TRANSITION ECONOMIES: ENHANCING MARKET …



privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies

BEN L. KEDIA

WANG PROFESSOR AND DIRECTOR

Robert Wang Center for International Business

220 Fogelman Executive Center

The University of Memphis

Memphis, TN 38152

Tel - (901) 678-2038

Fax - (901) 678-3678

E-mail: bkedia@cc.memphis.edu

c. clay dibrell

Assistant Professor of management

college of business

oregon state university

200 bexel hall

corvallis, or 97331-2603

PAULA D. HARVESTON

ASSISTANT PROFESSOR OF MANAGEMENT

BERRY COLLGE

MT. BERRY, GA 30149-5024

E-mail: PHARVESTON@BERRY.EDU

*Contact Person

Paper submitted to: Journal of Business Venturing

privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies

aBSTRACT

The impact of the intermediary factor markets of production and the entrepreneur has largely been underestimated and unexplored in the context of transition economies. Drawing upon economic market transition and entrepreneurship theories, a theoretical framework of the transition process from a command to a market economy is proposed of the interdependent relationships of transition policies, intermediary factors of production, and entrepreneurship.

KEYWORDS: Transition Economies; Entrepreneurship

privatization and economic liberalization: The role of the entrepreneur as a catalyst FOR CHANGE in transition economies

As once protected markets are opening to international competition and increasing worldwide consumer expectations, privatization and economic liberalization have become a focal area of attention in many national markets (Business Week, 1997; Cavusgil, 1997; Filatotchev, Wright, Buck & Zhukov, 1999). Many nations with transition economies are attempting to increase their national competitiveness through such processes as privatization of state owned enterprises (SOEs) and/or the use of economic liberalization (e.g., lessening of tariffs, industry regulations, etc.) to spur economic growth and development as a complement to privatization.

These economic policies are potent tools for governments and are necessary but not sufficient in moving a nation through the transition process toward a competitive market. As shown by Russia and other countries that continue to falter in their transition process (Gaddy & Ickes, 1999; Kingston-Mann, 1999), some countries are missing key factors that are critical to their successful transition. Other countries that have successfully completed the transition process such as Singapore (Gilbert, 1996) demonstrate the importance of investing in intermediary factors of production or intermediary factors of production to create a conducive environment for entrepreneurial growth, as the development of entrepreneurial firms provides a key underpinning for transition to a market economy (Loveman & Johnson, 1995; Mann, 1994). Hence, the development of the intermediary factor markets of production and the role of the entrepreneur at each phase of the transition process is necessary for effective economic progress. Indeed, the impact of the intermediary factor markets of production and of the entrepreneur have been underestimated and unexplored in this context. Thus, the purpose of this research is to conceptually explore the intermediary factor markets of production and the role of the entrepreneur in transition economies.

From this perspective, we will address the following research questions. As a government attempts to implement a privatization and liberalization agenda, how do the intermediary factors of production influence the transition process? Likewise, what role does the entrepreneur play in stimulating economic progress? In addressing this research agenda, the article is organized into five sections with propositions being developed throughout the paper. The first section consists of an overview of the privatization and economic liberalization literature. The second section describes the intermediary factors of production, while the third introduces the role of the entrepreneur. The fourth section discusses implications of the model for researchers and national policy-makers and future research needs closing with the conclusion.

PRIVATIZATION AND ECONOMIC LIBERALIZATION

Often researchers in this area describe privatization and economic liberalization as interchangeable processes. For example, some researchers argue that economic liberalization such as deregulation and contracting-out of public services to private providers should be studied together with privatization (e.g., Ricupero, 1997; Silberman, Weiss & Dutz, 1994); whereas, other scholars suggest that economic liberalization should be considered as a separate element (e.g., Bullis, 1998; Patel, 1998). Likewise, scholars who focus on the market shock approach (e.g., Feigenbaum & Henig, 1997) maintain that privatization and economic liberalization are one component as extensive levels of privatization of SOEs are executed in association with relatively moderate levels of economic liberalization. Conversely, writers of the gradual approach split this component into two distinctive components of privatization and economic liberalization, as this economic policy is associated with minor to moderate levels of privatization and extensive levels of economic liberalization (e.g., Manakkalathil & Chelminski, 1993; Rosefielde, 1995). As this research encompasses both market shock and gradual approaches, we take the position that privatization and economic liberalization are separate but complementary elements in the transition process of creating more competitive national markets. Thus, one economic policy is not treated as being more effective than the other since there are a number of nation states that have implemented both market shock and gradualistic economic policies with a high degree of success in their transition process (e.g., Poland, Hungary, India, China).

