A CONCEPTUAL MODEL
4. TRANSITION CONTEXT OF NEW VENTURE PERFORMANCE: AN EXTENDED MODEL
households, for example, still determines the initial capital level of the new ventures in transition economies. Likewise, business education in the central planned economy still has an impact on the founders’ knowledge of the principles of the market economy. Further, an extended integration of in- dividuals into family and community, and strong reciprocal relationships based on mutual favors still affect behavior and values of the founders (Danis, 2003;Field, 2003). For example, entrepreneurs in transition econo- mies share on average stronger collectivist values than their Western coun- terparts (Danis, 2003). Therefore, it is to be assumed that the legacy derived from the centrally planned economy and related to the resource scarcity, education system, individuals’ behavior, and way of thinking have an in- fluence on the present level of initial resources of new ventures.
4. TRANSITION CONTEXT OF NEW VENTURE
Occupational experience of individuals in the centrally planned economy comprises primarily work in state-owned enterprises. These enterprises were characterized by hierarchical structures (Soulsby & Clark, 1996). Information about production, product mix, and cost targets were delegated from the ministers to the top managers (Suutari & Riusala, 2001). In this way, hier- archical structures of planning inhibited the development of business man- agement practices accustomed for the market economy such as marketing and strategic management. In addition, the state supported its enterprises with subsidies, e.g., with financial and material resources, to enable them to perform better (Shipley, Hooley, Cox, & Fonfara, 1998). However, the per- formance of state-owned enterprises was hindered by the necessity to accom- plish a number of inefficient administrative tasks in response to ‘‘socialist competition’’ between executives. Managers tried to be more successful in organizing frequent work meetings, preparing reports, and realizing various types of ideological work (Gerber, 2000). Because of a permanent scarcity of resources in the former socio-economic system, managers had to develop their social networks (Suutari & Riusala, 2001). Therefore, social competences were one of the essential skills of executives (Smallbone & Welter, 2003). In ad- dition, corrupt behavior was a widespread practice under communism, in particular, by seeking scarce resources or promoting someone’s position in the organizational hierarchy (Wasilczuk, 2000;Suutari & Riusala, 2001).
As market mechanisms grow in importance following economic reforms and state socialist collapse, the return to education should rise and the return to political position should decline (Nee, 1989). Since the educational system under communism was not oriented toward producing entrepre- neurial skills and did not provide knowledge about business management, universities in the Central and Eastern European countries have devel- oped educational programs in business sciences on the basis of Western European and American programs since the collapse of communism. Thus, the younger generations of students have acquired knowledge about busi- ness management in the market economy. There are also diverse training courses on small business management offered for potential founders. Fur- ther, employees of enterprises coming from established market economies have an opportunity to understand the principles of the market economy easier, i.e., on-the-job (Peterson, 2003). However, working in the state- owned enterprises, which are often inefficient, is likely to be a hindrance in a new venture context; the practices of employees and the management style of executives are still similar to those in the central planned economy.
Knowledge and qualification necessary to manage state-owned enterprises in the centrally planned economy are mostly not applicable to the market
economy and not supportive in an entrepreneurial context. However, in- dividuals’ social competences, their ability to handle resource scarcity, and the experience of‘‘muddling through’’ during communism may be valuable skills for entrepreneurship in the transition economies, i.e., under conditions of uncertainty and still weak institutional frameworks (Kusnezova, 1999).
Further, entrepreneurs who gained work experience in Western Europe and North America under the former system got to know the principles of the market economy before the collapse of communism. Aidis and Van Praag (2004)found out that work experience of the Latvian entrepreneurs gained abroad under communism is positively related to objective business per- formance measures such as business turnover. Founders’ work experience gained abroad after the collapse of communism may also have a positive impact on new venture performance.
Maybe the most difficult challenge of the transition in the post-commu- nist countries is to change the mentality of individuals (Kenny & Trick, 1995). Entrepreneurs in the developed and emerging market economies are likely to have different values and practices reflecting their historically contrasting environments (Danis, 2003). For example, the realization of production targets was a crucial issue in the state-owned enterprises under communism. Profits were less relevant (Danis, 2003). Therefore, a lasting legacy of the centrally planned economy may be the production-first men- tality of entrepreneurs that can be not supportive for new venture perform- ance in the market economy, where profit orientation is predominantly required (Suutari & Riusala, 2001).
