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Entrepreneurship across Borders: the Nature and Role of Trust Friederike Welter, Professor CISEG, Jönköping International Business School, Sweden & TeliaSonera Professorship at SSE in Riga, Latvia Jönköping International Business School (JIBS), P.O. Box 1051, SE-55 511 Jönköping Email:
[email protected] David Smallbone, Professor for Small Business and Entrepreneurship, Small Business Research Centre, Kingston University, UK Nadezhda Alex, Ph.D. student, University Siegen, Germany Abstract Objectives: The aim of the paper is to assess the role of trust in the development of cross border entrepreneurial activity. Prior work: In recent years, there has been a growth of interest in the role of trust in business behaviour, because of its potential influence on reducing transaction costs, although empirical investigations of the topic are thin on the ground. Overall, the topic of trust in relation to cross border entrepreneurship has not been researched systematically, with most of the literature focusing on (inter-)-organisational and personal trust in the context of multinationals, but neglecting the regional component of international entrepreneurship. Approach: Conceptually, the paper will develop a framework outlining factors influencing crossborder entrepreneurship, drawing on institutional theory and concepts of trust. Empirically, the paper selectively draws on case material from two projects on cross-border co-operation, one concerned with Belarus, Ukraine and Moldova and the second one concerned with border regions in old and new EU member states, including Bulgaria, Estonia, Germany, Greece, Finland and Poland. Data of a total of 600 interviews with households, enterprises and institutions are analysed with the help of NVIVO software. Results: Results illustrate the important role trust plays for initiating and developing cross border entrepreneurship. For all forms of cross border partnerships, personal trust is a key enabling factor for cross border co-operation to emerge. This takes on particular importance for household co-operation, which thrives best when long-standing relationships between partners exist. Moreover, in countries where the institutional environment for entrepreneurship is still highly deficient, personal trust gains importance at all stages of cross border partnership and for all forms, acting as a substitute for institutional trust. Personal trust substitutes for control (and a lack of trust in formal institutions) in some of the former socialist regions, as well as in the NIS border regions, appearing to be a requirement for cross border partnerships to develop. Trust in formal institutions is not required for cross border partnerships in border regions to emerge, but it gains importance in the longer run. Institutional trust in the sense of trust in informal institutions (as reflected in cultural proximity) is more important for cross border cooperation, because it allows personal trust to develop and it can substitute for an initial lack of formal institutional trust, as seen in regions bordering highly deficient institutional environments. Implications: The results have demonstrated the close link between institutional and personal dimensions of trust. Future research could analyse the extent to which such differences in forms and levels of trust in cross-border entrepreneurship foster or impede the development potential of cross border activities. All this has implications for policies fostering cross border entrepreneurship as well. Value: The paper makes a conceptual and empirical contribution to the literature on the role of trust in relation to entrepreneurial activity, where detailed empirical studies are few in number. It also contributes to the evidence base for policies designed to promote cross border cooperation involving enterprises. Keywords: entrepreneurship, border regions, trust, EU enlargement, NIS countries
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Introduction The process of EU enlargement is redrawing the political map of Europe with particular implications for regions, which are adjacent to new borders of the EU or where the border status as a result of enlargement has changed from hard to soft border. This presents entrepreneurs and businesses with new sources of threat and opportunity, which in turn have implications for regional development. It may be argued that enlargement of the European Union will produce negative effects on adjoining NIS (newly independent states) like the Ukraine, Belarus and Moldova, especially in border regions, unless special measures are taken. The orientation of the new EU members towards the West combined with new regulations for cross border trade and visits may significantly hamper existing cross border cooperation of individuals and enterprises. On the other hand, cross border co-operation offers a potential source of opportunity which can lead to enhanced competitiveness for entrepreneurs and businesses on both sides of the border. Whilst the policy context for cross border entrepreneurship is its potential contribution to economic development in regions that are typically economically peripheral and disadvantaged, the phenomenon also has considerable conceptual significance for the wider literature on entrepreneurship. This particular paper will focus on cross border entrepreneurship, which represents an entrepreneurial opportunity for individual entrepreneurs, enterprises and regions in circumstances where alternative opportunities are often extremely limited. The projects on which the paper is based adopted a broadly based view of cross border entrepreneurial activity, ranging from simple petty trading (or arbitrage) to formal joint ventures. Conceptually, cross border co-operation may be viewed as a form of international entrepreneurship, which is the approach adopted in the paper. Cross border entrepreneurship is understood as comprising any entrepreneurial activity taking place across borders in neighbouring regions. In particular, the aim of the paper is to assess the role of trust in the development of cross border entrepreneurial activity, drawing on empirical evidence from border regions of the EU and neighbouring countries such as Belarus, Moldova and Ukraine. In recent years, there has been a growth of interest in the role of trust in business behaviour, because of its potential influence on reducing transaction costs. In relation to business behaviour, trust is based on a perception of the probability that other agents will behave in a way that is expected. In a cross border context, trust might be expected to play a particular important role because of the greater risks inherent in cross border transactions. Risks occur because implementation gaps in the legal framework of one or more of the border countries leave scope for discretionary actions of officials at the border. In such a context, trust assists individuals in controlling these risks and reducing the costs connected with each border crossing. Moreover, as an informal sanctioning mechanism, personal trust may complement institutional trust (and the institutional framework) in situations an individual lacks trust in or does not know the formal framework, which takes on particular importance in a cross border context, where differing institutional frameworks are an additional barrier. In these circumstances, personal trust may also substitute for deficiencies in the institutional business environment, becoming dominant where institutional trust into the formal framework is low or absent and thus impeding control of the co-operation at the macro level. In a cross border context, this can be mediated by the socio-spatial proximity of neighbouring regions and partners. Moreover, one might assume differences in the role of trust between types of cross border partnerships; with personal trust dominating petty trading activities and loosing importance (over time) for enterprise cross border partnerships. At the same time, empirical investigations of trust are thin on the ground, not least because of the challenges faced in empirically investigating the topic. Overall, the topic of trust in relation to cross border entrepreneurship has not been researched systematically, with most of the literature focusing on (inter-)-organisational and personal trust in the context of multinationals. As a result, it rather neglects the entrepreneurship component, as well as the regional dimension. As such, a conceptual and empirical investigation of the topic can contribute to greater understanding of the role of different forms of trust for cross border entrepreneurial activities, particularly with regard to whether or not trust facilitates cross border entrepreneurship and/or a lack of trust impedes it.
