Community-based Entrepreneurship and Rural Development

Creating Favourable Conditions for Small Businesses in Central Europe

Matthias Fink, Stephan Loidl, Richard Lang

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415614870
• eBook ISBN: 9781136264429
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

How can municipalities in Central Europe create favourable conditions for local business? What and how can municipalities learn from each other? How can each individual in the local area contribute? And what requirements have to be met before know-how can successfully be transferred on a communal level?

To answer all these questions, the authors of this book draw on results from a six-year research programme and comprehensively discuss the manifold opportunities, restrictions and prerequisites of establishing favourable conditions for small and medium enterprises in rural municipalities in Central Europe.

1 Setting the stage

1.1 Methodological approach — narrations as a key to the
configuration dilemma

1.1.1 The challenge

Business research has been dominated by the analysis of mono-causal and often uni-directional relationships between variables for a long time. A great number of studies — for instance on factors relevant for the foundation of new ventures or for business success — has been carried through with large impetus and high means (Busenitz et al. 2003, Grichnik 2006). Large samples of differing quality have hence led to many research results with restricted practical relevance (Tsang/Kwan 1999, Baldridge et al. 2004, Huw et al. 2007). Such research can hardly encompass, and most certainly cannot explain, empirically observable phenomena (Bouckenooghe et al. 2007, Diekmann 2000).

It is clear that a complete modelling of the section of the world that is relevant to business research is neither possible nor meaningful. Nevertheless, the benefit of a reductionist approach to empirical research is equally questionable, since empirical findings based on simplistic models cannot be adequately linked to everyday life (Chandler/Lyon 2001, Hitt et al. 2004). They do not present practical relevant propositions or even recommendations for action (Gopinath/Hoffman 1995, Huw et al. 2007) and are hence hardly received (Van de Ven 2002).

Conceptually, a holistic perspective may represent a possible key to this unsatisfactory situation. Thereby, empirical phenomena are tried to be pictured in their entirety by a set of variables that is as comprehensive as possible (Veliyath/Srinivasan 1995). If the values of the variables in the defined set are measured, a snapshot of the configuration results. The snapshot can be interpreted as a jigsaw piece of reality that is represented by the values of these variables at the time of measurement (Veliyath/Srinivasan 1995). By analysing the deviations between the configurations in different points in time, developments may be identified. Changes in bundles of variables may hence be related to developments. In such a structure of thought, specific variables not only affect specific other variables, but interdependencies between bundles of variables are also considered (Wiklund/Shepherd 2005). The aim is a reconstruction of the changes in the configurations and — based on that — a deduction of starting points and strategies for interventions (Harms et al. 2009).

The focus on variables that are relevant against the background of the respective research question is a fundamental principle of modern research practices. Only by using this complexity-reducing approach can the respective variables and thus the relationships between and developments of the phenomena of interest be identified from the infinite number of variables. The question is, however, which of the infinite number of possible variables are the most relevant. Due to this question, the broad application of the configuration approach as a conceptual frame for empirical surveys has failed so far (Harms et al. 2009). Attempts have been made to name the relevant jigsaw pieces of reality against the background of the research question by defining spheres following specific theoretical guidelines (Mugler 2005). However, such a procedure is affected by a high level of uncertainty and the selections can rarely be argued for stringently, which violates the criterion of scientific work regarding the transparency of the researcher's decisions.

1.1.2 The proposed key

It is only the choice of variables that creates the research object. The researcher constructs its object of research by choosing the aspects of reality to be measured. The choice of variables hence constitutes a decisive step in the research process (Fink 2005). If, however, the choice that follows specific theoretical guidelines cannot be argued for stringently, an empirical basis has to be used. Quantitative methods of data collection require an a priori existing structure of meaning with regard to the object of research. For that reason, such an empirical basis can only be created by qualitative data collection, since only open methods enable the collection of non-pre-structured data (Diekmann 2000). Narrations, in particular, enable data collections in the field without purporting structures by the researcher. The structuring work is then accomplished by the interviewee. The structure of the object of research may hence be developed on the basis of transcripts (Schütze 1987). Here the content analysis introduced by Mayring (2002) seems to be an appropriate method. It enables the identification of underlying structures of meaning. Hereby, the inherent structures of the field can be uncovered (Rust 1981).

