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First REDETE Conference
ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP
IN TRANSITION ECONOMIES:
A Review of Current Policy Approaches
CONFRENCE PROCEEDINGS
Banja Luka,
October 27-29, 2011
ISSN 2233-1034
International Conference
ECONOMIC DEVELOPMENT AND
ENTREPRENEURSHIP IN TRANSITION
ECONOMIES:
A Review of Current Policy Approaches
1
st
REDETE
2011
Publisher:
Faculty of Economics, University of Banja Luka
Majke Jugovica 4
78 000 Banja Luka, RS, BiH
Phone: + 387 51 430 012
Fax: + 387 51 430 053
For the Publisher:
Novak Kondić, Dean
Managing Editors:
Jovo Ateljević,
Branka Zolak Poljašević
Reviewers / Editorial Board:
Peter Rosa, UK
Anna Rogut, Poland
Jelena Budak, Croatia
Darko Petković,BiH
Saša Petković, BiH
Biljana Predić, Serbia
Kiril Todorov, Bulgaria
Nexhbi Veseli, FYRO
Macedonia
Ljubinka Joksimović, Serbia
Nikola Vukmirović, BiH
Bojan Zečević, Serbia
Ljiljana Eraković, NZ
Vassilios Fouskas, UK
FriederikeWelter, Sweden
Donato Iacobucci, Italy
Markus Kittler, UK
Irena Ateljević, Netherlands
Dejan Jović, Croatia
Marjan Svetličić, Slovenia
Tony O’Rourke, UK
Željko Vaško, BiH
Organizing Committee:
Jovo Ateljević, Chairperson
Branka Zolak Poljašević, Conference secretary
Željana Jovičić
Jelena Rožić
Marijana P. Milić
Mario Milanović
Bojana Popović
Dragana Šobot
Dragana Došenović
Milena Dobrnjac
Tatjana Vučić Rogić
Typesetting:
www.eradovi.com
Cover Design:
www.eradovi.com
Economic Development and Entrepreneurship in
Transition Economies:
A Review of Current Policy Approaches
First REDETE Conference
Proceedings:
PDF on CD ROM with full papers
Edited by:
Faculty of Economics, University of Banja Luka
Banja Luka, October 27-29, 2011
Copyright © Faculty of Economics in Banja Luka, Banja Luka, 2011
All rights reserved.
No part of this publication may be reproduced, stored in retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of
the Faculty of Economics, University of Banja Luka.
UDC 330.34(100)(063)
ISSN 2233-1034
First REDETE Conference
Economic Development and Entrepreneurship in Transition Economies:
A Review of Current Policy Approaches
Under the support of:
Government of Republic of Srpska
Minister of Science and Technology
Professor Jasmin Komić, PhD
Programme Committee:
Jovo Ateljević, Chairperson (RS-BiH)
David Smallbone, Chairperson (UK)
Peter Rosa, UK
Anna Rogut, Poland
Jelena Budak, Croatia
Darko Petković,BiH
Saša Petković, BiH
Biljana Predić, Serbia
Kiril Todorov, Bulgaria
Nexhbi Veseli, FYRO
Macedonia
Ljubinka Joksimović, Serbia
Nikola Vukmirović, BiH
Bojan Zečević, Serbia
Ljiljana Eraković, NZ
Vassilios Fouskas, UK
FriederikeWelter, Sweden
Donato Iacobucci, Italy
Markus Kittler, UK
Irena Ateljević, Netherlands
Dejan Jović, Croatia
Marjan Svetličić, Slovenia
Tony O’Rourke, UK
Željko Vaško, BiH
VII
CONTENTS
SPONSORS ............................................................................................................................................... XII
FORWARD ................................................................................................................................................ XIII
AGRICULTURE LENDING IN BOSNIA AND HERZEGOVINA - FROM THE EXPIRIENCE
OF IFAD PROJECTS .............................................................................................................................. 1
ALEKSANDRA FIGUREK; HALIL OMANOVIĆ; NATAŠA KOSIĆ; ŽELJKO VAŠKO
OPPORTUNITIES FOR FINANCING THE SMALL AND MEDIUM – SIZED BUSINESSES
IN THE REPUBLIC OF MACEDONIA ............................................................................................... 12
FANKA RISTESKA; GORDANA VITANOVA; MARJAN ANGELESKI; TATJANA SPASESKA
MECHANISM OF FINANCING SMES IN SERBIA AS MID-TRANSITION ECONOMY .......... 20
BRANKO Z. LJUTIC; IVANA B. LJUTIC ; PREDRAG MARJANOVIC
THE SME FINANCING GAP IN SLOVENIA: A MACROECONOMIC PERSPECTIVE ON A
MICROECONOMIC SME FINANCING PROBLEM ....................................................................... 28
BARBARA MÖREC; MATEVŽ RAŠKOVIĆ
BUSINESS ANGELS: ISSUES, EVIDENCE, AND IMPLICATIONS FOR TRANSITION
ECONOMIES ........................................................................................................................................... 43
CHRISTINE MITTER
BUSINESS ANGELS IN MACEDONIA ............................................................................................... 53
ANGELINA TANEVA-VESHOSKA; LAZAR GJUROV; LJUBOMIR DRAKULEVSKI; SLAVICA
TRAJKOVSKA
THE ROLE OF FINANCIAL SUPPORT FOR SME DEVELOPMENT IN REPUBLIC OF
MACEDONIA .......................................................................................................................................... 60
ANETA RISTESKA; MIROSLAV GVEROSKI; STEVCO DIMESKI
THE HARMONIZATION OF ACCOUNTING REGULATIONS OF CROATIAN SMALL
ENTERPRISES WITH ACCOUNTING REGULATIONS OF THE EU ......................................... 67
JASENKA BUBIĆ; PETAR PEPUR
THE ORGANIZATION OF MANAGEMENT ACCOUNTING IN SLOVAKIAN SMALL AND
MEDIUM SIZED ENTERPRISES ........................................................................................................ 73
STEFAN MAYR
DOING BUSINESS IN RUSSIA: LESSONS FOR MANAGEMENT ACCOUNTING ................... 81
BIRGIT FELDBAUER-DURSTMUELLER; CHRISTINE MITTER; KSENIA KEPLINGER
FOSTERING ENTREPRENEURSHIP AND INNOVATIONS THROUGH THE
INTERNATIONAL ACCOUNTING STANDARDS - RECOMMENDATIONS FOR SMEs
AND POLICY MAKERS IN B&H ........................................................................................................ 90
DENIS TURKANOVIĆ; NIKOLA VUKMIROVIĆ
CORRUPTION AS AN OBSTACLE FOR DOING BUSINESS IN WESTERN BALKANS: A
BUSINESS SECTOR PERSPECTIVE .................................................................................................. 95
EDO RAJH; JELENA BUDAK
THE IMPORTANCE OF CORRUPTION SUPPRESSION FOR APROACHING BOSNIA AND
HERZEGOVINA TO EUROPEAN UNION ........................................................................................ 104
BRANKA TOPIĆ-PAVKOVIĆ; TAJANA SERDAR
LOCATING ENTREPRENEURIAL CREATIVITY AND KNOWLEDGE TO FOSTER
GROWTH OF EUROPEAN CITIES .................................................................................................... 114
ARNIS SAUKA; EVGENII DAINOV
PART ONE: FINANCE, ACCOUNTING, CORRUPTION
PART TWO: ENTREPRENEURSHIP, INOVATION, CREATIVITY
VIII
A COMPARATIVE ANALYSIS OF THE NATIONAL INNOVATION PERFORMANCE:
R.MACEDONIA AND SELECTED BALKAN COUNTRIES IN CONTEXT OF EUROPA 2020
STRATEGY .............................................................................................................................................. 124
SINIŠA CVETKOVIĆ
INNOVATION AND ECONOMIC DEVELOPMENT – CORRELATIONS AND
CONDITIONS .......................................................................................................................................... 136
GADAF REXHEPI; SELAJDIN ABDULI; SHQIPE GERGURI; VELAND RAMADANI
ENTREPRENEURIAL PROPENSITY AS A GENERATOR OF TOURISM SUPPLY ................... 148
TOMISLAV KLARIN
FACTORS CONTRIBUTING TO THE MOBILITY OF INTELLECTUAL CAPITAL
EXAMPLE FROM BOSNIA AND HERZEGOVINA.......................................................................... 158
JOVO ATELJEVIĆ; ZORAN CRNČEVIĆ
INNOVATION IN THE PUBLIC SECTOR THE WAY FORWARD FOR AN EFFECTIVE
REFORM OF PUBLIC SECTOR MANAGEMENT IN BOSNIA AND HERZEGOVINA ............ 184
ILIJA STOJANOVIĆ; JOVO ATELJEVIĆ
ENTREPRENEURSHIP IN THE CREATIVE INDUSTRY ............................................................... 200
BRANKO ĆIRIĆ; MARKO TRMČIĆ; SNEŽANA TRMČIĆ
DECREASE POVERTY THROUGH ENTREPRENEURSHIP PROMOTION AND
COMMENCEMENT OF FAMILY BUSINESS .................................................................................... 212
MARINA RADOSAVLJEVIK BOJCEVA; ZORAN TEMELKOV
CHARACTERISTICS OF ENTREPRENEURIAL ACTIVITIES IN TRANSITIONAL
COUNTRIES AND THEIR INFLUENCE ON DEVELOPMENT ..................................................... 219
BOJAN LEKOVIĆ ; BOZIDAR LEKOVIĆ ; SLOBODAN MARIĆ
DEVELOPING MACEDONIA’S ENTREPRENEURIAL CAPACITY:
THE MISSING LINKS ........................................................................................................................... 232
BISERA GJOSEVSKA
DEVELOPMENT OF ENTREPRENEURSHIP AND GOING OUT FROM A VICIOUS
CIRCLE OF POVERTY ......................................................................................................................... 241
ELA VUKMIROVIĆ; NIKOLA VUKMIROVIĆ
CONTEXTUAL INFLUENCE ON THE ENTREPRENEURSHIP POVERTY REDUCTION
RELATIONSHIP IN NIGERIA: A MULTIVARIATE ANALYSIS .................................................... 247
YEKINI ELUJOBA
MANAGING INTERRELATIONS BETWEEN FAMILY AND BUSINESS .................................... 254
EMIL PAPAZOV; ILIYA KEREZIEV; KIRIL TODOROV; KOSTADIN KOLAROV
FAMILY BUSINESS REPRESENTATIONS IN POPULAR CULTURE:
THE CASE OF RUSSIA .......................................................................................................................... 264
BIRGIT FELDBAUER-DURSTMUELLER; KSENIA KEPLINGER
CHALLENGES AND PROBLEMS OF BUSINESS SUCCESSION IN BULGARIAN
FAMILY FIRMS ...................................................................................................................................... 273
ASEN ASSENOV; ILIYA KEREZIEV; KIRIL TODOROV; YORDANKA IVANOVA
HOW TO EVALUATE THE IMPACT OF ACADEMIC SPIN-OFFS ON REGIONAL
DEVELOPMENT .................................................................................................................................... 284
ALESSANDRA MICOZZI; DONATO IACOBUCCI
TRIGGERING INNOVATION IN THE RESEARCH COMMUNITY ............................................. 297
ELIZABETA ZIRNSTEIN; MITJA RUZZIER; PETER FATUR
ENTREPRENEURIAL BEHAVIOUR AMONG STUDENTS – CASE STUDY OF
UNIVERSITY OF DONJA GORICA, PODGORICA, MONTENEGRO ......................................... 304
DRAGANA RADEVIC; SANDRA TINAJ
PART THREE: FAMILY BUSINESS, EDUCATION, CULTURE, GENDER
IX
WOMEN ENTREPRENEURSHIP IN A FASHION INDUSTRY ...................................................... 312
DANIJELA PERKUŠIĆ MALČOK; KATJA RAKUŠIĆ CVRTAK; SENKA BOROVAC ZEKAN
THE TESTING OF STRATEGIC MODEL OF POSITIONING OF A NEW PRODUCT
OF A SMALL ENTERPRISE OF A COUNTRY IN TRANSITION ON THE GLOBAL
MARKET .................................................................................................................................................. 322
IVANA ŽILIĆ; NEVEN ŠERIĆ; STJEPAN KALINIĆ
PROCESS-ORIENTED ORGANIZATION OF PUBLIC UTILITY COMPANIES HAVE
BETTER BUSINESS PERFORMANCE THAN FUNCTION ORIENTED ORGANIZATION .... 328
ANITA KROLO CRVELIN; IVAN PERONJA
STRATEGIC MANAGEMENT OF ENTREPRENEURIAL CULTURE.......................................... 333
ANĐELIJA PLAVŠIĆ; MILICA PAUNOVIĆ
THE NETWORKING STRATEGIES’ CONTRIBUTION TO THE SMALL AND MEDIUM
SIZED ENETERPRISES’ PERFORMANCES .................................................................................... 341
BILJANA PREDIĆ; DANIJELA STOŠIĆ
WORKING CONDITIONS AND EFFICIENCY IN MANUFACTIRING ENTERPRISES OF
THE SPLIT-DALMATIA COUNTY (REPUBLIC OF CROATIA) ................................................... 357
MARIO BOGDANOVIĆ; ŽELJKO MATELJAK
QUALITY OF MANAGEMENT AS A FACTOR OF FIRM MARKET EXIT IN DIFFERING
MACROECONOMIC ENVIRONMENTS ........................................................................................... 373
KSENJA PUŠNIK; MAKS TAJNIKAR; NINA PONIKVAR; PETRA DOŠENOVIĆ BONČA
EVALUATING MERGERS AND ACQUISITIONS (M&A) AS A FORM OF COMPANY
RESTRUCTURING ................................................................................................................................ 384
DRАGАN МILОVАNОVIĆ
COGNITIVE CAPITALISM AND CONTROL OF AN INCREASINGLY AUTONOMOUS
LABOR FORCE IN ORGANIZATION ................................................................................................ 395
ALEKSANDAR KEŠELJEVIĆ
THE PRODUCT MARK-BRAND AND ITS ASSESSMENT IN THE MACEDONIAN
MARKET .................................................................................................................................................. 399
JUSUF ZEKIRI; NEXHBI VESELI
USING SOCIAL NETWORKS IN A SMALL BUSINESS ENTREPRENEURSHIP ....................... 414
KATJA RAKUŠIĆ CVRTAK; NEVEN ŠERIĆ; SENKA BOROVAC ZEKAN
CUSTOMER SERVICE AS A FACTOR OF COMPETITIVENESS OF RETAIL
COMPANIES ........................................................................................................................................... 422
JELENA CUGUROVIĆ; KATARINA BORISAVLJEVIĆ
THE ROLE OF BRANDING IN SMES: DIFFERENT PERSPECTIVE ON THE MARKET ...... 432
FRANC VIDIC; JAKA VADNJAL
TECHNOLOGY AND INNOVATION DYNAMICS: MODEL FOR ECONOMIC
DEVELOPMENT IN TRANSITION ECONOMIES ........................................................................... 441
TATJANA VUCIC ROGIC
IMPACT OF TRADE ON DEVELOPING COUNTRIES OF SOUTHEAST EUROPE ................. 453
ALEKSANDAR ŽIVKOVIĆ; JELENA PETROVIĆ; PERO PETROVIĆ
GLOBALIZATION PROCESS AND THE IMPACT ON INEVESTMENT IN ALBANIA ............ 462
IRMA SHYLE; JONIDA TETA
SOCIAL ENTREPRENEURSHIP IN POLAND’S CENTRAL AND REGIONAL POLICY
IN THE ASPECT OF FINANCIAL EFFECTIVENESS ..................................................................... 471
MARIAN OLIŃSKI
PART FOUR: STRATEGIES AND BUSINESS DEVELOPMENT
PART FIVE: REGIONAL DEVELOPMENT, GOVERNMENT
X
COMPARATIVE ANALYSIS OF FACTORS FROM MARKETING AND LEGAL
PERSPECTIVE AND POLICIES THAT AFECT SMES IN MACEDONIA AND EU .................... 477
BILJANA CONEVSKA; TAMARA JOVANOV MARJANOVA
STRATEGIC APPROACH TO PERIPHERAL AREAS DEVELOPMENT THROUGH
SMALL BUSINESS ENTREPRENEURSHIP ...................................................................................... 490
BLAGOJ GORGIEVSKI
TRENDS IN PRODUCTION AND PROCESSING OF MEAT IN
THE REPUBLIC OF SRPSKA .............................................................................................................. 499
ALEKSANDAR OSTOJIĆ; GORDANA ROKVIĆ; LJILJANA DRINIĆ; NEBOJŠA NOVKOVIĆ
INSTITUTIONAL SUPPORT FOR ENTREPRENEURSHIP AND SMEs DEVELOPMENT:
AN EMPIRICAL STUDY ON REPUBLIC OF SRPSKA (BOSNIA AND HERZEGOVINA) ........ 506
SAŠA PETKOVIĆ
THE CORRESPONDENCE OF PUBLIC POLICIES IN THE REPUBLIC OF MOLDOVA
TO THE DEVELOPMENTAL NEEDS AND PROBLEMS OF SMEs .............................................. 528
ELENA ACULAI
COMMERCIAL DIPLOMACY IN PRACTICE: EXPERIENCES OF INTERNATIONAL
BUSINESS EXECUTIVES AND RESPRESENTATIVES .................................................................. 537
HUUB J.M. RUËL; SIRP DE BOER; WOUTER TEN HAAF
SHAPING THE PATH? LEARNING EFFECTS ON ENTERPRISE POLICY
DEVELOPMENT IN POST-COMMUNIST ALBANIA ...................................................................... 547
MIRELA XHENETI
THE POSITIVE AND NEGATIVE ASPECTS OF FISCAL POLICY IN IMPROVING THE
BUSINESS ENVIRONMENT ................................................................................................................ 561
STEVAN GABER
THE ROLE OF LOCAL GOVERNMENT IN ENHANCING ENTREPRENEURSHIP
ON EXAMPLE OF POLISH TOWNS .................................................................................................. 568
EWA GLINSKA; TADEUSZ POPLAWSKI
IS CORPORATE SOCIAL RESPONSIBILITY THE WAY TO NON-PROFIT SECTOR
SUSTAINABILITY? ................................................................................................................................ 579
JAROSLAVA NĚMCOVÁ
MAPPING OF REGIONAL CLUSTERS IN SERBIA ........................................................................ 590
DRAGIŠA MIJAČIĆ
AND SUPPORTING FACTORS FOR THE SME COMPETITIVENESS ........................................ 597
KALOYAN GANEV ; RALITSA SIMEONOVA-GANEVA; ZHELYU VLADIMIROV
THE ANALYSIS OF KEY CHALLENGES AND CONSTRAINTS TO THE STABILITY AND
GROWTH OF AN ENTREPRENEURIAL SECTOR IN SERBIA .................................................... 614
MAJA DJUKIĆ-IVANOVIC; SUZANA STEFANOVIC; VESNA JANKOVIC-MILIC
BUSINESS DEVELOPMENT AND GROWTH DESPITE THE GLOBAL CRISIS:
THE CASE OF CROATIAN SMALL COMPANY ............................................................................. 628
HELENA MIKAČIĆ; IVICA ROMAC; MARIJAN ZUJIĆ; SENKA BOROVAC ZEKAN
SMES AS FACTOR OF ECONOMIC GROWTH IN BOSNIA AND HERZEGOVINA ................. 638
IGOR ŽIVKO; MILA GADŽIĆ
POLISH PRESIDENCY IN THE EUROPEAN UNION IN THE CONTEXT OF
THE EXPANSION OF UNION INT0 WEST BALKANS COUNTRIES - POLITICAL
AND ECONOMIC ISSUES. ................................................................................................................... 646
MAGDALENA ICKIEWICZ-SAWICKA
PART SIX: GROWTH, EU FUNDING, FDI, TRANSITION INTERACTION OF LEADING
XI
THE IMPLICATIONS OF STRUCTURAL FUNDS IN REGIONAL DEVELOPMENT AND
INCREASE WELFARE IN ROMANIA. CASE STUDY: GORJ COUNTY ..................................... 654
ENEA CONSTANTA; ENEA CONSTANTIN; STEGARTOIU CARINA
FOREIGN AID AND ECONOMIC DEVELOPMENT IN TRANSITION
ECONOMIES – VICIOUS CIRCLE VS. BETTER TARGETING .................................................... 666
VESNA PETROVIĆ
FACTORS CONCERNING THE ECONOMIC GROWTH: HR DEVELOPMENT IN
INSTITUTIONS THAT SUPPORT ENTREPRENEURSHIP ........................................................... 673
EMILIJA RISTOVA; HRISTINA SERAFIMOVSKA; LJUBICA STEFANOVSKA
THE LEGAL FRAMEWORK AND ITS INFLUENCE ON THE SCOPE AND THE
STRUCTURE OF THE FDIS – THE CASE OF THE R. OF MACEDONIA ................................... 680
MARGARITA MATLIEVSKA; PECE NEDANOVSKI; VLADIMIR MITREVSKI
FLEXICURITY IN TRANSITION: THE CASE OF COUNTRIES OF FORMER
YUGOSLAVIA ......................................................................................................................................... 689
LAPORŠEK SUZANA; PRIMOŽ DOLENC
TRENDS IN ENTREPRENEURIAL ACTIVITY IN CENTRAL AND EAST EUROPEAN
TRANSITION ECONOMIES ................................................................................................................ 701
ANDRÉ VAN STEL; JERZY CIEŚLIK
WHY 20 YEARS AFTER TRANSITION THERE ARE NO LUXURIOUS GLOBAL
BRANDS IN POLAND? COMPARISON WITH EMERGING MARKETS. ................................... 721
JOANNA RADZISZEWSKA
TWO WAYS OF TRANSITION – COMPARISON OF THE ECONOMIC RESULTS
ACHIEVED IN POLAND AND IN FORMER GERMAN DEMOCRATIC REPUBLIC ............... 733
KONRAD POPŁAWSKI
XII
Sponsors of the 1st REDETE Conference
Economic Development and Entrepreneurship in Transition Economies:
A Review of Current Policy Approaches
Ministry of Science
and Technology
XIII
FORWARD
More than 20 years have passed since the collapse of the single-party socialist systems, suggesting that it
is an appropriate time to review the state of play concerning entrepreneurship and economic development,
and assess the extent to which current policies are appropriate to developing a sustainable SME sector and
promoting entrepreneurship. In transition economies, the commanding ethos was to make the rapid transfer
from a socialistic highly-controlled economic structure to a “free-market” structure. The problem is that
economic development and real entrepreneurship have been stied by the so-called free market almost as
effectively as it had been by socialism. Many small enterprises were put out of business by large mostly
foreign-owned conglomerates. State structures in transition economies have tended to take a bureaucratic
approach to the problems associated with the SME sector. Due to a lack of systematic and fair transition in
many of those economies, the gap between the rich and poor has widened signicantly. The only exceptions
have been countries such as Slovenia, which has tended to embrace a German/French “social market” model
and return large sectors of important economic activity in public control, whilst ensuring a fairer division of
wealth through a Scandinavian style tax and welfare system. Arguably, the theory of entrepreneurship has
not hitherto, distinguished between entrepreneurs operating in different business environments or considered
differences between entrepreneurship in wealthy and poor countries at various stages in economic history.
The opportunities for entrepreneurs in developing countries are broader in scope than in those in developed
markets, yet developing country entrepreneurs face an increasing number of barriers to realise these
opportunities. For example, entrepreneurs in emerging markets heavily rely on informal sources of nance to
start-up their businesses, due to the lack of a regular supply of commercial loans. Statistical evidence suggests
that about 90 percent of the people in developing countries lack access to nancial services from institutions1.
Financial markets in most of those countries are set up to maximise the prot in a short time where the
lending cost normally exceeds prot margin of legitimate businesses. While entrepreneurial opportunities
are broader and resultant strategies are naturally self-hedging in developing countries, limited personal and
family savings and an absence of nancial innovation severely limits the growth prospects of promising start-
ups in developing countries. In this particular context, a number of questions arise such as how do we design
markets for entrepreneurial nance in developing countries? How do we extend nancial innovations such as
hedging and insurance to entrepreneurs in developing countries, in ways that allow them to manage risk more
effectively? How do we move away from a reliance on complex nancial instruments to nance business
activity, towards simpler and more basic credit/savings or other micronance models?
Being part of the neo-liberal ideology, governments of many transitional countries have not done much to
‘protect’ SMEs and entrepreneurs from Bretton Woods’s institutions2 that contribute to the concentration of
economic power in the hands of private capital, or more accurately, of nancial capital. Public intervention and
the support of entrepreneurial growth has been inconsistent and not always clearly focused. The managers of
state SME development organisations are frequently bureaucrats with no solid understanding of the problems
of the entrepreneur.
Another important and upcoming research theme within the elds of economic development and entrepreneurship
is poverty and its reduction. According to a World Bank report from several years ago (2008), more than
1.4 billion people live in conditions of poverty in developing countries3, fact in a direct relationship with
the problem of nance mentioned above. Even in the EU about 80 million people lived below the poverty
threshold4. Poverty reduction is considered the rst objective of the Millennium Development Goals. This is
a good reason to believe that ‘indigenous’ entrepreneurship can reduce the poverty in those countries. In the
conference call we encouraged researchers to submit papers on this vital topic.
Empirical research conducted in transition economies shows that SME and entrepreneurship contribution to
economic and social progress is affected by unstable environments and an institutional context that has yet to
establish the framework conditions for sustainable private sector development. This is directly linked to deep-
rooted and wide spread corruption in transitional countries, which is another legitimate concern for genuine
entrepreneurs. Unequal processes of privatisation, increasing corruption and organised crime, have disrupted
the transition towards a market economy. These processes have destroyed fair competition and the potential for
a free and healthy private initiative. In the early stages of transition in particular, the new class of entrepreneurs
that had emerged have had advantages related to the structural and institutional transformation of economies
due to their previous managerial roles in former public enterprises and their governmental connections. Such
1 Robinson, Marguerite S., (2002). “The Micronance Revolution: Sustainable Finance for the Poor”
2 The World Bank and the International Monetary Fund, its sister organization, created at Bretton Woods New
Hampshire in 1944, are referred to as the Bretton Woods Institutions (BWIs).
3 World Bank (2008). World Development indicators: Poverty data. Washington DC:
4 Wolff, P. (2009). ‘Population and Social Conditions’. EUROSTAT, Statistics in focus —46/2009. Luxemburg: Ofce
for Ofcial Publications of the European Communities.
XIV
an environment has created space for a large informal economy. Two political science scholars5 (Key Notes):
were invited to the conference to address these problems from; a) the perspectives of transitional theory (used
to help explain the context in the post communist countries including the Western Balkans) and, b) political
economy (explains the link between the business and political elites) and the geneses of the most recent global
economic and nancial crises. The next REDETE conference will include more topics of this kind.
In order to better comprehend an increasing number of problems that face transitional economies, the rational
to initiate this conference is well justied. Indeed, scholarly researches into topics implied by the Conference
title are scarce. It is argued that entrepreneurship in developing countries is the most understudied important
global economic phenomenon today. This was also clearly stressed by the Conference Key Notes6 calling for
a more integrative research into both economic development and entrepreneurship.
We deliberately combine these two inseparable areas considering the fact that in many transitional countries
‘clumsy’ economic reform and often irregular privatisation wiped out most of the manufacturing sector
dominated by large rms. Entrepreneurship and SME development is seen as one of the key avenues for overall
economic development. Development is explained either by increased inputs or by technological change which
somehow happens out there, yet economists often ignore the role of the human agency or entrepreneurship.
Moreover, Porter states in a number of papers in the Harvard Business Review, that national prosperity is created,
not inherited. It does not grow out of a country’s natural endowments, its labour pool, its interest rate, and its
currency value as classical economists insist. Globalisation has wiped out these traditional advantages. The
key factors of production today, which include – technology, intellectual and nancial capital, and managerial
skill – are not rooted in a nations’ soil but are eminently transportable across borders. The advent of the Internet
has accelerated this process of freedom from national boundaries. All this applied to developing or countries in
transition and, their economic prosperity will increasingly relay on entrepreneurship and innovation.
In general, the topic of this conference was closely related to the economic development and entrepreneurship
in transitional countries, reecting the new shifts that are becoming apparent in the economic system.
Amongst other themes a high number of papers presented at the rst REDETE conference were focused on
the distinctiveness of entrepreneurship in developing and transition economies and the implications for policy
development. Several papers critically analyze existing policy approaches and particularly those that involve
elements of policy transfer. Financing entrepreneurial or small business activities is another important topic
that has been well covered. One of the outstanding questions which this and future REDETE conferences seeks
to address is: How do we best harness intellectual assets in a form of research that brings together theory and
practice in a synergistic process? It is fair to say that for too long have we relied on theoretical modelling based
on conceptualised data gathering, which we seek to turn into methodology that is then applied to real-world
situations. We seek to challenge this philosophy.
Obviously the 1st REDETE conference did not address all the themes and issues mentioned above, nevertheless,
we strongly believe that the papers that were reviewed, discussed and presented and at the opening conference
- Economic Development And Entrepreneurship In Transition Economies: A Review Of Current Policy
Approaches - in Banja Luka in October 2011 will increasingly contribute to our research development and
knowledge through continued regular and constructive collaboration. We are proud to be able to attract
young and less established researchers from transitional countries in particular, who require genuine help
from experienced scholars to guide them through the publishing process. As we are very much committed to
establishing a REDETE forum, we use this opportunity to invite you to the 2nd REDETE conference, which
will be held in October2012.
London, Banja Luka, January, 2012
Programme Committee Chairpersons
Jovo Ateljevic & David Smallbone
5 Vassilios Fouskas (Richmond University, London -UK), Dejan Jović (Univdersity of Zagreb, Croatia)
6 David Smallbone (Kingston University, UK), Peter Rosa (The University of Edinburgh, UK), Friederike Welter
(Jonkoping University, Sweden)
Part One:
Finance, Accounting, Corruption
1
REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
AGRICULTURE LENDING IN BOSNIA AND HERZEGOVINA - FROM THE EXPIRIENCE OF
IFAD PROJECTS
Željko Vaško
University of Banjaluka, Faculty of Agriculture
E-mail: zeljko.vasko@agrofabl.org
Halil Omanović
University of Sarajevo, Faculty of Food and Agriculture
E-mail: h.omanovic@fmpvspcu.ba
Aleksandra Figurek
University of Banjaluka, Faculty of Agriculture
E-mail: aleksandra.gurek@agrofabl.org
Nataša Kosić
Ministry of Agriculture, Forestry and Water Management of the Republc of Srpska
Agriculture Projects Coordination Unit,
E-mail: kosic@rsapcu.org
Abstract
In the transition period agriculture in Bosnia and Herzegovina did not need to pass trough serious privatization,
as in other socialist countries, but had a need for other types of reforms. Agricultural production in Bosnia and
Herzegovina (BaH) has always been a subject of investment of private capital, but on the other side always
faced with constraints in the form of lack of funds to nance development of that type of entrepreneurial
activities. An important condition for ensuring the growth and development of agriculture is to provide a stable
source of funding necessary for new investments, while credits has a crucial role. In this regard, signicant is
foreign aid which Bosnia and Herzegovina has received and receives from international donors and creditors,
including the International Fund for Agricultural Development (IFAD). During the last fteen years in Bosnia
and Herzegovina IFAD designed, nanced and supervised the implementation of ve projects, the rst starting
from emergency and continuing with development projects. All these projects were related to establishing and
expanding the modalities of nancing and diversication of agricultural and other entrepreneurial activities in
rural areas. Lending began with the distribution of credits in kind, continued with the awarding of cash credits
through banks and MCOs and continued with the establishment of the rst saving and credit associations in
BaH. The rst lending target group were only farmers and later it spread to SMEs, the rst only livestock
production and then also to all other entrepreneurial activity in rural areas. In the implementation of all IFAD
credit lines in Bosnia and Herzegovina participated 25 nancial institutions so far (15 banks, 7 MCOs and 3
SCOs) that extended about 16.000 credits to farmers and SMEs from the target group in the total amount of
67 million BAM. Based on case studies and lessons learned from implementation of these projects the paper
describes modalities of lending activities and give some conclusions and recommendations that may be useful
in planning and management of further agriculture development funding in Bosnia and Herzegovina, and in
similar, less developed, countries.
Keywords: Agriculture, Lending, Bosnia and Herzegovina, IFAD
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1. INTRODUCTION
Agriculture is the economic activity that plays a signicant role in most developing countries in
terms of its contribution to the creation of gross domestic product (GDP), employment, participation
in foreign trade, etc. In developed countries, agriculture is less important in terms of the foregoing
contributions, but it is becoming increasingly important in terms of sustainable management and
protection of natural resources.
In BaH, a country in transition, agriculture plays both roles. Agriculture participates in the creation of
GDP with 6.5% with a tendency to further decrease (GDP, 2010) 1; informally employed about 20%
of the active labour force2, it is involved in foreign trade with 15% (analysis of foreign exchange
of BaH, 2011)3. Agriculture is becoming increasingly important from the standpoint of rational and
responsible use of agricultural land, groundwater protection and other issues of preserving the natural
environment.
If we want to ensure the development of agriculture and improve its competitiveness, there must
be investments in agriculture vest. Majority production resources in agriculture in BaH have been
and still are owned by small private sector. The majority of over 500,000 farms are not able to
modernize and increase their production without new investment. Own funds of the farms as a source
of nancing investments, are insufcient and therefore the agricultural holdings, and other entities in
agriculture (SC, Ltd, Coops) need funds necessary for accelerated development, which they borrow
i.e. take credits. Agricultural credit is crucial for raising full potential of available natural resources in
agricultural development. Share of agriculture in the total mass of credits in the RS and FBaH is low
among banks (from 1.3 to 1.8%), and much more at MCO (33 to 36.5%) (Vučenović & Vaško, 2009).
Agriculture is often characterized as a high risk sector. Rural Finance Learning Centre lists several
potential risks in agriculture: production and yield risk, price and market risk, lack of diversication,
political risk (Bankakademie, 2011), which makes nancial institutions reluctant to sell their free
funds to this sector. Regardless of the number of projects, and governmental and other interventions,
lack of credit is a problem of development, particularly of small agriculture in BaH.
Thus, the Agriculture Development Strategy of the Republic of Srpska until 2015 (adopted 2006)
includes one of the measures for its implementation, which is providing farmers access to credit
(including the establishment of a special Agricultural Bank) and establish a broader range of rural
nancial services (RS Agriculture Development Strategy, 2006). The Medium-Term Strategy of
development of the agricultural sector in the Federation B&H also notes that the establishment of credit
lines, which would be focused on agricultural production, are the needs that should not be questioned.
It further argues credits for agricultural production with an interest rate not exceeding 3-5%, with long
periods of investment lending, a special type of short term credits, including cooperatives and SCO
in credits to agricultural producers (Medium Term Development Strategy of the agricultural sector in
the Federation of BaH, 2006). And the World Bank, in its recent study on the state of agriculture in
BaH noted that limited availability of credit remains a problem of agricultural development in BaH
due to high interest rates, long procurement procedures and rigorous requirements for the provision
of loan repayment (Agriculture Sector Policy Note for BaH, 2010).
With these facts, the International Fund for Agricultural Development (IFAD) faced, which came
to BaH immediately after the last war with the aim and intention to help the poor population in
rural areas to rehabilitate war damage by giving multiple contributions to the development of their
agricultural production and improving living conditions within the framework of several projects that
were implemented in BaH over the past fteen years. Lending to agriculture was an integral part of
all these projects, and in this paper it is all about lending to agriculture in BaH from the experience of
IFAD projects. During the implementation of these projects there has been a shift from lending (only)
to agriculture to rural nancing that overlap each other, but certain elements are different (IFAD
Decision Tools for Rural Finance, 2010).
1 According to thematic bulletin 01 Gross Domestic Product by Production Approach, 2000-2009, participation of
agriculture in GDP in B&H in 2001 was 7.89%, in 2005 was 7.38% and in 2009 was 6.5%, Agency for Statistics of
Bosnia and Herzegovina, Sarajevo, 2010, p. 26.
2 According to Labor Force Survey 2010 in 2008 it was 20.6%, in 2009 was 21.2% and in 2010 was 19.7%, Agency for
Statistics of Bosnia and Herzegovina, Sarajevo, p. 37.
3 According to own calculations, based on analysis of data from the BaH foreign trade in 2010, the Ministry of Foreign
Trade and Economic Relations, agricultural products classied in the tariff group 1-24 of harmonized customs tariffs
have participated with 7.8% of total BaH exports, with 18.4% of total imports, accounted for 14.8% of total BaH
foreign trade and 30% of its total foreign trade decit.
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2. MATERIAL AND METHOD OF WORK
The starting material for the research project are the data from the Project Units (Project Implementation
Unit from the Federation of Bosnia and Herzegovina and Agriculture Projects Coordination Unit
from the Republic of Srpska), progress or completion reports of certain projects, as well as personal
experience some of the authors of this work, who participated in the implementation of IFAD projects
in BaH.
International Fund for Agricultural Development implemented the following projects in BaH and
Herzegovina in the period 1998-2010:
• Emergency Farm Reconstruction Project – Restocking (EFRP);
• Small Farm Reconstruction and Development Project (SFRDP);
• Livestock and Rural Finance Development Project (LRFDP);
• Rural Enterprise Enhancement Project (REEP);
• Rural Livelihood Development Project (RLDP).
Besides the focus on information and documentation relevant to the implementation of these projects,
there have been explored any other written and available sources on the topic of agriculture lending
in BaH. Because of public-decient knowledge of the role of IFAD projects in agriculture lending in
BaH and poor written sources on the subject, authors have decided to summarize them and publish
in this work with particular focus on lessons learned that can be used in planning and implementing
similar interventions in developing countries such as BaH. The research hypothesis is - whether the
modalities used in agricultural lending under IFAD projects in BaH can be successfully multiplied
and used for the same purpose in other areas from other sources?
The subject of the research is agriculture lending in BaH, and as a research method, method of case
studies of IFAD projects in BaH in the period 1996-2010 has been primarily used. During the research
the other conventional scientic research methods were used such as the following: desk research,
analysis, synthesis, comparison, methods of descriptive statistics, etc.
3. RESEARCH RESULTS AND DISCUSSION
At the end of the nineties of last century, agriculture lending in BaH was a rarity. Most of the non-
private banks were in extremely weak nancial condition, while the small private banks were
undercapitalized. Directed lending on a non-commercial basis still prevailed among state-owned
banks. Accounting and regulatory standards did not conform to the needs of a market-based banking
system (Bosnia and Herzegovina Post-Conict Reconstruction and the Transition to a Market
Economy, 2004). Besides not having enough long-term sources of nancing in general, banks were
not ready to lend to agriculture because of the high risks that this production carries with it, turning
in a time to a favourable SME sector. SWOT and other analysis that were done for the agricultural
sector at that time (and later) conrmed that lack of funds for investment and inaccessible and costly
credits are one of the major constraints to growth and development of agricultural production in BaH.
In a situation of lack of internal resources for nancing, solution is sought (and found) in securing
external resources (grants and loans) to credit domestic agriculture.
After the war, especially since the end of the nineties of last century, the micronance sector in BaH
has had impressive growth, which was signicantly contributed by two projects funded by the World
Bank (Local Initiative Project I and II). Most MFIs offer a similar range of loan products, essentially
credits as they are not allowed to offer other nancial services. Micronance services, mainly credits,
have reached a signicant part of population (Planet Rating, 2011). On the role and achievements
of micronance in the development of BaH there are varying opinions, as the number and value of
micro-credits grew steadily, but the indicators of growth and development of the sectors that are
credited, were much weaker and showed slower progress, for example, as pointed by Betman (Welle-
Strand at all, 2010). Some other studies have reached conclusions that could not clearly demonstrate
the impact of micro credits on revenue growth of their customers, among other things because the
majority of micro credits in BaH were used for employment or maintaining existing jobs, which is
dominated by agricultural production.
Of course, that the pace of economic growth is affected by many factors, of which loans are just one
of the necessary prerequisites. It is also true that in BaH after the war, much greater priority was given
to social than economic objectives, i.e. that the micro nance balanced between the nancial and
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social objectives (Matul & Tsilikounas, 2004).
Numerous critics of lending by MCOs, particularly those who advocate for the interests of agriculture,
in the rst place put high interest rates that are charged by MCO and even today they charge the
farmers. Therefore, donors, development agencies, government and individual ministries in various
ways sought to provide better resources and conditions for lending to agriculture.
In this situation, the International Fund for Agricultural Development (IFAD) was one of the rst
international development organizations that begun working on solving this problem in BaH in an
organized way. IFAD began operations in BaH in 1996 shortly after the conclusion of the Dayton
Peace Accord. Since then IFAD has supported four projects in the country and provided a total of
US$ 57.1 million in loans (www.operations.ifad.org). In its rst two projects EFRP and SFRDP the
lack of credits for the purchase of cattle was resolved by imports of livestock and distribution in the
form of quasi (in kind) crdits. BaH transformed IFAD loan funds into livestock (mainly of imported
origin) and thus urgently increased number of livestock destroyed during the war (Vaško, 2000).4
These interventions were meaningful for that period because there was no time and other assumptions
that livestock would gradually increase based on (only) reproduction and the number and genetic
performance of, signicantly destroyed, main herd. Farmers have not received the money, but cattle,
i.e. credited in the amount of the purchase price of livestock.
The rst Emergency Farm Reconstruction Project (EFRP) was implemented only in the Federation
of BaH in the period 1996-97 and dealt with the renewal of the livestock on the basis of imports. Due
to lack of data on the implementation of this project, only a conclusion that during two years, heifers
imported in the value of 10 million BAM equivalent, which were distributed to 3,974 farms nearly in
all municipalities in the Federation of BaH.
3. SMALL FARM RECONSTRUCTION PROJECT
The second one, Small Farm Reconstruction Project (SFRP) was implemented on the territory of
both entities of BaH (Federation of BaH and the Republic of Srpska) in the period 1998-99. Under
this project, farmers were granted over 8,000 credits in kind, mainly distribution of cattle (heifers,
sheep and goats) in the total amount of about 24 million BAM, for a period of 5 years with a grace
period of 12 months and an interest rate of only 2% (Table 1 in Appendix). In the absence of other
means of ensuring repayment of the credit, guarantors were used, who were not employed persons,
and they rather were farmers or neighbours of the borrowers. This mechanism of providing the credit
repayment was simple and acceptable to debtors, but later proved to be unusable (possibility of
collecting a debt from the guarantors were modest, although the majority of non-performing credits
were never prosecuted).
This project had positive effects because it was helpful (the perception that it is aid and not a credit
dominated!) to thousands of rural households out of which a large number used these credits properly
and began the reconstruction of livestock that was destroyed by war. Rural households primarily
increased production of milk and meat for their own consumption, and to a lesser extent and for the
market. The consequences of genetic improvement through imported animals as well as examples of
systematic rearing of offsprings of imported animals are still evident in BaH. However, implementation
of this project faced with the following problems:
• Imported heifers in their genetic and productive performance did not conform to local
conditions of their housing and feed (it was very common that animals lost condition of the
throat, signicantly lower milk yields than expected, delays and lack of re pregnancy etc.);
• Selection of beneciaries was burdened with social criteria (favouring refugees, returnees,
displaced persons, war invalids and the socially vulnerable groups, etc.), partly due to the
conditions of IFAD project to support poor population groups;
• Discontinuity of responsibility for the selection of credit beneciaries (municipalities),
extending the credits (government through the PIU/PCU) and collection of credit repayment
(bank);
• Broken market connections and the inability of the organized sale of milk and meat and the
absence of project activities that would remove these restrictions, signicantly reduced the
opportunities to achieve some income;
4 For example: research was implemented in a limited area, Mrkonjić Grad and other 6 municipalities, showed that war
damage of cattle were 83%, sheep 81% and tractors 45%.
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• Part of the credit product was mandatory insurance of livestock against mortality (whose
premiums were included in the credit amount) during the rst year of holding, which has
been extended by a very small number of beneciaries (combined reasons for the absence of
tradition of agricultural insurance and inertia of insurance companies);
• Very low level of repayment of credits due to insufcient income (majority of animals were
distributed based on the model of so-called. “social package” with a minimum number of
livestock per household (in the Republic of Srpska even 93.9% of credits were granted on
the model of one heifer-one household), lack of previous experience with the credit (SFRDP
report, 2009)5 and the absence of political will to sanction this practice seriously.
Since it was practically an emergency one-year project (that was being extended for another year)
there were not conducted any extensive study on effects and impacts of this project to its beneciaries.
Based on research conducted in late 2009 in the territory of the Republic of Srpska, 81.7% of
beneciaries have conrmed that livestock contributed to the recovery of their farms, but there was
no detailed quantitative analysis.
4. LIVESTOCK AND RURAL FINANCE DEVELOPMENT PROJECT
The lessons IFAD has drawn from its country experience indicate that: (i) efforts to increase agricultural
production and productivity, while essential, are not sufcient to reduce rural poverty unless there is
an accessible market in which farmers can dispose of increased production at remunerative prices;
and (ii) credit is needed to nance agricultural investment and value addition (B&H COSP, 2005).
Based on experience gained during the rst two projects with the allocation of exclusive in kind
credits, IFAD in collaboration with local governments, designed the new (third) Livestock and
rural nance development project (LRFDP). Within this project, which was implemented in the
period 2002 to 2008, there was a credit line designed for the purchase of livestock and agricultural
machinery, which was implemented through the intermediaries, i.e. commercial banks (9) and micro-
credit organizations (2). The goal was to replace the emergency (with dominant social objectives)
focus of intervention and transfer it to sustainable agriculture as a stable (and very often only) source
of income of rural households.
This and all subsequent IFAD projects in BaH have been implemented on a selected area (limited
number of municipalities that met certain criteria). The project, on a competitive basis made available
funds to banks and MCOs from which nancial intermediaries extended cash credits to the project
target group. Beneciaries of bank or MCO received the money and for that money buying cattle or
agricultural equipment of their choice. This model was a signicant improvement over the previous
projects because banks were given full autonomy in terms of choosing borrowers and borrowers were
given the freedom to choose subjects of lending. In this way, there was given almost 14 million BAM
of credits for the 1,934 agricultural households and 6 million BAM to over 500 credits to SMEs and
small family entrepreneurship (details in Table 1 in Appendix). This model of credits also had some
limitations that are primarily manifested as:
• The difculty of nding guarantors (almost exclusive way the banks and MCOs insisted as
guarantees for repayment of credits);
• Poorer quality cattle, which was obtained mainly in the local market;
• Lack of increase in livestock at the state level (because the same animals only changed owners
through its purchase);
• Expensive insurance of cattle purchased from the credit (which was not used for a long time
due to high premiums charged by insurance companies).
Although nancial institutions freely determined the level of interest rates, it was very good with
the banks (5.75 to 9.95%). With 6.5% interest on an annual basis a ve-year IFAD credits (lending
conditions LRFDP project in the RS) were the most favourable credit conditions in the market of
the Republic of Srpska. MCO for the same credits accounted slightly higher interest margin, which
resulted that more credits were disbursed through banks than through the MCO.
The second contribution of the LRFDP project was the fact that it broke up the pre-assumption that
farmers were not good and eligible beneciaries of bank credits IFAD credit repayment at the time,
that has never been below 95%, draw the way for many lines of credit that followed in the years
5 Only 7.9% of credit beneciaries used some credit before.
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from other projects sources, but also from own resources of banks. One of them was a World Bank
project Small Scale Commercial Agricultural Development Project (SSCADP) which used similar
model as LRFDP that introduced credit line for lending to agriculture (not only livestock but also
fruit and vegetable crops) through the commercial banks and MCOs as intermediaries to Herzegovina
region. The nal report of this project noted that the credit subcomponent has substantially helped in
increasing Bank and MCO willingness to lend to the agricultural sector. This is reected in a fourfold
increase of the portfolio of Nova Bank in the agricultural sector. Similarly, MCOs now deal with
small farmers readily and these prove to be one of the most reliable segments of borrowers to make
timely repayment of credits and that small farmers with a diversied production have a much lower
risk than commercial banks estimate (SSCADP Completion Report, 2010).
Both in case of banks and MCOs guarantors were almost exclusively an instrument of security
credits (2-3, depending on the size of the credit) that was difcult to provide in some less developed
municipalities, but the number of cases where this instrument had to be used was sporadic, so that the
guarantors were then much easier to nd than in later years.
This project made many progresses in the eld of agricultural lending: introduced healthy competition
of more nancial service providers for the same resources, did not limit the interest margin to providers,
it expanded the list of agricultural activities eligible for credit and provided greater adaptability of
credit conditions to the specic needs for individual groups of agricultural producers. Assistance in
the dissemination of information and the rst screening of potential borrowers, the project, using
a network of farmers’ associations and cooperatives that it founded and with whom it worked,
helped banks to better reach out the borrowers and to successfully complete the evaluation of their
creditworthiness.
The LRFDP completion report for part A (in FBaH) stated that real benets of project credit line accrue
from increases in livestock/rural enterprises production and productivity, incomes, employment and
household food security (LRFDP Completion Report, Part A, 2008). The same report for part B (in
RS) concluded that credits, especially in the very beginning of the project, was very important since
those were the most favourable agricultural credits, and good terms and conditions encouraged a
number of farmers to go into investments which they wouldn’t have done without those credit funds
(LRFDP Completion Report, Part B, 2008).
The second line of sub-credit was for SMEs but the interest in this kind of credits was much smaller
because there were other available sources to meet similar needs (sometimes even under more
favourable conditions) from the own resources of banks and other projects.
LRFDP project has had a breakthrough in the eld of nancial services, the establishment of the
rst Savings and Credit Organizations in BaH. The project has provided technical assistance in the
adoption of the SCO Law in 2006 (only for the RS), and then the establishment of the rst (and so
far the only) three Savings and Credit Organizations in Berkovići, Srbac and Derventa, which were
established in 2007. The idea was to mobilize the savings of the rural population and based on that
collected deposits SCO would extend smaller amounts of credits and shorter repayment periods, with
exible guarantees to its members. The greatest improvement was made in SCO “Hercegovina” in
Berkovici that started with initial 62 members and reached 246 members. So far it has approved 313
credits totalling 744,200 BAM, all exclusively for agricultural production. SCO “Gradina” Srbac
was established by 30 members and currently the SCO has 72 members. This SCO meanwhile, has
approved only 29 credits (larger amounts and longer repayment periods) and recorded an increased
number of risky credits. The third SCO “Agroinvest” Derventa was established by 30 founders and it
has increased to the current 89. So far, it has approved 156 credits amounting to 502,400 BAM6. From
a four year distance of the rst SCO in BiH, it could be concluded that this idea did not nd a good
ground, because SCOs in the meantime have not mobilized any savings, and their lending activities
are solely based on its founders’ initial and subsequent credits approved by the project so that, by the
way, their actions do not differ signicantly from the MCO. Their assets are insufcient to cover their
xed costs, and no signicant increase in its appearance.
6 Data have been updated as of 30.06.2011. and they have been taken out of internal data of Agriculture Projects
Coordination Unit that monitors their performance.
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5. RURAL ENTERPRISE ENHANCEMENT PROJECT
Model of lending developed within LRFDP project continued in Rural Enterprise Enhancement
Project (REEP). Number of eligible activities for credits has been expanded, so that apart for
livestock, credits could be used for all other types of agricultural (especially fruit production) and non
agricultural activities in rural areas.
In this and in other projects, part of credit funds was intended to SMEs in sectors of agribusiness but
number of used SME credits was below planned because in the same time, the same or similar credits
were offered by almost all banks. Until mid 2011, 1,063 credits ere disbursed to individuals within
this project in the value of 11.6 mil. BAM and 55 credits to SMEs in the value of 2.6 mil BAM (Table
1 in Appendix). Except enlargement purposes, other characteristics of these credits were mainly same
as in previous project (repayment of 7 years, grace period up to 12 months for orchards up to 3 years,
with interest rate from 6% to 10%).
The shift in REEP project was to spread a network of nancial intermediaries because the loan
agreements signed with the project were made by most banks and MCOs from both entities. This
provides better geographical distribution of credits and a higher level of competition so that some
banks and MCOs offered lower interest rates than their competitors, although the input conditions
were the same for all agents.
Farmers still have a need for additional resources that would fund their investments. In a survey of
1,390 rural households in 2008, which was conducted in 24 municipalities of the Republic of Srpska
72.4% of respondents said that the biggest obstacle to addressing their own business was shortage of
funds (RS Strategic Plan of Rural Development, 2009). Lending is certainly one of the major sources
of nancing agricultural development, but according to the previously mentioned survey, less than
55% of households had never used credit, and 38% used some form of agricultural credits (10% for the
purchase of cattle, 9.8% for raw materials, 8, 8% for purchases of machinery, 7.5% for the renovation
of buildings and 1.7% for planting perennial plantations). Legal entities from the category of SMEs
and cooperatives are in a somewhat more favourable position in terms of investment funding, because
it is easier to obtain credits.
Regardless of whether the intermediaries in the lending were banks or micro credit organizations, the
dominant instrument of ensuring repayment of credits were the guarantors. In terms of guarantors,
MCOs were somewhat more exible because they accepted and guarantors who have had informal
sources of income, while the banks insisted on employed guarantors, preferably in the public sector.
In addition to afrmative attitudes towards the IFAD credits, the problem of the impossibility of
obtaining guarantors was one of the most common objections to the borrower, which is why the
design of the next LRDP project introduced the possibility of their partial substitution mechanism of
the guarantee fund, whose concept was elaborated in another paper by the same authors (Vaško at
all., 2009).
Monitoring of REPP credit beneciaries performances in the RS REEP project area (sample of 86
farms) shows that in the years after using credits (2010) those farms increased their assets, agriculture
machinery by 28%, and livestock between 18% (sows) and 40% (milking cows) comparing it with
the level before credits (2008). In the same period, dairy farms that used credits increased their milk
production by 51%, milk sale by 58% and income from milk by 48%, mainly thanks to increased
number of cows and less to increase of milk yield. Borrowers from the category of meat producers
increased meat production by 17%, meat sale by 19% and income from meat production by 39%.
Borrowers from the category of fruit producers increased their fruit production and sale of the fruit
equally by 56% and their income from fruit production 32%. Total household income of the farms
which used credits increased by 24.6%, but their income only from agriculture by 43.6% because
they used dominantly credits for agribusiness. Net farm prot increased by 22.6% comparing it with
situation before agriculture production expansion nanced by credits from REEP project (REEP M&E
Report, 2011). This data uncontested shows that credit, if it is properly invested, can give signicant
benet for borrower and ensure enough income for credit repayment.
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6. RURAL LIVELIHOOD DEVELOPMENT PROJECT
The next project, Rural Livelihood Development Project (RLDP), which became effective in 2010,
will continue the lending, but only in the FBaH. The reason is that, at the time the RS formed
Investment Development Bank (IRB), in fact the Fund, whose credit potential has been around 600
million BAM, of which a considerable part was allocated to agriculture lending. During three years
of its operation IRB has extended 808 of micro credit for agriculture in the total amount of 14.5
million BAM and 80 credits to SME in agribusiness sector totalling 51.6 million BAM (FAO B&H
sector study reports, 2011). Comparing this line of credits, it can be concluded that it has many
similarities with previous REEP, LRFDP lines of credit, except that the IRB limits the interest margin
for the nancial intermediaries (which affected less interest in MCOs to use this source of lending to
agriculture). Because of the procedures necessary to meet the legal requirements to join OFID funds
to already approved IFAD loan funds, the credit line under the RLDP has not become effective yet.
Its results and achievements will be made in a few years time.
7. RURAL BUSINESS DEVELOPMENT PROJECT
IFAD, governments, ministries and project units from both BaH entities (in 2011) have been
preparing the latest project, Rural Business Development Project (RBDP), which in its design also
has a dedicated credit line to support on and off farm businesses. Regardless of what the agriculture
lending has become the practice of most nancial institutions in BaH, it was stated that there is still a
lack of long-term deposits and that agriculture is still underrepresented in the credit portfolio of most
banks. Opening the door on lending to agricultural producers and rural population, it is envisaged that
generally does not limit the activities, which would be eligible for nancing as well as the number
and types of nancial intermediaries (banks, MCOs and SCOs) so that this line of credit has a more
of rural nance, than the agriculture nance character.
8. CONCLUSION
International Fund for Agricultural Development (IFAD) has actively participated in the laying out,
expansion and diversication of agricultural credit in Bosnia and Herzegovina with the (until now)
16,000 individual credits totalling 67 million BAM (excluding the effect of revolving). It began
immediately after the war with the awarding the in kind credits, i.e. breeding animals, which was the
beginning of the process of returning back the credit in the investment logic of the peasants, because,
at that time, only donations were granted in BaH. On the other side, the banks (in the late nineties of
the last century) were reluctant to credit farmers, so it was necessary to provide a dedicated (long-
term) sources and create a special line of credit and credit products for certain types of agricultural
production and a suitable investment. It continued with the awarding of cash credits for the purchase
of livestock (dairy or breeding animals) approved by the several banks, and later several MCOs.
The highlight of the expansion of the number of intermediaries in lending has been the establishment
of the rst SCO, only in the RS (LRFDP project, 2002-08). The following IFAD Project (REEP,
2008-12) expanded the subject of credit to establish plantations of fruit, but the number of lending
intermediaries was reduced to banks and MCOs. Recently, the latest effective IFAD project (RLDP,
2010-16) will continue to extend credit subject to virtually all types of agricultural production and
related investments, and as intermediaries for distributing credit funds, all nancial institutions that
operate in the BaH market will be used.
IFAD projects have had a leadership role in nding the proper credit product for agricultural production
and were the role model for other projects, including the nancial institutions themselves that based
on experiences of the implementation of IFAD credit lines, created and modied their own credit
lines and products for agriculture.
Based on the experiences of ve implemented IFAD projects in Bosnia and Herzegovina and related
credit lines that were parts of these projects can be summarized as e follows:
• In order to increase the size and scope of agricultural credits it has been important to provide
a dedicated (long term) sources of nancing;
• To help the credits to reach specic target groups (women, poorer beneciaries, remote areas,
etc.) or types of investments, they should be favoured in the procedure for extending credits
and sometimes even specically targeted (principle of positive discrimination);
• Credit products (according to purpose, amount, terms and conditions, etc.) should be tailored
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according to the specic needs of agricultural production;
• Borrowers should be allowed the freedom to choose the amount and terms of credits and give
them freedom in the manner and conditions of supply that are subject of credit;
• Proper guarantees securing the credit repayment are critical conditions for the use of credit
by the majority of farmers (in which the MCO are much more exible than the banks) and
continuously look for alternative mechanisms for the elimination of “bottlenecks”;
• The interest rate isn’t a crucial prerequisite for a decision on the use of credit, but the interest
rate still remains a signicant psychological barrier for a decision on the use of credit, and
• On the contrary to the prejudices, the repayment of credits given to farmers was regular, with
lower levels of delinquency than some other categories of borrowers with stable and secure
sources of generating revenue.
The need for agriculture lending in BaH will increase in the future, bearing in mind the necessity for
its rapid modernization in the context of meeting the requirements in the EU agenda. It is expected
that the nancial institutions will still diversify their credit offers for agriculture and that the need
for the provision of external resources for these purposes will stop in the near future. We should not
ignore the progressive role of IFAD and other development projects in Bosnia and Herzegovina,
which they played in breaking down prejudices about the high risk of lending to agriculture, and in
adjusting credit conditions to the specic needs of certain types of agricultural production.
Experience from Bosnia and Herzegovina in strengthening funds for lending to agriculture (such as
into IFAD projects) and nding the most suitable credit products can be useful multiply and applicable
for other countries with similar situation and development level.
Reference
Agriculture Sector Policy Note for Bosnia and Herzegovina (2010), The World Bank, report, No. 57919–BA,
p. 15.
Analiza spoljnotrgovinske razmjene BiH za 2010. godinu (2011), Ministarstvo spoljne trgovine i ekonomskih
odnosa BiH/MoFTER, Sarajevo,
Bankakademie, adopted by Heney, J. Agricultural Lending – Self Study Guide for Loan Ofcers (2011),
Rural Finance Learning Centre, p. 5, from http://www.ruralnance.org/ training/self-study-guides/
agricultural-lending/agricultural-lending-details/en) (on July, 31, 2011),
BiH and Herzegovina Country Opportunity Strategic Paper (2005), International Fund for Agricultural
Development, p. vii,
BiH and Herzegovina Post-Conict Reconstruction and the Transition to a Market Economy (2004), An OED
Evaluation of World Bank Support, 2004, The World Bank, p. 12.
FAO Sector study reports for BaH and Herzegovina (2011), working paper for horizontal chapters,
Gross Domestic Product by Production Approach, 2000-2009, Thematic bulletin 01 (2010), Agency for
Statistics of BiH and Herzegovina, Sarajevo,
http://www.operations.ifad.org/web/ifad/operations/country/home/tags/BiH%20and%20herzegovina (on July,
31, 2011),
IFAD Decision Tools for Rural Finance (2010), IFAD, p. 12.
Izvještaj o realizaciji SFRDP (2009), Kancelarija za koordinaciju projekta Svjetske banke za rekonstrukciju i
obnovu Republike Srpske,
Labour Force Survey 2010, Thematic bulletin 10 (2010), Agency for Statistics of BaH and Herzegovina,
Sarajevo,
Livestock and Rural Finance Development Project Completion Report (Part A) (2008), Project Implementation
Unit, Ministry of Agriculture, Water Management and Forestry of Federation of B&H,
Livestock and Rural Finance Development Project Completion Report (Part B) (2008), Agriculture Projects
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
Coordination Unit, The Republic of Srpska Ministry of Agriculture, Forestry and Water Management,
Matul M., Tsilikounas Caroline, Role of Micronance in the Household Reconstruction in BiH and Herzegovina
(2004), Micronance Centre Spotlight Note # 6, p. 13.
Planet Rating, Country Rating – BiH and Herzegovina Report (2011), The Global Micronance Rating Agency,
pp. 1-3.
REEP Project Monitoring and Evaluation Report 2010 (2011), Agriculture Projects Coordination Unit, Banja
Luka, pp. 16-21.
Small Scale Commercial Agriculture Development Project, Implementation Completion and Results Report
(2010), The World Bank, p. 15. and 20.
Srednjoročna strategija razvoja poljoprivrednog sektora u Federaciji BiH (2006-10) (2006), Federalno
ministarstvo poljoprivrede, vodoprivrede i šumarstva, Sarajevo, pp. 53-57.
Strategija razvoja poljoprivrede Republike Srpske do 2015. godine (2006), Ministarstvo poljoprivrede,
šumarstva i vodoprivrede RS, p. 33.
The Republic of Srpska Strategic Plan of Rural Development for the period 2009-15 (2009), Faculty of
Agriculture for RS MAFWM, Banja Luka,
Vaško Ž., Posljedice rata na poljoprivredu (2000), Agroznanje, broj 4, pp. 5-16.
Vaško Ž., Vučenović Aleksandra, Kosić Nataša, Agrarni garantni fond kao instrument ekspanzije kreditiranja
poljoprivrede u Republici Srpskoj (2009), Agroznanje, Vol. 10 (3), p. 153-163.
Vučenović Aleksandra, Vaško Ž., Finansiranje razvoja poljoprivrede (2009), Agroznanje, Vol. 10 (3), pp. 165-
174.
Welle-Strand Anne, Kjøllesdal K., Sitter N., Assessing Micronance, The BiH and Herzegovina Case (2010),
Managing Global Transition 8 (2), pp. 145-166.
Table 1. IFAD credit lines in BaH in the period from 1996-2010
EFRP SFRP LRFDP REEP Total
(1996-97) (1998-2000) (2002-08) (2006-10) (1996-2010)
Farmers Credits through Commercial Banks
Number of banks 0 0 9 6 15
Amount of ex-
tended credit (mil.
KM)
9,733,958 23,687,194 10,263,555 1,035,800 44,720,507
Number of credits 3,974 8,293 1,748 163 14,178
Repayment period 5 years 5 years Up to 5 years Up to5 years
Grace period 12 months 6-12 months 6-12 months 12-18 months
Interest rate (an-
nual nominal) 2% 2% 5,75%-9,95% 8,39%-8,70%
Farmers Credits through MCOs
Number of MCOs 0 0 2 5 7
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Amount of ex-
tended credit (mil.
KM)
0 0 3,344,850 10,550,240 13,895,090
Number of credits 0 0 186 900 1,086
Repayment period 3-5 years do 5 years
Grace period Up to 12 months Up to 18 months
Interest rate (an-
nual nominal) 13%-18% 8%-18%
SME Credits through Commercial Banks
Number of banks 0 0 8 614
Amount of ex-
tended credit (mil.
KM)
0 0 5,066,012 2,205,201 7,271,213
Number of credits 0 0 107 26 133
Repayment period Up to 5 years Up to 7 years
Grace period 12-18 months 12-24 months
Interest rate (an-
nual nominal) 5,72%-6,32% 8,34%-8,70%
SME Credits through MCOs
Number of MCOs 0 0 2 5 7
Amount of ex-
tended credit (mil.
KM)
0 0 1,061,800 437,500 1,499,300
Number of credits 0 0 422 29 451
Repayment period 3-5 years Up to 7 years
Grace period Up to 12 months Up to 24 months
Interest rate (an-
nual nominal) 13-18% 8,23%-12,50%
Source: Internal data by Project Units (PCU/APCU)
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OPPORTUNITIES FOR FINANCING THE SMALL AND MEDIUM – SIZED BUSINESSES IN THE
REPUBLIC OF MACEDONIA
Gordana Vitanova
Faculty of Economics – Prilep, Macedonia
E-mail: vitanova04@yahoo.com
Marjan Angeleski
Faculty of Economics – Prilep, Macedonia
E-mail: angeleskimarjan@gmail.com
Tatjana Spaseska
Faculty of Economics – Prilep, Macedonia
E-mail: t_taleska@yahoo.com
Fanka Risteska
Faculty of Economics – Prilep, Macedonia
E-mail: f.risteska@yahoo.com
Abstract
Small and medium-sized businesses are major part of the economy. The effective nancing of such businesses
makes a signicant contribution to the economic growth and development. There are different types of
nancing the small and medium-sized businesses: internal funds; overdrafts and bank loans; leasing and hire
purchase arrangements; stock market equity and corporate bond issues; venture capital or private equity; asset-
based nance such as factoring and invoice discounting and trade nance. The capital market is alternative and
competitive way of nancing the business entities regarding the nancial institutions, above all the banks. In
the developed market economies the capital market allows the business entities to obtain the nancial assets
they need to realize their projects through issuing long-term securities. Considering the wide advantages these
forms of nancing offer, the subject of research of this paper shall be the opportunities of their implementation
in the small and medium-sized businesses. Namely, an analysis and empirical research shall be conveyed
of the current conditions of the small and medium-sized businesses related to their nancing. In addition,
recommendations shall be proposed for more efcient exploitation of the opportunities for nancing on the
capital market.
Keywords: Financing, Capital Market,Long-term securities, SME’s
1. INTRODUCTION
The funding of business entities is a very important and complex process, which consists of planning,
acquiring and use of the necessary nancial resources for the current and developmental operation.
The business entities can provide the necessary funds for investment projects realisation through
internal and external sources. Internal funding provides greater autonomy, sovereignty and freedom
during the nancial decision making. However, quite often, business entities are unable to meet their
need for capital only from internal nancial sources, and therefore there is a need to acquire capital
from external sources. In the developed market economies, the capital market gives an opportunity
to economic entities to use different forms of funding. The efcient capital market enables acquiring
of the necessary nances through: long-term investment loans, issuance of securities – shares and
bonds; as well as use of different derivative nancial instruments.
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2. SIGNIFICANT FACTORS TO CONSIDER WHEN CHOOSING THE SOURCE OF FUNDING
The economic entities in the developed market economies have an option to choose the source from
which to obtain the necessary capital. The choice between the equity or debt capital for business
needs funding is a complex and complicated process. It is of utmost importance that they resolve
certain issues through a detailed analysis, before they decide on how they will provide the necessary
capital, whether by loans or by issuance of securities, primarily because the capital secured by an
issuance of shares has a proprietary nature, and the capital secured by an issuance of bonds or loans
has a debt nature. The reasons and motives for an economic entity on the capital market to nd itself
in a role of a user of equity or a debt capital are multiple and varied. The practice shows that the most
important between them are the following:
• Maintaining an optimal balance between the equity and the borrowed (foreign) capital.
Namely, these particular relations are basic indicators for the nancial power and strength of
the business entity, its creditworthiness, rating and business perspective. These parameters, as
well as the relations between them, on the other hand, enable us to determine the place and the
role of the economic entity on the capital market;
• The degree of indebtedness of the business entity. This indicator has an utmost importance in
most cases when deciding on how to provide the needed capital. Namely, if the business entity
is considerably indebted or approaches the limit of allowed debt, it does not have a choice, but
to provide the necessary capital through issuance of shares;
• The degree of development and independence is also very signicant factor that has to be
considered. In a situation when the business entity has a successful and stable development, it
is logical to decide on mobilization of debt capital, for a simple reason that this will allow it to
maintain the high degree of independence and business autonomy in the future as well, which
is a very signicant prerequisite for maintaining the competitive advantage on the market in
sharp economic conditions;
• The degree of risk of the investment capital for which the mobilization of nancial resources is
made. If the risk of the investment of the potentially mobilized capital is higher, the economic
entity will give a priority to the issuance of shares, while on the other hand, if the risk is lower,
then it will decide upon debt capital;
• Current conditions on the capital market according to which an equity or debt capital can be
acquired;
• The market price of own shares (in case of joint stoke company). If the current, market price
of the shares is high and signicantly exceeds their nominal value and there is interest for
the shares among potential investors, it is realistic to assume that the necessary capital will
be obtained through an issuance of shares because they are expected to be attractive on the
market;
• The interest rate on the long-term loans granted from the banking institutions. In conditions
of low-interest rates and a stable bank loan policy, the economic entities will decide to obtain
the necessary funds by taking long-term loans from the banks;
• Tax policy and its instruments have a major impact on the decision to select the source that
will provide the necessary funds. In situations when by tax deductions and benets, bonds
are being favoured, it is assumed that the economic entity will obtain the necessary capital by
issuance of bonds. In cases when these tax deductions apply to the shares, the economic entity
will perform mobilization of capital through issuance of shares.
Given all these factors when choosing one of the capital sources, the business entities should always
consider the following:
• If they decide to provide the necessary capital through an issuance of bonds, then the ownership
structure of the capital will shift in favour of equity capital; and
• If they decide to provide the necessary capital through an issuance of bonds or by loans, then
the ownership structure of the capital will shift in favour of debt capital.
It is necessary to emphasize that there is no universal combination that can be used by all business
entities in mobilization of the needed nancial resources, and that is why before making a decision
they should always make a detailed analysis of all the factors in order to choose the combination that
will allow to maximize the value of the entity and minimize the costs for the capital.
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3. EXTERNAL SOURCES OF FUNDING
The capital market is a very important segment of the nancial market, mainly because on this market
the business entities can obtain the necessary capital through loans from banking institutions or
through issuance of securities.
Companies that provide the necessary capital by using long-term loans need to make prot from
the invested capital that can not be lower than the loan interest, because the interest is the price of
the capital. For a business entity to be able to get a loan, it is necessary for it to meet the following
conditions:
• To be solvent;
• To use the granted loan for its purpose;
• To meet certain requirements stipulated by the loan.
Almost always there are restrictive provisions in the loan agreements among which these are more
signicant:
• The loan user needs to maintain a minimal level of net working capital, as a condition for
providing of liquidity of the company;
• Restrictions in terms of expropriation of permanent assets;
• Restrictions on further long-term borrowing;
• Restrictions on status changes and signicant changes in its organisation;
• Restrictions on the amount of the issuance of securities, for the protection of creditors;
• Restrictions on dividend payment to a certain percentage of the prots.
The developed capital market allows business entities to get the needed capital by issuance of long-
term securities, shares or bonds. Before they issue securities, it is necessary for the business entities
to obtain permission for the issuance by a competent state authority, mainly by the Committee for
Securities. This permit is required in order to protect the interest of potential investors and to allow
issue only to those business entities that have good creditworthiness and high rating.
Funding of the business entities through issuance of shares has range of benets for the business
entities including:
• This source of funding puts smallest pressure on the company, because the mobilized funds
can be used permanently, and the dividend payment to the shareholders is made by an internal
decision of the administrative bodies;
• The dividend doesn’t have to be paid, and the unpaid dividend may be transformed into
dividend shares;
• It increases the company’s ability to mobilize funds from foreign sources.
Apart from the advantages, this source also has disadvantages i.e. issuance of common shares creates
an opportunity to change the power structure because of the inclusion of new shareholders i.e. change
in the ownership and executive structure. Also, this method of obtaining capital is followed by
expenses for the issuance and selling of the shares.
On the efcient capital market, business entities can obtain the necessary capital through an issuance
of corporate bonds. This kind of mobilization has range of benets among which the most signicant
are the following:
• The ability to mobilize higher amounts of funds, because the bonds are being sold to a large
number of interested subjects;
• Capital is being mobilized without changing of the structure of the equity;
• The costs related to the debt are restricted i.e. the only expense is the interest, which the issuer
has to pay to the bond holders;
• Because the interest payment is an expense, it can create some savings for the business entity
when paying the income tax.
• Insertion of a clause for early redemption of bonds if a cheaper source of funding becomes
available allows exibility in the nancial structure.
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As disadvantages of the funding through issuance of bonds, the following can be mentioned: the
interest is a xed cost that has to be compensated regardless of the results achieved, and if the
business entity makes a negative nancial result and is not able to pay the interest; its survival may
be jeopardized. As another disadvantage, it can be mentioned that the loan agreement might make
provision for certain restrictions for the issuer, such as ban on alienation of property, ban on additional
issuance of securities, ban on payment of dividend over some specied amount (if the issuer is a joint
stock company) etc.
In the structure of capital sources of the business entities in the developed market economies, bonds
take the dominant part, followed by shares, than long-term loans.
4. FINANCING OF BUSINESS ENTITIES IN THE REPUBLIC OF MACEDONIA
Republic of Macedonia is a small country with total area of 25,173 km2, with population of 2,052,772
inhabitants of whom 953,200 are capable of working, and gross domestic product amounting to
410,744 million denars. This country size determines the market. Macedonia is still underdeveloped
country and is at the lowest level of the medium-developed countries. Macedonian economy is nearly
two decades in stagnation as a result of which the unemployment rate is 32.1% and is the highest in
relation to neighboring countries.
According to statistics1
in the year 2010 in the country operate 75,497 businesses, from that 28,326
in the wholesale and retail, 8263 in manufacturing industry, in transport and communications activity
6417, scientic and technical activities 5228, building 4368, 3083 in agriculture, mining industry 164,
administrative and catering services 2519, in rental real estate 415, housing and service providers
4433, health services 3166, professional, nancial and insurance activities 408, education 992. Most
of these businesses or 59,276 (78.5%) are with a very small number of employees i.e. 1-9 employees
and only 203 entities (0.3%) have over 250 employees.
Most businesses that exist in the Republic of Macedonia are registered as limited liability companies
(LLC and Ltd.) while as joint stock companies exist 700 entities from which in 2010 only 33 companies
are listed on the Macedonian Stock Exchange.
Capacity utilization in the enterprises in recent years has ranged from 52-62%. There are more
reasons for such low utilization percentage, but these are noted as most important: nancial problems,
insufcient domestic demand, slow conquest of foreign markets, competitive imports, uncertain
economic environment.
Businesses in the Republic of Macedonia have still most of their investment projects nanced with
funds provided through expensive bank loans which certainly adversely affects their long-term
nancial balance and the capital structure. The maturity of the corporate sector indebtedness in the
country can be seen from the following table2.
In million denars
Table 1 Maturity structure of debt of the corporate sector
Type of indebtedness 31.12.2007 31.12.2008 31.12.2009 31.12.2010
Short-term loans 78,259 90,866 92,475 52,565
Long term loans 79,434 115,012 130,581 120,967
Due and nonperforming loans 7,949 9,012 11,426 17,284
Total 165,642 214,890 234,482 190,816
Bank loans are still the dominant source of capital for the economic entities in the country, that is,
the capital market mainly comes down to credit market. Borrowing by businesses in the long term
means longer load from the cost of these sources of funding. Here it is necessary to highlight the risk
of changing interest rates which is especially important because approved loans for the most part have
variable interest rates.
In the Republic of Macedonia the capital market is poorly developed despite the existence of a large
number of institutions that enable its operation. Namely, the Stock Exchange of securities exists more
than 15 years, was founded in 1995 and today it has 19 members of which 13 brokerage houses and
6 banks, of which 11 are with more than 50% foreign capital. It trades shares, bonds and other stock
material in accordance with the Commission for Securities.
1 Announcement of the State Statistical Ofce no.6.1.11 12. from 25/02/2011
2 Monetary Statistics of loans and savings banks, National Bank 2011.
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Despite the country’s businesses having the opportunity to mobilize nancial resources available
through the issuance of shares or bonds, relatively few of the companies nance its operations through
the capital market. Their role as issuers of securities is very rare. Joint Stock Companies usually issue
securities through a private offering. The following data are presented for the realized issuance of
securities for the period 2007-2009 year.
Table 2 Review of types of issuers, number of issued decisions, value of issuance and type of offer of shares issued in
the year 20073
Number Issuers of shares Number of
issued deci-
sions
Issuance value
Euro Denar Public oering (PE)/
Private oer (PP)
1Companies of the
economy 1 2,673,850 163,722,777 PP
2 Banks 2 23,021,562 1,408,440,000 PP
3Other nancial
institutions 62,541,033 155,450,502 PP
Total: 9 28,236,445 1,727,613,279 PP 9
Table 3 Review of types of issuers, number of issued decisions, value of issuance and type of offer of shares issued in
the year 20084
Number Issuers of shares Number of
issued deci-
sions
Issuance value
Euro Denar
Public oering
(PE)/
Private oer (PP)
1Companies of the
economy 211,561,710 708,982,162 PP
2 Banks 470,964,738 4,343,827,455 PP
3Other nancial
institutions 16 17,698,135 1,077,099,456 PP
Total: 22 100,224,583 6,129,909,073 PP 22
3 Report of the Committee for Securities of the Republic of Macedonia 2008, page 9
4 Report of the Committee for Securities of the Republic of Macedonia 2009, page 9
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Table 4 Review of types of issuers, number of issued decisions, value of issuance and type of offer of shares issued in
the year 20095
Number Issuers of shares Number of
issued deci-
sions
Issuance value
Euro Denar Public oering (PE)/
Private oer (PP)
1Companies of the
economy 384,517,900 5,169,570,105 PP
2 Banks 1 2,940,400 180,552,000 PP
3Other nancial
institutions 3 733,910 44,996,956 PP
Total: 788,192,210 5,395,119,061 PP 7
From the data presented it can be concluded that in three years only 6 businesses committed mobilization of
funds through the issuance of shares and through private offer which is really insignicant if we
take into account that the biggest problem of many businesses is their lack of funds.
5. ANALYSIS OF THE CONDUCTED SURVEY RESULTS
To explore the possibilities for nancing of small and medium businesses in the Pelagonia region
in Macedonia, a questionnaire of nine closed-type questions was prepared. Some of them are yes/
no questions, and some are questions with more provided answers to choose one or more from. The
questions were carefully selected in order to get a clearer picture as well as better quantitative analysis
of the current situation of small and medium businesses associated with the forms of their
nancing offered by the capital market . The questionnaire was carried out on a representative sample of
55 target business entities from the Pelagonia region, out of which 31 business entities answered the
questions. Survey was conducted from 15 June to 5 July, year 2011, in general through direct contact
or e-mail with representatives of the management team in business entities.
Quality conclusions can be drawn from the quantitative analysis, based on which useful
recommendations can be made.
To the rst question – Are you familiar with the forms for nancing small and medium-sized
businesses? – 23 responded positively, or 74.2% of the surveyed establishments. Despite the fact that
this is relatively high percentage of positive responses, 26% of the respondents had a negative response
which points to the fact that the investments realized by these business entities are nonstrategic.
To the second question – Have you had any investments in the previous 5 years? - 97% responded
positively, and only 1 business entity negatively.
To the third question, regarding the sources for providing needed funds for investment nancing,
which was a multiple choice question, 87.1% of the respondents answered that funds have been
provided from own sources, 77.4% by bank loans and 29% from borrowings. From own sources
as well as bank loans was the answer of 67.7% of respondents, while 7 or 22.6% of the surveyed
establishments chose all three above-mentioned sources of nancing. It’s interesting that none of
the businesses answered that the funds needed for investment nancing in the previous 5 years
were provided from leasing arrangements, shares, issuance of long-term bonds or factoring nance,
options listed as potential sources of nancing. The reasons for such answers should be either lack
of familiarity of business entities for funding opportunities, or their lack of faith in certain funding
sources.
The fourth question regarded planning investments in upcoming projects. 96.8% of the businesses
conrmed having plans to invest in new projects in the future. Only one business entity gave a negative
response to this question. This speaks of the fact that businesses are willing to develop in the future, but
considering the sources of nancing of those projects (which was stressed in the fth question) most
of them plan to provide the funds needed from own sources (87.1%) and by bank loans (83.9%),or
in both ways (22 businesses or 71%). Not one of the businesses stated other source of nancing for
5 Report of the Committee for Securities of the Republic of Macedonia 2010, page 7
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future planned projects. These ways of project nancing are, above all, due to the low awareness of
businesses of the advantages from providing funds through issuance of shares and bonds, which was
part of the sixth question. Namely, 77.4% or 24 surveyed establishments answered that they are not
familiar with the advantages from providing funds through issuance of shares and bonds, and 87.5%
of those who said they were not familiar with the advantages of this way of nancing said they needed
additional education in this eld (question no.7).
Interesting are the answers to the eighth question which asks whether businesses would use issuance
of shares and bonds as one of the ways to provide the needed nances. Namely, 74.2% of the business
entities gave a negative answer which in a way correlates to the answers regarding familiarity of
businesses with such ways of nancing and providing capital.
The last question concerns the transparency in the publication of data for the business entity. More than
30% of the surveyed establishments (10 businesses) stated that they are not ready yet for transparent
publication of their data. This means that business entities observe their data as secret and fear the
competition in case data regarding the ways of nancing their activities is made public.
6. CONCLUSION
Companies in developed capital market countries have the opportunity to provide the needed nances
not only from banking institutions in the shape of credits, but also through issuance of securities.
The existence of developed capital market, rich in nancial instruments, is an indispensable
prerequisite for growth and development of business entities in every country. What kind of
securities will be decided by the business entity depends above all on the policy of management, its
nancial structure and current capital market conditions.
The capital market in Republic of Macedonia is characterized with undeveloped primary market,
limited liquidity of secondary market, a modest offer of investment alternatives and an expressed
sensitivity of investors and their decisions regarding the economic developments in the region and
internationally.
The level of capital mobilization through issuance of securities in our country is very low. This is
primarily due to the lack of interest of the corporate sector for nancing their activities through
issuance of securities, which comes as a result of:
• Lack of familiarity of the management with the advantages coming from this way of nancing;
• Reluctance of the company to open to the public – fear of nancial reports publication;
• Fear of losing control over the company in case of issuance of new shares;
• Default on the securities issued by the issuers (the non-payment of dividend);
• Insufcient education of the public in terms of the advantages from investment of securities.
In order for the capital market in our country to function efciently, especially to encourage business
entities to provide the needed capital through issuance of securities, certain specic measures need
to be taken:
• Organization of seminars and expert panels to educate managers about the opportunities
offered by the capital market as an alternative way of nancing;
• Formation of specic nancial sectors in businesses equipped with experts to research capital
market conditions and affect management in direction of making relevant decisions while
choosing source of nancing;
• Greater openness and transparency of companies who mobilize capital through issuance of
securities, which will increase existing and potential investors’ trust;
• Improvement of the established information system;
• Education of the public on the advantages of investing in long-term bonds;
• Establishing cooperation of the Macedonian Stock Exchange in greater international frames;
• Improvement of legislation and its efcient application;
• Improvement of the organizational and functional structure of the Commission for Securities and
continuous improvement of its facilities and personnel techniques;
• Improvement and harmonization of capital market legislation with EU directives.
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References
Announcement of the State Statistical Ofce no.6.1.11 12 from 25.02.2011
Bogojevic Arsic Vesna. (2004). Securities Market, The Faculty of Organizational Sciences, Belgrade
Company Law, Ofcial Gazette of RM 28/2004 year
Faerber Esme. (2008). All about Stocks, third edition, The MeGraw-Hill
Law on Securities, Ofcial Gazette of R.Macedonia 7/2008
Leasing Law, Ofcial Gazette of RM 4/2002, 49/2003, 13/2006 and 88/2008
Monetary Statistics of the loans and savings banks, National Bank, 2011
Report of the Committee for Securities of the Republic of Macedonia, 2008
Report of the Committee for Securities of the Republic of Macedonia, 2009
Report of the Committee for Securities of the Republic of Macedonia, 2010
Revised national strategy for development of small and medium enterprises (2002-2013) Ministry of Economy,
Skopje, 2007
Strategy for enforcement of Law on Securities in the period 2007-2012, Committee on Securities.
Vitanova Gordana. (2003). Financial Markets and Institutions, Faculty of Economics, Prilep, 2003
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MECHANISM OF FINANCING SMES IN SERBIA AS MID-TRANSITION ECONOMY
Branko Z. Ljutic
Megatrend University, Belgrade, Serbia and State University of Belgrade, Serbia
E-mail: ljutic.branko@gmail.com
Ivana B. Ljutic
State University of Nis, Faculty of Law, Serbia
E-mail: ivablj@gmail.com
Predrag Marjanovic
R&B College, High School for Stock Markets Operations & Accountancy, Belgrade, Serbia
E-mail: pedamarjanovic@yahoo.com
Abstract
SME nancing is a rather complex and almost a rhetoric topic. In Serbia as a country which approached the
privatization process that lead to a tycoon model, the stalemate is inevitable. General leap service and empty
promises of reform and not so reform oriented governments for the last two decades did not make any real
change in nancing SMEs. Loans and grants from many international donors and agencies have being syphoned
to the sector in such large quantities and also in the many empty handed press conferences and public venues
paved with unfullled promises. In practice, the situation is more than grim, since most protable SMEs are
in the desperate needs for loan funds, but the interest rates and other costs are more than intolerable from the
nancial point of view. This paper is a form of vivisection what is really going on, taking into account the fact
that Serbia is knocking at the door of new election in 2013. Promises, promises, ination of promises and ever
rising decits of delivery and results is more than obvious. This research shall shed some more analytical light
on the real nancial performance of the sample of small group of SMEs in Serbia, in the region of Podrinje,
relatively close to Republic of Srpska. Model of business performance metrics and management as well as
benchmarking created by us shall be tested on the real nancial statement data, followed by the extensive
review and analysis of the real protability and liquidity factors of those enterprises. Business, operational
and nancial performance of the SMEs in Serbia, region of Podrinje, shall be viewed in the light and optics of
stimulation of the local and regional economic growth, and growth of employment.
Keywords: SME Financing, Performance Management, Transition Economy, Serbia
1. FINANCING GROWTH OF THE START-UP SME-S IN SERBIA - FORGONE OPPORTUNITIES
IN THE LOST DECADE: 2001-2011
The beginning of so called “new era of democratization, economic and social reforms” has being
envisaged in the heads and minds of many progressive people and radical intellectuals in Serbia during
the prolonged period of more than two decades after the Tito (1980) and the end of the Slobodan
Milosevic era (2001). More or less, some kind of political consensus and intellectual compromised
common ground has being created in a strategic orientation towards the market and strong democratic
institutions based on the rule of law, with an eye on joining EU, also with a strong notion to reintegrate
Serbia’s society and isolated economy into the regional and global institutions. In that context in
the early years of the rst decade of the 21st century, at least on the declarative verbal front, the
Government of Serbia opted strategically to enter into radical economic reforms, especially at the
SME sector, as some kind of a growth propulsor, that has being in accordance with prescriptions of
the international donors, aid agencies and foreign governments, also in a harmony with nancial and
technical assistance guidelines and strategic policy options. Expectation gap on both sides at that
moment was not as visible as it is the case nowadays. Some of the key proposed strategic options
almost ten years ago have being the following now and then (Ljutic, 2003, pp.2-14):
• Adoption and harmonization of the Serbian SME sector regulation by adopting and almost
transplanting with some small cosmetic alterations the American model (SBA Act) an at that
time new liberalized regulation of the sector.
• Strong protection of the more than weak SMEs from very strong government at that time
(which unfortunately is not nowadays very strong but more than gigantic and omnipotent
in controlling anything and everything regarding material and nancial more than scarce
resources).
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• Orientation to create a new system of nancial institutions which shall service additionally the
nancial needs of the existing and emerging SMEs in Serbia.
Serbia economic growth strategy still see the only window of optimistic opportunity to integrate into
EU, while establishing excellent political, diplomatic and economic ties with rst of all USA and also
with other OECD countries. In that context some of the main perspective areas have being and still
are:
• Unquestionable orientation to develop SME sector in Serbia.
• To create a strong but lean institutional infrastructure supportive to the SMEs, within the
framework of the long term strategic growth vision and policy
• Harmonization with the EU standards and regulation of the SME sector, as a prerequisite of
negotiations of joining as a candidate country EU.
• Global reintegration by adopting the foreign policy orientation of friendly relations with USA,
taking into accounts the globalization trends and inuences, especially of the WTO and of the
OECD.
Table 1 Economic Forecast for Serbia 2011/2012
20101) 2011 2012
GDP per capita, current prices [dinar] 416,495 457,653 503,161
Real GDP growth rate [%] 1.6 2.7 3.6
Monthly gross wage per employee [dinar] 47,450 51,552 56,582
Monthly gross wage, growth rate [%] 7.5 8.6 9.8
Real gross wage, growth rate [%] 1.2 0.1 2.5
Labour productivity, growth rate [%] 6.6 2 2.2
Employment, growth rate [%] 2) -5 0.7 1.4
Registered unemployment rate [%] 3) 26.9 26.4 25.5
Average ination rate, consumer prices [%] 5.9 8.4 7.1
Budget balance [% of GDP] -3.5 -4 -3.4
1)2010 partly estimated
2) Total employment excluding agricultural producers.3) Unemployed persons as percentage of unemployed persons
plus total employment.
Source:http://www.vojvodina-cess.org/index.php?mediumid=2&pagid=143&stukid=923&action= register Accessed:
30.07.2011
Based on the conclusions previous data of eminent economics professor Josidis from the State
University of Novi Sad, the unresolved problems of economic growth and policy for the current decade
shall still be even more pronounced unemployment and sluggish domestic and foreign investments.
On the other hand the main “lobby group” which protects the interest of the big businesses owned
by the Serbian tycoons and ex-Milosevic, or why “ex” captains of the socialist industry who are
nowadays proponents of the liberal capitalist ideas, gathered on the very beautiful mounting in Serbia
named Kopaonik. In beautiful hotels, while spending lavishly the fruits and results of more than
private privatization for them, have being able to create some kind of a document titled “Kopaonik
Consensus” which consisted of 11 policy recommendation for 2011, and on the top business forum
they have concluded that only sustainable reforms leads to sustainable development (Kopaonik
Consensus, 2011, pp. 1-3). Although almost the whole Serbian Government was present there, in that
Manifest they did not dare even to mention the SME sector. Based on that fact we could very easily
make a certain conclusion that the top ofcials of Serbian government only mention SMEs and their
employees when they meet them in person, and need them to vote for re-election. Serbia has made some
progress in the areas of economic reforms and freedoms, but at the institutional front still remains a
signicant vulnerability and need for a large structural reform and adjustment of the SME sector in its
preparation for the future within EU (IMF Executive Board, 2011). Only new supported program by
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the Government of Serbia could help SMEs to restructure, and complete transition entering a path of
more balanced and pronounced growth. Based on the ofcial data from 2008, the share of SME sector
in GVA was 59.1%. 67.2% in employment and 45.9 in exports (Government of the Republic of Serbia).
Some rather small goals have being in the area of competition development support program for fast
growing SMEs, as support project in the area of business services development (1 million Euros),
Program for co-nancing local initiatives for SME development, including business incubators, (0.5
million Euros), SME support program for introducing e-business (0.5 million Euros), and only 0.1
million Euros for the Program supporting SME’s facing nancial problems that can jeopardize their
survival as a kind of a second chance. Either Serbian SME’s are at large very protable, most of
them, or only the negligible number is facing difculties of illiquidity based on such “very generous
support”.
In another study nanced by the USAID which have tried to create some kind of a platform for the
Serbian post-crisis economic growth and development model 2011-2020, SME sector is non-existing
one, that is self-explanatory fact itself, and not any other comment is necessary (USAID, FREN,
TEI, 2010). Different observers and analysts could see the same set of objective real data differently,
depending not only on the level of objectivity but also based on the prospective interests also.
2. STIMULATING SMES GROWTH
In the ofcial documents issued by the Government of Serbia, its agencies and research institutes,
think-tanks and NGOs nanced by the same government, the picture is full of colour, vivid, promising,
where they express lavishly and generously assessment of their own activities, which is more than
positive. In conclusion, there is a prevailing feeling of happiness with the signicant progress in
strengthening entrepreneurship and creating a competitive sector of small and medium enterprises
by creating more favourable legal and regulatory framework, easier access to nancial institutions,
training of entrepreneurs and employees.
In recent research (Calic B, 2011, pp. 3-4), as review of current sources of SME external nancing
have benign included foreign donations, foreign credit lines (e.g. EAR, EU, EIB, Italian Government,
etc.). Serbian Ministry for Economics and Regional Development has created the package of support
measures of the economic policy. It is a form of grant scheme for SMEs existing at last three years
in a row, independently owned, not a part of a holding corporation, and external investors hold less
than 50% of equity capital. Grants are in the range of 1.000 to 15.000 Euros for the preparation
of the technical and project documentation and between 1.000 and 8.000 Euros for the purchase
of computer software (Serbian Ministry for Economics and Regional Development, 2011). They
also offer nancial support for the entrepreneurship focusing on the increase of the competitiveness,
establishment of SME associations and unions, research and innovation, clusters, and also a small
credit line for SMEs start-ups.
3. SERBIAN ECONOMIC AND FINANCIAL SYSTEM IN THE CONTEXT OF FINANCING SMES
Analytically observed the word system is a rather strong denition for the weak, fragmented and
poorly coordinated institutions and scattered part of the national economic and nancial system.
Observations in retrospect only showed the Serbian economic and nancial system at the had a chance
at the beginning of the rst decade of the 21st century to become well regulated and harmonized
with the unwritten but really abiding international standards and practice. In reality the system more
or less turned into some kind of deregulated chaos, from a “leap service” of more than attractive
promises to a prolonged way to hell. As world globally, and Europe regionally has being entering
economic, nancial and banking crisis in the last few years, Serbia has lost its manoeuvring time,
because instability at the South anks of the EU (Greece, Italy, Spain, Portugal, who is next?) is not
promising the EU shall even negotiate with Serbia as a candidate member country to enter the Union.
Unconditional nancial aid, grants and donors funds shall be curtailed very soon, so the Serbian
government shall face the rude reality of the strong budgetary constraints, still more pronounces as
the inow from the privatization sales is almost nulled.
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4. REVIEW OF THE PERTINENT LEGAL AND OTHER REGULATION RELATED TO SMES IN
SERBIA
Reforms in the Serbia’s nancial and banking sector do last almost a decade, but instability and the
risk of uncontrolled ination are not eliminated at all. Banking regulation in Serbia is more or less
reformed and based on the EU Directives and BIS Standards, while accounting and audit regulation
have adopted the framework of the International Accounting Standards, International Financial
Reporting Standards and of the International Standards of Auditing. Such standards based on our
prolonged research and studies are more than cumbersome, unnecessary complex and very costly for
the SME sector, and any suggestion to the Government, and especially to the Department of Finance
is facing with a strong impenetrable wall of silence. On the opposite side, most SME owners and
entrepreneurs consider costs of external accounting services as something unnecessary, while paying
low monthly fees for external accounting services and outsourcing, but objectively assessed the value
of those information is almost next to nothing for their needs in everyday management as well as for
any kind of strategic business planning. In the eld of scal system regulation VAT administration
with very frequent reporting and payment of the VAT obligations is a heavy burden for Serbian
SMEs since they lack the staff and management administrative infrastructure to support so frequent
VAT reporting and payment. At the early 1990 at that time the Department of Economy of Serbia
have established a working group to create a draft of the new SMEs law, with an aim to regulate
the sector as a US SBA Law as a some kind of Ombudsman regulation, e.g. to protect weak SMEs
from the strong government and big monopoly business, also very close to the Government. First so
called “Reform Government” of Doctor Zoran Djindjic in early 2003 has an orientation to reform
profoundly SME regulation and widely to apply EU related standards, but just after his assassination
all the movements and discussions in that direction unfortunately have being stopped at once.
