the motivations and perceived environment of

NCSB 2004 Conference 13th Nordic Conference on Small Business Research

FROM THE DAWN OF A M ARKET ECONOMY TO THE MEMBERSHIP OF THE EUROPEAN UNION: THE MOTIVATIONS AND PERCEIVED ENVIRONMENT OF ESTONIAN ENTREPRENEURS

Ahti Lehtomaa Lappeenranta University of Technology Department of Industrial Engineering and Management Finland [email protected]

Asko Miettinen Tampere University of Technology Industrial Management Finland [email protected]

Kaisu Puumalainen Lappeenranta University of Technology Department of Business Administration Finland kaisu.puumalainen @lut.fi

May 2004 Abstract. Changes in start-up motivations and availability and use of support services are explored from the perspective of Estonian start-up firms in 1991 and 2000, respectively. This is motivated by the critical role of new entrepreneurs as shapers of economic decisions, actions and business performance. A structured interview based survey was conducted in recently established enterprises in Estonia. Owners/managers from 80 new enterprises participated in this study in 1991 and 58 in 2000. The results showed that there has been changes start-up motivations and use of support services of small firms in 1990s. In addition to several institutional changes, the business environment has ‘normalised’ from the market economy point of view: the competition has intensified, political instability decreased, access to customers has become more difficult etc. Availability of capital seems even more difficult than in the early 1990s. At the same time, there were somewhat easier access to market information, various advisory and training services, which were also more utilised than a decade earlier. This was not enough, however, and majority of Estonian entrepreneurs considered SME support policy and practice still rather weak and ineffective. Some new challenges after the recent membership of Estonia in the European Union with the special reference to the SME sector are further discussed.


Introduction The processes of post-socialistic transitions have been a popular research topic over the past decade. Yet, the question of possible theoretical approaches to capture the essence of the these change processes has been challenged, not least because the transformation process from socialism to the market economy is a unique economic and social experience in the history. There are also some less studied aspects of this process, such as the social costs and consequences of transformation (Lagerspetz, 2000). It has been said that research is sometimes like driving a car under various conditions and with a map which is not very accurate. The driver does not know exactly what might happen on the way and his/her ability to exploit the route map is bounded. The driving conditions vary and changes are probable. This seems to be particularly try when doing research on economies in transition. There are a good number of methodological difficulties and traditional theories do not seem to fit particularly well in the landscape of those economies, but have rather a tendency to misguide the researcher (i.e. Peng and Heath, 1996; Liuhto and Michailova, 1999). It is all the same when organisation and management research is concerned, both in terms of quantitative and qualitative methodologies. The absence of ’a grand theory’ seems evident, and a lack of interaction between theories and empirical data may be one reason why many scholars continuously emphasise on the uniqueness of the transformation. A good number of organisation and management studies conducted during the socialist era, concentrated on describing how an organisation and its management fulfilled their tasks in the giant socialist system, carrying rather strong ideological flavour, as Liuhto and Michailova (1999) have noted. Thus, new type of studies on private small and medium-sized enterprises and entrepreneurship present a relatively new field of research. There is an increasing need for research in the microeconomic transformation: the overall transition to market economy will not occur if enterprise management is not capable of implementing changes at the enterprise level. In the 1997 transition report, Enterprise Performance and Growth, The European Bank for Reconstruction and Development (EBRD) noticed that organisational changes in enterprise management had bee n major factors in the transformation of Central and Eastern Europe to market economies. In this report, the EBRD referred to ”legacies inherited from central planning” leading to ”defensive restructuring” of formerly centrally-planned companies. These legacies had negative effects on the adoption of market-oriented Western management techniques and approaches. It was, however, somewhat unclear how and why these legacies indicated such strong persistence , even in the face of radical changes involving processes of transformation. Three years later, the EBRD admitted in its Transition Report 2000. Employment, Skills and Transition that these ”legacies” had not disappeared and concluded that there is a ”clear shortage of skills and a shortfall in training, not least for managers”. The underlying assumption in this report was that the introduction of Western management principles, techniques and practice would provide the benchmark against which enterprise restructuring in Central and Eastern Europe (CEE) could be measured. In their recent book, Clark and Soulsby (1999) clearly demonstrate that many managers in former centrally-planned enterprises exercised a different management style during transformation, based on the knowledge, competence, experience and values that had been accumulated during the period of the


