On the Path to Prosperity

With communism only a decade gone in Central and Eastern Europe, the region still is charting its best course into the global economy. Many believe that ventures into management education and entrepreneurship will put this promising market well on its way.
On the Path to Prosperity

So much attention has been paid to the wonders of “e-business” and the electronic age, it may be easy to overlook another important “e” steadily gaining in global importance. For the economies of Central and Eastern Europe, especially, this “e” stands for “entrepreneurship,” which many analysts believe will be the saving grace of that region.

Burgeoning private enterprise promises to create wealth in the private sectors of Russia, Lithuania, Poland, the former Yugoslavia, and other countries in the region. But even more important, it also may introduce innovation and adaptability to an unpredictable economic climate, characteristics that simply were not cultivated under communist rule.

Michael Diedring, Director General of the Baltic Management Institution, an executive education provider in Vilnius, Lithuania, has witnessed many of the changes experienced by that country firsthand. It’s not just the transformation of an economy at issue, he points out. It’s the transformation of an entire mindset.

“In many parts of the world, it’s OK to have ‘failed’ as an entrepreneur. Such failure is often even considered a ‘badge of honor.’ Many extremely successful entrepreneurs do not succeed until their third or fourth venture,” says Diedring. However, the perception of failure is much different in countries such as Lithuania.

“Entrepreneurs in this part of the world must be brave. They risk not only financial ruin and legal problems, but  if their businesses fail.”

“Entrepreneurs in this part of the world must be brave. They risk not only financial ruin and legal problems, but negative social consequences if their businesses fail. In Lithuania’s population of 3.5 million, for example, everyone is somehow related or knows everyone else. The news of a ‘failure’ is quickly spread through the entire society,” he explains. “In addition, European culture does not celebrate business in the same way as other cultures. It is still common for many educated people to see business as ‘dirty.’”

Economic scholars believe that educating the people about starting and managing businesses may be the best way to help Central and Eastern European countries thrive. And it may be up to management education institutions, at least in part, to provide much-needed training to some of the world’s most eager, yet most uncertain, entrepreneurs.

A Time of Reconstruction

Many vestigial remains of communism are still present in the banks and governmental agencies of Central and Eastern European countries. High taxes, low capitalization, legal entanglements, and few support systems are problems that still must be addressed for entrepreneurship to truly take hold, says Andrew Wilson, senior program officer with the Center for International Private Enterprise (CIPE) in Washington, D.C. The region’s old communist infrastructure must be rebuilt into a new, more flexible system, he believes.

“The level of difficulty varies from country to country, and follows a north-south pattern. Countries such as Poland, the Baltic States, Hungary, and the Czech Republic, which started their transitions from communism earlier, have done very well. But for others whose governments have resisted reform in the past, such as Bosnia-Herzegovina and Macedonia, it’s a much different story,” he says.

“The small entrepreneur has a very difficult time,” Wilson continues. “The regulatory environment can be daunting. The assistance that Western entrepreneurs take for granted— government agencies, tax breaks, and bank loans—is simply not there. In Montenegro, for instance, a person has to make a $20,000 deposit to the government just to start a business; that’s several years’ salary. And usually, most people can’t afford employees because the labor laws are so severe. For every $100 they pay in official salary, they must pay additional taxes of $200 or $300. That forces many business owners into a gray economy, where they keep two sets of books.”

A trend of “survival entrepreneurship” has emerged in these regions, explains Wilson. Those who have lost their formal jobs have been compelled to begin small, informal “suitcase trades” to survive. However, although these activities may be undertaken out of desperation, such initiative may serve the region well. These new microenterprises indicate a “natural spirit for entrepreneurship” that should be cultivated, he says.

Most agree that changes in long-established and traditionally sluggish institutions such as governments and banks will be slow in coming. That’s the reason organizations such as CIPE are pinning their short-term hopes on management education as a means to get the Central and Eastern European economies going.

“Entrepreneurial skills are important, but people there also need basic management skills,” says Wilson. “We’re talking about writing a business plan, getting credit, and learning bookkeeping. We need to target the small entrepreneurs and teach them these skills in order to get them into the economy.”

CIPE and other support groups like it provide direct assistance to entrepreneurs, work toward institutional reform, and cooperate with small business support centers and education institutions in order to encourage and instruct these individuals.

