AND ENTREPRENEURSHIP IN A TRANSITION CONTEXT
3. INSTITUTIONAL DEVELOPMENT IN NEW EU MEMBER STATES AND CANDIDATE COUNTRIES
associated with an institutional context in which the framework conditions for sustainable entrepreneurship have still to be established. Institutional deficiencies lead to mistrust on behalf of the entrepreneur, towards state officials and society more generally (e.g., Raiser, 1999; Rose-Ackerman, 2001; Tonoyan, 2005). This can lead to a potentially vicious circle of mis- trust fostering further evasion behaviour of entrepreneurs, which in turn fosters further mistrust and corruption practices (for country-specific ex- amples, see Raiser, Haerpfer, Nowotny, & Wallace, 2001; Service, 2002;
Satter, 2003; Welter, Kautonen, Chepurenko, Malieva, & Venesaar, 2004;
Chepurenko & Malieva, 2005;Radaev, 2005).
As a consequence, in conditions that pertain in countries such as Belarus and Ukraine, policy needs to focus on the overall institutional framework for entrepreneurial activities, in order to facilitate the development of pro- ductive entrepreneurship and minimise unproductive forms of entrepre- neurial behaviour. In this context, it is important to recognise that the cost of compliance with regulations and other statutory requirements includes opportunity costs for businesses with respect to the resources devoted to compliance, as well direct money payments in some cases. Improving the quality of laws and regulations are key elements in establishing the frame- work conditions that are necessary for economic and democratic develop- ment. Regulations that are overly burdensome, complex or impractical may reduce business competitiveness by contributing to higher administrative and compliance costs, as well as to a diminution of the rule of law when non-compliance becomes rife. Greater recognition also needs to be given to the fact that policy recommendations for small business support are often connected to specific political and cultural contexts, while conditions and legacies can vary considerably between countries.
3. INSTITUTIONAL DEVELOPMENT IN NEW EU
respect to enterprise development, in contrast to some of the countries re- ferred to earlier in the chapter. Although a very small country, Estonia is an interesting example for the purpose of this paper, not least because unlike Poland, Hungary and Slovenia, for example, it was formerly part of the Soviet Union, with a comparable formal institutional context at the start of the reform process to countries featuring in the first part of the paper.
Following independence in 1991, government policy in Estonia has been underpinned by a free market philosophy and a commitment to the insti- tutionalisation of private ownership and market reforms. Rapid privatisa- tion meant that by the end of 1996, most large enterprises had been sold, with attention turning to the utilities, such as energy, telecommunications, railways and ports. However, progress with the privatisation of land was hampered by a complicated restitution procedure. Since 1991, Estonia has also had a liberal trade policy in which trade barriers and tariffs have been largely abolished, leading to a growth in exports on the one hand and an inflow of duty-free imports on the other. The openness of the Estonian economy has also contributed to the country’s success in attracting foreign investment, which has been an important enabling factor contributing to the success of its economic reforms and the structural transformation of the economy. As a result, on most indicators of market reform, Estonia scores high in comparison with other Central and East European countries and former Soviet republics. For example, based on EBRD assessment, 75% of Estonia’s GDP in 2001 was contributed by the private sector.
During the initial phase of transition in Estonia, government was re- sponsible for administrative and legal reforms, which made it possible for privately owned enterprises to develop, although for a time the continuous nature of these changes contributed to an unstable and uncertain business environment. It also took some time to completely revise the tax system, which meant that the development of small private enterprises was initially constrained by the remains of a tax regime inherited from the Soviet period.
At the same time, until recently, direct support measures to support small business development in Estonia have been absent, with the role of gov- ernment best characterised as one of limited intervention (European Com- mission, 1999). The first step towards the harmonisation of regulations and business environment with EU requirements in Estonia was the introduction of a new Commercial Code in 1995. This resulted in the introduction of legal forms of entrepreneurship similar to mature market economies; an increase in the minimum capital requirements for public and limited liability com- panies; and the creation of a new, central Business Register. The influence of Estonia’s candidature for EU entry can also be seen in relation to the
definition of small business, as the EU definition of small businesses became accepted in Estonia.