old regime. This enabled them to cope with the processes of transformation and furthermore, to gain the legitimacy that was necessary to undertake organisational changes at the enterprise leve l. In examining these ”socio - institutional” processes, Clark and Soulsby contribute to the institutional theory by putting emphasis on the behaviour of enterprise managers and on the institutional basis for socio-economic change by linking the dynamics in macro-institutional environment to organisational changes at the micro-enterprise level. Although their primary data come from Czech Republic, their analysis characterising some typical features of enterprise management during transformation, in terms of style, knowledge, competence, experience and values has potentially much larger application in CEE countries including the Baltic States. The SMME sector in Estonian economy since the early 1990’s Before the start of major transformations in the turn of 1980/90s, it was very different to conduct research on socialist economies and organisations. Until the end of 1980s, it focused on pure system descriptions rather than any in-depth analysis. Furthermore, before the 1990s the small business sector and private entrepreneurship were formally (officially) almost non-existing. When the world political map started to undergo a process of re-territorialisation, as some boundaries disappeared and some emerged, major changes appeared in economic life of great many countries, too. These changes seemed to happen at the price of internal resistance (Berg, 2002). There were, however, some earlier signs of private entrepreneurship before the new independence in 1991. In 1987, a law was created which permitted small enterprises to exist. This form of company, otherwise known as Daughter companies, was often a spin-off company from a Large State Enterprise. Most often these daughter companies were still state companies, however, there was a trend toward the creation of more small private companies. The law for stock companies was passed and adopted in Estonia in 1989. This form of company allowed private individuals to establish their own privately held companies. Another route to small private companies appeared in 1987, when a law was established to support the development of Joint Venture Companies. This allowed foreign companies to create enterprises with joint capital, joint management and joint profit and losses. Such joint ventures were limited, however, to the co-operation of only legal persons, and not private persons. To sum up, Estonia’s way from a province in the socialist Soviet empire into regained economic and political independence: Development of its market economy has been divided into several phases. Aho et al. (1998, 153) and Kurik et al. (2002, 17) have periodised the development of private enterprising in Estonia over the past 15 years in four phases: 1. The first relatively modest steps in order to develop new forms of entrepreneurship in perestroika period in the late 1980s.; starting to move gradually towards a market economy and national independence restoration. Beginning of new private entrepreneurship. 2. The very rapid boom of private entrepreneurship that accompanied the economic liberalisation carried out in 1990-91; re-establishing Estonian political and economic independence. 3. The main years of privatisation in 1991-1995.


