32637 The Newsletter About Reforming Economies Public Disclosure Authorized Beyond Transition January—March 2005 • Volume 16, No. 1 http://www.worldbank.org/transitionnewsletter Barriers to entrepreneurship Theme of the Issue: Entrepreneurship and Barriers to Entry Policymakers in country after country Pages 3—21 are trying to foster entry. Yet many ques tions remain about which government poli cies can help create a favorable business Public Disclosure Authorized climate for entrepreneurship. Is a great number of small firms in a country, such as Italy, a sign of low entry barriers? Why do Russian entrepreneurs: tell me who your startups grow more slowly in some coun friends and family are… tries? How does enforcement of entry reg ulations affect new firm creation? Leora Klapper and Luc Laeven of the World Bank, When studying the determinants of entrepreneurship, social scientists and Raghuram Rajan of the IMF provide emphasize three sets of variables: institutions, social networks, and per answers to these and other questions after sonal characteristics. Although all three seem relevant, there remains no conducting an extensive empirical analysis clear consensus on why people become entrepreneurs. This makes it diffi of more than 3 million firms in Eastern and cult to devise policies that will encourage entrepreneurial development. Western Europe. They find that some regu Simeon Djankov (the World Bank), Gerard Roland, Edward Miguel and lations worsen welfare and hamper firm Yingui Qian (all from the University of California at Berkeley), and expansion, while others are beneficial to Ekaterina Zhuravskaya (CEFIR/NES in Moscow) have embarked on a large entrepreneurship. study of entrepreneurship that will encompass five countries with signifi Public Disclosure Authorized cant economic potential in the coming decades: China, Russia, Brazil, India, Page 6 and Nigeria. In this issue we present the results of the pilot study in Russia, based on 2,000 interviews in seven cities. Page 3 Creative destruction in industrialized Banking deregulation promotes "creative and developing countries destruction" In many countries around the world, banking sectors In all countries, firms undergo significant changes over remain heavily regulated, and the state intervenes directly or time, through resource reallocation among existing firms and indirectly in banks' lending decisions. Marianne Bertrand firm entry and exit. Eric Bartelsman (Free University (Chicago Graduate School of Business), Antoinette Schoar Amsterdam and Tinbergen Institute), John Haltiwanger (MIT) and David Thesmar (Ecole Nationale de la Statistique (University of Maryland and the Census Bureau) and Stefano et de l'Administration Economique, Paris) investigate the Public Disclosure Authorized Scarpetta (the World Bank) analyze the magnitude of firm cre consequences of the 1985 French banking sector deregula ation and destruction and the effect of "creative destruction" tion on firm behavior and industry structure. They identify on productivity in 24 industrialized and developing countries. several important effects on firm behavior, product markets They find that "creative destruction" has played an especially and allocative efficiency, implying that a more efficient important role in transition economies, where new firms not banking sector plays an important role in fostering a only displaced obsolete incumbents but also filled in new mar Schumpeterian process of "creative destruction". kets and, for a time, faced a relatively low level of competition. Page 12 Page 9 2 · Beyond Transition — The Newsletter About Reforming Economies What's Inside Theme of the Issue: Doing Business — 2005: Entrepreneuship and Barriers to Entry Removing obstacles to growth Simeon Djankov 16 Russian entrepreneurs: tell me who your friends and family are... Russia’s small business climate Simeon Djankov, Gerard Roland, Edward Miguel, continues to improve Yingui Qian, and Ekaterina Zhuravskaya 3 Oleg Zamulin 18 Entrepreneurs in Latvia: a few pieces Russian customs: a barrier to foreign trade, of the puzzle investments and entry? Vyacheslav Dombrovsky 5 Ksenia Yudaeva and Konstantin Kozlov 19 Barriers to entrepreneurship Leora Klapper, Luc Laeven, Discussion and Raghuram Rajan 6 Representatives of SME organiazations Business owners’ growth expectations in Lithuania, Romania, Slovakia and Russia in Lithuania talk about entrepreneurship 20 Ruta Aidis and Tomasz Mickiewicz 8 Banking deregulation promotes New Findings “creative destruction” Marianne Bertrand, Antoinette Schoar, Who bears the cost of Russia's military draft? and David Thesmar 9 Michael Lokshin and Ruslan Yemtsov 22 No exit? How transition paths differ: enterprise William Tompson 11 performance in Russia and China Sumon