Sme Development Models In The Cee Countries example essay topic

DISSERTATION PROPOSAL NAME: Clemente Be rr " is, Jr. INSTITUTION: University of P'es Faculty of Business and Economics International Ph. D. Program DATE: 15 April 2005 SIGNATURE: / Original Signed / PROFESSOR: Dr. L'asl'o Serb TITLE: Small & Medium Business Development Policy of the Post-Socialist States of Central and Eastern Europe in their Transition to an Open Market Economy: Lessons and Applications for Cuba. PROFESSOR COMMENTS: Berrios, C. 1 DISSERTATION PROPOSAL 1. Title of Dissertation: Small & Medium Business Development Policy of the Post-Socialist States of Central and Eastern Europe in their Transition to an Open Market Economy: Lessons and Applications for Cuba.

2. Aim of Dissertation & Motivation for Research: The objective of this dissertation is to study the small and medium business policies developed in Central and Eastern Europe (CEE) as a result of their transition to an open market economy. The experience gained from the extraordinary process of transition, still under way in CEE and in the former Soviet Union (FSU), is rich with lessons that could guide policy making and action in a Cuba of the future. This dissertation attempts to distill some of these lessons and to explore those, which would facilitate the growth of small and medium size enterprises, the so-called SMEs, when transition finally unfolds in the island.

Many years after the initiation of transition in the former command economies of CEE and the FSU, one thing is certain: the process of transformation is far more complex and it takes far more time and resources than envisioned in 1989. The reason is that transition involves changing institutions, practices, and behaviors that have taken root in society during decades of centralized control and political repression. Another certainty is that it is possible to transform economic and political systems radically and end up with market economies and political democracies. Many years after the Berlin Wall fell; most production in countries in transition originates in the private sector and is transacted under free market conditions.

In addition, most of the people live under democratic rule, where the people can vote governments out of office and have done so. The decision to change came about at different times in different countries in the region. In fact, Hungary, Poland, and Yugoslavia had already started some reforms by the late 1980's, before the destruction of the Wall. In 1990, COME CON, the Soviet dominated free trade area, was dissolved as members decided to start trading in hard currency and at world market prices. The disappearance of the Soviet Union, where Gorbachev had started a re-structuring program under socialism, witnessed in 1992 the start of transition in Russia and the newly independent Baltic States. How do I define transition?

In this context, transition has been the process of transforming what were non democratic regimes, whose economic systems were centrally controlled by the government, and where the state owned most of the means of production. The major objective of transition, at the national level, has been to develop an economic and political system that stimulates sustainable economic development and increased national well being, in a context of political freedom. The move toward a Berrios, C. 2 private sector based economy operating in a market context has been a key aspect of transition. Another equally important aspect has been the move toward representative democracy. The modus operandi of the former socialist countries in their transformation has required a number of key policy changes. To successfully divest the state of the elements used to control and to increase efficiency, most of the region's countries undertook programs of liberalization to free prices, privatization and distribution of the ownership of the means of production into private hands.

In addition, the countries initiated stabilization programs that called for monetary and fiscal discipline. These stabilization programs provided the foundation for the development of financial systems that worked in market prices, and dealt with productive enterprises on the basis of their creditworthiness rather than by public subsidization. The introduction of hard budget constraints and the privatization of large firms have been, in fact, two of the most essential but also most difficult undertakings. In many of these countries this process has not been completed and has not been perfect. A second group of changes has dealt with development of the institutional structures and processes required supporting a market system and private property.

Aside from developing adequate financial systems, these efforts have included the development and adoption of an appropriate legal framework and legal institutions to address, inter alia, property rights, contractual dispute adjudication, the rules for commercial transactions, and a financial regulatory framework. Finally, and in parallel with these changes, transition has meant the development of representative, participatory democracy. This undertaking has required the development of legal rules that protects and stimulates the creation of institutions of civil society including political parties, and that prescribes periodic competitive elections. In terms of the objectives referred to earlier, experience indicates that, generally, CEE and FSU countries have ended up into two groups. Most progress has been achieved in the countries of Central Europe, such as Hungary, the Czech Republic, Slovenia, Slovakia, Poland, and the Baltic countries. These are in fact the countries that historically have had greater contact and linkages with Western Europe.