4. The first half of 1992 there was a sharp shift to radical liberalisation of economy and foreign Economic relations. This became the permanent feature of Estonian economic model. Monetary reform started and the real beginning of macroeconomic policy started in summer 1992. 5. The period of moderating increase of entrepreneurship along with gradual stabilisation and normalisation of economic conditions from 1994 onwards. After a big recession in 1994 economy started to rise again. As to the small business sector during the early transition period, hundreds of companies were formed in various legal forms described above; the number of new SMEs literally boomed in the early 1990s. Scheinberg and Alänge (1991) have typified the entrepreneurs at the early transformation period based on the motivation and opportunity driven pattern of the business leaders as follows: (1) The Pragmatist had primarily one business idea and followed it’s development and implementation very practically, pragmatically and generally successfully. He/she really believed in his/her product or service and knew the market and best customers well, but mostly suffered along with everyone else in getting the supplies needed. (2) The Adventurer’s or Cowboy’s Portfolio or Opportunity Seeking Companies. In opposition to the pragmatist, the Opportunists, were running companies which had 5 to 10 business directions simultaneously. Most often, these business directions were not at all related to each other. These entrepreneurs were always motivated by their search for the best or better business opportunity, and therefore, kept adding new ventures to their portfolio of directions. (3) The Ruble Millionaire . During the early transition period, there existed conditions and situations that were unique to such transition periods. The companies that fell in this category were those entrepreneurs that had found a flaw in the system (such as the lack of a supply distribution system) and had found a way to make a million from it. These type of businesses often did not have many people employed. They were fast turn around operations, or they had a stock or commodity exchange direction. (4) The Joint Venture Company . Above all other forms, the Joint Venture, has been the company form that held the charm or the everyman’s solution for the future. In the late 1980’s, having had a relationship with a foreign partner, represented the key to almost all dreams. For example, along with this relationship access to supplies, western technology, ideas, markets, the new family car, not to mention hard foreign currency, were thought to appear. (Very soon it became clear, however, that with so many inquiries and so many attempts made, great many joint ventures failed.) Despite the rapid increase of the amount of SMEs in the early 1990’s, the number of active operating SMEs was not that high. Anyway, the amount of active operating small businesses grew continuously until 1995 and reached a total number of about 31,300 (active) units in 2000. (The Estonian population is about 1.5 million) In 1996-1997 there were about 20 enterprises per 1,000 inhabitants and 23 in 2000, which is lower than in most EU countries, but differences between Estonian counties were almost threefold. Although public enterprises are only an small part (1.4 %) of all registered enterprises they play an important role in some industries and in infrastructure. Public enterprises average proportion in turnover has decreased from one third in 1994 to 16.2 % in 1998 and to 9 % in 2000. Still the turnover of the public enterprises is more than six times bigger than the average (Sepp & Hankov, 2001). In terms of business start-ups and closures, there have been considerable changes year by year


throughout the 1990’s. From 11,400 registered start- ups in 1991, 17,500 new ventures were entered in the Register of enterprises in 1994. This number went down even further to 5,350 in 1996, while the number of new businesses entered in the Commercial Register went up to about 11,200 again in 1997. The overwhelming majority of enterprises established were SMEs. (Phare Report, 1998; Estonia. International Business Handbook, 2000) There is little disagreement today that social and economic revitalisation are associated with well functioning entrepreneurship. Freeing up economies has led to a substantial growth of micro and small enterprises. Research further suggests that not all societies foster entrepreneurial efforts with effectiveness. The process of privatisation /which has been easier at the small firm end) has affected growth considerably. It should also be mentioned that well operating local small business communities add to the democratic development in the globalising business world with the tendency of large multinational corporations becoming more and more powerful and dominating. Thus, the contribution from the small business sector in transition economies may serve not only economic, but democratic function as well. Some scholars have actually challenged the widely used term ”transition”. For example, according to Lagerspetz (2000), the term ”transition”, so often used in comments on post-socialistic change, is dismissed as it depicts the process as predictable and the ”transitory” problems as having an automatic solution. The term is instrumental in legitimising the political decisions , which have led to the emergence of new societal problems. On the other hand, transforming economies offer an unprecedented opportunity for researchers to study entrepreneurial adaptation to turbulent and emerging institutional environments. In addition to the generally observed liabilities of newness and smallness , entrepreneurial firms in transforming economies have to cope with an environment that itself is unpredictable and rapidly changing (Newman, 2000; Manolova and Yan, 2002). The probably most important accomplishment of Estonia’s recent development has been the consolidation of political democracy. The fast westward turn of foreign trade and the restructuring of economy have been less easy. The economic growth that has taken since mid 1990s has been able to raise Estonian GNP back to the pre-independence level. A liberal economic policy has also created growing inequality between regions, occupations and genders. Poverty, marginalisation and health problems result from the neglect of social policy. For the time being, public discussion on tasks of economic and social policies seems rather difficult to initiate. Research problem and methodology Scholars have studied managerial perceptions of business environments using a variety of methods ranging from simple procedures such as asking informants to list their observations or competitors to more sophisticated approaches such as network analyses and multivariate analysis of questionnaire items. One set of methods popular in the recent years includes various cognitive mapping methods. Given the critical role of business managers as shapers of organisational decisions, actions, and consequently, performance, investigation of variations in their perceptions of the environment is important for enhancing understanding of decision processes, firm actions, and organisational outcomes. Every enterprise has naturally its unique external environment; even firms within the same industry have environments unique to themselves. On the other hand, several scholars have also noted