5. HOW TO INCREASE THE AWARENESS OF THE SERBIAN GOVERNMENT AND THE
GENERAL PUBLIC ABOUT THE IMPORTANCE OF FINANCING SMES GROWTH?
Based on our preliminary intuitive analysis some strategic and operative goals could be contemplated
in order to increase the real public awareness of the Serbian government and the general public that
SME sector is important for the:
• Economic development and faster growth.
• Employment increase
• Social stability
In theory it is much easier to create any goal, but in real life practically the road to Hell is paved with
good intentions. Since Serbia is now facing the done phase of privatization, while at the same time many
of the previously privatized enterprises are nocking back at the Government door to be reprivatized
since the most of new owners did not have any idea expect to grab the value of the property and to
convert the existing industrial sites into protable new construction grounds. The Government of
Serbia could from now on count only on domestic scal income, may be they reconsider a possibility
to start a creation of viable business infrastructure for the whole economy and especially for the SME
sector, that is on the other side time consuming, costly, without any short term effects for the elections
to be won. On the other side, life wisdom is teaching us again and again, if we do not mention the
real problems in public that could be more than benecial and protable for the time being. Serbia’s
economy is more or less, please read much less, in some kind of reform process for almost two
decades. A famous Russian director and intellectual Nikhita Mihalkov directed a lm “Moscow Does
Not Believe in Tears” and we could also drew a line of similarity that even to mention a word or a
concept of “reform” in Serbia, most of the general public would respond with sarcasm and ask you in
return: “Could we eat the reforms”. The answer is obvious that reforms and especially economic ones
are only the prerequisite or pre-condition for the real life positive changes. If the promised changes do
not happen in ten or more years, than the support for any kind of reforms shall vanish like it has never
existed before. It is very complex and almost insurmountable task to make a profound change from
reforms in words to reform in deeds. On this pathway it is necessary and unavoidable the profound
and deep structural reform of the public administration and government on all levels, to make a real
change not only in perception, but also in the operational level by introduction market orientation and
at the same time increasing public trust in the accountability of the government sector, especially the
part which serves small and medium size businesses. The previous communist and socialist regimes
(1980-2001) have being the real master minders of spin doctors for TV and public charades and
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shows in public full of unreal promises. This medicine has stopped to be useful at the beginning of
21st century. The Serbian Government could try very hard from now on to create a public impression
about very big support for business perspectives and nancing SMEs, but this is not viable option
any more, since more and more small businesses are stopping operations or going bankrupt since
the rising illiquidity in the economy, where the main cause of illiquidity is government and illiquid
privatized companies. SMEs in Serbia need new loans, grant schemes, venture capital nancing and
institutional support, all the elements which are lacking now. For Serbia Government the key question
is how to increase the inow of external capital and bank loans to SMEs, but such a question is much
easier to ask than to answer.
6. FINANCIAL AID AND GRANTS SCHEMES OF FINANCING SME SECTOR IN SERBIA BY
THE EU COUNTRIES AND THE OTHER OECD MEMBER STATES
We have quoted in our research on of the prominent politicians from the Province of Vojvodina,
Mister Nenad Canak, MA,: “Genltemen, where is the money?”, his beloved phrase for almost two
decades. The real question for the SME sector in Serbia is – Where are hundreds and hundreds
billions of dollars and euros of grants, loans and credit lines specially dedicated to nance SMEs in
Serbia. The banks really administer credit lines for the SME sector, but when the private consultants
contact the banks they are so secretive and not at all cooperative, so there is no any way to nd out
if these nancial support reach at all the nal recipients as it has being planned by the international
donors. Possible solution is for the grant and nance agencies from the EU to properly audit those
projects by their own internal and eventually external independent auditors, but not in any case by
the existing auditors of those banks and nancial institutions. SME owners and managers are not
in an easy position vis-a-vis commercial banks, since most banks “prefer” to nance existing large
clients and service with loans the private businesses of their shareholders than to grant to unknown
SMEs. If Serbian SME sector does not ask nor the Government for any advice or prescription as it
is the case now, it is not good business to give any advice at all. During the whole period 2001-2011
the Serbian Governments acted and reacted as the owners of ultimate wisdom and owners of eternal
truth, by knowing everything about nothing, and knowing nothing about everything, that is the ideal
of economics as a science. If we assume that the government has been more than knowledgeable and
efcient, the result would be well developed, balanced, and strong SME sector which is very capable
to enter EU competition and regulatory arena. The time will tell and shall be a better judge than any
of us.
7. WHAT TO OR NOT TO DO NEXT IN THE SME FINANCING IN SERBIA
Based on our experience with SME sector as management consultants and external auditors for
almost two decades we strongly advocate the following next steps necessary to adapt SME sector to
EU standards and global competition pressures:
• Finally after many years of postponement to adopt new SME regulation, integral one,
simplied based on the US SBA Act with a strong EU avour.
• Strong protection of the SME from strong Government, unfriendly public administration,
court system and big monopolies which are riding hand in hand with the Government
• To create a new system of nancial institutions this shall serve additionally the needs of SMEs.
• The only real step forward is to introduce new check-up methodology to check up Government
promises with reality.
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8. ANALYTICAL RESULTS OF THE BUSINESS PERFORMANCE OF THE SAMPLE OF SMES IN
THE REGION OF PODRINJE, SERBIA
SMEs in Serbia based on the Law on Accounting are not obliged to audit statutory accounts, but just
to le the annual nancial statements to the public register (Accounting and Auditing Law, 2006).
Since the published data are limited in scope and depth most of such nancial data, although from the
very beginning unchecked are also limited (Business Registry Agency Law, 2004, 2009). The SME
based on that law are not obliged to reveal their full nancial data set (e.g. set of nancial statements
with full report), except to the creditors and investors on theirs demand, but that is covered with the
clause of business condentiality agreement. Such limitations are also extra problem for the proper
nancial statement and business performance measurement analysis. We have selected the sample of
ve different SMEs in the Region of the County of Podrinje, Serbia and applied the standard methods
of statistical analysis of correlation. We have observed two closely related statistical variables which
we considered relevant to determine the correlation relationship between the sources of nancing and
growth of the selected rms. The period we have covered is 2005-2008, relatively stable with not so
much pronounced ination and economic instability.
Table 1. Comparative Statistical Correlation Coefcients of the Five SMEs sample, County of Podrinje, Serbia
Correlation Commentary
SME Long Term Obligations/
Business Prot Long Term Obligations/
Income from Sales
Long Term
Obligations /
Business Prot
Long Term Obligations/
Income from Sales
Klas -0.99237 -0.88486 Extremely
strong relation Very strong relation
Banja 0.71293 0.73576 Strong relation Strong relation
Fincel -0.09292 0.76230 No relationship Very strong relation
Toplana -0.62417 0.88462 Strong relation Very strong relation
Stim -0.68942 -0.57824 Strong relation Strong relation
Data Source: Original nancial statements obtained through a courtesy of the managers of the ve SMEs included in the
statistical sample, 25 ofcial tables. Data obtained and accessed on 19.04.2010
We have noticed that SME Klas has an extremely strong correlation relationship between the long
term nancial obligations and of the business income, e.g. prot, and also income from sales. SME
Banja these two before mentioned relationships in both cases is very strong. SME Incel does not show
positive relationship between the long term obligations and the prot from business operations, but on
the other side it exist a strong relationship between the long term obligations and sales income. SME
Toplana the relationship is from strong (correlation of long term obligations and business income)
up to very strong as a reection of the impact of long term debt obligations on the sales income. For
the SME Stim it could be observed that both correlations relationships when we have analysed the
impact of the long term debt on business prot and income from sales. When we have observed the
whole sample consisted of the ve SMEs we come to a conclusion that the correlation relationships
are from extremely strong (SME 1), very strong (SME 3), strong (SMEs 4 and 5). Based on the
previous results we have come to a conclusion that our research has conrmed the hypothesis of the
positive inuence of the mechanism of the sources of nancing on the growth of selected business
performance indicators of the analysed SMEs.
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Table 2 Comparative Analysis of the Coefcients of Determination of the Selected Statistical Sample of 5 SMEs,
County of Podrinje, Serbia
Coecient of Determination
Selected SME Long Term Obligations /
Business Income Long Term Obligations /
Sales Income
Klas 98.48% 78.30%
Banja 50.83% 54.13%
Fincel 0.86% 58.11%
Toplana 38.96% 78.26%
Stim 47.53% 33.44%
Data Source: Original nancial statements obtained through a courtesy of the managers of the ve SMEs included in the
statistical sample, 25 ofcial tables. Data obtained and accessed on 19.04.2010
High values of the statistical coefcients of determination are also conrming to us our previous
partial conclusions of the statistical correlation analysis that the impact of factors like long term
nancial obligation on one side and business income, e.g. prot from business operations on the
other, are signicantly contributing to the high positive results of the harmony of the texted variables
X and Y. Calculation of the total rate of correlation for all ve analysed SMEs which are included
in the statistical sample in the County of Podrinje, Serbia is nally conrming that the correlation
relationship is in the area of strong relationship. This fact is conrming additionally our hypothesis
that obtaining and supplying the adequate sources of nancing for SMEs has a strong relationship with
the business growth of the before mentioned ve SMEs, and consequently proportionally contribute
to the local economic growth in the region. We have also applied the Altman test which is trying to
predict eventual bankruptcy and also selected business performance individual measures; as well we
have tried to project linear and exponential trends for the period 2005-2012. The before mentioned
tests have also conrmed our general conclusions about strong inuence of the sources of nancing
on the SME growth rates determined as protability.
9. CONCLUSION
As in everything else, there at least two ways of thinking and analytical approaches, on at least try to
be objective and real as much as possible regardless of the subject of our research that is something
we have opted for. On the other side there is a possibility to choose a research subject something
that we could be also objective, but the subject is irrelevant in real life, like exploring the technical
model of SME nancing in OECD countries. This paper have focused to shed some extra light that
in Serbia there are no “Angels of Business”, even less venture capitalists, that stock markets and
nancial institutions only serving the nancial needs of the SME sector on their Internet pages, while
in practice still exist more than harsh reality of more than modest external sources of nancing SME
operations and growth.
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aspx?id=230 and http://www.narr.gov.rs/Lists/Stranice/ViewPage.aspx?ID=17 Accessed: 07.08.2011
USAID, FREN, TEI, Government of Serbia. Memorandum on the Budget and Economic and Fiscal Policy
for 2011, with Projections for 2012 and 2013. Unofcial translation from Serbian language by the
Yugoslav Review. Serbian post-crisis economic growth and development model 2011-2020. Executive
Summary Belgrade. August 2010.
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
THE SME FINANCING GAP IN SLOVENIA: A MACROECONOMIC PERSPECTIVE ON A
MICROECONOMIC SME FINANCING PROBLEM1
Matevž Rašković
Faculty of Economics University of Ljubljana, Slovenia
E-mail: matevz.raskovic@ef.uni-lj.si
Barbara Mörec
Faculty of Economics University of Ljubljana, Slovenia
E-mail: barbara.moerec@ef.uni-lj.si
Abstract
The country-cyclical substitution effect between trade and bank credit seems to be one of the “hottest” and most
current research topics in both the banking and nance literature, as well as in the small business literature.
Despite this, there exist several gaps in the study of this issue, ranging from contradictory and limited empirical
evidence, to a lack of a unifying theory, and a general gap in studying this issue in non-Anglo-Saxon, smaller
and emerging market contexts; especially in Central and Eastern Europe. Our paper builds on Biais & Gollier’s
(1997) macroeconomic implications of trade credit and analyzes the counter-cyclical substitution effect
between trade and bank credit in a series of cross-section robust regression and xed effects panel regression
models. This is done on a sample of Slovenian SMEs (including micro companies) for the 2007-2010 period.
Our results do not only establish the existence of the substitution effect between trade and bank credit, but
show how this effect is stronger in the initial phase of the current global economic crisis, and less strong in the
subsequent deepening and bottoming of the crisis in 2009. Furthermore, we also show how the counter-cyclical
substitution effect between trade and bank credit does not only differ across the various phases of the current
global economic crisis, but also across different company size groups, where SMEs have actually become
“double victims” of the crisis.
Keywords: SMEs, Trade Credit, Counter-Cyclical Substitution, Slovenia.
1. INTRODUCTION
The research on bank vs. trade credit substitution, which was started more than half a century ago by
Meltzer (1960) and Schwartz (1974), has gained a new impetus within the current global economic
and nancial crisis. The so called country-cyclical aspect of this substitution seems to be one of the
“hottest” and most current research topics in both the banking and nance literature (Burkart &
Ellingsen, 2004; Mateut, Bougheas & Mizena, 2006; Ge & Qiu, 2007; Bougheas, Mateut & Mizena,
2009; Huang, Shi & Zhang, 2011), as well as in the small business literature (García-Teruel &
Martínez-Solano, 2007; García-Teruel & Martínez-Solano, 2010). Despite Biais & Gollier (1997)
positioning this topic as a future research avenue 15 years ago, Huang, Shi & Zhang, (2011, p. 1859)
today still point to several research gaps in this area. These are further accompanied by “somewhat
contradictory [empirical] evidence”. On a substantive level, they also outline a lack of a “unifying
theory,” which does not only consider substitution between bank and trade nancing, but also their
possible complementarity at various levels of the economic cycle.
The bulk of research on bank vs. trade credit substitution, as well as its economic cyclicality has
focused on large and developed countries (Huang, Shi & Zhang, 2011). This holds both for the
banking and nance literature, and the small business literature. With regards to the banking and
nance literature, the research on US companies (Peterson & Rajan, 1997; Nilsen, 2002; Danielson
& Scott, 2004) and UK companies (Mateut, Bougheas & Mizen, 2006; Guariglia & Mateut, 2006) has
undoubtedly shed important empirical evidence on the subject, which seems to support substitution.
However, there seems to be a substantial empirical gap of similar research for non-Anglo-Saxon
countries (García-Teruel & Martínez-Solano, 2010), and even more so for non-Western emerging
countries – i.e. from Central and/or Eastern Europe (Mörec & Rašković, 2011; Črnigoj & Mramor,
2009). While the recent rise of China as a global economic superpower has undoubtedly stimulated
more research of emerging markets (see i.e. Ge & Qiu, 2007; Cull, Xu & Zhu, 2009; Huang, Shi &
Zhang, 2011), China can by no means be considered an ordinary emerging market, yet alone a small
one. The same holds i.e. for Cook’s (1999) research on Russian SMEs, too.
1 We would like to thank the anonymous reviewer(s) within the forthcoming REDETTE conference in Banja Luka,
whose comments on the draft version of this paper signicantly contributed to its improvement. We would also like
to specially thank Banu M. Durukan (Dokuz Eylül University, Turkey), Nina Ponikvar (University of Ljubljana,
Slovenia), Petra Došenović Bonča (University of Ljubljana, Slovenia), Katja Zajc Kejžar (University of Ljubljana,
Slovenia), and Črt Kostevc (University of Ljubljana, Slovenia) for their comments and suggestions.
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
A similar observation can be drawn from the small business literature, where the work by García-
Teruel & Martínez-Solano (2010) published in the International Small Business Journal analyzes
the determinants of the use of trade credit by European SMEs across seven countries, among which
Greece is the closest proxy for an emerging economy. One has to point out to the research by Niskanen
& Niskanen (2006) on Finish SMEs, which however focused only on the commercial motives for
trade credit use among SMEs. Similarly to the banking and nance literature, large and developed
countries seem to be receiving much more research interest in the small business literature as well.
Thus, quite often ndings from these environments are simply transferred or at best “adjusted” to
emerging and non-western market contexts.
Our paper builds on Biais & Gollier’s (1997) “macroeconomic implications of trade credit” (Huang,
Shi & Zhang, 2011, p. 1859), and Mateut, Bougheas & Mizen’s (2006) analysis of trade credit,
bank lending and monetary policy transmission. In general, the paper focuses on the determinants of
trade credit use among SMEs, and more specically looks at the counter-cyclical substitution effect
between bank and trade credit. This topic is usually analyzed from a microeconomic perspective,
and is quite often related to a broader issue of SMEs’ capital structure and SME access to nancing.
Both have received exponential research attention over the recent decade (Rouse & Jayawarna, 2006;
Claessens & Tzioumis, 2006; Hussain, Millman & Matlay, 2006).
We employ both a cross-section robust regression model, and a xed effects panel regression model to
determine the nature of the substitution effect and its counter-cyclicality across various company size
groups, as well as across the current economic downturn. This is further complemented by descriptive
statistics on a population of non-nancial Slovenian companies with positive equity value between
2007 and 2010.
On a conceptual level, the paper also aims to bridge the chasm between the small business and the
banking and nance literatures, which are interlinked through the study of the determinants of SME
capital structures and their use of trade credit. In this context, the paper makes a series of contributions
to both elds. First, by addressing the issue of trade vs. bank credit substitution in SMEs the paper
builds and extends the work by García-Teruel & Martínez-Solano (2010) on the determinants of trade
credit among SMEs. Second, our research responds to the recent call by Rahaman (2011) to gather
new policy insights and test existing theoretical models in the current crisis context. It does so by
analyzing the counter-cyclical nature of the substitution effect between bank and trade credit. To the
best of our knowledge the study by Love, Preve & Sarria-Allende (2007) was so far the only one
which specically analyzed the counter-cyclical substitution effect between trade and bank credit
within an economic crisis situation, and at the same time in the emerging market contexts (albeit the
1990s Asian and South American country-level crises).
Third, while the study of García-Teruel & Martínez-Solano (2010) focuses on seven EU countries
- which were with the exception of Greece all highly developed - our analysis of Slovenian SMEs
narrows the research gap among small and developing countries (Črnigoj & Mramor, 2009; Doern,
2009). In this regard, our paper is also motivated by a broader cross-country analysis of nancing
patterns in transition countries (i.e. Haas, Ferreira & Taci, 2010, Beck, Demirgüç-Kunt & Maksimovic,
2008). In particular, our study complements and extends the limited research on the SME nance gap
in Eastern Europe.
Fourth, our research does not only include SMEs in the “traditional” sense (without companies with
less than 10 employees), but includes micro companies, as well. Despite representing the bulk of the
SME population this SME segment is generally excluded from the analysis in the majority of SME
studies (i.e. Črnigoj & Mramor, 2009). This is done usually under the pretence of not being relevant
or due to methodological challenges in dealing with sample heterogeneity and the corresponding
treatment of outliers in regression analysis (Hampel, 2001; Huber, 1981).
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
2. SURVEY OF THE LITERATURE
Garciá-Teruel & Martínez-Solano (2010, p. 215) dene trade credit as a “delay between the delivery
of goods or the provision of services by a supplier and their payment”. In general, the authors outline
how “for the seller this represents an investment in accounts receivable, while for the buyer it is a
source of nancing that is classed under current liabilities on the balance sheet”. In this regard, we
have operationalized trade credit in this paper as the share of accounts payable in total liabilities
or simply the share of accounts payable. In a comprehensive theoretical overview García-Teruel &
Martínez-Solano (2010, p. 215) outline “various theories to explain the use of trade credit based on
the advantages for suppliers and for customers” which they group into commercial, operational and
nancial motives for the use of trade credit, as shown in Table 1.
With regards to the correlation between trade credit and bank lending Meltzer (1960) was the rst to
conduct a systematical analysis of the alleged substitution effect between bank credit and trade credit.
This trade-off perspective was further expanded by Schwartz (1974), where the trade-off between
trade and bank credit was more explicitly outlined, either with regards to varying costs of borrowing
for different types of client companies in a “normal” and in a “constrained” (crisis) market setting. In
this sense Schwartz concludes how companies “with relatively low nancing costs will borrow more
from the bank during a contractionary period, in order to extend trade credit to downstream rms
with higher nancing costs and which encounter greater difculty in borrowing from banks” (Huang,
Shi & Zhang, 2011, p. 1860). However, this “curtsey” is by no means an act of seless altruism, but
rather a management of long-term buyer-supplier relationships, which are in turn an important source
of a company’s competitiveness (Dyer & Singh, 1998; Veludo, Macbeth & Purchase, 2006). More
recently, this perspective has evolved into a comprehensive study of the so called counter-cyclical
substitution between trade and bank credit, pursued by Biais & Gollier (1997); Burkart & Ellingsen
(2004); Mateut, Bougheas & Mizena (2006); Love, Preve & Sarria-Allende (2007); Bougheas, Mateut
& Mizena (2009); and Huang, Shi & Zhang (2011). This substitution effect is not only recognized
in the banking and nance literature, but also in the small business literature, particularly within the
work by Petersen & Rajan (1997), and García-Teruel & Martínez-Solano (2010).
Table 1: A summary of commercial, operational and nancial motives for trade credit
Mot ive type
Role
Brief description
Reference*
COMMERCIAL
MOTIVES
Form of price
di scr iminat ion
Length of payment may be seen as a form of discount,
which can be treated as a reduced price.
Brennan, Ma ksim ovic
& Zechner (1988);
Mian & Sm ith (1 992)
For m of
rai sing sale s
and
connection to
pro fit m arg in
Bigger trade credit does not only increase sales due to
lower eff ect ive price , but is a lso con nect ed to high er
profit margins, since companies with higher profit
margins are believed to extended also bigger trade
cr edi t.
Petersen & Rajan
(19 97)
Too l of
imp licit
guarantees
Bigger trade credit corresponds to a longer evaluation
period by the customer, and can be seen as a signal of the
quality of products, and their warranty.
Smith (1987);
Lee & Stowe (1993);
Lon g, M alitz & Ra vid
(19 93)
Reduction of
infor mati on
asymmetry
Bigger trade credit or a longer payment period calls for
more tr ust betwe en buy er and se ller, an d can be seen a s
a sign of signaling “good” intentions.
Pike , Ch eng & Cr aven s
(20 05)
Signal and
to ol for lon g-
term
rel atio nship
ori entat ion
Tr ade credit may be extended due to trust and long-term
rela ti o ns hi p. I t may be a sign of relationship
commitment, and the vested interest of the seller in the
long -te rm su rviv al of the buy er.
Ng, Smith & Sm ith
(19 99);
Cuñ at (2007 )
Market
se gmen tation
too l
Trade credit can be used as an effective tool for
se gment atio n of buy ers, and a seller’s marketing and
sal es s trat egy .
Pre nder gast & Sto le
(19 97, 2 001)
OPERATIONAL
MOTIVES
Too l for
oper atin g and
cost efficiency
Separation of goods and payment for g oods reduces
illiq uidit y ris k, which arises from a n uncertain
pur cha sing sc hedu le and derived demand.
F err is (198 1);
Emery (1984, 1987)
Ope rating
fl exi b il ity
Tr ade c redit , wh ich enab les bot h fa ste r pu rchas es a nd
bet ter m ark et re spon se, can act as a reward and sti mulu s
in a time of low demand, and enables the constancy of
delivery and production.
Emer y (19 84, 1 987);
Lon g, M alitz & Ra vid
(19 93)
FINANCIAL
MOTIVES
Information
ac quis ition
Based on established and long-te rm relati onshi ps w it h
th e bu yers , se llers hav e bet ter acce ss t o in forma tion on
buy er’s cr edit wort hines s and c an more e fficiently
evaluate the cr edi t ri sk.
Em ery (1 984); Smit h
(19 87); M ian & Smith
(19 92); Peter sen &
Raja n (199 7)
Better
mon itor ing
Trade credit can esta blis h hi gher b uyer dependency.
Th eref ore, int errup tion of regular supplies can have a
quick and direct impact on the buyer. In addition, good s
and merchandise are a fair ly valuable collateral, which
can be liquidated or seized.
Petersen & Rajan
(19 97);
García-Te ruel &
Martínez-Sola no
(20 10)
Vehicle for
bank
financing
High volumes of trade credit can be a si gnal of
cr editw orthi nes s to fina ncial i nst itut ions .
Bi ais & Go llier (19 97)
Type of
insurance
I t may be che aper for a selle r to i nsur e o r sell
outstanding accounts receivable, ra ther than for a buye r
to acquire appropriate external financing.
Schwartz (1974),
Emery (1984), Petersen
& Ra jan (1 997)
Source: Adopted from García-Teruel & Martínez-Solano (2010, p. 215-218), and author’s own analysis. Notes: *Since
the corresponding table provides mainly a synthesis of the original source, individual references within this table are not
included in the reference list, and readers are advised to look up these references in the original paper by García-Teruel
& Martínez-Solano (2010), and/or contact the authors of this paper directly.
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
In a recent review of the literature Huang, Shi & Zhang (2011, p. 1860) acknowledge that “the
available empirical evidence on relationship between trade and bank credits supports the above
theoretical prediction [substitution] in most cases. However, such evidence comes mainly from [large
and] developed economies such as the USA and the UK”. In emerging market contexts empirical
evidence remains not only scarce, but much more inconclusive, too. Thus, i.e. in their study of six
emerging Asian and South American markets, Love, Preve & Sarria-Allende (2007) found support
for substitution effect in the initial phases of country-level nancial crises (in the 1990s). However,
their empirical evidence failed to support this effect within the subsequent deepening of the nancial
crisis, when “the entire economy enters a credit trap which drains the sources of banking credit”
(Huang, Shi & Zhang, 2011, p. 1860). Supported by Love, Preve & Sarria-Allende’s (2007), our rst
hypothesis is thus as follows:
Hypothesis 1: Overall, the counter-cyclical substitution effect between trade and bank credit will
be more prevalent (strong) during the initial phases of the current economic crisis, but not in the
subsequent deepening and bottoming of the crisis.
Other empirical evidence, which has unfortunately received less attention in the literature, seems to
challenge the counter-cyclical substitution effect, altogether. Thus, i.e. Cook’s (1999) results on a
sample of small Russian companies actually establish a complementary relationship between trade
and bank credit, not a substitution relationship; albeit in a setting of “extreme nancial chaos”
in Russia (Huang, Shi & Zhang, 2011, p. 1861). A similar empirical observation was outlined for
manufacturing companies in Japan (Ono, 2001), and small companies in the US (Alphonse, Ducret
& Severin, 2006). Most recently, Huang, Shi & Zhang’s (2011) study on a small sample of 284 listed
Chinese companies proposes a modifying relationship between trade and bank credit, which tends
to be more close to substitution, but can alter into a more complementary relationship under certain
conditions. Thus, their results show that “when production efciency crosses a low threshold value,
trade credit and bank credit tend to be substitutes. Otherwise, they are complementary, but this rarely
occurs” (ibid. p. 1877).
2.1. The counter-cyclical substitution effect and company size
In general, Mörec & Rašković (2011) outline the following key rm-specic characteristics of
SMEs, which should be considered when analyzing any type of nancing patterns of SMEs as they
importantly contribute to the existence of the proverbial SME nancing gap2 and suboptimal capital
structures of SMEs:
• Lack of economies of scale in SMEs’ operations (Tether, 1998);
• Lack of collateral (Fraser, 2004);
• Inseparability of the owner’s and company’s nancial position (Berger & Udell, 2006);
• Lack of experience and know-how (Berger & Udell, 2006; Atherton, 2009);
• Limited human resources (Rašković et al., 2011);
• Higher personal involvement and desire for control (Hamelin, 2011);
• Pecking order theory and the entrepreneurs’ unwillingness to accept external nanciers and/or
investors (Hussain, Millman & Matlay, 2006);
• Lack of information and knowledge about existing nancing sources (Fraser, 2004);
• Lower involvement in various social networks (Vos et al., 2007; Atherton, 2009);
• Different business objectives, compared to large prot and growth-driven companies (Vos et
al., 2007; and
• Different preferences and demand for nance (Howorth, 2001).
Furthermore, as pointed out by Park, Lim & Koo (2008) there are conicting views regarding the
main reason for the existence of the SME suboptimal capital structures and different patterns of
nancing, where certain studies emphasize more the supply-of-funds side, and other more the issues
on the demand-for-funds side (i.e. Howorth, 2001). However, one thing is for sure: company size
does play an issue and SMEs’ capital structures and nancing patterns are different compared to those
of large companies. With this in mind our second hypothesis is thus:
2 We think SME nancing gap perspective is important for counter-cyclical trade credit substitution, since we believe
different company size segments can differently effective tap into trade vs. bank credit substitution.
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
Hypothesis 2: Overall, the counter-cyclical substitution effect between trade and bank credit will
differ across company size groups in the current crisis, and will be in general less strong among
SMEs, compared to large companies.
The overall logic of Meltzer’s (1960) and Schwartz’s (1974) theory is based on some kind of
“solidarity” between large companies (with better access to external bank nancing) and SMEs. It
assumes the existence of a certain liquidity “surplus” can be “split between suppliers and customers”
(Cuñat, 2007, p. 491). If a crisis is indeed just a liquidity crisis, this may hold. However, if the crisis
deepens and becomes more than just a liquidity crisis – i.e. a general longer-term credit crunch - large
companies will no longer be able to access appropriate bank nancing, as the evidence by Huang, Shi
& Zhang (2011, p. 1861) on the bottoming phase of the crisis context suggests. Consequently, large
companies will not only be unable to grant (additional) trade credit to their buyers, but will actually
use their size and market power to extend their own accounts payable. This will in turn force their
SME suppliers to become their source of funding (Mörec & Rašković, 2011). This perspective is
supported by Petersen & Rajan’s empirical results (1997, p. 669), also. It is also linked to the work of
Fisman & Love (2003) and to Mateut, Bougheas & Mizen (2006). The recent analysis of supply chain
risk management practices during the current economic crisis and an extensive review of the supply
chain management literature by Blome & Schoenherr (2011) seem to be most actively concerned with
this perspective.
3. DATA AND METHODOLOGY
3.1 Data
The data for our analysis comes from the Agency of the Republic of Slovenia for Public Legal
Records and Related Services (AJPES), to which all companies in Slovenia have to report annual
nancial statements by law for tax and statistical purposes. Our analysis includes all Slovenian non-
nancial companies (micro, small, medium-sized and large 3) with positive equity capital for the
period between 2007 and 2010. We also have to stress that, apart from company equity value being
above zero, no other criteria was used to exclude potential “outliers” within our studied sample.
Namely, quite often large sample heterogeneity is not addressed through robust statistics, but rather
by an a priori classication and exclusion of outliers (i.e. companies with 01). Thus, an a priori
classication and exclusion of outliers was also employed i.e. by Črnigoj & Mramor (2009) in the
analysis of the determinants of capital structure of Slovenian SMEs, as well as in the García-Teruel &
Martínez-Solano (2010) study of the determinants of trade credit.
3 Following the Slovenian Companies’ Act we adopt the following classication of company size:Micro company:
average number of employees does not exceed 10, revenue does not exceed 2 million (mil) EUR, and value of assets
does not exceed 2 mil EUR. Small company: employees < 50; revenues < 8.8 mil EUR; assets < 4.4 mil EUR.
Medium-sized company: employees < 250; revenues < 35 mn EUR; assets < 17.5 mil EUR.Large company: all other.
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
3.2 Operationalization of the variables
Table 2 summarizes the operationalized variables in our research, which are directly linked to the
motives for trade credit outlined in Table 1, and are used in our model(s).
Table 2: Operationalization and background of the employed variables
V a ri ab le
Brief descrip tion
I mp ac t
Reference
PAY AB
Share of accounts payable in total liabilities
(share of assets financed by tr ade credit)
Dependent
variable
P ete r sen & Raj an ( 1997);
Gar c ía-Terue l & Martínez -S olano (2010)
RE CE IV
Share of ac counts receivable in sales
(liquidity reallocated to the customers)
+
Petersen & Rajan (1997);
Gar c ía-Terue l & Martínez -S olano (2010)
lnA G E
Logarithm of firm’s age (+1)
(reputation and evolution of customer-supplier
relationship)
+
Petersen & Rajan (1997);
Gar cí a-Teruel & Martínez-Solano (2010),
Ge & Qiu (2007); Cuñat (2007)
CF LO W
Operating cash f low to assets
(firm’s capacity t o generate internal liquidity)
-
Love, P reve & Sa rr ia- Allende (2007);
Gar cí a-Teruel & Martínez-Solano (2010);
Huang, Shi & Zhang (2011);
Ge & Qiu (2007)
ST FI ND
Share of short-te rm financ ial debt in total liabilities
(substi tution ef fect)
-
Love, P reve & Sarria-Allende (2007);
Gar c ía-Terue l & Martínez-Solano (2010)
L TD E B T
Share of long-term debt in total l iabilities
(substi tution ef fect)
-
Gar c ía-Terue l & Martínez -S olano (2010)
PU R C H
Share of material and service costs in total costs of a
company
(demand for material and services)
+
Earle, Pagano & Les i (2006)
Industry_D
Dummies for industry specific effect: manufacturing (C),
construction (F), trade (G), hotels and restaurants (I),
transport (H), information and communication (J),
professional, scientific and technical activities (M), and
administrative and support serv ice activities (N); other
industries r epre sent basic category.
+/-
P ete rs en & Rajan ( 1997); Deloof & Jegers
(1999);
Huang, Shi & Zhang, 2011; Ge & Qiu
(2007)
Size_D
Dummi es for micro (1), small (2) and medium-sized (3)
companies; large companies represent basic category
(bargaining power)
+/-
Mateut, Bougheas & Mizen (2006)
Tine _D
Dummies for 2008, 2009 and 2010; year 2007 represe nt
basic category
(effect of financial and economic crisis)
+
Love, Preve & Sarria-Allende (2007)
Source: Authors’ own summary; see specic references for specic variables.
Simultaneous correlation analysis of the employed variables importantly bridges the work of
Garciá-Teruel & Martínez-Solano (2010), with the work of Love, Preve & Sarria-Allende (2007).
Additionally, we control for industry specic effects on level of trade credit, which the original work
by Garciá-Teruel & Martínez-Solano (2010) paid less attention to.
3.3 Model specication
As specied, our model was motivated by the recent work of Garciá-Teruel & Martínez-Solano
(2010) on the determinants of trade credit, published in the International Small Business Journal, and
the recent work by Huang, Shi & Zhang (2011) on the counter-cyclical substitution effect between
trade and bank credit in an emerging market context (China), published in the Journal of Banking
& Finance. It also complements the determinants of capital structure of Slovenian SMEs research
by Črnigoj & Mramor (2009), published in the Emerging Markets Finance & Trade. In terms of the
model specication, our model extends the model by Garciá-Teruel & Martínez-Solano (2010), and
closely follows the xed-effects panel data model by Love, Preve & Sarria-Allende (2007), in order
to separate the ex ante and ex post crisis effects.
First, we test the aggregate behavior of Slovenian rms in the period between 2007 and 2010 with
following basic regression model (detailed variable description is given in Table 2):
PAYABit = b0 + b1 RECEIVit + b2 lnAGEit + b3 CFLOWit + b4 STFIND it + b5 LTDEBT it + b6
PURCH it + b7 Industry_Dit + ei
Unlike Love, Preve & Sarria-Allende (2007) and García-Teruel & Martínez-Solano (2010), our
sample contains all solvent companies (including the lowest and highest 1 percentile of companies
with high parameter variability, which are usually treated as outliers). This signicantly increases the
heterogeneity of the studied sample, which prompted us to rst apply a robust regression cross-section
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
analysis over time using a iteratively reweighted least squares procedure4 (in Stata: RReg procedure),
since traditional OLS regression is not suitable for high variability samples due to violation of its
normality assumption (Alma, 2011). We rst employ a robust cross-section regression model to get a
general understanding of the impact of selected variables on trade credit, as well as to test the impact
of company size and time (years) separately. Therefore, the basic regression model is extended by
size dummy variables to determine the statistical signicance of company’s size on trade credit for
each year respectively.
In the second part of our research we upgrade cross-section analysis with a panel regression
analysis, which enables us to test the signicance of the interaction of company size and time (years)
simultaneously, in order to check the validity of our second hypothesis. Following Love, Preve &
Sarria-Allende (2007) we add time dummy variables to capture changes of trade credit over time.
Since the impact of company’s size on the level of approved trade credit is the main focus of our
study we include size dummies, as well (Mateut, Bougheas & Mizen, 2006). Combined with the time
dummy variables, size dummy variables capture the impact of crisis on trade credit across individual
size groups. Thus, the basic regression model is extended to:
PAYABit = β0 + β1 Xit + β2 Time_Dit + β3 Size_Dit + β4 Time_D it * Size_D it + ei
In the model X corresponds to a vector of control variables (RECEIV, lnAGE, CFLOW, STFIND,
LTDEBT, PURCH and Industry_D). With regards to our hypotheses testing, the direction and
signicance of regression coefcients on the interaction variables (year and size) are most relevant,
since they simultaneously capture the crisis and size effects on trade credit level. We employ a
xed effects model, since the Hausman specication test rejected the hypothesis related to the non-
systematic differences between coefcients of the xed effects and random effects model (Hausman,
1978).
4. THE RESULTS
4.1 Descriptive statistics
Table 3 shows almost all companies (99%) in Slovenia are SMEs. In the period 2007-2010 the
total number of companies increased by 14.2%, but only due to rapid establishment of new micro
companies. On the other hand, and in the light of the current nancial and economic crisis, the
number of medium-sized and large companies decreased partly due to shrinking business volume
(e.g. companies moved to lower size classes) or even bankruptcy.
Table 3: Basic Slovenian company data in the period 2007-2010
Size
Num ber of co mpa nie s
Number of employees
Total as set s
(in million EUR)
Turnover
(in million EUR)
2007
2010
2007
2010
2007
2010
2007
2010
Micro
4 5, 232
51,805
135,059
12 9, 706
20,265
20,199
13, 41 7
1 2, 427
Small
1,9 73
2,4 34
64, 59 5
72,272
9,912
12,713
8,300
9,3 59
Medium
797
774
81, 21 1
75,511
10,202
9,9 07
11, 15 8
1 0, 991
Large
779
721
218,599
18 5, 154
55,231
57,464
40, 04 1
3 8, 574
Total
48,781
5 5, 734
499 ,4 64
462,643
9 5,6 09
100,283
72 ,9 16
71,350
Source: AJPES and authors’ own analysis.
As can be seen from Table 3 the number of employees in companies of all sizes decreased signicantly
with the deepening of economic and nancial crisis. Despite a substantial increase in the number of
micro and small companies, newly established, mostly micro companies were not able to replace the
loss of jobs in medium-sized and large companies.
Table 4 shows the share of companies with bank debt, and the share of total liabilities to banks in total
liabilities between 2007 and 2010. It should be noted, that the number of companies (not percentage!)
with bank debt rose in the period from 2007 to 2010, primarily due to an increasing number of micro
4 In order to achieve efcient estimation this procedure removes units with Cook’s distance higher than 1 from estimation
(see Hamilton, 1991), and uses Huber weights and biweights to reduce or even eliminate the impact of extreme
observations on the regression estimation, thus solving the issue of sample heterogeneity.
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companies with bank debt. However, this might be due to an increasing number of bank overdrafts
and not systematic bank lending.
Lastly and most importantly, related to the counter-cyclical substitution effect between trade credit and
bank debt, Table 5 shows micro and small companies increased their net working capital nancing,
while on the other hand medium-sized and large companies were able to decrease their net working
capital.
Table 4: Overview of the share of companies with bank nancing and liabilities to banks for 2007 and 2010
2007
2008
2009
2010
%*
STBL**
%*
STBL**
%*
STBL**
%*
STBL**
Mi c ro
29.1%
18.6%
28.1%
1 9. 8%
29. 1%
19.4%
28.7%
19.3%
Small
72.7%
21.2%
73.4%
2 2. 3%
72. 5%
23.1%
72.0%
24.0%
Mediu m
72.3%
21.9%
73.5%
2 3. 2%
72. 8%
24.9%
71.7%
25.6%
Large
76.1%
24.4%
78.2%
2 8. 0%
75. 7%
29.5%
74.6%
29.1%
Source: AJPES and authors’ own analysis. Notes: *% = percentage of companies that are using bank debt nancing out
of the whole population of sample companies in a given reference year; **STBL= share of total liabilities to banks,
relative to total liabilities.
Table 5 indicates how the burden of net working capital nancing in 2008 was inversely proportional
to the size of the company, as large and medium-sized companies were able to signicantly reduce
their inventories from 2007 to 2008. On the other hand, trade credit (accounts payable) decreased in
micro and small companies.
Table 5: Shares of selected asset and liability components in total assets between 2007 and 2010 - only companies,
which use bank nancing (median values)
INV
NWC
STL
LTL
2007
2008
2007
2008
2007
2008
2007
2008
Mi c ro
2.3 %
2.0%
10.7%
11. 2%
4 9. 6%
49.8%
12.1%
12.5%
Small
11.4%
10.7%
15.5%
15. 7%
4 7. 7%
46.9%
15.1%
15.9%
Mediu m
14.6%
14.4%
16.6%
17. 2%
4 6. 3%
46.3%
13.2%
13.4%
Large
8.0 %
8.5%
8.4%
8.9%
4 0. 0%
42.7%
10.8%
11.3%
INV
NWC
STL
LTL
2009
2010
2009
2010
2009
2010
2009
2010
Mi c ro
1.9 %
1.9%
12.1%
12. 1%
5 0. 6%
49.9%
11.7%
11.2%
Small
10.5%
10.0%
16.5%
15. 9%
4 3. 8%
43.0%
17.5%
17.5%
Mediu m
12.5%
12.4%
17.1%
15. 1%
4 3. 4%
42.5%
14.4%
14.2%
Large
6.1 %
6.5%
7.6%
7.1%
3 9. 0%
38.8%
15.4%
15.8%
Source: AJPES and authors’ own analysis. Notes: INV= share of inventories in total assets; NWC = share of net
working capital in total assets (net working capital = accounts receivable + inventories - accounts payable); STL= share
of short-term liabilities in total liabilities; LTL= share of long-term liabilities in total liabilities.
Finally, it is worth to highlight how medium-sized and large companies decreased their share of short-
term liabilities, and sharply increased their share of long-term liabilities from 10.8% in 2007 to 15.4%
in 2010.5
5 Also, we have conducted an extensive analysis of the descriptive statistics related to our basic and extended regression
model, which conrm high heterogeneity across the whole sample, as well as within individual company size groups.
These quite extensive results are available upon request to the authors.
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4.2. Model testing
The basic results of the cross-section robust regression analysis in Table 6 (Model 1) show the share
of accounts receivable over total sales (RECEIV) seems to be highly statistically signicant across the
whole 2007 to 2010 period. However, it has an almost negligible effect size6 on trade credit. On the other
hand, the share of material and service costs over total costs (PURCH) is not only highly statistically
signicant, positive, and correlated with trade credit across the whole 2007 to 2010 period, but also
has the highest effect size (relatively high coefcient values) on trade credit. Quite logically, trade
credit depends on purchase volume, as was expected. Regarding the share of long-term debt over total
liabilities (LTDEBT) – whose regression coefcient indicates the substitution effect between trade and
bank credit – it is highly statistically signicant across the whole 2007 to 2010 period, and negative
as expected. More importantly though, the regressor’s coefcient reached its smallest absolute value
in 2009 with the bottoming of the crisis (and the biggest credit crunch), and consequently more than
halved from 2007 to 2010. The decrease was much more dramatic with regards to the share of short-
term debt over total liabilities (STFIND) – which measures the aforementioned substitution effect, as
well. The corresponding regressor’s coefcient is, not only highly statistically signicant, but almost
halved from 2007 to 2008 alone. It further decreased by more than three-fold between 2007 and 2009,
while remaining constant between 2009 and 2010.
The relative decreases of both LTDEBT and STFIND regression coefcients between 2007 and 2010
shows a signicant and consistent pattern of temporal change in the substitution effect between trade
and bank credit, brought on by the crisis. Overall, the counter-cyclical substitution effect between
trade and bank credit was more prevalent (strong) during the initial phases of the economic crisis (in
2007 and 2008), but not in the subsequent deepening and bottoming of the crisis (in 2009 and 2010).
Therefore, overall strength of the substitution effect decreased with the length of the crisis situation.
By including the effect of company’s size on the trade credit level in our cross-section regression
analysis (Model 2 in Table 6) we can see that micro, small and medium-sized companies are relatively
more dependent on trade credit nancing compared to large companies (our baseline category).
Over time the coefcient on size dummy variable decreased for all company sizes, indicating large
companies are no longer able to grant trade credit to their smaller suppliers.
Table 6: The results of the cross-section robust regression analysis
Source: AJPES and own analysis. Notes: Standard errors in brackets; *** p<0.01, ** p<0.05, * p<0.1. Variables
descriptions are available in Table 2.
6 Cohen (1988, p. 9-10) describes effect size as “the degree to which the phenomenon is present in the population”.
According to Breaugh (2003, p. 82) effect size measure are related to either “standardized measures of mean differences
or measures of variance accounted for” between various compared groups or samples.
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In order to test the statistical signicance of differences across time and company sizes, we employed
a xed effects panel regression analysis (Table 7).
Table 7: Results from the xed effects panel regression analysis
VARIABLES Model 1 Model 2
Constant 0.083*** 0.091***
[0.007] [0.009]
RECEIV 0.000 0.000
[0.000] [0.000]
CFLOW_2 -0.000*** -0.000**
[0.000] [0.000]
lnAGE 0.026*** 0.025***
[0.001] [0.001]
PURCH 0.129*** 0.129***
[0.002] [0.002]
LTDEBT -0.255*** -0.255***
[0.003] [0.003]
STFIND -0.223*** -0.224***
[0.003] [0.003]
D_year_2008 -0.010** -0.010**
[0.005] [0.005]
D_year_2009 -0.022*** -0.021***
[0.005] [0.005]
D_year_2010 -0.021*** -0.021***
[0.005] [0.005]
D_size_1 0.032*** 0.030***
[0.007] [0.007]
D_size_2 0.024*** 0.022***
[0.007] [0.007]
D_size_3 0.021*** 0.020***
[0.007] [0.007]
D_s_1_y_2008 -0.006 -0.006
[0.005] [0.005]
D_s_1_y_2009 -0.003 -0.003
[0.005] [0.005]
D_s_1_y_2010 -0.011** -0.011**
[0.005] [0.005]
D_s_2_y_2008 -0.009 -0.008
[0.006] [0.006]
D_s_2_y_2009 -0.014** -0.014**
[0.006] [0.006]
D_s_2_y_2010 -0.019*** -0.018***
[0.006] [0.006]
D_s_3_y_2008 -0.010 -0.010
[0.007] [0.007]
D_s_3_y_2009 -0.012 -0.011
[0.007] [0.007]
D_s_3_y_2010 -0.014* -0.013*
[0.007] [0.007]
Industry dummies no yes
R-squared 0.810 0.809
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Number of ms 53,481 51,426
Adj R-Squared 0.736 0.736
N (observations) 190,727 187,066
Source: AJPES and own analysis.
Notes: Standard errors in brackets; Baseline population are large companies in 2007
*** p<0.01, ** p<0.05, * p<0.1. Variables descriptions are available in Table 2.
The results in Table 7 are quite robust, with or without the industry dummies. Overall, the results
of the basic part of the regression model show companies with bank nancing (either long-term or
short-term) are less dependent on trade credit (negative and highly statistically signicant regression
coefcients for LTDEBT and STFIND). Over time (from 2007 to 2010) the statistical signicance
of the year dummies did not only increased (from p<0.05 to p<0.01), but the negative value of the
regression coefcients doubled between 2008 and 2009, as well.
Overall, all companies (including large ones) had less trade credit in 2008, and considerably less in
2009 and 2010. However, although micro, small and medium-sized companies have relatively more
trade credit compared to large companies (see highly signicant and positive coefcients on size
dummies), over time they suffered a stronger drop in trade credit (see statistically signicant and
negative coefcients on time and size interaction variables in 2009 for small companies and 2010 for
all SMEs).
5. COMMENTARY AND IMPLICATIONS OF THE RESULTS
5.1. Results of hypotheses testing
With regards to the testing of our two hypotheses, we nd support for the conrmation of hypothesis
1. This hypothesis relates to greater intensity of the counter-cyclical substitution effect between trade
and bank credit in the initial phase of the current global economic crisis, compared to the subsequent
deepening and bottoming of the crisis. As the results of our cross-section regression analysis shown
(Table 6), both the shares of short-term debt (STFIND) and long-term debt (LTDEBT) over total
liabilities have a highly statistically signicant and negative impact on the share of accounts payable
over total liabilities (PAYAB). This generally supports the substitution effect between trade and bank
credit. More importantly however, the changes in size of the corresponding regressor’s coefcients
indicate at important changes between the initial and subsequent phases of the current global economic
crisis. Generally speaking, there seems to be a considerable two- or three-fold decrease in the sizes
of the regressors’ coefcients between 2008 and 2009, corresponding with the bottoming of the crisis
in 2009. While one could justly argue that there can be many underlying causes for the decrease of
the aforementioned regressors’ coefcients, a more detailed examination of the descriptive statistics
(i.e. Table 4) provides support for this conclusion. Linking this to evidence by Love, Preve & Sarria-
Allende (2007) the initial phase (year 2008) of the current global economic crisis seems to correspond
to a typical liquidity crisis, where substitution was still possible. However, the steep decrease of this
substitution effect in 2009, and its low level in 2010, supports evidence by Huang, Shi & Zhang
(2011). Thus, when the crisis becomes more than just a liquidity crisis, it can result in a general
“credit trap” which “drains the sources of bank credit” altogether (ibid. p. 1860).
The panel regression model in Table 7 provides an indirect testing of hypothesis 2, which relates to
a varying strength of the counter-cyclical substitution effect between trade and bank credit across
different company size groups. While the model tests the interaction between temporal change (years)
and company size, it does not additionally address the issue of the level of bank credit across various
company size groups as the same time (shown in Table 4). However, by building on the fact that the
counter-cyclical substitution effect decreases with the deepening of the crisis (results of hypothesis
1), and by looking at the descriptive statistics related to inventories and net working capital in Table
5, we can indirectly provide support also for this hypothesis. Thus, while SMEs had a bigger share of
trade credit before the crisis compared to large companies, they also suffered a much stronger drop
and substitution decrease. On the other hand, large companies received certain soft-budget constraints
in Slovenia, to an extent managed to restructure their bank credit, and apply additional pressure on
their SME suppliers. This nding ironically supports Meltzer (1960) and Schwartz (1974), as well as
Cuñat (2007), and Petersen & Rajan (1997). While Meltzer’s and Schwartz’s theory was implicitly
built on the premise of large companies extending “solidarity” and passing off a certain kind of
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REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES
nancial surplus in the market (corresponding to a liquidity crisis), Cuñat (2007) shows how a lack of
this surplus (corresponding to a more devastating credit crunch) terminates this solidarity. Moreover,
as our evidence seems to suggest, large companies go even further, and actually apply additional
pressure in their SME suppliers, using them as nancing buffers themselves, and actually aggravating
the situation in the market.
5.2. Discussion of the macroeconomic implications
In the most recent global competitiveness ranking by World Economic Forum (2011-2012) Slovenia’s
12 place drop from 45th place to 57th place out of 142 compared countries is in many ways underpinned
by the poor development of its nancial market, where Slovenia ranks 102nd out of 142. In addition to
this, the issue of access to nancing remains as the most problematic factor for conducting business,
as shown by WEF. This and similar information provided by the World Bank and its Doing business
in survey shows how a microeconomic problem of a company’s access to nance and issues of its
capital structure can have also important macroeconomic implications; as emphasized by Biais &
Gollier (1997).
Our analysis suggests that the counter-cyclical nature of trade credit vs. bank credit substitution is not
as straightforward as thought of by Meltzer or Schwartz, and has different dimensions which come
into play at various phases of the economic cycle. In terms of the macroeconomic implications of this
issue it is very important to distinguish both between the different types of the economic crises, as
well as their phases within the downturn cycle. Thus, the existing evidence by Love, Preve & Sarria-
Allende (2007) on the substitution effect between trade and bank credit corresponds to a national-
level, shorter-term (single-phase), liquidity crisis. We nd support for their ndings in the initial
phase of the current global economic crisis, where liquidity was still an issue. As this crisis progressed
however, substitution became less relevant, and market power in the form of company size became a
bigger issue, raising a series of important macroeconomic policy issues. We see that in a full-blown
and longer-term crisis bank-dominated nancial systems prove to be relatively ill equipped to help
the business sector, particularly SMEs. While not granting additional nancing to large companies
hurts all in the market, granting this nancing usually only helps large companies. These in turn
become “double victims” since on top of their existing access-to-nance problems; they are plagued
additionally by large companies. This is in a way surprising, since the level of interest rates was fairly
low within this crisis, and banks had to potential to inject much more liquidity into the market.
Our results also raise an important question of where do SMEs get their liquidity in a crisis like we
are experiencing now? The answer seems to lie in a huge need to underinvest, which is especially
troubling, since SMEs were the only segment to actually grow in number and importance within this
crisis in Slovenia. We are thus talking about a unique paradox. On the one hand, large companies
lay off volumes of their employees, which are to a certain extent absorbed by the SME sector. On
the other hand, this sector becomes a “double victim” of the crisis and is additionally plagued by
large companies. Can favorable nancing terms extended to large companies be somehow tied to
large companies being encouraged to translate this additional liquidity to more favorable trade credit
to SMEs, as well? Or at least, can large companies be somehow prevented from aggravating the
situation and extending much less favorable trade credit to SMEs?
Lastly, we need to distinguish between different types of SMEs. There is an urgent need to identify
good and promising SMEs, which can even increase their business in a crisis, but must avoid being
plagued by large companies or nancing constraints. As the difference in results from traditional OLS
and robust regression analysis has shown, there can be small sub-segments of SMEs which can drive
the results for the whole SME population. This points to a need to avoid burdening the whole SME
segment with high risk premiums, and better understand the various shades of gray within the SME
population.
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BUSINESS ANGELS: ISSUES, EVIDENCE, AND IMPLICATIONS FOR TRANSITION
ECONOMIES
Christine Mitter
Salzburg University of Applied Sciences, Austria
E-mail: christine.mitter@fh-salzburg.ac.at
Abstract
Entrepreneurial ventures are considered of crucial importance for economic growth and development
worldwide. However, these companies often lack sufcient availability and access to funding sources. This
problem is extremely acute when banks are reluctant to lend money to these companies, and/or the formal
venture capital market is not highly developed. Funding provided by business angels (BAs) could be a potential
solution to this problem as they do not only provide capital but also value added contributions by means of
their personal skills and networks.
By summarizing and structuring current research dealing with the characteristics of BAs, their relationship
towards investees and the way they impact the companies they are funding as well as the inuence of
institutional settings, the paper presents a state-of-the-art picture of angel nance. The analysis reveals that the
relationship between BAs and investees is less driven by formal contracts and monitoring but more by relational
governance, resulting in mutual trust and an emphasis on mentoring. BAs’ investment style is characterized by
geographical proximity and – normally – active involvement. Thus, they support the entrepreneurial venture
with industry expertise, entrepreneurial knowledge and management skills (know-how) as well as with their
personal networks (know-who). The relationship between the entrepreneur and the BA as well as the impact of
BA nancing on the investee company are contingent on numerous factors including the characteristics of the
BA, the entrepreneur, and the venture as well as institutional conditions.
Although BAs play an important role in closing funding gaps at early stages, can address regional gaps in the
availability of nance and seem to be extremely well suited to deal with less developed institutional regimes,
BAs’ activity developed slowly or is still missing in transition economies. Consequently, insights into the role
and function of BAs are not merely limited to general aspects, but also place a particular focus on the context of
transition economies. Drawing on lessons from developed countries, the creation and advancement of business
angel networks (BANs) as well as tax incentive schemes appear promising measures to stimulate BA investing.
In the long run, however, other aspects of the institutional environment such as corporate governance, investor
regulation, and capital market development, in particular the advancement of the stock market should be
addressed as well in order to fully exploit this potential crucial funding source.
Keywords: Business Angel, Informal Venture Capital, Transition Economy, Entrepreneurial Finance
1. INTRODUCTION
Entrepreneurial ventures are considered of crucial importance for economic growth and development
worldwide (Minniti, 2008). However, especially in Europe they often lack sufcient availability of
and access to funding sources to set up, maintain, develop and grow their businesses (Lilischkis,
2011). This problem is extremely acute when banks are reluctant to lend money to these companies,
and/or the formal venture capital (VC) market is not highly developed. Funding provided by business
angels (BAs) could be a potential solution to this problem (Danson et al., 2007). Since they do not
only provide capital at very early stages of company life but also offer their investees business skills
(know-how) and personal networks (know-who), they play a signicant role in the development and
growth of entrepreneurial rms (Politis, 2008; Lahti, 2011a, 2011b).
While most research on entrepreneurial nance focused on venture capital, business angels are less
widely recognized and researched (Ibrahim, 2008; Bruton et al., 2010), although they are at least
equally (Wong et al., 2009) or even more important in the nancing of entrepreneurial ventures
(Riding, 2008; Collewaert et al., 2010). This paper therefore aims at tackling this research gap by
addressing the following questions:
• What are the characteristics of BAs?
• What does the relationship between BAs and investees look like?
• How do BAs impact the companies they are funding?
• Do institutional settings affect angel nance and in what way?
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By summarizing and structuring extant research concerning these questions and by linking them
to theoretical perspectives, the paper provides a state-of-the-art picture on angel nance. However,
insights into the role and function of business angels in the nancing of start-ups should not be
merely limited to general aspects, but should also place a particular focus on the context of transition
economies. Evidence suggests that BAs’ activity developed slowly or is still missing in many
transition economies (see part 5), indicating that this potential crucial funding source has not been
fully deployed yet or used at all. Consequently, current research and ndings are analyzed in order
to determine what lessons can be drawn for transition economies in terms of implications and public
policy issues.
The reminder of the paper is structured as follows: The next part delineates the term “business angel”
and develops a conceptual framework that serves in the following parts for structuring extant literature
concerning the above mentioned research questions. Based on these empirical ndings, implications
for angel nancing in transition economics are deducted. The paper concludes with a summary.
2. THEORETICAL BASIS AND CONCEPTUAL FRAMEWORK
BA research is characterized by a lack of a uniform denition (Avdeitchikova et al., 2008). Nonetheless,
the key features that delineate BAs from other types of investors remain robust (Mason and Harrison,
2008). These include the description of BAs or angel investors as wealthy individuals who offer risk
capital to unlisted rms in which they have no family connection. Contrary to institutional venture
capitalists (VCs) who raise the capital to be invested from others, business angels invest their own
money and at their own account. While some authors (e.g. Ramadani, 2009; Wong et al., 2009)
use the terms “informal venture capital” and “BA” interchangeably, others (e.g. Szerb et al., 2007;
Riding, 2008) segment the informal market into BAs (narrow denition of the informal VC) and love
money investors (family and friends).
Although less researched than VC, there are a number of empirical studies on BAs from a wide range
of countries in particular the USA and the UK (Politis, 2008; Lahti, 2011b). Empirical evidence,
however, is scattered across various contexts with different levels of detail (Kelley, 2007; Politis,
2008). Therefore, a conceptual model (see gure 1) was developed that served as an organizing
framework for the analysis and structuring of research on BAs. The paper’s aim is to provide a
systematic overview and state-of-the-art picture of BA research concerning the areas of inquiry
contained in the conceptual framework; neither are these areas meant to be an exhaustive set of issues
studied to date, nor is this paper meant to be an exhaustive survey of the literature on the issues listed
in the framework.
Figure 1: Conceptual framework
business angel
institutional setting
investee
•
personal characteristics (age, entrepreneurial
and management experience, investment
preferences, motives etc.)
•investment approach (syndication vs. alone)
•member of a business angel network vs.
individual investor
•life-cycle stage
•industry
•characteristics of founder(s),
management team
•strategy, business model
•financial system (bank-based vs. market-oriented)
•development of stock market
•legal environment
•corporate governance and investor protection
•taxation
•public policy support
relationship
contracting monitoring mentoring
impact on investee
provision of expertise (know-how)access to networks (know-who)
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3. BUSINESS ANGEL AND INVESTEE CHARACTERISTICS
According to the contingency approach (Donaldson, 2001) the design and outcome of the relationship
between BAs and portfolio companies may be dependent on conditions in the internal and external
environment of the BAs and the investees. Examples of internal inuencing factors concerning BA
characteristics are personal traits such as age, industry and entrepreneurial experience, investment
motive and afliation with a business angel network (BAN) or other institutions. Concerning the
investee, a rm’s life cycle stage, its industry, management/founder characteristics and the company’s
strategy may have an impact.
Although BAs exhibit great heterogeneity in personal characteristics (Wong et al., 2009), previous
empirical studies have revealed a fairly robust description of the “typical” BA, who is a middle aged
male often with a college or university degree that invests a relatively large amount of his personal
wealth in entrepreneurial rms (see Morrisette, 2007; Politis, 2008; Ramadani, 2009 for reviews).
Most BAs have an enterprise background stemming from previous entrepreneurial or management
experience (see Morrisette, 2007 and Politis, 2008 for reviews; Lahti, 2011b). Another generality
among BAs is their involvement with the investee (Mason and Harrison, 2008) as most of them do
not only provide the entrepreneurial rms with equity but also with non-nancial support (Wong et
al., 2009; Mitter and Kraus, 2011). In order to nd potential investment candidates, BAs rely on a
network of business associates and friends (Kelley, 2007).
The bulk of angel investments are made informally and in secrecy, making it extremely difcult to
measure the size of the market and/or the number of BAs (Mason, 2009). Since the mid- to late-
1990s, however, there are tendencies to formalization by creating BANs (Berger and Udell, 1998;
Ibrahim, 2008). Among the reasons for forming a BAN are a steadier stream of deal ow, increased
opportunities for interactions with other BAs and VCs and the advantages from the pooling of
resources such as the chance to fund larger deals (Ibrahim, 2008).
Contrary to VCs, monetary motives do not seem to be the only investment criterion for BAs.
Although many, if not most, invest primarily for prot (Prowse, 1998; Lahti, 2011a), they appear
to have signicant non-economic motives as well deriving from the desire to actively participate in
the entrepreneurial process (hedonistic motive) and/or the felt obligation to give something back to
society (moral or altruistic motives) (Sullivan and Miller, 1996).
Concerning investees, BAs primarily focus on start-ups and early stage rms (Prowse, 1998). A study
in the USA indicates that a majority of angel-backed rms have not earned revenues when they
receive funding from BAs (Wong, 2002). Consequently, angel-backed ventures receive nancing
earlier in the lifecycle than VC-nanced companies. Such early stages involve high informational
risks (see below) for potential investors, so that “angels are more willing to nance rms with greater
uncertainty about the prospects of success than venture capitalists” (Wong et al. 2009, p. 224) and are
often the only nancing source available at this stage (Denis, 2004; Ibrahim, 2008). For an optimal
benet of their enterprise background, BAs particularly invest in entrepreneurial ventures in their
region (Prowse, 1998; Wong, 2002; Morrisette, 2007; Ramadani, 2009; Lahti, 2011b) and in industries
they are familiar with (Wong et al., 2009). Most BAs focus on high-tech industries for investment
(Månsson and Landström, 2006) and provide investees – compared to VCs – with relatively smaller
amounts of funding (Wong et al., 2009). In order to mitigate risks, angels typically form syndicates
and co-invest with others rather than alone (Kelley, 2007; Wong et al., 2009; Lahti, 2011b). Evidence
from the US shows that companies that receive funding from BAs typically seek lower amounts of
capital coupled with higher revenue and prot projections (Manolova et al., 2009).
4. RELATIONSHIP BETWEEN ANGEL INVESTOR AND ENTREPRENEURIAL FIRM
The essential criterion of young ventures is their opacity (Beck et al., 2006; Hyytinen and Pajarinen,
2008) concerning their relationship to suppliers, customers, employees and other stakeholders, the
quality of their products as well as the founders’ management skills and personal characteristics
(Berger and Udell, 1998). Because the company has not yet been founded or has only existed for a
very short time, there is no track record investors can rely on. This results in an entrepreneur-investor
relationship which is characterized by large information asymmetries (Denis, 2004; Mitter and Kraus,
2011).
Agency theory (Jensen and Meckling, 1976) describes interactions, in which the better informed
agent performs actions which are delegated by the principal. Agency problems or agency costs arise
when agents make use of their superior knowledge in an opportunistic manner in order to maximize
their own utility, which, due to divergent interests of the principal and the agent, simultaneously
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limits the utility of the principal. In the case of entrepreneurial nance, the information asymmetry
can prevent a nancing relationship a priori (adverse selection problem) or lead to the phenomenon
of moral hazard, that creates an incentive for entrepreneurs to misallocate the funds received from
outside investors, e.g. BAs, by using them in a way that benets themselves but not necessarily the
BAs (Denis, 2004; Lahti, 2011a).
All corporate governance instruments in essence serve the purpose of decreasing the above mentioned
agency costs by reducing the asymmetrical information or by aligning the interests of the principal
and agent via an appropriate incentive structure. In the case of entrepreneurial nance, this can be
done by designing the nancing contract in a way that the interests of the entrepreneur and nancier
are harmonized and/or intensive monitoring rights are granted to the investor (Mitter and Kraus,
2011).
Instead of contracts (as proposed by agency theory), theories of relational governance and social
capital stress the importance of social embeddedness and norm-driven denitions of proper behavior
to regulate relationships between economic actors (Shepherd and Zacharakis, 2001; Shane and Cable,
2002; Sørheim, 2003). Therefore, mechanisms such as network ties, trust and a shared vision become
a necessary and efcient complement to formal contracts (Politis, 2008).
Empirical evidence shows that compared to VCs (e.g. Kaplan and Strömberg, 2003) BAs rely to a
much lower extent on contractual features such as board rights, staging, preferred stock or certain
contractual clauses in order to deal with agency problems (Prowse, 1998; Wong, 2002). There are
several reasons for this. First, designing and executing a complex contract is quite cost-intensive.
Since BAs only invest small sums, the transaction costs outweigh the benets (Ibrahim, 2008; Wong
et al., 2009). Second, due to the small amount of funding, BAs typically own less than a quarter of the
entrepreneurial rm while the founders’ still hold a large residual claim. Consequently, the interests
of the founders and BAs are aligned and the threat of expropriation is minimized (Wong et al., 2009).
Even if this were not the case, protective clauses and control mechanisms would be of little benet.
At the early stages, much of the venture’s value is embodied in the human capital of the founders,
meaning that a replacement would not increase the value of the rm (Wong et al., 2009). As a result
of these arguments, BAs use much more simple contracts and make less use of post-investment
monitoring than VCs. Moreover, in the case of BAs gaining control through active involvement (see
next part) seems to be a more effective form of monitoring than through contracts (Lahti, 2011a).
Theories of relational governance and social capital provide further explanations. By focusing on local
and relationship-driven investments, BAs gain access to private information and can overcome the
problems of information asymmetry (Shane and Cable, 2002). BAs rely on social capital in numerous
ways. First, they generate deal ow form trusted referrals from their personal network (Ibrahim,
2008). Secondly, personal characteristics of the entrepreneur and/or management team, in particular
their integrity and trustworthiness are among the most important investment decision-making
criteria (e.g. Sudek, 2006; Manolova et al., 2009; Maxwell et al., 2011 for a review). Demanding
comprehensive, protective terms would signal a lack of trust in entrepreneurs that does not t with
BAs’ altruistic investment motives (Ibrahim, 2008). Moreover, due to their enterprise background
BAs perceive themselves as entrepreneurs rather than as nanciers, facilitating the establishment of
a relationship characterized by a shared vision and mutual understanding (Politis, 2008). Investing in
close geographic proximity might additionally create a localized bond of trust between the BA and
the entrepreneur (Wong et al., 2009). In sum, these arguments manifest BAs’ mentoring role which is
about being a helpful, open and trustful partner (Politis, 2008).
BANs resemble VCs in a number of ways. They are characterized by a more arms-length relationship
with their investees, higher investment amounts and non-nancial motives that are less focused on
the development of the individual venture. All these factors lead to a higher use of formal contracts
including higher levels of monitoring (Ibrahim, 2008). A longitudinal study from Finland (Lahti,
2011b) indicates that BAs put more emphasis on formal control than previously. This might not only
result from BANs but also syndication as best practices concerning contracting are likely to be shared
in BA syndicates (Lahti, 2011b). In general, the extent to which BAs use several contract features and
perform their monitoring and/or mentoring role is contingent on their individual characteristics, their
investment style as well as the characteristics of the investee company (see e.g. the clusters identied
in Lahti, 2011a).
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5. IMPACT ON THE COMPANY FUNDED BY ANGEL FINANCE
Along with risk capital, BAs are assumed to provide the companies they fund with a number of
different value added activities that nurture their development. Apart from the inuence of these
activities on the relationship between BAs and entrepreneurs through mentoring and monitoring as
described above, they can also impact the company directly. In this regard, BAs’ activities can be
broadly categorized in two distinct roles (Politis, 2008): On the one hand, they directly participate
in the management of the rm providing it with entrepreneurial knowledge, industry expertise and
business skills (know-how). On the other hand, they support young companies with their network and
personal relationships (know-who).
The rst role can be linked to the resource-based view that assumes that a rm’s comparative advantage
is dependent on its access to resources (Barney, 1991). Given the lack of internal resources that
characterizes entrepreneurial ventures, BAs and their specic knowledge can substantially broaden
a rm’s resource pool and might be of crucial importance in order to form a long-term competitive
advantage. Ideally, entrepreneurial rms should search for BAs who provide the expertise they are
lacking the most.
A rm’s survival and long-term success, however, does not only depend on internal resources. Instead,
it also hinges on a company’s ability to link with its external environment as suggested by the resource
dependency perspective (Pfeffer and Salancik, 1978). Consequently, BAs seem heavily involved in
the provision of contacts through their personal networks (see Politis, 2008 for a review) in order to
help entrepreneurial ventures initiate and form stable business relationships. In this respect, BAs act
as certifying agents bringing legitimacy to start-ups and entrepreneurs that have no prior track record
(Steier and Greenwood, 2000) by signalling the entrepreneurial venture’s quality through their own
reputation and standing. This accreditation role is extremely important in order to enhance further
nancing (Harrison and Mason, 2000; Madill et al., 2005; Sørheim, 2005).
Both roles, the provision of expertise and the access to networks are extremely value adding when
BAs reside in geographical proximity (Prowse, 1998). On the one hand, empirical evidence from
the USA suggests that local investors provide more help to new ventures as they are more involved
(Wong, 2002). On the other hand, they can better rely on their network if they are from the same
region. The same is true for industry backgrounds. BAs can better provide critical knowledge and
contacts if the investee company is from an industry where they have gained specic expertise.
While empirical studies disagree on the extent to which BAs are active investors (Mitter and Kraus,
2011) and indicate that the degree of involvement varies by BA (Wong et al., 2009) and the development
needs of the investee (Lahti, 2011a), a Canadian study (Madill et al., 2005) demonstrates that BAs’
non nancial contributions are valued either helpful or extremely helpful by the investees. However,
recent evidence from longitudinal studies in Sweden (Månsson and Landström, 2006) and Finland
(Lahti, 2011b) show a decrease in the BAs’ active involvement. This decline might be the result
of changes in the BAs’ characteristics including lower levels of entrepreneurial experience (Lahti,
2011b) or syndication which allows BAs to be passive and benet from an actively involved lead
investor (Avdeitchikova et al., 2008; Lahti, 2011a).
6. INFLUENCE OF INSTITUTIONAL CONTEXT
Variations in BA activity that have been found in empirical studies conducted at different times
(Månsson and Landström, 2006; Lahti, 2011b) and in different countries (Chahine et al., 2007) imply
that the external environment inuences angel nancing, as suggested by contingency theory. By
affecting the information, legal, judicial, bankruptcy, social, tax, and regulatory environments in
which BAs operate, the prevalent institutional regime impacts the informal VC market and the BAs’
roles in numerous ways. Consequently, institutional factors such as the nancial system, the legal
environment or public policy support for entrepreneurial ventures may stimulate or hamper angel
investments.
The development of a country’s stock market seems to be a crucial factor in determining BA activity
as it denes whether and to what extent BAs can use IPOs as an exit route (Chahine et al., 2007;
Lahti, 2011b). Even if it is argued that BAs due to their altruistic motives might not intend to take
an investee rm public, they are usually followed by VCs and/or co-invest with VCs to whom the
opportunity of an IPO is extremely important (Black and Gilson, 1998; Jeng and Wells, 2000).
Given the important role that BAs play in early stages when nancing gaps are extremely severe, public
policies are increasingly focusing on the promotion of angel investments (Mason, 2009). Among the
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most common government interventions are tax incentive schemes and the establishment of BANs.
Evidence suggests that BAs are extremely sensitive to taxation (Mason and Harrison, 2002; Lahti,
2011b). By increasing the rewards of investments in entrepreneurial rms, tax incentives compensate
for the high uncertainty and risks involved and might lead to a higher supply of investors and capital
(Mason, 2009; Lahti, 2011b). While empirical results reveal positive effects of tax incentives schemes
(Månsson and Landström, 2006; see Mason, 2009 for a review), there are also drawbacks. Especially
the counterproductive effect of encouraging “amateur” informal investors, leading to publicly
subsidized ill-advised investments (Riding, 2008) must be tackled.
Due to the fragmented and invisible nature of the market, BAs (Prowse, 1998) as well as entrepreneurs
(Collewaert et al., 2010) are encountering difculties in information ow and the search for investment
opportunities/investors. Therefore, the creation and further development of BANs as platforms where
BAs and entrepreneurs can meet should be a promising stimulating measure (Lerner 1998). While
BANs proved to decrease information and nancing problems in Sweden (Månsson and Landström,
2006), Belgium (Collewaert et al., 2010) and Finland (Lahti, 2011b), evidence from the UK reports
only a fairly limited impact (Mason and Harrison, 2002). In Finland, the increase in transparency and
deal-ow also facilitated the syndication of investments (Lahti, 2011b).
Since not all BAs are nancially sophisticated and experienced, they should be provided with the
necessary skills to assess the risk of investment opportunities and to manage the process (Aernoudt,
2005). Entrepreneurs also lack skills in getting their business investment ready. Through actions
classied as “investment readiness” programs and BANs training for BAs and entrepreneurs can be
promoted (Heger et al., 2005; Mason, 2009; Collewaert et al., 2010).
7. IMPLICATIONS FOR TRANSITION ECONOMIES
Evidence from transition economies suggests that BAs’ activity developed slowly (e.g. in Poland, see
Brzozowska, 2008; Danson et al., 2007, or in Croatia, Hungary and Slovenia, see Szerb et al., 2007)
or is still missing in many transition economies (e.g. Ramadani, 2009 for the case of Macedonia;
Vemić and Stamatović, 2010 for the case of Serbia), indicating that this potential crucial funding
source has not been fully deployed yet or used at all. Among the reasons for this underdevelopment
or non-existence are imperfections on the supply and demand side (Szerb et al., 2007). Concerning
the supply side, individuals have in general accumulated less wealth as well as entrepreneurial
experience and business skills than in more developed countries (Kosztopulosz, 2004; Szerb et al.,
2007; Vemić and Stamatović, 2010). Entrepreneurial culture is still in its infancy. Consequently,
local entrepreneurs lack entrepreneurial knowledge and market economy experience resulting in
an insufcient number of high-quality investment opportunities (Szerb et al., 2007; Brzozowska,
2008). Moreover, entrepreneurs are often not aware of (Danson et al., 2007; Ramadani, 2009) and/
or willing to use angel nance (Kosztopulosz, 2004). Concerning the institutional environment of
transition economies, there have been tremendous improvements in governance, investor protection
and the nancial sector, however, they are still going through a catching-up period (Szerb et al., 2007;
Groh and Liechtenstein, 2009). Evidence from a survey among institutional investors indicates that
underdeveloped capital markets are considered as biggest investment obstacles in Central Eastern
Europe, followed by bribery and corruption (Groh and Liechtenstein, 2009, see also Ramadani,
2009), making the environment for angel investing less favorable.
Since – apart from the sources quoted above – there is a paucity of research concerning BAs in
transition economies, it seems rational to look for lessons in more mature markets and whether these
lessons can be transferred to the context of transition economies (Danson, et al., 2007). Evidence
suggests that BA characteristics (Kosztopulosz, 2004; Scheela and Isidro, 2009) as well as the
drivers of informal investments (Szerb et al, 2007) are similar in transition and developed countries.
Consequently, the following implications can be drawn for transition economies from the state-of-
the-art picture developed through literature review.
First of all, BAs appear to be extremely well suited to close nancing gaps in transition economies
given their willingness to invest in early stages with greater uncertainty. Secondly, as they prefer to
invest locally, they are able to close the regional gaps in the availability of funding (Mason, 2009). In
particular they might solve nancing gaps in the less developed rural regions of transition countries
(Vemić and Stamatović, 2010). Thirdly, since BAs in general provide a high degree of involvement
with their investee, they can compensate for a lack of resources and networks, which might be
exacerbated in transition economies given their less developed entrepreneurial culture. Moreover,
BAs prefer relational governance over formal contracts and monitoring and invest on the basis of
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trust (Bruton et al., 2010). This leads to an emphasis on networking, which seems extremely effective
in coping with a lack of formal institutions such as less developed legal and nancial institutions,
undersized IPO markets and intransparency (Scheela and Isidro, 2009).
These ndings highlight the importance of BAs in transition economies. Thus, public policy issues
that stimulate BA investments seem extremely expedient. Drawing on the ndings from developed
countries and the status quo in transition economies, the awareness of the existence and benets of
angel nance should be increased (Ramadani, 2009) and the lack of experience on the supply and
demand side tackled. Since the literature review implies that the personal characteristics and skills
of BAs as well as entrepreneurs are of crucial importance for a successful nancing relationship and
for positive effects on the investee companies, training BAs and entrepreneurs seems worthwile.
This would not only ensure that BAs have the experience and background to provide the portfolio
companies with highly appreciated value added contributions, but would also help entrepreneurs to
get their businesses “investment ready” in order to improve the number of investable opportunities.
Evidence from developed countries (see above) indicates that BANs can be a valuable instrument
to increase awareness as well as the skills of BAs and entrepreneurs. In this respect, the recent
establishment of BANs in Eastern Europe (Mason, 2009) might be seen as an important rst step.
Taxation is another important factor in increasing the BA market. However, it is important to stimulate
wealthy and experienced individuals to become BAs. In order to avoid the negative aspects of tax
incentives mentioned above, transition economies should be careful when drawing the qualications
for such incentives. Since investees appreciate BAs’ contributions in monitoring, mentoring, resource
provision and networking, the decline in BAs’ involvement in Western countries seems undesirable.
Given this trend as well as the fact that BANs and syndication contribute to such a trend, tax
incentives should be designed to ensure that they enable a transfer of business knowledge from BAs
to entrepreneurial ventures (Riding, 2008; Lahti, 2011a, 2011b).
Although, BAs’ can compensate – at least to a certain extent – for less developed institutional
settings, approaches to enhance corporate governance, investor protection and the size and liquidity
of the capital market appear warranted – at least in the long-run – given their central role (Groh and
Liechtenstein, 2009). Especially the state of the stock market proved to be crucial for VCs and BAs
and should therefore be focused on (Ramadani, 2009).
8. CONCLUSION
By summarizing and structuring extant research on BAs, a state-of-the-art picture of the characteristics,
roles, functions and particularities of BAs in the nancing of entrepreneurial rms is provided. The
analysis reveals that the relationship between BAs and investees is less driven by formal contracts
and monitoring but more by relational governance, resulting in mutual trust and an emphasis on
mentoring. BAs’ investment style is characterized by geographical proximity and – normally – an active
involvement. Thus, they support the entrepreneurial venture with industry expertise, entrepreneurial
knowledge and management skills (know-how) as well as with their personal network (know-who).
BAs’ activity and investment approach is contingent on numerous factors such as the characteristics
of the BA, entrepreneur, and venture as well as institutional conditions. All of them appear less
favorable in transition economies, providing proof for the slow or still missing BA development in
these countries.
Since BAs, however, play an important role in closing funding gaps at the early stages and regional
level and are better suited than many other nanciers to deal with less favorable institutional settings,
public policy in transition countries should focus on the enhancement of BA activity. Two promising
stimulating approaches are the creation and advancement of BANs as well as tax incentive schemes.
In the long run, however, other aspects of the institutional environment such as corporate governance,
investor regulation, and capital market development, in particular the advancement of the stock market
should be addressed in order to fully deploy this potential crucial funding source.
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BUSINESS ANGELS IN MACEDONIA
Ljubomir Drakulevski
Faculty of Economics, Ss. Cyril and Methodius University, Skopje, Macedonia
E-mail: drakul@eccf.ukim.edu.mk
Angelina Taneva-Veshoska
FON University, Skopje, Macedonia,
E-mail: angelina.tanevaveshoska@fon.edu.mk
Lazar Gjurov
Military Academy, Skopje, Macedonia
E-mail: lazar.gjurov@gmail.com
Slavica Trajkovska
FON University, Skopje, Macedonia
E-mail: slavica.trajkovska@fon.edu.mk
Abstract
Purpose: This exploratory study aims to examine the effects of existence of business angel network on
economy in Macedonia. More specically, it aims to examine the inuence of business angels in starting-up
new business and entrepreneurship in our country.
Design/methodology/approach: Business angels network is examined in several way-the way of functioning
and managing the network, the problems they have and the solutions they provide in the community, as well
as which type of business angels they are. The survey was administered in the new developed business angel
network in Republic of Macedonia.
Findings: The ndings show strong positive relationship between inuence of the business angel network and
the amount of new entrepreneurship business that were developed. The empirical ndings show support of the
hypotheses.
Research limitations/implications: The study was conducted in the newly established business angel network in
Republic of Macedonia, so the ndings can’t be generalized for all networks of this kind. Our recommendation
is to replicate the research and compare the analyses with different countries.
Originality value: This study makes a signicant contribution to the entrepreneurship literature and the practical
knowledge of Macedonian entrepreneurs and business angels and also provides further evidence of the impact
of business angel network on entrepreneurship.
Keywords: Entrepreneurship, Business Angels, Business Angel Network
1. INTRODUCTION
In all successful economies, entrepreneurs are viewed as essential factors for economic growth, as
driving factors towards the creation of new jobs, and the advantages of small businesses are by now
almost universally accepted. Entrepreneurs are small business managers who never rest, who create
and introduce quality, demand and seek changes, innovations and idea realizations. They are competent
in sensing the market needs and react quickly upon them, ready to take risk.1 Entrepreneurship, as
an immeasurable factor of business development, manifests its prime through the growth of small
businesses. The small business is oftentimes described as the backbone of entrepreneurship. It
constitutes the ideal environment which enables the exposure of the entrepreneurs’ real talents and
the realization of envisioned ideas.
1 Szabo A. (1995).The Rule of SMEs in Transition Economies and how to Promote them. ECE. UN. Geneva
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2. ENTREPRENEURSHIP AND FINANCING NEW BUSINESSES
2.1. DEVELOPMENT OF NEW ENTREPRENEURSHIP BUSINESS
Development of new entrepreneurship business usually involves two main stages:2
• Early stage, with seed, start-up, and early stage development phases,
• Expansion stage.
e rst stage is when the new business needs to be developed and proven. en the products or
services are developed and initial marketing takes place, witch continues with producing more goods
but oen unprotably. e second stage of expansion is when the business matures and goes public.
Successful businesses have enough nances, no matter if it is a start-up nances or nances needed to
be invested in its growth. Every business project needs a certain amount of money to be invested and
if this sum is easily accessible the entrepreneur is much closer to his success. There are different ways
to get the nances that the entrepreneurship needs-one is with the help of business angels. Depending
on the stage of development various sources of nance can be involved (Figure 1).
Figure 1 Development and nancing of entrepreneurial rms
Source: Mayer, C. (2001). Investment and Growth: The Role of Corporate Governance, Economic growth and
Government Policy. HM, Treasury
In their earliest stages, start-up companies typically rely on own funds, such as their own credit
cards, second mortgages or cash from close contacts. These sources, called by professional venture
investors as three Fs’ – founders, family, and friends, are limited, and are too small to bring to the
market innovative ideas that can eventually turn into well-earned, prospective business.3 Such gaps
can be fullled by venture capitalists which put up their money in return for a stake in the enterprise.
The main, complementary to each other, sources of early stage of venture projects are:4
• Business angels (informal venture capital): high net worth individuals, senior managers from
large companies, or serial entrepreneurs, who invest (on their own or in groups) a small
proportion of their own wealth in SMEs’;
• Venture capital rms (formal venture capital): rms which manage xed life venture capital
funds of banks, pension funds and nancial institutions, and other investors (wealthy families,
corporations).
A market of venture capital is still growing and makes more ambitious. Business angels have long
2 Mayer, C. (2001). Investment and Growth: The Role of Corporate Governance, Economic growth and Government
Policy. HM, Treasury
3 Kutsuna K. Honjo Y. (2005). Start-up Financing and Post – Entry Performance: Evidence from Japan, Discussion
Paper Series. Kobe University. Kobe
4 Harrison R.T. Mason C.M. (2001). Venture capital market complementarities: the links between business angels and
venture capital funds in the United Kingdom. Venture Capital. Vol. 2, No. 3. p. 228
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traditional track record as business investors, but their signicance increased in sixties and seventies
during Silicon Valley development, and a lot of pioneer investments had achieved nancing from
business angels.
2.2. Allocating nancial resources for the entrepreneurs
The capital is one of the biggest issues that entrepreneurs meet, especially those whose business
involves innovation. It often happens that the entrepreneurs have interesting idea that should be
transformed into a business idea. In order to realize that idea the entrepreneurs need lots of resources,
especially nances. Quite often do the entrepreneurs cannot allocate these resources from the banks or
the other nancial institutions, so they have to turn to friends or family, even though those resources
will not sufce to fulll the goal of the entrepreneur’s initiative.
Allocating the nancial resources to promote entrepreneurship is one of the most important factors of
both qualitative and quantitative development, which in coordination with the other means of support
(tax and custom reduction) enables optimal, desirable and necessary development of the business on
the whole.
The basic characteristic of the nancial support for the development of the entrepreneurship in
Republic of Macedonia is the understanding of its importance as an accelerating and multiplicative
effect in the development of the whole economy. For that cause, the state institutions in R. of
Macedonia, through the instruments of economic policy allocate resources specically directed
towards forming specialized funds, associations, banks etc. The nancial mechanism for support of
the entrepreneurship should consist of:5
• Selective crediting of the small industries that produce for the big economies;
• Selective crediting of projects regarding the import substitution in highly rentable export
products;
• Organizing assignment savings for the SME at specialized banks that nance highly protable
projects;
• Consortium nancing of small and medium enterprises;
• Selective nancing of new and decit products;
• Financing family factories by large enterprises.
The reasons for dedicating such special attention on the entrepreneurship and the support of its
development are rightfully questioned, knowing that the commercial banks are not always interested
in nancing new and risky business. The basic reasons are the following: the low amount of personal
capital, larger credit risks that the average, high expenditures from crediting one by one, and the
problems regarding discipline about payments of the credits. The newcomers nd it hard to deal with
the commercial banks, because of their strict conditions when approving credit, the high interest
rates, the high percentage of personal share, the short term for paying back, the mortgages etc. Banks
are not inclined to make any loans to small entrepreneurs mostly because of the distrust towards the
new enterprises and the constant fear whether their resources will ever be paid off, since there is no
way to check their creditworthiness coming from the little experience they got on the market. So the
need for special guarantees is requested, which burdens the process of approving credits and loans to
entrepreneurs.
3. WHAT IS A BUSINESS ANGEL?
Business angel is a high net-worth individual who invests his or her own money in start-up companies
in exchange for an equity share of the businesses. Some important things to know about angels
include:6
• Many angels are in most of the cases former entrepreneurs themselves. They bring both capital
and mentoring/coaching to the start-up company.
• They make investments in order to gain a return on their money, to participate in the
entrepreneurial process, and often to “give back” to their communities by catalyzing economic
growth.
5 Зарезанкова-Потевска, M. (2000). Перспективите на малото стопанство. Неол-Ристо-ДООЕЛ. Скопје
6 Biznis Angeli, Panoptikum, http://www.panoptikum.com.mk/old/images/stories/www.panoptikum.com.mk_-_
biznis_angeli.pdf (accessed 21.08.2010)
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• Angels make a return on their investment when the entrepreneur successfully grows the
business and exits it, generally through a sale or merger
• It is estimated that angels invested: $26 billion in 57,000 start-up businesses in 2007 in the
United States and around €3 billion in 2007 in Europe Angels tend to invest in companies that
are located near them regionally
• Angels tend to invest early and take a higher risk
• Angels invest in different sectors.
• Angels are generally more exible and reactive than other investors
• Angels give access to networks and new potential customers
• Angels acts as an ambassador for the business, increasing the credibility and the chances to
rise follow-on funding.
Business angels can act individually or in groups/networks. In North America angels groups are
more frequent. In an angel group, individual angels join with other angels to invest collectively in
entrepreneurial rms. In Europe angels tend to gather in networks, which can be more of less formalized
up to the country and the nature of the association. Business angels networks are organizations which
aim to facilitate the matching between entrepreneurs (looking for venture capital) and business angels
(providing capital and mentorship). Business angels networks tend to remain neutral and generally
refrain from formally evaluating business plans or angels, with the main function to make a market
place for matching services.
Business angel investments are generally high risk, so the returns can be extremely good. But recent
researches among existing business angels have shown that one in three investments resulted in the
total amount being lost. However, one in ve investments provided a cumulative return of 50%
or more per annum. Business angels are actively involved in the company and will therefore need
business skills in order to achieve the potential of the company in which they invest and accelerate
the growth of the company. Angels are often entrepreneurs themselves or have a solid entrepreneurial
experience, as their role is also to provide expertise to the company in its rst stages. If the business
angel’s business experience is limited, the angel should consider aligning himself/herself with an
experienced business angel in a syndicate. Generally speaking, the greater the percentage of shares
business angels acquire, the greater their control; but business angels should seek professional advice
before signing a contract.
Research shows that, on average, the business angel will spend about ten hours a week dealing
with the company’s affairs. The precise nature of their involvement, however, should be agreed in
advance. If the business angels have specic skills to contribute, the company should welcome their
involvement; on the other hand, some business angels have interfered too much and alienated the
executives who are primarily responsible for the success.
3.1. Difference between business angels and venture capitalists
While both invest in entrepreneurial rms and take equity (ownership) in those businesses, there are
some important differences:7
• Funding source – Angels invest their own funds directly in a business, while venture capitalists
invest funds from other sources (e.g. pension funds, insurance companies, foundations);
• Stage of entrepreneur – In general, angels invest in seed, start-up and early-stage businesses,
while venture capitalists invest in later-stage businesses (although there are exceptions);
• Size of investment – Venture capitalists generally invest $2 million and up in a nancing
round, while individual angels make much smaller investments ($5,000 to $100,000). Angel
groups can make investments in the mid-range, between most individual angels and VCs.
Business angels have a role in:8
• Filling the equity gap (50.000€ to 3 million €) in the start-up phase;
• Investing in companies at a stage where VCs are no longer active;
7 Venture Support Systems Project: Angel Investors, MIT Entrepreneurship Center, Feb. 2000, http://entrepreneurship.
mit.edu/Downloads/AngelReport.pdf (accessed 13.08.2010)
8 http://www.innovation.gov.au/Section/Innovation/Documents/Business_Angel_Report20070328092115.pdf
(accessed 12.08.2010)
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• Being an integral part of the chain of integrated nance tools;
• Contributing to the culture of entrepreneurship in the region;
• Agglomerating the existing investment capital in the region.
As venture capitalists are moving up the ladder to higher amounts, business angels are increasingly
active in the very early stage of companies, and are required to invest in several rounds of nancing
for the same company as there is a lack of follow-on investment. This new equity gap concerns
amounts from 1 million to 3 million €, depending on the country.
4. CURRENT SITUATION IN MACEDONIA – NEW BUSINESS ANGEL NETWORK
The Innovation Center has established the rst Business Angel Network in Macedonia – i2BAN.
The network is in close collaboration with the Slovenian Business Angel Network, Serbian Business
Angel Network (SBAN) and the Croatia Business Angel Network (CRANE). The main goal of the
network is to provide seed and growth capital to Macedonian companies, from established business-
people in the country and abroad.
The Innovation Center is a spin-off of USAID’s Competitiveness project. After a research that has
been conducted on the R&D topic, it turned out that Macedonia has some serious lack of R&D in the
business sector, thus there are not as many innovations in the country, especially not of the kind that
get commercialized.
Center’s main purpose is to help innovators/entrepreneurs select and implement their commercialization
option. USAID’s Competitiveness Project established The Innovation Center in April 2010 to
assist innovators and innovative companies adopt innovations, create new products or services, or
commercialize existing innovations. The Center is developing a pool of advisors, service providers
and resources within and outside Macedonia that can assist entrepreneurial business ventures be
successful. The Center will coach and guide entrepreneurs through every step it takes to realize
business success from an innovation, linking innovators to specic knowledge, technology and
nancial resources needed.
The Innovation Center Macedonia, unleashes the potential of domestic innovators, links them to
potential sources of capital, thus creating economic welfare in the country. The Innovation Center is
a place for developing ideas and growing businesses. This is achieved by fostering an environment of
innovation and providing a wealth of essential business resources to accelerate growth. The Innovation
Center nurtures innovative and growth-minded businesses by developing the venture during start-up,
early development, and the growth stages. The Innovation Center is all about growth. Growth in
the economy, growth in jobs, and the growth of dynamic new companies with great new ideas! The
Innovation Center seeks to create a way of thinking and acting that is opportunity obsessed, holistic
in approach, market driven and leadership balanced.
The goals of the Innovation Center are:9
• Information sharing: IC actively works to promote and educate its members and non-members
through events such as conferences, presentations, workshops, and informal gatherings;
• Relationship building: IC is promoting regional cooperation between its members and the
business community;
• Entrepreneurship Awareness: IC is increasing awareness of the importance of young, small
and medium-sized enterprises to economic development and the contribution of business
support.
The main activities of the Innovation Center Macedonia are:10
• Matchmaking between domestic innovators and investors;
• Facilitating the commercialization of innovation;
• Analysis of the present situation relevant for innovations and their commercialization;
• Offering support to innovators for attracting potential investors;
• Training for innovators for commercialization of innovations;
9 The Innovation Center. http://www.mcp.org.mk/ (accessed 23.02.2011)
10 I2BAN. http://www.i2ban.mk/ (accessed 13.09.2011)
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• Implementation of educational programs in business, attracting investors, structuring
investment deals etc.;
• Support to investors in locating favorable opportunities to invest;
• Support in investment portfolio management including the opt in opt out possibilities from
potential businesses;
• Establishing a framework for attracting capital for investment in early and risk phases when
starting a business;
• Establishment of innovation fund (Investment fund for ideas/projects/businesses);
• Establishment of an eco-system of companies that will be specialized in providing services in
technology commercialization, technology transfer, but also starting a business;
• Building capacities in these companies;
• Promoting innovations in the entire society;
• Promoting innovative thinking in the society, with special focus on the young population;
The Innovation Center serves innovators, entrepreneurs, business owners, and existing businesses
that want to launch (or expand, or re-invent) a company based on innovative technology, product, or
process in a high growth industry/sector. The Innovation Center assists access to all entrepreneurial
services - e.g. business development, access to capital, product innovation and commercialization
services, marketing, research, training, mentoring, and coaching - and it is committed to growing,
building, or developing innovative businesses in Macedonia and the region.
5. CONCLUSION
Startup companies usually do not have operational history, no steady cash-ow and no assets. Banks
or other nancial institutions are not willing to nance companies in early stages. The solution to
this problem is often found in business angels and venture capital funds. In Republic of Macedonia,
the nancing gap has enhanced the need of immediate implementation of measurements in order to
provide alternative nancial resources for the seed and early stage of business development for start-
ups.
Business angels are successful businesspeople who have usually built and/or manage one or
several successful companies in the past. They are high net worth individuals and their nancial
position allows them to invest in highly risky investments such as young companies with potential for
rapid growth and potential for high return. For the business angel, the investment presents sophisticated
money renement with inuence on the investment. Being a business angel is an important status
symbol, as it means sophisticated money renement, as well as helping entrepreneurs to build and
create a company. Being business angel in Macedonia is a new thing, a new opportunity for the rich
people in our country. The fact that now in Macedonia there is a business angel network makes things
much easier for the businessman, but also for the entrepreneurs. Hopefully, we can expect more new
businesses to start-up very soon thanks to the business network and the Innovation Center.