In view of the above, the following hypotheses related to the transition context can be proposed:
Hypothesis 1. There will be a negative correlation between the entrepre- neur’s investments in business education done under communism and new venture performance.
Hypothesis 2. There will be a negative correlation between the state- owned enterprise experience of the entrepreneur and new venture per- formance.
Hypothesis 3. There will be a positive correlation between prior work experience of the founder gained abroad and new venture performance.
Hypothesis 4. There will be a positive correlation between work experi- ence in Western enterprises acting on markets in transition countries and new venture performance.
Hypothesis 5. There will be a negative correlation between entrepreneur’s habits developed under communism and new venture performance.
4.2. Transition Context of Social Capital
Similar to the cultural capital, it is necessary to explain the function of social contacts in the former socio-economic system to better understand the role of social capital in the post-communist societies and economies.
Social networks were essential for the everyday life of individuals and enterprises under communism. Primarily, they reflected a defensive attitude of individuals toward the former regime and bureaucratic administration (Kolankiewicz, 1996). Executives of state-owned enterprises were rewarded principally for their political loyalty and for taking control of the state assets. In addition, they controlled the private life of employees to screen their political views. In order to take a tangible advantage or to get a better position in the organization, many work colleagues also provided the com- pany management with‘‘useful’’ information about other employees. Thus, both managers of state-owned enterprises and workmates were mostly mis- trusted. In this way, family and close friends were the major source of trust.
The importance of strong ties for a private and professional life of indi- viduals is directly connected with a permanent scarcity of resources under communism (Ko¨llermeier, 1992).
Food, clothing, medications, and means of production were among the scarcest commodities in the former socialist system. Scarce goods were ob- tained through family and friends and then friends of friends. In particular, strong ties that had connections to the communist administrators, that is, the so-called ‘‘nomenclatura,’’ were of great importance, because the no- menclatura possessed resources or had access to scarce goods (Field, 2003).
Many resources under communism may have been obtained by dispensing diverse favors (Ledeneva, 1998). Thus, personal networks and a system of the exchange of mutual favors played a considerable role when it came to getting hold of everyday goods and means of production. Financial capital was largely irrelevant (Ledeneva, 1998).
Social networks in the post-communist countries play a crucial role for new venture creation and performance. As mentioned above, the legal and institutional framework of entrepreneurship and small business develop- ment has not been completely established yet (Dallago, 2003). The existing law either has been changed several times or is not applied in the daily business. In addition, new venture creation and performance are hindered by the existence of considerable bureaucratic barriers (Smallbone & Welter,
2003). This situation indicates that the entrepreneurs’ environment in transition economies is still unstable, non-transparent and weakly institu- tionalized. Therefore, strong ties are very important for individuals, in par- ticular, because they are trustworthy and more predictable (Field, 2003). In addition, access to resources and stakeholders is more difficult in emerging market economies than in developed ones by virtue of the considerable scarcity of resources and asymmetry of market information (Lyles et al., 2004). Therefore, entrepreneurs in transition economies activate their per- sonal contacts to mobilize resources, especially scarce financial capital, and to overcome constraints imposed by bureaucratic structures and often un- friendly officials (Smallbone & Welter, 2003).
A further feature of the transition to the market economy is the consid- erable continuity of social contacts from the previous socio-economic sys- tem, in particular, among individuals representing former nomenclatura (Field, 2003). Former communist administrators use their connections par- ticularly to privatize and restructure state-owned enterprises, and to mo- bilize resources to develop their own businesses (Smallbone & Welter, 2003).
Because the government and state-owned enterprises still are key power brokers in transition economies (Lyles et al., 2004), previous management experience in the state-owned enterprises may contribute to new venture creation and performance by the use of‘‘old’’ networks and connections. In addition, these entrepreneurs mostly have high networking skills (Smallbone
& Welter, 2003). It allows them to establish new connections to develop their ventures easily. We can assume that, in a transition context, close ties of a new venture to key institutions such as state-owned enterprises and government enhance the venture’s survival and bring benefits to the entrepreneur.
In view of the above, the following hypotheses related to the transition context can be proposed:
Hypothesis 1. There will be a positive correlation between entrepreneur’s weak and strong ties and new venture performance; however, the influ- ence of strong ties will be stronger than weak ones.