There are many definitions of privatization in the extant literature (e.g., Ricupero, 1997). For example, Heald and Steel (1981) delineate three components of privatization that include, 1) the privatization of financing a service, which is still being provided by the public sector; 2) the privatization of production, which continues to be financed by the public sector; and, 3) transfer and purchase of property and financing rights from the public sector to the private sector. Similarly, a basic definition of privatization is “transferring productive industries out of the public sector and into private ownership” (Ricupero, 1997: 412) or the transfer of public assets to the private sector (Park, 1998). Building upon Ricupero and Park’s works, we view privatization as the transferring of ownership of a state owned industry or enterprise from the public sector to the private sector.

Economic liberalization can be defined as the process of removing constraints to both domestic and global trade (Heald & Steel, 1981; Kay, Mayer & Thompson, 1986). For instance, economic constraints can take the form of trade tariffs, subsidy programs, taxes, macro-involvement of the government with private industry, etc. The underlying logic of these economic constraints is to protect domestic industries from competitive market forces. One meaning of economic liberalization is the relaxing of governmental regulations that prevents private firms from entering a market (Heald & Steel, 1981). Likewise, Kay, Mayer, and Thompson (1986) argue that economic liberalization is the removal of regulations to increase competition in monopolistic industries. Building upon these definitions, we treat economic liberalization as the removal of internal and external governmental barriers to competitive trade within industries and markets and that this component should be viewed as a separate but complementary element along with privatization for use in a nation's transition process.

Market Transition Approaches

For a government to push its national economy from a command economy to a market economy, there are two basic or core approaches to implementing privatization and economic liberalization that could be employed: gradual and market shock (Gabrisch & Laski, 1991; Kotler, Jatusripitak & Maesincee, 1997). A gradual approach is an incremental approach by a nation to slowly and steadily formulate and implement privatization and economic liberalization reforms while learning from their own mistakes and through the mistakes made by other nations (Park, 1998). Conversely, market shock is the immediate introduction of vast privatizations of SOEs and economic liberalization of markets. Market shock is a turbulent, discontinuous change to a national economy that reverberates throughout a nation and may result in social unrest (Gabrisch & Laski, 1991). Either approach can lead to a successful transition from a command economy to a market economy (Naughton, 1995; Shama & Merrell, 1997). The following sections provide a more detailed analysis and include examples of each approach.

Gradual Approach. Governments that employ the gradual approach conduct it on a limited bases in a few industries, while the government learns from the process of privatization and economic liberalization (Park, 1998). In the process of implementing a gradual policy on a constrained basis, there typically will be an outcome of an economy that consists of a policy of extensive levels of economic liberalization and minor to moderate levels of privatization. This type of privatization consists of a small portion of the economy being opened as compared to a majority of the economy that is still being planned. The constrained, enabling market provides the linkage or transition phase between the command or monopolistic market to a competitive market, as some firms are allowed or enabled to compete with fewer barriers to trade, while economic liberalization is implemented. However, these same firms are constrained, since they are limited to only government targeted industries.

For instance, Dutt (1997) provides a historical perspective of the gradual approach adopted by India since gaining independence from the British in 1950. Prior to major reforms in 1991, the public sector grew from approximately ten percent in 1960 to approximately over twenty-five percent of the gross domestic product by the late 1980s. Moreover, this interventionist theme is demonstrated by the rapid influence of SOEs in India. In 1978, the Indian government controlled slightly more than sixty percent of all industrial productive capital, and in 1990, it still operated seven of the ten and sixteen of the top twenty-five largest industrial units. In addition to the rapidly expanding SOEs, the Indian government continued to increase regulations and was noted as having one of the highest sets of tariffs in the world.

Since the initiation of major reforms in 1991, the Indian government has attempted to gradually rollback state interventionism through extensive levels of economic liberalization and minor to moderate levels of privatization (Dutt, 1997). The flow of foreign capital inflows and foreign investment has greatly increased with the drastic reduction of restrictions. The economic liberalization program has taken hold in the banking industry with increased consumer credit available and more flexible monetary policies authorized by the government (Irani, 1994). However, the privatization of SOEs has been almost non-existent and the size of the public sector instead of decreasing has maintained its pre-reform size (Dutt, 1997). Thus, India has increased economic liberalization in a few industries such as the finance sector but has done little in the area of privatizing SOEs. In sum, we propose the following propositions:

Proposition 1a: Governments following a gradual market transition policy will likely undergo extensive levels of economic liberalization and minor to moderate levels of privatization resulting in a constrained, enabling market.