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The paper starts with reviewing the trust literature from a conceptual perspective, drawing on institutional theory and ending with identifying research questions. The next section gives a short overview on methodology and data before the following chapter empirically discusses the nature and roles of trust in a cross border context. The paper ends with conclusions and implications for entrepreneurship theory and policy.
Reviewing trust from a conceptual perspective The nature and role of trust From an institutional perspective, trust plays a role as a sanctioning mechanism, thus acting as an informal institution. In this context, trust complements the institutional framework. Formal institutions, such as legal regulations, are normally enforced and enforceable by the state. But, this always will be imperfect because human beings behave opportunistically, pursuing their own interests, which might contradict the rules as set by the state. Here, the maintenance of trust supplements formal institutions, acting as an enforcement mechanism. In this regard, trust often is understood as informal institution, although relationships between trust and institutions are complex and recursive. Trust is more than an informal institution, but rather is embedded in informal institutions, thus contributing to a trust-based culture and institutional frame (Welter 2005). In this regard, the trust literature distinguishes between institutional and personal trust (Fukuyama 1995, Williamson 1993). Institutional trust, also labelled systemic trust, arises as a result of the confidence that individuals show in institutions at the macro level. Institutional trust reflects trust in the functioning of the overall political, legal or economic framework and its informal rules, with low levels of institutional trust in general taken as indicators for a deficient institutional framework. Institutional trust is essential for the efficient operation of a market economy, because individuals can enter into transactions with only limited information about their partner’s specific attributes; that is, the scope of trust extends beyond the number of people that are known personally (Welter and Smallbone 2006). In case the partner defaults, legal regulations and sanctions help to safeguard the (business) relationship. In relation to transition environments which include new member states of the European Union, but particularly their neighbouring countries, a number of authors refer to a lack of systemic trust, and the instability of norms, contributing to an extensive use of personal networks (for example, Höhmann and Welter 2005, Peng 2000, Ledena 2006, Radaev 2001, 2004, Raiser, Rousso and Steves 2004, Yan and Manolova 1998, Welter and Smallbone 2006). A trust culture is likely to take generations to emerge, as it is resistant to radical change. This may have consequences for cross border co-operation between post Soviet countries and new EU member states, in circumstances where the latter have begun to develop a more advanced trust culture than in post-Soviet environments. On the other hand, it may be argued that their experience during the Soviet period might provide the basis for understanding the trust environment of their cross border partners, although they may have moved on from it themselves. However, legacies of the Soviet period also impede institutional trust, particularly in the NIS. For example, in Russia, Voronkov and Zdravomyslova (2004) identify the “master norm of double standards or hypocrisy” as a legacy of the Soviet period impeding institutional trust building. Written laws regulated the official public realm, while unwritten codes dominated the a-legal, but tolerated informal society, which evolved under socialism. Such habitual codes regulated the “social practices of the private sphere, the household economy, as well as shadow entrepreneurship (…) and even the mundane functioning of kollektiva” (Voronkov and Zdravosmyslova 2004, p. 110). Habitual codes were not questioned and were based on collective identities and trustworthy relations, which developed throughout everyday life. When the process of transformation started, the double standards collapsed and people no longer had to switch between official and private codes governing their conduct. Here, Voronkov and Zdravosmyslova (op cit) suggest that personal trust still dominates where survival strategies and coping strategies are concerned, but that in entrepreneurship impersonalised contracts slowly force out old practices. In the context of cross border entrepreneurial activities, one might therefore assume that small-scale petty activities heavily rely on personal trust, while the
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role of personal trust decreases for cross border co-operations of firms. However, for both groups, when crossing international borders, institutional trust needs to be supplemented by personal trust: Traders need to build up a relationship with the border officials, often initiated and / or facilitated by bribes (Thuen 1999). Personal trust reflects trust at the individual level. Factors at the organizational and personal level are important in this regard, as they assist in signalling the trustworthiness of the partner as one requirement for trust to emerge. Organisational factors are reflected, for example, in the regulation of the partnership, the communication structures, and the benefits of cross border co-operations to its partners. At a personal level, the background and behaviour of both partners, the nature of their relationship and any positive previous and ongoing experiences are important. All these factors signal reliability and reliance, which in turn reflects individual (or