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Reference
Biznis Angeli, Panoptikum, http://www.panoptikum.com.mk/old/images/stories/www.panoptikum. com.
mk_-_biznis_angeli.pdf (accessed 21.08.2010)
Harrison R.T. Mason C.M. (2001). Venture capital market complementarities: the links between business
angels and venture capital funds in the United Kingdom. Venture Capital. Vol. 2, No. 3. p. 228
http://www.innovation.gov.au/Section/Innovation/Documents/Business_Angel_Report20070328092115.pdf
(accessed 12.08.2010)
I2BAN. http://www.i2ban.mk/ (accessed 13.09.2011)
Kutsuna K. Honjo Y. (2005). Start-up Financing and Post – Entry Performance: Evidence from Japan,
Discussion Paper Series. Kobe University. Kobe
Mayer, C. (2001). Investment and Growth: The Role of Corporate Governance, Economic growth and
Government Policy. HM, Treasury
Szabo A. (1995).The Rule of SMEs in Transition Economies and how to Promote them. ECE. UN. Geneva
The Innovation Center. http://www.mcp.org.mk/ (accessed 23.02.2011)
Venture Support Systems Project: Angel Investors, MIT Entrepreneurship Center, Feb. 2000, http://
entrepreneurship.mit.edu/Downloads/AngelReport.pdf (accessed 13.08.2010)
Зарезанкова-Потевска, M. (2000). Перспективите на малото стопанство. Неол-Ристо-ДООЕЛ. Скопје
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THE ROLE OF FINANCIAL SUPPORT FOR SME DEVELOPMENT IN REPUBLIC OF
MACEDONIA
Miroslav Gveroski
Faculty of Economics – Prilep, Macedonia
E-mail: mveroski@yahoo.com
Aneta Risteska
Faculty of Economics – Prilep, Macedonia
E-mail: a_risteska@yahoo.com
Stevco Dimeski
Stopanska banka AD Skopje, Macedonia
E-mail: s.dimeski@yahoo.com
Abstract
Considering the fact that many of the countries are passing thought transitional period the leaders of development
should be small and medium sized enterprises. This paper will include the meaning and the role of different
forms of nancial support for SME in start-up phases in function of processes of overcoming the causes of
transition and recovering the competition, entrepreneurship and increasing the economy efciency. In the end
is the conclusion made to get information for perspectives and odds of nancing the small and medium sized
business in Republic of Macedonia.
Keywords: Financial Support, SMEs
1. INTRODUCTION
Considering the fact that many of the countries are passing thought transitional period the leaders
of development should be small and medium enterprises. The signicant appearance in period of
70th years of 20 centuries was decreasing the rate of GDP, increasing the unemployment, decreasing
the investment activities. The only way for enlarging the economics activities is bigger liberty on
the market and decreasing the role of the state in the economy life. This is important for stimulating
the competition, entrepreneurship and economy efciently in the national economy. It helps for
entrepreneurship’s reconstitution, manifested by establishing the small and medium enterprises which
lean on creativity, entrepreneurship spirit and individual innovation. The main goal of this paper is
researching the importance of nancial support for SMEs development in Republic of Macedonia
and current actuality for nancial support of MSP from the banking sector. An analysis of nancial
support for SMEs in Republic of Macedonia will be performed by using the statistical data from the
banks.
2. SMES DEFINITION
Given that SMEs are a heterogeneous group there isn’t single approach for their denition. According
to national statistics of countries, most often used criterion is the number of employees that varies
from one country to another. For example, in EU countries the limit is 250 employees in Japan to 300
employees in the U.S. and Canada that goes to 500 employees. Just for illustration in the following
table is indicated classication of enterprises by number of employees.
Table 1: SME classication by number of employees
micro small medium SMEs large
Countries of EU, Iceland,
Norway and Switzerland 1-9 10-49 50-249 1-249 250+
Australia 0-9 10-49 50-199 0-199 200+
Canada 0-9 10-49 50-499 0-499 500+
Japan 4-9 10-49 50-249 1-249 250+
Korea 5-9 10-49 50-199 5-199 200+
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Mexico 0-10 11-50 51-250 1-250 251+
New Zealand 1-9 10-49 50-99 0-99 100+
Turkey 1-19 20-49 50-249 1-249 250+
USA 1-9 10-99 100-499 1-499 500+
Resource: OECD Studies on SME and Entrepreneurship, 2010 (www.oecd.org/publishing/corrigenda)
Besides the number of employees there are in use other criteria that vary in different countries. As
a result of the small and medium enterprises operation on a single market without internal borders,
there is a need to initiate application of a uniform denition of their operational efciency and
consistency. The European Commission in 2003 made a modication of the denition of small and
medium enterprises and that denition is used in all strategies, programs and measures relating to
the small and medium enterprises. The denition is an important instrument for implementation of
effective measures and programs for support of the development and success of the small and medium
enterprises (http://ec.europa.eu/ The denition of SMEs according to the European Commission
recommendation 2003/361/EC)
Table 2: Criteria’s for SME denition
Criteria’s
Dimension of enterprises
small medium large
average number of
employees to 50 employees to 250 employees more than 250
employees
average incomes < of 8.000 wages < of 40.000 wages > of 40.000 wages
average of assets < of 6.000 wages < of 30.000 wages > of 30.000 wages
SMEs have a huge contribution for economics activities in the country and usually are appointing the
question: What are the reasons and advantages of SMEs and why are they so important for country
development?
SMEs are expected to boost efciency and growth and they lead the economy development because:
• SMEs constitute the most dynamic segment of many transition and developing economies
• They are engine of job creation
• SMEs boost the innovations, entrepreneurship , competition and exibility
• Important role in promoting growth and development
The other advantages of SMEs establishment are:
• Direct control of the costs;
• Easier and cheaper function control;
• More liberal and free lows for entering a foreign capital;
• Faster noticing of the direction for more successful investments, innovations and market
participation;
• Team work;
• Bigger responsibilities in work organization, etc.
In most economies, SMEs are much greater in number than big enterprises. In the EU, SMEs comprise
approximately 99% of all rms and employ about 65 million people. In many sectors, SMEs are also
responsible for setting up innovation and competition. Globally SMEs account for 99% of business
numbers and 40% to 50% of GDP.
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3. SMES IN REPUBLIC OF MACEDONIA
Private sector development in Republic of Macedonia has started since 1990. According to the data
of the State Statistical Ofce the number of active business entities in the Republic of Macedonia
in 2010 was 75497. The sectors with the highest share in the structure of business entities were:
Wholesale and retail trade; repair of motor vehicles and motorcycles with 28326 entities or 37.5% and
Manufacturing with 8263 entities or 11.0%, whereas the least represented were the sectors Electricity,
gas, steam and air conditioning supply with 107 entities or 0.1% and Mining and quarrying with
164 entities or 0.2%. The data on the structure of active business entities according to the number
of persons employed show that the highest share of 78.5% belongs to business entities with 1-9
persons employed, followed by business entities with no persons employed (or the entities did not
provide information about persons employed) with 14.2%, and entities with 10-19 persons employed
with 3.3%. The share of entities with 20-49 persons employed was 2.1%, those with 50-249 persons
employed participated with 1.6%, while entities with 250 or more persons employed had a share of
only 0.3%.
SMEs have a huge role for economy development actually for creating GDP, decreasing the
unemployment and increasing the export. A lot of measure should be taken in order to encourage the
SME sector.
Business climate has the main role for economics activities and for boosting the economy at all
and also for incresing the SME sector. According to the Doing business report 2011 Republic of
Macedonia has done a lot of improvements in business climate.
An analyses of business climate in R. Macedonia is given in the table according to the dates from
Doing business report 2011. That reports include the following criteria’s:
• Starting a business;
• Dealing with construction permits;
• Employing workers;
• Registering property;
• Getting credit;
• Protecting investors;
• Paying taxes;
• Trading across borders;
• Enforcing contracts;
• Closing a business.
Table 3: Doing business ranking
Macedonia
Easy of doing business (rank) 38
Starting a business 5
Procedures (number) 3
Time (days) 3
Cost (% of income per capita) 2.5
Minimum capital (% of income per capita) 0.0
Dealing with licenses 136
Procedures (number) 21
Time (days) 146
Cost (% of income per capita 1,601.4
Registering property 69
Procedures (number) 5
Time (days) 58
Cost ( % of property value) 3.2
Getting credit 46
Strength of legal rights index (0-10) 7
Depth of credit information index (0-6) 4
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Public registry coverage (% of adults) 39.4
Private bureau coverage(% of adults) 0.0
Protecting investors 20
Extent of disclosure index (0-10) 9
Extent of director liability index (0-10) 7
Ease of shareholder suits index (0-10) 4
Strength of investor protection index (0-10) 6.7
Paying taxes 33
Payments (number) 40
Time (hours per year) 119
Total tax payable (% of gross prot) 10.6
Trading across borders 66
Documents for export (number) 6
Signatures for export (number) 12
Time for export (days) 1,376
Documents for import (number) 6
Signatures for import (number) 11
Time for import (days) 1,380
Enforcing contracts 65
Procedures (number) 37
Time (days) 370
Cost (% of debt) 33.1
Closing a business 116
Time (year) 2.9
Cost (% of estate) 28
Recovery rate (cents on the dollar) 20,7
As we can see from the dates R. Macedonia has huge progress in starting a business (today you can
star a business for 7 days thanks to involving the one stop shop system) and paying taxes thanks to
the tax reliefs.
The most important condition for SMEs establishing is macroeconomic stability. The economics
performance of the Macedonian economy is expressed through stable GDP growth of around 4%,
a low rate ination rate of 3% on average, scal discipline conrmed by the international nancial
institutions and a well- functioning coordination between scal and monetary policy
4. FINANCIAL SUPPORT FOR SMES IN REPUBLIC OF MACEDONIA
Considering the current situation and the needs for provision of faster and more symmetrical
development of the small businesses in the Republic of Macedonia, with a goal to emphasize the
advantages of that process, it comes to an effort in building an appropriate environment and to take
adequate measures and activities. Mainly all these activities were aimed on providing of the necessary
nancial and other kind of support to the development of small and medium enterprises in the country.
Such measures are especially necessary in the starting stages of the SMEs development, when those
entities are characterized by a high level of risk and the impact of a numerous constraining factors -
the inability to use the stock exchange market, underdeveloped institutions and restraint of the banks
for their nancing.
In conditions of low level of development of the nancial market as an alternative form of nancing of
its ongoing and investment projects, the companies are primarily directed towards traditional banking
products. In that direction the loans from banks represent the single source of an external nancing1
of: investment projects, permanent working capital and nancing of the current assets in form of
short-term loans or revolving credit lines.
1 Apart from the banks own funds, for the SMEs there are also at disposal a numerous credit lines: Credit line through
the International Finance Corporation (IFC); Credit program for the development of small and medium enterprises
through the Macedonian Bank for Support of Development; Credit line through the Agricultural Credit Discount
Fund; European Investment Bank; MBSD credit line for export nancing; Italian credit line through MBSD; Credit
line through the European Fund for Southeast Europe (EFSE); Credit line through the Macedonian Enterprise
Development Foundation; Credit program by EIB implemented through the MBSD - for permanent working capital;
Credit program by EIB implemented through the MBSD - Investment Loans; Credit line for energy efciency and
renewable energy sources, EBRD (WeBSECLF).
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In the pre-crisis period we have witnessed the credit expansion, when the banks tended to increase the
credit support, and thus to secure greater market share. In particular, at the end of 2008, the total loans
to nonnancial persons remarked an annual growth of 34.4% (despite the slowdown in the second
half of 2008) and in 2007 the annual rate of credit growth was 39.1%. (www.nbrm.gov.mk)
In the last two years, the banks have been directed towards maintenance of their quality loan portfolio,
and therefore, it is evident that the lending to the companies by the banks unrolls gradually. The
support by the banking sector to companies in 2010 illustrates a recovery compared to the previous
2009 (see gures 1 and 2). The total loans granted to non-nancial entities at the end of 2010 rose to
7.4%, representing almost double increased intensity of acceleration with respect to previous 2009,
when the realized growth of credits was 3.35%. The rate of growth continued in 2011 when on an
annual basis (April 2011 / April 2010) it was observed a rate of growth of 7.8%, by which in the
contribution of growth of the total bank loans, the contribution of loans offered to the companies is
participating with 66 3% of the total increase, or expressed at an annual rate of growth of loans to
companies in accordance with data until April 2011, it accounts 8.6%, with a remark that an important
structural component are the exchange currency loans, together with the rapid trend of increase of
contribution of the Denar loans, as well as that a signicant contribution to the annual rate of growth
have the long-term loans, while the short-term loans have an annual contribution in the last three
months of 2011 with a negative indication.
Despite the progressive dynamics with low intensity, the annual growth rate of loans in the Republic
of Macedonia in 2010 (including Albania and Croatia) is above the annual growth rates of a number
of countries, except Turkey and Serbia, which in this period had far higher rates of credit growth. The
increase of credit growth goes in parallel with the raise of the quality to the ability for nancing of the
companies in terms of what it means spending of borrowed money, or, evident is the gradual decrease
of the interest rate of the loans, in particular to loans in domestic currency by 10.8% in June 2010 to
8.1% in April 2011.
Table 4: Financial support for SMEs -loans
In million denars
Date Description Total
Tota l Enterprises
MKD MKD with
clause Foreign MKD MKD with
clause Foreign Tota l
31.12.2009
Past due loans 2.414 1.586 501 327 620 363 309 1.293
Short-term loans 39.229 23.441 7.555 8.233 18.493 7.365 8.221 34.079
Long -term
loans 116.290 38.795 51.135 26.360 11.400 25.514 22.851 59.764
Non-performing
loans 15.777 8.315 3.141 4.321 4.649 1.596 3.889 10.133
Total loans 173.710 72.137 62.332 39.242 35.162 34.838 35.270 105.269
Impairment -16.054
Accumulated
amortization -528
Total net loans 157.128
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31.12.2010
Past due loans 2.968 1.549 496 922 578 369 910 1.857
Short-term loans 39.172 23.293 8.525 7.354 18.090 8.365 7.336 33.791
Long -term
loans 127.117 42.534 48.951 35.632 12.882 23.296 31.057 67.235
Non-performing
loans 17.289 9.466 3.563 4.260 5.775 1.931 3.672 11.378
Total loans 186.545 76.842 61.534 48.169 37.325 33.961 42.975 114.261
Impairment -17.491
Accumulated
amortization -708
Total net loans 168.346
Increase 31.12.2010/
31.12.2009
The absolute
increase in loans 12.835 4.706 -798 8.927 2.163 -877 7.706 8.992
Increase in % 7,4% 6,5% -1,3% 22,7% 6,2% -2,5% 21,8% 8,5%
Structure of
increase 36,7% -6,2% 69,6% 16,9% -6,8% 60,0% 70,1%
Table 5 Newly approved loans in the period
Activities
Number of credit parties Average interest rate
First
quarter
2010
Second
quarter
2010
Third
quarter
2010
Fourth
quarter
2010
First
quarter
2010
Second
quarter
2010
Third
quarter
2010
Fourth
quarter
2010
Enterprises 4.946 5.278 4.527 5.508 8,9% 8,5% 8,5% 8,3%
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5. CONCLUSION
The general conclusion about the nancial support to the SMEs persistence in this so called post-crisis
period as well as additional impulse for their development is that most of the offered nancial support
remains unused. The reasons for this situation the various stakeholders are detecting it differently.
The owners of small and medium businesses accent that the criteria for obtaining loans are strained
and at the same, the interest rates are quite high, while the banks emphasize that there is a low interest
among SMEs for borrowing, and there are not enough protable projects of creditworthy companies
that could be funded.
Therefore, future development and future support of SME development in the Republic of Macedonia
should be directed to the following:
• Development of the nancial system especially the capital markets and its special forms
faimed for small and medium enterprises;
• Greater awareness of the owners of SMEs on opportunities to nance their businesses and use
the pre-accession funds of EU;
• Developing a system of insurance of loans in terms of security does not rely only on the
mortgage;
• More liberal credit policy of banks;
• Decreasing the required reserves of banks;
• Greater awareness of SMEs on the owners of the essence and meaning of their nancial
statements, signicant qualitative content based on which banks carry the nancing decision.
This paper will contribute to determining the problems which are facing SMEs in the provision of
nances. Also we will suggest measures and instruments for improving the nancial support for SME
sector.
Reference
Banking Law, Ofcial Gazzete of Republic of Macedonia, 67/2007, www.pravo.org.mk (accessed 26 march
2011)
Doing business report 2011, www.doingbusiness.org (accessed 2 may 2011)
Fiti T., Haxi-Vasileva Markovska V., B. Milford, (2007), Entrepreneurship, Faculty of economics, Skopje.
Lucić L,(2006), Entrepreneurship nance, Akademska knjiga, Novi Sad.
Revised national strategy for development of small and medium enterprises (2002-2013) Ministry of Economy,
Skopje, 2007
Small enterprises development, An international journal of micronance and business development, MDG
Publishing, december ,Volume 16,2005
Trade Companies Law, Ofcial Gazzete of Republic of Macedonia, 28 / 2004, www.pravo.org.mk (accessed
15 march 2011)
www.ec.europa.eu
www.nbrm.gov.mk
www.oecd.org/publishing/corrigenda
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THE HARMONIZATION OF ACCOUNTING REGULATIONS OF CROATIAN SMALL
ENTERPRISES WITH ACCOUNTING REGULATIONS OF THE EU
Petar Pepur
University Centre for Professional Studies, Split, Croatia
E-mail: ppepur@oss.unist.hr
Jasenka Bubić
University Centre for Professional Studies, Split, Croatia
E-mail: jbubic@oss.unist.hr
Abstract
The modern economy is characterized by small enterprises which constitute the fundamental drivers of
economic development and contribute to the dynamic economic trends. Transition countries prior entering
to the global market have to create conditions which will ensure equal participation of their small enterprises
in competition with small enterprises of developed countries from the European Union. As one preconditions
is harmonization of accounting regulations for small enterprises. Ignoring the harmonization of accounting
regulations would result in an unfavorable position of small enterprises of transition countries, and thus the
overall economy of transition countries.
Keywords: Small Enterprises, Accounting Regulations, Transition Countries
1. INTRODUCTION
The rst records of small enterprises appear before 4000 years. From its beginnings the small
enterprises play a major role in the development of ancient cultures (Egyptians, Jews, Romans,
Babylonians ...) as well as the spread of civilization across the unexplored regions of the world.
During the second half of 20th century markets globalization resulting in frequent turbulence on the
market, what pushing forefront the exibility, dynamism and innovation as a necessary precondition
for a successful business life, and the aforementioned characteristics represent the fundamental
characteristics of small enterprises. The life expectancy of 4 000 years indicates the importance
tradition and achievements of small enterprises. Therefore, the goal of this paper is to point to the need
to create a favorable legislative conditions using regulatory accounting standards that would achieve
equality between small enterprises of transition countries and small enterprises of EU Member States.
2. CONCEPTUALIZATION OF SMALL FIRMS IN MODERN CONDITIONS
Entrepreneurship has always been very important both for development and the restructuring of the
market economy, which was conrmed during the great transitional period like the transition from
agrarian to industrial civilization in the 15th and 16 century, and the transition from industrial to
postindustrial civilization in the late 20th century. Entrepreneurship has played a decisive role in
development of the U.S., Japan, South Korea, Singapore and Hongkong, also crucial was for Europe
and for the former socialist states within which represented a major lever of reform. Regarding the
criteria for dening the small enterprises on a theoretical level we have a big mess, because there
are no uniform criteria for the theoretical denition of small enterprises. Therefore, in the world,
we nd signicant differences in the denitions of small businesses due to the different criteria for
dening the enterprises. In literature the often used criteria1 are the total asset value, the value of the
share capital, the amount of sales, the value of xed assets, , the size of necessary investments, the
volume of energy resources and the total number of employees. Most often as a separate or combined
criteria apply “Total number of employees” because the same easily accessible, transparent, fair and
comparable. Taking into account the total number of employees as the most common criterion, we
have a very vivid picture of small businesses:
• In the United States under a small enterprises belong the company which have up to 1500
employees,
• In Austria, Belgium, Netherlands and UK small enterprises are counted up to 100 employees.
• In France, small enterprises are those which employing between 10-500 employees.
1 Kuvačić, N.: Počela poduzetništva, Ekonomski fakultet Split, Split, 1999, str. 93-94.
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• In Japan, small enterprises, depending on the branch of industry employs up to 300 jobs in
wholesale and retail to 100 to 50 employees.
• In Sweden, small enterprises employing up to 200 employees
• In Switzerland, small enterprises employing up to 49 employees.
Until now in the Croatia as a criterion for classifying enterprises to small, medium and large used the
total number of employees in combination with following as shown in the table:
Table 1: Criteria for classifying enterprises
Parameters ZOR /1992 ZOR / 2005 ZOR / 2008
Total assets 2.000.000,00 DEM 27.000.000,00 HRK 32.500.000,00 HRK
Annual income 4.000.000,00 DEM 54.000.000,00 HRK 65.000.000,00 HRK
Number of employees 50 50 50
Currently the Croatian Law of Accounting (01.01.2008) classicate the enterprises to small, medium
and large regarding the following2. Small enterprises are those that do not exceed two of the three
following criteria:
• Total assets to 32,500,000.00 HRK;
• Annual income is 65,000,000.00 HRK;
• They have 50 employees.
Medium enterprises are those that exceed two of the three aforementioned criteria and not exceed two
of the three following criteria:
• Total assets 108,000,000.00 HRK;
• Annual income 216,000,000.00 HRK;
• They have 250 employees.
Large enterprises are those that exceed two of the three aforementioned criteria.
3. THE ROLE AND IMPORTANCE OF SMALL BUSINESSES IN THE MODERN ECONOMY
Small businesses are at the heart of contemporary society, supplying with their products and services
the overall environment. In support of the role and importance of small businesses in the modern
economy tell us the following information:
• Austrian small enterprises represent (excluding companies in the eld of agriculture) between
98% and 99%, 55% and provide jobs and generate 50% of the total social product;
• Belgium small enterprises represent 98% of all companies;
• France small enterprises represent (up to 500 employees) 99.90% of all companies, employing
66.80% of all employees in total investment accounted for 55.10%;
• Switzerland small enterprises represent the 97.10% of the total number of enterprises;
• U.S. small enterprises with up to 10 employees participate with 88.90%, to 20 employees
participate with 91.30%, to 100 employees with 99.10% and up to 500 employees with as
much as 99.80% of the total number of enterprises;
The above data indicates a change in the structure of the company as a core business entities. The
increase of signicance and the role of small businesses and their numerical dominance in the structure
of the company are due to changes in the following conditions:
• Extreme uncertainty of contemporary changes in the economic eld requires extraordinary
economic dynamism;
• Time becomes a central factor in the eld of competitive struggle, because of uncertainty
2 Zakon o računovodstvu, Narodne Novine br. 109/07, Zagreb, 2007. čl. 17.
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requires speed, exibility and adaptability on the basis of information and technological
change;
• Quality, design and service remain the most important comparative advantages of producers
of new products;
• Restructuring of large companies based on quality, design and service, organizational and
technological exibility and adaptability of the market;
• Individual organization becomes part of cooperative networks;
• Internationalization of economic processes means that all agents have become interconnected
and dependent on world market.
Due to its specic characteristics, the small enterprises along with medium have the chance to
survive in today’s complex business conditions. One of the important role of small business is to
increase total employment. Increasing employement by small enterprises is understandable when
we knows that for the establishment of small businesses require a relatively small amount of capital
than to establish a medium or large enterprises. Furthermore, new technologies will enable for small
enterprises a successful business with a certain minimum level of production. The relatively small
volume of production is a consequence of changes in consumption trends from the mass consumption
of these goods to the individaully consumption goods. Due to the increasing inuence of international
competition and the inability of the isolated effect all companies have develop their organization,
managament, production, marketing, nance and other skills to perfection, what is simpler to small
than to large enetrprises. For all these reasons it is assumed that the small business more dynamic and
more exible than large companies. Overall, small businesses play a signicant role in the modern
economy.
4. SMALL ENTERPRISES IN CROATIA
From the examples of the developed economies the Republic of Croatia following the politics where
small businesses are the engines of economic development. In support of this tells us the following
table and chart:
Table 2: Development of small enterprises per year
Year Number of enterprises
1990 5651
1994 48021
1998 59718
2002 60562
2007 81467
Chart 1: Number of small enterprises
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1990 1994 1998 2002 2007
Number of enterprises
Based on the above table and chart we can see a signicant increasing of small enterprises during
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the period from 1990. to 2007., what represent the trend of the developed world economies, in which
small businesses are the engines of economic development. Thus we can see that the the appropriate
political and economic developments of the 90-year led to a signicant increasing in the number of
small enterprises from 5651 to th even 81 467 small enterprises. The importance of small enterprises
in the overall economic development tells us all the more pronounced role of small enterprises, which
is reected in share of overall companies structure as shown in the following table and chart:
Table 3: Share of enterprises in the overall structure
Type of enterprises Number of enterprises %
Small enterprises 81467 97,5
Medium enterprises 1590 1,9
Large enterprises 475 0,6
Ukupno 83532 100
Chart 2: Share of enterprises in the overall structure
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1
Type of enterprises
Small enterprises
Medium ent erprises
Large enterprises
From table and chart above we can see that even 97,5% of overall enterprises in the economy of the
Republic of Croatia. At the same time the importance of small rms is conrmed and the number
of employees, where they employ 48% of the total number of employees in the Croatian economy,
apropos 460 856 workers. This indicates that small enterpirses represent generator of employment,
what is essential for further economic development. Small enterprises are the most exible part of
the economy, because with the least committed capital achieved positive results despite a challenging
market conditions.
5. THE HARMONIZATION OF CROATIAN ACCOUNTING REGULATIONS WITH
ACCOUNTING REQUIREMENTS OF THE EUROPEAN UNION
The establishment and development of small enterprises requires the appropriate measures of economic
policy and support of government bodies and business institutions. Recognizing the importance of
small enterprises, goverment and others business bodies have taken signicant steps in promoting
small enterprises with the goal of economic development and approximation to EU standards. The
fundamental step was the adoption of Croatian Financial Reporting Standards (01.01.2008.), because
previous Accounting Act from 1993. and from 2006. practically not taking care of small enterprises.
Previous standards were related to all companies equally, regardless of size, which indicated that
they were too broad, too general and with more alternatives. Only makes the nancial statements
for small businesses differ from large rms was the number and shortening scheme of nancial
statements which are supposed to prepare. Croatian Financial Reporting Standards have been adopted
in accordance with the existing Accounting Law3 and apply to small businesses since 01.01.2008.
They were adopted with the aim of harmonizing Croatian legislation with the legislative framework
3 Zakon o računovodstvu, Narodne Novine br. 109/07, Zagreb, 2007.
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of the European Union. But here we have doubt between the harmonization of accounting regulations
versus equality of small businesses in transition countries (like Croatia) with small businesses in EU
countries. Based on the criteria for classifying companies by size, which is shown by the following
table:
Table 4: Criteria for Small Businesses
Parameters EU Hrvatska
Total assets ≤10.000.000,00 E ≤8.900.000,00 E
Annual income ≤10.000.000,00 E ≤4.500.000,00 E
Number of employees <50 ≤50
Croatian conversion of the exchange rate criterion is 7.3 HRK / E
Chart 3: Criteria for small enterprises
0,00
1.000.000, 00
2.000.000, 00
3.000.000, 00
4.000.000, 00
5.000.000, 00
6.000.000, 00
7.000.000, 00
8.000.000, 00
9.000.000, 00
10.000.000, 00
123
Criteria for small enterprises
EU
Croatia
We can see obvious differences in the criteria to be met by small enterprises in the EU against the
criteria of small enterprises in Croatia. Threshold amounts of total assets and annual income are
higher in the EU compared to the Republic of Croatia. These difference represent disadvantage to
croatian small enterprises which have to carry on the European market with more powerful companies
from the EU. Apropos EU small enterprisess thanks to EU criteria, larger total assets and higher
annual incomes were able to overcome the croatian small enterprises. In addition, in determining
the categories of enterprises in the EU’s mandatory criteria is the number of employees and one of
the remaining criteria, whereas in the Republic of Croatia condition set is two of the three criteria.
Regarding the number of employees required by the EU to 49 employees, while the RH frame is
allowed 50 employees. Also, classication of enterprises in the EU includes micro enterprises to
9 employees, as well as the criterion of independence of other companies. All of the above places
in an unequal relationship between croatian small enterprises with EU small enterprises, because
the assumption of major credit and business capacity of small enterprises in the EU we can expect
competition problems of croatian smaller enterprises. If we take into account the current economic
and political developments in which republic of Croatia is the rst candidate to enter the EU to
assume that it will face similar problems and other transition countries in the eld of ex-Yugoslavia.
Therefore, the intention of this paper is to show the necessary reclassication criteria for classifying
companies by size, or increasing thresholds of total assets and annual income with which to acquire
a more equitable conditions of competition and the conditions for the use of incentives by the EU for
small enterprises of transition states.
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6. CONCLUSION
Contemporary market conditions forced on us such a dynamic environment that business must
constantly adapt to new conditions, but just small enterprises thanks to its characteristics are active
participants in these business environments. Small enterprises represent crucial factors for economic
development. It is necessary to establish accounting and legislative framework to improve the credit
and business capacity of small enterprises. To achieve the above it is necessary to harmonize the
criteria for the classication of enterprises by size and change the threshold value based on which
we distinguish between businesses. By changing the thresholds would contribute to equalizing the
conditions of competition between rms of underdeveloped countries in transition and the company
of the European Union.
Reference
Bubić J. (2006).Upravljanje kapitalom trgovackih društava, magistarski rad, Ekonomski fakultet u Splitu,
Split.
Grubišić D (1997). Fleksibilnost i konkurentnost malih poduzeća, doktorska disertacija, Ekonomski fakultet
Split, Split.
Kuvačić, N.(1999). Počela poduzetništva, Ekonomski fakultet Split, Split.
Ramljak, B.(1999). Računovodstvene politike u malim poduzećima, doktorska disertacija, Ekonomski fakultet
Split.
www.na.hr (14.09.2011)
www.hgk.hr (14.09.2011)
www.nn.hr (14.09.2011)
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THE ORGANIZATION OF MANAGEMENT ACCOUNTING IN SLOVAKIAN SMALL AND
MEDIUM SIZED ENTERPRISES
Stefan Mayr
Johannes Kepler Universität Linz, Institut für Controlling und Consulting, Austria
E-mail: stefan.mayr@jku.at
Abstract
The paper surveys the organization of management accounting in Slovakian small and medium sized
enterprises. Since Slovakia is facing a lot of social and economic changes, the question arises, to which extend
the process of transition inuences the organization of management accounting and the use of operational
plans and strategic instruments. Existing studies regarding management accounting in transition countries
show that management accounting has become an important eld of research. However the organization of
management accounting and the use of management accounting instruments can be determined at a very low
level of institutionalization.
The contingency theory as a theoretical frame is used in order to explore the effect of the stratifying variables
size and structure (family rm versus non family rm). In conclusion, the analyses will reveal that the
organization of management accounting in Slovakian enterprises measured by the institutionalization of an
appropriate sub-unit is at a very low level. Regarding the used operational plans the survey shows that some
plans are used frequently, but the nancial budget can be found rarely. Strategic instruments are used for
control and documentation but not for governance.
Keywords: Management Accounting, Small And Medium Sized Enterprises, Process of Transition
1. INTRODUCTION
Like many other countries in Eastern Europe, Slovakia is currently facing a lot of social and economic
changes. Slovakia has reached the highest average economic growth in the European Union from 2000
to 2010. Slovakia, like all European countries, is dominated by small and medium sized enterprises
(SME) – 98.8% of all enterprises in Slovakia are SME. The fact that Slovakia has a very small
proportion of micro sized enterprises (Schmiemann, 2008) allows to conclude, that the structure of
the Slovakian economy is relatively high developed.
Regarding the management of these small and medium sized enterprises in Slovakia, the question
arises, to which extend the process of transition from a primary centrally planned economy towards
an international oriented free market system is already completed. Economic reforms, the access to
the European Union (EU) and globalization of transition economies in Central and Eastern Europe
in general and in Slovakia in particular have dramatically changed the economic preconditions.
Regarding these dramatic changes the management of SME in Slovakia is facing a big challenge.
In general, SME are confronted with limited resources of capital, staff (including management)
and time. Exactly this lack of resources is often the reason for reducing their concentration on
management activities. Management accounting must support the management to reach operational
and strategic objectives. According to a traditional denition, management accounting can be dened
as the process of identication, measurement, accumulation, analysis, preparation, interpretation, and
communication of nancial information used by management to plan, evaluate, and control within
an organization (Kaplan, 1984). Firms in transitional and merging economies have realized that they
need effective management accounting techniques to provide management with relevant, timely and
accurate information to improve enterprise performance. However, few ndings have been published
on the progress that rms in these economies have made toward this goal (Jaruga/Ho, 2002).
The paper deals with the organization of management accounting and inuencing context factors
in small and medium sized enterprises in Slovakia. The topic has been a neglected eld both in
management accounting research as well as in small and medium sized enterprise research (national
and international) so far. It is of great interest, how management accounting as a concept of planning
and control is organized in a transition economy like Slovakia. The accounting law has been changed
in Slovakia in 1993. The accounting system is based now on the principle of providing appropriate
information to nancial managers of a company (Schroll, 1995).
The few existing investigations into management accounting in transition countries in Eastern
Europe have mainly been conceptual, descriptive, or otherwise qualitative. Shama and McMahan
(1990) have reviewed the historical development in the nature of management accounting in the
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Soviet Union subject to the command economic (a context referring and explanatory approach) in
the years before 1990. They sum up that it is necessary to look at management accounting from
the perspective of the context. Stevens (1991) has made an analysis of fundamental, conceptual
differences between management accounting principles and objectives and the derived differences in
market and commercial language in the USA and the Central and East European transition economies,
respectively. He points out the differences in the understanding of protability and success criteria.
Vamosi (2000) examines in his case study how the interpretation of new concepts and ideas affects
management accounting in a Hungarian, previously government-owned enterprise. He focuses on
how economic matters and management accounting are constituted between ´cargoes of thoughts´
and a new ´reality of everyday life´. Interesting perspectives of the case are the practiced instruments
of management accounting and the experiences made by the management and the management
accountants during the process of transition. According to his results calculation practice technically
is almost unchanged, whereas cash management is a quite new discipline. Daniel, Suranova and De
Beelde (2001) focus on analyzing the development and role of accounting and auditing in Slovakia.
They resume that after the political changes of 1989, the accounting system was adapted to meet
the economic changes in the country. The innovations in (management) accounting were strongly
inuenced by continental European accounting models. The role of accounting has moved from an
instrument of central planning to a tool to manage enterprises and report to third parties (e.g. foreign
owners). Szychta (2002) analyzed in her empirical work the scope of application of management
accounting methods in Polish enterprises. According to the results the majority of Polish enterprises
use the traditional full costing system based on actual costs. Annual operating nancial budgets for
the whole enterprises are prepared by a considerable proportion of the companies studied. In large
enterprises management accounting methods are used to a greater extent than in smaller ones.
International researchers (e.g. Matthews/Scott 1992, Reid/Smith 2000) as well as german-speaking
ones (Ossadnik/Barklage/Lengerich, 2004, Berens/Püthe/Siemes, 2005, Schachner/Speckbacher/
Wentges, 2006, Feldbauer-Durstmüller/Wimmer/Duller, 2007, Becker/Ulrich, 2009, Becker/Staffel/
Ulrich, 2010) have published several descriptive studies on the implementation status of management
accounting and investigations on the contingency factors of management accounting. Summing up
contingency factors “rm size” and “rm type” (family versus non family rm) were identied as the
most important ones (Flacke, 2007).
In conclusion, the above studies indicate that research of management accounting has become and is
still to focus on transition countries. Following the research gap, the paper, which exclusively focuses
on Slovakian small and medium sized enterprises, explores the research questions below:
• How is the management accounting organized in Slovakian enterprises (internal/external,
sub-unit for management accounting)?
• Which operational plans and strategic instruments are used in Slovakian enterprises?
• What are the dominating effects on the organization of management accounting: legal form,
size, family rm/non family rm, internationalization?
To tackle these research questions, the paper is structured as follows: Section 2 presents the theoretical
background. Small and medium sized enterprises are dened and the contingency theory as the basic
reference theory is explained. Section 3 provides information on the data collection process, samples
structure and the different types of the organisation of management accounting. Crucial results are
presented in Section 4, which focuses in particular on the answering of the research questions. In
section 5, the ndings are discussed.
Based on the empirical ndings of the research, implications for the practice, in particular for the
organization of management accounting in Slovakia and other transition economies, are derived. In
addition, ndings are discussed in detail and compared to other researches. The paper also provides
directions for further research.
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2. THEORETICAL BACKGROUND
2.1. Denition of small and medium sized enterprises
Attempts to dene SME are most likely in combination with different size categories like number of
employees, turnover, total assets, value added or equity. These gures separate the different sizes of
enterprises. Medium sized enterprises are dened by the European Commission (suggestion 2003/361/
EG) as follows: not more than 249 employees and less than 50 million Euros turnover per year and/
or total assets of less than 43 million Euros and (mainly) independent.
This study uses the criterion “number of employees” for its denition. The distinction by rm size
was chosen because a certain minimum size is required to measure the suspected interactions. For
dening SME quantitative and qualitative attributes are used (Pfohl, 1997, pp.1-25).
Specic characteristics of this type of rm are: lack of specialist input (Belz/Travella, 1999, p.7),
more focus on production oriented than management oriented knowledge, limited time budget for
management tasks of the entrepreneur, limited use of costly planning and management instruments,
neglect of strategic management and decision-making on a daily basis with regards to personnel
resources and priorities. Especially qualitative attributes like ownership or management rights and
quantitative features like rm size dene SME according to the literature.
2.2. Contingency theory and hypothesis
The contingency theory (Burns/Stalker 1961, Laurence/Lorsch 1967, Thompson 1967) is used in order
to explore the effect of the stratifying variables mentioned above. This theory is a very prominent
approach when it comes to the investigation of management accounting practices. According
to Luft and Shields (2007, p.35) the contingency theory is the most common theoretical base for
empirical studies on planning and control. Among the frequently investigated variables are size and
organizational structure.
According to international literature about SME the rm size is one of the most outstanding inuential
on the organization of management accounting. With regards to the contingency theory this is
most likely because of a growing organizational differentiation at bigger companies. This leads to
hypothesis number one:
H1: Medium sized enterprises are more likely to have established a separate management accounting
department than small sized enterprises.
Furthermore, rm type (family versus non-family companies, operationalization according to the
concept of substantial family inuence (concept of SFI, Klein, 2000) is expected to inuence the
organization and structure of management accounting: companies managed by family members do
not get back to institutionalized management accountants so often compared to one controlled by
external managers (Davila, 2005). This leads to hypothesis number two:
H2: Non-family rms are more likely to have established a separate management accounting
department than family rms.
The extent to which companies operate internationally is seen as a further contingency factor.
Internationally operating enterprises are confronted with more and intense competition and therefore
modern management instruments like qualitative price calculations are required. This leads to
hypothesis number three:
H3: Internationally operating enterprises are more likely to have established a separate management
department than not or just little internationally operating ones.
Another contingency factor for the organization of management accounting is the legal form of the
enterprises. Due to the strict and comprehensive guidelines of the Slovakian commercial law there are
special implications for accounting and management accounting in corporations. It is most likely that
this circumstance inuences the organization and structure of management accounting. This leads to
hypothesis number four:
H4: Corporations are more likely to have established a separate management accounting department than
sole proprietorships or partnerships.
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3. RESEARCH DESIGN
3.1. Sample
In order to answer the research questions and to prove these hypotheses a study was carried out in
Slovakia within the framework of a bigger research project in Austria, Germany and Slovakia. For
this empirical research data was collected in Slovakia by the Catholic University of Ruzomberku.
This institution acted as a partner of the Johannes Kepler University in Linz (Austria) in this joint
research project. In November and December 2010 the chief executive ofcers of more than 5.400
small and medium sized enterprises in Slovakia were contacted. The questionnaire was answered
by 484 enterprises, 397 of those could be used for the survey (response rate of 7.4 %). The survey
instrument employed was a standardized online questionnaire, which had already undergone a pretest.
To control for a non-response bias, the representativeness was tested by comparing the rst third of
the data set with the last third. As no differences were detected, the representativeness of the study
was conrmed. Of the participating rms 92% are small sized enterprises (between 0-50 employees).
Since there is no clear-cut denition of the term ‘family rm’, the operationalization of the concept
is not a simple task. The decision of which denition of family rm should be adopted will crucially
affect the results of the empirical study (Villalonga/Amit, 2006; Rutherford et al., 2008). A approach
to delineating the concept can be found in the dimension of power which, according to the F-PEC
scale, focuses on the fact that the family will exert substantial inuence on the rm; this method of
distinguishing a family rm from a non-family rm (SFI – substantial family inuence) was used in
order to enable a comparison between our results and the results of other empirical studies based on
the F-PEC denition of ‘family rm’. SFI measures the strength of family inuence, construed as the
family’s share of equity in the rm as well its inuence through governance boards and management.
Moreover, some shares must be held by the family in order for the rm to be considered a family
business. Following this classication the sample of the research included 67.2 % family enterprises
and 32.8 % non-family-businesses.
3.2. Methodology
In addition to descriptive statistics also classical statistical testing for our data analysis was employed.
To test the hypotheses either the chi-squared test or Fisher’s exact test at a signicance level of α =
0.05 was applied. The usual as well as special assumptions (for the chi-squared test expected cell
count is 5 or more in at least 80 % of cells and the minimum expected count is 1 or more) were
always fullled. Prior to the mailing of the questionnaire a pre-test was conducted with enterprises
in Slovakia.
4. RESULTS AND IMPLICATIONS
Research question 1: How is the management accounting organized in Slovakian enterprises (internal/
external, sub-unit for management accounting)?
With respect to the institutionalization of management accounting only 4.3% of the participating rms
(in relation to those enterprises, which have implemented management accounting) had a specialized
sub-unit for management accounting. Table 1 shows the result for small and medium sized enterprises:
Table 1: Institutionalization of management accounting sub-units in small and medium sized rms (source: author´s
compilation)
Institutionalization of Manage-
ment Accounting Small sized enterprises (n
= 210) Medium sized enterprises (n
= 21) Total (n = 231)
with sub-unit 4.29% 4.76% 4.33%
without sub-unit 95.71% 95.24% 95.67%
Only a minor part of all SME examined has a separate sub-unit for management accounting, the rest
gets the relevant information from the management (39%), the nancial or accounting department
(36%) or from an external consultant (20%). With respect to these results it is most likely that
management accounting is not very much formally institutionalized in Slovakia. Around 27% of
all enterprises examined have not installed any active management accounting (28% of small sized
enterprises, 5% of medium sized enterprises).
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Research question 2: Which operational plans and strategic instruments are used in Slovakian
enterprises?
With regards to operative plans it is to say that especially sales and marketing plans are the dominating
instruments (44.10%), followed by budget balance sheets, procurement and purchasing plans, inventory
plans and production plans which are used by nearly a fth of all enterprises examined. Surprisingly,
liquidity planning seems to be less important. Only 11% of the sample uses that instrument.
Table two shows the results.
Table 2: Implementation of operational instruments (source: author´s compilation)
Type of instrument Small sized enter-
prises Medium sized enter-
prises To tal
sales/marketing plan 45.10% 35.00% 44.10%
product portfolio plan 10.90% 10.00% 10.80%
procurement/purchasing plan 17.60% 55.00% 21.10%
prot and loss forecast/ scal plan 5.20% 30.00% 7.50%
budget balance sheet 22.30% 30.00% 23.00%
liquidity plan 10.40% 15.00% 10.80%
production plan 16.10% 50.00% 19.20%
inventory plan 22.30% 20.00% 22.10%
personnel plan 8.30% 20.00% 9.40%
R&D plan 2.10% 0.00% 1.90%
Results on usage of strategic instruments in Slovakian enterprises show: performance measurement
systems, SWOT analysis and competitor analysis are very common (nearly 40% of interviewed
enterprises). The implementation of other strategic instruments like capital budgeting, balanced
scorecard or shareholder value analysis could not be observed very often. Table three shows the
results:
Table 3: Implementation of (selected) strategic instruments (source: author´s compilation)
Type of instrument Small sized enter-
prises Medium sized en-
terprises Tota l
performance measurement system 41.50% 50.00% 42.20%
SWOT analysis 40.10% 40.00% 40.10%
competitor analysis 39.60% 25.00% 38.40%
benchmarking 6.90% 5.00% 6.80%
cost-benet analysis 11.50% 20.00% 12.20%
balanced scorecard 2.80% 5.00% 2.90%
shareholder value analysis 4.10% 0.00% 3.80%
target costing 5.50% 10.00% 5.90%
capital budgeting 0.90% 0.00% 0.80%
portfolio analysis 5.00% 5.00% 5.00%
Research question 3: What are the dominating effects on the organization of management accounting:
legal form, size, family rm/non family rm, internationalization?
In order to answer the research question 3, three hypotheses were stated.
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Hypothesis 1:
With respect to the effects of size on the institutionalization of management accounting table one can
be taken into consideration. Surprisingly, there is no signicant difference between small and medium
sized companies with respect to building up a separate management accounting department (Fisher´s
Exact Test at a level of 95%). Hypothesis 1 cannot be conrmed.
Hypothesis 2:
For evaluating Hypothesis 2 the impact of the rm structure (family rm versus non family rm) on
building up a separate management accounting department was measured:
Surprisingly, signicantly more family rms have installed a separate management accounting
department than non-family rms (table four): Hypothesis 2 cannot be conrmed as well.
Table 4: Institutionalization of management accounting sub-units in family rms and non-family rms (source: author´s
compilation)
Institutionalization of Management Ac-
counting Family rms (n = 144) Non family rms (n
=80) Total (n = 224)
With sub-unit 6.25% 1.25% 4.46%
without sub-unit 93.75% 98.75% 95.67%
Hypothesis 3:
For details about Hypothesis 3 please refer to table ve. Interestingly, fewer internationally operating
enterprises have built up a separate management accounting department (3.33%) compared to
locally operating ones (4.73%). On the other hand it has to be stated that approximately a fth of
internationally operating enterprises examined (21.10%) has no active management accounting at all
(local enterprises 28.70%). That means even predominantly internationally operating enterprises in
Slovakia hardly have a separate sub-unit for management accounting. Therefore Hypothesis 3 cannot
be conrmed as well.
Table 5: Institutionalization of management accounting sub-units in international and local enterprises (source: author´s
compilation)
Institutionalization of Manage-
ment Accounting Substantial internationally active
(n = 60) Predominant local active
(n = 169) Total (n = 229)
With sub-unit 3.33% 4.73% 4.37%
without sub-unit 96.67% 95.27% 95.67%
Hypothesis 4:
For evaluating Hypothesis 4 the inuence of the legal form on building up a separate sub-unit for
management accounting was investigated. Table six summarizes all corporations and compares it
to sole proprietorships and partnerships. Unexpectedly, more partnerships have installed a separate
management accounting department than strictly regulated corporations. There is a signicantly
higher rate at partnerships (Fisher´s Exact Test at a level of 95%).
Table 6: Institutionalization of management accounting sub-units in corporate enterprises and private companies
(source: author´s compilation)
Institutionalization of Management
Accounting corporate enterprises (n =
219) private enterprises (n = 9) Total (n = 228)
with sub-unit 3.20% 33.33% 4.59%
without sub-unit 96.80% 66.67% 95.67%
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5. CONCLUSION
Summing up results are surprising: on the one hand the study identies that operational plans like
turnover or sales plans are very common in Slovakian enterprises (around 44% of interviewed
companies), on the other hand instruments like liquidity plans are used seldom (just around 11%
of examined companies). These results are conrmed by the study of Vamosi (2000) who shows
that cash management and liquidity planning are new and innovative instruments in Slovakia. The
heavy use of performance measurement systems, which are doubtlessly past- or control-oriented
instruments, could mean that management accounting is more likely to be seen as control- rather
than management-oriented. A major limitation in this context is that only the use of the instruments
itself was queried, but not the way of its use. The fact that such a few Slovakian enterprises have
built up a separate management accounting department and that the management itself is often
responsible for the management accounting activities (around 40% of all enterprises which have
installed management accounting) shows that there is a very indenite understanding of what means
and implies management accounting exactly in Slovakia. The cultural context and meaning of
management accounting in Slovakia seems to be not clear and denite so far.
It has to be mentioned that previous studies and recent literature do not conrm with these investigations.
Especially for the contingency factors “rm size” and “rm structure” (family rm versus non-family
rm) which are investigated commonly, this study could not measure any inuence on management
accounting. Regarding operative plans and strategic instruments only the contingency factor rm size
was analyzed: only purchasing plans, prot and loss forecasts, scal plans and production plans are
more likely to be used in medium sized Slovakian enterprises than in small sized ones. With respect
to strategic instruments there are no signicant differences in use between medium and small sized
companies.
Possible explanations for these results could be as follows: due to the fact that just a minor share of
enterprises examined has installed a separate management accounting department (around 4.3%);
a low institutionalization of management accounting in Slovakia is quite likely. As a result the
evaluation of Hypothesis 1 to 4 is only of limited value.
Based on the above ndings following implications can be derived for further research: with respect
to the indenite understanding of management accounting in Slovakia (which can be seen as evident
after this study) it seems interesting to investigate what is understood by management accounting
in Eastern European countries exactly and in which way organization and structure of management
accounting are inuenced by their culture (Shama/McMahahn, 1990). Furthermore research on the
reasons of implementing or non-implementing a separate management accounting department would
be interesting. Qualitative research methods like expert interviews or case studies could be appropriate
tools in this case. Based on this study the way of use of the investigated instruments in Slovakia could
be examined to eliminate one of its limitations.
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DOING BUSINESS IN RUSSIA: LESSONS FOR MANAGEMENT ACCOUNTING
Ksenia Keplinger
Johannes Kepler University Linz, Austria
E-mail: marksenia@hotmail.com
Birgit Feldbauer-Durstmueller
Johannes Kepler University Linz, Austria
E-mail: birgit.feldbauer-durstmueller@jku.at
Christine Mitter
Salzburg University of Applied Sciences, Austria
E-mail: christine.mitter@fh-salzburg.ac.at
Abstract
Since the collapse of the Soviet Union, Russia is on the transition from a command economy to a market system.
Having undergone fundamental political and economic changes in the last 20 years, Russia is considered to be
a signicant player in the world economy and an attractive location for foreign direct investments. As a result,
Russia is also an important trading partner for Austrian companies that often maintain a Russian sales ofce,
branch or subsidiary.
It is widely acknowledged and empirically tested that leadership and management theories developed in
one culture cannot be easily exported to other cultures. This applies also to management accounting that
contributes to the achievement of the company’s objectives and thus takes on an important role in managing
the organization. Since people react to situations and interpret information differently depending on the norms
of their native culture, cultural differences impact management accounting activities. Despite the growing
interest in management accounting in transition economies in general and in Russia in particular, there is still
a signicant lack of research concerning the inuence of cultural factors on management accounting.
Drawing on interviews with Austrian companies operating on the Russian market, this paper investigates the
inuence of cultural differences between Austria and Russia on management accounting. Our study does not
only aim to enhance the understanding of the needs and particularities of doing business in Russia but also
places a particular focus on the context of management accounting by exploring how cultural differences
impact management accounting functions such as information supply, planning and control.
Our results reveal that the access to management accounting information as well as the readiness to provide data
is signicantly lower in Russia than in Austria. Moreover, Austrian employees participate more actively in the
planning process, develop more detailed and precise plans and are able to accept objective criticism to a greater
extent than their Russian counterparts. Consequently, the study provides evidence that culture differences have
a considerable effect on management accounting. This implies that companies entering or already serving
the Russian market have to consider these differences in order to design an effective management accounting
system.
Keywords: Management Accounting, Russia, Austria, Cross-Cultural Study
1. INTRODUCTION
During the last 20 years, since the collapse of the Soviet Union, Russia has undergone fundamental
political and economic changes in its transition from a command economy to a market system.
Today, Russia belongs to the group of eight (G8) and represents one of the world’s major economies.
Consequently, it has become an attractive location for investors, amongst others Austrian companies.
With a bilateral trade volume reaching the record level of €5 billion in 2008 (Statistik Austria, 2011)
Russia is one of the most important trade partners of Austria. More than 1.200 Austrian companies
operate on the Russian market, of which approximately 400 maintain a subsidiary or a branch in 50
Russian regions (Pfeffer, 2008).
The successful operation of foreign sales ofces, plants, branches or subsidiaries requires – amongst
other management tools – the implementation of a management accounting system in the host country
to ensure that managers receive the information necessary for planning, control and decision-making.
However, it is widely acknowledged and empirically investigated that leadership and management
theories developed in one culture cannot be easily exported to other cultures (Hofstede, 1980; Newman
and Nollen, 1996; Paik et al., 2002; Thang et al., 2007). This applies also to management accounting.
With the aim of advancing the understanding of the needs and particularities of doing business with
Russian companies, this paper makes the following contributions: First of all, it provides insights
how cultural differences between Austria and Russia affect the management accounting functions
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information supply, planning and control. Secondly, it develops recommendations for the design of
an effective management accounting system for rms entering or already serving the Russian market.
The reminder of the paper is organized as follows. In the next section an overview of the theoretical
background is provided and the relationship between culture and management accounting described.
The third part focuses on the results of previous studies devoted to the inuence of cultural factors on
management accounting, followed by the development of hypotheses. Next, the data collection and
methodology used as well as the empirical results are presented. The paper concludes with a summary
of our ndings, implications for management accounting and possible avenues for future research.
2. CULTURE AND MANAGEMENT ACCOUNTING
Hofstede (2001, p. 9), one of the most inuential researchers in intercultural management, denes
culture as “the collective programming of the mind that distinguishes the members of one group or
category of people from another.” Put differently, culture describes a set of shared attitudes, values
and behaviors that allows people to successfully adapt to their environment.
There are a number of approaches to operationalize the concept of culture and to develop a set of
criteria on the basis of which national cultures can be compared. In his seminal study of cultural
differences, Hofstede (1983a) extracted four dimensions of national culture, namely power distance,
uncertainty avoidance, individualism vs. collectivism and masculinity vs. femininity.
The most recent study of cross-cultural differences that extended Hofstede’s cultural dimensions was
conducted as a part of the large-scale research program GLOBE in 62 countries (House and Javidan,
2004). Researchers identied nine cultural dimensions: power distance, uncertainty avoidance,
institutional and in-group collectivism, gender egalitarianism, assertiveness, future, performance and
humane orientation.
Power distance and uncertainty avoidance are dened as direct extensions of Hofstede’s work. Power
distance describes the degree to which an unequal distribution of power is accepted and expected.
In high power-distance cultures people are more likely to approve inequalities, be comfortable with
hierarchic organization structures and overestimate authority and seniority. People from low power-
distance countries demand more equality in social relations, easy access to superiors and open channels
of communication (O’Clock and Devine, 2003). Uncertainty avoidance represents the preference of
a society to avoid ambiguous or risky situations. In strong uncertainty avoidance countries rules
and norms are important in order to generate stability and pseudo-security, while weak uncertainty
avoidance cultures prefer less structure and standardization (Hofstede, 2001; O’Clock and Devine,
2003).
Individualism vs. collectivism describes the tendency of society members to perceive themselves
as individuals rather than members of a group. In individualistic cultures individuals tend to place
their own goals and interests above those of other members and are concerned with the recognition
of personal achievement and independence (Van der Stede, 2003). On the contrary, people from
collectivistic cultures attach great importance to social connections, group harmony and dependencies
and postpone their own interests to the welfare of the group (Kraus et al., 2008). The GLOBE
study split the concept of individualism/collectivism into two distinct dimensions. While in-group
collectivism refers to the extent, to which individuals express pride, loyalty and cohesiveness in their
families and organizations, institutional collectivism describes how society encourages and rewards
collective action and distribution of resources (House and Javidan, 2004).
Gender egalitarianism and assertiveness have their origins in Hofstede’s dimension of masculinity/
femininity. While gender egalitarianism describes the extent to which society minimizes gender role
differences and gender discrimination, assertiveness is the degree to which individuals are assertive,
confrontational, and aggressive in social relationships (House and Javidan, 2004).
GLOBE’s new dimension of “future orientation” relates to the degree to which people engage in
future-oriented behaviors such as planning, investing in the future and delaying gratication (House
and Javidan, 2004). Countries with a high score on this dimension (e.g. Japan) are more willing to
sacrify current success in favor of future development (O’Clock and Devine, 2003). The dimension of
“performance orientation” shows how society members are encouraged and rewarded for performance
improvement and excellence (Javidan, 2004). Humane orientation relates to the extent to which
individuals are encouraged and rewarded for being fair, altruistic, friendly, generous, caring, and kind
to others.
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Table 1 shows the scores of Austria and Russia on the GLOBE-study’s dimensions. It illustrates
that Austria is characterized by low power distance, a rather individualistic orientation, a low score
on gender egalitarianism and a high score on assertiveness reecting a masculine culture, strong
uncertainty avoidance, a rather higher extent of future orientation and a high performance orientation.
Russia exhibits high levels of power distance and collectivism, in particular in-group collectivism,
but a rather low performance orientation. Russia scores lowest on uncertainty avoidance and future
orientation among all participating countries. It is very gender egalitarian but rather assertive,
however to a far lower extent than Austria. Thus, Russia is regarded as a rather feminine culture.
Since Austria’s and Russia’s score on humane orientation are relatively similar, it is not considered as
relevant for our study and examined further.
Table 1: Cultural dimension scores of Austria and Russia according to the GLOBE-study (Sources: Grachev et al., 2007;
Szabo and Reber, 2007)
Cultural dimensions Austria Russia Dierence Mean
Power Distance 4.95 5.52 0.57 5.17
Uncertainty Avoidance 5.16 2.88 2.28 4.16
Institutional Collectivism 4.30 4.50 0.20 4.25
In-Group Collectivism 4.85 5.63 0.78 5.13
Gender Egalitarianism 3.09 4.07 0.98 3.37
Assertiveness 4.62 3.68 0.94 4.14
Future Orientation 4.46 2.88 1.58 3.85
Performance Orientation 4.44 3.39 1.05 4.10
Humane Orientation 3.72 3.94 0.22 4.09
Two other surveys have identied additional dimensions that seem relevant for our study. In Hall’s
cultural framework (Hall and Reed Hall, 1990) communication styles are central. It distinguishes
between high-context and low-context cultures. Low-context cultures (e.g. Austria) communicate
predominantly through explicit, detailed, direct and precise statements. On the contrary, communication
in high-context cultures (e.g. Russia) occurs not only through the spoken words. Messages include
other communication cues such as body language, eye movement and the use of silence. For this
reason, verbal communication in high-context cultures is regarded to be indirect, implicit and vague.
A second cultural dimension describes the way cultures perceive and manage time. In monochronic
cultures (e.g. Austria) all tasks are arranged and completed one after another, and detailed time
schedules and punctuality play an essential role. In contrast, people from polychronic cultures (e.g.
Russia) are usually involved in many projects at the same time. Meeting deadlines seems to be
secondary as priority is given to the human being and not to tasks.
In a broad-based survey of cultural differences Trompenaars (1993) extracted seven cultural dimensions
that are labeled universalism vs. pluralism, individualism vs. collectivism, neutral vs. affective,
specic vs. diffuse, achievement vs. ascription, time and environment are proposed. Since they are
similar to some extent to the earlier described dimensions of the GLOBE study or Hall’s framework,
only one of them (neutral vs. affective) is of primary interest for our study. This dimension illustrates
how people display their emotions. While affective cultures (e.g. Russia) do not deem necessary to
hide feelings, representatives of neutral cultures (e.g. Austria) are taught not to display their feelings
overtly.
Since accounting systems are developed and implemented within a cultural setting, culture affects
management accounting practices. The effectiveness of an accounting system ultimately depends on
how accounting information is used by people or inuences people’s behavior (Hopwood, 1974) and
this is shaped to a considerable extent by culture. Hence, management accounting tools acknowledged
to be highly effective in one culture could be less effective or even dysfunctional in another environment
(Chow et al., 1996). For this reason the design of an efcient management accounting system requires
an understanding of the cultural aspects of a particular country (MacArthur, 2006).
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3. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
Concerning the impact of cultural differences on management accounting, the attention of scholars
focuses primarily on the function of management control in the intercultural context (e.g. Chow et al.,
1994, 1999; Van der Stede, 2003). The majority of studies conclude that control procedures cannot
be designed without considering the underlying patterns of culture (Scheytt, 2003). Several other
surveys (e.g. Rauch et al., 2000; Choe and Langeld-Smith, 2004; Hoffjan and Boucoiran, 2008)
investigate the impact of cultural differences on planning, budgeting and information supply and
reveal that the national culture inuences the behavior and attitudes of managers towards planning
and the precision of plans to a great extent.
Most previous studies focus on cultural differences between the USA, Japan and Germany. Although
there is a growing interest in studying management accounting in Russia (Morrison and Abrosimova,
1993; Enthoven, 1999; Taylor and Osipenkova, 2003) and investigating the impact of Russian culture
on management activities (Michailova, 2000; Naumov and Puffer, 2000; Grachev, 2001; Grachev and
Bobina, 2006), there is still a signicant lack of research concerning the inuence of cultural factors
on Russian management accounting practices.
As a result of this paucity it was not always possible to deduce hypotheses on the relationship
between Russian culture and management accounting from previous research. Instead, we had to rely
on general assumptions and interpretations associated with the cultural dimensions presented before
and on research conducted in other countries that exhibit similar scores on a particular dimension.
One of the major tasks of management accounting is to provide managers with the necessary
information for decision making, planning, control and performance evaluation (Scarbrough et al.,
1991). Considering the process of information supply, cultural differences can affect the types and
amount of management accounting information. Managers in masculine low-context cultures (such
as Austria) prefer an explicit communication style and are more willing to provide management
accounting information. The majority of management accounting information is available in written
form (e.g. protocols and records). Feminine high-context cultures (such as Russia), on the other hand,
replace open communication by implicit information. Thus, less data is provided and verbal information
plays a more important role. Personal contacts, networking and informal information exchange
are crucial for management accountants. In order to get access to the necessary data, management
accountants are expected to cultivate social relationships within a company and constantly expand
their network (Hoffjan and Boucoiran, 2008). Moreover, the level of power distance in a culture
has a strong inuence on the access to management accounting information. In cultures with high
power distance (e.g. Russia) the access to information is based on hierarchical positions of users
and therefore is more limited than in societies with low power distance (e.g. Austria) (Komlodi and
Carlin, 2004). Based upon these arguments, the following hypothesis can be proposed:
H1: Concerning information supply, verbal information is less important, access to information
easier and the management accountants more willing to provide decision-relevant information in
Austria than in Russia.
The planning process substantiates what activities and resources are necessary for the achievement of
the objectives dened. Four dimensions appear especially inuential in planning. A culture’s power
distance and individualistic orientation determine the degree of participation and centralization that is
desired by employees. While participation of subordinates in planning is encouraged in individualistic
cultures with low power distance (e.g. Austria), collectivist cultures with high power distance (e.g.
Russia) emphasize centralized authority and hierarchical structures. The desire for being part of the
decision-making process is less important for individuals from collectivistic cultures (Meindl et al.,
1989; Frucot and Shearon, 1991). The ability of a culture to accept uncertainty is probably the most
relevant dimension for planning (Rauch et al., 2000). Austria is characterized by strong uncertainty
avoidance. Such cultures tend to invest signicant resources in planning “trying to beat the future”
(Hofstede, 1983b) with the help of very detailed and precise plans (MacArthur, 2006). In contrast,
Russia bears the most uncertainty of all countries. In such a regime, detailed and precise planning
may even seem dysfunctional because it requires investments and reduces exibility needed for the
successful adoption to the constantly altering business environment (Rauch et al., 2000). Finally, a
culture’s time orientation has a signicant inuence on the attitude towards planning. Polychronic
cultures (e.g. Russia) tend to have more tolerance for unplanned behavior and less respect for plans
(Rauch et al., 2000). Plans and deadlines are considered as reference points that can be easily changed
or postponed. In contrast, people from monochronic cultures (e.g. Austria) attach great importance to
meeting deadlines. As a result, they are inclined to stick to their plans and perceive changes of plans
threatening (Nonis et al., 2005). The above arguments lead to our second hypothesis:
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H2: Planning is characterized by a higher degree of employee participation, detailedness and
precision in Austria than in Russia.
The control function appears to be affected by the dimensions of individualism/collectivism, masculinity
(especially assertiveness), performance orientation and neutrality. As masculine performance-oriented
cultures like Austria give a high priority to meeting budget targets and performance evaluation,
it is likely that the acceptance of performance-based rewards and sanctions is high. Focusing on
performance-based rewards and sanctions without taking into account the interpersonal relationships
is less accepted by feminine cultures with low performance orientation such as Russia (Van der Stede,
2003).
Besides, collectivism and the desire for harmony in social relationships associated with the Russian
culture result in the avoidance of conicts that alienate the group. Consequently, conicts are not
directly addressed, but rather solved through compromises or just ignored. In individualistic masculine
cultures (e.g. Austria) coping with conicts is considered to be an inevitable part of social life. Direct
confrontations are perceived natural and conicts are approached constructively (Ohbuchi et al.,
1999).
Feedback seems to be inuenced by culture as well. Especially in collectivistic, affective cultures
like Russia, positive feedback is usually considered to be of higher quality and more relevant than
negative one (Van de Vliert et al., 2004). For this reason, criticism is considered rather as an offence in
Russia than as a chance for improvement (Schwarzenbach, 2009). Due to this reluctance to criticism,
Russians might have stronger emotional reactions to negative feedback while representatives of the
individualistic neutral Austrian culture seek for feedback and are ready to accept it (Kurman et al.,
2003). Based on this reasoning, the following is expected:
H3: Concerning control activities, Austrian management accountants avoid conicts to a lower extent
and exhibit a higher acceptance of sanctions and criticism than their Russian counterparts.
4. RESEARCH METHOD AND RESULTS
To test our hypotheses, interviews based on the case study research approach (Yin, 1984) were
conducted. Data was collected in 2010 by personal in-depth interviews with management accountants
of ten Austrian manufacturing companies. In order to be included in our survey, a rm had to be active
on the Russian market with a joint venture or subsidiary and familiar with management accounting.
Each interview took approximately one hour and was based on a semi-structured questionnaire
enabling the replication of the study. To examine the impact of cultural differences on information
supply, planning and control, management accountants had to indicate their perceived agreement with
different management accounting practices in Austria and Russia on a scale from 1 (very low) to 5
(very high).
As shown in gure 1, both Austrian and Russian management accountants attach almost equal
importance to verbal information, which is in contrast to our assumption. As hypothesized, the access
to management accounting information is easier in Austria than in Russia and Austrian management
accountants reect a higher willingness to provide decision-relevant information than their Russian
counterparts. Consequently, hypothesis 1 can only be partially conrmed.
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Figure 1: Impact of cultural differences on information supply
Concerning planning, the ndings of the study support hypothesis 2 and illustrate that Austrians
participate more actively in planning and use more detailed and precise plans than their Russian
counterparts (see gure 2). One of the interview partners described the planning process in Russia
in the following way: “Planning means in Russia the denition of objectives. Nobody is concerned
about if and how these objectives can be achieved”.
Figure 2: Impact of cultural differences on planning
In contrast to hypothesis 3, Austrian management accountants seem to avoid conict even to a
slightly higher extent than their Russian counterparts. Concerning the ability to accept sanctions and
constructive criticism, however, the data collected conrm our assumptions that Russian management
accountants have more difculties in accepting sanctions and are less open to criticism than Austrians
(see gure 3). Several respondents pointed out that objective criticism was frequently regarded as
personal criticism by Russian employees and consequently caused frustration and discouragement by
the persons concerned.
Figure 3: Impact of cultural differences on control
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5. CONCLUSION
Our study afrms the impact of a country’s national culture on management accounting. Comparing
Austria and Russia, the access to management accounting information and the willingness to provide
decision-relevant data are signicantly lower in Russia. Moreover, Russians participate less in the
planning process, develop less detailed and precise plans and accept criticism and sanctions to a lower
extent.
The contributions of our study are twofold. First of all, it provides empirical evidence on management
accounting practices in Austria and Russia, two countries that have been scarcely researched. A
deeper understanding of the particularities of the Russian culture and how it inuences management
accounting seems extremely warranted given the potential of the Russian market for international
investors and the rapid increase of multinational business activities in Russia in the last years.
The comparison of Austrian and Russian management accounting practices contributes to a better
understanding of the inuence of cultural differences on information supply, planning and control
and a further exploration of the differences in management accounting between Western and Eastern
Europe. Secondly, for multinational companies that already serve or plan to enter the Russian market
the study’s ndings provide helpful insights into Russian management accounting practices.
Based on our results, the following recommendations for designing an effective management
accounting system can be developed. In order to increase the willingness of Russian management
accountants to provide information, personal contacts should be intensied. This can be done by
modern communication technologies like videoconferencing that enable the exchange of verbal
information. The implementation of appropriate incentive systems that encourage Russian employees
to participate in the planning process could enhance the overall importance of planning in Russia. In
order to increase Russian employees’ ability to accept criticism, an organizational culture that tolerates
mistakes and allows fruitful discussions should be established. Generally, companies doing business
in Russia should be aware of cultural distances and should enhance their employees’ awareness of
differences in thinking and behavior patterns.
In interpreting the results of this study and the recommendations for designing an effective management
accounting system, certain limitations should be acknowledged. Due to the small sample size, the
generalization of the results has to be viewed with caution. Furthermore, since interviews were
only conducted with Austrian management accountants, our ndings might be biased, reecting an
Austrian perception of Russian management accounting.
In terms of future research, there is a need to study the impact of cultural differences on management
accounting activities in more depth. To verify the results of this study, future research could use
large-scale surveys and explore the self-reection of Russian employees in performing management
accounting activities.
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FOSTERING ENTREPRENEURSHIP AND INNOVATIONS THROUGH THE INTERNATIONAL
ACCOUNTING STANDARDS - RECOMMENDATIONS FOR SMES AND POLICY MAKERS IN
B&H
Nikola Vukmirovic
Faculty of Economics, University of Banja Luka, Bosnia and Herzegovina
E.mail: n.vukmirovic@efbl.org
Denis Turkanovic
Ministry of Science and Technology of Republic of Srpska, Bosnia and Herzegovina
E.mail: n.vukmirovic@efbl.org
Abstract
The importance of entrepreneurship and innovations for sustainable development and growth has been proven
beyond any doubt a thousand times over. In the eld, especially in emerging economies, questions regarding
nancial treatment of innovative activities in SMEs very often occur and as a result produce different effects
on nancial performance of given enterprise, sector, economy, etc. From the other side, transitional countries
such as Bosnia and Herzegovina are determined to raise entrepreneurship and encourage SMEs development.
In line with this, innovations friendly accounting frameworks may additionally stimulate entrepreneurs to set
up new or improve current activities in terms to be more innovative and as results to have greater added value.
As Bosnia and Herzegovina admitted International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS) for its accounting framework, this paper will examine relevant IAS and IFRS,
especially IAS 38 – Intangible Assets, in order to nd out “positive” or “negative” effects which arise from
given accounting treatment of innovative activities of SMEs. The aim is to answer: Are the IAS and IFRS
entrepreneurship friendly? Additionally, concrete accounting models will be proposed, in order to maximise/
minimise effects of nancial treatment of innovative activities in SMEs given by IAS and IFRS. Those models
shall be used by SMEs and policy makers equally, in order to rise up current level of investments in innovative
activities (RS is cca 0.1% of GDP and on the level of B&H about 0.07% of GDP).
Keywords: Innovations Friendly Accounting Framework, Accounting Treatment of Entrepreneurial
Activities, Financial Treatment of Innovative Activities, Financial Effects of Innovative Activities on SMEs
1. DEFINITION AND POSITION OF ENTREPRENEURIAL AND INNOVATIVE ACTIVITIES IN
RELEVANT IAS AND IFRS
In literature, by Entrepreneurship is usually considered a start up of new business or enterprise in new,
original way. That originality is manifested through an innovation that presents new technological,
economic or organizational solution. Every change has innovative character when a company rst
uses a new idea in given place and time. Development of entrepreneurship and innovativeness
interact: capable entrepreneurs are creating conditions for the innovators and successful innovators
help entrepreneurs to create and modify new products and services that bring them above average
prots. By modifying and adjusting products to current market needs they are and innovators at the
same time. Therefore, in the era of commercialization and by looking from commercial aspect solely,
entrepreneurship and innovativeness are different words but with the same meaning.
Entrepreneurial capacity on individual and institutional level is the most important source of
proactivity and innovativeness in any country and therefore it is of interest to everyone, from policy
makers to businesses, universities and research centres. As enterprises as well as policy makers draw
decisions based on data in enterprises nancial statements, accurate accounting-nancial treatment of
those activities is of signicant importance for enterprises as well as policy makers and Governments
and therefore it is essential to analyse those activities from the aspect of IAS and IFRS.
By analasis of IAS and IFRS, it seems that the most televant accounting standard for innovative and
enteprenurial activities is IAS 38 – Intangible Assets. Even the name of this standard highlits “just”
type of assets its coverage and usage is much wider. IAS 38, paragraph 5, points out that although the
result of these activities can be assets with dominant physical substance (for example, the prototype)
the physical element of the asset is of secondary importance compared to its intangible component,
what is the knowledge embodied in it. Therefore, regardless of the result of innovation activities and
form its takes (physical or intangible), enterprise’s innovation process and corresponding nancial
outlays are dened and determined by IAS 38 - Intangibles.
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When enterprise internally develops a patent, a technology solution or innovate business processes,
different kinds of costs and/or investments occur and its accounting and nancial treatment is given
by IRS 38. Specically, this is the case of internally generated Intangibles1 and activities undertaken
in order to develop such asset, in accounting terms, are known as research and development (R&D)
activities. Therefore, from the aspect of enterprise and management theory those activates are known
as innovative activities but in accounting and nancial terms those are known as R&D activities. In
both cases it is about the knowledge application and incorporation in daily business and processes but
is called with different names – innovative or R&D activities.
IAS 38 recognizes and situation when an enterprise hires another enterprise, institute, research
center or agency to develop a new technology, product, service or business process and then buys
resulting study, patent, know-how or machine from that subject. According to IAS 38 this is the case
of externally acquired knowledge – intangibles. Therefore, in this case enterprise buys “knowledge”
from other subject instead to develop it internally, and as a matter of contrast those activities refer as
entrepreneurial activities.
When enterprise externally acquire knowledge - buy an assets (either tangible or intangible but
improved – with knowledge incorporated), in the amount of the purchased value corporate assets, in
enterprise’s Balance Statements, will be increased. In the future, given asset is subject to depreciation,
and by time it will be fully transferred to Income Statement. By depreciation, enterprise’s cost of
depreciation will be higher and as a result net prot will be lower for the amount of higher depreciation
costs as well as corresponding corporate tax. Therefore, the company realizes so-called tax savings
from the investments in intangible and its use in the production process and many countries nowadays
very often use depreciation expenditures to indirectly stimulate innovative (R&D) and entrepreneurial
activities in private sector. One of the examples is recognition of depreciation costs in higher amount
than real costs in order to additionally decrease the amount of corporate tax paid based on the type
and character of business that enterprise does.
2. ACCOUNTING TRETAMENT OF ENTERPRISE’ INNOVATIVE ACTIVITES
In previous chapter we could clearly conclude that innovative activities of enterprises are dened by
IAS 38 and comes under the category of “internally generated intangible assets”. In order to estimate
whether an internally generated intangible asset meets the criteria for recognition, an enterprise
classies the generation of property on:
• Research phase;
• Development phase.2
By research, according to IAS 38, is considered original and planned research undertaken with the
aim to acquire new scientic or tehnical knowledge and understanding. As research always has a new
knowledge but not a product or service as a consequence, future inows of economic benets to the
enterprises are blurred and not possible to be capitalized and found in Balance Statement. As a result,
all research outlays are recognized as expenditures when occurred3.
On the other hand, in the development phase, a new product or service, organizational solution
or innovative market approach is possible to predict and as a result outlays in this phase can be
capitalized. Development activities means the application of scientic - research results or production
design of signicantly improved materials, devices, products, processes, systems or services before
commercial production or usage4. Given that inow of future economic benets (if and only if this is
possible) is certain all expenses incurred during this phase of innovation development is recognized
1 Intrnational Accounting Standard 38 – Intangible Assets, translation, Ministry of Finance of Republic of Serbia, http://www.mn.
gov.rs
2 Intrnational Accounting Standard 38 – Intangible Assets, translation, Ministry of Finance of Republic of Serbia, http://www.mn.
gov.rs
3 Examples of research activities, according to IAS 38 are: (a) activities aimed at acquiring new knowledge, (b) search for the
application of research ndings and other knowledge, their evaluation and nal selection (v) the search for alternatives for
materials, devices, products , processes, systems or services, and (d) the formulation, design, evaluation and nal selection of
possible alternatives for new or improved materials, devices, products, processes, systems or services. Source: IAS 38 - Intangible
assets, translation, Ministry of Finance of the Republic of Serbia, http://www.mn.gov.rs
4 Examples of development activities, according to IAS 38 are: (a) designing, building and testing prototypes and models of pre-
production and before use, (b) design tools, assembly equipment, molds and dies, which means the new technology, (v) the design,
construction and pilot plant work, which in size is not economically feasible for commercial production, and (g) the design,
construction and testing of the chosen alternative for new or improved materials, devices, products, processes, systems or services.
These examples are taken from IAS 38, whereby it should be stressed that any national body in charge of this activity can be dened
more narrow or broaden their scope depending on the situations that arise in practice.
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as an asset5.
Availability of resources for innovation completion and successful usage in business purpose can
be proved, for example, with a business plan in which the present technical, nancial and other
necessary resources are shown and the ability of enterprise to provide those resources. In some cases,
an enterprise demonstrates the availability to provide desirable resources with external nancier’s
indication-willingness to nance given innovation development.
In order to precisely and in adequate way divide outlays incurred in the phase of research and in
the phase of innovation development, beside those essential factor, it is necessary to ensure some
technical conditions. One of them is existence of adequate cost accounting system in enterprise in
order to reliably measure the value of internally generated intangible assets, such as salaries and other
expenses incurred in securing copyrights or licenses or developing computer software.
3.HOW INNOVATION PROCESS IMPACTS ENTERPRISE’S FINANCIAL STABILITY
For an enterprise is said to be nancially stable if there is balance (both in value and in terms of
time) between the available sources of nancing and assets immobilization of a given enterprise. In
practice, the nancial stability of the company is measured by the coefcient of nancial stability
(CFS) that shows which part of the enterprise’s xed assets is nanced from long-term nancial
sources and which part of the short-term sources. The optimal situation is when the entire xed assets
are nanced by long-term sources of nancing, and then the coefcient is equal to 1, because we have
an optimal effect on the protability of the company. Financial stability performance is even better as
the coefcient is closer to zero (then a part of current asset-s is-are nanced from long-term nancial
sources and worse as the value of the coefcient is higher - above 1.
CFS =
In order to assess the inuence of enterprise’s innovative activities (R&D activities) on nancial
stability of the company, it is necessary to bear in mind the above mentioned levels of innovation’s
completion. In the research phase, each outlay is treated as an expense and as such has no impact on
nancial stability, but has on the protability of the enterprise as it will be shown below.
In the development stage, when incurred outlays meet the above mentioned requirements to be
recognized in Balance Statement, long-term assets will increase and thus the coefcient of nancial
stability will increase too. This negative effect on the ratio will decrease by amortization of these
assets continuously through the useful life of innovation. Also, in order to minimize negative impact
on nancial stability performance, and taking into account factors that affect the same, it is necessary
to take care of the sources of nancing - denominator of the CFS. Given the long-term effects of
the development stage and maturity of innovation, outlays in this stage need to be nanced by
long-term nancial sources (from its own capital – by the issue of additional equities, “stronger”
allocations from net prot on account of “retained earnings”, issuing own bonds or through long-term
borrowing). Given the experience of other countries and current situation in our country in terms
of available external nancial resources, our recommendation relates to the formation of long-term
provisions, which in accounting terms will favorably impact CFS and will allow greater allocation
from the enterprise’s net prot to additionally focus on improvement and development of innovations
and innovative products, processes and services. Previously mentioned option is even more important
and useful for companies that already have background in innovating – innovation active enterprises
and thus can meet the condition for the formation of provisions, such as Provisions for Investment
Maintenance, the Provisions for Costs of Restructuring and other types of provisions that will meet
the criteria for its formation according to IAS 37 - Provisions, Contingent Liabilities and Contingent
Assets.
5 Necessary conditions that need to substantiate the fact of recognition are: a) the technical feasibility of completing the
intangible asset so that it will be available for use or sale (feasibility); b) its intention to complete the intangible asset
and use or sell it (the end of intent); v) our ability to use or sale of intangible property (possession); g) intangible asset
will generate probable future economic benets - the existence of markets for the product of an intangible asset or
intangible asset itself (commercialization)
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4.HOW INNOVATION PROCESS IMPACTS ENTERPRISE’S PROFITABILITY
The accounting treatment of outlays in the phase of research as operative expenditures will imply
smaller amount of net prot from regular business activities, smaller amount of total gross and net
prot and therefore smaller amount of tax paid for prot. Therefore, by investing in research, company
accomplishes positive tax savings in the following amount:
the R expenditures x tax rate for prot (2)
which leads us to the fact that
the real amount of costs for research = R expenditures (1-tax rate for prot) (3)
Considering that, according to the current Accounting framework in
Republic of Srpska and Bosnia and Herzegovina, the expenditures
appeared in the phase of research are treated as operative costs, at
the moment when they appear, will burden the business gain and thus
affect the increase of the business risk. As a result it will affect the
fading of nancial image of company during deliberation about credit
application etc. However, we have two effects or embedded automatisms
present in MRS 38. To clarify the rst effect it is necessary to make
the difference between innovation active and inactive companies. At
innovation active companies, which have successful innovation results
behind them, the impact on the business risk growth or leverage will
not be that signicant because of the fact that this kind of companies
have very high business incomes. It is unlikely that companies, which
are just starting with their innovative activities, will have enough resources for nancing innovative
projects from the beginning till the end, which means from the phase of research to the new product,
service, process, etc. Also, there is a very big risk of, so called, deadweight loss, if, for example,
during the phase of research it turns out that this kind of project is unenforceable. On the other
hand, through this kind of treatment of research and development activities, the commercial basis of
that researches or, for example, engagement of other, more experienced business subjects (institutes,
centers of excellence, universities etc) is forced to carry out the research for the companies’ needs
because the risk of irreparable costs or failure of innovation undertaking is not so big.
The treatment of expenditure in the phase of development as capital costs, affects the increase of
value of total assets of companies and, in the amortization period, it affects reductions of gross and
net gain and the amount of gain tax. If the company, at the same time, has active research projects,
gross gain of the period will be additionally burdened, which leads us to the total tax savings in the
following amount:
(Depreciation expenditures + R expenditures) x tax prot (4)
which opens the space for “internal nancing” of expenses for research and development activities.
Real expenses of investment in R&D activities are:
R expenditures - (4)
We cannot forget the income aspect of balance of success of
innovation companies. For sure, changed product or service,
specialized process or improved approach to the market will affect
the realization of higher incomes when compared with the previous
period or with the competition. Observing from the aspect of
innovation companies, burdening such high incomes with above
mentioned expenses of research, amortization of material and non-
material property (results of research and development activities),
then with the expenses of booking and expenses of interest on
long-term sources of nancing, in synergy, will have even more
positive effects on company’s tax savings. On the other hand, that
will provide the company with the base for the long-term growth
and development, but only provided that companies continuously invest in development and research
activities. Also, the amount of expenses of research should not have big impact on the amount of gain
from regular business activities because of the high incomes that innovative product or service brings
to the company, and therefore also the height of business risk that it brings.
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5. ACCOUNTING TREATMENT OF THE EXTERNALLY OBTAINED INNOVATIONS –
COMPANY`S ENTREPRENEURIAL ACTIVITIES
When a company buys some kind of a non-material good, the value of company`s property will
increase for the amount of the purchase value6 of that good. In the next period, the non-material good
amortizes and that is how it transfers its value on the expenses, in order to show all the expenses that
occurred in the observed period due to the generated incomes. Consequently, net gain of the period,
as a result of increased expenses of amortizations based on the amortization of non-material property,
will be smaller and therefore even the amount of paid gain tax will be smaller. Based on that fact, the
company achieves, so - called, tax saves from the investment in non – material goods and their use in
the process of production.
6. CONCLUSION
In this paper, we tried to present the advantages and disadvantages that appear when investing in non
– material forms of property. At the same time, we proposed potential solutions for the reduction of
potential negative effects on the nancial stability and protability of a company. Also, we noticed that
IAC 38 covers all the innovative activities of the company, which means research and development
activities, regardless of the form in which it will result.
Appreciating the fact that, in this paper, we fullled the aim of the research, and for the sake of
further promotion of potential “internally generated” advantages of investing in the research
activities, development and the utilization of the positive “hidden” mechanisms through IAS 38, in
the next period, we propose the partition of all legal persons according to their innovative intensity, in
Republic of Srpska and Bosnia and Herzegovina. In order to achieve that, it is necessary to raise the
current level of the quality of nancial reporting in Republic of Srpska and Bosnia and Herzegovina,
for example through education of professional accountants, company managers and entrepreneurs
in order to give them the conceptual and technical classication, accounting – nancial treatment of
research and development activities and the advantages of that investments. That would be the way
to provide the quality base for the legislator and the executive authority in Republic of Srpska and
Bosnia and Herzegovina for further, signicantly efcient and more effective measures of incitement
of innovative activities of companies, which is done by other, more developed countries in our closer
and wider surrounding.
Reference
Accenture. Intangible Assets and Future Value. Accenture/Economist Intelligence Unit, 2003.
Contractor, F. J.Intangible Assets and Principles for Their Valuation. In Valuation of Intangible Assets in Global
Operations (F. J. Contractor, ed.), Quorum Books, 2001.
Daum, J. H. Intangible Assets and Value Creation. John Wiley and Sons, New York, 2003.
Design and Evaluation of Tax Incentives for Business Research and Development, Expert Group on Impacts
of R&D Tax Incentives, European Commission, Directorate General – Research, Brussels, November
15, 2009.
International Accounting Standard 38 – Intangibles, translation, Ministry of nance of Republic of Serbia, ,
http://www.mn.gov.rs
Kenan, P. J., Furrow, Р., Intangible Asset Monetization:The Promise and the Reality, April 2008
Lev, B. Intangibles: Management, Measurement, and Reporting. Brookings Institution Press, Washington,
D.C., 2001., стр. 5.
Patries Boekholt, Bastian Mostert, Paul Cunningham, Ken Guy, Reinhold Hofer,Christian Rammer, Policy
Mixes for R&D in Europe, UNU-MERIT, April 2009.
Statistics of Innovations, Annual Report, Institute of Statistics, Republic of Srpska, 2008.
6 The purchase value of some good is the amount of cash or cash equivalent paid, or fair value of other compensation given for the
acquisition of that mean.
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CORRUPTION AS AN OBSTACLE FOR DOING BUSINESS IN WESTERN BALKANS: A
BUSINESS SECTOR PERSPECTIVE
Jelena Budak
The Institute of Economics, Zagreb, Croatia
E-mail: jbudak@eizg.hr
Edo Rajh
The Institute of Economics, Zagreb, Croatia
E-mail: erajh@eizg.hr
Abstract
This paper investigates businessmen perceptions on corruption as obstacle for business and their attitudes
towards corruption. The research is based on the survey conducted on the sample of over 1800 business owners
and managers in Western Balkans region. Using the original survey data7 collected from February to June 2010
for seven countries – Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro and Serbia,
the paper explores businessmen views on how business sector is facing with corruption, and on the role of
private and government agents to combat corruption.
The empirical analysis based on data obtained from businessmen opinion survey is performed in several
steps. The data are analyzed using descriptive statistics, exploratory factor analysis, and analysis of variance
(ANOVA).
The factor analysis has been performed at nine selected items from the questionnaire, each in the form of
statement. Businessmen rated each statement on a 11-point Likert-type scale anchored by strongly disagree
(0) and strongly agree (10). Three distinct factors were extracted: (1) Understanding corruption as a “greasing
wheel”, (2) Self-initiative to combat corruption needed, (3) Corruption is a government-related issue. The
main research question was if there were differences in factor means related to the: i) country of origin,
ii) perceptions on corruption being an obstacle for business, iii) corruption experience, and iv) opinions on
corruption trends in the past decade.
The results of the analysis of variance showed that the country of origin strongly determines businessmen
attitudes on corruption as measured on all three factors, probably due to the different social and economic set-
up and heritage. Businessmen with corruption experience tend to justify corruption as greasing wheel more than
“clean” respondents with no corruption experience. Generally businessmen that see corruption rising in their
country would attribute this problem exclusively to the government. This group of respondents accordingly
expect government authorities to take the anti-corruption lead. Government response to the corruption issue
rather than strengthening individual or private anti-corruption initiative is a prevalent opinion of businessmen
who consider corruption as big or enormous obstacle for their business.
Country-specics, business corruption experience, and different opinions on selected corruption-related issues
showed to have inuenced businessmen attitudes towards corruption. Since the large majority of companies in
the survey sample are young and small enterprises up to 50 employees, results of this research study provide
useful policy recommendations. Findings could help countries in Western Balkans region to design more
entrepreneurship-friendly environment.
Keywords: Corruption, Businessmen Attitudes, Perceptions, Corruption Experience, Western Balkans
7 The survey was conducted within the project Responsible youth entrepreneurship: creating a culture of anti-corruption
in the private sector, www.yes.org.mk. Authors would like to thank YES Foundation, Macedonia and Partnership for
social development, Croatia for supplying us with the original database for this research.
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1. INTRODUCTION
The extensive research in last decade or two has brought to the common understanding of negative
effects of corruption8. Corruption has multiple adverse impacts on entrepreneurship and business in
general (Kaufmann and Wei, 2000; Méon and Sekkat, 2005). Hellman et al. (2000) based their analysis
on the Business Environment and Enterprise performance Survey (BEEPS) results and argued that
governance, corruption, and state capture shape business environment in transition countries. Despite
various anti-corruption initiatives to combat political and administrative corruption that had been
put in place both internationally and locally, in many countries corruption still stands as an obstacle
for doing business. One could assume that modest results are related to the lack of country-specic
measures to eliminate corruption. The motif of this research study is to assess the business sector
attitudes and opinions on corruption and to better understand factors associated to these attitudes. The
approach applied in this study should help policy-makers to better target measures to ght corruption
as an obstacle for doing business.
The paper investigates corruption as an obstacle for doing business in Western Balkans. Besides
the research covers one historical and geographical region, it offers a multi-national comparative
perspective among seven countries: Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia,
Montenegro and Serbia. The issue of corruption hindering the development of business sector is
explored by surveying local businessmen views on how business sector is facing with corruption,
and on the perceived role of private and government agents to combat corruption. Our main research
question is whether different business opinions and attitudes are related to the country of origin,
individual corruption experience and perceptions, and opinions on past corruption trends. This study
adds to the existing literature by providing results that could help countries in Western Balkans region
to create corruption-free business environment.
The next section elaborates the rationale background and conceptual framework used in this research.
The survey methodology and data are presented in section three, and the results of empirical analysis
are provided in section four. The concluding section offers preliminary policy recommendations and
indicates lines of future research.
2. RATIONALE BACKGROUND
Corruption is broadly dened as “a misuse of public power for the private gain” (The World Bank,
1997) that distorts resource allocation by shifting them to private elite. Corruption hampers social and
economic development by increasing inequality and poverty (Hassan, 2004), yet the main negative
impacts are seen in the poor performance of public sector (Tanzi, 1998; Mauro, 1995). Corruption
rent-seeking decrease state revenues and leave less funds for public services such as health, education,
and infrastructure (Tanzi and Davoodi, 1997; Shleifer and Vishny, 1993). Driven by personal benets
corrupt public ofcials make decisions opposite to the public interest they should serve. Instead of
the development criteria the policy priorities chosen by individual rent-seeking opportunities make
economic policy inefcient (Kaufman and Wei, 2000). Growing bureaucracy and malfunctioning
institutions (North, 1990) go hand in hand with corruption thus affecting all aspects of citizens’ daily
life, as well as business sector prospectives.
In the corrupt environment costs of doing business increase signicantly in terms of resources needed
to cope with expenses and risks. Corruption rent works as a tax imposed arbitrarily to business agents.
Corruption fee is required to enter the market, to ensure compliance with regulations, to cope with the
excessive bureaucracy, or to get political protection. The modalities of corrupt transactions include
bribery, inuence peddling, embezzlement, fraud and extortion, cronysm and patronage (Amundsen,
1999). Entry to new markets for example may be subject to corruption if export or import quotas are to
be obtained. Firms may confront with corrupt pressure at global market because of unfair competitive
advantage gained by other companies that offer corruption deals to third party. Respectively, public
procurement is especially sensitive to corruption (Ateljević and Budak, 2010; Grødeland and Aasland,
2011).
Besides bribery and similar rather simple modalities of corrupt rent-seeking, more sophisticated
corruption deals may include political nancing arrangements, conict of interests and lobbying,
nepotism and cronyism such as hiring personnel or loyal partners to insure institutional or political
support needed. Grand corruption is associated with shadow economy, tax evasion, money laundering,
and even international crime and terrorism. Illegal corruption transactions require complex nancing
schemes and networking. Whether it consists of “small” or “big” deals, corruption increases transaction
8 For review of corruption studies, see Jain (2001).
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costs of doing business. Indeed this arguments against theories of justifying corruption as a greasing
wheel that helps rms to get things done when public administration is inefcient (e.g. Leff, 1964;
Dreher and Grassgebner, 2007). Instead of doing core business and keeping focus to innovation and
development, in the corrupt business environment rms need to allocate signicant human, nancial
and time resources to handle corrupt pressures. Large companies have more capacities to cope with
corruption and to protect their business interests (Tanzi, 1998). Corruption therefore more strongly
affects new and small and medium enterprises.
Table 1: Corruption Perceptions Index for Western Balkans countries, 2003-2010
Country 2003 2004 2005 2006 2007 2008 2009 2010
Albania 2.5 2.5 2.4 2.6 2.9 3.4 3.2 3.3
Bosnia and Herzegovina 3.3 3.1 2.9 2.9 3.3 3.2 3.0 3.2
Croatia 3.7 3.5 3.4 3.4 4.1 4.4 4.1 4.1
Kosovo n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2.8
Macedonia, FYR 2.3 2.7 2.7 2.7 3.3 3.6 3.8 4.1
Montenegro* 2.3 2.7 2.8 3.0 3.3 3.4 3.9 3.7
Serbia* 2.3 2.7 2.8 3.0 3.4 3.4 3.5 3.5
Source: Transparency International.
Note: CPI at the scale from 0-highly corrupt to 10-highly clean. *Data for 2003 to 2006 are for Serbia
and Montenegro.
Western Balkans is considered a region of high corruption prevalence (Table 1). Despite slight
differences in Corruption Perceptions Index (CPI) scores for particular countries, the corruption problem
is common to the entire Western Balkans region (UNODC, 2011). Corruption is as well perceived as
a major hurdle to investing in the region and doing business efciently (EUROCHAMBRES, 2009).
National studies also point out the corruption creates considerable difculties for doing business
(e.g. see Džać et al., 2011 for Bosnia and Herzegovina; Budak, 2006 for Croatia). Although there
is a common view on regional prevalence of corruption and its adverse impacts to business sector
development, there are many outstanding research and policy issues to explore corruption and
business climate nexus. Our approach is to assess businessmen attitudes towards corruption using the
conceptual model developed and presented by Figure 1.
Figure 1. Conceptual framework to assess business sector attitudes towards corruption
The empirical analysis that follows will explore what different business attitudes exist, and if they
are related to the country of business origin, expressed views on corruption as an obstacle for doing
business, eventual real corruption experience and businessmen perceptions on corruption prevalence
trends. Survey data and methodology used for the empirical analysis are presented in details below.
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3. DATA AND METHODOLOGY
This quantitative research is based on the survey conducted on the sample of 1849 business owners
and managers in Western Balkans region. The original survey data9 were collected by conducting
the telephone survey in the period from February to June 2010 in seven Western Balkans countries.