the likelihood of shared perceptions of the environment across firms within industries as a consequence of a number of factors, i.e. recruiting personnel from within industry, interorganisational communications arising from key persons’ participation in conventions and professional associations, and borrowing ideas from business, trade, or other professional sources. In addition, to the extent that perceptions are influenced by practices, institutional theory would support the idea that perceptions would be more similar within industries than across industries and within SME sector than across all firms. An interview-based survey was conducted in recently established enterprises in Estonia in 2000 using the questionnaire developed for the Society for Associated Researchers on International Entrepreneurship (SARIE) and administrated in 18 countries in the late 1980s. The SARIE questionnaire focuses i.e. on start- up motivations and the influence of environment during the first years of operations of new ventures (i.e. Kolvereid, 1991; McGrath et al., 1992 a and 1992 b). Owners/managers from 59 new enterprises participated in this study. The results were then compared to findings achieved in the similar study in Estonia conducted by the SARIE questionnaire a decade earlier, in 1991 with a sample of 80 entrepreneurs who had recently started up a business of their own. The purpose of the study reported here is to explore entrepreneurs’/SB managers’ start-up motivations and their perceptions about support services available in 1991 (in the “dawn of a market economy in Estonia”) and a decade later, in late 2000. The questionnaire used in the interviews (conducted mostly by Estonian students) includes a list of 23 start-up motivations and 18 items covering the availability of support services and their perceived usefulness for the new ventures. (see appendices). The two samples (in 1991 and in 2000) were remarkably similar in terms of the background of the entrepreneurs interviewed: the average age 37 years (ranging from 24 to 58 years); 76 % males and 24 % females; about 60 % of the new firms operating in service industry, some 20 % in construction industry and 10 % in production business. More than a half had higher education, 30 came from vocational school background and some 15 % had only basic education. Two thirds of the firms in both samples operated in Greater Tallinn area. The mean annual turnover (in the 2000 sample) was very small, only 500.000 EEK (33.300 Euros). Only one of the firms had sales over 10 million EEK (about 6.7 million Euros). For all entrepreneurs in the 1991 sample the new venture was the first one; in the 2000 sample 78 % had started up their first business. The expectations for the future were rather positive in the 2000 sample: some 60 % estimated to be better off after two years and 39 % at the same level as at the time of the interview. Roughly 75 % reported about willingness to grow and to increase employees. 59 % were profitable, 34 % had made a zero result and 7 % had made financial losses. Some 60 % had a better standard of living than before starting up a business of their own and another 40 % said that they continued to have the same standard of living. Results Given the two independent samples from 1991 and 2000, the assumption that they belong to the same basic population of new start-up firms is taken. The start-up motivation variables (see Appendix 1) were factor analysed. A seven factor solution was the most promising one in both cases, but they


appeared much more difficult to interpret than for example in the studies using large international data (i.e. McGrath et al., 1992). That is why new sum variables were constructed based on the most reliable items (coefficients varied from .82 to .59). After this the motivation constructions were renamed and the significance of means tested (a two-tailed t-test) between the 2000 and 1991 samples:

Table 1. The differences between start-up motivations in 2000 and 1991.

2000 1991 t df sign. M sd M sd ___________________________________________________________________________________ Factor 1: Need for Approval

