The Nature of Corruption Affecting Entrepreneurship in Transition Economies: Some Lessons from Montenegro

South East European Journal of Economics and Business Volume 12 (2) 2017, 20-34 DOI: 10.1515/jeb-2017-0014 THE NATURE OF CORRUPTION AFFECTING ENTREPRENEURSHIP IN TRANSITION ECONOMIES: SOME LESSONS FROM MONTENEGRO Nick Williams, Dragana Radevic, Cristian Gherhes, Tim Vorley Abstract The aim of this paper is to examine how the institutional environment impacts the nature of corruption affecting entrepreneurship in transition economies. Drawing on a survey and in-depth interviews with entrepreneurs in Montenegro, the paper finds that corruption is a pervasive presence which has not been amelio- rated despite economic reforms. Montenegro is a transition economy which has made significant strides in terms of creating a more open market economy. However, reforms have often overlooked corruption which remains prevalent, and the institutional environment has left space for officials and entrepreneurs to engage in corrupt practices. The paper shows that although it takes different forms, corruption can be viewed as a cultural impediment even if the majority of entrepreneurs are not exposed to it. Keywords: Corruption, Entrepreneurship, Institutions, Transition economies INTRODUCTION Nick Williams, PhD Entrepreneurship is regarded as a catalyst of econom- Associate Professor in Enterprise ic development in transition economies (Smallbone Centre for Enterprise and Entrepreneurship and Welter 2001; Puffer, McCarthy, and Boisot 2010). Studies, Business School, The University of Leeds Yet corruption, which is often associated with transi- E-mail: [email protected] tion economies, represents a significant challenge to moves towards open competitive markets (Manolova, Dragana Radevic, PhD Eunni, and Gyoshev 2008; Tonoyan et al. 2010; Estrin Associate Professor in Institute for and Mickiewicz 2011; Imami 2012). Where institutions Entrepreneurship and Economic Development, are weak, entrepreneurs can become exposed to and University of Donja Gorica, Montenegro embroiled in corrupt practices (Xheneti, Smallbone, E-mail: [email protected] and Welter, 2012). As a result, corrupt practices can de- Mr Cristian Gherhes, Doctoral researcher tract from more productive forms of entrepreneurial Centre for Regional Economic and Enterprise activity, and where corruption is deep-seated there Development, Management School, The University are often wider economic and social ramifications. of Sheffield Although entrepreneurship is often portrayed as an E-mail: [email protected] individual endeavour, it is important to recognise that it both affects and is affected by the institutional envi- Tim Vorley, PhD ronment which governs and directs economic activity Professor of Entrepreneurship (Acs, Desai, and Hessels, 2008; Bruton, Ahlstrom, and Centre for Regional Economic and Enterprise Obloj, 2008). As a corollary, institutional arrangements Development, Management School which create space for corrupt practices can stymie The University of Sheffield more productive forms of entrepreneurial activity, E-mail: [email protected] Brought to you by | University of Leeds Copyright © 2017 by the School of Economics and Business Sarajevo Authenticated 20 Download Date | 2/15/18 12:50 PM The nature of corruption affecting entrepreneurship in transition economies: Some lessons from Montenegro with wider ramifications for the economy and society economies such as Montenegro the institutional envi- (Chowdhury, Audretsch, and Belitski, 2015). ronment has not developed to the extent that it coun- This paper finds that entrepreneurs in formerly teracts corruption. As such, perceptions of corruption centrally planned transition economies are frequently are affected by negative experiences and the stories unable to operate beyond the realms of corruption. of others, even though most entrepreneurs do not ex- While this is the case in the larger transition econo- perience corruption on a day-to-day basis. Given the mies of Eastern Europe (Vorley and Williams 2016), in size of the economy, corruption is often not linked to the smaller, newly independent states corruption is money, but rather nepotism. Where entrepreneurs en- common. Examining the nature of corruption affect- gage in or are affected by corruption, it will most likely ing entrepreneurs in a transition economy, the paper be through networks being used to speed up pro- demonstrates that part of what holds back entrepre- cesses or by getting a preferential deal. Financial cor- neurship and its ability to contribute to economic de- ruption only really affects large businesses with links velopment in these localities is partly the prevalence to government, and the majority of entrepreneurs do of corruption. While corruption is often seen as oper- not experience