The share of respondents per country reects the size of the economies, with two largest economies
representing about 20 percent of sampled respondents each: Croatia (22 percent of respondents) and
Serbia (20 percent). The characteristics of survey sample are presented in Table 2.
Table 2. Summary statistics of sampled respondents, n = 1,849
Respondent prole %
1. Gender
1.1. Male 65.7
1.2. Female 34.3
2. Country
2.1. Albania 10.7
2.2. Bosnia and Herzegovina 15.6
2.3. Croatia 22.2
2.4. Kosovo 8.6
2.5. Macedonia 15.1
2.6. Montenegro 7.8
2.7. Serbia 20.0
3. Respondent age
3.1. 18 to 30 years 20.4
3.2. 31 to 40 years 33.6
3.3. 41 to 50 years 24.7
3.4. 51 to 60 years 17.0
3.5. 61 years or older 4.3
4. Company size
4.1. 1 to 9 employees 61.3
4.2. 10 to 49 employees 28.7
4.3. 50 to 249 employees 7.9
4.4. 250 or more employees 2.2
5. Company age
5.1. 1 to 5 years 20.6
5.2. 6 to 10 years 24.1
5.3. 11 to 20 years 45.0
5.4. 21 years or older 10.2
Respondents are 66 percent males and 34 percent females, which is in line with the male gender
prevalence in the business sector in the region. Over half of the respondents are businessmen
under the age of 40. Younger businessmen opinions represented in the sample are valuable to the
ndings of the survey research. That part of the business sector would be the most affected by the
future developments in creating corruption-free business environment. Over 98 percent of the rms
represented in the survey sample are small and medium enterprises (SMEs). This share as well as the
large subset of micro companies (up to 10 employees) corresponds to the national business sectors
9 The survey was conducted within the project Responsible youth entrepreneurship: creating a culture of anti-corruption
in the private sector, www.yes.org.mk. Authors would like to thank YES Foundation, Macedonia and Partnership for
social development, Croatia for supplying us with the original database for this research.
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structure. Regarding the company age, 20 percent of rms in the surveyed sample are young companies
established ve years ago or less. The largest share (45 percent of respondents) is associated to the
rms with longer experience of doing business in these business environments (companies established
11 to 20 years ago). Businessmen from established companies might have broader past experience
to estimate how corruption affects business, the effectiveness of anti-corruption initiatives and past
developments. Finally the large size of the sample in our survey provides reliable database to conduct
empirical analysis. The empirical analysis based on data obtained from businessmen opinion survey
is performed in several steps. The data are analyzed using descriptive statistics, exploratory factor
analysis, and analysis of variance (ANOVA).
The measurement instrument for measuring attitudes towards corruption included nine questions.
Respondents were asked about corruption pressures faced by private companies and the potential
efciency of corrupt means in their business operations. Further we have collected their opinion on
the perceived role of private sector and/or government agents to combat corruption, as well as general
opinions on roots of corruption (Table 3).
Table 3. Mean values, n=1,849
Items Means
i1 The private (business) sector is helpless before corruption, because corruption derives from the
government 6.9
i2 Private companies can refuse to get involved in corruption without consequences to their operation 5.1
i3 Private companies are the ones which initiate corruption by offering bribe to get benets they don’t
disserve 4.5
i4 A certain (small) degree of corruption is useful for business 3.4
i5 Corruption is rooted in our culture; people believe they should “grease” to get the job done 6.8
i6 The basic instrument in the ght against corruption is the effective policy for its identication and
punishment 8.1
i7 The ght against corruption is primarily an obligation of the authorities 8.5
i8 The ght against corruption is primarily an obligation of citizens 7.3
i9 Each individual and organization can make a strong contribution in the ght against corruption 8.2
Businessmen rated each statement on the 11-point Likert-type scale anchored by strongly disagree (0)
and strongly agree (10). The mean values (Table 3) provide rst insight into businessmen opinions.
Business people most strongly agree (mean value over 8) that ghting corruption is primarily the
responsibility of the government who should implement effective anti-corruption measures (including
more repressive actions); yet, each individual and organization can contribute to these efforts. On the
other side, respondents most strongly disagree on corruption effectiveness as a greasing wheel (mean
value 3.4). At the rst sight, expressed opinions reect encouraging business sector attitudes towards
corruption as a negative phenomenon. Next we proceed to more detailed factor analysis.
4. RESULTS
The factor analysis has been performed at nine selected items from the questionnaire, each in the form
of statement. Two items (i2 and i6) were removed from further analysis as they had signicant cross-
loadings. Three distinct factors were extracted, with 58.4 percent of explained variance (Table 4).
Table 4. Factor analysis results, factor loadings
Items Factor 1 Factor 2 Factor 3
i1 0.18 -0.16 0.71
i3 0.68 0.01 0.06
i4 0.73 0.03 -0.12
i5 0.63 -0.05 0.35
i7 -0.10 0.23 0.73
i8 -0.02 0.81 0.21
i9 0.02 0.82 -0.14
As presented in Table 5, description of factors corresponds to the items attributed to each factor: (1)
Understanding corruption as a “greasing wheel”, (2) Self-initiative to combat corruption needed, (3)
Corruption is a government-related issue (Table 5).
Table 5. Description of factors
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Factor 1: Understanding corruption as a “greasing wheel” Means
i3 Private companies are the ones which initiate corruption by offering bribe to get benets they don’t
disserve 4.5
i4 A certain (small) degree of corruption is useful for business 3.4
i5 Corruption is rooted in our culture; people believe they should “grease” to get the job done 6.8
Factor 2: Self-initiative to combat corruption needed
i8 The ght against corruption is primarily an obligation of citizens 7.3
i9 Each individual and organization can make a strong contribution in the ght against corruption 8.2
Factor 3: Corruption is a government-related issue
i1 The private (business) sector is helpless before corruption, because corruption derives from the
government 6.9
i7 The ght against corruption is primarily an obligation of the authorities 8.5
Statements related to understanding corruption as a “greasing wheel” (items i3, i4 and i5) form factor
1. Factor 2 contains statements on the potentially signicant individual contribution to the success of
anti-corruption initiatives (items i8 and i9). Finally, statements reecting opinions on corruption as an
exclusive responsibility of government authorities (items i1 and i7) are grouped in factor 3.
In the next step, the analysis of variance has been performed to test the effects of country of origin,
perceptions on corruption being an obstacle for business, corruption experience, and opinions on
corruption trends in the past decade on factor means (Table 6).
Analysis of variance indicate that attitude on corruption as a “greasing wheel” was affected by country
of origin (F=22.56, p=0.000), by perceptions on corruption being an obstacle for business (F=4.23,
p=0.005), by corruption experience (F=46.11, p=0.000), and by opinions on corruption trends in
the past decade (F=4.53, p=0.000). Furthermore, attitude that self-initiative is needed to combat
corruption was affected only by country of origin (F=6.22, p=0.000), while attitude that corruption is
a government-related issue was affected by country of origin (F=10.48, p=0.000), by perceptions on
corruption being an obstacle for business (F=37.78, p=0.000), and by opinions on corruption trends
in the past decade (F=47.33, p=0.000).
Table 6. ANOVA results
Independent variables Dependent variables
Country of origin Understanding corruption
as a “greasing wheel”
Self-initiative to
combat corruption
needed
Corruption is a
government-related
issue
Macedonia (n=279) 5.0 7.5 7.2
Serbia (n=370) 5.3 7.5 7.8
Croatia (n=410) 4.9 7.9 8.1
Montenegro (n=144) 4.6 8.6 6.9
Kosovo (n=159) 3.1 8.3 7.7
Bosnia and Herzegovina (n=289) 5.6 7.8 8.1
Albania (n=198) 4.4 7.3 7.2
All groups (n=1,849) 4.9 7.8 7.7
ANOVA F=22.56
p=0.000 F=6.22
p=0.000 F=10.48
p=0.000
In your opinion, is corruption an obstacle
for your business? Understanding corrup-
tion as a “greasing wheel” Self-initiative to com-
bat corruption needed
Corruption is a
government-related
issue
It is not an obstacle at all (n=409) 4.6 7.8 6.9
It is a small obstacle (n=660) 5.1 7.8 7.6
It is a big obstacle (n=497) 4.9 7.7 8.1
It is an enormous obstacle (n=283) 4.7 7.8 8.5
All groups (n=1,849) 4.9 7.8 7.7
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ANOVA F=4.23
p=0.005 F=0.04
p=0.988 F=37.78
p=0.000
In the last year, have you or anyone in your
company paid bribes in any form? Understanding corruption
as a “greasing wheel” Self-initiative to com-
bat corruption needed
Corruption is a
government-related
issue
Yes (n=347) 5.7 7.5 7.8
No (n=1491) 4.7 7.8 7.7
All groups (n=1,838) 4.9 7.8 7.7
ANOVA F=46.11
p=0.000 F=3.29
p=0.070 F=1.66
p=0.198
Do you think corruption in your country in
the past decade has: Understanding corruption
as a “greasing wheel” Self-initiative to com-
bat corruption needed
Corruption is a
government-related
issue
been growing (n=809) 5.1 7.8 8.2
been declining (n=279) 4.6 7.9 6.6
remained unchanged (n=642) 4.9 7.7 7.6
doesn’t know/refuses to answer (n=119) 4.4 7.9 6.8
All groups (n=1,849) 4.9 7.8 7.7
ANOVA F=4.53
p=0.004 F=0.412
p=0.744 F=47.33
p=0.000
Results presented in Table 6 enable comparative analysis of respondents attributes. Businessmen
from Montenegro, Kosovo, Macedonia and Albania expressed their rm opinion on more individual
efforts needed to combat corruption. The prevalent opinion of respondents from other countries in
the survey (Croatia, Bosnia and Herzegovina and Serbia) is that corruption problem derives from
government and therefore should be solved by ofcial authorities.
Corruption is primarily a government-related issue for businessmen who consider corruption big and
enormous obstacle for business, and for those who had recent corruption experience in doing business.
An interesting nding is that businessmen who believe corruption has been declining in the past
decade, have more rm and positive attitudes on strengthening self-initiative to combat corruption.
This group of respondents would not blame only the government for corruption prevalence.
5 CONCLUSION
The analysis based on the business-sector survey showed there are three distinct factors of attitudes
towards corruption: (1) Understanding corruption as a “greasing wheel”, (2) Self-initiative to
combat corruption needed, (3) Corruption is a government-related issue. Country-specics, business
corruption experience, and different opinions on selected corruption-related issues showed to have
inuenced businessmen attitudes towards corruption.
Country of origin strongly determines businessmen attitudes on corruption as measured on all three
factors, probably due to the different social and economic set-up and heritage. Businessmen with
corruption experience tend to justify corruption as greasing wheel more than “clean” respondents
with no corruption experience. Generally businessmen that see corruption rising in their country
would attribute this problem exclusively to the government. This group of respondents accordingly
expect government authorities to take the anti-corruption lead. Government response to the corruption
issue rather than strengthening individual or private anti-corruption initiative is a prevalent opinion of
businessmen who consider corruption as big or enormous obstacle for their business. The results of
this research study provide useful policy recommendations, especially having in mind that the large
majority of companies in the survey sample are young and small enterprises up to 50 employees who
should generate the economic development in the coming years.
In Western Balkans countries where businessmen expressed rm opinion that more individual efforts
are needed in combating corruption, the key component of seizing corruption activities should be
raising public anti-corruption awareness. In countries where business sector mostly understands
corruption as a government-related issue, “clean” ofcial practises of government institutions would
raise trust in the institutions and are considered a good starting point for anti-corruption activities.
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Business sector recognizes efforts in combating corruption. This is supported with an important
nding: businessmen perceptions on decreasing corruption are related to their (lower) expectations
from the government to take an exclusive responsibility in seizing corruption.
Conclusively, policy measures to remove corruption as an obstacle for doing business in Western
Balkans should be focused to strengthen anti-corruption awareness and to promote transparency and
openness of public services to business. Increased transparency of for example public procurement
procedures or issuing licences would increase transaction costs of manipulation so the misuse of public
power would not pay off. Governments have to prove their commitment in combating corruption;
however, the results would be visible at the longer run. Probably the fastest results could be achieved
in increasing trust in institutions and encouraging businessmen and public employees to report
on corruption incidence. Findings could help countries in Western Balkans region to design more
entrepreneurship-friendly environment. In this respect, more detailed business survey on corruption
modalities and bribery experience would provide useful basis for the future research.
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THE IMPORTANCE OF CORRUPTION SUPPRESSION FOR APROACHING BOSNIA AND
HERZEGOVINA TO EUROPEAN UNION
Tajana Serdar
Faculty of Economics, University of Banja Luka, Bosnia and Herzegovina
E-mail: tajana.serdar@efbl.org
Branka Topić-Pavković
NLB Razvojna banka a.d. Banja Luka, Bosnia and Herzegovina
E-mail: t_branka@hotmail.com
Abstract
Historically, the corruption phenomenon was observed in all human societies from the time immemorial, but
economic science has recently begun to deal with this problem seriously. Corruption exists if there is a deliberate
distortion of the impartiality principle in decision making process in order to appropriate some benets. In
other words, corruption can be dened as abuse of public power for private gains realization. Corruption is not
crucially related to the character of the people in certain region, but it is primarily system creation. Economic
system based on greater economic freedom and lower degree of economic activity control is followed by
lower level of coruption. Greater interventionism in economy results in higher level of corruption. Therefore,
developing countries should establish liberalization of the economy, in order to approach the corruption level
that exists in European Union.
According to the mechanisms of corruption and its economic consequences, it is possible to identify several
types of corruption:
• Corruption that enables the application of regulations (laws), so-called corruption without theft;
• Corruption that allows circumvention or violation of regulations (laws), so-called corruption with
theft;
• Corruption that brings modications in the existing and creates new regulation (law) or political
corruption.
An important issue when considering problem of corruption is difference between centralised and decentralised
corruption. It is often considered that decentralised corruption (basic concept: honest government and several
corrupted ofcers) is represented in democratic and developed market economies. More pernicious centralised
corruption implies a monopolly in the market of corruption. This type of corruption is a limiting characteric
and particularly difcult problem in developing countries.
Obviously, corruption will never be completely eradicated. A certain level of corruption is inevitable in any
society. In order to eliminate sources of this negative activity in developing countries, such as Bosnia and
Herzegovina, it is necessary to revitalize assumptions of market economy: private property, economic freedom,
individual entrepreneurship, open market and competition. New legal and institutional framework based on
mentioned conditions including principle of transpartency, is the best way to prevent and suppress corruption
to the minimal level.
Keywords: Corruption, Economic Freedom, Corruption Suppression, Centralised and Decentralised
Corruption.
1. INTRODUCTION
The corruption phenomenon has existed since the very beginnings of the human society and is
associated with the essence of human nature, which is why it is very difcult to eradicate. The word
corruption originates from the Latin word corrumpere which means to break something in parts.
Even Plato, Aristotle and Cicero’s writtings testify about existence of corruption. Modern meaning
of corruption from 1283. is attracting with promises and gifts certain person who has authority and
power to act contrary to their duty. Corruption destroyes the community, reverses the role of legal and
moral standards and threatens public goods and existence of most people.
This paper focuses on the inuence of corruption and corruption suppression to the developing
countries’ socio-economic position and factors affecting the spread of this negative phenomenon in
society. In the article we claim that strengthening of market economy assumptions such as liberalization
and economic freedom, private property, open market, competition and transparency with new legal
and institutional framework, is the best way to prevent and reduce corruption to the lowest possible
level. In order to conrm this conclusion, we turn to theoretical considerations of the term and types
of corruption, then we consider the factors leading to corruption and its consequences for society, and
nally in the last section we explain ways to prevent and limit corruption in developing countries.
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2. THE TERMS AND TYPES OF CORRUPTION
Regardless of the obvious corruption subsistence, social sciences, especially economic science has
recently begun to seriously address this problem. Functionalist’s and liberal theories in the USA (60’s
and 70’s of XX century) argued that corruption’s ethical aspect is secondary, because it is inherent
in human nature; it is necessary product of social development and facilitates its progress, therefore
corruption will disappear when development process is completed. Critics of this theory point out
the ineffectiveness of most corruption forms, because it encourages the adoption of non-productive
behaviors (investing in the purchase of decision makers, not in the quality of the decisions); corruption
is a conservative element that attempts to preserve the acquired situations. The European authors
approach to corruption problem from the standpoint of universal human rights and social contract.
Corruption attacks the foundation of the social contract and civil liberties. The inefciency of the law
and the possibility to rise above the law through corruption practice hurt fundamental principles of
democracy: equality and justice. Corruption can be divided into (Hayek, 1997):
• Black – the most dangerous form of expression which fall under the impact of criminal law;
• Gray – condemnation of public opinion, but tolerated by governing elite;
• White – in the public it is considered benign and generally seen as acceptable behavior.
Hayek also claims that corruption is pursuit of the private at the expense of public interest. On the
other hand, corruption could be seen as putting public things in service of private interest, while
OUN’s denition is: “The concept of corruption includes any act or omission done by responsible
person when performing duties or in connection with duty, and as compensation, solicit or accept
a gift, a promise or a benet”. World Bank and Transparency International talk about corruption as
abuse of public power for private gain.
Corruption is the abandonment of the impartiality principle while making decisions that may be
intentional or motivated by acquiring material gain. So far, the most comprehensive denition is:
“Corruption exists in case of willful violation of the impartiality principle in decision making in order
to appropriate certain benets. Accidental distortion of impartiality (e.g. due to imperfect information)
or discrimination for other reasons (e.g. racism) is not a corruption” (Tanzi, 1998).
According to the mechanisms of corruption and its consequences, we distinguish several types of
corruption (Mappes-Niedek, 2004).
• Administrative corruption is divided into:
▪ Corruption which enables the application of regulation for the implementation or
acceleration of rights based on laws, where the employee is motivated to work efciently
or deliberately delays to obtain a bride. This is so-called corruption without theft.
▪ Corruption which allows a violation or circumvention of regulations (enables
implementation of illegal rights or fulllment avoidance of legal obligations or sanctions).
This is so-called corruption with theft.
• Political corruption - which leads to change or adoption of new regulation or laws (enables
partial interests of groups or individuals establish themselves as general);
• Centralized corruption – where powerful individuals are trying to control the state. If the
product’s import requires just one licence from one public ofcer, there is a monopolly in
the market of corruption. In case the permit is issued by more ofcers, it is assumed they
are colluding to form perfect (full) cartel. As there is no difference between the monopolly
equilibrium and balance in the case of a perfect cartel, this market structure is called centralised
corruption. This type of corruption is particularly difcult problem in developing countries.
• Decentralized corruption – carried out in the individual interest (an individual or few related
individuals perform the corruption). Let’s assume, the import may take several licences, each
representing necessary, but not sufcient condition for import of the observed product. Every
licence is issued by different incoherent department of public administration and different
public ofcers who are not in collusion. This market structure or industrial organization of
corruption is known as decentralised corruption.
Different types of corruption could give different effects on economic efciency. One of important
questions is whether it is worse for a country to have decentralized or centralized corruption. Centralized
corruption is much more difcult to eradicate; it permeates the whole system. Decentralized corruption
is better researched section because it’s basic concept: honest government and several corrupted
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ofcers is more suitable for democratic and developed market economies, with delaborated economic
theory.
3. INFLUENCE OF THE ECONOMIC SYSTEM’S TYPE ON THE CORRUPTION LEVEL
Greater interventionism in economy and increasing role of the state leads to the higher corruption
level. On other words, economic system based on greater economic freedom implies a lower degree
of corruption in society. If the government has more resources to regulate the economy, there are
more conditions for corruption and bribery. Rule of the low means the government is restricted in all
proceedings with determined and proclaimed rules – rules which make it possible to predict with fair
certainty how the government will use its power of coercion in given circumstances (Hayek, 1997).
Hayek is against so-called arbitrary rule, which involves the situation where the government directs
the use of production’s resources for specic use. In order to avoid this, regulations should be made
in advance in form of formal rules that do not target the needs and desires of individuals.
However, state interventionism is the opposite of this approach. The state agency which acts
according to plan, cannot limit on the opportunity provision and conditions creation for individuals.
The authority such as this one solves problems case by case and does not use established rules,
but entries specicities of the moment and subjective ratings. This immediately creates a suitable
environment for abuse of positions for their own purposes. Analysis of intervention would not be
completed if corruption phenomenon was not mentioned (Von Mises, 1966). Any system that has the
ideal of distributive justice threatens the rule of rules and produce convenient ambient for corruption.
Distributive justice is not based on fundamental rights, but on specic orders and decrees adapted to
circumstances and/or certain people and groups.
From the point of corruption it is very important to found an institutional system in which the state will
be limited on establishing the rules related to the general types of situation (not on case by case) and
where individual freedom will be allowed. Freedom of the individuals means creating conditions for
corruption, but also for the control of every government’s action (Douglas, 1990). Different analyses
show corruption is very present in areas that lack economic freedom.
The interdependence between economic freedom and corruption has been empirically measured
within research carried out by Heritage Foundation from Washington. The Index of Economic
Freedom and TI Index (Transparency International Index) are constructed by their methodology.
Though measurements are error-prone, statistic data are relevant and conrm the logical analysis
of state interventionism combined with the weakness of human nature opens up the possibility for
corruption. Economic freedom in this model is measured by index which gave three independent
organizations: Heritage Foundation, Fraser Institute and Freedom House. The rst index (Heritage
Foundation) includes 140 countries, the second (Economic Freedom of the World) - 95 and the third
(Survey of Economic Freedom) – 69 countries. Index of Economic Freedom ranges from 1 (the
lowest) to 100 (the highest level of freedom). Corruption is measured by TI Index, ranged from 0
(the most corrupted country) to 10 (the cleanest country). The following graph shows the correlation
between economic freedom (Index of Economic Freedom) and corruption (TI Index).
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Graph 1: High level of economic freedom is correlated with lower level of corruption1
All indexes of economic freedom have a high negative correlation with the index of corruption: the
higher the index of economic freedom - the lower corruption index. This correlation is high and it
amounts R2 = 0.51. Therefore, 1% increases in the Index of Economic Freedom causes reduction of
more than 1% in the level of corruption.
True economic freedom is only possible in a system with great power of government and strong legal
norms. Hence, the rule of law system, which means the system of limited state powers, constitutes the
essence of a just society that protects individual rights and individuals are free to realize their desires
and actions.
It should be noted corruption will not automatically disappear with introducing of economic freedom
and minimizing government intervention. In countries with the same degree of economic freedom
may be found different level and types of corruption. Increase of corruption is especially observed
in developing countries, such as Bosnia and Herzegovina. In these countries, corruption becomes a
particular problem in the following situations:
• Certain groups and political allies have obtained favorable positions and monopolies (e.g.
during privatization process);
• Change in the structure of government intervention has occurred in the economy;
• Globalization in the economy affects increasing importance of economic power.
During the XX century, state interventionism was easily concealed by claims that these activities
served the common good or the execution of social obligations. Import restrictions gave opportunity
to civil servants to charge their signature on import permit. However, with globalization and expansion
of international trade, listed phenomena are becoming hard to maintain and the hiding costs are
growing. In terms of globalization, facilitated import and lower prices, there are fewer people seeking
the “other way”, so diffusion of economic power and easier access to information affects reduction
opportunities for corruption. Preservation of closed economy is very hard in modern times. If the
import of quality products from abroad is restricted and its domestic substitute is costly, it increases
expenses that were previously covered through loans and assistance from foreign countries or lower
standard. Globalization denitely breaks down closed systems. Certainly, changes in corruption do
not automatically correspond to changes in economic freedom. This process requires time and even
countries with low level of corruption take time to reach that level. Corruption requires a period
1 Source: http://www.transparency.de/Veranstaltungen-zum-Thema-Korr.1181.0.html (accessed 29.08.2011.)
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of time only for discovering and then the time for institutional changes that will stand up against
corruption.
4. CORRUPTION IN MARKET ECONOMIES
Even in market economies, corruption is successfully working. However, in comparison to developing
countries, we are mainly talking about decentralized corruption. Corruption is seen in connection
with the creation and operation of the black market. Black market appears in situations where there
is consumer interest in certain types of products and services whose market transactions are disabled.
Thus it appears in both market and non-market environments. Revenue’s realization from large
transactions on black markets creates a strong nancial potential for the initiation and maintenance of
corruption. Like any market phenomenon, it is possible to identify carriers of supply and demand for
a given type of service. Interested players engaged in this type of transaction tend to reduce external
constraints that the system sets them. They realize their aim by corrupting civil servants. Consequently,
it is possible to involve bribery in standard analytical framework of the market equilibrium concept.
Theoretically speaking, entrepreneurs in the black market could perform openly the same way as
on the free market, which make it possible, with dened supply, to establish level of equilibrium
bribe. This bribe should be calculated with costs and passed on the equilibrium price (Becker, 1993).
However, it is a theoretical assumption, because in reality entrepreneurs tend to crowd out their
potential competitors and establish a classical monopoly, often by all means necessary and without
any regard to moral norms.
This type of behavior has broad implications. The bribery process leads to creating a parallel system
of bribery regulation, apropos illegal private taxation which actors on black market pay to public
employees. Tax burden caused by bribery is transferred to nal consumers, who pay higher price.
If we compare the black market without regulation and the state of corruption and regulation, two
effects can be observed: allocation and distribution (Mijatović, 2001). The allocation effect is caused
by changing the price level and therefore conditions of equilibrium and distribution effect is the fact
that part of income is directed to government ofcers.
In the situation where government agencies appear on the market either as a buyer or as a seller, there
is a whole range of opportunities for corruption (Rand, 1994). Major incentives for corruption are
public sales (e.g. privatization or sale of national wealth) and functioning of public services sector
which is in the regime of controlled prices. Controlled prices lead to emergence of excess demand
and lack of supply, and the balance is established by long waiting at services. On the supply side is
civil servant – monopolist. Interested actors on demand side offer funds through informal auctions
to reduce the time of waiting (so-called ways of pressure) and the winner is the highest bribe bidder.
This type of corruption in public sector provides additional social problem and generates social
inertia. On the other hand it creates powerful and inuential lobbies that prevent or oppose any kind
of liberalization, in order to keep their positions.
So, source of corruption is always the same: existence of state which distributes welfare to different
social groups. Any regulation, law or legal program creates space for manipulating in the interest
of certain social groups (Becker, 1993). If the state has the power of economic control, it attracts
legislators and politicians who are prone to bribery. They will work in favor of incompetent
entrepreneurs and hinder economic efciency based on ongoing initiatives and activities, which
means long-term destroying vital prerequisites for economic development in society. This is also the
most serious negative effect of corruption.
The 2009 Global Corruption Barometer research asked more than 73,000 individuals around the
world to perceive corruption in six key sectors and institutions. Political parties were perceived to
be corrupt by 68% of respondents, followed closely by the civil service and parliament: 63% and
60% respectively. The private sector and judiciary are also seen as corrupted by half of respondents.
Around 43% of interviewees also believed that the media is affected by corruption. When asked
which of the six sectors/institutions they considered to be the most corrupted, the general public
frequently identied political parties and the civil service, with 29% and 26% respectively. The media
and the judiciary, with 6% and 9% of respondents, were seen as the least corrupted institutions.
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Table 1: Single institution/sector perceived to be most affected by corruption, by countries
Institution/Sector Country/Territory
Political Parties
Argentina, Austria, Bolivia, Bosnia and Herzegovina, Chile,
Colombia, El Salvador,
Finland, Greece, Hungary, India, Israel, Italy, Lebanon,
Malaysia, Nigeria, Serbia, South Korea, Thailand, United
Kingdom, Venezuela.
Parliament/Legislature Indonesia, Panama, Romania, United States.
Business/Private Sector
Brunei Darussalam, Canada, Denmark, Hong Kong, Iceland,
Luxembourg, Moldova, Netherlands, Norway, Portugal,
Singapore, Spain, Switzerland.
Public ofcials/Civil Servant
Azerbaijan, Belarus, Cameroon, Czech Republic, Ghana,
Iraq, Japan, Kenya, Kuwait, Lithuania, Morocco, Pakistan,
Philippines, Poland, Russia, Senegal, Turkey, Ukraine,
Zambia
Judiciary Armenia, Bulgaria, Cambodia, Croatia, FYR Macedonia,
Georgia, Kosovo, Mongolia, Peru, Senegal, Uganda
Source: http://ti-bih.org/wp-content/uploads/2011/02/Global_Corruption_Barometer.pdf (accessed 05.09.2011.)
Percentages are weighted.
Table 1 shows the institution or sector that was identied in each country as the most corrupted. When
looking at people’s perceptions of corruption in key sectors over time, the results show little change
between 2004 and 2009. Analysis of individual assessments in 41 countries and territories covered
by all editions of the Barometer since 2004, indicate that the views of the general public on political
parties, parliaments, the judiciary and the media have not changed notably. Table 2 groups countries
based on reported bribery.
Table 2: Countries reported to be most affected by bribery
% of
respondents
reporting that
they had paid a
bribe in the
previous 12
months
Country/Territory
Group 1: More
than 50 % Cameroon, Liberia, Sierra Leone, Uganda
Group 2:
Between 23 and
49%
Armenia, Azerbaijan, Bolivia, Cambodia, Ghana, Indonesia, Iraq, Kenya,
Lithuania, Moldova, Mongolia, Russia, Senegal, Venezuela
Group 3:
Between 13 and
22%
Belarus, Greece, Hungary, Kosovo, Kuwait, Lebanon, Nigeria, Pakistan, Peru,
Romania, Serbia, Ukraine
Group 4:
Between 7 and
12%
Bosnia and Herzegovina, Chile, Colombia, Czech Republic, Hong Kong,
India, Malaysia, Philippines, Thailand
Group 5: 6% or
less
Argentina, Austria, Brunei Darussalam, Bulgaria, Canada, Croatia, Denmark,
Finland, FYR Macedonia, Georgia, Iceland, Israel, Japan, Luxembourg,
Netherlands, Norway, Panama, Poland, Portugal, Singapore, South Korea,
Spain, Switzerland, Turkey, United Kingdom, United States.
Source: http://ti-bih.org/wp-content/uploads/2011/02/Global_Corruption_Barometer.pdf (accessed 05.09.2011.). Figures
exclude ‘Don’t know’ answers. Groups were dened using cluster analysis.
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5. STIMULATING FACTORS FOR THE APPEARANCE OF CORRUPTION
When it comes to corruption, it is necessary to explain the factors that stimulate corruption and answer
the question what are the suitable conditions for the ourishing of the same. Corruption in developing
countries is particularly affected by economic factors, such as structure and transformation of the
ownership (privatization), excessive state intervention in the economy, non-observance of market
principles, poverty, etc. In these conditions, one institutional system is destroyed and has not been
established an alternative, which is why the society lost its landmark. The market economy is formally
introduced, but the production and allocation of resources is directed by administrative activities of
the state. Due to the lack of market verication of business, political mediation creates a privileged
position of individuals and groups. Directors of state owned enterprises are in favor of excessive state
regulation of economic activity, import and other licenses and price control, resulting in a hypertrophy
of the institutions (Čupić, 2002). Regulation and price control is a key tool for the development of
corruption in the history of civilization. An example of corruption’s implementation is granting loans
at interest rates lower than market ones by some of the banks, thus certain groups; the most politically
convenient draw their advantage. Do not forget the weak local currency which restricts political and
economic freedom. High ination and weak currency induce people to protect their own interest in
different ways through speculation, which is the opportunity for corruption.
Furthermore, political factors may also be initiators of corruption and the most important ones are: an
inadequate institutional framework, functioning mode of the political parties, uncertain legal status,
long-term international isolation, informal power centers and the lack of consensus on strategic
state goals (Nikolić, 2005). Government guarantees for the loans, intermediations and government
procurement, always of high volume, represent a very suitable environment for the corruption
development. In developing countries the state often has a monopoly over the information, which is
used to create unfair competition among the potential competitors.
The legal factors which may increase corruption include: failure or selective application of regulation,
the existence of legal gaps and inconsistency of regulations (Vukotić, 2000). Conversely, institutional
factors that encourage corruption are: missing or dysfunction of institutions, unqualied staff, lack
of material equipment and incompetent institutions. Corruption can also have historical background,
e.g. rapid change of social values, consequences of the wars in former Yugoslavia, tradition, the lack
of professionalism. Abundance of natural resources, high level of corruption in neighboring countries
and long distance from the world’s leading trading centers are factors that instigate corruption. Studies
show countries with high level of general trust; a lot of Protestants and low acceptance of hierarchy
are less exposed to the corruption risk. Further, the social structure dominated by men adversely
affects corruption. Gender’s inuence on corruption signicantly decreases when variables such as
rule of low, press freedom and democracy are valued and kept under the control.
6. CONSEQUENCES OF CORRUPTION
The incentive factors of corruption are related to a number of negative consequences of this
phenomenon. The direct economic consequences include high transaction costs shifted on citizens
(in this case, citizens are not subjects of judicial corruption protection, so a lot of resources and time
have been spent unneccesarilly). Long-term economic consequences are following:
• Corruption and organized crimes are not productive but redistributive activities so they
redistribute in the society;
• The diversion of direct foreign investments, not only because of the amount to be paid, but
also by instigating uncertainity and risk during the lifetime of the investment project;
• Increasing risk of placing loans in listed country and thus increasing interest rates;
• The interest of organized crime it to increase corruption, because it allows taking control in
the state.
At the end, corruption leaves serious social consequences: decreasing living standard, destruction of
the earlier value systems, increasing social stratication, cutting the budget and thus the social rights
of the poor (poverty is one of the causes of corruption and vice versa).
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7. HOW TO SUPRESS CORRUPTION
How we saw in previous chapters nor market economies are exempt from corruption problems.
However, developing countries have much more trouble with this phenomenon. So how to ght
corruption back? It is necessary to establish not only market competition, but also democratic
political system. Free competition in the democracy context is of the same importance as in free
enterprise. In an ideal democratic atmosphere no one could stay long in power if they did not respect
the will of voters. This would reduce potential for abuse of ofcial position. The more government is
constrained; the incentives for corruption are minor. In order to restrain civil servants from abusing
public functions, there have been suggested different measures. One proposal is to shorten the term of
individual functions and, but it can lead to a counter effect. Another suggestion is the decentralization
of powers (Tullock, 1992). Voters should raise questions of their vital interest and exert pressure
towards the authorities. Enabling citizens to choose their institutions and carry out the democratic
control decreases opportunities for corruption. In smaller communities, the interdependence is greater
and any criminal activity or corruption would put in question survival of the community.
Liberal doctrine holds the point any institutional restraint, especially economic freedom limiting, as
a rule leads to corruption. Economic freedom has much deeper implications that it could be assumed
at rst. “Economic control is not only a control of human life that can be separated from the rest, it is
the control of resources necessary for our goals” (Hayek, 1997) .It is important to have in mind the
fact there is strong interdependence between economic and political freedom. Without the existence
of economic freedom, legal freedom itself is not able to prevent corruption.
8. CONCLUSION
After all it is said, how can we cut down and supress corruption? First, the type of economic system
denitely affect the level of corruption in society. Numerous studies conrm economic systems with
less interventionism and more freedom indicate a lower degree of corruption. Not only that: even in
the same society corruption representation is much higher in the elds controlled by state and lacking
economic freedom. So the rst goal in the ght against corruption is to limit often very harmful
regulation. Since the corruption occurs as a result of priviledge that only the government can legally
authorize, Index of economic freedom in the country includes corruption as one of the variables
(using the indicators of corruption in bureaucracy and judiciary and existence of black markets).
Therefore, corruption can be supressed by reducing the public sector. However, there is another
problem. Private enterprises can also be exposed to corruption, e.g. massive corruption during
the privatization. The stumbling block is not the size of the public sector, but bad regulation and
erroneously targeted state intervention. Corruption is a reection of the lacking competition, although
competition can sometimes increase corruption. The ofcials’ obligation to inform public about
their work, transparency and increasing salaries of civil servants, career development system and
development of ethical standards can signicantly reduce corruption. In particular, anti-corruption
mechanisms can be divided into:
• Prevention – transparency, decision making and access to the information, limiting monopoly
in decision making, restriction of discretionary powers, reducing the number of prohibitions
and restrictions, strenghtening public ethics.
• Repressive measures – annulment of corrupt activities, discovery of actors, efciency of the
procedure and adequacy of imposing sanctions, seizure of the property acquired through
corruption, etc.
Democracy limit corruption by increasing competition for political mandates. Researches show
the parliamentary systems are followed by lower levels of corruption, while the strong presidential
systems tend to be more corrupted. Smaller electoral units increase corruption, also corruption is
greater when the deputies have been elected from party lists rather then as independent candidates.
Furthmore, decentralization is a way to reduce corruption, because the government becomes closer
to citizens (the problem is that local authority can be weak, but local players strong.) Corruption
in developing countries is a systemic and systematic phenomenon and such should be the struggle
against it. The most important test is preventing corruption in the tops of power by introduction of
anti-corruption system laws. The power within the government can be controlled by decentralization,
distribution of power, demonopolisation and rule of the law. In this regard it is necessary to separate
the judiciary from legislative power since functioning, effectivness and independence of the judical
system affects all political institutions. These institutions are using judicial system to protect
themselves against political tyranny and criminalization. Only with institutional (economic, legal
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and political) arrangements that protect economic and political freedom based on it, it is possible to
achieve the necessary conditions for combating corruption.
We conlude that any loss of economic freedom creates the conditions for the emergence and expansion
of corruption with all its negative consequences. Developing countries need less interventionism
and more free space to strengthen the mechanisms of market economy, with transparent, protected
and strictly followed rules and laws. Building a system based on private property, individual
entrepreneurship, competition and open market, and promoting transparency and public opinion
in society represents the possibility to combat corruption and improve the economic position of
developing countries.
Reference
Becker, Gary S. (1993). Oekonomische Erklerung menschlichten Verhaltens. Tuebingen: Mohr Siebeck
Begović, B; Mijatović, B. (2001). Corruption in Serbia. Belgrade: Center for Liberal-democratic Studies
Čupić, Č. (2002). Openly on Corruption. Belgrade: Council for Anti-corruption
Douglas, N. (1990). Institutional Change and Economic Performance. Cambridge: University Press
Hayek, F. (1997). The Road to Serfdom. Novi Sad: Global Book
http://ti-bih.org/wp-content/uploads/2011/02/Global_Corruption_Barometer.pdf (accessed 05.09.2011.)
http://www.transparency.de/Veranstaltungen-zum-Thema-Korr.1181.0.html (accessed 29.08.2011)
Mappes-Niedek, N. (2004). Balkan Maa. Zagreb: Durieux
Mijatović, B. (2001). Corruption: From Regulation to Kleptokracy. Belgrade: Economic Institute and Center
for Liberal-democratic Studies
Nikolić, R. (2005). Openly on Corruption – three years later. Belgrade: Friedrich Ebert Stiftung
Rand, A. (1994). Capitalism Unknown Ideal. Novi Sad: Global Book
Tanzi. V. (1998). Corruption Around the World. IMF Staff Papers, 4/1998.
Tullock, G. (1992). Organisation of modern federal state. Belgrade: Institute of Economic Sciences
Von Mises, L. (1966) Human Action: A Treatiste on Economics. Requery Press, Chicago, pp. 734-736.
Vukotić, V. (2000). Economic System and Corruption. Podgorica: Faculty of Economics and Institute for
Strategic Studies and Prognoses.
Part Two:
Entrepreneurship, Inovation, Creativity
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LOCATING ENTREPRENEURIAL CREATIVITY AND KNOWLEDGE TO FOSTER GROWTH
OF EUROPEAN CITIES1
Evgenii Dainov
Centre for Social Practices, New Bulgarian University, Soa, Bulgaria
E-mail: edainov@csp-soa.org
Arnis Sauka
Stockholm School of Economics in Riga, Latvia
E-mail: arnis.sauka@sseriga.edu.lv
Abstract
By exploring the attitudes and preferences of managers and entrepreneurs from creative and knowledge-
based sectors, this paper aims to contribute to the ongoing discussion of the factors fostering the ow of
entrepreneurs to particular cities and regions in Central and Eastern Europe and Western Europe. The cases
of ve metropolitan regions – Soa, Riga, Budapest, Helsinki and Toulouse are used for this purpose. Among
other things, our the data suggests that, although very useful, the distinction between “hard” and “soft” factors
is not a sufcient theoretical basis to explain the location patterns of creatives. In this light, the inuential role
of additional drivers, such as the “individual trajectory” considerations that overwhelmingly dominated in all
studied groups in our sample, was identied by this study.
Keywords: Entrepreneurship, Creativity, Europe, Cities
1. INTRODUCTION
Recent literature emphasizes the role of the constant supply of creative energy from citizens in
fostering the development of places, cities in particular (e.g. Florida, 2002). In this light, globalization
and new technologies have signicantly decreased the impact of distances which in turn has facilitated
the ow of the creative population between various cities and regions (e.g. Lucas, 1988; Karlsson,
Johansson and Stough 2008), widely acknowledged as having a positive impact on productivity2
(Amabile, 1983; Audretch and Feldman, 1996). Attempting to explain why economic activity and
creative people group in one place and not another, literature emphasizes the role of supply and
demand conditions.
The supply side refers to the personality and cognitive characteristics of individuals living in cities -
their ability to generate new ideas and spot new opportunities and their willingness to implement these
opportunities (e.g. Amabile, 1996). Furthermore the role of the context in which people live and make
everyday decisions has been highlighted as having considerable impact on the level of individuals’
creativity (Florida, 2002; Rasulzada, 2007). In this light, literature highlights the importance of
the demand side of cities, referring to the “overall quality of the city”. Factors such as the level of
education institutions, tolerance towards minorities, city size and the size of the market as well as
networking possibilities and the ability to generate spillovers have been mentioned among other
factors of inuence (e.g. Jacobs, 1961; Florida, 2002; Glaeser, et al., 2001; Fujita and Thisse, 2002).
In spite of considerable efforts to address the questions of why and how cities and regions attract people
and stimulate creativity, there is still a lack of sufciently robust empirical evidence in this regard. By
exploring the attitudes and preferences of managers and entrepreneurs from creative and knowledge-
based sectors, this paper aims to contribute to the ongoing discussion of the factors fostering the ow
of entrepreneurs to particular cities and regions in Europe. The cases of ve metropolitan regions –
Soa, Riga, Budapest (East European capitals), Helsinki (a West European capital city) and Toulouse,
1 We are grateful to all ACRE project partners, in particular Denis Eckert and Anders Paalzow for providing with
valuable comments which contributed to the development of this paper. Extended version of this paper has been
published in S. Musterd and A. Murie (Eds.) (2010) Making Competitive Cities. Wiley: Blackwell. Generous support
from TeliaSonera Institute at SSE Riga is also acknowledged.
2 Although it is generally believed that creativity has a positive effect on productivity and general well-being, it should
be emphasized that there are also costs which the process of creativity can involve. For example, due to the uncertainty
of the outcome, creative people are met with scepticism and resistance from society and are also at risk for failure and
increased stress (Boden, 1997; Kanter, 1988).
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a classic West European “second city” operating in the shadow of the national capital – are used for
this purpose. The rest of the paper is structured as follows: Section 2 highlights the major challenges
in the existing conceptual framework. Section 3 presents methodology. The main results are presented
in Section 4 and the paper closes with conclusions and implications in Section 5.
2. CITIES AND THE CREATIVE CLASS: MAJOR CONCEPTUAL CHALLENGES
An inuential position within the debate on the determinants of creative population ow between
cities is, of course, the conceptual construct of the “creative class” developed by Richard Florida
(2002). There are three major points in Florida’s theory. The rst is that the highest value added is
produced by “creative industries” such as IT, design and arts and cities should thus focus on these
industries. Florida’s second point is that, in creative industries it is no longer the case that employees
follow the company. On the contrary, creative companies tend to be located in places where the
“creative class” (“creatives” for short) congregates.
The third point is most directly linked to policymaking and planning, highlighting that “creatives” are
highly mobile, nomadic individuals who choose their location for reasons other than the classic “hard”-
factor considerations, such as rent levels, availability of ofce space, accessibility and transport.
Instead, “soft” factors, e.g. urban “buzz”, varied (sub)cultural life, ethnic diversity, availability of
greenery and open water, bicycle-friendliness, friendly spaces for interpersonal communication and
high levels of tolerance are of major importance when location decisions are made. The simplied
policy-related outcome arising from this framework is obvious: a city which intends to have creative
industries should rst put together the right mix of “soft” and “hard” factors to attract the nomadic
“creatives”. The development of the city should then follow as they move in.
In light of this discussion, it should be emphasized, however, that a multitude of critical objections
have arisen regarding the Florida brand of “creative class” theory and its policy ramications. Steven
Malanga, the editor of City Journal, for example, pointed out that over a longer term horizon the
“most creative” US cities on Florida’s list are the worst performers economically (Malanga, 2004).
According to Malanga’s estimates, the top ten most “creative” cities, for instance, experienced 17.5 %
job growth from 1993-2003, while “Florida’s least creative cities” saw their job numbers grow by 19.4
%. Furthermore, over a 20-year period, the “least creative” cities have been the USA’s powerhouses,
expanding 60% faster than creative cities.
Next, in line with Florida (2002), some US-based empirical evidence has indeed indicated that
amenities do matter and play a role in individuals’ location decisions. The trouble here, however,
is that existing empirical evidence suggests that almost every group of the population, not only
“creatives”, are attracted by amenities (Clark, 2004). Furthermore, “pipes, pavements and policing”
seem, even in the USA, to remain very important in making cities attractive places. If that is the case,
an over-simplied Florida-derived development plan may badly misre by misdirecting resources,
for example.
These are only a few examples of criticism of Florida (2002) to be found in the literature, of course.
The major caveat in this discussion is that getting policy-oriented decisions wrong can have a
negative impact on the future of each city. This is why the assumptions behind location theories of the
“creative class” must be constantly re-assessed. Consequently, it is reasonable to argue that updated
and diversied conceptual and empirical packages are needed in order to inform policy decisions.
The next sections of this paper aim to contribute in this regard by providing empirical evidence from
Soa, Riga, Toulouse, Budapest and Helsinki, drawing on data from a survey of managers in creative
and knowledge-intensive industries.
3. METHODOLOGY
21 to 24 semi-structured interviews were conducted from February-April of 2008 in each city, i.e. Soa,
Riga, Toulouse, Budapest and Helsinki. The respondents were all “managers” – where “manager”
was dened as the person being the leading decision maker of the company. Following sectors were
covered: business and management consultancy; computer games and electronic publishing, motion
picture and video activities, radio and TV activities, research and development. All interviews were
in depth face-to-face interviews lasting for about one hour.
The main aim of the interviews was to address the reasoning behind the location decisions of the
managers and entrepreneurs from creative and knowledge intensive industries. Thus, interviews were
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conducted based on a semi-standardised guideline which comprised open-ended questions structured
around the following themes3:
• The company’s business model and markets;
• Labour processes and recruitment;
• Networks (formal and informal) and their importance;
• Choice of location;
• Public support;
• Prospects at the current location.
4. TESTING FLORIDA: ON THE LOCATION OF THE CREATIVE CLASS
4.1. Location Decisions: the Role of “Individual Trajectory” Considerations and “Hard” Factors
The results from all cities in our sample suggest that the main drivers for settlement of entrepreneurs
and managers from creative and knowledge-intensive industries are linked not to “hard” or “soft”
factors but to “individual trajectory”. In Toulouse, for instance, as much as 75% of the interviewed
managers had an anterior link with the city, either through family networks or networking established
during their studies. Moreover, 55 % of the managers were born in or near the Toulouse region and
60% studied in Toulouse. Very similar ndings to those are also reported in the case of the Helsinki
Metropolitan Area, whereas in Soa, Budapest and Riga “individual trajectory” seemed to have an
even more signicant impact.
To be more specic, respondents from the knowledge-intensive industries in Soa and Budapest
reported location decisions related to “individual trajectory” factors virtually without exception. Also,
in Riga the majority of managers mentioned that their company is located in the city mainly because
they were born there, have lived there in the past, or have studied there, thus having relatives and
friends in the city. Overall, these ndings are in line with Krugman (1991) and Markussen (1996),
who emphasized the place-dependency of entrepreneurial activities, arguing that entrepreneurs tend
to stick to the places they know and where they have networking opportunities – very often these are
the places they originally come from.
As for the inuence of “hard” factors, managers and entrepreneurs of creative companies in Toulouse
cited “market opportunity” reasons rather than “soft” factors as having an inuence on their location
decisions. Opportunities to recruit skilled workers, the presence of good universities as well as size
of the city seemed to affect the location choices of both local and incoming managers considerably.
Furthermore, the rapid demographic growth of the UAT (about 17,000 extra inhabitants per year since
1999) is seen as a favourable factor by companies, especially those having a link with the real estate
sector. Overall, these ndings reect previous empirical evidence highlighting the role of density
within cities in generating knowledge spillovers, achieved through the interaction and networking
of the (creative) population and furthermore positively inuencing the growth of the region (Lucas,
1988; Johansson and Karlsson, 2008). It should be emphasized, however, that according to our data,
“hard” factor deciencies are also seen, in Toulouse, as a signicant stumbling block. Respondents
from Toulouse, for instance, mentioned that the city is at a disadvantage due to the lack of cheap high-
speed train connections to the capital and other strategic nodes in France and Europe. In managers’
and entrepreneurs’ opinion, the concentration of power and resources in Paris means that the majority
of managers have to travel regularly to the capital city to meet and socialize with decision-makers.
“Hard” factors outweigh “soft” considerations in the case of Helsinki as well. More specically,
apart from “individual trajectory” considerations, the major drivers of entrepreneurs’ and managers’
location here are the presence of specialized skilled labour and the concentration of customers.
Furthermore, many entrepreneurs stated that nearly the whole industry is located in Metropolitan
Helsinki; thus, they simply have to be there. Such claims are well justied by available statistics,
e.g. similarly to other industries, the business and management consulting industry, for example, is
strongly concentrated in the Helsinki area, with approximately 60% of the entire sector’s employment
positions in Finland (Kepsu and Vaattovaara, 2008). Interestingly enough, however, none of the
entrepreneurs or managers interviewed in Helsinki mentioned any “soft” factors as important location
drivers for their location to the city.
3 Please see hp://www2.fmg.uva.nl/ACRE/results/reports.html (reports 6) for a more detailed description of
methodology.
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As in the case of Helsinki, “hard” factors, just after “individual trajectories”, play a decisive role in the
site selection of entrepreneurs and managers and their companies in Budapest. The availability of the
labour force, especially in nancial and business activities, stands out as a crucial issue in this regard.
That is, according to respondents, Budapest, as the centre of business life and also of higher education,
is an “ideal place” to recruit. As in the other cities in our sample, however, several “hard” factors,
such as the poor state of public transportation, were mentioned as causing major dissatisfaction.
Overall, the same picture with regard to the importance of “hard factors” is reproduced by interviewed
entrepreneurs and managers in Riga and Soa, where beyond the dominant “individual trajectory”
issues, factors such as access to a qualied workforce, the concentration of the relevant industry in
the city, proximity of customers, access to government institutions and networking possibilities were
highlighted as having a positive role in the location decision.
4.2. Location Decisions: the Role of “Soft” Factors
The main conclusion with regard to the inuence of “soft” factors on the location decisions of
managers and entrepreneurs of creative and knowledge-intensive industries in Soa, Riga, Toulouse,
Budapest and Helsinki is that our sample falls almost entirely outside of Florida’s theoretical model.
More specically, “soft” factors were mentioned very rarely and were emphasized as the drivers
behind location decisions by isolated individuals only. Still, drawing on our results, an analytical
sub-division between “location” and “retention” decisions has to be introduced as even though the
location decisions of managers in the sample are nearly free of “soft” considerations, the decision to
stay in the city is often signicantly inuenced by satisfaction with the “soft” factors in place.
For example, in the case of Toulouse, not a single respondent has made a location decision based
signicantly on “soft” considerations. Overall, the most mobile turned out to be managers in the
business and management consultancy sector, over half of whom had no prior link to Toulouse, whereas
web designers and managers from the games industry showed the least mobility in our sample, all
of them being locals. A number of managers, however, reected a strong affective attachment to the
region by saying that they are not willing to leave the city at all. Arguably, this pattern may result from
the “individual trajectory”. However, the inuence of “soft” considerations, such as the proximity of
the sea and mountains, the sunny climate, and the specic atmosphere and mindset of the South of
France, could be another explanation in this regard, pointing to the comparably large role of “soft
factors” with regard to managers’ and entrepreneurs’ retention decision.
Contrary to Toulouse, some evidence that “soft” factor considerations inform at least a few location
decisions in Helsinki emerged from the data set. The major considerations include the nearness to
high-quality residential space and safety issues. Furthermore, in line with the ndings of a previous
sub-study on creative knowledge workers in Helsinki (Kepsu and Vaattovaara, 2008) our data from
Helsinki, as well as from other cities in the sample, suggest that managers appear to value “soft”
factors, such as the ambience or “buzz” of the city. More specically, according to managers various
networking related factors, such as hanging out in theatre cafés, going to movie premiers and being
inspired by urban life are of increasing importance to people, e.g. potential and existing employees
from the managers’ and entrepreneurs’ viewpoint, in the whole industry. Overall, however, the
mentioned “soft” factors seem to have a greater weight in entrepreneurs’ and managers’ retention,
rather than in location decisions.
The situation regarding the inuence of “soft” factors is not very different in the ex-socialist cities
covered by the survey. In Budapest and Riga, for example, managers mentioned “soft” factors rarely
and largely by chance, suggesting that as far as location decisions go, “soft” factors play no appreciable
role. According to managers, “soft” factors emerge during site selection primarily when the residence
(cottage) is also the seat of the company and in the agglomeration zone, where due to the lower rental
fees and real estate prices the business managers have better opportunities to consider “soft” factors
in decision-making. Of such factors, the importance of a calm and quiet environment was mentioned
by the managers as most important. A neighbourhood with very poor outer appearance and social
composition could be an excluding circumstance in a few cases.
The fact that very few managers from Budapest and especially from Riga explicitly discussed the
role of the “soft” factors in the location decision might support the view that “soft” factors are not
important. However, since people usually nd it easier to complain than to give credit, the reason for
not mentioning problems with “soft” factors could also be due to the fact that Riga, for instance, does
quite well in this regard. This notion, however, again appears to be more relevant for employees than
for managers. Furthermore, as in the case of other cities, managers’ and entrepreneurs’ decisions to
retain in Riga are more likely to be motivated by “soft” factors than decisions to move in.
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As regards Soa, almost uniformly companies do not see emblematic “soft” factors, such as amenities,
leisure and nightlife, or diversity as having any signicance in their location decision. Of particular
interest in this regard is the lack of sensitivity to the factor of cultural tolerance, which Florida (2002)
nds to be of particular signicance – i.e. the importance of low barriers for entry, such as barriers
for self expression (often related to tolerance towards gays and bohemians), in order to facilitate the
ow of creatives to the city. In this light, according to the available statistics, Soa seems to be one
of Europe’s most cosmopolitan and tolerant cities, with more than 17% of its population being some
sort of ethnic, religious or national minority (Dainov and Nachev, 2008). Yet, according to our data,
in no case did a single respondent see tolerance and diversity as a factor in location decisions. It is
not, therefore, surprising that in cities more homogenous than Soa, tolerance of diversity also plays
no role in location decisions.
Finally, according to our data, the importance of “soft” considerations, especially in Helsinki,
Budapest and Soa, varies across the industries. In this light, respondents having at least some
sensitivity to “soft” factors in these cities can be found at broadcasting companies. It could be argued
in this regard that while representatives of other industries, such as consultants and computer-related
businesses, are almost entirely oblivious to this problem, broadcasters are capable of discussing and
evaluating the role of “soft” factors. One of the explanations for this phenomenon could be related to
the maturity of the companies, since consultancies and computer-related businesses are at an age of
infancy compared to broadcasters. Thus, the reasoning that “individual trajectory” issues and “hard”
factors dominate when you start a business, whereas sensitivity for “soft” factors is developed when a
business matures and stabilizes, could make at least some sense. This is, however, something previous
empirical studies have not captured to a sufcient extent, suggesting that further research is needed
on the issue.
4.3. In-City Location Decisions
Different types of creatives tend to congregate in different locations within the urban area. While
“cultural creatives”, such as artists, media and entertainment workers, scientists, teachers, designers
and advertisers, usually prefer an inner-city location, managers and entrepreneurs seem to be spread
much more evenly across the city (e.g. Musterd, 2004). Such differences in location decisions within
the “creative class”, often inuenced by “soft” considerations, have also been pointed out by Florida
(2002), especially with regard to, as labelled by the author, “bohemians” and “nerds” in the U.S..
Whether the location preferences of creatives within the city centre or suburbs are inuenced by “soft”
factors, however, is a very problematic issue in the European context. According to our ndings, for
example, “soft” factor considerations play a strikingly insignicant role with regard to in-city location
decisions as compared with the case of the U.S., being mostly related to classic “hard” factors, such as
rent, access, and closeness to client base. Moreover, it looks like such proling, for whatever reason,
should be expected of settled “Western” cities, rather than of the more turbulent and as yet unsettled
ex-socialist newcomers to capitalism.
To be more specic, in Toulouse, for example, in-city location proling does exist, but evidence points
away from the overwhelming dominance of “soft” factor considerations. Self-employed creatives as
well as small companies4, for instance, tend to settle more frequently in the periphery, where rent
is lower, whereas the largest companies exclusively choose the city centre of Toulouse5. However,
companies involved in, arguably, the most creative activities, such as video, animation movie, 3D
web design, and computer games, seem to favour the historic core and show the most sensitivity
to “soft” factors. Here, the managers mention accessibility and exible working hours, but location
choice also relates to the image given to clients, whereas “soft” factors are linked to atmosphere,
including architecture, density of boutiques, cafés and restaurants in the neighbourhood.
Entrepreneurs and managers whose companies are located in the centre of Toulouse usually justied
their choice by proximity to their own place of residence and by the fact that employees tend to live in
the area. The parking difculties and the congestion problems in the centre, however, often come up
as explanations for choosing a location in the peripheral business parks. According to the survey data,
the computer industry also benets from a large density of already-existing clustered establishments,
such as the aeronautics clusters in the northwest, electronic and computer clusters in the southwest
as well as space, computer and biotechnology clusters in the southeast and the multi-nodal logistic
platform in the north of the city. Among inuential factors regardless of the sector in Toulouse,
however, the importance of informal social networks linked to “individual trajectory” factors and
to the role of the anterior social insertion of the respondents in the city region was mentioned by
entrepreneurs and managers.
4 1-9 employees.
5 E.g. according to our ndings, no companies with 50 employees or more are located in the periphery.
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In the case of Helsinki, and to some extent also Budapest, in general “individual trajectories” play
a decisive role with regard to the in-city location patterns of entrepreneurs and managers located
outside the city centre (most companies not located in the city centre are established close to where
the founding manager lives). This trend, however, is less obvious for companies who have chosen
to be located in the city centre. According to our data, the main driver for the entrepreneurs and
managers of these rms is the high prestige of the city centre, with the predominant inuence of
“hard” factors shaping the location decision instead. It should be mentioned, however, that being
located in business parks is considered to provide a good image to the company as well. Overall, as in
the case of Toulouse, all managers in the sample stress the importance of being within easy reach of
the place of work and customers. The factor that came up as the most decisive for all rms, however,
was the need for a supply of a specialized and skilled labour force, whereas clustering is particularly
valued in the lm and TV industries.
In light of previous discussion, it is perhaps no surprise that “hard” factors dominate in-city location
decisions in the case of Budapest and Riga as well, where ofce price or rent seem to be of overriding
importance. Furthermore problems with the availability of parking space in the centre have a
signicant impact, especially in the case of Riga. In this light, most of the managers claimed that the
reasons mentioned prevent them from being located in the city centre, where desirable “hard” factors,
such as proximity to clients, would come into play. It should be emphasized however, that at least in
the case of Budapest the issue of distance from the clients has been losing signicance for particular
sectors, such as the ICT sector and the software consultancy sub-sector. Furthermore, the proximity
to other research institutes rather than to customers is mentioned among the managers of companies
involved in research and development in Riga.
Transport–accessibility–availability forms the next set of the most important “hard” factors of
inuence in Budapest, just after the cost of ofce space. It should be mentioned here that entrepreneurs
and managers seem to employ various strategies in order to overcome the inuence of such factors.
In the case of Budapest as well as Toulouse, for example, it is common for a company to have its
headquarters in an ofce owned by the director, thus saving on the rent, for example. Despite such
efforts, “hard” factors still often play a decisive role. To illustrate this: most of the companies in Riga
located in the suburbs, for example, do not intend to move into the centre mainly due to high rent and
parking problems. The companies located in the centre, on the other hand, were in general happy with
their location, but concerned about the cost of ofce space and the poor infrastructure: some thought
that eventually this might force them to leave the centre.
Finally, our data suggests that managers in Soa are taking deliberate in-city location decisions, in
contrast with the chaotic pattern of domestic settlement of the various types of “creatives”. As in the
cases of other cities in the sample, managerial location decisions are dominated by “hard” factors
virtually to the exclusion of all other considerations, with only one company reported being at the
periphery not because it is cheaper, but because it is a nicer place than the centre. Furthermore, some
differences with regard to inner location decisions exist across various industries in Soa. Managers
of consultancy rms, for example, generally prefer the city because of the proximity to client
government institutions, whereas nancial and IT consultancy companies choose the sub-centre area,
near to central trafc roads for rapid movement around the city and better access for clients from
outside Soa. Moreover, for computer-related companies prices and rent are a crucial location factor,
just as they are for the ITC and software sector, where companies are young and small in size.
4.4. Capital City vs. Provincial City Location Decisions
A major – overwhelming, in effect – location decision determinant, which has little to do with the
“soft”/ “hard” debate, is whether the city in question is the national capital of a small nation (thereby
attracting the bulk of its resources, qualied workforce and development potential), or a non-capital
city of a big nation. According to our ndings at least, the main trend emerging from the capital cities
covered in our sample seems to be that creative and knowledge industry managers simply nd it
difcult to envisage not being in the capital city.
More specically, in the case of Helsinki, for instance, all interviewed managers were unequivocal
on the issue of capital vs. province, usually stating that operating from other parts of the country
aside from the capital city is simply not an option. According to them, the main motives for this
are related to the proximity of both customers and the skilled labour force in Helsinki. The case of
Budapest, where the country’s creative and knowledge industries are concentrated, is very similar. In
fact, the whole “critical mass” of Hungary, in the social and economic sense, seems to be concentrated
in the metropolitan region of Budapest, with branches of cultural industries being overrepresented
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in the Budapest area. The setting in Budapest is also favourable from the aspect of nancing, as
rms are better off here than in the provincial towns of Budapest. Besides, as voiced by one of the
interviewed managers, tax and nancial auditing is not so frequent in Budapest due to the large number
of enterprises in the area, thus making life easier for the entrepreneurs. Overall, all respondents in
Budapest agreed that it is absolutely necessary to be in or near the capital city to be able to take part
in specic “creative activities”, such as motion picture productions, for example.
In Riga we nd the same situation. Being the capital and by far the largest city not only in Latvia but
also in the region (e.g. Estonia, Latvia and Lithuania), Riga is Latvia’s main attractor of investment
and generator of employment. Furthermore, Riga is the main educational and scientic centre of
Latvia. To be located outside Riga is thus to not be considered as an option by any of the companies
interviewed. As mentioned by many, within Latvia, there is simply no competition from any other
city.
As in the case of Riga, Soa enjoys the benets of being the capital city by concentrating the major
resources of the country, including the “power of decision-making” and labour. It is obvious that many
industries, almost without exception, depend on the presence and quality of these institutions; thus, it
is of no surprise that managers and entrepreneurs choose to be located there. Furthermore, especially
for companies that work entirely in the local market, the market size is of major importance. In this
light, it should be emphasized that Soa is several times larger than the next largest city in Bulgaria,
which is of major inuence on the location decisions of many entrepreneurs and managers.
In contrast to the cities explored previously, Toulouse is clearly a “second” city, living in the shadow
of the capital of France, Paris. As a result, Toulouse might seem to be attractive primarily to the
industries and branches already developed in the capital city and “moved down” to Toulouse as a
consequence of the government’s de-concentration policy. Otherwise, Paris is as dominant for the
creative industries in France as Soa for Bulgaria or Budapest for Hungary. For instance, 74.5%
of cinema, picture and video production activities are gathered in Île-de-France, 59% in the only
commune of Paris. Over 62% of motion picture, video and television programme production activities
are concentrated in Paris and its adjacent western département of Hauts-de-Seine, which comes in
second in most of the audiovisual sub-sectors. From these numbers it is quite clear that Toulouse’s
chances of directly competing with Paris are very limited.
4.5. Policymaking: “Soft”, “Hard” or “Other”?
As expected, the “Western” cities in the sample, which didn’t undergo the severe dislocations of the
1940s as well as the 1990s, are much more prone to sustained planning and policy efforts than the ex-
socialist cities. Differences, however, also exist if “Western” cities are compared among themselves,
mostly arising from the fact that one of the cities in our sample, e.g. Helsinki, is the capital city,
whereas Toulouse is not.
More specically, Toulouse, for example, whose “knowledge-intensive” prole is the outcome of
national-level policies in France, seems to be lacking the local capacity to provide policy-based
support for the creative sector. Here, sector managers report lack of interest and misunderstanding
about new creative industries from the local policymakers as well as administrative heaviness and
complications in entering local markets. Entrepreneurs and managers’ demands from policymakers,
however, have little to do with “soft” factors. Instead, “hard”-factor-related policies are requested
such as improvement of transport and infrastructure, development of the business climate and easing
of cumbersome administrative procedures. Furthermore, audiovisual companies claimed the need for
easier access to nancing. Interestingly enough, however, managers in general claimed they would
like to see policy improvement at the national rather than local level.
Being a capital city, Helsinki, on the other hand, boasts a good bottom-up policy track record. During the
economic crisis of the early 1990s, government, municipalities, universities and business community
joined together to revive the economy. The key principle of the authorities has been to mobilise and
join the resources of the business community, the academic community and the administrative sector.
The emphasis in policymaking has been on education, research and knowledge. As a result, there is
strong enthusiasm in Finland among politicians and civil servants to work on creative knowledge
strategies to foster national development.
As for “Eastern” cities, Budapest, although for various reasons less “Eastern” than Riga or Soa,
demonstrates a lack of effective municipal-level policy, as usually expected from non-”Western” cities.
In this light, the research found, for example, that at least according to the viewpoint of entrepreneurs
and managers, local government virtually has no role in fostering the creative sector, and that only
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the national government can inuence the development of any creative activity. As for more specic
wishes, entrepreneurs and managers highlighted the need for a more business-friendly climate on the
national level. On the local level, however, “hard”-factor-related demands were expressed, including
the improvement of transport, noise, pollution, top-heavy bureaucracy in the issuing of business
permits and similar areas.
When analyzing policymaking practices in Riga, it should be noted that the whole concept of planning
was historically discredited because of its association with the central planning of the former Soviet
system. It is still symptomatic, however, that when asked about collaboration with the public sector,
only one respondent out of the 21 interviewed mentioned having received support from Riga City.
However, when the issue of public support or support from the European Union was brought up during
the interviews, again, all but one manager in our sample claimed that no support had been received
either from Latvian or from European Union sources. However, there is a variety of demands from
entrepreneurs and managers in Riga, primarily targeted at the central government and concerned with
“hard” factors. These include facilitation of tax administration, lowering of taxes, battling corruption,
facilitation of the administration of EU projects, making education more practical and improving the
business climate as such.
In the case of Soa, the path of the city’s development had much less to do with planning than
application of the Aristotelian-Habermasian model, under which civic energies and habits, once
awoken, spread beyond issues of governance (the end of communism, in this case) and infuse the
daily lives of citizens. As a result, political initiative turned into economic entrepreneurship and
established Soa as the locomotive of the new national economy. Conrming this “self-regulating
pattern”, all respondents reported an absence of municipal-level policies for their sectors. Strikingly
enough, and uniquely for the ve cities studied, the lack of policy initiatives was conrmed by the city
planners themselves. To illustrate the extent of the problem: ofcials of Soa Municipality refused to
be involved in the survey on the grounds that the Municipality had no policies whatsoever aimed at
knowledge-intensive and creative industries.
National level policies, however, such as the government’s package of policies lowering taxation,
are found to be of much greater help by entrepreneurs and managers in Soa. Regarding the wished
for municipal policies, as with other cities in the sample, “hard” factors, such as infrastructure,
transportation, access to social and educational centres, security and also initiation events and
happenings in the cultural life of the capital, were highlighted by respondents. Sadly, most of the
entrepreneurs and managers seemed to be sceptical about the Municipality’s capacity to deliver those
factors. At best, respondents expressed hopes that the various administrations would simply stop
getting in their way.
5. CONCLUSIONS AND IMPLICATIONS
According to the data compiled from ve European cities, it seems that considerable differences in
creative entrepreneurs’ and managers’ location patterns exist in Europe as compared with the U.S.
(e.g. Florida, 2002). More specically, the survey suggests that in Europe, cultures are much less
individualistic and individuals are less geographically mobile than in the U.S., from where “creative
class” theories originate. Location decisions, therefore, include factors less visible in America, such
as family ties, traditions, national identities and the like. These ndings alone in turn lead to the
conclusion that, in Europe’s case at least, the analytical picture as developed by Florida (2002) needs
elaboration and, to a certain extent, redenition.
Among other things, the data from Europe suggests that, although very useful, the distinction
between “hard” and “soft” factors is not a sufcient theoretical basis to explain the location patterns
of creatives. In this light, the inuential role of additional drivers, such as the “individual trajectory”
considerations that overwhelmingly dominated in all studied groups in our sample, was identied by
this study. However, considering location decisions through the “hard” and “soft” dichotomy in the
ve cities of our sample makes sense mostly on the level of decisions to be located in a particular area
inside the city. In these decisions, as far as the managerial sample is concerned, traditional “hard”
factors reign supreme.
There are areas, however, in which European “creatives” reveal sensitivity to “soft” factors. The vast
majority of respondents from all cities in our sample, for instance, reported signicant levels of job
satisfaction, with emphasis placed on workplace-related factors, including a sense of achievement
gained from work, the scope for innovation in the workplace and the level of inuence individuals
have in directing their work. Furthermore, high satisfaction with “soft” factors, such as the living
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environment in their district and the cultural life of the city, were often mentioned by entrepreneurs
and managers from creative sectors.
In light of this discussion, it should be noted, however, that the sensitivity of respondents in creative
and knowledge-intensive industries to “soft” issues did not turn out to drive their location decisions.
These respondents simply did not behave as Florida’s “happy nomads”. A complex package of
location motivations emerged instead, having to do greatly with the inuence of “individual trajectory
issues”. More specically, for most of the entrepreneurs and managers, the reason for being located
in a particular city had much more to do with the fact that the respondents were born in the region,
had family there, had studied in the city, or had moved there to join a spouse or to be in the proximity
of friends than with various “soft” considerations. Community-related rather than “nomadic”
considerations thus play a more signicant role in this regard.
Beyond that, entrepreneurs and managers in all ve cities strongly follow a “hard” factor path of
location decision making. Costs, nearness to clients, access issues and availability of labour outweigh
“soft” factor considerations. Only a handful of isolated individuals interviewed have gone in the
opposite Florida-type direction. At the same time, dissatisfaction is most frequently voiced with the
“hard” factors of a city – costs, taxes, transportation issues. This in itself means that city planners
should start by concentrating on the development of “hard”-factor-related policies, if attracting
creative managers and entrepreneurs to the city is at least one of the priorities of their work. Our data,
however, suggest that “soft”-factor-related policies also can not be ignored, as these considerations
play a signicant role in retention decisions of creatives.
According to our data, the theoretical model of city development needs to be re-drafted so as to
differentiate between capital and non-capital cities. This is particularly the case with regard to less
populated European countries (such as Finland, Hungary, Latvia and Bulgaria), where up to one-third
of the entire population lives in the capital area and up to 100% of all the nation’s knowledge-intensive
and (particularly) creative industries may be concentrated. The capital, being the administrative,
economic, educational, political, cultural, commercial and tourist hub of a small country, can almost
by default step onto the path of “creative city”. Any city that is not a capital, therefore, would be facing
an uphill battle if it decided to persuade creatives to re-locate from their nation’s capital. Finally, as
suggested by our study, an appreciable difference between “Western” and “Eastern” cities exist.
To conclude, it would be premature to “dismiss” Florida’s conceptual construct as a useful tool in
explaining location patterns of entrepreneurs and managers from creative and knowledge-based sectors
in Europe. After all, if individual energy and creativity can compensate for structural deciencies
and push cities forward and onto the creative path, the duty of city planners is to create the optimal,
favourable conditions for citizens to develop and harness their energy and creativity productively.
This notion brings the discussion back, at least to some degree, to classic Florida “soft” themes, such
as the importance of the availability of friendly public and semi-public spaces for personal intercourse
and networking, urban “buzz” among other things.
Ultimately, however, it may turn out that Florida-type constructs have more relevance during “good”
times and fall by the wayside during “bad” times. In this light critics of Florida (2002) have long
pointed out that, in the end, wages matter more than amenities, particularly during an economic
recession. As managers are forced to employ “hard” factor survival mechanisms by cutting costs and
dismissing labour, even creatives see their incomes disappear or decline. The policy measures that
can address the current crisis in Europe and the U.S., on either a global or national level, should thus
concentrate on “hard” factors rst, such as getting the nancial systems kick-started and nding ways
of reviving the economies of the world. Only once these issues are resolved can policymakers again
enjoy the luxury of debating the relative merits of “soft” factors.
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A COMPARATIVE ANALYSIS OF THE NATIONAL INNOVATION PERFORMANCE:
R.MACEDONIA AND SELECTED BALKAN COUNTRIES IN CONTEXT OF EUROPA 2020
STRATEGY
Siniša Cvetković
State University “Ss. Cyril and Methodius”- Skopje, Macedonia
E-mail: sinisa.cvetkovic@vodovod-skopje.com.mk
Abstract
Contemporary predictions of future economic concepts are that societies in essence will be innovative, based
on information and knowledge. The characteristics of a modern society can be analyzed in terms of dominance
of innovation, knowledge and information. Knowledge and ability for creating, available and effective use
of knowledge for a long period of time represent an instrument of innovation, competition and economic
progress and leading power of wider economic and social development. Nonmaterial investments in research
and development, education, professional development and upgrading the software, increasing the efciency
of management processes and communication of information, become crucial indicators of opportunities for
future development of the economy and society as a whole.
The Lisbon Summit held in 2000 expressed the attitude that innovation supposed to be a fundamental mechanism
for transition towards a knowledge society. Innovation policy therefore become a major strategic tool for
achieving the competitiveness of industry and thus to stimulate sustainable economic growth. The European
Council in March 2005 redened the broad goals of the Lisbon focuse the priorities on economic growth
and employment, and conrm that knowledge, innovation and human capital are key to social development.
Shift away barriers to free movement of knowledge, encouraging innovation through border cooperation and
exibility of R&D facilities and the creation of conditions for wider application of ICT become essential
priorities of the EU.
The new strategy entitled “Europe 2020”, adopted by Member States in June 2010, conrming the continuity
of the previous strategy. The European Council denes innovation as a top priority and a pillar of economic
growth in the EU in the next decade. Strategy determines the future development of the union as “smart,
sustainable and inclusive growth.” Innovative Union is one of seven agship initiatives or directions of action
within the Strategy. It means improving conditions and access to nance for R&D and innovation in order to
ensure that innovation to be converted in products and services that will enable creation of new jobs.
As a basis for comparative analysis and evaluation of innovative performance of countries in this paper,
data will be used by the IUS (Innovation Union Scoreboard 2010). Normalized values of selected indicators
for countries of the Balkans were obtained by graphical calculation schedules for each indicator separately,
which are published in the report (Innovation Union Scoreboard 2010 - Methodology report, 2011). Graphical
comparisons are made between countries in order to identify comparative advantages and delays, what should
emerge future directions of action to improve performance indicators.
The current position of R.Macedonia represents lagging behind and away from the innovative performance
of countries in the Balkans. If in the coming period policies are not be promoted in direction to improve the
performances of the indicators for detected weaknesses in terms of dynamic processes of development of
innovative performance, R.Macedonia will have a wider gap shared by Member States and candidate countries
for EU membership.
Keywords: Knowledge-Based Economy, Competitiveness, Innovation, National Innovation System,
Innovation Performance
1. INTRODUCTION
Modern economic reality characterized accelerated creation and emergence of new technologies,
globalization and regional economic connection. In these circumstances the search for new forms
of economic activity need to be adopted by a new paradigm called knowledge-based economy.
Policy makers in the transition countries are increasingly emphasizing the importance of building
knowledge-based economies, where capacity to innovate is the basic competition factor (Masso &
Vahter, 2008; Roper, 2009). The ability to create economic value is the basis for gaining competitive
advantage and growth of enterprises, industry and society at large (Fagerberg 1988, 1996, Fagerberg,
Knell and Srholec 2004).
At the time of the informational revolution created opportunities for quick access to and use of
knowledge by any subject of the global community. This knowledge can be used in the creation of
their own innovations as part of the world treasure of new ideas, and through which rms can upgrade
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their innovation capabilities through organisational learning (Nelson and Winter 1982). Companies
starting from directions of global changes and the criteria governing the world market, are increasingly
pressured to invest in knowledge, or in technology-intensive production and through innovation to ght
at the market with its competitors. There are important differences among industries or technological
elds in the operation of processes characterized by entry (and exit) of rms, continuous innovation,
gradual development of standards, the adaptation or creation of institutions, etc. (Pavitt 1984, Carlsson
and Stankiewicz 1991, Malerba 2004).
SMEs were likely to be the source of most innovation (Schumpeter, 1934). Subsequently, he claimed
that large established rms possessing some degree of monopoly power were likely to be the driving
force behind technical progress (Schumpeter, 1950). The ability and innovative capacity of SMEs
varies signicantly, depending on their sector, size, focus, resources, and the business environment
in which they operate (Burrone and Jaiya 2005). A recently proposed and popularized model for the
management of innovation, known as open innovation, is based on the need for companies (especially
SMEs) to open up their innovation processes and combine internally and externally developed
technologies to create business value. (Chesbrough 2003a; 2003b).
The basic question that arises for the purpose of future development of the transition economies, is
“new” way to organize and re-structuring limited resources in order to enable the creation, diffusion
and use of innovation to create higher value-added products and services. Previous course is based
on increased investment in science and technology, R&D, the system of knowledge and developing
skills for the technological development with the ultimate aim of increasing the welfare of citizens
and improving the standard of living.
2. THE DEVELOPMENT OF INNOVATIVE PERFORMANCE AS THE BASIS FOR ECONOMIC
GROWTH
The creation of innovations, their diffusion and transfer of modern technology and knowledge as a
basis for increased economic activity and performance of companies on the open market, have the
role of carriers of economic growth (Fagerberg and Godinho 2004; Fagerberg 2006). The empirical
analysis suggests that a well developed innovation system is essential for countries that wish to
succeed in catch-up. There is a strong statistical relationship between level and change of GDP per
capita on the one hand, and the innovation system on the other. Historical and analytical evidence also
suggests that countries that have succeeded in catch-up are given a high priority to this dimension of
development (Fagerberg & Srholec, 2008).
Innovation covers the entire process from creation of a new idea to its implementation, in order to
develop or enhance new or existing products, services, methods, processes. According to Joseph
Schumpeter, innovations are classied into two major categories: product innovation and innovation
process. Product Innovation covers “...... creating a new product that meets adequate existing or
previously satisfactory needs “, thus allowing the inventor a monopoly position. Innovation process
replaces “.... production or consumption of one thing with another that serves to satisfy the same need,
but is cheaper. “ Thus the innovation process involves the implementation of new repro-materials that
have the potential to allow production of cheaper product.1
“Innovation is the implementation of new or signicantly improved product (good or service)
or process, a new marketing method or a new organizational method in business practice in the
workplace or enterprise in external relations. The minimum requirement for innovation is a product,
process or organizational method to be new (or signicantly improved) in terms of enterprise.” 2
The major factor determining the overall innovation performance is not the performance of the
individual organisations, but the intensity and quality of linkages and co-operation among them
(Fagerberg (2005); Lundvall (2002); Niosi (2002). Several authors note the growing importance
of network-type innovation interactions among rms, and private and public research institutions
(Lundvall, 1992; Nelson, 1993; Etzkowitz & Leydersdorff, 2000; Charles, 2003). Therefore innovation
process is not isolated and because of his interactive nature interest of the analysis is replaced from
initial interest to R&D towards National Innovation System (NIS).
The (NIS) concept rst appeared in work by (Freeman 1987), (Lundvall 1992), (Nelson 1993) and
Edquist (1997). According to one of his biggest advocates Christopher Freeman is dened as “a
1 Bilge Mutlu, Alpay Er, (2003), Design Innovation: Historical and Theoretical Perspectives on Product Innovation by
Design, 5th European Academy of Design Conference, Barcelona, p.5
2 Rajnish Tiwari, (2008), Dening Innovation, (Based on “Oslo Manual”, 3rd edition, 2005) Hamburg University of
Technology (TUHH), p.1
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network of institutions of public and private sector who interact, initiate, import, modify and diffused
innovation.” 3 National innovation system refers to the network institutions, rules and procedures
that affect the way that the country acquires, creates, expands and uses knowledge. The universities,
public and private research centers are included in the institutions of the innovation system. NGOs
and government are also part of the innovation system. An effective innovation system is one that
provides a setting that encourages research and development, resulting in new products, new processes
and new knowledge and therefore the main source for the development of innovative performance of
countries.
3. EUROPEAN STRATEGY FOR SMART, SUSTAINABLE AND INCLUSIVE GROWTH EUROPE
2020
The challenge of nding solutions to the Global nancial crisis and preventing the tendency of
economic processes to take place with the dynamics and the way in the period before the crisis,
there is a huge challenge for policy makers to promote a new strategy for economic growth and
development of the EU. These processes occur in a time period of waning importance of the Lisbon
strategy and that the EU should develop a new strategy for economic growth in the next ten year
period. The new strategy was adopted in June 2010 by the European Council entitled Europe 2020,
which determined the future economic development of the union as: “smart, sustainable and inclusive
growth.” The strategy sets priorities and objectives through the realization of which should provide
greater economic growth and job creation, social cohesion, higher levels of education, dealing
with social challenges (climate change, health care, energy supply, demographic changes, limited
resources, lack of food and clean drinking water, etc.). The answer to these challenges leads through
the exercise of seven agship initiatives. One of them is Innovative Union, where innovations are the
main driver of the processes for achieving the objectives of the Strategy.
“At a time of public budget constraints, major demographic changes and increasing global
competition, Europe’s competitiveness, our capacity to create millions of new jobs to replace those
lost in the crisis and, overall, our future standard of living depends on our ability to drive innovation
in products, services, business and social processes and models. This is why innovation has been
placed at the heart of the Europe 2020 strategy.”4
Implementation of the Strategy will take place at the national level and EU level. The European
Commission will monitor progress towards achieving the objectives, to mediate and facilitate the
exchange of policies and practices in processes and make suggestions for encouraging leading
initiatives. The European Parliament is a driving force for mobilizing citizens and initiate the
necessary legislative changes. This partnership approach will include the European commission,
national parliaments, local and regional authorities and all citizens and social partners from civil
society to include all factors towards achieving the strategy Europe 2020.
3. THE INNOVATIVE PERFORMANCE OF R. MACEDONIA AND THE BALKAN COUNTRIES
SELECTED IN THE CONTEXT OF THE EUROPE 2020
In this paper the analysis of innovation performance in the Balkan countries in which would be
included Macedonia, Serbia, Croatia, Bulgaria and Slovenia are based on the latest methodology
in 2011, Innovation Union Scoreboard 2010 (IUS). The choice of group is made by a common
historical aspect of the model economy by 1990, the regional association, the traditional economies
of cooperation and common agenda, EU membership (Bulgaria and Slovenia are already members).
Countries of Europe by the values of its innovative performance are grouped into four groups:
• Innovation leaders - include Germany, Finland, Denmark, Sweden and Switzerland, countries
that show much higher performance than the EU27 average
• Innovative followers - Slovenia, Iceland, Cyprus, France, Luxembourg, Ireland, Netherlands,
Austria, Belgium and United Kingdom, countries that demonstrate performance similar to the
EU27 average
• Moderate innovators - Slovakia, Poland, Croatia, Hungary, Malta, Greece, Spain, Czech
Republic, Italy, Portugal, Norway, Estonia, countries whose performance is slightly below the
3 OECD, (1997), National Innovation Systems, Paris, France, p.10
4 European Commission, (2010), Communication From The Commission To The European Parliament, The Council,
The European Economic and Social Committee and Тhe Committee of The Regions, Europe 2020 Flagship Initiative
Innovation Union, Brussels, p.2
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EU27 average
• Modest innovators - Latvia, Turkey, Bulgaria, Lithuania, Macedonia, Serbia and Romania,
countries whose performance is well below the EU27 average
The total index for innovative recipient countries of Europe is shown in Graph 1
Graph. 1 Innovative performance of European countries
Modest innovators Moderate innovators
Innovative followers Innovative leaders
Source: “Innovation Union Scoreboard 2010”, Inno metrics, 2011, page. 15
The current state of the innovative performance of selected countries from the Balkans for the group
of Enablers and the three dimensions of innovation in this group are shown in the following:
Table 1. Current state of the innovative performance - group of Enablers
ЕU27 BG SI HR RS МК
ENABLERS
Human Resources
1.1.1 New doctorate graduates aged (25 – 34) 1.4 0.5 1.3 0.8 0.5 0.3
1.1.2 Population completed tertiary education aged (30 – 34) 32.3 27.9 31.6 20.5 19.2 14.3
1.1.3 Youth with upper secondary level education aged (20-
24) 78.6 83.7 89.4 95.1 84.7 81.9
Open, excellent and attractive research systems
1.2.1 International scientic co-publications 266 190 750 --- --- ---
1.2.2 Scientic publications among top 10% most cited 0.11 0.03 0.07 0.03 --- ---
1.2.3 Non – EU doctorate students 19.5 3.97 4.64 2.55 8.50 3.36
Finance and support
1.3.1 Public R&D expenditure 0.75 0.36 0.66 0.50 0.38 0.14
1.3.2 Venture capital 0.11 0.03 --- --- --- ---
Source: “Innovation Union Scoreboard 2010”, Inno metricks 2011, Annex A, p.62-63
Graphical display of innovation indicators in separate dimensions, expressed in normalized values1
of indicators are shown in the following charts. For the purposes of this paper normalized values of
1 Hugo Hollanders – MERIT (Maastricht University), Stefano Tarantola – Joint Research Centre, (2011), Innovation
Union Scoreboard 2010 – Methodology report, Unit G3. p.15-24 Normalized values of the indicators presented in the
report obtained by the method of (min-max) values. The maximum value is the largest score for each indicator in the
period (2005 – 2010) reviewed by all countries. The minimum value is the lowest score for each indicator throughout
the period considered for all countries. Normalized value is obtained when each of the minimum value is subtracted
and the result is divided by the difference between the maximum and minimum value. The highest normalized value
is equal to 1 and the smallest to 0. For more see: Stefano, Tarantola, S., (2008), “European Innovation Scoreboard:
strategies to measure country progress over time”, Joint Research Centre, p.3 - 7
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selected indicators for countries of the Balkans were obtained by graphical calculation schedules for
each indicator separately, which are published in the report. Possible inaccuracies of standardized
values of indicators should not depreciate the analysis, which aims to show the current state of
indicators to detect weaknesses in terms of dynamic changes in innovative performance. Graphical
comparisons are made between countries in order to identify comparative advantages and delays,
what should emerge future directions of action to improve performance indicators.
The innovative dimension of Human resources in Macedonia all indicators showing the weakest
performance in relation to other selected countries. Weaknesses are observed in the acquisition of
new doctoral degrees, offering higher education workforce in all areas and scientic disciplines as
well as the level of qualications of the young population (20-24), discussed in terms of supply of
human capital for that age and as output of the education system through a number of diplomas.
Completed secondary education is considered as a minimum level of education that can successfully
participate in a knowledge-based economy.2
Graph. 2 Human resources - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.25-30
R. Macedonia needs to stimulate higher education, graduate and doctoral studies to ensure quality
supply of human capital, but certainly the number and percentages may not be lifted only as a quantity
to a higher quotation schedules and analysis, but also need to be raised the quality of education. It
is the only way the labor force to possess the necessary knowledge, skills and acquire the “acquired
need” to constantly up graded in the process of lifelong learning.
The innovative dimension of Open, attractive and excellent research systems, lack of data on
both indicators makes the analysis a bit more uncertain in this section. The statistical databases in
Macedonia are supposed to be improved in this area in order to:
• Through analyzing the number of international scientic publications, to assess the quality of
research and international cooperation.
• Through a number of scientic publications published in the top 10% of the world most
prestigious scientic journals, to assess the effectiveness of R&D system and its quality.
• Through a number of PhD students from non-recipient countries of the EU, to assess the mobility
of students as an effective way of diffusion of knowledge.
2 In the previous methodology (EIS 2009) higher educated were calculated only in technical and natural sciences, but
today is widely accepted view that the absorption and creation of innovations in many areas especially in the service
sector are directly dependent on the existence of a wide range of knowledge and skills.
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Graph. 3 Open, attractive and excellent research systems - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.31-33
Analysis of the performance of the innovative dimension Financing and support separately for each
indicator points to the need for R.Macedonia to make greater efforts to increase R&D costs which are
the main promoters of economic growth in modern economies based on knowledge.
Graph. 4 Financing and support - through comparative data normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.34-35
Costs for R&D investments are actually needed for the transition to knowledge-based economy by
stimulating technological development. In this respect, the availability of capital to nance risky
business, venture capital (expansion, use of new technology, developing new businesses, etc.) becomes
a necessity to support the innovative performance of enterprises and the economy as a whole.
The current state of the innovative performance of selected countries from the Balkans to the group
Firm Activities and innovative three dimensions in this group are shown in the following:
Table 2. Current state of the innovative performance - group Firm Activities
EU27 BG SI HR RS МК
FIRM ACTIVITIES
Firm investments
2.1.1 Business R&D expenditure 1.25 0.16 1.20 0.34 0.10 0.04
2.1.2 Non – R&D innovation expenditure 0.71 0.95 0.79 0.86 0.80 0.90
Linkages and entrepreneurship
2.2.1 SMEs innovating in-house 30.3 17.1 --- 25.6 27.8 11.3
2.2.2 Innovative SMEs collaborating with others 11.2 3.50 14.2 11.9 3.50 9.6
2.2.3 Public – private co-publications 36.2 2.3 51.0 17.7 4.2 ---
Intellectual Assets
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2.3.1 PCT patent applications 4.00 0.38 2.56 0.88 --- 0.13
2.3.2 PCT patent applications in societal challenges 0.64 0.04 0.65 0.03 --- ---
2.3.3 Community trademarks 5.41 3.97 3.80 0.52 0.50 0.06
2.3.4 Community designs 4.75 1.78 2.45 0.23 0.00 0.06
Source: “Innovation Union Scoreboard 2010”, Inno metricks 2011, Annex A, p.62-63
From the analysis of the performance of innovation dimension Firm Investments for each indicator
separately derived conclusion that Macedonian efforts to reach innovative performance of the
developed countries of Europe need to allocate more funds for R&D that will enable the creation of
new knowledge and its diffusion among enterprises. Investments in equipment and machinery, costs
of patents and licenses, measure the diffusion of new production technologies and ideas, represent the
basis for technological development and improved competitiveness among enterprises.
Graph. 5 Firm Investments – comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.36-37
The second dimension of innovation Linkages and entrepreneurship shows that Macedonia has a
very poor record in the eld of SMEs presented their own market innovation, while better position
(closer to the European average), has in the eld of SMEs with innovation common with other SMEs
which shows a higher level of cooperation between SMEs and a better ow of knowledge between
research institutions and SMEs and between themselves. It should be stressed the need for active
cooperation between researchers from both public and private sector that will result in an increased
number of co-publications that raise the quality of creation and diffusion of knowledge.
Graph. 6 Linkages and entrepreneurship - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.37-41
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R. Macedonia in the third innovative dimension of Intellectual assets shows the weakest performance
in respect of all countries analyzed on all indicators. Macedonia shows the weakest results in the eld
of protection of intellectual property and the output of innovative activity in patents, trademarks and
design marks. This conrms the low capacity of enterprises to develop new products and processes
which basically determines their competitive advantage. The need for an increased number of patent
applications in the eld of social challenges (climate change mitigation and health care), is in direct
correlation with the strategy for ensuring long-term and sustainable economic development as a high
priority for the EU and the R.Macedonia as a candidate for EU membership.
Graph. 7 Intellectual assets - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.42-45
The current state of the innovative performance of selected countries from the Balkans to the group
Outputs both innovative dimensions in this group are shown in the following:
Table 3. Current state of the innovative performance - group Outputs
EU27 BG SI HR RS МК
OUTPUTS
Innovators
3.1.1 SMEs introducing product or process innovations (%
of SMEs) 34.2 20.7 31.0 31.5 18.3 39.2
3.1.2 SMEs introducing marketing/organizational
innovations (% of SMEs) 39.1 17.4 39.4 32.5 18.1 30.8
Economic effects
3.2.1 Employment in knowledge-intensive activities 13.0 8.49 12.9 9.43 --- ---
3.2.2 Medium and high-tech product exports 47.4 26.2 58.5 41.6 27.4 30.5
3.2.3 Knowledge-intensive services exports 49.4 21.5 27.2 16.1 34.4 28.7
3.2.4 Sales of new to market and new to rm innovations 13.3 14.2 16.3 14.4 10.0 9.90
3.2.5 License and patent revenues from abroad 0.21 0.02 0.08 0.06 0.10 0.06
Source:”Innovation Union Scoreboard 2010”,Inno metricks2011,Annex A,стр.62-63
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The situation in the rst dimension of the innovative group Outputs, Innovators shows that
Macedonia produces good results in technological innovation (products and services) and in the
forms of innovation that are not technological (marketing and organizational innovation). However,
diffusion of innovation is also very important segment in the direction of propagation and absorption
of innovations and achieve higher commercial effects, which should pay more attention to this
innovative activity.
Graph. 8 Innovators - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.46-47
The innovative dimension of Economic effects, R.Macedonia separately through indicators show
results higher than half the EU27 average. Lack of indicator values for employees in knowledge-
intensive activities in (manufacturing and services) emphasized the need for statistical engagement
in this eld. Regarding the export of intermediate and high-tech products as measured by the
competitiveness of the EU market and the ability for commercial exploitation of the results of R&D
activities, R.Macedonia is a higher rank than half the EU27 average. Intermediate and high-tech
products are key promoters of economic growth due to high value added products that contribute to
higher paid employees in those sectors. The export of services sectors based on knowledge intensive
value indicates better results than many advanced countries. In the area of creation of new technologies
in terms of new market and in terms of enterprise and their diffusion, R.Macedonia is showing the
weakest analyzed results from all Balkan countries. In the area of revenue from licenses and patents
from abroad all Balkan countries have a low rank in terms of the EU27 average, which is higher more
than doubled.
Graph. 9 Economic effects - comparative data using normalized values of indicators
Source: “Innovation Union Scoreboard 2010 – Methodology report”, 2011, p.46-47
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4. GROWTH RATE OF INNOVATION PERFORMANCE
The rate of growth of the innovative performance of the considered countries is calculated for ve-year
period (2005-2010) according to the methodology of the generalized approach.3
The construction of
the following graph 10. which shows the average growth rates of innovative performance of countries
data are used from Annex F of the (IUS) 2010.
According to the graph with respect to the total value of the innovation index, almost equal results have
R. Macedonia 0.228, Serbia 0.237 and Bulgaria 0.226, while Croatia 0.301 has a higher innovation
performance. Slovenia with an average of 0.487 is very close to the EU27 average with 0.516.
But in terms of average growth rate of innovative performance, R.Macedonia with -0.36% is the only
country with negative growth rate in relation to comparable countries and far behind Croatia with
3.55% and Serbia 3.63%. Bulgaria 6.15% and Slovenia with 6.52% showed extremely high rates of
growth compared to the EU27 average of 0.85%.
Graph. 10 Convergence in innovation performance of countries in the Balkans
Average growth rate of innovative performance
Source: “Innovation Union Scoreboard 2010”,Inno metricks2011,Annex F, p.72
If we analyze the growth rates of innovative performance in the innovative dimensions of R.Macedonia,
the following summary is:4
Rates of growth in innovative dimensions Human Resource, Firm investment and Economic effects
are above average in the EU27, while the innovative dimension Finance and support and Intellectual
assets are below the EU27 average.