This group rapidly implemented liberalization and has undertaken sustained - though sometimes controversial - stabilization programs. These, in turn, have provided the foundation for institutional change. The slow achievers, such as Belarus, Ukraine, Russia, Moldova, have been laggard in implementing liberalization programs or in mounting steady stabilization programs. In these countries, progress towards truly representative democracy has also been slow. In many, the former political elite's remain powerful and unwilling to relinquish control. A great deal of rent seeking behavior remains.

As a Berrios, C. 3 result, markets have been less efficient, soft-budget constraints remaining, and the environment for private firms has been less that ideal. Many obstacles, as well as corruption, remain and impede the growth of new private firms. A number of important lessons can be learned from the transition experiences of CEE and the FSU: The faster the liberalization and stabilization programs are put in place the easier they are to implement. Democratization must proceed apace in order to empower the people and weaken the former that would oppose change. To the maximum extent, the old guard must be dispossessed of power.

Political competition is as important a factor as is market competition to assuring a sustainable transition. The state must assume an infinitely less controlling role than before. Yet, it must remain strong and credible to help create and support the conditions and the institutions required by a market system. Institutional restructuring must be implemented as rapidly as possible so that the legal, financial and regulatory frameworks are in place. Otherwise, growth of SMEs would be severely constrained.

The transition program must have the support of the population on the whole, a fact that suggests all groups should bear equally the necessary costs of transition. Special attention must be given to programs that assure this outcome. The possibility of joining a successful trading group constitutes a major incentive to undertake rapid change. Further, external alliances can encourage and facilitate change. There will be serious declines in output, particularly in large state-owned firms.

These are also difficult to sell off before they are restructured. Privatization can be achieved in many ways. One is selling large state enterprises. Another is selling or transferring property of small firms to their current employees. The third way is creating the right conditions for new small and medium sized firms to appear. SMEs deserve the interest they have received in transition countries for three fundamental reasons: First, they are employment intensive.

Second, when managed by the owner, they have proven to be efficient. And third, they are a very effective means of deepening the privatization process by making thousands of citizens private entrepreneurs with a stake in the new system. In fact, SMEs are considered to be one of the principal forces underlying transition in CEE. Berrios, C. 4 SMEs play a large role in developed economies. For example, according to the United Nations Economic Commission for Europe, in 2000, 99.8 per cent of enterprises in 19 countries in Western Europe were SMEs; 92 per cent of the total number of these were firms with fewer than ten employees. In the United States, small businesses employ more than half of the labor force; in 1999, the Small Business Administration reported that of about 22 million non-primary firms in the United States, 99 per cent were small.

SMEs are attractive because of their agility in adapting to changing market and supply environments, their role in deepening managerial and entrepreneurial skills, their employment intensiveness, and their contribution to diversity and competition in the supply of products and services. Similar experiences have been observed in transition countries where agricultural lands have been transferred or sold to former rural workers. As has been the case in the United States, many of the faster transition countries have organized institutions to stimulate growth of SMEs. The Czech Republic, Hungary, Poland, the Baltic countries, Slovenia, Slovakia, and even slower moving Romania have all created institutions and implemented programs to assist SMEs. The transition process needs to create a sufficient forward momentum that it may be guided but not reversed by the ups and downs of an open political system. International experience with what works is now very solid.