it. ating at the political or big business level (Round and The remainder of the article is structured as fol- Williams 2010), the paper highlights that corruption lows. Section 2 frames the study in terms of academic is faced by all entrepreneurs irrespective of the size of debates on corruption and entrepreneurship in transi- their ventures, and impacts at different points along tion economies. Section 3 introduces the institutional their entrepreneurial journey, but has differential im- environment in Montenegro and sets out the method- pacts on entrepreneurs according to the stage of their ological approach of the empirical project. Section 4 business activity (i.e. start-up or established, surviv- discusses the findings, highlighting the importance of ing or growing) and the size/value of their business. informal institutions and networks, and how they rep- In starting a business, entrepreneurs are required to resent an important aspect of the institutional land- comply with numerous regulations, which exposes scape which affects entrepreneurial behaviours. Lastly, them to opportunistic petty corruption by low level the article concludes by reflecting on the findings, bureaucrats. As their businesses grow, the nature of and considers the wider implications for strengthen- corruption is often more organised, involving kick- ing the institutional environment of Montenegro and backs to political officials and/or extortion from more other transition economies. established ‘tycoon’ entrepreneurs. Some entrepreneurs use strategies to avoid corruption (Hudson et al. 2012), some accept it as a normal aspect of the cul- LITERATURE REVIEW ture, while others engage in it as perpetrators (Vorley The institutional environment and corruption and Williams 2016). As such, the central research question in this article is: “How does the institutional en- Corruption is a multidimensional concept, the causes vironment impact the nature of corruption affecting of which are diverse. It can be understood as a struc- entrepreneurs in transition economies?” In answering tural problem relating to political-economy, socio- this question, the paper finds that the institutional cultural issues or a combination thereof (Luo 2005; arrangements see corruption prevail, with entrepre- Transparency International 2016). The literature neurs engaged and embroiled in corrupt practices demonstrates that there are numerous causes of cor- whether by necessity or opportunity in different ways ruption, ranging from the impact of national wealth and at different stages of the business. (Paldam 2002; Treisman 2000), the size of govern- The empirical focus of the paper is Montenegro, ment (Montinola and Jackman 2002), income distri- a transition economy facing significant levels of cor- bution and poverty (Paldam 2002), trade openness ruption, which hinders productive entrepreneur- (Broadman and Recanatini 2000), inflation (Paldam, ship and is detrimental to economic development 2002), economic freedom (Goel and Nelson 2005), (Transparency International 2016; World Economic political stability (Treisman 2000), government regu- Forum 2016). Montenegro therefore provides an ap- lations (Gerring and Thacker 2005), gender (Swamy et propriate context for studying the nature of corrup- al. 2001) and an economy’s competitiveness (Shleifer tion affecting entrepreneurship. The paper highlights and Vishny 1993). These wide-ranging causes show lessons from a transition economy but also to draw that researchers have sought to categorise corruption out implications for other countries seeking to de- in different ways to understand how it relates to other velop more effective institutional frameworks which social, political and economic processes. can reduce corruption and foster entrepreneurship. Moreover, the context in which entrepreneur- Our contribution is to show that in small transitioning ship occurs is heterogeneous (Acs, O’Gorman, C., and Brought to you by | University of Leeds South East European Journal of Economics and Business, Volume 12 (2) 2017 Authenticated 21 Download Date | 2/15/18 12:50 PM The nature of corruption affecting entrepreneurship in transition economies: Some lessons from Montenegro Szerb, 2007; Puffer, McCarthy, and Boisot 2010) and incentives are structured in such a way that they are the institutional framework that prevails is fundamen- incompatible with formal ones, and exist in environ- tal to shaping entrepreneurial orientation, new ven- ments where formal institutions are weak or not en- ture creation, aspirations, perceptions and, ultimately, forced. For example, entrepreneurs draw on extensive growth (Welter 2011; Doern and Goss 2014; Efendic, networks that are governed by informal norms to cir- Mickiewicz, and Rebmann, 2015).

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