organisational) trustworthiness (Nooteboom 2002). The background of partners, as reflected in, for example, their professional experiences, schooling and language skills as well as experiences in living abroad, signals openness towards other cultures, but it may also provide them with the skills and knowledge required for building cross border partnerships. Key characteristics of partners include their personal characteristics and feelings such as honesty or loyalty, oftentimes mentioned together with sympathy and empathy (e.g., Nooteboom 2007), but also their entrepreneurial professionalism (e.g., Nuissl 2001). Additionally, personal trust also can be a result of characteristics of a group, such as ethnic groups or kinship. Trust in this case is transported through recommendations of others within this group (Williamson 1993) or through reputation, which refers to knowledge held by individuals about potential partner in terms of
his/her behaviour in prior network relations. Overall, trustor and trustee know or assume that the partner/friend will not behave in a way detrimental to the relationship, even when there are no written or explicit rules set out and regardless of whether it is personal or business relationships. In other words, they are governed by informal institutions (North 1990), that is, norms, values and codes of conduct inherent in a business environment and/or a wider society, which refers to “socially incalculated values, norms and customs” (Nooteboom 2007: 40). In a cross border context, these informal institutions are reflected in cultural proximity, which facilitates trust building at the macro level. Trust building is facilitated between communities, which have a common history, some common rules or other shared experiences (Welter 2005) and also across regions with similar economic conditions. For example, the literature on Italian districts (e.g., Dei Ottati 2005) has shown the impact of the local “code of fair behaviour” which creates a specific trust milieu within a region and for the district’s firms. This draws attention to the embeddedness of trust in the overall institutional and spatial context as factors influencing both the nature of personal and institutional trust (Welter, Veleva and Kolb 2008). Research questions So far, the literature on trust has tended to start from the assumption that trust helps to reduce transaction costs, albeit without conclusive evidence. In a cross border context, trust could take on particular importance in lowering risks of business transactions across borders and in unfamiliar contexts, supported by geographical and cultural proximity as outlined above. Therefore, the role and nature of trust deserves a closer look: is trust complementing or substituting for the institutional framework? For that, one needs to distinguish between the two forms of trust. As an informal sanctioning mechanism, personal trust may complement institutional trust (and the institutional framework) in situations an individual lacks trust in or does not know the formal framework (Welter and Smallbone 2006). Personal trust is needed because institutional frameworks can never completely guarantee and safeguard individual relationships. But, research undertaken in contexts of low(er) institutional trust, such as in former Soviet countries, often emphasizes the role of personal trust in an incomplete institutional framework (e.g., Peng 2000, for Russia: Chepurenko and Malieva 2005, Ledeneva, 1998, 2006; Radaev, 2001, 2004, Voronkov and Zdravosmyslova 2004, for Belarus, Ukraine and Moldova: Smallbone and Welter 2001, Welter and Smallbone 2003). In these circumstances, personal trust may substitute for deficiencies in the institutional business environment. For example, business partners may turn to friends and acquaintances to help solve problems and access resources, rather than to consultants or public agencies. Personal trust can even dominate such relationships when institutional trust into the formal framework is
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lacking, thus impeding control of the co-operation at the macro level. In a cross border context, this can be mediated by the socio-spatial proximity of neighbouring regions and partners. Moreover, one might assume differences in the role of trust between types of cross border partnerships; with personal trust dominating petty trading activities and losing importance (over time) for enterprise cross border partnerships. In order to capture the role of trust, we propose the following relationships between types of trust and their role in cross border entrepreneurial activities, which will be explored empirically in the remainder of the paper. •
Personal trust is the main trigger for the emergence of entrepreneurial activities at household, and enterprise level. Moreover, personal trust gains importance throughout cross border entrepreneurship development, in particular in environments where institutional trust is absent or low. In such environments personal trust is the main facilitator of cross border entrepreneurship in order to overcome institutional mistrust. Personal trust also gains importance in the case of cultural stereotypes and prejudices or a lack of regional identity.
•
Institutional trust is required for cross border entrepreneurial activities in order to develop further, to be sustainable and to contribute to the overall level of entrepreneurship development within the regions. In case institutional trust is absent, this could partly be compensated through personal trust or through cross-border identities as visible in cultural proximity. However, in the longer run, institutional trust is needed in order for the economic and entrepreneurial potential of cross border entrepreneurship to be fully realised.