With regard to the dilemma of selection, the content analysis of narrations of protagonists in the field of interest offers the possibility to use their structuring work and hence carry out a posterior choice of variables. For that reason, the scheme of categories that constitutes the empirical investigation's frame of reference evolves little by little. The persons concerned define the object of research as structures that are depicted in the configurations themselves. The variables hence constitute the section of reality under research, thus they are constitutive for the research object.

The proposed approach enables a direct application of the configuration approach in empirical studies. The answer to the key question regarding the selection decision leads to the strengthening of the holistic approach in business research due to the use of the openness of qualitative data collection and interpretative analysis methods, which therefore gains considerable relevance for the empirical social science.

1.2 Entrepreneurship and small business in Central European
countries in transition

SMEs are the backbone of every developed market economy. The following survey builds on the basic thesis that a strong and prospering SME sector is an important prerequisite for the successful economic development of regions and, thus, should be focused on by regional policy (Bender 1997). It therefore makes sense to take a closer look at the situation of the SME sector and — closely connected with it — entrepreneurship in the transformation countries.

Generally, there are substantial parallels between the four countries compared as regards SMEs, which makes it logical to tackle them together. Country-specific differences or empirical studies worth mentioning will be discussed as the need arises.

1.2.1 Deficits of socialist planned economies

Criticism of capitalism started in the nineteenth century against the backdrop of a market-economy system (“Manchester capitalism”), which was characterized by enormous social differences. A minority that controlled the means of production enriched itself at the expense of the workers, who lived in atrocious conditions. The theoretical conclusion of communist thinkers was that this development based on inequality would intensify further to the proletariat's disadvantage. Private ownership of the means of production was seen as the pivotal point of this development and thus the solution was to be found in bundling means of production on a collective level.

One thing, however, which from today's perspective seems more apparent, was grossly neglected. In the nineteenth century, the market-economy system was still at its beginning. Instead of considering improvement and further development, a radical overthrow of the system was propagated. Put bluntly, “instead of providing a cure, they proposed killing the patient and creating a new organism” (Petrakov 1993: 8). The October revolution of 1917 made it possible for the first time to apply the theory — albeit with major caveats — in practice on a state level. Following the Second World War, the Soviet system spilled over to several Central and Eastern European countries. The core idea of a planned-economy model is the state's control over all means of production and its monopoly in deciding and planning on how to use them.

The planning body was the Communist Party, which, in fact, had a monopolistic position of power in the state often exerted by oligarchs (Ebel 1990: 213). Its task was to anticipate down to the last details, calculate and control, by means of the control and planning apparatus, economic processes that spontaneously emerged in the market economy (Ebel 1990: 241). This included first coordinating all areas of the economy that directly contributed towards national income: all enterprises in all sectors had to be coordinated individually and in their relationships to each other in order to optimize output. Furthermore, it was necessary to identify how and to what extent other areas of society (culture, social matters) were to be supported with resources. A decision had to be made concerning what part of national income was to be invested and what part consumed, and what was to be exported and imported. Finally, the deterioration in production facilities and infrastructure had to be calculated in advance in order to enable timely replacement and repair (Ebel 1990: 242ff).

The consequences were manifold. (1) In order to manage the immense planning effort, a strong, unwieldy bureaucratic system quickly developed, which then took up the country's important human resources (especially university graduates) to fulfil the tasks at hand (Ebel 1990: 248). (2) Central planning resulted in a seller's market, in which buyers compete for the goods on offer. Free from the market-economy pressures of a buyer's market, it was not necessary to take customers' demand into account, improve the quality of the goods offered or indeed to develop new products (Kornai 2001: 168). (3) The planners were too far removed from the actual sites of production. Their conception of what was required frequently did not match the real situation in the enterprises. In addition, the cumbersome decision mechanism reacted to events in the economic sphere only with a substantial delay. Lacking market-economy adaption mechanisms, the whole economic system was inflexible, resulting in inappropriate decisions from above that made fulfilling the plans impossible.