Proposition 1b: Governments following a gradual market transition policy will likely progress from (1) a monopolistic market to (2) a constrained, enabling market, and lastly (3) to a competitive market.

Market Shock Approach. The market shock approach involves a radical change of the present command market system that results in the rapid privatization of many large SOEs over a short period (Jones, 1997). A market shock approach provides for greater economic participation on a national level by the public (compared to a more micro approach involved in the gradual approach), through selling of SOEs. However, the government still attempts to coordinate the rate of privatization and economic liberalization in the economy by timing when transfer of SOEs will occur and by leaving moderate to extensive levels of barriers to competition in place, while the private ownership takes control of the transferred SOEs. Hence, under shock therapy or market shock the government still maintains some control of the economy through privatization and economic liberalization resulting in a coordinated, participatory market.

For example, Poland successfully implemented the market shock approach by applying rapid change through extensive levels of privatization and moderate levels of economic liberalization. The Polish government placed the greatest emphasis on SOEs privatization, with added inducement of economic liberalization to assist in attracting foreign direct investment directed toward the purchase of SOEs (Kotler, Jatusripitak & Maesincee, 1997; Winiecki, 1993). Thus, they used extensive levels of privatization, complemented by economic liberalization to assist in making a strong transition from a command economy towards a market economy.

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Figure 1 is a graphical illustration of the privatization and economic liberalization interaction in relation to the gradual and market shock approaches. Therefore, we suggest the following propositions:

Proposition 2a: Governments following a market shock transition policy will likely undergo extensive levels of privatization and minor to moderate levels of economic liberalization resulting in a coordinated, participatory market.

Proposition 2b: Governments following a market shock transition policy will likely progress from (1) a monopolistic market to (2) a coordinated, participatory market, and lastly (3) to a competitive market.

Figure 1 is a reflection of proposed paths of transition that a nation could follow to have greater competitiveness. For instance, Cuba and North Korea could be considered to reside in quadrant 1 due to their command economy policies (Kim, 1994). For quadrant 2, Chile is a good example of how a nation has been involved in extensive economic liberalization in several industries but still maintains control over some SOEs and is now involved in privatizing several SOEs (Pilling, 1994). The Czech Republic is a representative nation for quadrant 3, as the Czech Republic is in the process of privatizing many of its large SOEs, while keeping a relatively moderate economic liberalization plan of action (Kmetz, 1997). For quadrant 4, the United States and the United Kingdom both have consistently extensive levels of privatization and economic liberalization to create a highly competitive market (Miller, 1997).

As demonstrated in Figure 1, the levels of privatization and economic liberalization will influence a nation's path to a competitive marketplace (Czinkota & Ronkainen, 1999), leading to internationally competitive firms (Porter, 1990). An underlying assumption of this model is that a state of equifinality exists. Specifically, a nation could position itself by either adopting a gradual approach (i.e., minor to moderate levels of privatization and extensive levels of economic liberalization) or a market shock approach (i.e., extensive levels of privatization and minor to moderate levels of economic liberalization) and still be able to achieve the goal of creating a domestically competitive market leading to internationally competitive firms. However, neither the gradual nor the market shock approach is likely to be effective without the intermediary factors of production being developed.

INTERMEDIARY FACTORS OF PRODUCTION

Every national economy possesses factors of production, which vary based upon levels of development that are essential for firms to compete in any industry. In transition economies, intermediary factor markets are typically not developed nor evenly distributed across the country. These intermediary factors of production develop as the country develops economically and may in fact help spur the country through market transitions along the privatization and economic liberalization path by facilitating the development of entrepreneurial firms.

The factors of production are often thought of as consisting of land, labor, capital, infrastructure and natural resources. We follow Porter’s (1990) contention that the factors of production are more than just resources and depend on the levels of specialization and economic advancement (basic versus advanced factors) in a country. In certain types of national economic conditions, factor markets have resources with specific levels of usefulness in terms of generalized to specialized and levels of basic to advanced.

