Entrepreneurial Heritage and start-up activities in a Socialist and Post-socialist Economy

Michael Wyrwich
Friedrich Schiller University Jena

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     Last modified: January 2, 2010

Abstract
The focus of this paper is on the role of structural change for regions. Its main aim is to enhance our knowledge of the role of the entrepreneurial culture and climate of regions that are important to foster economic growth (e.g. Wagner/Sternberg 2004). The paper sheds light on regional differences of the role of entrepreneurship in a socialist and post-socialist economy, which is to the authors’ best knowledge a unique approach. Such an analysis is promising because a transition from a centrally planned (CPE) towards a market economy is a heavy “shock” for the development of the concerned region. The role of the entrepreneur in a socialist economy is marginal, whereas it is crucial for economic development in a market economy.

It is shown that regions with a long industrial and entrepreneurial tradition have higher rates of self-employment in socialist times and remarkably higher start-up rates in manufacturing after the transition towards a market economy. Regions where these traditions played only a minor role before the introduction of a centrally planned economy (CPE) reveal lower self-employment rates during socialist times and after the transition. It seems that some regions have a certain entrepreneurial heritage, which is an important regionally embedded resource.

The region of analysis is the eastern part of Germany which comprised of the former socialist German Democratic Republic (GDR) which was dissolved in the course of the German reunification in 1990. The transition towards a market economy implied a supply, demand, wage, regulation and mental shock for the East German economy. Many of the state-owned firms simply collapsed because they were not able to compete with West German peer firms (Brezinski/Fritsch 1995).

The East German economy underwent a vast structural change whereby it was hoped that new business formation may help to foster economic growth. Self-Employment in the GDR was mainly restricted to handicrafts, retailing and gastronomy. Astonishingly those regions with a long industrial tradition in industries, where small and medium-sized firms play a larger role in the historical regional economic development, self-employment rates were high in 1989 - at the eve of the transition of the GDR towards a market economy - even though self-employment in manufacturing was not allowed. Regions with a high self-employment rate in 1989 and a high share of industries, where entrepreneurship played an important role in regional development, have higher start-up rates in manufacturing even more than 10 years after transition and a vast structural change in between. Even the “natural experiment” of four decades of socialism and the most severe industrial restructuring and decline of an economy in the 20th century could not destroy the entrepreneurial climate of regions.

In the analysis a unique dataset is used that contains data for the socialist economy of the GDR on industry employment shares and the number of self-employed across NUTS-3 regions. For the analysis of current start-up activities the well-known German Social Insurance Statistics are used. This dataset comprises of all German establishments that employ at least one employee liable to social insurance (Fritsch Brixy, 2004). For methods I rely on regression techniques.

An important implication for policy is that region-specific entrepreneurial potentials and resources should be stimulated and activated to attain a sustainable regional development. Moreover, it seems to be long lasting task to turn entrepreneurial laggards into entrepreneurial hotspots since far reaching developments in industrial history seem to matter.

References:

Brezinski, H. and M. Fritsch (1995). Transformation: The Shocking German Way, Moct-Most, 5, 1-25.

Fritsch, M. and Brixy, U. (2004), The Establishment File of the German Social Insurance Statistics, Zeitschrift für Wirtschafts- und Sozialwissenschaften, 124, 183-190.

Wagner, J. and Sternberg, R. (2004), Start-up activities, individual characteristics, and the regional milieu: Lessons for entrepreneurship support policies form German micro data, Annals of Regional Science, 38, 219-240.