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Entrepreneurship In Post-Communist Nations
Larry E. Short
Introduction As we enter the 21st Century, entrepreneurship is well recognized in the USA as a successful job generator. Most of the increase in private sector employment in the USA can be accounted for by the generation of jobs by small firms. For example, firms with fewer than 500 employees accounted for 69 percent of the total 1992-96 changes in employment, while firms with fewer than 20 employees accounted for 43 percent of the employment growth (SBA, 2000). The U. S. National Governor’s Association has proposed actions that governors can take to encourage entrepreneurship on a state-by-state basis (Leibowitz, 2000). Many nations—especially those who have recently moved away from government ownership and control of private property and some that continue to support such policies—have adopted privatization strategies that encourage entrepreneurship as a centerpiece of their national policies for economic development (Shaker, Ireland, Gutierrez & Hill, 2000). Entrepreneurial activity is similar to the organic processes of life. Throughout life, an individual acts as an embryonic entrepreneur taking resources around him and fashioning them to satisfy his desires. Inherent in this concept are issues of recognition of desire, choice among available resources, marginal utility considerations, and timing of actions. One can choose to seek immediate gratification of needs or wait to amass greater resources and satisfy greater needs at a later time. Entrepreneurs utilize insight into this process to recognize and predict consumer desires and exploit this knowledge through inventing cost-efficient businesses to satisfy consumer desires. Richard Cantillon appears to have introduced the term of entrepreneurship in the early part of the 18th Century as meaning someone who specializes in organizing business activities and assuming the risks of business in returns for profits (Higgs, 1931). Joseph Schumpeter (1934) redefined the term to include someone who uses innovation to destroy the existing order by introducing new products and services, by creating new forms of organization, and by exploiting new raw materials. The Path to Successful Entrepreneurship There appears to be at least three major elements involved in fostering successful entrepreneurship in a nation: an entrepreneurial oriented society, a government that supports entrepreneurship, and an open communication process among the parties. The first crucial component in an entrepreneurial society is the individual who has been introduced to the concept that one can create value through establishing a business endeavor using ideas. The second component is a willingness of the individual to act on this knowledge and take the necessary steps to move an idea through to product evolution. The third component involves the availability of the necessary resources to move the idea past inception, through product development, to successful introduction of the product into the market. The path toward entrepreneurial success, however, is seldom direct. Entrepreneurs may attempt multiple ventures using different foci to their efforts and interact with different players each time before achieving success. However, as the entrepreneur proceeds there are two key factors that will influence success— government and its actions, and communications among the entities involved. These intervening factors are environmental constraints that can facilitate or impede progress toward successful entrepreneurship. Governments have an overarching capability of influencing and controlling both the society it represents and communications among the parties and as such are probably the most critical to success. Communication permits arbitrage to occur in which the various parties within the scenario constantly adjust their inputs to improve the economic exchange process. The Role of Government Governments play a critical role in successful entrepreneurship and entrepreneurship plays a significant role in economic development. In the USA, entrepreneurship and small business are the powerhouse of job generation, creating about two-thirds of the net new jobs since 1970. Entrepreneurship is an important contributor to innovation in the business world and it produces roughly one-half of the private sector Gross Domestic Product of the United States. The enormous volume of goods and services production by small businesses make American small businesses the world’s third largest economy, trailing only the United States, as a whole, and Japan. (SBA, 2000) The USA believes that for entrepreneurship to flourish, it requires a capitalistic economic system and a democratic form of government. However, while it has been reasonably well established that entrepreneurship works well under a democratic form of government and a capitalistic economic system, are these essential requirements? Can entrepreneurship survive and flourish in a more autocratic or socialistic form of government? among the citizens of a nation—socialism and capitalism. These two philosophies can be viewed as being on a single continuum with pure socialism (i.e., complete ownership and control of all resources by the state with a resultant command economy) on one end of the continuum and pure capitalism (i.e., complete ownership and control of all resources by private individuals and no control of the economy by government) on the other end of the continuum. Countries Leaning Toward Socialism. In more socialistic societies the distribution of wealth is decided by the few in power who redistribute the wealth, often using their power to take care of themselves, their family and their friends before taking care of their citizens. In these socialistic societies, bureaucratic intelligentsia decide what is best for citizens and distribute wealth accordingly. Historically, centralized managed economies have operated by assuring certainty of outputs by totally controlling inputs consisting of land, labor and capital and expressing application of these inputs in multi-year macro-economic plans. The role of government in the centrally managed economy is one of control—assuring conformity to the “centralized plan” which is held to contribute to the well being of society. The average citizen has very little input into this decision process. Individual economic success, if permitted, is often taxed very highly in order that wealth can be redistributed, thus high taxes on individual achievements are often the norm and tend to discourage hard work. Countries Leaning Toward Capitalism. In capitalistic leaning societies, wealth is created and distributed by individuals through the free exchange of goods and services in uncontrolled markets open to all buyers and sellers. The government has not limited control