Thus, we propose that at the most basic level, where privatization and economic liberalization are minor and market activity is planned by the government and implemented by SOEs, intermediary factor markets are basic generalized. That is, factors are natural and indigenous to the country. For example, factors that are inherited by a country include physical resources such as land, mineral deposits and climatic conditions that cannot be altered. Other resources such as the human resources of the country are typically basic and undeveloped with workers limited in terms of their knowledge, skills, and abilities. Thus, the workforce is typically limited to working in jobs that require physical labor (e.g., ditch digging, harvesting crops) as opposed to working in specialized fields or positions (e.g., computer analyst or programmer, laboratory assistant) that require more developed skills, knowledge and abilities.

As governments attempt to move their nations through the transition process to a higher level of economic development, intermediary factor markets need to be developed. In the former case, factor markets should be developed from basic generalized to advanced generalized. Advanced generalized intermediary factor markets can be characterized as having developed the basic components that can be utilized across industries necessary to attain some level of competitive advantage.

Generalized components include factors that affect the entire economy of a country such as infrastructure. The development of roads and bridges to increase access and flow of good and services, the implementation of an advanced telecommunications system to facilitate efficient communication, or the development of an educational system to produce a more skilled labor force are examples of the development of an advanced generalized intermediary factor market. A distinguishing characteristic for this type of factor market is that it can be utilized by firms in a variety of industries. Based on the previous arguments, we propose:

Proposition 3a: Successful implementations of transition policy (i.e., gradual or market shock) will likely transform or generate intermediary factors of production that will create an environment conducive for the growth of entrepreneurship.

However, intermediary factor markets by themselves are not sufficient for the transition process to proceed. Without entrepreneurship taking form in a transition market, potential engines of economic growth are left dormant, as entrepreneurship has been linked to the successful transition of nations (Gibb, 1993; Lane, 1995; Mann, 1994; Roman, 1991). Conversely, entrepreneurship without the intermediary factors of production will likely be insufficient to move the national economy forward. Hence, together both of these components in conjunction with an implemented transition policy (i.e., gradual or market shock) are complementary and sufficient together. Therefore, we predict:

Proposition 3b: Intermediary factors of production will likely be necessary but not sufficient for a nation's economy to progress from one stage of market development to another.

In the latter case, when the government increases the level of economic liberalization, intermediary factor markets need to be developed from basic generalized to basic specialized. Basic specialized intermediary factor markets can be characterized as having developed the basic components in specific industries necessary to attain some level of competitive advantage. Basic specialized components include factors that affect specific industries. For instance, these factors may involve the narrow development of human resources to be extremely well trained in specific fields and to develop knowledge bases in specific areas such as human resource management, computer programming, automotive assembly, or chemical processing. Brenner (1992) notes that in addition to the lack of physical capital in the Russian economy, a major missing element is managerial talent. He argues this missing element frustrates the fundamental issues of managing a business such as how are workers compensated, what are the wage differentials, and who should make the decisions in the firm. Basic specialized components can be developed by the government through the implementation of focused activities such education policies that develop and promote polytechnic institutes (e.g., vocational, business, engineering). Similarly, the government may wish to look to multinational corporations for assistance in providing these basic specialized factors. The gap between existing and needed skills, knowledge and abilities can be narrowed through the transfer of knowledge from West to East through the investment of multinational corporations (Springer & Czinkota, 1999).

These skills are prevalent for this form of entrepreneurship, since they allow the entrepreneur to gain knowledge in the specific industries that have been targeted for economic liberalization by the government. As the entrepreneur attains knowledge in their specialized area, they will likely be able to find appropriate entrepreneurial niches in areas of opportunity. With the entrepreneur becoming more established in these entrepreneurial niches, the gradual economic policies of the government will likely become more integrated with the targeted market or industry. Hence, we predict:

Proposition 3c: For nations that adopt a gradual transition policy, fermentation of advanced generalized factors of production will likely be most critical for the growth of entrepreneurship.

Likewise, for nations that attempt a shock therapy or market shock approach greater basic specialized skills are needed for the entrepreneur to thrive. In a market shock approach, the national markets undergo a dramatic upheaval, with SOEs being transferred from the public to the private sectors. Greater basic specialized skills will be appropriate with the need for labor mobility to fill the opportunities for entrepreneurs with basic generalized skills. The government can assist in this situation by providing development institutions that can link the entrepreneur with the opportunity and management of unemployment by introducing unemployment benefits, retraining institutions and job counseling (Simai, 1999). These services are vital to the establishment of the entrepreneur as an engine of growth. With the market shock approach, the command economic structure is shattered. With the destruction of the command economic structure, there will likely be a greater demand for coordinative skills as the market becomes highly fragmented from the transferring of SOEs. Thus, we propose:

Proposition 3d: For nations that adopt a market shock transition policy, fermentation of basic specialized factors of production will likely be most critical for the growth of entrepreneurship.