2.84

0.92

2.14

0.87

4.25

117 .000***

Factor 2: Following Examples

2.00

0.88

1.50

0.74

3.37

117 .001***

Factor 3: Need for Personal Development

3.96

0.74

4.28

0.54

-2.70

118 .008**

Factor 4: Degree of Communitarianism

2.02

0.83

2.28

0.92

-1.62

117 .108

Factor 5: Perceived Instrumentality of Wealth 3.80

0.72

2.84 0.86

7.44 118 .000***

Factor 6: Need for Independence

3.96

0.74

3.24

0.89

4.81

117 .000***

Factor 7: Opportunistic Behaviour

3.61

0.73

3.38 0.80

1.65

117 .102

The results showed that there are considerable changes in start-up motivations during the decade studied. There are only two not significant changes. Need for Approval, Following examples, Instrumentality of Wealth and Need for Independence are all on higher level as start- up drivers than they were 10 years earlier. On the other hand, Need for Personal Development has decreased as a motivator. It can be interpreted that motivations have more or less ‘normalised’ in Western terms looking very much alike results from a good number of studies conducted in Estonia’s Nordic Neighbours. Private entrepreneurs has much more become an every-day phenomenon than the situation a decade earlier was. There are examples to follow, more success stories and attitudes towards entrepreneurship as one way to earn one’s living have balanced: entrepreneurs are not any more equalised to dishonest behaviour. Many remarkable changes have taken place in Estonia’s institutional environment on the way from a Soviet province towards a fully functioning market economy and the membership in the EU. This trend has accelerated new legislation and stabilisation of societal circumstances. On the other hand, the liberal economic policy (if not ‘American way’ or ’laizzes- fair’ policy) adopted by the Estonian Government has led to some evident critical incidents.


The Estonian banking sector is a good example. After the monetary reform in 1992 new banks emerged and rapidly totaled some 50. Regulations passed in 1995 required a minimum of 50 million EEK (about 3.33 million Euro) of own capital, which launched a book of bankruptcies in a short run (Lesser, 2000; Vense l & Wihlberg, 2001). For the time being (early 2004) there are 7 banks left. Two biggest ones (owned by foreign banks) account a market share of 89 %. Thus, it is no wonder that small enterprises found financing on of their most urgent problems, even worse now than a decade earlier with the emerging banking sector. The role of government policy in influencing the nature and pace of enterprise development may cover a wide range of opportunities, extending beyond the scope of direct support measures such as the role of government in relation to macroeconomic policy, tax issues, legal framework and general regulatory regime. There is also a risk in supporting entrepreneurship because through support it is easy to create competition deformity. In this study, looking at the support services item by item strengthened the overall picture. Instead of all progress and closing gap between every-day management life and the economic institutions, the problems encountered by small businesses seemed to still appear rather in their institutional than in their technical environment. This is indicated also by perceived availability of support services in 1990 and 2000, respectively: although there has been progress in two thirds of items, the overall landscape is still very moderate. The means of the items remained mostly on the less positive side on a five-point Likert scale. On the other hand, a decade is not a long period if one starts almost from a zero level. ___________________________________________________________________________________ Table 2. Use of support services in 2000 and 1991. ___________________________________________________________________________________ 2000 1991 t df sign. M sd M sd ___________________________________________________________________________________ Type of service Advantageous legal services Advantageous consulting services Courses in new business management Market information Courses in special skills Export assistance Low cost plants/office space Business advisory services Tax free business zones/enterprise zone Low interest loans Operating subsidies Grant to start- ups Loans guaranteed Public risk capital

3.17 3.10 2.42 2.68 2.47 1.92 2.15 1.97 1.63 1.58 1.42 1.83 1.76 1.64

1.04 1.16 1.28 1.27 1.21 1.15 1.45 1.11 0.95 1.10 0.91 1.35 1.38 1.23

2.80 1.07 2.77 1.16 1.84 1.17 2.21 1.25 1.75 0.99 1.51 0.82 2.82 1.41 1.48 0.91 1.23 0.67 1.70 1.15 1.33 0.71 1.42 0.79 1.38 0.83 1.19 0.64

1.70 1.57 2.63 2.02 3.56 2.22 -2.56 2.59 2.61 -.060 .064 1.99 1.81 2.49

118 118 118 118 118 105 118 112 105 117 115 94 94 89

.060 .120 .010** .045* .001*** .029* .012* .011* .010** .551 .527 .049* .073 .015*


Assistance to develop new products Local advisory services Advantageous accounting services

1.68 1.61 1.53

1.25 0.93 1.10

1.08 0.34 1.31 0.82 2.15 1.46

3.52 1.90 -2.64

66 114 110

.001*** .060 .010**

A similar analysis was conducted in terms of the experienced usefulness of support services in 1991 and 2000, respectively. This analysis showed the following changes:

Table 3. The usefulness of support services in 2000 and 1991.

