
to assembling, shortage of space).
In the company GALEB PLC, Omi, (manufacturing of textile products) working conditions
signifcantly correlated with effciency are workspace cleanliness (negative correlation), while
sultriness/humidity and excessive temperature are marginal. The two marginal working conditions
have negative correlation. The workers also emphasized inadequate working conditions such as
cramped workspace, dampness, noise, lack of air-conditioning, inadequate involvement of workers,
obsolete and run-down work chairs, lack of resolution and agreement in management.
The working conditions signifcantly correlated with work effciency in BRODOTROGIR PLC, Trogir,
(shipbuilding) are: bad air, noise, vibrations, radiation, work organization (negative correlation), and
pleasant colours, cleanliness, tidiness (positive correlation). In this company employees complained
about lighting, ventilation, exposure to weather conditions, noise, dust, excessive cold/heat,
bureaucracy, poor quality tools, inadequate safety, etc.
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In SARDINA POSTIRA Ltd, Postira (fsh processing) and MLJEKARA MILS Ltd, Split
(manufacturing of dairy products) there are no working conditions that are statistically signifcantly
correlated with organizational effciency. However, their employees complain about poor air
conditioning, excessive temperature, noise, dampness and sultriness, hard physical labour, ventilation,
interpersonal relations, work organization.
Finally, in DALMACIJAVINO Ltd, Split (manufacturing of alcoholic and non-alcoholic
beverages) only two working conditions are marginally correlated with effciency: radiation and
work organization (positive correlation). Employees in this company complained about lighting,
vibrations, heat/cold, lack of responsibility in management, poor communication, disorganization,
ventilation, and air-conditioning.
According to the obtained results it is obvious that the work in manufacturing companies of the Split-
Dalmatia County can be signifcantly improved in terms of technical rationalization by upgrading
working conditions, and that it can be better organized. This should enhance productivity and
organizational effciency, which should lead to better competitiveness of Croatian manufacturing
companies.
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30. Interviews with employees of manufacturing companies surveyed.
Appendix 1.
Please state: NEVER=0; SELDOM=1; SOMETIMES=2; OFTEN=3; VERY OFTEN=4; ALWAYS=5 your agreement
with the following statements:
No Statement 0 1 2 3 4 5
1. In the company it is too hot/cold.
2. In the company the air is quite bad.
3. In the company it is sultry.
4. The lighting in the company is very good.
5. The colours make the premises a pleasant place to work in.
6. It is noisy in the company.
7. Appliances and engines create vibrations.
8. Electrical appliances and computer equipment emit radiation.
9. Workspace is quite clean.
10. Workspace is well arranged.
11. Work organization is adequate.
12. Workspace should be tidied up.
In your opinion, which working conditions are bad for company effciency?
________________________________________________________________________________________________
________________________________________________________________________________________________
________________________________________________________________________________________________
________________________________________________
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Appendix 2.
In the following questions please mark your opinion on your company effciency.
1. How would you estimate the output of products and services in your company?
a) very low; b) low; c) medium; d) high; e) very high
2. How would you evaluate the quality of products and services offered by your company?
a) very poor; b) poor; c) medium; d) very good; e) excellent
3. To what extent do the employees in your company use the available resources (people, capital,
equipment), i.e. how effciently do they do their work?
a) very ineffciently; b) ineffciently; c) with average effciency; d) very effciently; e) extremely
effciently
4. How well are possible problems predicted in your company in order to reduce or prevent their
negative consequences?
a) very poorly; b) poorly; c) averagely; d) very well; e) excellently
5. How well are employees in your company informed about innovations that could affect the manner
of working?
a) not at all; b) to some extent; c) averagely; d) very well; e) excellently
6. When there is change in your company how fast do employees accept them and adapt to them?
a) very slowly; b) slowly; c) neither slowly nor quickly; d) quickly; e) at once
7. How many employees in your company, in your opinion, readily accept change and adapt to it?
a) hardly anybody; b) less than a half; c) about half of them; d) signifcantly more than a half; e)
almost everybody
8. How would you evaluate the performance of employees in your company when faced with sudden
crises and disruptions?
a) very poor; b) poor; c) average; d) very good; e) excellent
Appendix 3.
Please state your basic socio-demographic characteristics
Sex
Male
Female
Age
<19
19-30
31-40
41-50
51-60
>60
Qualifcations
Incomplete elementary school
Elementary education
Secondary education
Post-secondary professional education
University degree
Higher university degrees (MrSc, PhD)
Other:
Hierarchy
Blue-collar worker
White-collar worker
Manager
Net monthly salary
a) up to 3,000 kn
b) 3,000-5,000 kn
c) 5,000-7,000 kn
d) 7,000-9,000 kn
f) 9,000-11,000 kn
g) 11,000-13,000 kn
h) > 13,000 kn
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QUALITY OF MANAGEMENT AS A FACTOR OF FIRM MARKET EXIT IN DIFFERING
MACROECONOMIC ENVIRONMENTS
1
Petra Doenovi Bona
University of Ljubljana, Faculty of Economics, Slovenia;
E-mail: petra.d.bonca@ef.uni-lj.si
Ksenja Punik
University of Maribor, Faculty of Economics and Business, Slovenia
E-mail: ksenja.pusnik@uni-mb.si
Maks Tajnikar
University of Ljubljana, Faculty of Economics, Slovenia;
E-mail: maks.tajnikar@ef.uni-lj.si
Nina Ponikvar
University of Ljubljana, Faculty of Economics, Slovenia;
E-mail: nina.ponivar@ef.uni-lj.si
Abstract
In this paper we study the quality of management as a factor of frm market exit in differing macroeconomic
environments. We also analyse whether the impact of the quality of management on frm market exit depends
on the characteristics of the macroeconomic environment. For this purpose, we use a logistic regression for
rare events to estimate non-nested microeconomic models of frm market exit for two periods, i.e. 19952000
and 20002005 in which Slovenian macroeconomic conditions differed signifcantly. The results confrm that
frms with low quality of management resulting in their inferior technical and cost effciency are more likely
to exit the market. We also fnd that technical effciency has a more signifcant infuence on frm market exit
compared to cost effciency in a favourable macroeconomic environment, while cost effciency has a more
signifcant infuence on frm market exit than technical effciency in unfavourable macroeconomic conditions.
Keywords: Market exit, Quality of management, Non-nested microeconomic models
1. INTRODUCTION
In this paper we study the quality of management as a factor of frm market exit in differing
macroeconomic environments. We address two issues. First, we identify the set of factors impacting
frm market exit. We focus on the impact of the quality of management on frm market exit. Our
research is based on the premise that the quality of management is refected in the frms effciency
and can thus be proxied by technical and cost effciency measures. Namely, in achieving technical
and cost effciency the key role is assigned to the ability of managers to infuence the quantity of
employed production inputs and to select such input combinations that minimise the long-run costs
of production. We hypothesise that frms with low quality of management resulting in their inferior
technical and cost effciency are more likely to exit the market. Second, we analyse whether the
set of market exit factors and their impact on frm market exit depend on the characteristics of the
macroeconomic environment. Also in this case the role of quality of management is of special interest.
We hypothesise that in a favourable macroeconomic environment cost effciency plays a prevailing
role in explaining frm market exit. In a less favourable macroeconomic environment, such a role is
assigned to technical effciency.
In order to analyse the abovementioned two issues, we develop an empirical model of frm market
exit based on a neoclassical theory of the frm (Panzar, 1989) and contributions of the existing body
of literature in the frm market exit feld. We thus specify several non-nested microeconomic models
of frm market exit. To differentiate between those factors that can be infuenced by frm management
and those factors that are considered non-discretionary, our categorisation of explanatory variables
includes four groups, i.e. internal, external, demographic and environmental factors. The specifcations
of models differ in their selection of variables representing individual groups of factors and in the way
1 This paper is based on the doctoral dissertation of Ksenja Pusnik, written under the supervision of Professor Maks
Tajnikar and is written in memory of Ksenja, who lost her battle against cancer at the beginning of 2011.
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these variables are measured. The internal factors group includes the quality of management that is
the main focus of this paper and is proxied by technical and cost effciency measures. Technical and
cost effciency measures are estimated using parametric stochastic frontier analysis. Models of frm
market exit are estimated using a logistic regression for rare events (King and Zeng 1999), based on
a panel of the population of Slovenian frms. To identify the explanatory power of estimated models
we use the classifcation test, the Bayesian information criterion and an artifcial model nesting test.
In order to assess how the quality of management infuences frm market exit in differing macroeconomic
environments non-nested microeconomic models of frm market exit are estimated for two periods
in which Slovenian macroeconomic conditions signifcantly. The 19951999 period represents the
second phase of Slovenias transition to a market economy when the transition process imposed tight
macroeconomic conditions and the 20002006 period is the period when the Slovenian economy may
be considered a consolidated market economy. The distinction between the two periods in the model
estimation allows us to examine how macroeconomic conditions impact the success of managers in
ensuring the survival of their frms. We hypothesise that the tight macroeconomic conditions reduce
the importance of management when it comes to preventing a frms market exit.
The paper contributes to the existing body of empirical frm market exit literature by estimating non-
nested microeconomic models of the frm and selecting the ideal model specifcation by using the
classifcation test, the Bayesian information criterion and an artifcial model nesting test. Further,
we introduce a new classifcation of frm market exit factors, i.e. internal, external, demographic and
environmental factors. Among these factors the focus is on the quality of management that is proxied
by technical and cost effciency measures. As such, the paper contributes to the relatively small body
of research investigating the impact of the quality of management and effciency on frm market exit
in non-banking sectors. An advantage of this paper is that the analysis of the impact of effciency
and other factors on frm market exit is based on the population of Slovenian frms regardless of
their industry membership. In addition, the impact of market exit factors is investigated for two
periods, allowing us to study differences in the impact of the quality of management in differing
macroeconomic conditions. Moreover, our study is one of the few studies dealing with business
failure and market exit issues in Slovenia.
The remainder of the paper is organised as follows. A review of the literature on the determinants
of market exit and our research hypotheses are presented in Section 2. In Section 3 the data and
methodology are described. Estimation results form Section 4, while in Section 5 the results are
discussed.
2. LITERATURE REVIEW AND HYPOTHESES
There is a vast body of empirical literature investigating market exit factors that is based on various
theories from economics, business sciences and entrepreneurship, which are relevant to understanding
frm market exit. These relevant theories include the transaction cost theory (Coase, 1937; Williamson,
1985), the neoclassical theory of the frm (Panzar, 1989), the theory of industrial organisation (Bain,
1954) and the dynamic growth theory consisting of Gibrats Law (Gibrat, 1931), the passive learning
theory (Jovanovic, 1982, 1994), the active learning theory (Ericson and Peakes, 1995), the life cycle
theory (Churchill and Lewis, 1983), Schumpeters theory of innovation (1934) and the resource-
based theory of the frm (Penrose, 1959; Barney, 1991).
Considering that the empirical literature draws from and combines many different theoretical
approaches, there is a wide array of theoretically proposed market exit factors. Since in this paper
we focus on the quality of management as a factor of frm market exit in differing macroeconomic
environments and that we assume the quality of management can be proxied by frm technical and
cost effciency, we primarily review those empirical contributions that include frm effciency and
macroeconomic characteristics in the range of market exit factors.
An effciency measure obtained by data envelopment analysis (DEA) was introduced as a quality of
management measure in the model predicting the failure of banks. Their contributions marked the
beginning of intense research efforts to link effciency to bank failure. Several authors (Barr, Sieford
and Siems, 1993; Yeh, 1996; Pille and Paradi, 2002; Cielen, Peeters and Vanhoof, 2004; Kao and
Liu, 2004; Paradi, Asmild and Simak, 2004; Premachandra, Bhabra and Sueyoshi, 2009) confrm that
technical effciency signifcantly differs between non-successful and successful banks and that these
differences are evident a few years prior to failure. Another group of authors employ either DEA or
Stochastic Frontier Analysis (SFA) effciency measures as regressors in the probability function of
a bank market exit (e.g. Barr, Sieford and Siems, 1993; Wheelock and Wilson, 2000). Most studies
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confrm the positive impact of technical ineffciency on the probability of banks suffering a business
failure. Wheelock and Wilson (2000) arrived at the same conclusion for the link between cost
effciency and the business failure of US banks.
In the past few years, research into the impact of effciency on market exit has also extended to
non-banking sectors. Becchetti and Sierra (2003) report a signifcant positive impact of the SFA
technical effciency of manufacturing frms in Italy in the 19891997 period on the probability of frm
survival. Similar results, but based on DEA technical effciency measures, were obtained by Tsionas
and Papadogonas (2006) for a sample of 3,404 manufacturing frms in Greece, Psillaki, Tsolas and
Margaritas (2008) for a sample of French frms in the textile and research industries and Punik and
Tajnikar (2008) for a sample of small frms in Slovenia. Cost effciency as a variable in the market
exit prediction model in non-fnancial sectors has to our knowledge only been used by Punik and
Tajnikar (2008), showing that both DEA technical and cost ineffciency measures hold predictive
power concerning market exit.
Contributions that examine environmental characteristics as determinants of a frms market
exit show that the probability of a frms market exit increases with the uncertainty of the legal
and regulatory environment (Denis and Denis, 1995; Foreman, 2003; Bhattacharjee et al. 2004),
instability of the macroeconomic environment (Cybinski and Forster, 2002; Bhattacharjee et al., 2002,
2004), unexpected macroeconomic developments (Denis and Denis, 1995), a low level of economic
activity (Lussier, 1996), globalisation (Coucke and Sleuwaegen, 2008; Harris and Li, 2010) and is
also impacted by the location of the frm (Wheelock and Wilson, 2000; Punik and Tajnikar, 2008).
Research on the impact of the frms industry membership on market exit yields mixed results. Cefs
and Marsili (2005) show that frms from high-tech industries have the greatest probability of survival.
On the contrary, Phillips and Kirchhoff (1989) do not fnd signifcant differences in frm survival rates
between industries.
Studies investigating effciency and environmental characteristics as factors of market exit represent
a small part of studies in this feld. Namely, the majority of empirical studies investigates the impact
of a number of different fnancial and non-fnancial factors on market exit. The most common
determinant included in empirical research is the frms fnancial operations. Foreman (2003), for
example, explains, when studying US local telecommunication, which frms fail within two years
by considering certain fnancial ratios such as earnings per share, return on assets, retained earnings
to assets, total debt proportion, and working capital to sales. Pompe and Bilderbeek (2005) fnd that
virtually every ratio category (proftability, activity, liquidity, and solvency ratios) has some predictive
power with regard to bankruptcy. Certain ratios perform similarly with different populations. Opler
and Titman (1994) fnd that a frms capital structure must also be considered as a factor in the
announcement of bankruptcy. Analysing German private and public corporations, Kke (2002) fnds
that frms are more likely to fail when fnancial performance is generally poor. A positive effect of the
leverage variable on the likelihood of exit was found by Fotopoulos and Louri (2000).
A negative relationship between frm size and the likelihood of exit was found by Brderl and
Schssler (1990), Shleifer and Vishny (1992), Dunne and Hughes (1994), Audretch and Mahmood
(1995) and Kke (2002). The age of a frm is also considered one of the key frm exit determinants.
The general consensus of empirical studies examining the impact of age on exit is that (after infancy)
the likelihood of exit declines with age (Carroll, 1983; Freeman, Carroll and Hannan, 1983; Williams,
1993; Watson and Everett, 1996; Nucci, 1999; Thornhill and Amit, 2003). Studies also show that frm
survival is linked not only to a frms size at the time of its establishment (Phillips and Kirchhoff,
1989) but also to the growth achieved in the period closely following the frms establishment (Phillips
and Kirchhoff, 1989; Kke, 2002; Cefs and Marsili, 2005; Foreman, 2003). Empirical support can
also be found for a negative relationship between market growth and frms exit rates. However, there
is also evidence to the contrary (see Tsionas and Papadogonas, 2006).
Following theory and empirical evidence regarding frm market exit we assume that a general frm
market exit model includes four groups of factors:
) , , , ( EN DE EX IN f ME = , (eq. 1)
where IN denotes the group of internal market exit factors, EX the group of external market exit
factors, DE the group of frms demographic factors, while EN denotes environmental factors. Market
exit (ME) describes liquidation of the frm due to a business failure, the deliberate termination of
business activities or as a result of a merger, acquisition or takeover.
The group of internal factors includes those frm characteristics that affect frm costs through the
employment of inputs and can be directly infuenced by frm management. Namely, according to the
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microeconomic theory of the frm (Panzar, 1989) fnding a proper combination of inputs for the frm
to achieve an equilibrium is the task of the frms management. It is thus managements role to select
those techniques that enable the frm to maximise its technical effciency and to take input prices
into consideration when choosing such a combination of inputs that results in allocative and cost
effciency (Farrell, 1957; Fried, Lovell and Schmidt, 2008). To attain allocative and cost effciency
the frms management varies the quantity of all inputs. These management decisions about input
use thus shape the frms long-run equilibrium at a minimal average cost. External factors defne the
frms position in the market and primarily infuence the frms revenues. These factors impact the
frms market exit through market prices and output quantities sold. The achieved market prices and
quantities sold depend on market competition. The frms management can thus only affect them to a
limited extent and has to make decisions within limitations imposed by the market. External factors
therefore cannot directly and wholly refect the quality of a frms management as they are conditional
on market characteristics. This is why they mostly impact revenues. Actually, they impact the frms
proftability considering that internal factors control for the frms cost level. Demographic factors
are those characteristics of a frm which have their origin in the past and are a result of past decisions
of frm management and past market and environmental characteristics. Consequently, demographic
factors can no longer be infuenced by frm management and market characteristics at the time the
frms market exit is observed. Environmental factors refect the frms economic, legal, political,
technological and social environments.
We test two main hypotheses to satisfy the aim of this paper, i.e. to examine the quality of management
as a factor of frm market exit in differing macroeconomic environments. First, we hypothesise that a
technically and/or cost ineffcient frm is more likely to exit the market. Second, technical effciency
is hypothesised to have a more signifcant infuence on frm market exit compared to cost effciency
in a favourable macroeconomic environment while cost effciency has a more signifcant infuence on
frm market exit than technical effciency in tight macroeconomic conditions.
Besides effciency and the macroeconomic environment, the specifcation of our model (eq. 1) also
includes other market exit factors that have been proposed by the empirical studies mentioned above
and are theoretically supported to a smaller or larger extent. This is why the four groups of factors in
our model also include those factors that are not directly referred to in our research hypotheses, but
are important for the model to encompass all relevant frm market exit factors.
3. DATA AND METHODOLOGY
The primary data source for our study is the database of frms fnancial statements collected by the
Agency of the Republic of Slovenia for Public Legal Records and Related Services, which covers the
whole population of Slovenian frms for the 19952005 period. We narrowed the dataset by excluding
frms for which an industry was not defned, frms with zero employees, frms with a negative value
of equity or with zero sales revenues, and frms with zero assets or zero fxed assets. We further
narrowed the datasets by excluding frms with missing values in our panel. We argue that, given the
purpose of our analysis, such an approach to dealing with missing values is more appropriate than
other more arbitrary methods such as imputation. Further, the disadvantages of this approach do not
impact our results due to the large number of frms in our database.
In order to test our hypothesis about the impact of macroeconomic conditions on the infuence of
management on a frms market exit, we split the analysed period into two panel datasets that represent
differing macroeconomic conditions. The frst panel represents the 19952000 period characterised
by tight macroeconomic conditions and the second panel is based on the 20002005 period of a
consolidated market economy. The frst panel comprises data on 16,121 frms and 80,605 observations
and the second panel data on 17,405 frms and 87,520 observations. Firms in both panel datasets are
divided into two mutually exclusive groups, i.e. exit and non-exit frms. In the observed period of
six years, exit frms are those that were in business in the frst fve years of the analysed period and
had closed their operations, thereby exiting the market in the sixth year of the analysed period (2000
for the frst panel and 2005 for the second panel). Non-exit frms are those that were in business for
the whole six-year period. Both panels are unbalanced in favour of non-exit frms. Namely, in 2000
there were 2.48 percent of exit frms and in 2005 their share amounted to 2.19 percent. The use
of unbalanced panels distinguishes our research from other studies adopting a balanced-sampling
approach (e.g. Becchetti and Sierra, 2003; Masten and Masten, 2009).
For both analysed periods we proposed different empirical frm market exit specifcations, all following
the structure of the general model from Equation 1. The empirical specifcations thus follow the
same classifcation of the market exit factors as the general model. However, the proposed empirical
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specifcations stem from different theoretical frameworks. Due to the theoretically based variation in
the sets of factors we have to consider the proposed models as non-nested models when selecting the
most appropriate, i.e. ideal model for explaining frm market exit in Slovenia. We follow the model
selection approach instead of the hypothesis testing approach. In the model selection approach, each
competing model is evaluated by means of a numerical criterion: for a given sample observation, the
procedure consists of selecting the model that optimises the chosen criterion. When using such an
approach models with different specifcations can be selected as the most appropriate for two different
time periods. This is also the case in our research as we study quality of management as a factor of
frm market exit in two time periods that differ with respect to their macroeconomic conditions.
The factors proposed by different theories as being relevant to market exit vary. In empirical research
the most notable differences can be found in the selection of the array of external and internal factors.
This is why for each of the two investigated periods our empirical specifcations are obtained by
keeping demographic and environmental factors unchanged, while testing two different sets of
external factors and two different sets of internal factors. Further, the selection of a particular factor
within individual sets of factors may differ between the two studied periods due to the model selection
approach. For both periods and all empirical specifcations of the market exit model, the dependent
variable (ME) is defned in the same way as a binary variable with a value of 1 for exit frms and a
value of 0 for non-exit frms.
The frst set of internal factors includes long-term and short-term internal factors. Measures of technical
and cost effciency are regarded as long-term factors and asset turnover indices as short-term internal
market exit factors. Asset turnover indices (INATI) included in the frst set of internal factors are
days sales outstanding (INDSO), days payables outstanding (INDPO), price of debt (INDP) and days
inventory in stock (INDIS). Cost (INCE) and technical effciency (INTE) measures are obtained by
Stochastic Frontier Analysis using the number of employees and the value of fxed assets as inputs, the
value of business revenues as an output measure and annual gross wages per employee and the sum
of depreciation and costs of fnancing relative to the sum of fxed assets and inventory as factor prices
(Punik, 2008). In the second set of internal factors short-term internal factors remain unchanged,
while labour productivity measured as the ratio between business revenues and the number of full-
time equivalents (INLP), capacity utilisation as a ratio between business revenues and the value of
fxed assets (INCU), the ratio between frm cost and its business revenues (INCTR), average monthly
wage (INW) and price of capital approximated by the ratio between the sum of depreciation and cost
of fnancing on one hand and total liabilities of the frm on the other hand (INPC) are included as
long-term internal factors as an alternative to measures of technical and cost effciency.
The frst set of external factors also includes long-term and short-term factors. Long-term factors are
represented by a set of dummy variables refecting a frms position in its industry and the industrys
position in the whole economy. A set of dummies is obtained based on a comparison of the frms and
industrys wage and proft rates and a comparison of the industrys and economys wage and proft
rates. Such comparisons enable us to divide the analysed frms into 16 groups (EXD16) (see Tajnikar
and Punik, 2008). A frms liquidity measured by the quick ratio (EXQR) is used as a short-term
external factor. The second set of external factors differs from the frst one in the selection of the long-
term external factors. The set of dummy variables is replaced by variables refecting the frms long-
term market position that have an impact on the frms generated revenues. These variables include
return ratios (EXRR) (either return on equity (EXROE) or return on assets (EXROA)), and proftability
ratios (EXPR) (either relative break-even point, defned as the ratio between frms actual revenues
and its revenues at the break-even point (EXBEP) or return on sales (EXROS)).
All empirical model specifcations include the same demographic and environmental factors.
Demographic factors are represented by the frms fnancial leverage (DEFL) and frm size (DESIZE)
measured either in terms of the value of revenues (DESIZE1) or with the value of a frms fxed
assets (DESIZE2). Environmental factors include industry (ENNACE2) and a frms region (ENREG),
included as two sets of dummy variables.
To eliminate the impact of annual changes in price levels and/or to control for industry membership,
some of the independent variables are defned in terms of the deviation of the variable from the industry
average, where industry is defned according to the 2-digit NACE classifcation of industries. Further,
we estimate the 5-year trend of independent variables and use the trend regression coeffcient values
(see Appetiti, 1984) instead of annual values of independent variables to eliminate the collinearity
between the values of selected variables in consequential years.
For both periods all empirical frm market exit models were assessed by the cross-sectional binominal
logistic regression for rare events data of King and Zeng (1999, 2001), which eliminates the impact
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of sample size and/or rare events on estimates of coeffcients and the probability of frm exit. In
choosing the ideal model specifcation for both of the investigated time periods we use second-degree
empiricism, which represents a selection from among so-called non-nested models. The choice
of alternative models was based upon a classifcation test, Akaikes (1973) information criterion
(AIC), Bayes information criterion (BIC) (Raftery, 1995), an artifcial model nesting test, Vuongs
(1989) parametric distribution-free test for non-nested models and Clarks (2003) non-parametric
distribution-free test for non-nested models2.
4. RESULTS
Following the model selection approach using the above described criteria we selected the ideal
model for explaining the market exit of frms in Slovenia. The model selection is shown in Figure
1, depicting that the ideal model to be used for analysing market exit is described by Alternative 2.
The model under Alternative 2 includes technical and cost effciency measures as long-term internal
frm market exit factors and fnancial return and proftability ratios as long-term external frm market
exit factors. The model with the fnancial return and proftability ratios as long-term external frm
market exit factors was selected because it performs better than the model using the frms relative
position in its industry and the industrys position within the whole economy. Similarly, technical and
cost effciency measures are included because the comparison of alternative models that differ in the
defnition of long-term internal factors shows that the model with effciency measures outperforms
its counterpart including fnancial indicators. This result of the model selection process implies that
the technical and cost effciency measures are superior to the standard fnancial ratios that are widely
used to capture the internal factors infuencing frm market exit.
Figure 1: Selection of alternative non-nested models
The ideal model under Alternative 2 includes technical and cost effciency measures as long-term
internal frm market exit factors and fnancial return and proftability ratios as long-term external frm
market exit factors. This ideal model is used to study the market exit determinants for the case of
frms in Slovenia in differing macroeconomic conditions. This means that we employ it to investigate
frm market exit in the 19952000 and 20002005 periods. However, the empirical specifcations
of the ideal model for the two periods differ in the defnition of some variables refecting return and
proftability. Namely, for the 19952000 period return is measured by the return on equity (EXROE)
and proftability by the relative break-even point (EXBEP), while for the 20002005 period we use
the return on assets (EXROA) and the return on sales (EXROS) as return and proftability measures.
Further, size is measured differently in the two periods. In the frst period size is defned in terms
of the generated revenues (DESIZE1) and in the second period in terms of the value of fxed assets
(DESIZE2). Accordingly, Equation 2 represents the empirical specifcation of the ideal model used
2 The results of all tests are available on request from the authors.
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for the analysis of frm market exit in Slovenia in the 19952000 period. Equation 3 shows the
empirical specifcation of the ideal model for the 20002005 period.
=
,ENREG ,ENNACE E DEFL,DESIZ
EXQR EXBEP EXROE
INDIS, PO, INDP, INDSO, IND INCE INTE
f ME
2 1
, , ,
, ,
(eq. 2)
=
ENREG ENNACE DESIZE DEFL
EXQR EXROS EXROA
INDIS, PO, INDP, INDSO, IND INCE INTE
f ME
, 2 , 2 ,
, , ,
, ,
(eq. 3)
Table 1 shows the results obtained from the logistic regression of the empirical specifcations of the
ideal market exit models for both studied periods. The models are estimated frst for the 19952000
period and then for the 20002005 period. The results are shown in three columns for each of the
analysed periods. The frst depicts the results of the logit regression, the second the estimates obtained
by the logit regression for rare events, and the third the estimates of the logit regression for rare events
based on the empirical specifcation obtained with the backward elimination procedure that improves
the model by dealing with the issue of multicollinearity (Chatterjee and Hadi, 2006).
The econometric tests presented in Table 1 confrm the statistical signifcance of all of the proposed
econometric specifcations regardless of the applied regression form. However, according to the AIC
and BIC tests for both of the analysed periods the results of the logistic regression for rare events
based on the backward elimination procedure outperform the other models. Still, they confrm the
robustness of the regression coeffcients we obtained.
Table 1: Results of the market exit models of Slovenian frms
Dependent vari-
able ME
19952000 20002005
Logit
Logit-rare
events
Logit-rare events
(backward
elimination)
Logit
Logit-rare
events
Logit-rare events
(backward
elimination)
INTE -2.512 -2.469 -10.079
a
-10.920
a
-11.483
a
INCE -9.386
a
-9.322
a
-9.886
a
0.190 -0.011
INDSO -0.001 0.001
c
0.001 0.001
INDPO 0.016
a
0.015
a
0.016
a
0.010 0.009
INDP 0.203 0.203 0.245
b
0.052 -0.042
INDIS -0.016
b
-0.014
c
-0.015
c
0.001 -0.004
a
EXQR 0.004 0.008
b
0.007 0.005 0.012
EXROE -11.343
a
-11.790
a
-11.372
a
EXROA -2.778
a
-2.709
a
-2.806
a
EXBEP 0.001 0.028
a
EXROS -0.001 -0.001
DEFL -0.003 0.003
b
-7.8E-06 -0.001
a
DESIZE1 -3.7E-11 1.2E-08
DESIZE2 -2.2E-10 1.7E-08
c
ENNACE2
dummy set
yes yes yes yes yes yes
ENREG dummy
set
yes yes yes yes yes yes
Constant -3.297
a
-3.284
a
-3.651
a
-3.753
a
-3.728
a
-3.894
a
Log-likelihood -1,742.95 -1,764.54 -1,696.16 -1,721.88
LR c
2
237.04 193.87 260.51 209.06
AIC 3,601.9 3,551.1 3,514.3 3,463.8
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BIC 4,046.1 3,635.3 3,986.3 3,541.1
p-value 0.000 0.000 0.000 0.000
No. of
observations
15,647 16,949
Note: a, b and c denote signifcance at 0.1%, 1% and 5%, respectively
5. DISCUSSION
The results confrm our frst hypothesis that technically and/or cost ineffcient frms are more likely to
exit the market. Namely, for both of the analysed periods the technical and cost effciency regression
coeffcients have the expected negative sign. This confrms our main hypothesis that technical and cost
effciency are a decisive market exit factor. Considering our argument that technical and cost effciency
refect and measure the quality of management, our results confrm that the quality of management is
one of the key factors in explaining frm market exit. Even though a frms management plays many
relevant roles within the frm, our research demonstrates that those management decisions that refer
to input selection and their relative combinations are those which are most crucial for preventing a
frm from failing and ensuring its survival.
The results also confrm our second hypothesis that technical effciency has a more signifcant infuence
on a frms market exit compared to cost effciency in a favourable macroeconomic environment, while cost
effciency has a more signifcant infuence on a frms market exit than technical effciency in unfavourable
macroeconomic conditions. It is evident from Table 1 that in the 19952000 period cost effciency is
a statistically signifcant frm market exit factor. This is not characteristic for technical effciency in
this period. Interestingly, the opposite holds true for the 20002005 period, when technically effcient
frms were statistically signifcantly less likely to exit the market while cost effciency did not have
a signifcant impact. These results indicate that technical and cost effciency refect different internal
market exit factors. Considering the defnitions of cost and technical effciency we could argue that
in the frst analysed period with tight macroeconomic conditions the market exit of Slovenian frms
depended on either their allocative ineffciency or a combination of both their technical and allocative
ineffciencies that are the two elements of cost effciency. In this period, the market exit probability
was thus impacted by managements decisions about the quantities and combinations of inputs
relative to their prices. In the 20002005 period, i.e. the period of the consolidated market economy,
the market exit probability depended mostly on the quantities of inputs employed and to a smaller
degree on proper price-determined input combinations.
The latter results imply that during the period of the consolidated market economy those frms which
exited the market were mostly technically inferior frms. Managers of such frms were able to infuence
the frms cost level and allocate inputs according to relative input prices. However, they had limited
infuence on the technical effciency due to obsolete techniques used in the frms production. In
the frst period characterised by tight macroeconomic conditions managers also faced restrictions
stemming from obsolete techniques. In addition, during this period management did not focus on
properly allocating the inputs either because they were unable to do so or because incentives were not
in place to stimulate such management decisions.
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EVALUATING MERGERS AND ACQUISITIONS (M&A) AS A FORM OF COMPANY
RESTRUCTURING
Drgn ilvnvi
knmski fkultt, Univrzitt u Bnj Luci, BIH
E-mail: dragan.milovanovic@efbl.org
Abstract
With the increasing globalization of world markets and the internationalization of the activities of large
corporations, the emergence of acquisitions and their mutual mergers have become common practice in all
markets. In the last twenty years there was almost more a global company that has not been able to implement
a strategy or taking recourse to a defensive mechanism in the event that the target of acquisitions. When the
acquisition of the target company must pay its fair market value or higher cost, added value can be created
solely on the basis of synergistic effects or effective management. Synergistic effect is present when the value
of the combined company after the M & A is worth more than the sum of the value of individual companies
before the M & A transactions. Gains on synergistic effect can be achieved on the basis of increasing cash
fows, or after reduction of cost of capital.
The management company which intends to merge with another company must frst evaluate whether the
investment is proftable for them. In this sense, they must assess how companies target actually worth. Naturally,
both sides of this work have different views about the value of the company that target. Buyer intends
to evaluate the company as expensive as possible, while the buyer will try to lower the maximum price
possible. Among the numerous methods for assessing the value of the company, will use the discounted cash
fow method (DCF). Budget obtained value target companies may be a more reliable indicator. In case of
successful completion of mergers and acquisitions, the company acquired only bidder fails to value the target
companies, but also the value of other benefts from combining. The aim of this study was to quantify the
benefts of a value of mergers and acquisitions as a form of company restructuring. The aim of the paper is also
based on the practical interpretation of mergers and acquisitions of two companies, to elaborate options for
improving the effects of operating and fnancial synergies. The paper used the scientifc method of deduction,
analysis and comparative analysis of best practices. Interpretation of results should serve as a basis for
professional and scientifc discussion on the evaluation of mergers and acquisitions (M & A) as a form of
company restructuring.
Keywords: Mergers, acquisitions, Synergistic effect, Enterprise restructuring, the DCF method
1. INTRODUCTION
The modern world, economic environment and the company itself, are in constant change and
turbulence. A revolutionary advancement of new technologies have signifcantly reduced the
production costs of goods and services, and companies that are unable to successfully respond to new
challenges, they risk their independence and existence in the market. A large number of research studies
deals with the problem of evaluation of mergers and acquisitions transactions, as well as analyzing
the advantages and disadvantages of mergers and acquisitions. Global phenomena in business and
development organizations, the consequences of the economic crisis and other parameters that
follow the global economy the last two years, the companys management require different strategies
and implementation mechanisms for survival and growth. In response to the development of these
trends over the past twenty years, saw a record number of companies that are out of adjustment
to new conditions and improve their operations through the application of methods found external
growth. Companies in the Republika Srpska and Bosnia and Herzegovina, as well as all Balkan
countries that aspire to become or have become part of the European Union, are also at the impact of
the global economy and the trends that follow the American and European economies. To survive in
the future to be competitive enterprises in developed countries of European Union in the future, our
companies need to implement external growth strategy.
Organizational changes present new challenges and demands for everything from executives to
production workers. If you are changing, especially in times of crisis, not managed properly, there
is an additional loss of company. Restructuring within the organization is a model that includes a
signifcantly wider range of measures to bring about the organizations ability to raise the internal
market and its competitiveness. Mergers and acquisitions as a form of company restructuring, are
the methods of transformation of enterprises in conditions of globalization that enable companies to
adapt to the environment and opportunities to better position themselves to achieve greater value for
their stakeholders. Restructuring is also often applied not only in crisis situations but also in changes
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in ownership structure. The new management model is done through this strategy shift to increase
corporate performance and increase its market value. The world is often the case that investment
companies or funds to buy the company, whose market value is not high at the time, made their
restructuring to increase their value and, then, the stock market to sell the company, thus making a
proft.
The implementation process of mergers and acquisitions, inevitably requires the valuation of
companies and transactions that result from these forms of company restructuring. In the analysis of
the value of the company will use the discounted cash fow method.In implementing the process of
mergers and acquisitions, including scientifc research circles, economic forums and other areas of
economic analysis, analysis of the value of companies is one of the basic parameters in the successful
implementation of mergers and acquisitions. It should also be noted that the essence of every intelligent
investment make a thorough analysis of the value of the company and its development potential in
the future. The paper used the scientifc method of deduction, analysis and comparative analysis
of good practices. Interpretation of the results should highlight the importance, opportunities and
guidelines for increasing the value for the owners in the process of mergers and acquisitions, as well
as for professional and scientifc discussion on the topic of enterprise restructuring through mergers
and acquisitions in the region.
2. THE BASIC PRINCIPLES OF ENTERPRISE RESTRUCTURING BASED ON MERGERS AND
ACQUISITIONS
Restructuring, reorganization and other major changes are very common in companies trying to grow
or survive. In short, the restructuring of the organization, in modern terms, as a condition of a strategy
of growth and development companies, as well as the condition for his recovery and survival. For
decades, mergers and acquisitions activity were characteristic of the Anglo-Saxon model of corporate
governance. In recent years, mergers and acquisitions transactions are often used as a mechanism
of privatization of state or socially owned enterprises in countries in transition. The highest level of
worldwide mergers and acquisitions activity was recorded in 2007. when the total value of mergers
and acquisitions transactions amounted to about 4,800 billion U.S. dollars, say, four times the level of
value from 2002. year. American transactions, participated in a total transaction value of mergers and
acquisitions worldwide in 2007. year, with 33% in 2000. year by 50% (Todorovic, 2010., p. 133.). The
highest level of transaction value of European mergers and acquisitions, was recorded in 2007. in
the amount of 2,800 billion. U.S. dollars. Companies can provide signifcant value creation from
the implementation of mergers and acquisitions, implementation of adequate planning transactions,
formulating a clear vision focused on the integration goals, setting realistic time frame and timetable
of the transaction and by understanding the diversity of corporate culture of companies.
According to data from Thomson Financial, the total value of transactions for 2006. amounted to
3790 billion dollars, which is 38% more than in 2005. year, 55 transactions had a value greater than
$ 10 billion. The European market was one of the most active, with 39% more transactions compared
to 2005. year, with a value of $ 1,430 billion. Transactions in the U.S. market amounted to $ 1,560
billion, 36% more than in 2005. year (www.acquisitions-monthly.com (accessed 30.05.2011.).)
Research Accenture / Economist Intelligence Unit Global data makes that 70% of top management of
companies around the world are planning or implementing merger and acquisition year (Chanmugam,
Auslinger, Park, 2004 ., www.accenture.com / SBA (accessed 20.06.2011.)). In Table 1., shows the
largest transaction value of mergers and acquisitions of all time.
Table 1. The largest transaction value of mergers and acquisitions of all time
Bidder Target Branch Value(inbn.$) Year
Vodafone Mannesmann Telecommunications 203 2000
AOL Time Warner Internet / Media 165 2000
BHP Biliton Rio Tinto Energy, Oil 152 2007
MCI Sprint Corp. Telecommunications 114 1999
Royal Bank ABN Ambro Finance, Banking 96 2007
Pfzer Warner-Lambert Health care 89 1999
Exxon Mobil Energy, Oil 79 1998
Glaxo SmithKline Health care 76 2000
American Warner-Lambert Health care 76 1999
Royal Shell Energy, Oil 74 2004
BellSouth AT&T Telecommunications 73 2006
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Travelers Citicorp Finance 73 1998
Comcast AT&T Broadband Telecommunications 72 2001
Source: (Todorovi, 2010., p. 123.)
There are a number of inconsistencies and overlap when it comes to the demarcation of the term
mergers and acquisitions. However, even though it often is done in the public identifcation
of mergers and acquisitions, these terms mean different things. Mergers, which is with us still
use the terms merger, integration or merger, a transaction in which a single economic entity
from the previous two or more entities. Merger is a merger of two companies into one company,
which will be jointly owned by shareholders of both companies (Todorovic, 2010., p. 86.).
The shareholders of a company (B) exchange shares possessed a given company for shares of another
company (A).The company maintains its customer name and identity that merges all assets and
liabilities of the acquired company (A + B = A). So the customer company (A) makes the absorption
of another company (B) which ceases to exist as a separate legal entity. The most common case of
mergers when one company absorbs another. For mergers is particularly the case that it is a voluntary
agreement the two companies where one company joins all assets (and liabilities) other companies,
thus increasing its size. Owners of connected companies can replace their shares for shares of the new
enlarged company. A related form of the consolidation, which differs only in that the merger of two
companies created a completely new company, while two earlier cease to exist, and their owners are
not damaged because they can exchange their shares for shares of the new joint company.
Another form of the acquisition transaction. This is a very broad term used when one company buys
stake and acquires another company (Todorovic, 2010., p. 86.). In this way, it can take control and
be in a position to decide on his future. When one company takes a different and simply become the
new owner, this type of activity is called acquisition. From a legal point of view, a company that is
the subject of takeover ceases to exist and the company continues to own the customer being in the
stock market.Today it is the basis for achieving synergies and growth of large and strong companies,
as well as improved performance and strategic goals. The acquisition of the target company may
be effected in the form of a friendly transaction, a situation in which the director and the board of
managers of the target company and its shareholders support the transaction and recommended the
enemy in the form of transaction where the offer sent directly to the public shareholders of target
companies are incompatible with the management team of bypassing the target company. Acquisition
can take different forms and ways of implementation. For example, payment can be made in cash
or securities, may be friendly and hostile, and may be directed to the full or partial control over the
acquisition of another company. Also, it can be played in three forms: as a direct private offering and
the preferred management company, as a public offer to buy shares as acquisition of physical assets.
Thus, for example, the company Daimler-Benz and Chrysler ceased to exist when the two companies
merged and formed a new - DaimlerChrysler. In Table 2., showing the movement of the basic
parameters of transactions in DaimlerChrysler merger.
Table 2. The success of the DaimlerChryslermerger
Name Daimler u bn $ Chrysler u bn $ DaimlerChrysler u bn $
The market value before the transaction 52,8$ 29,4$ 82,2$
Added value 18,0$
The market value after the transaction 100,2$
Percentage of ownership after the transaction 57,2% 42,8% 100%
The value after the transaction 57,3$ 42,9$ 100,2$
Gains on certain groups of shareholders 4,5$ 13,5$ 18,0$
The relative gains of shareholders in% 9% 46%
Source: www.sec.gov.rs : Mergers and acquisitions, taken (15.05.2011.);
Based on data presented in the previous table we can see how much they amounted to the value of the
basic parameters of theDaimlerChrysler merger transaction.
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3. MOTIF SYNERGY MERGERS AND ACQUISITIONS
Various motives are combining different name for the potential sources of value in
transactions. If the offce of the real motives and potential sources of value to materialize, the
transaction will bring benefts to shareholders, to be successful and add value. When the acquisition
of the target company must pay its fair market price or higher price, added value can be
created only on the basis of exploiting synergies and effective management, ie. better control and
improved asset management strategies. Synergetic effects are present when the value of the
combined companies after mergers or acquisitions worth more than the sum of the value of
individual companies before mergeror acquisition transactions.
Synergistic effect can be represented using the following equation (Todorovic, 2010., p. 138.)
Relation 1.:
ili value of synergies
With mergers and acquisitions transactions is possible business synergies and fnancial
synergies. Business synergy is the dominant form of synergy in combining strategic
enterprises. Increase cash fow is usually associated with business synergies, while reducing cost
of capital effects generally associated with the fnancial effects. Business synergy manifested
in additional, differential or incremental future free cash fows FCFF combined entity than the
sum of future free cash fows of companies A and B. Differential FCFF can be approximated by the
difference of income differential and differential costs, differential and differential taxation of capital
expenditures, we introduced the relation 2. (Todorovic, 2010., p. 138.).
Relation 2.:
Sources of value in the case of differential income, represent the effects arising from the conquest of new
markets and industries, improve product mix, improved promotion, use of co-branded, improvements
in the distribution network, management know-how, improved fexibility of managers in exploiting
perceived opportunities, effective transfer of key skills and others. Cost savings based on economies
of scale and economies of vertical integration, which implies. Economies of vertical integration,
refers to the cost savings that are achieved due to the internalization of transactions and raw material
supply in the early stages of production and distribution process transactions or distribution of fnished
products in the later links of the production-distribution chain.Also, the business combination may
result in tax savings, ie. If one of the companies entering the combine is operated at a loss, the tax
base and the amount of tax paid by the combined entity would be less than the sum of the tax base
or the amount of taxes to be paid in two separate companies. Investment needs of the combined
companies should be lower than the sum of the investment needs of separate companies, which
means that transactions of mergers and acquisitions of water cuts in capital expenditures. Sources
of fnancial synergy can represent unused free cash fows and debit unused capacity. In the absence
of proftable internal investment opportunities, mergers and acquisitions with positive net present
value, may be a good alternative to the use of free cash fow (Todorovic, 2010., p. 142.). Therefore,
combining the company with surplus cash and no good investment opportunities with companies that
do not have suffcient cash to fund good investment opportunities are an important form of fnancial
synergies. Unused debit facilities as a source of fnancial synergies of the combined entity, is refected
in the use of leverage to the target company failed to exploit. It is also important to emphasize that
combining the companies from various sectors through acquisitions and conglomerated merdre
carries the possibility of reducing the instability of business proft and net cash fows.
In order to achieve their full synergistic effect it is necessary to the acquisition process are adequately
designed, to approach the conclusion of the acquisition deal appropriately with the appropriate tactics,
and integration postakvizaciona be implemented on the basis of the established planning acquisitions.
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4. ANALYSIS AND EVALUATION OF THE EFFECTS OF MERGERS AND ACQUISITIONS
BASED ON THE DCF METHOD
By far the most commonly used method of valuation of companies in mergers and acquisitions
transactions is based on discounting cash fows (Discounted Cash Flow - DCF). Also, based on
discounting cash fows is the economic framework for investment decision making. Enterprise value
represents the present value of cash fow projections over the period, increased by the amount the
present value of cash fow projections beyond the period (uriin, 2007., p. 346.). The basic premise
underlying the DCF method, implies that the value of the company capital is equal to the sum of net
present value of future infows, the potential owners can realize the unlimited long period.Applying the
DCF method requires a response in at least three questions. First, how do you defne cash fow? Then,
what is the discount rate? How long is the period of cash fow projections?
Economic theory and practice recognizes two defnitions of cash fow. Cash fow after debt service
and cash fow before debt service. Net cash fow after debt service so as to compute realized gains
or projected increase in the selected period of depreciation, then the sum obtained by deducting the
amount of investment in working capital and fxed assets, as well as the amount of repayment of existing
long-term loans (Leko, Vlahovic, acquaintances , 1997., p. 41.). Net cash fow before debt service
obtained by the sum of the projected proft excluding fnancial income and expenses of fnancing and
depreciation subtract the amount of projected investment in fxed and current assets (Leko, Vlahovic,
acquaintances, 1997., p. 42.). The value of equity is the difference between the estimated long-term
capital and long-term loans that existed on the date when the selected. The following work shall effect
an empirical elaboration of using cash fow after debt service, so we will work to give the following
basic principles of analysis of cash fow after debt service. The discount rate used in the calculation of
equity value based on an analysis of cash fow after debt service, we get a budget based on cost of equity.
To determine the cost of equity, it is possible to use three methods (Leko, Vlahovic, acquaintances,
1997., p. 54.) Method CAPM (Capital Asset Pricing Model), a method of general instructions and
method of walling (Build up approach). In this paper, we as a method of determining the price of
the equity method of use of masonry (Build up approach). According to the method of building, the
discount rate is calculated as the sum of the following three components (Bojovi, 2006., p. 137):
The real rate of return on investment without risk;
The risk premium of investment into the country;
The risk premium in the investment company.
The real rate of return on investment without risk is related to the return on investment in government
bonds. The premium for the risk of investment in land should be included because it can occur as
investors and foreign entities. The calculation of the risk premium of investment in the country includes
an assessment of specifc risks related tofunding, business environment risks and fnancial
risks in the country. On the other hand the risk premium for investing in a company whose capital
is estimated assess mentincludes specifc risks such as key man risk (Key Man), frm size, fnancial
structure, production /geographic diversifcation,
diversifcation of buyers and predictability. Analysis and interpretation of mathematical calculations
valuation companies, as well as mergers and acquisitions transactions, we will show on the basis of
hypothetical examples of practical analysis of the company A and company B. Budget d projections of
net cash fow after debt service company A, are shown in Table 3.
Table 3. Budget and projections of net cash fow after debt service company A
Planned projection
Description
/ Year
2011 2012 2013 2014 2015 2016 2017
1. Proft 10.000.000,00 10.100.000,00 10.500.000,00 11.000.000,00 11.900.000,00 12.950.000,00 14.000.000,00
2. Amortization 2.300.000,00 2.300.000,00 2.300.000,00 2.300.000,00 2.300.000,00 2.300.000,00 2.300.000,00
3. Changes
in long-term
loans
1.700.000,00 1.212.000,00 1.470.000,00 1.760.000,00 1.023.000,00 1.331.000,00 1.660.000,00
4. Changes
in working
capital
330.000,00 232.300,00 451.500,00 363.000,00 440.300,00 530.950,00 602.000,00
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5. Investments in
fxed assets
700.000,00 909.000,00 1.050.000,00 1.100.000,00 1.190.000,00 1.424.500,00 2.090.000,00
6. Repayment
of long-term
loans
100.000,00 150.000,00 200.000,00 170.000,00 130.000,00 180.000,00 210.000,00
7. Net cash
fow after debt
service company A
(1+2+3-4-5-6)
12.870.000,00 12.320.700,00 12.568.500,00 13.427.000,00 13.462.700,00 14.445.550,00 15.058.000,00
Source: The author
The remainder of this paper we approach the analysis of the discount rate. Interest rates on
bonds whose issuer is the Republika Srpska is about 3% per annum. In this regard, according to this
method, the real rate of return on investment without risk in the Republika Srpska is 3% (Directorate
for Privatization of Republika Srpska). Suppose that the risk premium of investment into the
country, based on the assessment of specifc risk is 6% (Direction for the privatization of Republika
Srpska). The remainder of this paper, we will analyze the rate of risk of investing in company A. Table
4. shows the calculation of risk of investing in company A (Leko, Vlahovic, acquaintances, 1997., p.167.
Table 4. The calculation of risk of investing in a company
Scale risk of investing in a company in%
0 1 2 3
Key man
Organizational Structure +
The compactness of management team +
Strategic planning +
Product Range +
Specialized knowledge of an expert +
Weighted 0 0 6 6
Sum 12
Number of parameters 5
Specifc risk 2,40%
Company Size
Number of employees +
The value of business assets +
Rating competition +
Weighted 0 3 0 0
Sum 3
Number of parameters 3
Specifc risk 1,00%
Financial Structure
Fixed Assets / Capital +
Inventories and fxed assets / long-term capital +
Equity / Total capital +
Kontribucioni proft / revenue +
Financial Expenses / Income +
Weighted 0 3 4 0
Sum 7
Number of parameters 5
Specifc risk 1,40%
Production / geographic diversifcation
The contribution of certain product revenue +
Existence of long-term contracts +
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The share of foreign investments in income +
Access to EU market +
Weighted 0 1 2 3
Sum 6
Number of parameters 4
Specifc risk 1,50%
Customer diversifcation
Concentration of buyers +
The size and position of the dominant buyers +
The existence of long-term contracts +
The importance of products to customers +
Weighted 0 0 0 12
Sum 12
Number of parameters 4
Specifc risk 3,00%
Ability to predict
Age enterprises +
The stability of business performance +
Discontinuities in business +
Changing economic environment branches +
Weighted 0 0 2 9
Sum 11
Number of parameters 4
Specifc risk 2,70%
Total at-risk companies in% 12,00 %
Source: The author
Based on the above analysis, we calculated the rate of investment risk in company A was
12%. Adding the previous components, we get a discount rate of 21%. Since the company and
after the projection period (2011 .- 2017th), carries on business, we will analyze the residual
value (Residual Value). Residual value(Residual Value) represents the value of cash fows in
periods after the period of prediction. To calculate the amount of residual value, we use a
mathematical relationship to calculate the residual value on the basis Gordonov models.