Methodological and empirical approach Empirically, the paper draws on case material from two projects on cross border co-operation, one of which studied cross border entrepreneurship in Belarus, Ukraine and Moldova, financed by INTAS (Intas project); and the second in border regions in Bulgaria, Estonia, Germany, Greece, Finland and Poland, financed by the EU within its 6th Framework Programme (www.crossbordercoop.net). Both projects involved partners from several European and NIS countries, with each of the national teams responsible for conducting the interviews in their border regions. One must be aware that trust is not an ‘objective’ phenomenon, which can easily be measured and understood across cultures and countries (Welter and Smallbone 2006). Trust, in particular its understanding and interpretation, is very much also a socially constructed phenomenon, which renders its measurement and empirical analysis difficult. Key issues concern the operationalization of different concepts of trust and the choice of adequate empirical methods. Trust frequently results from habitual behaviour, where individuals implicitly draw on habits and norms without calculating or justifying their behaviour beforehand. Previous research in which some of the authors have been involved has demonstrated the difficulties in using standardised surveys in order to study trust in entrepreneurial activities (cf. Höhmann and Welter 2005). Therefore, both projects used a qualitative approach based on multiple case studies. Interviews were conducted on a semi-structured basis, using a topic guide, with respondents from households, enterprises and local support organisations and administrations. Household respondents were identified by researchers at random, through observation of petty trading activities at markets on both border sides and/or railway stations at border crossing points. Enterprises were mainly identified through assistance from institutions, in order to include firms where there was some expectation that they were, or had been, involved in cross border activity. Enterprises were selected to represent different size, sector and age groups. Within the first project (INTAS 04-79-6991), a total of 300 in-depth interviews were completed, including institutions (10 per region), enterprises (20 per region) and households (10 per region). These interviews were carried out face-to-face in three regions in Belarus and Ukraine respectively and two regions in Moldova in 2006 (see Map 1 in Annex). The investigated border regions in Belarus included Grodno (bordering Poland and Lithuania), Brest (bordering Poland and Ukraine) and Vitebsk, which borders Lithuania, Latvia and Russia. In Moldova, the case regions included the Cahul district, in the southern part of the country, and the Edinet district, which is in the north of the country. Both districts have a common border with Romania and are
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members of Euro-regions. In Ukraine the project was carried out in three border regions of Western Ukraine, Lviv region, Volyn region and Zakarpattya region which have common borders with Poland, Slovakia, Hungary and Romania. Within the latter project (CBCED, 2006-2008), a total of 240 in-depths interviews with enterprises and a total of 80 households (with the exception of the German and Finnish border regions) have been conducted in twelve border regions, two per country (see Map 1 in Annex). This includes Hochfranken in Germany, bordering the Czech Republic, and Görlitz – Zgorgelec at the German-Polish border, Biala-Podlaska as the second Polish region, bordering Belarus; Tornio in Finland, bordering Sweden, and South Karelia at the border of Russia; Ida-Viru and South East Estonia, both bordering Russia; in Greece Florina, bordering FYROM, and Serres, bordering Bulgaria; and in Bulgaria Petrich and Kyustendil. The guidelines used in the interviews paid particular attention to the nature and extent of cross border entrepreneurial activities; the motives of entrepreneurs and individuals for engaging in such activities; their entrepreneurial practices; and the factors either inhibiting or favouring the development of their entrepreneurial activities; the role of trust and learning in this regard as well as policies and support. In the case of interviews with representatives of households, the role of different members of the household and families in the cross border entrepreneurial activities was discussed. Since cross border partnerships are part of a wider trading system, a key aspect of the investigation was the nature and extent of the co-operation with trading partners for all groups. Interviews in both projects were conducted face-to-face and extensive interview protocols have been kept; where possible, interviews also were recorded. Interview protocols have been translated into English and have been systematically analysed with the help of NVivo software. While national teams were responsible for the initial analysis of issues related to cross border entrepreneurship, a more detailed cross case analysis concerning issues of trust and learning has been conducted by the authors of this paper (cf. Welter et al. 2007; Welter, Veleva and Kolb 2008 for more details). The conceptual framework outlined in the previous section was the basis to develop coding nodes, which allowed a systematic search for patterns of trust, its origin, forms and role as well as for ways trust is built and lost. Interviews have been coded by all members of the German research team and coding has been cross checked for inconsistencies before progressing with the thematic analysis.
An empirical view of trust within cross border entrepreneurship This section turns to analyse institutional and personal trust, with particular emphasis on their roles and nature as well as factors influencing it, in a cross border context. The role of institutional trust in a cross border context In line with results from several previous studies (Bachman 2003, Chepurenko and Malieva 2005, Lane 1997, Lane and Bachmann 1996, Radaev 2004, Venesaar 2005, Smallbone and Welter 2006), evidence from both projects illustrates how trust building is facilitated in environments where legal frameworks exist and function well, leaving little room for discretionary decisions of officials. This is visible in several of our case study regions: for example, in co-operations between Poland and Belarus where respondents from households and enterprises alike complain about difficulties with customs officials and restrictive border regulations after Poland joined the EU. It is also visible between Greece and FYROM and between South Karelia and Russia where in both cases an uncertain environment impedes cross border activities. A typical statement is this one of a Finnish entrepreneur, co-operating with Russia, who discusses the problems involved in that co-operation: “The main problem in Russia, the uncertainty, has to do with the Russian officials. Their activities create most of the barriers we have faced in our CBC. (…) especially the way the local authorities’ interpretation of the law – they are not consistent in this way, the interpretations seem to change every day (if not every hour).”, while Polish entrepreneurs recognise the Belarusian border institutions as a major hindrance for their cross border activities: “It has changed significantly since 2004. Belarusian law has blocked, not lowered but blocked the trade.”