over what is sold and who buys it. The role of government, in the entrepreneurial model, shifts to one of enabling of individualism and entrepreneurship. Moreover, governmental orientation changes from one emphasizing the past and the history of governance toward improving functioning of free markets. The market is seen as the driving force allowing entrepreneurship to flourish free from the reins of centralized planning. The basic concept of entrepreneurship relies heavily upon the individual to use innovation to create products or services that will capture unique niches of a market and through this process increase personal wealth. In capitalistic societies, which are based on Today there are two quite different philosophies about political systems that can create and distribute wealth private ownership and control of property, numerous individuals assume the risk of the marketplace and create and distribute wealth through the exchange of goods and services. The distribution of this wealth may not be fair from everyone’s point of view, but it is relatively efficient. The creation of this wealth relies more heavily upon an individual’s efforts, creativity, and tenacity, not on an individual’s education or family background. Which System of Government is Best for Entrepreneurship? It appears that nations with economic systems leaning more toward private ownership and control of property may be better suited for entrepreneurship than nations with economic systems leaning toward public ownership and control of property. Although in the democratic United States entrepreneurship has been the primary engine driving a continually growing economy, in some other democratic societies entrepreneurship does not appear to have the same impact on economic development. For example, in Eastern Europe, when the iron curtain fell, Poland and Ukraine eliminated Communism as a political and economic system and moved toward a democratic, capitalistic system. Poland has become a thriving economic success with entrepreneurship as a key core to its economic success. Ukraine, however, is still struggling to utilize its newfound freedom to bring about significant economic success. There is evidence, however, that at least some of Ukraine’s problems lie in political phenomena that came into being as a result of the vacuum occurring after the postcommunist era. Among these phenomena are exorbitant taxation and extortion by government bureaucrats resulting in under-reporting of profits or output to avoid taxation and a sizeable unreported, but highly entrepreneurial, underground economy with mafia involvement (Johnson, Kaufmann, McMillan and Woodruff, 1999). Changes in entrepreneurial activity are also being influenced by a world-wide shift of economic activity from high labor cost to low labor cost locations which has been stimulated by movements toward economic integration in the form of free trade areas, customs unions, and economic unions. These governmental changes allow easier movement of product, people, and in some cases factors of production. The change to high value being derived from a knowledge-based economy promotes exploitation of the asymmetry that exists between nations and the entrepreneurial model. Central and Eastern European countries and China are well positioned to take advantage of this asymmetry because of their high universal educational levels that were a product of the cold war era. Higher educational levels are often associated with higher creativity. In some autocratic governments entrepreneurship has flourished while in others it has died. For example, entrepreneurship thrived in Hong Kong, which was a British colony with an appointed governor. While many thought the take-over of Hong Kong by the Peoples Republic of China would signal the death of entrepreneurship, Hong Kong still appears to be quite entrepreneurially oriented. And in China, a nation that has been ruled by a single party for over 50 years, entrepreneurship has recently become a key part of its strategy for economic development and appears to be having some success. Yet on the other hand, 75 years of a single party rule has largely destroyed entrepreneurship in more a democratic Mexico. In summary, entrepreneurship is found in a variety of political/ economic settings and its success often seems independent of these settings. Requisites for Entrepreneurship1 Entrepreneurship, in some form, appears to exist in both capitalistic and socialistic societies; however it is more successful in some than others. Why is this? Since it appears that entrepreneurship may operate at either end of the political system continuum, it may be more useful to determine the critical governmental aspects necessary for entrepreneurship to thrive rather than attempting to find the correct political system that supports entrepreneurial endeavors. Andretsch and Thurik (1997) suggest that central role of government in an entrepreneurial based economy is enabling in nature. That is, the focus of these governments should be to encourage production rather than limiting firms through regulation and public ownership. We suggest that entrepreneurship does not require a certain form of government to succeed; a successful entrepreneurial society appears to require only six major elements. If these elements are present, entrepreneurship should thrive in any political system. The six fundamental requisites of entrepreneurship are as follows. Private Property Rights. Individuals must be able to hold title to property and obtain, use or dispose of property as a basic right. Government action must protect personal property rights to enable the entrepreneur to acquire funding and make managerial decisions that facilitate the entrepreneurial process. Without these property rights, managerial decision-making becomes so burdensome that it cannot function in a timely manner. Command economies that use collective ownership and control of resources require a constant and direct interface with the state in the utilization of resources. This continually required interface is often so cumbersome and slow that it reduces the ability of the organization to react to the consuming public in a timely and equitable manner. Thus, ownership and control of property are fundamental to successful entrepreneurship Free Market Place. An open and free marketplace must be available for the entrepreneur to buy and sell goods and services. This market place must be perceived as stable and capable of evolution such that new products can be successfully introduced. While some tinkering on the part of government would be expected, it should be minimal and not interfere with the basic functioning of the supply-demand and price setting mechanisms. When governmental judgment is substituted for direct interface with the consumer (i.e., the market place), command economies have