Relation 3. (Leko, Vlahovi, Poznani, 1997., p.171.):
RV=
Where:
RV residual value;
DNNTr discounted net cash fow in the residual;
DS discount rate;
SRr growth rate in the residual;
The value of net cash fow in the residual value of the product as we get the cash fow projections in
the last year and growth rates in theresidual cash fow. Assuming that the expected constant growth
ratein the residual cash fow, ie. for the period after the 2017th amounts to 3%, we will value the
calculation of net cash fow in the residual.Net cash fow will be equal to the residual net cash
fow realized in 2017. year, plus the amount of projected growth rates in constant residual.
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The value of net cash fow in the residual (2018) = 15.058.000,00+15.058.000,00*3% = 15.509.740,00
The following work shall effect the residual value calculation. It is noteworthy that in practice most
often when evaluating the company does not perform the calculation of residual values. This practice
is used in international projects that are cultivated and processed in this area. In practice, most often
used depending on the business they are engaged in an enterprise, a long enough period of projection.
On the basis of the relationship 1., the residual value is:
RV (Residual value) =
RV (Residual value) = 22.689.996,05 KM
The remainder of this paper we approach the calculation of present value of net cash
fow projection period, discounting all cash fows to present value, calculated using a discount rate.
Present value of net cash fow projection period = + +
+ + + + =
46.168.445,78 KM
A company will get value by adding the present value of net cash fow projection periodand the
amount of residual value.
Value of the company A ) (
A
V = 46.168.445,78 + 22.689.996,05 = 68.858.441,82 KM
Projected net cash fow after debt service company B, is shown in table 5.
Table 5. Projected net cash fow after debt service company B
Planned projection
Description
/ Year
2011 2012 2013 2014 2015 2016 2017
Net cash
fow after debt
service company
B
1.000.000,00 1.000.000,00 1.500.000,00 2.400.000,00 2.700.000,00 3.000.000,00 3.600.000,00
The remainder of this paper we approach the analysis of the discount rate for the company B. Interest
rates on bonds whose issuer is the Rpublik Srpsk is about 3% per annum. In this regard, according to
this method, the real rate of return on investment without risk in the Republika Srpska is 3%(Directorate
for Privatization of Republika Srpska). Suppose that the risk premium of investment into the
country, based on the assess ment of specifc risk is 6% (Direction for the privatization of Republika
Srpska). On the other hand we will assume that the rate calculated risk of investing in company B is
15%. Adding the previous components, we get a discount rate amounting to 24%. Assuming that the
expected constant growth rate in the residual cash fow, ie. for the period after the 2017th amounts
to 4%, we will value the calculation of net cash fow in the residual-based model Gordonov. Net cash
fow will be equal to the residual net cash fow realized in 2017. year, plus the amount of projected growth
rates in constant residual.
The value of net cash fow in the residual (2018) = 3.600.000,00+3.600.000,00*4% = 3.744.000,00
The following work shall effect the residual value calculation. On the basis of the relationship frst,
the residual value is:
RV (Residual value) =
RV(Residual value) = 4.152.924,62 KM
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The remainder of this paper we approach the calculation of present value of net cash
fow projection period, discounting all cash fows to present value, calculated using a discount rate.
Present value of net cash fow projection period = + + +
+ + + = 5.803.574,25 KM
The value of company B will get by adding the present value of netcash fow projection period and
the amount of residual value.
Value of the company B ) (
B
V = 4.152.924,62 + 5.803.574,25 = 9.956.498,87 KM
Based on preliminary analysis, the value of the new entity resulting
from merger or acquisition by company A and company B is:
= 68.858.441,82 + 9.956.498,87 + value of synergies;
= 78.814.940,69 + value of synergies;
Or
> 78.814.940,69;
The value of synergy is measured using the parameters that we previously analyzed, which refect
the operating and fnancial synergies. The effects of business synergies will be refected in the
more increase in expected cash fows of the combined entity will be perceived more synergism of
two independent entities. It is also important to stress that the value of total capital is the range between
the lower and upper limit values of total capital (the Regulation on the methodology for the valuation of
capital assets and RS).
5. VALUATION OF SYNERGIES IN MERGERS AND ACQUISITIONS TRANSACTIONS
In the previous chapter we analyzed the procedures for assessing company value inmergers and
acquisitions transactions. However, transactions in mergers and acquisitions, the buyer company,
or company that brings together, in addition to the value of other acquired companies and the value
of business and fnancial synergies.
The remainder of this paper will present models of valuation synergies in mergers and
acquisitions transactions. The effects of business synergies will be refected in the more increase
in expected cash fows of the combined entity will be perceived higher degree of synergism of
two independent entities. Calculation of business synergies valuation effects is shown in Table 6.
Table 6. Calculation of valuation effects of business synergies
Year projections
2011 2012 2013 2014 2015 2016 2017
Net cash
company fowA
(FCFFA)
12.870.000,00 12.320.700,00 12.568.500,00 13.427.000,00 13.462.700,00 14.445.550,00 15.058.000,00
Net cash
company fow
B (FCFFB)
1.000.000,00 1.000.000,00 1.500.000,00 2.400.000,00 2.700.000,00 3.000.000,00 3.600.000,00
FCFFA+B 13.870.000,00 13.320.700,00 14.068.500,00 15.827.000,00 16.162.700,00 17.445.550,00 18.658.000,00
FCFFAB 13.911.610,00 13.853.528,00 14.673.445,50 16.555.042,00 16.938.509,60 18.317.827,50 19.609.558,00
The effects
of business
synergy
41.610,00 532.828,00 604.945,50 728.042,00 775.809,60 872.277,50 951.558,00
Source: Author based on data in Table 4. and 5.
One of the aspects of fnancial and tax synergies are the effects of the new entity. The
following work shall effect the calculation ofvaluation effects of fnancial synergies through the tax
effects of the new entity. Calculation of the synergy effects of the evaluation is shown in Table 7.
Table 7. Calculation of valuation effects of fnancial synergies
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Category CompanyA CompanyB Company AB
Income 60.000.000,00 5.000.000,00 65.000.000,00
Amortization 2.300.000,00 250.000,00 2.550.000,00
Other expenses 47.700.000,00 3.750.000,00 51.450.000,00
Business proft 10.000.000,00 1.000.000,00 11.500.000,00
Tax 3.000.000,00 300.000,00 3.450.000,00
Net cash fow from
businesse activities
9.300.000,00 950.000,00 10.600.000,00
Financial synergies
(tax effect)
350.000,00
Source: Author based on data in Table 4. and 5.
Net cash fow from operating activities of the combined entity will begreater than the
sum of 350,000.00 net cash fows of individualcompany A and company B.
6. CONCLUSION
The globalization of business, strong competitiveness and volatility environment, mergers and
acquisitions, as well as external growth strategy of the company, enabling frms to adapt to
new opportunities and better positioned to achieve greater value for their stakeholders. Whether
the result of a new company mergers or acquisitions, it must achieve a certain synergy effects that
justify the whole procedure. First, it should be achieved by increasing the volume of productionwhich
can result in the benefts that brings economies of scale. Also, the conquest of new technologies that other
companies have kept and improved competitive position. In addition, mergers or acquisitions, the
company win new markets and use existing distribution networks that support revenue growth. On
the cost side, the reduction of staff in public sectors is achieved by signifcantly reducing costs. Of
course, the management company which intends to merge with another company must frst evaluate
whether the investment is proftable for them.
In this sense, they must assess how companies target actually worth. Naturally, both sides of
this work have different views about the value of the company that target: the seller intends to
evaluate the company as expensive as possible, while the buyer will try to lower the maximum price
possible. Mergers and acquisition strategy to promote the necessary process of external expansion
of the company. In most cases, companies can initiate to pay a signifcant premium to market price of
shares of the company you are buying. The justifcation for this procedure almost always comes down to
the notion of synergy. However, the added value of the new entity is noteasy to create in practice,
things can often go awry. There are many ways to assess the value of target.
The value of targets can be evolved over the discounted net revenue in the future the
company realized or, even, than replacement cost of assets targets. As we already pointed out,
the value of newly created entity, the sum of the value of individual companies entering into
transactions and mergers and acquisitions value of operating and fnancial synergies. He was taken
to a large number of studies that had been the subject of factors affecting the failure of mergers of
companies. Most of the results suggests that companies focus too much on reducing costs, and
ultimately, revenue and proft are ignored. The management company that is the product of mergers may
be too focused on integrative issuesand cutting costs, while neglecting the operational activities leading
to the gradual loss of customers and, ultimately, reducing the companys value.
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Reference
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Gaughan, P.,A., (2002.), Mergers, Acquisitions and Corporate Restructurings, New York: John Wiley & Sons;
Ivnivi, ., (2008.), Pslvn fnnsi, knmski fkultt, Bgrd.
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London: Response Books Business Books from SAGE;
Lk, V., Vlhvi, ., Pznni, V., (1997)., Prcn vrdnsti kpitl-mtdlgi i primri, Bgrd,
knmski institut Bgrd,
Mishkin,F.; Eakins, S., (2006.), ntrn knmi, bnkrstv i fnnsisk trit, Dt sttus, Bgrd.
Rezaee, Z., (2001.), Financial Institutions, Valuations, Mergers, and Acquisitions, New York, John Wiley &
Sons;
Roberts, D., (2009.), Mergers and Acquisitions an insiders Guide to the Purchase and Sale of Middle Market
Business Interests New York, John Wiley & Sons;
Todorovi, M.,(2010.) Poslovno i fnansijsko restruktuiranje preduzea, CID Ekonomski fakultet Beograd,
Beograd;
Uredba o metodologiji za procjenu vrijednosti kapitala i imovine RS;
Van Horne, J., Wachowicz, J., (2002.), snv fnnsiskg mndmnt, 9. izd., t, Zgrb.
www.acquisitions-monthly.com (taken, 30.05.2011.)
www.sec.gov.rs : Merderi i akvizicije, (taken, 15.05.2011.);
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COGNITIVE CAPITALISM AND CONTROL OF AN INCREASINGLY AUTONOMOUS LABOR
FORCE IN ORGANIZATION
Aleksandar Keeljevi
Faculty of Economics, University of Ljubljana, Slovenia
E-mail: saso.keseljevic@ef.uni-lj.si
Abstract
Fundamental shift has been occurring today from the economy based on physical resources to the one based
on knowledge. Knowledge is increasingly spilling over to others through the socialization process, and thus it
is becoming even more a common good and even less a private one. Author strongly believes that incongruity
between knowledge as a private or/and a common good brings out the contradiction between social production
of knowledge and private appropriation of it. Author argues that this contradiction will help us to better
understand that the current crisis of capitalistic system is not a cyclical crisis, but a structural one. Instead of
continuous precarization of labour the author seeks to explain why a new labour-capital compromise should be
based on a different understanding of the knowledge.
Keywords: Knowledge, Common good, Cognitive capitalism, Rent, Crisis.
1. INSTEAD OF INTRODUCTION
Knowledge revolution describes the fact that the emergence of wealth will be in the future mainly
derived from knowledge. The main source of the creativity and value now resides in knowledge
workers and not in physical capital. It is becoming apparent that ownership of the means of production
in the knowledge economy is going to be less straightforward than in the past since most valuable
assets resides in the brains of the workers. In this context the old antagonism between labour and
capital reappears in the new form.
In the paper the author seeks to show why the key to understanding, of the todays crisis and antagonism
between labour and capital, lies in understanding of the knowledge. In the second chapter the author
provides arguments for understanding the true nature of knowledge. In the third chapter the author
seeks to explain a contradiction between social character of knowledge production and the private
character of its appropriation. In the last chapter the author argues that this contradiction can help us
to better understand the current crisis of capitalism and the need for a new labour-capital compromise.
2. KNOWLEDGE AS A COMMON GOOD
I believe that, besides the behaviour of fnancial markets, the key to understanding the todays
economic crisis lies in deeper understanding of knowledge and its valorisation mechanism. Hence,
we frst need to discover the nature of knowledge itself, in particular whether it is a private and/or a
common good. Knowledge requires its carrier. Knowledge-cognitive processes are basically related to
the individual, since only subjective knowledge can provide the basis of decision-making. Acquiring
knowledge is an individual process since individuals can acquire knowledge only through education.
The neoclassical human capital theory underlines that knowledge is basically a personalised process,
an investment into an individual, who is giving up a part of his or her income during education,
trading it for higher income in the future (Mincer, 1958; Becker, 1964; Schultz, 1960). Consequently,
an organisation can only learn by learning of its members or by accepting new ones (Senge, 1990).
Nonaka (1994) and Grant (1997) emphasise that individual knowledge is stored in physical skills
and in the brain, and can therefore only be transferred with the person that possesses it. All these
statements show us, that knowledge is primarily a private good, because it is embodied in individual
and its acquisition pertains to individual who appropriates the majority of the benefts derived from
the investment into it.
Through socialization process knowledge becomes materialized in machinery, teamwork, and in
production-organizational process. The process of acquiring knowledge which is fundamentally related
to the individual apparently generates positive externalities that are manifest at the organizational level.
Organization should be therefore viewed as a lot more than a group of individuals. Numerous authors
acknowledge the organizations capacity to create, learn, and store knowledge. Nelson and Winter
(1973, 1982) stress that organization creates through its operations, learning, and experience its own
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organizational knowledge. Holzner and Marx (1979) assert that organization as a collective agent of
knowledge has the capacity to learn. Organizational learning, organizational routines, and collective
brains are notions that point to a conception of the organization as an agent of knowledge. For instance,
Senge (1990) speaks of a learning organization, Quinn (1992) of an intelligent organization, and
Nonaka and Takeuchi (1995) of a knowledge enterprise. It means that an organization can be an
important agent of knowledge, besides the individual.
Knowledge also enters the market, through the system of property rights hold by individuals and
organizations, where knowledge can be exchanged for other entitlements. At the same time individual
subjects are, though the information function of the market prices, learning from each other (Hayek,
1945). Market becomes a way of social learning and acquiring knowledge. Relations keep emerging
through market as a process of social learning. Hence, knowledge cannot be entirely understood
through the prism of an individual or an organization, but only through a more profound insight into
the market mechanism. Or to put differently, knowledge ceases to become a private commodity, since
knowledge is increasingly spilling over to others through the market relations, and thus it is becoming
even more a common good and even less a private one.
3. SOCIAL CHARACTER OF KNOWLEDGE PRODUCTION AND THE PRIVATE CHARACTER
OF ITS APPROPRIATION
Knowledge related processes are basically related to the individual, since it is primarily acquired
through education and since only subjective knowledge can provide the basis for decision-making.
However, the knowledge is diffused through the whole society. It is spilling over to other users, and
thus it is becoming a common good. It means that the business competitiveness increasingly depends
today on so called external knowledge suppliers such as public research, mass education and the
rising level of general training. This is completely contrary to the traditional model of industry which
is based on the central role of the technical division of labour in the organization.
Since knowledge is produced by social cooperation and through the market society it means that as
such it does not belong to a single owner. Therefore, the value that springs from its use it simply cant
be the reward of the investment in physical capital. Value is generated by the social cooperation;
thus the expropriation is no longer confned within the individual or organization but extended to the
whole society (Vercellone, 2010, 93). In other words, as long as proft comes from the exploitation
and expropriation of knowledge as a common good for private purposes it can be partially understood
as a rent. It means that contradiction between knowledge as a private and/or a common good brings
out the contradiction between social production of knowledge and the private appropriation of it.
Therefore, the cognitive capitalism requires a different understanding of the valorisation process in a
way that a single person cannot take the rent from a system based on social cooperation. In the Fordist
paradigm the valorisation is based on the tangibility of production factors itself and its necessary time
for production. In the cognitive capitalism the process of valorisation is not immediately computable
at the time of production and the result is the crisis of the traditional measurement of the value
(Fumagalli, 2010, 65). New understanding of knowledge represents a new way of valorisation, since
the main source of value resides in creativity of the key workers and because of the nature of the
knowledge as a common good is based largely on the factors outside the enterprise itself (e.g. public
research, mass education, the rising level of general training) (Marazzi, 2008). Expropriation of
knowledge as a common good is no longer confned solely within the factory but extended to the
whole society as well. As knowledge becomes a common good, the measurement of valorisation
tends to realize itself through socialization of knowledge.
Such an understanding undoubtedly opens dilemmas regarding the wage system (e.g. universal basic
income) and intellectual property right regime (Keeljevi, Cvijanovi, 2011). From perspective
of knowledge the universal basic income should not be understood only as social security income,
but primarily as a collective investment of society into knowledge which steam from individuals
productive contribution and its spill over effects. It also means, that the existing property rights (IPR)
institutional framework in which knowledge is neither freely produced, nor freely available, is in
deep contrast with the nature of knowledge (as the common good) as the most important production
factor in capitalism (Keeljevi, Cvijanovi, 2011).
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4. CRISIS AND INCREASINGLY AUTONOMOUS LABOR FORCE IN COGNITIVE CAPITALISM
The current debate about the causes of todays crisis mainly deals with the responsibility of the
fnancial system (e.g. real negative interest rates, inappropriate monetary policy, weak regulation,
systemic risk, high leverage effect). At the moment it seems that the rescue packages, like large
increases in public defcits and expansionary monetary policy, will not be suffcient to restore soon
the previous growth rates. At the moment it does not seem that BRIC countries can suffciently
compensate for the loss of internal demand in the most developed countries (e.g. EU, USA).
Fumagalli, Lucarelli (2010) and Vercellone (2010) believe that the origin of the crisis lies in the
tendency of the fnancial capitalism toward a rent which does not belong to them. This rent comes
from the exploitation of knowledge as a common good, produced by social cooperation, which does
not belong to a single owner. It means that the value cannot simply be the reward of the investment in
the physical capital. Since capitalistic accumulation is reproduced in the subsumption of the common,
it means that a crisis becomes a permanent process.
Knowledge capitalism requires a different understanding of the valorisation process in a way that
a single person cannot take the rent from a system based on social cooperation. I strongly believe
that incongruity between knowledge as a private/common good, which brings out the contradiction
between social production of knowledge and private appropriation of it, is crucial in explanation of
the current economic crisis. Capital-labour antagonism takes the form of antagonism between the
institutions of the common as the foundations of knowledge based economy and the institutions of
appropriation of the common good (Vercellone, 20101, 92). The explosion of the todays crisis is the
result of this antagonism, since the fnancial markets have taken the rent from the social production
of knowledge.
These structural reasons in combination with the exhaustion of the technological foundations of
the Fordist paradigm are shown as endless attempts of companies to bring back by different means
the high proft rates through reduction in labour costs, fexible labour forms, attacks on syndicates,
automatization and robotization of the entire labour process, delocalization of industry in countries
with low wages and strong industrial reserve army force, and in precarization of work (Marazzi,
2010; Fumagalli and Lucarelli, 2010). The current crisis of capitalistic system is therefore not a
cyclical crisis, but a structural one.
Knowledge increasingly becomes with the individuals inclusion into the organization and society a
common good. In this context the old dilemma between labour and capital reappears in the new form
(Vercellone, 2010, 106). The knowledge embodied in key workers surpassed the knowledge embodied
in material capital and becomes the principal factor of economic growth. Capital is obviously loosing
control since it has been increasingly dependent on the quality of cooperation among workers and
on external providers of knowledge (e.g. public research, mass education). It seems that capital
answers to this challenge with continuous precarization of labour instead with a new labour-capital
compromise based on the nature of knowledge.
5. CONCLUSION
Knowledge revolution describes the shift from the economy based on physical resources to the one
based on knowledge. The wealth of nations will be in the future mainly derived from knowledge,
which has become today the prime factor of the value and the principal factor of economic growth.
Knowledge-cognitive processes are basically related to the individual, since individuals can acquire
knowledge only through education. However, knowledge cannot be fully understood through the
prism of an individual or an organization, but only through a more profound insight into the market
mechanism. Since knowledge is increasingly spilling over to others in organizations and society and
through the market relations it is becoming more a common good and less a private one.
Contradiction between knowledge as a private and/or a common good brings out the contradiction
between social production of knowledge and the private appropriation of it. In other words, as long
as proft comes from the exploitation and expropriation of knowledge as a common good for private
purposes, it can be partially understood as a rent. Since knowledge is produced by social cooperation
it means that such rent does not belong to a single owner.
Author also believes that the origin of the todays crisis lies in the tendency of the fnancial capitalism
toward a rent which does not belong to them. Since capitalistic accumulation is reproduced in the
subsumption of the common, it means that a crisis becomes a permanent process. These structural
reasons are shown as endless attempts of companies and a strong tendency for fexible labour forms,
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precarization and reduction in labour costs and in employment security. The current crisis of capitalistic
system is therefore not a cyclical crisis, but a structural one. Therefore, knowledge capitalism requires
a new labour-capital compromise based on the nature of knowledge and a different understanding of
the valorisation process in a way that a single person cannot take the rent from a system based on
social cooperation.
Reference
Becker, S. G., (1964). Human Capital: A Theoretical and Empirical Analysis with Special Reference to
Education. New York: National Bureau of Economic Research
Fumagalli, A. and S. Lucarelli, (2010). Cognitive Capitalism as a Financial Economy of Production. in V.
Cvijanovi, A. Fumagalli and C. Vercellone, eds.: Cognitive Capitalism and its Refections in South-
Eastern Europe, Frankfurt am Main: Peter Lang
Fumagalli A. (2010). The Global Economic Crisis and Socioeconomic Governance in A. Fumagalli and S.
Mezzadra, eds.: Crisis in the Global Economy: Financial Markets, Social Struggles, and New Political
Scenarios. Los Angeles: Semiotexte
Grant, M. R., (1997). The Knowledge Based View of the Firm: Implications for Management Practise, Long
Range Planning. 30(3), pp. 450-454
Hayek, F. A., (1945). The Use of Knowledge in Society, The American Economic Review. 35(4), pp. 519-530
Holzner, B. and J. Marx, (1979). Knowledge Application: The Knowledge System in Society. Boston:
Allyn&Bacon
Keeljevi A., Cvijanovi V. (2011). Cognitive capitalism and the global crisis : nothing will ever be the same.
V: Challenges of Europe : growth and competitiveness - reversing the trends. Split: University of Split,
Faculty of Economics, 2011.
Marazzi, C., (2008). Capital and Language: From the New Economy to the War Economy. Los Angeles:
Semiotext(e)
Mincer, J., (1958). Investment in Human Capital and Personal Income Distribution, The Journal of Political
Economy. 66(4), pp. 281-302
Nelson, R. and S. Winter, (1973). Toward Evolutionary Theory of Economic Capabilities, The American
Economic Review. 63(2), pp. 440-449
Nelson, R. and S. Winter, (1982). An Evolutionary Theory of Economic Change. Cambridge: Belknap Press
Nonaka, I. and H. Takeuchi, (1995). The Knowledge Creating Company. New York: Oxford University Press
Nonaka, I., (1994). A Dynamic Theory of Organizational Knowledge Creation, Organization Science. 5(1),
pp. 14-37
Quinn, J., (1992). Intelligent Enterprise. New York: The Free Press
Schultz, W. T., (1960). Capital Formation by Education, The Journal of Political Economy. 68(6), pp. 571-583
Senge, P., (1990). The Fifth Discipline. London: Century Business
Vercellone, C., (2010). The Crisis of the Law of Value and the Becoming-Rent of Proft in A. Fumagalli
and S. Mezzadra, eds.: Crisis in the Global Economy: Financial Markets, Social Struggles, and New
Political Scenarios, Los Angeles: Semiotexte
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THE PRODUCT MARK-BRAND AND ITS ASSESSMENT IN THE MACEDONIAN MARKET
Nexhbi Veseli
SEE University, Business and Economics Faculty, Macedonia
E-mail: n.veseli@seeu.edu.mk
Jusuf Zekiri
SEE University, Business and Economics Faculty, Macedonia;
E-mail: j.zekiri@seeu.edu.mk
Abstract
This paper is structured in several chapters and sub-chapters, where thorough analyses were made about the real
situation of brand products in our country, and uncontrolled production and the distribution of various brands
on the market that in most cases make the process diffcult of deciding to purchase the desired brands that are
offered in the market, for meeting the objectives of individuals and organizations. Therefore, the company in
order to realize the desired products from the market, it must take into account customer demand, technological
capacity, its skills, and commercial and fnancial potentials. First of all, the product strategy does not mean only
the technical characteristics of hoped by the demand, but also the psychological expectations, which appear
with the choice of the form, design, brand, packaging, and other services. Finally, the marketing-mix and
other marketing variables (price, communication, motivation, distribution, etc.) need to be determined by the
product policy, since the choices made at these levels directly affect the image-branding of the product. Thus,
the purpose of the paper is the brand of product, which has special importance for the successful penetration
and product positioning in the market. In this paper, we analyze in particular, theories or brand marks, meaning
the brand of the product, the functions of the brand, brand policy, factors that infuence the creation of the
brand, brand testing and brand positioning in the market
And fnally, we present results from the survey conducted with a structured questionnaire, where a total number
of 1424 respondents were surveyed, where they responded to 14 questions about the brands of products. From
the obtained results we came up with some fndings about confdence in brands, their admiration, how much
are brand products purchased, who purchases them, the satisfaction from brands purchased, and so on. From
the fndings for brands on the Macedonian market, we recommend solutions on how companies should brand
their products.
Keywords: Product brands-brands, Customers, Companies.
1. INTRODUCTION
Product Brands
The presence of a large number of products with the same value or for the same usage, intends to
fulfll the same or similar needs of customers, adds the need for identifying all needs of use of each
type of product to any manufacturer. This role in the contemporary market economy has been played
by brand or product brand.
The mark or brand is a well-known name or sign of any product, an acronym, a collection of words,
syllables, letters, symbols, pictograms or a logo (ex: 3 Mercedes star properties), a shape, a design
(ex: Perrier Bottle) , a collection of colors (Kodak), specifc graphs, ways of writing the name (Ford)
or a combination of two or more elements from these, which are intended to identify manufacturers
products or services from other manufacturers, which often means the quality of products.
As can be seen the brand product uses various tools for the purpose of performing the function
itself. In practice we fnd various ways of presenting the brand of products. In most cases, brand-
name is expressed with a pronounceable name, known as product name, ex: Pepsi-Cola. When
it has a name and is registered at a legal competent authority, then it is as used as a protective sign.
The protective sign beside the product name, it includes the manner of its graphic and structural
expression, packaging and other associated symbols.
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2. THE MOST IMPORTANT TERM OF PRODUCT BRAND (MARKS OR BRAND)
These two terms are very often argued within circles of marketing experts in order to fnd out which
of the two terms is more suitable for products or companies. In marketing practice, there are two
rhymes, on the one side are proponents who think that marks and brand are with different meanings
that must be differentiated, and, on the other side those that support the thesis that these two terms
are synonyms.
It can be found even in large vocabulary of International Marketing and Communications the concept
for the expression as: brand image which is probably explained as: customer feedback about product
and about which brand is registered and legally protected.
Which meaning is right?
MARK = BRAND - the personifcation of the product for customer loyalty.
Brands and markss are synonymous, that means they have the same meaning and signifcance,
although there are opinions that the brand is the trend of the time and has to do with the branding of
the product and is more important than the mark.
The three most important terms related with the brand are the following:
The value of the brand - based by that limit on which the brand has the highest confdence,
consumer awareness of the existence of this brand and strong cooperation in production. The
brand value has also other intangible assets as: the right of invention inventor, protection sign
and the spread of manufacturing channels.
The image of the brand - understood as the set of beliefs that consumers have about specifc
brands. The image must be developed rightly the negative image of the brand can be hardly
left aside.
The expansion of the brand - using its real name that successfully introduced or sold in the
same market. VIRGIN is a good example of how fully the expansion of the brand can be used
in any market.
3. THE FUNCTIONS OF THE BRAND
The main function of the product brand is to identify the value of use of each product, and the brand
itself appears as a product guarantee that contains those used vales attributed to the use of that specifc
product.
Kapferer and Laurent have defned six functions of the brand, as
1
:
The function of practicality;
The function of warranty;
The function of personalization;
The function of satisfaction;
The function of specifcation, and
The distinctive function.
The function of practicality is about the practical character of the brand. Brands should help to easy
memorize the results of the initial process of selection without the need to review again in order to
retake the brand that is prejudged as appropriate.
The function of the guarantee expresses the fact that for some customers and some products a
known brand is a guarantee for a better quality.
The function of satisfaction corresponds to customers satisfaction from the purchases, such as
varieties, where the lack of the brand will result in disappearing of the satisfaction.
The function of specifcation arises when the brand has a confguration similar to the product
quality. Trademark is inseparable from the product.
The brand has a distinctive feature when it is the only benchmark for product differentiation
by the customer. This feature is critical when products are opaque (metal, champagne, clothing,
1 J. N. Kapferer and G. Laurent, Ce qui vas changer LES MARQUES, Paru, 2005, pp.372
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liquids, etc.) because the name and visual identity of these products resemble to each other.
Choosing a brand and the elements that associate it (location, signs, colors, graphic elements, etc.) is
sometimes a way of differentiation, personalization and recognition of the product.
Before you introduce a brand on the market, it must be tested for:
Its readability;
Its ease of expression;
Its ease of memory;
Its attracting ability;
Its ability to be used without modifcation by foreigners
Its availability, etc.
In order for it to be more perceptive and acceptable by consumers- the market.
4. THE MAIN FACTORS FOR BRAND FORMATION
The brands are rarely held for only one product. They are most often conducted for the purposes of
lines or manufacturing groups. Professor David Jobber has identifed seven key factors for successful
construction of brands:
2
Quality - is an important ingredient of a powerful brand. It should be kept in mind that
advantage goals are items that customers have in their expectations. Statistical analysis
prove that with high quality brands, a greater volume of the market and greater proftability is
achieved compared to poorer competitors.
Position - has to do with the position that brands benefts from the market. Strong brands
have often the clearer position in the market. The positioning is achieved through several
means: brand name, image, service standards for the product, packaging and how the product
is sent to the market. The successful positioning represent the combination of activities above
mentioned.
Repositioning happens when the brand tends to change its position on the market in order to
fulfll the changed needs of consumers. This is mostly needed when the brand becomes not
as required maybe when the market is more developed, or is destroyed.
Communication - has also an important role in developing a successful brand. It was mentioned
that brand positioning is a must for attracting consumers, with the aim of building clearly
defned position in the target positions of the auditorium. In the beginning, it is very important
to use all the elements of the promotion techniques in order to attract customers, and then to
create positive beliefs which will increase the demand for those products.
Being frst in the market - in terms of brand development, as the frst promotor, it is possible
that the frst successful brand in the market to establish a clear position on the opinions of
consumers, before the competition. But being the frst in the market does not mean a guarantee
for long term success in the market.
Long term perspective - long-term investments are also an important factor in the brand
formation. Creating positive customer beliefs and brand trust requires a strong commitment
and long-successful management with marketing orders and costs creation. This means that
management must invest in brands by spending its short-term proftability.
Internal Marketing - fnally management should ensure that the brand is so well promoted
within the organization and outside it. This means that businesses in general must understand
the positioning and brand value. This is extremely important with service activities in the act
of service, where the critical brand value is with the quality of service that customers receive.
Marketers have a broader knowledge that strong brands which ensure high sales and profts, have
the potential to use the same strategy in all other products. There are two operations that are usually
named as rebuild and expansion of the brand.
2 M.J. Etzel, B. J. Walker, W.J. Stanton, Marketing, njimbdhjet edition, Irwin, 1997, p. 246-250.
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A successful brand helps companies to more easily enter a market with a new product line. Rebuilding
a brand has several advantages:
Consumers will associate the quality from brand expansion with the new product, and will
have the opportunity to trust the new product;
The new product will attract more quickly the customer, the awareness and will prepare him/
her for usage and taste of the new product;
Distributors may notice that there is lower risk if the new product holds in itself holds the
familiar brand;
The cost for promotions are supposed to be less.
5. BRAND POLICY
Brands at the same time represent an element of trade policy. Choosing a brand is the primary
policy, mainly in the discussion between manufacturers and distributors. The distributor pays a great
importance to the brand in order to refer to the product. This concept for better understanding is
presented in Figure -1.
3
Fig. -1. The role and importance of the brand for the product.
Choosing a brand is a primary policy, mainly in the discussion between manufacturers and distributors.
Some other important principles are:
The choice of a unique brand for the company or product line, provides good reputation of the
product, but in case of failure, threatens to damage the other products;
Policy brand differentiation increases advertising investment, but allows a very strong
segmentation;
When a frm has many lines, it is good to differentiate its lines to avoid negative effects of the
past;
The choice of a new brand leads to a higher product differentiation;
One of the main risks is cannibalism among brands, the last brands introduced in the market,
to gain market share on behalf of other brands of the same frm. This error is often the result
of inadequate or unclear positioning.
3 Nexhbi Veseli, Principles of Marketing, second edition-ALMA, Skopje, 2009.
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Different policies of brands of products can be presented with Figures -2.
Figure: 2 Brand policy
6. TYPES OF BRANDS
There are two important types of brands:
Manufacturing brands
Own label brands
Manufacturing brands are established and appointed by the manufacturers.
Manufacturers are responsible for the brand promotion. By building the brand,
manufacturers can achieve wide distribution of products and build customer confdence.
Own label brands are mediators that are created and possessed for the network distribution -
distributors. It happens in many cases that distributors are retailers, and all range of their products, to
be own-labeled. Distributors often mix manufacturing brands with own-labeled brands.
Own-label marketing, if done well, offers to consumers good value of money and
provides the distributor with additional skills when it comes to pricing and conditions
with manufacturing brands. Often the question is why businesses are trying to build brand.
There are many priority in for businesses that build up successful brands. This includes:
Higher price;
Higher proft;
Better distribution;
Consumers confdence.
Consumers are rarely prepared to pay compensation for products or services which carry only the
initial gains. Successful brands are those that besides the initial benefts that carry the product, they
also bring additional values to consumers. These additional values enables brands to be distinguished
from other competitive brands. When they are well built, consumers recognize the added value of the
preferred product and brand information. As for example, the customer may require a guarantee for
the quality, when not sure during the choice. The customer may also require a that brand has a special
meaning in terms of status or life style.
Brand theory assumes that there are three main types of brand names:
Familiar brand names - used for all products. Through building trust and loyalty to consumers
about familiar brand name, all products which use the brand can beneft. The use of familiar brand
name can bring up problems, if a product builds negative publicity in the market. This can destroy the
reputation of all assortments of brand.
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Individual brand names are not identifed with specifc companies. There are several reasons why
brands must have personal identity:
The product can be competitive in this new market segment, where a possible failure can
hurt the main family name;
Family brand name may not be well positioned for the entire market segment;
Brand may already be built, or in other words to be promoted as the leading brand in the
market segment. The fact that it is built from the company with a powerful brand family, does
not mean it should be changed.
Combined brand names links family name with individual brand name. The idea is to allow
several associations for the product with a powerful name of brand family as well as maintaining
some specifcations that customers know what they get.
The brand name should be chosen carefully because it gives consumers more information. The
following list contains ideas that should be constructed prior to fnal selection of brand name.
The brand name should:
evoke positive associations;
be easy for pronunciation and to be kept in mind;
contain manufacturing benefts;
be simple;
use numbers when emphasizes technological properties;
not be in confict with the brand name that exists.
Brand positioning
Brand positioning can be defned as: the relationship of one product with other products on the
market. Brands can be positioned against competing brands in the perceptual map.
4
It defnes
the market in terms of the way that consumers perceive the key features of competing products.
The initial map perception that buyers use designed products depending on their price and quality as
is illustrated below:
Figure: 1 Price and quality of brands
The purpose of this paper is to show confdence and assessment in brands, and to fnd out how
product brand affects consumer behavior. In order to achieve this, a survey sheet was carried out
through a questionnaire.
4 Jean-Noel Kaoferrer, Strategic Brand Management: New Approaches to creating brand equity and evaluating (London:
Kogan Page, 2002.
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7. STATISTICAL ANALYSIS OF RESULTS FROM THE CONDUCTED SURVEY
The survey was conducted with the help of students and faculty of Business and Economics in R.
Macedonia. A sample of 1424 respondents were randomly chosen in the RM. Respondents answered
independently and without interference of others. The age of respondents is listed in the table under
the rule Sturgersit:
k =1+3,3 N log k -number of age groups
i=
k
x x
min max
i-internal length
Respondents age gropus:
48 28 70 21 21
28 17 41 35 21
34 16 41 22 23
46 20 22 20 19
49 67 29 20 21
Solution: k=1+3,3 N log =1+3,3 25 log =5,6 6
There would be X age grops.
i=
k
x x
min max
16
30
min
max
=
=
x
x
i= 8 , 2
5
16 30
=
,
i
EX
measures the degree of foreign trade
and is equal to:
1 2
Im _ _
2 2
i i i i
i
port Export Exp output Exp turnover
EX w w
+ +
= +
, where
1
w
and
2
w
are respectively the weights (in this case assumed to be equal respectively to 40% and
60%),
Im
i
port
and
i
Export
indicate the presence of relevant import and export
_
i
Exp output
is the
export share of total production in enterprise
i
, and
_
i
Exp turnover
- the share of turnover that comes
from exports.
Index Trade marks and patents
The index formula is as follows:
( )
1 2 2
Re 100
i i i i
ITM w gistrations w Financing w Awareness = + +
, where:
i
ITM
is the index, which measures the degree of patent activities in enterprise
i
,
Re
i
gistrations
is an
indicator corresponding to the already made and expected registrations of trademarks and patents at
home country and abroad by company
i
,
i
Financing
measures the extent to which company
i
can
fnance the registration of trade marks, patents or intellectual property,
i
Awareness
measures the
extent to which company
i
is informed about the opportunities and brand value, and the possibility
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of registering such in the EU,
1
w
is the weight of the registered intellectual property in the fnal index,
which in this case is equal to 60% and
2
w
the weight used for the availability of funding and the
level of awareness in the fnal index, which in this case is equal to 20%.
Index Access to Finance
The index considers whether the companies have used different fnancial instrument in the last year.
The formula used for the calculation of the index is as follows:
Pr
100
max( Pr )
n m k
i i i
n m k
i n m k
n m k
FinInstrument ogramme FamilyFriends
IAF
FinInstrument ogramme FamilyFriends
+ +
=
+ +
where:
i
IAF
is the index of access to fnance for entrepreneur
i
,
n
i
FinInstrument
measures whether the
entrepreneur
i
uses fnancial instrument
n
, provided by banking, investment and other fnancial
institutions,
Pr
m
i
ogramme
measures whether the entrepreneur
i
uses funding program
m
, granted by
the Government, the EU funds and third parties,
k
i
FamilyFriends
measures whether the entrepreneur
i
uses loans from source
k
, received by the owner(s) of the enterprise, family and friends.
Index Good management practices
The index accounts for the application of good management practices in the business during the
previous and the past fve years. The index formula is:
100
3
i i i
i
ICT HR BS
IBP
+ +
=
, where:
i
IBP
is the index, which measures the implementation of good practices in enterprise
i
,
i
ICT
measures
the usage of ICT by enterprise
i
and is calculated as follows:
max max
2
n m
i i
n m
n m
n m
i
MIS Internet
MIS Internet
ICT
+
=
, where
n
i
MIS
shows the use of management information
system
n
, and
m
i
Internet
- use of internet
technology
m
.
i
HR
measures the extent of implementation of human resources policies and is calculated as follows:
0.4 0.6
max
k
i
k
i i
k
m
Training
HR Qualification
Training
= +
, where
i
Qualification
is an indicator of the
high qualifcation of the personnel and
k
i
Training
shows the involvement of staff in training
k
.
i
BS
measures the extent to which frm
i
uses marketing strategies and is calculated as follows:
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max
max
2
j
t
i
i
j
t
t
j
t
j
i
MS
Plan
Plan
MS
BS
+
=
, where
t
i
Plan
indicates the existence of planning period
t
,
and
j
i
MS
indicates the presence of developed and implemented marketing strategy
j
.
1.2. Econometric models
The structural models are based on the following specifcation. Let X be the vector of all factors for
sustainable competitiveness (calculated indexes):
( )
1 2 3 4 5
, , , , X X X X X =
T
X
Then the structural model defned through a system of equations is as follows: = + X AX BZ,
Where A and B are matrices of coeffcients as follows:
{ }
{ }
, , 1,..., 5, 0,
, 1,..., 5, 1,..., 7
ij ij
ij
i j i j
i j
= = = =
= = =
A
B
,
And
1 2 3 4 5 6 7
( , , , , , , ) Z Z Z Z Z Z Z =
T
Z is the vector of control variables.
After empirically testing all possible combinations of interdependencies between the factors for
competitiveness, two systems of equations have been identifed and used further in the analysis.
Regression models used are trying to explain the linear dependence of each factor for competitiveness
on the rest through: factor for competitiveness
i
Index = + X Z
,
where X and Z are vectors of factors for competitiveness and control variables respectively, and
and
are coeffcient vectors. For example, the index for innovations is explained by the rest indexes
for competitiveness and the control variables.
The third type of models are logit/ probit models and follow the following specifcation:
0 1 1 5 5 1 1 7 7
... ...
k
i i i i i i
Effect X X Z Z u = + + + + + + + ,
where
k
Effect denotes the various types of effects as defned above.
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1.3. Estimation output
Structural model of the inter-
relations among the factors for
development and
competitiveness
Factors
(1) Dependent
variable -
Innovation
activity
(2) Dependent
variable - Best
practices
(3) Dependent
variable -
Internationalisati
on
(4) Dependent
variable - Patent
activity
Innovation activity - 0.26** 0.14** -
Best practices 0.68** - - -
Internationalisation - - - 0.42**
Patent activity - 0.60** 0.27** -
Standards - - 11.13* -
Exports 19.08** - - -
Number of employees - 0.25** 0.10** -
Size of the settlement - -5.75** - -
Constant 0.26** 31.16** -0.01 2.25**
Estimation method
R-squared 0.35 0.45 0.32 0.22
Adjusted R-squared 0.34 0.43 0.30 0.22
Number of observations 167 132 188 220
** p < 0.01 * p < 0.05
WLS WLS
System 1 System 2
Regression models, explaining
the factors for development and
competitiveness
Factors
Innovation
activity
Internationalis
ation
Best practices Patent activity Access to
finance
Innovation activity - 0.06** 0.26** 0.23** -
Standards - 8.15** - - -
Patent activity - - 0.60** - 0.24**
Access to finance 0.32* - - - -
Exports 30.0** 40.5** - - -
Number of employees 0.13** 0.06** 0.25** - 0.06**
Size of the settlement -5.19* 1.31* -5.75** - -
Constant 17.8** -2.23 31.16** 0.52 -
Estimation method LS
1
LS
1
LS
1
LS
1
LS
1
R-squared 0.24 0.75 0.45 0.25 0.13
Adjusted R-squared 0.23 0.74 0.43 0.25 0.12
Number of observations 254 247 132 205 206
1
Newey-West HAC Standard Errors & Covariance ** p < 0.01 * p < 0.05
Dependent variables
Behavioural equations,
explaining the effects of the
economic crisis
Factors
Dicrease in
sales
Dicrease in
profit
Difficulties in
debt payments
Released staff
Best practices -0.33** -0.30* - -0.02*
Access to finance - - -0.12** -0.05**
Constant 33.4** 32.7** -3.00** -0.45*
Estimation method LS
1
LS
1
Logit Probit
R-squared 0.14 0.13 - -
McFadden R-squared - - 0.18 0.11
Number of observations 174 169 277 172
1
Newey-West HAC Standard Errors & Covariance ** p < 0.01 * p < 0.05
Dependent variables
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THE ANALYSIS OF KEY CHALLENGES AND CONSTRAINTS TO THE STABILITY AND
GROWTH OF AN ENTREPRENEURIAL SECTOR IN SERBIA
Suzana Stefanovic
Faculty of Economics, University of Nis, Serbia
suzana.stefanovic@eknfak.ni.ac.rs
Maja Djuki-Ivanovic
Faculty of Economics, University of Nis, Serbia
maja.djukic@eknfak.ni.ac.rs
Vesna Jankovic-Milic
Faculty of Economics, University of Nis, Serbia
vesna.jankovic@eknfak.ni.ac.rs
Abstract
Macroeconomic business conditions in Serbia are still quite unfavorable in the post-recession period. Unfavorable
business conditions are refected primarily in: a negative Trade Balance and Balance of Payments, high rate of
infation, which still cannot be reduced to the level of targeted single-digit infation, high unemployment rate
and, consequently, a low standard of living. Although the growth of the entrepreneurial sector is identifed as
a key factor in the development of Serbian economy and overcoming the burning problem of unemployment,
Serbia is faced with many issues related to the evolvement of this sector as well as its increased participation
in the economy. Data submitted by the Serbian Business Registers Agency show that the number of newly
established entrepreneurs in Serbia in 2010 are for the frst time less than the number of those that have gone
out of business over the previous year. These data were the basis for the analysis of constraints and factors
that brought about this situation. The high mortality rate of entrepreneurial ventures indicates the presence
of a large number of problems that limit the development of entrepreneurship in Serbia. Besides the impact
of the global economic crisis and macroeconomic instability, which generally adversely affect the stability
and growth of entrepreneurship in Serbia, a survey carried out on entrepreneurs and managers of SMEs by
the Republic Agency for Development of Small and Medium Enterprises and Entrepreneurship revealed a
number of other restrictions to the entrepreneurship expansion in Serbia. Some of the key constraints are:
lack of fnancial resources, administrative obstacles, the insuffciency of qualifed labor, lack of information
on markets and technologies, non-compliance with standards, and other less signifcant issues. Therefore,
objective of the paper is to stress the infuence of the major problems and restrictions to the development of
the entrepreneurial sector in Serbia. Constraints to the growth of entrepreneurship are going to be perceived
through the prism of (insuffcient) fnancial investments that the government makes to overcome them. Also,
by using statistical analysis methods, it will be tested whether and to what extent each of these factors affect
the number of start-ups and the number of their employees. Based on these results, certain recommendations
to the economic policy makers will be given. They will focus on the measures, which can be taken to eliminate
the key problems and encourage the development of entrepreneurship in Serbia.
Keywords: Entrepreneurship, Serbian Economy, Constraints to Growth, Start-ups.
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1. INTRODUCTION
Entrepreneurship, as the carrier of technological changes, new products and services, stands for one
of the key driving forces of the development of global economy. Newly opened businesses play a
big part in innovations of products and services that change the way in which we live and work.
At the same time, entrepreneurial organizations generate a great number of new jobs all over the
world, create added value, contribute to the increase in demand for other companies products. In a
word, they stimulate economic development of the national economies and of the global economy in
general.
In transitional economies, entrepreneurship plays even more important part because it contributes to
the development of market economy by the creation of new jobs, establishment of open competitive
markets and by imposition of constraints on the market power of public enterprises (McMillian
and Woodruff, 2002, pp. 153-170). Entrepreneurial organizations are of special importance for
developing countries as well, because they create wealth, alleviate poverty and produce long-term
benefts for the entire society (taxation of entrepreneurs provides for the fnance that can be invested
in the improvement of infrastructure as well as of systems of education and health care) (Donald and
Liedholm, 1998, pp. 61-74). In a word, the development of entrepreneurship and establishment of
entrepreneurial organizations have a great signifcance for the developed countries, as well as for the
developing countries and transitional economies. For that reason, recent times have seen even more
serious research of the essence of entrepreneurship (Gartner, 1985. pp. 696-706, Kirzner, 1973. p.
9, Bygrave and Hofer 1991. pp.13-22), as well as the enquiry of problems that might slow down its
development and fnding measures that can help remove those problems.
Entrepreneurs all over the world have traditionally been facing the problem of the provision of
initial capital (Moore, Petty, Palich, Longeneker, 2008. pp. 306-308). Start-up bank loans are often
seen as unfavourable because of the high risk that the entrepreneurial business involves and the
long period of return on investment in innovation (Petersen and Rajan 1997, pp. 3-37). Besides,
entrepreneurs access to market capital is diffcult (Westhead, Storey, 1997, pp. 197201), which
is why the provision of sources of funding can stand for the serious problem in the development of
entrepreneurship (Berger and Udell, 1998. pp. 613-673). For that reason, many countries establish
development funds that serve the purpose of funding start-ups (Stefanovic, Ivanovic-Djukic, 2011,
pp. 187-208). More often than not, entrepreneurs access to modern technology and market is diffcult
as well and they also lack information on market opportunities, standards and regulations, which
endangers their effectiveness and effciency, fexibility, and, at the worst, affects the proft. Tax policy,
legal-administrative procedures and legal regulations in the feld of entrepreneurship can also stand
for the constraining factor in the development of entrepreneurship (Krik, Price, Gatt, Rae, 2008).
These challenges can even be higher in transitional countries, such as Serbia, due to the inherited
structural and other economic problems from the past. This paper will examine the specifc problems
of the development of entrepreneurship in Serbia. The purpose of the paper is to provide an in-depth
analysis of the problems and constraints the entrepreneurs face in the process of establishment of
start-up business in Serbia. The aim of the paper is also to test the signifcance of the identifed
key problems and constraints and perceive the impact that the funds the Government provides for
their removal have on the increase/decrease in the number of entrepreneurs in Serbia. Application
of appropriate statistical analysis methods will be used for the purpose of testing whether, and to
which extent, each of the analyzed factors infuences the number of entrepreneurs and the number
of new entrepreneurs. Finally, on the basis of the achieved results conclusions will be reached and
recommendations on the measures for the removal of the most signifcant problems and constraints
to the development of entrepreneurship in Serbia will be given to the creators of economic policy.
2. THE DEVELOPMENT OF ENTREPRENEURSHIP IN SERBIA AND THE PROBLEMS FACED
BY ENTREPRENEURS UNDER THE CONDITIONS OF THE ECONOMIC CRISIS
After the political changes that happened in Serbia in 2000, the new Government recognized the sector
of small and medium enterprises and entrepreneurs (SMEEs) as the key driving force of economy.
For that reason, great number of measures have been taken for the reform and development of this
sector (Strategy for the development of SMEEs 2003-2008
1
has been adopted and Republic Agency
for the Development of SMEE (RAD of SMEEs) has been established which is responsible for the
implementation of this Strategy; laws and regulations of importance for this sector have been changed
with the purpose of alleviating legal-administrative barriers etc.) (Filipovic, 2003).
1 After that, the Government adopted the new Strategy of the development of competitive and innovative small and
medium enterprises for the period 2008-2013 (Serbian Government, Belgrade, 2008)
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All mentioned measures contributed to the development of entrepreneurship in Serbia. This fact is
supported by the increase in the number of SMEEs and the number of their employees, which is
shown in Table 1 in Appendix.
Nowadays, similar to the situation in EU countries, the number of SMEEs is dominant in Serbian
economy
2
. However, their number of employees is not as proportional, which shows that their
potential for the employment of labour has not been fully exploited yet. When the data on the basis
of which the total amount of GDP that entrepreneurs achieved in 2009 (193,688 million RSD) (SO of
RS, 2009) was slightly less than the one achieved by small enterprises (whose share in the achieved
GDP of all companies amounts to 18.2% (SO of RS, 2010) is taken into consideration, we see that
SMEEs are becoming all the more signifcant segment of the overall economy, that their participation
in economic structure is all the more signifcant and that they continually increase its impact on the
creation of GDP and proft in the Republic of Serbia.
However, present condition in this sector in Serbia can still not be regarded as favourable due to
the existence of a great number of problems and constraints. Serbian economy, whose decades-long
problems have resulted from unfavourable economic structure and systemic ineffciency of economic
subjects, is recovering with diffculty from the impact of the world economic crisis. Insecure business
ambience is primarily refected in negative trade balance and balance of payments, high rate of infation
(which can still not be reduced to the targeted level of single-digit infation), uncertainty related to
changes in dinar exchange rate, business insolvency, insuffcient infow of foreign direct investments,
high rate of unemployment, and, consequently, low level of living standard of the population. Thus,
for example, when macroeconomic indicators for 2007 (one year before the world economic crisis)
are compared to macroeconomic indicators for 2010, the results are the following: GDP growth rate
in 2007 amounted to 6.9% and in 2010 to 1.8% (in 2009 it was negative and amounted to -3.1%);
trade balance is still negative (in 2010 it was -5,228.5 mil E) as well as the balance of payment of
the country (in 2010 it was -929 mil E); foreign direct investments amounted to 1,821 mil E in 2007
and in 2010 to 860 mil E; rate of unemployment amounted to 18.8% in 2007 and to 20.0% in 2010;
rate of infation amounted to 11% in 2007 and after its reduction to 6.6% in 2009, it became double-
digit again (10.3%) in 2010 with the tendency for further growth (in April 2011, in comparison to
the same period last year, it amounted to 17.7%) (NBS, 2011). Although the frst quarter of 2011
saw certain revival of economic activities (which are refected in the growth of GDP, increase of
export, increase of employment), macroeconomic climate is still unfavourable and achieved results,
as shown by certain indicators, insuffcient for the removal of negative effects of the world economic
crisis from the past few years, as well as for the overcoming of the decades-long negative heritage in
the development of Serbian economy.