The values of the separate indicators show the following condition: Positive and high rates of growth
observed in the indicator Number of new PhDs 10.7%, a percentage of the population aged (30-34)
who have completed higher education 5.4%, expenditures for R&D by business sector 7.5%, Medium
and high-tech product exports 9.7%, exports of knowledge-intensive services 17.8%, licenses and
patents revenue from abroad 11.8%.
Negative growth rates are observed in the indicators Public R&D expenditure -9.6%, PCT patent
applications -19.8% and Community trademarks -29.9%.
The overall average annual growth rate of the innovative performance of R.Macedonia for the period
(2005-2010) is -0.36%, and only worse ranked than it in terms of all EU27 member states and selected
countries in the Balkans is Lithuania, with an average annual growth rate of innovative performance
-0.70%.
3 Stefano, Tarantola, S. (2008). European Innovation Scoreboard: Strategies to measure country progress over time.
Joint Research Centre, p.13 - 14
4 INNO METRICKS, (2011), Innovation Union Scoreboard 2010, The Innovation Union’s performance scoreboard for
Research and Innovation, hp://www.proinno-europe.eu/metrics , p.65
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5. CONCLUSION
According to the results achieved by groups, innovative dimensions and indicators of innovative
performance of R. Macedonia, the weaknesses and strengths are detected for each indicator separately.
Thus the following conclusions and recommendations can be drawn towards enhancing their values:
• Stimulating higher education, post-graduate and doctoral studies that should provide better
quality supply of human capital;
• Fostering a lifelong education that will qualify people with knowledge and skills through
training and education, to enable better adaptation of the workforce of the new economic
conditions and potential changes in the workplace;
• Improving the statistical database on the number of internationally published scientic
publications through which one can evaluate the quality of scientic research and international
cooperation and to evaluate the performance of IR system and its quality;
• Increasing mobility of students as an effective way of diffusion of knowledge;
• Increasing costs of R&D by the public sector;
• Improving access to capital to nance risky business which is necessary to support the
innovative performance of enterprises and the economy as a whole;
• More funds for R&D by business sector which will enable the creation of new knowledge and
its diffusion among companies;
• Increasing investment in equipment and machinery, increasing the cost of patents and licenses,
the cost of measuring the diffusion of new production technologies and ideas and so on;
• Fostering entrepreneurship and stimulate innovation activities of SMEs;
• Active collaboration between researchers from both public and private sector that will result
in an increased number of co-publications that raise the quality of creation and diffusion of
knowledge;
• Greater protection of intellectual property;
• Increasing the output of innovative activity in patents, trademarks, marks and designs;
• Increasing the number of patent applications in the eld of social challenges (climate change
mitigation and health protection, energy supply);
• Improving the diffusion of innovation which is a very important segment in the direction of
propagation and absorption of innovations and achieve higher commercial effects;
• Increasing exports of intermediate and high-tech products;
• Increasing exports of services sectors based on intensive knowledge;
• Improving conditions for creation of new technologies in terms of new market and in terms
of enterprise and their diffusion;
• Increasing revenue from licenses and patents from abroad.
Greater priority in R.Macedonia should be given to the commercialization of innovation in the business
sector and the faster spread of their innovations, knowledge and import advanced technologies in
economic and non-economic activities. EU membership will inevitably require adaptation of the
economy in terms of acceptance and achievement of the objectives of development strategy, the EU
Member States. In this context the promotion and development of innovative performance are crucial
for the restructuring of production, its growth and development, oriented towards foreign markets,
increasing competitiveness of products and services and increasing the number of jobs. It will be
possible only through achieving higher growth rates of innovative performance of the country which
will ensure sustainable GDP growth and overall economic development.
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Reference
Bilge, Mutlu. Alpay, Er. (2003). Design Innovation: Historical and Theoretical Perspectives on Product
Innovation by Design. 5th European Academy of Design Conference held in Barcelona
European Commission. (2010). Communication From The Commission To The European Parliament, The
Council, The European Economic and Social Committee and Тhe Committee of The Regions. Europe
2020 Flagship Initiative Innovation Union. Brussels
http://www.proinno-europe.eu/metrics (accessed 02.02.2011)
Hugo, Hollanders. – MERIT (Maastricht University), Stefano, Tarantola. – Joint Research Centre (2011).
Innovation Union Scoreboard 2010 – Methodology report 2011. Unit G3
INNO METRICKS. (2011). Innovation Union Scoreboard 2010. The Innovation Union’s performance
scoreboard for Research and Innovation,
Jan, Fagerberg. (2006). Innovation, technology and the global knowledge economy: Challenges for future
growth. University of Oslo
Jan, Fagerberg. Martin, Srholec. Bart, Verspagen. (2009). Innovation and Economic Development. University
of Oslo
Luc, Soete. Bart, Verspagen. and Bas Ter Weel. (2009). Systems of Innovation. UNU-MERIT Working Papers.
Maastricht University
OECD. (1997). National Innovation Systems. Paris. France
Rajnish, Tiwari. (2008). Dening Innovation. (Based on “Oslo Manual”,3rd edition, 2005). Hamburg University
of Technology (TUHH)
Stefano, Tarantola. (2008). European Innovation Scoreboard: strategies to measure country progress over
time. Joint Research Centre
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INNOVATION AND ECONOMIC DEVELOPMENT – CORRELATIONS AND CONDITIONS
Veland Ramadani
South East European University at Tetovo - Faculty of Business and Economy, Macedonia
E-mail: v.ramadani@seeu.edu.mk
Shqipe Gerguri
South East European University at Tetovo - Faculty of Business and Economy, Macedonia
E-mail: s.gerguri@seeu.edu.mk
Gadaf Rexhepi
South East European University at Tetovo - Faculty of Business and Economy, Macedonia
E-mail: g.rexhepi@seeu.edu.mk
Selajdin Abduli
South East European University at Tetovo - Faculty of Business and Economy, Macedonia
E-mail: s.abduli@seeu.edu.mk
Abstract
Innovation is not a new phenomenon. Arguably, it is old as mankind itself. There seems to be something
inherently “human” about the tendency to think about new and better ways of doing things and to try them out
in practice. Innovation is essential for sustainable growth and development. In the modern economy, innovation
is crucial factor for value creation, growth and employment. Innovation will lead to new businesses as well as
to the increased competitiveness of existing enterprises.
As a country where EU integration is among the top priorities considering the Innovation Union Scoarboard
(IUS) indicators, Republic of Macedonia belongs to the modest innovators, with performance well below the
EU27. Republic of Macedonia is a full-edged partner in the Programme for Competition and Innovations of
the European Union. The Programme for Competition and Innovation is especially important for the small and
medium sized enterprises in our country, because it will provide them with internationalization, as well as an
easier access to the nancial assets, more appropriate use of information and communication technologies,
development of the IT society and promotion of the importance of new renewable resources of energy and
energy efciency.
There are several core conditions which enable innovation and encourage economic growth and development.
According to OECD the most important are: strong standards and effective enforcement of intellectual property
protection; dynamic competition and contestable markets; a strong and sustainable fundamental research and
development infrastructure; encouraging information and technology communication developments and a
strong emphasis on education at all levels.
This paper specically elaborates the proper way of using terms such as innovation, invention, creativity and
science, because in daily conversations they are often used interchangeably. The paper also addresses the
meaning of innovation, innovation sources, types of innovation etc.
Keywords: Innovation, Invention, Competition, Economic Growth, Development
1. INTRUDUCTION
Enterprises today act under a big pressure by other enterprises, which offer the same or similar
production or service, or they are under the pressure of the customers who expect more and more
from the product they consume. In order to face with the new conditions and situations, enterprises are
made to continuously search for new ways of production, namely offering new products or enhancing
existing ones. In other words, they should continuously introduce innovations. But, what in fact do
innovations represent?
Innovation is a process of transforming the new ideas, new knowledge into new products and services.
Joseph Schumpeter denes innovation as an activity which leads to new producing function, new
product. He divides this activity in several steps, as follows (McDaniel, 2002, р.57-58): a) Introducing
a new product: the entrepreneur should produce, namely introduce a new product which can be easily
sold and which is not offered in the market; b) Introducing a new method of production: innovation
should offer a new scheme of production which through existing inputs can lead to an increased
output, decrease of costs per 2unit product, introduction of new inputs and change of existing ones; c)
Opening new markets: innovations can increase the sell in new regions, and also increase the number
of customers; d) Finding of appropriate sources of raw materials: The raw material supplier can often
lower raw materials’ quality or increase their price and this directly inuences over the quality and
the selling price of the new product. Therefore, the entrepreneur should nd an appropriate source of
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inputs, which are needed for production of new products; e) Establishing a new organization in the
industry: Schumpeter describes this step as an entrance of the entrepreneur in the monopoly market,
where there has been no competition previously; or creating conditions through which the entrepreneur
would take the monopoly position in the market. Lionnet (2003, p. 6) denes innovation as a process
by which a novel idea is brought to the stage where it eventually produces money. It is a dynamic
technical, economic and social process involving the interaction of people coming from different
horizons, with different perspectives and different motivations. Ramadani and Gerguri (2011, p.102)
dene innovations as a process of creating a new product or service, new technologic process, new
organization, or enhancement of existing product or service, existing technologic process and existing
organization. UK Department of Trade and Industry (2003, p.18) denes innovation as the successful
exploitation of new ideas and it is central to meeting this challenge; it involves investments in new
products, processes or services and in new ways of doing business.
According to the given denitions, if we analyze their separate elements, we can say that we classify:
innovations in production – development or enhancement of a specic product; innovations in services
– offering new or enhancing of existing services; innovations in process – nding of new ways of
organizing and combining inputs in the process of production of specic products or services; and
innovations in management – creating new ways of organizing business resources.
The importance and denition of innovations can be explained from several aspects. From the aspect
of customers, innovation means products with better quality and better services, which together
mean a better way of life. From the aspect of businesses, innovation means sustainable growth
and development, realization of great prot. For the employees, innovation means new and more
interesting job, which requires more mental faculty, which results in higher salaries. From the aspect
of whole economy, innovation represents a bigger productivity and development for all (Ramadani
and Gerguri, 2011, p. 102).
In daily conversation, terms like innovation, invention, creativity and science are often used
interchangeably. But, for academics, researchers and policymakers there are important distinctions
between these terms and these distinctions give each term a unique, specic meaning. Invention is
the rst occurrence of an idea for a new product or process, while innovation is the rst attempt to
carry it out into practice (Fagerberg et al, 2004, p.4). Creativity is thinking about new things, while
innovation is making new things. Creativity is an ability to develop new ideas and ways of facing
problems and possibilities, while innovation is an ability to perform creative solutions in order to
enhance people’s life. Hence, enterprises can be successful only if they invent and make new things,
or if they make the old ones in a new way (Zimmerer and Scarborough, 2002, p. 37). According
to Cannon (1991, p.17), the distinction between these terms is as follow: Creativity represents an
opportunity to create new appearance, content or process by combining existing inputs or factors of
production; Inventiveness is a process of creating something new, which assigns a contribution to the
level of overall mankind knowledge; and innovation is linked to the denitive marketing of the new
product, service or technologic process, which is a result of the inventiveness.
Also, very important issue is that where do innovation come from? Which are the innovation sources
or ideas for potenctial successful innovations? IBM made a study about the potencial sources of
innovations, which was based on phone interviews with over 750 CEOs and business leaders. This
study found “that 76% of CEOs ranked business partner and customer collaboration as top sources for
new ideas. This greatly contrasts with internal R&D, which ranked eighth as a source for new ideas
— cited by only 14% of CEOs”. The top sources can be considered sources outside of the company
(De Ridder, 2008). There are the IBM’s top sources of innovation: Employees, Business partners,
Customers directly, Consultants, Competitors, Associations, Internal Sales & Service Unites, Internal
R&D, Academia, Think-tanks and Labs or other institutions. Another research shows that innovation
s come from the inside of company (28.4%), suppliers (26.4 %), customers (25.8 %), competitors
(24.9 %), and exhibitions (24.6 %). Such innovation sources as universities and other non-prot R&D
institutions scored just 3.7 % and 2.9 %, respectively (Ukrainski and Varblane, 2005, p. 20-21).
Innovation is a major factor of economic growth and performance in the globalised economy. The
relationship between innovation and economic growth and development has been well studied.
However, that is not to say that it is well understood. Innovation brings new technologies and new
products that help address global challenges, new ways of producing goods and delivering services
boost productivity, create jobs and can help improve citizens’ quality of life.
Innovation is the throbbing heart of the twenty-rst century economy, consistently pumping new
revitalizing activity through the system. The opposing force is commoditization—probably the single
most powerful force in business today—which rapidly takes what was distinctive and protable and
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rapidly makes it commonplace and marginal, sucking out the vitality and protability(Torun and
Çiçekci, 2007).
2. THE CORREALTIONS BETWEEN INNOVATION AND ECONOMIC GROWTH AND
DEVELOPMENT
Federal Reserve Board Vice Chairman Roger W. Ferguson, Jr. says that innovation benets consumers
through the development of new and improved goods, services, and processes, an economy’s capacity
for invention and innovation helps drive its economic growth and the degree to which standards of
living increase (Federal Trade Comission, 2003, p.4). The capacity and the ability to create economic
value are critical to competitive advantage and growth for rms, industries and countries. The
question then becomes how to best organize resources to create, diffuse and sustain innovation and,
moreover, how to leverage investments made in science and technology, research and development
and related capabilities with the ultimate goal of reaping rewards in terms of wealth creation and
increased standards of living.
Table 1. Innovation Union Scorecard indicators
Source: Inno Metrics, 2011
According to the main ndings of the Innovation Union Scorecard 2010 on their average innovation
performance across 24 indicators presented in Table 1, the countries can be divided into four groups:
Innovation leaders, innovation followers, moderate innoavtors and modest innovators (Inno Metrics,
2011).
• Innovation leaders show a performance well above that of the EU27. In this group belong
Denmark, Finland, Germany and Sweden.
• Innovation followers show a performance close to that of the EU27 such as Austria, Belgium,
Cyprus, Estonia, France, Ireland, Luxembourg, Netherlands, Slovenia and the UK.
• Moderate Innovatiors show a performance below that of EU27. In this group belong Czech
Republic, Greece, Hungary, Italy, Malta, Poland, Portugal, Slovakia and Spain.
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• Modest innovators show a performance well below that of EU27 such as Bulgaria, Latvia,
Lithuania and Romania.
In all countries, indicators used in these analyses show an absolute improvement in the innovation
performance over time, except Lithuania. The report shows that within the Innovation leaders, Finland
and Germany are the growth leaders. Table 3 presents the annual growth rate for the rest of EU27
countries (Inno Metrics, 2011, p.11).
Table 2. Innovation Growth Leaders
* Average annual growth rates as calculated over a ve-year period
Source: Inno Metrics, 2011, p.11
According to the Fourth Community Innovation Survey in collaboration with the European
Commission of the European Innovation Scoreboard, Frunză (2010, p.10-11) observed that among
the EU27 Member States the highest proportion of companies with innovation activity in 2002-
2007 period was recorded in Germany (65% of enterprises), Austria (53%), Denmark, Ireland and
Luxembourg (52% each), Belgium (51%) and Sweden (50%), while the lowest rates were observed
in Bulgaria (16%), Latvia (18%), Romania (20%), Hungary and Malta (both 21%).
As a core conditions which enable innovation and encourage economic growth are: strong standards
and effective enforcement of intellectual property protection; dynamic competition and contestable
markets; a strong and sustainable fundamental research and development infrastructure; encouraging
information and technology communication developments, a strong emphasis on education at all
levels (OECD, 2004).
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2.1. The strong protection of intellectual property
Innovation and intellectual property increasingly dominate the economy. As technology advances,
no rm has the resources to stand alone, and collaboration with others is becoming essential. This
means that new business models are needed for developing intellectual property and sharing in its
value. In 1421 the Government of Florence awarded the world’s rst patent to Filippo Brunelleschi
for a means of bringing goods up the usually unnavigable river Arno to the city. He demanded and
was duly awarded legal protection for his invention, being given the right for three years to burn any
competitor’s ship that incorporated his design (Dawson, 2002).
Intellectual Property Rights such as patents, trademarks copyrights, registered industrial designs,
integrated circuit topographies ect, are known as key factors promoting innovation and growth in
today’s economy. Designing an effective and appropriate system of IPRs is complex for any country.
The mechanisms by which IPRs operate vary across functional areas such as mentioned above and their
importance differs across sectors. The nature and the purposes of these mechanisms are distinctive,
although they share certain fundamental characteristics that bring them under the IPRs Umbrella.
The strength of IPRs depends on the demand characteristics, market structure and other forms of
business and competition regulation. Intellectual property helped make possible the conditions for
innovation, entrepreneurship and market-oriented economic growth that shaped the 20th Century. In
the 21st Century, IPRs increasingly will dene these conditions, and will dictate the pace and direction
of innovation, investment and economic growth around the world (Torun and Cicekci, 2007, p. 11).
Since the 1995 Green Paper on Innovation, the European Commission and the Governments of
several Member States have emphasized the role of Intellectual Property Rights (IPR) as an incentive
to rms to invest in innovation and as a means of appropriating their investments in innovation. If
we look at one of mechanisms of IPR such as patenting, one of the main concerns over time has been
a lower rate of patenting by European rms compared to American rms, as identied in several
editions of the EIS (European Comisson, 2005). The difference in patenting rates between the US
and Europe is partly due to a difference in industrial structures. For example, compared to the US, a
higher percentage of European value added and employment is from manufacturing sectors with low
to moderate background patent rates1, such as transportation equipment. The US, conversely, has a
higher concentration of rms active in high-technology sectors with high background patent rates
such as pharmaceuticals, biotechnology and IT equipment.
Table 3. The equivalent subsidy rates of patents by industries
USA FRANCE GERMANY
Pharmaceutical
Industrial Chemicals
Food, kindred and tobacco products
22%
14%
2%
4.1%
7.2% 15.2%
Semi-conductors
Electronic Components
Communication Equipment
Computer
23%
13%
39%
8% 12.5%
Metals
Rubber Products 23%
19%
Aircraft and Missiles 4%
Instruments
Medical Instruments 16%
21%
Source: Lévêque and Ménière, 2006, p. 10
From the Table 3 we can see different studies carried out at different periods of time in different
countries and with different methodologies. In the table we can see the importance of patents to
recover investments and their effects on innovation depends on industrial sectors. Unsurprisingly, for
pharmaceuticals patent protection is a key mechanism (drugs can easily be imitated) whereas it is not
for missiles manufacturers (purchaser of weapons do not want the invention being public). We must
always keep in mind that patent stimulates innovation differently from one sector or one technology
to another. There is not a universal effect of patents (Lévêque and Ménière, 2006, p. 10).
1 The background patent rate is dened as the number of patents per employee or unit of value added or sales
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2.2. Dynamic competition and contestable markets
Competition is the critical driver of performance and innovation. It benets everyone by enabling to
choose from an array of excellent products at affordable prices. Competition encourages the adoption
of innovation as companies evolve and offer new ideas in order to ourish in the marketplace.
Products should compete on their own merits, and consumers everywhere should have the ability
to easily choose the best products available for purchase. Fair and open competition dictates that
the best product wins, and market forces prevail. Competition among rms generally works best to
achieve optimum prices, quantity, and quality of goods and services for consumers. Competition can
stimulate innovation. Competition among rms can spur the invention of new or better products or
more efcient processes. Firms may race to be the rst to market an innovative technology. Companies
may invent lower cost manufacturing processes, thereby increasing their prots and enhancing their
ability to compete. Competition can prompt rms to identify consumers’ unmet needs and develop
new products or services to satisfy them.
2.3. Research and development infrastructure
Research and development (R&D), resulting in new goods, new processes and new knowledge is
a major source of technical change. R&D is a fundamental input into the innovation process and
innovation is an important factor that inuencies productivity growth and competitiveness. As
dened by the Frascati Manual (OECD, 1993, p. 29) “R&D comprises creative work under-taken on
a systematic basis in order to increase the stock of knowledge and the use of this stock of knowledge
to devise new applications”. The relationship between R&D and innovation is a complex, non-linear
one. However, it is recognized also that it is difcult for substantial advances in technology to occur
without work undertaken on a systematic basis (even serendipity tends to develop in such a context),
and R&D is a good indicator of this broader phenomenon.
2.4. Development of information and technology communication
In the last two decades, the information technology sector has been responsible for more economic
activity, more wealth creation, more productivity and more worldwide economic growth than any
other sector in the economy. Economies, consumers, businesses and governments reap the benets
of technological innovations. R&D is not the only source of new technology: in modern, industrial
economies, other activities, such as learning by doing or design are conducted in most cases on the
basis of new technology coming out of R&D (e.g. changes in the organisation of business related to
the use of information and communication technology.
Technological change is the rate at which new knowledge is put into physical forms and diffused for
use in the economy. Major technological advances, such as the steam engine or microprocessors are
known as general purpose technology as they have broad applications and productivity-enhancing
effects in a number of different sectors. As a result, general purpose technologies induce dramatic
economic changes by creating innovation that rejuvenates existing sectors and, in the process, create
new industries and services. A historical example is the steam engine, the Internet is a more recent
example. The Dot-Com bubble notwithstanding, the Internet has fundamentally changed the way
business transactions take place, creating efciencies and productivity growth for existing rms as
well as new opportunities for entrepreneurs (Feldman, 2004, p. 7).
According to a study done regarding ICT (Information and communication technologies) Innovation
and Economic Growth in Transition Economies, suggest that ICT is already playing a signicant
role in the transition economies, with ensuing economic benets. However, it is also evident that the
introduction of new technologies must be accompanied by a range of complementing factors for ICT
to be effectively utilized and to contribute to productivity gains and economic growth. In particular,
rms must develop appropriate and new marketing strategies, invest in equipment, and undertake
processes of organizational change. This raises a critical question of whether the reason for some
rms having yet to experience economic benets from ICT lie with their failure to undertake the
complementary efforts, or if it is due to some limitations inherent in ICT itself (ECORYS, 2007).
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2.5. Impact of education on the economic growth and development
Education represent very important determinant of economic growth and development (Barro, 2001).
Sandberg (1982) showed for 21 European countries that there exists a relationship between the literacy
rates in 1850 and per capita income in 1970, but not between literacy and income in 1850, suggesting
that literacy affects economic well-being in the very long-run. This nding is further supported by
Nunez (1990) for 49 Spanish provinces. Unfortunately, in most of these studies it is unclear how
literacy translates into better economic outcomes.
Innovation driven economic growth is a process of continual transformation. The economy expands
into new materials, new sources of energy, new processes and new products, and it contracts from
old onis requires a mobile labour force. People have to be ready to move from one occupational
position to another maybe several times within a generation. This is not possible without the support
of a system of education and training, which provides both general purpose and learning skills and
diversied specialization possibilities as the national educational systems supervised by the state, has
done for years. There are some tendencies towards international integration of education, but this is
mainly on the post graduate level and as a supplement to national systems.
A large number of literatures suggest that education’s contribution to economic growth has been
variable across countries over time, and it is proven to have made a substantial contribution to growth.
Education accounts for between 15 percent and 25 percent of growth in the U.S. national income
per employee. Its contribution to economic growth has tended to increase over time (Becker and
Lewis, 1993). As coverage of primary education has expanded rapidly in the developing world,
higher education has gained importance. Thus, countries which have invested heavily in creating
a well-developed infrastructure for tertiary education have reaped enormous benets in terms of
growth. Education has been a particularly important driver in the development of the capacity for
technological innovation, as the experience of Finland, Korea, Taiwan, and Israel clearly shows
(Lopez-Carlos and Mia, 2006, p. 89-105).
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3. INNOVATION AND REPUBLIC OF MACEDONIA
As a country where EU integration is among the top priorities considering the IUS indicators presented
in gure 1 and the group division, Republic of Macedonia belongs to the modest innovators, with
performance well below the EU27. Considering the IUS Report “relative strengths are in innovators
relative, weaknesses are in open, excellent and attractive research systems, nance and support and
intellectual assets. High growth is observed for new doctorate graduates, knowledge-intensive services
exports and license and patent revenues from abroad. A strong decline is observed for pct patent
applications and community trademarks. Growth performance in human resources, rm investments
and outputs is above average, growth performance in nance and support and intellectual assets is
below average” (Inno Matrics, 2011, p.57).
Figure 1. Annual average growth per indicator and average country growth
Source: Inno Matrics, 2011, p.57
Growing role of innovation in economic and social development, and how governments can help ensure
that innovation is translated into new products and techniques that can help society meet the global
challenges of the 21st century. Therefore, signicant efforts are invested in preparing the country for
EU membership – national legislation is being adapted to EU legislation in all areas covered by EU
law, EU standards are adopted in economic, political and social areas and comprehensive horizontal
reforms of the public administration are conducted. Government ofcials and commentators have
recognized this reality and have called for a variety of different substantive incentives for stimulating
innovation (Analytica, 2007).
In 2006, the Government of the Republic of Macedonia adopted the Programme for Scientic
Research, Technology and Technological Development which along with the newly developed draft
Laws on Higher Education and on Scientic and Research Activity, regulate research activities and set
priorities in this area (Analytica, 2007, p.5). Since Republic of Macedonia singed the above mentioned
programme, in the area of Information Society, the government launched several initiatives with ‘e’
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prex: E-Citizens, E-Education, E-Business, E-Government, and E-Infrastructure, and IT is now an
integral component of every government policy.
Republic of Macedonia is a full-edged partner in the Programme for Competition and Innovations of
the European Union (CIP). Starting from January 1st 2008, Republic of Macedonia ofcially started
with the implementation of this programme for the period 2007-2013, and in this way, it became the
second country after Croatia which is not a member of EU, but has joined this Programme. Through
this programme, the European Commission gives an impulse to the entrepreneurship, innovations
and the development of small and medium sized enterprises, which in EU are considered a backbone
for the national economies. The aim is to encourage the competition and innovations in the European
Union, bearing in mind that this could lead to an increase in the economic growth in the member-
countries and candidate-countries for membership in EU.
The Programme for Competition and Innovation is especially important for the small and medium
sized enterprises in our country, because it will provide them with internationalization, as well as
an easier access to the nancial assets, more appropriate use of information and communication
technologies, development of the IT society and promotion of the importance of new renewable
resources of energy and energy efciency.
The Programme for Competition and Innovation of the European Commission is planned for the 2007-
2013 period and it has a budget of 3.6 million Euros, and it is divided into three basic programmes:
Entrepreneurship and Innovation Framework Programme (EIP), Information and Communication
Technologies Policy Support Programme (ICTPSP) and Intelligent Energy Europe Programme (IEE).
Entrepreneurship and Innovation Framework Programme (EIP) has several dened goals:
• Providing more efcient access to nancial resources for the small and medium sized
enterprises (SMEs) by co-guarantees and co-investments of the local banks and funds for the
capital venture;
• Ensuring business and innovation services through a developed network of regional centres;
• Supporting and promoting entrepreneurship and innovation;
• Supporting ECO – Innovations.
The Programme for Competition and Innovation of the European Commission foresees cooperation
among owners of the small and medium sized enterprises, state institutions and organizations,
organizations of the civil society. It is specic that co-nancing of the projects is conditioned with
cooperation through the consortium or network of co-operators.
Regarding to the innovations in the Republic of Macedonia, the Bureau for protection of the intellectual
property conveyed a research in order to nd out the reasons of undertaking innovative activities by
the enterprises. The results of this research are shown in Figure 2.
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Figure 2. Reasons for undertaking innovative activiti
Source: APERM, 2004, p. 49
To reveal the types of benets that innovation brings to companies, we will use the empirical data
from our research, which was carried out during January–April 2010 in 119 small and medium sized
enterprises from different cities of the Republic of Macedonia. The data shows that improving the
quality of products and services offered to customers is the rst ranked benet from innovation. This
benet was mentioned from 27% of respondents. Further benets are ranked as follows: creating
better conditions at work (by 18% of respondents), maintaining the existing position in the market
(17%), entering new markets (13%), creating exibility at work (9%), improving the ecological
environment (5%) and diversication of product range (2%).
4. CONCLUSION
Innovations represent an activity of creating a new product or service, new technologic process, new
organization, or enhancement of existing product or service, existing technologic process and existing
organization. According to the given denition, if we analyze its separate elements, we can say that we
classify: innovations in production – development or enhancement of a specic product; innovations
in services – offering new or enhancing of existing services; innovations in process – nding of new
ways of organizing and combining inputs in the process of production of specic products or services;
and innovations in management – creating new ways of organizing business resources.
The importance and denition of innovations can be explained from several aspects. From the aspect
of customers, innovation means products with better quality and better services, which together
mean a better way of life. From the aspect of businesses, innovation means sustainable growth
and development, realization of great prot. For the employees, innovation means new and more
interesting job, which requires more mental faculty, which results in higher salaries. From the aspect
of whole economy, innovation represents a bigger productivity and development for all.
Growing role of innovation in economic growth and development, how governments can help
ensure that innovation is translated into new products and techniques that can help society meet
the global challenges of the 21st century. EU integration is among the top priorities of Macedonia.
Therefore, signicant efforts are invested in preparing the country for EU membership – national
legislation is being adapted to EU legislation in all areas covered by EU law, EU standards are
adopted in economic, political and social areas and comprehensive horizontal reforms of the public
administration are conducted. Government ofcials and commentators have recognized this reality
and have called for a variety of different substantive incentives for stimulating innovation. Several
core conditions enable innovation and encourage economic growth: strong standards and effective
enforcement of intellectual property protection, vigorous competition and contestable markets, a
strong and sustainable fundamental research and development infrastructure, encouraging information
and technology communication developments, a strong emphasis on education at all levels, etc.
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As a country where EU integration is among the top priorities considering the IUS indicators presented
in table and the group division, Republic of Macedonia belongs to the modest innovators, with
performance well below the EU27. From January 1st 2008 Republic of Macedonia ofcially started
the implementation of the European Union CI Programme for the period of 2007 – 2013, which
became the second country after Croatia, which is not part of the EU but is part of this programme.
Competitiveness and Innovation Programme (CIP) is particularly important for small and medium
enterprise in Republic of Macedonia, which would make them become international, and have a
better access to nancial resources, better usage of information and communication technologies and
development of the technological society.
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Chichester: Jonh Wiley and Sons.
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ENTREPRENEURIAL PROPENSITY AS A GENERATOR OF TOURISM SUPPLY
Tomislav Klarin
University of Zadar, Department of Tourism and Communication Studies, Croatia
E-mail: tklarin@unizd.hr
Abstract
Innovation is a key success factor in today’s market and, consequently, innovative entrepreneurship in the
modern economy is the very driving force that positively affects the development of technology and knowledge,
encourages new jobs and ultimately leads to the general stability of society. A particularly important segment
of entrepreneurship is small and medium-sized enterprises, which makes up the majority of the total number
of companies in developed economies.
Croatia is one of the countries going through the transitional process of changing their social system from
socialism to capitalism. Socialism in its essence involved job security and uniformity and was not an incentive
setting for the exercise of individual creativity, innovation and entrepreneurial productivity. Therefore,
the process of transition inevitably requires from individuals to change their perception in favour of larger
entrepreneurial initiative. Researches suggest that this process has not been fully accomplished. Its objectives
must ultimately result in competitive and dynamic economy based on knowledge and technology, capable of
sustainable development, creation of more quality jobs and a stronger social integration.
Despite the instability of the market, Croatia by means of various measures and incentives is trying to encourage
entrepreneurial development and catch up with more developed European countries. Tourism is a fundamental
activity in Croatian economy and accounts for the most important element in its GDP and is constantly evolving
and improving. Tourism and entrepreneurship are in strong interaction, because fresh ideas and changes are a
prerequisite for the survival of a destination in the tourist market.
Due to the transition trends and the global crisis which led to dramatic changes in the labour market, new young
generations are in a highly disadvantaged position. The positive shift is possible through their entrepreneurial
involvement, based on knowledge, innovation, strength and willingness to contribute to the development of the
economy, especially tourism, as the only sector recording positive results.
The aim of this paper is to explore attitudes about employment or, in other words, the willingness of the new
generation of young people to work for others or to start their own business, to examine their entrepreneurial
potential and the motives and reasons for (not) starting-up their own business. In particular, it discusses their
entrepreneurial propensity to participate in the tourism supply. The assumption is that students of tourism are
more inclined to entrepreneurial ventures. A survey was carried out through a structured questionnaire on a
sample of students of the University of Zadar. The collected data were analyzed by methods of descriptive
statistics and the research results were presented as workable solutions for the development of a model meant
to encourage entrepreneurship among the student population.
Keywords: Entrepreneurship, Tourism,Students, Education, Croatia
1. INTRODUCTION
Many of the current developed countries were forced to transform their economies and accept concept
of small and medium enterprises as a response to turbulent and demanding environment. Modern
economy based on exible, innovative and penetrating enterprises gave positive results, not only in
economical, but also in political and social development. Entrepreneurship had inuence on all levels
of human living generating value added and general prosperity.
Transition countries recognized the power of entrepreneurship, but still try to nd solid framework
for making positive entrepreneurial climate. Global crisis makes the situation worse. Croatia is one
of countries with the same problem. Strongly oriented on entrepreneurship, has noticed its weakness
that wanted to remove, but also noticed its advantages that wanted to exploit. Advantages graded
in tourism, only sector with positive trend in previous years. A positive trend follows also young
population expecting opportunity for progress and development as a participant of modern concept
of entrepreneurship.
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2. TRANSITION AND ENTREPRENEURSHIP
Democratic changes in transition countries have created new economic and social order. Economies of
the social countries were based on large and indolent companies and believing that economic success
and wealth creation depended only on these companies. Under these conditions worker’s existence
was assured but also possibility and freedom of entrepreneurial ventures was limited. Abandoning
the economy of scale concept and state control, processing market liberalization and reaching
open economies, many large companies could not nd solution in hard situation, gradually have
reduced business activities and ultimately, many of them have ceased to operate. Some of those large
companies have managed to restructure and adapt to changes and still work successfully. Mostly, they
have transformed into many small enterprises, which have applied knowledge and new technologies
much easier. According to data from research (Kandzija, Biljan-August and Lovric, 1997) in Croatia
in 1989 were 4,109 small and medium enterprises, and up to 1995 that number raised on 59,407. At
the same time, number of large companies reduced from 1.403 to 515.
Developed countries have realized on time fact that Small and Medium Enterprises (SME) were
precondition of local and regional economy development, competitive creation and overall social
prosperity. Their example followed transition countries. The experience of developed countries and
those in transition has identied entrepreneurship as an important accelerator of economic and social
development, although, exibility, adaptability and creativity of SMEs continuously recorded positive
results in all socio-economical levels.
Development of an entrepreneurial climate requires primarily freedom, expressed trough free and
competitive marketplace, the right and safety of capital, the right of establishing companies, investment
freedom, the possibility of making prot etc. Assumption of higher freedom degree is well functioning
of government, market and other institutions and transparent legal and statutory regulations. In addition,
a socio-political environment must be achieved to make a positive entrepreneurial climate. It involves
stimulating state policy with aim to ensure the existence and development of SMEs economy and to
create cultural, moral and ethical society that will make entrepreneurial behaviour acceptable and
positive. Securing property rights, stable monetary policy, good regulation, low taxes and free trade
presume increasing entrepreneurial activity and economic prosperity (Gwartney & Lawson, 1996).
In order to make a positive business climate and entrepreneurial economy, numerous political
and economics programs have been created to encourage entrepreneurship at all levels. Programs
of encouraging and developing SMEs include three basic strategic documents and actions of the
European Union: 1) The Lisbon Strategy, 2) The European Charter for Small Enterprises and 3)
Action plan for entrepreneurship, (Croatian Chamber of Economy, 2009). Some of the activities of
encouraging and developing SMEs are following: removing and reducing administrative cost and
barriers, appropriate sources of corporate nancing, export orientation, constructing enterprise zones
and business incubators, developing consulting educational programs, researches and development
of new technologies etc. All actions are aimed to promote the establishment of new companies,
encouraging development and innovation capability of enterprises through the creation of dynamic
and stable business environment, strengthening of internal market and accessing to other markets.
Entrepreneurial motives are determined by entrepreneurial climate and entrepreneurial environment
depends on the degree of development of certain country. Data show a different representation
of SMEs in the European Union and transition countries. According to the Croatian Chamber of
Economy in Croatian economy in year 2009 SMEs made 99.5% of the total number of enterprises, in
which worked 66.01% of total employees and where achieved 57.72% of the total prots made by all
enterprises. The share of SMEs in Croatian export in 2009 was 44% (Croatian Chamber of Economy,
2011). Data for EU-27, estimated from European Commission in year 2008 were similar: 99.8% of
the total numbers of enterprises with 67.4% of whole employees and 57.9% of all value added. In non
European countries like Serbia was almost similar situation. It was estimated 99.4% SMEs in total
number of enterprises, where worked 57.3% of whole employees and realized 51.5% of whole value
added (European Commission, 2009).
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2.1. MODERN CONCEPT OF ENTREPRENEURSHIP
Economic freedom and market liberalization signicantly inuenced on development of modern
enterprises, a higher degree of economic freedom has increased the opportunity for entrepreneurial
activity. Although, entrepreneurial activities are different between countries, its role in shaping
economic and social environment is unquestionable. The positive effect of entrepreneurship is:
the creation of new companies and new markets, liberalization of closed sectors, the expansion of
technology and knowledge, creation of new products and services, higher level of employment and
labour mobility, development and expansion of industry and production, better education and higher
technological level – thereby generates economic growth and raises general welfare of society.
Economic theory has developed different denitions of entrepreneurship, but they all contain the same
essential elements. Entrepreneurship is ability to initiate specic actions, to undertake activities with
purpose to struggle against obstacles in achieving desired aim, taking over the risk and uncertainty
of outcomes together (Deakins & Freel, 2003), where the entrepreneur must be prepared to identify
business opportunities, to collect and invest resources, to start a business and achieved planned value
(Cengic, 1995). Therefore, it could be concluded that entrepreneurship is behavioural phenomenon,
talent or skill that includes specic management of various resources and undertakes business
activities in order to achieve positive economic results, while taking risk.
The establishment of new SMEs increases competitive pressure on existing companies, pushing them
to enhance their effectiveness, while stimulating changes. Modern entrepreneurship increasingly
emphasizes the role of innovation, knowledge and technology, while reducing the importance of
material resources (land, raw material, energy), because these elements affect the efciency of
business and enable competitiveness and productivity of economy.
As a participant of entrepreneurship, entrepreneur is a person who creates new business activities,
identifying market opportunities and ensuring resources, necessary to exploit recognized opportunities,
taking uncertainty of prot and development of the enterprise (Leburic & Krneta, 2004).
Entrepreneur implements four dimensions – economic, managerial, innovative and socio-ethical
dimension (Cingula, 1995).
Economic dimension of entrepreneurship manifests through the creation of prot and achieving
greater income. That act makes him aware of possible risk, and possibility of loosing invested assets
and nancial capital, so he must necessarily identify business opportunity and distinguish chance
from the threat.
Control dimension refers to the duties and responsibilities of management – planning, managing and
realization of strategic plans, organizing and controlling nancial, material and human resources,
coordinating all process and business activities etc. Managerial skill is very important, because this
dimension requires entrepreneur to be rational, rightful and wise leader in optimizing all resource and
business activities in order to achieve sustainable development and prosperity of enterprise.
Innovative business reects in reproduction and generation of new, different and creative ideas.
According to Schumpeter, ideas include ve innovations (Vujic, 2010): 1) initiation of a new product
and service, 2) initiation of new method or production process, 3) opening and conquering new
markets, 4) conquering new source of supply or raw materials and 5) creating new organization in
certain industry. In that context Peter Drucker nd innovation as function and special instrument of
entrepreneur – doing something in a different way, not doing something better than what already
exists (Drucker, 1992).
Socio-ethical or moral dimension combines other three dimensions, whose realization is possible if
the socio-ethical responsibility minimum is satised. That responsibility reects through respecting
economic and legal framework of national laws and international standards. It reects also through
behaviour according to moral principles and rules and respect for human rights. Although, moral
and ethical values of modern world brought to a crisis, ethical should not be left to entrepreneur as
a free choice. It should be settled as an obligation and any contempt and deviant behaviour should
be sanctioned. For this reason, importance of socio-ethical dimension stresses more and more, while
gradually transformed into a special form of entrepreneurship, so-called social entrepreneurship
(Cingula, Veselica & Cingula, 2010).
All of the above states that entrepreneur must be versatile and govern the economic, legal and socio-
ethical skills. Therefore, some experts call them pert of the “economic elite” of modern societies
(Cengic, 2005), while some authors consider them as “elite controlling most resources” according to
order they have created in some countries in recent years (Kutsenko, 2004).
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3. TYPOLOGY OF ENTREPRENEURS AND ENTREPRENEURIAL MOTIVATIONS
Various authors give different typologies of entrepreneurs (Earle & Sakova, 2000; Smith, Norman
& Miner, 1983) connected with status, entrepreneurial tradition, working experience, due the work
purpose it considers only certain.
Typology and entrepreneurial motives relates to social and professional status, and specic situation
potential entrepreneur is found. Abstracting, it is possible to distinguish “entrepreneur of necessity” and
“opportunity entrepreneur” (Aidis, 2005). Entrepreneurs of necessity are appropriate to developing
countries, where limited alternatives encourage or even push in realization of entrepreneurial
ventures. Contrary to them, opportunity entrepreneurs are driven by market conditions entering in
entrepreneurship by a desire to exploit business opportunity in a way to accomplish their idea and
demonstrate their ability. The same classication states global Entrepreneurship monitor (GEM -
Global Entrepreneurship Monitor, 2010) in the global report about business activities of enterprises
in year 2010.
Social factors interacting with each other helps to create positive a positive entrepreneurial climate –
quality of life, moral and ethical socially acceptable norms, representation of social strata in certain
society, family structures, social roles within society, the strength of gender role in society, social status
of entrepreneurs are such factor that de/stimulate entrepreneurial climate. If values of these variables
concentrate around the mean average within a slight tendency to increase, stimulating inuence on
the creation of positive entrepreneurial climate. Contiguity with extreme values, discourage positive
entrepreneurial climate. There is also a contrary interpretation of the so-called marginalization theory
concerning the role that individuals presently achieve in society. Dissatisfaction with role or status in
society or current work encourages individuals to make some changes. This situation creates a critical
mass of individuals and potential entrepreneurial base.
4. ENTREPRENEURSHIP IN TOURISM
Considering the historical facts of the development of modern tourism is obvious that entrepreneurial
factors (knowledge, technology and innovation) have played an important role in developing tourism
and improving quality of tourist destinations. It is hard to measure the efciency of transport technology
in approaching tourist destinations or facility of communication and doing business installing ICT
technology, but all these changes improved tourist supply with purpose to satisfy growing consumer’s
needs.
Entrepreneurship gures complex economic activity represented and determinate differently in
certain industry sector. Concerning the interdisciplinary nature of tourism, entrepreneurship takes
place in all activities of tourism sector but also exceeds its limits, because of tight links with activities
of other sectors. It proceeds in SMEs and large enterprises, in private and public sectors. Economic
principles used in tourism are the same as in other economic sectors, however, the difference reects
in specic resources and market, product and service complexity, regarding tourism supply which is
trying to valorise.
Entering the tourism market enterprises must consider their possibilities and market conditions.
Facilitating the entry of enterprise is possible through adjusting supply to market conditions and
needs. In conditions where is necessary to ensure long-term survival in the market, SMEs must
nd mode of constant adaptation to market demand. In order to succeed, it is necessary to maintain
competitiveness and innovation. Innovation should not be a static dimension of onetime creation of
making product and services uniqueness, but requires long term process of continuous maintaining
and innovation offer. Therefore, the long term of enterprise’s survival and competitiveness presumes
constant innovation.
5. METHODOLOGY
Within the framework, a research was conducted on a random sample of students at University of
Zadar, Department of Tourism and Communication Studies. The research was realized electronically
by anonymous questionnaire appointed by link on social network Facebook or sent by email to
personal email addresses in period 15th of July to 15th of June 2011. The questionnaire approached
69 students, representing 15% of the total population of the Department. The questionnaire tried to
investigate student’s opinions and attitudes about work and entrepreneurship, their entrepreneurial
potential and propensity of entrepreneurial venture.
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A structured questionnaire was composed of primary part and seven others parts. Primary part requested
personal information about students, their study, work experience and entrepreneurial tradition in
family. The rst and second parts were related on their assessment of the current entrepreneurial
climate and incentives in Croatia. In the third section it has been examined student’s attitude about
job opportunities and mobility inside and outside the country. Motives and factors of starting-up own
business was evaluated in fourth and fth part of questionnaire. Sixth part had the intention to explore
their preferences of working for employer. Finally, in the seventh section students gave their answers
to open question which kind of business would they deal with, if they have started their own business.
The research results are explained by methods of descriptive statistic graphically and tabular illustrated.
Interpretation is settled in the theoretical framework and assumption that tourism students are more
disposed to start their own business.
6. RESEARCH RESULTS
In a random sample of respondents were represented 87% of women and 13% of men, aged 18-25
years (91.3%) or older than 26 years (8.7%).
Information about working experience, with multiple choice answer is showed in Graph 1, where
is obvious variety of working experience. Only small part of students never worked and more then
60% worked through student service – both index are positive and show working experience starts
in earlier age, but also indicate difcult nancial situation where students are forced to work to cover
their student costs. Concerning data is that 32.4% students worked on moonlight (black market) –
indicates the problem still exists in Croatian economy, despite the State struggle. It requires more
actions from the State and behavioural changes of employers.
Graph 1: Working experience
Source: own research
The information was also obtained about working experience considering certain business sector.
From all students with working experience, 26.9% of them worked in public sector, 82.1% in private
sector and only 4.5% independently as an entrepreneur. Data correspond to actual data because, even
the largest number of employees is concentrated in private sector still, more than 20% of employees
work in the big state apparatus.
Within the questionnaire it was investigated family relatives and entrepreneurial tradition in family.
Results showed that even 70.6% of examined students had someone from close relatives (father,
mother, brothers, grandfather etc.) working as an entrepreneur, and only 29.4% without entrepreneur
in family. According to data from Croatian Financial Agency (Croatian Financial agency, 2011) in
year 2010 in Croatia was 96,383 SMEs, so, comparing to the latest population list (Croatian Bureau
of Statistic, 2011), there was 22.5 enterprises per 1,000 inhabitants. Countries like Germany had only
20 enterprises, while Italy had 65 or Portugal even 80 enterprises per 1,000 inhabitants.
Entrepreneurial climate and relevant elements were examined through the assigned marks based on
Likert scale from 1 to 5. Table 1 shows student’s assessment of entrepreneurial climate, stated in
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percentage accordingly to representation of their marks. Mostly, students had bad judgement. Even
exists, (Government program for encouraging entrepreneurship, 2008), 40% of students knew nothing
about Government program of encouraging entrepreneurship, so is understandable the negative opinion
about encouraging entrepreneurial ventures. Government tries to achieve entrepreneurial climate and
program of encouraging entrepreneurship exists, but still not transparent enough and recognized
as successful. Perception of low level of economic freedom indicates inappropriate functioning of
government, market and other institutions and non transparent legal and statutory regulations.
Table 1: Assessment of Entrepreneurial climate
Marks (%) 1 - very bad 2 – bad 3 – neither good no
bad 4 - well 5 – very well
Economic freedom 4.4% 27.9% 52.9% 13.2% 1.5%
Entrepreneurial climate 10.3% 50.0% 33.8% 5.9% 0.0%
Encouraging
entrepreneurship 11.8% 48.5% 35.3% 4.4% 0.0%
Current situation for
starting-up business 23.5% 54.5% 20.6% 1.5% 0.0%
Source: own research
Table 2 is also connected with they marginalized thinking and behaviour, but shows they still don’t
have enough courage and experience to make a certain step in their life. They also don’t show enough
entrepreneurial propensities. Even they are pushed up by negative conditions on the labour market,
they try to nd chance working in safety and lower stress public sector. Certainly, alternative is not
only entrepreneurship, even 30.9% of them found interesting perhaps, do to higher benets, working
simultaneously as entrepreneur and as employee.
Table 2: Intensions and desires after nishing study
Aer nishing study,
I would like to Work as
employee in
private sector
Work as
employee in
public sector
Try to start-up own
business, If can’t nd
adequate job
Work only as
entrepreneur
Work simultaneously,
as entrepreneur and as
employee
4.4% 35.3% 22.1% 7.4% 30.9%
Source: own research
It was also tried to investigate relation between sex (man & woman) and entrepreneurial propensity.
44% of all men declared they would like to work only as entrepreneur and simultaneously, as
entrepreneur and as employee. Women had stronger entrepreneurial propensity participating with
50% of all examined women. In Efciency-driven countries, where Croatia is also classied, men
and women ratio oscillates from 1:3 to even 1:1, so this case of women’s entrepreneurial propensity
conrms the fact from GEM report 2010 (GEM, 2010).
Between the motives assessed in the research, results presented in Table 3 found interesting.
Obviously, in entrepreneurship students saw the major opportunities missing in Croatian economy
and society. According to low standard and low salaries, they want to be independent and increase
prot. Also, through entrepreneurship they found possibility of development and progress aware of
current situation, where small part of companies invests in their workers. Croatian people spend only
app. 15 years in continuing whole life education, while some of Scandinavian countries have average
of app. 23 years.
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Table 3: Motives of starting-up own business
Motives for starting-
up own business 1 – not at all impor-
tant 2 – not impor-
tant 3 – yes and not im-
portant 4 – important 5 – very im-
portant
Independence and
increased prot 0.0% 0.0% 9.1% 54.5% 36.4%
Possibility of own
development and
progress 0.0% 0.0% 6.1% 45.5% 48.5%
Desire to use an
opportunity 0.0% 3.0% 13.6% 53.0% 30.3%
Continuing and
developing family
business 15.4% 26.2% 15.4% 36.9% 6.2%
Insuring job to other
family members 6.2% 15.4% 29.2% 38.5% 10.8%
Fear of
unemployment 1.5% 4.5% 24.2% 42.4% 27.3%
Source: own research
Assessing features and factors for starting-up own business showed variety of perception, but most
student have agreed that major elements for starting-up own business are quality and competitive
product in correlation with innovation and creativity. They also concluded that for being entrepreneur
and having own enterprise it’s necessary to work hard and be persistent. Table 4 indicates student’s
perception.
Comparing students with entrepreneur in close family and desire of working, it could be conclude
that 50% of students with entrepreneur in close family wanted to work only as entrepreneur or
simultaneously, as entrepreneur and employee. 34% of them wanted to work in public sector. It’s
obvious that entrepreneurship is bipolar – it could give some benets but still could be too risky and
hard. Most of them indicated the same motives of starting-up own business (independence, increased
prot, possibility of development and progress), but very few possibility of insuring tradition of
family business and job to other family members.
Table 4: Features and factors necessary for starting-up own business
Features and factors
necessary for starting-up
own business
1 – not at all
important 2 – not impor-
tant 3 – yes and not
important 4 – important 5 – very impor-
tant
Good manager skills 0.0% 0.0% 4.5% 40.9% 54.5%
Human, social features
and honesty 0.0% 4.5% 9.1% 31.8% 54.5%
Education and
experience 0.0% 1.5% 18.2% 40.9% 39,4%
Innovation and creativity 0.0% 0.0% 0.0% 37.9% 62.1%
Initial capital 1.5% 0.0% 3.0% 34.8% 60.6%
Having quality and
competitive product/
service
0.0% 0.0% 1.5% 22.7% 75.8%
Be persistent and work
hard 0.0% 0.0% 3.0% 28.8% 68.2%
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Positive entrepreneurial
climate and market
conditions
1.5% 0.0% 6.8% 50.0% 58.3%
Political and private
connections 9.1% 9.1% 28.8% 30.3% 22.7%
Source: own resource
Contrary to the entrepreneurial motives and factors of starting-up business, students also gave their
attitudes about relevant elements of working as an employee with the employer. If they had chance to
work for employers most important factor was pleasant working environment, relation with superiors,
then salary and personal development and lifelong earning. The least important was monotony of job,
working hours and stress at work.
Last part of the questionnaire asked for open student responses on question of which activities would
they dealt with if they have started their own business. 40% of students stated some of the tourism
activities, while remaining 60% would involve in some other business.
7. CONCLUSION
Abstracting many anomalies and deviant behaviour raised from transition process, it is possible to
conclude that relation to entrepreneurship in Croatia slowly going better. Perception of entrepreneur
changed, but still connects entrepreneur with behaviour not in accordance with government measures
and social awareness. Perhaps, the entrepreneurs are considered as some kind of elite, but certainly
they are considered as elite according to new order of power and control they have established.
Development of entrepreneurship is possible if three conditions are provided: economical, political
and sociological. Neither of them is completely insured. Indeed, some of activities from fundamental
European documents of encouraging entrepreneurship are conducting, but European and Croatian
socio-nancial crises indicate really difcult and unpromising time for entrepreneurship.
Problem of encouraging entrepreneurship is also lack of coordination of government policies in
creating and enabling environment for entrepreneurial activity. Large number of institutions and
large public sector on central and regional level encourage entrepreneurship, without coordination
and efciency measurement of incentive programs and implementation of policies consistent with
regional development needs.
Some positive improvements made in tourism, but still it’s not enough without production and export.
Students of tourism also showed their low entrepreneurial propensity and interests for starting-up
own business. There are neither entrepreneurs of necessity nor opportunity entrepreneurs. They
recognized all positive benets entrepreneurship is offering, but they are also aware of current hard
situation, alluding with their attitudes and perception on past times, living in socio-democracy, job
security and lower stress life.
Creation of an effective social entrepreneurship is possible by engaging legal, economical and social
institutions and political power in order to construct basic framework of social actions and equitable
society. Healthy socio-economical environment encourages and reinforces entrepreneur’s standing,
while venture-oriented economy provides entrepreneur and entrepreneurship a central position in
economic activities and achieving economic and social development.
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FACTORS CONTRIBUTING TO THE MOBILITY OF INTELLECTUAL CAPITAL EXAMPLE
FROM BOSNIA AND HERZEGOVINA
Zoran Crnčević
University of Banja Luka - Faculty of Economics,
E-mail: epicentar.crni@gmail.com
Jovo Ateljević
University of Banja Luka - Faculty of Economics,
E-mail: jovo.ateljevic@gmail.com
Apstract
Economic development based on creativity and knowledge or human capital in general, has become the leading
growth strategy for both developed and developing economies. Those countries able to attract and retain
educated, creative and entrepreneurial people build a sustainable competitive advantage in an increasingly
interdependent global economy. Despite a growing amount of research into the phenomenon in developed
economies, a detailed review of the literature revealed that there is a lack empirical research dealing with
human capital and its mobility in transitional countries. Our research reports on a comprehensive survey of
420 creative and with knowledge-equipped people in Bosnia and Herzegovina (BiH). This study suggests that
for those ties with family and friends are the most important factor in choosing their place of residence, while
culture, place amenities, social diversity, and environmental quality are less important in this regard. The
results have also been compared with ndings of similar surveys conducted across developed part of the EU.
We have also found that less than a quarter of the respondents are almost denitely or very likely to leave the
country, mostly targeting larger EU cities, which is not as much as it was previously believed.
Keywords: Human capital mobility, urban environment, knowledge economy, creative industry, transitional
countries.
1. INTRODUCTION
In an open global economy intellectual capital (Miller, 1999) has increasingly become sought after
resource for economic and business development. Public availability of knowledge and decreasing
communication costs propelled growth of knowledge-based products and services. Development of
the Internet and related technologies boosted demand for innovative ideas, creative solutions, and
custom made products. Companies, whose primary sources of prot are knowledge and creativity,
nourish cooperation and wellbeing of their teams to support generation of new knowledge. Information
and Communication Technologies (ICT) revolutionized methods of knowledge sharing and creation
(Z. Acs & Varga, 2004; Jensen, Johnson, Lorenz, & Lundvall, 2007). Although the Internet and
social mobility, knowledge networks span across the Globe, yet innovation is still very much a local
phenomenon. Urban places with varied and complementing industries, founded on the diversied
knowledge base, have been at the core of economic growth (The World Economic Forum, 2011),
as people depend on personal contact and physical proximity to disseminate and develop ideas. In
recent decades, a handful of metropolitan areas have experienced growth of knowledge and creative
industries, while many other cities have experienced depletion of their stock of human capital. Thus
as, Florida (2005) observes, the world economy is increasingly divided between thriving urban areas
and the rest of the world. In fact, the majority of the world population, most key patents, and majority
of the most-cited scientists are concentrated in several metropolitan regions. Development of the
knowledge and creative economy increases the gap between rich and poor, not only on the global,
but even more so, on the regional and local level (Weiming, 2000). In such an environment, the
availability of local talents is the key precondition for growth of the knowledge and creative economy.
Talented and highly educated workers are increasingly mobile, those originating from other countries,
make 2% of the European labour market, 4,5% in the United States, 8% in Australia and over 10%
in Canada. Even countries like China and Brazil will long-term face the problem of labour shortages,
especially highly educated professionals and entrepreneurs. Companies and countries struggle to
attract the best and the brightest innovative and creative people, advertising quality of the environment
to lure the top talent. Creating entertainment component of the city living has become a part of the
long term strategic planning (Clark, 2003a). Knowledge enterprises work in the complex multicultural
environment, what brings issues of tolerance into the fore of the research in economics (Florida, 2002).
Creative and knowledge workers, with original ideas, non-conforming personal beliefs, attitudes, and
different lifestyles want to feel welcomed among their peers (Amabile, 1998; Long & Fahey, 2000).
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Same goes for non-domicile knowledge and creative workers, who need to be accepted and tolerated
in the society they live in, regardless of their ethnicity, race, or sexual orientation. Contrary to the
argument of Florida (2002), that the key factors of human capital mobility are community`s tolerance
to differences, amenities, and bohemian-like lifestyle opportunities, there is a nding of the ACRE
research (Musterd, Brown, Lutz, Gibney, & Murie, 2010) that human capital in the EU is more likely
to stay in their place of birth or study, close to their family and friends Family and social networks
are also the key factor on choosing the place of residence for human capital in Dublin (Murphy,
Redmond, & McKnight, 2008). A possible explanation for this discrepancy could be related to lower
general population mobility in Europe than in the USA.
Countries in transition are lagging behind in terms of development of economy based on knowledge
and creativity. Bosnia and Herzegovina (hereafter, “BiH”) is the case in point, the country’s larger
cities unable to create appropriate leaving and working conditions are in danger of losing their pool
of talents. Global Competitiveness Report (2010) indicates that for the availability of scientists and
engineers BiH occupies the 115th place amongst 139 countries covered by the survey. BiH is also one
of the highest-ranked countries when comes to the number of educated and talented people leaving
the country. In order to better understand the reasons contributing to such a situation in BiH, a typical
transitional country, our research is set to analyze relationship between human capital mobility and
societal and economic factors of the living and working environment in countries in transition. To
the best of our knowledge similar research has not been conducted before. We also test whether the
ACRE research ndings (Musterd et al., 2010), that knowledge and creative workers in the EU are
more likely to stay in their place of birth or study, hold true for knowledge and creative workers
in BiH. The ultimate research question is to nd out to how and to what extent socio-economic
conditions (factors) inuence the choice of residence of knowledge and creative workers in BiH.
In order to deal with the main research problem the following questions are specied: What is the
signicance of traditional social networks, in regard to proximity of the family and friends on the
choice of residence? What is the importance of economic factors on the likelihood of moving away
from their city in BiH? What is the signicance of city features on the likelihood of moving away?
The paper is structured as follows. After the introductory section, a comprehensive review of the
literature gives us insight into development of theoretical and practical understanding of creative
and knowledge economy (Section 2). Section 3 describes methodology and sample used for our
research. Results of the survey are presented in Section 4, followed by the discussion in Section 5,
and conclusion in Section 6.
2. LITERATURE REVIEW
Theoretical contest of the present research is rather broad as a number of topics are associated with the
research problem, including knowledge economy, creative industry, innovation and entrepreneurship,
the business/living environment and social mobility. The following discussion will focus on:
knowledge dissemination, generation of knowledge, sources of innovation, human capital mobility,
and factors that impact mobility of knowledge and creative workers.
Scholarly debate about the Knowledge and Creative industries has intensied in the past couple of
decades (Hartley, 2005; Marcus, 2005; Musterd et al., 2010; UNCTAD & UNDP, 2008). Indeed,
Knowledge and Creative industries signicantly contribute to the economic growth, generating value
by applying new knowledge to products, services and organizational processes. Prot comes from
innovation of an entrepreneur who produces a commodity with lower costs than his competition,
selling it for the prevailing market price, and keeping the entrepreneur`s prot (Schumpeter, 1939).
Idea that knowledge has a big impact on economic development is not new. Weber argued (2005, p.
xxxvii) that utilization of technical possibilities, funded on “natural sciences based on mathematics
and exact and rational experiment” had strong inuence on development of capitalism. Breaking
apart from neoclassical economic theory of the diminishing returns, in his study of data from 1909
to 1949, Solow (1957) argued that 7/8 of the rise in productivity is due to technological change, and
only 1/8 of the growth was due to increased capital per man hour. In this sense, neoclassical theory
becomes a special case of endogenous growth theory with margin of innovation converging to zero
(Aghion & Howitt, 2007). Building on the model of Solow, Lucas (1988) incorporated human capital,
identied as a production skill of a worker and its accumulation over time, marking human capital as
the main source of rising productivity, both of labour and physical capital.
According to UNCTAD1 & UNDP2 report (2008), concept of creative industries is new and
1 United Nations Conference on Trade and Development
2 United Nations Development Programme
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evolving, focused on their dynamics, without a single denition for creative economy, and with no
consensus about activities based on knowledge that summarize sector of creative industries. These
industries “constitute a set of knowledge-based activities”, using “creativity and intellectual capital
as primary inputs”, not necessarily limited to arts but rich in creative content, being on the crossroads
“among the artisan, services and industrial sectors” (UNCTAD & UNDP, 2008, pp. 12–18). Creative
workers, as an agglomeration of a very large number of complementing professions, cover jobs
such as: marketing and PR, advertising, architecture, trade with antiquities, ICT services, creative
crafts, music, visual arts, theatre, newspapers – printed media/publishing/web portals, video, lm,
photography, music production, RV and radio, while knowledge-based work is usually found in legal
and nancial intermediaries and consulting services, science, R&D and engineering departments, and
university faculty. Creative and knowledge workers bring prosperity to places where they work and
live. Entrepreneurs create links and networks, serving as a medium for the transfer and creation of
knowledge (Z. J. Acs, Audretsch, Braunerhjelm, & Carlsson, 2005). Examples of success, role models,
famous creative and knowledge entrepreneurs, networks of support and knowledge spillovers, all
constitute important environmental factors that increase success rate of new rms.
2.1. Innovation and knowledge
Innovators are creative and skilled people who “do things differently in the realm of economic life”
(Schumpeter, 1939, p. 80). Creating something new, whether in a physical form or in a form of
mental imagery, is regarded by Vygotsky (2004) to be an act of creativity or imagination, intrinsic
to all human beings as their ability to process past knowledge and recombine it into innovations.
Diversity and depth of available knowledge are crucial to new learning (Cohen & Levinthal, 1990).
Economically relevant knowledge is idiosyncratic to innovative people, as there are able to recombine
existing resources creating new products or services. Different forms of creativity are interconnected,
they “not only do they share a common thought processes, they reinforce each other through cross-
fertilization and mutual stimulation” (Florida, 2002, p. 33), creativity is “associated with a mind that
exhibits a variety of interests and knowledge” (Simonton, 1999, p. 207).
Novelty ideas could come from convergence of random and varied stimuli, sometimes through
collaboration of people from exceptionally different domains (Csikszentmihalyi & Sawyer, 1995;
Nooteboom, 2000), if divergence of their cognitive processes is not too wide apart. Therefore, natural
habitat for innovators is environment diverse in knowledge and rich in creative stimulus (Audretsch &
Feldman, 2004). Polanyi argued that “we can know more than we can tell”, meaning that “tacit thought
forms an indispensable part of all knowledge” (Polanyi, 1966, p. 20). Distribution of knowledge that
can be codied (written and copied without substantial costs) depends on acquired tacit knowledge,
which exists in a form of practical knowledge or knowledge that is still not completely developed (Z.
Acs & Varga, 2004; Jensen et al., 2007).
2.2. Environmental aspects of knowledge and creativity
Concentration of knowledge and creative entrepreneurs bring competition, competence and dynamism
into community. In a longitudinal survey (1977 to 2000), Glaeser et al. (2010) found that 10% increase
in rms per worker in 1977 correlates with employment growth of 10% in that period. Agglomerating to
certain places entrepreneurs not only increase their productivity by reducing transport costs and being
closer to the natural resources and clients, but also by increasing access to ideas of their peers (Glaeser,
2007). Knowledge-creating networks spread far further that the boundaries of the workplace. People
introduce information, personal contacts, specic experiences and personal insights from the outside
world into their companies (Nooteboom, 2000). Cities with an abundance of business, educational,
cultural and self-actualizing prospects are more likely to attract creative and knowledge workers
than places where those opportunities are scarce (Clark, 2003b). A successful city is a “nucleus of
an atom” (R. E. J. Lucas, 1988) that attracts increasing labour inows. Glaeser et al. (2010) found
a strong correlation between amenity index and level of employment in metropolitan areas, arguing
that high amenity places attract human capital with college degrees; therefore, industries that employ
them are also clustering in those cities.
Cities rich in amenities offer context for initial contact and friendship in a variety of situations; in art,
sport, music events and venues, in clubs, art classes, lectures, bars, street performances, opera houses,
libraries or galleries (Clark, 2003a; Clark, Lloyd, Wong, & Jain, 2003) . Knowledge entrepreneurs
are willing to pay more for living closer to the city centre (Glaeser, 2007). There are four key city
amenities aaccording to Glaeser et al., (2004): range of available goods and services, aesthetic
features of the city, quality and range of public services, and the quality and speed of transport and
availability of jobs. The same researchers found that number of local amenities such as restaurants,
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live performance theatres, attractive city dwellers, city architecture, superior schools, less crime,
good local weather, well-organized transport connections, and availability of jobs are in positive
correlation with an overall growth of a city. Research conducted in the EU found that there is no single
city characteristic that is important to creative-knowledge workers (Musterd & Murie, 2010d), so we
need to look into history of a place, quality and diversity of social and business networks, transport
and communication infrastructure and quality and cost of housing. Musterd & Murie (2010a, p. 25)
recognize “Soft conditions”, such as the quality of life, urban atmospheres, housing market situations,
levels of tolerance, openness and the diversity of the population, while “hard conditions” relate to
factors that are traditionally regarded as “playing the major role in explaining the development of
rms in urban regions: availability of capital and of labour with adequate skills, proper institutional
context, tax regimes, up-to-date infrastructure and accessibility” (Musterd & Murie, 2010b, p. 7).
Contrary to this description, we consider proximity of family and friends, and other soft conditions
that support social networks, as `societal factors`, while `economic factors` are related to local hard
conditions which depend on local funding and political decisions.
Proximity to friends or family most often determine where European creative-knowledge workers
settle or move to (Musterd & Murie, 2010d). This differs from ndings from the USA (Florida, 2002),
that tolerance, openness and diversity are the key factors of human capital mobility. This discrepancy
between Europe and USA could appear due to generally higher mobility of people in the USA, where
knowledge and creative workers are less reliant on friendship and family networks and more on
easier integration into local community and professional and business networks. Glaeser & Redlick
(2008) found that declining areas might not experience weakening of social capital, keeping networks
between family and friends strong, while being more likely to experience drop in number of skilled
people. Furthermore, the existence of national boundaries within Europe, differences in citizenship
rights and responsibilities, stronger interventionist traditions and the welfare state are also likely to
affect the European human capital mobility (Musterd & Murie, 2010c).
Overall, available studies address issues of human capital mobility in developed countries in context
of the living and working environment, while countries in transition are poorly represented in the
literature on knowledge economy and human capital mobility. The existing research does not address
differences between knowledge and creative workers who are more and those who are less likely to
move away from their present place of residence in terms of their perception of their living environment.
Also, there is a gap in the literature covering countries in transition, regarding the question of whether
proximity to family and friends impacts knowledge and creative workers` decision when choosing a
place of residence, in spite of lower wages and poorer educational and career prospects in transitional
economies. In the context of the Western Balkans countries, limited data suggest that over one fth of
the tertiary educated population from, for example BiH, Croatia, and FYR Macedonia are immigrants
in the OECD countries only (R. Lucas & Martin, 2010), and still more highly educated people from
these countries have settled in the USA, Canada and Australasia.
2.3. The knowledge and creative economy in Bosnia and Herzegovina
Countries in the SEE and CEE3 regions went through a long period of the socialist planned economy,
followed by a period of transition to the market economy. Some countries, like Czech Republic,
Slovenia and Poland went through the transitional period more successfully, while others, such as
Romania, Bulgaria, and most of the ex-SFRY4 republics are struggling to consolidate their economies.
Migration of younger and educated workers in BiH, from the periphery to urban centers and abroad,
was exacerbated during the breakup of former Yugoslavia from 1991-1999. Anecdotal evidence
suggests that high number of people with tertiary education want to leave the SEE countries. Glaeser
and Redlick (2008) found that even in declining areas, with a net outbound human capital migration,
people are more likely to return to schooling in order to raise their chances to migrate, adding in that
way to accumulation of human capital in the area.
When it comes to youth, unemployment rates in the SEE countries are particularly high, with 60%
percent in FYR Macedonia and BiH and 50% in Serbia (R. Lucas & Martin, 2010). In regard to mobility
of human capital, high unemployment rates could propel outbound migration to more developed
EU metropolitan areas as soon as administrative barriers are lifted. In BiH, research conrmed that
around 70% of young people want to leave the country, mostly for economic or political reasons
(United Nations WPAY – Youth UNIT, 2005). Commission of the European Communities (2007)
acknowledged that obstacles for migration from BiH to the EU mainly relate to legal and administrative
barriers, housing costs and availability, employment of spouses and partners, portability of pensions,
3 CEE – Central and Eastern Europe – countries of the former communist block
4 SFRY – The Socialist Federal Republic of Yugoslavia
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linguistic barriers, and issues on the acceptance of qualications.
3. RESEARCH DESIGN
The research process was conducted in phases. Firstly, focus group method was used to test validity
and adjust a questionnaire we borrowed from the ACRE5 research. The focus group ltered the most
important factors of respondents` living environment.
In the second phase, we used the questionnaire to collect data on four aspects of working and living
conditions, as well as demographics.
We use hypothesis testing to determine whether arguments from reviewed literature hold true for
knowledge and creative workers in economies in transition:
H1: Proximity to family and friends signicantly inuence the choice of place of residence,
H2: Cost of living signicantly inuence the decision of change of residence,
H3: City features do not signicantly impact on human capital mobility.
3.1. The Survey
We use survey technique to test the hypotheses with. The questionnaire used for this research was
borrowed from the EU research ACRE6. We use focus group interview to test the questionnaire. For
the focus group we chose 11 people from the creative and knowledge economy7. We deliberately
choose people with varied educational, professional and life backgrounds. Focus group was held on
9th of October 2010, Saturday, in a meeting room of the City Development Agency in Banja Luka
(CIDEA). The questionnaire was then sent to a group of 25 respondents, who lled it online. They
gave their comments on the clarity of the questions and technical issues.
The Sample and sampling techniques
We have determined the survey sample in accordance with the methodology and encountered
difculties. We follow argument of Fowler (1984), that there are ve key issues related to sampling,
including the sample frame, choice, size, design, collection of data, and the rate of response. The
sample frame for our research consists of knowledge and creative workers living and working in larger
BiH cities. Entrepreneurs are difcult to sample, since they are difcult to identify, their population
is usually very small, and proprietary databases are either incomplete or non-existent, because of the
populations` dynamics (Neergaard, 2008).
To determine the sample frame size we approached The Institute of Statistics and The Employment
Bureau, who were not able to provide us with necessary information. Therefore, we decided to settle
with the non-probability, snowball sampling method. We use every effort to reach population as wide
as possible, but there is a large element of self-selection in the data collection process. We reduce
selection bias by expanding the sample size. However, since we were not using probability sampling,
we faced two sources of bias. The rst one was our choice of initial subjects, and the second was
volunteerism in responding (Heckathorn, 2002).
Our targeted population is fairly small in BiH and well interconnected. The initial group had 100
people including long-term friends, acquaintances from work, university, and leisure activities. It
was assumed that older people were less likely to use the Internet, and people under the age of 30,
who grew up with the web and ICT, are more likely to be overrepresented on the Internet (Sapsford
& Jupp, 2006). Therefore, our sample frame consists of people from BiH under the age of 35, and
people in managerial or other decision-making positions over 35 years old, who are found to be well
represented on the Internet8. We used web platform Survey Monkey9 to distribute our questionnaire,
and repeatedly reminded our initial group to send the link to their contacts via emails.
People we contacted directly or through friends` networks were highly responsive. This generated a
5 http://www.acre.socsci.uva.nl/
6 ACRE - Accommodating Creative Knowledge – Competitiveness of European Metropolitan Regions within the
Enlarged Union, http://acre.socsci.uva.nl/
7 Economist, corporate banking, microcredit organization, Computer Programmer, Architect (senior architect in The
Bureau for Civil engineering), Actress for The National Theatre, Graphic designer, the 3D design and animation
studio.
8 „The GfK Group“ BiH: „A growing number of Internet users in BiH“: http://www.gfk.ba/public_relations/press/
press/004443/index.ba.html, 02.01.2011.
9 http://www.surveymonkey.com/
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signicant number of participants. The most active propagators were female friends who are holding
managerial positions in web-based media houses. Our respondents work in the knowledge and creative
economy, and they are in their twenties or older. Within the period of 3 months (February - May,
2011), the total number of people who followed the link from unique IP addresses was 684, while 464
people completed the questionnaire. The response rate was 67,8%. We deleted 42 responses that did
not full our specic requirements regarding the occupation. Therefore, the nal response rate is 642
responses with 420 completed and useful questionnaires, so the nal response rate is 65,42%.
We cannot claim population validity, because but there is a large element of self-selection in the
data collection process. However, our sample is fairly large to minimize this bias, and number of
completed questionnaires is sufcient, compared with number of visits to the web site (Sapsford
& Jupp, 2006). We also introduced variables whose sole purpose is to exclude respondents who do
not t into our sample frame. In addition to our procedures to reduce bias and support validity and
reliability, repeated research in the SEE countries could add to our analysis in this respect.
3.2. Data analysis techniques
To evaluate relationship for data acquired with the questionnaire, we use the non parametric Chi-
square test and factor analysis in SPSS 17 software package. The Chi-square test was chosen because
collected data are non-numerical; consisting in large part of nominal and ordinal data, and population
distribution does not t the normal distribution parameters. In addition to the Chi-square test, we use
factor analysis and binary logistic regression, in order to determine which factors most signicantly
impact respondent`s decision to move away from their city in the next three years.
To use binary logistic regression we modied dependent variable: “How likely are you to move away
from their city in the next 3 years?”, by reducing 5 options (almost denitely, very likely, somewhat
likely, not too likely, and not at all likely) to 2 options (1 and 0), where option “1”= “YES” represents
answers almost denitely and very likely, while option “0”= “NO” represents answers somewhat
likely, not too likely, and not at all likely. This allows the calculation of equations expressing the
relationship between binary outcome and impact of several factors, as predictors.
After conversion, our dependant variable (Likelihood of moving away from their city in the next
3 years) is dichotomous. Binary logistic regression analysis is used for one categorical dependent
variable, and seven continuous independent variables - predictors (seven linear combinations that
we get after the factor analysis). In this way, we are able to predict whether the probability of the
dependent variable is the function of independent variables. Likelihood of moving away from the city
is calculated by the equation for odds:
−
=p
p
odds 1
Greater the odds of an event, the greater the probability that the event occurs, where,
( )
−
=p
p
1
logoddslog
In the case of multiple predictors, as in our example, the equation for p is:
......xbxbb
......xbxbb
22110
22110
e1
e
p
+++
+++
−
=
bi – a measure of association between the predictors and the equation (log (odds)) for the occurrence
of an event that interests us.
bi > 0 – positive association
bi = 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 ndings show that respondents selected the following answers: 7,4% of our respondents selected
almost denitely, 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 signicant 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 nished
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 signicant
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 nancial intermediaries 10.5%, legal and other business services 10.0%, marketing and
PR, advertising 7.9%, design, applied arts 4.8%, arts: music, ne 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, lm, 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 denitely` 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 signicant variation exists in observed and expected values between mobility
subgroups in terms of the respondents` age with χ² (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 signicant factor. A signicant variation exists between mobility
subgroups in relation to their monthly income, with χ² (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
signicantly 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 signicant 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 signicant 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 resident’s
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 ve choices: very satised, satised, neither, dissatised,
and very dissatised. For our analysis, we aggregated scores of ve into three choices: very satised
to satised, neither, dissatised to very dissatised. In that way we were able to use Chi-square to test
signicance 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 satised or satised with quality of public spaces (plazas, parkas, etc), quality and range of
restaurants, quality of bars and cafés, and quality of cinemas. Highest scores of very satised to
satised 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 cafés 46.7% of
respondents from the more mobile, and 62.3% from the less mobile subgroup are very satised to
satised.
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 dissatised to very dissatised.
Statistically conrmed differences between two mobility subgroups are identied 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 cafés, quality of cinemas, quality of shopping areas,
architecture of the city/relevant monuments, and quality and range of tness centres, with more
mobile subgroup being in larger percentages dissatised to very dissatised.
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 dissatised
to very dissatised with a number of bicycle lanes, while 82.6% respondents from the rst, and 72.5%
from the second subgroup are dissatised to very dissatised with the quality of tourist attractions.
High percentages of dissatised to very dissatised 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 signicance is conrmed 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 signicantly more dissatised to very dissatised
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 dissatised to very dissatised with levels of
use of bicycles as a means of transport, while 64,7% respondents from the rst, and 67,4% from the
second subgroup are dissatised to very dissatised with tidiness and cleanliness of rivers and river
banks.
Regarding environmental aspects of their city, high percentages of dissatised to very dissatised
respondents are recorded for the recycling collection services (65,8% for the more, and 59,7% for the
less mobile subgroup), trafc 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 signicant
difference between mobility subgroups is recorded only for tidiness and cleanliness of rivers and river
banks, where the less mobile subgroup is more dissatised with a state of riverbanks and cleanliness
of rivers, χ² (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 ve 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 signicance of the relationship between mobility of
respondents and their concern with the societal and economic factors of the living environment, we
aggregated scores of ve 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 rst, 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 trafc 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 signicance is conrmed 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 grafti,
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
signicantly 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 ve choices: very expensive, expensive, average, cheap, and very cheap. For our analysis,
we aggregated scores of ve 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 rst, 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 signicance is conrmed for variables: costs of education and training χ² (2, n=420) =
6.862, p< ,05, transportation costs χ² (2, n=520) = 12.956, p< ,01, and general cost of living χ² (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
denitely 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 ve choices: strongly agree, agree, neither, agree, and strongly disagree. For our analysis, we
aggregated scores of ve 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 signicant 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 denitely to move away from their city
signicantly 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 inuenced by the amount of public funding.
We use factor analysis and in order to determine which factors, economic or cultural/societal, most
signicantly 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 grati
Drug problems
Homelessness
Aggressive/anti-social behaviour
Prostitution on streets
Behaviour of trac 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 aordable 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 Bartlett’s Test for the null hypothesis (correlations between variables equal
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to zero) is signicant for given variables, therefore we proceed to extract factors which encompass
independent variables. Table 9: Bartlett’s Test
Bartlett’s Test
Bartlett’s 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 specic
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 grafti 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 trafc 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 rst 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. %
17,277 27,988 27,988 7,277 27,988 27,988 2,719 10,458 10,458
22,345 9,017 37,005 2,345 9,017 37,005 2,688 10,339 20,797
31,561 6,005 43,010 1,561 6,005 43,010 2,503 9,626 30,423
41,419 5,456 48,466 1,419 5,456 48,466 2,483 9,551 39,974
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51,353 5,205 53,671 1,353 5,205 53,671 2,211 8,505 48,479
61,151 4,429 58,100 1,151 4,429 58,100 2,059 7,920 56,399
71,061 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 specic independent variables. Therefore, we nd 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 grafti, 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 Matrixa
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 grafti ,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 trafc 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) = ebi, 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
signicance. Therefore, our analysis returned three statistically signicant 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 1a
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 reects upon the outcomes of the statistical hypothesis tests.
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H1) We nd that the proximity to family and friends signicantly impacts the choice of place of
residence of sampled knowledge and creative workers.
Our ndings 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, conrm ndings 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 ndings 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 conrm that the cost of living signicantly inuence 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 signicantly 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 signicantly
impact perception of knowledge and creative workers about their living environment. Our results
conrm that urban amenities and street life culture attract knowledge and creative workers (Clark,
2003b; Florida, 2002; Glaeser et al., 2004). We nd 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 ndings 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 café 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 signicantly 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 signicantly 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 conrms
argument of Glaeser et al. (2004) that aesthetic features of the city are one of the key amenities. The
key city amenities are signicantly 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, cafés, cinemas, shopping
areas, city architecture, monuments, and the quality and range of tness 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 signicantly more dissatised 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 nd 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 conrm 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 signicantly 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 conicts. 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 quantiable causalities.
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Appendix I
Table 1: Four most important reasons for living in the city
Reason NRange Min.
value* Max.
value** Sum of
scores Mean Std.
Error Std. Devia-
tion σ
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
partner’s 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 61 1 2 91,50 0,22 0,55 0,23%
tolerant to gay/ LGBT 61 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 χ²
Going out to the pub/bar
Somewhat likely to almost denitely 3.3% 8.2% 34.2% 51.1% 3.3%
4.224
Not too likely to not likely at all 5.9% 11.4% 36.0% 44.5% 2.1%
Visiting coffee shops, during the day
Somewhat likely to almost denitely 2.7% 0.5% 16.3% 52.7% 27.7%
2.754
Not too likely to not likely at all 3.0% 2.1% 13.1% 51.7% 30.1%
Eating out
Somewhat likely to almost denitely 11.4% 25.5% 48.4% 14.7% .0% 4.638
Not too likely to not likely at all 6.4% 24.2% 51.7% 17.4% .4%
Going to movie, theatre and/or concerts
Somewhat likely to almost denitely 6.5% 19.0% 58.7% 15.8% .0% 2.249
Not too likely to not likely at all 5.9% 24.6% 56.8% 12.7% .0%
Going to museum and/or art gallery
Somewhat likely to almost denitely 23.9% 37.0% 32.6% 6.5% .0%
13.813**
Not too likely to not likely at all 27.1% 50.0% 19.9% 3.0% .0%
Walking around city centre
Somewhat likely to almost denitely 3.8% 6.0% 21.7% 45.1% 23.4% 8.946
Not too likely to not likely at all 2.1% 3.0% 14.4% 49.6% 30.9%
Excursions in parks or peripheral green areas
Somewhat likely to almost denitely 4.9% 16.8% 40.8% 35.9% 1.6%
3.461
Not too likely to not likely at all 2.5% 17.8% 37.3% 39.0% 3.4%
Going to a night club
Somewhat likely to almost denitely 16.8% 23.4% 45.7% 14.1% .0%
8.707*
Not too likely to not likely at all 28.4% 23.7% 36.0% 11.9% .0%
Going to sport events
Somewhat likely to almost denitely 41.8% 33.7% 17.9% 6.5% .0%
7.423
Not too likely to not likely at all 29.2% 42.8% 20.3% 7.6% .0%
Going to city parks
Somewhat likely to almost denitely 5.4% 12.5% 37.5% 37.5% 7.1%
2.473
Not too likely to not likely at all 6.4% 9.3% 33.5% 43.2% 7.6%
Going to a festival (when happening in the city)
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Somewhat likely to almost denitely 13.0% 36.4% 18.5% 15.2% 16.8%
11.174*
Not too likely to not likely at all 11.0% 40.3% 20.8% 20.8% 7.2%
Visiting friends
Somewhat likely to almost denitely .0% 3.8% 32.1% 55.4% 8.7%
3.742
Not too likely to not likely at all 1.3% 2.1% 29.7% 57.2% 9.7%
Participating in Resident’s associations
Somewhat likely to almost denitely 50.0% 20.7% 10.3% 9.8% 9.2% 3.265
Not too likely to not likely at all 55.1% 19.5% 12.3% 6.4% 6.8%
Participating in Religious activities
Somewhat likely to almost denitely 64.7% 24.5% 8.7% 2.2% 10.241*
(df =3)
Not too likely to not likely at all 51.7% 27.5% 14.4% 6.4%
Participating in community work
Somewhat likely to almost denitely 67.4% 22.8% 5.4% 2.7% 1.6%
11.338*
Not too likely to not likely at all 55.1% 24.6% 14.4% 4.2% 1.7%
Participating in political activities (trade union, political party, etc)
political party, etc)
Somewhat likely to almost denitely 87.5% 8.2% 2.7% .0% 1.6% 6.700
Not too likely to not likely at all 87.7% 5.5% 2.1% 3.0% 1.7%
(df=4, N = 420), * p<0,05, ** p<0,01
Table 3: Satisfaction with leisure amenities and likelihood of moving away
Likelihood of moving from
the city in the next three years? Dissatised to
very dissatised Neither Very Satised to
satised χ²
Quality of Public spaces (plazas, parkas, etc)
Somewhat likely to almost denitely 33.7% 25.5% 40.8% 12.621**
Not too likely to not likely at all 18.6% 29.2% 52.1%
Quality of sport facilities
Somewhat likely to almost denitely 32.6% 48.4% 19.0% 3.705
Not too likely to not likely at all 24.2% 55.1% 20.8%
The quality and range of festival events and cultural activities
Somewhat likely to almost denitely 31.5% 41.8% 26.6% 2.441
Not too likely to not likely at all 26.3% 40.7% 33.1%
The quality and range of art galleries / museums
Somewhat likely to almost denitely 42.9% 39.1% 17.9% 9.096**
Not too likely to not likely at all 28.8% 49.6% 21.6%
Quality and range of libraries
Somewhat likely to almost denitely 29.3% 41.3% 29.3% 2.933
Not too likely to not likely at all 22.0% 45.8% 32.2%
Quality and range of restaurants
Somewhat likely to almost denitely 12.5% 35.3% 52.2% 2.697
Not too likely to not likely at all 10.6% 29.2% 60.2%
Quality of bars and cafés
Somewhat likely to almost denitely 20.1% 33.2% 46.7% 10.295**
Not too likely to not likely at all 13.1% 24.6% 62.3%
Quality of cinemas
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Somewhat likely to almost denitely 14.1% 22.8% 63.0% 6.716*
Not too likely to not likely at all 8.1% 17.8% 74.2%
Quality of shopping areas
Somewhat likely to almost denitely 39.1% 32.6% 28.3% 10.108**
Not too likely to not likely at all 29.7% 27.1% 43.2%
Architecture of city/relevant monuments
Somewhat likely to almost denitely 60.3% 25.5% 14.1% 17.437**
Not too likely to not likely at all 39.8% 37.7% 22.5%
Number of associations/ organizations for social activities
Somewhat likely to almost denitely 42.4% 41.3% 16.3% 5.567
Not too likely to not likely at all 31.8% 51.7% 16.5%
Quality and range of tness centers
Somewhat likely to almost denitely 15.8% 47.8% 36.4% 7.028*
Not too likely to not likely at all 8.1% 47.5% 44.5%
Quality and range of saunas, spa and wellness centres
Somewhat likely to almost denitely 28.3% 54.3% 17.4% 5.172
Not too likely to not likely at all 24.2% 49.2% 26.7%
df = 2, N = 420, *p < 0,05, **p < 0,01
Table 4: Satisfaction with public services and likelihood of moving away
Likelihood of moving from
the city in the next three years? Dissatised to very
dissatised Neither Very Satised to
satised χ²
Quality of public transportation system
Somewhat likely to almost denitely 34.2% 32.6% 33.2% 6.650*
Not too likely to not likely at all 22.9% 37.7% 39.4%
Transport within the city – all types
Somewhat likely to almost denitely 39.1% 32.6% 28.3% 4.118
Not too likely to not likely at all 30.9% 32.6% 36.4%
Connectivity between city & periphery
Somewhat likely to almost denitely 33.2% 39.1% 27.7% 3.907
Not too likely to not likely at all 24.6% 42.4% 33.1%
Safety on the streets
Somewhat likely to almost denitely 56.0% 19.0% 25.0% 4.998
Not too likely to not likely at all 50.4% 28.4% 21.2%
Police services
Somewhat likely to almost denitely 57.6% 31.5% 10.9% 8.969**
Not too likely to not likely at all 43.2% 39.8% 16.9%
Municipal police services
Somewhat likely to almost denitely 46.7% 35.3% 17.9% 2.454
Not too likely to not likely at all 39.4% 38.6% 22.0%
Number of bicycle lanes
Somewhat likely to almost denitely 85.9% 8.7% 5.4% 6.268*
Not too likely to not likely at all 80.1% 16.5% 3.4%
Quality of tourist attractions
Somewhat likely to almost denitely 82.6% 14.7% 2.7% 7.216*
Not too likely to not likely at all 72.5% 20.3% 7.2%
Social security
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Somewhat likely to almost denitely 69.6% 23.9% 6.5% 11.500**
Not too likely to not likely at all 53.4% 35.2% 11.4%
Quality of health services
Somewhat likely to almost denitely 65.8% 27.2% 7.1% 9.969**
Not too likely to not likely at all 50.8% 36.4% 12.7%
Quality of the university education
Somewhat likely to almost denitely 60.9% 26.1% 13.0% 14.219**
Not too likely to not likely at all 45.3% 28.0% 26.7%
Quality of the high school and elementary school education
Somewhat likely to almost denitely 50.5% 33.2% 16.3% 14.020**
Not too likely to not likely at all 39.4% 28.4% 32.2%
df= 2, N=420, * p<0,05, **p<0,01
Table 5: Satisfaction with environmental aspects and likelihood of moving away
Likelihood of moving from
the city in the next three years? Dissatised to
very dissatised Neither Very Satised to
satised χ²
Pavement condition of city streets and sidewalks
Somewhat likely to almost denitely 47.8% 22.8% 29.3% .575
Not too likely to not likely at all 44.9% 25.8% 29.2%
Condition/cleanliness of city streets and sidewalks
Somewhat likely to almost denitely 12.0% 15.8% 72.3% .794
Not too likely to not likely at all 11.9% 19.1% 69.1%
Recycling collection services
Somewhat likely to almost denitely 65.8% 20.7% 13.6% 2.170
Not too likely to not likely at all 59.7% 26.7% 13.6%
Quality of drinking water
Somewhat likely to almost denitely 19.0% 26.1% 54.9% 5.317
Not too likely to not likely at all 13.1% 21.2% 65.7%
Garbage/waste collection
Somewhat likely to almost denitely 8.7% 16.8% 74.5% 1.019
Not too likely to not likely at all 7.2% 20.3% 72.5%
Cleanliness of facilities in city parks
Somewhat likely to almost denitely 6.0% 14.1% 79.9% 3.711
Not too likely to not likely at all 9.7% 18.2% 72.0%
Care of trees and city parks
Somewhat likely to almost denitely 25.5% 22.8% 51.6% 5.711
Not too likely to not likely at all 16.1% 25.8% 58.1%
Trafc congestion
Somewhat likely to almost denitely 64.1% 25.5% 10.3% .112
Not too likely to not likely at all 65.7% 24.6% 9.7%
Availability of parking space
Somewhat likely to almost denitely 59.2% 23.4% 17.4% .780
Not too likely to not likely at all 62.7% 19.9% 17.4%
Levels of use of bicycles as a means of transport
Somewhat likely to almost denitely 75.5% 16.3% 8.2% 3.569
Not too likely to not likely at all 75.4% 20.3% 4.2%
Levels of noise in the city
Somewhat likely to almost denitely 35.9% 42.4% 21.7% .197
Not too likely to not likely at all 37.7% 41.9% 20.3%
Air pollution
Somewhat likely to almost denitely 47.3% 34.2% 18.5% 5.427
Not too likely to not likely at all 38.1% 45.3% 16.5%
Quality of children playgrounds
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Somewhat likely to almost denitely 56.5% 33.7% 9.8% .585
Not too likely to not likely at all 56.8% 31.4% 11.9%
Tidiness and cleanliness of rivers and river banks
Somewhat likely to almost denitely 64.7% 19.0% 16.3% 5.841*
Not too likely to not likely at all 67.4% 23.7% 8.9%
df= 2, N=420, * p<0,05
Table 6: Issues of concern and likelihood of moving away
Likelihood of moving from
the city in the next three years?