As expressed in the Pre-Accession Economic Programme (Republic of Estonia, 2001), the main goals of Estonian economic policy are to achieve sustainable, socially and regionally balanced economic growth. The basis of small business policy was embedded in the National Program for the Adoption of the ‘Aqcuis Communitaire’ 2002–2003 (NPAA, 2001), which included a number of specific activities, demonstrating how policy develop- ment has been affected by the EU accession agenda. Examples include the use of pre-structural funds and other foreign assistance instruments to assist in the implementation of the Action Plan; offering state support services to start-up businesses; offering guarantees for small loans; developing an infrastructure for entrepreneurship, which was supported through Phare projects; and strengthening the capacity of relevant institutions in prepa- ration for receiving assistance through EU Structural Funds.
3.2. Developing the Institutional Framework for Entrepreneurship in Estonia
The development of an appropriate institutional framework is an important part of the market reform process. In general, the institutionalisation of business support includes the development of institutions on three levels:
macro- meso- and micro-level (Welter, 1997). In Estonia, during the 1990s, two ministries (the Ministry of Economic Affairs and the Ministry of In- ternal Affairs) were responsible for implementing the main tasks connected with the support programmes for small businesses at themacro level. How- ever, three other Ministries (for Finance, Agriculture and Social Affairs) were also involved through their responsibility for administering various foundations concerned with supporting regional and enterprise develop- ment. Since 2000, the responsibility for enterprise support was centralised under the Ministry of Economic Affairs, with the aim of making more effective use of the resources available for enterprise support, on a regional as well as on a sectoral basis (EstonianMinistry of Economic Affairs, 2002).
Considerable progress has also been made in developing the institutional framework for enterprise development at the meso level. This includes the banking system which, now largely under foreign ownership, is increasingly developing a range of financial products similar to those available to en- terprises in a market economy. It also includes a number of unions, asso- ciations and chambers, established by special interests groups, mainly on the
basis of voluntary membership. Some of these, such as the Chamber of Trade and Commerce and specialised sector-based organisations, have been the main source of support for businesses in the process of exploiting foreign markets. In 2000, the public business support infrastructure in Estonia was restructured in an attempt to make it more efficient, transparent and accessible. Seven foundations together with the Tourist Board, under the administration of five different ministries, were integrated into two new organisations, namely Kredex (the Credit and Export Guarantee Fund) and Enterprise Estonia, which has responsibility for implementing public busi- ness support measures, and through the Regional Development Agency, the responsibility for supporting the local business development centres.
At themicro-level, institutional development has focused on the develop- ment of a network of business development centres that originated with foreign donor funding in the 1990s. Previous evaluation has identified a number of weaknesses in the donor-financed network, including poor relationships with local authorities and other relevant institutions (such as banks) in many cases, and their impact within local business networks appears to have been weak. Other problems included the ongoing depend- ence of these centres on subsidies, the poor advertising of their services, and the fact that hitherto their activities have been mainly limited to dealing with start-ups (Bateman, 2000; European Commmission, 1999). As a result, the business support network has recently been the subject of reform, both to improve the quality and effectiveness of services delivered to small businesses, but also to improve the administration, management and cost- effectiveness of the support institutions.
Although the small size of the Estonian economy, combined with the opportunity to exploit historic ties with Nordic neighbours has presented Estonia with potential advantages over many other former Soviet republics, the pace of change has been impressive and considerable progress has been achieved with respect to the institutionalisation of small business policy. The publication of a national policy document for small business development represented a significant step forward in strategic thinking, with related measures and responsibilities for implementation (OECD, 2002). Moreover, linking strategic policy objectives to specific action plans, which are tied into the budgetary process, was a positive step towards overcoming the implementation gap that is a common feature of small business policy in a transition context. The rationalisation of the various agencies into Enterprise Estonia and Kredex also appears to have been a positive step from an enterprise development standpoint. Another positive feature of the current policy environment in Estonia is the opportunities that exist for
representative organisations of small businesses (such as the Chamber of Commerce) to express their views on draft regulations and legislation, although it is difficult to establish to what extent their comments have in- fluenced final decision making.