Under these unfavourable macroeconomic conditions, it is diffcult for SMEEs, which should become
the engine of economic development of Serbia, to do business. It is also refected in the fact that in
Serbia in 2010 the number of entrepreneurs who went out of business was bigger than the number
of new ones, which happened for the frst time since the fling system has existed (SBRA, 2011).
Namely, in the course of 2010, 35.299 new entrepreneurs were registered, which is 10% less than
in 2009. In 2010, 37.168 entrepreneurs were deleted from the register, which is 2% more than the
previous year. Due to the fact that in 2010 the number of closed enterprises and entrepreneurs who
went out of business was bigger than the new ones, there are no positive effects on the growth of
employment in Serbia. Instead of amortizing the losses of workplaces in big companies that have
problems in doing business, in the last two years (2010 in comparison to 2008) more than 140.000
people among entrepreneurs were deleted from the offcial register of the employed (Ekonomija.org.,
2011).
Table 2 Number of new entrepreneurs
Year Number of new entrepreneurs
2007. 47951
2008. 43375
2009. 44000
2010. 35299
Source: SBRA, Belgrade, 2011
2 According to the data of the SO of RS for 2009, micro and small enterprises represent 96.66% of companies and
employ 33.76% out of the total number of people employed by them. However, in contrast to micro, small and
medium enterprises, entrepreneurs are not companies and are fled in the separate register in the Serbian Business
Register Agency (SBRA). Entrepreneurs do the bookkeeping on the principle of simple and double-entry bookkeeping
and only the ones who do the double-entry bookkeeping are obliged to submit fnancial reports to the National Bank
of Serbia (NBS) and the SBRA.
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This unfavourable trend has continued at the beginning of 2011. Out of the ones which are considered as
existent, thousands of them have left the system of value added tax, which means that they are practically
dead, i.e. that they do not work. These worrying data have stood for the starting point of the analysis of the
factors that have a constraining impact on the development of entrepreneurship in Serbia.
3. CONSTRAINTS AND PROBLEMS IN THE DEVELOPMENT OF ENTREPRENEURSHIP IN
SERBIA
Tending to identify some of the key problems and constraints that unfavourably infuence the
development of entrepreneurship in Serbia, we started from the Report of the RAD of SMEEs dealing
with the conditions, needs and problems of SMEEs and realized on the basis of the survey of a
sample of 3.000 SMEEs in Serbia (RAD of SMEEs, 2009). Surveyed units were economically active
SMEEs, i.e. the ones that submitted annual fnancial reports for 2008 to the SBRA and the NBS, as
well as the entrepreneurs that are not in VAT system. The results of the survey are shown in Figure 1.
Figure 1. The main problems in the business of SMEEs in Serbia
2,0
2,1
4,4
4,0
4,1
5,0
3,6
0
1
2
3
4
5
Lack of sources of funding
Administrative barriers
Lack of qualified labor
Lack of information on markets Non-compliance with standards
Lack of information on
technologies
Other
Source: RAD of SMEEs, Belgrade, 2009
Due to the fact that the lack of funds, administrative barriers and the lack of qualifed labour were
identifed as some of the key constraints to the development of entrepreneurship in Serbia, they will
be the focus of special interest in this paper.
Provision of initial capital stands for the most serious constraint to the development of entrepreneurship
in Serbia. On the basis of the survey of Serbian entrepreneurs, it was shown that own funds were
regarded as the most secure source of funding of start-up business in Serbia. This is supported by the
data on the basis of which more than 50% of entrepreneurs use their own funds or private loans in
the process of investment, because they regard these as the most proftable source of funding (RAD
of SMEEs, 2009).
However, entrepreneurs often lack enough of their own sources of funding. Since the capital market
in Serbia is underdeveloped and the entrepreneurs access to that market limited, entrepreneurs
are forced to ask banks for loans. Since prospective entrepreneurs and newly opened enterprises
have short credit history, the banks regard them as high risk category of debtors and therefore insist
on high insurance against risk in the form of mortgage or pledge. Because of the great number of
cadastral problems, it is very diffcult to put a mortgage on the majority of real estate in Serbia,
which is partly resolved by the intervention of the Republic Guarantee Fund (RGF). Besides, loan
terms and conditions are considered to be unfavourable
3
in Serbia (interest rates range from 8-12%,
loan repayment period mostly ranges from 1 to 5 years, loan approval costs amount to 1-2% of the
approved loan, grace period ranges from 6-12 months), which is why small number of entrepreneurs
decide to ask for commercial banks loans.
State funds, such as Development Fund of the Republic of Serbia (DF of RS) and NEA, which are
3 Research shows that 40% of the population think that loan terms and conditions for start-ups in Serbia are unfavourable,
50% think that they are moderately favourable and only 10% of the population claim that loan terms and conditions
are favourable.
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intended for start-up businesses, play an important part in the process of funding entrepreneurial
ventures in Serbia. For example, funds that the DF of RS allocated to start-ups in Serbia in the past
four years and the funds that are planned for 2011 can be seen in Table 3 in Appendix.
Also, funds provided by the NEA stand for the signifcant fnancial support for the development of
entrepreneurship. However, these funds are limited. Data on the realization of program of subventions
for self-employment of the NEA are given in Table 4 in Appendix.
Apart from the lack of fnancial resources, there is also a great number of other problems that
accompany the approval of the sources of funding. Processes of allocation of funds at the DF and
NEA are realized on the basis of public calls. Allocation of funds is performed once or possibly a few
times a year. It means that the funds are not available to prospective entrepreneurs during the whole
year. The consequence of such a system is that the focus of the ones who apply for the funds is the
possibility of obtaining the sources of funding and not the start-up of business. However, apart from
numerous problems connected with the process of approval of fnancial resources by the DF of RS
and NEA, their role is of crucial signifcance for the starting of entrepreneurial activities in Serbia.
Entrepreneurs in Serbia are still facing very complex procedures and regulations which are related
to opening, closing or re-registration of an enterprise/entrepreneur. It is necessary to change the
behaviour and the way the public administration works, both of which need to be more transparent
and more effcient because the process of registration of enterprises in Serbia is very bureaucratized,
complex and long-lasting and the costs are high. With respect to this, some steps have been taken with
the purpose of improvement of conditions of registration of new business and reduction of a number
and costs of procedures (for example, the project called Regulatory guillotine).
In the past few years, a signifcant step forward has been made in the feld of establishment and
registration of SMEEs in all countries of West Balkans and Serbia. Nevertheless, results of research
show that those problems still burden entrepreneurs in the process of successful business start-up.
Thus, the Report of the RAD of SMEEs on the condition, needs and problems of SMEEs (RAD
of SMEEs, 2009, p.12) shows that administrative barriers are still highly positioned on the list of
entrepreneurs problems, which can be seen from Figure 2.
Figure 2. Key administrative barriers in the business of SMEEs in Serbia
4
2,7
3,8
2.6
3,2
3,6
3.7
4
4
2.9
0
1
2
3
4
Tax regulations and procedures
Obtaining construction and
renovation permits
Work of inspection bodies
Registration of property
Registration and de-registration of
employees
Registration of business
Export procedures
Import regime and procedures
Other
Source: RAD of SMEEs, Belgrade, 2009
Nevertheless, certain step forward in the feld of establishment and registration of businesses has been
made in Serbia, which can be seen in Table 5 in Appendix.
It seems that the process of registration and establishment of a business no longer stands for a
burdening problem in the process of starting a business in Serbia. However, when the problems
4 The Figure has been made on the basis of the data from the Report of the RAD of SMEEs. Respondents ranged the
problems by using grades from one to eight, grade 1 standing for the highest intensity. Average grades have been
shown in the Figure.
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related to obtaining all permits (the most problematic being construction permits), registration of
property, registration and de-registration of employees are taken into consideration, overall process of
starting a business is signifcantly prolonged. Serbian entrepreneurs themselves regard these problems
as urgent.
Apart from the above-mentioned problems, entrepreneurs also pointed out problems related to tax
regulations and work of inspection bodies. Therefore, according to recommendations coming from
OECD (OECD, 2009), further attention should be directed to the improvement of effciency and
transparency related to the number of days needed for the completion of the overall process, costs and
minimal capital requirements, as well as to provision of on-line registration. With respect to on-line
registration, Croatia and Serbia are the only two countries from West Balkans that offer the possibility
of on-line application for a great number of permits and licenses. However, the issue of electronic
signature has not become fully operative in Serbia yet, which is why on-line procedures still cannot
be fully completed.
Apart from these, the problem of entrepreneurs education, especially in the feld of strategic planning
and management, stands for the urgent issue in the development of entrepreneurship in Serbia.
Overloaded with a great number of everyday operational activities, entrepreneurs are left with not
much time to deal with strategic issues of growth and development of an enterprise. Absence of
strategic approach may result in stagnation of business activities and of enterprise itself. In most
cases, stagnation and ineffciency result from the lack of managerial knowledge and skills. Moreover,
incompetence in strategic planning and management reduces the chances for mere survival of an
enterprise (Predi, Stefanovi, Djuki, 2011, pp. 219-233). This results in the high rate of mortality
of SMEEs in Serbia, whereas low percent of businesses reach the phase of growth and development.
According to the Report of the RAD of SMEEs, professional qualifcations of the owners in Serbia
are in compliance with the needs of the business in little more than half of the cases. This compliance
is bigger when it comes to technical profles (40%), whereas the compliance is smaller in cases of
economic-managerial profles (17%). Also, among the surveyed entrepreneurs, the greatest number
of them are with secondary education (47%), and 44% are with higher education and university
education. When the data on the basis of which 80% of micro enterprises founders and 70% of small
enterprises founders are managers themselves is taken into consideration, it can be seen that the
problem of insuffcient professional qualifcations can be the problem for the successful growth and
development of SMEEs.
When national institutions are taken into consideration, in recent years, the leading role in the feld
of informal education, i.e. education and trainings of entrepreneurs, has been played by the National
Agency for Regional Development (NARD) in cooperation with regional agencies. They offer various
forms of fnancial and non-fnancial support, as well as various projects of support for entrepreneurship.
With respect to this, in 2010 only NARD approved 60 million RSD (little more than 568,720 euros)
to 320 SMEEs within the scope of the Program of support for the development of competitiveness
of SMEEs (NARD, 2011). The Program aims at providing direct support for the development of
competitiveness of SMEEs through participation in covering costs of consulting services (preparation
of business plans, market research, certifcation and standardization, improvement of the process of
production, introduction of new systems of quality, implementation of innovations). It is achieved in
the form of grants.
Regardless of that, certain steps towards improvement of education and trainings of entrepreneurs are
started to be taken in Serbia. In cooperation with the Ministry of Economy and Regional Development
of the Republic of Serbia (MERD of RS) and the DF, NARD participates in the realization of the
Program of start-up business loans (NARD, 2011). NARD participates in the part that is related to non-
fnancial support, and all this enables the provision of a unifed package of non-fnancial and fnancial
support for future entrepreneurs. NARD also organizes start-up trainings as a form of support for the
realization of this credit line. In the course of four public calls (starting from 2007), 655 trainings
were held with the total of 9739 attendees. Table 6 in Appendix provides unifed statistics of approved
loans and trainings for starters in business, i.e. future entrepreneurs.
It is planned that 4400 attendees pass this kind of training in 2011. In this way, the total number of
entrepreneurs who passed the training will reach 15000. The aim of organizing these free trainings is
to provide Serbian entrepreneurs and starters in business with higher level of knowledge. Apart from
that, this Agency offers non-fnancial assistance in the form of trainings, seminars, consulting and
mentoring services to owners of SMEEs (NARD, 2011).
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4. MODEL OF RESEARCH, HYPOTHESES AND DISCUSSION OF RESULTS
On the basis of the Report (survey) of the RAD of SMEEs on the problems and constraints to the
development of entrepreneurship in Serbia, the most signifcant identifed problems and constraints
are: lack of sources of funding, administrative barriers and the lack of qualifed labour. For that reason,
the idea was to test the identifed factors by the application of appropriate methods of statistical
inference, i.e. to perceive the impact of each specifc factor and of combination of all factors on the
number of new entrepreneurs on the basis of regression model.
Namely, as a consequence of negative impact of these factors and prolonged impact of the world
economic crisis on the Serbian economy, the number of entrepreneurs decreased in the course of
2009 and 2010 with the tendency for further continuation of this negative trend. We are of opinion
that the decrease in the number of entrepreneurs in Serbia directly resulted from the states reduction
of programs of fnancial and non-fnancial incentives for the development of entrepreneurship. This
reduction by the state, which was specially expressed in 2010 when compared to previous years,
resulted from the spillover effects of the world economic crisis on Serbia. Spillover effect is also
refected in the fact that the decrease in the number of entrepreneurs and their employees did not occur
in 2008 when the world economic crisis had the highest impact all over the world. This is because the
direct causes of the economic crisis were not to be searched for in Serbia (but on the global fnancial
market). Nevertheless, its postponed effect had an impact on other sectors and economies of many
countries, including Serbia. Those spillover effects of the world economic crisis in Serbia reached
culmination in the course of 2009 and 2010, which resulted in further fall of the level of economic
activity, deterioration of macroeconomic conditions of doing business, and, consequently, reduction
of states fnancial and non-fnancial incentives for the development of entrepreneurship. Finally, this
resulted in the fact that the number of new entrepreneurs was smaller than the number of the ones who
went out of business and subsequent reduction in the number of entrepreneurs and their employees in
the course of these years.
In accordance with the above-stated remarks, we will try to test the following starting hypotheses:
H
1
: There is a statistically signifcant connection between the number of new entrepreneurs and the
most signifcant problems/factors that have an impact on the development of entrepreneurship in
Serbia and that were identifed in the course of survey of entrepreneurs.
H
2
: Under the conditions of prolonged impact of the effects of the world economic crisis on economic
activity in Serbia, only the states active measures (in the form of direct fnancial allocations from the
budget) for the programs of fnancial incentives for start-ups can result in the increase in the number
of new entrepreneurs.
H
3
: Enhancing the level of qualifcations of prospective entrepreneurs through trainings on the
establishment of start-ups, i.e. increase in the number of attendees who passed those trainings can
positively affect the development of entrepreneurship in Serbia
With the purpose of examining whether there is a stochastic link between the above-mentioned
variables, regression analysis has been applied. Dependence and link between the two variables can
be generalized by the inclusion of several variables into the process of examination. With this purpose,
appropriate methods of multiple regression analysis are applied. The task of regression analysis is to
fnd and test the model that shows random values.
The role of dependent variable (Y) in the model is given to the number of new entrepreneurs in the
period 2007-2010, whereas the following are treated as independent variables:
Amount of allocations from the DF for start-up loans (X1),
Subventions for self-employment of the NEA (X2),
Cost (% of income per capita) X3,
Paid-in Min.Capital (% of income per capita) X4,
Amount of approved loans for trainings (X5),
Number of trainings (X6),
Number of attendees (X7),
Average amount of loan per training (X8).
Validity of the hypothesis H
1
can be checked by testing the direction and the degree of quantitative
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agreement between variations in the number of new entrepreneurs and variables which defne the
most signifcant identifed problems in the development of entrepreneurship (variables X
1
, ..., X
8
). For
that purpose, Pearsons simple linear correlation coeffcient (r
yx
) was calculated, with simultaneous
testing of the signifcance of its evaluation. Namely, analyzed agreement between previously defned
dependent variables and the number of new entrepreneurs was isolated. The results are shown in the
following Table:
Table 7 Pearsons simple linear correlation coeffcients
r
yx
p-value
X
1
0,373 0,627
X
2
0,711 0,289
X
3
0,829 0,170
X
4
0,781 0,218
X
5
0,317 0,683
X
6
-0,417 0,583
X
7
-0,376 0,624
X
8
0,790 0,210
According to the results from the Table 7, among the identifed variables, the ones that belong to the
group of direct fnancial incentives for the entrepreneurs start-up (X
1
i X
2
) have a signifcant and
positive impact on the growth of number of new entrepreneurs. Statistically speaking, subventions for
self-employment of the National Employment Agency have more signifcant impact, which is shown
by the value of Pearsons correlation coeffcient r
yx2
= 0,711.
Positive correlation link between variables that are related to administrative barriers (X
3
i X
4
) and the
number of new entrepreneurs points to the fact that although the state tried to facilitate the process
of establishment of entrepreneurs, it did not have statistically signifcant impact on the number of
new entrepreneurs and the number of their employees. Cost reduction and paid-in minimal capital
in the analyzed period did not result in the increase in the number of new entrepreneurs. Therefore,
a conclusion can be drawn that the costs of registration of entrepreneurs do not have a signifcant
impact on the opening of entrepreneurs businesses in Serbia, i.e. that the impact of other factors is
more signifcant.
Variations in the number of new entrepreneurs show negative direction of quantitative agreement with
the number of organized trainings and the number of attendees (X
6
i X
7
), which means that the increase
in the number of trainings and the number of attendees did not have statistically signifcant impact
on the increase in the number of new entrepreneurs. Increase of the amount of loans for trainings
(X
5
) shows positive direction of quantitative agreement with the number of new entrepreneurs. Since
the negative direction of quantitative agreement between variables that are related to the number of
attendees and the number of trainings on the one hand, and the number of new entrepreneurs on the
other hand was not in accordance with the starting hypotheses, the idea was reached to introduce new
variable into analysis. This new variable was obtained from the amount of approved loans for trainings
and the number of trainings, and that was the average amount of approved loan per training (X
8
). The
value of simple linear correlation coeffcient, which shows isolated agreement of this variable with
variations in the number of new entrepreneurs r
yx8
= 0,790, points to the extremely signifcant direct
correlation link.
Achieved results point to the existence of dependence between the number of new entrepreneurs and
the defned independent variables, which confrms the starting hypothesis H
1
.
In accordance with the hypothesis H
2
, multiple linear regression model was used for testing the
form and direction of dependence between the number of new entrepreneurs and variables X
1
i X
2
which belong to the group of factors that represent the fnancial support for the development of
entrepreneurship. On the basis of the data for the period 2007-2010, the following three-dimensional
regression model was evaluated:
Y=13035,53 + 0,001X
1
+ 0,002 X
2
Value of regression coeffcient b
1
= 0,001 shows that the increase in the amount of allocations from the
DF for start-up loans has a positive impact on the average increase in the number of new entrepreneurs.
Also, positive value of regression coeffcient that stands by the second independent variable b
2
=0,002
shows that the increase in subventions for self-employment results in the increase in the average
number of new entrepreneurs. At the same time, the results show that the subventions of the NEA
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for self-employment have twice as strong positive impact on the opening of new entrepreneurs
businesses. Measures of representativeness of this evaluated regression model, i.e. multiple coeffcient
of determination R
2
=0,919 and standard error of the regression S=1511,66 show that the model is
representative and it can be used for further predictions of the number of new entrepreneurs. These
results confrm hypothesis H
2
.
The impact of fnancial aspects of state incentives, which belong to the group of factors that have an
impact on the rise of the level of qualifcations of prospective entrepreneurs, on dependent variable
can also be analyzed. With that purpose, the link between Y and variables X
5
and X
8
should be
observed. Evaluated three-dimensional regression model has the following form:
Y = 26571,98 + 0,001X
5
+ 0,036 X
8
Value of regression coeffcient b
1
= 0,001 points to the direct link between the amount of loan and the
number of new entrepreneurs. Also, the parameter b
2
= 0,036 shows that the increase in the average
amount of loan per training has a stimulating impact on the number of new entrepreneurs. Value of
multiple coeffcient of determination R
2
= 0,624 points to the fact that 62,4% of variations in the
number of new entrepreneurs can be explained by variations in variables X
5
i X
8
, which points to high
representativeness of the evaluated model. These obtained results also support hypothesis H
2
, which
means that the states fnancial incentives for entrepreneurs have the most signifcant direct impact on
the starting of new entrepreneurs business.
With the purpose of testing hypothesis H
3
, coeffcients of partial correlation for the set of variables (Y,
X
5
, X
7
i X
8
) were evaluated which show the degree of quantitative agreement between two variables.
At the same time the impact of other variables from the selected set was tested. Obtained values and
their signifcance levels are shown in the Table 8.
Table 8 Correlation matrix
Number of at-
tendees
Average amount of loan
per training
Number of new
entrepreneurs
Amount of approved
loans for trainings
Number of attendees 1,000 -0,798 0,422 0,784
p-value . 0,412 0,723 0,427
Average amount of loan
per training
-0,798 1,000 0,210 -0,251
p-value 0,412 . 0,865 0,838
Number of new
entrepreneurs
0,422 0,210 1,000 0,894
p-value 0,723 0,865 . 0,296
Amount of approved
loans for trainings
0,784 -0,251 0,894 1,000
p-value 0,427 0,838 0,296 .
Results show that from the set of selected variables the strongest direct correlation link exists between
the number of new entrepreneurs and the amount of loans for trainings. However, when the link
between the number of attendees who passed the trainings before the establishment of start-ups and
the number of new entrepreneurs is taken into consideration, it can be said that there is a direct
agreement between them, but that the degree of this agreement is lower than expected. If this result
is taken into consideration, it can be said that the hypothesis H
3
is only partly confrmed, i.e. that the
factors from the group of fnancial incentives for the development of entrepreneurship have much
bigger impact. In this way, results of the survey of SMEs and entrepreneurs have been indirectly
confrmed, on the basis of which the lack of funds was identifed as the most signifcant problem in
the development of entrepreneurship in Serbia.
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5. CONCLUSION
Our research confrmed the results obtained on the basis of the survey of the owners of SMEs and
entrepreneurs conducted by the RAD of SMEEs, as well as the starting hypothesis on the dominant
impact of the states fnancial incentives on the development of entrepreneurship in Serbia, and,
consequently, on the increase in the number of employees. Those fnancial incentives can occur in
the form of direct subventions for self-employment or in the form of favourable loan conditions for
prospective entrepreneurs. The results of the research showed that subventions for self-employment,
especially the ones given by the NEA, were of greater signifcance. Therefore, our recommendation is
that the amount of funds that the NEA allocates for this purpose should be increased in the period to
come. With this regard, it is desirable to provide much more fnancial incentives for the development
of entrepreneurship at the national, as well as at the local level. For example, local communities
can play a vital role in the provision of micro loans and micro leasing for new enterprises on their
territory. They can also allocate the funds from the budget and connect micro loan institutions and
entrepreneurs. Moreover, local communities can assess the local entrepreneurs needs for start-up
loans and lobby and encourage institutions that deal with micro loans to meet those needs.
Apart from direct funding, it is very useful to provide guarantees for the entrepreneurs and establish
local guarantee funds. This measure can bring about the improvement of availability of loan capital
to entrepreneurs business ventures in a municipality, because the guarantee enables entrepreneurs
to get the loan under more favourable conditions
5
. Pursuant to the existent legal regulations in
Serbia, guarantees are provided exclusively by the RGF. In most cases these guarantees amount to
50% of the principal, i.e. of the loan, and in specifc cases to 80%. Problems occur because of the
way of functioning of the RGF which the banks ask for guarantees and not the end clients. Local
communities, i.e. local authorities need to fght for the change of this system and cancellation of a
specifc monopoly that exists now. In this way, opportunities will be opened for the local communities
to start establishing their own guarantee funds. At the same time, several local communities may be
connected, which is desirable, or the partnership of the public and private sector in this feld may be
formed.
One group of activities that belong to the group of non-fnancial services but that is related to funding
is the provision of advice which are related to funding. Due to the fact that serious problems of
entrepreneurs are connected with fnancial negotiations with banks (since entrepreneurs are usually
insuffciently acquainted with fnancial institutions business techniques) as well as with the access
to formal fnancial market (since entrepreneurs usually do not possess signifcant property that could
serve as security), they could be helped with advice or education on fnancial planning, fnancial
institutions technology of work and the like.
When non-fnancial incentives for the development of entrepreneurship are taken into consideration,
besides the established positive link between the reduction of administrative barriers and the
establishment of start-ups, further attempts should be made with the purpose of raising the level of
qualifcations and trainings of prospective entrepreneurs. Therefore, it is necessary to take measures
to increase the number of prospective entrepreneurs who passed trainings on the issues of importance
for the establishment and management of entrepreneurial venture. Some steps of that kind have
already been taken since one of the conditions for getting the subventions for self-employment of
NEA is the previously attended training organized by this institution. However, those trainings need
to involve much more people, including prospective entrepreneurs, and not only the ones who are
registered as unemployed persons in NEA. Therefore, it is expected that the states activities, refected
in the measures of the NARD, should bring about positive results in the form of future increase in the
number of new entrepreneurs in Serbia.
5 High interest rates are the consequence of the high risk of loans, i.e. of the risk that the debtor will not return the
principal. Guarantee that the debtor will return the principal reduces that risk, enables and stimulates loan approval,
and reduces interest rates.
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Program2011.pdf (accesed 17.06.2011)
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Appendix
Table 1. Number of entrepreneurs in Serbia and their employees
1
Year Month
Number of entrepreneurs and their employee (000)
Total
3= 4+5
Number of entrepreneurs
Persons employed with
entrepreneurs
2004
March
September
464
477
208
210
255
267
2005
March
September
513
531
228
230
285
300
2006
March
September
536
572
228
242
308
330
2007
March
September
566
573
239
245
327
328
2008
March
September
574
568
245
245
329
323
2009
March
September
500
485
210
211
290
274
2010
March
September
455
427
199
183
257
244
Source: Statistical Offce of the Republic of Serbia (SO of RS) Semi-annual report on the employees and employees
salaries RAD-1/P; Survey
2
conducted for the purpose of supplementing the semi-annual report RAD-1; Semi-annual
report on private entrepreneurs and their employees RAD-15; National Employment Agency (NEA).
Table 3. Amount of funds from the DF for start-up loans per year
Year Amount of funds from the DF for start-up loans in euros
2007. approximately 23,000,0001
2008. 24,830,700
2009. 32,328,710
2010. 20,853,080
2011. 11,141,252
Source: DF of RS
Table 4. Subvention for self-employment of NEA
Realization of the program in the period 2004-2010
Year Number of recipients Amount in euros
2007. 5465 8,953,811
2008. 3386 4,968,228
2009. 2307 3,127,646
2010. 2217 3,352,038
Source: NEA, Belgrade, 2011.
Table 5. Starting a Business in Serbia
Starting a Business data
Doing Business
2007
Doing Business
2008
Doing Business
2009
Doing Business
2010
Doing Business
2011
Rank - - - 75 83
Procedures (number) 10 11 11 7 7
Time (days) 18 23 23 13 13
Cost (% of income per capita) 10.2 8.9 7.6 7.1 7.9
Paid-in Min.Capital (% of income
per capita)
7.6 8.0 6.9 6.1 6.0
Source: Doing Business Report, 2011.
1 Kvartalni monitor br. 23, Beograd, oktobardecembar 2010.
2 Labour Survey is the survey which helps examine the characteristics of labour and events on labour market according
to the activities in the observed week and not in accordance with the formal status of surveyed people. The survey
is conducted in accordance with the standards of International Labour Organization (ILO) and the requirements of
EUROSTAT, which is why the results of the Labour Survey can be regarded as internationally comparable.
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Table 6. Approved loans and organized trainings for starters in business
Year Number of credits
Amount of approved loans for
trainings in euros
Number of train-
ings
Number of attendees
2007. 1522 25,242,302 64 1037
2008. 2279 31,611,174 216 3024
2009. 2824 42,781,312 230 3217
2010. 1367 20,853,080 177 2430
Total 7992 - 655 9739
Source: NARD, 2011
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BUSINESS DEVELOPMENT AND GROWTH DESPITE THE GLOBAL CRISIS: THE CASE OF
CROATIAN SMALL COMPANY
Senka Borovac Zekan
University Centre for Professional Studies, Split, Croatia
E-mail: sborovac@oss.unist.hr
Marijan Zuji
Maritime Faculty in Split, Croatia
E-mail: mzujic@pfst.hr
Helena Mikai
University Centre for Professional Studies, Split, Croatia
E-mail: hele.sweeeety@gmail.com
Ivica Romac
University Centre for Professional Studies, Split, Croatia
E-mail: ivicaromac@yahoo.com
Abstract
INTRODUCTION
Situation in the Croatian textile industry for many years has been quite diffcult. One of the major causes of
the slow growth of the textile industry is the reluctance of existing frms to adapt to new market conditions.
This situation is further worsened with the infuence of global recession in recent years. Domestic textile
industry is in a very disadvantaged position, because the business concept has not changed for decades as
ultimately refected in its position in the global competitive environment. Croatia is not the only country which
experienced the effects of crisis namely in the textile industry. The crisis in textile industry is present in the
whole world, mostly because of cheap labor from China and Eastern countries. The situation is diffcult,, but
not so black as shows us the example of small Croatian company Merkur. Merkur expanded into new markets
and reported a remarkable growth in turnover of 5% which is an excellent result in today global crisis and a
good indicator of future business. How did they do it?
RESEARCH METHODOLOGY
This paper was brought up using the case study method to present a successful small company that has managed
not only to maintain the existing level of business in this time of global recession, but to enhance and expand
into new markets. Using the case study method the authors were able to deeply and comprehensively analyze
all of the key determinants of small business enterprises that have infuenced the fnal successful result.
RESULTS
Using the tools of market research the owners of this company have received valuable information about the
characteristics and appearance which should have the fnal product as well as the preferences of the target
market. Among the other things, the management of the company has used new marketing tools in their
marketing strategies. The Social Networks like Facebook and Twitter showed to have the greatest importance.
Keywords: SME, Business strategies, Social networks, Global crisis
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1. INTRODUCTION
Small businesses are important for growth and development of each economy, including Croatian.
In the past, textile and apparel industry in Croatia played an important role in the economy growth.
Unfortunately that role has changed in the past decade. This paper focuses on the subject that speaks
about the successful operations of small enterprises in the global economy and gives foundation for
motivating new measures for better SME development in Croatia. The future of SMEs is determined
by their natural, technological, market, economic and social environment. Adaptations to external
conditions depend on balance, and a compromise between fexibility and specialization for future
development. Taking risk for future development of SMEs is the basic characteristic of entrepreneurs
and market economy. Our study emphases the importance of SMEs for the Croatian economy and
highlights the importance of using Social media and Internet and make transparent success factors
and development of SMEs in the development of Croatian economy as a whole. Research has found
that small frm that grows, tend to develop proftable and expanding market niches that are often quite
narrow and appear diffcult to describe by objective, industry or market wide variables (Storey, 1996,
1997 and Storey D.J.1996). This paper addresses these afore mentioned topics by positioning the
research in the broader SME growth literature, as internationalisation is a means of achieving SME
growth. The research approach incorporated in-depth interview with the owner-manager of SME in
retailing sector in theCroatia. In Croatia, SMEs are the largest group according to the total number
of companies (99% of the total number of companies), employ a little less than a half of total number
of employees (45%), and achieved 43% of income, and 35% of proft of the whole economy (Strugar,
krtic, 2006, p. 236-238). In the period 2000-2005, the share of SMEs declined by several percent
in total number of employees, total income and proft, which can be considered as consequence of
competitive pressure increase and process of globalization. Managing small business growth identifes
many opportunities and diffculties for the entrepreneur. We introduce an entrepreneurial perspective
toward enhancing growth opportunities within the small business sector. In SMEs the decision-
making process is signifcantly different than in large companies. We look at initiatives facilitating the
growth of small businesses. The paper commences with a literature review on the identifed services
marketing initiatives, followed by chapter about textile industry in Croatia, research methodology,
fndings and fnaly recommendations.
2. THEORY REVIEW
2.1. Entrepreneurship and economic growth
Small frm growth is a research area that has attracted considerable attention in recent years. Small
businesses have always been a catalyst for economic development. Most employees have been
employed in small and medium enterprises. An organized entrepreneur works in a coordinated way
which enhance the employment level as well as GDP. Entrepreneurs are mostly known as the risk takers
and the innovators. Entrepreneurship is the practice of starting a new business in response to identify
opportunities. There are several different criteria by which companies are included in the group of
small businesses;number of their employees, their share in total revenue and their share in total proft.
SMEs are comprised of three categories of frm: the micro frm (less than 10 employees), the small
frm (less than 50 employees) and the medium frm (less than 250 employees. There are different
types of entrepreneurial activities depending upon the type of the organization. Entrepreneurship is
basically creating something new e.g. new products, exploring new methods of production, face the
challenges etc. Entrepreneurship is often associated with the true uncertainty, particularly when it
involves bringing something new. So entrepreneurship is the process of discovering and starting a
new business. Firstly the meaning of entrepreneurship is defned as: An entrepreneur is an organized
person who wants to do job in that organized way where he will be able to transfer the idea into new
ways. (Schumpter, 1950). The person is able to willing the job in a very coordinated way to manage
the organization.
Entrepreneurship is the process of new inventions of opportunities to develop the value of new
organization (Fisscher at al: 2005). It is clear from the defnition that entrepreneurship is the process
of creating new ways and ideas so as to create the value of an organization whether it is new or an
already existing organization. The entrepreneur is that factor of production which develops the new
things in the culture, something good for the society to meet the requirements of the consumers
(Buchholz and Rosenthal, 2005) It is very clear that an entrepreneur is a person who creates something
new in the society so that it is helpful for the consumer.
All the defnitions discussed above, almost revolve around the same meaning. Different writers have
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written different defnitions but almost all have the same meaning about the entrepreneurship.
Economic Growth indicates the progress in the economy. Another way to describe the economic
growth is that, to enhance the economic development in the country in a very smooth and organized
way. So the economic growth term is used to emphasize on the economic progress in the country
which leads to increase in per capita income. Economic growth has two aspects; one is positive and
the other one is negative. In a positive sense of economic growth means the increment in this variable
and vice versa. The GDP is a component which shows the overall economic growth in a country. It is
the most important macroeconomic variable which is used to calculate all the fnal good and services
produced in a country in a year. It is a broader concept which confrmed with the economic progress.
It is basically a positively related to the better living standard of the citizens which concerns with
the employment level of a country. Thirdly there is another variable i.e. employment which is most
commonly recognized in the macroeconomic indicators. The employment is basically the contract
between two parties i.e. employee and employer.
2.2. Stages in development
There are three types of entrepreneurs in the development stages; the frst generation entrepreneurs
who are the innovators and risk takers and who are the frst who are taking step in their family to start
a new business, second are the modern entrepreneurs who are checking the feasibility of the business
according to the market situation. They see the present market situation that what business is mostly
in. Third ones is the classical entrepreneur, the one who gives more importance to consistent returns
than to growth. They have a more concern on the customer and marketing needs.
2.3. Growth in the small frm
Growth in the small frm is usually related to an increase in turnover, proftability, number of
employees, and/or fnancial assets the same criteria in fact as is used as success indicators. A high
growth rate within small frms is not unusual because if the frm is small a relatively modest amount
of growth may result in a high growth rate. Thus the main reason for the high rate of growth may be
more to do with the original size of the small frm (Brown, 1995), than with tripling a little [being]
much easier than doubling a lot (Heller, 1988). It is generally accepted that smaller organisations
grow more quickly than larger ones, and that young frms grow more quickly than old ones (Deakins,
1999). Rapid growth within (even highly proftable) smaller frms has often led to their premature
collapse through cash fow imbalance, with immediate fnance requirements causing a cash crisis and
crippling the frm (Barrow, 1995; Bennett, 1993). It is recognised that as a small frm grows instinctive
management becomes insuffcient (Pleitner 1989) with the need for well-designed and managed
systems, controls and procedures becoming paramount (Stewart, 1990). The frm must become more
institutionalised (Cohn and Lindberg, 1974), more bureaucratic (Stanworth and Curran, 1981), and
systematic (Ackelsberg and Arlow, 1985), these kinds of structures and systems being the antithesis
of many small businesses which paradoxically have fourished while being fexible with inherently
informal management processes. Growth of the frm to beyond a level where the owner/manager can
manage it effectively often sparks a crisis (Stewart, 1990). The pervasive infuence of the small frm
owner/manager has already been noted. His/her capacity to change as the company grows will have
a signifcant bearing on the success of the company. More fundamentally, his/her attitude to growth
of the frm will largely determine whether or not the frm is actively grown. Evidence suggests that
the many owner/managers seek to estrain the growth of their frm and that this is connected to their
attitudes towards growth and control (Gray, 1993; Cannon, 1991).
2.4. Attitudes to growth
One of the diffculties for the owner/manager is that while an autocratic management style may prove
successful while the frm remains small, there is a need for both management style and organisational
structure to change to as the frm grows (Burns and Harrison, 1996). Growth itself, however, is not
necessarily a goal for small frm owner/managers (Stokes, 1995), as they attempt to maximise success
(as defned in their own personal terms) while restricting the size of the company to a level with which
they are comfortable (Burns and Harrison, 1996). The size of the business will be a function of two
factors the owner/managers image of the business itself and the marketplace within which the frm
operates (Birley, 1996). The goals and aspirations of the owner/manager have signifcant implications
for small frm growth.
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2.5. Intuition versus planning
The small frm owner/manager has little time to think strategically about the business (Brown, 1995),
with resource constraints necessitating intuitive decision-making (Tibbits, 1981). Generally he/she
does not believe that formal strategic planning will beneft his/her business (Orpen, 1994), despite
recommendations that the small frm owner/manager should adopt a judicious balance of the formal
and informal in their planning systems (Mc Kiernan and Morris, 1994). Evidence suggests that many
successful small businesses do not practice what is conventionally described as strategic management
(Pleitner, 1989). Complicated theories and highbrow formal processes are deemed to be unsuitable
for small frms as owner/managers will not use them (Hogarth-Scott, Watson and Wilson, 1996),
opting instead to engage in informal management practices than to adopt sophisticated planning
and control techniques for good reason (Martin and Staines, 1994, p. 26). Much of the available
literature on marketing planning is written for and about large business (Brooksbank, 1996; Lancaster
and Waddelow, 1998) and is of little use to the small business owner/manager.
3. INTERNATIONAL SMALL BUSINESS GROWTH
Internationalisation is a route for business growth where businesses seek to expand their activities
beyond domestic markets. The objective of this research is to examine the process of internationalisation
in a sample of Croatian SME. In particular, topics such as the reasons why owner/managers export,
their choice of international market, the market entry strategies adopted and the challenges encountered
in internationalisation are the subject of this study. Growth is a multifaceted phenomenon that is
commonly associated with frm survival, achievement of business goals and success, or scaling up
activities (Storey, 1994; Kinsella et al., 1994; Delmar and Wiklund, 2003; Wickham, 2004; Dobbs
and Hamilton, 2007). Business growth may take different forms (employment, revenue, market
share and product development), albeit not necessarily all at the same time. Furthermore, typically
in the small frm growth occurs in a local and national context before the owner-manager considers
internationalisation of business activities (Pope, 2002; Cremins, 2006). Owner-managers may be
exposed to the same challenges in achieving growth, but given the heterogeneity of small frm growth
differences occur in how these are managed by the owner-manager (Kinsella et al., 1994; Barkham et
al., 1996; Gibb, 2000; Wickham, 2004; Donohoe and Wyer, 2005). Wickham (2004) proposed that the
owner/managers perception of how it would impact on their personal role in the business determined
the strategies adopted to pursue frm growth, where one such strategy is internationalisation. With
regard to the challenges faced by the owner/manager in growing the business, the literature broadly
classifed them into internal and external (Morrison et al., 2008; Niskanen and Niskanen, 2005;
Pasanen, 2006). Internal factors relate to the owners intention and motivation to grow the business
and their access to and effective utilisation of resources (Kinsella et al., 1994; Storey, 1994; Barkham
et al., 1996; Morrison et al., 2008; Niskanen and Niskanen, 2005; Pasanen, 2006). The external factors
include a range of economic, political, societal/demographic, technological and regulatory aspects
that are largely outside the control of the owner-manager. It is important that the owner-manager
is aware of how these will impact on business growth strategies. The internal factors are within the
control of the owner/manager and will therefore greatly determine the type of strategies adopted to
avail of the opportunities in the international marketplace. For this reason the internal factors, in
particular the reason why owner-managers chose international frm growth, the strategies adopted
and the challenges encountered in the achievement of international growth, are of most interest in this
study.
The survey involved in-depth interview with an owner of the SME in Croatia The data show that the
owner decided to export due to a lack of alternative market opportunities in the Croatian market. He
chosed the Serbian market as their frst location and adopted a phased approach to internationalisation.
The primary challenges experienced by owner/managers related to the establishment of strategic
alliances and partnerships to facilitate international frm growth are insuffcient market research,
lack of customer familiarity and diffculties in balancing the dual management of frm activities in
the domestic market and new international markets. The fndings emphasise the need to examine
SME internationalisation as a series of interrelated activities that should be embedded as part of the
overall growth strategy of the frm as opposed to a separate strategy. Suggestions are put forward for
government policy to develop more SME targeted fnancial and non-fnancial supports to develop the
export capabilities and competencies of owner/managers and to assist them establish strategic
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4. MANAGERS MOTIVES FOR GROW THEIR BUSINESSES INTERNATIONALLY
The factors inducing international frm growth are generally categorised into a dichotomy of positive
and negative factors that align with the determinants of general frm growth (Czinkota and Tesar, 1998;
Lawless, 2007). Positive reasons are associated with the proactive seeking out of international market
opportunities by the owner/manager. Conversely, owner/managers may only consider international
market expansion due to a lack of growth opportunities in domestic markets. In this latter instance
the owner-manager adopts a passive and risk-adverse approach in the choice of market and the type
of market entry strategy adopted (Czinkota and Tesar, 1998; Lawless, 2007). Additionally, a variety
of micro and macro environmental factors contribute to a frms decision to export. These include
factors associated with the customer and competitive, social, cultural, economic and technological
characteristics of the international business environment, and provide positive or negative determinants
for SME internationalisation (Bell, 1995; Tybejee, 1994). Once the decision to export is made the
owner/manager needs to evaluate the suitability of their product or service in its current form for
acceptance in new international markets. The level of adaptability required and the availability of
fnancial resources to support the modifcation of the product or service, and in functional areas such
as international marketing, selling, production and distribution, will impact on the feasibility of the
export activity. Concurrently, the owner-manager must asses their own commitment to international
frm growth and the availability of the necessary knowledge and skills to do so. Small business
owners and entrepreneurs have the perceived desirability, feasibility and propensity to act to grow
their small businesses. Such entrepreneurial intentions are depicted in Krueger, Reilly and Carsrud
(2000). Furthermore, there is a strong link between these elements and overall proft and growth of an
organisation (Heskett et al., 1997). Organisational proft and growth are linked to customer loyalty,
satisfaction and value via the strategic implementation of referral,related sales and retention strategies
(Heskett, Jones, Loveman, Sasser and Schlesinger, 1994).
5. TEXTILE AND APPAREL INDUSTRY IN CROATIA
Since the end of 2008 to November last year in Croatian textile and apparel industry has lost 4020
jobs. In the future there will be an even greater loss of jobs. Due to the decrease in domestic sales of
products Croatian clothing and textile industry companies have signifcantly reduced the production
of its products. According to information from the Croatian Commercial Chamber in the future will
reach even greater decline and loss of jobs due to tough competition in the market. Prospects are only
those companies that are fnancially consolidated and modernized.
3
Textile and apparel industry in
Croatia is one of the most important Croatian industries. Despite the many changes and diffculties
caused by the decrease in the market and the recent war, the textile and apparel industry maintained
a very important place in the Croatian economy. Since dressing is daily need in a mans life, and also
considering the traditions and development of textile and apparel industry, we can claim with certainty
that they have good prospects for future development in the Republic of Croatia. In recent times,
exports of textile and apparel industry remained at the level of the war years, with a slight rise in the
imports. The share of textile industry in exports is 17.3%, and imports only 6.2%. It is particularly
important in the textile and garment industry, Croatian has 46 600 employees, which considering the
number of employees in manufacturing industry amounted to 17.3%. This is a very important fact,
because these industries have a signifcant infuence on the overall employment rate, the more so
because they employ about 75% of female labor force. For the textile and clothing industry continues
to operate successfully it is necessary to modernize and reorganize production. Service industry
should continue to be a substantial amount of total production. But above all it is necessary to have
your own product known on the European and world markets. To achieve this we need to develop our
own creation of high quality products competitive in the global market. Despite the high competition
of cheap textiles from Asia, high quality modern textile design or just attractively designed textiles
can still be proftable to qualify for the world. It is in particular the approach and methods of work and
we see our chance, of course with proper use of marketing strategies.
4
3 http://www.index.hr/vijesti/clanak/izumire-li-hrvatska-tekstilna-industrija-u-dvije-godine-izgubljeno-4000 radnih-
mjesta/535735.aspx
4 http://www.privredni.hr/index.php?option=com_content&task=view&id=1802&Itemid=2
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6. GLOBAL CRISIS AND SME
Since the beginning of the economic crisis in 2008, it has been noticed that plummeting production
has had a major effect on SMEs in the EU. The European Commissions annual report on SMEs
shows that the crisis has hit medium and large companies harder than small and micro ones. A
major issue SMEs have to cope with is that of access to fnancing. The proftability of SMEs in
the EU is under huge pressure, which diminishes the number of new market entries and increases
the number of exits. Implicitly, the phenomenon entails growing unemployment. At the level of the
European Union, SMEs stand for 99% of all enterprises. The world economy seems to recover faster
than certain economists anticipated, mostly because of the drop in aggressive interest rates, of the
emergency credit of the central bank and the governmental fnancial stimulus. According to analysts,
the European Unions economy has left behind the free fall period and is gradually recovering. The
main factors determining the recovery are the scope of the problems in the banking sector (showing in
harsher lending terms) and the obstacles as to restoring peoples confdence. The slow expor growth
rate (notably to the Eurozone) and the drop in foreign investment in the region are another two
factors further infuencing the recovery. Recovery in this part of Europe largely depends on a pickup
in the activity of small and medium-sized enterprises (SMEs), which were seriously affected by the
credit crunch the economic crisis entailed. The adverse impact on most SMEs causes a decline in the
development rate and a rise in the number of bankruptcies (Gabriela, 2011,p. 129-140).
7. SME AND SOCIAL MEDIA
Facebook and Twitter are dominant social networks. Ignoring the social media movement wont make
it go away, therefore, the best strategy is to use them in marketing purpose. Social Media Networks
have more than 300 million users. There are also slightly more female than male users. How can we
use them productively? They have become important for any business because they changed the way
people use the Internet. Facebook was originaly created for students to keep in touch. Facebook page,
intended as a business or professional platform can be an important marketing tool which is free of
costs Twitter is what is known as a Microblogging. It is really easy for companies to open the site
profles of the company and gather the information who likes the product that the company offers,
or the company. Fans have the opportunity to comment on the companys public profle, as well as
photos. Additional benefts provided by social networks are the statistics on the number of visitors,
fans, the number of comments, etc. Small businesses without a web presence may consider setting
up a Twitter or Facebook profle or page as a no-cost way of connecting and advertising online.
The next step is the research of infuence of Social media and Internet on SMEs development. The
preliminary research results shows that only 6 % of companies do not have a web site, and among
SMEs this fgure is much higher-17%. In the SME category, all the companies involved in the IT
application development or service have a web site (Strugar, krti, 2006, 236-238). They help small
businesses grow and expand. Social networking sites could be helpful for generating a network of
loyal customers. As well as through them can reach the target market segment, they are an excellent
medium for fnding business partners.
8. RESEARCH METHODOLOGY
In-depth face-to-face interview was the primary means of data collection. Finally, the focus of the
research was on the owner-manager who owned and managed their own frm, only single plant.
Information was obtained on the profle of the frm and from intervju with the owner/manager; the
characteristics of the owner-manager (age and nature of prior work experience), the factors that
infuenced his decision to export and the international growth strategies adopted. Owner/manager
was encouraged to describe the challenges he encountered in the implementation of strategies for
international frm growth. The analysis of the data refects the key themes that were investigated in the
interview. The research approach incorporated in depth interview with the owner/manager of SME in
retailing sector in the Croatia with the current heory.
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9. MERKURS PROFILE
Merkur is a small family business established in 1992. for production and sale of textiles. Headoffce
is in the Vinogradska 2, Pitomaa. At the beggining there were only three seamstress employed
together with the owner. Today, twelve seamstress are engaged in production. Initially, the owners
were focused on the production of clothes and goods for childrens baptisms and special occasions.
Materials for sewing the clothes were purchased from small and large manufacturers from Croatia,
Italy and Germany. Production began on home machines that were already owned, and material
procurement was initially in very small quantities. The lower foor of the private house was completely
renovated and adapted for the production. During the time, family acquired additional knowledge and
skills and invested it in the purchase of new sewing machine. In 1995. they invested in the acquisition
of the entire machine park. 1996th begins with the production (sewing) of baptismal garment. The
idea of seamless child baptismal clothing came from the parents of todays owner Matija krinjar,
Josip and Nada krinjar, who were dealing with retail sales of textiles, saw the need for baptismal
clothing. They already had an experience in selling the textiles and realized that there is a demand for
baby clothes for baptism. They started with production of only a few outfts for boys and girls. They
produced baby shirts and linen ornament for wrapping the candles.
Over the time, the range of baby clothes expanded and beguin their collaboration with the largest
wholesalers of textiles in Croatia - Tekstilpromet. Additional assortment extension happened in 2003
and the owners immediately experienced the serious sales growth. The older son, Zlatko krinjar
joined the family business after he graduated at the Faculty of Economics in Zagreb His arrival
brought some changes in the company related to the target market. They began with the processing
and analysis of the market which resulted in increased demand for their products and increasing
list of customers. They employed additional employees. Customers were chosen according to the
geographical orientation - the goal was in every major city across the country to have at least one
large and reputable buyer, retail chain, etc. With existing Tekstilpromet, covering the whole Croatia,
the new customers were Minako for the whole Slavonia region , NAMA on the Zagreb theritory
and KTC for northwestern Croatia. Zlatko, who started his own company for sport marketing,
quit the family business and left it to younger brother Matija krinjar. Matija continued to invest in
new technology, machinery, education, monitoring market trends, and achieved signifcant growth
in production. The production in period from 2004 until 2008 grew more than 35% annually. The
assortment was available in all the majors and some smaller shops in Croatia. The company had a
constant tendency to grow.
10. BOUTIQUE LITTLE ANGEL
In 2008 Matija decided to open a boutique in Zagreb in the Shopping Mall Importanne Gallery.
Although they had plenty of major businesses with the wholesalers, they decided to try retail. He
decided to offer his products to regular customers. He thought he would thus have an opportunity
for listening the market better, seeing how customers react on their products and to directly obtain
information about individual preferences and possible changes in the assortment. Ideas for new
models come following the global childrens fashion trends and from visiting a specialized childrens
fashion fairs. Little by little he managed to achieve cooperation with some foreign business partners
In 2010, with the opening of new Shopping Malls in Zagreb, the traffc in the Importanne Gallery has
dropped drastically, and so does the attendance of boutique Little Angels. They found themselves in
thankless situation from which they had to be drawn as soon as possible if they wanted to retain their
customers. In these diffcult moments for the family business Matija even thought about closing the
Little Angel boutique. Profts from sale were minimal and Little Angel was faced with closure.
In a conversation with his friend that occurred by chance, Matija got some helpful tips for recovering
the company. He decides to surrender his friend marketing activities and leadership of the boutiques,
and a free hand to do whatever she thinks might help in the recovery of the boutique. They recognized
the value of free advertising through the internet social network, Facebook and Twitter. They opened
the Facebook profle of the company in October 2010, and it immediately gave the results; sale have
increased signifcantly and the global awareness of the boutique was spread out. The profle page has
more than 2000 friends and more than 5000 fans. Benefts offered by Facebook profle pages turn to
be huge; information literally travels as the speed of light! Members give their suggestions regarding
the design, color, details etc. The marketing manager designed the contest for the prettiest baby up
to one year on the Facebook. The contest lasted for one month. The grand award was shooting for
the Mercurys new catalog and a gift package of baby clothes worth 1000 kn. All items in the shop
were photographed once again. The new catalog has exceeded the expectations of wholesalers who
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were thrilled. The same products from the new catalogs had higher sales than when they were in the
old catalog and Matija and his new marketing manager were often faced with the questions: Is this
new in the catalogue? It further convinced Matija that the esthetic appearance of the catalog is very
important in this business. They created a new web page and activated a web shop. Almost every
day they were receiving new orders. Sometimes it demanded even working on holidays. They often
organized the various contest and always try to keep their customers pleasently suprised. Customers
were encouraged to freely give an advice about new products, choice of colors, the new models etc.