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Thus, in hostile or turbulent environments, institutional deficiencies hinder the development of cross border entrepreneurship and through that they also restrict possibilities for trust building indirectly. The following examples serve to illustrate the influence of both domestic and foreign institutions in this regard. A household in Biala-Podlaska, trading with cigarettes and alcohol, complains about the risks involved in his illegal trading activities, while a Bulgarian household in Kyustendil legalized his activities over the course of time. At the same time, changing border regulations in the wake of EU enlargement have had a direct and often adverse impact on cross 1 border activities in the NIS countries, in particular those of households . Individuals frequently complained about harassment through customs officials, especially those involved in unregistered or partially illegal activities. Bribes and “presents” are but one typical “solution”, while some traders also started to formalise their illegal and semi-legal petty trading activities as illustrated by the example in Box 1. Box 1: Coping with institutional deficiencies Two sisters, 58 and 61 years old, started trading Moldovan food to Romania in 1994, after losing employment at a state factory. Later they added the importation of textiles from Romania to their portfolio. Until 1999, they transported their goods by regular buses, without any regulation of the trade activity. At the customs, they usually bribed officers which allowed them to pass the frontier with large amounts of goods. However, since 2001 controls became stricter, both on the border and on local markets, which forced them to regulate their business. Today they hold a licence to trade, although in order to earn some income from their trading activities they still continue circumventing (some of) the import procedures. EU enlargement has reduced controls on the borders between new member states and existing EU countries, consequently facilitating cross border activities, although acting as additional impediment for those case study regions bordering non-EU members (Greece-FYROM, BulgariaFYROM, Estonia-Russia, Finland-Russia, Poland-Belarus) and for case study regions from the NIS countries now bordering the enlarged EU (Belarus-Poland, Ukraine-Poland, UkraineSlovakia, Ukraine-Hungary, Moldova-Romania), where low(er) institutional trust into the formal framework continues to dominate. Faced with contexts where major institutional deficiencies exist, individuals sometimes mention bribing officials, which reflects a lack of (access to) trustbased relations: “People prefer mutual reciprocity. (…) It follows from this that bribery is something people resort to; in other words, bribery is practised when people do not have the necessary networks of friends.” (Humphrey 2002: 129). The use of bribes is also apparent in the empirical evidence from both projects, in that those who cannot claim personal relations at the customs or border have to pay: “Our relations with local authorities relied on bribes. Everywhere, as simple as that. For example, in the customs, paying for a truck, giving some money through custom fines, etc.” (Greek-Bulgarian border). “Our offices are public, but all of them work for their pockets.” (Ukrainian-Polish border) is a typical statement reflecting the overall low level of institutional trust, while at the same time indicating the need for bribing behaviour when dealing with public officials. As an entrepreneur in the South-Estonian border region with Russia complains: “Then there is Russian bureaucracy and bribing. In Russia the orders come top-down – from Tsar to his subordinates. Our official communication is horizontal, in Russia it’s vertical. In Russia people can’t influence decision-making, instead they use bribes.” The data show an interesting, but not surprising regional pattern, in that such practices are more evident in partnerships with non-EU member states such as Belarus, Moldova, Ukraine, Russia or FYROM and in the early stages of co-operation with countries such as Bulgaria before it became a member of the EU, although in this case with changes for the better in the course of EU accession. The nature of institutional trust in a cross border context Results from both projects demonstrate that factors which influence entrepreneurship-based cross border co-operation include both “hard” (such as border controls and customs regimes) and “soft” elements, such as spatial and socio-cultural proximity. Whilst factors such as changing border regulations have a direct and often adverse impact on cross border activities, 1
Our study was conducted before Hungary and Poland joined the Schengen agreement in 2007. After this, petty trading across borders virtually has been stopped because of rigid visa regulations.
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particularly those at the household level and in the NIS countries, a common history, shared experiences, collective memories and shared identities positively affect the trust environment in which cross border entrepreneurship takes place. In this regard, institutional trust is required for entrepreneurial activities to develop and thrive over time. Institutional trust is influenced by individual experiences made with single institutions, or representatives of such institutions, thus having a competence-based component. However, institutional trust is also influenced by the overall institutional legal and political frameworks, the respective culture and economies and historical experiences. All factors can contribute to a high level of institutional trust if and when individuals have had positive experiences regarding the institutional framework or where they are confident that the institutional environment is functioning well. While interviewees often complain about deficiencies in the formal institutional framework which impedes their cross border activity, in most cases this does not prevent them from continuing or starting trading across the border. It is less the lack of trust in formal institutions, but rather the existence of trust into informal institutions, sometimes alongside personal trust, which in these conditions, helps them to cope with a deficient formal framework. Such trust in informal institutions is reflected in a collective identity and/or shared experiences from the Soviet period. In other words, the pattern emerging from our evidence demonstrates the dual nature of institutional trust with informal institutional trust as visible in cultural proximity often substituting for a low(er) level of formal institutional trust. Collective identities as basis for trust building are visible across most regions, with the German border regions being exceptions because of their resettlement history. In Southern European regions interviewees emphasized their ‘Balkan identity’ as well as similarity in the languages as means to create a common understanding also in business relations. In other regions, for example Sweden and Finland or Moldova and Romania, cultural proximity is visible in common mentalities and behaviour. In more detail, interviewees mention traditions, religion, music, social habits, history and stories, heroes and national symbols, and common languages as main facets in this regard as the following quotes for different regions illustrate: “A common background with Eastern countries helps to build trust. (…) They see the Slavic roots, similar language. Also, the perception of the world is similar.” (Polish-Belarusian border); “Common cultural habits helped in trust building. Balkan people are very close to us. I never felt fear or insecurity when in the FYROM. They were never offensive towards us, unlike what many Greeks were expecting.” (Greek-Macedonian