Hypothesis 2. There will be a positive correlation between entrepreneur’s management experience in the state-owned enterprise and new venture performance.
Hypothesis 3. There will be a positive correlation between close ties of the entrepreneur to key institutions and new venture performance.
4.3. Implications for Future Research: An Extended Model
The above analysis indicates the necessity of incorporating transition related variables in models of new venture performance. Before presenting a model, we have to turn our attention to some methodological aspects relevant in the transition context. By virtue of the high rate of failure of new ventures within the first year of their existence in transition economies, it is necessary to improve the understanding of causal mechanisms between the cultural and social capital and early performance of a new enterprise. Further, it requires including a time dimension into the model in order to explore founding processes better. We propose a longitudinal research design re- lating to new venture performance in transition economies.
Since the end of the 1980s, theorists have realized that new venture survival and growth are strongly affected by the type and quality of the founder’s decisions and behaviors, such as planning, strategy formulation, and allo- cation of resources (Chrisman et al., 1999;Gartner, 1988). However,Shook, Priem, and McGee (2003, p. 390) point out that‘‘perhaps the most under- researched aspect of the individual and venture creation is exploitation ac- tivities. We know very little about the role of the individual in acquiring resources and organizing the company.’’ Therefore, both entrepreneurs’ cul- tural and social capital and the economic activities they engage in will be the key components of the proposed model (seeFig. 1).
In the start-up phase of a new venture, there are primarily two categories of activities the entrepreneur can engage in that have an impact on performance of the start-up process, i.e., planning and organizing (Shook et al., 2003;
Delmar & Shane, 2002). Planning activities can comprise preparing a busi- ness plan, estimating financial forecasts, and creating a company’s strategy.
Organizing activities can cover finding resources, networking, and initiation of product and service development. In transition economies, networking is a particularly widespread behavior because of the lack of resources and im- portance of social contacts for new venture creation and development (Lyles et al., 2004). New venture survival and growth are more likely, for example, when the entrepreneurs devote more time to establish and maintain contacts with customers and suppliers (Lyles et al., 2004;Ostgaard & Birley, 1996).
Likewise, strategic planning enhances the likelihood of new venture survival and growth (Schwenk & Shrader, 1993).
Activities will be influenced by the cultural capital of entrepreneurs. For example, founders who reflect survival mentality (as work norm) mostly do not create a business plan (Shuman & Seeger, 1986). In particular, individ- uals in transition economies reflect a shorter-term orientation than their
Fig. 1. Model of New Venture Performance in an Economy in Transition.
VenturePerformanceintheTransitionEconomies103
Western counterparts. It mainly reflects unstable and uncertain economic and political conditions in post-communist countries (Danis, 2003). By contrast, industry and entrepreneurial experience may positively affect cre- ating an appropriate business plan or formulating a strategy. Considering the transition context, we distinguish between conventional and unconven- tional cultural capital. Conventional cultural capital will comprise variables that are usually integrated into models of new venture performance in the market economy, i.e., educational level, field of education, entrepreneurship training, entrepreneurial experience, management experience, and industry experience. Unconventional cultural capital will consist of variables related to an economy in transition, i.e., business education under communism state-owned experience, work experience gained abroad, work experience in foreign enterprises acting on emerging market economies, social skills, and individual’s habits.
Social capital will also influence activities related to the establishment of a new venture. For example, entrepreneurs who have a sparse social network will have to devote more time to establishing and maintaining contacts relevant for their ventures than individuals with larger networks. Likewise, founders who have ties to the political and economic decision-makers, i.e., resourceful key institutions, can find new opportunities or exploit the ex- isting ones easier. The model will include structural, relational, and resource embeddedness as social capital dimensions. Structural embeddedness relates to the structure of network relations and includes network size, network density, and network diversity. Relational embeddedness refers to the extent to which economic actions are affected by the quality of individuals’
social relations and includes weak and strong ties of the entrepreneur. In a transition context, it is necessary to incorporate resource embeddedness, i.e., the degree to which network ties contain valuable instrumental re- sources (Batjargal, 2000), into the model. Resource embeddedness refers to the close ties of the entrepreneur to key institutions, such as state-owned enterprises and government.