Any advice was welcome. The website for group discounts turned out to be an effective marketing
tool for advertising. They had a set of eco-diapers down by 50% and gained many new customers.
The new assortment for 2011 has already been made and they dont intend to stop one that. Customers
might choose to combine what they want from the provided assortment. They strive to be fexible
and meet all customers demands, so it is possible to order the clothes of your desire and needs. The
packaging of their products is their concern. In the future they plan to achieve more of some of their
ideas. So far, they have 150 products in their assortment.
Export
Matija completely turned to wholesalers who are his most important business partners. Business
is still expanding, aided by the fact that a lot of small trades that are engaged in the same business
collapsed due to recession, and now they are a leader in the manufacture of baptismal equipment
in Croatia. They exhibited a number of craft fairs organized by the Croatian Craft Chamber and
independently; Graz, Celje, Munich, Zagreb, Split, Pula, Rijeka, Osijek .etc.where they realized the
potential business contacts. The fair that was held in early April in Mostar, brought them the frst
export to Bosnia und Herzegovina. The frst shippment of good happend in May. They have focused
on the Herzegovina market.
Future plans
In 2009. Merkur was present on a solo exhibition at the fair in Cologne (one of three worlds largest
specialized fair for the baby up to 1.year) - Kind + Judged. So far, they have achieved signifcant
business results. It is because they succeed to constantly listen to their customers and follow market
trends, invest in market research to keep pace with time and requirements and invest in expansion.
Future plans are related to the modernization of production by building more production facilities. It
is interesting to note, especially in these diffcult times of crisis, they suceed all of this without any
loan, and all fnancing was done from their own resources.
They are currently in the process of obtaining certifcation and quality labels from CCC. Since they
have a representative on the German market, their efforts are directed on achieving co-operation
with one of renowned European commodity house. The Merkurs target markets are young married
couples, expectant parents, pregnant and lactating women and therefore they choose to appear on
Mom and Baby fairs. The materials are mostly imported, with the fnest quality fber and prices are
formed depending on the prices of raw materials. In these times of recession they accomplish to
operate successfully. Market monitoring helped them to exceed the challenges that competition could
not keep track and additionally took over the customers and expand product range. They had growth
of 10% in 2009 and 6% in 2010%. At a time when the entire textile industry is dropped on the knees
and numerous textile factories were closed they succeed to survive thanks to effective marketing
strategy and an open mind of managers to new marketing tools.
11. IMPLICATIONS
Internationalization is one of the ways small business growths. In order to encourage the export of
Croatian companies they need to be furnished with additional information. Understanding the pattern
of SME export activity and the challenges they encounter in the process is a fundamental foundation
on which to develop appropriate policy and for the design of suitable management support and
training initiatives for owner/managers who wish to achieve export growth. For instance, why owner-
managers embark on international frm growth, the choice of international market, the market entry
strategy adopted and the diffculties encountered in achieving successful international frm growth
are issues worthy of investigation. Furthermore, the availability of new marketing tools in the form of
social networks enables small businesses without a web presence to consider setting up a Facebook
profle or page as a no-cost way of connecting and advertising online.
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12. CONCLUSION
Research has found that small frm that grows, tend to develop proftable and expanding market
niches (Storey, 1996., 1997) that are often quite narrow and appear diffcult to describe by objective,
industry or market wide variables. One of the successful ways to reach the narrow target markets are
Social Networks. The role of Social Networks is thus extremely important, and this paper shows that
Social Networks within SMEs are still considered as a neglected resource with only operational but
not strategic importance. This attitude can be changed by action, education and popularization of
benefts of Social Networks among SMEs, adaptation. The consequence of this process can already
be recognized in growing number of Internet business users. Given that social networks do not know
the physical boundaries, their greater use for business purposes can be expected. Development of
SMEs and intensive IT technology application could be the key factor in companys development.
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SMES AS FACTOR OF ECONOMIC GROWTH IN BOSNIA AND HERZEGOVINA
Mila Gadi
Faculty of Economics, University of Mostar, BIH
E-mail: mila.gadzic@sve-mo.ba
Igor ivko
Faculty of Economics, University of Mostar, BIH
E-mail: igor.zivko@sve-mo.ba
Abstract
The most important economic challenge that is posed by policy makers in Bosnia and Herzegovina is a
challenge to start new development cycle that will ensure economic progress and better standards of living for
residents. In this sense, a priority is to create conditions for increasing competitiveness of the economy.
The main sources of growth of the private sector are in stimulating business environment,
supporting development of entrepreneurship and attracting foreign investment. In Bosnia and
Herzegovina there has been a noticeable improvement in the removal of administrative barriers to
domestic and foreign investment. However, strengthening entrepreneurship has been established
as a prerequisite for faster development of the private sector, especially for SMEs growth.
The basis of competitiveness lies in the nature of the environment in which businesses operate,
which means that the business environment should be incentive for investment, be transparent
and effcient in providing all necessary information, natural and human resources, physical
infrastructure, fnancial resources, scientifc, information and technology infrastructure.
The ability of frms to achieve competitive advantage does not depend not only on their
strategy, innovation and jobs, but also on external factors and institutions. Macroeconomic
reforms are necessary but not suffcient condition for productivity growth and competitiveness.
Microeconomic reforms are also essential, and they occur at the level of the enterprise.
SMEs in the context of entrepreneurial restructuring should be the bearer of economic growth. To be able to
realize their role as such, it is necessary to remove the restrictions which is generally expressed through an
adverse environment for their development and growth.
In this paper the authors will analyze key internal and external constraints for development of SMEs in
B&H. On the base of scientifc analyze, this article should give recommendations for further improvement
of economic policy that should be in function of faster economic development and better competitiveness of
B&H economy.
Keywords: SMEs, Economic growth, Entrepreneurial restructuring, Competitiveness.
1. THE ROLE OF SME S IN IMPRUVING NATIONAL COMPETITIVENESS
Modern approach to economic development and new theories that arise in response to the problems
of modern economies less and less importance attach on factors that are favorable macroeconomic
context, cheap labor, abundant natural resources and economic policies which encourage development
by protecting industries.
Modern approach to economic growth and development search for answers how to ensure a sustainable
growth and better quality of life. The general view of the answer lies in sustainable competitiveness
that is focused on companies and industries rather than the economy as a whole.
The competitiveness of the economy implies a sustained growth in productivity and business, that
affect the macroeconomic and microeconomic business environment. Level of competition determines
the productivity. Therefore, the state has to take measures to increase the overall social productivity.
The most important challenge of economic policy in the B&H is the challenge of starting a new
development cycle that will ensure GDP growth and better standard of living. Therefore, the priority
of economic policy makers is to create conditions for increased economic competitiveness.
However, to develop a competitive advantage is not easy. Competitiveness requires a strategy based
on knowledge, a thorough knowledge of consumer behavior, cooperation and rivalry among frms,
external orientation and positive partnership between the government and the private sector.
The basis of competitiveness is in the nature of the environment in which businesses operate,
which means that the business environment should be incentive for investing, transparent
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and effcient in providing the necessary information, natural and human resources, physical
infrastructure, fnancial resources, research, information and technology infrastructure.
The ability of frms to achieve competitive advantage depends not only on their strategy, innovation
and jobs, but also on external factors and institutions. Macroeconomic reforms are necessary but
not suffcient condition for the increase of social productivity and competitiveness. Microeconomic
reforms are also essential, and they occur at the level of enterprises. That is why the joint action of
government and business is important to create an environment for competitiveness. The process
of improving the competitiveness involves a partnership of governments, business and academic
communities, which all must work together on the challenges of the global market posed to country.
Compared to previous years, there has been a noticeable improvement in the removal of administrative
barriers to domestic and foreign investment. However, requirements necessary to create conditions for
improved competitiveness of the domestic economy are not designed. Strengthening entrepreneurship
in B&H has been established as a prerequisite for rapid development of the private sector, especially
for SME growth.
Compared with other transition countries, B&H has the lowest SMEs number per 1000 inhabitans.
Starting a business is the most expensive in the region, and more expensive compared to other countries,
indicating that government have to speed up reforms needed to create a business environment more
suitable for development of SMEs.
2. KEY REASONS FOR UNDERDEVELOPMENT OF SMES IN B&H
There are a many factors that limit the opportunities for development
SMEs in B&H. However, the key reasons for SMEs underdevelopment are the following:
1) The inherited economic structure of the country based on large companies and complex integrated
business systems. The restructuring of large systems is not yet complete and many of them have
not been privatized. Through the restruction of these business systems it is possible to create a
large number of SMEs that can operate signifcantly easier. Small and medium enterprises as the
main factor in the development of the country gain importance in the transition period and post-
privatization restructuring. Competitiveness of economies in transition economies in general is
possible to increase on diferent ways: 1) more effcient production of goods produced in the country,
2) introduction of new or improvement of existing products, processes and organizational structure,
3) more effcient allocation of resources and capacity between sectors, 4) faster implementation and
costs reduction of structural changes, especially those that are conditioned by technological changes.
2) The slow pace of privatization and the whole process of transition to the market economy.
3) The inconsistency of economic policies and legislative measures at the level of B&H legal
framework: strategic directions and instruments of development of SMEs have been established at
the entity level without adequate coordination and harmonization at the country level. The Council
of Ministers in 2009. adopted a document entitled Strategy for the Development of SMEs in B&H
for the period 2009.-2011. Republic of Srpska adopted a Strategy for the development of small and
medium enterprises for the period 2006-2010., and the Federation of Bosnia and Herzegovina was
adopted by the 2007th The Development Programme. In Republic of Srpska the Agency for SMEs
has been established, and together with 4 regional and 20 local agencies makes a basic network to
support their development.
However, it is necessary to take into account the Entity and regional differences in the development
of SMEs. Emphasis should be placed on decentralization in accordance with regional specifcities.
This means that it is necessary to guide the development of SMEs in accordance with local
specifcs. Discrepancies between the institutional framework is the fourth key factor that hinders the
development of SMEs in B&H. It is also necessary to respect the specifcities od industrial policies,
which determine the position od SMEs.
It is important to emphasize that the concept of SMEs is not uniform, but vary signifcantly according
to different stage of development nad certain specifc economic structure. In this regard we should
respect the existing economic structure, industrial and other sectors, and in accordance with that
specifcs create policies supportive for the development of SMEs.
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The structure of SMEs in Bosnia and Herzegovina:
Number of employes Total entities %
1-9 151.107 93,6%
10-49 8.712 5,5%
49-249 1.476 0,9%
TOTAL 161.295 100%
Source: Strategy for the development of SMEs, 2009.-2011., Ministry of Foreign Trade and Economic Relations of
Bosnia and Herzegovina.
3. KEY LIMITATIONS IN THE DEVELOPMENT OF SMES
Limitations in the development of SMEs in B&H can be divided into two groups.
a) The frst group consists external constraints:
Weak support for manufacturing SMEs
The dominance of micro enterprises,
Unequal institutional support and territorial development of SMEs
Low levels of investment in research and development,
Lack of entrepreneurial culture and business ethics,
Insuffcient involvement of SMEs in the creation of draft laws,
Insuffcient investment in business infrastructure,
Excessive bureaucracy.
The second group consists internal constraints (derived from the company):
Low-level knowledge and skills in new technologies, ICT, management, etc.
Outdated technology,
Focus on the traditional industry (low productivity and technological development),
The orientation on local market,
Low competitiveness and limited ability to export.
The largest number of companies in B&H belong to the category of micro enterprises (with the
number of employees less than 10), which is about 95% of all SMEs. These companies are among the
most sensitive group.
The main causes of deterioration of small and medium-sized enterprises in B&H are: lack of
development of the business climate and legal framework, lack of adequate state support, lack of
cheap sources of fnancing business and unfair competition, lack of competent managers and a low
level of entrepreneurial education and behavior. According to the indicator, the time needed for the
start business in B&H lags signifcantly behind the countries of the region. According to a Survey
of business environment, B&H is on the 160th place of 180 countries ranked according to the start-
up and business registration. In 2010. year, the registration process lasted 60 days in B&H, while in
Macedonia it took 4 days, in Croatia 22 days, in Serbia for 13 days to do the same thing.
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4. INSTITUTIONAL SUPPORT TO THE DEVELOPMENT OF SMES
Institutional support to the development of SMEs is one of the most important preconditions for
development of entrepreneurship and competitiveness. That support to entrepreneurship and SMEs
should be based on creating a network that includes:
Business support agencies,
Business associations,
Clusters
1
,
Support the creation of favourable environment for business.
Measures and activities aimed at strengthening the business support environment include:
Financial support for SMEs and entrepreneurship development,
Acceleration of the procedures and reduction of the business registrations costs,
Reducing the fnancial burdens and taxes,
Creation and development of business infrastructure,
Partnerships and clustering of SMEs,
Education of entrepreneurs (through education, training programs, etc.),
Strengthening the innovative and technological competitiveness of SMEs,
Strengthening the role of ICT in SMEs,
Internationalization of SMEs business, especially with foreign investment,
The integration of gender principles in the development of SMEs, with an emphasis on
strengthening womens entrepreneurship.
For majority of countries foreign investments are very important factor of promoting economic growth
- technology, capital and knowledge that are transferred to the countries recipients of investments -
remove the insuffciency of these resources, which are crucial factors of growth in world term. That
is why the B&H have to take measures with the aim of instigating direct foreign investments. It
is clear that direct foreign investments represent a necessary integrating factor to world economy.
However, a fundamental assumption for the infow of direct foreign investments is the realisation of
all-encompassing institutional transformation and general economic stabilisation.
EU experience in supporting the development of SMEs can be helpful, especially in terms of the
accession process. However, the use of these experiences has to respect the level of development
and specifc conditions in B&H. SMEs are the backbone of EU economy: they provide 2/3 of total
private sector employment, represent 80% of the total job creation and produce more than a half of
the EU added value. The new EU policy strategy cares very mach for the regional inovation systems
and clusters as the main factor of competitiveness. The aim is to build world-class clusters with the
necessary dimensional strength, since most clasters are too small in size to compete globaly.
2
The
European Commission has developed and implemented a range of policy measures specifcally to
support SMEs in Europe. These policies are aimed at creating the conditions in which small frms can
be created and can thrive.
SMEs and their development have been incorporated into most EU policies and programs. The
European Commission has undertaken several initiatives to promote entrepreneurship and SME
development, such as the European Charter for Small Enterprises and the Entrepreneurship Action
Plan. Implementation of European Charter for Small Enterprises is an essential part of the Lisbon
strategy. It is clear that long-term development of the economy depends on successful entry into the
Western European market. But, low effciency of economies seems a natural barrier of entry into the
market in Western Europe, therefore the construction of national competitive advantage is the only
way to overcome this obstacle.
EU priorities in the development of SMEs and their use in B&H can be summarized in the following
1 A cluster is a form of strategic alliance or group of related enterprises from a branch. This group includes producers
of raw materials, governmental and nongovernmental organizations, and even educational and scientifc institutions
that have joined together to solve common problems. It is believed that clusters increase the productivity and
competitiveness of companies, which then become more powerful in the national and global sense.
2 Marco Lapriore: Supporting Enterprise Development and SMEs in Europe, EIPASCOPE, 2009./2.
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paragraphs:
Progress in implementing the European Charter for SMEs,
fulfllment of commitments of the European Partnership for B&H,
implementation of the Integration Strategy of Bosnia and Herzegovina to the EU,
removing other administrative barriers for business and SMEs,
Improving the business environment for SMEs.
In economies in transition is generally necessary to create a basic assumptions to support the
development of SMEs. The most important of these assumptions are:
Macroeconomic and political stability,
Functioning of markets and institutions to provide services of commercial development, of
SMEs;
The legal framework that supports the start-up and development of SMEs, but also extinguish
the enterprise;
Access to information for SMEs is the most important factor which determines their survival
and growth,
Monitoring and adoption of new knowledge,
Liberalisation and the abolition of visa requirements for equal performance of entrepreneurs
from the foreign markets.
Advanced elements of the competitiveness of SMEs are related to their access to the new technologies
and the ability of competition in the global market, which are necessary instruments of improvement
of their work. For example, to a large extent it can increase the export competitiveness of SMEs
through clusters formation, or through other intercompany connectivity (ie connectivity between
large and small enterprises, formal and informal cooperation among local SMEs at the regional level,
etc.).
5. FINANCING SMS DEVELOPMENT AND ENTREPRENEURSHIP
SMEs in low and medium income countries have lacked acess to fnancial product and services.
Microfnance institutions serve the micro enterprises, while banking sector have tipically concentrated
on large corporations. SMEs fall between these two markets. Thereby there is fnancial gap commonly
described as the missing midlle.
Fastering a dynamic SMEs development is seen as a priority among economic development goals in
economies in transition. SMEs are a primary driver for job creation and GDP growth.
SMEs face more severe constraints to growth than large companies, their lack of critical size resulting
in reduced acess to market, skills and capital.
Tipical business background in emerging economies is
3
Corporate and multinational
0,1%
Large companies
0,9%
Small enterprises
20%
Micro enterprises
65-75%
Five Strategic areas form the foundation for SME banking performance
4
:
3 The World Bank, January 2010.Issue No.30., page 2.
4 IFC SME banking CHECK Diagnostic Toolkit
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6. FALI TABELA GRAFIK
Key activities ateach of the fve stages of the SME banking chain are
5
:
Understanding the SMEs market,
Developing product and services,
Acquiring and screening SMEs clients,
Serving SMEs clients,
Managing with information and knowledge.
In B&H banks the high demand for soft loans for private investment can not yet be met. This points
to the fact that banks can not be suffciently well and safe place for funding domestic enterprises and
households. Experience with a number of credit lines intended for small and medium-sized companies
shows that they can give a strong impetus to the development and fnancial and manufacturing sectors,
and thus to overall economic growth.
In such a context, government has to create the framework conditions for private sector
development to become sustaining. Current priorities for government with respect to the
environment for SMEs development include encouraging the banking system to adopt and
recognise the SMEs sector as a potential market for a range of fnancial products, facilitating the
development of venture capital funds for that minority of SMEs that seek external equity, and
working in partnership with the private sector to establish an effective support infrastructure.
In this regard, government policies can help subsidizing and promoting the development of certain
segments of the economy. Such an incentive is given with the establishment of the Development
Bank of the Federation of B&H in 2008. and the Development and Investment Bank RS in 2006.
Therefore it is necessary:
To raise capital development banks,
Decentralize Development Bank of the Federation B&H to create conditions for easier and
faster access to customer funds,
Subsidize part of the cost of capital, interest, incentives to investment and employment,
Introduce new lines of credit that will encourage the restruction of the company voted in the
privatization process, etc.
Poor condition of private sector is one of the main causes of inadequate allocation of funds within the
banking system. There is an evident lack of quality projects to absorb the available funds. For many
years the share of loans to the households was greater than to the companies, only in recent years this
relationship is changing in favor of the company. This relatively low share of loans to corporate sector
has resulted in a lower level of investment, and thus an unsatisfactory level of economic growth.
In doing so, the inadequacy of fnancial resources is not in the top of the list that limits the development
of SMEs, but those are primarily the ineffcient bureaucracy, corruption, inadequate or discouraging
tax system and regulations. The main problem is the lack of quality investment projects which could
be realized with an acceptable risk. Therefore, it is necessary to create educational support that will
enable the development of entrepreneurial ideas and proftable projects.
SMEs are mainly oriented towards the banks, not the capital market, for raising funds.
In B&H, The World Bank is implementing the project Project to facilitate the fnancing of small
and medium-sized enterprises. The aim of the project is to provide better access to fnance for
SMEs in the context of the global fnancial crisis. In this sense, the project provide U$ 70 million
(60% in FB&H and 40% for RS), funds for working capital and investment projects for small and
medium enterprises. The interest rate is variable and will be determined based on the 6-month LIBOR
interest rate for the euro and by adding a 0.17% margin included by the World Bank. The fee for the
preparation of the project is a once 0.25% of the amount of the loan with a repayment period of 25
years, including a grace period of 10 years.
Funds are placed by commercial banks, and the success of this project depends on the ability of
commercial banks to provide fnancing for small and medium-sized businesses under more favorable
conditions. Project implementation will also depend on the ability of companies to prepare proposals
for sub-projects for commercial banks.
5 The World Bank, January 2010.Issue No.30., page 3.
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Full transparency in combination with the process of pre-qualifcation of commercial banks, will
promote competition between banks and ensure that reasonable interest rates will be charged to the
users.. SMEs will have the opportunity to choose the most favorable conditions and terms of the loan
offered by any of the eligible banks.
7. CONCLUSION
SMEs should be one of the pillars of BiHs economic development. In this sense, it is necessary to
defne the overall SMEs development policy in the context of regional and local specifcities. Policy
development of SMEs should be focused on removing barriers and encouraging environment for the
emergence and development of new enterprises.
This paper has identifed the most important limitations in the development of SMEs, particularly:
inadequate education and training of entrepreneurs, lack of a simple and inexpensive business start,
inadequate legislation and regulation, skills and knowledge insuffciency, poor on-line access to
company registration and tax requirements, diffcult access to the beneft of using the advantages of
the single market, disincentive taxation and fnance, bad presentation of medium and small enterprises.
The main question is: how to improve competitiveness od SMEs? The positive business environment
and effcient public business support at all levels are the most important factor in the competitiveness
of SMEs. Further improvement of economic policy that should be in function of faster economic
development and better competitiveness position of B&H economy is necessary. Special attention
should be focused on:
Improving administrative effciency at the national and regional level,
Improving business competitiveness through e-business services,
Providing advisory services to SMEs,
Creating incentive investment climate
Supporting cluster development.
A key factor for SMEs development in the developed economies are clusters. They offer a new
way of thinking about economic development, giving the new role of business to the governments
and institutions. They are development tool that should be recognized by state, entities and local
authorities in BiH, who should encourage their formation and growth.
Clusters are binding factor with similar companies in a particular feld and they have to become
widely accepted component of national and regional development plans. That process involves a
partnership of governments, business and academic communities.
That is why B&H need new policies for the development of SMEs, aimed at removing barriers and
creating an enabling environment for their establishment and development. Effective policies must
take into account all the specifcs of B&H. In this way it is possible to ensure sustainable economic
development in which SMEs should be one of the pillars of creating a growing competitive economy.
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Reference
Access Finance, IFCs SME Banking Knowledge Guide, The World Bank, January 2010.Issue No.30.,
Doing business in BH, World Bank, 2010.
Enhancing the competitiveness of SMEs in the global economy:strategies and policies, OECD.,2000.
Gadi,M.: Bankarski sektor u funkciji razvoja malog i srednjeg poduzetnitva, II Meunarodni simpozij
Financije i raunovodstvo u funkciji gospodarskog rasta Bosne i Hercegovine, Mostar, 20.-21. rujan
2007.
Gadi,M. Pulji,M.: Razvitak fnancijskog trita Bosne i Hercegovine kao pretpostavka gospodarskog
rasta, Znanje i konkurentnost, Sveuilite Jurja Dotule u Puli, Odjel za ekonomiju i turizam dr. Mijo
Mirkovi, 2007.,
Impruving the competitiveness of SMEs in developing countries, The role of Finance to enhance Enterprise
Development, UN, 2001.
Internalisation and SMEs Development in transition economies: An international comparison, Journal of Small
Business Enterprise Development, Volume 5., no.4
Marco Lapriore: Supporting Enterprise Development and SMEs in Europe, EIPASCOPE, 2009./2.
Small Business economies, Volume 14., no.4
Strategy for the development of SMEs, 2009th-2011th Ministry of Foreign Trade and Economic Relations of
Bosnia and Herzegovina
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POLISH PRESIDENCY IN THE EUROPEAN UNION IN THE CONTEXT OF THE EXPANSION
OF UNION INT0 WEST BALKANS COUNTRIES - POLITICAL AND ECONOMIC ISSUES.
Magdalena Ickiewicz-Sawicka
Bialystok University of Technology, Poland
e-mail: madziak11@wp.pl
Abstract
On the frst of July 2011 Poland assumed the presidency in the European Council which will last over six
months and will host the executives of European Union. The top priorities of this guidance are the following:
the frst priority is concerned with the growth of the EUs budget for oncoming years. The second topic covers
the issue of Eastern Countries Partnership, and fnally the third one touches upon the subject of the European
Unions expansion of the countries located in Western Balkans.
First of all Poland should actively support the Balkan countries aiming at the their full integration into European
community. Controversly, Poland may be perceived as a kind of an obsticle or a bridge dividing East and
West, EU and Russia, countries of the post-Soviet regime. Positive atmosphere accompaning EU expansion
into Balkans and support given for Polish government in this feld area, Polish Foreign Policy creates an
opportunity to achieve real political success, both in domestic and international context.
Poland can play the role of a leader and a promoter of the increasing membership in the European Union:
Croatia, Macedonia, Bosnia and Herzegovina. Their accession to the European community is presumably more
likely than the adaptation into EU of Ukraine or Belarus. Furthermore, Poland maintains positive relations with
all countries from the Balkan region and is considered as a plausible and credible partner. As an active promoter
of quick entry of the Balkan countries into EU, Poland will gain support and recognition on the international
ground, particularly because both EU and the U.S.are keen to join Balkan countries into European community.
Keywords: Polish presidency, European Union, Western Balkans, Political issues, Economic issues
1. INTRODUCTION
The region of Europe expanded through the East-West pivot still dominates in Polish Foreign Policy.
The contemporary diplomacy and the modern strategy for international relations prove that Polish
Foreign Policy should proceed in a multi-vector way and should be characterized by the diversity
and the heterogeneity. Accordingly, in Polish Foreign Policy, next to the East-West dimension, the
thread of south countries, particularly Balkans, should appear. Acceptance of such a strategy would
be exceptionally consistent with the policies appointed by the European Unions committee which in
XXI century prioritize the theme of Balkan and other south countries.
So far, in Polish Foreign Policy West Balkans were perceived as a region of marginal importance.
Nowadays, the situation begins to change and Balkan politics starts to upgrade in the hierarchy of
strategic priorities of Polish presidency in the European Union. Even though West Balkans do not
occupy leading position, the fact of incorporation of this theme refects positive atmosphere and
attitudes.
On the frst of July Poland assumes the presidency in the Council of Europe, taking up the leadership
of the European Union for over six months. The priorities of this leadership consist of three major
points. First point touches upon the subject of European Unions budget for the oncoming years. The
second point covers the theme of East Partnership, and fnally the third topic relates to the subject of
European Union expansion in the countries of West Balkans (Todorova, 2008, pp.251-301).
In overall, the engagement of the European Union countries in Balkans was the most noticeable and
active at the beginning of the 90s of XX century within the context of peacekeeping mission, giving
fnancial support and during the process of expansion. The West, not unduly, recognized that the best
and actually the only one guarantor of the stabilization in this region is the integration into European
Union. As a result, the action of accession of Balkan countries into European Union is strongly
supported by all the members of the Union, unlike the action of accession of East Europe or Turkey
(Balcer, Krawczyk, Wycicki, 2009,pp.12).
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2. THE EUROPEAN UNION TOWARDS THE WEST BALKANS AND UKRAINE
The EU countries have recognized that the existence of the wide zone of instability in the Balkan
region would pose a serious threat. The support of this thesis may be proved by the fact of hasty
adoption of Bulgaria and Romania into UE, despite the problems those countries faced. The zone of
instability was torn into two halves. The frst is concerned with the situation in Russia, Belarus and
Ukraine. The second is concerned with the problems in Kosovo, Serbia, Macedonia or Bosnia and
Herzegovina.
Activity of EU in West Balkans is defnitely stronger than in the East and is still increasing. Balkans,
until the moment of stabilization, are treated as a competition for the Unions engagement in the East
Europe, since the prospect of Ukraine accession into EU prolongs to 2030.
Possible membership of Ukraine in NATO and EU does not constitute a common political interest
for USA, EU and Russia. Most probably Ukraine will not join those structures (at least in the future
decade) and will remain in the Russians zone of infuence. The chance of full integration with the
West, outlined before Ukraine in 2005, was merely an illusion. In fact, Ukraine have never stand this
chance, since neither EU, nor US and Turkey do not perceive Ukraine as a principal partner in the
interests, but rather as a buffer between Europe, Turkey and Russia.
Both EU and USA avoid political confrontation with Russia, which traditionally treat Ukraine as
its zone of infuence. The attitude of most of the Unions countries and Turkey towards Russia was
accurately concluded by American political scientist Walter Russell Mead: The actual interests of US
and Russia, despite appearances, are fundamentally consistent with each other. Both countries crave
for geopolitical stabilization. In East Asia and West Europe terrorism and religious fanatism is hugely
despised. Russia needs the right to veto in the matters of Ukraine foreign policy - America is not
able to grant the right answers and should deal with it (Kaczorowski, 2010, pp.4).
Concluding the above considerations, it should be stated that the strategic partnership of Poland and
Ukraine is possible, however, in the further perspective. Poland should still support Ukraine in its
process of integration with EU, but only when the real chances appear. At the moment, such a chance
and international situation do not exist . If such an opportunity appears, Poland should get directly
involved. The key for gaining this aim may be hidden in the intensifcation of operations in Balkan
countries.
Furthermore, positive operations of Polish diplomacy in East Europe, in the importance measure,
depend on the development of the situation in Balkans. With no explicit success on this ground, the
progress of the integration of Partner countries is concerned with the Balkan theme. That is why,
Poland should not perceive the dimension of south only instrumentally by the prism of Polish East
Politics. What is worth stressing, the integration of West Balkans will not be an easy process for
EU and will proclaim a serious challenge for Common Foreign Policy and Security. Poland should
support Balkan initiatives and at the same time should open the way for European integration of the
countries of East Partnership.
Nevertheless, Balkans become a priority and the expansion of Unions integration are going to be
directed on south-east. Such a scenario should motivate Polish government for a greater involvement
into the Balkan theme.
Common Security and Defense Policy (CSDP) is inextricably linked with West Balkans. The following
initiative may be compared to a litmus test of the European dimension of safety and security in this
part of Europe. Possible defeat in the Balkan region may be seen as a holistic failure of CSDP. Two
thirds of soldiers, policemen, judges and EU offcials are currently engaged in CSDP mission. On
the other hand, the development of CSDP will be extremely diffcult without strengthening EU and
NATO cooperation, which is particularly signifcant for Poland.
3. EU STABILIZATION MISSIONS IN THE BALKANS
West Balkans region remains to be of crucial importance in the world arena for the development of
good EU Balkan relations. It may be proved by the example of KFOR mission in Kosovo - EU
protectorate. The mission will be eventually transferred to EU. Position of Poland on this ground is
particularly strong, since one of the largest contingents in Kosovo (EULEX) and EUFOR in Bosnia
constitutes 10% of all soldiers and offcials (there are more than 200 Polish soldiers in Bosnia (more
than 10%) - (Balcer, Krawczyk, Wycicki, 2009, pp.12) .
The administrative and police mission EULEX in Kosovo in the framework of Polish contingent of
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international police offcers, offcials and lawyers constituted about 8%.). This represents a signifcant
manifestation of Polish involvement in international missions in Balkans, and the organizations
created at the initiative of Brussels to the regional integration of South East Europe (eg. the Stability
Pact for South Eastern Europe - present Regional Cooperation Council).
As a result, the reapproachment of cooperation between Poland, Ukraine and Lithuania occured,
within the common battalion in Kosovo and joint actions of Polish and Scandinavian group of blue
berets in Bosnia. Poland should draw a conclusion from this benefcial situation and demonstrate its
involvement in this part of Europe. Unfortunately, Polish contingent intends to be withdrawn from
Bosnia.
Moreover, Poland should perceive Balkans as a bridge between Central Europe and Turkey, as an area
of Russian lawyers operations in Europe (traditionally, Russia has some very loyal allies in Balkans,
they are: Greece, Serbia, Bulgaria, Bosnia (Republika Srpska), Montenegro and a region of gas and
oil transit from Asia to Europe. That means, the Balkan region of great energetic potential (Balcer,
Krawczyk, Wycicki, 2009, pp.13).
4. THE ISSUE OF POLITICAL AND ENERGY SECURITY IN EUROPE
Energy security is one of the top priorities during Polish presidency. Poland have to present the issue
of energy security in the context of politics, also with the respect to the whole Union. There is no
denying that without Balkan countries being incorporated into EU in the rising energy market, it will
be extremely diffcult to guarantee energy security for, at least, few Member States.
In February 2011 on the energy summit of the Visegrad Group, Romania, Croatia, Bulgaria, Bosnia
and Herzegovina the declaration of diversifcation of gas supplies to Central Europe was adopted.
This diversifcation of supplies is meant to be achieved through the construction of gas terminals on
Krk, in Swinoujscie and Constanta, and the Nabucco pipeline (gas from Azerbaijan, Central Asia,
Middle East). This initiative seems to be relevant because of Russias plans to build South Stream
pipeline in West Balkans, frequently perceived as a competition for Nabucco. Russias project is
of great signifcance for the energy security of Central Europe and Ukraine. What is more, Russia
possesses huge political infuence in Serbia. Moreover, Russia affects the situation in Bosnia and
Herzegovina through their support given to the Serbian Republic (one of the components of B&H).
Balkans, again in the history of Europe, became the area of political confrontation among Russia and
countries of West Europe.
Generally speaking, membership of West Balkans In EU will mean the expansion of coalition of
new members of EU. Poland should take advantage of the correlation between Balkans, Ukraine and
Moldova (the strategy for Danube countries, Black Sea Synergy, the Organization for Cooperation
of the Black Sea, Moldova s membership in numerous organizations, Balkan, Central European
Initiative) to tighten the bonds between those countries and the EU. Poland could have played major
role in building and strengthening this cooperation since Balkan-European foreign policy direction
remains indeterminate.
After 1989 countries of West Europe (especially Italy) endeavored to the createation of so-called
pentagonal - the union of south-central Europe with ommission of the rest of south-central European
countries, Poland including. Notwithstanding, one confict in Bosnia completely shattered those plans
and Polish response for Italian actions was the initiative for the creation of the Visegrad Group,
Czechoslovakia and Hungary, and then subsequent founding of this group of Central European Free
Trade Association (CEFTA)- (Balcer, Gromadzki, 2010, pp.1)
In the subsequent years Slovenia, Romania, Bulgaria and Croatia joined the organization. In 2004
Poland abandoned this organization, however still remains to be an important contributor to CEFTA
Central Europe in the development of the regional cooperation in West Balkans. Between 2003-
2007, CEFTA members became an independent experts to the European region (according to: Adam
Balcer - director of Enlargement and Neighbourhood Policy the EU; in demosEUROPA - Centre
for European Strategy Gromadzki Gregory - has worked at Stefan Batory Foundation and the Eastern
Studies Centre).
What is more, greater involvement of Poland in West Balkans can contribute to stronger cooperation
within the Visegrad Group. Beyond any doubt stays the fact that for Hungary, Slovakia and Czech
Republic, Balkan region is far more important, from the natural reasons, than Eastern Europe.
However, in general, support for the expansion of EU is one of the most noticeable and also common
characteristics joining new EU members (countries of East and Central Europe, Baltic countries,
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Bulgaria and Romania). Furthermore, one of the stanuch supporters of West Balkans being included
into EU is Sweden (the co-initiator of Eastern Partnership), which also supports the extension of the
Union into Eastern countries.
Common diplomatic front could cover, by its range, east and south direction. In this issue Poland
would play the role of a leader and a propagator of inclusion of Croatia, Macedonia, Bosnia and
Herzogovina, or Montenegro into EU. Poland maintains positive relations with all Balkan countries
and is perceived as a reliable partner. As an active and staunch supporter of a prompt admission of
Balkan countries into EU Poland would have obtained support and recognition of the international
community. American and EU politics concerning the issue of integration of West Balkans seem to
be very coherent.
Positive completion of the integration process of West Balkans into EU seems to be of crucial
importance for the position of EU on the World arena. Moreover, it also affects the relations of
EU with Russia amd USA. Stabilization and integration of this region continue to be one of the
biggest challenges for Unions Foreign Policies, which may be exemplifed by numerous projects as
peacekeeping missions, protectorate, or fnancial aid. Operations, mentioned above are still desired
and needed, since the potential sources of threat or danger for West Balkans stability still exist.
The threat of war was ultimately averted, however the local conficts of a national (Cziomer,
Zyblikiewicz, 2007 pp. 259-262, 358-363), or of an ethnic character(Gniazdowski, 2008, pp.123-
140), terrorist attacks (Hoyst, 2011, Bantetas, Nash, 2003, pp.17-49), an increased activity of
organized criminal structures (Hoyst, Chang, 1998, pp.3ff), or a deep economic crisis (as in Greece
Kaplan, 2010, pp. 369-390) cannot be utterly exterminated and excluded. Moreover, in several Balkan
countries (especially in Kosovo, Gibas - Krzak, 2010, pp. 100-266) corruption and the weakness of
state institutions become a serious problem. This problem matter has signifcantly changed in Kosovo
during past few years, since in the past the major problems were religious and ethnic animosities.
An illustrious example here may be represented by the fact of detention of central bank chief of
Kosovo, just the day after the decision of The International Court of Justice, confrming the legality
of unilateral declaration of independence (Winnicki, 2009, pp. 107-109).
5. POLISH PRESIDENCY IN THE CONTEXT OF ACCESSION OF WEST BALKANS INTO EU
The areas mentioned above require active and strong engagement, as well as new assertive strategy
towards Balkan countries. Polish presidency should promote new European strategy, Balkans inclusive.
The problems which may accidentally appear during the integration of West Balkans process may
undermine the credibility of EU as well as the Unions ambitions to serve the role of a global force.
Furthermore, it should be stated that problems concerning West Balkans affect transatlantic relations.
United States wish Europe solved the problems (read Balkan issues) on its own, without any help
of USA ally. The leading role of Polish diplomacy is to strengthen the relations between EU and
USA in the context of Balkan countries, emphasizing the independence of European countries in the
transatlantic area.
Poland as a country assuming EU presidency should be actively involved in the process of integration
of Balkans into EU, mentioning the fact that Polish society speaks enthusiastically about the EU
direction of extension.According to the Eurobarometer studies from 2008, the level of acceptance of
Poles to integratet each of West Balkan countries is currently the largest among 27 Member States.
Although the most Poles favour the adoption of Croatia (EU average is 52 percent), there is also high
support for Serbia, Montenegro, Bosnia and Herzegovina. The controversial Kosovo or Albania also
obtained, 44 and 48 % of support.
Positive view of Polish society, presented above, is actually very coherent with the declarations made
by Polish politicians in the depicted area. During the last visit of Polish Foreign Minister Radoslaw
Sikorski in Belgrade, the representative of Polish government insured the chief of Serbian diplomacy
Vuk Jeremic of strong Polish support for West Balkans inclusion into EU structures, through the
presidency in the General Affair Council which decides about the expansion of EU.
Polish Foreign Minister defned Serbia as kindred Slavonic country. Moreover, the Minister concluded
that Poland and Serbia are bound together by history and sympathy. Therefore, it seems natural that
Poland supports European aspirations of Serbia, at the same time encouraging Serbian government to
continue with their internal reforms, which hopefully will create an opportunity for full integration.
Minister Jeremi expressed his true hopes that during Polish presidency Serbia will formally become
a candidate country for EU. What is more, Jeremi thanked Poland for being one of the loudest and
most famous allies of Serbia on their way to EU (Wandelberg, 2008, pp. 434). Jeremi also praised
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Poland for being consistent supporter of not only Serbia but also other Balkan countries during
European integration. Paying attention on a good economic situation of Poland, Jeremi mentioned
his wishes to intensify cooperation between the two countries in economic, trade and investment area.
Unfortunately, on the trade ground of Poland with Balkan region countries situation presents to
be rather bad. In that the level of Polish trade with the countries of Balkan region presents to be
extremely weak. Virtually, the real investment of Polish enterpreneurs do not exist. According to the
European Stability Initiative report, total value of Polish trade with the seven countries of Balkan
region is lesser than the trade with Latvia. In general Polish investments in Balkans are literally not
visible. Unlike the example of Czech investments, using historical ties with the Balkan states (Austro-
Hungarian heritage) continues to develop extensive commercial contacts not only with Balkans
permanent partner - Croatia, but also with notorious on the public arena - Albania, where Czech
building contractor companies are very active (Kaczorowski, 2010, pp.4).
However,some contacts exist giving a hope for the further development. For instance, all EU countries
(Poland including) approved of preferential export regimes concerning Balkans (the data concerns
B&H). According to this contract agreements until the end of 2013 Bosnia and Herzegovina will abolish
duty. Nowadays, 95% of goods being imported to B&H are exempt from custom duties. Furthermore,
EU together with B&H government signed up a contract Stabilization and Association Agreement
(SAA) as well as contract concerning avoidance of double taxation (Agreement on Avoidance of
Double Taxation - due to the limited scope of this study, the text was subjected to analysis of trade and
economic situation, only of some Balkan countries. Consciously abandoned discussion of Croatia,
which will soon be connected to EU and therefore, this subject is now extremely exploited).
6. POLISH ECONOMIC COOPERATION WITH B&H AND SERBIA
Polish economic cooperation with B&H is implemented on the basis of: EU Council Regulation
No 2007/2000 from 18 September 2000. The Regulation introduces exceptional trade measures for
countries participating in the process of SAA. It was the Agreement between the Government of the
Republic of Poland and the BiH Council of Ministers relating to B&H legal succession in relation to
contracts signed up by Poland and the countries of former Yugoslavia. The contract came into force
on 18th of February 2008 together with European Commissions Interim Agreement with B&H on
the liberalization of trade, binding from 1st of July 2008 (Ministry of Foregin Affairs of tne Republic
of Poland, Informant about countries of the world economy, the Internet source, see the bibliography)
In the export matters from B&H to Poland, machinery and mechanical appliances, metal ores,
chemical substances and plastics dominate. In the import from Poland to B&H, wood, textures and
their derevatives, products of agricultural industry, machines and mechanical devices are in the
forefront.
According to the data from B&H Statistical Agency, Poland in terms of trade turnover is placed
on 15
th
position of trade partners of B&H. In 2010 the structure of Polish foreign trade with B&H
decreased and a positive balance of foreign trade exchange decreased form 36,48mlneuro to 13,92mln
euro (Ministry of Foregin Affairs of tne Republic of Poland, Informant about countries of the world
economy, internet source, see the bibliography).
In the period of 8months in 2010 in the lead of Polish export were furniture 5,19mln euro, then
live animals 3,34mln, then on the third place pulp, paper and related products 2,02mln, fnally
tobacco, cigarettes 1,51mln, cotton and its derivatives 1,08mln and diesel oil - 0.99 mln (Ministry
of Foregin Affairs of tne Republic of Poland, Informant about countries of the world economy, the
Internet source, see the bibliography).
Polish import structure also has changed signifcantly. On the frst place were reactors, boliers and
machinery 5,63mln. The second product imported from B&H was aluminum 3,68mln, third
clothes 3,48mln, fourth iron ores and concentrates - 2.63 million, and fnalny on the last place were
various chemical products - 2.45 million and steam turbines - 1.64 million (Ministry of Foregin
Affairs of tne Republic of Poland, Informant about countries of the world economy, The Internet
source, see the bibliography)
The next area refecting business relations between Poland and B&H is concerned with the mutual
investments.
In 2010 most successful were companies from the mining and Combined Heat and Power industries
Polish Mining Machinery (UGS) from FAMUR, KOPEX, RAFAKO and JUG-POL Groups from
Warsaw (railroad industry). In total the investments were in the amount of 45mln euro (Ministry of
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Foregin Affairs of tne Republic of Poland, Informant about countries of the world economy, The
Internet source, see the bibliography).
In 2010 Polish companies have participated in major trade fairs in B&H, includingZEPS - industrial
fairs in Zenica (06.10.2010) where more than 500 companies expose annually (approximately 150 of
them deal with the metal processing). Furthermore, within the regional cooperation 05.l0.2010 special
delegation of seven Polish companies was invited by B&H Chamber of Commerce to Sarajevo. The
major organizer from Polish side was Economic Club of Silesia and Polish companies which attended
the fairs (all of them for Lower Silesia) were the following: Edex; from Ostrow Wielkopolski -
automotive industry, ;Spomasz; of Naklo - catering equipment manufacture, Fanina SA; from
Przemysl - manufacture of electrical equipment, ;Mysak Group; from Poznan - the production of
machinery for food treatment and chemical industries, KOOL; in Wroclaw - distribution of rolling
bearings, Re-invest in Legnica - implementing new technologies in mining and Pol World Travel
(Ministry of Economy of the Republic of Poland, Informant about countries of the world economy,
internet source, see the bibliography). - Tour. (See more on so-called black p.a. image of Serbia and
Republika Srpska in the world, by which it is only the government and the Serbian population has
been given responsibility for the last war in the Balkans).
The Republic of Serbia is another country requiring the improvement of economic and trade relations
with Poland. However, the year 2009 has produced a sharp decline in the volume of trade caused by
the general economic slowdown (esp. in Serbia) and international crisis.
According to the data from Ministry of Economy, Polish export reached 148,5mln (decrease of 32,1%)
and import reached the sum of 48,2mln euro (decrease of 51,9% in comparison to 2008). Moreover,
relatively high positive balance still persists, at the time of study it was 100,3ml euro.
In 2010 revival of foreign trade between Poland and Serbia was noted. The dynamics of Polish export
overtook signifcantly the dynamics of import, which affected positive trade balance. In the end of
2010 the exchange of goods between Poland and Serbia was 358,7mln EUR (an increase of 87,1%),
Polish export inclusive: 281,6mln (an increase of 89,6%) and import: 77,1mln EUR (an increase of
59,9%).(Ministry of Economy of the Republic of Poland, Informant about countries of the world
economy, internet source, see the bibliography).
In Polish export dominate: engeneering products, agri-food products, mineral products, products of
wood and paper industry, light industry products, machines and devices, and fnally woodwork. In
import dominate: mechanical and electrical equipment, wood and woodwork, chemical products,
agri-food products, wood and paper industry as well as light industry products (Ministry of Economy
of the Republic of Poland, Informant about countries of the world economy, internet source, see the
bibliography).
Nevertheless, it should be clearly stated (with the regert) that the volume of trade with Serbia is still
on the niche position in Polish International Trade - 0,15% of Polish export and 0,05% of Polish
import. For Serbia, the volume of trade reached 1,7% of all international trade. (Ministry of Economy
of the Republic of Poland, Informant about countries of the world economy, the Internet source, see
the bibliography).
In 2007 there was a signifcant increase in Polish investments in Serbia. According to NBS data,
in 2008 their value stood at U.S. $ 10.1 million (net foreign direct investment in Serbia in total -
2.195 million. USD in 2007). Among the leading Polish investors are: KOPEX Group the company
won the privatization tender for 4 factories in Niu (MIN Holding Co.. MONT AD, MIN Holding
Co.. FITIP AD, MIN Holding Co.. OPREMA and MIN AD Holding Co.AD SIVI LIV) and TELE
- FONIKA Kable SA, company which overtook Serbian cable factory - Fabrika Kablova Zajear.
Polish investments in the IT sector were also reported. Assecco Group Poland intercepted three
leading Serbian companies in this sector. For 11months of 2009 Polish investments in Serbia reached
approximately 2.5 million USD (Ministry of Economy of the Republic of Poland, Informant about
countries of the world economy,The Internet source, see the bibliography).
Cooperation between Serbian and Polish governments is gradually expanding. According to the
information obtained from the Embassy, contacts were established within the EU programme
EXCHANGE (EXCHANGE Programme, internet source, see bibliograph) which was sponsored by
the European Union within the CARDS 2004 (total value of the program - 5.3 million EUR.). The
implementation of the programme was launched in January 2005 and its completion was scheduled
for December 2007. The amount of funds assigned for Polish-Serbian government projects under the
programme reached 343,810 000 EUR (Ministry of Economy of the Republic of Poland, Informant
about countries of the world economy, the Internet source, see the bibliography).
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Considerations, presented above clearly depict the gaps in Polish-Balkan economic relations. Poland
should verify existing situation by initiating a series of activities aiming at economic revival of
Polish-West Balkan communication. First of All, Poland should take care about positive political
image and good climate of Balkan countries (especially Serbia, Bosnia and Herzegovina Republica
Srpska), since these countries may also be regarded as prospective EU Polish allies. If Poland will
look after positive relations, it will pay off in the future when West Balkan countries become full
EU members. Despite the fact that Balkans become benefciaries of EU funds, they are too small to
constitute serious competition for Poland. Although, it should be remembered that there will be as
many as seven countries from West Balkans being incorporated to EU, which is more than a quarter
of todays number of EU countries. Even in the context of Lisbon Treaty , the right of each of them is
important - regardless the population. Therefore, activity in the Balkans must be perceived as a long-
term investment.
7. CONCLUSION
Summarizing, Polish government, especially during played role of a leader in the European Council,
should explicitly support the Balkan countries aspiring for their full European integration. Poland
became a bridge between East and West, between the EU and Russia and between countries of
the post-Soviet reality. Positive climate for EU expansion towards Balkans and support of Polish
government in this area, creates a great opportunity for Polish Foreign Policy to achieve real political
success, both in national and international context.
Nevertheless, Polish presidency provides an excellent opportunity to improve the situation. The
existence of Polish expert bodies dealing with the issues of Balkans gives hope for the future. These
include primarily Centre of Eastern Studies, which deals with the analysis of political, economic and
social developments in Polish neighborhood, the area of Central and Eastern Europe, and Balkan
Peninsula. The Centre of Eastern Studies is particularly involved in the discussion about the European
Unions eastern policy, the challenges of energy security, political transition processes and socio-
economic Polish partners of east.
The Centre of Eastern Studies is also interseted in this stimulating debate. It is also involved in both
expert, and information support for analytical Polish decision-makers. According to experts long-
lasting commitments in Balkans will prove that Polish Foreign Policy is not just focused on Eastern
Europe but also wants to engage into Balkans.
Reference
Bachora R. (2008). Bonia i Hercegowina pastwem upadym ? (kwestia ekstremizmu muzumaskiego),
Warszawa: Polski Instytut spraw Midzynarodowych
Balcer A., A. Krawczyk, K. Wycicki. (2009). Nowe wektory polskiej polityki zagranicznej (wektory Pnocy
i Poudnia oraz alternatywa poudniowo-wschodnia). Warszawa: Sprawy Midzynarodowe 4 (LXII),
pp. 12-13.
Bantetas T.I.,Nash S. (2003) , International criminal law. London: Cavendish Publishining Limited
Bofnger, P. (2003). The Stability and Growth Pact neglects the policy mix between fscal and monetary
policy, Intereconomics, Review of European Economic Policy, 1, pp. 47.
Chang D. H (1998). Orgsnized crime Forms in the World - Can We win againts organized Crim ?, Euro
Criminology (edited by B. Hoyst), Volumed 12, pp. 3ff.
Cziomer E, L., Zyblikiewicz W. (2007). Zarys wspczesnych stosunkw midzynarodowych, Warszawa:
Wydawnictwo Naukowe PWN
Gibas- Krzak, D. (2010). Serbsko-albaski konfikt o Kosowo w XX wieku, uwarunkowanie, przebieg,
konsekwencje, Published by Adam Marszaek
Gniazdowski M. (red:), Europejski Protektorat ? (Bonia i Hercegowina w perspektywie rodkowoeuropejskiej,
Hoyst B. (2011). Terroryzm t. 1 i 2, Warszawa, Published by LexisNexis, pp. 1000-1015.
Kaczorowski A. (2010). Bakany zamiast Ukrainy, Newsweek - Europa, 8/2010, pp. 3-4
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Kaplan R. D. (2008). Bakaskie upiory. Podr przez histori, rozdzia IV: Grecja - kochanka Zachodu,
narzeczona Wschodu, Published by Woowiec, pp. 367- 390.
Todorova M. (2008). Bakany wyobraone, Published by Woowiec: pp. 251-301.