The final type of intermediary factor market occurs when governments attempt to move their country through the transition process from a coordinated, participatory market (extensive levels privatization and minor to moderate levels of economic liberalization) or from a constrained, enabling market (extensive levels of economic liberalization and minor to moderate levels of privatization) to a competitive market (extensive levels of both privatization and economic liberalization). This type of intermediary factor market is known as advanced specialized. It is the most difficult factor market to develop. However, countries that attain this type of intermediary factor market can gain the most significant and sustainable competitive advantage results (Porter, 1990). Based on the previous arguments, we propose:

Proposition 3e: After a nation transits to either a constrained, enabling national market (gradual policy) or coordinated, participatory national market (market shock policy), fermentation of advanced specialized factors of production will likely be most critical for the growth of entrepreneurship.

These four forms of intermediary factors have been summarized in Figure 2.

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ROLE OF ENTREPRENEURSHIP

Since the early 1980s, entrepreneurship has emerged as an important focus for practitioners and academia across the world (Kao, 1991; Shane & Venkatraman, 1999). The entrepreneur is not an exclusive U.S. domestic phenomenon but a global phenomenon and exists across the world in a variety of cultural and economic environments (Cavusgil & Knight, 1997; Filatotchev, et. al., 1999). Typically, entrepreneurship has been studied as a micro-level (individual or business level) activity with micro-level consequences (Coombs & Sadrieh, 1997). Scholars have focused on issues such as essential skills, attitudes and experiences of entrepreneurs, the role of venture capital and the importance of technology in facilitating entrepreneurship (e.g., Cavusgil & Naor, 1987; Karsai, Wright & Filatotchev, 1997); however, the role of entrepreneurship has consequences at the macro-level (industry or country level) and that these consequences warrant further investigation (Mann, 1994).

Venkatraman (1997) argues that entrepreneurship occurs when lucrative opportunities exist and enterprising individuals are poised to take advantage of those opportunities. When entrepreneurs create new businesses, they also create new jobs, new products, and often, creative work environments (Kao, 1991). To foster this entrepreneurial spirit, the U.S. government has instituted several mechanisms and organizations through institutions like the Department of Commerce to facilitate the entrepreneurial process such as the Small Business Development Centers. The building blocks of entrepreneurship have been recognized and developed over the course of many years by the U.S. government. Indeed, entrepreneurs are acknowledged to be engines of growth. The commitment of resources for enhancement of entrepreneurial opportunities over many decades has made the U.S. business environment conducive to continued development of entrepreneurs. On the other hand, if the U.S. government did not provide the appropriate intermediary factor markets such as inexpensive capital, etc., then over time the level of new entrepreneurs could possibly erode. Thus, we offer the following proposition:

Proposition 4a: Entrepreneurship will likely be necessary but not sufficient for a nation's economy to progress from one stage of market development to another.

Types of Entrepreneurial Activity

In this section we develop a typology of entrepreneurial activity that is likely to occur in transition economies. These are informal/barter, narrow/clustered, constrained/cooperative, and unfettered. Each of these types is constrained or facilitated by opportunity and access to the intermediary factors of production. The latter three types of entrepreneurial activity are associated with transition economies, while the former is associated with a planned or command economy. Although it is possible for more than one type of entrepreneurial activity to occur at each stage of market privatization and economic liberalization, a specific type of entrepreneurship will be predominant in each transition phase.

Drawing from the different theoretical streams, it is apparent that the development of appropriate factor markets and entrepreneurship has an indelible influence on transition economies and their effective movement from one stage of market development to another. Figure 3 shows the proposed relationships between the market transitions guided through government intervention in the forms of privatization and economic liberalization in connection to the roles of the intermediary factors of production and entrepreneurship. As such, Figure 3 is a holistic framework describing the integration of these transition relationships.