As a reaction to these undesirable developments, (4) total production was concentrated in a few large production sites, intended to minimize the complexity of supplier networks and the number of business units to be coordinated (Töpfer 1996: 32). Large businesses were given a certain output target that eventually resulted in (5) non-productive activity. Production became less efficient and the target was “achieved” only through (6) various types of manipulation (Indruch 1994: 19).

The seller's market ties (7) the planned economy to production. At least in the socialist planned economies under Soviet influence, the focus of production was on (heavy) industry, to the detriment of consumer-goods production. This one-sided orientation was based on the assumption that resources can be invested in production or used for consumer goods (Brenner 1993: 105f). Economic growth, however, depends on production alone. Anything used for consumer goods cannot be used for production and thus reduces economic growth. In the inter-war Soviet Union, therefore, consumption was kept on as low a level as possible. The hope that, on achieving a sufficient level of wealth, this wealth would transfer, via production, to consumption turned out to be in vain. This initial economic orientation was nonetheless continued in the socialist planned economies that emerged after the Second World War.

The economy's orientation towards industrial production rather than demand resulted in (8) an undersupply of the population. This, in turn, led to (9) a loss of trust, decreasing motivation and passive resistance. Unsurprisingly, this had a negative effect on the economy's production performance. The excellent growth rates announced regularly at the time are, with hindsight, explained by a significantly higher input of resources and manpower, as well as businesses growing autonomously, despite checks, and simple data manipulation (Brenner 1993: 110ff).

The factors mentioned resulted in (10) large-scale undersupply, which, in many cases, could only be ameliorated by taking out loans abroad. The intensive and ruthless industrial production led to environmental pollution and subsequently health problems in the population. Citizens' dissatisfaction was further amplified through Western media and communication networks (Hill/Magas 1993: 36f), until the planned-economy system finally collapsed.

Returning to the outset of our deliberations, it can be said once again: the attempt to escape from destitution actually drove people who lived in “really existing” socialist economies into destitution, both relative and absolute. Hence, this phenomenon turned out to be not an expression of the general law of capitalist accumulation, but a symptom of an underdeveloped market economy (Ebel 1990: 203).

1.2.2 Problems of transformation

Depending on the commitment with which the planned-economy concepts were applied in practice, the economy of socialist planned regimes was characterized to a greater or lesser extent by desolate infrastructure, worn-out and out-of-date facilities and machines, backward organizational and production structures, an unmotivated and passive workforce, inefficient business, high indebtedness abroad and pollution. No matter how much these burdens actually differed from transformation country to transformation country — all states faced a transformation recession and rapidly evolving regional differences within the country. The following discussion sketches out the reasons for these transformation phenomena.

The transformation process in the medium term requires making businesses autonomous (privatization), ending price and wage controls, enabling the free convertibility of the currency, lifting the international trade monopoly, redesigning the banking system, creating a real labour market and, in connection with this, setting up at least a minimum social welfare net (Indruch 1994: 13ff). There was little doubt these reforms were to be implemented, but the speed at which this was to be achieved was contentious. Proponents of shock therapy saw a massive gap in development between East and West that could only be bridged in one great leap. The gradualists made use of the metaphor of altitude difference: in order to reach the West's altitude, a slow but steady ascent with safely placed steps was required (Laski 1992: 35).

Irrespective of the strategy pursued, the more or less restrained implementation of reforms in all transformation countries resulted in a rapid decrease in economic output and — with certain exceptions — an increase in inflation, as well as higher unemployment. Naturally, the economic decline depended on the respective initial situation of the transforming country. The states of the former Soviet Union (without the Baltic countries) were hit more heavily than the Baltic and...

Table of contents

• Cover
• Community-based Entrepreneurship and Rural Development
• Regions and Cities
• Full Title
• Copyright
• Contents
• Foreword
• Introduction
• 1 Setting the stage
• 2 An action framework for rural municipalities
• 3 An agenda for cross-border know-how exchange
• 4 The evaluation of the transferability of the proposed agenda
• 5 Conclusion
• Bibliography
• Index