Waldenbarg M. (2005). Rozbicie Jugosawii (jugosowiaskie lustro midzynarodowej polityki):Warszawa.
pp. 468-476.
Winnicki J. (2009). Kosowo Nostra, Polityka 15 (2700) . pp. 107-109.
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Balcer, A. Gromadzki G. (2009). Docemy wreszcie Bakany: Gazeta Wyborcza. http://wyborcza.pl/prezyden
cja2011/1,111636,8579180,Docenmy_wreszcie_Balkany.html (accesed 5.07.2011.)
Kryzys w Grecji , http://www.forbes.pl/tagi/1216/kryzys-w-grecji/2 (accesed 2.07.2011)
Ministry of Foregin Affairs of tne Republic of Poland, Informant about countries of the world economy (Serbia)
http://www.mg.gov.pl/Wspolpraca+z+zagranica/Wspolpraca+gospodarcza+Polski+z+krajami+UE+i+EFTA/
Wspolpraca+gospodarcza+Serbia z dnia 3.07.2011
Ministry of Foregin Affairs of tne Republic of Poland, Informant about countries of the world economy (Bosnia
and Hercegovine))
http://www.mg.gov.pl/Wspolpraca+z+zagranica/Wspolpraca+gospodarcza+Polski+z+krajami+UE+i+EFTA/
Wspolpraca+gospodarcza+Serbia
(accesed 3.07.2011)
Ministry of Economy of the Republic of Poland, Informant about countries of the world economy, http://
www.mg.gov.pl/Wspolpraca+z+zagranica/Wspolpraca+gospodarcza+Polski+z+krajami+UE+i+EF
TA/Wspolpraca+gospodarcza+Serbia (accesed 3.07.2011)
Program Exchange, www.exchange.org.rs (accesed 2.07.2011).
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Wsppraca zagraniczna: Serbia, http://www.mg.gov.pl/Wspolpraca+z+zagranica/Wspolpraca+gospodarcza+
Polski+z+krajami+UE+i+EFTA/Wspolpraca+gospodarcza+Serbia
(accesed 3.07.2011.)
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THE IMPLICATIONS OF STRUCTURAL FUNDS IN REGIONAL DEVELOPMENT AND
INCREASE WELFARE IN ROMANIA. CASE STUDY: GORJ COUNTY
Enea Constanta
University Constantin Brancusi of Targu Jiu,
Faculty of Economics and Business Administration
E-mail: eneaconstanta@yahoo.com
Enea Constantin
University Constantin Brancusi of Targu Jiu,
Faculty of Economics and Business Administration
E-mail: eneaconstanta@yahoo.com
Stegartoiu Carina
University Constantin Brancusi of Targu Jiu,
Faculty of Economics and Business Administration
E-mail: eneaconstanta@yahoo.com
Abstract
Regional development is a complex process which supports each territory in building its future on the basis of
its own territorial capital and, thus, contributing to reducing disparities between different geographical areas.
Regional development policy is a set of planned measures, promoted by local and central public administration
authorities, in partnership with different actors (private, public, volunteers) used to ensure dynamic and
sustainable economic growth by effciently using regional and local potential to improve living conditions.
The main areas of interest of regional policies are: enterprise development, labor market, attracting investment,
technology transfer, SME sector development, infrastructure improvement, environmental quality, rural
development, health, education, culture.
Despite acute problems inherited, the specifc county and always insuffcient resources, local government
capacity has improved steadily. Can identify fve major factors that have defeated resistance to change led
system and continuous modernization of the administrative act: political will, political competition, public and
media pressure, taking over the acquis communautaire and accessing external funding. However, the factor
that caused the biggest change in mentality and way of addressing the local government authorities was the
opportunity of accessing external funding grants since 2001, so PHARE actually triggered the modernization
of the administrative capacity of the county by implementing projects to be presented below. The results are
presented and analyzed in a case study which seeks development strategy and coordination of sectoral policies,
in accordance with territorial issues.
Keywords: Resources, Modernization, Access to external grant funds, PHARE
1. INTRODUCTION
Regional development is a new concept aimed at boosting and diversifying economic activities,
stimulating private sector investment, helping to reduce unemployment and ultimately improve
living standards. In order for the regional development policy to be applied, there have established
eight development regions, which comprise all of Romania. Each development area includes several
counties. Developing regions are not administrative-territorial units, they do not have legal personality,
and are the result of an agreement between the county and local councils.
The primary objectives of regional development policy are: reducing the existing regional disparities,
especially by stimulating balanced development and revitalization of disadvantaged areas, preventing
production of new imbalances, linking with government sectorial development policies, fostering
inter-regional, national and international cooperation, thus contributing to economic development
which is in accordance with legal provisions and international agreements concluded by Romania.
The principles underlying the development and implementation of regional development policies
are: decentralization of decision-making process, from the central / governmental, to the regional
communities, the partnership between all stakeholders in regional development, planning - the process
of using resources to achieve set targets, cofnancing - the fnancial contribution of various actors in
implementing programs and projects for regional development.
The countrys whole economic system collapse and the decline since 1989 made the issue of territorial
priorities, one of the key concerns of regional development policies to be very hard to fght. Meanwhile,
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Romania has faced considerable pressure from the EU to meet membership criteria in the rules and
principles of Community regional policy in order to reduce development disparities between regions.
The fundamental objective of regional development policies is to reduce regional disparities, and the
achievement of a balance between economical and social development levels of different areas.
An
objective of regional policy, particular to this period, is to facilitate structural and sectorial adjustment ,
to support restructuring processes and economic recovery, restoration and boosting of the competitive
ability of regions , supporting European integration processes.
Most countries, including economically developed ones, are facing regional disparities and, accordingly,
apply strategies and policies for regional development. But must be noted that the diffculties arising
from regional imbalances and the possibilities of solving them can not be addressed without taking
into account the general level of development of each country.
The eight regions have certain particular features in terms of their economic structure, making certain
sectors to play a decisive role in their future development. Such economy of southern regions (South -
East South - Muntenia, South - West Oltenia) is infuenced by the evolution of the agricultural sector,
its holding in these areas covers over 15%, making the years of adverse conditions for agriculture,
the GDP growth to be adversely affected. There are also regions with important tourist potential
(Northern Bucovina region - East the coast and Danube Delta in the South - East, etc.) their economic
developments being infuenced also by the utilization of this potential. Another feature is the areas
where the extractive industries had an important role (Jiu Valley Basin in the South - West Oltenia)
and whose economy was affected as a result of the broad restructuring of the mining sector.
Romanias transition to the market economy situation continues to refect artifcially created problems
during communism.
Currently, Romania confronts major development problems (Stegroiu V., 2007) whose solving
requires implementation of the regional strategic development measures. These issues will be analyzed
in the following subsections.
If we compare Romanias situation with that of EU Member States, is apparent that the disparities
between regions is relatively low compared to other regions in the EU countries. The process of
creating regions led to eight regions with a relatively uniform level of development. The only notable
exceptions are Bucharest - Ilfov, relatively developed compared with all other regions and the North-
East region which is less developed , from an economical and social point of view.
This development is noticed regionally between regions Northeast, Southeast, South, West and South
West regions, North - West, Center. A map of regional disparities in Romania allows spacial location
of poverty and under-development in two main areas of the country: Northeast, including the historical
region of Moldova and the South, the largest agricultural area in the country. By contrast, Western
regions, the Center and Bucharest-Ilfov are the richest and most developed in terms of income,
technical equipment facilities , human resources and economic potential (Monterides G., 2002).
Chronic underdevelopment is focused in peripheral areas, towards the border, namely the North-East
- on the border with Moldova and in the South - along the Danube and the border with Bulgaria.
Besides the global order gaps, can also be identifed specifc problems that each area confronts. Thus,
counties with the most decreased level of life standard are included in two major areas of poverty:
North East - Botosani and Vaslui and South - Teleorman, Giurgiu, Calarasi and Ialomita.
The Northeast counties mentioned are characterized by generalized poverty, with few material
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resources and a high rate of infant mortality , of migration and unemployment. Counties in the
South, especially Calarasi Giurgiu and Teleorman, represent typical examples of a cultural poverty,
characterized by low education and high rate of infant mortality.
A feature of regional development in Romania is the mosaic structure of economic development at sub-
regional level. Virtually, in all regions are both relatively developed areas as well as underdeveloped
areas.
Should be noted that there are still major disparities within regions, where predominantly agricultural
counties coexist with the more developed counties. This phenomenon has gained momentum because
of the impact of economical restructuring, especially felt in mono-industrial areas, whose population
has been heavily affected by unemployment due to closing of unproftable state enterprises. Of less
developed regions there are part also the border regions - regions that border with Moldova and
Ukraine - and the regions along the Danube. The different causes of disparities in intra-regional social
and economic development, cause quite unpredictable future developments.
The decline of small and medium sized cities can be observed especially in mono-industrial cities,
and was generated mainly by industrial restructuring. Along with the traditionally leftbehind regions
, there have appeared areas of industrial decline with a high rate of unemployment.
Following the introduction of market economy system, the resources were directly allocated to
regions that can use them to maximum capacity. Therefore, poor regions that have been artifcially
industrially developed during communism have known the adverse infuences of transition and the
structural reorganization process. Except some companies with foreign capital, the new facilities
reorganized after 1990 did not have the specialization and the necessary technology to combat his
foreign competition ()Monterides G., 2002).
The low level of attractiveness of regions is particularly due to the decreased level of technical
and social infrastructure development. Paradoxically, there are certain situations where the low life
conditions contrasts the sustained level of economic activity. It is the case of Constanta County , for
example, where only a small proportion of the population of this county benefts from the economic
growth, most of them living in poverty.
One of the serious problems facing Romania in the post-revolutionary period was the socio-economic
decline of many large urban centers and the reduction of their role in the development of adjacent
areas within.
The regional disparities tags indicate that there are signifcant discrepancies in both economic, social
and technical and in terms of quality of life. The most dynamic changes were recorded by the indices
of the infrastructure and demographics. The most remarkable positive dynamics was that of the
index showing the growth of personal car numbers and telephone subscriptions. The urbanization
level expressed as a percentage of the population living in the urban areas has remained relatively
invariable, suggesting that the population has migrated massively from rural to urban areas or vice
versa.
Apart from the problems inherited from communism, the major causes which led and still lead to
even more growth of regional disparities can be summarized as: the location and extent of domestic
and foreign investment bodies in these regions, loss of competitive capacity of the enterprises, the
acceleration of the infuenced reform process, in a slower or a more alert pace, the increasing of
regional disparities, the specialized workforce, the traditional crafts and trade, the infrastructural
potential, the infuence of migration, the proximity to sources of raw materials, the proximity to
domestic and foreign markets, the existence of disadvantaged areas or areas that beneft of government
or international programs.
The process of stimulating regional activities, as well as their coordination with government policies
to promote inter-regional cooperation is included in a general effort to link the entire territory
necessities, as well as the necessities of the geographical ,economical and cultural regions of the
country. The regional development process must also be examined in the broader context of European
integration process and therefore in the process of adapting and preparing Romania to the European
institutional structures in order to successfully implement policies and structural funds.
In the short term, however, regional policy should be submitting to focus particularly on reducing
the negative effects caused by the process of the transition economy, especially on industrial
reorganization.
Local and regional communities have, until now, an innovation capacity for this purpose and,
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unfortunately, have not become more fexible, in order to respond effectively and quickly to new
challenges and changes required by the process of reorganization of the economy.
Bearing in mind that free initiative and entrepreneurial spirit are basic prerequisites of development,
the regional policy strategy there should be oriented towards creating conditions for the development
of the innovation capacity of territorial communities for the purpose of adopting new activities that
will gradually replace the ineffcient activities.
Agriculture in this region has a major role, accounting for about 18%. The industry also has an
important share in the regions economy, providing about 30% of regional gross domestic product.
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Regarding existing businesses in South-West Oltenia region, depending on the number of employees
they can be represented as follows (Figure 1):
Fig.1 Type and share of enterprises in South-West Oltenia in total country
South - West - Oltenia has a share in the total economy gross domestic product of about 8%. Evolution
of GDP in South-West Oltenia region is refected in Table No. 1.
Table 1 Evolution of GDP in South-West Oltenia -Million current prices
GDP 2004 2005 2006 2007 2008 2009
Dolj 6554,1 7266,9 8839,4 10675,0 11315,5 10942,39
Gorj 4652,9 5120,1 5984,1 7613,9 8025,05 7599,73
Mehedinti 2620,2 2688,6 3246,6 3755, 6 3992,2 3716,74
Olt 3695,2 3937,6 4560,4 6808,8 5911,4 5686,77
Valcea 4187,3 4907,3 5958,7 6808,8 7230,9 7035,9
Region Total 21709,7 23920,5 28589,2 34419,6 36415,6 34922,47
Source: Romanian Statistical Yearbook 2008, National Institute of Statistics Publishing House, Bucharest, 2009
Table 2 Evolution of percentage of GDP in South-West Oltenia
2010 2011 2012
DOLJ 0,2 2,6 3,9
GORJ -0,3 2,2 3,5
MEHEDINTI -0,8 2,3 3,3
OLT 0,2 2,6 3,6
VALCEA 0,1 2,5 3,7
REGION TOTAL -0,1 2,5 3,6
Source: National Commission for Prognosis
We can see that approximately 14% of businesses in Romania are located in South West Oltenia region, of
which 13.89% are enterprises with employees undertaking a number between 0 and 9; 14.45% are companies
with a total staff between 10 and 49 employees, 14.29% enterprises with a number of employees between 50
and 249 employees and 7.08% companies with more than 250 employees.
As the result of increased structural imbalances and the defcit of economic performance and competitiveness
continued employment dropped by 2005, when most counties in the region have recorded increases except
Gorj which keeps a decreasing trend due to the restructuring of the extractive industry.
Statistical surveys on labor costs have highlighted the following structure in the average number of employees
in the South-West Oltenia (Table 3).
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Table 3 Average number of employees in South-West Oltenia -Thousands-
2004 2005 2006 2007 2008 2009 2010* 2011* 2012*
DOLJ 121 119 125 134 136 134 133,2 133,1 134
GORJ 83 79 78 81 79 80 79,7 79,5 80
MEHEDINTI 46 47 48 49 49 47 46,9 46,9 47,4
OLT 68 69 68 73 75 72 72,4 72,5 73,3
VALCEA 77 79 81 84 84 82 81,5 81,6 83,1
TOTAL 395 393 400 421 423 415 413,6 413,6 417,7
Source: Romanian Statistical Yearbook 2008, National Institute of Statistics Publishing House, Bucharest, 2009
* Provisional data according to the National Commission for Prognosis
2. IMPACT OF EXTERNAL FUNDING ON DEVELOPING ADMINISTRATIVE CAPACITY GORJ
In line with national policy and strategy for reform and modernization of central and local government,
but also exposed to constant pressure exerted by civil society and local media, makers of the county
and local authorities have responded positively to the need of constantly changing system. Despite
acute problems inherited, the specifc county and always insuffcient resources, local government
capacity has improved steadily. You can identify fve major factors that have defeated the resistance
to change led system and continuous modernization of the administrative act: will policy, competition
policy, public pressure and the media, taking over the acquis communautaire and accessing external
funding.
When the local program aligned with local decision makers about the natural governing decisions
and superior echelons of political parties, local political competition generated by the examination,
represented by the electoral cycles, was undoubtedly one of the factors that forced the authorities
and elected Local begin to accept change and reform. This, plus the increasing pressure exerted by
population and NGOs, supported by media, wishing to eliminate corruption and improving quality of
service. These pressures have led authorities to learn not only from past experiences and mistakes,
but also of successful actions, and multiplying by taking examples of best practices at local, national
and EU.
However, the factor that caused the biggest change in mentality and way of addressing the local
government authorities was the opportunity of accessing external funding grants since 2001. Initially
viewed with great apprehension by local mayor, grants schemes originally made available by the
European Union trough PHARE program actually began the process of upgrading administrative
capacity in the county.
Thus, the frst substantial projects through impact and value was accessed under the scheme MARR -
Grant (Mining Afected Region Reconstruction) for reconstruction of mining areas affected, program
only for Gorj and Hunedoara county. Under this scheme, during 2001-2002, local authorities from
20 municipalities of the county have developed 22 projects totaling 3.5 millions Euro, representing
water supply, rehabilitation of roads and schools and infrastructure development business SMEs. The
impact of these projects on population and especially the local mayor has started a real competition
in the local government in terms of accessing grant funds by participating in tenders for projects
fnanced by foreign or national.
This was followed (2002-2003) by fnancing scheme PHARE RO 9904.01.04 - RICOP through
which local authorities, SMEs and NGOs have accessed and implemented 15 projects totaling over
2 millions Euro in areas such as : public works, active measures for employment and social response
measures.
Faced with ferce competition for grants access to both county and national level, government has had
to develop the ability to write and implement projects, leading to better staff training and inevitable
acquisition procedures of compulsory work and good industry practices. That development of local
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administrative capacity led to the location of Gorj county during 2004-2005 among the 10 counties
in the country access to the Measure 2.1. - Rural infrastructure, fnanced by SAPARD Program
(Special Pre-Accession Programme for Agriculture and Rural Development). Under this program
local authorities in the county have implemented 25 projects with a total value exceeding 29 millions
Euro.
Another important impetus was the launch of the Program Modernization Fund for development
of local Administration, in which during the period 2006-2007, local authorities have implemented
17 projects with a total value of over 500.000 Euro. Though relatively small, the local government
modernization projects funded in areas such as modern information dissemination and management
of the budget mayor and local resources with the active participation of local community, the
development of local networks, upgrading information systems collection of local taxes etc..
Result of institutional development and experience gained in this competition authorities in the period
2001-2008, local and county has developed over 100 projects with domestic and external fnancing
with a total value exceeding 50 millions Euro.
Currently, the administration must face the competition challenges accessing the Structural and
Cohesion Funds, which requires mobilization of all stakeholders converged in the ongoing development
of administrative capacity at district level also supplies nearly unlimited opportunities for economic
and social development . Finally, authorities must seize the opportunities especially for Operational
Programme Administrative Capacity Development (OP ACD), which fnances the whole problem
still facing public administration structures.
The main purpose of this research is to provide support so that participants in making socio-economic
development strategies of Gorj county can beneft from an objective source, containing relevant
information for identifying major issues and priorities. Research has as main objectives:
Presenting a selection of data the most important characteristics of socio-economic and
cultural space of this county.
Identify key development issues at district level in order to assess potential factors and regional
differences.
Presentation of data and information on local community members to the perception of critical
issues.
Evaluation and correlation potential for development at county level, with priority axes of
operational programs for the 2007-2013 period covering the current research in the county.
Data for analysis were collected from the Department of Statistics Gorj County in the National
Institute of Statistics, questionnaires as a representative sample of households and individuals.
The main objective of this research was conducted by the County Department is to collect detailed
statistics in order to characterize the level of living standards. This was done by collecting information
on various social issues: living conditions, education, occupation, income, expenses, etc..
Social-economic development strategy 2007-2013 of Gorj county was developed by the PHARE
2004 program as a component for adopting and implementing the acquis communautaire. This
strategy aims to increase partnership and planning capacity and therefore the absorption capacity of
European funds at district level in order to obtain the following results: identifying and promoting the
real interests of local communities, promoting social dialogue and communication among all parties
involved in the development process, linking the county with the regional strategies and fostering
partnership initiatives, responsibilities and strengthen relational ties in order to increase opportunities
for accessing funds.
Balanced development of all regions will be achieved through an integrated approach, based on a
combination of public investment in local infrastructure, active policies to stimulate and support
business to maximize local resources, by following priorities:
Supporting the sustainable development of urban growth poles. This priority aims
to increase the quality of life and creating jobs in cities, the rehabilitation of urban
infrastructure, improving services, including social services and development support
structures in business and entrepreneurship;
Improvement of regional and local transport. This priority axis aims to increase regional
accessibility and mobility of people, goods, and services to promote sustainable economic
development;
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Improvement of social infrastructure. This priority axis aims to create prerequisites
for improving public access to essential services and contribute to achieving European
economic and social cohesion by improving the infrastructure for health, education and
public safety and social emergencies.
Strengthening regional and local businesses. This priority axis aims at establishing
and developing business support structures of regional and local importance, industrial
rehabilitation and support regional and local entrepreneurial initiatives, to facilitate job
creation and sustainable economic growth;
Sustainable development and tourism. This priority axis aims mainly sustainable recovery
and promoting cultural heritage and natural resources with tourism potential and improving
the quality of accommodation and tourist infrastructure to increase attractiveness, develop
the local economies and create jobs.
Technical assistance. The objective of this priority is to provide support for implementation,
transparent and effective program.
Gorj has a weaker economical and social status, being told by government decree as underdeveloped
area. This special status derives from the typical profle of mono-industrial region, based almost
exclusively on the mining sector. Therefore, the situation is quite critical for mining affected towns
and surrounding rural communities, given the high unemployment due to restructuring of the mining
industry, problems environment affecting the entire ecosystem surrounding the low participation of
citizens in solving local problems, because of low education and aging. Most people around the age of
20 years have left these mono-industrial areas in search of jobs in EU countries. Thus, the population
dropped dramatically, raising issues of local governance process as a whole. These economic and
social causes made him Gorj a status quo which is among the counties with the greatest potential
to receive EU structural funds, as a tool for cohesion and convergence in less developed regions.
Therefore, without tools or programs to promote youth participation in local development agenda,
there is a high risk of not-coordination of expenditure and waste of funds diffuse.
Development Strategy is designed to integrate and link solutions to priority areas: infrastructure,
human resources and business environment, agriculture, environment and natural resources, social.
The main sources of funding for implementing the development strategy are considered local and county
budgets, state budget funds and EU structural and cohesion that are accessible through operational
programs. Establishing the priorities of development was in accordance with diagnostic analysis and
opinions based on future benefciaries of the strategy, which means about 1,500 representatives of
local communities in the county.
Development Strategy aims to coordinate programs and sectoral policies (social services, education,
health), in accordance with territorial issues in order to eliminate differences in development between
the urban and rural poor and to integrate disadvantaged.
Of the subjects interviewed in 59.6% households living in rural areas while only 40.4% are urban.
Average income per household in this sample is 1612.63 lei. Median is at 1386 lei, which means that
in 24 of the 47 households surveyed their members have an income less than 1386 lei. The result is
not surprising given the fact that the majority of the population lives in rural areas.
As regards the period in which homes were built, it shows that 10.6% of them were built in 1968 and
another 10.6% of them in 1988. Since then, in rural areas (with the highest weight in the sample),
fewer houses were built mainly due to the low level of income, the maximum value for this variable
was reached in 1995. Therefore, we conclude that, after these years was very diffcult for people to
build new homes.
The total expenditure incurred by households in one month can vary greatly, as shown in Table 3.
We can say that average monthly expenditure per household is about 1001 lei and the 24 units listed
total expenses were over 759 lei. This trend is due mainly to rising prices and stagnant wages. If
we consider the expenditure categories (food, non food and service) can be seen that the average
expenditure for food is greater than the other (approx. 286 million), though very small amount,
covering only basic needs. The amount spent on non-food products will follow closely, while the
services situation is different.
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Table 4 The total expenditure incurred by households in one month can vary greatly Total expenses
N
N
Minimum
Minimum
Maximum
Maximum
Medie Aver-
age
Deviaie std. Std deviation.
Cheltuieli alimentare Food
Expenditure
47
47
77.50 77.50 749.50 749.50
286.1068
286.1068
141.32853 141.32853
Cheltuieli nealimentare Non-
food expenditure
47
47
15.80 15.80 969.50 969.50
276.0891
276.0891
250.33842 250.33842
Cheltuieli servicii Expenditure
on services
47
47
.00 .00 888.00 888.00
172.2000
172.2000
157.56354 157.56354
Valid N Valid N
47
47
Variables related to the purchase of land and buildings show a disturbing reality: none of the members
of households did not buy land or buildings, therefore the amount entered is invalid. Expenditure
on new construction is almost the same trend as only two of the 47 households reporting such
expenditures. Therefore we are entitled to say that real estate investments are very low and that the
landscape has become unattractive because of this infuence.
If we analyze the evolution of credit and monthly deposits, note frst that almost all households survey
record monthly pay their debts to various credit institutions on the other hand, only 12.8% have
deposit accounts. The amount of monthly payments on loans of 1090 lei, while average income per
household is 1612 lei say that public debt is enormous.
Should be also taken into account educational level and employment status of the 129 people in the
questionnaire. It seems that most of them graduate schools of arts and crafts (professional) (26.4%)
followed by high school graduates (20.9%) and those with higher education (17.8%). It should also
noted the relatively high proportion of the full uneducated (untrained) (13.2%).
Table 5 The distribution of persons according to occupation. Educational level
Frecventa
Frequent
Procent
Percentage
Procent Valid
Valid Percent
Procent Cumulativ
Cumulative Percent
Fr coal absolvit Without
graduated school
17 17 13.2 13.2 13.2 13.2 13.2 13.2
Primar (clasele 1-4) Primary
(grades 1-4)
19 19 14.7 14.7 14.7 14.7 27.9 27.9
Gimnazial (clasele 5-8) Secondary
(grades 5-8)
27 27 20.9 9.20 20.9 20.9 48.8 48.8
Profesional Vocational 34 34 26.4 4.26 26.4 26.4 75.2 75.2
Treapta I liceu (clasele 9-10) Stage
I high school (grades 9-10)
1 1 .8 .8 .8 .8 76.0 76.0
Liceal (clasele 9-12) Secondary
(grades 9-12)
23 23 17.8 17.8 17.8 17.8 93.8 93.8
Postliceal Secondary 3 3 2.3 2.3 2.3 2.3 96.1 96.1
Universitar de scurt durat Short
university
2 2 1.6 1.6 1.6 1.6 97.7 97.7
Universitar de lung durat Long
university
3 3 2.3 2.3 2.3 2.3 100.0 86.3
Total Total 129 129 100.0 100.0 100.0 100.0 100.0
Occupational status in Table 5 shows the distribution of persons according to occupation.
In line with trends experienced at the country level, 36.4% of the 129 people surveyed were retired,
only 17.8% employed, 10.1% students and other 10.1% people home, the rest are occasional workers,
unemployed or students. This distribution shows the diffculties faced by the fact the whole country.
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Table 6. The sector performed using the database shows that of the 129 respondents either did not work part time.
Occupational Status
Frecvena
Frequency
Procent Per-
centage
Procent Valid
Valid Percent
Procent Cumulativ Cumula-
tive Percent
angajai Employers 23 23 17.8 17.8 17.8 17.8 17.8 17.8
Lucrtori n activiti
Workers non agriculture
activities neagricole
5
5
3.9
3.9
3.9
3.9
21.7
21.7
Agricultori Farmers 2 Two 1.6 1.6 1.6 1.6 23.3 23.3
Asistai social Socially
assisted
3 3 2.3 2.3 2.3 2.3 25.6 25.6
omeri Unemployed 8 8 6.2 6.2 6.2 6.2 31.8 31.8
pensionari Retired 47 47 36.4 36.4 36.4 36.4 68.2 68.2
Elevi Pupils 13 13 10.1 10.1 10.1 10.1 78.3 78.3
Studeni Students 3 3 2.3 2.3 2.3 2.3 80.6 80.6
Casnice Domestic 14 14 10.9 10.9 10.9 10.9 91.5 91.5
Alte categorii Other 11 11 8.5 8.5 8.5 8.5 100.0 86.3
Total Total 129 129 100.0 100.0 100.0 100.0 100.0
Figure circle sector performed using the database shows that of the 129 respondents either did not
work part time. Level of development of frms in the county is relatively low, so are unwilling to
make hiring part time. Also, unemployment is a top, representing more than 82%. Same percentage
population without a job, result from the distribution of employment contracts in which a majority
(81.2%) answered that are not employed. Most others are employed on fxed-term contract. We
conclude that job stability for the respondents (many from rural areas) is very low. Analysis of
variables is by nothing more optimistic. This shows that the majority fght for a decent life, while
others take their existence under normal living standards. In urban areas the situation is not that bad,
but the countrys population leads a hard life. Instability of jobs and therefore uncertain revenues and
increasing number of pensioners and socially assisted is an alarming problem and thus conclude to
important issues that are slowing the development of this county.
3. CONCLUSIONS AND RECOMMENDATIONS
In order to realize the regional reform objectives designed to create a more fexible territory, consider
that these recommendations are not of no bearing:
adoption of a law of development as an organic law;
completion and stabilization of the developing regions;
strengthening the role and position of CNDR;
continuation of regional building and institutional strengthening;
development of cultural partnership;
development of an integrated information management system.
The relatively recent emergence of regional development as a major occupational and as national
policy, on the recommendation of the European Union over the past decade was made, unfortunately,
without recovering the informational, statistics, formative, educational, and cultural disability that our
country will have in report to the Western European countries. The recovery occurred in jumps, with
the justifed concern that the fulfllment of minimum requirements be done as quickly as possible for
the prospect of joining and this feld to be classifed as satisfactory in terms of capacity-fulfllment of
European Union member state. But from here, to create prerequisites to develop a specifc character
state policy based on broad involvement of different categories of institutional, economical and social
actors, both centrally and regionally, based on recognized principles and objectives of development
and a freely consented partnership is a long way. To pave the road, I consider that a responsible
approach to the feld should start from the quality of education and training of all the human resources
involved, a real education process to represent a real long term investment for the success of regional
development policy but also of other policies aimed at achieving economic and social cohesion.
We conclude by saying that a key factor for the regional development of Romania is the optimal
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planning of available resources based on the local potential of development regions, taking into
account not only economic disparities, but also social needs.
Having many of the beauties of the country, Gorj is a region with great opportunities for sustainable
development. The problem discussed in this research is whether the actual state of this region enables
smooth integration with other counties.
Although data analysis revealed great diffculties for the inhabitants of the region, particularly those
from rural areas into national development strategies, they seek to discover the potential opportunities
and to allocate more adequate resources available for welfare and progress so much expected.
Issues such as regional development strategies, implementing policies on regional labor market,
establishment of regional centers of innovation, execution of transfer centers, technology would give
effciency at regional level while limiting the functions of design, supervision and assessment of
central governments. Regions should also assume jurisdiction on the implementation of county-level
economies of scale and / or subsidiary of: vocational or university education, health, environmental
protection, regional planning infrastructure, burdens on regional economic development.
In accordance with the priorities of economic and social development make these recommendations
for the next three years to conduct county:
In agriculture: a modern and competitive agriculture, high quality products and various
technologies, a large search marketing, specialized farms, with performance management
using modern technologies and environmental associations of farmers.
Infrastructure: access roads to the sites of modern cultural, social and tourist facilities and
building new roads, parking lots, sidewalks in all cities, all towns ring road, competitive
systems both drinking water treatment and waste, supply gas, Internet, public lighting,
educational institutions, health, social and cultural modern and functional, information centers
for disaster in every locality.
Environmental and natural resources: water and air, land consolidation, biodiversity, protected
nature reserves, a system of collecting, transporting and storing waste.
Human resources and business: fnancing by local investors or outside of small and medium
competitive and attractive, young specialization in various felds, especially IT.
In the social feld: effective social services, in line with European standards, to promote
equality.
In conclusion, we could say that the government and local authorities should have regard to the issues
identifed and to act accordingly, because change takes time to be successfully implemented and
Romania must catch up with other countries in South - Eastern Union European.
County is and will continue to be the major active participant in the development of the South - West
Oltenia because of the signifcant industrial forces and natural resources, tourism and human diversity.
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Bischoff, C., Giosan, V. Regional Development and Decentralization in Romania: Connecting the Dots The
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Cirnu D, Particulars of regional developemment and specifc causes, University of C. Brancusi of Targu Jiu,
2010.
Ciungu C, Strategies for fnancing agri-food sector in Romania, Universitas Publishing House, Petrosani,
2005.
Horen N., 2007, Economics and Public Finance, Ed Polirom, Bucharest.
Khan B., Teulon F., 2006, the state role in economy, European Institute,
Mosteanu T. and collectively, in 2007, Budget and Public Treasury, Ed Bucharest University;
M. Manoilescu, National productive forces and foreign trade, Didactic and Pedagogic Publishing
House, Bucharest, 2004.
Monterides G., Globalization and Universality - bubble and Truth. Bucharest, 2002.
C. Munteanu, International institutions, Oscar Print Publishing House, Bucharest, 2000.
Rust NA, Economic principles, Publishing House, Bucharest, 1993.
Stegroiu V., Cernianu N. Matei Cernianu AD, Political Economy. Microeconomics. Macroeconomics,
Universitaria Publishing House, Craiova 2007.
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FOREIGN AID AND ECONOMIC DEVELOPMENT IN TRANSITION ECONOMIES VICIOUS
CIRCLE VS. BETTER TARGETING
Vesna Petrovi
Faculty of Business Economics, Bijeljina,
University of East Sarajevo,
E-mail: vesna.petrovic@fpe.unssa.rs.ba
Abstract
This paper deals with the impact of foreign aid on economic development in transition economies, especially
analysing the case study of Bosnia and Herzegovina (BiH) in the area of support to economic and entrepreneurship
development. Firstly, it presents theoretical fundaments and historical development of foreign aid in general,
its different modalities, and then gradually focuses on the impact and necessity of its long-term duration,
sustainability and the most important issue of better targeting and more effective usage. In general and subject
to different estimation techniques it has been proved that offcial development assistance promotes economic
growth, but also facilitates development of entrepreneurship sector. This paper intends to discover whether this
conclusion applies to all development countries, especially transition ones, as there has been limited evidence
presented to date. In the context of post-confict and triple transition process in BiH economic, political
and social challenges seem to be vastly demanding for underdeveloped institutional capacities. Therefore,
dialog between foreign donors and domestic stakeholders revels lack of long-term dedication to priority task
of job creation within small and medium enterprise (SME) sector, which is considered to be the most needed
stimulant to economic development in general. The paper will critically analyse various channels through
which foreign aid has been given to date in BiH. The case will then be made for a need to break from a vicious
circle of limited effectiveness and lack of responsibility for that on both sides senders and receivers. The
key for better usage of foreign aid is in increased capability, accountability and transparency on both sides.
Focusing on capacity development in these three areas should then lead to better targeting of foreign aid in
priority sectors, such as entrepreneurship. Conclusion of the paper is that foreign aid as a form of foreign funds
is of fundamental value for transitional economies, due to the fact that it has a potential to facilitate certain
economic activities. The impact of robust and large amounts of foreign aid on sustained growth has been
substantially limited in transitional countries, especially in BiH, however, that does not reduces its potential, if
both donors and local stakeholders are to take a different approach for future better targeting and achievement
of its long-term effectiveness.
Keywords: Foreign aid, Economic development, SME, aid efficiency.
1. INTRODUCTION TO FOREIGN AID THEORY, HISTORY AND EMPIRICS
Aid has a positive impact on growth in developing countries with good fscal, monetary, and trade
policies but has little effect in the presence of poor policies... claim Burnside & Dollar (2000). The
authors investigated the relationship between foreign aid, economic policy and growth of per capita
GDP using a new database on foreign aid developed by the World Bank. Regressions in which the
dependent variable of growth rates in developing countries depends on initial per capita national
income, an index that measures institutional and policy distortions, foreign aid and then aid interacted
with policies. Easterly (2003) argues that achieving a benefcial aggregate impact of foreign aid
remains a puzzle, and that aid agencies should set more modest objectives than expecting aid to
launch the takeoff into self-sustained growth. But, some introduction into the issue of foreign aid
needs to be made frst.
Foreign aid or development cooperation (also development assistance, technical assistance,
international aid, overseas aid, Offcial Development Assistance (ODA) or development aid) is aid given
by governments of mainly developed countries and their various agencies to support the economic,
social and political development of developing countries. It is distinguished from humanitarian aid by
focusing on alleviating poverty in the long term, rather than a short term response. Most development
aid comes from the Western industrialised countries but some poorer countries also contribute aid.
Aid may be bilateral: given from one country directly to another; or it may be multilateral: given
by the donor country to an international organisation such as the World Bank or the United Nations
Agencies (UNDP, UNICEF, UNAIDS, etc.) which then distributes it among the developing countries.
The proportion is currently about 70% bilateral 30% multilateral. About 80-85% of developmental
aid comes from government sources as offcial development assistance (ODA). The remaining
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15-20% comes from private organisations such as Non-Governmental organisations (NGOs),
foundations and other development charities (e.g. Oxfam). In addition, remittances received from
migrants working or living in diaspora form a signifcant amount of international transfer. Private
consulting frms, such as PricewaterhouseCoopers and Deloitte, are increasingly being contracted by
donor agencies to manage and implement elements of their aid program, due to their perceived ability
to perform higher quality program management and delivery. Offcial Development Assistance is a
measure of government-contributed aid, compiled by the Development Assistance Committee of the
Organisation for Economic Co-operation and Development (OECD) since 1969. The DAC consists
of 22 of the largest aid-donating countries.
1
Many scientist have analysed the theory and practice of the ODA, some of them claim that ODA should
be aimed at improving the economic fabric of a country, export possibilities or local production, but
also that it should be given more generously to good performers, as successful projects strengthen
economic capacities to fnance further improvements in human development (Raffer and Singer,
1996. p. 203). At the same time, Raffer and Singer criticise ODA by saying that aid and development
fnance are currently ridden by numerous faults, that money is spent on useless prestige projects based
on political or military objectives of the donors, making people in development countries worse off,
which has led to so called aid fatigue and demands that one should get rid of aid. However, they
suggest that it is better to get rid of the faults and to evolve mechanisms that improve the quality
of aid and development fnance. Other scientists argue that aid is in decline, but not dying and that
developmentally speaking much more can be done with much less (Browne, 1999). Brown claims
that the priority is not on the improvement of aid, but on its nature, and that it is no longer a choice of
how, but of what. Some other authors have analysed the impact of aid in much wider perspective
taking into consideration political and stability issues. Therefore, Joanna Macrae (2001) is basing her
analysis of postconfict countries claiming that much more fundamental review of aid strategies in
chorincal political emergencies is required. In addition to that, she argues that the uncertain legitimacy
and weak capacity of recipient states confned aid responses to the projectised, decentralised and
supply-oriented models of relief, failing to address developmental objectives. All said above is fully
applicable to situation in Bosnia and Herzegovina. There is also argument in literature that trade is
better than aid, but evidence suggests that some aid appears to be have been productive, much has
not and it is diffcult to draw an overall balance, while benefts of international trade and foreign
investment should by default be benefcial and at least give opportunity for poor countries to grow out
of poverty. This dilemma is analysed by Albert Berry (in J. Freedman, ed. 2000) who emphasises the
need for a new and more effective set of international institutions to protect the interests of the more
vulnerable developing countries by giving them some infuence in how their economies are affected
by the rest of the world.
If developing country is at the same time going through postconfict recovery, Forman & Partick (2000)
refer to triple transition process which involves security, democratic and socioeconomic transition,
that are all complex, costly and risky. They claim that sequence and duration of these transitions
can vary signifcantly, assisted by emergency, reconstruction and ultimately development assistance,
that should all restore some lasting degree of political stability and self-sustained economic growth.
Hjertholm and White (2000) present a good overview of main developments in history of foreign aid
given in Table 1 below.
1 http://en.wikipedia.org/wiki/development_aid
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2. AID QUANTITY, QUALITY AND EFFECTIVENESS
According to OECD (2009) data most Offcial Development Assistance (ODA) came from the 23
members of the Development Assistance Committee (DAC), or about USD 120 billion in 2009. In
2007 a further USD 11.8 billion came from the European Commission while all non-DAC countries
gave USD 5.56 billion (OECD, 2011).The largest DAC donors in 2009 were the United States (USD
28.8 billion), France ($12.6 billion), Germany ($12.1 billion), United Kingdom ($11.5 billion) and
Japan ($9.5 billion). The largest non-DAC donors in 2007 were Saudi Arabia (USD 2 billion) and
Turkey ($0.6 billion). However, none of these countries met the UN target of giving at least 0.7
percent of the Gross National Income (GNI) as aid. United States (0.21% of GNI) and Japan (0.18%
of GNI) were ranked 19 and 21 respectively out of the 23 DAC countries. The only countries meeting
the targets in 2009 were Sweden (1.12% of GNI), Norway (1.06% of GNI), Luxembourg (1.04% of
GNI), Denmark (0.88% of GNI), and the Netherlands (0.82% of GNI).
There is also much debate about evaluating the quality of development aid, rather than simply the
quantity. For instance, tied aid is often criticized as the aid given must be spent in the donor country
or in a group of selected countries. Tied aid can increase development aid project costs by up to 20
or 30 percent. There is also criticism because donors may give with one hand, through large amounts
of development aid, yet take away with the other, through strict trade or migration policies. The
Commitment to Development Index measures the overall policies of donors and evaluates the quality
of their development aid, instead of just comparing the quantity of Offcial Development Assistance
given. Aid effectiveness is the degree to which development aid works, and is a subject of signifcant
disagreement. Many econometric studies in recent years have supported the view that development
aid has no effect on the speed with which countries develop. Negative side effects of aid can include an
unbalanced appreciation of the recipients currency (known as Dutch Disease), increasing corruption,
and adverse political effects such as postponements of necessary economic and democratic reforms
(Kaufmann, 2009).
An excerpt from Dr. Thomas Dichters (2003) recently published book Despite
Good Intentions: Why Development Assistance to the Third World Has Failed reads: This industry
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has become one in which the benefts of what is spent are increasingly in inverse proportion to
the amount spent - a case of more gets you less. As donors are attracted on the basis of appeals
emphasizing product, results, and accountabilitythe tendency to engage in project-based, direct-
action development becomes inevitable. Because funding for development is increasingly fnite, this
situation is very much a zero-sum game. What gets lost in the shuffe is the far more challenging long-
term process of development. An inquiry into aid effectiveness by the UK All Party Parliamentary
Group (APPG) for Debt, Aid and Trade featured evidence from Rosalind Eyben (2009), a Fellow at
the Institute of Development Studies. Her evidence to the inquiry stated that effective aid requires
as much investing in relationships as in managing money. It suggests Development organisations
need to change the way they work to manage better the multiple partnerships that the Accra Agenda
for Action recognises is at the core of the aid business. In relation to this specifc inquiry, Dr Eyben
outlined the following points:
Achieving impact requires investing in relationships, development organisations need to
support their staff to do this. At the moment, the opposite is happening.
In multiple sets of relationships there will be different ideas about what is success and how to
achieve it and this should be refected in methodologies for defning and assessing the impact
of aid.
Helpful procedural harmonisation should not mean assuming there is only a single diagnosis
and solution to any complex problem.
In addition to measuring results, donors need to assess the quality of relations at project/
programme, country and international levels against indicators agreed with partners.
Decisions on aid need to be made on a case by case basis on the advice of well-informed
country offces.
Dr Eyben lists some more recommendations relating to UK aid solely, but the set of the above mentioned
conclusions relating to aid effectiveness seems to be applicable to a great number of developing
countries, including the relationship between donors and recipients in Bosnia and Herzegovina.
3. DONOR AID FLOWS TO ECONOMIC DEVELOPMENT SECTOR INCLUDING SUPPORT TO
SMES - EVIDENCE AND IMPACT FROM BIH
Economic development and social protection sector is of critical importance for the BiH progress in
economic, social and political arenas. There are several development strategies Country development
strategy, Social inclusion strategy, Employment strategy, Export promotion strategy, and above all
there is Stabilisation and Association Agreement (SAA) as an additional impetus for reforms, which
paves the way to EU integration and additional EU funds for development. However, there is a
strong need to synchronise, harmonise and coordinate all the mentioned strategies, and most urgently
develop and implement appropriate action plans.
When it comes to SMEs and improvement of business climate sub-sector according to Donor
coordination forums data
2
(DCF) which includes 11 active bilateral donors (USAID, DFID, JICA,
etc) and 6 multilaterals (EBRD, EC, UNDP, WB, etc) total contribution to Economic development and
social protection sector and its sub-sector of Small and Medium-Sized Enterprises and Improvement
of the Business Climate has been 784.004.612 to date. This sector received 32% of total ODA in 2009 and
42% in 2010. In 2009, support to SMEs and the improvement of business climate was given a major boost by
adoption of BiH Small and Medium-Sized Enterprise Development Strategy 2009-2011, through which
the access has been gained to Competitiveness and Innovation Framework Programme (CIP) fund.
Support to Small and Medium-Sized Enterprises (SMEs) and Improvement of the Business Climate
sub-sector is comprised of direct donor support to the development of SMEs in the Industrial sector,
including accounting, auditing and advisory services as well as tourism policy and administrative
management.
This strategy envisions the establishment of the Council for Entrepreneurship. The formation of a
state-level SME agency and SME fund is foreseen. According to this strategy, the functions of a SME
agency will be incorporated within a sector in the BiH MoFTER. Some proposed activities include
measures to enable SMEs in BiH to close the gap in technological development and competitiveness
with companies from the EU and neighbouring countries. Additionally, the adoption of this strategy
will enable BiH to obtain access to the CIP fund. In the absence of the Law on the Promotion of
2 All data and fgures presented are available in the Donor Coordination Forum database - www.donormapping.ba
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SMEs in BiH, which is currently in parliamentary procedures, the implementation of the strategy is
delayed. A state-level law in the area of SMEs is necessary to create conditions for use of IPA funds
as well as other foreign resources to support the development of SMEs. The adoption of such a law is
a European Partnership short-term priority for BiH.
The fgures presented in the paper below give the overview about the quantity, dispersion and donor
allocations to the Economic development sector and its relevant sub-sectors in BiH.
Figure 1. Aid fows per sub-sector in the economic development and social protection sector 2009-2010
As it can be seen SMEs and improvement of business climate sub-sector received the largest
part of ODA funds in 2009, whereas in 2010 it comes second, as it was overtaken by support to
Macroeconomic policy support.
Figure 2. Aid fows to Economic development and social protection sector 2007-2010 (Euros millions)
Total support to the overall sector recorded continuous increases from 2007-2010, with signifcant
increase of fund in 2010 in comparison with 2008 and 2009 allocations.
Figure 3. Aid fows to Economic development and social protection sector per donor countries and IFIs in 2009 and
2010
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4. CONCLUSION
It has been said that total amount of ODA spent for the reconstruction of the Balkans is signifcant,
ranging between 6-6.5 billion per annum from 1995-2006. On average BiH received about $730
million per year from 1996-2002. At $1,400 per head, assistance in the frst two post-war years in BiH
was higher than any other international state-building project since the Second World War. For many
observers, foreign aid to the Balkans has a mixed record and very scarce evidence on its implementation
and effectiveness. Many consider the Balkan as a mix of weak states and international protectorates
with low growth record, pervasive corruption, high unemployment, and public disaffection. Some
studies that focused more specifcally on the economic effectiveness of assistance have also reached
limited and mainly negative conclusions, arguing that external aid has had a very weak positive
impact on the economic performance of the Balkan countries, including BiH, too.
This article presented foreign aid allocations to economic development sector and gave more recent
data for 2009 and 2010. As it has been presented here, total allocations to Economic development
and social protection sector in 2009 and 2010 was more than 500 million of Euros more than 70
million in grants and almost 450 million in loans. There is a growing consensus in the literature that
offcial assistance should only fow to those countries that are likely to use it well, as judged by their
policies and institutions. It has also been concluded that aid can assist in the domestic dialogue on
these policies and institutions, but it cannot make them come about through conditionality.
While aid effectiveness is clearly helped by appropriate domestic policies in recipient countries.
However, BiH domestic political economy is too strong to be infuenced by aid fows, at least in
anything beyond the very short run. As this paper argued, in the study case of Bosnia and Herzegovina
vicious circle of huge allocations of foreign funds, both in grants and loans, have made a very limited
contribution to the overall economic growth and development. dialog between foreign donors and
domestic stakeholders revels lack of long-term dedication to priority task of job creation within small
and medium enterprise (SME) sector. This sector is considered to be the most needed stimulant to
economic development in general. Therefore, the vicious circle of limited effectiveness and lack
of responsibility exists on both sides senders and receivers. The key for better usage of foreign
aid is in increased capability, accountability and transparency on both sides. Focusing on capacity
development in these three areas should then lead to better targeting of foreign aid in priority sectors,
such as entrepreneurship. Conclusion of the paper is that foreign aid as a form of foreign funds is of
fundamental value for transitional economies, due to the fact that it has a potential to facilitate certain
economic activities. The impact of robust and large amounts of foreign aid on sustained growth has
been substantially limited in transitional countries, especially in BiH, however, that does not reduces
its potential, if both donors and local stakeholders are to take a different approach for future better
targeting and achievement of its long-term effectiveness.
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Reference
Berry, A. (2000) International trade as the answer to world poverty: is foreign aid obsolete? in J. Freedman
(ed.) Transforming development: Foreign aid for changing world, University of Toronto Press,
Toronto, Buffalo, London
Browne, S. (1999) Beyond aid: from patronage to partnership, Ashgate Publishing Ltd, Aldershot, England
Burnside, C. and D. Dollar (2000) Aid, Policies, and Growth. American Economic Review. September, 90:4,
pp. 84768.
Ditcher, T.W. (2003) Despite Good Intentions: Why Development Assistance to the Third World Has Failed,
University of Massachusetts Press
Easterly, W. (2003) Can Foreign Aid Buy Growth? Journal of Economic PerspectivesVolume 17, Number
3Summer 2003Pages 2348
Eyben, R. (2009) Putting relationships frst for aid effectiveness, IDS, University of Sussex, Brighton, UK
Forman, S. & S. Patrick (2000) ed. Good intentions: Pledges of Aid for Postconfict recovery, Lynne Reinner
Publishers, Boulder London
Hjertholm, P. and H. White (2000) Foreign aid in historical perspective: Background and trends. in F. Tarp.
(ed.). Foreign Aid and Development. London and New York. Routledge
Kaufmann, D. (2009) Aid effectiveness and governance: Good, bad and ugly, The Brookings Institutions,
http://www.brookings.edu/opinions/2009/0317_aid_governance_kaufmann.aspx
Macrae, J. (2001) Aiding recovery? The crisis of aid in chronical political emergencies, Zed books & Overseas
Development Institute
Raffer, K. and H.W. Singer (1996) The foreign aid business economic assistance and development co-
operation, Edward Elgar Publishing, Cheltenham, UK
OECD (2011), DAC Members Net Offcial Development Assistance in 2009 http://www.oecd.org/document/0
,3746,en_2649_34447_44981579_1_1_1_1,00.html
OECD (2008), Aid targets slipping out of reach? http://www.oecd.org/dataoecd/47/25/41724314.pdf
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FACTORS CONCERNING THE ECONOMIC GROWTH: HR DEVELOPMENT IN
INSTITUTIONS THAT SUPPORT ENTREPRENEURSHIP
Hristina Serafmovska
Goce Delcev University Stip, Macedonia
E-mail: hristina.serafmovska@ugd.edu.mk
Ljubica Stefanovska
Faculty of Mechanical Engineering Vinica, Macedonia, Goce Delcev University Stip, Macedonia
E-mail: ljubica.stefanovska@ugd.edu.mk
Emilija Ristova
Faculty of Mechanical Engineering Vinica, Macedonia, Goce Delcev University Stip, Macedonia
E-mail: emilija.ristova@ugd.edu.mk
Abstract
Entrepreneurship is one of the driving forces for achieving high results within an economy. Starting from the
development component as its basic feature, entrepreneurship is a key cause of economic growth and employment
bearer. When we talk about entrepreneurship, a particularly interesting question is the one about its status in
transitional economies, where due to the breakdown of large industrial facilities and the rapidly actualization
of the sector of small and medium enterprises led to the emergence of a spontaneous entrepreneurship. This
type of entrepreneurship has its features that dont look like a mature enough entrepreneurial activity that relies
more on intuition than on scientifcally tested and proven actions and as such it continues to have its impact
on the future development of the overall economy in these societies. This is why this issue deserves special
attention.
One of the main obstacles, regarding the development of entrepreneurial climate, is the condition of the human
resource factor (HR factor), which is part of the numerous administrative - bureaucracy factors and obstacles.
Large number of failures are identifed and determined in the policies for human resource development, starting
from the primary selection of employees in already existing and working organizations and institutions, which
refects further working life of institutions. It also affects the process of creating entrepreneurial climate.
For that purpose, we are stressing out the need of improvement in the area of the entrepreneurial supportive
policies, engaging the entrepreneurial development, starting from the institutions which already are established
and their main feld of work is supporting the entrepreneurial development.