border); or “(…) a Finnish person and a Swedish person share exactly the same characteristics: they are equally honest, hardworking and also equally envious of other people.” (FinnishSwedish border). In some instances, economic conditions reinforce collective mindsets and contribute to trust across the borders as illustrated by a household in Biala-Podlaska, trading with Belarus: “Our and their life problems are similar; we have much to talk about.” Again, proximity, this time reflected in similar economic experiences, allows partners to draw on something ‘known’ and trusted on both sides of the border, which are of importance here. On the other hand, negative individual experiences often contribute to cultural stereotyping, reflecting cultural distance, as one means of expressing one’s disappointment. This is a pattern particularly visible in the Polish-Belarusian, Ukrainian-Polish or Moldovan-Romanian border regions, where despite a shared history cross border entrepreneurship is impeded due to individual experiences and a deficient formal framework. A low level of institutional trust can also be based on historical retentions of the neighbouring population, thus drawing attention to the path-dependency of institutional trust in a cross border context. This is reflected in statements like “they have it [cheating] in their blood” (Polish-Belarusian border) or a Finnish partner explaining that “The Russians’ commitment to doing business is not always admirable – I think this is something that the local culture does not emphasize, and this will surely be a problem also in the future.” Moreover, current political relations and problems between neighbouring countries influence institutional trust as well as levels of personal trust, as is apparent in the case of the Estonian regions, or in the Greece-FYROM (Republic of Macedonia) border region because of the naming issue. This consequently results in low levels of overall institutional trust as explained by this entrepreneur from Estonia: “Political relations are rather negative at the moment, and this has decreased the trust of some partners.” Overall, a regional pattern is visible in the data where interviewees in border regions of both old and new EU member states show (initially) lower levels of trust towards their non-EU member neighbouring countries (and partners), despite (or even because of) common experiences
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during Soviet times in the case of the new EU members: “The East still is far away.” Entrepreneurs and individuals from non-EU member countries are more trusting, although it is more of a necessity for them in order to keep their business relations, rather than signalling genuine personal trust (Welter and Smallbone 2008). The role of personal trust in a cross border context Personal contacts and trust at an individual level can play an important role in cross border partnerships as vividly illustrated by a German entrepreneur describing his experiences in the Czech Republic: “People have to be very friendly to Czech institutions, then there will be no problems.” Personal trust generally plays an important role for cross border co-operations and its importance is recognised in all case study regions: “People have to trust (…). Without trust, it is not possible to do business.” (Hochfranken), “Trust is the foundation for the development and the maintenance of a client base. Especially in Poland trust is of great importance.” (Görlitz) and “Unless there is trust between the partners, the cross border co-operation cannot develop” (Kyustendil) are typical statements in this regard. Personal trust is signalled through cross border relations starting from personal relations and/or extending beyond mere ‘business’ co-operations, as for example in the case of an entrepreneur from Görlitz who was invited to the public EU enlargement ceremony taking place in Poland. Another entrepreneur from the same region named his first conversation with his Polish partner as an example of the role trust played in the cooperation between the partners from the beginning: the Polish director took a notepad and wrote down the Polish translation of the word ‘trust’, and our interviewee added the German word. According to him, in this way, the parties manifested their will that the cooperation should mainly be based on trust, which has been the case until today. Personal trust is not only a trigger for cross border activities, but also facilitates their consequent development, as is visible in the choice of partners through kinship- and friendshipbased networks. This is of particular importance in the NIS countries and in household entrepreneurial activities in case study regions of former socialist countries and new EU members such as Poland or Bulgaria, mainly because of a deficient institutional framework and consequently low institutional trust. Traders rely on help from family and relatives in buying, transporting and selling their goods, which demonstrates the role of networking and personal contacts, or so-called “blat” (Ledeneva 1998), for trading purposes. “Blat” is the name given to a system that Ledeneva described as an “economy of favours”, signalling a web of trust-based relations. The empirical results show that such relations are also used in cross border entrepreneurship, mainly by individuals and households, thus confirming the importance of personal trust at the level of petty trading. Box 2 illustrates the importance of relatives and kinship in accessing resources and goods as well as their assistance in selling these goods. Box 2: Kinship networks and cross border entrepreneurship A 65-year old woman from Vitebsk in Belarus relies heavily on family connections and friends of friends to conduct her cross border activity. The respondent’s sister is married and living in Vilnius in Lithuania; the respondent and her daughter live in Belarus. The respondent trades in medicines and clothes. The daughter, working in a chemicals firm in Belarus, has access to cheap traditional medicines from Russia, Ukraine and Belarus, which are popular with older people in Lithuania, but not legally importable in most cases. On her way to Lithuania, which the respondent travels to regularly (and officially) to visit relatives, she visits her daughter in order to buy a stock of medicines, using a medicinal certificate (again obtained with the help of her daughter) to export some of the medicine. Once in Vilnius, her sister helps her to sell the medicine through pensioners, who they both know. Only when her personal network contacts do not purchase all the medicine brought for sale, does she sell on the Vilnius market. When returning home, she brings back clothes for sale, which she buys in second-hand stores, in this case assisted by the girlfriend of her niece who works in such a store in Vilnius. In the border regions of the NIS, personal trust has gained importance with EU enlargement. Many cross border trading activities have been negatively affected by new restrictions placed on the movement of certain types of product. For example, in Belarus meat and dairy products, together with plants and flowers are no longer allowed to be exported to Poland and Polish as well as Belarusian individuals may only bring in small quantities (according to household