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Informal/Barter. The most constrained type of entrepreneurship is informal/barter. It predominantly occurs in command or monopolistic economies such as where both privatization and economic liberalization levels are minor with the nation controlling both the planning and implementation of production. The command economies of communist countries such as Cuba and North Korea are examples of this type of economy (Kim, 1994). The opportunity for entrepreneurs to start businesses is limited in this type of environment. Since the government plans almost all of the economy’s activities and production is implemented by SOEs, entrepreneurial activities are typically limited to the local level and are based on barter or exchange. For instance, entrepreneurs in monopolistic markets may sell/trade extra agricultural produce or homemade items such as clothing, jellies and jams, or provide services such a repairing bicycles or cleaning chimneys.

These entrepreneurs not only lack the opportunity to develop new ideas and products but also are limited in terms of access to the basic generalized factors of production including resources such as capital and skilled labor. Thus, informal/barter entrepreneurial enterprises are limited to operating at the local level and preclude these entrepreneurs from taking their ideas to the national or a global level. Entrepreneurs in this type of environment are limited to the informal sector of the economy. The goods and services that they provide are not legitimate activities and are not recognized or encouraged but merely tolerated by the government (McCrohan, Smith & Adams, 1991). This type of entrepreneurial activity is an initial state associated with a monopolistic market condition and basic generalized factors of production.

Narrow/Clustered. A second type of entrepreneurship is narrow/clustered and predominantly occurs in transition economies that are moving from monopolistic markets to constrained, enabling markets where economic liberalization activities are extensive and privatization levels are minor to moderate. This type of transition is associated with a gradual transition approach. In this instance, the government is attempting to move its country through the transition process to a higher level of economic development by increasing the extensiveness of economic liberalization and maintaining a minor to moderate extensiveness of privatization (see Figure 1, for a graphical depiction).

The opportunity for entrepreneurs to start businesses is limited in this type of transition environment but is greater than the informal/barter entrepreneur's opportunities. As the market is gradually liberalized, multinational corporations will begin to engage in foreign direct investment and will often employ local labor. In order to facilitate FDI, governments often initiate specialized trade institutes to train a limited amount of the labor pool; thus, developing the factors of production of the country from basic generalized to basic specialized and consequently, opportunities for entrepreneurs. By developing factor markets, governments can have a direct influence on the effectiveness of the transition process. In this context, entrepreneurs may learn from within the multinational company of new venture opportunities or may take the new knowledge, skills and abilities they have acquired through factors markets and apply them to the local market opportunities. By tapping into the newly developed basic specialized factor markets, entrepreneurs may be able to start new firms in limited sectors or bands of industries within the economy.

Thus, entrepreneurship is not widespread in a constrained, enabling economy. Indeed, it may be limited to certain areas of the country or entrepreneurial pockets. The Chinese economy is a good example of a country that is following a gradual approach to economic transition moving from a monopolistic market to a constrained, enabling market. National industries are not privatizing but economic reforms are opening markets or certain areas of the country to foreign direct investment and allowing Chinese entrepreneurs to legitimize their activities and grow through tapping into the newly developed basic specialized factor markets. For instance, the universities are owned and operated by specific industries in China. This educational structure inhibits the creation of generalized knowledge. To counter this obstacle, many of these universities have established linkages with major western universities to compensate and generate these basic specialized factors of production (Toh, Osmasn-Gani, Tan & Low, 1995). Therefore, we predict:

Proposition 4b: For nations that adopt a gradual transition policy, constrained/ cooperative will likely be the dominant form of entrepreneurship for transition from a monopolistic market to a constrained, enabling market.

Constrained/Cooperative. A third type of entrepreneurship is constrained/cooperative. It occurs predominantly in transition economies moving from monopolistic markets to coordinated, participatory markets, where privatization levels are extensive and economic liberalization is minor to moderate. In these types of markets, the government is attempting to move through the transition process to a higher level of economic development by increasing the extensiveness of the privatization of national industries and maintaining the same level of economic liberalization. This type of approach to economic transition is often referred to as the shock therapy. Here, entrepreneurial activities spurred by privatization opportunities and by the development of advanced generalized factor markets begin in abundance.

Due to the shock therapy of transition, the business environment is turbulent. Entrepreneurs may seize the opportunity to start businesses when opportunities develop; however, not all succeed in this type of turbulent environment. Economies, which follow this shock therapy, are often cited as having high mortality rates among new businesses (Gabrisch & Laski, 1991). Many of the failures have been attributed to the lack of development of advanced generalized intermediary factor markets. In fact, the lack of advanced generalized factors of production may also decrease the number of entrepreneurs who start businesses.