The whole approach regarding the improvement of the human resources is divided in two phases. The frst
one has its main focus on the employee selection process. The second phase is human resource development
policies, within institutional frameworks. These two phases have a tight connection and are supported with
accurate data which derives from our research, where the main focus is put on the current condition with
the human resources factor in both, state and public organizations (state organizations which have a leading
role in entrepreneurial development and private organizations as a carrier of the entrepreneurial development
functioning) in the country. For that purpose, we point out the need and credentials for organizational
restructuring with concentration on institutions that support entrepreneurial development.
Keywords: Entrepreneurship, Entrepreneurial development, Entrepreneurial climate, Economic growth,
human resource factor.
1. INTRODUCTION
Contemporary trends of the global economy, the turbulent environment and the pressure as a
consequence of the trend of globalization dictate suitable modes of operation of enterprises and national
economy. This atmosphere, on one hand opens new unusual opportunities for progress, but it also
represents a kind of a threat for the economic subjects that have problems adjusting. As an imperative
of modern living, entrepreneurial behavior occurs at all levels of action: individuals, companies and
entire countries. Starting from the development component as is basic feature, entrepreneurship is
a key cause of economic growth and a bearer of employment opportunities. It is not surprising that
the development of an entrepreneurial climate is an issue that occupies a central place in the Lisbon
agenda set by the European Commission as part of the European Union policies for achieving high
results in terms of economy. However, when talking about entrepreneurship we must keep in mind
that there is a difference in the treatment of this question depending on whether it is a developed,
undeveloped country or a country in transition. The economic system in developed countries is fully
mature and established, but the situation in the countries in transition is quite different. Indeed, the
second have a situation when the economic system along with society in general are in a transitional
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period that has yet to form a new mode of functioning of enterprises, new institutions are being
established, the whole way of thinking and acting as individuals is being changed and etc. Such is the
case with the Republic of Macedonia, as a case study, where the transition is submitted with the mass
privatization process and with the change in the ownership structure in industrial giants. This resulted
whit a great economic and social insecurity among the population. Increased unemployment caused
the appearance of a so-called spontaneous entrepreneurship through massive formation of small
and medium enterprises. Companies were established without a previous analysis of the environment,
without a plan and strategy. Founders didnt have a prior entrepreneurial knowledge so they acted
intuitively, and as a result enterprises were faced with a high degree of failure. In this situation it is
obvious that the key question is the situation of human resources, the level of knowledge and skill at
their disposal, and the readiness to respond to new conditions.
2. DEVELOPMENT OF ENTREPRENEURSHIP AND CONSEQUENCES OF TRANSITION
PROCESS
Common for transition economies that are affected by a process of mass formation of small and
medium enterprises is facing the problem of the unpreparedness of the social system for accepting
and supporting this process. Usually problems arise around the unsatisfactory state of infrastructure,
diffcult access to fnance, unfavorable tax policies, but special attention deserves the weakness of
institutions and administrative and bureaucratic obstacles that appear as major inhibitors to the process
of entrepreneurship. Those are the maladjusted legal regulations and long procedures that hamper the
process, for example: the problem concerning the application of contractual rights, the ineffectiveness
of the legal system, corruption, procedures for registration of enterprises, especially the complex
procedures on closing them. Just as an example we specify the Republic of Macedonia on this issue,
the analysis shows that despite the surpass transition process there are still unsurpassed interferences.
The report of IFC-Doing business in 2010 shows that in the group of eight countries (Japan, Slovakia,
Montenegro, Hungary, Bulgaria, Croatia, Macedonia and Czech Republic), Republic of Macedonia
with 115 index is in the penultimate place because of the complexity of the procedure for the closure
of enterprises, only the Czech Republic falls behind.
However, what this paper highlights is precisely the question of the adequacy of staff, a value that is
missing in the overall process of development of entrepreneurship and economy. Speaking of staff
we must point out that this problem is present in both cases: staff as owners/managers and employees
within organizations/enterprises. With the frst ones the lack of proper business education is evident.
Very often it is present the opinion that with the completion of the regular school learning, upgrading
and personal development ends as well. Such incomplete personnel dont have the capacity to handle
the challenges of the contemporary environment. Most of the instruments and opportunities that are
provided by the institutions remain unused because of doubts caused by a lack of knowledge. Also
the mass appearance of inseparability of the ownership functions from the management function.
Usually the owner who has a general versus a specialized knowledge is the one who performs multiple
functions: organizer, salesman, fnancial manager etc. and as a consequence of this serious diffculties
arise in the conduct of enterprises in terms of lack of adequate planning, effective marketing, rapid
and unplanned expansion and etc. On the other hand the problem of inadequate staff is the basic
reason a good part of the estimated reforms to fail. This phenomenon is present because of the fact
that the appropriate methods and techniques for selection of required personnel are rarely practiced.
The selection and promotion of staff in organizations and expectations and abilities of staff need to
correspond with the conditions of work and requirements which are imposed by the tasks. Studies
on the feld have shown that in the process of selection of staff and making the ultimate decision for
employment are being avoided and still as an unsurpassed obstacle is the appearance of personal
interests.
3. ANALYSIS OF INSTITUTIONS WHOSE MAIN FIELD OF WORK IS SUPPORTING
ENTREPRENEURIAL ACTIVITIES IN EAST MACEDONIA
Since the process of decentralization has been intensifed (July 2005) local authorities were
concerned with mobilizing local resources and reinforcing the economy (as a responsibility of the
local government). Previous experiences show that in order to animate the entrepreneurial ideas and
initiatives, the main key factor is the role of the local government their organization, hr factor, the
will to face and deal with administrative bureaucratic procedures and obstacles as well as dedication
on realization of local plans for development and entrepreneurial activities. Around 20 years ago,
local governments were taken away the authorization of the economic functions connected to the
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local economy development. The level of centralization of the fnances in early transition years was
relatively low (less than 2% of the net budget incomes were intended for the local governments.
With the new territorial separation and fscal decentralization there has been improvement of the
condition, but what is considered to be a problem is the capacity for transformation of most of the
municipalities in the Republic of Macedonia, especially East Macedonia. The local government in the
East region doesnt have local ministry of economy that seriously affects entrepreneurial development,
especially considering the fact that this local ministry of economy can follow the process of providing
information for entrepreneurial analysis as well as reinforcing entrepreneurial initiatives and simplify
the process of application. Other municipalities that include a local ministry of economy, are facing
other problems, especially undeveloped HR strategies and low capacity of qualifed workforce in
the feld of entrepreneurship and development of the local economy. The measures that have been
undertaken from the local authorities in the central area of East Macedonia have resulted with few
institutions (Table 1): The business incubator, Local Economy Development (LED) offce and East
Plan regional development Center.
Table 1: Summary of institutions that support entrepreneurial activities in the East Region of Macedonia.
Name of the
institution
Business incubator
Local Economy Development LED
ofce
East plan regional devel-
opment Center
Number of
employees
4
5 regional centers, 8 local offces (1
offce 13 employees)
/
Type of service
technical, managerial, law and
economy consultancy services,
administrative services,
possibility of using shared
equipment and offers workspace
for less price then the available
commercial workspace
Developing and leading local
economy policies, distributing
information to small and medium
enterprises (SME), organization
of promotional activities, fairs
etc.(for SME), creating and
promoting programs for SME
support, institutional support and
active collaboration in a manner
of developing local network for
institutions that support SME and
other consultancy activities related to
SME.
Building up the capacity
of networks in local
and rural communities,
business sector,
stimulation the local and
regional development,
promoting and reinforcing
the principles of public-
private partnership etc.
Self fnancing Since 2000 / /
Weaknesses
Lack of qualifed staff to
provide services such as
preparation of business plans,
innovative ideas and new set of
measures for motivating young
entrepreneurs
Lack of qualifed staff capable
of conducting tannings to raise
awareness of entrepreneurship,
strategic approach and long term plan
for development of SME sector
/
The main issue regarding the functionality of these formations is considered to be the usage of capacities
and the nonexistence of long term action plans. It should be noted that the German Society for Technical
Collaboration GTZ has been working in Macedonia since 1993. It works on behalf of the Federal Ministry for
Economic Cooperation and Development (BMZ) in the areas of sustainable economic development and water.
Its priority areas of work in Macedonia is economic reform and development of the market system and
promotion of democracy and civil society. Particular emphasis is placed on cooperation beyond national
boundaries, promoting an understanding between the various ethnic groups and strengthening decentralized
structures. Cluster development initiatives are an important new direction in economic policy, building on
earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing
business. Clusters also exist on the territory of Macedonia, especially the cluster for textile development,
since the East Region of Macedonia especially the central area is considered as the center of textile industry
in Macedonia.
In order to acquire information about the main obstacles for starting and developing business in the
East region of Macedonia, with a special concentration on the central area, questionnaire was attained
regarding 100 respondents and conducted in the central region of East Macedonia (the municipality
of Shtip, 2010). Figure 1 shows that obtaining fnances for opening a business is stated as the main
obstacle for starting up a business. Figure 2 emphasizes the obstacles for constraining a business
development, where working capital is stated as the main constraint.
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Figure 1: Obstacles for starting a new business in East Macedonia (central region)
Figure 2: Obstacles that affect development of new businesses in East Macedonia (central region)
Access to information and formulating a business idea as stated previously are the main obstacles
for starting up a business in the East region of Macedonia which can be eliminated by reinforcing
the idea of creating a selection process for further employments. This will have an impact on the
bureaucracy factors which are considered to be an obstacle for business development in the region.
Both constraints can be included as a part of an HR strategy program for further development of
institutions which support entrepreneurial ideas and activities.
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4. CURRENT SITUATION WITH THE HR FACTOR IN STATE AND PRIVATE ORGANIZATIONS
IN EAST MACEDONIA
As previously mentioned, the inseparability of the ownership functions from the management functions
determine the lack of adequate staff in organizations. The fast growing number of spontaneous
entrepreneurs and short life organizations seems to be a trend that unfortunately has a signifcant
effect on economic growth. One of the biggest operational challenges in establishing an organization
is considered to be fnding, hiring and retaining qualifed workers.
Figure 4: What is the biggest operational challenge in managing a company?
The situation in Republic of Macedonia with the HR factor can be previewed from our research made
in 39 state and private organizations (219 employees) where 46% of the organizations are public
organizations (100 employees out of 219) Most of the employees are part of public organizations
that count 51-250 employees (36%). Only 4 employees come from public organizations that count
less than 10 employees. Among the factors that were examined in the research, the most contributive
information arises from the questions which apply directly to selecting and retaining qualifed workers
in organizations, work motivation, defning work specifcations as well as directions for better
organizational climate and better employee performance. Causes which decrease work performance
initiate lack of motivation towards achieving organizational goals and as such need to be examined
carefully and concretely. They are the ones that can be used for further indicators for completing a
work evaluation process. If we consider humans need for achieving personal goals and combine
them with achieving organizational goals in order to provide existence, employees are constantly
seeking for higher salary, better working conditions, etc. Vroom rejects the idea that people have
fxed set of needs and is trying to take in consideration humans variability and complexity. Retaining
employees is a part of a motivational system that needs to be implemented into the organization.
This system provides working conditions and employees are motivated to stay on their current job
positions and be productive. Every human being has their own personal goals and their motivation
for work arises when they are facing different expectations which are connected with these goals. So
far as a most used selection method are the personal interview and the resume (CV), but very often
they are performed incompetently, improvised and the results obtained from them are not used as the
basic for making the fnal decision. Therefore, state organizations are facing a serious issue of lack of
work motivation caused by problems that occur at work, where employees that are not qualifed and
have lack of experience in the specifed feld are dealing with high level of stress at work because they
cant complete the specifcally given tasks. On the other hand, private organizations have a different
approach to the process of selection, since their funds are limited and nongovernmental, the selection
process is stricter, usually the job specifcations are given in the work application and candidates
are facing series of tests in order to be chosen for the specifc job position. If we compare both state
and private organization with specifc concentration on motivation towards achieving organizational
goals, we can make a conclusion that the motivational level is not the highest but it is satisfactory and
requires further work especially in creating strategy for increasing work motivation.
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Motivation towards achieving organizational goals in state organizations vs. private organizations.
Not motivated at all (13% for state organizations vs. 10% for private organizations);
Not motivated (15% for state organizations vs.16 % for private organizations);
Motivated enough (62% for state organizations vs. 57% for private organizations);
Completely motivated (10% for state organizations vs. 17% for private organizations).
Precisely defned job specifcations are closely connected to work quality. When one organization
is facing low quality of job specifcations and work expectations, the level of employee motivation
decreases because employees are facing an issue of working without knowing what the employer is
expecting from them. The situation in the Republic of Macedonia concerning the existence of programs
for retaining employees in public organizations is on a satisfactory level (56% of the employees
answered that their organizations have a program for retaining and encouraging qualifed workers
to stay on the current job positions, even 6% have been offered a higher hierarchy job position).
Employees also consider their work activities well defned (60% of the employees answered that
their job specifcation is on a high level - position 3 out of 4 where 4 is the highest grade). Another
challenge that entrepreneurs are facing now is dynamic business environment. In this competitive
business environment, customers need requirements, technology, government rules and regulation,
product life cycle, fnancial market, economy and politics. As entrepreneurs are the most important
variables in the business, institutions for entrepreneurial support should understand them and react to
fulfll what they expect constantly. Entrepreneurs are becoming more demanding and are constantly
seeking for answers and support from the government and institutions that support entrepreneurship.
Despite entrepreneurs which have to be able to adapt to the changes, also institutions that support
entrepreneurship should prepare for this issue. Many of these institutions have been established
in the past 10 years, there was a fast growing number of training bodies, consultancy institutions,
commercials about institutions that support entrepreneurship etc. East Macedonia, comparing to the
other territory, has a lack of functioning institutions for entrepreneurial support. Entrepreneurs have
to be warned about the obstacles and factors that might jeopardize their growth. Institutions need to
take measures concerning job restructuring and setting goals according to their institutions needs as
part of motivational work strategies.
5. CONCLUSION
The Republic of Macedonia principally seeks to develop the entrepreneurship and to adjust the fow
of the contemporary economics. Many political measures have been undertaken to facilitate the
development of small and medium enterprises, numerous strategies and programs have been brought
for the development of entrepreneurship and SME sector, institutions have been established precisely
to support this sector and so on. However, a good part of the results of the reform do not correspond
with the expected, and established institutions (agencies, centers and offces for local development,
etc.) stagnate on the initial level, instead of stimulating the environment, the development of
entrepreneurship and SME sector. This situation is precisely because of the inadequate staff that
does not possess the required capacity. Current government policies in the Republic of Macedonia
considering the condition of the human resources predicts reforms so-called a new model for HR
managing in the area of public administration. This model predicts 4 levels of career (level A, level
B, level C and level D) and retains professional development and work assessment. The promotion
is done so that the employee is evaluated every year. Usually the condition for promotion requires
3 years of work, but early promotion can be done after 2 years of work. If the grades were positive
in the last two years, the employee can be promoted in the next level. The promotion is followed by
higher salary for every level of career: level A (5%); level B (10%); level C (15%) and level D (20%).
In the moment this model is used only for promotion of public administration employees, but
considering the fact it has on work motivation, our recommendation is to be used in other
organizations, institutions and companies. Because institutions for entrepreneurial support include
minimum number of employees, this model will have restricted use especially considering the
vertical rotation of employee on hierarchy level, which in this case is impossible. As our research
conducted in the center of the East region of the Republic of Macedonia, in the future these
institutions need to improve their employee selection processes. This involves usage of stricter
methods for employee selection that will guarantee a needed working capacity.
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References
Fiti, T., Hadzi Vasileva Markovska, V., Bejtmen, M. (2007). Entrepreneurship. Faculty of Economics. Skopje
Serafmovska, H.(2011). Condition and entrepreneurial perspectives of the economy in the municipality of
Stip. 2ri Avgust. Stip
Vroom, V., (1964). Work and Motivation. Wiley.
Harvard business school. Institute for strategy and competitiveness. http://www.isc.hbs.edu/econ-clusters.htm
(accessed 10.07.2011)
Imagine Great People Genesis Assessments 605.321.5800. An Authorized Strategic Partner of Profles
International, Inc. http://www.danfarrell.com/workforce_analysis.htm (accessed 07.08.2011)
Offcial GTZ webpage. GTZ worldwide > Europe, Caucasus and Central Asia > Macedonia. http://www.gtz.
de/en/weltweit/europa-kaukasus-zentralasien/658.htm.(accessed 13.08.2011)
Deming, W.E., (1996). Kako izai iz krize, PS Grme. Beograd.
IFC Doing business 2011, Macedonia, F, The World Bank, Washington DC
Motivation Center. (2006). http://motivationcentre.blogspot.com/2006/03/expectancy-theory-vroom.html
(accessed 10.09.2011)
Maslow, A.(1987) Motivation and Personality, 3rd Edition, Harper & Row.
McClelland, D.(1988). Human Motivation. Cambridge University Press.
Stojkov, G. and others.(2008). Sorabotka za podobra idnina od pilot proekt do univerzalen pristap. GTZ.
Skopje.
Adler, J., and others.(2008). Sorabotka za podobra idnina regionalen razvoj preku regionalni proekti. GTZ.
Skopje
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THE LEGAL FRAMEWORK AND ITS INFLUENCE ON THE SCOPE AND THE STRUCTURE OF
THE FDIS THE CASE OF THE R. OF MACEDONIA
Pece Nedanovski
University Ss. Cyril and Methodius, Faculty of Economics, Skopje
E-mail: pecen@eccf.ukim.edu.mk.
Margarita Matlievska
Goce Delcev University, Faculty of Economics, Stip
E-mail: margarita.matlievska@ugd.edu.mk
Vladimir Mitrevski
Goce Delcev University, Faculty of Law, Stip
E-mail: vladimir.mitrevski@ugd.edu.mk
Abstract
The Foreign Direct Investments (FDI) is a form of venture capital which provides the foreign investor acquiring
rights to ownership, control and management on the basis of invested capital. The experience has undoubtedly
affrms the fact that FDI is one of the fundamentals that enables and accelerates the economic development of a
national economy. Among other things, each national economy must have adequate legislation that will enable
smooth attracting of foreign capital.
The core motivation for conducting this research paper is analysis of the changes in legislation and their impact
on the scope and structure of the FDI in the Republic of Macedonia during the last decade.
The crucial aim of the paper is to look upon the legal aspects for attracting the FDI. However, to some extent
the paper covers the institutional mechanisms that profled the framework for doing business.
The subject of the research are the laws that regulate this area, also the laws related to the fscal sector, foreign
trade, foreign exchange operations, the area of labor relations, etc..
The results of research done lead to the conclusion that the legal framework, as a signifcant factor of the
business environment in a country, has a very strong infuence on the intensity and the structure of the FDI in
the Republic of Macedonia. ver the last decade Republic of Macedonia has achieved signifcant results in
this feld, but there is a need for further improvement of the relevant legislation yet. This is more important
considering the insuffcient volume of FDI.
Keywords: Foreign Direct Investments (FDI), Legal Framework, Republic of Macedonia.
1. INTRODUCTION
The Foreign Direct Investment (FDI) represents such form of investment of capital which obtains
the foreign investor gaining of right to ownership, control and management on basis of the invested
capital. According to the defnition of the International Monetary Fund the foreign direct investments
are investments which aim is to gain permanent interest in the enterprises, which operate out of
the investors country and by that the essential intention of the investor is to enable and achieve
effective management with the enterprise where he invests in (Kapor, 2007, p. 9).This is connected
to certain minimal share in the ownership capital (equity) in the company (most frequently 10%) so
as this investment to be able to be treated as foreign direct investment and which enables effective
participation in the management. It is similar defnition of OECD according to which a company with
foreign direct investment is such company where one investor owns 10% or more of the regular shares
or votes of an enterprise, or a company where the foreign investor owns less than 10% of common
shares or votes but still there is possibility effectively to infuence on the company management
(Kapor, 2007, p. 9).
The main holders of the foreign direct investments are the international corporations. Besides their basic
interest recognized in proft maximizing and expanding the capital for their owners, the international
corporations realize other strategic goals, such as expanding the volume of their economic operations
based on new resources, securing more market opportunities and realizing more effcient production
and more competitiveness (Kapor, 2007, p. 10).
From the other side the basic motive for attraction of foreign direct investments for each country is
securing means which are missing for work and development that enables realization of projects and
programs in conditions when own means are not suffcient (domestic savings/accumulation) or when
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the conditions for its engagement are inconvenient. It is obvious that on the macro level, with the help
of FDI one country could stabilize and make sustainable the balance of payments, but also it could
improve the conditions on the domestic market, it could decrease the level of unemployment, and the
last but not least, to transfer a technology and know-how. All of the previous has its positive impact
on the economic growth.
The economy of the R. of Macedonia which at the beginning of the 1990s to the beginning of the
new millennium passed through the process of transition, has been transferring into market oriented
economy and the investors interest is increased for it from all over the world. Namely, the national
treatment of the foreign investors, the protection of the ownership, the stabile legal and business
surrounding infuence the economic and before all the political stabilization of Republic of Macedonia,
which represents a basic precondition for the increase of investors interest. The improvement of the
investment climate the capable and qualifed labor, the fertile tax policy transformed into lowest tax
rates in Europe, infuences the investors to take into consideration Macedonia as a potential country
for investments of their capital.
The legal system in Macedonia has been constantly improved in the direction of continuous
encouragement and support of the economic progress of the country, the globalization fows and
the political development. It is signifcant to mention the adjustment of the domestic legislature
towards the legislature of EU, which goes according to the confrmed dynamics of Macedonia with
the Agreement for stabilization and association. That means that many legal decisions are closer
or identical to the corresponding in the developed European countries. In the passed period there
has been implemented regulatory guillotine, which enabled confrmation of the boundaries and the
drawbacks which infuenced the management procedures connected to the realization of the necessary
steps for investments and the development of entrepreneurship in Macedonia. After statements,
the observations and fndings from the made guillotines the government of the R. of Macedonia
took steps for the removal of the boundaries and drawbacks which resulted with the increase of
the effciency and the effectiveness of the management procedures. In that direction many of the
Government measurements are in the direction of faster realization of the business plans and project
of the investors. The tax policy, the human potential, the enforcement of the service, obtaining process
as well the simplifcation of the management procedures, but also the development in the feld of the
protection of intellectual and industrial property, they all are considered as advantages in the direction
of attraction of investments and also taking into consideration that such parameters and felds are
most frequently the crucial preconditions for entrance of foreign investors in one country.
Aware for the importance of the multilateral and bilateral agreements that R. of Macedonia has
concluded which from their own side refer to the feld of investments, an attempt has been made
all of them to be covered in this paper. It is certainly important because in that way the investor can
clearly notice whether the country he comes from has signed an agreement for avoidance of double
taxation, agreement for free trading or an agreement for support and mutual investments protection
in the R. of Macedonia.
2. CONSTITUTIONAL BASIS FOR FDI
With the independence and the adoption of the Constitution in November 1991 R. of Macedonia found
the constitutional legal frames for the new social order and establishment of new economic system.
The obvious intention for establishing of an economy based on market principles, it was frstly easy
confrmed as one of the basic values planned in the constitution of the R. of Macedonia defned as
freedom on market and the entrepreneurship. Further, the Constitution additionally confrmed the
market principles on which new economic regulations are based, planning guarantees and limitations
of the same. Namely, according to the Constitution the freedom of market and the entrepreneurship is
guaranteed. The Government supplies equal legal status of all subjects on the market. The Government
takes measures against the monopolistic status and the monopolistic behavior on the market. Freedom
of the market and the entrepreneurship can be limited with law solely for defense of the country,
environmental and nature protection, or peoples health.
Having in mind the capacities of the national economy and the economic subjects in Macedonia the
Constitution additionally gives support for entrance of foreign investors through the guarantee of the
safety for taking (export) of the invested equity and the equity that they invested in Macedonia. That
is in Article 59 and it has been planned to foreign investors the right of free export and the invested
equity and gain are guaranteed. The right gained on bases of the invested capital cannot be reduced
by law or other provision.
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3. LEGAL FRAMEWORK FOR FDI
The most signifcant felds for the foreign direct investments are represented in one common cycle
starting from: registration of the business, employing adequate labor, starting with the business, tax
burdening, agreement, obligations for trading, reinvestment, protection of the investors, and closing
of the business.
Initiation of business - This part covers the possibilities for registration of a commercial company and
the most important felds that could be the subject of interest for the investors such as the concessions
and public-private partnership, mineral raw materials, energetic, commerce with securities, funds,
stock markets etc. So, this part covers all that is important before the beginning of the business. When
initiating a business in R. of Macedonia, there are several key institutions. Namely, the authorized
institution for initial registration of the business is the Central register where for only four hours and
without the necessity for initial capital, one could open the several types of commercial companies:
traderindividual, public commercial company, company with limited liability - DOO, company with
limited liability of one person - DOOEL, joint stock company, limited company and limited company
with stocks. In the frames of the Central register, technical offces are formed as well which prepare
the overall documentation for initiation of a company, which additionally reduces the expenses and
the time necessary for registration of a company. To the investors it is on their disposal the Agency
of foreign investments of the R. of Macedonia in any phase of the investment process. For the
necessities of the entrepreneurs and the support of their business, the Agency for the support of the
entrepreneurship of the R. of Macedonia has been formed. The commission for securities is liable for
effcient and legal functioning of the market of long term securities and protection of investors rights.
This institution is liable for implementation of The Law on securities, The Law on investment funds
and the Law for taking over of the joint stock companies.
The key laws for initiation of business in the Republic of Macedonia are: Law on commercial
companies (28/2004, 84/05, 25/2007; 87/2008), Law on single desk system, and leading of commercial
register and the register of legal entities (84/2005, 150/2007; 140/2008), Law on Central register
(50/2001, 49/03, 109/05, 88/2008), Law on concession and other types of public-private partnership
(7/2008; 139/2008), Law on mineral raw materials (24/2007, 88/2008, 52/2009), Law on energetic
(63/2006, 36/2007, 106/2008), Law on securities (95/2005, 25/2007, 7/2008), Law on the investment
funds (9/2000, 29/2007, 12/2009), Law on foreign exchange operations (34/2001, 81/2008), Law for
establishment of Foreign Investments Agency of the R. of Macedonia (37/2004, 81/2008), The Law
on establishment of Entrepreneurship Agency of the R. of Macedonia (60/2003), etc.
Labor/employment - Qualifcation of the labor, the legal provisions of this sphere are certainly in the
focus of investors attention because without workers it is impossible to enter in serious investments.
In this area the most important laws and provisions have been covered that are interesting for the
investors. In the employment part the provisions are covered that regulate the labor market. The
most important state institution of this sphere is the Employment agency which frameworks cover
the procedure for registration of employed people which is simplifed with shortening of terms,
reduction of benefts and the documentation that is asked from the companies. Still, the biggest news
represents the introduction of system for contracting the calculation and payment of gross salary of
workers since January 2009. Simultaneously as a compositional part of this system is the integrated
payment of all social transfers and the personal income tax by the Department of Public Incomes.
With the adoption of the Law for peaceful solution of the labor lawsuits (87/2007) out of court
procedure through mediation by which the terms of the procedures themselves are shortened, the
expenses have been reduced and the workers are returned on the labor market faster. Regarding the
employment procedures the most important laws are as follow: Law on labor relations (62/2005,
106/2008, 161/2008), Law on compulsory contributions from the social insurance (142/2008), Law
for peaceful mediation of labor lawsuits (87/2007), Law on employment and work of foreigners
(70/2007, 5/2009), Law on pension and disable insurance (80/1993, 153/2007, 152/2008, 161/2009),
Law on initiation of employment (62/2006), Law on disable persons (87/2005, 88/2008, 161/2009),
Law on employment and insurance in case of unemployment (37/1997, 102/2008, 161/2009), Law on
agencies for temporary employments (49/2006), etc.
Initiation of business/work. At the start of its business, each investor is interested for the possibilities
of crediting and fnancing of business plans, obtaining of different permits and licenses, the obligations
that result from taking account for the environment, different advantages that technological industrial
zones offer and certainly the ownership relations as fundament of the civilization. The releasing of the
procedures for business initiation is just the frst pillar of the regulation reforms that are implemented
in Macedonia. In that direction with the project regulation guillotine, hundreds of laws have been
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simplifed and their sub legal acts and the obtaining of licenses and permits for business running
is released and cheaper. Also, the introduction of the rule the silence is an approval represents a
powerful instrument for pressure towards the administration to reply on the citizens requests and
businessmen in the prescribed term, because on the contrary it will be considered that the answer is
positive.
The documentation and the terms for obtaining licenses and permits is considerably reduced with
new changes of the Law on construction land and the Law for construction. The procedures for
construction permits are simplifed but also the foreign legal and physical entities will be able to gain
the ownership on construction land.
The fees and compensations at the land registry offce, the Customs and the Bureau of meteorology
are reduced. With the new Law on Banks which enabled departments of well known foreign banks in
Macedonia to be opened and by that the approach to capital necessary for fnancing of new investments
projects is released.
The credit registers in the frameworks of the Central (National) bank is additionally upgraded and
there is a procedure at the moment for foundation of new investment projects.
In order to achieve larger effciency in the registration of the ownership rights and its overall
functionality and digitalization to the end of 2008, large reforms are taken over the Land registry
department. With the strengthening of human resources and introduction of ITC technology, the
process and the work procedures of the land registry have been improved.
For business initiation it is essential to emphasize the laws that refer to the possibilities for crediting,
ownership, the environmental protection and certainly the free economic zones. Also, connected to
credits there should be mentioned: Law on banks (67/2007), Leasing law (4/2002, 49/2003, 88/2008)
and the Law on contractual pledge (5/2003). For the ownership regulation the most important are
the following: Law on ownership and other property rights (18/2001, 92/2008), Law on land registry
of real estates (40/2008), Construction law (51/2005, 82/2008), Law on construction land (82/2008,
143/2008) and Law on privatization and rent of construction land in state ownership (4/2005, 13/2007,
165/2008).
During the last 10-15 years, the environmental protection has been gaining more and more importance
for the business running. From the point of view of the investor the most important are the following
laws: Law for the environment (53/2005, 24/2007), Law on nature protection (67/2004, 84/2007), and
Law for waste management (68/2004, 107/2007, 102/2008, 143/2009). The free economic zones are
regulated by the Law for technological industrial zones (14/2007, 103/2008, 130/2008).
The tax burden is maybe the most essential part in the investment decision, but also during the
period of business running. That is why, the most important legal decisions in the area of taxes
have been covered as well as the contracts for avoidance of double taxation in Macedonia that it
ratifed with other countries. The laws in this area confrm the most important tax burden which would
be interesting for the investors. In that direction the implementation of policy for larger economic
freedom of business fat rate income tax has been introduced and fat rate personal income tax which
rates are only 10% and by that Macedonia has the lowest package of taxes in Europe. It is essential to
emphasize that the reinvested income is completely exempted from taxation. In that area there should
be taken into consideration: Law on income tax (74/2006, 160/2007), Law on personal income tax
(74/2006, 160/2007), Law on value added tax (44/1999, 114/2007, 103/2008), Law on property taxes
(61/2004, 102/2008), Law on the amount of default interest rate (65/1992), Law on communal fees
(61/2004; 92/2007), etc.
When taxes are in question it is important to mention that in the frames of the Department of Public
Incomes separate offces have been established for small and medium sized companies and by that an
attempt has been made for adjustment and releasing of the administration procedures for tax payments
of this type as tax payers .Large tax payers can send by Internet tax forms and opinions to the offce
for large tax payers and by that the processing has been considerably fastened and also the time for
tax payment.
The contract for avoidance of double taxation promotes the economic cooperation between the R.
of Macedonia and other countries especially in the domain of stock exchange, services and common
investments and by that stimulation and intensifying of the economic fnancial relations between
the countries is enabled. The R. of Macedonia has ratifed 30 contracts for avoidance of double
taxation, generally with these contracts the avoidance of double taxation of the resident of one or
the other country has been regulated referring to income taxes (personal income tax and income
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tax) and property tax. In that way the residents of one state gains the same tax treatment in the other
state. Correspondingly, the rights of the state are regulated where there are cases which will make
the taxation and which will not, as well as which state is entitled to make payment of certain tax
obligation. Also, with the contracts the dividends, interests and the incomes of copyrights are also
treated and etc. R. of Macedonia has concluded contracts for avoidance of double taxation with
the followings states: Croatia 17/953, Turkey 45/95, Poland 17/97, Italy 34/97, China 49/97, Russia
7/98, Albania 16/98, Sweden 21/98, Ukraine 21/98, Slovenia 31/98, Netherlands 13/99, Bulgaria
23/99, France 23/99, Taiwan 44/99, Egypt 7/2000, Denmark 48/2000, Switzerland 55/2000, Romania
7/2002, Czech Republic 7/2002, Iran 7/2002, Finland 7/2002, Hungary 12/2002, Belorussia 96/2005,
Spain 96/2005, Moldavia 130/2006, United Kingdom and Northern Ireland 47/2007, Latvia 47/2007,
Germany 86/2007 and Austria 152/2007.
Contractual obligations/commercial conditions. When the investor runs its business in Macedonia it is
of exceptional importance the felds such as commerce, export/import, customs, contractual relations,
the freedom on market and the completion as well the contract of free commerce with EU and other
states that is, all areas that infuence the running of business commerce and obligation relations. These
felds are regulated by the Law on commerce (15/2004, 129/2006 63/2007, 88/2008), the Law on
e-trade / e-commerce (133/2007), Law on competition protection (4/2005, 70/2006, 22/2007), Law
on taking over of joint stocks companies (4/2002, 36/2007), Law on customers protection (38/2004,
77/2007, 103/2008), Law on customs (39/2005), etc.
Suffcient improvement has been reached in the releasing of the export and import. Namely at
the Customs procedures for goods transit more effciently and faster are implemented. With the
introduction of single desk system the procedures have been considerably shortened as well as the
documents which are necessary at export import. R. of Macedonia has concluded three multilateral
contracts for free market The Stabilization and association agreement, EFTA and CEFTA
1
Also it has
concluded bilateral contracts for free trading with Turkey and Ukraine.
Reinvestment is the area of exceptional importance for Macedonia because the gained capital of the
investor is essentional to be invested here and that purpose large tax relives and advantages are on
his disposal. In the part of investment and reinvestment the Government offers special advantages,
planned as tax relives that are through supportive tax policy in the part of reinvestment. By exempt
that is the reduction of tax rates the investors and the businessmen can reinvest their income that they
earned in Macedonia. The provisions that support the reinvestment are mainly included in the Law
on value added tax (44/1999, 114/2007, 103/2008), the Law on income tax (27/2006, 159/2008), the
Law on personal income tax (74/2006, 160/2007, 159/2009) etc.
Protection of investors. Wide spectrum of legal regulations manage this material which includes the
contracts for investments protection as well. For the protection of the investors rights and improvement
of cooperative operating, the Law on commercial companies is fully applied. At the same time,
the Commission of securities adopted new sub legal acts by which the provisions for information
announcement of joint stock companies have been strengthen and measures have been introduced
by which it is sanctioned the use of inside information. Special attention has been dedicated to the
protection of the minority share holders, who in the past used to be blackmailed and interrupted freely
to operate with their capital. Regarding the foreign investors the legislature in Macedonia guarantees
free transfer and repartition of capital and income.
In order to avoid double taxation and large mutual protection of investments bilateral contracts have
been concluded to guarantee the same. Namely, the contracts for support and mutual protection of
investments are concluded in order to attract foreign investments and in the frames of efforts and
1 With the Stabilization and association agreement, the R. of Macedonia took over the obligations for liberalization
of the market with the European union, signing of contracts for free trading with states from the region and etc.
With joining to EFTA asymmetrical approach in the commercial running has been secured with the industrial and
the agricultural nutrition products on behalf of the R. of Macedonia. By that the Macedonian industrial products
are exported freely without customs on EFTA states markets for the necessities of 12 million people. The Central
European contract for free trading (CEFTA 2006) represents important step in the efforts for economic integration
of the countries from the South East Europe (region) From the economic aspect the increase that is the possibility
for creation of a single zone for free trading will be especially acceptable for the countries with small sized market
such as Macedonia. This contract beside the liberalization of the stock commerce for the frst time opens space for
increased cooperation between its members and in the following areas: services, trading, public supplies, investments,
and protection of the intellectual property.
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activities of the Government for promotion of the cooperation with other countries.
2
In 2006 Law on International commercial arbitrage has been adopted securing that all foreign
arbitrage decisions are under direct authority of the Arbitrage court. Also the Republic of Macedonia
has signed and ratifed the New York convention for recognition and execution of foreign arbitrage
decisions(1958) and Washington convention for solution of investment lawsuits between the states
and the citizens of others state (ICSID, 1965). In this feld key are: Law on International Commercial
Arbitrage (39/2006), Law on Industrial Ownership (47/2002, 42/2003, 9/2004, 39/2006 79/2007),
Law on Commercial companies (28/2004, 84/05, 25/2007, 87/20085), Criminal law (19/2004, 7/2008)
and the Law on Corruption Prevention (28/2002, 126/2006).
In this part laws are also included which cover the inspection, surveillance, the Law on Labor
Inspection (35/97), Law on Department of Public Incomes (81/2005), Law on Living Environment
(53/2005, 24/2007), Law on Food Safety, Products and Materials that are in contact with the food
(54/2002, 84/2007), Law on Market Inspectorate (24/2007), Law on Sanitary and Health Inspection
(71/2006), Law on Construction (51/2005, 82/2008).
Closing of a business The bankruptcy and the liquidation, the duration and the way of leading of these
procedures are of essential importance for the investors and they circle this process. The fnanical
means and the time that is necessary for liquidation or closing of a commercial company mainly
represent the essential elements referring to this feld. Namely, when talking of the Republic of
Macedonia and the procedures for closing of a business, the Law on bankruptcy (34,2006,126/2006
and 84/2007) allows cheaper and faster implementation of the bankruptcy procedures in average of
nine months.
4. ECONOMIC PRECONDITIONS FOR THE FDI
Economic performances in the Republic of Macedonia are manifested through the stable growth of
GDP which is about 4-5%, the low infation rate the average of which is 2-3%, the fscal discipline
confrmed by the international fnancial institutions as well as the coordination between the fscal and
the monetary policy.
Table 1 Main economic indicators for the R. of Macedonia 2004-2008
2004 2005 2006 2007 2008
Real growth of GDP (%) 4.1 4.1 4.0 5,9 5.0
Infation on annual basis (%) - 0.4 0.5 3.2 2.3 8.3
Central Budget Defcit (as a % of GDP 0.0 0.2 -0.5 0.6 -1.0
The extent to which the export covers the
import (%)
57.2 63.2 63.8 64.2 58.1
Source: State Statistical offce and Central Bank of the R. of Macedonia.
With the appropriate legislation, the Republic of Macedonia undertook economic reforms, and by
doing so it offered the most attractive tax package in Europe. Namely, the income (proft) tax rates
and the personal income tax are 10% (the proft tax was decreased for 15% and the personal income
tax was decreased for 15%, 18% and 24%). Regarding the value added tax, the general tax rate is
18% whereas the preferential/privileged tax rate is 5% (including computer software and hardware,
food etc.).
The property tax rate amounts 0.1-0.2% and the inheritance tax is in the range between 2-3% for
the tax payers that are second in the row of inheritance and 4-5% for the tax payer who is third in
the row of inheritance or the one who is not in any relation with the person leaving the inheritance.
For the purpose of stimulating additional foreign and domestic investments, the corporate tax on
undistributed proft is 0%.
2 Normally these types of contracts are signed in the direction of legal protection of the investments made by the
investors of one country on the territory of the other one. In that direction Macedonia and the other countries signatory
are obliged that the investments made by the investors by the other contractual side to be able to have treatment which
will not be worse than the treatment that is given to the investment of the domestic investors. By this contract normally
regulated the way of decision of the eventual made lawsuits between an investor and the contractual side or lawsuits
between two contractual sides. The Republic of Macedonia has concluded such types of contracts with the Republic
of Croatia (17/95), Republic of Turkey 5/97, Republic of Slovenia 55/96, the former United Republic of Yugoslavia
69/96, FR of Germany 8/97, Switzerland 8/97, Poland 17/97, Italy 34/97, Peoples Republic of China 49/97, Russian
Federation 7/98, Malaysia 7/99, Albania 15/98, Democratic Peoples Republic of Korea 15/98, France 16/98, Ukraine
21/98, Kingdom of Sweden 31/98, Kingdom of Netherland 13/99, Kingdom of Belgium 23/99, Bulgaria 23/99,
Republic of China 44/99, Romania 7/02, Finland 7/02, Bosnia and Herzegovina 7/02, Austria 7/02, Hungary 12/02,
Czech Republic 7/02, Kingdom of Spain 110/05.
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The introduction of the fat rate tax was made for the purpose of simplifying the tax system which
is expected to further stimulate the successful companies to improve their operation and to increase
their proftability. The intention is to also make the companies use the money they saved from taxes
for the purpose of increasing their competitiveness. The fat rate system enables having transparent
and effcient administrative procedures, simple calculation and fast flling in of the tax forms.
Special tax relief is offered to companies that operate in technological industrial development zones.
This covers relief from both proft tax and personal income tax payment during the frst 10 years.
Each company is relieved from paying the undistributed proft tax.
Companies can pay tax via Internet, and this saves their time and money.
There are no restrictions on transfer accounts i.e. on the current account payments. The proft and the
dividends from the investments can freely be transferred abroad, after the payment of corporate proft
tax.
There are no regulatory restrictions for foreign direct investments made by non-residents in the
Republic of Macedonia. Credit transactions between residents and non-residents can freely be made
as long as they are registered in the Central Bank. Certain legal entities that operate abroad can hold
their deposits in foreign banks, only if being given permission for this by the Central Bank. Non-
residents are free to open non-resident accounts in Macedonian banks. The Law on foreign exchange
operations enables liberal regime regarding capital transactions, to a great extent.
According to legislation, foreign companies and foreign citizens may own construction land in the
Republic of Macedonia. Construction site is offered with public tender procedure.
1
The Republic of Macedonia introduced one-counter system that enables investors to register their
business in 4 hours. An individual can register a company by visiting one offce, getting information at
one place and engaging only one administration offcer. This signifcantly reduces the administrative
barriers and the business start-up costs. Decrease was made of the pension and health insurance.
According to the above mentioned, and according to the Doing Business Report 2010 of the World
Bank, the Republic of Macedonia was ranked third among the ten top reformers for year 2008/2009.
In addition, out of 183 economies, Macedonia was ranked as 32
nd
on the list Ease of Doing Business.
5. FDI IN THE R. OF MACEDONIA FOR THE PERIOD 2003-2008
In this paper, foreign direct investments are investments of legal and physical entities from abroad
in business entities in the Republic of Macedonia, which results in establishing mutual long-term
interest where the foreign investor owns at least 10% of the total value of the business entity.
Table 2 - FDI according to the economic sectors, 2003-2008, in 000 US$
Operations/Years 2003 2004 2005 2006 2007 2008
Agriculture, hunting, forestry 1 260 1 559 2 892 900 3 040 4 632
Mine and stone extraction 5 4 401 26 581 20 035 13 272 10 237
Processing industry 35 936 38 586 53 989 50 498 72 982 66 504
Electricity, gas and water supply 3 0 22 225 962 67 870 35 906
Construction 60 6 284 2 413 3 349 16 168 21 405
Wholesale and retail 7 096 13 228 7 967 13 263 14 816 31 048
Hotels and restaurants 21 22 2 763 5 233 11 500 10 130
Traffc, storage and connections 869 65 996 741 4 471 14 675 14 301
Financial mediations 19 180 7 707 12 784 8 140 107 190 146 637
Operations regarding real estate,
renting and business activities
13 423 1 531 3 612 14 178 8 051 12 275
Public usage and defense,
compulsory social care
0 0 1 905 323 0 0
Education 2 761 3 10 17 21 27
Health and social affairs 0 7 92 1 083 0 11
Other communal, general and
personal services
29 136 397 3 213 1 217 3 281
Total 80 643 139 460 116 168 350 665 330 802 356 394
Source: State Statistical offce of the R. of Macedonia.
1 The minimum price offer is determined on the part of the Ministry of Transport and Communications, in compliance
with the Construction Land Price Determination Methodology.
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According to the business activity (economic sector) the investment was made in, during the analyzed
period of time, years 2003-2008, foreign direct investments in the Republic of Macedonia total 1374.1
million US dollars. The most of FDI were made in 2008 being 28.9%, and the least in 2003 being 80.6
million US dollars or 5.8%.
Foreign direct investments in 2008 compared to those in 2007 increased for 25.6 million US dollars.
Compared to 2003, FDI in 2008 increased for 275.7 million US dollars which is four times more
(441.9%).
In terms of business activities, the greatest value FDI has in processing industry (44.5% of the total
FDI), in 2004 in traffc, storage and connections (47.3% of the total FDI), in 2005 again the greatest
value FDI has in processing industry (46.4% of the total FDI for that year), and in 2006 it was in
the electricity, gas and water supply (64.4% of the total FDI for that year. Over the last years of the
analyzed period, 2007 and 2008, and compared with the other business activities, the value of FDI
was considerably at its highest in the fnancial mediations i.e. in 2007 32.4% of the total FDI for that
year, and in 2008 41.1%. Compared to 2003, in this business activity FDI increased for 560% in 2007
i.e. 764% in 2008.
Seen per years, FDI in 2004 are higher for 58.8 million dollars than those in 2003, and in 2005
compared to 2004 they are lower for 23.3 million dollars; in 2006 compared to 2005 there was an
increase for 235 million dollars and in the period between 2007 and 2006 there was again decrease for
19.9 million dollars. In 2008 there was an increase for 25.6 million dollars compared to 2007.
Table 3 - Financial results from the business running of the companies with FDI according to economic sectors 2003-
2008, in millions of denars
Economic sectors 2003 2004 2005 2006 2007 2008
Agriculture, hunting, forestry - 29 25 36 75 52 53
Mine and stone extraction 231 189 202 218 345 389
Processing industry - 553 - 331 102 1 570 2 451 3 102
Electricity, gas and water supply 0 0 - 2 - - 6 11
Construction 231 19 0 36 - 43 - 45
Wholesale and retail 44 512 154 1 027 1 284 1 435
Hotels and restaurants 20 - 70 - 61 - 38 583 641
Traffc, storage and connections 2 604 502 3 418 1 470 5 925 7 586
Financial mediations 173 76 651 5 445 4 196 4 736
Operations regarding real estate,
renting and business activities
- 263 458 79 25 250 270
Public usage and defense,
compulsory social care
0 0 - 58 0 0 51
Education 0 119 153 206 212 202
Health and social affairs 0 - 1 - 40 - 10 7 5
Other communal, general and
personal services
- 3 1 31 4 8 8
Total proft/loss 2 455 1 499 4 665 10 028 15 264 17 844
Source: State Statistical offce of the R. of Macedonia.
When it comes to fnancial results of the business entities operations with FDI, per business activity,
for the period 2003-2008, the total of FDI was 51,755 million denars. In 2008, there was a total proft
higher for 2,580 million denars compared to year 2007, and when compared to year 2003, the total
proft in 2008 was higher for 15,389 million denars i.e. it became seven times bigger (726.8%).
In the period 2003-2008, analyzed by business activity, there are positive fnancial results in the
following activities traffc, storage and connections, fnancial mediations, processing industry, mine
and stone extraction, wholesale and retail, operations regarding real estate, renting and business
activities, education, other communal, general and personal services, agriculture, hunting and forestry.
Per years, in 2004, the biggest proft was made in wholesale and retail, and in 2006 in fnancial
mediations. However, the question is to which extent is this fact factual valid to be used for any
analysis if it is considered that in year 2006 there is no data about the total proft/loss in the sector of
electricity, gas and water supply, although it was then when highest FDI were being made. In the rest
of the years (2003, 2005, 2007 2008) the biggest proft was made in the sector of traffc, storage
and connections which can lead to the conclusion that that business activity shows the highest level
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of proft rate for the analyzed period of time.
What is interesting is the analysis of the business sector hotels and restaurants which in 2003 presented
a proft of 20 million denars, whereas in 2004, 2005 and 2006 it had a loss. However, beginning form
2007, this business sector makes rapid proft growth. Namely in 2006 the loss was 38 million denars,
in 2007 it made a proft of 583 million denars, and in 2008 the proft was 641 million denars.
6.CONCLUSION
The so far worldwide experiences have undoubtedly affrmed the fact that FDI is one of the fundamentals
that enables and accelerates the economic development of a national economy. Consequently, every
national economy must have adequate legislation that will enable smooth attracting of foreign capital.
The analysis of the changes in legislation and their impact on the scope and structure of the FDI in the
Republic of Macedonia during the last decade has approved the fact that the legal aspects are of great
importance for attracting the FDI. However, to some extent the institutional mechanisms that profled
the framework for doing business are important too.
The results of research done lead to the conclusion that the legal framework, as a signifcant factor of
the business environment in a country, has a very strong infuence on the intensity and the structure
of the FDI in the Republic of Macedonia. ver the last decade Republic of Macedonia has achieved
signifcant results in this feld, but there is a need for further improvement of the relevant legislation
yet. What is more important, this fact is more relevant considering the insuffcient volume of FDI.
Reference
Imad A. Moosa (2002). Foreign direct investment: theory, evidence, and practice. Palgrave Macmillan.
Kapor Predrag (2007): Foreign investments in enterprises, investment projects and concessions. Poslovni biro,
Belgrade.
Moran H. Theodore, Edward M. Graham and Magnus Blomstrm (ed.), Does Foreign Direct Investment
Promote Development?. May 2005.
Moran H. Theodore (2006). Harnessing Foreign Direct Investment for Development Policies for Developed
and Developing Countries. Center For Global Development.
Neuhaus, Marco (2006). The Impact of FDI on Economic Growth - An Analysis for the Transition Countries of
Central and Eastern Europe. A product of Physica Verlag Heidelberg.
Proceedings of FIKUSZ 2009. Determinants of foreign direct investment in Macedonia. Evidence from time
series 1994-2008.
State Statistical Offce (2009). Foreign direct investments in Macedonia 2003-2007. Skopje.
State Statistical Offce (2009). Foreign direct investments in Macedonia in 2008. National accounts,
Announcement, Skopje.
World Banks Doing Business 2010 Report.
http://www.fdi.net/country/sub_index.cfm?countrynum=122
http://www.investinmacedonia.com/Default.aspx?item=menu&themeid=294&itemid=698
http://www.unctad.org/sections/dite_fdistat/docs/wid_ib_mk_en.pdf
http://fdiatlas.com/area/Europe/Macedonia
http://www.doingbusiness.org/rankings.
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FLEXICURITY IN TRANSITION: THE CASE OF COUNTRIES OF FORMER YUGOSLAVIA
Laporek Suzana
University of Primorska, Faculty of Management Koper, Slovenia.
E-mail: suzana.laporsek@fm-kp.si
Primo Dolenc
University of Primorska, Faculty of Management Koper, Slovenia.
E-mail: primoz.dolenc@fm-kp.si
Abstract
Flexicurity, best described as an attempt to simultaneously combine fexibility and security in the labour
market, is today in the core of the European employment agenda. As it aims to increase the adaptability of
frms and workers in order to cope with quickly changing economic environment, it has become fundamental
for enhancing labour market performance, productivity and competitiveness while reinforcing European social
model.
Countries of former Yugoslavia (with exception of Slovenia) are facing several employment challenges, also
as a consequence of political and economic developments after the break-up of Yugoslavia. The current labour
market situation therefore demands a comprehensive strategy that would enhance labour market performance,
however not endanger macroeconomic sustainability. There is a need for fexi-secure labour market policies,
which would allow for fexible employment arrangements, however at the same ensure employment security
of workers. Slovenia, as a member of the European Union (EU), was already formally invited to design and
implement fexicurity strategies. Similar expectations will be put in front of other countries of former Yugoslavia
in near future as well. The paper therefore presents a systematic in-depth analysis of the current level of
implementation of fexicurity policy components set by the EU i.e. fexibility of working arrangements,
lifelong learning strategies, social security of unemployed and active employment policies in the countries
of former Yugoslavia and by that gives grounds for shaping recommendations about further labour market
strategies. Moreover, it examines how ex-Yugoslav countries perform in implementation of these policy
components in comparison to new Central and Eastern EU Member States.