“We’ve been working since 1990 with different programs in the Balkans,” adds Wilson. “We have focused on the development of small and medium enterprises (SMEs) as a priority for the region, because most agree that the old socialist enterprises are not going to cut it.”

First, Educate

In light of the formidable obstacles facing these entrepreneurs, a strong foundation in business education has become not just important, but vital. In addition to the management skills required by anyone who starts a business, entrepreneurs in Central and Eastern Europe also must develop coping skills to work around obstacles unheard of in most Western countries.

“Under the old regime, entrepreneurs often derived their opportunities from imperfections in the ‘system,’” says Stefan Kwiatkowski, a professor of entrepreneurship at the Leon Kozminski Academy of Entrepreneurship and Management in Warsaw, Poland. “Those efforts to ‘beat the system,’ whether through opportunistic or parasitic behavior, were a response to working under an essentially omnipotent government.”

That habit of exploitation has led to a lack of understanding of how a capitalist economy operates, perhaps one of the biggest obstacles facing these entrepreneurs. Where communist economies worked under perpetual shortages of goods, putting control of the market in the hands of the sellers, Western economies are based on an abundance of choice. The consumer holds the upper hand, and the market determines, in large part, what a seller must do to survive.

“Local companies are struggling to understand the cyclical nature of a market economy. The early 1990s, for example, was a time of rapid development and easy money,” says Diedring of the Baltic Management Institute. “But when the Russian Crisis occurred in the mid-1990s, it forced companies in this region to turn away from their traditional markets and improve their products for the markets of Western Europe.

“At this time, many inexperienced entrepreneurs were unable to manage the transition and lost their businesses,” he points out. “But those who survived are learning to compete in the Western markets, where quality, service, and speed often count as much as or more than price.”

A dearth of good managers is at the top of the list of woes for many parts of the region, and is at the top of the list of priorities for local business schools. Because the importance of developing creative management practices and effective coping strategies is now widely acknowledged, management education institutions promise to play an increasingly vital role in putting Central and Eastern Europe on a more even footing with the West.

These economies are also suffering from a gradual “brain drain,” as people in their 20s and 30s are leaving  for the West.

But the entrepreneurs aren’t the only ones following a learning curve. Management education institutions operating locally must match their services to the changing needs of a rapidly evolving region, in which old world perceptions and new economy necessities still co-exist and often come into conflict. At times, teaching business and coping skills in such an environment, while keeping on top of world trends, can be a daunting task.

At schools such as the Kozminski Academy of Entrepreneurship and Management, emphasis is placed on fundamentals. “We must teach the very basics, from math and history to accounting, economics, and law, to business ethics and philosophy,” stresses Kwiatkowski. “We must teach concrete skills on dealing with the market, but we also teach the art of learning to learn. For example, knowing ‘what’ to do is not as important as know-how, know-who, and know-when.”

And perhaps most important, he adds, business schools must make learning and teaching attractive to each upcoming cohort of students. In this way, schools can ensure that the cycle of management training continues.

A Sense of Community

In the West, communications technologies have created an environment in which sharing information is seen as almost essential to building a healthy economy. This tendency to network, almost taken for granted elsewhere, is not as strong in Central and Eastern European countries, says Blair Kolasa, prorector of the Higher School of Business- National Louis University of Nowy Sacz, Poland. One of the stronger economies in Central Europe, even Poland faces challenges in this regard.

Kolasa explains that in the early years after communism, a strong individualistic streak was beneficial, if not crucial, for an entrepreneur’s survival. “The economic atmosphere for entrepreneurs in Poland was the most favorable in the early 1990s, when most barriers to individual effort in the new Commonwealth were seemingly diminished,” he says. “The sheer numbers of startups of small or medium size appeared to be more than the bureaucrats could, or perhaps wanted, to effectively control.”

However, while that streak is an advantage to an entrepreneur in getting a business started, it does not help in reforming systems that stymie even the most determined would-be business owner. “The Poles have always been individualistic, which helped them to adopt various ways to bypass the restrictions imposed by the government. Most of our entrepreneurs come from technical backgrounds, such as engineering, which help them cope with those types of problems,” continues Kolasa. “However, the downside to this individualism is that there is a reluctance to join together to lobby for better conditions. There has been some recent movement toward the development of trade associations, but the inclination to network is still at a low level.”