Bhaumik and Saul Estrin 24 Creative destruction in industrial and developing countries India's reform attracts interest in Beijing Eric Bartelsman, John Haltiwanger Suman Bery 25 and Stefano Scarpetta 12 Lobbying on entry World Bank \ IMF Agenda 26 Enrico Perotti and Paolo Volpin 13 New Books and Working Papers 28 What makes small firms grow? Evidence from Romania Conference Diary 30 David Brown, John Earle and Dana Lup 14 Bibliography of Selected Articles 31 Financing conditions for small and medium enterprises in the new EU member states Ulrich Volz 15 The main theme of the next issue forthcoming in June: Poverty and Growth The World Bank · 3 Theme of the Issue: Entrepreneurship and Barriers to Entry Russian entrepreneurs: tell me who your friends and family are… Simeon Djankov, Gerard Roland, Edward Miguel, Yingui Qian, and Ekaterina Zhuravskaya t is increasingly recognized that entrepreneurship plays a and/or have only recently embraced the capitalist system, we crucial role for successful economic development. are able to study entrepreneurship as it emerges, rather than in I Schumpeterian analysis advances the view that entre the relative stability of highly developed economies. preneurial dynamism is the key to innovation and growth. Russia is a particularly interesting case, as entrepreneurship Why does entrepreneurship thrive in certain societies and was not legally allowed in the country until 1992, with the not in others? When studying the determinants of entrepre exception of so-called cooperative (de facto private) enterpris- neurship, social scientists emphasize three sets of variables: es created under Gorbachev. Russia's institutional environment institutions, social networks, and personal characteristics. has been highly volatile, with large regional variations and The results of 2,000 interviews in seven cities across Russia weak institutional support for the market economy in many provide evidence in all the three areas, with a particularly regions. Corruption, racketeering, bureaucratic harassment, strong effect coming from social networks. The study is part of a larger project to be conducted in five large developing and poorly developed financial intermediaries have all nega- and transition countries — China, Russia, Brazil, India, and tively impacted the development of the private sector. Nigeria. The pilot study carried out in Russia in 2003—2004 cov- ered seven cities (including Moscow) in four different regions. Social scientists have proposed numerous explanations to We defined an entrepreneur as an owner or a co-owner of a account for cross-country differences in entrepreneurial activi- business with five or more employees. The sample included ty, falling generally into three categories. An institutional per- both entrepreneurs and non-entrepreneurs in order to under- spective, favored by economists and political economists, stand how these groups differ in terms of individual character- focuses on the role of economic, political, and legal institutions istics; non-entrepreneurs mirrored the sample of entrepreneurs in fostering entrepreneurship. Particularly relevant are credit with respect to age, gender and educational attainment. In markets and the protection of property rights: credit con- addition, 150 non-entrepreneurs were surveyed without regard straints make it impossible for the relatively poor to borrow to demographic characteristics. funds to start up a business, and insufficiently strong property Finally, a random sample of 1,200 respondents allowed us rights may not provide entrepreneurs with the necessary incen- to determine the rough proportion of entrepreneurs across tives. cities. We find a considerable variation in the cities surveyed, A second perspective emphasizes sociological variables, with the lowest proportion of self-employed and entrepreneurs such as social norms, values, and social networks, including in Nizhny Novgorod (6%) and Moscow (8%) and the highest relatives, friends, and social groups. in Taganrog (18%). The third perspective emphasizes the individual characteris- tics of entrepreneurs, such as a personal need for achievement, Entrepreneurs wealthier, healthier and happier self-confidence, self-reliance, and attitudes toward risk. Although all three perspectives seem relevant, there remains Controlling for individual age, gender, education, and loca- no clear consensus on the determinants of entrepreneurship. tion, we find that: This makes it difficult to devise policies to encourage entrepre- • Entrepreneurs are more likely to be married and tend neurial development in any given country. For example, relax- to have slightly more children (1.3 vs. 1.2 in non-entrepre- ing credit constraints may not be of much help if the main neurs' families); obstacle