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respondents interviewed in Brest). Other constraints reported include customs officers not allowing more than one visit per day thus effectively shutting down “ant” traders; and new visa procedures, which require health and auto insurance. At the same time, respondents are creative in dealing with changing border regulations through involving family members in their cross border activities which again draws attention to the role of personal trust in facilitating such activities. In Belarus, for example, each person may now import 50kg without having to pay import duties, although any excess amount is taxed. Households reacted to this new restriction by involving a large number of household members in their trade, since this increases the total volume of goods that can be imported free of duty. Another strategy, which can be seen as equivalent to kinship-based networks mentioned, is to involve “commercial” intermediaries who have to be paid for their services (Welter and Smallbone 2008). Thuen (1999) explains the emergence of such “informal social systems” as part of the socialist heritage (cf. Ledeneva 1998, 2006) and the need to defend informality at the border. Overall, personal trust plays a twofold role in cross border co-operations. Cross border entrepreneurial activities are mainly triggered at a personal level, which means that personal trust is a necessary “ingredient” for many cross border co-operations to emerge, especially in institutional environments which do not allow for institutional trust in the wider sense. On the other hand, personal trust emerges as a result of repeated actions in cross border cooperations, apparently leaving us with a dilemma in this regard: how can cross border cooperations come about if personal trust does not exist at the beginning? Here, Möllering (2006: 191) argues that at the “heart of the concept of trust is the suspension of vulnerability and uncertainty (the leap of faith), which enables actors to have positive expectations of others.” This perspective allows us to solve the dilemma of the recursive nature of trust; and it is an important facet drawing attention to a much required process perspective on trust in a cross border context. The nature of personal trust in a cross border context Similar to institutional trust, cultural proximity also facilitates personal trust: “I am one of them and we perfectly understand each other.” and “Their mentality is similar to ours.” are typical statements illustrating the importance of cultural proximity for trust as it allows individuals to draw on a shared understanding and collective ‘cross border’ identities. This also holds true for many interviewees in the Finnish-Russian case study region of South Karelia. Although in this case, it is personal trust that dominates cross border relations, thus confirming the important role of social capital and close ties in developing partnerships with partners from a post Soviet context (Ledeneva 2006; Schrader 2004), as illustrated by the following quotes: “There is a saying about business in Russia, that before you know your partner thoroughly there is no point in starting to do business with him.” and “the only way to build trust is to have very close and personal relationships with the people involved – you have to be almost “friends” before you can assume that things will work as promised.” With regard to the question whether trust is substituting or complementing the institutional framework, the results from both projects show that personal trust fulfils both roles. It either complements the overall institutional framework, but it also can substitute for formal institutional trust. Through the examples set out above, recursive relations can be observed between both forms of trust: a low level of institutional trust influences levels of personal trust because individuals are reluctant to undergo cross border activities in situations where institutional trust is low. “I feel that there is no way or creating trust between our company and the Russian partners – the Russian administration acts in an unpredictable way and we cannot help this at all.” (South-Karelia). However, interviewees also clearly identify unstable administrations and political distortions as the reason for this: “It is a pity that poor relations between politicians influence communication between ordinary persons.” (Ida-Viru in Estonia). Interestingly, our empirical evidence also demonstrates that “genuine” personal trust, based on friendship, empathy and habituation, rarely dominates in business relations, because of the recurrent presence of a calculative element. This is despite case studies showing that social and personal friendships, which reflect non-rational and non-calculative sources for trust (Nooteboom 2002: 65) and “genuine” personal trust, evolve over time, but they mainly evolve because of control mechanisms, i.e., the calculated side of trust. There is widespread evidence,
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even in well-functioning co-operations, showing that personal trust is complemented by “calculated” trust, thus apparently confirming Williamson’s conclusion that it is not personal trust, but rather “calculated” trust which dominates business relationships (Williamson 1993). This is best summarized by an Estonian entrepreneur laconically stating that “Trust is important, but agreements and other documents have to be in order.” It is also visible in the sources for trusting behaviour valued by interviewees, namely “Western entrepreneurial identities”, visible in interviewees referring to quality of products, timely deliveries and an overall business-like behaviour (Welter, Veleva and Kolb 2008). Such Western entrepreneurial identities reflect a rational assessment of the partner’s behaviour. Moreover, geographical proximity is of importance, since it allows for frequent face-to-face contact, whilst also facilitating supervision of business relations, thus allowing for trust as a calculated risk. The relations between institutional and personal trust Results from both projects also illustrate the difficulty of distinguishing clearly between personal and institutional trust, instead pointing out the complexities and linked nature of both forms as was raised already in the conceptual review. Based on individual experiences, interviewees often tend to classify the entire neighbouring nation as one deserving or not deserving trust, which reflects the complex and recursive relations existing between personal and institutional trust. Only in a few cases are such assessments based on explicit negative experiences with cross border activities, where one of the partners defaulted, or the institutional environment did not work (e.g., custom officials are taking bribes or the procedures are cumbersome and timeconsuming). Frequently, interviewees rely on ‘hearsay’ and popular knowledge of the “other”, the stranger. This is visible in stereotypes to be found in all border regions, such as “You cannot trust Russian partners or Russian in general.” (Finnish-Russian border); “They are Russians – they have a different mentality.” (Polish-Belarusian border); “They are lazy in general and they act like gypsies.” (Greek-Macedonian border); “(…) we are dealing with a completely different mentality” (Greek-Bulgarian border); “Polish people are approaching things easily” (GermanPolish border); “the Czechs’ behaviour is very much determined by their mood and they are considerably less organized.” (German-Czech border); or “It’s hard to cooperate with Russian firms, they have a different way of thinking.” (Estonian-Russian border). Such stereotyping, however, is important as it allows individuals to cope with situations and partners unfamiliar to them in drawing on something familiar and trusted, namely the stereotype, although this tends to reinforce low initial levels of trust. Luhmann (2000: 95) referred to this process as “familiarity breeding unfamiliarity”, where symbols help to reintroduce the unfamiliar into the familiar world, as happens here with stereotyping. Therefore, levels (and also forms) of trust are not only a result of path-dependency, but are also determined by the respective current context and situation and underlying processes of trustbuilding (Möllering 2006).
