The Development of Entrepreneurship in the European Transition Countries: Is Transition Complete?

• Date: 01 March 2016
• Author: László Szerb,William N. Trumbull
• Published date: 01 March 2016
• DOI: http://doi.org/10.1002/jsc.2051

RESEARCH ARTICLE

Strat. Change 25: 109–129 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2051

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2051

The Development of Entrepreneurship in the European

Transition Countries: Is Transition Complete?1

László Szerb

Faculty of Business and Economics, University of Pécs, Hungary

William N. Trumbull

School of Business, e Citadel, e Military College of South Carolina, Charleston,

South Carolina, USA

Although transition is over, Central and Eastern European countries still lag behind

Western economies in terms of cultural support to business creation, which is

vital for the development of a healthy entrepreneurship‐based society.

e fall of the Berlin Wall in 1989 clearly indicated the end of the socialist system.

A peaceful transition from the planned to a market economy, which was unprec-

edented, challenged scholars in the 1990s. Early research was characterized by the

identication of the phases, the necessary steps, as well as the order and speed of

transition (Aghion and Blanchard, 1994; Sachs, 1996). Interest later turned toward

the institutional structure of the market economy and the microeconomic issues

of rm performance (Earle et al., 1996; Havrylyshyn, 2003; Aidis et al., 2008).

One of the important, albeit relatively under‐researched, elds of transition

was the role of entrepreneurship (Tyson et al., 1994; Aidis, 2005a; Estrin and

Mickiewicz, 2010). McMillan and Woodru (2002) argued that ‘the success or

failure of a transition economy can be traced in large part to the performance of

its entrepreneurs’ (p. 154). It was believed that the eciency and performance

ofentrepreneurship depended mainly on the institutional development and incen-

tive structure of the country (Baumol, 1990; Acemoglu and Robinson, 2011).

Johnson et al. (2004) examined ve former socialist countries and identied

institutions that support entrepreneurship: macroeconomic stability, clear prop-

erty rights, and developed nancial institutions. Some important institutions, such

as role models, began to play a role in the later phases of transition, when a new

generation of young entrepreneurs began to emerge (Lafuente and Vaillant, 2013).

In 2004, eight former socialist countries joined the European Union (EU),

followed by Bulgaria, Romania, and Croatia later on, indicating the success of

transition. Since then, the interest in transition has declined. For many transitional

1 JEL classication codes: L26, M13, O10, P20.

Central and Eastern European

countries have made important

institutional progress, but the

low cultural support to

entrepreneurship evidences their

socialist heritage.

Central and Eastern European

countries should focus on

improving opportunity perception

potential, creativeness, and

positive attitudes toward

entrepreneurs, which require

changes in the education system.

Rather than homogeneous

entrepreneurship support policies,

support policies in Central and

Eastern European countries should

t the specic prole of the

targeted territory.

110 László Szerb and William N. Trumbull

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

experts, EU accession also meant the end of research in

this eld. However, an important question of transition

has not been answered convincingly: Has transition com-

pletely nished? Several years ago, Kornai (2006) took the

perspective that transition was complete, at least in the

eight countries making up the Visegrád region (Czech

Republic, Hungary, Poland, and Slovakia), the Baltics,

and Slovenia, when he assessed the successes and disap-

pointments of transition in a historical analysis: ‘e

transformation took place with incredible speed, within a

time frame of 10 to 15 years’ (Kornai, 2006, p. 218).

On the contrary, ‘the elimination of the socialist system

continues to proceed in areas to the south and to the east of

the eight countries under scrutiny’ (Kornai, 2006, p. 220).

Gros and Steinherr (2004), Döhrn and Heilemann

(2005), and Kitov (2009) also claimed that transition in

the Central and Eastern European (CEE) countries is

nearly over. Kitov (2009) concluded that ‘the transition

has practically nished in many Central and Eastern

European countries and their economic evolution is

driven by forces associated with [the] capitalist system’

(Kitov, 2009, p. 526). His model is purely mechanical and

based on observations of per capita gross domestic product

(GDP) as each country undergoes its transformation con-

traction and then recovers.2 In a recent summary study,

Sonin (2013) also argued that transition had nished.

Other researchers took a less denitive stand on the

completion of transition (iessen and Gregory, 2005 and

most recently Pistor, 2013). Rening Kornai’s argument

and providing various measures of transition, Havryly-

shyn (2009) argued that transition is nearly over only for

the CEE and Baltic countries. e south eastern and

former socialist Balkan countries and Commonwealth of

Independent States (CIS) countries were still lagging

behind in the reform process. However, even for the most

2 One might wonder how such a methodology would account

for China, which did not suer a transformation contraction.

Kitov (2009) does not explain, only asserting that ‘… all FSC

[former socialist countries] have demonstrated the J‐curve

behavior with a varying depth of the downturn’ (p. 527).

advanced countries, ‘… there remains a signicant transi-

tion policy task: completing the various institutional

reforms relating to regulations in the nancial sector,

competition policy, minority shareholder rights, legal

institutions, etc.’ (Havrylyshyn, 2009, p. 42).

Our purpose here is not to come up with a conclusion

as to whether transition is over. Rather, we focus on one

dimension of transition, entrepreneurship. Entrepreneur-

ship represents the new economy and, as a recent Euro-

pean Bank for Reconstruction and Development report

highlights, ‘the success of a transition economy is linked

closely to entrepreneurial activity.’3 While it is surely the

case that certain transition tasks, like privatizing state‐

owned enterprises, remain unnished, a perhaps more

interesting question is whether the fundamental charac-

teristics of these economies have changed to the point

where starting and growing a new business in former

socialist countries is substantively dierent from starting

and growing a new business elsewhere. us, we ask

whether it is possible to discern dierences with respect

to entrepreneurship between post‐socialist countries of

Europe and non‐post‐socialist countries, controlling for

level of economic development. Further, we ask this ques-

tion at two points in time.

Should we care whether transition is over? We should

care, because the policies the post‐socialist countries

pursue depend very much on whether they are still in

transition or not and, if they are in transition, exactly what

dimensions of transition remain incomplete, in particular

the institutional or behavioral dimensions. We will, of

course, develop this argument more fully in what follows.

We turn in the rst section to a comparison of the

transition countries using macro‐level measures, such as

per capita GDP, measures of economic and political

freedom, and corruption.4 is analysis is based on the

Global Entrepreneurship Monitor (GEM) data collection,

3 Nikolova et al. (2012, p. 1). See also Berkowitz and DeJong

(2005).

4 Similar to Leeson and Trumbull (2006).