found the balancing of market needs with production capability to be unwieldy and almost impossible to maintain. The problem is that production for direct use by the consumer without the exchange intermediary process of a free market requires an intricate mix of planning and execution. Often, too little or largely inaccurate information is fed back to decision- makers to allow rationalized production and distribution of goods. An open and free market place functions extremely well in allocating resources for the benefit of consumers. Objective Capital Markets. Capital markets must exist that permit individuals (or organizations) to raise capital to invest in business ideas. Too often capital markets and governments in developing countries only lend money to privileged elite and will not consider lending to struggling entrepreneurs. An objective capital market system must allow consolidation and protection of assets so that large amounts of money can be obtained. This system must have order such as that obtained from adherence to generally accepted accounting principles and be based in contract law such that investors are protected. Too often little is done to assure that sizeable portions of capital markets are not siphoned off to benefit larger state-owned businesses. A reliable banking and capital market system is fundamental to a successful entrepreneurial environment. Supportive Business Laws. A comprehensive system of laws must be established that supports an entrepreneurial society. These laws must consist of legislation formulated to provide rights to individuals and businesses, case or common laws providing insight into judicial decisions, and rules of procedure that provide the machinery to indicate how lawsuits will be handled by the judicial system. Both substantive law used to handle disputes and procedural law used to dictate conduct of trials and appeals must be present. A system of laws must be instituted that prohibits activities that interfere with the smooth operation of a business system and provide certainty and predictability to the business setting. For example, activities such as robbery, bribing, intimidation, hostile monopolistic actions, etc. must be clearly outlawed. In addition to a general system of laws that encourage and protect commerce, the following specific issues must be adequately addressed if entrepreneurship is to survive and flourish. If the entrepreneur is to invest his own time and capital in pursuing an innovative idea he should be able to capitalize on his efforts and risks. High individual and business tax rates sap the incentive for individuals to risk their own money for gains. Thus, a system of reasonable tax rates must be in place to encourage entrepreneurs. As well, tax disincentives such as duties on imported machinery, spare parts, supplies or locally unavailable raw materials used in the production of goods or services should be removed or limited. Laws must exist to protect the profitability of creative ideas. In recent years, legal systems have come to realize that interference with contracts or business relationships is of growing importance. One particular kind of interference is found in wrongful appropriation of another’s ideas, or business values. Increasingly courts have allowed recovery of loss when it can be proved that a patent, trademark or copyright was infringed upon. Individuals will not expend time and capital in developing new products if they cannot protect these products from others trying to steal the idea. These laws must be of sufficient strength that they are recognized and supported by international courts of law to allow protection of ideas beyond the borders of the country. Within substantive law, a reliable set of contract laws must be in place to enforce the concept that contracts, i.e., an agreement between two or more people, must be enforceable by all parties to the contract. These types of laws are often called business laws and include such issues as sales, instruments, agency, and organizational form. Absent a set of laws establishing the rights of parties to a contract, financial backers would be extremely reluctant to invest in entrepreneurial ventures. As well, suppliers of raw materials or intermediate goods used in the production process would be reluctant to accept any transfer of goods without a contract unless transfers took place on a cash basis. Unbiased Law Enforcement. The establishment of a clear system of laws of a civil society is only the first step. Mechanisms defining how laws will be enforced must be present within the system of procedural law, as well as safeguards instituted to prevent abuse of power by law enforcement officers. A system to enforce the body of laws established to foster entrepreneurship must be established and aggressively implemented to protect the economic system. Laws without fair and impartial enforcement are like no laws at all. Impartial Judicial System. Once an entrepreneur finds himself in the judicial system, a fair and just system must exist that will adjudicate laws in an equitable manner regardless of political rank or family relations. The entrepreneur must be assured that the profitability of a creative idea will be protected; a contract will be impartially judged; appropriate action ordered to correct wrongs; and illegal and hostile actions that could impair economic success by the entrepreneur will be prohibited. Too often in developing countries, the unholy trinity of government, military and the existing oligarchy in power will not allow disruption of the existing order and do everything possible to deny or delay entrepreneur’s access to markets and financing. Conclusion Is there a particular political system that is required for entrepreneurship? In the United States we believe that capitalism and democracy are two sides of a single coin. That is, capitalism can flourish only in a democracy. But is this necessarily true? Can entrepreneurship flourish in a government in which one political party maintains extensive or complete control? Or is a democracy—a government by the people, either directly or through elected representatives—absolutely necessary for successful entrepreneurship? We believe that entrepreneurship can exist in many economic and political systems as long as certain essential elements are present. Decreasing existence of these elements will typically result in less likelihood of success. In a highly socialistic society, it is doubtful that entrepreneurial efforts will succeed because of the cumbersomeness of the process of allocation of resources. However in most other situations, the politico/economic system appears to be less important than the existence of elements that support an entrepreneurial environment and improve movement toward entrepreneurship. References
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