However, alliances have formed that are encouraging interaction and idea sharing between managers, organizations, and even countries. The Polish-American-Ukrainian Cooperation Initiative (PAUCI), an organization funded by the U.S. Agency for International Development, is one such effort to bring together countries at all stages of economic independence. PAUCI’s central purpose is to help the Ukraine learn from Poland’s successful transition so that it, too, can create a healthy national economy. In addition, the organization hopes that it will allow the two countries to share and learn from the other’s experience.

“There has been a recent warming of relations between Poland and the Ukraine, and to a lesser extent, between Poland and Russia,” Kolasa notes. “This is perceived as an opportunity for export from Poland to those countries, because, in the past, the business conditions in those countries were not favorable to the Poles.” Increasingly, says Kolasa, Poland is perceived as a “bridge to the East.”

As alliances build across the globe, Central and Eastern Europe are seeking partners in business and education, as well as other support systems to help the region build its infrastructure. Many believe that such partnership may prove to be a wise investment for foreign organizations as these countries become stronger economic forces.

Investing in Intellectual Capital

Perhaps the strongest indication that Central and Eastern European countries are on their way to a brighter economic future lies in the changing attitudes of the younger generation. Although many in the older generation may see business as “dirty,” as Diedring describes, many young people see it as something else: opportunity.

“Younger people are starting to see that business is not only materially profitable; it also can be intellectually stimulating and socially rewarding,” notes Diedring. The promise of intellectual reward is, in fact, drawing people with artistic and scientific backgrounds to apply their creative and analytical skills to the business arena. The trend toward “intellectual entrepreneurship” is so prominent that the phenomenon has captured the attention of educators worldwide, including Diedring and Kwiatkowski. Its cause lies in the emphasis old communist regimes placed on national art and research efforts, explains Kwiatkowski, who has written two books on the subject, and is working on a third.

“Countries such as Poland and those in the former Soviet Union offer a very hospitable environment for intellectual entrepreneurship. The artists and scientists once were financially supported by the government. They had a very good life under socialism,” he explains. However, when that support vanished, these intellectuals needed to find a new means of support and a new outlet for their talents.

“You would be amazed at how many mathematicians and physicists are now in business,” Kwiatkowski says. “Because of their backgrounds, they have a talent for handling chaos, for working within it to make good decisions.”

In the last two decades, many management education institutions have opened in the region, much to the delight of those who wish to help these countries make successful transitions into the global economy. Educators have made it a priority to cultivate existing talent and to spark an interest in business among the young, whose outlook is decidedly different from their “old world” predecessors. And, ironically, while business schools have worked toward this goal, they also have had to adopt the same entrepreneurial practices that they must teach to their students.

Since the Baltic Management Institute opened its doors to executives in 2000, with the help of startup EU funding, the school has been an intellectual and entrepreneurial venture in every sense, says Diedring. “We like to think of ourselves as totally entrepreneurial in nature. We must keep close track of customer needs, price our services appropriately, and position ourselves as a center of excellence for this type of management training in the Baltic region.”

The Higher School of Business-National Louis University, says Kolasa, also realizes that its mission as a purveyor of management education is crucial for the region it serves. “We have a mandatory course in entrepreneurship at the bachelor’s and master’s level; in addition, we require students to participate in a short internship with a firm.” To assure the economic success of the region, he holds, “more education and support is mandatory.”

In addition to a lack of capital, these economies are also suffering from a gradual “brain drain,” says Wilson, as people in their 20s and 30s are leaving countries such as Serbia for the West. Wilson of CIPE hopes that local business programs may create more opportunities at home to retain that talent. “Medium and large enterprises really need the management skills right now,” he says. “If these companies are going to be competitive, they need to be able to train local managers. Therefore, we need to create good management programs in the region.”

Although the West is looking at Central and Eastern European countries with great interest in terms of what they might add to the global economy, the interaction, for now, is somewhat one-sided, Wilson says. That is, the global economy can survive without Central and Eastern Europe; but that region cannot survive without help, he believes. The transformation will start with quality education programs that focus on business building and the nature of competition, as well as investment of talent and capital from global organizations.

The greatest challenge, concludes Diedring, is “to create well-trained middle to senior managers who understand how business works in a market economy.” As management education becomes more accessible to the general population, so, too, will the opportunity to prosper locally and globally. The next generation of well-trained entrepreneurs may be the catalyst for sweeping change in these emerging markets, putting them on their way to a healthy and thriving economy.