The paper fnds that ex-Yugoslav countries are, on average, characterized by relatively strict employment
protection legislation and low levels of part-time and temporary employment, in spite of signifcant liberalization
measures during the past decade. Majority of countries provide relatively weak social protection of workers
in terms of unemployment benefts schemes with extremely low coverage rate. Furthermore, most of the
countries face diffculties in the feld of design and implementation of active employment policies and lifelong
learning programmes. Among ex-Yugoslav countries, the highest progress both in enabling fexibility and
security at the labour market is evident in Slovenia.
The implementation of fexicurity policies presents an important tool in improving employment and
unemployment situation and by this labour productivity and overall economic performance. Therefore, the
countries of former Yugoslavia should more intensely work on the effectiveness of active employment policies
and lifelong learning strategies, target them on the most disadvantaged group of unemployed and stimulate
them to use these programs. Moreover, they should improve the system of unemployment benefts to better the
security of unemployed, however not pulling people out of labour market. At this point it is crucial that each
country shapes a comprehensive strategy of further development of labour market, with special attention put
on fnding such a balance between different fexicurity policy components that best suits specifc needs of its
labour market.
Keywords: Flexicurity; Labour market; Labour market policy; Countries of former Yugoslavia; Empirical
analysis.
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1. INTRODUCTION
The need for fexible and at the same time secure labour markets (i.e. the need for fexicurity) is today
in the core of the European employment agenda. Namely, fexicurity presents a response to changes
in national economies due to globalization processes, rapid technological development, demographic
aging and labour market segmentation. Moreover, it presents a tool for improving labour market
outcomes, productivity and competitiveness while reinforcing European social model.
Countries of former Yugoslavia,
2
with exception of Slovenia, face several employment challenges,
also as a consequence of political and economic developments after the break-up of Yugoslavia.
The current labour market situation demands a comprehensive strategy that would enhance labour
market performance, however not endanger macroeconomic sustainability. There is a need for fexi-
secure labour market policies, which would allow for fexible employment arrangements, however
at the same ensure employment security of workers. Slovenia, as a member of the European Union
(EU), was already formally invited to design and implement fexicurity strategies. Nevertheless,
similar expectations will be put in front of other countries of former Yugoslavia in near future as
well. The research objective of this paper is therefore to assess the current level of implementation
of fexicurity policy components in countries of former Yugoslavia and by that to give grounds for
shaping recommendations about further labour market strategies. In the analysis we study fexibility
of working arrangements, lifelong learning (LLL) strategies, social security of unemployed and
active labour market policies (ALMPs) i.e. fexicurity policy components set by the EU. Moreover,
we examine how ex-Yugoslav countries perform in implementation of these policy components
in comparison to the new Central and Eastern EU Member States (CEE),
3
which also underwent
transition from centrally planned system to market economy.
The analysis, based on descriptive statistics, was performed on the latest available data and
included variables chosen from the list of indicators suitable for studying fexicurity prepared by the
European Commission (2007). Data were collected from national statistical and employment offces,
international databases and offcial reports of several international organisations (The Organisation for
Economic Co-operation and Development (OECD), The World Bank (WB), The International Labour
Organisation (ILO), The International Financial Corporation (IFC), The Eurostat, The European
Commission and The European Training Foundation (ETF)). At this point we stress that some of
the countries of former Yugoslavia did not yet developed a systematic approach to collecting and
generating data in certain felds of fexicurity, aggravating qualitative and comprehensive analysis.
Nonetheless, this is the frst systematic overview of all four fexicurity policy components in all seven
countries of former Yugoslavia.
The paper continues with presentation of the fexicurity strategy at the EU level. Section 3 provides
a short overview of labour market situation in the ex-Yugoslav countries, followed by an in-depth
analysis of the implementation of fexicurity policy components. Last section summarizes major
fndings and concludes.
1.The concept of fexicurity within the European Union
The concept of fexicurity was frst employed in the Netherlands in the mid-1990s as a part of labour
market reforms; however, today we often link it to the Danish golden triangle. The latter presents
a prime example of a well-functioning fexicurity arrangement. The model combines a high degree
of occupational and geographical job mobility due to low employment protection, comprehensive
social security for unemployed and ALMPs aimed at skill improvement and activation of unemployed
(OECD, 2004, p. 97).
Pursue for balance between fexibility and security has been present in the EU policy discourse since
1993 and is especially evident within the European Employment Strategy (Tros, 2004, p. 2). As it is
stated in the Council Decision (2003/578/EC, p. 13-21) on revision of the Employment Guidelines,
providing the right balance between fexibility and security will help support the competitiveness of
frms, increase quality and productivity at work and facilitate the adaptation of frms and workers to
economic change. The EU addressed the issue of fexibility and security more explicitly (with the
term fexicurity) in 2006 at the Informal Meeting of Ministers for Employment and Social Affairs.
Since then it is in the forefront of the European employment agenda.
The European Commission (2007, p. 10) defned fexicurity as an integrated strategy to enhance,
2 Countries of former Yugoslavia are Bosnia and Herzegovina (BiH), Croatia, Macedonia, Montenegro, Kosovo, Serbia
and Slovenia.
3 The CEE-10 countries are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia
and Slovenia. We study Slovenia as a part of former Yugoslavia and as a part of the CEE group of countries.
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at the same time, fexibility and security in the labour market.
4
The latter should not be perceived as
contradictory, but as complementary and mutually supportive. The rationale of fexicurity is therefore
to increase the adaptability of frms and workers in order to cope with quickly changing economic
environment and to reduce labour market segmentation.
According to the European Commission (2007), fexicurity policies can be designed and implemented
across four policy components:
fexible and reliable contractual arrangements both for employees and employers;
comprehensive LLL strategies;
effective ALMPs to cope with rapid economic changes, to reduce unemployment spells and to
ease transitions to new jobs; and
modern social security systems to provide adequate income support, to encourage employment
and to facilitate labour market mobility.
Economic analyses confrmed that these four components can be mutually supportive, and improve
employment, at-risk-of-poverty rates, and human capital (see European Commission, 2006).
However, it should be noted that crucial preconditions for developing fexicurity and making it work
are supportive, productive and well-established social dialogue, mutual trust and highly developed
industrial relations (see European Expert Group on Flexicurity, 2007).
2. BRIEF OVERVIEW OF LABOUR MARKET SITUATION IN COUNTRIES OF FORMER
YUGOSLAVIA
The breakup of Yugoslavia, followed by a deep transition crisis deteriorated by armed conficts and/or
high political instability, heavily marked economic development of most of the ex-Yugoslav countries
in the 1990s. Due to these specifc conditions, economic and labour market recovery of these countries
(with exception of Slovenia) has been much slower comparing to other CEE countries (see Gligorov
et al., 2008, p. 37). Data on employment growth show that during the transition period most of the
ex-Yugoslav countries recorded a strong decline in employment, refecting job losses because of
collapses of larger frms and low level of job creation in mostly smaller frms (see Neporov et al.,
2006, p. 10-11). Employment started gradually to recover in the late 1990s and more intensely after
2004. Nevertheless, employment rates are still low in most of the countries today, especially when
compared to Slovenia and other EU countries. For example, in 2009, the employment rate in Kosovo
amounted 23.2 %,
5
in BiH 40.1 %, in Macedonia 43.3 % and in Serbia 50.4 %. The employment
situation was better in Croatia, as the employment rate in 2009 amounted 56.6 %, whereas in Slovenia
67.5 %. On the other hand, all countries of former Yugoslavia, except Slovenia and Croatia, record
enormously high, double-digit unemployment rates, in Kosovo exceeding even 50 %. Most exposed
to unemployment are women and young people the youth unemployment rate is in majority of
countries twice as high as the adult unemployment rate or even higher. A serious problem presents
also long-term unemployment. The latter has reached especially high levels in BiH, Macedonia,
Kosovo and Serbia, where in 2009 more than 75 % of all unemployed were unemployed more than
one year. In Croatia and Montenegro the share of long-term unemployed amounted approximately
55 %. For comparison, the share of long-term unemployment in Slovenia amounted 32.8 % in 2009,
whereas in EU-27 17.8 %.
One of the key obstacles on the way towards labour market recovery is also extensive informal
economy. According to Gligorov et al. (2008, p. 49), informal economy produces about one third
of GDP in BiH and Serbia (the estimate is even higher for Kosovo and Macedonia) and accounts
between 30 and 60 % of total employment. The informal economy does not only present a cost to
the national economies due to unpaid tax revenues, but also a risk to workers, as they are not entitled
to any kind of labour rights, job security, employment protection and are deprived for professional
development (see also Nastav et al., 2007).
4 As fexicurity is relatively new term, there is no universal defnition of it. Nevertheless, we can fnd several (partially
overlapping) defnitions. For overview see Madsen (2006).
5 Kita (2008, p. 5) estimated that only half of the employment in the private sector is reported, whereas the other half
is being informal.
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3. THE ANALYSIS OF IMPLEMENTATION OF FLEXICURITY POLICY COMPONENTS
In the analysis of implementation of fexicurity we focus on four policy components: fexible
and reliable contractual arrangements, LLL programmes, ALMPs and social security system for
unemployed. The analysis will be based on the variables suitable for studying fexicurity prepared by
the European Commission (2007).
3.1. Flexible and reliable contractual arrangements
One of the most commonly used indicators in international comparisons of labour market regulations
is Employment Protection Legislation index (EPL), developed by the OECD.
6
Under previous regime,
countries of former Yugoslavia had very protective labour legislation. For example, dismissals were
not permitted (except out of disciplinary reasons), workers were mostly full-time employed (what
provided high security of staying in employment) and were entitled to several employment benefts.
However, over the last twenty years all ex-Yugoslav countries adopted profound changes in national
labour legislations, which signifcantly decreased the level of employment protection. For example,
EPL index in Slovenia amounted 4.1 in 1991, it declined to 3.0 in 1998 and reached the value 2.5
in 2008. Although some countries already reached the level of employment protection in more
developed OECD or EU Member States (see Table 1, data for 2003), differences between them are
still high. According to the last available data, the overall EPL index varies from 2.5 in Slovenia and
Kosovo to 3.6 in Montenegro,
7
which is above average of the OECD, EU-15 and CEE countries. For
comparison, the most fexible CEE countries in 2008 were Slovakia (1.4) and Hungary (1.7), mostly
due to increased fexibility in the area of temporary contracts.
As can be seen from the table below, the employment protection in 2003 was rather high in the
feld of temporary contracts, especially when comparing to the CEE average. Exceptions to high EPL
on temporary contracts were Slovenia and Croatia due to legalization of temporary work agencies
and legislative changes regarding the duration of temporary contracts. Even stricter were collective
dismissal regulations, being especially high in Montenegro, Kosovo and Croatia. In this way countries
tried to prevent extensive dismissal of workers through restructuring processes of large companies and
by this avoid negative impacts on labour markets and massive quests for social protection. On the other
hand, the ex-Yugoslav countries, except Slovenia and Croatia, recorded very fexible regulations in the
feld of regular employment, being even more fexible than in the CEE-8 and EU-15.
Table 1: Total EPL index and its components, 2003 and 2008
Country Year
Regular employ-
ment
Temporary em-
ployment
Collective dis-
missals
Total EPL
index
BiH 2003 1.8 3.1 3.3 2.6
Croatia 2003 2.6 1.9 4.3 2.6
Kosovo 2001 1.3 2.8 4.6 2.5
Macedonia, FYR 2003 2.0 3.1 4.0 2.8
Montenegro 2003 2.2 4.5 4.8 3.6
Serbia 2005 2.0 4.4 3.6 3.3
Slovenia
2003 2.7 2.0 4.8 2.7
2008 3.2 1.9 2.9 2.5
Ex-Yugoslav countries
average
1
2003 2.1 3.1 4.2 2.1
CEE-8 average
2
2003 2.6 1.4 3.3 2.2
2008 2.6 1.6 3.3 2.1
EU-15 average
2003
3
2.3 2.1 3.3 2.2
2008 2.3 2.0 3.2 2.2
OECD average
2003 2.1 1.8 3.0 1.9
2008 2.1 1.8 3.0 2.1
Note:
6 EPL index is compiled from 21 items, covering three different aspects of employment protection: (i) individual
dismissal of workers with regular contracts; (ii) additional costs for collective dismissals; and (iii) regulation of
temporary contracts. Index values are ranging from 0 (least stringent employment legislation) to 6 (most restrictive
employment legislation). Data on EPL index for 2008 are in accordance with the OECD methodology version 3. Data
for years before 2008 are available only in accordance with the OECD version 2 (see OECD, 2011a; OECD.Stat,
2011).
7 EPL estimation for Slovenia refers to 2008, whereas for Kosovo to 2001. Data for Montenegro refer to 2003.
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1
Data for Kosovo refer to year 2001, whereas for Serbia to 2005.
2
The CEE-8 average includes data for Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and
Slovenia. Data for Lithuania and Latvia refer to 2004.
3
The average value does not include data for Luxembourg.
Sources: Gligorov et al. (2008); Micevska (2004); Neporov et al. (2006); OECD (2011b); OECD.Stat (2011); Tonin
(2009); Vodopivec et al. (2007).
Up to today, the value of total EPL index and/or its sub-indices has probably decreased in some of
the ex-Yugoslav countries due to changes in labour legislation; however, there is no offcial data yet
available. For example, in 2005 Macedonia reduced maximum severance payments from eight to six
months, abolished some restrictions on fxed-term, temporary and part-time contracts and shortened
employers obligation on sick pay from 60 to 21 days (see Feiler et al., 2009). Furthermore, in 2006
it adopted Law on Temporary Work Agencies and by this introduced possibility of hiring agency
workers. With the amendments adopted in 2008, the use of fxed-term contracts for permanent task
was prolonged from 4 to 5 years. Moreover, in the same year Montenegro allowed fxed-term contracts
for permanent task with no duration limitation and eased the notifcation procedures prior dismissal
for employers (see WB, IFC, 2009, 2010a).
As already mentioned, most of the employment protection data presented in the table above are out-
dated. In order to obtain a more realistic view on labour arrangements and to broaden the analysis
of employment situation in studied countries, we also analysed the rigidity of employment index,
developed by the WB.
8
As shown in Table 2, employment in terms of hiring and fring workers and
rigidity of working hours are the most fexible in Kosovo.
9
Low employment rigidity is also recorded
in Montenegro and Macedonia due to several legislation changes in the past years. For example, both
countries eliminated requirements relating to redundancy, eased restrictions on fxed-term contracts
and introduced greater fexibility in scheduling of working hours (see Gribben, 2009; Feiler et al.,
2009; WB, IFC, 2009).
10
Serbia, on the other hand, adopted legislative measures allowing employers
to respond to a decline in work volume by reducing their workers hours or placing workers on
temporary leave with reduced pay (see WB, IFC, 2010c). The employment regulation is, according
to the WBs index, the most rigid in Slovenia and Croatia. Rigidity is especially high in the area of
hiring workers, as both countries prohibit fxed-term contracts for permanent tasks and limit duration
of fxed-term contracts to 24 (Slovenia) or 36 (Croatia) months. Comparing to other countries, they
record also high rigidity of working hours due to regulations on annual leave and work on weekly
rest day.
Table 2: The rigidity of employment index and its components, 2010
Components of the rigidity of employment index
(0-100)
Country
Diffculty of hiring
index
Rigidity of hours
index
Diffculty of
redundancy index
Rigidity of
employment index
(0-100)
BiH 56 13 30 33
Croatia 61 40 50 50
Kosovo 0 0 30 10
Macedonia, FYR 11 20 10 14
Montenegro 0 20 20 13
Serbia 78 7 20 35
Slovenia 78 53 30 54
Ex-Yugoslav average 41 22 27 30
CEE-10 average 34 41 24 33
EU-15 average 32 40 32 35
Source: WB, IFC, 2010a.
8 The rigidity of employment index is a simple average of three indices: diffculty of hiring index, rigidity of hours
index and diffculty of fring index. The values of indices are ranging from 0 to 100, by which higher values indicate
more rigid regulation (WB, IFC, 2010b).
9 For example, there is no limit on the length of fxed-term contracts (including renewals), no obligation of notifcation
or approval of a third party in case of dismissal of one or more workers (WB and IFC, 2010a).
10 In Macedonia, employers are allowed to choose the duration for scheduling and frequency of shift rotation when
arranging nights shifts, employer and employees are free to agree on the weekly rest day and on the number of days
of paid annual leave beyond the legal minimum of 20 working days. In Montenegro, when employers have to dismiss
a worker, they are required to give notice of 15 calendar days only and are no longer obliged to give prior notifcation
to a third party (see WB, IFC, 2009, 2010b).
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Although the labour markets of former countries of Yugoslavia became more fexible comparing
to a decade ago, the level of part-time employment is rather low. For example, in 2009, the share
of part-time employment in total employment amounted approximately 2 % in Croatia, 5.3 % in
Macedonia,
11
10.2 % in BiH, whereas it was the highest in Kosovo (16.3 %). In Slovenia, the share
of part-time employment in total employment amounted 9.5 %, which is 5 percentage points below
the CEE average. The share of part-time employment in total employment is higher among women
and workers employed in agriculture sector. According to Fetsi (2007, p. 116), non-use of part-time
employment is associated with the fact that pension regulations make it very diffcult for part-time
employees in most of the countries to qualify even for the minimum pension.
More common, on the other hand, are temporary employment arrangements. Their share in total
employment is increasing in most of the ex-Yugoslav countries, especially among young and lower-
skilled people (see Neporov et al., 2006; Crnkovi-Pozai, 2006; Novkovska, 2008). In 2009, the share
of temporary employed in total employment amounted 11.6 % in Croatia, 15.5 % in Macedonia and
16.2 % in Slovenia.
12
For comparison, the average value of temporary employed in total employment in
NMS amounted 8.0 %, which is 5 percentage points below the EU-15 average. The share of temporary
employed in total employment was higher among young people (15-24 years of age): in Macedonia
37.1 %, in Croatia 35.0 %, whereas in Slovenia 66.6 %. For comparison, the CEE average (without
Estonia) amounted 21.6 %, which is 18.3 percentage points below the EU-15 average.
3.2. Lifelong learning
LLL programmes (i.e. education and training programmes, which are or are not in relation to the
current or the future job of participant) are crucial for ensuring long-term employability of workers,
especially the most vulnerable. According to the European Commission (2007), high participation
in LLL is positively related with high employment and low long-term unemployment. However, it
is often the case that frms underinvest in education and training of low-skilled workers, workers on
temporary contracts, self-employed and older workers.
During the previous regime, adult population was committed to permanent and functional education.
As there were no room for comprehensive LLL strategies, in majority of countries the LLL
programmes are today in their early stage of development, what is among others refected in low
participation rates. According to the available data, participation rate of adults (between 25 and 64
years of age) in LLL in Slovenia amounted 14.6 % in 2009, whereas in Macedonia 2.5 % and 2.2 % in
Croatia in 2008. Participation rates are probably even lower in other countries of former Yugoslavia.
13
Low participation rates in LLL present also a problem in most of the CEE countries. For example,
participation rate in 2009 did not exceed 1.5 % in Romania and Bulgaria and it amounted 2.8 % in
Slovakia and Hungary. For comparison, the average in the CEE amounted 5.5 %, whereas in the EU-
27 9.7 %. Still, this is way below participation rate in Scandinavian countries (it amounted 31.6 % in
Denmark and 22.1 % in Sweden and Finland).
Slovenia already developed a functioning system of LLL, as this is one of the important requirements
and expectations of the EU and the Lisbon Strategy. However, in other countries of former Yugoslavia,
the importance of LLL is only slowly coming in the forefront of employment agenda.
14
Although
these countries, except BiH, adopted strategies or programmes for adult education and LLL in the past
years,
15
they face problems of how to insure their implementation. This is additionally hindered by
modest public expenditures for adult education and training (especially in rural places) and lack of EU
instruments. Some countries receive funding from different international donors, but these funds are
mainly project-oriented, short term and unsystematic (see Popovi, 2009). One of the main reasons for
low participation in adult education and training is also a lack of motivation (especially by older and
unemployed people), related with existential problems, low quality of life and an incorrect perception
of LLL as a shame (see upari, 2009). Likewise employers are not aware of the importance of adult
11 According to the ILO, there is still a strong disincentive in Macedonia against the use of atypical forms of employment
due to the high tax wedge at low wage levels (Viertel, 2008, p. 13).
12 Comparing to year 2005, the share of temporary employed in total employment increased only in Macedonia (from
11.8 to 15.5 % in 2009), whereas Slovenia and Croatia recorded a minor decrease (from 17.1 % in Slovenia and from
12.9 % in Croatia).
13 Countries of former Yugoslavia, except Slovenia, do not collect systematic statistical data on participation in LLL. The
cited data were obtained from the Eurostat (2011).
14 Progress in national legislation has been especially evident in Croatia and Macedonia, mostly due to obligations in
the process of obtaining EU membership. Overview of developments in the feld of LLL in mentioned countries is
available in Devi Torbica (2009) and Buova et al. (2009).
15 Overview of adopted strategies and laws for adult education in the ex-Yugoslav countries is available in Popovi
(2009) and Devi Torbica (2009).
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education and of development of employee. For example, in BiH only a small part of employers, mostly
from the private sector, involve their employees in the process of further education, which mostly takes
place in foreign countries (Heri et al., 2008, p. 11). This points on the further problem of low quality
and inadequate infrastructure for LLL in terms of providers, educational staff and lack of practices and
comprehensive guidance system.
16
3.3. Active labour market policies
Several studies pointed on a positive impact of ALMPs on labour market and economic performance
(see for example OECD, 2004; Neporov et al., 2006; Anspal et al., 2007), signifying that expenditures
for ALMPs could have an important impact on reducing unemployment and therefore facilitating
employment. However, as can be seen from Table 3, expenditures for labour market policies are
modest. As the major part of expenditures is devoted to passive employment policies, this leaves an
extremely low portion for the ALMPs. Namely, expenditures for the latter vary from 0.04 % of GDP
in Croatia to 0.18 % in Slovenia. Low funding is also a reality in the CEE countries, which in 2008
earmarked only 0.23 % of GDP to ALMPs this is 0.5 percentage points below the EU-15 average
and even 1 percentage point below the level in countries with the highest expenditures (Belgium and
Denmark).
Table 3: Expenditures for active and passive employment policies as % of GDP
Country Active employment policies, 2008 Passive employment policies, 2006
BiH 0.08 n/a
Croatia 0.04 0.38
Kosovo n/a n/a
Macedonia, FYR
0.1
(0.2 in 2009)
n/a
Montenegro n/a 0.30
Serbia 0.12 0.80
Slovenia 0.18 0.27
1
CEE-10 average 0.23 0.27
1
EU-15 average 0.74 1.08
1
Note:
1
Data for 2008.
Sources: Centre of Public Employment Services of Southeast European Countries, CPESSEC (2009); Eurostat (2011);
Gligorov et al. (2008).
Expenditures for ALMPs are in majority of the ex-Yugoslav countries mostly concentrated on wage
subsidies for the integration of disabled, job search assistance and support for self-employed and too
little on employment incentives, training programs and direct job creation measures.
17
Moreover,
ALMPs are not organised on a larger scale and therefore focus only on selected groups of unemployed.
Consequently, the coverage rate (i.e. % of unemployed participating in ALMPs) is low. According to
the available data, the coverage rate in Croatia in 2009 amounted 2.5 % (WB, 2010b), similar rate was
also recorded in Macedonia in 2005 (Cazes et al., 2007a, b).
Majority of the ex-Yugoslav countries adopted employment programs or plans including recommendations
and measures on implementation of ALMPs. However, the highest obstacle in implementation of these
measures remains lack of funds, which is especially evident in BiH and Kosovo. For example, in BiH there
were no ALMPs implemented in 2008, except those funded by the WB programme (Lorencic, 2008, p.
7). Also in Kosovo almost all ALMPs are supported and implemented by the international organisations
such as the UNDP, the MLSW and the ILO, by which they mostly focus on youth employment (Kita,
2008, p. 22). Situation regarding funding is at most improving in Montenegro, where the fnancing of
the ALMPs reached approximately 1 % of GDP in 2008 (Gribben, 2008, p. 10).
16 Educational and LLL challenges in Montenegro, Macedonia and Croatia are also presented in ETF working papers
(Gribben, 2008; Feiler et al., 2009; Skjolstrup, 2008).
17 Overview of development of ALMPs for Montenegro, Macedonia, Croatia and Serbia is available in the reports of the
ILO and the Council of Europe (Cazes et al. 2007a, b; Rosas et al., 2007; Harasty et al., 2007) and the ETF working
papers (Griben, 2008; Feiler et al. 2009; Skjolstrup, 2008).
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3.4. Social security system
There are signifcant differences in unemployment beneft (UB) programmes between countries of
former Yugoslavia. The most generous UBs can be found in Slovenia, followed by Serbia, whereas in
other countries the UBs are really modest. The extremely low UB level was recorded in Montenegro,
where UBs present only 60 % of minimum wage (i.e. 55 EUR) in 2008. For comparison, poverty
line in Montenegro amounted 119 EUR in 2007, implying that UBs increase the risk of falling into
poverty or of resort to the informal economy (see Kaludjerovi et al., 2008; Rosas et al., 2007).
Moreover, labour legislation in Kosovo provides no UBs - the social safety net provides only basic
pensions and limited social assistance (see USAID, 2009).
In majority of studied countries the UBs are mostly limited to 12 months. The duration of benefts is
longer only in Federation BiH, Serbia and Slovenia. However, several countries (Croatia, Macedonia
and Montenegro) have adopted provisions to allow unlimited duration of UBs for older workers after
certain cumulative duration of employment.
As can be seen from Table 4, the share of unemployed who receive UBs is very low. Only exception
is Slovenia, where almost one third of unemployed is entitled to UBs. Low coverage rate in other
countries is a consequence of the state of labour market and the composition of the unemployment
registers, on which the vast majority present labour market entrants and others who had no opportunity
of building up the necessary contributions (Fetsi, 2007).
Table 4: Comparison of the UB systems between countries of former Yugoslavia (last available data)
Country
UBs as % of average net
wage, 2009
UB duration
% of registered
unemployed
receiving UBs
BiH
Federation BIH: 40.0
Republika Srpska: 20.0
Federation BiH: 3-24 months
Republika Srpska and District Brcko: 3-12 months
2.31
(July 2010)
Croatia 27.8
78-450 days
Unlimited duration for persons with 32 years of
employment.
24.0
(September 2010)
Kosovo 0.0 no 0.0
Macedonia,
FYR
34.0
1-12 months
Unlimited duration for persons with more than 15 years of
employment and are at most 5 years short to qualify for an
old age pension.
Duration of beneft is extended for women during
pregnancy and for persons on training for the time of its
duration.
1.0
1
(2007)
Montenegro 8.4
2
1-12 months
Unlimited duration for persons with more than 25 years in
employment.
21.2
(2007)
Serbia 60.0-50.0
3
3-24 months
9.6
(2008)
Slovenia
63.0
(August 2010)
3-25 months
30.0
(August 2010)
Notes:
1
By the end of 2007, 24,720 individuals in Macedonia received UBs, of which 21,291 persons received early retirement
allowance (until they reach retirement age and are therefore entitled to old-age pension), 3,429 individuals yet received
the regular UB.
2
Data for 2008.
3
In frst three months 60 % of previously earned average net wage, thereafter 50 %.
Sources: CPESSEC (2009); Croatian Employment Service (2010a, b); Employment Service of Slovenia (2010);
Kaludjerovi et al. (2008); Labour and Employment Agency of BiH (2010); MISSCEO (2010); Rosas et al. (2007);
USAID (2009); WB (2008).
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4. CONCLUSION
Although countries of former Yugoslavia share a common legacy of centrally planned regime, today
they signifcantly differ in their economic and labour market performance, mostly as a consequence
of political and economic developments after the break-up of Yugoslavia. Namely, apart in Slovenia
and Croatia, the current labour market situation in the ex-Yugoslav countries is serious. Countries face
low employment and labour force participation rates and extremely high unemployment and long-
term unemployment rates, which are especially pronounced among women and young people. Among
others, high costs to labour markets are also imposed by a large informal economy. The current labour
market situation therefore calls on governments to shape comprehensive and suitable strategies or
policies to facilitate favourable labour market performance, however not endanger macroeconomic
sustainability. One of the answers to the labour market challenges is the approach of fexicurity,
promoted by the EU. According to the European Commission (2007) and studies that analysed the
impact of one or more fexicurity policy components on labour market outcomes, properly shaped
and implemented fexicurity policy components have a positive impact on labour market performance
(for brief overview of studies see Laporek and Dolenc, 2011). This paper therefore analyses the
current level of implementation of fexicurity policy components as a policy tool in the countries
of former Yugoslavia and by that gives grounds for shaping recommendations about further labour
market strategies.
The analysis has shown that countries of former Yugoslavia signifcantly liberalized employment
protection legislation during the past decade, almost reaching the employment protection level of the
CEE countries. Despite this, the employment protection is still relatively strict, refected also in low
levels of part-time and temporary employment. Although the liberalization of employment protection
on one hand eased hiring and fring procedures for employers, it decreased protection of workers on
the other. The loss of workers security should be compensated by effective social security system
and ALMPs. The latter together with LLL programmes are of especial importance as, if designed and
implemented properly, can reduce negative labour market outcomes by improving the effciency of
job matching and enhancing the level of human capital (for overview of studies see OECD, 2004;
Bassanini and Duval, 2006). However, data show that some governments still underestimate the
importance of these policies, as they have not yet established a comprehensive strategy for their
development and funding. Some countries also record weak (in Kosovo even no) social protection of
workers in terms of UBs.
Except Slovenia, the ex-Yugoslav countries have not yet adopted the concept of fexicurity, however
we can expect a gradual transfer of fexicurity policies in their labour markets in near future. This opens
the question which fexicurity policy components are the most appropriate for specifc labour market
situation and how should be designed. Our fndings propose that countries should more intensely
work on the effectiveness of ALMPs and LLL strategies, target them on the most disadvantaged
group of unemployed and stimulate them to use these programs. Moreover, they should enhance
the system of UBs to better the security of unemployed. However, on this way towards fexicure
labour markets, it should be taken into account that each country has to fnd its own balance between
different fexicurity policy components. This will demand better dialogue between social partners,
stronger state institutions and higher funding.
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TRENDS IN ENTREPRENEURIAL ACTIVITY IN CENTRAL AND EAST EUROPEAN
TRANSITION ECONOMIES
Jerzy Cielik
Kozminski University, Warsaw, Poland
E-mail: jerzy@cieslik.edu.pl
Andr van Stel
EIM Business and Policy Research, Zoetermeer, The Netherlands
E-mail: AST@eim.nl
Abstract
After 1989, radical changes in the level of entrepreneurial activity have taken place in the Central and East
European (CEE) region countries, transitioning from the communist to a market economy system. These
developments have not been properly researched so far, inter alia, due to a lack of reliable empirical data.
In this paper we identify key factors affecting business ownership (BO) rates in the four CEE transition
economies, such as: historic and cultural roots, experiences with entrepreneurship under communism, the level
of economic development, the growth of GDP during transition, and the speed of market oriented reforms.
Using EIMs COMPENDIA data base we test seven hypotheses by conducting comparative analysis of trends
in BO rates - both actual levels and dynamics of change- during the period 1989-2008. Five out of seven
hypotheses are confrmed while the remaining two hypotheses are partially confrmed.
The current paper makes two contributions. First, we present, for the frst time, harmonized business ownership
time series during 1989 2008, for the new CEE EU member states, which facilitates meaningful comparisons
with other OECD countries. Second, we explain the sizable differences in the level and development of
business ownership since 1989 among four Central and East European transition economies: Czech Republic,
Hungary, Poland, and Slovak Republic. The fndings bear important implications for shaping policies aimed at
enhancing entrepreneurship in the CEE region.
1. INTRODUCTION
This paper explores the different developments of business ownership (BO) rates over the period 1989-
2008 in four Central and East European (CEE) countries: the Czech Republic, the Slovak Republic,
Hungary and Poland, against similar trends observed in other OECD countries during the same
period. Understanding country differences in entrepreneurship is important because entrepreneurship
is widely believed to play a key role in economic development (Audretsch and Thurik, 2004, 2010).
Such understanding is particularly relevant in countries undergoing systemic transformation from the
centrally-planned or communist to a market economy system. The Central European countries under
study, immediately after the Second World War, fell under Soviet dominance which lasted until 1989-
1990. During 45 years private business ownership was disallowed or barely tolerated as a marginal,
unimportant addition to a dominating state-owned sector. Within the offcial paradigm of the socio-
economic development under communism there was no room for entrepreneurship as a potential
factor contributing to such development.
The situation has changed dramatically after 1989, when the communist system collapsed. Obviously,
entrepreneurs played an important role in this process refected in the explosion of entrepreneurial
initiatives in the CEE region, particularly during the 1990s. These developments have attracted
considerable attention among entrepreneurship researchers. The vast majority of this research
focused on how individual entrepreneurs cope with the opportunities, threats and challenges within
a particular transition context being still affected by the inheritance from the communist past and
characterized by mounting barriers and obstacles resulting from a weak institutional base during
the early phase of implementing the free market system (Smallbone and Welter, 2001; Peng, 2001;
Doern, 2009; Van der Zwan, Verheul and Thurik, 2011). Most recent research acknowledges the
heterogeneity of entrepreneurial responses to institutional conditions and the fact that entrepreneurs
may also infuence change (Welter and Smallbone, 2011). An interesting direction of this debate
is related to the homo sovieticus mindset developed by several generations of population living
under communism (Zinovyev, 1986), which is refected, inter alia, in the lack of individual initiative,
overreliance on the state and passive, obedient acceptance of the rules imposed by the government
authorities. The important question is to what extent such mindset affected entrepreneurial attitudes,
once the communist-type regimes collapsed and the basic institutions of the free market capitalist
system were introduced after 1989 (Shiller, Boycko and Korobov, 1992).
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Recent efforts aimed at harmonization of longitudinal data on business ownership (BO) rates and
inclusion of four transition economies (Czech Republic, Hungary, Poland and Slovak Republic) in
EIMs COMPENDIA data base in the latest edition, paved the way for longitudinal analysis of the BO
rates, covering 20 years during the period 1989-2008 (Van Stel, Cieslik and Hartog, 2010). We were
able to construct business ownership rates for these countries which are comparable across countries
and over time, allowing for comparisons of relevant trends between the selected transition and mature
market economies but also among these four transition countries. This was not straightforward as
different countries tend to use different business ownership (self-employment) defnitions in offcial
OECD statistics (Van Stel, 2005).
The rest of the paper is organized as follows. In the second section we conduct a literature review
with the purpose to identify key factors affecting the levels and changes in BO rates of the four
countries under study. Based on this review we formulate seven hypotheses for further testing. Next,
in the third section, we discuss our data base with harmonized data on the number of business owners
across OECD countries over a long range of years. In section four we present business ownership data
for OECD member countries with particular focus as how the new CEE countries ft within general
patterns of business ownership in the OECD during 1989 2008. The results are discussed in the
ffth section in the context of seven hypotheses being formulated. In the fnal section we discuss some
policy implications stemming from our research, limitations, as well as directions for future research.
2. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
2.1. Scope of literature review
In this section we make an attempt, based on a literature review, to identify key factors affecting the
levels and trends in business ownership rates over time in four Central and East European (CEE)
transition economies: the Czech Republic, Hungary, Poland and the Slovak Republic. The frst group
of factors is related to the historic roots and cultural traditions. Over many centuries these four nations
have developed strong ties with the Western civilization. In the last 100 years, all of them gained
independence after World War I and, after a short period of building the fundamentals of modern
states during 1918-1939, fell under Nazi occupation and later Soviet dominance, which ended only
in 1989.
The second group of factors relates to the experiences of the four countries under study with respect
to the private business sector under communism. Despite the fact that general principles of the
command-type economy were quite universal and driven by the ideological motivations, there were
notable differences as to the extent the non-state-owned business sector and individual initiatives
were tolerated and controlled.
Thirdly we take into consideration the level of economic development and the growth of GDP in
the four CEE countries during 1989 2008. The relationship between economic development and
entrepreneurial activity is vividly discussed in the literature (e.g. Acs, Audretsch and Evans, 1994;
Carree et al., 2002, 2007; Wennekers et al., 2010). On the other hand there are sizeable differences in
the level of socio-economic development among the four countries under study. Finally, we examine
the speed of implementation of market oriented reforms in these countries after 1989, with particular
reference to those shaping institutional environment for private business initiatives.
2.2. Historic and cultural roots
Within the new institutional economic analytical framework, there are several levels of institutions, the
highest of which is that of informal, institutionalized rules shaped over the centuries, including norms,
customs, traditions and religions (Williamson, 2000). Winiecki (2004) adapted this framework to the
analysis of conditions that affected transition success from the communist to the free market system.
According to Winiecki, what played a decisive role in the rapid development of the new private sector
under transition was not so much the communist legacy as the pre-communist legacy, which he called
civilization fundamentals. Therefore, it is useful to determine how close the informal rules that
existed before communism were to the kind of institutional environment necessary to the effcient
functioning of the free market system that emerged after the communist break-up. The informal rules
that shape civilization fundamentals include freedom of entrepreneurship, perception of the general
need for law and order, and generalized trust. To develop his argument, Winiecki pointed out that
practically all successful transition economies in Europe were those that belonged historically to
Western Christendom, whereas the laggards fell outside the eastern borders of Christianity.
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The arguments raised by Winiecki are powerful as they pertain to the differences between Poland and
Russia, the example the author used. However, they are of limited use in explaining the differences
among the Czech and Slovak Republics, Hungary and Poland because these countries all fall within
the historic borders of Western Christendom. Still, by taking into account the variations in their
civilization fundamentals, one may point to particular historic institutional traditions that could
explain the phenomenon of Czech entrepreneurship revival. Benacek (1995) stressed the role of the
Czech Protestant traditions, which date back to the 1780s, and to the proliferation of liberal and
cosmopolitan ideas in the 19
th
century. These factors, combined with the very high level of industrial
development in the area, provide a fruitful historic base on which Czech entrepreneurship could
regain its strength after the 45 lost years under Soviet dominance.
A similar argument based on the pre-communist legacy concept can be developed with respect
to the formal rules, particularly the legal framework for starting and running a business. Here we
may refer to the concept of legal origin developed by La Porta et al. (1999), who distinguished
between the traditions of common law and civil law, where common law is typically associated
with less government inclination to intervene in the economy and, therefore, greater favorability for
entrepreneurship.
The original concept (La Porta et al., 1999) identifed within the civil law tradition a socialist legal
system that prevailed in the communist economies. However, following widespread criticism, this
sub-category was eliminated in the most recent formulation (La Porta, Lopez-de-Silanes and Shleifer,
2008). What seems especially important, however, is the level of pre-communist maturity of the
legal system, particularly whether regulations that affect business operations were established before
World War II. All four countries under study managed to shape the basics of business law during
their short period of independence from 1918 to 1939. Although it does not seem to be useful in
explaining differences in the levels of business ownership rates among the four countries, this legal
maturity had a practical impact during the early days of transition because the necessary laws could
be quickly restored and/or updated. For example, the sophisticated Polish Commercial Code of 1934
was not cancelled under communism, even though most of its regulations were not compatible with
the centrally planned system. Under the new circumstances after the fall of communism, the Code was
found to be extremely useful, especially for setting up limited liability companies, which became the
most popular business vehicles for setting up larger domestic operations and subsidiaries of foreign
companies.
Based on the above analysis we may formulate three hypotheses:
H1: As all four countries under study belonged historically to the Western Christendom, this facilitated
rapid catching-up of BO rates with those prevailing in the mature market economies while at the same
time downplaying the role of communist heritage.
H2: Due to historic and cultural links with some Western European countries, BO rates prevailing in
these countries form a historic benchmark to which CEE region tended to approximate.
H3: Among the CEE countries under study the historic roots of the Czech Republic provided the most
favorable environment for catching up with respect to BO rates.
2.3. Experiences with entrepreneurship under communism
The experiences with entrepreneurship under communism varied signifcantly among the four
countries under study. The private sector was practically liquidated in Czechoslovakia by the mid-
1960s, whereas it was allowed to exist as a marginal addition to the dominating state-owned sector
in Hungary and in Poland. The relevant policies in both countries were implemented in waves, with
periods of greater fexibility interspersed with tightened measures aimed at curbing the size and the
excessive richness of the private business owners. In the case of Poland, an important additional
factor was that foreign travel was much less restricted than it was in the other three countries. Therefore,
many Poles particularly the young had exposure to the free market system from working abroad
(often illegally) and (particularly in the 1980s) from the chance to engage in individual international
trade (Johnson and Loveman, 1995, p. 232).
In view of these developments, one may argue that Hungary and Poland were much better prepared for
the entrepreneurial take-off in 1989 than the Czech and Slovak Republics were. First, at the verge
of the systemic transition, Hungary and Poland had many individuals with at least some experience in
starting and running small private business, albeit in the very peculiar and restrictive environment of
a centrally planned economy. Second, these businesses were frmly legal with clearly defned rules on
registration requirements, tax obligations, restrictions as to the scope of activities, maximum number
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of employees, and so on. This observation contradicts the prevailing approach (e.g., Peng 2001),
which has pointed to the gray underground character of the private sector under communism. While
this character may have applied in the former Soviet Union, it defnitely did not in Hungary and
Poland. Third, some formal regulations designed specifcally for the private sector could be easily
adapted to the new market-economy environment. For example, the simplifed tax scheme for small-
scale craft activities currently in use in Poland relies heavily on regulations introduced in the 1980s.
However, there were important negative implications of the communist embeddedness of the
incumbent private sector in Hungary and Poland, particularly the business skills, attitudes, ethical
and moral standards and operating routines developed while conducting business under communism
that became obsolete impediments when the rules changed. The lack of customer focus serves as a
good example here; under communism, clients were generally not looked after because of the acute
shortage of consumer goods and services, so customers waited in lines and got what they got. The
major concern of the private business owners operating within the shortage economy was getting
access, often through informal and/or illegal arrangements, to various production inputs, materials,
and componentsnot customer service. As a result, they were ill-equipped to operate within a market
environment where the crucial success factor related to building a strong client base.
Since the communist authorities in Hungary and Poland often switched between fexible policies
toward the private sector to tightened measures, the private sector in both countries followed a low
profle strategy to survive the instability. This strategy was refected in deliberate avoidance of
demonstrations of excessive richness but also in limited market visibility. This strategy obviously
contrasts with the proactive, dynamic orientation required when operating within a free-market
environment.
While the extant transition literature has focused on the impact of rapidly changing conditions on the
survival of the state-owned enterprises, in fact the transition shock also brought similar challenges
to the incumbent private sector (Winiecki, 2004), as exemplifed by the words of an incumbent
entrepreneur: In 1989 Poland changed to such an extent that, in order to continue my prosperous
business, I had to start de novo. The same business, in a different environment, became a new kind of
activity (Osborn and Slomczynski, 2005, p. 88).
Some empirical data has suggested that the overall balance of already being in business at the time
of transition, on the one hand, and communist embeddedness, on the other, was not positive for
the incumbent private sector and that it was the newly established entrepreneurial frms that were the
key driving force of the transition process. For example, Cieslik and Kaciak (2009a) found that the
incumbent private sector was only marginally engaged in the advanced forms of entrepreneurship,
namely exporting; in 2003, among approximately 50,000 exporters, only 1,200 private frms were
established before 1989 and they provided only 4% of the Polish commodity exports. At the same
time, 40,500 domestic exporting frms established after 1988 contributed 32% of the export volume
(54% of export volume was generated by 7,100 foreign subsidiaries and 10% by 1,200 state-owned
enterprises). This paucity of pre-1989 exporters is surprising, given that many Poles were engaged
in individual (informal) international trade, particularly in the 1980s, and the income derived from
such operations helped to build a capital base for setting up many genuine private businesses after the
collapse of the communist system.
The above analysis leads to the following hypothesis:
H4: Experiences with entrepreneurship under the communist regime in Hungary and Poland contributed
to the accelerated growth of BO rates after transition. However, this contribution is moderated by
the fact that the private sector before 1989 was deeply rooted in the communist environment and
consequently the experiences accumulated were not always useful within a market economy system.
2.4. Level of economic development and the growth of GDP after transition
The complex relationship between entrepreneurship and the level of economic development has been
subject to considerable debate in the extant literature (for an overview, see Wennekers et al., 2010).
For instance, rising per capita income tends to go together with rising real wages (Lucas, 1978),
implying increasing opportunity costs of self-employment and hence a negative relation between
entrepreneurship and the level of economic development. On the other hand, the importance of
services (niche) markets and a higher preference towards autonomy in highly developed economies
suggest a positive relation.
Data from the four CEE countries (Figure 1) show considerable differences in their GDP per capita
in the early 1990s, when the transition process had just started, particularly between the most
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industrialized of the four, the Czech Republic and the least developed Poland (Czech income per
capita was almost double that of Poland in 1992). During 1992-2008 all four countries experienced
growth in GDP per capita, but the pace of growth was much faster in the countries with a lower base:
Poland and Slovakia. In fact, the growth of GDP achieved in Slovakia was remarkable and, as a
result, Slovakia surpassed Hungary in GDP per capita in 2007. Consequently, the distance between
the highest (Czech Republic) and the lowest (Poland) GDP per capita shrank from 46% in 1992 to
30% in 2008.
At the same time there was a clear trend in narrowing the gap as to the GDP per capita between the
four CEE countries under study and the remaining OECD members. Whereas in the early 1990s
the average GDP per capita in this region represented only 35 % of the COMPENDIA-23 average,
by 2008 this ratio increased to 51% (see Figure 1).
1
This in turn led to gradual transition of this
region from the manufacturing-based, effciency-driven to the innovation-driven development stage.
Following the classifcation of stages of development put forward by the World Economic Forum
(Schwab, 2009), both the Czech and Slovak Republics have been categorized as innovation-driven
economies, whereas Hungary and Poland have been classifed as being in transition from effciency-
driven to innovation-driven. One may reasonably expect that within 10-15 years all four CEE
countries will reach the innovation-driven stage, following the path of mature Western economies.
While an innovation-driven economy is associated with many entrepreneurs trying to commercialize
new innovative ideas in the market, in effciency-driven economies the exploitation of economies
of scale by large frms plays a more dominant role and there is typically less room for small-scaled
entrepreneurship.
Insert Figure 1 about here
The above literature review and data presented lead to the following hypotheses:
H5: The narrowing gap as to the level of GDP per capita between mature market economies and CEE
countries during 1989-2008 contributed to the convergence of BO rates between these two groups of
countries.
H6: The relatively high level of economic development in the Czech Republic contributed positively
to bridging the gap in BO rates with the mature economies.
2.5. The speed of market oriented reforms
The impact of the speed and magnitude of macro-economic reforms can be studied from the
perspective of the individual decision to start a business and/or from the perspective of how the
reforms affected the growth of the private sector in general. The research conducted by Smallbone
and Welter (2001) on a number of transition economies in the 1990s demonstrated that the need for
independence and autonomy was by far the most common reason for starting a business in these
countries. Clearly, the radically changing external environment, particularly the quick dismantling of
the state-owned sector, could prompt such individual decisions. To account for the transition-specifc
factors in a persons considering entrepreneurship as a life-path option, Cieslik and Kaciak (2009a)
adopted Shaperos model of an entrepreneurial event (Shapero and Sokol, 1982). The systemic
displacement in the model refects the negative emotions invoked by working in highly bureaucratic
state-owned enterprises, government or municipality organizations with very limited opportunities
to demonstrate initiative. The models between systems effect encompasses the overall feeling
that the communist system has collapsed irreversibly and the new era has begun. At the same time,
the numerous businesses being started by former colleagues from work, friends and relatives creates
a positive pull through demonstration effects, prompting similar decisions to start businesses by
people with no previous experience or relevant family backgrounds.
With respect to the magnitude and speed of major macro-economic reforms that paved the way for
the market-based economy, Poland emerged as the clear leader among transition economies in the
CEE region. As early as 1990, Poland put in force a set of radical regulatory changes that introduced
free-market mechanisms and eliminated protective measures for the state-owned sector. In other
countriesHungary and then the Czechoslovak Federated Republic (CSFR)the respective reforms
were introduced more gradually.
The empirical data that demonstrates the signifcant increase of the new entrepreneurial start-ups in
Poland during 1989-1992 seems to support the argument that the shock therapy during the initial
1 The COMPENDIA-23 countries are those originally included in EIMs COMPENDIA data base. The group includes the frst 20
countries listed in Table 1 of this paper (i.e. excluding the CEE countries), and Luxembourg, Iceland and Japan (Van Stel, Cieslik
and Hartog, 2010).
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phase of systemic transition was an important factor in the formation of the new private sector.
However, there were similar trends during this period in other CEE countries, particularly the Czech
Republic and Slovakia, where the overall pace of systemic transformation was much slower at that
time, suggesting that there were other important factors contributing to the expansion of the private
sector.
The effectiveness of the shock therapy versus that of gradual transition has been the subject of a
vivid economic and political debate, particularly in Poland, with strong voices of criticism pointing out
the unnecessary hardships of the shock therapy, particularly for the employees of the state-controlled
sector (e.g., Kolodko, 2000). Johnson and Loveman (1995) argued that, from the perspective of
the new private sector, the overall impact of the shock therapy was positive because it shaped the
macro-economic conditions that were necessary for accelerated growth. However, based on the
comparative analysis of specifc policy measures related to the development of the small business
sector in Hungary and Poland, Fogel and Zapalska (2001) found no evidence on the appropriateness
of macro-economic policies to suggest that slower or more gradual policies have overall a greater
positive effect on SME development and entrepreneurial growth (p. 50).
Similarly inconclusive fndings result from analyzing the impact of the overall business climate,
particularly the impact of ease of doing business on business ownership. Using the aggregated World
Bank index as a measure of the ease of doing business in 2009 (World Bank, 2009), at the bottom of
the list were both the Czech Republic and Poland, as the most heavily regulated of EU countries, with
the exception of Italy and Greece. Slovakia and Hungary, ranked in the middle of the list. Thus, the
rankings of the four countries in terms of ease of doing business do not correspond with the rankings
based on the level of business ownership. This conclusion does not necessarily refect transition-
specifc conditions but reinforces a more general argument raised by Van Stel, Storey and Thurik
(2007) regarding the rather insignifcant impact of administrative considerations on the level of
entrepreneurial activity.
The above literature review leads to the following hypothesis:
H7: The high speed and broad scope of market oriented reforms in Poland contributed positively to
bridging the gap in BO rates with the mature economies.
3. DATA
In this paper we use business ownership rates for 24 OECD countries, defned as the number of non-
agricultural business owners in a country divided by the size of the labour force. Business ownership
(self-employment) is defned as the total number of unincorporated and incorporated self-employed
outside the agriculture, hunting, forestry and fshing industries, who carry out self-employment as
their primary employment activity, see Van Stel (2005, p. 108). Unpaid family workers are excluded.
These data are taken from EIMs COMPENDIA data base (version 2009.1).
2
In this data base, self-
employment numbers as published in OECD Labour Force Statistics are corrected for measurement
differences across countries and over time and thus harmonized. In particular, in OECD Labour Force
Statistics owner-managers of incorporated businesses (OMIBs) are counted as self-employed in some
countries, and as employees in other countries. Also, the raw OECD data suffer from many trend
breaks relating to changes in self-employment defnitions over time. EIM has constructed a method to
correct for these inconsistencies (see Van Stel, 2005). For an update of the harmonization methods and
for detailed information regarding the specifcs of the business ownership data for the CEE countries,
we refer to Van Stel, Cieslik and Hartog (2010).
2 COMPENDIA is an acronym for COMParative ENtrepreneurship Data for International Analysis. See http://www.ondernemerschap.
nl for the data and Van Stel (2005) for a justifcation of the harmonization methods. This database has been used and acknowledged
widely (see, among other studies, Armour and Cumming, 2008, Carree et al., 2002, 2007, Davis, 2008 (p. 54), Koellinger and
Thurik, 2009, Nystrm, 2008, and Parker, Congregado and Golpe, 2011).
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4. RESULTS
4.1. Trends in BO rates 1989-2008 a comparative analysis
To test our hypotheses we have conducted comparative analysis of trends in BO rates -both actual
levels and dynamics of change- during the period 1989-2008. Taking into consideration the above-
mentioned mix of economic, institutional and cultural factors affecting the levels and trends in
business ownership rates, the countries originally included in the COMPENDIA data base (except for
Iceland, Luxembourg and Japan) have been divided into four major country groups (see Wennekers
et al., 2010): Mediterranean, Anglo-Saxon, Western European and Scandinavian. The ffth group
consists of four Central and Eastern European countries (CEE) which have recently been added to the
COMPENDIA data base.
