What entrepreneurs seem to need in Eastern Europe
The problems facing new private manufacturers in Eastern Europe differ greatly from one country to another, so finds World Bank economist Leila Webster after surveying entrepreneurs in Poland, Hungary, and the Czech and Slovak Federal Republic (CSFR) in 1991 and early 1992.[1] But each of them wants stronger demand and easier finance---small wonder.
The key findings:
Private manufacturers in Poland, Hungary, and the CSFR faced far different economic environments 18 months into reform when the surveys were conducted.
In May 1991, Polish manufac-turers interviewed faced continuing inflation, weak domestic demand, an appreciated zloty, a collapsing state sector, and a massive influx of competing imports.
The Hungarian business environment in September 1991 was less difficult than that in Poland, but not positive. There was continuing inflation, a stagnant economy, and a stalled privatization program. But serious import competition was absent, social acceptance of private enterprise was growing rapidly (reflecting the country's decade-long reform experiment), and foreign investment was booming.
Czech and Slovak entrepreneurs were operating under fairly positive conditions in January 1992, especially since many had started up after the initial effects of the large reforms of 1990 and 1991 were felt. Inflation was minimal. Wages had stabilized. Assets were becoming available through the small privatization auctions. Trade flows with the West were increasing. And the shock of the collapse of common market trade had been weathered. The crucial questions there centered on the fate of the large state sector on which many private producers depended.
Entrepreneurs in all three countries were almost identical in age, gender, education, motivation, and employment histories. They were overwhelmingly male, their average age was 42 to 43, and most were highly educated, primarily as engineers. However, their career tracks and the firms they ran were distinctive.
Of the Poles, although 12% were prereform "craftsmen," for 89% their current business was their first and only business.
The Hungarians held the advantage of experience. Almost half currently or previously owned another private business, a quarter owned more than one.
Almost all the Czechs and Slovaks were inexperienced---only a few had worked as prereform, private craftsmen prior to 1990. But entrepreneurs in the CSFR were quick to translate their experience in the state sector into private enterprise. More than a third already owned more than one private business.
The asset base of the Polish firms was thin, usually made up of cast-off equipment from the state sector and long-term leases on factory space typically in need of substantial renovation. Only 11% of sample firms derived even indirectly from the state sector, so few Polish entre- preneurs had taken over functional factories or had continued to manage their old firms.
Start-ups in Hungary looked much like their counterparts in Poland, but half of sample firms originated as quasi-private enterprise firms operating before 1989. Their managers were seasoned, and their sales large. Only a quarter of sample firms were new entrants. Three quarters of sample firms were transformed into private registered companies from various pre-1989 enterprise forms, including industrial divisions of agricultural cooperatives and so-called economic work partnerships.
In the CSFR, start-ups and privatized state firms were both managed by inexperienced but technically proficient owners, many of whom had amassed substantial assets in their short time in business. The new manufacturing sector in the CSFR was almost an equal mix between new and older firms. The availability of investment capital in the CSFR had enabled many new entrants to purchase fully functional factories through the small privatization auctions and to invest in new production equipment.
The biggest problems affecting entrepreneurs' businesses in all three countries were those of demand and finance.
Polish entrepreneurs complained that demand for their products was inadequate due to reduced real incomes associated with the Polish recession. The reasons for this soft demand: declining real incomes, decreasing orders from the state sector, and a tremendous expansion in imports and in the supply of goods from new domestic producers. Short-term finance was broadly available, but investment capital was scarce.
Finance problems topped the list among Hungarian entrepreneurs, alternately described as banks' unwillingness to extend loans, nonpayment or slow payment by state enterprises, and high interest rates. Hungarian entrepreneurs were stretching scarce capital as far as possible, but the costs of inadequate capital were evident everywhere. The second most prevalent complaint was inadequate demand. Hungarian firms with demand problems faced little competition. Their problems stemmed from their dependency on the state sector.
For Czech and Slovak entrepreneurs the most frequent complaint was slow payment by state-owned customers, followed by weak demand.
More strong firms and fewer weak firms were located in Hungary and the CSFR than in Poland. Firms in the CSFR and Hungary were able to obtain more key assets from the state sector than their Polish counterparts, they were better able to enter export markets, and the level of experience of their managers made a big difference.
Some common traits of strong firms were that their owners were exceptionally competent, they produced highly differentiated goods, they were larger, with average sales three times that of weak firms, and they bought their inputs mostly from the state sector, as did all sample firms, but they avoided selling their products to state enterprises by exporting and targeting niche markets.
Weak firms were more likely than others to produce homogeneous, mass-produced consumer products. Their equipment was worth less, and it was nearly twice as old as equipment in strong firms. They faced far more competitors (not surprising, as the low entry costs for simpler products ensured many new entrants), and they sold mainly to state enterprises.
How to bolster the private sector (4K Box Text)