M

2000 sd

1991

t

M

sd

4.25 4.16 3.80 4.33 3.67 4.00 4.33 3.58 3.57 4.38 2.82 3.84 4.02 3.66 3.92 3.58 4.15

0.79 0.78 0.81 0.68 0.80 0.78 0.83 0.89 1.02 0.66 0.97 0.90 0.91 0.59 0.94 1.03 0.81

df

sign.

Type of service Advantageous legal services Advantageous consulting services Courses in new business management Market information Courses in special skills Export assistance Low cost plants/office space Business advisory services Tax free business zones/enterprise zone Low interest loans Operating subsides Grant to start- ups Loans guaranteed Public risk capital Assistance to develop new products Local advisory services Advantageous accounting services

4.44 4.47 4.24 4.24 4.34 4.08 4.41 3.93 3.78 4.61 3.93 4.31 4.56 4.49 4.19 4.05 4.64

0.68 0.73 0.78 0.75 0.71 0.92 0.65 0.89 0.85 0.67 0.93 0.77 0.60 0.73 0.86 0.84 0.58

1.45 2.26 3.57 - .69 4.86 .55 .58 2.14 1.24 1.92 6.43 3.06 3.84 5.41 1.63 2.71 3.84

118 118 118 118 118 118 118 117 117 118 117 118 117 118 117 117 118

.150 .026* .001*** .488 .000*** .586 .564 .034* .218 .058 .000*** .003** .000*** .000*** .106 .008** .000***

The first notion is that use of services was much lower than their experienced usefulness. There were expectations among entrepreneurs that more support services should be available. Evidently knowledge of existence of such potential support measures has increased. Evidently running one’s own business was at more realistic level in 2000 compared to the situation a decade earlier, too. The gap between availability and use was still in 2000 considerable: support services so far have been more hopeful than helpful. A correlation analysis between start-up motivation and support service items was administrated (Pearson; 2-tailed). Surprisingly, there were only a few significant relationships in the 1991 data (less than 10 % of all intercorrelations). This may partly be because of the very moderate variation of


support services at that time. In terms of use of support services in the 1991 data, ‘legal services’ correlated significantly with ‘communitarianism’ (.32), ‘opportunism’ (.32) and ‘independence’ (.28). Among other significant correlations were ‘public risk capital’ & ‘independence’ (.31) and ‘market information’ & ‘opportunistic behaviour’ (.32). Usefulness of services variables and motivations correlated even less with each other in the 1991 data. ‘Courses in special skills’ correlated negatively with ‘approval’ and ‘wealth’ motivations (-.34). On the other hand, ‘public risk capital’ and ‘wealth’ correlated positively (.31). There were more and higher intercorrelations in the year 2000 data. For example, almost all (12/18) support service variables correlated significantly with the motivation construct ‘Degree of Communitarianism’ (.28-.46). This motivation factor correlated with ‘operating subsides’ (.46), ‘public risk capital’ (.42) and ‘loans guaranteed’ (.42). Thus, there seemed to be clear expectations about availability of various support services. When looking at the relationships between usefulness of support services and motivations, there were less significant coefficients. Majority of them were logical, such as the positive relationship between ‘operating subsides’ and ‘wealth’ (.51); ’operating subsides’ and ‘opportunistic behaviour’ (.38); and ‘local advisory services’ and ‘wealth’ (.35). Another set of same kind of relationships correlated with ‘business advisory services’ and ‘opportunistic behaviour’ (.49); ‘wealth’ (.37); ‘independence’ (.30). Another high correlation worth mentioning in this data was between ‘export assistance’ and ‘opportunistic behaviour’ (.37). Discussion and conclusions Estonian business support network has been subject of reforms since 2000 to improve the quality, efficiency , administration and management of services to delivered to SMMEs. The reform has aimed to develop SMMEs through improving their access to capital, to support and increase their export efforts and to progress the financing of home purchases and renovation. Access to finance has remained a constraint on SMME development in Estonia because of high interest rates, problems with collateral bureaucracy and the low competition in banking sector (Sepp & Hankov, 2002). In all, the following conclusions from this study and that of Sepp & Hankov can be drawn: -

Entrepreneurs consider SMME support policy rather weak and ineffective;

-

The biggest problem applying for finance is too high interest rate; and

-

From entrepreneurs’ point view it is important to improve the co-operation between public and private sector.