Proposition 4c: For nations that adopt a market shock transition policy, narrow/clustered entrepreneurs will likely be the dominant form of entrepreneurship for transition from a monopolistic market to a coordinated, participatory market.

Unfettered. The final type of entrepreneurship is unfettered and predominantly occurs in economies where both privatization and economic liberalization levels are extensive. This type of market is described as a competitive market with the United States being a good example. In these types of markets, the government has moved the country through transition processes to the highest level of economic development by increasing both the level of privatization of national industries and through economic liberalization activities. In this type of economy, entrepreneurs tap into the advanced specialized factor markets to start businesses wherever they see opportunities. There are very little constraints in this type of environment to starting a business; thus, entrepreneurs may seize the opportunity to start businesses when opportunities develop.

To reach this type of market, governments must consider their current market conditions and how to develop their factor markets to encourage entrepreneurial opportunity. Transitions can be from a coordinated, participatory market (extensive levels privatization and minor to moderate levels of economic liberalization) or from a constrained, enabling market (extensive levels of economic liberalization and minor to moderate levels of privatization) to a competitive market (extensive levels of both privatization and economic liberalization).

For governments with constrained, enabling markets that are in transition moving toward a competitive market economy (gradual approach), factor markets need to be developed from basic specialized to advanced specialized. Basic specialized intermediary factor markets consist of the basic components in specific industries necessary to attain some level of competitive advantage. However, they are not sufficient as they focus only on basic factors of production and limit the skill base and resources available to entrepreneurs. When this type of market conditions is developed, entrepreneurs can tap into the markets and start businesses in any industry segment of the economy promoting job creation and economic growth throughout the entire economy. Although, this type of market is the most difficult factor market to develop, countries that attain this type of intermediary factor market can gain the most significant and sustainable competitive advantage results (Porter, 1990).

For governments with coordinated, participatory markets that are in transition moving toward a competitive market economy (market shock approach), factor markets should be developed from advanced generalized to advanced specialized. Advanced generalized factor markets are composed of the basic factor components that can be utilized across industries necessary to attain some level of competitive advantage but are not sufficient to fuel the growth of unfettered entrepreneurship. Thus, development of intermediary factor markets is necessary; however, it is a difficult challenge due to both the rapid time-period of market changes and the complexity of developing advanced specialized factor markets. Advanced specialized factors are constantly changing in accordance with the state of knowledge, technology and science (Porter, 1990). Therefore, countries in this transition stage must continuously update their advanced specialized factors of production in order to stay competitive and to encourage continued unfettered entrepreneurial behavior. Based on the previous discussion, the following proposition is presented. Hence, we propose:

Proposition 4d: After either a constrained/cooperative form of entrepreneurship (gradual policy) or narrow/clustered form of entrepreneurship (market shock policy) becomes established in a nation's markets, unfettered entrepreneurship will likely be the dominant form of entrepreneurship for transition from a constrained, enabling or coordinated, participatory market to competitive market.

As demonstrated in Figure 3, the different components of a market transition from a command to a market economy are interdependent. Governments must not only attempt either a gradual or a market shock approach to transition but also create and develop the essential intermediary factors of production. Thus, none of the components can stand-alone, but each is complementary to the other. Thus, we predict the following relationships:

Proposition 5: There likely will be an interdependent relationship between a nation and the entrepreneur through the creation of intermediary factors of production by the government resulting in an integration of transition policy (e.g., gradual or market shock transition policy) to move the nation's economy from a command economy to a market economy.

DISCUSSION AND MODEL IMPLICATIONS

Economic tools for macro-level change such as privatization and economic liberalization have become an important area of concern for many governments as they attempt to increase their country's national competitiveness (Cavusgil, 1997). Through privatization and economic liberalization, competition increases in domestic markets through the entry of foreign multinational enterprises. The increased intensity of competition in domestic markets will likely develop domestic firms that are stronger and more capable of competing elsewhere in the world. Thus, a firm that resides in a strong competitive industry will likely be highly efficient and effective in the production and selling of its products to the consumer (Buckley & Casson, 1979; Porter, 1990). If it is not, the firm will lose competitive positioning to other firms in the domestic industry. However, if a nation’s domestic market is weakly competitive, then a firm will likely be ineffectual in global competition (Dunning, 1988; Porter, 1990).