Not worried at
all to Not wor-
ried Not particularly
worried
Somewhat
worried
to very
worried
χ²
Amount of crime in the city
Somewhat likely to almost denitely 4.3% 17.4% 78.3% .194
Not too likely to not likely at all 4.2% 19.1% 76.7%
Safety
Somewhat likely to almost denitely 7.1% 19.6% 73.4% 4.335
Not too likely to not likely at all 8.5% 27.5% 64.0%
Availability of Recreation for teenagers
Somewhat likely to almost denitely 9.8% 17.9% 72.3% 9.465**
Not too likely to not likely at all 10.6% 30.5% 58.9%
Availability of Affordable Housing
Somewhat likely to almost denitely 10.3% 14.7% 75.0% 15.655**
Not too likely to not likely at all 12.3% 30.1% 57.6%
Availability of recreation for seniors
Somewhat likely to almost denitely 8.7% 20.1% 71.2% 11.039**
Not too likely to not likely at all 11.9% 32.6% 55.5%
Availability of jobs
Somewhat likely to almost denitely 1.6% 3.8% 94.6% .454
Not too likely to not likely at all 2.5% 3.4% 94.1%
Quality of university education
Somewhat likely to almost denitely 5.4% 9.8% 84.8% 3.718
Not too likely to not likely at all 6.8% 15.7% 77.5%
Quality of secondary and elementary education
Somewhat likely to almost denitely 7.1% 14.7% 78.3% 5.196
Not too likely to not likely at all 12.7% 18.2% 69.1%
Quality of kindergartens
Somewhat likely to almost denitely 13.0% 24.5% 62.5% .435
Not too likely to not likely at all 11.9% 27.1% 61.0%
Availability of public transportation
Somewhat likely to almost denitely 17.9% 37.0% 45.1% 5.638
Not too likely to not likely at all 24.6% 41.1% 34.3%
Availability of recreation for children
Somewhat likely to almost denitely 9.8% 22.8% 67.4% 5.113
Not too likely to not likely at all 16.9% 24.2% 58.9%
Amount of grafti
Somewhat likely to almost denitely 41.8% 32.1% 26.1% 7.227*
Not too likely to not likely at all 33.1% 44.9% 22.0%
Drug problems
Somewhat likely to almost denitely 8.2% 10.9% 81.0% 2.769
Not too likely to not likely at all 7.2% 16.5% 76.3%
Homelessness
Somewhat likely to almost denitely 10.3% 19.6% 70.1% 3.767
Not too likely to not likely at all 13.1% 25.8% 61.0%
Aggressive/anti-social behaviour
Somewhat likely to almost denitely 6.5% 13.0% 80.4% 1.486
Not too likely to not likely at all 6.4% 17.4% 76.3%
Prostitution on streets
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Somewhat likely to almost denitely 23.4% 38.0% 38.6% .491
Not too likely to not likely at all 26.3% 37.3% 36.4%
Behavior of trafc participants
Somewhat likely to almost denitely 5.4% 13.0% 81.5% .987
Not too likely to not likely at all 5.1% 16.5% 78.4%
Air pollution
Somewhat likely to almost denitely 12.0% 27.7% 60.3% 1.601
Not too likely to not likely at all 9.7% 33.1% 57.2%
Maintenance of trees and green areas
Somewhat likely to almost denitely 23.4% 29.9% 46.7% 7.858*
Not too likely to not likely at all 27.1% 39.4% 33.5%
Demonstrations in the streets
Somewhat likely to almost denitely 40.8% 41.3% 17.9% 1.143
Not too likely to not likely at all 44.5% 41.1% 14.4%
Illegal construction
Somewhat likely to almost denitely 6.5% 15.8% 77.7% 21.920**Cramer’s V
=0,228
Not too likely to not likely at all 14.8% 29.2% 55.9%
Lack of bicycle lanes
Somewhat likely to almost denitely 6.5% 12.0% 81.5% 4.809
Not too likely to not likely at all 7.6% 19.5% 72.9%
Lack of sidewalks
Somewhat likely to almost denitely 4.3% 19.6% 76.1% 8.116*
Not too likely to not likely at all 12.3% 17.8% 69.9%
Quality of medical services
Somewhat likely to almost denitely 4.3% 9.8% 85.9% 6.069*
Not too likely to not likely at all 4.7% 18.2% 77.1%
Presence of smugglers, dealers
Somewhat likely to almost denitely 18.5% 31.5% 50.0% 4.964
Not too likely to not likely at all 16.9% 41.9% 41.1%
Appearance of building facades and shop windows
Somewhat likely to almost denitely 9.2% 25.5% 65.2% 9.087**
Not too likely to not likely at all 15.3% 33.9% 50.8%
df= 2, N=420, *p<0,05, **p<0,01
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Table 7: Cost of living and likelihood of moving away
Likelihood of moving from
their city in the next three years? Cheap to very
cheap Average Very expensive
to expensive χ²
Housing cost (mortgage, rent)
Somewhat likely to almost denitely 0% 2.7% 97.3%
Not too likely to not likely at all .4% 7.2% 92.4%
Cost of basic services related to the house (water, electricity)
Somewhat likely to almost denitely .5% 15.2% 84.2%
Not too likely to not likely at all 3.0% 19.1% 78.0%
Cost of leisure activities
Somewhat likely to almost denitely 1.6% 35.3% 63.0% 4.954
Not too likely to not likely at all 4.2% 41.9% 53.8%
Costs of education and training
Somewhat likely to almost denitely 6.0% 34.2% 59.8% 6.862*
Not too likely to not likely at all 8.9% 44.1% 47.0%
Transportation costs
Somewhat likely to almost denitely 2.7% 42.9% 54.3% 12.956**
Not too likely to not likely at all 4.7% 58.5% 36.9%
Cost of food and beverages (basic consumables)
Somewhat likely to almost denitely .5% 13.0% 86.4%
Not too likely to not likely at all .8% 24.2% 75.0%
General Cost of Living
Somewhat likely to almost denitely 0% 6.0% 94.0% 13.096**
Not too likely to not likely at all 0% 17.8% 82.2%
df= 2, N=420, *p<0,05, **p<0,01
Table 8: Tolerance and likelihood of moving away
Likelihood of moving from
their city in the next three years? Strongly Disa-
gree/ Disagree Neither Agree/ Strongly
Agree χ²
Agreeing that city is welcoming place to people from other countries
Somewhat likely to almost denitely 19.0% 20.7% 60.3% 11.658**
Not too likely to not likely at all 8.1% 20.3% 71.6%
Agreeing that their city accepts all ethnic groups
Somewhat likely to almost denitely 37.0% 29.3% 33.7% 8.981**
Not too likely to not likely at all 23.7% 33.1% 43.2%
Agreeing that their city accepts the gay population
Somewhat likely to almost denitely 67.4% 26.6% 6.0% 1.603
Not too likely to not likely at all 61.4% 31.8% 6.8%
Agreeing that their city accepts the minority religious and ideological groups
Somewhat likely to almost denitely 55.4% 32.6% 12.0% 1.986
Not too likely to not likely at all 54.7% 28.8% 16.5%
Agreeing that their city accepts the differences between rich and poor
Somewhat likely to almost denitely 51.1% 28.8% 20.1% 11.971**
Not too likely to not likely at all 34.3% 38.1% 27.5%
df = 2, N= 420, *p< 0,05, **p< 0,01
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INNOVATION IN THE PUBLIC SECTOR THE WAY FORWARD FOR AN EFFECTIVE REFORM
OF PUBLIC SECTOR MANAGEMENT IN BOSNIA AND HERZEGOVINA
Ilija Stojanović
University of Banja Luka, Republic of Srpska - Bosnia and Herzegovina,
E-mail: ilija.stojanovic@teol.net
Jovo Ateljević
University of Banja Luka, Republic of Srpska - Bosnia and Herzegovina,
E-mail: jovo.ateljevic@gmail.com
Abstract
Innovation has become important consideration for the public sector today, particularly in the policy development,
programs design and delivery of public services. This paradigm is shifting from a highly rational approach
towards a more efcient and exible management, which has been triggered by fast socio-economic, political
and other changes across the World. An increasing number of practitioners, including those from various
international organizations, have questioned the efciency and effectiveness of the public sector management
in transitional countries, such as Bosnia and Herzegovina (BiH). In BiH itself, numerous administrative barriers
are cited as the most common factors discouraging economic and business development, thus reducing the
overall competitiveness of the country. Despite such claims, there is a great need for scholarly research into the
problem identied in order to nd the best solutions for tackling it. This paper is aimed to answer the following
research question: Does transition to an innovative model of strategic public sector management in Bosnia and
Herzegovina affect its efciency and effectiveness?
The research took an explanatory approach, establishing causal links between the selected variables. Values of
the independent variable are presented through the Global Innovation Index of pillar institutions. Values of the
dependent variable for different elements of public sector efciency and effectiveness are presented through
data of the Index of Economic Freedom of the World (pillar: Bureaucracy Costs), Doing Business Report
(World Bank), Global Competitiveness Index (World Economic Forum) and GPD per capita. The data was
analysed through quantitative statistical techniques to test the hypotheses and observe signicant correlations.
More specically, the methods of correlation and regression were employed to measure the impact of identied
indicators. An on-line survey was conducted in July and August 2011 with different respondent groups: users of
public sector services and public sector employees in BiH. The conclusions drawn from the preliminary results
indicate a high degree of correlation and regression of independent and dependents variables, suggesting a
potential theoretical contribution to the existing knowledge and valuable recommendations for practitioners
and policy makers.
Keywords: Public sector management, Innovation, Efficiency, Effectiveness, Countries in transition, BiH.
1. INTRODUCTION
Today’s world is becoming very open, and state boundaries are not so relevant for business activities.
This affects the movement of capital, investments and business activities in countries that are more
competitive. Those countries that are not ready for the competitive game are facing serious problems
and crises. Furthermore, nancial crisis and economic downturn have raised a host of new questions
about the functioning of the public sector and have placed focus to their efciency and effectiveness.
The most important source of country competitiveness lies in the public sector functioning efciently
with the existing dynamic environment. This requires reforming the public sector, and its transition
from rigid bureaucracy to new management models. In a competitive environment, the public sector
needs to innovate in order to survive (Potts, 2009).
Although many authors emphasize the importance of innovation in the public sector, and there are
developed theoretical concepts that support management on the basis of innovation, there is insufcient
research linking theory and practice. This is particularly the case for countries in transition. Due to the
limitations of previous studies, effects of innovations on efciency and effectiveness of public sector
remain underdeveloped.
This paper is aimed to research the importance of innovation in terms of the efciency and
effectiveness of public sector. Broadly, we were analyzing the correlation between innovation within
the public sector and their efciency and effectiveness. The specic focus we put on the obstacles and
possibilities of innovation in the public sector in Bosnia and Herzegovina, as a country in transition.
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Citizens and businesses in transition counties, including Bosnia and Herzegovina, perceive the public
sector as inefcient, too bureaucratic and very expensive. This situation leads to a reduction in the
overall competitiveness of Bosnia and Herzegovina and lack of investor trust. This study raises the
fundamental question: Does transition to an innovative model of strategic management of public
sector in Bosnia and Herzegovina may affect its efciency and effectiveness?
The contribution of this study is two-fold: (i) it provides insights into the relationship between
innovations and specic elements of efciency and effectiveness, and (ii) provides an overview at
the public sector innovation in BiH, as a transition country. The results of study suggest a potential
theoretical contribution to the existing knowledge and valuable recommendations for practitioners
and policy makers.
2. LITERATURE REVIEW
According to Max Weber, bureaucracy management is the most rational form of management. He
believed that bureaucracy is being “capable of attaining the highest degree of efciency” (Weber,
1997:337). This theoretical assumption, based on hierarchical organizational structure and very strict
procedures, has found practical application in the public sector organizations in many countries.
However, a lot of authors have the opposite opinion on bureaucratic efciency and effectiveness.
Since the 1930s, the bureaucratic paradigm has been criticized (Barzelay&Armajani, 1992:6). The
opinion that “bureaucracy carries with it seeds of its own inefciency” is a relevant insight (Singhi,
1974:184). Such opinion is linked with decreasing efciency and effectiveness of the bureaucratic
public sector. Some sources indicate the “the impact of red tape“, or so-called ‘bureaucratic burden’
(Global Competiveness report, 2008-2009:49), as a very important issue of competitiveness within
public sector. In this regard, global economic competition and its competitive pressures associated
with globalization is the most important motivator in reforming the public sector (Parker, 2004;
Kamarck, 2003:11).
The lack of competitiveness in the global world leads to economic crisis. The 2008 economic and
nancial crisis changed entrenched views on efciency and effectiveness of public sector (Kamarck,
2003, Mihaiu, 2010; Klein et.al, 2010), thus requiring a fresh approach in activities regarding the public
sector. According to Brümmerhoff, the “bilateral monopoly”, in which politicians are monopolists
in securing funds in the budget, while bureaucrats become the only providers of public services
(Brümmerhoff, 1996), is a closed system both to its environment and the users of public services.
According to Parker and Bradley (2004:198), embracing new management techniques is a necessary
step towards overcoming problems such as inefciency and inexibility. The application of new
management techniques begins its realization through the systematic reform of public management
(Pollitt&Bouckaert, 2000). In recent decades, this type of reform has reached the top of the political
agenda in many countries.
2.1. Entrepreneurial Management in the Public Sector
In the last decades the entrepreneurial paradigm has become the key driving force in public management
reform. A special contribution to the analysis of entrepreneurial policies in the public sector gave
Peter Drucker (1909-2005), renowned management consultant. In his work “Innovation and
entrepreneurship practice and principles”, Drucker sets out the basic principles of entrepreneurship
policy in the public sector. According to him, each organizational unit within the public sector should
have a clearly dened role and its mission. It is the mission, rather than legal standards, that determines
the course of action of the public sector (Drucker, 1991:223).
Entrepreneurial management has a clear interest for prot. On the other hand, the public sector
does not have prot as its main interest but is more focused on satisfying public needs and public
services. The problem arises in the impossibility of measuring achievement of strategic goals and
operational tasks, but also in the absence of competition in the public sector. For application of the
entrepreneurship concept into public management, it is important to identify differences between
private and public entrepreneurial action (Klein et.al, 2010:2). The practices of the private and public
sector should be brought into line and with market-based decision-making (Wanna&Forset, 1996:33).
The application of entrepreneurial management in the public sector prevents conformism as priority
objective of bureaucrats and focuses primarily on encouraging innovation. In doing so, the emphasis
is solely on results, and not on bureaucratic work procedures.
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2.2. The New Public Management
The New Public Management is a new philosophy of management in the public sector. New Public
Management (NPM) is sometimes confused with the ‘New Public Administration’ movement in the
USA of the late 1960s and early 1970s as well with the public administration reform agenda of most
OECD countries from the late 1970s. The genuine rise of “new public management” began in the
1980s (Smelser et.al, 2001:12553; Hood, 1991; Development Policy Management Division, 2003).
NPM occurs in the period of globalization, with the expanding global economy, which brings
costs and benets to countries. It requires the reinforcement of an effective state that can focus on
compensating losses caused by globalization and technical change. NPM follows that a well- organized
public administration gives a better opportunity to benet from globalization (Development Policy
Management Division, 2003). x
New public management is tied to the political program of Margaret Thatcher, former Prime Minister
of Great Britain, which has signicantly reformed the public sector during her mandate. Under the
Thatcher’s leadership (1979-1990) came the reform of the public sector management that led to a very
competitive system compared to other states. This was a period when the UK had suffered heavily
from recessive developments and tax revolts of their citizens; it was a period of crisis. This was an
incentive for other commonwealth countries, mainly New Zealand and Australia, to join the reform.
Later in almost all OECD countries, the NPM became priority on their political agendas (Gruening,
1998:2; Hood 1995:99).
The inefciency and ineffectiveness of the public sector were the most important factors for the
reforms and are therefore the core paradigm of the NPM (Development Policy Management Division,
2003). It has initiated a wide range of reforms that need to contribute to greater market orientation
in order to increase cost efciency, avoiding negative impacts on social goals and tasks of the public
sector.
New Public Management (NPM) is a label used to describe a management culture that use
management approaches and techniques borrowed from the private-for-prot sector (Development
Policy Management Division, 2003). NPM is linked with the term “managerialism” (Hood, 1991;
Gruening, 1998, Development Policy Management Division, 2003) meaning more “discretionary
decision space in exchange for direct accountability for their actions“ (Smelser et.al, 2001:12554).
It implies a business type and market-based public service management based on enterprise culture
with smaller, faster-moving service delivery organizations that would be kept lean by the pressures of
competition (Development Policy Management Division, 2003).
According to Hood (1991), the major NPM doctrines of what must be done are that: cut costs in
the public sector, increase exibility, labor discipline, completion, decentralization, establishment
of standards and performance. In addition, Hood (1995) believes that basic principle of NPM is
removing differences between the public and the private sector.
2.3. Public Sector Innovation
According to Mulgan and Albury (2003), “Successful innovation is the creation and implementation of new
processes, products, services and methods of delivery which result in signicant improvements in outcomes
efciency, effectiveness or quality”.
When governmental action is failing in a period of increasing problems, the public sector is expected to increase
their capacity to innovate (Bland, et.al, 2010; Eggers et.al, 2009). In such circumstances, internal problems and
crises are important factors leading to innovations (Borins, 2001). Innovations are very important for public
sector performance with the aim to improve service delivery to users and citizens with focus on improving
their quality of life and building a better and stronger community (Walker, et. al, 2011:367). This is a source
of competitive advantage in the global economy (NESTA, 2006; INSEAD). In addition, innovative states are
more competitive and richer, and they are above average in wealth and competitiveness (Grey, 1973:1182).
However, the bureaucratic model of public management is an obstacle for innovations and entrepreneurship
(Thompson, 1969; Borins, 2001), as in many transitional countries public sector suffers from an innovation
decit and entrepreneurial attitude amongst the political elite (Potts, 2009).
Innovation, per se is characteristic of the private sector as they encourage protability as their value. Values
and motivations in public sector are more complex and difcult to measure. (Mulgan and Albury 2003,
IDaA, 2005). With the aim of exploring levels of innovation performance in the public sector, a number of
indicators have been developed, such as the Worldwide Governance Indicators, Global Innovation Index,
NESTA Innovation Index, European Innovation Scoreboard etc.
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3. A STUDY OF IMPORTANCE OF INNOVATION IN PUBLIC SECTOR
In the last few decades, we have witnessed an ongoing debate among scholars and public policy
practitioners on the importance of innovation in the public sector. Application of empirical assessments
of the efciency and usefulness (effectiveness) of public sector activities has impacted on the shifting
of their role (Aristovnik, 2009:2).
It is true that a number of signicant studies (as mentioned in the Literature Review) have recently
been done in order to conrm the necessity of reforming the public sector, but the question of how
such inferences would help towards building up innovative models of public management, especially
in transition countries, still remains. While there has been some research on the general impact of
innovation in the public sector, little has been written about the effects of on specic elements of the
efciency and effectiveness.
There have been a number of valuable studies and reports relating to the level of innovation in public
sector across the World (Global Innovation Index Report, The World Competitiveness Report).
However, these studies do not provide a picture of correlation between innovation indicators in the
public sector and elements of their efciency and effectiveness. Different measurement systems and
the lack of reliable data (Kamarck, 2003:23; Klein et.al, 2010:5; Aristovnik 2009:4; Mandl et.al,
2008) are contributing to the lack of understanding of the importance of innovation in the public
sector, especially when it comes to countries in transition.
Studying the impact of innovation is mainly carried out in the sphere of the private sector and less
in the public sector. According to Mulgan and Albury (2003), whilst a substantial body of research
has emerged in the past four decades on innovation in the private sector, a signicant knowledge gap
exists with regard to innovation within the public sector, where quality research on the subject is
rather limited.
This paper will suggest key issues that need to be addressed when considering the effects of innovations
in public sector. In addition, it will review the capacity to introduce an innovative management model
in the public sector in Bosnia and Herzegovina, as an example of a country in transition.
3.1. Key issues on effects of innovation within the public sector
In our research, we have looked at two aspects in order to nd out whether and to what extent they
are conditioned from the level of innovation in the public sector:
• Efciency – describes the extent of using of time or effort for the implementation tasks or
purpose;
• Effectiveness - describes the capability of producing effect.
To achieve research objectives and assess the impact of innovation in the public sector, this paper
identies these two dimensions of public sector performance. In accordance with our research
question, we set the main hypothesis, as follows:
(H0) Application of an innovative model of strategic management of public sector will signicantly
affect the increase in elements of its efciency and effectiveness.
According to Khan and Akif (2005), “efcient and effective institutional structure is the back bone of
sustainable social and economic structure”. Mihaiu et.al. (2010), as stated as an opinion as stated as
an opinion of Peter Drucker (2001), share an opinion that there is no efciency without effectiveness;
they are part of a whole. Both elements are part of the performance in the public sector.
However, in order to comprehend more deeply the effects of innovation in the public sector on the
efciency and effectiveness, we analyzed specic elements. The research will therefore test the
following working hypothesis:
(H1): Application of an innovative model of strategic management of public sector will lead to a
reduction in the cost of bureaucracy.
(H2): Application of an innovative model of strategic management of public sector will contribute to
reducing number procedures and their shorter duration.
(H3): Application of an innovative model of strategic management of public sector will result in
increasing the overall competitiveness of country.
(H4): Application of an innovative model of strategic management of public sector will contribute to
increasing the level of living standard.
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4. METHODOLOGY
Measuring efciency and effectiveness in the public sector is difcult because of the lack of suitable
data (Mandl et.al, 2008). In order to avoid a general look at the problem, research was realized in two
phases: (i) the analysis of the correlation and regression between innovation and specic elements
of the efciency and effectiveness, and (ii) the analysis of perceptions about the innovative capacity
of the public sector in BiH, as an example of country in transition. This enabled consideration of the
research problem at a general level as well as a specic level.
The rst general phase of research was carried out with the analysis of correlation and regression
between independent and dependent variables. The efciency and effectiveness of the public sector
were presented as dependent variables, while independent variables in our study were dened at the
level of innovation in public sector. The research took an explanatory approach establishing causal
links between the selected variables.
The values of the independent variable were presented through data of the Global Innovation Index
- GII, for pillar Institutions (INSEAD, The Global Innovation Index). The values of the GII move in
interval from 1 (lowest) to 7 (best). The GII Institution pillar is described as: “nurturing an institutional
framework that attracts business and fosters growth by providing good governance and the correct
levels of protection and incentives” (INSEAD, The Global Innovation Index).
With the aim of systematic review, dependent variables were presented in the following table.
Table 1: Metrics for dependent variables
Hypothesis Dependent variable Source of data Interval values Description Number of
observations
H1 cost of bureaucracy The Economic freedom
of the World Report 1 (lowest) to 7
(highest)
Bureaucracy Costs as a
component of the EFW
Index, section: Business
Regulation
119
H2 procedures
(number and
duration) Doing Business Report lower values
are better
The number of
procedures and duration
(days) of the day in
section “Starting a
Business”
240/2321
H3 overall
competitiveness of
country
The Global
Competitiveness Report 1 (lowest) to 7
(best)
A set of institutions,
policies, and factors
that determine the level
of productivity
200
H4 level of living
standard
UNSTAT: National
Accounts and Main
Aggregates Database:
GDP p/c US Dollars
GDP per
capita in US
Dollars used as an indicator of
living standards 250
The data was analysed through quantitative statistical techniques to test the hypotheses and observe
signicant correlations. More specically, the methods of correlation and regression were employed
to measure the impact of identied indicators.
The second specic phase of research was carried out with descriptive analysis of the data which the
respondents expressed an opinion on important issues of innovation in the public sector in Bosnia
and Herzegovina. The questionnaire was constructed around the key research objectives with the aim
of analyzing several topics relevant for Bosnia and Herzegovina, as a county in transition: efciency,
effectiveness, status of public sector reform, innovative management principles, sources of innovation,
and obstacles and opportunities for the application of innovation. The questionnaire was made up of
categorical options for the respondents to choose from. For the questions geared at obtaining the
respondent’s opinion, a list of statements was presented using the Likert-style rating.
With the aim of analyzing the specic situation of the public sector in BiH and the possibility of
introducing an innovative management model, an online survey was conducted during July and August
of 2011. The survey was conducted with two different groups: users of public sector services, and
public sector employees in BiH. This division enabled descriptive cross-tab analysis of the specic
questions in order to comprehend the situation from two angles: from inside and outside the public
sector.
We obtained responses from 121 respondents, of which were 56 (46.28%) were users of public sector
services and 65 (53.72%) public sector employees. There were 53 (43.80%) female and 68 (56.20%)
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male respondents. The respondents devided into the following age groups: 18-25 (1/0.83%), 26-35
(50/41.32%), 36-45 (34/28.10%), 46-55 (22/18.18%), above 55 (14/11.570%). Respondents were
from different areas in Bosnia and Herzegovina: Republic of Srpska (34/28.10%), Federation of BiH
(61/50.41%), Brcko District (26/21.49%).
Given the large number of questions in the questionnaire, we presented the answers on the most
important questions. Basic descriptive analysis of the data collected was carried out to see where
the majority of the responses tended to be positioned. As many of the variables used were ordinal
(categorical variable with some form of intrinsic ranking) non-parametric measures were employed.
The correlation coefcient was used to assess the strength of the linear association between pairs of
ordinal variables, which included questions where respondents were asked to indicate strongly agree
(5), agree (4), neutral (3), disagree (2) or strongly disagree (1).
5. RESULTS AND INTERPRETATION
The results for each section, geared at testing each hypothesis, are now presented and interpreted.
Although not every result can be covered in this section, the results most relevant to answering the
research questions have been presented.
(H1): Application of an innovative model of strategic management of public sector will lead to a
reduction in the cost of bureaucracy.
The correlation analysis of GII Institutions (IV) and EFW Bureaucracy Cost (DV) indicated strong
high negative correlation between their values (-0,871). The equation shows a negative trend, which
conrms that increasing level of innovation in the institutions leads to the reduction of bureaucratic
costs.
Graph 1- GII vs. Bureaucracy Costs
y = -1,5142x + 10,743
R
2
= 0,7582
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0 1 2 3 4 5 6 7
GII Instituti ons
EFW Bureauc racy costs
The results from the second phase show that most respondents either disagree (52,893%), or strongly
disagree (27,273%) on the statement that “the costs of the public sector in BiH in carrying out
its responsibilities and duties is justied”. The central tendency of mean at 1,967 (1 to 5 interval)
suggests that the majority of respondents disagree with the above mentioned assumption. The
observed correlation between opinion on the orientation of public sector in BiH on innovation and
cost justication is statistically signicant (0,353).
(H2): Application of an innovative model of strategic management of public sector will contribute to
reducing a number procedures and their shorter duration.
The correlation analysis of GII Institutions (IV) and the number of procedures (DV) indicated
reasonable negative correlation between their values (-0,548). The equation shows a negative trend,
which conrms that increasing level of innovation in the institutions would lead to reducing the
number of procedures.
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Graph 2: GII vs. Procedures (number)
y = -2,0142x + 17,007
R
2
= 0,3008
0
2
4
6
8
10
12
14
16
18
20
01234567
GII Insti tutions
Procedures
(number )
In the context of BiH we found that most respondents are “disagree” (42,975%), and “strongly
disagree” (29,752%) on the thesis that “the number of rules and procedures governing the resolution
of certain rights / services in the public sector in BiH is not large” The central tendency of mean
amounts 2,066, closer to score “disagree”. The observed correlation between opinion on orientation
of public sector in BiH on innovation and extensiveness of the procedures is statistically signicant
(0,234).
Going further into the analysis, the correlation analysis of GII Institutions (IV) and the duration of
procedures in days (DV) indicated reasonable negative correlation between their values (-0,502).
The equation shows a negative trend, which conrms that increasing levels of innovation in the
institutions leads to reducing the duration of procedures.
Graph 3: GII vs. Time
In the analysis of the second phase we found that most respondents disagree (42,149%), while
22,314% strongly disagree, and 21,488% are neutral on the thesis that “the public sector in BiH is
carried out their duties in acceptable time limits”. The central tendency of mean amounts to 2,273,
again closer to score disagrees. The observed correlation between opinion on orientation of public
sector in BiH on innovation and duration deadlines is statistically signicant (0,469).
(H3): Application of an innovative model of strategic management of public sector will result in
increasing the overall competitiveness of the country.
The correlation analysis of GII Institutions (IV) and the global competitiveness index (DV) indicated
strong high positive correlation between their values (0,839). The equation shows a positive trend,
which conrms that increasing level of innovation in the institutions would lead to greater overall
competitiveness.
Graph 4: GII vs. GCI
y = 0,5912x + 1,7126
R
2
= 0,7047
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7
GII Instituti ons
GCI
Most respondents disagree (42,149%) or strongly disagree (31,405%), while 20,661% are neutral about
the thesis that “the public sector in BiH contributes to the overall competitiveness at the regional /
global level”. As the amount of mean amounts to 2,008, the central tendency is closer to score disagree.
The observed correlation between opinion on orientation of public sector in BiH on innovation and
contribution to competitiveness is statistically signicant (0,489).
(H4): Application of an innovative model of strategic management of public sector will contribute to
increasing the level of living standard.
The correlation analysis of GII Institutions (IV) and GDP p/c (DV) indicated strong high positive
correlation between their values (0,731). The equation shows a positive trend, which conrms that
increasing levels of innovation in the institutions leading to increasing of standard of living represented
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by GDP p/c.
Graph 5: GII vs. GDP p/c
y = 16350x - 53310
R
2
= 0,5347
-40000
-20000
0
20000
40000
60000
80000
100000
120000
140000
01234567
GII Instituti ons
GDP p/c USD
Going further, the analysis found that most respondents disagree (41,322%), while 26,446% strongly
disagree and 24,793% are neutral on the thesis that “the public sector in BiH contributes to the living
standard”. The central tendency of mean amounts 2,132, closer to score disagrees. The observed
correlation between the opinion on the orientation of the public sector in BiH on innovation and
contribution to living standard is statistically signicant (0,469).
5.1. Main Findings in the Context of Bosnia and Herzegovina
The majority of the respondents (44,628%) in regard to their opinion on the efciency of the public
sector in BiH gave a score disagree, while the central tendency of mean amounts to 2,190. On the
other hand, great percentages (38,017%) of those surveyed strongly disagree on the thesis that the
public sector in BiH is strategically oriented to the application of innovation in their work. Based
on the distribution of responses of other respondents, the central tendency of mean is 2,025. The
observed correlation between these two variables (application of innovation in public sector-IV, level
of efciency-DV) is statistically signicant (0,394). Regarding opinions on the effectiveness of the
public sector in BiH, the majority of the respondents (46,281%) disagree on the positive statement on
this topic; the mean is 2,116.
The observed correlation between effectiveness and application of innovation in the public sector is
statistically signicant (0,530). A specic question on the impact of innovation in the public sector
u BiH in increasing its efciency and effectiveness, focused the majority of respondents to answer
agree (50,413%) and strongly agree (42,975%); the mean amounts to 4,355.
The analysis of the current situation in the public sector in BiH showed that most respondents disagree
(37,190%), or strongly disagree (28,926%), while 26,446% are neutral so the current bureaucratic
model of organization and management in the public sector in BiH enables room for innovation in
their work. The majority of respondents gave the score strongly disagree (38,843%) and disagree
(34,711%) on the claim that there are adequate methods of measuring efciency and effectiveness of
public sector in BiH. The chart below showed the results of respondents’ opinions on current base for
conducting operations of the public sector in BiH. The survey showed that the public sector in BiH
is rmly based on bureaucratic principles because its basics are legislation and political platforms,
rather than vision, mission and strategic documents.
Graph 6: Current base for conducting operations of the public sector in BiH
Political
agreements
44%
Strategy paper s
6%
Regulations
40%
Other
8%
Vision and
Missio n
2%
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Exploring incentives that contribute to the change management model, we found that most respondents
agree (40,496%) that global/regional competition in principle contributes to the innovative behavior
of public sector in the world. At the same time the majority of respondents disagreed (39,669%) or
are neutral (28,099%), while 23,967% strongly disagreed with the claim that the innovations are due
to the global/regional competition actively applied in the public sector in BiH. The central tendency
of mode amounts to 2,207, clustering opinions about score disagree on the claim. Pearson Correlation
(0,041) of contribution global/regional competition to innovation and application of innovation in BiH
due to competition showed that the observed correlation is not statistically signicant. This means
that global competition does not affect incentive to apply innovation in the public sector in BiH. In
order to comprehend the reasons for this situation, we examined respondents’ opinions about the
most important obstacles for the implementation of innovation. Furthermore, we examined potential
sources for innovation that have ideas for increasing the level of innovation in the public sector in
BiH. Analysis of respondent opinion is presented in graphs 6 and 7 (mean score mode).
0
0,5
1
1,5
2
2,5
3
3,5
Regulatio ns
Budgetar y rul es
Bureaucr atic management
Cross-sec toral cooperatio n
Organis ational structure
Motivat ion of employees
Knowledge
Pol itical sense
Political w illingness
Strateg y approach
Mean Score
Graph 7: Obstacles for Innovation1
0
0,5
1
1,5
2
2,5
3
3,5
4
Pol itican s
Employees
Citi se ns
NG Os
Companies
Internati onal organisations
Experts from outside
Academic i nstituti ons
Mean Score
Graph 8: Sources for Innovation2
6. DISCUSSION
The inefciency and ineffectiveness of the public sector were the most important factors for the reforms
in public sector based on the New Public Management Paradigm (Development Policy Management
Division, 2003). Our survey results showed a strong link between the level of innovation in the
public sector and their efciency and effectiveness. Taking into account the complexity of measuring
efciency and effectiveness (Aristovnik, 2009), establishing relationships between innovation with
some elements of efciency and effectiveness in this research was very important for elaborating
hypothesis.
As Mulgan and Albury (2003) point out, the cost of public services tends to rise faster than the rest of
the economy because of the lack of competition. According to research performed by NESTA (Hughes,
et.al, 2011), the impacts of innovation in service delivery lead to cost savings. Innovation is the basis
for entrepreneurial activities and allows more competition within the public sector. Considering the
rising costs in the public sector compared to the rest of economy, the management of this issue is of
1 Research question: What are the most important preconditions (obstacles) for the implementation of an innovative
model of strategic management in the public sector in BiH?
2 Research question: (-----) have ideas that can increase the level of innovation in the public sector in BiH
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great importance. In this regard, innovation occurs when resources are deployed in new ways (Klein
et.al, 2010).
Our research has clearly shown that lower levels of innovation in the public sector are correlated to
higher bureaucratic costs, and vice versa. For further analysis of the impact of innovations on public
sector cost, it would be interesting to perform a comparison of cost movement between countries that
are applying innovation (e.g. OECD countries) and others that are not innovatively oriented. For this
purpose indicator “Expense (%GDP)” in the public sector could be interesting to compare (The World
Bank: World dataBank).
Besides the costs, as a tool of efciency in this study, we measured the number and duration of
the procedures. Procedures, according to Doing Business Report (The World Bank: Doing Business
Report), are one of ‘the bureaucratic and legal hurdles which an entrepreneur must overcome to
incorporate and register a new rm’. Process innovation refers to the way new internal procedures,
policies and organisational forms may be required for supporting innovation (IdeA, 2005). In the
research, we supported a claim that higher innovation performance in public sector leads to reducing
the number of procedures and their shorter duration.
Many authors (Parker, 2004; Kamarck, 2003) support ideas that global economic competition and
the competitive pressures associated with globalization are the most important motivators of public
sector reform. According to Borins (2001), internal problems and crises are important factors leading
to innovations. In response to the crisis, many countries, especially OECDs of in late 1980s, have
begun reforming the public sector in order to enable innovation (Gruening, 1998; Hood 1995).
Innovation is a source of competitive advantage in global economy (NESTA, 2006; INSEAD).
Furthermore, innovative states are more competitive and richer, and they are above average in wealth
and competitiveness (Grey, 1973:1182). For this reason, we analyzed the impact of innovation in the
public sector to the country’s competitiveness. The correlation between these two variables suggests
the need of deeper analysis of the sources of competitiveness during public administration reform.
According to Potts (2009), in a competitive environment, the public sector needs to innovate in order
to survive. However, it has been shown that these principles do not apply in the context of public
administration reform in Bosnia and Herzegovina. Our research has shown that despite the fact that
global competition affects the application of innovation in the public sector, innovation through global
inuences has not been successful in BiH. It seems that Brümmerhoffss (1996) concept of “bilateral
monopoly” has found fertile ground in Bosnia and Herzegovina.
A clearly dened role and mission, according to Drucker (1991), should be over legal standards, as a
base of determination of action within the public sector. Our research has shown that the vision and
mission, as well as strategic management, are routinely negligible when conducting operations of the
public sector in BiH. Instead, importance is placed on political agreements and regulations indicating
the existence of strong bureaucratic structures, despite the current reform processes within the public
sector in BiH.
Our research suggests that the public sector in BiH is not strategically oriented to the application of
innovation in their work. Such conrmation is in accordance with claim of Thompson (1969) and
Borins (2001) that the bureaucracy model of public management is an obstacle for innovation.
Conclusively, we can conrm the existence of an innovation decit in the bureaucratic public sector
that is emphasized by Potts (2009). He believes that political leaders should act as entrepreneurs.
Our research has shown that insiders (politicians and employees) are not “blessed” with ideas that
encourage innovative ideas and do not represent a signicant source of innovation in the public sector
in BiH.
The importance of innovation lies in the aim to improve service delivery to users and citizens with
a focus on improving quality of life, and building better and stronger communities (Walker, et. al,
2011). Our research is relevant in examining the inuence of innovation in the public sector in relation
to living standards. Through the study of the correlation between innovation and GDP p/c we have
conrmed the working hypothesis, and supported the claims imposed by this author.
We will summarize by discussing the importance of measurement methods in the public sector.
According to Aristovnik (2009), application of empirical assessments of the efciency and usefulness
(effectiveness) of public sector activities has impacted on shifting their role. Mulgan and Albury
(2003) believe that research innovation is mainly carried out in the private sector sphere and less in
the public sector. In the context of the research situation in BiH, we have conrmed a claim of the lack
of methods for measuring innovation, efciency and effectiveness within the public sector. This may
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be the reason behind the consequent lack of desire for signicant changes in the public sector in BiH.
7. CONCLUSIONS AND IMPLICATIONS
To surmise, both Entrepreneurial Management in the Public Sector, and New Public Management
theories have created solid basis for the improvement of public management. Their principle of the
importance of innovations found their application in the public sector around the world. However,
transition from bureaucratic models to innovative models represents a major change. It is a transition
from the ‘status quo’ to the status of ‘permanent changes’. It should be based on changing management
models that systematically support innovation, rather than adapting bureaucratic organization to
public sector. For those who lead this process, it can be very tedious. Especially as these changes
introduce principles of work from the private sector, and that means the risk of job loss, struggle to
achieve results, permanent work and training. This requires that public administration should consider
innovation rather than being orientated towards conformism.
This paper highlighted global competition as a motivator for the states to reform the public sector.
Analysis that we did in this paper conrms the hypothesis that the application of innovation in the
public sector contributes to their efciency and effectiveness. States whose public sector is more
innovative are also more competitive.
The ndings of this study suggest a potential theoretical contribution to the existing knowledge and
valuable recommendations for practitioners and policymakers. They point out the need to question
the application of innovation above the dominating political agenda. Today, this is not only an
unfashionable practice in public administration reform but also a necessity to survive in the game.
This should be a special message to decision and policy makers in Bosnia and Herzegovina, as a
country in transition. Research has shown that the main obstacles to success are sources of innovation
in public sector. Future research should examine forms of overcoming obstacles and ways to better
utilize resources for innovation.
Ways of measuring innovation within the public sector remains an important issue to discuss. Apart
from the improvement in developing indicators to measure innovation, it is necessary to develop a
system of measuring the impact of innovation on the efciency and effectiveness of the public sector.
Only on the basis of such systematic analysis can one make decisions relating to public sector reform.
8. LIMITATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
Limited time and resources have put limitations on the research. The sample size, 121 respondents, is
not an ideal amount. This is especially the case as the sample covered a wide range of demographic
groups, meaning many of the groups were too small to carry out any statistical tests upon. All that
can be said for the sample is that it includes respondents from a wide range of different groups and
demographic backgrounds, but there are not enough respondents within each group to make any
decent generalizations regarding the differences between the groups. Further research could involve a
larger more representative sample allowing statistical tests to be carried out and assess the signicance
of demographic groups to the responses given.
The results are also limited in that they reect the opinions of Internet users only. The results cannot
be applied to other groups that are not using Internet. Further research could use mixed model for
collection of survey data.
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ENTREPRENEURSHIP IN THE CREATIVE INDUSTRY
Branko Ćirić
Fakultet za menadžment malih i srednjih preduzeća, Beograd, Serbia
E-mail: ciricbranko@gmail.com
Marko Trmčić
Fakultet za menadzment malih i srednjih preduzeca,Beograd,Serbia,
E-mail: markotrmcic@gmail.com
Snežana Trmčić
Fakultet za menadzment malih i srednjih preduzecaBeograd,Serbia,
E-mail: snezanatrmcic@gmail.com
Abstract
Economies of developed countries heavily rely on small and medium enterprises, in which entrepreneurship
is highly expressed. For that reason, the government’s economic planners focused attention on creating the
economic environment within all industries in which SMEs will be able to develop easily and freely. However,
entrepreneurship in Serbia and in most Western Balkan countries mainly refers to the production and service
activities of the real sector and much less on the creative industries. It deals with insufcient knowledge of the
potential of this industry which in developed western countries recorded the continual highest growth rates both
in revenue and in number of employees and we’re always looking for additional qualied staff. In addition,
products and services of creative industries in these countries are become the very important export items.
The importance of the creative industry expresses not only the results that it achieves, but also the attention
that it deserves from the most important global institutions such as UNDP, UNCTAD, World Bank. Statistical
indicators from the United States, which are used in this paper very clear show the kind of results which can
be achieved by the creative industry if government intends to help its development. Entrepreneurship has
particularly important place in the creative industry, given that a large part based on the creativity and initiative
of individuals. Beside lm and music industries, which by their very nature and number of consumers realize
huge incomes, creative industries includes specic vertical segments that will reach its peak in coming years,
this are primarily related to the development of computer animation and interactive television. For this reason,
the economic planners of the Western Balkan countries should devote signicantly greater attention towards
creative industry that would also have to be taken into account in long-term plans of educational systems.
A creative industry requires much less investment for the new job creation, which usually represents the
biggest obstacle to faster economic development in these countries. This industry are partially relying both
on the cultural heritage and cultural tourism, which by their nature entail a development of numerous other
industries, such as transport, construction, food processing, textile industry and others. In order to encourage
the development of creative industries should be used best practices from the European Union in particular
from Great Britain, where creative industry accounts for a signicant percentage of the GDP, and also in the
foreign trade balance.
Key words: Creative industry; Entrepreneurship; Economic development;
1. INTRODUCTION
Broadly speaking, creative activities has occurred at the dawn of civilization when, beside to the
permanent struggle for survival, people nd time to be creative and express themselves. Many
artefacts show that the ancient civilization developed and encourage creativity in fullling everyday
necessity as well as in the construction of monuments, some of these are classied as an invaluable
human inheritance. Looking from this angle, could be said that the creative industries have always
existed, but the term industry implies that these refers to the organization of mass production, thus
their origin particularly related to the modern era.
The rst mention of the phrase creative industries is in the document Australian Government’s
„Creative Nation” in which it addresses the potential of cultural industries. Later on, that phrase is
widely accepted by members of these industries and also by the general public. Also, the creative
industries have become well-deserved recognised economic sector in the plans of the government that
can achieve signicant revenues for the Gross national product with a modest investment.
The aim of this paper is to highlight the importance of entrepreneurship in the creative and artistic
activities and to show to creators of economic development how important may be the development
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of creative industries, which generally do not require large investments, excluding some high-tech
industries.
For the purposes of this study, have been research the effects of creative industries in a few developed
countries where these industries are particularly encouraged by various measures of governments
as holders of highest revenue and employment growth in comparison to other industries. Also were
collected all available data on the state of creative industries in Serbia and the Balkans.
Special attention is given to the self-employment opportunities of young artists of all artistic genres,
by fostering entrepreneurship and creating an environment for the promotion of such way of nancing
and organizing creative activities. The results have been achieved in some countries, fully justify this
approach.
Creative industries are based on the artist as producer, who, beside real artistic creativity, can create
huge prots in the production of mass culture, such as lm, music or publishing. The concept of creative
industries makes it necessary that artists have to actively participate not only in arts activities but also
in economic approaches, and not to wait that money comes from state budgets and sponsorship. For
this reason, governments should create the environment to consolidate the status of national culture
and encouraging creative people. Cultural policy must provide the artistic professionals a chance to
survive in the market, and avoids any economic restrictions for artistic projects by the government.
2. METHODOLOGY
The subject of this paper is to dene the determinants of success in entrepreneurial process on
example of the creative industries as the industries of future either in Serbia, EU Member States and
the countries of the Western Balkan. The research problem, identication of major determinates and
key success factors in this business area. The aim of this work is to analyze the possibility of applying
a modern concept of entrepreneurship. The key point in such endeavours is accepting risks and changes
based on the innovative activities in order to create conditions for businesses development within the
creative industries and strive to achieve EU business excellence model. The nal intention is to create
of the same business environment in Serbia in order to reducing the poverty and unemployment,
through increasing the protability and vitalization of the economy as a whole. Having in mind the
specicities of this research subject, it has been used the different research methods to full the basic
methodological requirements: objectivity, reliability, generality and systematicity.
For the purpose of this work, we undertook various research and study on the theoretical scientic
knowledge, relevant literature and contemporary business practices by using methods: induction,
analysis, synthesis, generalization, complex observation, comparison and content analysis
3. RESEARCH RESULTS AND DISCUSSION
3.1. What are the Creative Industries
The creative industries encompass a broader range of activities which include the cultural industries
plus all cultural or artistic production, whether live or produced as an individual unit. The term
“Creative Industries” was a concept of the Department of Culture, Media and Sports of United
Kingdom (UK DCMS), which has listed out 13 types of industries: Advertising, Architecture, Art
& Antiques Market, Crafts, Design, Designer Fashion, Film & Video, Interactive Leisure Software,
Music, Performing Arts, Publishing, Software & Computer Services, and Television & Radio. The
broad denition of the creative industry also includes a number of creative sectors which specialize in
production, distribution and retail, for example museums, booksellers and cinemas. These categories
were classied conforming to the actual situation and business development in UK, and hence
not necessarily applicable to other countries. For comparison in the table below, provides another
classication of creative industries.
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Table 1. Concept and context of the creative economy
UK DCMS model Symbolic texts model Core
cultural industries Concentric circles model
Core creative arts WIPO2 copyright model
Core copyright industries
Advertising
Architecture
Art and antiques market
Crafts
Design
Fashion
Film and video
Music
Performing arts
Publishing
Software
Television and radio
Video and computer games
Core cultural industries
Advertising
Film
Internet
Music
Publishing
Television and radio
Video and computer games
Peripheral cultural
industries
Creative arts
Borderline cultural
industries
Consumer electronics
Fashion
Software
Sport
Literature
Music
Performing arts
Visual arts
Other core cultural
industries
Film
Museums and libraries
Wider cultural industries
Heritage services
Publishing
Sound recording
Television and radio
Video and computer games
Related industries
Advertising
Architecture
Design
Fashion
Advertising
Collecting societies
Film and video
Music
Performing arts
Publishing
Software
Television and radio
Visual and graphic art
Interdependent copyright
industries
Blank recording material
Consumer electronics
Musical instruments
Paper
Photocopiers, photographic
equipment
Partial copyright
industries
Architecture
Clothing, footwear
Source: http://www.ifap.ru/
Figure 1. UNCTAD classication of creative industries
The creative industries are those in which the product or service contains a substantial element of
artistic or creative endeavour and include activities such as architecture and advertising, in accordance
to that, UK DCMS offered a denition of Creative industries “...those industries which have their
origin in individual creativity, skill and talent which have a potential for job and wealth creation
through the generation and exploitation of intellectual property”1
Although these industries connected creativity, their structure is very different, not only by meter of
work, but much more in terms of organization and technologies for their product realization. Such
kind of diversity in some way implies the kind of entrepreneurship and ability to quickly adapt to
1 ‘Creative Industries Mapping Document’, DCMS, 2001
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market demands. In order to illustrate this assumption should be given a brief description of each of
the aforementioned industries.
• Advertising
Beside numerous of denitions, the following denition very clear describe the core of advertising.
„The activity or profession of producing information for promoting the sale of commercial products
or services.”2 Without any doubt, advertising is the most dynamic creative activity where only
constant is change. Innovative formats, new technologies and shifts in priorities mean there’s always
something new and always something next in ongoing quest to communicate with consumers.
• Architecture
Architecture is the activity of designing and constructing buildings and other physical structures that
integrate with their surrounding landscape as town planning, urban design, and landscape architecture.
On the micro level, architecture means design of architectural or construction details and, sometimes,
furniture.
• Art & Antiques Market
“Art and Antiques includes paintings sculpture, works on paper, other ne art, furniture, other discrete
disciplines and collectibles. The main outlets for these products are: auctions, galleries, specialist
fairs, shops, warehouses, department stores and, more recently, the Internet.”3
• Crafts
Craft production refers to work carried out by a skilled worker. Its aim is to produce not just a
commodity but to do something for its own pleasure. In craft production, the work expresses the
individual’s talent and creativity. Therefore it is less standardised form of production than the machine
based mass industrial production.
• Design
Design itself is highly artistic discipline with different way of expression as graphic design, industrial
design, system design etc. However design is primarily creative work, as said in following denition:
“Design is the human power to conceive, plan, and realize products that serve human beings in the
accomplishment of any individual or collective purpose.”4
• Fashion Design
The denition of fashion designing is very wide and covers host of activities relating to conceptualizing,
creating the designs and preparing patterns for costumes, clothes, garments, clothing accessories,
jewellers or any other articles intended to be worn by humans. Most of high-fashion designers,
who established fashion trends, are self-employed and design for some fashion companies. These
designers create original garments, as well as clothing that follow other fashion designers who are
working for apparel manufacturers, creating designs of men’s, women’s, and children’s fashions for
the mass market.
• Film & Video
Film and video produces, beside feature lms, mass adverts spots promotion and other videos for
cinema, video, DVD and television. The integral and very strong part of this industry is distribution,
broadcasting and cinema showing. Through wide distribution channels lm and video industry
provides lm and tape delivery and storage, as well as buying and selling of lm and video distribution
rights.
• Interactive Leisure Software
Interactive Leisure Software products are generally known as video games. The same as traditional
games, they are created with the purpose of entertainment and support learning in schools. Teachers
play a crucial role in the successful use of these games for learning and motivating children to learn
competencies such as communication and team work.
• Music
2 http://www.businessdictionary.com/denition/advertising.html
3 UK Department for Culture, Media and Sport http://www.culture.gov.uk/images/publications/Arts2001.pdf (accessed
Jun, 28. 2011)
4 Richard Buchanan is professor of Design, Management and Information Systems at the Weatherhead School of
Management at Case Western Reserve University
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Music industry, well known from the second half of twenty century as recording industry, include
music performance, composition, distribution, promotion, production, training and education, as well
as record labels, recording studios, live music venues, manufacturing and sales music equipments.
• Performing Arts
The performing arts covers all sorts of stage art, performed live by artists for an audience, it can take
the form of theatre, opera, poetry, dance, ballet, concerts, the circus, puppetry, etc., Performing arts
are a special case since their products are expressed only as an intangible service, unlike other sectors
of creative industries that produce tangible creative goods.
• Publishing
Publishing and printed media are the literary production in the form of various types of books as novels,
poetry, education, entertainment as well as all types of printed media, newspapers and magazines.
Publishing and print media are very important sector of creative industries from the cultural and
economic point of view. In the last twenty years, publishing and print media are facing a growing
trend of electronic publishing, which forces them to think of alternative ways of preservation the
market positions.
• Software & Computer Services
Software & Computer Services generally include the development of computer software and
providing related services. This industry, beside it’s creatively sector, includes production of
equipment, consultancy, training etc. The importance of this industry is primarily reected in the
software development business that can directly contribute to new jobs creation as a labour-intensive
activity, and to bring signicant revenues to the country’s GDP. In addition, this industry signicantly
inuence to growth of other industries’ production and services, due the fact that ICT systems are
essential for all other businesses.
• Television & Radio
Radio TV industry includes broadcasting station and a network of companies that produce programs
or sell the rights to broadcasting the recorded TV and radio programs. Programs are usually consisting
of national and local news, some specic thematic contents, musical shows, movies, various
entertainment shows, commercials and other. Some of the larger and better equipped stations produce
own programs, but most of the programs are produced outside the broadcasting radio television
stations by specialized companies that are usually classied into lm and video industry.
Since the activities of the creative industries are overlapping with some other industries there are lot
of classications of these industries, but classication done by UNCTAD is very illustrative due its
horizontally layers according the types of activities.
3.2. Development of the creative industries
History of the creative industries dated long before the rst formal use of that phrase, however
organized development of the industry begins only when some economists from the developed
countries began to understand its potential as a generator of new job places and as a signicant export
opportunity. The beginning of the modern creative industry can be related to initiatives of creative
and enterprising artists who have invested their own funds in various forms of creative production,
with uncertain possibilities to return of investment. Over time, in creative industries have come
professional managers specialized in this type of activity bringing the spirit of entrepreneurship. And
just this symbiosis of arts and entrepreneurship has delivered the modern creative industries. Today
there is no doubt, should be creative industries develop or not, but planners are trying to nd as much
as possible effective way for its development. Also, they gladly include all stakeholders as artists, arts
managers, NGOs, cultural institutions, founders and the education sector, in denition of long-term
economic development plans counting that all investment will be multiply returned.
4. THE CURRENT POSITION OF THE CREATIVE INDUSTRIES
Despite all the attention directed to the creative industries their position in most of countries aren’t
adequate in comparison with their economic potential. However in some developed countries as
UK, USA, Canada and Australia, the creative industries are concerned as economic sector with high
priority in government’s plans. Very deep economic crisis, that has shocked the leading developed
countries, has redirected attention to the creative industries as key factor in structural transformation
of world economy. Thanks to their exibility and adaptability creative industries can initiate the
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process of economic recovery, without signicant investment. For example, the UK lm industry in
“compares with a current cost of the lm tax relief of around 110 million pounds a year, meaning that
an extra 13 pounds in GDP is generated for every one pound invested. Overall, the report estimated
that the movie business contributed 4.6 billion pounds to the economy last year, compared with
around 4.3 billion in 2007.” 5
Also, EU Commission has show a particular attention to the creative industries in their study “The
Economy of Culture in Europe” issued in 2006. which “ has been the starting point of a quick political
revaluation of the Creative Industries in Europe and its member states.”6
This study underlines the
sustainability development of whole culture and force member states to adopt the development plans
of these industries. “More importantly, some EU member States have been looking into ways of
analysing the commercial value of creative industries without necessarily attempting to capture
their cultural and social values. Those countries are developing programmes to turn creativity into
industrial successes. These attempts are relayed in cities and regions.” (p. 32)
4.1. The creative industries in Serbia
The creative potential of Serbia, its creative capital, and especially the different domain of
entrepreneurship in the culture, therefore, the contribution of the private sector, never gained enough
attention in the development process neither at national nor at the regional level. (Kreativne industrije
i ekonomija znanja p.11). Unfortunately this statement is still valid, and there is no indication that
Serbian Government has intention to change anything. Only active voice has come from some NGO
as well as from some art associations as is Academica from Belgrade. These initiatives result in 2006.
in new way of thinking about creative industries in Serbia. The rst tangible result was the study
„Creative industries: recommendations for the development of creative industries in Serbia” which
was the result of one-year project initiated by the British Council in Belgrade, the eld of creative
work is beginning to be considered in a different socio-economic perspective. (Mikic, 2008. p 40,41)
Thanks to this study and enormous effort of different organizations now we do have vide initiatives to
create creative clusters in Serbia. The rst one is Creative cluster of Vojvodina with numerous of artist
and creative entrepreneurs associated in very powerful organization. The similar cluster is organizing
in Southeast region of Serbia.
4.2. The creative industries in the South East Europe
In order to properly perceive the change mode in the context of the creative economy of South East
Europe, it is important to analyze several key preconditions for the development of creative economy
in Southeast Europe. The rst and most important of these key dimensions related to the issue of (de)
centralization - with one hand as regards the areas of nancing, on the other hand, considering the
spatial dimension (de) centralization. In South Eastern Europe there are two levels of centralization
that can be spoken when exploring the area of creative industries. The rst level and centralization
stems from the fact that until recently, nancial support for these activities was centralized at the state
level. It is still the tendency is present, whether we are talking about nancial aid that is allocated to
central level or that level of local administration and government. Investment in creative industries
was also minimal, as businesses venture and private initiatives in this eld. (Primorac, 2010, p 104).
The way out from this circulus vitiosus is introduce the entrepreneur behaviour in creative industries
and leave the habit to wait the support from government’s budget as unique sources of nancing.
5. THE CREATIVE ECONOMY
The best illustration how important is creative economy gives the following citation “Britain
makes more money from music than from its car industry. In the United States, the core copyright
industries achieved foreign sales and exports of $60.18 billion-a gure that surpasses, for the rst
time, every other export sector, including automobiles, agriculture, and aircraft. “7
Knowing this
facts it seems very logical why UN gain such attention to the Creative economy. They suggest that
that “Fundamental to an understanding of the creative economy – what it comprises and how it
functions in the economies of both developed and developing countries – are the evolving concepts of
“cultural industries” and “creative industries”.( Creative Economy, Report 2010,p3) This publication,
also contains a number of successful examples from undeveloped countries: lm industry in India
5 The UK Film Council report for year 2010. - http://www.reuters.com/ (accessed July 3. 2011.)
6 http://www.european-creative-industries.eu/ (accessed July 3.2011)
7 John Howkins - The Creative Economy: How People Make Money From Ideas, 2008. Product description http://
www.amazon.com/gp/product/0140287949/sr=8-1/qid=1154956721/ref=pd_bbs_1/104-7929277-7071141?ie=UTF8
(accessed July 10.2011)
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and Nigeria, fashion industry in Africa and Asia, soap operas in Mexico and Brazil, tourist attractions
in Brazil and Caribbean. Such industries in developing countries have been promoting trade, while
often providing training and employment to the poor. The best example is Nigeria’s lm industry with
revenue of almost 3 billion USD. It is the third largest lm industry in the world, following the US
and India. Their “Nollywood” produces more than 1,000 lms annually, creating thousands of jobs
and is the country’s second most important industry after oil.
It is obvious that the shortest way to improve a country’s economy is to encourage creativity and
entrepreneurship in the cultural and creative industries. Developing countries in particular have a
good reason to run their economies in such a way taking into account the untapped potential of
tourism, national heritage and culture that can be a locomotive in the economic recovery. The current
approach, of most third world economies, to establish a production and export of raw materials has
proved to be fatal due to the price uctuations and limited natural resources as well.
5.1. The creative industries - Fact and gures
Due to the limited scope of this work have been presented data only from two sources, but they are
sufciently illustrative to conrm the assumption that the creative industries have the highest growth
rate compared with any other industries, especially in comparison with conventional manufacturing
industries. The importance of the creative economy has been emphasise in a recent survey on
employment in the cultural sector conducted by the EU, which showed that the rate of employment
growth in cultural sector were four times higher than the EU average. The similar situation is in UK,
shown in Table 3.
Table 2: Gross Value Added (GVA) of the Creative Industries, UK - 2008 Data
Sector GVA at basic prices (£mil-
lion) Proportion of total
UK GVA (%)
1. Advertising 7,800 0.7%
2. Architecture 3,600 0.3%
3. Art & Antiques 300 0.03%
5. Design 1,600 0.2%
6. Designer Fashion 100 0.01%
7. Film, Video & Photography 2,700 0.3%
9 & 10. Music & Visual and Performing Arts 3,200 0.3%
11. Publishing 10,100 1.0%
8 & 12. Software & Electronic Publishing 26,400 2.5%
8 & 12. Digital & Entertainment Media 200 0.02%
13. TV & Radio 3,200 0.3%
Total GVA for Creative Industries 59,100 5.6%
Total GVA for all Industries 1,053,9002
Source: Annual Business Survey (ABS), Ofce for National Statistics (from Creative Industries Economic Estimates,
2010)
Table 3: Creative Employment, Great Britain - 2010 Data (July - September)
Sector Employees in
Creative Indus-
tries
Self-employed in
Creative Indus-
tries
Employees doing
creative jobs in
other industries
Self-employed
people doing
creative jobs in
other industries
Total Employ-
ment
1. Advertising 89,100 25,400 163,800 21,000 299,200
2. Architecture 63,300 35,300 26,300 3,500 128,400
3. Art & Antiques 6,600 3,200 9,800
4. Crafts 66,300 45,100 111,400
5. Design 35,000 56,600 113,500 20,400 225,400
6. Designer Fashion 2,500 3,700 3,200 400 9,700
7. Film, Video &
Photography 26,000 13,300 10,700 10,500 60,500
9 & 10. Music & Visual
and Performing Arts 67,200 136,300 33,300 69,000 305,800
11. Publishing 151,100 20,500 55,700 9,300 236,600
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8 & 12. Software &
Electronic Publishing 347,000 81,000 290,600 34,500 753,000
8 & 12. Digital &
Entertainment Media 5,600 700 6,200
13. TV & Radio 77,300 37,300 10,500 7,200 132,300
Total 870,600 413,200 774,000 220,700 2,278,500
Employment within Creative Industries 1,283,800
Employment in businesses outside Creative Industries 994,700
Total Creative Employment 2,278,500
All Employment1 29,189,000
Total creative employment as a proportion of all employment (%) 7.8%
Source: Labour Force Survey (LFS), Ofce for National Statistics(from Creative Industries Economic Estimates, 2010)
Table 4: Number of business in the Creative Industries, UK - 2010 Data
Sector Number of enter-
prises
As a proportion of
Creative Industry En-
terprises (%)
As a proportion
of all enterprises
(%)
1. Advertising 14,800 8.1% 0.7%
2. Architecture 11,500 6.3% 0.5%
3. Art & Antiques 2,700 1.5% 0.1%
5. Design 14,200 7.8% 0.7%
6. Designer Fashion 900 0.5% 0.04%
7. Film, Video & Photography 9,900 5.4% 0.5%
9 & 10. Music & Visual and Performing Arts 30,800 16.9% 1.5%
11. Publishing 7,700 4.2% 0.4%
8 &12. Software & Electronic Publishing 81,700 44.9% 3.9%
8 & 12. Digital & Entertainment Media 200 0.1% 0.01%
13. TV & Radio 7,700 4.2% 0.4%
Total 182,100 100.0% 8.7%
All enterprises 2,100,400
Source: Inter-Departmental Business Register (IDBR), Ofce for National Statistics (from Creative Industries
Economic Estimates, 2010)
Notes The data available did not allow us to measure the number of enterprises in the Crafts Industry.
Table 5. Creative goods: Exports, by economic group, 2002 and 2008 (in millions of $)
Worl d Developed economies Developing economies Transition economies
2002 2008 2002 2008 2002 2008 2002 2008
All Creative 204,948 406,992 127,903 227,103 75,835 176,211 1,210 3,678
Art Crafts 17,503 32,323 8,256 11,443 9,202 20,715 45 164
Audiovisuals 462 811 425 726 35 75 3 10
Design 114,692 241,972 60,967 117,816 53,362 122,439 362 1,716
New Media 17,365 27,754 11,422 13,248 5,908 14,423 36 82
Performing Arts 9,689 26,136 8,947 22,539 698 3,323 43 274
Publishing 29,817 48,266 25,970 38,753 3,157 8,138 690 1,376
Visual Arts 15,421 29,730 11,916 22,578 3,474 7,097 31 56
Source: UNCTAD, based on ofcial data in UN COMTRADE database (from Creative Economy report 2010)
Table 6. Creative goods: Top 20 exporters worldwide, 2002 and 2008
Rank Value (in millions of $) Rank Market share % Growth rate %
2008 Exporter 2008 2002 2002 2008 2003-2008
1 China 84,807 32,348 1 20.8 16.9
2 United States 35,000 18,557 3 8.6 13.3
3Germany 34,408 15,213 68.5 14.7
4 China, Hong Kong SAR 33,254 23,667 2 8.2 6.3
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5Italy 27,792 16,517 46.8 9.7
6United Kingdom 19,898 13,657 74.9 6.5
7 France 17,271 8,999 9 4.2 10.2
8 Netherlands 10,527 3,686 15 2.6 11.6
9 Switzerland 9,916 5,141 11 2.4 13.5
10 India 9,450 - - 2.3 15.7
11 Belgium 9,220 5,387 10 2.3 6.7
12 Canada 9,215 9,327 8 2.3 -0.9
13 Japan 6,988 3,976 13 1.7 14.7
14 Austria 6,313 3,603 16 1.6 8.5
15 Spain 6,287 4,507 12 1.5 4.9
16 Turkey 5,369 2,154 23 1.3 15.0
17 Poland 5,250 1,983 24 1.3 14.9
18 Mexico 5,167 3,797 14 1.3 9.1
19 Thailand 5,077 2,899 18 1.2 10.3
20 Singapore 5,047 2,619 21 1.2 6.0
Source: UNCTAD, based on ofcial data in UN COMTRADE database (from Creative Economy report 2010)
Table 7 World exports of all creative industry (goods and services), by subgroup, 2002 and 2008
Subgroup
Value (in
millions
of $)
As % of all
creative
industries
As % of
total world
export
Value (in
millions
of $)
As % of all
creative
industries
As % of
total world
export
Growth
rate (%)
2002 2008 2003-2008
All creative industries 267,175 100.00 - 592,079 100.00 -14.4
All creative goods 204,948 76.71 3.52 406,992 68.74 2.73 11.5
All creative services 62,227 23.29 3.79 185,087 31.26 4.80 17.1
Heritage 25,007 9.36 - 43,629 7.37 - -
Art crafts goods 17,503 6.55 0.30 32,323 5.46 0.22 8.7
Other personal, cultural
and recreational services 7,504 2.81 0.46 11,306 1.91 0.29 7.3
Arts 25,109 9.40 - 55,867 9.44 - -
Visual arts goods 15,421 5.77 0.27 29,730 5.02 0.20 12.8
Performing arts goods 9,689 3.63 0.17 26,136 4.41 0.18 17.8
Media 43,960 16.45 - 75,503 12.75 - -
Publishing goods 29,817 11.16 0.51 48,266 8.15 0.32 7.3
Audiovisual goods 462 0.17 0.01 811 0.14 0.01 7.2
Audiovisual and related
services 13,681 5.12 0.83 26,426 4.46 0.69 11.0
Functional creations 194,283 72.72 -454,813 76.82 - -
Design goods 114,692 42.93 1.97 241,972 40.87 1.62 12.5
New media goods 17,365 6.50 0.30 27,754 4.69 0.19 8.9
Advertising and related
services 8,914 3.34 0.54 27,999 4.73 0.73 18.4
Architecture and related
services 18,746 7.02 1.14 85,157 14.38 2.21 20.9
Research and
development services 12,639 4.73 0.77 31,111 5.25 0.81 14.8
Personal, cultural and
recreational services 21,927 8.21 1.34 40,821 6.89 1.06 10.4
Source: UNCTAD Secretariat calculation based on ofcial data in UN COMTRADE database (from Creative Economy
report 2010)
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5.2. Entrepreneurship in the Creative industries
On the very beginning we should be aware that there are the crucial question how to delineating the
natures of entrepreneurship in the creative industries, even if these have received signicant attention
from economists. The identication of entrepreneur role becomes all the more difcult when we
consider that some segments of the creative industries are organized in a complex way as project-
based activities. However on another hand, the OECD’s position on this question is very clear, they
consider that “Encouraging entrepreneurship is high on the agenda of governments in OECD member
countries and in transition, emerging, and developing economies, as entrepreneurs are the catalysts
of growth, combining capital, innovation and skills. The importance of entrepreneurship stands out
in this time of innovative change, and fostering a climate to help the dynamism in rm creation is
considered fundamental worldwide.”1
Since the creative business highly depends on the personal talent, skill and ability it is very obvious
that entrepreneurship is the crucial factor for creative industries development. According to this matter
of fact in 1999 the British Council has start the Creative and Cultural Economy programme2
within
his Arts department having in mind an idea to work with the UK’s creative sectors and to develop a
programme of work that would share the UK’s experience of developing the creative economy and
the wider impact of this process in terms of education, economic regeneration, social inclusion and
international engagement. This programme give particular attention to stimulate young people to start
the own business in creative sector. Therefore they announce the call for Young Creative Entrepreneur
(YCE) Award Programme, giving participant denitions:
• Somebody working in the creative sector who is able to demonstrate business success in the
classic terms of business growth (prot, market share, employees) and/or in terms of his or her
reputation (creativity, quality and aesthetic) amongst their peers.
• Somebody working in the creative sector who has developed a successful (in terms of impact
and reach) social or not-for-prot enterprise in this sector.
• Somebody working in the creative sector who has shown leadership in the industry by
championing its development in their country.
• Somebody working in the creative sector who has developed initiatives (exhibitions, trade
fairs, festivals etc) that develop and grow the market for this sector in their country.
This call covers all sectors of the creative industries, but creative entrepreneurs should possess the
following qualities:
Entrepreneurial ability
• Risk taking: Can assess, enjoy and face risks, with the skills/initiative to successfully drive
ideas forward
• Passion for their creative sector: Creative entrepreneurs are the mediators that bring creative
products to the market and require an ability to talent spot, respect, understand and manage
creativity
• Corporate skills: Business acumen, commercial awareness, managerial ability, vision and
strategy
• Interpersonal skills: Ability to sell an idea, negotiate and network
Innovation/ development of new business models
• Finds new, innovative ways to take creative work to audiences and communities – new models
of production, distribution, value – highlighting the wider social, economic and cultural
benets in doing so
• Original ideas and the exibility and self-condence to take these to market
Leadership ability/potential to change their sector
• Leadership ability: Have the vision to combine their creative and entrepreneurial skills to
be a leader in their national creative community. Ability to share the lessons of their IYCE
experience with others.
1 http://www.oecd.org/ (accessed July 7. 2011)
2 http://creativeconomy.britishcouncil.org/creative-entrepreneurship/young-creative-entrepreneur-programme/
(accessed July 11. 2011)
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• Agent of change: ability to make a difference – as not merely successful in business terms but
also intervenes in the domestic market to impact positively on its infrastructure.
Market awareness and understanding
• Market awareness: Knowledge of the local market situation and their role in it
• Ability to spot gaps within the market and exploit these opportunities into real solutions
International outlook and ability to network with the UK/globally
• International outlook: Wants to develop a mutually benecial culture of personal/professional
engagement and collaboration with the UK, and to benet from dialogue with other international
participants and is keen to develop future international projects
• Such qualities are valid around the world and can be the very good example for other countries
how stimulate and support the creative entrepreneurship especially for young skilled people.
6. CONCLUSION
Creative industries are the industries of the future and will absorb the huge number of surplus labour
force which is due to the fact that traditional industries are increasingly implementing automation
and robotics, which resulting with signicantly reducing actual number of employees. Because
of that labour-intensive sector of creative industries can be real way out from the huge problems
of unemployment and poverty especially in the developing countries and transition economies. In
addition, low-investment in opening new jobs allows these countries to nance new jobs without
expensive credit lines from international nancial market. The best example of this approach is China,
which is only in 20 years from extremely underdeveloped and poor countries has become the second
economy in the world with a tendency that in the next few years takes the leading position. It should
be taken in consideration that China from the very beginning has not been in high technologies, but
just in crafts and textile industry, whose revenues are then nanced the high-tech industry.
This example should be followed by the Western Balkan countries, which are still looking for their
place in a complex structure of the European economy, as their logical and largest partner. This is
particularly important, due the fact that EU member states are working very intensively on promoting
and encouraging the development of own creative industries. Therefore governments in the Western
Balkans have to make plans for the development of these industries, very quickly otherwise they will
lose this race long before the start.
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Reference
Creative economy, Report 2008, (2009) UNCTAD/DITC/2008/2 http://www.ifap.ru/library/book352.pdf
(accessed June.14 2011.)
Creative Economy, Report 2010 (2011) http://www.unctad.org/en/docs/ditctab20103_en.pdf (accessed July
5.2011)
Creative Industries Economic Estimates (Experimental Statistics) Full Statistical Release, ( 2010)
Creative Industries Mapping Document’, DCMS, 2001
Creative Nation: Commonwealth Cultural Policy, October 1994 http://www.nla.gov.au/creative.nation/
contents.html (accessed May 21. 2011.)
Hartli, Dž. Ed – (2007) Kreativne industrije, Clio Beograd,str.
http://www.culture.gov.uk/images/research/CIEE_Full_Release_Dec2010.pdf (accessed july 10.2011)
http://www.culture.gov.uk/ukgwacnf.html?url=http://www.culture.gov.uk/reference_library/
publications/4632.asp (accessed June 19. 2011.)
Kreativne industrije i ekonomija znanja (2007) – Mad Marx – Kreativni kapital Srbije I knjiga, Academica,
Beograd.
Mikić, H – (2008) Kreativne industrije, dizajn i konkurentnost: proaktivan pristup, CEI, Beograd.
Primorac, J. (2008) Promjena strukture rada u kreativnoj ekonomiji: kultura, tranzicija i kreativna klasa -
doktorska disertacija, Sveučilište u Zagrebu, Filozovski fakultet
Trmčić Marko, Trmčić Snezana (2011) Business network strategy creation of large and small company-strategy
for the security,International scientic conference,”Small and Medium Enterprises-Possibilities and
Perspectives” 2011,Novi Pazar,Serbia(in press).
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DECREASE POVERTY THROUGH ENTREPRENEURSHIP PROMOTION AND
COMMENCEMENT OF FAMILY BUSINESS
Zoran Temelkov
Faculty of Economics, University of “Goce Delcev” – Stip, Macedonia.
E-mail: zoran.temelkov@ugd.edu.mk
Marina Radosavljevik Bojceva
Faculty of Economics, University of “Goce Delcev” – Stip, Macedonia.
E-mail: marina.radosavljevik@ugd.edu.mk
Abstract
Small or family managed businesses are the driving force behind poverty reduction and stimulation of
economic growth in transitional economies. Enforcing the entrepreneurship spirit could signicantly support
the objective for the decline of unemployment rate and augmentation of the living standard of the population.
For these reasons, constraints limiting the development of entrepreneurs should be decreased with the tendency
for the same to be eliminated. Some of the major constrains are the inappropriate educational background, lack
of experience, as well as restricted access to available funds.
In Macedonia, many of the family owned business are started with the objective of earning a monthly income
for covering business cost and covering the cost of living for the entrepreneur and his/her family. Considering
the high unemployment rate in Macedonia, from the former it could be concluded that although entrepreneurs
are striving for high prots, the primary objective is to earn a salary and escape the potential poverty problems
eminent in the Macedonian economy.
In order for the entrepreneurs businesses to be supported, step by step strategy should be put in place, a
strategy that will capture and eliminate the primary restrictions obstructing the entrepreneur’s development.
This strategy should be consisted of program that will improve the entrepreneur’s education and skills, change
the way of thinking i.e. remodel the mentality “I know everything, I can do everything by myself” - of many
entrepreneurs, and improve the availability of funds, more precisely, availability of low cost funds needed for
business startup, and later on for business expansion.
Concluding remarks will present that initially foreign aid, and aid in general directed toward entrepreneurship
development should be primarily focused on improvement of their skills and educating the same regarding
the accurate analysis of nancing options. With other words, giving nancial aid to entrepreneur who doesn’t
have the needed skill to manage the funds adequately is the same as burning the money. - “Give a men a sh
and feed him for a day, teach a men to sh and feed him for a life” - would be adequate description of what
should be done. A program, which will provide in depth claricationof the potential nancial and non-nancial
problems that might arise and adequate solutions of the same, should be established. In addition, maybe the
most important point is that, entrepreneurs should fully understand the role and the potential of family owned
business in the objective of poverty reduction and improved standard of living.
Keywords: Entrepreneurship promotion, Poverty, Programs, Education, Financial resources
1. INTRODUCTION
The dissolution of Yugoslavia has initiated the privatization process of socials companies, which in turn
offered the possibility for development of entrepreneurs. The problems were that many of the newly
privatized companies’ layoff large number of employees, thus sharply increasing the unemployment
rate and decrease the living standard in Macedonia. Moreover, the new entrepreneurs lacked crucial
skills and experience needed for running a company in a capitals manner. The dissolution have opened
the gates for entrepreneurs development, and the transition itself has imposed a lot of constrains, and
at the same time inuenced the economic growth.
For this reasons, policy makers, should develop a strategy for elimination of the most basic constrains
obstructing the development of self employed entrepreneurs. Constrains consisted of lack of
experience, inadequate education and limitation of nancial resources availability should be primary
focus of the entrepreneurship development strategy.
Moreover, policy makers should not be focused solely on development of large companies in order to
achieve an economic growth. The focal point should be the decrease in poverty and improvement of
living standards, through the decrease of jobless population. As result of the former, the government
should develop a strategy for promotion of self employment entrepreneurs.
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2. IMPORTANCE OF ENTREPRENEURS FOR TRANSITIONAL COUNTRIES
It is a well know fact that small rms are responsible for the biggest part of an economic activities.
Although the corporations are the one employing thousands of individuals, their activities have
little contribution toward the economic growth. While corporations do impact the economic growth,
it should be noted that the economic growth should not be seen only from the point of view that
large corporations are contributing signicantly for the GDP. Instead, the economic growth should
be also viewed from different perspective i.e. the perspective of technological innovation, increase
competitiveness, increase in production efciency, and increase in investment activities all of these
leading toward primarily, decrease in the unemployment rate, and later on increase in wealth. The
former is of crucial importance when considering the transitional economies, especially economies
with socialist background. In some of these economies, as a result of the system itself, the idea behind
entrepreneur’s spirit and the functioning of small rms has been abandoned until the transformation
into capitalist society. Facing the capitals functioning, many of the state owned companies have been
privatized and large number of the population has been faced with unemployment. During the period
of privatization, the newly privatized companies provided little or no new employments, whereas
they were responsible for job destruction and increased in unemployed individuals (Mete Karayel
and Münire Ciftci, 2007, pp.180 - 182 ). The increased in unemployment rate had signicant negative
impact initially for the living standard of the individuals and later on for the decrease in economic
development.
After privatization, the big companies continued to contribute toward economic growth, but the
problem was, and is some transitional countries such as Macedonia this problem is still evident after
20 years of transition, the sudden high unemployment rate and decrease in the living standard of the
individuals which in turn, gradually lead toward increased poverty. Many of the jobless individuals
unaware of the entrepreneurship concept were forced to become entrepreneurs themselves in order
to survive the difcult economic situation they were faced with. Progressively, many of these
entrepreneurs have established rms that grew into large companies, signicantly affecting the
economic growth from all aspects. As the concept of entrepreneurships become part of individual’s
everyday life, many of them have seen a possibility to improve their standard by engaging into some
economic activity.
The success of small rms growing into large companies (corporations) is important for the economy
because they reduced unemployment, economically inuence the development of the surrounding
region, and have undertaken investment activities. But what is more important for economic
development, are the small rms themselves. They are important because they are the mechanism for
direct decrease of unemployment and thus decrease in the burden for the state, originating from the
unemployed population (Mete Karayel and Münire Ciftci, 2007, pp.180 - 182).These rms are the
primary source for the economic development, in a way that primarily they remove the cost of the
government for taking care of the unemployed population3. Secondly, they are contributing toward
the government revenues since they are paying taxes. Thirdly, the newly established rms have
created a competitive discipline for the companies founded under the socialist system (Mete Karayel
and MünireCiftci, 2007, pp.180 - 182). The most important point is that through entrepreneurship
activities, the entrepreneurs are improving the standard of living for themselves and their family. Stated
differently, the lack of competition have made the existing companies lazy in terms of innovativeness
and improvements in efciency, thus the new entrepreneurs rms brought fresh thinking which forced
these companies to restructure their activities and the organization as a whole. The former have lead
toward increased efciency of both the newly created and socialist companies.
In addition entrepreneurial rms could be considered as a dynamic rms, because of their learning
curve resulting in numerous research regarding the process for conducting a business (Mete Karayel
and Münire Ciftci, 2007, pp.180 - 182). In some instances, entrepreneurship is considered to be the
fourth factor of production i.e. a factor responsible for the formation of wealth by joining together the
current production factors in new ways (Erik Stam and André van Stel, 2009, pp. 5 -7). This is in a
sense that entrepreneurs are using new and innovative approaches of doing business in order to rst
and foremost improve their standard of living through prot maximization.
(Landes, 1998,pp. 44) is stating that the entrepreneurship has been perceived as fundamental mechanism
for economic development. Some analyses draw the conclusion that although economic growth might
not be experienced in low income countries as a result of the entrepreneurship activates, it is achieved
in the transitional countries, where entrepreneurship focused on growth signicantly contributes for
3 The unemployed population has the right on health insurance paid by the government, social help, and other benets
that signicantly impact the level of government expenditure.
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the macroeconomic growth (Vilasinee Bunyasrie, 2010, p.151- 152). Additionally, viewing economic
growth in terms of GDP in transitional countries, is more evident if growth oriented entrepreneurs
exist in comparison with the general entrepreneurship (Vilasinee Bunyasrie, 2010, p.151- 152). More
over it could be said that the small rms are the main pillar of a transitional economy and they
represent the key source for economic growth because these businesses are bringing value for the
economy in terms of innovative products or techniques (Vilasinee Bunyasrie, 2010, p.151- 152).
Noteworthy is to say that the former is indirectly pointing out the role of the small entrepreneurship
rms as a key mechanism for job creation i.e. self-employment.
As a result of the low level of incentives for innovation under the socialist system, the transition into
capitalist system opened new prospects for entrepreneurs to use the resources for high productivity
activities. In addition, in order for the transition economies to experience a growth and economic
development, there was the need for employment of new technologies, and these technologies were
brought by the capitalist entrepreneurs (Saul Estrin,Klaus E. Meyer, andMaria Bytchkova, 2005, pp.
2 -25).
Talking about the economic growth, two differences should be made. Namely, the difference between
self – employed entrepreneurs, and entrepreneurs whose business grew and increase the employment
in the region (Saul Estrin, Klaus E. Meyer, andMaria Bytchkova, 2005, pp. 2 -25). From the former
it could be concluded that the entrepreneurs can directly and indirectly inuence the economic
growth and development. The self – employed entrepreneurs are contributing toward the decrease
of unemployment rate and thus indirectly supporting the economic growth. On the other hand, the
entrepreneurs starting a small rm and latter on expanding its activates directly inuences the GDP
growth. Stated differently, entrepreneurship can signicantly help in the objective of poverty reduction
and at the same time support the economic growth and development.
Worth mentioning is the fact that many of the jobless citizens are still maintaining some level of living
standard although, formally, they do not have any income. This is because of the fact that they are
working in the informal economy and thus earning some income, which is not registered and no taxes
are paid for. These activities are with the objective of self-employment, an example would be the new
car import legislation, when some entrepreneurs have imported second hand cars and sold them on
the Macedonian market. The problem was that, for many, this was a short term business, but it did
increase the economic activity.
3. MAJOR CONSTRAINS SUFFOCATING THE ENTREPRENEURS SPIRIT
3.1. Insufcient educational background
“Claiming to go entrepreneurialdoes not involve only creation of new businesses and rms but
also incentives and provision of relevant education and training.Young business leaders need to be
educated and trained, particularly when it comes to exploitation of technologies and innovations”
(Mohand-Said Oukil, 2009, p. 10 – 13)
One of the main constrain for the entrepreneurs is their educational background in terms of the
knowledge they possess for developing and managing a business. This is in a way that, although
many entrepreneurs might be the best in their eld of expertise and accordingly to have the desire to
establish a family owned business, they might lack the necessary skill to manage the business. More
precisely, they will know how to set up the rm, they might conduct an analysis of what the market
needs and offer the best product, but they don’t know how to manage the business itself. Suddenly
they are making mistakes in the area of nancing, marketing and organizing and managing employees.
Although it is generally know fact that an entrepreneurs will not know everything he/she needs for
proper functioning of the rm, the problem here is the mentality of the entrepreneurs themselves
the mentality of “I know everything, I can do everything by myself”. This way of thinking is as
a result of the insufcient education and lack of experience in term of managing an organization
whether small or a large one. There are many consulting companies existing in the market, and the
entrepreneurs should seek their consultation services during the early stages of the rm’s development.
For instance, consulting companies might provide to be helpful for a non-nance entrepreneur in
managing his/her nancing sources. One of the most frequentmistakes that entrepreneurs are doing is
the mismatching of the maturity of nancial sources with the investment activity to be nanced. For
instance, entrepreneurs with no nancial backgroundusually are acquiring short term loans to nance
long term investment. The problem is that the loan will mature before the investment starts to generate
any revenue thus creating liquidity problems. These liquidity problems might result in lost business
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due to bank collateral. The consequences from such a simple mistake might be devastating for the
entrepreneurs because of the lack of desire to ask for an advise from investment advisors. The former
is an example regarding portion of the issues that might go wrong as a result of inadequate education.
Other things considered the entrepreneurs could face problems in the process of management of their
employees, their customers, suppliers, etc.
3.2. Lack of experience
This constrain of the entrepreneurs is closely related with the inadequate educational background
in terms of management of specic business activities. Namely, although entrepreneurs might have
specic experience4 in some areas such as - product innovation, employee management, nancial
management, marketing5, and lack the needed experience for most of the other relevant activities. One
of the main problems is not the lack of experience; instead the problem is the absence of the aspiration
to acquire the needed knowledge and accordingly, the experience for improvement of personal skills.
Because of the lack of market experience and the bureaucratic planned economy, many of the socialist
directors lack the managerial skills needed for proper management of a rm (Saul Estrin, Klaus E.
Meyer, andMaria Bytchkova, 2005, pp. 2 -25).
3.3. Limited access to nancial resources
Another major constrain for the entrepreneurs in transitional economies are the availability of funds
for starting a business or for expansion of the business activities. There are two perspectives that
should be taken into consideration when discussing the nancial availability. Firstly, the general
access to nancial resources and secondly the availability of low cost capital.
The choices that an entrepreneur might have for nancing its entrepreneurial activities in transitional
economies are the family owned money, loans from commercial banks, venture capitalist or angel
investors, the capital market, and different governmental programs for supporting entrepreneurs.
Although there are various nancing options present in the markets, we should see the real availability
of these options. Namely, in most transitional countries, especially in Republic of Macedonia, the
amount of family money is highly limited for the entrepreneurs, since in most cases they have low
living standard and thus low savings. It is suggested that because of the insufcient family wealth, a
well developed nancial system should be established if an economy wants to support the development
of entrepreneur activities (Mete Karayel and Münire Ciftci, 2007, pp.180 - 182 ).
Considering the capital market, it has limited capacity because very few entrepreneurs are able (or
willing for that matter) to sell part of their ownership, or sell a debt to other investors usually seeking
low risk investments. One of the widely available options is the venture capitalist and angel investor
nancing. The drawbacks of this form of nancing are the lost control over the rm and the high
returns that the investors are demanding.Most often entrepreneurs in Macedonia are nancing their
activates using the commercial banks as a primary source of funds and from couple of years back, the
different governmental programs.
Using bank loans might be a good option for nancing an expansion of a rm, but the new entrepreneurs
have the need of funds for nancing their startup rms and this is the stage where they face the major
constrain. The problem is that with most of the banks,entrepreneurs should practically show that they
don’t need the money so that banks are willing to approve the loan. The former is a direct result of
the banks unwillingness to nance “risky” borrower, and the lack of the aspiration to support new
entrepreneurs. Stated differently, banks are unenthusiastic when it comes to lending to newly created
rms or small rms because of the possible high risk and high administrative cost for the specic
loans (Donald J. Johnston and Carlos Magariños, 2004, pp. 37).
One of the main reasons responsible for the nancing problems faced by entrepreneurs is the
inadequate assortment of nancial products and services and lack of information for the banks as well
as the small rms (OECD, 2006, p. 3 – 4).Very often banks may be unwilling to offer their products
to young rms or start up business due to the deciency in the level of collateral required, since these
rms have the opportunity to enjoy above average prots that are followed with the same level of risk
(OECD, 2006, p. 3-4).
4 This is from a perspective of their past employment i.e. employment and position they have held within the socialist
companies.
5 This process is a bit debatable because there wasn’t a lot of marketing programs used in the planned economy, so most
probably this would be one of the weakest points for the entrepreneurs in terms of experience.
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Presenting the numerous options for nancing, one might say that raising funds should not be
considered a problem faced by the entrepreneurs. But these nancing options have another perspective
that should be taken into account i.e. the cost of these funds. As a result of the way in which the
thinking is shaped in transitional economies, there are two aspects related to the cost depending on
the nancing option. The psychological cost is usually present when the entrepreneur needs to give
up a part of the ownership in his rm to third party investors such as the angel investors or venture
capitalist. The nancial cost of capital is another issue that is highly relevant for the entrepreneurs and
is crucial for the business activities.
Although the psychological cost could be “easily” overcome, the nancial cost is much difcult to
solve and this is where most of the entrepreneurs give up and does not implement their activities. As
it was previously mentioned, in transitional economies the main source for nancing is the banking
sector. This sector has high interest rates and in order to protect itself against the increased risk of the
entrepreneurs segment, they set up a nancial products and services with above market interest rates.
In turn, these high interest rates demand that the entrepreneur earn much higher prots in order to
cover the interest expense as well the business operating costs.
The government support has signicant role in the nancing stage of the entrepreneur’s activities,
in a way that some government programs offer “cheap” loans for newly established or small rms,
and these loans drastically decrease the interest burden for the entrepreneurs6. Another government
programs that might eliminate portion of the nancing costs, are the different grants available for
nancing investment activities of entrepreneurs.
3.4. Suggestions for improvement of entrepreneurs efciency resulting in decreased poverty and
economic growth
“In contexts where business culture is not highly developed, boosting an entrepreneurship mindset
requires an active role of governments and education institutions to make citizens exposed to
entrepreneurship and aware of all possibilities and opportunities” (Mohan Said Oukli, 2009, p.13).
Economic development and growth objectives in transitional economies should be accompanied by
activities directed toward strengthening of the nancial institutions, creation of adequate nancial
instruments, and supporting the relationships between the lending institution and entrepreneurs
(Donald J. Johnston and Carlos Magariños, 2004, pp.37).
Suggestions regarding the steps that should be included in the strategy for the entrepreneurial
development could be presented from the following perspectives:
• The primary focus of foreign and government aid
• Developing a reliable nancing mechanism
• Presentation of the entrepreneurial benets
• In – depth education about the concept of self employment
• In-depth education about the benets of paying taxes
Firstly, the foreign aid as well as the aid provided by the transitional government should be directed
toward education of the existing and potential entrepreneurs. This is in a sense that instead of
just offering a nancial aid, they should rst offer a preparation of the entrepreneurs in terms of
managing nancial resources and resources in general, for that matter. This pre –entrepreneurial
activity preparation should be formulated in a way that will be adequate for entrepreneurs with
different background. It might also include testing of their skills and abilities in a virtual company,
as a prerequisite for granting the nancial and any other support offered by the government or other
institutions7.
Secondly, the state should establish a reliable nancing mechanism through the development of
advanced nancial system consisted of capital markets and banking sector, instead of the focus
being on strengthening the banking sector, as it might be obvious in some transitional economies8.
Moreover, in order for the bank’s nancing obstacles to be overcome, resulting from the inadequate
and insufcient information, a close collaboration and information sharing between the entrepreneurs,
6 An example would be the nancial services offered by the Macedonia Bank for Development Promotion. For more
info please visit www.mbdp.com.mk
7 Other institutions providing support are the different NGO, the support provided by the European Union, etc.
8 Although debatable, but the restriction of Macedonian citizens to directly trade on foreign capital markets is serious
drawback when it comes to raising the necessary funds.
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nancing and government institutions should be formed. If we want to develop successful businesses,
an in-depth understanding of the business nance should be present, as well as access to capital, and
relationships with lenders (Gwen Richtermeyer, 2003, p. 1).
Thirdly, the government and the NGO’s supporting the entrepreneurial development should initially
present the concept of entrepreneurship to the population. Namely, although many business owners are
engaged in this process, they are not aware about the concept itself. For this reason, getting the process
closer to the market participants is of crucial importance, because all positive and negative aspects, as
well as potential problems, could be directly communicated. Presenting the entrepreneurship concept
to the population, especially the unemployed, could increase the self employment awareness.
For this reason the government should initiate a more aggressive campaign for self-employment.
The self employment is not only important in terms of decrease in unemployment rate, but it is also
important because the increase in employments will reduce the government burden to nance the
social benets and other benets of jobless population.
As it was mentioned earlier, portion of the unemployed population is earning an income through
informal channels, which means that they are not presenting their income and thus avoid tax obligations.
The governmental programs, aside of the nancial and educational focus, they should alsohave the
objective of educate the entrepreneurs about the benets of paying taxes. This is because many of
the informal entrepreneurs are unwilling to pay taxes, but in many instances they are criticizing the
government of not providing enough support to the small businesses.
Value should be given to the actions undertaken by the government to support the private sector
and the development of startup companies with the initiation of the business startup centers, the
Macedonia Bank for Development promotion, the government program for supporting of young and
jobless citizens, etc. Although all actions and steps undertaken by the government are adding value
for the Macedonian entrepreneurs and they are offering the means for entrepreneurial activity, they do
not provide the knowledge as well as the experience. Even though one might argue that the experience
is not something you read in the books, but still it is something you could share with others and help
them avoid some basic mistakes.
4. CONCLUSION
As result of the transitional period in the socialist countries, a major opportunity has aroused for the
development of an entrepreneurship, especially because of the large number of jobless population.
When using entrepreneurship as one of the means for economic development and growth, the
government should direct it resources toward the self-employment entrepreneurs. These entrepreneurs
are decreasing the level of unemployment rate, and also they are decreasing the individual poverty,
and thus improving the living standards.
The focal point for promotion and support of entrepreneurs should be their education and experience
sharing, as well as foundation of a rm nancial system. In addition, the government should develop
a strategy for the registration of entrepreneurs conducting it’s activates in the informal economy. This
strategy could provide accurate insight into the real poverty and unemployment problems, and the cost
of these problems for the country i.e. the government. This type of strategy could free up additional
governmental nancial resources, a resources which could be directed toward the entrepreneurship
promotion, instead of being directed toward “unemployed population”.
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Reference
Donald J. Johnston and Carlos Magariños (2004) “ Transition economies forum on
entrepreneurship and enterprise development”, Centre For Co-operation With Non-Members, OECDin Co-
operation withUnited Nations Industrial Development Organization, pp.37
Erik Stam and André van Stel (2009) “Types of Entrepreneurship and Economic
Growth”, UNU-MERIT, Working Papers No. 2009 -049, pp. 5- 7
Gwen Richtermeyer (2003) “Problems Entrepreneurs Face” Researching small business
and entrepreneurship, June, p.1.
Landes, D S. (1998) “The Wealth and Poverty of Nations: Why Some Are So Rich and
Some So Poor”, New York, NY: W. W. Norton, p. 44
Mete KARAYEL and Münire ÇİFTÇİ (2007 ) “ Entrepreneurship in transition
economies: A literature review of the central and eastern European countries (CEECs)”, pp. 180 – 182, http://
ces.epoka.edu.al/icme/Entre_Trans_Eco_CEEC_MK_MC.pdf
Mohand-Said Oukil (2009) “Enhancing Innovation and Entrepreneurship for Growth
andCompetitiveness of Arab Business Organizations” 3rd Scientic Forum in Jordan, April 27-29, p.13
OECD (2006) “Financing SMEs and Entrepreneurs”, Policy Brief, OECD Observer, November, p 3 - 4
Saul Estrin, Klaus E. Meyer, and Maria Bytchkova (2005) “Entrepreneurship in
Transition Economies”, Paper written as a chapter in M.C. Casson et al. (ed) The Oxford Handbook of
Entrepreneurship, forthcoming Oxford University, pp. 2 -25.
Vilasinee Bunyasrie (2010) “The role of entrepreneurship on economic growth”,
executive Journal, p. 151 – 152.
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CHARACTERISTICS OF ENTREPRENEURIAL ACTIVITIES IN TRANSITIONAL COUNTRIES
AND THEIR INFLUENCE ON DEVELOPMENT
Bozidar Leković
The Faculty of Economics Subotica, University of Novi Sad, Serbia
Email: bolesu@ef.uns.ac.rs
Slobodan Marić
The Faculty of Economics Subotica, University of Novi Sad, Serbia
Email: bolesu@ef.uns.ac.rs
Bojan Leković
The Faculty of Economics Subotica, University of Novi Sad, Serbia
Email: bolesu@ef.uns.ac.rs
Abstract
The GEM approach in measuring the volume of entrepreneurial activities and their interrelations with the
general social, economic and entrepreneurial conditions, on the one side, and the results of economic activities
at the level of national economy on the other side, gives the whole, systematically and methodologically well
established understanding of entrepreneurship as the signicant factor of the cited environment.
The level of entrepreneurial activities exert inuence on GDP growth depending on the level of country
development, i.e. there is far bigger GDP growth in highly developed countries, while the results in less
developed countries is far less regarding to the exploitation of entrepreneurial sectors in the function of
economic growth.
Not all this means that the entrepreneurship in less developed countries, in this case, in transitional countries,
should be discouraged for their contribution to economic development; on the contrary, small businesses and
entrepreneurial projects represent the driving force to go through crises and the factor of economic stabilization
in transitional countries.
Keywords: Entrepreneurial activity, Transition, Economic growth, Economic development
1. INTRODUCTION
The traditional analysis of the economic growth did not provide an observed place, role to entrepreneurs,
entrepreneurship, entrepreneurial processes, and its creation (Bosma and Levie, 2009). Many factors
generally explained the economic growth and development, both economic and noneconomic ones
( Bleaney and Nishiyama, 2002). Seen through history, the biggest contribution in developing the
theory of entrepreneurship and its role is ascribed to the Austrian economist L. Schumpeter (1934)
to whom entrepreneurship is the driving force of all the changes disturbing the current state and
cause to the creative destruction. It is indisputable that many economists attach much importance to
entrepreneurship for the economic development, especially in critical situations, both in developed
and developing countries, as a tool for solving the developmental problems in transitional countries
(see Giamartino, 1991), but no more than that.
The previously said enables us, before all, to outline this work and analyze the scope and structure of
entrepreneurial activities, as well as their role and connectivity with the economic growth of transitional
countries (mostly in Central and East Europe, without China) in relation to other groups of countries
of less or more development degree. In this work, we want to show how transition environment is
suitable for developing the volume and structure of entrepreneurial activities in relation to other
groups of countries, more or less developed.
Many previous works in this eld emphasize entrepreneurship and the sector of centrally planned
economies to market economies (Smallbone & Welter, 2001), but highly developed countries do not
renounce this development lever, determining formally even in strategic documents.
As it can be seen from the previous attitudes, entrepreneurship, as sort of activity plays the same
role in all the economies disregarding the degree of development. However, the volume and quality
of entrepreneurial activities in the form of contribution to the economic growth and development is
different depending on the level of development of the country where the environment quality is one
of the main criteria of division. At the same time, it is a direct factor of entrepreneurship. Special
attention will be paid to in the second part of the work.
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The rest of work is outlined in four parts. The second part points to the relationship of transition
and entrepreneurship. The third art illustrates the methodology and sources of data processed by
statistical procedures. In addition, in this part, selected indicators as research variables are specially
represented. The fourth part comments the results carried out by statistical analysis, while the fth
part is reserved for conclusions.
2. TRANSITION, ENTREPRENEURSHIP AND DEVELOPMENT
The stage of social and economic development, called transition, concerning to new history that has
happened in all the former socialist countries, among which our country is, relates to transition in
market business frameworks with dominant private property so it is considered the basic prerequisite
for entrepreneurship development in the former socialist countries (Smallbone & Welter, 2001).