In 2002, the Estonian government launched the document ‘Enterprising Estonia’ representing a national policy for the development of SMMEs in the country until 2006. This document adopted the EU activity and purposes aiming to improve the support system. The entrepreneurs have appeared to be rather pessimistic until this official policy document, but it is still too early to evaluate the latest progress in this field. The brand new membership in the EU provides both now opportunities and problems for the Estonian SMME sector. Emphasising entrepreneurship as the development factor of economy has been a national priority. It has lead to implementation of measures of supporting and developing the entrepreneurship arena in economic policy. There has been simultaneously a debate about the purposes of the measures. As Sepp and Hankov (2002) have noticed, there has been an opposition between competition policies that emphasises the frame conditions of entrepreneurship and


industrial policy, which appropriates direct intervention. The last one has been criticised according to new political economy in relation to danger of rent-seeking society. Efforts to rapid growth are understand able and acceptable. On the other hand, it has been estimated that the moment of time, when living standards of Estonia and the older EU members will be on the same level. Assuming that the Estonian economy is advancing 5 per cent a year (GNP per capita at PPP), and at the same time the equivalent average growth in the old EU countries will be about 2 per cent with annual population growth of zero in both cases), it can be projected that Estonia will reach the Greek level in year 2030 and the level of its Nordic neighbours in 2045. Actually the decrease of Estonian population is forecasted to be much quicker in Estonia than in the case of its Nordic neighbours by 2045-2050. In the transition process towards a market economy and the membership in the EU in Estonia, rules have changed quickly as a result of political and/or juridical decision. This is not usually the case for internal constraints, which are embedded in customs, traditions and codes of conduct, in ‘the glory of the past’. Thus, accidents and incidents, small historical events, learning and natural selections all shape changes and development paths, making them more challenging and less predictable. Considering the problems in establishing new firms in the early 1990s, the entrepreneurs reported often about insufficient knowledge and skills in i.e. legal issues, accounting and taxation and financial management. They used pretty seldom any outside help in solving their problems outside some friends and acquaintances. There was actually no t much professional aid available during the first years of the new independence. The consistent liberal policy of practically all governments (including rapidly changing ones) has created a generally favourable environment for the development of entrepreneurship. Estonia has chosen “the American way” in its economic policy unlike its Nordic neighbours exercising their traditional “welfare state policies”. Economic growth has also remained robust in Estonia from the latter part of the 1990s on varying from 4.7 % (in 1998) to 10.6 % (in 1997) (except for 1999 when the growth was slightly negative –0.7 %). The new millennium started with a rapid growth again and it has continued over the past few years (2000: +7.3 %; 2001: +6.5 %; 2002: +6.0 %; 2003: + 4.7 %). The stable macroeconomic environment made it possible to maintain low and stable interest rates, which provided both enterprises and households with incentives to invest. The recovery of Russia’s foreign trade has effectively meant higher trans it trade volumes and thus provided Estonia with a strong foreign currency revenue. The overall inflation rate has also remained around 2.5 from 1999 to 2001, although it did accelerate somewhat since the late 2001. The rapid growth has continued after 2000: the average growth in 2000-2003 was above 6 % and the forecast for 2004 is 5.4 % and 5.9 % for 2005. The favourable macroeconomic environment is only one part although an important one of the whole picture from he point of view of an individual firm’s business performance. Entrepreneurial activities in general in Estonia today seem to base less in trial and error type of learning than a decade earlier. The institutional support structure is, however, still weaker than in most western European and neighbouring Nordic countries. There seems still to be some general lack of public trust in official bureaucracies, their associated lack of credibility, although a great deal of positive development is inevitable. The challenge for the Estonian entrepreneur, and start-up businesses in particular, will


continue to be large and full of risk and opportunity.