Figure 4 demonstrates the conceptual relationships among the differing levels of analysis (i.e., the national governmental transition initiatives, the intermediary factors of production, and the entrepreneur). The proposed model in Figure 4 infers that a high degree of interdependency is needed for a country to progress their national economy toward a competitive national market. Though nations may implement either gradual or market shock approaches, neither will be effective without a conducive environment (i.e., intermediary factors of production) being in place for entrepreneurial growth. Hence, the entrepreneur provides the critical mass for a nation to move toward a more developed and competitive economy.

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As depicted in Figure 4, there are many implications for both researchers and national policy-makers. For researchers, this article demonstrates the need for the entrepreneur and the consequences of entrepreneurship to be considered in the economic transition research. The entrepreneur acts as a catalyst on the micro-level to enhance the macro movement through the privatization/economic liberalization transition process of the national economy. However, without the intermediary factor markets of production to nurture the development of entrepreneurs, the entrepreneur would be constrained in both opportunity and access to factor resources and thus, economic progress would be limited. The government can only attempt to make the microenvironment conducive for entrepreneurial growth through macro-level changes as established through the different approaches associated with privatization and economic liberalization and the intermediary factors of production. The government can directly and indirectly influence the growth of the entrepreneur, but it cannot force the creation of entrepreneurship.

The levels of privatization and economic liberalization have been demonstrated to influence the competitive development of an industry. Moreover, increased levels of privatization and economic liberalization create more developed markets that benefit the nation’s citizens through increased production and consumption of goods (Gitter & Scheuer, 1998; Pilling, 1994). This article has attempted to provide researchers with new avenues of discovery and a greater understanding of this complex process.

Implications for policy-makers are two-fold. First, policy-makers need to push for greater privatization and economic liberalization of a nation’s economy. The benefits to a society are greater than the long-term costs of continuing to operate in anything less than a competitive economy. Goulding suggests that policy-makers often “fail to recognize that the returns from selling the enterprise and reinvesting in social items like universal elementary education have far higher returns than are being made by [SOEs]” (1997: 611). Therefore, policy-makers must attempt to demonstrate to their constituents that increased levels of privatization and economic liberalization will be beneficial to all of society in the long run, and warrant short-term sacrifice.

Second, policy-makers must be willing to invest the resources necessary to develop and maintain the intermediary factors of production. Not withstanding, governments are unable to force their citizens to become entrepreneurs, and thus, the state should try to provide an environment conducive for the entrepreneur to be able to succeed through the intermediary factors of production. In essence, policy-makers must have the political fortitude to not only make tough legislative decisions in terms of privatization and economic liberalization issues, but they must also be able to develop and sustain the intermediary factors of production until entrepreneurs are capable of being a catalyst in the transition process in the potential wake of disgruntled denizens.

CONCLUSION

As all but the most developed countries continue to find themselves in some phase of economic transition, the need for more pluralistic research continues to grow. In the future, researchers should focus upon the potential differences between the gradual and market shock approaches in relation to how the entrepreneur develops and acts as a catalyst. We have treated these two economic transition approaches as acting in a state of equifinality with little attention paid to the potential nuances that may exist under the different approaches. Additionally, researchers could focus on the role of stakeholders, both internally (e.g., local banks, consumers) and externally (e.g., multinational corporations, international monetary fund), in this process and how they act as inhibitors and enhancers in the transition process.

From an entrepreneurial perspective, researchers could focus on the priority level of intermediary factors of production within each phase. For instance, in some transition stages, the development of specialized human resource factors of production may be more important than in other transition stages. In addition, it is possible that some factors may possess greater returns to the entrepreneur than others and may need to be implemented at an earlier stage than the other factors. However, this area of research has received such scant attention that relatively little is known. Hence, further research directed toward policy development and implementation is essential. Another issue that warrants further attention is the sequential or simultaneous ordering of events or development of factors. It is possible that the temporal lag associated with the implementation of transition policies and the progress through the different transition stages may be a factor in this process.

The successful privatization of SOEs and economic liberalization of a national economy has become an important topic for national governments, policy-makers, entrepreneurs and researchers alike as markets have globalized. Each nation must examine its unique bundle of resources and constraints in determining its objectives for each industry and try to meet them through both privatization and the economic liberalization processes that fit their needs.

Many paths lead to the development of successful market economies that are able to compete in an increasingly complex and rapidly changing global business environment (i.e., gradual or market shock). Additionally, the impact of the entrepreneur and the intermediary factor markets of production have been underestimated and unexplored in this context. Given the paucity of research on this topic, we ask researchers to join us in more fully understanding this phenomenon.

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