Table 1 demonstrates remarkable developments in business ownership in the four Central and East
European (CEE) transition economies (the Czech Republic, Hungary, Poland and Slovak Republic)
since 1989. Radical changes in the levels of business ownership during the period under study were
combined with diversifed patterns, as BO rates evolved over time.
Insert Table 1 about here
After 45 years of communist dominance, during which period private business was disallowed or
tolerated only as a marginal addition to the state-ownership sector, and subsequently 20 years of
transitioning from a centrally-planned to a market economy, the CEE countries were able to catch
up with the mature Western economies in terms of the levels of BO rates. While in 1989 the average
(weighted) BO rate for the area comprising the four CEE countries was less than one third of the
COMPENDIA-23 average, by 2008 this gap had effectively been closed (Table 2; panel 1). At present
BO rates in Hungary, Slovak Republic and Poland are quite similar to those of Western European
countries, which are geographically and culturally close (Table 2; panel 2). The Czech Republic is
a clear exemption; with a very high rate it fts better to the Anglo-Saxon group. Taking into account
that very high BO rates in the Mediterranean countries are strongly affected by historic and cultural
factors which are specifc for this region, we may conclude that nowadays the CEE region as a whole
fts very well within a general pattern of business ownership rates in Europe (Figure 2).
Insert Table 2 about here
Insert Figure 2 about here
The most surprising outcome of the developments taking place in the course of transition from the
centrally-planned to a market economy system was that countries that lagged behind in business
ownership at the early stage of the transition process, the Czech and Slovak republics, eventually
emerged as the leaders in entrepreneurial activity, surpassing Hungary and Poland, which had a more
sizeable private sector under communism (Figure 3). As discussed in greater detail in Subsection
2.3. above, due to severe restrictions under communism, at the outbreak of systemic transformation
in 1989, the private business sector was practically non-existent in Czech and Slovak republics
(then Czechoslovakia). Nowadays (2008), Slovak Republic surpassed United Kingdom as to the
level of the BO rate, whereas Czech Republic emerged as a clear leader, lagging only behind two
Mediterranean countries traditionally showing exceptionally high business ownership rates, namely
Italy and Greece. An additional effect was that the levels of BO rates among CEE countries which
were extremely differentiated at the beginning of the transition process, have gradually converged
over time (Table 2; panels 3 and 4).
Insert Figure 3 about here
4.2. Actual vs equilibrium business ownership rates in the CEE countries
In the statistical analysis conducted in the previous Sub-section we have investigated the convergence
of BO rates in the CEE region with those achieved in other OECD countries during 1989 2008. In
this section we investigate to what extent the four CEE countries, since 1989, have converged towards
business ownership levels which are compatible with their levels of economic development. For
each stage or level of economic development one can think of a natural rate of business ownership
expressing the relative importance of scale economies, the importance of the service sector and several
other phenomena infuencing the average scale of production (Wennekers et al., 2010).
For this purpose we re-estimate (part of) the model by Carree et al. (2002, 2007). In particular, we
re-estimate the equilibrium relation between economic development and the business ownership
rate. Using this relation we are able to describe the patterns of convergence of the business ownership
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rate towards the equilibrium business ownership rate for the four CEE countries since 1989. For full
details of the econometric analysis we refer to the Appendix to this paper. In this section we will focus
on the implications for convergence.
According to our estimation results the equilibrium rate of business ownership can be written as
1
333 . 1 381 . 1
*
+
=
it
it
it
YCAP
YCAP
E , where YCAP is expressed in thousands of US dollars of price level
2000. Using this equilibrium relation, Tables 3a until 3d describe the convergence pattern of the (non-
agricultural) business ownership rate for the four CEE countries.
In 1989, at the end of the Communist period, business ownership (self-employment) levels in the four
CEE countries were relatively low. In particular, business ownership levels were lower than could
be expected on the basis of their level of economic development. From the last columns we can see
that convergence has clearly taken place: the difference between the equilibrium and actual business
ownership rate has decreased since 1992 (and indeed since 1989). In fact, for Czech Republic the
business ownership is even higher in 2008 than could be expected based on their per capita income
level. Slovak Republic has just recently converged towards the equilibrium rate, while convergence
in Hungary and Poland also occurs, but at a slower speed. Figure 4 shows the actual and equilibrium
business ownership rates for the four CEE countries in 2008. As a point of reference, the United
States is also included in the fgure.
Insert Table 3 about here
Insert Figure 4 about here
5. DISCUSSION
The results of the analysis contained in the preceding Section lead to a general conclusion that the
period of 45 years under communist rule, a system which ideologically and practically battled with
entrepreneurial initiatives, did not have prolonged negative effect on the private business sector
in the CEE region. What mattered most were the institutional and cultural roots or civilization
fundamentals. Based on those fundamentals, the CEE countries were able, within the relatively short
period of transition, to rebuild the entrepreneurial sector.
This is particularly refected in the gradual approximation of the BO rates in the CEE region with
the OECD (COMPENDIA-23) average (Table 2; panel 1): from 32.5% in 1989 to 98.7% in 2008.
This confrms Hypothesis 1: As all four countries under study belonged historically to the Western
Christendom, this facilitated rapid catching-up of BO rates with those prevailing in the mature market
economies while at the same time downplaying the role of communist heritage.
In Hypothesis 2 we speculated that: Due to historic and cultural links with some Western European
countries, BO rates prevailing in these countries form a historic benchmark to which CEE
region tended to approximate. Such trend is clearly visible for Hungary and Poland (Table 2; panel
2), whereas in the case of the Slovak and Czech republics their historical benchmark seem to
be the Anglo-Saxon countries. Such developments in the Czech Republic can be explained by the
strength of additional factors, namely its most intensive, among CEE countries, historic ties with
the Western civilization. In Hypothesis 3 we speculated that such historic roots provided most
favorable environment for catching up with respect to BO rates. Parallel to that was a relative high
rate of socio-economic development at the beginning of the transition period (Figure 1), compared
to other CEE countries under study which, as expected in Hypothesis 6, also contributed positively
to bridging the gap in BO rates with the mature economies. Indeed, the speed of catching up was
extremely fast. As exemplifed by the data contained in Table 2, Czech Republic has surpassed, in
terms of BO rate, the COMPENDIA-23 average already in 1996, reaching in 2008 a level 43% higher
than the said average.
As to the developments in the Slovak Republic, one shall also bear in mind that Czech and Slovak
republics have tradition of functioning as a two-nation state since 1918 and were separated only in
1993. Historically being less advanced, the Slovak Republic could beneft from continuing strong
economic, cultural and institutional ties with the Czech Republic, resulting in similar approaches to
rebuilding the private business sector after transition to a market economy system. Based on that we
consider Hypotheses 2, 3 and 6 as confrmed.
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Regarding the impact of past experiences with the private business sector under communism we could
distinguish between those countries having sizeable private sector at the outbreak of systemic transition
(Hungary and Poland) and countries where the private sector was practically non-existent (Czech
Republic and Slovak Republic). In Hypothesis 4 we speculated: Experiences with entrepreneurship
under the communist regime in Hungary and Poland contributed to the accelerated growth of BO
rates after transition. We have pointed out , however, that the positive impact of such experiences can
be limited due to the strong embeddedness in the past institutional environment.
The results of empirical analysis presented in the preceding Section (Table 1 and Figure 3) point out to
the complex nature of such a relationship. Clearly, the communist past helped in the rapid expansion
of the small business sector in Hungary and Poland in the early 1990s. Later on we could note a
saturation (Poland) or even decline of BO rates (Hungary). On the one hand this was the result of many
of the new business establishments closing after a short period, due to a lack of experience of their
owners, inadequate fnancing, uncertain fscal regulations, etc. At the same time incumbent private
frms could not adjust to the market economy system and ceased operations, despite being successful
under communism. Thus our analysis seem to confrm the fndings from the extant literature, referred
to in sub-section 2.3, that the entrepreneurial experiences accumulated under communism were not
much useful for growth of the private business sector after transition to a market economy system.
Based on the above we may conclude that Hypothesis 4 was partially confrmed.
Hypothesis 5 read: The narrowing gap as to the level of GDP per capita between mature market
economies and CEE countries during 1989-2008 contributed to the convergence of BO rates between
these two groups of countries. The fast increase in GDP per capita of the CEE countries implied
moving from an effciency-driven type of economy towards an innovation-driven type of economy,
where entrepreneurial opportunities are more abundant, especially in a transition context (Stam and
Van Stel, 2011). In this sense, the catching-up process in terms of economic development of the CEE
countries contributed to a catching-up process also in terms of business ownership.
Moreover, since in the long run countries tend to follow an equilibrium rate of business ownership
which is declining with economic development
3
, the fast increase in GDP per capita for the CEE
countries implied that their equilibrium BO rates were declining, contributing to a convergence
process between the actual and the equilibrium BO rates for the CEE countries (see Section 4.2).
We conclude that Hypothesis 5 is confrmed.
With respect to Hypothesis 7, the high speed and broad scope of market oriented reforms in Poland
contributed positively to bridging the gap in BO rates with the mature economies, the empirical analysis
leads to some observations which are similar to those related to Hypothesis 5. The substantial impact
of radical economic reforms introduced in Poland on BO rates could be noted during 1989-1991. The
shock therapy involving major privatizations and closures of many state-owned companies meant
the loss of hundreds of thousands of jobs deemed secure under the previous regime. In addition,
the winds of history spirit (Cieslik and Kaciak, 2009a) inspired many people to start their own
business. Later on, the impact of radical reforms seemed to vanish, which strengthens some doubts on
this subject, raised in the extant literature and discussed in subsection 2.5 (Fogel and Zapalska, 2001).
We may therefore conclude that Hypothesis 7 is partially confrmed.
Summing up the discussion of the results of the empirical analysis in relation to the hypotheses
developed in Section 2 we are able to confrm 5 out of 7 hypotheses. Two remaining hypotheses are
partially confrmed. It is interesting to note that the two hypotheses being only partially confrmed
relate to the developments under communism and during the 20 years of transition. This reinforces
the key conclusion derived from our analysis that what mattered most with respect to business
ownership rates were the historic economic, institutional and cultural ties with the Western world (the
civilization fundamentals).
3 Note that, whereas the relation between economic development and business ownership (a measure of incumbent entrepreneurship)
is mostly found to be L-shaped, the relation between economic development and measures of new-frm entrepreneurship such
as GEMs TEA rate, is often found to be U-shaped (see e.g. Kelley, Bosma and Amors, 2011). The high exit rates in modern
economies form the most likely explanation for these different patterns.
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6. POLICY IMPLICATIONS, LIMITATIONS AND RECOMMENDATIONS FOR FURTHER
RESEARCH
6.1. Policy implications
As latecomers, the CEE countries are in a privileged position as they may study trends in the
mature economies and assess the effectiveness of various policy measures aimed at enhancing
entrepreneurship. The accumulated body of policy-oriented entrepreneurship research can be helpful
in this respect, as well. Since the current entrepreneurship policy debate lacks a sound empirical
background, inclusion of these CEE countries in the harmonized COMPENDIA data base is very
important as it provides benchmark BO rates, useful for shaping entrepreneurship policies.
Based on the research presented in this paper we point out some conclusions and recommendations.
One of the key policy issues, to be addressed by the CEE policymakers, is whether they shall strive for
further increasing the general level of business ownership, which is in fact their most often declared
policy statement. Here we shall refer to the concept of the optimal business ownership rate (in
terms of achieving the highest GDP levels), estimated by Van Praag and Van Stel (2010) as being in
the range of 12.5%. Except for the Czech Republic, the remaining CEE countries achieved lower than
optimal business ownership rates, so far. However, Van Praag and Van Stel fnd the optimal rate
to decrease with higher participation levels in tertiary education.
4
This is generally a strongpoint of
the CEE region, particularly of Poland, which scholarization index ranks very high among European
countries (Central Statistical Offce, 2010, p. 27).
Assuming that the CEE countries are quite close to or above their optimal business ownership rates,
further increases of the total number of business establishments may not be justifed. Alternatively,
these countries should rather focus on the ambitious segments of entrepreneurship in view of their
potential contribution to the growth of GDP and employment (Stam and Van Stel, 2011). Here we have
in mind fast-growing, knowledge-based or innovation-driven frms, creative industries, exporters,
etc. In fact, some interesting trends have already become noticeable. We refer to Cieslik and Kaciak
(2009b), who demonstrate a signifcantly higher proportion of high-growth frms and gazelles among
Polish manufacturing SMEs, as compared to other OECD member countries (OECD, 2008).
While improving the general conditions for entrepreneurship development, CEE countries should
concentrate on the measures that reinforce positive effects of civilization fundamentals and
downplaying the role of communist heritage. This includes, inter alia, promoting good practices
regarding business ethics and corporate social responsibility (CSR). While shaping specifc instruments
and policy measures, due to historic ties, the accumulated experiences of Western European countries
seem to be particularly relevant.
6.2. Limitations and future research directions
The inclusion of the four CEE countries in the latest edition of the COMPENDIA data base shall be
seen as a frst step in the harmonization efforts regarding BO rates in transition economies. In view
of the distinct characteristics of their statistical systems, more work is required to make sure that the
differences as to the levels of the BO rates are not affected by methodological inconsistencies.
A major limitation of our study stems from the fact that it focused on quantitative aspects of
entrepreneurship development. To offer a more meaningful contribution, relevant for entrepreneurs
and policymakers, additional research on the qualitative dimensions of entrepreneurship development
in transition economies, will be necessary.
More specifcally, we need to explore in greater detail the distribution of entrepreneurial activity
by major categories: the size of informal versus formal entrepreneurship and the share of marginal-
scale entrepreneurial engagements, including those for which the business is a secondary activity,
dependent self-employment and those using commission and task contracts without registering the
business. The distribution between the solo-entrepreneurs and employers in each country is worth
considering as well.
An obvious limitation results from the concentration of our research on four CEE countries with very
similar historic and cultural traditions and relatively short (45 years) periods of communist rule. Thus
extention of the analysis to other members of the former Soviet Bloc is highly recommended. In the
case of such countries like Belarus, Russia and Ukraine we may expect a different picture as the key
4 Since their education implies a bigger span of control, higher-educated entrepreneurs optimize their profts by running larger frms
implying a lower number of business owners at the macro level.
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factors affecting entrepreneurship differ signifcantly from those observed in the four countries under
study: civilization fundamentals, experience with entrepreneurship under communism, the level of
socio-economic development and the speed of implementation of market-oriented reforms. On top of
that, those countries experienced communist rule over 70 years. This can be seen as a minor difference
with 45 years experienced by the Czech Republic, Hungary, Poland and Slovak Republic. It meant,
however, that three, rather than two generations of people could develop a homo sovieticus mindset
with potentially negative effects as to the initiatives to start and run own businesses.
Another group of countries worth studying are the Baltic States. Here one can expect similar patterns
as to the BO rates, compared to those identifed in the four CEE countries under study. In general,
broadening the scope by including countries representing different levels of economic and cultural
development would greatly enhance the prospects for a quality research on the trends in entrepreneurial
activity in a transition environment.
A very promising and largely unexplored research avenue on the former communist countries relates
to the historic coincidence of two fundamental developments that took place towards the end of the
twentieth century: the collapse of communism and the widespread dissemination of information and
communication technologies (ICT). As a general-purpose technology (GPT) that spreads across and
has profound effects on all key sectors of economic and social life (Bresnahan and Trajtenberg, 1995),
the ICT represents surely one of the great leaps in the history of mankind. What is of particular
importance in the context of business ownership is that the ICT revolutionparticularly Internet
technologieshas been extremely favorable to entrepreneurship initiatives because it has reduced
the negative effects of the liability of newness (Morse, Fowler and Lawrence, 2007). Particular
benefciaries of the ICT revolution are those new business owners in transition economies who have
the necessary skills to assimilate these technologies in starting and growing successful businesses
within a specifc environment of market conditions and physical infrastructure.
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Appendix: Re-estimating Carree et al. (2002, 2007)
The model
5
The main equation in the model by Carree et al. (2002, 2007) explains changes in the rate of business
ownership (self-employment) from an error-correction process towards equilibrium or natural
business ownership rates. A second equation acts as a defnition and describes the equilibrium rate
of business ownership as a function of economic development. Equation (1) relates the change in the
rate of business ownership
it
E to the extent in which this rate deviates from the equilibrium rate
*
it
E
, to which the unemployment rate
it
U deviates from the sample average unemployment rate and to
which the labour income share
it
LIQ deviates from the sample average income share. Equation (2)
describes the equilibrium relationship between business ownership rates and economic development
(
it
YCAP ) as either U-shaped (2a) or L-shaped (2b). In the quadratic form, entrepreneurship declines
with per capita income up till a minimum (when
it
YCAP equals 2 / ) after which entrepreneurship
increases with per capita income. In the inverse function, entrepreneurship gradually declines towards
an asymptotic minimum value (of ). In the frst equation the following notation is used:
4 4
=
t t t
X X X . The model reads as follows:
(1) ( ) ( ) ( )
it ITA ITA t i t i t i t i it
D b LIQ LIQ b U U b E E b E
1 6 , 3 6 , 2 4 ,
*
4 , 1 4
+ + + + =
;
(2a)
2 *
it it it
YCAP YCAP E + + = ;
(2b)
1
*
+
=
it
it
it
YCAP
YCAP
E ,
5 Apart from some minor adjustments, the description of the model, variables and data sources is taken over from Carree et al.
(2007).
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where
E: number of business owners per labour force,
E*: equilibrium number of business owners per labour force,
YCAP: per capita GDP in thousands of purchasing power parities per U.S. $ in 2000 prices,
U, U : unemployment rate and sample average, respectively,
LIQ, LIQ: labour income share and sample average, respectively,
D
ITA
: dummy variable with value 1 for Italy, and 0 for other countries,
1
: disturbance term
i, t: indices for country and year, respectively.
The rationale of the model
The variable to be explained in equation (1) is the growth in the number of business owners per labour
force in a four-year period. The parameter b
1
refects the speed of an error correction mechanism
between the equilibrium and the actual rate of self-employment at the start of the period and is
expected to have a positive sign. As control variables, unemployment and the labour income share are
included. Unemployment is expected to act as a push factor for self-employment and its expected sign
is positive. The labour income share is an (inverse) proxy for business proftability and its expected
sign is negative. Finally, we follow Carree et al. (2002) incorporating a dummy for Italy. Italy, and
Northern Italy in particular, is exceptional in the sense that a relatively high value of GDP per capita
is combined with a high and rising self-employment rate. The model is estimated by substituting the
defnition (2a) or (2b) into equation (1):
(3a)
it ITA ITA t i t i t i t i t i it
D b YCAP a YCAP a LIQ b U b E b a E
1
2
4 , 5 4 , 4 6 , 3 6 , 2 4 , 1 0 4
+ + + + + + =
(3b)
it ITA ITA
it
it
t i t i t i it
D b
YCAP
YCAP
a LIQ b U b E b a E
1
4
4
4 6 , 3 6 , 2 4 , 1 0 4
1
+ +
+
+ + + =
.
For this paper we are mainly interested in the parameter estimates of , and and these are
calculated as a reparametrisation of the parameters in (3a) and (3b):
(4a)
1 5 1 4 1 3 2 0
b / a b / a
b / ) LIQ b U b a ( = = + + = ,
(4b) ) /(
/ ) (
1 4 1 3 2 0
b a b LIQ b U b a = + + = .
Using these parameter estimates, variable E* can be computed (see equation 2).
Variables and data sources
E: Business ownership or self-employment is defned as the number of business owners (in all sectors
excluding the agricultural sector), expressed as a fraction of the labour force. Business owners include
unincorporated and incorporated self-employed individuals but exclude unpaid family workers. Data
on business ownership are taken from EIMs COMPENDIA data base (available through www.eim.
net). In COMPENDIA numbers of self-employed reported in OECD Labour Force Statistics are
harmonized across countries and over time. In the present paper version 2008.1 of the COMPENDIA
data base is used. See van Stel (2005) for an account of how an earlier version of this data set is put
together. Data on total labour force are from OECD Labour Force Statistics;
YCAP: Gross domestic product per capita. The variables gross domestic product and total population
are taken from OECD National Accounts and OECD Labour Force Statistics, respectively. GDP (in
thousands of US $) is measured in constant prices. Furthermore, purchasing power parities of 2000
are used to make the monetary units comparable between countries;
U: Unemployment rate. It is measured as the number of unemployed as a fraction of the total labour
force. The labour force consists of employees, self-employed persons, unpaid family workers, people
employed by the armed forces and unemployed persons. The main source for this variable is OECD
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Main Economic Indicators;
LIQ: Labour income share. It is defned as the share of labour income (including the calculated
compensation of the self-employed for their labour contribution) in the gross national income. Total
compensation of employees is multiplied by (total employment/number of employees) to correct for
the imputed wage income for the self-employed persons. Next, the number obtained is divided by
total income (compensation of employees plus gross operating surplus and gross mixed income). The
data of these variables are from OECD National Accounts.
Estimation results
Following Carree et al. (2002, 2007) we estimate the model using weighted least squares (with
population as the weight factor). Instead of the 23 OECD countries originally used by Carree et al.,
we now use data of 27 OECD countries to estimate the model, where the four CEE countries have
been newly added to the data base.
6
For the 23 original countries we use data for the years 1996,
2000, 2004 and 2008.
7
However, since the early years after the collapse of Communism cannot be
considered representative for the relation between economic development and self-employment in
the four CEE countries (as self-employment was artifcially low), we only use the last two years of
data (i.e., 2004 and 2008) for these four countries. Our sample then consists of 100 observations. The
results are presented in Table 4.
Table 4: Estimation results
Quadratic equilibrium rate:
equation (2a)
Inverse equilibrium
rate: equation (2b)
Equations (3a) and (3b), dependent variable: 4-year growth of business ownership rate
a
0
autonomous effect
0.057***
(3.6)
0.186**
(2.6)
b
1
error
correction
0.118***
(4.1)
0.111***
(3.9)
b
2
unemployment
0.023
(1.1)
0.027
(1.3)
b
3
labour income share
-0.060***
(3.6)
-0.052***
(3.3)
a
4
per capita GDP
-0.000189
(0.3)
-0.148**
(2.2)
a
5
per capita GDP
-2.54
E
-06
(0.2)
b
ita
Italy
0.013***
(3.4)
0.013***
(3.3)
2(a) and 2(b)
0.158**
(2.3)
1.381***
(9.3)
2(a) and 2(b)
-0.0016
(0.3)
1.333**
(2.0)
2(a) and 2(b)
-2.15
E
-5
(0.2)
minimum -
asymptote 0.048
R
2
adj
0.232 0.221
Note: Absolute t-values in parentheses. * Signifcant at 0.10 level; ** Signifcant at 0.05 level; *** Signifcant at 0.01
level. The number of observations is 100.
Since the Inverse model seems to perform somewhat better, we will use this model in the paper.
According to our estimation results the equilibrium rate of self-employment can then be written as
1
333 . 1 381 . 1
*
+
=
it
it
it
YCAP
YCAP
E , where YCAP is expressed in thousands of US dollars of price level
2000.
6 The 23 OECD countries originally used by Carree et al. comprise of the former EU-15, together with Iceland, Norway, Switzerland,
the United States, Japan, Canada, Australia and New Zealand.
7 Due to the four year lag in the model, the equilibrium relation between self-employment and economic development is actually
estimated using data for the years 1992, 1996, 2000 and 2004.
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List of Tables
Table 1. Non-agricultural business ownership rates in selected OECD countries, 1989-2008.
Country 1989 1996 2002 2008
Greece 0.188 0.197 0.190 0.198
Italy 0.198 0.208 0.207 0.204
Portugal 0.134 0.167 0.147 0.131
Spain 0.123 0.130 0.127 0.131
Mediterranean countries 0.166 0.177 0.172 0.168
Australia 0.158 0.159 0.158 0.145
Canada 0.105 0.128 0.124 0.120
Ireland 0.102 0.112 0.113 0.116
New Zealand 0.120 0.137 0.135 0.128
United Kingdom 0.113 0.112 0.104 0.115
USA 0.108 0.106 0.098 0.096
Anglo-Saxon countries 0.111 0.111 0.104 0.104
Austria 0.072 0.074 0.087 0.089
Belgium 0.111 0.119 0.115 0.111
France 0.099 0.086 0.079 0.086
Germany 0.071 0.082 0.086 0.097
The Netherlands 0.080 0.098 0.103 0.119
Switzerland 0.069 0.077 0.074 0.068
Western European countries 0.084 0.086 0.086 0.095
Denmark 0.060 0.064 0.067 0.070
Finland 0.081 0.080 0.079 0.088
Norway 0.081 0.071 0.065 0.084
Sweden 0.069 0.081 0.081 0.087
Scandinavian countries 0.071 0.075 0.074 0.083
Czech Republic 0.002 0.112 0.146 0.152
Hungary 0.061 0.120 0.103 0.097
Poland 0.046 0.077 0.077 0.091
Slovak Republic 0.001 0.053 0.065 0.117
Central and Eastern European countries 0.037 0.087 0.092 0.105
COMPENDIA-23 0.113 0.111 0.106 0.107
Source: EIM, COMPENDIA 2009.1 data base.
Note: Business ownership rates for the country groups are weighted averages of the underlying countries.
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Table 2. Comparative analysis of trends in BO rates during 1989 2008.
No. Description 1989 1996 2002 2008
1.
Average BO rates in the CEE countries as % of average
COMPENDIA-23, of which:
- Czech Republic
- Hungary
- Poland
- Slovak Republic
32.5
1.5
53.8
40.4
0.7
78.6
100.9
107.9
69.4
48.1
86.7
137.7
96.8
72.8
61.7
98.7
143.1
91.0
85.2
109.5
2.
Average BO rates in the CEE countries as % of average
Western European group, of which:
- Czech Republic
- Hungary
- Poland
- Slovak Republic
43.8
2.0
72.6
54.5
1.0
101.8
130.7
139.8
89.9
62.2
106.4
169.0
118.8
89.4
75.8
111.2
161.2
102.5
96.0
123.4
3.
Lowest BO rate as % of the highest BO rate within the
CEE country group
1.3 44.5 44.8 59.6
4.
BO rates in individual CEE countries as % of the average
BO rate for the CEE group as a whole
- Czech Republic
- Hungary
- Poland
- Slovak Republic
4.6
165.6
124.3
2.2
128.4
137.3
88.3
61.1
158.8
111.7
84.0
71.2
145.0
92.2
86.4
111.0
Source: EIM, COMPENDIA 2009.1 data base.
Note: Business ownership rates for the country groups are weighted averages of the underlying countries (see Table 1).
Table 3a: Actual and equilibrium self-employment rates, Czech Republic
Year
Per capita income
in US$ of 2000
Four-yearly growth
of per capita in-
come
Equilibrium SE
rate (E*)
Actual SE rate (E) E*-E
1989 N.A. N.A. N.A. 0.002 N.A.
1992 12798 N.A. 0.145 0.069 0.076
1996 14429 0.127 0.134 0.112 0.022
2000 14995 0.039 0.131 0.133 -0.002
2004 17054 0.137 0.122 0.151 -0.030
2008 20609 0.208 0.110 0.152 -0.043
Source: EIM, COMPENDIA 2009.1 data base, and own calculations.
Table 3b: Actual and equilibrium self-employment rates, Hungary
Year
Per capita income
in US$ of 2000
Four-yearly growth
of per capita in-
come
Equilibrium SE
rate (E*)
Actual SE rate (E) E*-E
1989 N.A. N.A. N.A. 0.061 N.A.
1992 9477 N.A. 0.175 0.085 0.091
1996 10001 0.055 0.169 0.120 0.049
2000 12114 0.211 0.150 0.110 0.040
2004 14549 0.201 0.134 0.112 0.021
2008 16022 0.101 0.126 0.097 0.029
Source: EIM, COMPENDIA 2009.1 data base, and own calculations.
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Table 3c: Actual and equilibrium self-employment rates, Poland
Year
Per capita income
in US$ of 2000
Four-yearly growth
of per capita in-
come
Equilibrium SE
rate (E*)
Actual SE rate (E) E*-E
1989 N.A. N.A. N.A. 0.046 N.A.
1992 6966 N.A. 0.215 0.068 0.148
1996 8619 0.237 0.186 0.077 0.109
2000 10568 0.226 0.163 0.080 0.083
2004 11896 0.126 0.151 0.078 0.073
2008 14706 0.236 0.133 0.091 0.042
Source: EIM, COMPENDIA 2009.1 data base, and own calculations.
Table 3d: Actual and equilibrium self-employment rates, Slovak Republic
Year
Per capita income
in US$ of 2000
Four-yearly growth
of per capita in-
come
Equilibrium SE
rate (E*)
Actual SE rate (E) E*-E
1989 N.A. N.A. N.A. 0.001 N.A.
1992 8253 N.A. 0.192 0.041 0.151
1996 9984 0.210 0.169 0.053 0.116
2000 10972 0.099 0.159 0.060 0.099
2004 13115 0.195 0.142 0.091 0.051
2008 17721 0.351 0.119 0.117 0.002
Source: EIM, COMPENDIA 2009.1 data base, and own calculations.
List of Figures
Figure 1: GDP per capita in four CEE countries, 1992-2008
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
Czech Republic Hungary Poland
Slovak Republic COMPENDIA-23
Source: EIM, COMPENDIA 2009.1 data base, based on OECD National Accounts and OECD Labour Force Statistics.
Note: GDP per capita is expressed in purchasing power parities per U.S. $ at 2000 prices. The COMPENDIA-23 level
of GDP per capita is included as a benchmark.
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Figure 2. Non-agricultural BO rates by major OECD country groups in 2008
0.00
0.03
0.06
0.09
0.12
0.15
0.18
S
c
a
n
d
i
n
a
v
i
a
n
c
o
u
n
t
r
i
e
s
W
e
s
t
e
r
n
E
u
r
o
p
e
a
n
c
o
u
n
t
r
i
e
s
A
n
g
l
o
-
S
a
x
o
n
c
o
u
n
t
r
i
e
s
C
E
E
c
o
u
n
t
r
i
e
s
M
e
d
i
t
e
r
r
a
n
e
a
n
c
o
u
n
t
r
i
e
s
Source: EIM, COMPENDIA 2009.1 data base.
Figure 3. Development in non-agrural business ownership rates in four CEE countries, 1989-2008.
CZECH REPUBLIC
HUNGARY
POLAND
SLOVAK REPUBLIC
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: EIM, COMPENDIA 2009.1 data base
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Figure 4. Actual and equilibrium business ownership rates in 2008
Equilibrium rate
US
HU
PL
SV
CZ
0.06
0.09
0.12
0.15
0.18
10000 15000 20000 25000 30000 35000 40000
YCAP
E
Source: EIM, COMPENDIA 2009.1 data base, and own calculations.
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WHY 20 YEARS AFTER TRANSITION THERE ARE NO LUXURIOUS GLOBAL BRANDS IN
POLAND
1
? COMPARISON WITH EMERGING MARKETS
Joanna Radziszewska
Warsaw School of Economics, Poland
E-mail: zuzia_radziszewska@poczta.fm
Abstract
Poland 20 years after the transition is fast growing economy. The society is enriching fast and at the same time
is eager to surround with luxury. For a long time luxury goods were unavailable for Polish, they didnt even
know luxury brands. Then they started to desire them, but didnt have fnancial resources. Now comes the time
when desire to consume match the fnancial possibilities.
Thereve been many changes on luxury market recently. Traditionally the most important markets for luxury
were supposed to be Western Europe, North America and Japan. In recent times the perspective is changing
customers from emerging markets are becoming more and more important. Brazil, Russia, India and China
are playing here special role. China has become the second biggest market for luxury. In the near future
emerging economies will contribute to 80% of growth in the luxury goods sector. Also Poland, although not as
spectacularly as China, is developing fast.
The aim of this paper is to analyze the economic development and social conditions of Poland, from the point
of view of luxury companies. The question is, why 20 years after transition despite dynamic development of
country the number of luxury companies is very limited. What are the factors which determine the attractiveness
of the market and what are the limits? The characters of Polish market were compared with BRIC markets,
which seem to be new capitals of luxury. Polish and BRIC markets were analyzed and compared according
to the theory of investment climate. Also conception of conspicuous consumption created by Thorsten Veblen
was very crucial.
Keyworlds:Luxury, Poland, emerging markets, BRICs
1 It is possible to buy luxury goods in Poland. However the choice is small, prices of products higher than of the same
goods in Western Europe. There are only 8 luxury boutiques in Warsaw, 4 in other cities. Luxury companies seem to
see Polish market as unattractive, less attractive than markets of Brazil, India, Russia or China.
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1. INTRODUCTION TO THE TOPIC
The situation on luxury market is changing recently very fast. The luxury is no longer available only
for the richest. Global companies started to create cheaper brands whose target is middle class. A
lot of not expensive branded accessories are sold (Sikora, 2010). Also the geographical dimensions
are changing. Luxury companies have become oriented at emerging economies, especially BRIC
countries. Among those new perspective markets Poland should be considered.
The aim of this paper is to analyze economic development and the social conditions of Poland, from
the point of view of luxury companies. The question is, why 20 years after transition despite dynamic
development of country the number of luxury companies is very limited. What are the factors which
determine the attractiveness of the market and what are the limits?
2. METHODOLOGICAL NOTE
The paper is based on literature, reports of industry organizations and articles from magazines. A very
crucial source was KPMG report about luxury in Poland, the frst such complex analysis. The company
conducted research as well among consumers of luxury as owners of luxury companies. Financial
information in the report was based on data from Ministry of Finance. Due to that fact author relies
on the report a lot. The topic is quite complex, existing literature resources are not enough to answer
the question with 100% certainty. The conclusions should be treated as author hypotheses, opened to
the discussion and further research.
The structure of the article consist of four parts. Firstly the characters of Polish market will be listed.
In second part theoretical framework will be presented. Then changes on the global luxury market
will be described, Polish market compared with BRICs markets. Finally the conclusions will be
drived and the title question answered.
Treating Brazil, Russia, India and China (BRIC countries) as one group of countries cause among
many researchers doubts. However BRIC countries have a lot in common. What link them are fast
economic development, enriching of society, rising consumption aspirations and lack of market
saturation. There is one more factor: the belief of western companies that they will bring profts to
them. However it cant be forgotten that they are still emerging countries with turbulent economic
environment and huge social stratifcation. They are treated as new markets for luxury: full of risks
but with perspectives of high profts. Entering Poland also brings perspective of high profts and
lower risks at the same time. It also could be new market for luxury. Author decided to compare those
countries with Poland because it is surprising, why global luxury companies see such potential in
BRIC countries and are not interested in better developed Poland. Basing on this comparison author
considers what makes market attractive for luxury.
For purpose of this article author defnes luxury brand as a brand which is selective, exclusive,
contributes emotional and creative value to the consumer. Moreover it needs to have an artistic
dimension, to be result of craftsmanship and to be international (Chevalier and Mazzalovo, 2008).
Other defnition stress factors that must be included to qualify a product as a luxury. Firstly, in order to
fulfll holistic experience an extravagant service is required. Luxury product should represent a dream:
functionality is one dimension but it is the dream which satisfes all senses. Finally luxury product
must stay current and be timeless by design and materials that age well (Kapferer and Bastien 2009).
Polish and BRIC markets will be analysed and compared according to the theory of investment
climate. Also conception of conspicuous consumption created by Thorsten Veblen was very crucial.
Finally concept of luxury spread in society will be shortly described. It helps to understand consumer
behavior, illustrates dependence between consumer taste and customs, economic development and
political system as well. It shows how consumption of luxury is becoming part of everyday life on
different markets. Despite those advantages it has many inaccuracies and because of that author
resigned from applying it in the article.
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3. LUXURY ON POLISH MARKET
There are three main factors determining demand for luxury goods. They are: number of people with
high income, the level of their income and eagerness to spend money on luxury goods. The other
determinant is supply of luxury brands on the market. Poland will be analyzed according to those
factors.
For purpose of this article consumers of luxury in Poland were divided because of the level of their
monthly income. The division was prepared in accordance with tax threshold. The frst group earns
between 920 1 800 euro/month, the second 1 800 5 000 euro/month, the third over 5 000 euro/
month. Luxury is also bought by people with lower income, but because of the marginal size of their
spending, they werent taken into account (KPMG report, 2010, pp. 23-25). The analyze doesnt
take into account the earnings of people active in shadow economy, which according to World Bank
amounts to almost 30 % of GDP
2
.
The level of earnings of Polish is growing Poland in years 2006 2008 noticed the highest in
Europe, amounting to 33%, growth of number of richest people, so called HNWI (high net worth
individuals)
3
. During last 10 years the number of people earning more than 1 800 euro by month
(gross) almost tripled. Their income level increased by 30%. It is estimated that in 2010 there was
606 thousands of them, their average income amounted to 3 750 euro. 50 000 of them have income
amounting to over 50 000 euro (KPMG report, 2010, p.23).
Figure 5: Number of people earning over 1800 euro/month in Poland (thousands)
Source: own scheme based on KPMG report 2011
Whats worth mentioning is the fast growth of number of rich, after the decrease due to fnancial
crisis in year 2009.
About 40% of spending for luxury in Poland belongs to people who earn less than 1800 euro/month.
There are 2 million people belonging to this group, their number doubled during last 10 years (KPMG
report, 2010, p.23).
2 http://bezrobocie.org.pl/wiadomosc/594405.html
3 KPMG report, pp. 7, HNWI earn at least 50 000 euro and has liquid assets with a value of 1 million dollars
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Figure 6: Number of people earning between 920 1800 euro/month in Poland (in millions)
Source: own evaluation based on KPMG report 2011
Consumers of luxury in Poland spend for luxury goods from 9% to 18% of their income. The frst
group spends around 9%, the second 15%, the richest spend even 18%. Its estimated that during
next two years the average spending for luxury can increase by 50% and arise to the level of 19% of
income of consumers (KPMG report, 2010, p. 25).
The economic crisis in year 2009 infuenced the level of spending for luxury of half of consumers.
The need for savings hit mainly the frst group, they reduced their spending by 30% comparing with
previous year (KPMG report, 2010, pp.7-8).
Table 1: Consumers of luxury in Poland
group
number
monthly gross in-
come (euro)
number of peo-
ple in 2009
number of
people in
2010
declared spending
on luxury goods
(% of income)
other
1 920 1 800 1 945 000
2 000 000
9%
From year 2000 the number
of people in this group
doubled. Their income level
rose by 50%.
2 1 800 5 000 543 000 555 000
556 000
15%
Between year 2000 and 2010
the number of people in this
group doubled. Their income
level rose by 40%.
3
over 5 000, fuid
assets with value of 1
million dollars
50 000 50 000
51 000
18%
From year 2006 till 2008
the number of people in this
group was arising at 10%
level. In 2009 it slowed a
little
Source: KPMG report 2010, 2011
Polish society is enriching dynamically. After over 40 years of communist leadership, and after hard
time of transition they desire to spend money, make their life comfortable, surround with beautiful
objects, use expensive and luxurious products. People want to live as elites in Western Europe do. The
demand of society to consume luxury is very high.
If it comes to availability of global luxurious brands in Poland only 53% of them
4
are present (KPMG
4 Out of 200 best known global luxurious brands which has been distinguished
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report, 2010, p.34). By presence author means either brand salon or multi branded store. Most brands
are cooperating with local partners and are being sold in their branded salons. Luxury can be divided
into three groups: cars, watches, clothes&accessories, the presence differs between each of them.
The presence in automobile industry is very high it amounts to 88% attendance rate. Almost all
brands have its representatives: Porsche, Bentley, Maybach, Jaguar, Aston Martin or Ferrari (KPMG
report, 2010, p. 35). If it comes to jewelry and watches 65% of the most famous brands can be bought
in Poland. Most of them have an offcial representative in Poland, only a few have its own brand
shops. Only 30% of clothes brands can be bought in Poland. They are sold in stores located in big
cities, mainly in Warsaw (KPMG report, 2010, pp. 37-47).
Luxury companies claim that there is a big problem with fnding appropriate place to locate boutique
in Poland. They dont want to be present in commercial centers or on shopping streets near popular,
cheaper brands.. A few luxury basins exist in Poland, for example Three Crosses Square or opened
in November 2011 vitkAC shopping center in Warsaw. However because of high demand the renting
prices are very high there, even for luxury companies (KPMG report, 2010, pp. 33-48). Some new
luxury shopping centers are being built. Klif center is planning to develop shopping malls dedicated
only for luxury (connected with entrance of Chloe, Dior, DKNy, Givenchy).
Only 30 % of luxury consumers live in mazowiecki region, where capital is located (KPMG report,
2011, p.5). Over half of them live in middle sized cities, only 31 % live in bigger towns (KPMG
report, 2010, pp. 56-57). The author opinion is that this lack of concentration can be seen as main
obstacle when analyzing attractiveness of Polish luxury market. That situation makes building brand
awareness diffcult and expensive. Many would be consumers dont recognize the global brands
and have no opportunity to see them in luxury boutiques. Due to the lack of brand awareness many
people doesnt see the need to buy expensive, unknown brands, even when they see them in shops in
Warsaw. The other result of this situation is proportionately lower revenues brought by each boutique.
One shop in a city meets demand only of a small part of potential customers. This situation makes
costs of activity higher than they are in countries with big territorial concentration of customers.
Luxury clothes brands are represented by Polish company Paradise Group. There are 12 luxurious
boutiques in Poland
(http://www.paradisegroup.pl), 8 of them in Warsaw. Its worth considering that
in such business and touristic places as Krakow and Wroclaw there are no luxury stores. Tourists
often buy luxury as souvenirs, also local businessmen would buy some luxury products, if they have
such possibility. While almost all of luxury stores are located in Warsaw only 30% of all potential
consumers of luxury have the possibility to visit them frequently.
Lack of competition makes luxury goods in Poland much more expensive, sometimes even twice
more expensive than the same goods abroad. Goods that are sold in Poland as luxury, are considered
abroad as popular and from lower shelf, offer in Poland is very limited. That encourages some Polish
to buy luxury abroad. Lowering the prices to European standards and widening offer would encourage
many new customers for shopping.
Lack of global brands on Polish market strengthens the local companies. The best known Polish brand
is Wittchen, who produce leather goods and accessories, Kruk third best known among worldwide
jewelry brands, vodka Belvedere, sport cars- Leopard or Zaremba company sewing suits on measure
for men. Wittchen company is planning to develop Polish luxury brands capital group. It will specialize
in leather goods and luxury accessories. At the moment there is Wittchen and Vip Collection in this
group, the president of the group is planning new acquisitions (Property News, 2011). Creating a
luxury group can strengthen the potential of companies and make them more successful in future.
4. INVESTMENT CLIMATE, CONSPICUOUS CONSUMPTION AND CONCEPTION OF LUXURY
SPREAD IN SOCIETY
Factors which make luxury companies eager to start activity on new market are not so clear. However
author decided that theory of good investment climate explains the subject fully (Stpniak, Umiski,
1993, p. 61). The theory presents motives of companies to invest on foreign markets. Factors creating
good investment climate can be divided into: economical, social, administrative and political groups
(Stpniak, Umiski, 1993, p. 61). Economical climate is created by present economic situation, by
forecasts for the future and by condition of infrastructure. Social climate is made by situation on the
labour market, welfare of society, customers group size, culture, shopping customs (for example
conspicuous consumption habit), brands knowledge. Administrative climate consists of tax politic,
control over transfers of income and law regulating entrepreneurship. Political conditions consist of
political stability, privileges granted for foreign investors, protection of intellectual property. Good
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investment climate determines if the market is seen as attractive for investors or not. Polish and BRIC
markets will be analyzed according to those determinants.
When talking about luxury concept of conspicuous consumption is particularly important. According
to Veblen people consume not only to maximize individual satisfaction but also to build its position
in society. Preferences are determined socially in relation to position in social hierarchy (Trigg 2001,
p. 99). There are two ways in which person can display its wealth: through leisure activities and
through high expenditures on consumption and services. The common feature of those activities is
fact of wasting time and money. By taking part in such activities the leisure class show its status
and wealth. Spending money on consumption due to indicate somebodys wealth to other members of
society is called by Veblen conspicuous consumption. Its claimed that this type of consumption is the
most important factor determining consumers behavior. Veblen claims that its shaping behavior as
well of the rich as the other social classes. Each social class tries to emulate the consumption behavior
of the class above it, even the poorest are under the pressure to consume for show. The search for
status never ends. In order to distinguishe from others people always try to own more (Trigg 2001,
p. 101). The necessity to consume conspicuously is often the main reason of buying luxury products.
Conspicuous consumption is tightly connected to the scheme of luxury spread in society. The process
is divided into fve phases. In each of them luxury is becoming more familiar to the society. The
theory assume that in frst stage of development the society is poor, ruled by the authoritarian regime,
basic goods are missing. In second phase socio-political changes take place. They allow dynamic
economic growth and thus enrichment of a wide part of society. The middle class is growing, the
wealthier elites start to buy some luxury products. In next phase conspicuous consumption takes
place. Wealthy elites are purchasing a lot of luxury goods and consuming it ostentatiously. Social
discrepancies are growing. In the next phase society is getting used to luxury, elites dont demonstrate
the fact of owning so much. However, possessing luxury goods is still indicator of status. The fnal
phase begins when people are used to luxury and consume it discretely, for their own pleasure. Elites
appreciate the high quality and original design, they are no longer satisfed with other goods than
luxury ones (Chadha and Husband, 2007, pp.43-47).
Its very diffcult to decide in which phase Poland or BRIC countries are. The societies in those
countries are enriching fast- because of that some groups of people are in frst phase, and the other
even in fourth. The process is in fact very fuent and for sure further, detail research is needed to
decide which country is in which stage of development. Because of that this model will not be used
in further parts of article.
5. SITUATION ON GLOBAL LUXURY MARKET
Traditionally the most important markets for luxury were supposed to be Western Europe, North
America and Japan. However in recent times the perspective is changing customers from emerging
markets are becoming more and more important. Brazil, Russia, India and China are playing here
special role. According to forecast of Goldman Sachs the GDP of above mentioned countries in year
2040 will be higher than GDP of actually leading countries: USA, Japan, Great Britain, Germany,
France and Italy (Wilson, 2003). Emerging economies will contribute in the near future to 80% of
growth in the luxury goods sector (Curtin, 2009).
The most perspective market is China. According to the World Luxury Association in 2009 Chinese
have consumed 27.5% of luxury goods sold around the world, which gave a value of 9.4 billion
dollars. It places China as second, after Japan (share of 29%), biggest market for luxury. At the same
time Europe amounted to 18% of share, United States 14%. The Association estimates that in year
2012 Chinese will spend for luxury 14, 5 billion dollars (without luxury cars, yachts and planes),
which will place them at frst place in global ranking (Yang, 2010).
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Figure 1: Consumers of luxury in 2040 Figure 2: Consumers of luxury in 2009
Source: own scheme based on Goldman Sachs forecast Source: own scheme based on World Luxury Association
data
6. POLAND AND BRICS MARKETS COMPARISON OF FACTORS DETERMINING SUCCESS
OF LUXURY BRANDS
Poland and BRIC countries have a lot in common: as well advantages as barriers. In this part author
will compare characteristics of those markets. The comparison will show the reason why BRIC
countries are seen as more attractive to invest than Poland is.
There are many factors attracting foreign companies to BRIC countries. One of them can be number
of residents in those countries. Compared with 1, 3 billion inhabitants in China, 1, 15 billion in India,
193 million in Brazil or 141 million in Russia, Poland with its 40 million society seems to be very
small market (World Bank, 2009).
What links together societies of Russia, India and China is conspicuous consumption. Possession
of branded products has become an alternative system of prestige. Social status is achieved largely
through consumption on the show (Chevalier and Xiao Lu, 2009). In Brazil this phenomenon is not
so popular, in Poland such behavior is seen as a bad taste. Polish consume rather discretely, at home,
for their own pleasure. Whats more Polish society is far more egalitarian than societies of BRIC
countries. Surprisingly for luxury companies its not advantage. The bigger the social stratifcation,
the more visible the richness of the fnancial elites is. Social stratifcation links with conspicuous
consumption the bigger social differences, the more intensive conspicuous consumption. Author
opinion is that this is important reason why each of BRIC countries is seen as more attractive than
Polish market is. Lets describe those markets.
The luxury goods market in Brazil is limited appropriately to Sao Paolo, where 50% of all luxury
consumers in the country live (Rumsey, 2009). The population of billionaires amount for 30 people
(Forbes, 2011). The middle class is still small, so does its consumption-needs. Brazilians dont know
global brands and dont see the necessity to buy them (Rumsey, 2009). High import tariffs double
the price of luxury products in Brazil. However, due to visa and huge distances within the Brazil,
Brazilians rarely go abroad. On the one hand it increases the demand for products sold in the country,
on the other lack of traveling contribute to the ignorance of brands knowledge and lack of motives to
encourage their purchase (CPP Management Consultants, 2009).
Russian fnancial elites spend large sums quite spontaneously. Many Russians make purchases
abroad but the vast majority still uses the Moscow boutiques. In Moscow live 79 billionaires, it is
the biggest such cluster of wealthy people in the world (Forbes, 2011). The disadvantage of Russian
wealth, however, is its instability. Since their origin is most often associated with natural resources,
fuctuations in world markets results in regular changes in their properties. Hence, the fast rotation on
the list of Russian millionaires. The middle class is growing fast, so does its consumption necessities
(The luxury goods market in Russia, 2007).
In India live 50 billionaires (Forbes, 2011). Middle class is numerous and their number is growing
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fast. So does its consumption needs. Due to high prices and relatively small choice of luxury goods
in India the richest customers make shopping abroad ( Seidel, 2010). However middle class and
businessmen still buy in country. Because of lack of territorial concentration of customers in India
its hard to reach all of them. Due to that more and more companies are opening Internet shops.
In China live 115 billionaires (Forbes, 2011). Comparing to 2009 the number increased more than
four times in that year China was inhabited by 28 billionaires (Forbes, 2010). However the average
luxury consumer is not so rich. It is a person between 20-40 years old, earning between 732 7320
dollars (Yang, 2010), often spending family savings
5
. Even if the average spending of each consumer
in China is not high, a large number of buyers make huge profts of the company. Chinese buy many
goods abroad, during the trips in previous year they spend for luxury in Europe 50 billon dollars
(Rzeczpospolita, 2011).
Another important factor contributing to market attractiveness is law transparency. Transparent law
makes it easier and safer to invest on the market. The situation is good in Poland, India and Brazil, the
law is unclear in Russia and China. The big impediment of being present on China market is lack of
respect for intellectual values, rampant piracy and unclear rules of competition. Also counterfghting
lowers the benefts of companies and destroys the brand image. Fake products are more and more
similar to original ones which make fghting with them even more diffcult. Russian market is also
hard to predict the company can not be sure how the law will be interpreted (Chevalier and Xiao Lu,
2009). Due to the instability of Russian market, international companies were present there for a long
time only through local distributors. Nowadays more and more of them decide to be present directly
(Report Russia, 2007).
Very crucial element creating demand for luxury is level of duties imposed on import of products of
higher order. In India and Brazil its very high, sometimes can reach even 60% of value of the object
(Rumsey, 2009). It lowers the demand and encourages to make shopping abroad. In other BRIC
countries its moderate and doesnt infuence demand so much. If it comes to costs implied by state
China has to be mentioned. Functioning on this attractive market further facilitates the favor of the
authorities who are reducing entrance barriers and are ensuring a privileged position. Also the owners
of prestigious shopping centers due to attract foreign brands offer very favorable terms. Shopping
places are rented on very low prices, the renovation and decoration costs are often fnanced by shop
owners (Jing Daily, 2010). The situation looks totally different in India. Lack of proper infrastructure
has been the main problem that foreign companies met when entering the market. Shopping malls and
streets didnt exist there, all trade took place on markets. Companies at the beginning were opening
boutiques in exclusive hotels. A few exclusive locations have been recently opened but the renting
prices are much more expensive than in Europe (Ridge, 2010, p.12). Also in Poland infrastructure is
often said to be main obstacle preventing luxury companies from entering the market. In Russia exist
a lot of exclusive boutiques, also in Brazil the infrastructure is well developed.
Table 3: Factors determining attractiveness of market