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(2), 163-184. McGrath, R.G., MacMillan, I. C. and Scheinberg, S. (1992). Elitists, Risk-Takers, and Rugged Non-Entrepreneurs. Journal of Business Venturing, Vol. 7, 115-135. McGrath, R. M., MacMillan, I. C., Ai- Yan Yang, E. & Tsai, W. (1992). Does Culture Endure, or Is It Malleable ? Issues for Entrepreneurial Economic Development. Journal of Business Venturing, Vol. 7, 441-458. Newman, K. L. (2000). Organizational Transformation during Institutional Upheaval. Academy of Management Review, 25 (3), 602-619. North, D. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. North, D. (1999). Understand ing the Process of Economic Change. The Institute of Economic Affairs. Occasional Paper 106. North, D., Alston, L. and Eggertssob, T. (1977). Empirical Studies in Institutional Change. Cambridge: Cambridge University Press. Pautola-Mol, Niina (2001). The Baltic States Integration into the European Union – Institutional Approach. Helsinki School of Economics. Acta Universitatis Oeconomicae Helsingiensis, A-196. Peng, M. W. and Heath, P. S. (1996). The Growth of the Firm in Planned Economies in Transition: Institutions, Organizations, and Strategic Choice. Academy of Management Review, Vol. 21, 492-528. Phare Support to SME Development in Estonia. The State of Small Business in Estonia. Report 1998, Ta llinn. Staudt, Erich (1992). Innovation barriers on the way from the planned economy: The management of non-routine processes. International Journal of Technology Management, Vol. 9, 799-817. Sepp, Jüri & Hankov, Minika (2002). Entrepreneurhip and support of entrepreneurship in Estonia. http://eee.epi- entrepreneurship.com/doc/SEPP.pdf Sutcliffe, K. M. and Huber, George P. (1998). Firm and Industry as Determinants of Executive Perceptions of the Environment. Strategic Management Journal, Vol. 19, 793-817. Vensel, Vello & Wihlborg, Clas (eds., 2001). Estonia on the Threshold of the European Union: Financial Sector and Enterprise Restructuring in the Changing Economic Environment. Department of Economics at Tallinn Technical University, Tallinn.


Appendix 1 REASONS LEADING TO START-UP When you established your current business, to what extent were the following reasons important to you ? To To To To To a no little some great very extent extent extent extent great extent (1)

R1 To develop an idea for a product R2 To achieve a higher position for myself in society R 3 To take advantage of an opportunity that appeared R4 To continue a family tradition R5 To have more influence in my community R6 To be respected by friends R7 To achieve something and get recognition for it R8 To control my own life R9 To contribute to the welfare of my relatives R 10 To contribute to the welfare of people with the same background as me R 11 To contribute to the welfare of the community that I live in R 12 To give myself, my spouse and children security R 13 It made sense at that time in my life R 14 As a vehicle to reduce the burden of taxes I face R 15 To be challenged by the problems and opportunities of starting and growing a new business R 16 To increase the status and prestige of my family R 17 To follow the example of the person that I admire R 18 Desire to have high earnings R 19 To be innovative and be in the forefront of technological development

(2)

(3)

(4)

(5)


R 20 R 21 R 22 R 23

To continue learning To have greater flexibility for my personal and family life To have considerable freedom to adapt my own approach to work To have access to indirect benefits such as tax

Appendix 2 SUPPORT SERVICES Were the following support services available and could you afford them to enhance your business start up ? Not at all (1)

A few

(2)

Some

(3)

Much

Very much

(4)

(5)

P 1 Advantageous legal services P 2 Advantageous consulting services P 3 Courses in new business management P 4 Market information P 5 Training programmes P 6 Export assistance P 7 Low cost plants/office space P 8 Business advisory services P 9 Tax free business zones/enterprise zones P 10 Low interest loans P 11 Operating subsidies P 12 Industry related subsidies P 13 Grants to start-ups P 14 Loan guaranteed P 15 Public risk capital P 16 Loans to develop new products and processes P 17 Local advisory organisations P 18 Advantageous accounting services ________________________________________________________________________________________________