Transition processes create economic and system conditions for entrepreneurship development and
small businesses that will be the carrier of transformation processes, but most important are:
• Private property;
• Market as a regulator economic processes;
• Managers as a ofce holder management - separation of property from management (Lekovic,
2006).
Money value plays important role in these processes, which, if stable, does not cause damage to
investors with the long-term loan contracts and xed compensation. “In the period of changes, when
prices are on the rise, entrepreneurs have favorable possibilities to prot increase because purchase
is done to favorable prices. The fall of money value causes to encouragement to invest and the fall
of entrepreneurial activities. They hesitate to start the long-term production process that requires
investment much earlier than the possibility to return it. Urgent problems are not any more only
“proteers”, but employment” (Keynes, 1037). The previously cited Keynes’ attitudes speak about
another essential problem for entrepreneurship development, and it is the stability of money values,
which, if not present, affects negatively on entrepreneurial activities.
Transition as an economic ambient for entrepreneurship development in the former socialist countries
carries two big limiting factors:
Firstly, the heavy historical heritage, and economic and system conditions, which proceeded the
transitional period, within the framework of which every entrepreneurial form of behavior was doomed
to failure in advanced. After the Second World War in Yugoslavia, as in other socialist countries, except
the U.S.S.R., where socialism came with the October Revolution and V. I. Lenin, the period of centrally
planned management and the social property, administrative pricing and the interventionism of the
state organs came. With the new social system, market, economic business criteria and competition
were pushed into the background choking initiation, creativity and entrepreneurship. “Small number
of large enterprises is all, a million of small is nothing”, then “Small commodity producers should be
destroyed by a long, slow organizational work because small commodity producers spoil proletariat
and they are a constant reservoir for capitalism restoration”. “To destroy classes does not only mean
to expel capitalists; it means to destroy small commodity producers, they cannot be expelled, they
cannot be destroyed, it is necessary to live with them, but they can be changed and re-educated”
(Jojic, R., 1973). Fear can be seen from these Lenin’s words, importance and power which he attached
to small commodity producers as an indestructible root of capitalism, which, adapt, in unfavorable
economic and social ambient, to survive and further expansion when a favorable moment comes, and
to which it must be approached in the way described in the citation.
That what was Yugoslavia in the period of socialism in relation to other socialist countries it is
China in the period of transition. Just these characteristics, we are talking about, and which used to
differentiate Yugoslavia from other socialist countries enabled private property, entrepreneurship and
small commodity producers to provide continuity. This continuity, which we mention, provided a
more favorable economic ambient than in other socialist countries, necessary to survive the so-called
socialist black hole and welcome the favorable moment for revival and prosperity of the oppressed
economic sector, and which understands deep changes.
The basic differences in relation to other socialist countries were, at the same time, the main
characteristics of the self-management socialism. The state, from the position of the “central planner”
took over the role of the coordinator of economic activities. It caused management decentralization,
workers, which represented the central organ of management and made all decisions in the so-called
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“assemblies of working people”, did enterprise management. Enterprises were social ownerships.
Neither the state nor workers as owners had the right to sell them. Workers had the right to distribute
the rest of income as their personal income.
“Socialism in the East collapsed because three the most important rights of people were not respected:
religion, freedom and property” (Zlatkovic, 1994). People did not work, did not produce and did not
buy on behalf of other people, or to advance the society, but for their own interest. In this way, at the
same time, not knowing, not intending, they advance interests of the society and increase the social
welfare”. Only complete freedom of the individual to work as he thinks it is the best for him and his
competition with others, the same with individuals to follow their own interest in the struggle for
poor goods, brings to the natural order of freedom, which necessarily leads to progress and welfare of
humankind. These are the words of Adam Smith. Smith steadily believed that, in the way to progress,
it was needed to eliminate all obstacles and troubles by which the state and its regulations limited
the natural order that was the best for all people. “As a specication of the nature and product of
the society, the human accepts this society only if it does not prevent him to use efciently his work
and his knowledge and skills, to be enterprising. Every prevention to be rich based on his work and
capabilities represents the violation of the natural right of the human and restriction of his existence”
(Jojic, 1973).
Secondly, transition in most of the former socialist countries, especially in our country, is not a
determination but the running way from the past and looking for the solution for the deep social-
political and economic-social crisis. Such an approach to the reform of the social-economic system
contributed to the appearance of “transition recession”, which reected in the fall of the living
standard, inationary growth, instability of the rate of exchange, increase of the foreign-trade decit,
unemployment growth and other macroeconomic indicators, which had denitely negative trends. An
urgent problem in transitional countries was an increasing unemployment caused by the fall of large
enterprises, which were the state and social property (Drnovsek, 2002).
The essential reason for the economic collapse, at the beginning of the transitional period, in all the
countries of Central and East Europe and the former Soviet republics, as well as in our country, was
the huge pressure of simultaneous blows, i.e. the following factors (Avramovic, 1994):
• Ination, which was characteristic for almost all the countries because of strict stabilization
programs, for the purpose to end ination as soon as possible, budget balance, closing gaps
in balance of payments, price liberalization to eliminate disparity with the deation policy,
caused the fall of production
• Abandoning the centrally planned system of management without establishing market
mechanisms caused an undened state of the economies in these countries. This is something
quite contrary to the Chinese transition.
• Import liberalization brought about the collapse of domestic production
• Privatization of the state and social property – with much uncertainty represents one the long-
lasting process, which stopped investments and slowed down the current production
• Socialist countries remained without the huge market by the collapse of the socialism system
Of course, these ve blows did not meet every country at once. Dependent on the intensity of
numerous factors, which met one country, the depth of crises was dependent. We can cite the case of
Czechoslovakia, which did not suffer from ination so much and did not have the big foreign-trade
decit, while Hungary introduced important market elements before the process of transition so these
two countries easily adapted to the new (the old one before 1948) market business system. Because
of all this, there was the appearance of one economic vacuum system, which was the fertile soil for
all illegal ows and stimulating the “grey economy”. One of the successful models of economic
transformation is the Chinese model, which understood the existence of two parallel models of
economic systems and well-planned and justied set of actions of the economic reform. Regarding
the fact that it is about a mega economy, China could not allow the appearance of transition recession,
as it was the case in most socialist countries. In China, the fall of so big economy required huge
efforts and the long period of recovery and it could be disastrous relating to power redistribution
and its future position in the world economy. All other transitional economies were characterized by
deep recession, which generated many barriers of one non-dened social-economic environment for
entrepreneurship development, the main task in the process of transition. Most barriers for growth
and development of SMEs represent product of the environment (Doern, 2009). It relates to the crisis
of institutions, non-dened political, legal and nancial framework where the cited sector dominates.
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As this sector plays a vital role in the process of transition, it provides the exit from recession (Wells
at al., 2003). As the driving force, it generally strengthens the economy by creating new jobs and
innovations. Every obstacle in the road in the form of cited barriers leaves irreparable consequences.
The state is responsible for creating a favorable economic environment at all the levels (Smallbone,
2010) and it should provide an appropriate institutional, legal and cultural framework, as the external
environment is one of the essential conditions for entrepreneurship development both in transitional
countries and in the countries of developed market economies (Smallbone and Welter, 2001).
Well-developed SME sector provides all benets to one economy, as well as in highly developed
economies (Aidis, 2005). It means that there is no difference between the role of entrepreneurship and
SME characteristics, relating to the level of economic development (Smallbone and Welter, 2001).
The connection between entrepreneurship and economic development was supported in developed
countries, as the U.S.A. still in the second part of the 20th century (Birch, 1987). It is indisputable
that large companies played the leading role in developing these countries. However, in the crises in
the 19970s (crises in 1973/74 and 1978/1979) they showed their weakness and impossibility to adapt
to the new situations. Developed countries found their chance just in small business rms, which,
in such situations, successfully amortized crisis blows. Thanks to big exibility and innovations,
small businesses adapted faster and better to newly created situations. The relationships between
the environment and entrepreneurial strategies suggest that the entrepreneurial environment is
characterized by dynamism and heterogeneity. Hostility can also exert inuence on entrepreneurial
perception, which, in return can make small businesses to adapt some strategic orientations as
innovation, proaction and risk taking (Tan, 1996). The trend of strengthening small businesses is
present in almost all developed countries and represents the main determination of economic policy,
relating to chances and possibilities it gives. Therefore, EU, setting itself the goal called the most
competitive economy until 2010, determined the SMEs sector as one of the strategies. All these
directives for development, EU dened by the European Charter For Small Enterprises2, initiated
by the European Commission and the Declaration3 about policy which oblige all the EU candidate
countries to help in realizing the goals of EU (UNECE, 2000-2001).
The analysis in this work is oriented towards transitional economies, mostly in Central and East
Europe, relating to other countries classied in line with WEF. This classication indirectly means
institutional, demographic and cultural differences as the result of the degree of economic development.
Based on the previous analyses and exposed attitudes, it can be seen that the role and characteristics of
entrepreneurial activities in all the stages of economic development are identical, but different types
and phases of entrepreneurship may affect economic growth differently in different parts of the world
(Sternberg and Wennekers, 2005). According to Bosma and Levies, countries of the lower degree of
development like factor-driven economies are characterized by dominant agricultural sector, which
provide the existence of the population, the starting phase of industrialization and natural resources
exploitation. Big unemployment and the low standard of life exert inuence on the people to provide
their survival through entrepreneurial activities and self-employment. The countries being qualied as
efciency-driven economies are characterized by powerful industrial sector and productivity increase
through the economies of scale. By means of signicant industrial support, the SME sector is formed,
dominantly productive. In highly market economies, classied as innovation-driven economies, the
service sector broadens. Research, development and knowledge-based activities dominate as the
stage in development. It contributes that entrepreneurs use the advantages of productivity based on
innovations.
3. DATA AND METHODOLOGY
We shal anayze the sample of 48 countries classied in four subsamples in relation to the degree of
development according to the methodology of the World Economic Forum: Group 1 – Factor-driven
economics (n- 8), Group 2 – Efciency-driven transitional economies (n – 7)7 , Group 3 – efciency-
driven other countries (n 14) and Group 4 – Innovation-driven economies (n – 19). The subgroup
within the framework of efciency-driven economies was formed, to authors’ determination, under
the name of efciency-driven transitional economies, which consists of seven transitional countries,
mostly from Central and East Europe plus China. It was done to carry out an analysis to selected
features in relation to other groups. As the source for GDP characteristics per capita in US$, we used
the data from the International Monetary Fund, World Economic Outlook Database, October 2010.
Criteria to select countries for the sample were data availability for every country according to chosen
variables. To the same criteria, the year to be observed was chosen; in this case, it is 2009 because
in this year, the number of 48 countries was provided in the sample, as well as satisfying structure in
subsamples.
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Observed variables, development degree represented as GDP per capita in US$, total entrepreneurial
activity reported as Overall Entrepreneurial Activity (OEA anybus), Total Early Stage Entrepreneurial
Activity (TEA) including nascent and up to 3.5 years entrepreneurs, entrepreneurs more than 3.5
years (estbu) and the rate of economic growth (ΔGDP percent change) are the features or variables.
They make together the research space in this work. The feature – development degree, represented
as GDP per capita in US$ in relation to those for sample division are the criterion feature.
Indicator, of the volume and structure of entrepreneurship, three variables/features were chosen:
indicator of Overall Entrepreneurial Activity (OEA anybus), indicators of Total Early Stage
Entrepreneurial Activity (TEA) that includes nascent up to 3.5 years entrepreneurs and indicator
of entrepreneurs more than 3.5 years (estbbu). These chosen indicators of entrepreneurial activities
reect different phases of the entrepreneurial process. Every phase reects different barriers in
entrepreneurial development and different motives of entrepreneurial behavior (Reynolds, et al.,
2005). These indicators are the result of methodology and research of the GEM project, which was
successfully implemented in Serbia in 2007, 2008, and 2009 by the GEM National Team. In 2009, the
GEM project included 55 countries, of which 48 were included as the sample in this work, according
to the established criterioa. The database for chosen indicators, besides many others, which also
were the result of this project, is GEM 2009 Adult Population Survey Country, version 3b. All these
indicators are dened as percentage of adult population (18 – 64 years old) involved in some phase of
the entrepreneurial process or activity being researched.
As the indicator of growth in this work, and also for this analysis, we use the variable of GDP growth
rate (as percent change – ΔGDP), where the source of data for selected countries is International
Monetary Fund , World Economic Outlook Database, October 2010.
Hypothesis denition for applied procedures is carried out in the following way:
By the procedure of MANOVA, the hypothesis H1 is tested, which is worded like:
H1 There is no signicant difference between the subsamples for the observed thematic entirety
A1 There are signicant differences between some subsamples for the observed thematic entirety
By the procedure of discrimination analysis, the hypothesis H2 is tested:
H2 There is not clearly dened limit between subsamples for the observed thematic entirety
A2 There is clearly dened limit between some subsamples for the observed thematic entirety
By the procedure of ANOVA the hypothesis H3 is tested:
H3 There is no signicant difference between subsamples to some features
A3 There is signicant difference between some subsamples to some features
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3. RESULTS AND DISCUSSION
In the rst part, central and dispersion parameters, measures of asymmetry and skewness in relation
to the followed parameters will be reviewed. In the second part, the difference between the groups of
countries will be analyzed, i.e. hypotheses will be proved or rejected.
Table 1. Central dispersion parameters, measures of skewness and analyzed characteristics per groups of
countries
Medium
value Standard
devijation min max Coef-
cient of
variation Interval of trust Skewness Kurto-
sis p
Factor driven economies
GDP
per
capita
in US$
6226.24 4937.27 481.9 14744.6 79.30 2097.46 10355.02 .62 -.96 .586
TEA –
nascent
and up
to 3.5
years
19.03 8.49 4.7 33.7 44.60 11.93 26.12 .08 -.15 .995
es-
tabbu
– more
than
3.5
years
11.11 7.03 4.1 22.0 63.26 5.24 17.00 .24 -1.51 .729
OEA -
anybus 29.32 13.02 8.4 53.5 44.41 18.43 40.20 .35 .10 .846
∆GDP
- per-
cent
change
2.29 4.50 -3.3 9.0 196.85 -1.48 6.05 .17 -1.23 .996
Eciency driven trasitional economies
GDP
per
capita
in US$
8331.84 4345.02 3734.6 15283.7 52.15 4312.32 12351.36 .56 -1.09 .974
TEA –
nascent
and up
to 3.5
years
7.49 5.28 3.9 18.8 70.46 2.61 12.38 1.66 1.23 .297
es-
tabbu
– more
than
3.5
years
6.15 5.05 2.3 17.2 81.99 1.49 10.82 1.73 1.50 .317
OEA -
anybus 13.48 10.25 6.0 35.7 76.04 4.00 22.96 1.70 1.35 .324
∆GDP
- per-
cent
change
-3.45 5.85 -7.9 9.1 169.46 -8.86 1.96 1.62 1.24 .434
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Eciency driven other
economies
GDP
per
capita
in US$
6671.79 2349.95 4170.9 11465.6 35.22 5314.63 8028.96 .58 -.81 .827
TEA –
nascent
and up
to 3.5
years
12.86 5.16 4.4 22.4 40.14 9.88 15.84 .28 -.58 .975
es-
tabbu
– more
than
3.5
years
7.88 3.62 1.4 13.5 45.93 5.79 9.97 .02 -1.03 .953
OEA -
anybus 20.29 7.82 7.2 33.8 38.55 15.77 24.80 -.05 -.85 .951
∆GDP
- per-
cent
change
-.34 5.38 -18.0 3.5 1560.61 -3.45 2.76 -2.70 6.55 .297
Innovation driven economies
GDP
per
capita
in US$
42117.53 13152.85 24111.4 78178.3 31.23 35776.51 48458.55 1.13 1.24 .377
TEA –
nascent
and up
to 3.5
years
6.24 2.81 3.3 13.3 45.01 4.89 7.59 1.05 .34 .577
es-
tabbu
– more
than
3.5
years
6.49 2.86 2.5 15.1 44.01 5.11 7.87 1.27 2.44 .632
OEA -
anybus 12.48 4.72 6.0 23.6 37.86 10.20 14.75 .69 -.18 .713
∆GDP
- per-
cent
change
-3.81 2.24 -8.0 .8 58.72 -4.89 -2.73 -.20 -.25 .989
Notes: Value of asymmetry and skewness at intervals from-.04 to .04 are not discussed
e central and dispersion parameter, measures of asymmetry and skewness of followed characteris-
tics represent the groups of countries and orient towards the possibility of applying parameter proce-
dures in the next analysis in view of the fact that distribution of values of all the observed characteris-
tics ranges within the framework of normality according to schedule (p).
Values of skewness (sk) and kurtosis (ku) point to the appearance of normal distribution curve (value
distribution within the framework of normal distribution) relating to kurtosis (higher value ku), i.e.
skewness (less value ku), symmetry (sk = 0), i. e. negative asymmetry (higher value sk). When the
curve of value distribution of the observed characteristic inclines to higher values, i.e. there are more
higher values in relation to the normal distribution as it is the case with all the groups of countries ac-
cording to all the observed characteristics.
e higher value of coecient variance (k. var.) evident with all the groups of countries points to
heterogeneity to all observed characteristics. e highest value is especially met in eciency-driven
traditional economies in all the observed characteristics: GDP per capita in US$ (52.15), TEA-nascent
and up to 3.5 years (70.46), estabbu-more than 3.5 years (81.99), OEA-anybus (76.04) and ΔGDP-
percent change (169.46).
Minimal (min) and maximal (max) values of observed characteristics per the groups of countries point
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that values are in the expected range. e analysis of min, max and medium values conrms the stand-
ard traits of observed characteristics per the groups of countries. erefore, within the framework of
the groups of countries of factor-driven economies, the lowest development degree of measured GDP
per capita in US$ (medium value 6226.24 US$), we meet the highest medium values TEA –nascent
and up to 3.5 years (19.03), estabbu-more than 3.5 years (11.11), OEA-anybus (29.32) and ΔGDP-
percent change (2.29). Holders of the biggest individual values are in the same group of countries, that
is for TEA-nascent and up to 3.5 years (33.67) Uganda, estabbu-more than 3.5 years (21.95) Uganda,
OEA-anybus (53.54) Uganda, while ΔGDP-percent change (9.01) China. It makes this country an al-
ready known phenomenon of economic growth and development. Based on the previous assertions,
minimal medium values of characteristics are present in innovation-driven economies (medium value
GDP per capita 42117.53 in US$) and TEA-nascent and up to 3.5 years (6.24), estabbu-more than 3.5
years (11.11), OEA-anybus (12.48) and ΔGDP-percent change (-3.81), while the minimal medium
value estabbu-more than 3.5 years (6.15) is in eciency-driven traditional economies. Holders of the
smallest individual values come from the same groups of countries. erefore, Japan has the smallest
TEA –nascent and up to 3.5 years (3.3). Belgium has OEA-anybus (5.96), Finland has ΔGDP–percent
change (-8.02), and Russia has the smallest estabby-more than 3.5 years (2.30). For the eciency-driv-
en traditional economies from the aspect of analyses of medium values of observed characteristics, the
level of economic development, the scope and structure of entrepreneurial activities and the level of
economic growth, the previously mentioned and noted correlation is valid. Factor-driven economies
(6671.79) have some closeness and eciency-driven other economies (6671.79) according to the de-
gree of development. According to the level and structure of entrepreneurial activities and economic
growth, eciency-driven transitional economies (OEA- anybus 13.48; ΔGDP – percent change -3.45)
are the closest to innovation-driven economies (OEA – anybus 12.48; ΔGDP – percent change -3.81).
As the groups of countries reect the dierent level of economic development, as one of the observed
characteristics, that is the criterion one (based on which sample division is done to subsamples, and
countries in subgroups), opposite proportion to characteristics of entrepreneurial activities and eco-
nomic growth is obvious and drastically expressed. It induces us to the following analysis for the pur-
pose of searching answer to the previous observation. is negative correlation is visible in the illus-
trated correlation matrix (Table 2) that is the result of analyzing the structure of two separated factors
(by the method of main components) of observed characteristics at the whole sample of 48 countries.
Table 2. Correlation matrix for all the countries to observed characteristics
∆GDP
as a percent
change
estabbu
more than 3.5
years
OEA
anybus
TEA
nascent
nd up to 3.5
years
GDP
per capita in
US$
∆GDP – as a percent change 1000
estabbu – more than 3.5 years 449 1000
OEA – anybus 539 876 1000
TEA – nascent and up to 3.5 years 524 670 945 1000
GDP per capita in US$ -359 -215 -417 -490 1000
The visible in the matrix that should be emphasized is the negative correlation of the level of economic
development measured as GDP per capita in US$ and all observed characteristics of the scope and
structure of entrepreneurial activities, as well as growth level. Countries at the higher level of the
social-economic development have developed institutional system infrastructures, national welfare
growth, economic development guided by industrialization and economies of scale, stability, social
security and wide possibilities for employment. Signicant participation of large companies, where
most population has stable jobs, exerts inuence on reducing the pressure on the early phase of
entrepreneurial activities. On the other side, in countries with the lower degree of development because
of large unemployment, entrepreneurship is the only possibility. Therefore, in countries of the lower
degree of development (as in efciency-driven economies), the fall of the level of entrepreneurial
activities can be a good signal of economic stability and development.
The biggest positive correlation (945) in the matrix is observed between the total entrepreneurial
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activities of the country OEA-anybus and the early stage of entrepreneurial activity TEA. It points to
the fact that TEA has signicant contribution in the total entrepreneurial activity of the country, but at
the lower level of economic development (factor-driven economies TEA 19.03; estbbu 11.11). Here
this participation reduces signicantly in highly developed countries (innovation-driven economies –
TEA 6.24; estbbu 6.49), where there is no risk because of stable economic circumstances at the early
phases of entrepreneurial activities.
As open questions should be the subject of the next analysis, it is necessary to test hypotheses and
establish the existence of differences, their signicance and limits as illustrated in Table 3 and Table
4.
Table 3. MANOVA and discriminative analysis between groups of countries relating to observed characteristics
Analysis n F p
MANOVA 58.461 .000
discriminative 5 13.017 .000
Table 4. ANOVA analysis for observed characteristics/variables
Characteristics/variables F p Coecient of discrim-
ination
GDP per capita in US$ 60.092 .000 .000
TEA – nascent and up to 3.5 years 13.504 .000 .035
estabbu – more than 3.5 years 2.477 .074 .049
OEA - anybus 8.841 .000 .040
∆GDP – as a percent change 4.668 .006 .080
By the next analysis, we try to make differences between the groups of countries to all observed
characteristics. As p<1, alternative hypothesis A3 is accepted. It means that there is a signicant
difference between the groups of countries to all observed characteristics with: GDP per capita in US$
(.000), TEA-nascent and up to 3.5 years (.000), estabbu-more than 3.5 years (.074), OEA-anybus
(.000) and ΔGDP-percent change (.000).
The coefcient of discrimination points to that the biggest contribution to discrimination between the
groups of countries in relation to observed characteristics/variables, i.e. difference is the biggest with:
ΔGDP-percent change (,080), estabbu-more than 3.5 years (.049), OEA-anybus (.040), TEA-nascent
and up to 3.5 years (.035), GDP per capita in US$ (.000).
Based on the former consideration and the sample analysis of 48 countries, divided in four groups to
the degree of development, in line with the applied methodology, the logic ow of researching is the
determination of characteristics and homogeneity of every group of country and distance between
them. The fact that p = .000 of discriminative analysis means that there is a clear dened limit between
the group of countries, i.e. it is possible to determine characteristics of every group of countries in
relation to observed characteristics.
Table. 5 Characteristics and homogeneity of groups in relation to the observed characteristics/variables
Factor driven
economies
Eciency driven
trasitional
economies
Eciency driven
other
economies
Innovation driven
economies dpr %
∆GDP – as a percent
change biggest* 2 smaller bigger* 1 smallest 39.216
estabbu – more than 3.5
years biggest* 1 smallest veće smaller 24.020
OEA - anybus biggest* 3 smaller bigger* 1 smallest 19.608
TEA – nascent and up to
3.5 years biggest* 3 smaller bigger* 2 smallest 17.157
GDP per capita in US$ smallest bigger smaller biggest* 3 .000
n/m 7/8 6/7 13/14 19/19
hmg % 87.50 85.71 92.86 100.00
hmg - homogeneity
dpr – contribution of characteristics of features
*1 – related before, *2 – related before two, *3 – related before three
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In Table 5, it is obvious that the characteristics of every subsample of the group of countries is
dened by ΔGDP-present change because the contribution of characteristics of features 39.22. Then,
it follows: estabbu-more than 3.5 years (24.02%), OEA-anybus (19.61%), TEA-nascent and up to 3.5
years (17.16) and GDP per capita in US$ (.00%). Homogeneity, factor-driven economies is 87.50%,
efciency-driven transitional economies is 85.71%, efciency-driven other economies is 92.86% and
innovation-driven economies is 100.00%.
Based on the exposed, we can say that seven of eight countries have characteristics of factor-driven
economies, homogeneity is 87.50% (bigger). It means that one country has other characteristics,
not the characteristics of its own group. Six of seven countries have characteristics of efciency-
driven economies; homogeneity is 85.70% (bigger) because one country has other characteristics.
Characteristics of innovation-driven economies have 19 of 19 cccl, homogeneity is 100.00% (bigger).
Based on the previous analysis of characteristics and homogeneity of the groups of countries to
observed characteristics, it can be clearly seen that there are precise limitation between every group
of countries to observed characteristics, therefore, every group has expressed specicities in relation
to other groups of countries. A large percent of homogeneity points to that fact.
In the nal part of the analysis, all these differences between the groups of countries will be also
illustrated by calculating the Mahalanobis distance, by which another indicator of similarities and
differences is obtained, for the purpose of graphical illustration.
Table 6. Distance (Mahalanobis) between the groups of countries in relation to observed variables
Factor driven
economies (1)
Eciency driven
transitional (2)
economies
Eciency driven
other (3)
economies
Innovation driven
economies (4)
Factor driven economies .000 2.42 1.25 4.69
Efciency driven transitional
economies 2.42 .00 1.21 3.85
Efciency driven other
economies 1.25 1.21 .00 4.20
Innovation driven economies 4.69 3.85 4.20 .00
The distances of different spaces can be compared, and in this way, we can see the distance between
the groups of countries. The distances in this Table point to the fact that the least distance is between
efciency-driven other economies and efciency-driven transitional economies (1.21). Innovation-
driven economies and factor-driven economies are the farthest groups of economies (4.69).
Table 7. Classifying countries according to observed characteristics/variables
Level nearness
Group 2 – Group 3 1.21
Group 1 – Group 2 2.14
Group 1 – Group 4 5.12
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Based of the illustrated dendrogram, we can notice the mutual position relating to the distance between the
groups of countries to all observed characteristics
Figure 2. Dendrogram of closeness of the groups of countries in relation to observed characteristics
Legend: factor-driven economies (1) eciency-driven trasitional economies (2) eciency-driven other economies (3)
innovation-driven economies (4)
4.CONCLUSION
Entrepreneurial behavior and activities, in contemporary economic circumstances at the global
level, is identied as a signicant potential and valuable resource in creating economic growth,
development and the total social prosperity. Only recognizing the phenomenon, entrepreneurship
and its glorication will not leave a deep trail and signicant effects for economy and society.
On the contrary, it will have the same destiny, uncertain result, as any other innovation that is the
result of natural activities of an individual or the group. Of course, for the Republic of Serbia and
other transitional countries, according to the phase of economic development, entrepreneurship
represents something new, which the expert public characterized as positive and signicant. It is
necessary to fulll some essential prerequisites for target orientation of entrepreneurial processes
as a signicant factor in building economic structures if we want to know the desired result with
signicant results and benets for economy and society. These necessary prerequisites, in considering
and understanding entrepreneurship is provided by the GEM project with its research results, making
a basis for creating appropriate instruments and measures of the economic policy, using, in this way,
rationally and efciently this very signicant resource. On the one side, we should know that economic
entrepreneurial effects on economic growth are limited by the level of economic development, while,
on the other side, the negatively characterized transitional environment is not a limiting factor.
With all the analyzed groups of countries, as well as with separated group of transitional countries within
the framework of efciency-driven economies, some specities to all observed characteristics are
identied. All the applied statistical procedures point to the previous assertion, by means of which we
obtained the presented results with signicant differences, precise limits of separation, characteristics
and homogeneity of the groups of countries, as well as their mutual distances. It contributed to all
observed characteristics at the level of economic development (as criterion), the scope and structure
of entrepreneurial activities and economic growth. The traditional business environment of the former
socialist countries and, besides many limitations and shortages represented in the rst part of the work,
is not a limiting factor of entrepreneurial activities and economic growth as observed derivations are
completely appropriate to the reached level of economic development, disregarding to the social-
economic characteristics of the environment. The separate group f transitional countries signicantly
differentiate. It has its characteristics and the signicant level of homogeneity for the volume and
structure of entrepreneurial activities and economic growth in accordance to the reached level of
economic development. In this way reached level of economic development measured by GDP per
capita represents a very complex, strong and reliable indicator of the social-economic potential of a
country, regarding to the capabilities for creating growth and development, as dened by the World
Economic Forum methodology and the Global Competition Index. As entrepreneurship is also a
social and economic phenomenon, it becomes the direct consequence of the previous strategy.
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DEVELOPING MACEDONIA’S ENTREPRENEURIAL CAPACITY: THE MISSING LINKS
Bisera Gjosevska1
Abstract
Although considered a major driving force of all developed economies, entrepreneurship has only recently
started gaining momentum among Macedonian authorities designing policies aimed at accelerating the
completion of the transitional cycle. Thus, the purpose of this article is to evaluate the status of Macedonia’s
entrepreneurial potential in relation to its regional, sectoral and global peers for the year 2008. Using a cross-
sectional study of the data available through GEM’s Adult Population Survey, the determining factors of total
entrepreneurial activity are identied. In addition, a number of issues intrinsic to the Macedonian economy,
such as historical legacies, the role of female entrepreneurs and nancing difculties are also discussed,
revealing the peculiar nature of the developmental path of Macedonian entrepreneurship.
Keywords: entrepreneurship, cross-sectional study, transitional economies
1. INTRODUCTION
The role of the entrepreneur has always been an intriguing one. Traditionally, apart from being seen
as “responsible for all exchange and circulation in the economy” (Cantillon, 1959), the entrepreneur
has also been regarded as having “good judgment as principle quality” (Say, 1821), and who, at
the same time, fullls two of the most vital functions in the economy, by being both an innovator
(Schumpeter, 1949) and a risk-taker (Knight, 1921). Modern times, however, have seen the denition
of entrepreneur evolve into a blend of “lucrative opportunities and enterprising individuals” (Shane &
Venkatamaran, 2000), thus reecting the changing and all-encompassing nature of the concept. Yet,
a universal denition has proven to be a rather elusive goal as experts in the eld have failed to settle
on the distinctive traits of the entrepreneur. For the purposes of this paper however, entrepreneurs
shall be dened as “business owners who seek to generate value, through the creation or expansion of
economic activity, by identifying and exploiting new products, processes or markets” (OECD, 2011).
This paper provides an overview of the recent theoretical and empirical research on entrepreneurship
in all its forms. Specically, it examines all the different categories of entrepreneurial activity, as
well as its evolution and development in the Republic of Macedonia. Moreover, it employs the terms
developed by the Global Entrepreneurship Monitor in order to classify the economies in one of three
categories: factor-, efciency-, and innovation-driven. Due to the lack of regularly collected data, this
paper focuses on cross-sectional studies conducted at one specic time points, such as 2008 and 2010,
when Macedonia participated in the surveys. These years are especially interesting as they provide an
insight as to how Macedonian entrepreneurship has evolved after the eruption of the Global Financial
Crisis as they pinpoint the missing links that would allow an improved development of the local
entrepreneurial capacity. The data suggests that the missing links are both of a psychological and of
structural nature, but given the scant data, a cautious interpretation of the relationships is advised as
any results would prove inconclusive within such a short time horizon.
Meanwhile, tt is important to distinguish between entrepreneurial opportunities and entrepreneurial
capacity; as Bygrave & Zacharakis caution, “what drives entrepreneurial activity is that people
perceive opportunities and have the skills and motivation to exploit them” (2008).
The paper is structured as follows. In order to motivate the analysis, Section 2 presents a background
on the development of entrepreneurship in Macedonia with its peculiarities a result of different
sociopolitical systems. Section 3 presents the results of the GEM Adult Population Survey conducted
in 2008, comparing the state of entrepreneurship in Macedonia with the region and the world. Section
4 presents the results of the same survey conducted two years later, again comparing the state of
entrepreneurship in Macedonia regionally and internationally. Section 5 examines the impact of the
Global Financial Crisis on entrepreneurship in the Republic of Macedonia. Section 6 concludes the
paper, by identifying the missing links to developing the Macedonian entrepreneurial capacity.
1 University of Ss. Cyril and Methodius, Bul. Krste Misirkov bb, 1000 Skopje, Macedonia, gjosevska@gmail.com
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2. EVOLUTION OF ENTREPRENEURSHIP IN THE REPUBLIC OF MACEDONIA
The rather profound, if irregular, development of entrepreneurship on the territory of the Republic
of Macedonia makes it a fascinating subject for researchers alike. Having spent approximately ve
centuries in economic hibernation under Ottoman rule, Macedonians were plunged into nascent
capitalism under Serbian, Bulgarian, and later Yugoslav rule during the rst half of the 20th century.
The abrupt change of the economic system that followed after WWII fast-forwarded the local
populace – some of which was still attached to the feudal mindset – directly into centrally planned
government. The sociopolitical construct of self-management, specic to enterprises in the Former
Yugoslavia, ensured that each employee carried one vote in his or her rm, thus becoming a direct
participant in the decision-making process. Taking part during the second half of the 20th century, self-
management disintegrated with the breakup of Yugoslavia. During this time, the Yugoslav economy
was populated by large, sprawling socially-owned enterprises employing thousands of workers, as
well as by numerous small private proprietorships. The middle way, however, was non-existent, as
small and medium enterprises employing 20 to 80 people were virtually absent in Macedonia, leading
Fiti et al. to declare this a phenomenon of a “socialist black gap” (1999). The Law on Transformation
of Enterprises with Social Capital from 1993 brought the country one step closer to a free market
system, but left a number of lingering issues in the fragile economy of the newly-formed Republic of
Macedonia. The development of entrepreneurship became a priority of the successive democratically
elected governments, but it wasn’t until the comprehensive Global Entrepreneurship Monitor
(GEM) sponsored study of 2009 that the public received an impartial assessment of the state of
entrepreneurship in the Republic of Macedonia.
According to the Global Competitiveness Report (Global Entrepreneurship Monitor, 2008), the
Republic of Macedonia is ranked among efciency-driven economies. These are countries whose
GDPs vary from USD 3,000 to USD 9,000 per capita, with the Republic of Macedonia ranking in the
lower end of the group with USD 4,656 per capita for 2008. These countries’ competitiveness stems
not only from low prices, but improved quality of products, strengthened institutional framework
and increased productivity as well. Specically, the Republic of Macedonia has beneted from
expansionary credit and monetary policy since 2003 and has boasted a combined BDP growth rate of
4.65% during the 2003-2008 period. The other two classes of economies are factor- and innovation-
driven. Factor-driven economies have less than USD 2,000 per capita, basing their comparative
advantage on low prices, usually coming from abundant natural resources or cheap labor. Innovation-
driven economies have per capital income upwards of USA 17,000, with a vibrant manufacturing
sector developing new, value-added, innovative products and services. The following table gives the
GEM ranking of countries in Macedonia’s surrounding for which data are available.
Table 1. Country Classication
Country Macedonia Serbia B&H Croatia Greece Slovenia Turk e y
GEM 2008 Ranking efciency efciency factor efciency innovation innovation efciency
It is important to note that data for Bulgaria, Albania and Montenegro are not provided by GEM for
2008. Therefore these countries have been excluded from the list.
2.1. MACEDONIAN ENTREPRENEURS AND THEIR PEERS DURING 2008
Given the lack of available data that would allow a precise time series analysis of the evolution of the
entrepreneurial spirit in Macedonia, the only telling assessment which remains is that of comparative
analysis with regional and international peers. Table 1 shows the average scores of surveyed variables
in the above mentioned countries during 2008 have been contrasted with the scores attained for the
Republic of Macedonia in the same year. As illustrated in Figure 1, Macedonia leads the region
in most parameters, but falls signicantly short in the bracket teayyido, which GEM denes as
“percentage of those involved in TEA who (i) claim to be driven by opportunity as opposed to nding
no other option for work; and (ii) who indicate the main driver for being involved in this opportunity
is being independent or increasing their income, rather than just maintaining their income”, where the
regional average is 46%, as opposed to Macedonia’s 13%. In addition, the variable teayynw is also
one for concern, as Macedonia falls short in original products and services as well, with 27% of local
entrepreneurs indicating that their product or service is new to at least some customers, as opposed
to 42% of the entrepreneurs in the region. This does not necessarily signal a lack of creativity or
originality; it may also point to apprehension about introducing new products to the market and its
reaction to the novelty.
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Table 2. The state of entrepreneurship 2008 - Macedonia, its region, and the world (GEM)
Indicators MK% Region% World% Indicators MK% Region% World%
Babybuyy 7.7 3 4.5 Suboanyy 7.2 5 6.1
Busangyy 5.7 4 4.7 Suskilyy 62 58 49.6
Estbbuyy 11 87.6 TEAyyint 33 23 18.9
Frfailop 33 31 34.7 TEAyyjg5 32 26 26.2
Futsupno 39 18 17,3 TEAyynw 27 42 43.2
Knoentyy 51 46 42.5 TEAyy 14.5 8 10.4
Nbgoodyy 80 72 66.5 TEAyyfem 8.6 5 8
Nbmediyy 66 62 76.9 TEAyyido 13 46 49
Nbstatyy 72 70 70.9 TEAyymal 20.3 10 12.8
Oportyy 47 42 38.1 TEAyynec_p 47 31 24.2
When compared to the rest of the world, the situation differs slightly. As in the previous example, the
average scores of the surveyed variables for the participating countries in the world during 2008 have
been contrasted with the scores attained for the Republic of Macedonia in the same year.
Figure 1. The state of entrepreneurship in Macedonia and its surrounding region, 2008 (GEM)
As illustrated in Figure 2, the percentage of Macedonian entrepreneurs that experiences fear of failure
that would prevent them from setting up a business, frfailop, is 33%, somewhat less than the world
average of 34.7%. Another category where a signicant difference appears is the percentage of 18-
64 population who agree with the statement that successful entrepreneurs receive favorable media
coverage, nbmediyy, with only 66% of the respondents agreeing, as opposed to 76.9% in the world.
Again, the variable teayynw stands out as only 27% of Macedonian entrepreneurs indicate that their
product or service is new to at least some customers, unlike 43.2% internationally.
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Figure 2. The state of entrepreneurship in Macedonia and the world, 2008 (GEM)
2.2. Macedonian Entrepreneurs And Their Peers during 2010
With the advent of the Global Financial Crisis, the entrepreneurial sector was one of the rst to suffer
both locally and globally. When comparing entrepreneurial indicators within the region, one must
not forget to mention that no GEM surveys were conducted in Serbia during 2010, but that one was
nonetheless conducted in Montenegro. For the purposes of this paper, Macedonia’s region for 2010
will therefore include Montenegro, but will still be missing Serbia, Albania and Bulgaria.
Table 3. The state of entrepreneurship 2010 - Macedonia, its region, and the world (GEM)
Indicators MK% Region% World% Indicators MK% Region% World%
Babybuyy 3.6 3.4 5.9 Suboanyy 4.4 4.6 6.5
Busangyy 12.1 5 6.6 Suskilyy 60 58.2 54.9
Estbbuyy 7.6 8 8.5 TEAyyint 23 21 14
Frfailop 31 32 31.7 TEAyyjg5 35 23.4 22.9
Futsupno 26.7 16.2 21.8 TEAyynw 39 36.8 39.5
Knoentyy 41 45.6 44 TEAyy 8 7.8 11.9
Nbgoodyy 71 69 68.3 TEAyyfem 3.9 4.9 9.9
Nbmediyy 56 52.2 60.6 TEAyyido 23 42.8 46.1
Nbstatyy 66 66.8 72.6 TEAyymal 11.9 10.8 13.9
Oportyy 34 29.3 43.7 TEAyynec_p 59 32.7 27
As shown in Table 3 and as illustrated in Figure 3, the consequences arising from a two-year economic
slowdown offer a number of surprises, depending on the category. There appears to be a signicant
increase in busangyy, the portion of the population who have personally provided funds for a new
business, started by someone else, in the past three years, with Macedonian business angels making
up 12.1% of the population, as opposed to 5% in the region. There is also an increase in futsupno, the
percentage of 18-64 population who intend to start a business within three years, with 26.7% future
entrepreneurs in Macedonia, compared to 16.2% regionally. Another signicant positive gap appears
in the category teayynec_p, that is, the fraction of population involved in entrepreneurship due to a
lack of other options for work, with 59% in Macedonia and only 32.7% in the region. As expected,
there emerges a large fall in teayyido, the percentage of entrepreneurs who claim to be driven by
opportunity as opposed to nding no other option for work; and who indicate the main driver for
being involved in this opportunity is being independent or increasing their income, rather than just
maintaining their income. In the region, 42.8% fall within this category, as opposed to only 23% in
Macedonia.
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When compared to the rest of the world, as in Figure 4, the state of entrepreneurship in the Republic of
Macedonia in 2010 should sound alarm bells. Only 34% of the local population sees good opportunities
to start a rm in the area where they live, oportyy, in contrast with 43.7% in the world. The overall
percentage of the 18-64 population who are either a nascent entrepreneur or owner-manager of new
business, teayy, is only 8%, unlike 11.9% in the world.
Figure 3. The state of entrepreneurship in Macedonia and its surrounding region, 2010 (GEM)
The female population is especially vulnerable, as only 3.9% of the female 18-64 population is
either a nascent entrepreneur or owner-manager of new business, as opposed to 9.9% in the world.
Finally, there is a chasm between those entrepreneurs internationally who claim that they are driven
by opportunity as opposed to not having any other option to work, teayyido, who stand at a staggering
46.1%, and a meager 23% of the population in Macedonia.
Figure 4. The state of entrepreneurship in Macedonia and the world, 2010 (GEM)
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3. THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON ENTREPRENEURSHIP IN
MACEDONIA
As with most other nancial and economic parameters, the development of entrepreneurship in the
Republic of Macedonia had taken a severe hit with the outbreak of the Global Financial Crisis. Its
impact became most acutely felt in 2009 when GDP fell sharply to -0.9%, dragging down with it
all other indicators of economic activity as well. Unfortunately, given that no data were collected
by GEM prior to 2008 in Macedonia, the only way to measure the impact of the crisis, however
inaccurately, is to perform comparative analysis with the data collected for 2010.
The results are worrisome – as can be seen in Table 4 and Figure 5, a staggering 15 out of 20 indicators
have dipped into negative territory. Teayyfem, the percentage of female 18-64 population who are either
a nascent entrepreneur or owner-manager of a new business has fallen by -54.64%, closely followed
by teayymal, their male counterparts with -41.38%. The variable futsupno, showing the percentage of
18-64 population who intend to start a business within three years, has plummeted to -31.54%. The
percentage of entrepreneurs who indicate that at least a quarter of their customers are international,
teayyint, has experienced a -30.30% change. Overall, teayy, the percentage of 18-64 population who
are either a nascent entrepreneur or owner-manager of a new business has decreased by -44.83%.
The only bright spots can be seen in the variably busangyy, meaning that the percentage of 18-64
population who have personally provided funds for a new business, started by someone else, in the
past three years, has skyrocketed by 112.28%. In addition, teayynw, the percentage of entrepreneurs
who indicate that their product or service is new to at least some customers has increased to 44.44%.
There has also been an increase of 76.92% in teayyido, the percentage of entrepreneurs who claim to
be driven by opportunity, as well as a jump of 25.53% in teayynec_p, the percentage of those involved
in entrepreneurship because they had no other option for work.
Table 4. The impact of the Global Financial Crisis (2008-10) on entrepreneurship in Macedonia (GEM)
Indicators 2008 2010 %Change Indicators 2008 2010 %Change
Babybuyy 7.7 3.6 -53.25 Suboanyy 7.2 4.4 -38.89
Busangyy 5.7 12.1 112.28 Suskilyy 62 60 -3.23
Estbbuyy 11 7.6 -30.91 TEAyyint 33 23 -30.30
Frfailop 33 31 -6.06 TEAyyjg5 32 35 9.38
Futsupno 39 26.7 -31.54 TEAyynw 27 39 44.44
Knoentyy 51 41 -19.61 TEAyy 14.5 8 -44.83
Nbgoodyy 80 71 -11.25 TEAyyfem 8.6 3.9 -54.65
Nbmediyy 66 56 -15.15 TEAyyido 13 23 76.92
Nbstatyy 72 66 -8.33 TEAyymal 20.3 11.9 -41.38
Oportyy 47 34 -27.66 TEAyynec_p 47 59 25.53
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Figure 5. The impact of the Global Financial Crisis on entrepreneurship in Macedonia
A caveat is in place, however. Considering the fact that GEM has conducted its survey only twice, both
times during this particular crisis period, the results may be inconclusive or may provide evidence of
spurious relationships which may, or may not exist, during normal times.
In order to clarify the use of the assorted shortened forms of the variables used throughout the analysis,
a GEM-sponsored legend will be included in the Appendix to this paper.
4. CONCLUSION: THE MISSING LINKS
The reasons behind the lagging numbers in the development of the entrepreneurial sector in the
Republic of Macedonia, when compared to the region and to the world are twofold. One could
distinguish between fundamental (or structural) and psychological (or behavioral) reasons that hinder
the advancement of entrepreneurial activity. Taken broadly, even the GEM survey is divided along
the fundamental/psychological line. On the one side there are the activity-based indicators which
delineate the underlying fundamental intricacies of entrepreneurship. On the other side there are the
aspirations-, attitudes-, and perceptions-based indicators which depict the psychological forces at
play in the entrepreneurial mindset.
Financing, for one, appears to be among the major fundamental missing links in the development of
entrepreneurial capacity in the Republic of Macedonia. Although 12.1% of the population constitutes
the informal investors rate, the local economy remains predominantly bank-fueled. It is necessary to
further raise the awareness about the benets of venture capital, both in the form of equity and know-
how. Structurally, it is of paramount importance for the government to facilitate access to venture
capital funds and to provide a supportive scal policy, while private initiative could be used to form
business angel networks, in line with Ramadani’s recommendation (2011).
An increase of 25.53% in necessity-driven entrepreneurship is not automatically a favorable
development, as this may come to be seen as forceful push toward entrepreneurship for those unable
to nd employment or enjoy the social welfare nets any longer. Fortunately, opportunity-driven
entrepreneurship is also on the rise by 76.92% indicating that entrepreneurs are driven by opportunity
rather than pushed by necessity.
Female entrepreneurs, traditionally less numerous than their male counterparts, have suffered severely
during the most recent downturn, slashing their participation levels by 54.65%. This is another missing
link, as it is imperative for the government to bring the numbers of female entrepreneurs up to par
with their male rivals. A set of policies, ranging from maternity leave incentives to improved funding
opportunities for females should be devised by the government in order to create a level playing eld
for both genders.
Having dramatically fallen during the recent crisis, established and new business ownership rates
also present the danger of weakened, if not missing links. Given that national economic growth is a
function of two sets of interrelated activities – established and new businesses – a prolonged slump in
both sectors may kill the growth engine altogether.
The psychological reasons, given by two different sets of questions on aspirations as well as attitudes
and perceptions also show interesting results. Entrepreneurial intention has experienced a serious
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dip of 31.54%, suggesting disillusionment with business tendencies. Even perceived capabilities
and opportunities have entered negative territory with -3.23 and -27.66%, respectively, reecting an
overall wave of pessimism. The same holds true for people who know startup entrepreneurs, whose
numbers have fallen by -19.61%. Even the status of a successful entrepreneur has become marred,
experiencing a -8.33 drop. The social norms of a system which has experienced a rollercoaster ride
from feudalism to capitalism to socialism then back to capitalism are also a missing link, as there
have been no time horizons long enough to warrant the steady emergence of successful entrepreneurs
unscathed by dubious business dealings. They need to be strengthened and able to incorporate the
perceptions and dispositions towards successful people who have thrived having relied on their
entrepreneurial acumen only.
What all these numbers suggest is that a lot remains to be done in the behavioral realm. Psychological
inuences are rmly engraved in the entrepreneurial mindset and they may prove to be the engine
able to kick-start the distressed economy. For until the biggest missing link – the belief in creating a
successful business venture – is restored, it will be difcult to bolster the innovative, entrepreneurial
part of the Macedonian economy.
References
Bygrave, W., & Zacharakis, A. (2008). Entrepreneurship (2nd ed.). Wellesley, MA: John Wiley & Sons.
Cantillon, R. (1959). Essai sur la nature du Commerce in General. London: Frank Cass and Company.
Fiti, T., Hadzi Vasileva - Markovska, V., & Beitman, M. (1999). Entrepreneurship. Skopje: Faculty of Economy.
Global Entrepreneurship Monitor. (2008). Entrepreneurship in Macedonia. Skopje: Macedonian Enterprise
Development Foundation.
Knight, F. (1921). Prot and Entrepreneurial Functions. Journal of Economic History, 2, 126-132.
OECD. (2011). Entrepreneurship at a Glance 2010. Paris: OECD Publishing.
Ramadani, V. (2011). Venture Capital and Small Businesses in Republic of Macedonia: What is Done and
What Should Be Done? SEE Tetovo, 1-29.
Say, J.-B. (1821). A Treatise on Political Economy. Claxton, Remsen & Haffelnger: Philadelphia.
Schumpeter, J. (1949). The Theory of Economic Development. Cambridge: Harvard University Press.
Shane, S., & Venkatamaran, S. (2000). The Promis of Entrepreneurship as a Field of Research. The Academy
of Management Review, 25, 216-226.
Appendix: Gem Indicators
Described below are some of the most important variables that GEM (2008) derives from data collected as part
of the Adult Population Survey (APS). This is not an exhaustive list.
ACTIVITY
Estbbuyy - Established Business Ownership Rate - Percentage of 18-64 population who are currently owner-
manager of an established business, i.e., owning and managing a running business that has paid salaries,
wages, or any other payments to the owners for more than 42 months.
Teayyido - Improvement-Driven Opportunity Entrepreneurial Activity: Relative Prevalence - Percentage of
those involved in TEA who (i) claim to be driven by opportunity as opposed to nding no other
option for work; and (ii) who indicate the main driver for being involved in this opportunity is being
independent or increasing their income, rather than just maintaining their income.
Busangyy - Informal Investors Rate - Percentage of 18-64 population who have personally provided funds for
a new business, started by someone else, in the past three years.
Suboanyy - Nascent Entrepreneurship Rate - Percentage of 18-64 population who are currently a nascent
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entrepreneur, i.e., actively involved in setting up a business they will own or co-own; this business has
not paid salaries, wages, or any other payments to the owners for more than three months.
Teanec_p - Necessity-Driven Entrepreneurial Activity: Relative Prevalence - Percentage of those involved in
TEA who are involved in entrepreneurship because they had no other option for work.
Babybuyy - New Business Ownership Rate - Percentage of 18-64 population who are currently a owner-
manager of a new business, i.e., owning and managing a running business that has paid salaries,
wages, or any other payments to the owners for more than three months, but not more than 42 months.
Teayy - Total early-stage Entrepreneurial Activity (TEA) - Percentage of 18-64 population who are either a
nascent entrepreneur or owner-manager of a new business (as dened above).
Teayymal - Total early-stage Entrepreneurial Activity for Male Working Age Population - Percentage of male
18-64 population who are either a nascent entrepreneur or owner-manager of a new business (as
dened above).
Teayyfem - Total early-stage Entrepreneurial Activity for Female Working Age Population - Percentage of
female 18-64 population who are either a nascent entrepreneur or owner-manager of a new business
(as dened above).
ASPIRATIONS
TEAyyjg5 - Growth Expectation early-stage Entrepreneurial Activity: Relative Prevalence - Percentage of
TEA who expect to employ at least ve employees ve years from now.
TEAyynwp - New Product early-stage Entrepreneurial Activity - Percentage of TEA who indicate that their
product or service is new to at least some customers.
TEAyyint - International Orientation early-stage Entrepreneurial Activity - Percentage of TEA who indicate
that at least 25% of the customers come from other countries.
ATTITUDES AND PERCEPTIONS
Futsupno - Entrepreneurial Intention - Percentage of 18-64 population (individuals involved in any stage of
entrepreneurial activity excluded) who intend to start a business within three years.
Nbgoodyy - Entrepreneurship as Desirable Career Choice - Percentage of 18-64 population who agree with the
statement that in their country, most people consider starting a business as a desirable career choice.
Frfailop - Fear of Failure Rate - Percentage of 18-64 population with positive perceived opportunities who
indicate that fear of failure would prevent them from setting up a business.
Nbstatyy - High Status Successful Entrepreneurship - Percentage of 18-64 population who agree with the
statement that in their country, successful entrepreneurs receive high status.
Knoentyy - Know Startup Entrepreneur Rate - Percentage of 18-64 population who personally know someone
who started a business in the past two years.
Nbmediyy - Media Attention for Entrepreneurship - Percentage of 18-64 population who agree with the
statement that in their country, you will often see stories in the public media about successful new
businesses.
Suskilyy - Perceived Capabilities - Percentage of 18-64 population who believe to have the required skills and
knowledge to start a business.
Opportyy - Perceived Opportunities - Percentage of 18-64 who see good opportunities to start a rm in the
area where they live.
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DEVELOPMENT OF ENTREPRENEURSHIP AND GOING OUT FROM A VICIOUS CIRCLE OF
POVERTY
Nikola Vukmirović
Faculty of Economics, Banja Luka, Republika Srpska
E-mail: nikola.vukmirovic@yahoo.com
Ela Vukmirović
Public enterprise, Banja Luka, Republika Srpska
E-mail: ela_vukmirovic@yahoo.com
Abstract
The way of going out from a vicious circle of poverty in Bosnia and Herzegovina, should be introducing
innovation and development of entrepreneurship in all elds of economy and society. The emphasis should
be put on stimulation and development of small enterprises as promoters of new entrepreneurial ideas. They
should be given the opportunity to grow and reach a higher level and expand through convenient working
conditions. They should also become cooperation carriers for some new small enterprises.
New and more complexes forms of organizing, doing business and synergetic development of small and
medium enterprises is the best answer to the powerful foreign competitors in Bosnia and Herzegovina.
The correctness of this kind of approach towards making the role of small and medium enterprises stronger, is
conrmed by the success of developed countries and regions. They achieved fast economic growth during the
process of globalization, computerization and technologization of the world`s economy.
These countries, also, showed that they are the most competent in nding the solution for newly appeared
developmental issues, imposed by the latest global economic crisis. These solutions (which are very important)
are not the old, restrictive clichés but, new, innovative-developing approaches.
Keywords: Innovation, Entrepreneurship, SME, Poverty, Development
1. INTRODUCTION
The economy of Bosnia and Herzegovina in the postwar period is constantly falling behind
the economies of most countries in it`s surrounding.This can be especially seen through high
unemployment, foreign trade decit, export of cheap raw materials and import of expensive industrial
products, technical/technological inferiority, low national GDP, worrying “brain drain” and other
negative indicators.
Even though, this country possesses signicant natural resources and very well educated labour
force, the economy of Bosnia and Herzegovina is still stagnating and with the appearance of the
world economic crisis, lately, it even declines.The situation in Republic of Srpska is better than in
Federation of Bosnia and Herzegovina, but this fact does not change signicantly the general image
of the state of poverty and undevelopment.
Most of home and foreign economic analysts explain this state with the problem of inadequate
business terms that block the efcient usage of available resources and decreases the inux of direct
foreign investments and slows the involvement of knowledge in resolving problems of development.
The aim of this science project is not a detailed analysis of the problem of captivated resources, such
as human, natural, economic, cultural and other, but to try to show the right way of going out from
crisis and poverty, while relying on scientic knowledge and patterns of development given by world-
famous economists (especially Nobel prize winner P.Samuelson).Those patterns were implemented
by many countries which, lately, managed to achieve fast growth and development of the national
economy.Therefore, we will make a short review on the essence of the problem called “vicious circle
of poverty” that most of the undeveloped countries, such as Bosnia and Herzegovina, are facing.We
will make this review especially from the aspect of opportunities and needs for founding new small
enterprises.Bosnia and Herzegovina, falls behind on this aspect too, especially if we compare it with
other countries that ended the process of trasition successfully (Czech Republic, Slovakia, Poland,
Slovenia,…) and became members of the EU.Falling behind these countries, when it comes to the
number of small and medium enterprises, is 10 times per 1000 citizens.
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2. VICIOUS CIRCLE OF POVERTY
Poor countries, such as Bosnia and Herzegovina, are facing big obstacles and problems in the
combination of four key factors of progress: work, capital, natural resources and entrepreneurship.
Beside that, these countries note that these difculties, in fact, are reinforcing each other in the “vicious
circle of poverty”.Attached graphical display shows how one obstacle activates the other, according to
Nobel prize winner P.Samuelson[6].Low income, leads to low savings, low savings slow the growth
of capital, inadequate capital prevents introducing new technical/technological solutions and faster
growth of productivity, low productivity leads to low income for laborers.Poverty is followed by
low levels of literacy and education, and these factors are preventing the implementation of new and
improved technologies.
Simplied graphical display of "vicious circle of poverty" according to Samuelson looks like this:
Going out from"vicious circle of poverty" in the largest number of cases requires harmonized effort
in many elds and economists who are dealing with the problem of development are recommending
"the big step forward" to break the vicious circle.When it comes to developed countries it is not such
a big problem.Those countries, thanks to bigger investments, better education of their population,
"brain import" and other labor forces of high quality, can relatively easy break the "vicious circle of
poverty" and encourage the "good circle" of economic development.
Scientists who are studing social disciplines, are dealing with differences in the velocity of economic
growth between different countries.Some early theories were putting the emphasis on the climate as
the cause of progress, highlighting the fact that the position of all developed countries is in the area of
moderate climate.Others were putting emphasis on the importance of culture, religion and customs as
the key factors.Max Weber was highlighting the "protestant ethics" as the leading force that initiates
capitalism[1].On the other hand, others distinguish the fact that the country starts to regress once
when it`s structure of bringing decisions becomes fragile and when interest groups or oligarchies start
to prevent social and economic changes.
Every theory mentioned above has it`s value for certain time and place, but they are not the universal
solutions for the economic development for different countries which are placed on different level of
development, have different industrial tradition, business culture and other.
3. NEW AND/OR RENEWED APPROACHES TO DEVELOPMENT
During the long period of time, scientists and researchers of economic development were intensively
working on new models of economic development for developed and for undeveloped countries.
In addition, we will try to give the review of the most important models based on groups of similar
approaches and experiences in economic development.Every single approach mentioned will try to
describe how different countries break the “vicious circle of poverty” and try to mobilize the key
factors of development.
The take-off-History of economic development of today`s developed countries is full of standstills,
declines and take-offs.Often, big inequalities in incomes enabled the minority to direct the savings
to form capital and investments in big entrepreneurial ventures wich leaded to unexpectedly fast
economic development.For example, inequality between former periods and industrial revolution
was so dramatic that scientists, such as W.W. Rostow, developed the theory that divides and puts the
emphasis on the periods of economic growth[6].One of Rostow`s periods is called The take-off, and
the analogy is made with the plane which is capable to y only after achieving the critical speed.
Different countries had their take-offs during different periods.For example, England had it`s ascent
at the begginig of the eighteenth century, USA around 1850., Japan in 1910., and in the last 15 years
four big countries (China, India, Brasil and Russia) and a big number of smaller countries (South
Korea, Finland, Ireland, Taiwan, Czech Republic, Slovakia and others).
The take-off is encouraged by the leading sectors from fast growing export markets or some industry
that has large economy.Once when those sectors experience the expansion, the process of self-
sustaining growth happens.Growth leads to prot, prot can be invested again, capital, productivity
and GDP are advancing.The "good circle" of economic development replaces the "vicious circle of
poverty".
Hypothesis about relative backwardness-The other point of view emphasizes the international
context of development of the undeveloped countries which provides the overcoming of their
backwardness in much shorter period.Nowadays, countries in transition can progress on the basis
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of capital, skills, and technology of developed countries, which, before, was not an option for
developed countries of today.This hypothesis, made by A.Gerschenkron from Harward, states that
relative backwardness itself can even have it`s contribution in the process of development.Countries
in transition can purchase modern textile machines, efcient pumps, surprisingly well seeds, new
chemicals and medical remedies and other goods produced with the help of high tech.Considering the
fact that these countries can rely on technologies of developed countries, today they can develop and
grow much faster than developed countries could in the past.
Balanced growth- Hypothesis about the take-off and relative backwardness have attracted the
attention of scientists and experts.But, some authors point out that the growth is a balanced process
in which developed countries are constantly moving forward.According to them, economic growth
is similar to the tailor that progresses constantly and not to a rabbit that runs intermittently and rests
when it is tired.In one exceptional study, Simon Kuznets examined the history of thirteen developed
countries, going even 1800 years back in history.He came to the conclusion that the model of the
balanced growth is the most consistent, at least when it comes to the countries that he studied.
In the end, the logical question is asked: Which of the three models of rapid leaving the “vicious circle
of poverty” is the most suitable for Bosnia and Herzegovina, if we consider the countrie`s needs and
possibilities?
Of course, reliable answer to this complex question would require an extensive study that goes
beyond this article.But, the experiences of developed countries showed that the periods of crisis are
the ideal time for big reforms and “destruction” of old economic structures and building absolutely
new structures, based on new technologies[4].
4. THE AMBIENT NECESSARY FOR THE RAPID DEVELOPMENT
Modern development implies, at rst place, introducing innovations and entrepreneurship in all
segments of economy and society[5].This kind of development requires changes in basic political
and economic values such as: democracy, competition, ownership, legal security, market freedom,
education and others.These factors represent the frame of developing new entrepreneurial and
economic values, opening new working places, the increase of export, better standards for the society,
etc.
The latest world experiences indicate that the behavior of the country and it`s specic regulations
in the area of economy is very important for the development of entrepreneurship.Of course, this
does not mean that it`s action should be the substitution for objective economic legitimacy, but just
correction and supplement for trade actions.
Exaggerated state regulation of economic processs can be very harmful and it can create such
business ambient that prevents and slows down the initiatives and the entrepreneurial spirit, increases
uncertainty and risk, limits the ability of making business predictions and the success rate of initiation
and realization of entrepreneurial undertakings.
Creating favorable business ambient has a special signicance for stimulating small and medium
entrepreneurship through reasonable tax rates, appropriate monetary and credit politics, supporting
science and research and education, etc.
Therefore, the state should create an ambient which will help in forming as bigger number of
entrepreneurial companies as possible, which will create a competition and contribute to development
of economic structure and strengthening the economic power of the state.
The state should contribute to removing the old ideological prejudices about marginal signicance
of small enterprises in comparison with big enterprises which were the carriers of the economic
development through history.The old ideological prejudices about entrepreneurship should give place
to the economic reason about rational organization of economical structure in which different forms
of owning, organization and size of the business have their place.
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5. INNOVATION AND ENTREPRENEURSHIP-SUCCESSFUL EXAMPLES IN OUR PRACTICE
Innovations are the generator for the development of the modern entrepreneurship and (self)
employment.Along with innovations in technology, non-technological innovations, that refer to
introducing the new way of doing business, became very important: organization, nancing, selling,
managing human resources, etc.Both forms are especially important in the period of economic crisis
because they can help the most in ghting against it.Therefore, genuine entrepreneurs see the chance
for new ideas and new business right in crisis.People who have ideas, innovations and entrepreneurial
spirit do not pay attention on crisis because they have their own vision how to use the resources that
are blocked by the crisis and how to turn the trouble into a chance for business[1].
The example of one economist who did not wait at the employment bureau to be offered a job, is
very instructive.He decided to become an entrepreneur and with the help of innovation he managed
to turn a relatively small business, in the eld of special dishes, into a multinational company.The rise
and expansion of his company, founded in Vienna, were happening very fast through producing new,
patented sort of dishes, medical devices, new sorts of cosmetics and other products and services that
were innovative in some way.Today, his group of companies is present in 40 countries and with 150
000 employees, experts and researchers.Bussines philosophy of his company is: innovation, quality,
style and endurance[8].
Another entrepreneur started small home business in producing underwear, while working in a public
company.But, when his business started bringing him more money than his salary, he left the old
job and dedicated his time to the new business and constant improvement of the quality and design.
Today, his company, only in the section based in Teslic, has several hundred employees.The company
exports more than 90% of their products to the demanding and choosy European market, thanks to
the innovations in producing program and cutting the costs.
Two big companies in Loznica had unused halls and equipment which helped the third entrepreneur
(young technologist) to swich the production of metal equipment with the producing of-pellet.It is
a cheap ecological fuel for heating, made from waste wood.He came to this idea when he noticed
that the market of pallet was very disturbed.Because of the problems with the raw material, Austrian
manufacturer reduced the production to one fth and made a large shortage in the market.That
increased the prize of the product for 60%.
Young veterinarian who, temporarily woked at the big pharmaceutical company "Krka" in Slovenia,
came to the idea of breeding horses, but not for recreation.He realized that, with a special procedure,
their blood can be turned into a serum for snake venom.This innovation increases the income from
breeding horses 10 times.
Two graduated engineers of agriculture are preparing the production of fruit seedlings on spacious,
neglected garden of his parents on the periphery of Banja Luka.Their business plan shows that the
annual average prot will be 37.000 KM .That will only be the rst phase of their project which they
intend to expand quickly.
In one street in Banja Luka, on the same side of the street, there are ve cafes.Four of them are
periodically closed and not well visited.The fth one, located in the end of the street is always
offering new drinks and new services and constantly innovates the ambient and the way of serving
the customers.
It is a pity that there are still not any sponsors or investors interested in the innovations of a very
young group of innovators from the elementary school Stanko Rakita in Banja Luka.Three students
from this school invented a new stick for blind people and new foil for the helmets of Formula 1
drivers and achieved a success on a global level.At the fair of innovations in Zagreb and Skoplje they
won third place and a bronze medal and silver medal in Warsaw.Their biggest success was when their
innovation was proclaimed the best in the competition of 220 innovations from seven countries by the
First institute of innovators and researchers of Iran at the Eight exhibition of innovations in Zagreb
"Arka 2010".This is a great chance of turning innovations into business which would make great prot
and which would be a big stimulus for other young, talented people to, just like their peers in Finland,
during their lifetime wish to register at least one patent.That would be a big economical benet and it
would help Republic of Srpska and Bosnia and Herzegovina to leave, as soon as possible, the circle
of the undeveloped countries (that survive thanks to exploitation of the natural resources) and become
the members of the group of countries that base their development on innovations and knowledge.
Global Entrepreneurship Monitor-GEM, divided the countries in three groups on the basis of their
level of development and the competition ability of their economies in 2009.The rst group of
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countries are those that base their economic development on the natural resources (those are the least
developed countries, one of them is Bosnia and Herzegovina).The second group of countries base
their economic development on the efciency of the industrial production (from ex Yugoslavia:Serbia
and Croatia).The third group are the countries whose economic development is based on innovations
(from ex Yugoslavia only Slovenia).
Innovations are not the monopoly of big and rich countries that invest signicant amounts of
money in research and science.Among 15 countries that, according to the research of the magazine
"The Economist" in 2008., realized the most innovations per capita are also small developed
countries:Switzerland, Israel, Finland, Austria and Slovenia.The example of Finland, that created
great logistic support and social climate for innovations in numerous innovation centers, called
"technopolis", is especially interesting.The life ambition for young people there is to register at least
one patent during their lifetime.A similar program is initiated in Bosnia and Herzegovina through
innovation centers in Tuzla and Banja Luka.This fact is encouraging but too modest because of the
fact that innovations and their turning into business ideas, development and (self)employing are the
best option for young people who have entrepreneurial preferences and skills.
6. SMALL COMPANIES MUST GROW INTO BIG ONES
Creating new entrepreneurial ambient, at all levels (from the state level to the local communities),
in Bosnia and Herzegovina must be systematic and with clear aim of unblocking existing resources
and creating new ones.Economic and law system must stimulate irrational usage of resources and
bad entrepreneurial ideas.That means that the most important task of the economic and law system
is to provide such business ambient in which the irrational usage of resources will be replaced with
the new, more rational, and the unsatisfactory entrepreneurial ideas will be replaced with new, more
progressive and more creative ones.
Removing the obstacles for realization of new entrepreneurial ideas, a new entrepreneurial social
class that efciently uses the existing resources and thinks about the opportunities of creating new
resources, will be constituted.G.Gilder (former adviser of the president of the USA R.Reagan) said it
wisely that the true entrepreneur is the one who, not only optimally combines the available resources,
but also creates them.According to G.Gilder the entrepreneur is the “creator of the market and business
opportunities, the one who encourages the resources and creates new technology”.Such individuals
do not pay attention to crisis but create and realize the vision of development of their business 30 of 50
years in advance.Their entrepreneurial projects are based on the principle of “turning the trouble into
advantage” and they are recognized by the exponential growth of their business.Such entrepreneurial
projects are at the same time crucial “drivers” in leaving the crisis and “vicious circle of poverty”.
This approach in Bosnia and Herzegovina should also remove the obsolete point of view when it
comes to small enterprises, which are the strategic component of economic development, increasing
the employment, export and the social standard.It should not be forgotten that small enterprises have
their spot in the market, but their prerogative task is to grow rapidly and develop into small and
big enterprises.Small enterprise is the beginning of the big business (big enterprise), not the nal
goal and the nal form of business.Small enterprises can manifest their importance only if they are
connected into chains of value, clusters, cooperative processes etc.They have to be linked in clusters
and similar business forms which represent “exible business networks” as new forms of economic
subjects that are quickly adjusting to the changes in the global market.In particular that refers to the
improvement of design, quality, service and prizes of products.They are becoming the key factors of
the competition position of every economy in the global market and therefore all rules of management
and development are changing.
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7. CONCLUSION
Everything mentioned above indicates that leaving the “vicious circle of poverty” in Bosnia and
Herzegovina should be accomplished through innovations and developing entrepreneurship in all
areas of economy and society.Stimulating the development of small enterprises as promoters of
new entrepreneurial ideas and enabling them to grow into larger forms is very important.The new
advanced form of organization will be the best answer to the strong foreign competition in Bosnia
and Herzegovina.
Correctness of this approach to the development of entrepreneurship based on knowledge and
strengthening the role of small and medium enterprises is conrmed by the successes of the above
mentioned countries and regions, that recorded fast economic growth in the process of globalization,
computerization and technologization of the global economy.
These countries proved to be the readiest in nding the solution for newest developmental problems
imposed by the latest global economic crisis.Those solutions (which is very important) are not the
old, restrictive clishes, but new innovative-developmental approaches.
In Republic of Srpska and Bosnia and Herzegovina these processes are at the beginning and it takes a
lot of time, knowledge, resources and experiences of other countries in creating favorable ambient for
the development of entrepreneurship and self-employment based on innovations, new technologies
and new ideas.Without that it is hard to expect that we will leave the “vicious circle of poverty” and
deep economic crisis in which we are.
Reference
Vukmirović, N., Savremeno preduzetništvo, Ekonomski faultet Univrziteta u Banjoj Luci; Banja Luka, 2006.
Gilliland, M., The Business Forecasting Deal, John Wiley & Sons, Inc., New Jersey, 2010.
Skarzynski, P., Gibson, R., Innovation To The Core, International Edition, 2009.
Global Entrepreneurship Monitor, Entrepreneurship Development Centre, Universty of Tuzla, 2011.
Bessant, J., Tidd, J., Innovation and Entrepreneurship, John Wiley & Sons, Ltd, 2007.
Samuelson, P., Nordhaus, W., Economics, McGraw-Hill, Inc., 2000.
Deželjin, J., i drugi, Preduzetnički menadžment, Consult, Zagreb, 2002.
Development Strategy of Small and Medium Enterprises in The Republic of Srpska, for the period 2006-2010,
Agency for development of small and medium enterprises of Republic of Srpska, Banja Luka, 2007.
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CONTEXTUAL INFLUENCE ON THE ENTREPRENEURSHIP POVERTY REDUCTION
RELATIONSHIP IN NIGERIA: A MULTIVARIATE ANALYSIS
Yekini Elujoba,
Department of economics, University of Lagos,
E-mail: crownprinceunilag@yahoo.com
Abstract
Poverty reduction is the millennium development goal of the United Nations and in deed of all developing
countries in Africa. Previous research has shown that there is a positive relationship between entrepreneurship
and poverty reduction on one side and economic growth and poverty reduction on the other. This study’s
contribution is the focus on the impact of entrepreneurship on poverty reduction as a spill over effect of
national growth.
1. INTRODUCTION
Nigeria is known all over the world for its mass-poverty and poor economic growth (world bank
2011).further, poverty is wide spread in Nigeria, which is one of the stylized facts in Sub-Saharan
Africa (Schoumaker, 2004, Fissuh and Harris 2010).
The poverty trap had a continual dependence on external injections of resource such as socio-economic
family dependency without the potential for Nigerians to reach endogenously stable consumption/
production equilibrium. Poverty traps are associated with poor human development, thus cumulating
in unending spiral of human misery (Adams and Raymond, 2008, Mckenzie and woodruff, 2006)
It has been noted that it is not sufcient simply to focus on raising growth rates of GNP, in the
expectation or hope that the national growth will trickle down’ to improve levels of living for the very
poor on the contrary, economists argued that direct attacks on poverty by means of poverty focused
policies and plans especially in areas of entrepreneurial development can be more effective in both
the short run and Long run (Todaro, 2000)
Entrepreneurship can help to reduce absolute poverty by commanding sufcient resources to satisfy
basic needs (Todara, 2000). Further, scholars seen to have reached consensus about 1980s being the
Turing point when entrepreneurship rates reversed their long term downward trend (blau,1987 act
and Audretsch, 1993, act, Carlson and Karlsson, 1999, Carrere and Thurik, 2009, Vestal, Thurik and
Ennekers, 2002)
2. OBJECTIVE OF STUDY
The major signicance of this research is that a number of important gaps exist in the areas of impact of
entrepreneurship on poverty alleviation. It must be noted that, previous research has show that there is
a positive relationship between enterprises levels of entrepreneurship and their nancial performance,
that is the creation of value in form of wealth maximization for the owners as a strategy to reduce
poverty. Little research has hither to focus on measuring the relationship between entrepreneurship
and poverty reduction in Nigeria. Such research had concentrated mostly on areas as purpose, structure
intensity and value creation. Thus, this research will concentrate mostly on a comprehensive study
of entrepreneurial activity in order to assess time-varying and time-invariant determinants of rm-
creation, and its relationship to economic growth and poverty reduction.
3. EMPIRICAL LITERATURE
The entrepreneur is a person who is working to take risks: or a person who by exploiting market
opportunities, eliminating disequilibrium between aggregate supply and aggregate demand or as one
who owns and operates a business (Tyson, Petron, Rogers 1994). Further entrepreneurship can best
be dened as “a force that mobilises other resources to meet demand the ability to create and building
something from practically nothing” that is, the process of creating value by’ pulling together a unique
privilege of resources to generation.
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4. THEORITCAL BACKGROUND
Schumpeter (1934) pioneered the theory of economic development and value creation through the
motion of technological and innovation. Entrepreneurship theory. Theoretical insights from industrial
economy (Hanna and Freeman 1989, Carroll and Hanna 2000) and also researches in institutional
economic nelson, 1996; north 1984) as well as empirical studies describing the ongoing politically
dened changes in the institutional constraints (Ducket, 1998, Guthrie, 1999, Nolan 2001) suggest a
dynamic approach to formulating an expost analysis of the development of the development of the
private business sector. Further, the dynamic capability perspective (Teece et.al 1977) emphazise the
proactive potential of the rm by referring to certain types of resource and capabilities.
In the rst case, Nimi et.al, (2003) found that the degree of engagement in export (measured by the
additional determinants of change in poverty status. They are classied as trade-related determinants
of poverty dynamics. In similar vein, Dawson, hanky and Laterithe (2009), opined that market directed
opportunity entrepreneurships are more strongly associated with higher educational attainment.
Exploit an opportunity “(Jones, sarong 1980, Timmons, 1989, Stevenson, (1985).
Entrepreneurship is an important element in organizational development and economic growth
(Antoncic and Hisrich 2001; Drucker 2002). In Developing countries, entrepreneurship is seen to be
vital to address the issue of job creation, economic growth and the exploitation of opportunities (von
Broembsea, Herrington and wood, 2005). Entrepreneurship is essential for the continued dynamism
of the modern market economy and a greater tare of new business can foster completion and economic
growth (apper, leaven and Rajan, 2007).
Even though the impact of entrepreneurship Baumol, 1990, Thurik and Wennekers 2002), but then
the importance of entrepreneurial behaviour in developing countries, such as Nigeria is emphasised
by intensied competition in global economy, the need for economic growth and the impact of
entrepreneurial behaviour on future growth and poverty reduction. Most researchers argued that the
strength of entrepreneurial value creation (poverty reduction through nancial performance), will
increase over time as levels of entrepreneurship increase (Hayton 2005. Goosed, De coming and
Smith 2002; Zahra, Nielsen and Bogner 1999). Entrepreneurship in Nigeria is predominant in the
service sector, which includes numerous low-value but labour-intensive sub-sectors ahs arguably
made a contribution to employment.
5. METHODOLOGY
In assessing models of entrepreneurial evaluation and impact assessment questions revolved on data
collection and verication discussions on the use of parametric versus non-parametric approaches to
measuring outcomes and the appropriate outcome variables, to measure, at this time, there does not
appear to be a common standard for evaluation, with each program using its own sets of measures
(Crombruggbe, Tenikue and Sureda, 2008; Hollis and sweet man, 2001,). In some cases a Multnomial
(or binomial) logistic regression to panel has been used to study poverty dynamics and the correlation
with entrepreneurship, for example, Glewwe et.al (2002) and Justirio Litcheld (2003b) but the most
common methods in the research employed, survey, or used data from surveys taken by researcher is
regression analysis to report model t (Phan 2009).
Following the methodology adopted by Pierre Erasmus and Retha Scheepers (2008), also multiple
regression was used to assess the degree of relationship between levels (types) of entrepreneurship
and poverty reduction; subset and step wise regression analysis were not employed since there are
few numbers of predictors.
6. MODEL SPECIFICATION
The econometric specication that will capture poverty reduction and other control variables that
effectively impact on the strategy is adapted from the work of simpler k; et.al (2004); and Fissuh and
Harriec M., (undated); Thang N., (2006) and Wodon Q., (undated). Thus
Pov= F(Eq +Z---------------------------------(1)
Et= F(Ri Ed, Lv,)-----------------------------(2)
Where Pov = poverty
Et = Entrepreneurship
Ri = Return on investment
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Ed = Educational Development of entrepreneur.
Lv = Level of Entrepreneurship.
Z = Vector of all control variables that affect poverty; other than entrepreneurship.
From theory, the a priori expectation is an inverse relationship between poverty and the predictors
for alleviation.
Hence: pov =
pov = + + Z + M ----------------------------- (3)
Normally harvesting will be combining. Thus giving.
Log Pov = log + log + log Z + M---------- (4)
Log = log + e.g. + log + log + M-------- (5)
A priori, we expect
>0 <0, >0, >0
7. RESULTS
With the assertions by Hangton and Khandker (2009) and Glewee (2009). Our main focus of analysis
will be the estimation of main statistical inferences like mean R2, the t- statistics and the P- values,
deviations and slim-squared error.
7.1. DESCRIPTIVE RESULTS
(a) Mean: Edu =21.6
Ent = 22.4
Retn =30.6
(b) Deviation: Edu = 8.53
Ent =14.46
Retn =10. 06
(c) Probability: Edu =0.55
Ent = 0.71
Retn =0.70
(d) Sum sq. error: Edu =108.00
Ent =112.00
Retn = 153.00
7.2. REGRESSION RESULTS
The adjusted R_2 will be employed to measure the proportion of the variation in the dependent
variable (poverty reduction) accounted for by the explanatory variables nancial returns on
investment, Educational level of the entrepreneur, and entrepreneurship level in terms of amount of
capital invested. Thus from the regression output:
Pov =6.10 -0.019Rt -0.010 Ed -0.014El
Se = (0.632790) (0.49923) (0.220429).
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7.3. DISCUSION OF RESULTS
The mean score, here, corresponds to the average of score on the 5-point Likert- type scale used for
the characteristics of poverty reduction. The statistical reliability of our t values is not in doubt as
reected in our data displayed in 7.1. Also the output of our sample data variation through the sum
squared for error (that is the within- treatment variation) as described in 7.1, under descriptive results.
Section 7.2 discussed earlier displays the regression output. The coefcients for most of the poverty
reduction strategies (that is contributory determinants) are all negative. Education of the entrepreneur
however is a better determinant with 10% increase leading to 61% boost in poverty reduction. The
adjusted is low and negative. This suggests serial correlation i.e. multicollinearity among
the explanatory variable; most likely to result from specication error as is normally expected of
cross-sectional data. The negativity of the notwithstanding, the t is excellent as depicted by
the standard error of the estimates for the three parameters, but then here entrepreneurial level is
more preferred as a contributing strategy for poverty alleviation, even though education is equally
important. The value of the test statistics (t) for all the predictors dedicates linear relationships with
the dependent variable. The large t-values for education again is an indication of level of education
as the best predictive value.
8. CONCLUSION
Entrepreneurship is omnipresent- entrepreneurs are present in all settings. Cultural explanations for
a lack of entrepreneurship over look what people have in common-namely alertness for prot and
to improve their general situations. Under developed countries do not lack entrepreneurship. Rather
entrepreneurial activities exist but are not directed toward productive ends conducive to economic
progress.
The connection between entrepreneurship employment growth and subsequence reduction in absolute
poverty is remarkably robust. It is stronger for transportation. Distribution and service but never the
less not strong for direct productive activities.
Theories that emphasized the supply of entrepreneurship in order to reduce poverty and contribute
to national growth face both theoretical and empirical challenges. Challenge arising from the output
of this research is harder. To show how entrepreneurship can reduce poverty, there must be well
measured exogenous variables that capture and drive entrepreneurship supply. This illustrates that
using broad-brush measures like overall education levels is likely to be insufcient.
The nancial returns on most form of entrepreneurship are probably comparable, rather than higher in
production and export activities which had been theorized by scholars as preferred types. Despite all
the challenges encountered in this research, it must be noted that there is truth to chinitz’s hypothesis
and that at least some of the connection between entrepreneurship and poverty reduction reects
heterogeneity in the various determinants that could be employed to reduce poverty in Nigeria.
However, it is very signicant to note that established theory indicates the importance of providing
a supportive climate for enterprises pursuing a growth strategy and the eventual poverty reduction
opportunities.
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Reference
Kaiser U, 2008 a primer in entrepreneurship institute for strategy and Business Economic, University of Zurich.
Spring semester 2008.
Glaesser, E.L; Kerr, W.R; Ponzetto, G.A.M, 2009, Havard Business School, Working Paper 10-019’
Scheepers, M.J, 2007 entrepreneurial intensity: the Inuence of Dissertation approved for the Degree of Doctor
of Philosophy in Business Management, University of Stellenbosch Nov. 2007.
Klapper, L; Raphael Guillen m. F 2009, Entrepreneurship and Firm Formation Across countries Wharton
School, University of Pennsylvania and World Bank Group entrepreneurship Survey (2009)
Phan, P.H, 2009, Entrepreneurship and Micronance, a Review and Research Agenda, the Johns Hopkins
Carey Business School, Baltimore, USA, 1-22.
Wodom Q.T, 1996, Micro determinants of consumption, poverty, growth and inequality in Bangladesh, World
Bank working paper, 1-33.
Fissuh, E and Haris, E, 1997, Monash University Clayton, Victoria, Australia 1-35.
Buera, F.J, 2008, persistency of poverty, Financial Friction’s and Entrepreneurship, mimeo North-western
University, 1-26.
Thang, N; Trung l.D; Dat, V.H; Phuaong, N.T., 2009, Poverty, Poverty Reduction and Poverty Dynamics in
Vietnam, Background paper for the Chronic Poverty Report, Chronic Poverty Research Centre, 1-46.
Erasmus. P; Scheepers, R, 2008, the Relationship Between Entrepreneurial intensity and Shareholder value
Creation, Managing Global Transition 6(3): 229-256.
APPENDIX 1
Table 1. Survey data on entrepreneurial characteristic and determinants of poverty alleviation policies.
Enter characteristic Code Rt Ed El
Transportation
Services
Production
Distribution
Exports
1
2
3
4
5
39
36
26
37
15
25
29
22
25
7
37
30
4
31
10
Total (%) 100 100 100 100
Source: researcher’s survey, 2011.
APPENDIX 2
Table 2: Regression output; descriptive statistics
Sample: 1-5
EDU ENTERP RETURN
Mean 21.60000 22.40000 30.60000
Median 25.00000 30.00000 36.00000
Maximum 29.00000 37.00000 39.00000
Minimum 7.000000 4.000000 15.00000
Std. Dev. 8.532292 14.46720 10.06479
Skewness -1.182668 -0.364522 -0.789933
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Kurtosis 2.871734 1.373287 2.045794
Jarque-Bera 1.169015 0.662021 0.709685
Probability 0.557380 0.718198 0.701284
Sum 108.0000 112.0000 153.0000
Sum Sq. Dev. 291.2000 837.2000 405.2000
Observations 5 5 5
Table 3: regression output: least squares method.
Sample: 2001 2005
Included observations: 5
Variable Coefcient Std. Error t-Statistic Prob.
C6.102297 5.393561 1.131404 0.4608
RETURN -0.019951 0.632790 -0.031529 0.9799
EDU -0.100386 0.499323 -0.201044 0.8737
ENTERP -0.014440 0.220429 -0.065508 0.9584
R-squared 0.571846 Mean dependent var 3.000000
Adjusted R-squared -0.712617 S.D. dependent var 1.581139
S.E. of regression 2.069189 Akaike info criterion 4.282752
Sum squared reside 4.281541 Schwarz criterion 3.970303
Log likelihood -6.706881 Hannan-Quinn criter. 3.444168
F-statistic 0.445203 Durbin-Watson stat 1.790466
Prob(F-statistic) 0.769109
(Footnotes)
1 Correlation GII vs. number (no. observations: 240), correlation GII vs. duration (no. observations: 232)
2 WIPO - World Intellectual Property Organization
Part Three:
Family business, Education, Culture,
Gender
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MANAGING INTERRELATIONS BETWEEN FAMILY AND BUSINESS
Kiril Todorov
University of National and World Economy, Soa, Bulgaria,
E-mail: ktodorov@unwe.acad.bg
Kostadin Kolarov
University of National and World Economy, Soa, Bulgaria,
E-mail: kkolarov@unwe.acad.bg
Emil Papazov
University of National and World Economy, Soa, Bulgaria,
E-mail: epapazov@gmail.com
Iliya Kereziev
University of National and World Economy, Soa, Bulgaria,
E-mail: iker@unwe.acad.bg
Abstract
In recent decades, family businesses have enjoyed the special attention of researchers and scientists in the
areas of entrepreneurship, management, economic development and small business. The interest of researchers
in these areas is understandable because of the unquestionable contribution of family business to the sound
economic development in comparison with the non-family business. More or less, researchers from those areas
focus primarily on economic and management issues of family business as a relatively modest emphasis on
family-related problems is being put.
Incorporating family relationships in the relations arising in the processes of the business itself, including its
governance, poses specic problems whose solution depends on the success of the business. Assuming that it is
hardly possible to fully distinguish between family and business issues in a family enterprise, leads to the idea
that it is necessary to establish business relations skillfully managing a ‘family – business’, instead of making
a completely separated relationship.
Relations between family and business cover issues such as:
• Selection and Employment of family members;
• Rewarding family members;
• Erection of management positions of family members;
• Transfer of ownership in the family business between two or more generations as well as landmark
relatives from one generation;
• Relations with sisters-in-law, brothers-in-law and lovers;
• Allocation and division of property;
• Representativeness of the family in managing the family business.
This report will provide an overview of theoretical concepts, research results and own case studies in respect
of approaches, methods and practical solutions in managing the relationships ‘family – business’.
Keywords: Family business, Management
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1. NATURE OF FAMILY BUSINESS
The family business is widespread on the continent. According to the European Commission about
60% of European companies are family businesses (Mandl, 2008). For this reason and because
of contribution to economic development, its nature, specicities and characteristics represent a
signicant interest to researchers, consultants and trainers.
In economic theory there is no consensus about the nature of the family business. In 2009 an expert
group of the European Commission rst adopted a common European denition of family business.
According to this denition a company, regardless of its size, can be categorized as a family business,
provided it meets the following requirements (Mandl, 2008):
• Majority share of ownership of a family company is owned directly or indirectly by the
individual who established the company or acquired the relevant shares or share capital of
the company, or possession of her / his spouse (s), parents, children, direct descendants of the
children.
• The majority of decision-making rights are directly or indirectly associated with the family.
• At least one representative of the family is actively involved in the company’s activity (ie, not
all are waiting dividends).
• Companies, whose shares are quoted on the stock exchange, meet the denition of family
business if the person who established or acquired company (equity) or family members hold
at least 25 percent of the shares.
The ‘European’ denition is based on 90 different denitions of family business. The concentration of
family ownership and inuence on management (strategic control) is placed in its base. In this regard
it is considered that there is a family business where over 51% of the ownership of an enterprise is
in the hands of the family. Additional features are set to differentiate a family from a non-family
business. For example, involvement of family members in the daily activities of the entity (i.e. formal
or informal employment of family members with managerial activities), major contribution of the
company to generating family income, and continuity between generations (i.e. intention to ensure
sustainability of the enterprise regardless of the life of its assets).
This seemingly clear picture of the nature of the family business does not reect the main difculty
associated with its operation, namely: family rms grow at the border of two qualitatively heterogeneous
social systems – family and economy. The social function of each is different. For example, the task
of the family is to grow and develop its members, and business – to meet the needs of society products
and services. Each of them, though, has its own set of values, cultural norms and ethical principles and
specic rules of governance and modes of communication. As these systems have innate differences,
but interact intensively, the boundaries between them are blurred and sometimes show a sense of
confusion and frustration (Todorov, 2011, pp. 158-160).
Recognizing the importance of the alleged peculiarity, R. Donnelly (1964) suggested more concrete
understanding of family business with a requirement that it (business) has developed at least two
generations of a particular family. This not only allows the formation of long-term company policy,
but also taking into account the interests of the family as a whole.
Understanding of ‘classical’ family company in which ownership and control are in the hands of the
family as well as the making of all important decisions, was adopted not only in developed European
economies, but in the U.S. There, however, attention is also aimed at the so-called ‘managerial
capitalism’ (Colli, 2003, pp. 9-12). From the perspective of ‘managerial capitalism’ there is a
theoretical possibility for family enterprises to be dened as such, bearing in mind their size. In broad
terms, the family rm may even be regarded as a step in the lifecycle of an enterprise, which includes
the period from launch to acquisition of a public character by the company. In other words, family
rms are primarily small and medium-sized enterprises, which are characterized by slow growth, a
at organizational structure and simplied business model. These companies rely heavily on self-
nancing or limited external funding from local, often non-bank sources, which affects the generated
prot margin (protability).
Of course nowadays there are opposing views based on the number of examples of large family
businesses with signicant earnings (protability). They combine features of the traditional family
company with advanced features of capital markets. These include most of medium and large family
businesses, dominated by transnational companies in an industry. They are known throughout the
world to rely on international nancial institutions and investors, attracted by its protability. It is
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therefore not properly being considered that family businesses are less protable than non-familial
managed by hired professional managers.
According to David Sirmon and Michael Hitt (2003) success of family rms is more dependent on
how well managed the following aspects of business are:
1. Human Resources. The main among them is the family human resource or ‘inner circle’ of the
company. When the skills of family members are coordinated (presumably deeper division of labor),
the probability of success improves signicantly.
2. Social capital. Family members are carriers of valuable social capital for businesses in the form of
social contact with the outside environment to enrich the company’s internal environment.
3. Financial capital. The family company usually has a stable capital in the form of assets and debt
nancing from family members. Family relationships between investors and managers reduce the
threat of liquidation.
4. Survivability capital (capital for survival). The family rm has to manage the so-called capital for
survival or it is the willingness of family members to provide free labor or money, so that the entity
does not tolerate failure or a bad reputation.
5. Low management costs. Family business should be able to maintain a certain level of management
costs. In non-familial rms, these costs include maintenance of accounting, security systems,
regulations and other mechanisms to curb abuses and monitor the work habits of employees. Family
rm can minimize or eliminate these costs, because employees and managers relate to and trust each
other.
Clear separation of these unique characteristics of family businesses and their inclusion in a well-
implemented management strategy would signicantly improve the chances of business success,
compared with non-family enterprises.
However it is the fact that family rms in the process of decision making is more complex than that
of non-family. It is directly or indirectly involved in a wide range of stakeholders, thus increasing
the likelihood of conict. A good idea about the complexity of relationships gives a family business
model, developed by K. Gersick, E., J. Davis, M. Hampton and I. Lansberg (1997) who represent a
family business as combination of three cycles – family, business itself, and ownership.
The presented model can be used to identify possible sources of interpersonal conict in the line
‘family – ownership – business’. For example, owners – family members who do not work in the
company may require increased dividends, perceiving it as an acceptable return on investment. Family
members, working in the company but not being owners, are likely to declare themselves against such
a move. They are behind the idea of reinvestment in order to create better opportunities for their
professional development. Both parties may be brother and sister or have another family connection.
Another common conict situation is related to the question of jobs and wages of family members. A
person who has more than one link with the business (through the marital relationship, participation
in ownership or personnel of the company), for example (family circle) will defend the position to
give chance to all children of the family. Employees who are not family members would accept the
appointment only to those relatives who are better than all other candidates and advancement based
on individual qualities.
2. ADVANTAGES AND DISADVANTAGES OF FAMILY BUSINESS
The relationships between ‘family’ and ‘business’ have both its positive and its negative consequences
on the performance of a family enterprise. Reasons for this are various targets and related functions of
the systems ‘family’ and ‘business’. Giving more consideration or preference to one of the two systems
inevitably leads to undesirable consequences for others. However, good management of relations
between the two systems would create signicant benets for the family business. Below we will
refer to a summary of the main advantages and disadvantages of family businesses, which will serve
as a starting point in the search for basic principles of good governance of the relationship between
family and business. This generalization can highlight the following advantages and disadvantages:1
Advantages of a family business:
• Aligning goals in life and business. Opportunity for achievement of business purposes in the
best way, feeling them as a life vocation.
1 Leach, P., T. Bogod, Guide to the Family Business. 3-th ed. 1999. BDO Stoy Hayward, UK.
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• Knowledge – applying own knowledge and making money from it, which brings satisfaction
to the family.
• Flexibility of time, work and money – can quickly adapt to changing environmental conditions
and unforeseen circumstances.
• Forward-thinking –the family business almost always has a family vision for its development
in the horizon of 10-15 years. In Japan, family businesses may even have a planning horizon
up to 20 years (one generation). Perspective planning in family businesses is not always linked
with written plans. In most cases, it is informal.
• Sustainable culture – every family member knows by tradition how things happen; how they
conducted negotiations; which are the major competitors; what are the ethical rules, etc. These
ordinances are passed from generation to generation and have a sustainable character. They
are learnt unconsciously in most cases.
• Quick decisions – because of informal (family) relations, as well as linking ownership and
management.
• Reliability and proud – family rms are generally solid and reliable structures and market-
oriented. They have traditions, which make them attractive to business partnerships. Reputation
and traditions bring pride to the family and generations. For example, when breweries
companies, which have arisen as a family enterprises, in advertising rely on tradition and
reputation.
Traps (disadvantages) of a family business:
• Numbness - in terms of traditions in the family business. Knowledge of the older generation,
which adopted novelties with difculty.
• Business challenges – for different generations in the family business, business challenges
have different meaning and character.
• Success – success of the previous generation can be discouraging to the next. So-called ‘Old
Glory’.
• Emotional problems – problems in the family as an emotion may impact negatively on business
and relationships in the company.
• Leadership and home affairs – the struggle for leadership in family businesses and the
imposition of internal order can be a ‘trap’ for the development of the company.