Performance of a new venture will be predominantly affected by the entrepreneur’s activities. In entrepreneurship research, various measures of new venture performance are used (Weinzimmer, Nystrom, & Freeman, 1998;Murphy, Trailer, & Hill, 1996). In the transition context, we suggest investigating both subjective and objective performance measures. We de- fine subjective performance as an individual’s satisfaction with being an entrepreneur. By virtue of high unemployment in the majority of transition economies in Europe (for example, about 19% in Poland (PEAD, 2003)), founders may be initially content with establishing a new business, even if
the objective measures of performance is still low. Survival, sales growth, and growth in employment are objective measures of performance inte- grated into the model. Survival can be seen as the minimum criterion of successful organizational performance. Sales growth is connected with other categories of financial growth, e.g., profitability, and return on investment that usually are not announced by companies. The meta-analysis of 35 studies on measuring organizational growth conducted by Weinzimmer et al. (1998)indicates that sales growth is the most used measure of venture growth. However, sales are strongly dependent upon the type of industry and initial size of a venture. Growth in employment is of great importance for regional development by virtue of the widespread hope that new enter- prises create new jobs. In a new venture context, it is also necessary to recognize that an important challenge the entrepreneur has to face in the start-up phase is to assemble and organize the needed resources to establish the new venture (Delmar & Shane, 2002). Therefore, we propose to examine the improvement of the organizational resource base as an early perform- ance measure.
We also recommend investigating the early performance of a new venture close to the business opening, e.g., after three months after the start-up moment. In view of a low rate of venture survival in transition economies after the first operating year, we propose to investigate the subsequent per- formance of a new enterprise by the end of the first year after the business’
opening. This research design makes it possible to accompany the founder from the start-up process and, in addition, to avoid the‘‘survival biases.’’
Furthermore, we suggest investigating activities of the entrepreneur in a later phase of the first year of the venture’s existence. Thus, it will be pos- sible to provide founders with valuable postulates relating to the reduced risk of failure. These emerging activities will encompass aspects such as analyzing markets, financial controlling, creating or changing of strategy, changing of ownership structure, intensifying networking activities, and ac- celerating the product and service development. Emerging activities will be affected by the early performance of a new venture. For example, low sales growth and an unsatisfactory resource base can necessitate entrepreneurs to intensify their networking activities. Likewise, poor financial performance can contribute to changing the company’s strategy. In the model, new venture performance will be influenced both by founding and emerging activities.
Certainly, cultural and social capital will also directly affect emerging activities as well as early and subsequent performance of a new business.
Because of the variety of new ventures, it is difficult to recognize all the
important activities as well as an order in which the entrepreneur engages in the activities (Delmar & Shane, 2002). In addition, financial capital of the founder will be incorporated into the model as an influence factor. A well- founded financial base of a venture helps to protect it against random shocks and increase the scope of the entrepreneur’s actions (Cooper et al., 1994). In transition economies, lack of financial capital is one of the largest obstacles to small and medium-sized enterprises. In particular, it prevents the venture’s growth and modernization (Dallago, 2003). Financial capital will affect new venture performance and activities (e.g., creating a strategy).
The level of financial capital will be dependent upon entrepreneurs’ cultural and social capital (Bourdieu, 1986). For example, individuals with a high level of education are expected to gain higher wages than their less-educated counterparts (Becker, 1993). Therefore, we can assume that well-educated founders possess higher savings than less-educated ones. Likewise, entre- preneurs who have a large social network can increase their initial financial capital by the use of informal contacts, e.g., by getting private loans from friends. Further, entrepreneurs who have a high level of cultural capital, e.g., more industry experience, may possess large networks of contacts that can be valuable in the process of new venture creation and development (Jing, Pek-hooi, & Poh-kam, 2003).
Finally, in order to reflect an unstable and uncertain nature of the environment in transition economies, it is reasonable to incorporate the entrepreneur’s perception of the local business climate and the opportunities it provides into the model (Mueller & Goic, 2002). Environment will affect cultural capital of the entrepreneur, activities, and performance. We propose to examine the founder’s perception of economic infrastructure for entre- preneurship and small and medium-sized enterprises and of economic de- velopment in the region. Likewise, the corrupt practices in a venture industry may determine firm performance and the entrepreneur’s behavior and habits.