Conclusions and implications The results confirm the important role that trust plays in initiating and developing cross border entrepreneurship as suggested in the conceptual review. For all forms of cross border partnerships, personal trust, i.e., personal knowledge of the foreign partners is a key enabling factor for cross border co-operation to emerge. This takes on particular importance for household co-operation, which thrives best when long-standing relationships between partners exist, as empirical data from the three NIS countries and from border regions in former socialist countries such as Poland and Bulgaria demonstrate. Moreover, in countries where the institutional environment for entrepreneurship is still highly deficient, as for example in Belarus, Moldova and to a certain extent also Ukraine and Bulgaria, personal trust gains importance at all stages of cross border partnership and for all forms, acting as a substitute for institutional trust. This confirms the majority perspective in literature which sees trust not as complementing, but rather as supplementing the institutional frame (Woodruff 2000). Personal trust dominates and has apparently gained importance in recent years, because of new regulations and EU enlargement. Overall, personal trust triggers cross border partnerships on all levels and of all kinds. Personal trust and calculative trust (as reflected in control
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mechanisms within a cross border partnership) complement each other. Personal trust substitutes for control (and a lack of trust in formal institutions) in some of the former socialist regions as well as in the NIS border regions, appearing to be a requirement for cross border partnerships to develop. Trust in formal institutions is not required for cross border partnerships in border regions to emerge, although it gains importance in the longer run, as seen in the surveyed border regions of old EU member states (Greece, Germany, Finland) and some of the new member state regions (Poland and to some extent Estonia). Trust in formal institutions, however, can impede personal trust. Institutional trust in the sense of trust in informal institutions (as reflected in cultural proximity) is more important for cross border co-operation, because it allows personal trust to develop and it can substitute for an initial lack of institutional formal trust as seen in regions bordering highly deficient institutional environments (BulgariaFYROM, Estonia-Russia, Finland-Russia, Poland-Belarus, Romania-Moldova, Poland-Ukraine). The paper makes a conceptual and empirical contribution to the literature on the role of trust in entrepreneurial activity, with implications both for entrepreneurship theory and policy. The results have demonstrated the close link between institutional and personal dimensions of trust as suggested in the conceptual section. Overall, our evidence also shows personal trust in a cross border context as having both calculative and non-calculative, routinized and habitual, elements, thus confirming its dual nature where genuine trust and control can co-exist and coevolve (Möllering 2005). We also found evidence of the dual nature of institutional trust, which points to the need for future research analysing the impact such differences in the nature of trust have on the development potential of cross border entrepreneurship. Moreover, the results emphasize not only that trust is context bound, but also its process-dimensions, which warrants further exploration. In this regard, one lesson emerging from the research reported here concerns methods and methodologies of researching trust and learning. Taking into account the context- and process-nature of the phenomena in question, future research would benefit from a longitudinal as well as a qualitative dimension, in order to gain deeper insights into its nature. Finally, with regard to the discussion around international entrepreneurship, the results demonstrate the need to recognise the importance of “soft” factors such as trust in fostering the discovery and exploitation of opportunities across borders. One of the main policy implications arising from the analysis focuses on the importance of institutional trust in fostering enterprise-based cross border partnerships, in situations where one of the partners is located in a border region in one of the NIS. Whilst the absence of trust in formal institutions does not prevent such partnerships from developing, it inevitably affects the nature and extent of any investment by the western partner. Relevant examples of institutional trust, in this regard, include trust in the legal system to enforce contracts and protect private property rights, as well as aspects more directly related to cross border movement, such as border controls, customs procedures and visa regimes. It is important to emphasise that it is the behaviour of those individuals and institutions responsible for implementing laws and regulations that is important and not just the regulations themselves. As a consequence, it is suggested that one of the core conditions for the development of productive cross border entrepreneurship is the establishment of an institutional framework that entrepreneurs feel they can trust to operate fairly and consistently. The findings with respect to the role of personal trust at the enterprise level also have implications for policy makers interested in promoting cross border entrepreneurship as an economic development tool as well as for entrepreneurs interested in developing cross border partnerships in environments where institutional frameworks are not functioning well. The implication for entrepreneurs is that successful co-operation requires a learning element, suggesting that there is merit in a “step by step” approach, where entrepreneurs gain experience with looser forms of co-operation with a partner first in order to learn about each partner’s culture and improve communication, before intensifying their collaborative activities. The implication for policy points to a need for support programmes to assist firms in planning and preparing management and key staff to co-operate, which in a cross border context would benefit from the inclusion of cultural awareness training. At the same time, to implement this successfully requires business support agencies with sufficient penetration of the local business community and sufficiently competent to attract the trust of local entrepreneurs in the value of their programmes.
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Annex 1: Map of the analysed border regions
Note: Red stars signify border regions analysed in the CBCED project; blue stars those analysed in the INTAS project.
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