3. FAMILY BUSINESS IN BULGARIA – CHARACTERISTICS OF ITS DEVELOPMENT
The period in the economic development of Bulgaria after World War II is characterized by the
forcible entry of the Soviet economic model, in which for ideological reasons, there was no place
for private, including family business. The nationalization of industry in 1947 practically put an end
to many family businesses, some of which had decades of history. Only with the adoption of new
economic regulations in the 80s and mostly entered immediately before the political changes in force
Decree 56 of 1989 created real conditions for the revival and establishment of new family businesses.
The result is a boom in the creation of new enterprises, many of whom are family businesses. After
more than 20 years of transition to market economy, it would be naive to assume the existence of an
equal start in the establishment of new family businesses. Today, there are signicant concerns that
not all family businesses are the result of full family initiative and entrepreneurial qualities of the
founders. Thus now we can talk about several types of family businesses. The rst type – perhaps
the most popular, companies are created by families who have no family tradition, but started their
business, seeing in it the preferred alternative for realisation, for both the founders and the other
family members. Among this type, many cases of forced entrepreneurship could be found – especially
in areas where the chances of nding attractive jobs are very limited.
The second type of family rms are those created on the basis of restoration of the proprietary rights
on old family assets (usually buildings that served as the basis for family business decades ago). In
this type it is not uncommon for some family tradition to recover as far as contemporary situation
permits. In general, these companies have an advantage over the rst type in two respects – the capital
base and family traditions.
The third type of family rms are companies created by people with strong positions in the transition,
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whether in politics or in business life. Using established contacts, some patronage, and vast
opportunities created by privatization, these people managed to gain signicant business assets at a
low price and then, in the case of a successful entry into the business began to attract their heirs to
the business.
The above summarized distinction aims to give us a starting point for our further analysis in the
management of family and business relationships, outlining several important moments in giving
priority to family or to business. For example, in the rst type of companies we could not expect
signicant sacrices in the family as far as business is the only one tool for achieving and maintaining
family well-being and in this plan one can hardly expect that business management will be placed
entirely on principle bases. Rather, the business would tolerate change and development to meet the
family needs more. In the second case of family rms – those, whose roots are in the more distant
past, could suggest that more family relationships will be subject to business, or at least will see the
family reach a consensus on the balance between family and business. Most interesting is the third
type of family businesses in which to launch the family business has less merit and commitment
respectively. Beneting from its strong position, the founder has sought primarily to strengthen the
business and his family is rather perceived as a user of any goods to which the business would
contribute. Naturally, such a situation can even lead to neglect of family relationships in the name of
preservation and development of the business.
Important practical issues that arise from the nature of family business are the following:
• Separation of family relations from the relations required by the business;
• The selection, appointment and remuneration of members of the family;
• The selection, training and promotion of family business successor.
In the rst type of companies it is natural that the rst question remains open as far as business is
subject to the welfare of the family, almost all capable of working family members are involved in
business, and it would be unrealistic to require strict separation of family and business relationships.
In these companies, solving the second problem is mostly based on family relationships and has
less than rational practice of non-family enterprises. Finally, the third question is left to solve itself,
relying on tradition, natural processes in the dynamics of a family, not ruled out if the potential
successors decide to accept it as a family business or take on their own way.
In the second type of rms it can be expected that the established precedents in the past in solving
those groups of problems serve as an important milestone even today, providing a smaller degree
of drama in the management of family business. Surprises here may occur mostly in line with the
relationship-in-law and wives, especially when they are too ambitious and express large claims for
participation in the process of moving business from one generation to another. Such enterprises
are particularly sensitive to the expression of key employees who are not family members, thereby
limiting potential of enterprise management. The fact is that in Bulgaria there is no signicant number
of this type of family businesses, not so because of more than four decades of de facto ban on private
business, but more due to exhaustion of the potential of a family to raise and train successors to the
wide range of opportunities provided by the present of a limited number of successors.
The third type of companies is most often characterized by a later phase of involving family members
as employees, which helps the company to acquire characteristics of a family business. Although such
companies avail of a number of formal rules and procedures (given their larger average size or their
inheritance as privatized entity), as a rule, family members are given privileged position, high salary,
regardless of their personal skills and efciency. This practice, of course does not mean that because
of their successors, the creator of such an enterprise would be prepared to risk its ruin by incompetent
leadership from the unprepared successors – rather, he would entrust the actual control in the hands
of professional managers, but ensure his heirs’ enviable status and income (if possible). Concerns
can be expected at a later stage, when the owner of such an enterprise is hampered by limitations
arising from age, but his successors have not yet proven quality at reasonable entrepreneurs. And it is
not excluded that an entity will be left in the hands of professional managers (something extremely
difcult in Bulgaria) and the heirs are forced to distance themselves from making the most important
decisions in order to keep the business as a reliable source of family income.
For a better understanding of the Bulgarian specics in the management of family and business
relationships it is necessary to put a brief presentation of the modern Bulgarian family.
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4. THE BULGARIAN FAMILY AS SOURCE OF PROBLEMS IN A FAMILY BUSINESS
For the purposes of this study it is hardly necessary, and also hardly possible to search a complete
and comprehensive picture of the state of the Bulgarian family. The lack of a need for a composite
portrait could be argued with research interest in only one part of families – those who are involved
with their own family business. Although these families would have revealed signicant differences,
especially in terms of their social characteristics, the common between them is the expected relatively
high family cohesion necessary for successful realization of the family business. On the other hand,
the ability to seek full and complete account of the family in Bulgaria is strongly limited by the
existence of diverse cultural groups, differentiated by class, ethnic, religion, and even geographically.
So, here we consider more important to identify and analyze in the context of the family business,
only those trends highlighted in recent decades that characterize most families involved in their own
business. Narrowing the focus on families involved in family business, we will place emphasis on the
relationship between the founders of the business (most often parents in a family) and their children
as people who are assigned to certain hopes to engage in the problems of the business.
Among the few studies of contemporary family made over the last decade we will have a look at the
study of Alpha Research conducted in 2006 (Angelova, 2006). Among the main conclusions, reached
by this study pertaining to the family business, the following should be highlighted:
• The relatively late creation of families and children by the highly educated seeking or making
their career, young people;
• Increased criteria to assumed responsibilities to the opportunities for living, educating and
developing their children.
As to the data for the preferred age for having children, the study shows 30 for men and 26 for women.
Simple arithmetic shows that when the heirs reach maturity, the founders of family businesses are
in an active age, with very foreseeable limit to possibilities. In the best case for withdrawal from
the business the most mature heirs are those of the age of 35, which will correspond to their early
married years. The logical question is: will there be sufcient time to prepare a credible successor
in the business, given the time necessary to acquire university education, the time at which a person
makes their life decision from so-called ‘modern hedonism’, which aims to provide ‘more free time
limited by commitments and responsibilities, their maximum satisfaction of consumer attitudes,
etc.’. Not coincidentally, in some of the developed countries they accept that the achievement of
sufcient maturity for running a business is only to 40 years – age, at which the successful so far life
experience is accumulated to reach the emotional liberation needed for making thoughtful, rational
and objectively measured decision in running a business.
The second important characteristic of these Bulgarian families is that a signicant part of the lives
of the founders of the family business occurred in the years of so-called ‘socialism’ – social structure
in which the opportunities for material security and personal prosperity were greatly restricted. These
restrictions, including the ability to create their own business, eventually led to two important effects,
which are evident today. The rst is the limited number of children produced within a family – most
often two, sometimes three, and very rarely exceeding four. (Here we do not mean Roma people,
whose livelihoods almost preclude the family business.) The second important effect is the special
sensitivity to physical security of the heirs, which in the case of reaching signicant capabilities of
parents, most often exceeds reasonable levels of property security of children at the time of their
maturity.
Finally, it should focus on some peculiarities in the education of children in the Bulgarian family.
A survey among parents proves that the parents’ beliefs that the values their children perceive
depend rst and foremost on the family, and to a much lesser extent on the society, especially on the
educational institutions. This belief is paradoxical largely because of the very limited time that parents
have to their employment, but on the other hand is completely understandable given the negligible
opportunities provided by the society for self-growth and development of the individual. The latter
refers not only to the teenage years, but primarily to the rst decade of post-secondary education in
which man builds the most important skills for individual development. And while the existence of
man is linked to parental support it is much more likely to perceive values instilled by the parents,
especially when life’s achievements of parents are high and their experience – positive.
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Expected consequences for the family business from those features of the Bulgarian family can be
summarized in the following features:
• Successors often inadequately trained and not mature enough to ensure continuity in family
businesses;
• Very limited options for selecting a suitable successor to the business among the direct heirs;
• Reduced motivation of heirs because of the premature saturation with material collateral in
traditional and public plans;
• In the case that direct heirs are involved in the family business, they tend to occupy high
privileged positions, regardless of their personal achievements and higher than other employees
in the business for payment;
• The formation of unreasonable self-importance and claims by heirs to the others.
5. RESEARCH THESES – COMBINATION AND SEPARATION OF FAMILY AND BUSINESS
RELATIONS IN THE BULGARIAN FAMILY BUSINESSES
Undoubtedly, the success of a family business depends largely on the enjoyment of the advantages
and overcoming the disadvantages of nepotism in the business set out above. In family businesses in
Bulgaria these advantages and disadvantages reect also some national and historical peculiarities,
shown above too.
In this study we will try to formulate a number of theses whose proof will rely on empirical studies
conducted in the spring of 2011. The directions in which the theses will be formulated are:
Guidelines, which will be exhibited are:
• Selection and Employment of family members;
• Rewarding family members;
• Erection of management positions of family members;
• Transfer of ownership in the family business between two or more generations as well as
landmark relatives from one generation;
• Relations with sisters-in-law, brothers-in-law and lovers.
Thesis 1. In the selection and employment of family members there is no desire to objectify, instead
each member is allowed to participate in business, regardless of abilities and skills possessed.
Justication of such an approach is based on the expected loyalty, higher condence compared to non-
family members, and the expected higher degree of sacrice and obedience of the family members
in crisis situations.
Thesis 2. Remuneration of members of the family engaged in the business will be based on the
capabilities of the family rm, most often at the expense of workers nonmembers of the family, and
no direct connection with the contribution of staff member of the family. The justication of this
approach can be sought in two directions - 1. Family business to be perceived as desirable employer
(compared to others) and 2. To emphasize the importance of family members as potential successors
to the rest of the management staff.
Thesis 3. The rise to management positions of family members of the founder is based on the principle
‘in his image and likeness’, thus giving preference to one heir, whose character and behavior are most
similar to the notion of ‘right’ manager. The justication of this approach lies in the fear of taking
‘evasive maneuvers’ that can ‘sink the ship’.
Thesis 4. The issue of transfer of ownership in the family business in Bulgaria is approached with
extreme caution, as the aim is to avoid any prejudiced vanity of a member of the family from which
serious conicts may arise, and even disruption of family relationships. In general, if the situation
still requires concentration of ownership, transfer to a preferred successor shall be accompanied by
appropriate compensation to other heirs.
Thesis 5. The small number of direct descendants requires the involvement in business of the brothers-
and-sister-in-law who are traditionally not seen as equal sons and daughters. There are cases in which
the founders of the family business, suspend relations with their legitimate wives (husbands) and do
not conceal their links with other partners, which is also not fair to the family members. These re-
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compositions of the family complicate management relations in the family business, but are one more
proof that the business gives way to relations with relatives in the value hierarchy.
The rest of the report will present examples from various research studies with which to illustrate the
negative (problematic) impact of the actual management of family and business relationships, so to
indicate the advantages justifying these practices.
6. EMPIRICAL EVIDENCE IN SUPPORT OR REJECTION OF THE THESES
Given below are examples taken from case studies conducted during the study course in Family
Business with the help of the students of entrepreneurship at the University of National and World
Economy. Studies aimed at identifying management problems arising from the nature of family
businesses as well as taking steps to resolve them.
Below in tabular form will be summarized the case studies, the characteristics of the relations ‘family
– business’ and its interpretation in the light of the proposed theses.
Table 1.
Case Relations ‘family – business’ Relevance to the theses
Case 1. Early and rapid growth of a
heir in the company hierarchy leads
to conicts between him and his
father, company founder, and other
stakeholders – managers, employees
and institutions. The reason for
this is too much trust and bias in
assessing the qualities of his son in his
appointment in the company to a high
position, but without clear borders.
The conviction of the founder of
the business that a family member
(his son) deserves preferential
growth leads to irrational and
somewhat unprincipled concession of
government power in business.
The idea of good relations in the
family is not only compromised
but can also lead to negative
consequences in business
management.
The case is typical evidence
conrming the thesis 1 and somewhat
thesis 2and thesis 4.
Case 2. The designation as successor
in the management of family rm
of the more prepared for this role
brother, and ignoring the second
potential successor, creates deep
family conicts – both between
brothers and between the ignored
brother and his parents.
In this case the founder of the family
business has tried to be rational in
terms of company management, but
the consequences are negative family
relationships. On the other hand,
this is a good example of typical
Bulgarian attitude of the heirs to the
established by the previous generation
– regardless of their own contribution.
The case does not correspond directly
to those exposed, but is sufciently
indicative of the impact that
neglecting family relationships might
have in a family business.
Case 3. Appointed staff to the highest
levels is mainly from family or in
personal relationships with the leading
core of the company. But they are not
adequately prepared for their given
position. Their incompetence leads
to making wrong strategic decisions
that are as a stumbling block to the
development of the company.
Another example in which the
principles of good governance have
been sacriced in the name of welfare
of the family.
The case is yet another proof of
Thesis 1.
Case 4. The selection of unmotivated
successor in the management of
family rms in the conditions of very
limited choice and a signicant age
difference between generations.
Despite the knowledge that the
chosen successor has not the needed
motivation, the founder of the
company is not looking for options
other than a blood heir, proving the
prioritization of family over other
alternatives for continuation of the
business.
Although the case cannot directly
conrm the proposition 3, it is
determined indirectly by showing that
owners of family business practically
do not allow non-members of the
family as successors in management.
Case 5. Displacement from leadership
position of the founder of a family
business, by a relative employed in a
managerial position, but who does not
hold shares in the business.
The initial rationality manifested
in combining the advantages of the
relationship and the principles of
good governance leads to a situation
in which the owner of expert power
displaces power based on ownership.
Thus the balance between family and
business relationships is a challenge
to the leadership function in business
management.
The case is related to Thesis 4 and
Thesis 5 - in terms of how under
conditions of limited selection of
members of the management team
to nd a rational balance between
control and manage a family business.
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Case 6. Appointment of son and
daughter to different functional
positions in the hope that everyone
will also maximize their abilities in
tandem and will accept the company’s
management after the withdrawal
of the holder. Instead, conict
arises between son and daughter on
corporate strategy and a struggle for
leadership begins.
An exceptionally typical example
in which family relationships are
revealed as more important and
signicant for the good governance of
family business, which should ignore
kinship. Also here appear the interests
of potential heirs, whose growth is
rather the result of parental care,
rather than systematic preparation.
The case presents an attempt to
implement the set out in the Thesis
4, but the real consequences of this
situation are negative. Explanation
for the latter could be found in
typical Bulgarian tradition inability to
achieve consensus and teamwork in
the management of an activity (in this
case business).
Case 7. In an already executed
transfer of management from father
to son, after a long absence from the
country, the daughter of the company
founder and sister of the current
manager claims to hold share in the
family business and management
position without having the necessary
experience and education for the
latter.
Like the previous case, here we see
a rationality in business relations,
which, however, faces particular
understanding of participation in the
family business of a member of the
family. Obviously a mistake is made
in respect of interests in the family.
In this case we have a refutation of
the thesis 4, but it underlines the need
for an approach to the succession
described in this thesis.
Case 8. Involving the children in a
diversied business, in which one of
the promising activities is not desired
by the heirs.
In this case the founder of the
company places great emphasis on
business development, while seeking
to raise his sons as future successors
in the management of the company,
seeking a balance between business
interests and the stated interests of the
children.
The ambition of the founder of the
family business to bring business to
his sons, which they perceive as an
adversity largely conrms Thesis 3.
Case 9. Signicant draining of
nancial resources from the company
to meet the various whims of the
family, including the signicant role
on a lover of one of the brothers,
founders of the family rm.
After building a substantial family
business, in this case, we see the
use of the opportunities created by
the business to meet the needs of
acceptable and unacceptable to the
families of the founders, reaching
the level of stripping business. The
situation is complicated by the
admission to the business of the lover
of one of the founders, whose conduct
further deteriorates relations within
the business.
Although the case study conrms
Thesis 2, the interference of the lover
also draws attention to the Thesis 5 -
to what extent access to such business
entities is justied and rational.
Case 10. Provision of employment
and income of family members,
regardless of their abilities and skills,
which in a crisis situation results in
the need of cuts in particular among
family members.
The pursuit of solving family
problems and meeting family needs
here is confronted with the economic
capacity of the family business to
provide the desired standard of family
members.
The case clearly conrms Thesis 1
and Thesis 2.
Case 11. After the tragic loss of the
son, prepared for the successor of the
business of the family, rm founders
are faced with the choice – to
prepare their daughter, who lacks the
necessary education and experience
or seek professional manager to take
over management of the company.
One tragic event destroys the balance
achieved in the relationship ‘family –
business’ moving the attention on the
feasibility of the desired continuity of
management.
Although in a specic way this case
advocates thesis 3 and to some extent
reects on the raised in Thesis 1.
Case 12. Rewarding members of the
family employed in family business
based on their needs rather than on
the basis of their contribution, and the
resulting conict from such practice.
Here we have an exclusive orientation
to promote good family relationships
and obviously a serious disregard of
economic and managerial rationality.
The case is a forceful reafrmation of
Thesis 2.
The cases studied not only rejected those formulated, but also highlighted the conicts arising from
the accentuation on family relationships in the family business. The existence of the advantages of
family business cannot be denied, but in the cases studied, these advantages seem more relative than
absolute when comparisons are made with non-family enterprises.
Without denying the social signicance of family enterprises in the Bulgarian economy (not only) of
the cases studied, the analysis leads to the thought that the family business is more poorly managed
because of giving preference to family considerations at the expense of principles of good governance.
Explanations for the dominance of family considerations over economic management and rational
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management of the relationship ‘family – business’ may be seeking a relatively short period of
existence of these enterprises and the vulnerability of the small business (as is the business of most
family businesses). An attempt for the cases studied to be analyzed by the type of family business
described in the preceding section leads to the following conclusions:
• In the rst type of family businesses there is a greater tendency to neglect the business in the
name of good family relationships;
• In the second and third type is found a trend of subordination of the family relations to the
requirements of good business management.
Explanation could be found in the relative importance of the family business for the welfare of the
family – as it grows, the more important is consideration of the family relationships to the requirements
of the business.
7. CONCLUSION
Managing the relationship between family and business is one of the most critical points in the
management of family business in Bulgaria. Neither practical nor even theoretically sufcient
guidelines for good management of these relationships exist at the moment in Bulgaria. The collision
of two systems – family and business is inevitable, but only negative consequences not always
to be expected. The consequences of this collision could become good lessons for improving the
management of family business – both as tools for prediction of critical situations and as a basis for a
system of principles by which these critical situations can be avoided. This requires further research
to combine knowledge management with knowledge of the Bulgarian family as a system of values,
attitudes, and practices.
Reference
Angelova, R. (2006). The Dilemma – Family or Career, Alpha Research Articles http://alpharesearch.bg/
bg/socialni_izsledvania/socialni_publikacii/dilemata-semeystvo-ili-kariera.586.html (accessed
10.07.2011)
Colli, A. (2003) The history of Family Business 1850-2000. Cambridge: Cambridge University Press, pp. 9-12.
Donnelly, R. (1964), The family business. Harvard Business Review, No 42, pp. 93-105.
Gersick, K.E., Davis, J.A., Hampton, M.M., & Lansberg, I. (1997). Generation to generation: Life cycles of
the family business. Boston: Harvard Business School Press.
Kets de Vries, M.F.R. (1993) `The Dynamics of Family Controlled Firms: The Good News and the Bad News
, Organizational Dynamics 21(3): 59-71.
Leach, P., Bogod, T. (1999). The BDO Stoy Hayward guide to the family business. 3rd ed. London: Kogan Page.
Mandl, I. (2008). Overview of Family Business Relevant Issues. Vienna: KMU Forschung Austria.
Moores, K. & Barrett, M. (2002). Learning Family Business. Paradoxes and pathways. Hampshire: Ashgate,
pp. 4-5.
Sirmon, D.G. & Hitt, M.A. (2003). Managing resources: Linking unique resources, management, and wealth
creation in family rms. Entrepreneurship Theory and Practice, 27(4), pp. 339–358.
Todorov, K. (2011). Business Entrepreneurship, vol. I. Soa: BAMDE. pp. 158-160 (In Bulgarian)
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FAMILY BUSINESS REPRESENTATIONS IN POPULAR CULTURE: THE CASE OF RUSSIA
Ksenia Keplinger
Johannes Kepler University Linz, Altenbergerstr. Linz, Austria,
E-mail: marksenia@hotmail.com
Birgit Feldbauer-Durstmueller
Johannes Kepler University Linz, Altenbergerstr. Linz, Austria,
E-mail: birgit.feldbauer-durstmueller@jku.at
Abstract
Being a signicant source of growth, prosperity and welfare, family businesses are of prime importance for the
economies of countries all over the world. It is widely acknowledged that family rms differ from non-family
businesses in many aspects, such as nancing, organization structure and human resources. The majority of
associations with family rms is formed by the family business scholars and owners and illustrates therefore an
“insider-perspective”. Despite the increased attention to theoretical and empirical research in family businesses
in the last years, the relevance of external images of family rms has been neglected by scholars. Maintaining
the ways in which the wider population perceives family rms is signicant not only for better understanding
the roles of family businesses in society and preserving respectability, but also for attracting the best talents,
achieving a sustainable competitive advantage and ensuring the survival of family rms. One of the ways to
study external images of family businesses is to examine their portrayals in popular culture.
In this paper we analyze the public perceptions of family businesses through times in the cultural and historical
context of Russia, using popular culture as a eld material. The main reasons for choosing Russian family
businesses as objects for the present study are the current low level of knowledge about the development
of family rms in Russia and their remarkable historical development. This paper is the rst step to close
the existing research gap addressing the following research questions:What is the image of modern family
businesses in Russian popular culture?How did the political, economic and social changes inuence the
public’s perceptions of family rms over the years?Are there any misconceptions about family rms promoted
through the mass media?
To answer these research questions, we conduct a qualitative study of Russian ction and movies before the
October Revolution, during the Soviet era and after the fall of the Soviet Union. The theoretical framework of
the study is based on the identity-oriented approach and the sociological understanding of images. Our study
includes a review and content analysis of 9 novels and10movies released from 1882 till 2010.
Keywords: Family business, Russia, Popular culture, Image
1. INTRODUCTION
Being a signicant source of growth, prosperity and welfare, family businesses are of prime importance
for the economies of countries all over the world. It is widely acknowledged that family rms differ
from non-family businesses in many aspects, such as nancing, organization and governance structure,
survivability and human resources (Chrisman et al., 2006; Colli, 2003). The specic characteristics
such as the long-term orientation, risk aversion, sustainability and fair working conditions are
consistently referred to family rms. The majority of perceptionsand associations with family rms
is formed by the family business scholars, members and other experts and illustrates therefore an
“insider-perspective”(Krappe et al., 2011). Despite the increased scholarly attention to theoretical and
empirical research in family businesses in the last years, the relevance of external images of family
rms has been neglected by research.
An understanding of the ways in which the wider population perceives family businesses helpsto
better appreciate the roles of family rms in a broader social context. Maintaining public perceptions
is signicant not only for preserving respectability and attracting the best talents, but also for achieving
a sustainable competitive advantageand ensuring the survival of family businesses (Carnegie and
Napier, 2010). One of the ways to study the external images of family rms from the perspective of
the broad public is to examine their portrayals in popular culture. Fiction and lms can bedescribed as
“the canon of the modern age, the set ofcultural references with which everyone in society is familiar”
(Zakaria, 2003). Fiction can be used as an enriching eld for management research (Phillips, 1995)
because it presents a common image of an occupation at a certain time in a certain place and at the
same time inuences actual practices and career choices of people(Czarniawska and Rhodes, 2006).
Film, as one of the most massive and inuential artifacts of modern popular culture, has also the
power to depict and then change the public attitudes to a particular profession and its role in society
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(Lee, 2001).Serving both as a mirror of widely held public beliefs and as a lens for shaping social
perceptions (Dyer, 1993), representations in ction and movies have an essential inuence on any
social group.
In this paper we analyze the public perceptions of family businesses through times in the cultural
and historical context of Russia, using ction and movies as a eld material. Studying the image of
a profession in popular culture and choosing a cultural perspective are the well-known methods of
management research. However,the external images of family businesses in general and those of
Russian family rms in particular have been scarcely explored by scholars. Considering the role of
family rms in modern society andthe rapidly growing body of literature and empirical studies, the
implementation of this research approach is deemed to be appropriate also for the eld of family
business. This paper is the rst step to close the existing research gap in order to provide a better
understanding of family business images in Russia and reveal misconceptions about family rms
promoted to the audience through the mass media. Besides, we explore how the political, economic
and social changes in Russiainuenced the public perceptions towards family businesses over the
years. Finally, we seek to explain the reasons why the negative portrayals of family rms in Russian
popular culture are the rule rather than the exception and present possible solutions of this problem.
There are two main reasons for choosing Russian family businesses as objects for the present study.
The rst reason is the current low level of knowledge about the development of family rms in Russia.
A signicant amount of empirical studies about family businesses in various nations has emerged in
the last twenty years (Bewayo, 2009; Welsh and Raven, 2006; Andersson et al., 2002; Klein, 2000;
Flören, 1998; Astrachan, 1993). The rst discussion about the re-emergence of family rms in the
former soviet countries has already been started in the late 1990s in the Family Business Review
(Donckels and Lambrecht, 1999; Pistrui et al., 1997; Poutziouris et al. 1997) and is still topic of
current research (Kowalewski et al., 2010; Barkhatova, 2008; Dyer and Mortensen, 2005). However,
family rms in Russia remain littlestudied, thus this topic needs to be brought to the research agenda.
The second reason for selecting Russian family businesses is their remarkable historical development.
On the one hand, modern family rms in Russia lack tradition and experience because establishing
a business was forbidden during the Soviet era. On the other hand, there are a lot of examples of
Russian families (e.g. Demidovy), who carried on successful businesses for many generations
before the October Revolution 1917 and whose names are still well-known all over the country. This
contrast asks for evaluation of how the political, economic and social changes have inuenced the
representations of family businesses in popular culture and consequently the public perceptions of
family rms over the years.
The reminder of the paper is structured as follows. The second part starts with an overview of previous
studies devoted to the image of family rms in popular culture in different countries, followed by the
description of the theoretical framework applied. Next, the data collection, analysis and methodology
used are explained. The paper concludes with the presentation and discussion of the results of the
qualitative study as well as some recommendations and ideas for future research.
2. PREVIOUS RESEARCH
Our study contributes to a body of empirical research that investigates how representations in popular
culture shape and change the public perceptions regarding different professions such as lawyers
(Hilyerd 2009; Greeneld, 2001), PR professionals (Ames, 2010; Miller, 1999)and accountants
(Dimnik and Felton, 2006; Hoffjan, 2003; Beard, 1994).
The main part of previous research was dedicated to the images of (family) businesses in the English
speaking countries, primarily in the US. For instance, Ribstein analyzes portrayals of businesses in
more than 100 Hollywood movies and reports that “the family rm is the epitome of a worker-friendly
company” (Ribstein, 2005). Family business is expected to provide the same continuity between the
individual and the community as the family itself. As an example serves the movie Sometimes a
Great Notion (1971)where a family business comes into conict with the community because of
the attitudes of the founders. Family business as a long-term player that cares about employees is
depicted in Other People’s Money (1991). A family-owned wire and cable manufacturer is targeted
to be taken over by the nancial raider Gareld, who is shown as an inhuman capitalist warring only
about the prots and shareholders’ interests and ignoring the employees’ needs. On the contrary, the
patrician manager of the family business Jorgenson always chooses a long-term oriented and “moral”
perspective, refusing to reincorporate the company to Delaware, pay greenmail or borrow money
(Ribstein, 2005).
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Examining American ction of the rst half of the 20th century, Halsey points out that family business
members are often portrayed as people who care for their customers by building personal relationships
(e.g. “Dangerous Business” by E.Balmer) (Halsey, 1959).Sarachekexplores images of entrepreneurs
in recent American ction and concludes that (family) business members are usually depicted as
“hardworking but ruthless exploiters of customers, employees, society and competitors” (Sarachek,
1995). Graham Masterton’s”Rich” can serve as an example for such portrayals.
The most recent study dealing with the external images of family businesses was conducted by Krappe
et al. Researchers interviewed 111 people across Germany with no explicit knowledge about family
businesses and concluded that family rms have an overall positive image in the wider population
(Krappe et al., 2011). In contrast to the results of Krappe et al., Ceja and Tàpies found out that family
businesses have a less favorable image compared to non-family companies. In this study213 MBA
students from 20 different countries with low or moderate knowledge about family businesses were
interviewed. According to the results, family businesses are believed to have more difculties in
attracting talented managers and issuing equity. Moreover, they are perceived to be more nepotistic,
reluctant to implement new technologies and slower in the internalization process than non-family
businesses (Ceja and Tàpies, 2009).
As the development of family businesses in Russia has attracted little attention from scholars, we did
not succeed in nding any studies explicitly devoted to the external images of Russian family rms.
In order to explore the entrepreneurial potential of Russian societyChepurenko et al. interviewed
1.756 people from 12 different regions of the Russian Federation. Among general ndings there was
a specic side result that 75% of respondents perceive family rms in a positive way. Moreover, the
general public feels sympathy for family business members because the work very hard in order to
make their business run properly (Chepurenko et al., 2003). The PhD thesis of Milehinais devoted to
the general image of business people and their language in Russian popular culture. She concludes that
Russian business people are portrayed mostly in anunfavorable way and their negative characteristics
are especially emphasized (Milehina, 2006). Similar results show also other studies dealing with the
images of business people in Russian ction (Harseyeva, 2009; Sarubina, 2003; Levadovsky and
Levadovskaya, 2002).
3. THEORETICAL BASIS
The identity-oriented approach towards brands serves us as a primary theoretical basis. The identity-
based understanding of a brand takes into account both the brand perception by external stakeholders
(referred to as image) and the self-reection of a brand by internal stakeholders (referred to as identity)
(Burmann et al., 2009). Identity is often described to be the way how internal stakeholders view the
central features of an organization which distinguish it from others (Albert and Whetten, 1985). On
the contrary, the image is not what a company believes to be, but the feelings and understanding of
an organization that are constructed by external stakeholders as a result of conscious or unconscious
observation and experience (Bernstein, 1984). There is a generally held view that the two perspectives
should match in order to create a strong brand (Meffert et al., 2008; Davies and Chun, 2002).
Applying the identity-oriented approach in the context of Russian family businesses, it is interesting
to analyze the degree of compliance between the self-reection of family rms and their perceptions
by the wider population. Obviously, the self-reection of family businesses is based mainly on the
concept of family and contains such well-established characteristics as strong efforts in sustainability,
economic efciency, fair working conditions and social responsibility (ASBR, 2011). As already
mentioned, one way to understand the public perceptions of family rms is to examine their
representations in ction and lms. This paper seeks to explore if there is a gap between the external
and internal perspective in Russia.
4. FAMILY BUSINESS IN RUSSIA
In the last ten years only a few PhD theses and sporadic journal articles (Slutsky, 2000; Barhatova,
1999; Babayeva, 1993) dealing with the development of family businesses in Russia are to be found.
Besides, there are hardly any studies and no ofcial statistics about the number and turnover of family
rms. The vast majority of family rms operates in the service or trade sector and plays an important
role in gastronomy. Experts certify a high development potential for family rms in tourism and the
municipal economy. As many Russian family rms are currently confronted with the problem of
rst succession, practitioners have a constantly increasing interest in research on specic features
of family businesses. This fact is conrmed by the foundation of the Family Business Association
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in Russia (ASBR) in October 2010. Major objectives of this association include the organization
of seminars and workshops about different aspects of family business, representation of interests
of family business members, collaboration with legislative authorities for improving the regulatory
framework, etc (ASBR, 2011).
5. METHODOLOGY
The rst step was to identify movies and novels with plots involving family business in Russia. We
conducted searches of published book and movie reviews as well as Internet databases, including
kino-teatr.ru, feb-web.ru and klassika.ru. Three criteria should be fullled to include a movie or a
novel into our study.
Firstly, movies or works of ction should take place in Russia, so that family business representations
do not involve cross-cultural perspectives. Secondly, all works of ction and movies are appropriate
for general public, broadly accessible through libraries and retail stores. Moreover, they should meet
basic quality expectations. It is obvious that popular movies are likely to attract wider audience
and have more potential to shape the public perceptions of family businesses than unknown lms
(Felton et al., 2008). Thirdly, a family business should play a signicant role in the plot development.
Although the data collection method used does not allow for developing an exhaustive set of all
images of family businesses, the selected sample is suggested to adequately represent the major
trends of family business depictions in Russian popular culture over the years.
Using the research methodology described above, a set of 9 novels and 10 movies was identied
(s. Table 1). A qualitative content analysis of plot summaries was conducted in order to analyze the
data. The movies and works of ction were coded for time period, employee treatment, role in the
unfolding narrative and overall description.
6. ANALYSIS AND RESULTS
The data were analyzed according to three time periods in order to investigate the development of
family business images in Russia over the years. The category “Time period” is measured by release
date for movies and year of rst publishing for novels and ranges from 1882 till 2010. The rst time
period includes titles published before the October Revolution 1917 and contains four novels and two
movies. Titles released between 1917 and 1991 are covered by the second time period. Establishing
a company and working of family members in the same department was de facto forbidden in the
Soviet Union. This fact explains the lack of novels and movies about family business during the
Soviet era. The third time period deals with modern movies and ction published after the fall of the
Soviet Union in 1991 and includes ve movies and two novels (s. Table 1). Although Russian modern
authors and lmmakers are particularly interested in portraying the new business generation, the
majority of them concentrates on the development of big corporations. Consequently, family business
is still rarely in the focus of attention.
The employee classication measures how employees are treated in a family rm and what dominates
the working environment. In only two novels family rms are portrayed as organizations that take care
for their employees and provide social working conditions. The most novels (6/9) emphasize unsafe
and oppressive labor practices dominating the working environment in Russian family rms. In the
majority of movies analyzed (7/10) the question of employee treatment is not explicitly considered.
The extent to which a family business plays a role in the plot of a movie or a novel is covered by
the role classication. The category “Main/ involved” contains movies and novels that are primarily
based on the longtime story of a family business (e.g. Ugryum-reka by V. Shishkov). Titles where
family rms play a supportive role dominate the dataset of the study.
Initially movies and works of ction were also coded for efciency, sustainability, social responsibility,
exibility and global interaction. In order to provide a better understanding and handling of the
results, we decided to abandon these categories and develop the aggregate classication “Overall
description”. It evaluates how favorably or unfavorably a family rm is portrayed in the plot summary.
The content analysis of plot summaries shows that family businesses are mostly portrayed in an
unfavorable way in Russian ction before the October Revolution 1917 and during the Soviet era.
Business activities in general and family business in particular are associated with cutting corners,
exploitation of employees, moral decay, deceptions and even crimes. Depictions of business in this
way have reached the zenith in the Soviet era, when almost all negative characters in ction and
movies were businesspeople trying to cheat the Socialist state.
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Family business members with a positive image are rather the exception in novels at that time. Usually
they present an unreachable ideal of business people (e.g. Sergey Privalov in “Privalovskiyemilliony”
by D. Mamin-Sibiryak). Due to Russian mentality, such characteristics as entrepreneurial spirit,
prudence and rationality were not highly estimated and consequently insufciently pictured in
Russian ction. On the contrary, in memoir literature and biographical studies devoted to family rms
operating from 917 till 1917 (Platonov, 1995) and from 1800 till 2000 (Musskaya, 2003), they are
depicted as organizations that act conservatively, care for employees and take on social responsibility.
As for the modern works of ction and movies released after the fall of the Soviet Union, the majority
of them deals with the legalization process of the underground commerce that Russia inherited from
the former Soviet system. Due to conditions of privatization and unfair reallocation of state-owned
assets in the early 90s, business activities are still considered to be partly criminal and fraudulent.
Nevertheless, a favorable trend of portraying family business as a positive phenomenon can be
observed in the last years. Several movies and novels show that family businesses do not seek for
short-term gains, are willing to invest money in further development and feel responsible for their
employees as well as for society.
Table 1: Images of family business in Russian ction and movies
Classication Codes Fiction Movies
Time period
Before the
October
Revolution 1917
Kitaj-gorod by Boborykin P. (1882);
Privalovskye milliony by Mamin-
Sibiryak D. (1883); Gornoye gnesdo
by Mamin-Sibiryak D. (1884); Foma
Gordeyev by Gorky M. (1899)
Deti kuptsaVolschina (1915); Idi sa
mnoy (1917)
Soviet era (1917
- 1991)
Delo Artamonovyh by Gorky M.
(1925); Ugryum-reka by Shishkov V.
(1928-1933); Bruski by Panferov F.
(1928-1937)
Konets roda Korostomyslovyh
(1920); Vo vlasti solota (1957); Deti
Vanyushina (1973)
After the fall of
the Soviet Union
Tolko goluby letayut besplatno by
Latynina Yu. (2004); Generalny director
by Vetluschskih E. (2010)
Pro businessmena Fomu (1993);
Dryan horoshaya, dryan plohaya
(1998); Na boykom meste (1998);
Next 2 (2002); Undina (2003)
Employee
Treatment
Fair working
conditions, care
for employees
Kitaj-gorod (1882); Generalny director
(2010)
Unfair working
conditions,
worker
oppression
Privalovskye milliony (1883); Gornoye
gnesdo (1884); Foma Gordeyev (1899);
Delo Artamonovyh 1925); Ugryum-reka
(1928-1933); Bruski (1928-1937)
Deti kuptsa Volschina (1915); Vo
vlasti solota (1957); Na boykom meste
(1998)
Not mentioned Tolko goluby letayut besplatno (2004)
Idi sa mnoy (1917); Konets roda
Korostomyslovyh (1920); Deti
Vanyushina (1973); Pro businessmena
Fomu (1993); Dryan horoshaya,
dryan plohaya (1998); Next 2 (2002);
Undina (2003)
Role in the
unfolding
narrative
Main/involved Delo Artamonovyh (1925); Ugryum-
reka; (1928-1933); Generalny director
(2010)
Deti kuptsa Volschina (1915); Vo
vlasti solota (1957); Na boykom meste
(1998)
Limited/ not
much
Kitaj-gorod (1882); Privalovskye
milliony (1883); Foma Gordeyev
(1899); Gornoye gnesdo (1884); Bruski
(1928-1937); Tolko goluby letayut
besplatno (2004);
Idi sa mnoy (1917); Konets roda
Korostomyslovyh (1920); Deti
Vanyushina (1973);Dryan horoshaya,
dryan plohaya (1998); Next 2 (2002);
Undina (2003)
Overall
description
Either negative
or very negative
Delo Artamonovyh (1925); Ugryum-
reka (1928-1933); Gornoye gnesdo
(1884); Foma Gordeyev (1899); Bruski
(1928-1937); Tolko goluby letayut
besplatno (2004)
Deti kuptsa Volschina (1915); Konets
roda Korostomyslovyh (1920); Vo
vlasti solota (1957); Deti Vanyushina
(1973); Na boykom meste (1998)
Either positive or
very positive
Kitaj-gorod (1882); Privalovskye
milliony (1883); Generalny director
(2010)
Idi sa mnoy (1917); Pro businessmena
Fomu (1993); Next 2 (2002)
Indifferent/
Mixed
Dryan horoshaya, dryan plohaya
(1998); Undina (2003)
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7. CONCLUSION
Despite the importance of family businesses for the modern economy and society, researchers
have given little attention to its image in popular culture. While portrayals of accountants and PR
professionals in ction and movies have been analyzed in every detail, there has been little comparable
study devoted to the external images of family rms. The present article sheds light on how family
businesses are depicted in Russian popular culture and how certain characteristics of family rms are
communicated to the general public.
The study contributes to existing knowledge in three ways. Firstly, it shows that the portrayals of
family businesses in Russian popular culture are overwhelmingly and consistently negative. Such
characteristics as “cheating”, “greedy”, “immoral”,”criminal” and “cutting corners” are common
associations with (family) business. Positive depictions of family rms are rare, yet a trend of its
portraying in a more favorable way in the last years is not to be overlooked. Secondly, we present how
family business images have evolved between 1882 and 2010 due to fundamental politic, economic
and social changes in Russia. We conclude that Russian popular culture fails to create a positive
image of (family) business. Even if a family business member is described positively, favorable
characteristics are regarded as a mask to conceal the true character greedy for power and money
that suddenly comes to the fore at the end of a novel or a movie. Consequently, it is possible to say
that Russian popular culture continues to promote a one-sided negative image of (family) business
over 120 years. Thirdly, the results of the study illustrate that there is a signicant gap between
the self-reection of family rms and the public perceptions towards them in Russia. The positive
characteristics of family businesses are hardly reected by the general public, and the external image
of family rms needs to be urgently improved.
Therefore we recommend Russian family businesses to take appropriate measures in order to break
with the long-time tradition of their negative depictions in popular culture. One of the possibilities
would be to educate the general public by making the strengths of family rms better known.
Furthermore, international co-operations with European or American family businesses that have
already succeeded in creating a strong brand could help to improve the image of Russian family rms.
Media trainings for family business members, increased online presence for attracting young people
and state programs for supporting family rms are further examples of possible measures.
Generally, research on the external images of family businesses offers a better understanding of the
public perceptions towards family rms and of the reasons that form the basis for these perceptions.
Besides, it allows for improving ways of managing and representing family businesses to the wider
population (Krappe et al., 2011). Further research could investigate additional datasets to verify the
results of the study. Another area of future research could be to analyze the external images of family
businesses in Russian newspapers and magazines. As the print media react to changes in society
quicker than movies and ction, it would be interesting to compare the development of family rm
images in newspapers to those in ction and movies. The next possibility for future research could be
to explore the differences in portrayals of family businesses across different countries.
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CHALLENGES AND PROBLEMS OF BUSINESS SUCCESSION IN BULGARIAN FAMILY FIRMS
Kiril Todorov
University of National and World Economy, Soa, Bulgaria
E-mail: ktodorov@unwe.acad.bg
Iliya Kereziev
University of National and World Economy, Soa, Bulgaria
E-mail: iker@unwe.acad.bg
Yordanka Ivanova
Bulgarian Association for Management Development and Entrepreneurship, Soa, Bulgaria
E-mail: ivanova@bamde.org
Asen Assenov
Bulgarian Association for Management Development and Entrepreneurship, Soa, Bulgaria
E-mail: assenov@bamde.org
Abstract
Usually family business is accepted as a small scale business, predominantly micro and small rms, typical
for traditional and labour intensive sectors such as agriculture, manufacturing/crafts, construction, tourism
and retail trade. The general characteristics of Bulgarian family rms are their smaller size in comparison
with the average size of European SMEs, simpler structures of ownership and management. Nevertheless, it
could be outlined the signicant contribution of family rms to employment creation and long-term stability
of Bulgarian economy. In relation to the business succession issues, Bulgarian families declare as their priority
passing into the hands of the next generation stronger and more competitive business. However, the youth of
entrepreneurship in Bulgaria, the lack of family business tradition, and insufcient support from both the public
organizations and NGOs hinder the survival and transfer of family businesses. Moreover Bulgarian family
rms as all private businesses in the country are still at a very young age and are managed mainly by the rst
generation entrepreneurs. Therefore, just now the issue of transfer of ownership and management to the next
family generation appears. In this respect the paper presents some management challenges of family business
succession and on this base reveals specic characteristics and discusses succession problems of Bulgarian
family rms. The paper is based on the case studies and results gathered within the frame of university research
project Managing Business Succession in Bulgarian Family Enterprises (funded by the University of National
and World Economy) and Family Business Succession Programme of Bulgarian Association for Management
Development and Entrepreneurship.
Keywords: Family business succession, Management challenges of business succession, Succession
problems of Bulgarian family firms
1. INTRODUCTION
The most important objective of company management is to ensure business survival and successful
long-term development. In contrast to non-family rms, for family rms this objective requires the
realization of business succession, which is the biggest challenge for the family rms’ development.
In this regard, the survival and success of family businesses depends on the succession results.
However many entrepreneurs and their families neglect the preparation and planning of business
transfer, without realizing that this is the ultimate criterion of success for the family entrepreneurship
(Aronoff, McClure and Ward, 2003).
Bulgarian private business sector, which includes also family businesses, is still in its youth, but
it is already affected by succession difculties. There is a necessity to pass on the business to a
second generation, in some cases also to third generation within the family. The rst generation of
entrepreneurs, who started their business in the rst years of democracy, is due to transfer the control
of the company within the next ten years. Despite of that, so far in our country, this signicant
problem with a practical importance is not examined on its managerial aspect. On the one hand, the
main reason for that is the non-existence of this problem for the 50-year period of socialist economy
and respectively the lack of experience and traditions in management of family businesses. On the
other hand, in the early stages of development of private business sector, the public interest was
focused on more pressing issues. Last but not least, politicians, researchers and practitioners neglect
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this problem, considering it as a purely practical issue, which should be solved in virtue of evolution
forces and therefore it doesn’t require any external support.
2. FAMILY BUSINESS SUCCESSION AS A MANAGEMENT CHALLENGE
As a narrow denition, business succession is a transfer of business ownership and management over
the next generation in the family (Todorov, 2011). In regard to this, the main objective of managing
succession is successful business transition in the hands of the next generation within the family by
securing and even developing the economic potential of the business and in the meanwhile keeping
the family commitment. The complex nature of business succession suggests that it shouldn’t be
simply regarded as a one-time activity but as a process that requires good preparation, planning and
on-time starting. Often the realization of this process has a heavy impact on the interests of all family
business stakeholders. This is the reason why the business transition cannot be governed solely by
only one person, even if that person is the company founder himself. Except from family members,
other important participants in the business transfer include potential successors, members of the
wide family, shareholders, members of the management team, key employees and etc. On the one
hand, various views and interests of all involved parties make succession management difcult, but
on the other hand, they can be involved in this process by using their knowledge and abilities and by
sharing with them the responsibility for achieving the desired results.
To be successful, succession planning can be divided on two interconnected processes – the
management succession process and the ownership succession process (Walsh, 2007). Moreover,
business succession literature focuses on various important issues that most family businesses face
in the succession process such as withdrawal of the current leader (who is the business founder in
some cases), choice of a successor, preparation of the next generation to assume responsibility for
the business, professionalisation of the company management and strengthening family commitment,
etc. Therefore, effective management of business succession requires nding adequate answers for
a sequence of difcult and interconnected issues concerning various aspects of transition process.
Despite of the presence of general guidelines for managing succession, there are no universal
answers that can help achieving the desired results. This is why these problematic issues represent a
management challenges and the way they will be solved determines the success of business transfer.
In the cases when the challenges are left without corresponding governance and answers, including
late reaction, this could provoke a rise of signicant problems for business succession and also for
the family and the rm. Implementing good management practices can seem obvious, but family
businesses require taking into account and overcoming additional difculties. For the purpose of the
present paper, succession challenges are discussed in the frames of four main issues that are faced
by all family businesses, not taking into account the specicity of the external environment in which
they operate. They are 1) transferring the leadership role in the family business, 2) securing the family
commitment and harmony, 3) transferring the management and maintaining the competitiveness of
family business and 4) transferring the business ownership and family estate. In this frame, we discuss
how Bulgarian family rms manage these challenges and the most common problems coming from
their management failures are identied and analyzed.
The discussion and analysis of the succession management, including its challenges and problems
were made on the basis of the data and results from the survey of Bulgarian family rms (UNWE,
2010). The survey covered:
• 88 randomly selected family rms where a total number of 66 owners and 77 prospective
heirs were interviewed. In 36 of the cases both the founder of the business and its heir were
interviewed. In this way we were able to make comparison between their views concerning
the planning and management of the succession.
• 21 case studies made on the base of detailed interviews with various stakeholders in investigated
rms. The subjects of these case studies are selected randomly from within the whole group
of studied family companies.
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2.1. Transferring the leadership role in the family business
Transferring the leading role is the most important challenge because when the family rm owner/
current leader doesn’t want or is not ready to transfer the management control to next generation, we
can hardly speak of successful succession. In the case of Bulgarian family rms this challenge often
means transferring the leading role on behalf of the entrepreneur-founder of the company to an heir
apparent, very often his own children.
Family rm owners share the opinion that they have a willingness to transfer the business to family
members (see Figure 1). However for most of them this is not a priority (39%), which can be
interpreted in two ways 1) the moment for this has not yet come or 2) they wouldn’t transfer the
business to next generation at any cost. Only 5% of owners declare they are not willing to transfer
the business. Despite of founders’ willingness for business transition, transferring the leadership role
however is not that easy and unproblematic. The reason lies in the specic personalities of Bulgarian
entrepreneurs. They can be dened as strong leaders, who succeeded in the creation and development
of businesses despite of the severe conditions of economic and political transition period during the
last 20 years. We should truly take into account the fact that in the context of a small volume internal
market, lack of public support, tough bureaucracy and numerous administrative barriers, lack of
business and managerial experience and with minimum start-up capital, only individuals with strong
entrepreneurial and leadership skills could develop a private business. However this type of family
entrepreneurs has their disadvantages regarding the necessities of succession. Often they hardly
accept that somebody else can manage better than them the business that they have built. Accepting
that other people’s views and management decisions are better than their own is even harder for the
founders. It is no surprising that such entrepreneurs aspire to stay on the top of the business as long as
they can. This makes it very difcult for the next generation to take over the business in a smoother
way and to increase the rm potential for successful development.
Figure 1 Owners’ willingness for transferring the business to the next family generation
56%
39%
5%
They want and this is priority for
them
They want but t his is not priorit y for
them
They don't want
This is conrmed by the case studies evident, which show that the owners are not very condent in the
transition outcome of the succession process in their family businesses. Some of them share they have
witnessed the process of succession among their colleagues and point out that they have not seen yet
a successful transition. None of the successors could master the business and the company founders
cannot explain this phenomenon. No doubt in Bulgarian family companies, there is a strong desire
to keep the business within the family, but the owners do not have enough trust in their successors’
abilities. Such attitude towards the succession process for sure will affect negatively the nal outcome.
Possible solutions of the leadership challenge could be found mostly in two main directions.
The rst is effective preparation of successors, including trough training and education of successors
on behalf of the business owner/ current leader. The retirement of the current leader depends on the
presence of a prepared successor. Figure 2 shows the readiness of successors to take over family
rms. According to the opinion of the owners, in half of the family rms, successors are not prepared
enough to assume the business control. The objectiveness of this assessment could not be put under
doubt because the opinion of the owners is also shared by their successors. Of course there are well
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prepared successors too, mostly due to their formal education in the domain of business management
and economics, and in a smaller extent due to practice in real business. We should bear in mind that in
Bulgaria there is a lack of traditions in preparing successors, and also lack of specialized institutions
and programmes in the domain of family business development and management. In this context
there is no surprise that the preparation of successors is identied as a major problem for succession
of Bulgarian family rms (Todorov, 2009).
Figure 2 Preparedness of family business successors (multiple entries possible)
0
10
20
30
40
50
60
Well-prepared Prepared through
practi ce in real
busines s
Prepared through
busines s educat ion
Not enough prepared Ot her
%
Directly linked with this problem is the late beginning of the succession process. According to the
plans and the intentions of the owners, family business transfer is planned to start in about 5 years
– in about half of the interviewed rms. Around 1/4 of the rms plan to start the transfer in a middle-
term (from 1 to 5 years) and less than 10% have already started the succession or they expect to start
it in less than a year (see Figure 3). Regardless of the youth of Bulgarian family business, including
the companies in the study these results are unsatisfactory. This is because more than half of the
interviewed family business owners are over 51 years old and a well-prepared succession process
must lasts about 15 years (Aronoff, McClure and Ward, 2003). The late start of succession process
is a weakness and a precondition for the rise of various problems. A signicant part of families make
efforts for the preparation of successors by involving them in the business activity or by formal
education, but this only witness that the preparation of successors is not regarded as being part of the
succession plan.
Figure 3 The planned start of the business transfer according to the plans or intentions of the owners
1%
14%
13%
31%
22%
8%
11%
In the following year
In following 1-3 years
In the following 3-5 years
In the following 5-10 years
In more than 10 years
The transfer has been s tarted
There is no informati on
The second direction of the solution is ensuring nancial independence of the owners after they leave
the business. Financial security has a great signicance for the decision of owners to undertake the
retirement. Regarding that Bulgaria is less economically developed in comparison with the average
European level, this is even a more delicate and emotional issue. Study results show that more than
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80% of owners have planned their nancial security after they leave business. This indicates their
willingness and intention to make the transfer happen and to leave the company control. However, the
analysis of the planned approach and instruments for securing nancial security is more important.
Around 1/3 of owners count on dividends and bonuses from business ownership, 1/4 count on personal
savings and pensions, and another 1/4 will depend on incomes from the company without involvement
in the company activities and development. In 15% of the cases there is a total lack of such a plan. The
results show that in the majority of rms (almost 70%) the owners will rely on income sources, linked
to the business. Experience and practice prove that it is very difcult for owners that are nancially
dependent on business results to leave the business (Bowman-Upton, 1987). This conrms again the
withdrawal desire but also shows a lack of preparedness needed to a successful business succession.
The analysis of presented data and results show that in the case of Bulgarian family rms the
challenge of leadership transfer turns out to be a source of major problems for business succession.
Most often they are linked with late start of the succession process and unprepared successors. The
presence of signicant problems at this point limits the possibility for nding adequate answers of
next management challenges.
Figure 4 Plans for personal nancial security of owners after their retirement (multiple entries possible)
0
5
10
15
20
25
30
35
40
45
Co-ownership in
the business and
receiving
bonuses/
dividents etc.
Savings and
pension
Receiving income
from the
busines s without
work duties
There is not a
plan for financial
security after
retirement
Other (not
specified)
%
3. SECURING THE FAMILY COMMITMENT AND HARMONY
Family business succession provokes changes that affect the interests of the members of the family
in various ways. Every member of even a not very big and united family has his own perception of
business success on one hand and of personal success and happiness on the other. Often this leads
to contradictions which could cause severe family conicts and in this way to ruin the established
relations in the family. In this line, succession that ensures the competitiveness of the business, but
ruins the family or provokes family conicts could be dened as non efcient. In the same time,
protecting family harmony should not be done at the expense of compromises in business development.
In this regard Bulgarian families demonstrate a high level of agreement on basic issues concerning
management and realization of business succession. This is shown by the results on gure 5. In most
of the cases, both main parties (owners and successors) in succession consider family agreement as
high or moderately high. This conclusion is also proven by the fact that owners and successors share
the same or almost the same views on important topics such as deadline of the start and the end of
succession process, preparedness of successors, guidelines for preparation of successors and etc.
There are small shares of companies, in which there is lack of agreement (16%) or the succession
issue has not yet been discussed (18%). The case study results show that the reasons for disagreement
between owners and successors are mainly about 1) which is the most appropriate time for starting
the transfer and 2) which is the most effective strategy for further business development. These
differences are most evident in the rms, where successors are around or at a mature age (over 35
years old) and they already possess some entrepreneurial experience. This conrms the rule that an
easier start of the succession process makes chances for success higher.
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Figure 5 Family agreements regarding the main issues of business succession
40%
26%
16%
0%
18%
High level of family harmony
Medium-high l evel of family harmony
Insufficient family harmony
Lack of famil y harmony
There is no informati on
High level of unity of the family could serve as a starting point and a base on which to realize a
successful transfer of family business by keeping and developing its potential for further development.
Family’s involvement in the business activity is important in order to ensure family commitment
and overcoming conicts. Results show that except from owners, his/ her spouses and children
successors are strongly involved in the functioning of the family rm – this is valid in about 60%
of family rms. In about 15% of the cases, children in the family, which do not perceive themselves
as potential successors, are involved actively in the activity of the family rm, and in about 25%
of rms other relatives from the extended family take part. It is interesting that children successors
are the second most important and active interested party within the family, but most often close
relatives are involved instead of the children non-successors. In a small part of the rms (less than
15%), strongly involved are also other interested parties such as employees, nephews, sons-in-law
and etc. Involvement of a wider circle of family members helps for limiting problems, arising from
disagreements about business responsibilities and family necessities. Successful balance between
the interests of the family and the requirements of the business does not mean that there are no
problems at all but contradictions are solved more easily by compromises made by family members.
The high involvement of family members in the business aims and activities of the rm assists to the
maintenance of that balance.
Figure 6 Involvement of family members in family business activity and development
0% 20% 40% 60% 80% 100%
Owners
Spouses
Children successors
Children non-
successors
Other relatives
Others
High level
Medium-high level
Low level
Not involved
The solution of family harmony challenge is mostly concerned with improving the communication
within the family business and acquiring skills for conict resolution. Despite of the unity of
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Bulgarian business families, it is not certain that they are able to make shared decisions and to solve
future conicts. About 1/3 of the family businesses do not have instruments like the Family protocol
(regulating the relationships of family members in relation to the enterprise), the Family council (a
special body intended to facilitate the resolutions of conicts and problems that are not foreseen in
the Family protocol) or formal family business meetings. It is widespread conducting regular family
business meetings (in 55% of rms), but they are mostly informal (see Figure 7). These meetings
take place without preparation in an informal ambiance and without rules for discussing and making
decisions. In 22 % of rms, there are regular meetings of the Family council and only 5% of rms
have a Family protocol. Moreover Bulgarian families have no dened internal rules and procedures
to organize family relationships and resolve conicts. In general, usage of suitable instruments for
effective communication and conict resolution is not widespread and in this area there is signicant
potential for improvement.
Figure 7 Use of specialized instruments for managing family company and resolving family conicts (multiple entries
possible)
0%
10%
20%
30%
40%
50%
60%
Family business
meetings
Family counc il Family protocol Do not use any
established
inst ruments
Other (not
specified)
4. TRANSFERRING THE MANAGEMENT AND MAINTAINING THE COMPETITIVENESS OF FAMILY
BUSINESS
At best, the business succession should be viewed as a chance to strengthen and develop the family
rm, although the complexity of this process could affect negatively and even destroy the vitality of
the business. The presence of a mission and a strategy for developing family business, also a well
developed management team is a prerequisite for realizing changes, linked to succession and in a
long term this is the base for sustainable development, regardless of which generation heads the
rm. The results in Figure 8 denitely show that in Bulgarian family rms ownership and control
are concentrated in the hands of family members (although 18% of respondents didn’t answer this
question). In 64% of the interviewed rms family owns 100% of the business and family members
have full management control. In the other two most widespread cases 1) the family owns entirely
the company but also external managers are part of the management team (7%) and 2) the family
owns more than 50% of the rm and the management team is made of family members and external
managers (8 %).
Concentration of ownership suggests that family rms applied a clear development strategy, strict
hierarchy and simple organizational structure, which would favor the achievement of an efcient
management. Moreover in such rms usually there are no problems and disagreements, which are
common for family businesses affected by the inuence of a wider circle of interested parties. This
simple conguration of ownership and management in family rms has a positive impact on present
management and development of the rm, but during a transition process it could become a reason for
a difcult problem – who will be the next family and business leader. Very often there are no family
members who have the potential effectively to replace the business founder, taking the full control
over the rm.
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On the other hand, the necessity of management control transfer is an opportunity for change of the
management model of business in the process of succession. In Bulgarian family rms the most
important step which could be undertaken in this line is a professionalisation of management during
the succession process. Moreover professionalisation of management is the key for ensuring business
competitiveness in the long term.
Figure 8 Family ownership and control in Bulgarian family rms
64%
2%
0%
7%
8%
0%
0%
0%
1%
18%
100% family ownership; 100% control
Over 50% family ownership; 100%
control
Under 50% family ownership; 100%
control
100% family ownership; mixed
management team
Over 50% family ownership; mixed
management team
Under 50% family ownership; m ixed
management team
100% family ownership; proffesionalised
management
Over 50% family ownership;
proffesionalis ed management
Under 50% family ownership;
proffesionalis ed management
There is no informati on
This however is not an easy task for small sized rms, which are run by small families. In this
context, it is logical that succession plans of the studied rms are concentrated in two main groups.
39% of rms plan a transfer of ownership and also of a management to successors, and 41% plan a
partial transfer of ownership and management to successors. In some rare cases, a more complicated
situation is being expected – ownership will be transferred to successors but management will be
transferred to professional managers (8 % of rms, see Figure 9). In some isolated cases, business
withdrawal or company closure is expected.
Figure 9 The characteristics of owners’ plans and intensions for business transfer of family rms
39%
41%
8%
10%
0%
2%
Full t ransfer of both the ownership and
control to the succes sors
Partial transfer of both the ownership
and control to the succes sors
Transfer of the ownership to t he
success ors and professionalisation of
the management
Leaving the bus iness including selling
the business
Closing the busines s
Other (not s pecified)
Data shows that there is a high share of companies who plan a partial business transfer and this could
be interpreted as a intention for management professionalisation or at least taking into account the
need of professionalisation. This also means that in Bulgarian family rms two complex and linked
processes should be coordinated – business succession and management professionalisation, which
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would be a challenging task for family rms’ management. No doubt this requires a good preparation
and well-grounded succession plan. But although that two thirds of interviewed family rms have
a succession plan, only in 10 % of them the plan is in written form. In most of the cases this plan
consists of owners’ general view and intention on realizing the process, without a clear understanding
about its main parameters and expected results. Moreover, this view is not properly shared with the
rest of the interested parties. In 69 % of the rms, family members are informed about the details
of the succession plan and only in 11 % of rms – all interested parties are informed. Conversely in
12% of the rms none of the stakeholders, apart from owners, has been informed about succession
plans or intentions. This threatens the success of the business transition because involving main
interested parties (family, successors, managers, key employees and personnel) in the process is a key
for achieving the desired results.
The analysis shows that the management succession will be concentrated in the hands of the business
owners and partly in the hands of their successors. This approach suggests that the business transfer
could be done with a high speed and efciency, but also could endanger the motivation and interests
of the successors, key associates and managers within the rm and also could threaten the long term
business development.
5. TRANSFERRING THE BUSINESS OWNERSHIP AND FAMILY ESTATE
There are two main ownership transfer issues to be considered 1) how to distribute the ownership
among family members and 2) how to realize the transfer with minimum taxes and transactions costs.
At present, the second problem doesn’t exist for Bulgarian family rms because succession regulation
and taxes are favorable and don’t impede this process (spouses, children, grandchildren and great
grandchildren are liberated from succession taxes).
It is not that easy to solve the rst issue, because a fair division of ownership (everybody should take
what he deserves) contradicts with the principle of equality of all family members. On the other hand
an equal division of ownership is rarely fair.
For an adequate management of ownership transfer it is necessary rst of all to make decisions of the
already mentioned three succession management challenges. For example the ownership transfer is
strongly depended on transfer of management control. But because in most of the studied companies
there is a lack of succession plan and full clarity about its main parameters, the problem with ownership
transfer remains also without clarity and an adequate solution. Despite of the presence of evident
problems and the lack of knowledge how to cope with them, 83% of the interviewed rms do not use
any consulting services concerning the problems of business succession.
The case study results show that almost all parents want to divide their family business ownership
equally among their children successors regardless of the degree of their involvement in the business
development. On the other hand, owners point out rational reasons when choosing the successors
that will take over the control of the rm – motivation, involvement, preparedness and etc. The
mechanisms for realizing this decision remain unknown and also it is not clear how potential family
conicts coming from this decision will be solved. Again there is a contradiction between the desire
of the owners to be fair and to provide a good life of their direct successors and their willingness to
secure a good future for their business. In this regard, there is an inclination to neglecting the needs
of the business in order to suit the need and interests of the family. As an exception there are owners
intending transfer of the control over the business to more prepared and interested relatives and
associates instead of closest relatives. In these rare cases however the owners expect a rise of severe
family conicts and they have no clear plan or even view how to implement such an unconventional
decision. This suggest that the main reason for ownership transfer problems is the lack of an integral
succession plan, which could provide a basis for balancing all aspects and decisions concerning
business succession management.
Last but not least the family business is part of a family’s estate but family business literature examined
these closely connected issues separately. As an example, there are cases from the practice, when
the business is left in the hands of most interested and prepared family members, and family estate
distribution is used as an instrument for achieving equality among all successors. In this way the rise
of future problems could be avoided. Unfortunately, in succession management of Bulgarian family
rms these two aspects of ownership transfer are mixed and this is a barrier for nding more exible
solutions of ownership challenge.
In general, Bulgarian families intend to use simple ways for business succession, which protects them
from signicant problems when transferring the ownership. However this limits them in nding the
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best possible solutions and forms of business transfer. Finding the right decisions can be made easier
by following two main principles. First the ownership transfer decisions should be made in a way
that would provide competitiveness for the business and then fairness and equality within the family
should be guaranteed by dividing the family estate.
6. CONCLUSION
In Bulgarian family rms ownership and management control are concentrated in the family
members and respectively succession management is mainly in the hand of the business owners. In
addition, business owners partly use the assistance of heirs and often ignore the expectations of the
key employees and other stakeholders. Such a style of succession management allows high speed
of succession process implementation and maintaining family harmony. But it also could endanger
successful motivation and training of successors, managers and key employees and the long-term
survival of the business. In part, these specics could be explained by the small size of family rms,
but it should not be underestimated the impact of national business culture on the management of
Bulgarian family rms. In summary, this impact is presented by the lack of entrepreneurial tradition,
underdeveloped culture of cooperation and partnership, high power-distance and mistrust between
superiors and subordinates, owners’ voluntarism when making important business and management
decisions, etc.
The presented empirical data and the analysis that were done show that despite of the desire of
families to keep the business and the presence of prerequisites for realization of an efcient transfer,
there is a lack of a suitable management of succession challenges. As a result we witness several
major problems in regards to business succession implementation. The most important of them is the
unpreparedness of successors to take over family business and to replace the owners. Other signicant
problems are the necessity of professionalisation of management and the distribution of ownership,
the loyalty and motivation of the staff, the introduction of modern management practices such as use
of external consulting assistance, establishment of family councils and instruments for family conict
resolving.
On the other hand, Bulgarian family enterprises can benet from various advantages in the process
of business succession such as the family commitment, the high degree of agreement between the
owners and successors regarding the major issues of succession implementation, the strong desire
of owners and successors to keep the business in the family and to achieve business excellence and
success. Also, the lack of tradition could be viewed as an opportunity for Bulgarian family rms to
transfer and adapt best management practices in accordance with their specic characteristics and
needs.
With regard to the identied problems and opportunities, we can make the following simple
recommendations, aimed at improvement of management of succession challenges in Bulgarian
context:
• starting the succession process as early as possible;
• counting on planned succession instead on evolutionary approach;
• focusing on preparation of successors and to combine various opportunities for this inside and
outside of the family;
• improving family rms management with the external help and consulting although that at
present such services are difcult to afford;
• getting over the idea that everyone has to have an equal share in the ownership.
Realization of an effective succession requires nding suitable answers to some well known challenges
that all family rms face. The lack of management solutions, which could be valid for all rms
and conditions leads to mistakes in succession management and to the rise of signicant problems.
Identifying the most common problems of business succession in the family rms and nding the
reasons for their rise give us the base for improvement of succession management and achieving
better succession results in accordance with the specic national or local circumstances.
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Reference
Aronoff, C., S. McClure and J. Ward. (2003). Family Business Succession: The Final Test of Greatnes. Second
Edition. Marietta. Georgia. USA
Todorov, K. (2011). Business Entrepreneurship, vol. I. Soa: BAMDE, (in Bulgarian)
Walsh, G. (2007). Family Business Succession: Managing the All-Important Family Component, KPMG LLP
University of National and World Economy (UNWE). (2010). Managing Business Succession in Bulgarian
Family Enterprises. Second year report, University research project, Soa
Todorov, K. (2009). ‘An Original Approach in Preparing Successors in Family Business: The Case of Bulgaria’,
Presentation at 9th IFERA World Family Business Research Conference Global Perspectives on
Family Business Developments: Theory – Practice – Policy, Limassol, Cyprus, 24 - 27 June
Bowman-Upton, N. (1987). Family Business Succession. Waco, TX: Institute for Family Business. Baylor
University. USA
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HOW TO EVALUATE THE IMPACT OF ACADEMIC SPIN-OFFS ON REGIONAL
DEVELOPMENT
Donato Iacobucci
Faculty of Engineering of the Università Politecnica delle Marche, Italy
Email: iacobucci@univpm.it
Alessandra Micozzi
Faculty of Engineering of the Università Politecnica delle Marche, Italy
Email: a.micozzi@univpm.it
Abstract
The triple helix concept emphasizes the role of university and its relations with rms and institutions
at regional level. However, the impact of technology transfer activities depends on how universities
organize them and on the characteristics of the regional context. The paper analyzes academic spin-
offs as a way of commercializing research results and discusses the beneciaries of spin-offs and their
impact at regional level. Spin-off creation is the most complex way of commercializing academic
research, compared to patenting and R&D collaboration, but with the highest potential impact on the
regional context.
The paper discusses how to measure the impact of spin-offs at regional level and analyzes empirical
data about Italy. The Italian experience shows that the quantitative impact of spin-offs on local
economies is rather low; however, there are qualitative direct and indirect effects that must be taken
into consideration in the short and in the longer term.
1. INTRODUCTION
Over the last decade there has been an increasing interest toward academic entrepreneurship, i.e.
the direct involvement of academic scientists into the development and commercialization of their
research. The commercialization of scientic and technological knowledge produced within publicly
funded research institutions such as universities, laboratories, research centers is increasingly
considered by policymakers as fuel for developing and sustaining regional economic growth. This
paper focuses on one of the most promising ways to transfer research results to the market place: the
creation of academic spin-offs. Some scholars argue that the involvement of academic scientists in
commercial activities solves some imperfections in the transmission of knowledge, and motivates
researchers to undertake projects with greater economic and social relevance (Etzkowitz et al.).
After ten years experience of spin-off promotion by universities and local institutions, there is a
growing concern about the evaluation of the impact of spin-offs on universities’ technology transfer
and local economies.
Up to now the empirical analyses of the phenomenon has focussed on analyzing the characteristics of
spin-offs and their growth (Iacobucci et al.), the difference between those universities that have been
most active in the creation of spin-offs and those that have been least active (Lockett, Wright, and
Franklin), the factors that foster the creation (Clarysse et al.; Iacobucci et al.), the benecial impact
on the growth of other local high-tech start-ups when these are able to detect, absorb, and use this
knowledge (Colombo and Piva).
Nevertheless, the empirical evidence indicates that most academic spin-offs are not gazelles. Most
university spin-offs start small and remain small, reecting founder aspirations, capabilities, and
resource endowments. Leitch and Harrison (2010), based on detailed analysis of university spin-
offs in Northern Ireland, concluded that academic spin-offs are technology lifestyle businesses not
dynamic high-growth potential start-ups, and it is suggested that the prominence given to spin-offs
in the analysis of technology transfer and in discussions of the economic impacts of universities
is misplaced. In this regard, there is a growing recognition that the overall signicance of the now
widely accepted technology transfer model is based on the atypical experience in technology hotspots,
such as Silicon Valley and the Route 128 area (Nicolaou and Birley). Much of the US context that
European policymakers have sought to emulate involves atypical high tech clusters that are generally
absent from Europe. The spin-off process in such contexts is likely to be very different from that in
more developed high tech entrepreneurial environments such as Boston or Silicon Valley where the
capability to select the best projects and allocate resources to them already exists. This experience has
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often been exaggerated.
There is a need for assessing the effective role played by these rms in an advanced economy.
Knowledge-based economies are innovation driven: there is widespread agreement that knowledge,
technological innovation, and industrial competitiveness are linked. In the context of concerns in
countries such as Italy that economic performance is held back by a lack of innovation, universities
should be crucial stakeholders in the innovation process to drive economic development. Innovation
is dened by Lawton Smith (Smith and Ho) as an industry-based concept and has become increasingly
complex as rms increasingly seek external inputs into in-house innovation to develop new
technologies and to promote market differentiation and expansion. The universities are a resource
for high-tech rms, especially in the early stages of product development, so we have to consider the
local context where the universities are located.
The performance of spin-off change signicantly is we consider different local context and these
disparities depends on many factors:
• the importance that university gives to the third mission, encouraging university
entrepreneurship;
• reputation and research eminence of individual universities (Di Gregorio and Shane);
• the culture of the university, its attitude toward spin-offs and the competence of the technology
transfer ofces (TTOs) (Lockett, Wright, and Franklin). TTOs have a key role to play in
making their ventures ‘investor ready’. ‘Readiness’ includes the potential competence of spin-
off companies to overcome the four different critical junctures needed for survival: opportunity
recognition, entrepreneurial commitment, credibility and sustainability (Vohora, Wright, and
Lockett);
• the sector of activities reects the research conducted in University: the greatest concentration
is in the life sciences followed closely by information technologies depends of this.
In this sense, the impact of spin-offs tends to be local as most spin-offs stay within the same geographical
area as the institution from which they originated (Shane). To the best of our knowledge, little attention
has been paid to evaluate the role of spin-offs on technology tranfer activity by universities and to
their impact on local systems.
The aims of the paper is to cover this knowledge gap:
• developing an analytical framework to evaluate the impact of academic spin-offs on university
technology trasfer and on regional development;
• appling this framework to the Italian context.
The empirical analysis is based on a sample of 26 spin-offs created between 2000 and 2010 from
Università Politecnica delle Marche, for which balance sheet data and information about governance
were examined. The analysis of the ownership and managemnt team, and its change over time, was
made through an examination of information provided by Chambers of Commerce.
The paper is organized as follows. Section 2 provides a discussion of the role of spin-offs on the
technology transfer activities of universities and propose a framework to analyze their impact on
local innovation system by developing a set of indicators. Section 3 provides information on the
overall phenomenon of academic spin-offs in Italy and the empirical results found applying this set
of indicators to spin-offs set-up by in the Università Politecnica delle Marche. Section 4 discusses the
main ndings of the analysis.
2. LITERATURE BACKGROUND
There are a wide range of arguments concerning universities’ economic benets for knowledge
societies. The literature considers universities as key actors in an innovation system where universities
work together with industry and government to evolve new competitive industrial forms (Etzkowitz
and Leydesdorff).
In the triple helix model presented by Etzkowitz (2008), interaction among universities, industry and
government is identied as being the key to innovation and resultant economic growth.
The relationship between university-industry depends on such factors as sector and its stage of
evolution, rms’ absorptive capacities, institutional autonomy, and the eminence of the university and
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its response to political power exerted at international, national, and subnational levels. The potential
impact of universities through skills made available to the local labour market, and the consequent
raising of the level of innovation in a locality’s rms, is contingent on a similar range of factors
(Smith and Ho). By analyzing Oxford’s spin-offs they show that:
• innovation process is more efcient if rms use external sources of knowledge to improve
their own technological performance;
• universities are one of these external sources;
• the academic literature suggests that the innovation process is more effective if it is localized
hence, proximity of rms to universities is critical to the transfer of knowledge between them;
• governments throughout the world have adopted the normative position that universities, their
staff, and students should be more entrepreneurial and should contribute directly to economic
development through business activities such as the formation of spin-off companies, and the
patenting and licensing of technology.
The growing importance of the university third mission (technology transfer) emphasises the role
played by universities at local level. In this sense, there is also an increasing regional literature,
looking at the multi-faceted benets which universities bring to their territories (Boucher, Conway,
and Van Der Meer).
This is true especially in the case of university-rm relations, giving the importance of face-to-face
interactions (Hewitt-Dundas). This is even more true in the case of spin-offs, that are normally located
very close to the parent institution. This is due to serveral reasons: a) the incubator role played by
universities in the start-up phase (use of university structures); b) the involvement of academicians;
c) the continuous collaboration between spin-offs and university departments.
Technology commercialization can take place through various forms or mechanisms. The common
forms of university–industry technology transfer concern:
• formal mechanisms (patenting, university licensing, strategic alliance through formal and
informal research partnerships or joint ventures, and the creation of university spin-outs or
spin-offs);
• informal mechanisms (knowledge transfer, consulting and joint publications with industry
scientists).
Compared to other ways of transferring research results - licensing of intellectual property (patents)
and joint research and development projects involving universities and enterprises - spin-off is
characterized by the following: a) the start-up of a new company, b) the transfer to that company
of specic technological knowledge developed in universities, c) the involvement of staff from the
research institute in the ownership and management of the new initiative (O’Shea, Chugh, and Allen).
The effective capacity of the spin-off phenomenon to contribute to these objectives, and to have a
signicant impact on regioanl systems depends on two aspects: a) the capacity for rapid growth of
at least some of these initiatives, b) the generation of positive externalities in the system, also by
stimulating innovation in sectors which are already presente in the area. On the other hand, there
are growing doubts surrounding the real impact of university spinoffs, the 1000 new businesses in
Italy set up to commercialize university research. At present there are no gures to prove that their
costs – including public investment – were less than the revenues from products sales and intellectual
property valorization (Harrison and Leitch).
A previous paper on the phenomenon of academic spin-offs in Italy (Iacobucci et al.) shows that these
rms are small and remain small with few prospective of growth. This is true at national level. We
chose to investigate the phenomenon of university spin-offs by Università Politecnica delle Marche
to change the focus at local level where the impact is relevant. Large empirical literature nding
supports this line of research giving growing importance to consider the knowledge spillovers from
university research to industrial innovation localized (Audretsch and Feldman) .
Spin-off creation is the most complex way of commercializing academic research in terms of process,
people involved, risks, etc. It is expensive and resource consuming (as patenting) for universities
but with little or no prospective nancial returns but has (potentially) the highest impact on the local
context, in terms of:
• Knowledge transfer: the ability to transfer new knowledge into commercially viable products
and services;
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• Financial benets;
• Knowledge spillovers that their activity can generate at local level.
In terms of nancial benets it is relevant to evaluate who get them (university, academicians, rms).
In both cases (technology transfer and nancial benets) it is also relevant to evaluate the geographical
span in which the benets are obtained (local, regional or national) (Figure 1).
Figure 1- Geographical impact of technology transfer activities
Local Regional National /
Global
Patenting and
Licensing ++
Contract research
and consulting ++ +++ +
Spin-offs +++ +
Figure 2 shows the potential benets of spin-offs activity and compare them with the other forms of technology
transfer.
Figure 2- Pecuniary beneciares of technology trasfer activity
Contract research
and consulting Patenting and licensing Spin-os
University share in external contracts Fees
dividends and capital gains
(when the university has a
share in the spin-off)
Faculty direct remuneration Fees Remunerations;
dividends and capital gains
Former students and
researchers
Salaries;
dividends and capital gains
Firms dividends and capital gains
In terms of nancial benets, the most important way of commercializing univeristy research, is through
contract research. Most of these benets are appropriated direcly by the academicians involved in the research
and consulting activity. However, a signicant share is retained by the univeristy to cover general expenses and
to contribute to the research infrastructure.
In the case of patents issued as a result of publicly fund research, the nancial benets goes to the university
and to the inventors, depending on who is the owner of the patent1. In recent years there has been an
increase in IP mangement by Italian universities (Balderi, Patrono, and Piccaluga). However, several
studies demonstrate that even in universities that manage a large portfolio of patens the revenues form
fees hardly cover the expenses.
From the university point of view, spin-offs are not likely to be a major source of income, as compared
with licensing or other technology transfer activities, and neither is signicant relative to other sources
of income. There is the need to evaluate the quantitative and qualitative impact of this phenomenon
and we propose a set of indicators to do it (Figure 3).
Figure 3- Set of indicators to measure the impact of academic spin-offs
Impact Indicators
High-tech employer Sector of activity
Number of employees
Source of technological entrepreneurship Sector of activity
Promoters, owners, managers
Links with parent institutions Grants and contracts with parent university
Global networks for nance, technology and markets Ownership structure, international project in R&D,
geographical market
1 In Italy the so-called professor privilege allows academicians to choose whether to exploit directly the invention or
leave the ownership (and costs) of the patent to the university and retain a share of royalties. In the case of spin-off
there is a complex structure of nancial beneciaries: a) the owners; b) promoters and helpers; c) management.
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Source of technological spill-over Collaboration at local level
Labour mobility
Stimulate business support services Incubators, start-up competitions, entrepreneurship
courses
Sectors of activities, number of employes and number of promoters could mesures the capability of
spin-offs to create hi-tech employment and entrepreneurship.
The number of grants and of contracts with parent university mesures the links between spin-off and
PRI.
The capability of spin-off to create global networks for nance, technology and market could be
evaluate through the number of international projects in R&D, geographical market and ownership
structure.
Lobour mobility is an indicator of technological spillover. Inside the governance of spin-offs there is
a lot of turnover in promoters, managers, researchers, etc.
The number of incubations, start up competition and entrepreneurial education are linked with the
development of spin-offs in terms of number and growth.
All potential benets found in literature are analyzed in the following and put into system of indicators
to evaluate the quantitative and qualitative impact on a specic local context, starting with an analysis
of academic spin-off in Italy to put the case study of Università Politecnica delle Marche in the
framework of national phenomenon.
3. EMPIRICAL RESULTS
At present, there is no precise information on the population of Italian spin-offs due to the different
denitions, the difculties in collecting information and the recent emergence of this phenomenon.
The number of spin-offs calculated by various sources differs depending on the parameters used to
dene them: normative references, authorized or not authorized by the PRI, PRI equity participation,
etc. Considering the birthrate of spin-offs in the time period indicated, it can be noted that since 2003
there has been a real spread of this phenomenon in the Italian PRI. The birthrate reached a rst peak
in 2004, suggesting a boom effect generated by the introduction of this model in the Italian system;
this is seen especially in the PRI which are more sensitive to this form of research exploitation, in
line with American and British models. In subsequent years, the slowdown of the phenomenon can
be justied by a more rigorous regulation of spin-off authorisation adopted by the competent bodies
through the introduction of stricter selection criteria (Figure 4).
Figure 4- Spin-offs set up in the period 2000-2008
Source: Balderi et al. (2011)
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There is a strong concentration of spin-offs at regional level, with most initiatives being in the
Center and Northern parts of the country . As observed in other countries, spin-offs are not uniformly
distributed between the different PRI: the 5 most important agencies have developed about one third
of the initiatives; in addition, 80% of the spin-offs can be traced back to the rst 18 PRI (NetVal,
2009) (Figure 5).
Figure 5- Spin-offs set up in the period 2000-2008 by Region
Source: Balderi et al. (2011)
The activity of the spin-offs by sector shows a stronger concentration in services than in manufacturing:
44% of the spin-offs operate in the eld “Other business services”, followed by “Computer and
related activities” which account for 22% and the “Research and Development” accounting for 12%
of the total (Table 1).
Table 1– Sector of activity of spin-offs
Sector %
R&D and services 44,1
ICT 22,2
Biomedical 9,8
Chemicals and pharmaceuticals 7,0
Electronics and Telecommunications 4,8
Machinery 1,3
Transportation 3,2
Other sectors 7,6
Total 100
Source: Balderi et al. (2011)
In Marche region there are 4 universities Table 2 the most important one is Università Politecnica
delle Marche.
Table 2 – Universities in Marche Region
Università Politecnica
delle Marche Università degli Studi
di Urbino Università degli studi
di Macerata Università di Cam-
erino
Students 16400 12500 10500 6400
Researchers 523 420 316 280
Spin-offs 26 6 2 0
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In the last decade, 26 spin-offs were set-up by professors and researchers of Università Politecnica delle
Marche, 4 of these are dissolved or in liquidation (Figure 6).
Figure 6- Univpm spin-offs by founding year
The prevalent sectors of activities are, as expected, ICT, energy and green economies and innovation
services and this reects the sectors of activities of Università Politecnica delle Marche (Figure 7) .
Figure 7- Univpm spin-off companies by sector
The concentration in high-tech sectors is particular important for region in the view of the need for
Marche business to change the specialization from low tech to knowledge based sector. Over the last
decades we observe in the Marche region a decrease of employment in manufacturing in low tech
sectors and a progressive shift from this one to other sectors, but the process is slow.
The rst aspect analyzed is related to the volume of sales recorded by the sample companies for each
years after the set-up. Given the nature of these enterprises, their success on the market is critically
important for assessing their capacity to exploit research results. After three years of activity, i.e. after
the ‘incubation’ period, the best performers of our sample show a signicant rate of growth in sales.
In 2001 just only a spin-off generates 65000 euros. In 2010 the 23 spin-offs of Università Politecnica
delle Marche have a total revenue of more than 5 million euros (Figure 9).
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Figure 9 – Revenues of spin-offs by Università Politecnica delle Marche
Spin-o Year of
set-up 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 Nautes S.r.l. 2001 65,4 260,7 389 513,4 578,3 731,5 971,3 1.146,8 1.116,6 1.234,1
2 Strategie S.r.l. 2005 32,4 171,4 457,4 434,1 563,3 567,8
3P.C.Q. S.r.l. 2007 26,5 219 386,4 438,4
4Duepuntozero S.r.l. 2008 70 378,3 437,5
5 A.M.A. S.r.l. 2008 33 46,3 326,5
6 L.I.V.E. S.r.l. 2007 121,2 313,6 280,6 324,1
7 ArieLAB S.r.l. 2004 12 28,5 39,2 172,6 152,5 274,8
8SIBE S.r.l. 2007 46,2 90,9 201,5 260,3
9 BINT S.r.l. 2006 294,1 426,1 229,8 291 236,6
10 SI2G S.r.l. 2008 23,5 49,3 209,8
11 EcoTechSystems S.r.l. 2003 61,7 84,8 115,1 124,4 363,7 914,2 553,6 208,3
12 IDEA Soc Coop. 2007 18,4 7,2 17,7 165,1
13 Smart Space Solutions
S.r.l. 2008 10 93,1 127,7
14 Artemis S.r.l. 2003 68,5 19 27,7 27,1 81,1 39,9 85 120,6
15 NOW S.r.l. 2009 31,5 50
16 Tecnosuoli S.r.l. 2008 9,5 22,8 21,7
17 H.E.O.S. S.r.l. 2008 * 4,2 17,8
18 Oce. AN. Soc. Coop. 2003 1,8 23,1 30,2 133 56,8 32,5 14,8 16,6
19 CEDAR Solutions S.r.l. 2007 0 5,2 120,7 14,2
20 ASSET S.r.l. 2010 0
21 OPENMOB S.r.l. 2010 0
22 Seismotechnologies
S.r.l. 2005 8 632 51,6 100,8 n.a.
23 Ingegna S.r.l. 2006 57,6 F
24 VI.RA.BO. S.r.l. 2003 2 0,8 S
25 Alpiquadro S.r.l. 2008 0 F
26 Thermal TI De S.r.l. 2006 0 0 F
Total revenues 65,4 260,7 523,0 641,1 803,7 1.516,0 2.697,5 3.803,4 4.510,0 5.051,9
F = failure; S=sold out
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The best performers of sample show a continuous process of growth with the exception of
EcoTechSystem and BINT that operate in the service sectors and are affected by the economic crisis
of the last years (Figure 10).
Figure 10– Best performers of spin-offs by Università Politecnica delle Marche
Apart from the growth of sales, another important aspect of spin-off growth is the ability to create
jobs. Since the data concerning staff are not always given in the balance sheet notes, the amount of
personnel costs was used as a proxy for wage and salary employment. The data shows how the spin-
offs postponed some choices related to the organization of the company (in terms of human resources),
sometimes even in the presence of a revenue which would be sufcient to justify them: around 30%
of our sample has no personnel costs. We try to make an estimation of how many people are employed
in spin-offs. We sum the total expenditure for personnel costs and divide for 30 thousands of euros,
that is more or less the average salary for a full time employee.
The obtained value is underestimated because some people in spin-offs have contract of collaboration
and the item “personnel costs” in balance sheet doesn’t include it.
These spin-offs have not implemented meaningful growth processes and maintain a generally cautious
approach in structuring the organization.
Considering the ownership structure, almost all the research spin-offs have the legal status of limited
liability companies, with a few exceptions of corporations and cooperative companies. The use of the
legal status of a limited liability company is associated with a relatively limited initial endowment of
capital, generally close to the minimum required for limited companies. Three years after set-up, the
average stock capital continues to be relatively low.
The ownership structure of the spin-off is, in most cases, made up mainly by individual partners.
These are supported by PRI shares, companies, nance companies and other institutions (Table 3).
Table 3– Spin-offs by ownership share of universities, companies and nancial institutions at set-up (percentage of
total)
Share of legal entity owners 0 < 10 10-19 20-49 > 50 To tal
PRI 36 50 14 0 0 100
Companies 56 4 4 36 12 100
Financial Companies or Other
Institutions 100 0 0 0 0 100
Source: UPM Spin-off database
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The data show a clear difference between the nancial commitment of the PRI and the other two
types of investors. PRI are present in 64% of the spin-offs with an average share of about 10% and
a participation value of around 5,000 euros. This is because the PRI generally enter into the capital
of the spin-offs at the time of their creation and with a clearly minority share; the main purpose
behind this presence is, in fact, to provide credibility for the new initiative rather than to enhance
the investment. In contrast, in the case of rms and nancial companies, entry in order to exploit the
capital is prevalent. This leads to greater selectivity in entry and a greater nancial commitment. If
we analyze the spin-offs where there is the presence of industrial companies in social capital, in 36%
of cases the share of capital is in class 20-49, while in 12% of cases it is more then 50%.
Analyzing the team of promoters, this is made up by several partners, 6 on average. Of these, 1 or 2
are faculty members that have the role to promote the creation of spin-offs and provide professional
advice based on experience, during the incubation stage, while the other are researchers or former
students. This means that, at least, for each spin-offs 4 persons try the entrepreneurial carrier and
the probability that an entrepreneur starts another company is higher than one who doesn’t try. Our
ndings suggest that teams evolve over time and change in composition, in this sense, many people
try the entrepreneurial carrier.
On the basis of this data we try to identify a set of indicators to measure the impact of these 23 spin-
offs on the local context.
An qualitative analysis conducted through interviews to promoters of spin-offs shows how the most
part of the ones that have changed the team of founders have a process of growth more relevant.
According to (Vanaelst et al.), the entrepreneurial teams evolve through the different stages of a spin-
out process, suggesting that teams evolve over time and change in composition, and therefore, they
cannot be studied as immutable entities.
Even in my case study Teams active in the rst phase of the spin-out process appear to be unbalanced
in terms of experience. Their experience is highly concentrated in research and development. In this
sense, Teams in the rst phase of the spin-out process, which are still deciding how to commercialize
their knowledge, show a lack of entrepreneurial experience. Once the decision is taken to create a
spinout, team members are attracted to the team that may have entrepreneurial experience. After
the legal establishment of the rm, no clear nding on the nature of entrepreneurial experience was
identied. If we try to evaluate the impact of academic spin-offs by Università Politecnica delle
Marche using the available information to measure the impact using the set of indicators we could say
that it tends to be relevant but local, remaining within the same geographical area of the institution
from which the spin-offs originated. Figure 11 shows the available data for 2010 of 23 spin-offs.
Figure 11– Impact of academic spin-offs by Università Politecnica delle Marche
The analysis suggests that the phenomenon of spin-offs has a marginal impact in quantitative terms
in short term.
On the other hand spin-offs have positive qualitative impacts in several directions: they are important
for University because they provide income streams to their universities, allowing new investment in
basic science and they promote relations between local government, university and rms. Moreover,
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spin-offs can be important drivers of regional economic development because they generate hi-
tech entrepreneurship: they are source of 136 technology entrepreneurs that can help transforming
local economies, through the emergence of local technology clusters. Furthermore, they represent
a connection for other rms to access the expertise and skills within universities, encouraging the
development of networks through which new technologies and knowledge can be shared. Following
the “network paradigm” to analyze a territorial-system, a primary network is the one between small
innovative rms and local sources of scientic knowledge as Universities and research centres. This
relationship allows small rms to build up the technological environment that sustains their innovative
capability. Academic spin-offs represent a signicant example of network between research centres
and small rms. Last but not least, they are companies in high-tech sectors, so they can contribute to
production specialization to knowlwdge based activities, building learning activities which improve
the quality of regional innovation environment.
4. CONCLUSIONS
In most advanced countries, the phenomenon of academic spin-offs became signicant in the ‘80s
and the signicant increase in licensing activities and the setting up of spin-offs by universities can
be considered the result of the general growth in importance of scientic knowledge in productive
activities and a progressive stance towards the university having a more active role in the economic
development of the territory. This process started in US and many European countries, especially
those in Northern Europe, have followed the trend observed in the U.S., albeit with some lag. The
excellent performance of institutions such as Massachusetts Institute of Technology and Stanford
University in stimulating the creation of new business ventures in their local environments is well
known. European universities tried and followed this experience during the last twenty years and this
has stimulated the attention of several authors who have investigated the creation and development
of spin-offs in Europe, but the empirical results show that the idea of importance of university in
national economic development remain based on advocacy rather than evidence. In this regard, there
is a growing recognition that the overall signicance of the widely accepted technology transfer model
is based on the atypical experience in technology hotspots, such as Silicon Valley and the Route 128
area but the US context is completely different from European one and the effort to emulate atypical
high tech clusters that are generally absent from Europe is a feilure idea. Rather, many universities in
Europe have traditionally operated in an environment where high tech entrepreneurship is relatively
new or undeveloped. The spin-off process in such contexts is likely to be very different from that in
more developed high tech entrepreneurial environments such as Boston or Silicon Valley so we have
to evaluate this phenomenon using a different approach.
We chose to adopt a local approach due to the fact that there are several difference in local innovation
system and these may depend on the relevance of the three main actors of triple helix model, university,
industry and governament, in terms of:
• quantitative importance on the regional innovation system;
• the orientation towards R&D and innovation;
• technology transfer activities by universities;
• R&D expenditures by rms;
• R&D funding;
• the relations between the three main actors;
• number and amount of university-rms relations;
• funds allocated by public institutions to rms and universities.
These differences in local system determine the development of spin-offs due to the fact that the factors
fostering the creation of this kind of rms ara several. Regulations have an impact on spin-off activity
because they determine the degree to which universities have the autonomy to make their own rules
regarding TT activities, as the reputation and research eminence of individual universities. Even the
institutional factors as culture of the university, its attitude toward spin-offs and the competence of the
technology transfer ofces, could have an impact on this phenomenon. Moreover, the distribution of
spin-offs across industry sectors is highly uneven and spin-offs are diverse in their activities because
they reect the prevalent sectors of research and activities of universities.
Our results reafrm the consolidated literature about the localized nature of knowledge transfer.
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If knowledge spill over tends to occur only within limited geographic areas, embedding economic
activity based on this knowledge within the local context, universities can become important focal
points for local economic developments.
In this sense the main results of our analysis could be sum up as following:
• Spin-off is not a way of commercializing university research, because the main beneciares
(in nancial terms) are former students and researchers. For the univeristies spinoff promotion
generates costs with little prospective returns;
• Neverthless, this phenomenon could have positive effect at the local level but we have to
evaluate it on long term;
• The geographical span of the spin-off impact is mainly at local level;
• To evaluate the real effect it is important to consider the local context in terms of industry
specialization and policy objectives.
Universities can play an active role in promoting and supporting spin-offs, seeing them as an
opportunity to pursue several objectives: a) develop an effective way to exploit research results; b)
contribute to production diversication and the development of the geographical areas where they
are set up, c) provide a possible source of employment for their researchers. The policy maker’s
attention to spin-off is justied by the need to promote the commercial fallout of investment in basic
and applied research and the need to promote the development of ‘knowledge-based’ business, which
is increasingly regarded as fundamental for territorial competitiveness.
However the interactions between rms and between rms and universities tend to be contained in
smaller areas.
This can be important from the point of view of policy makers, concerned on fostering economic development
locally, and for university administrators to decide the importance of TT activities. A key issue to understand
the potential impact of academic spin-offs in further research could be to analyze the phenomenon of academic
spin-offs at local level, distinguishing short term from long term impact, using a qualitative approach and
avoiding the quantrophrenia.
More empirical research is needed to assess the qualitative impact of spin-offs on local systems:
for the short term impact it would be important to know the number and value of R&D projects in
cooperation with other rms and the nature and importance of relations with the parent universities.
To measure the impact of spin-offs in the longer term, it would be interesting to analyze the companies
set up by people involved in spin-offs creation (second generation spin-off, new technology
entrepreneurship) and the labor mobility between spin-offs and other companies in the local system.
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