What needs to be done is well known: taking advantage of participatory democracy and transparency to educate the population on the needs for transition and what will be done to minimize its costs is the responsibility of all, economists, technicians, and politicians. Without the informed support of the majority of the people, sustained transformation of Cuban society will not occur. 3. Preliminary Structure of the Dissertation: DedicationAbstract Introduction Definition of Transition Definition of SMESME and entrepreneurship comparison Central & Eastern Europe (CEE) Government authorities responsible for formulation of SME policies Characteristics of the SME sector in countries in transition Post communist transition and importance of the private sector Paths of recession, recovery and expansion Performance explanations of the SME sector The macro environment and privatization Barriers to SME development Policies for the development and promotion of SMEs Berrios, C. 5 Cuba: Present History and geography Business and economics Politics and government policy Demographics and social trends Environmental regulations Cuba: Future The role and importance of the SMEs in the economy Policies for the development and promotion of SMEs SME financing SME vision, by economic / business sector Features of foreign investment code Foreign investment in Cuba Trade policy Technology innovation policy Human resource formation and development policy Institutional framework of support to the SMEs Environmental legislation Consumer prices, money supply, and liberalization Competition policy Taxation laws Business ethics and government corruption Business education Implications to SME development in Cuba: Lessons from Central & Eastern Europe Conclusion Bibliography AnnexesFiguresTables 4. State of the Art in the Literature: Numerous "think-tank" type organizations in both Europe and the U.S. have produced a myriad of literature pertaining to the analysis and evaluation of SME and entrepreneurship business development policies in CEE. A not all-inclusive listing of key contributors follow: Bank of Finland Institute for Economics in Transition Center for Advanced Small Business Economics, Erasmus University, Rotterdam Center for Regional Economic Competitiveness, Arlington, VA, U.S.A. Commission of the European Communities European Commission, DG Enterprise European Commission for Enterprise Policy GEA College, Ljubljana, Slovenia Manchester School of Management, UMIST, Manchester, U.K. National Commission on Entrepreneurship, Washington, DC, U.S.A. Routledge, Taylor & Frances Consultancy Group Swedish Foundation for Small Business Research United Nations Department of Economic and Social Affairs, Division for Public Economics and Public Administration Berrios, C. 6 University of P'es, Faculty of Business and Economics University of Regina, Department of Economics West Virginia University, Entrepreneurship Center Will Bartlett School for Public Studies, University of Bristol Due to Cuba's communist regime discouraging entrepreneurial activity, resulting therefore in a lack of SMEs in Cuba, the study of Cuban SMEs, as a future parallel, extrapolation or comparison with CEE SMEs has been "few and far between.".. still searching.

Herein lies the added value and practicality of the study... uncharted territory. Neutral and objective literature pertaining to Cuba in general, both present and future, is not bountiful. Most of the literature is from academic institutions and not business "think tank" groups as mentioned above. A not all-inclusive listing of key contributors in order of importance follow: The University of Puerto Rico, Hemispheric Trade Development Institute The University of Miami, Cuban Heritage Institute The University of Florida, Faculty of Business Administration The University of Texas at Austin, Latin American Studies Institute Interamerican University of Puerto Rico, Faculty of Business Administration Florida State University, Faculty of Business Administration Florida International University, Cuban Research Institute City University of New York, Caribbean Studies Institute Rutgers University, Hispanic Caribbean Studies Institute Tulane University, Cuban & Caribbean Studies Institute Universidad de Alicante in Spain, "Proyecto Habana" University of Wolverhampton in the U.K., Forum for the study of Cuba 5.

Outline & Motivation for the Research Methodology to be applied: The research method that I will utilize will be very empirical and simplistic in nature. As per the preliminary structure in paragraph 3 above, I will initially provide a thorough, broad and all encompassing definition of what is transition in this context and what are SMEs. I will then proceed with a detailed concept comparison of what are SMEs versus what is entrepreneurship. Separately, I will research, analyze, and evaluate the main developmental issues of SMEs in the CEE countries.

This will be followed by a brief but concise examination of today's Cuba, within a business context. I will then integrate both concepts by creating a business vision for Cuba benchmark ed on the lessons learned from SME development models in the CEE countries. In order to predict Cuba's future business performance, I will conduct empirical research in the form of a "bootstrapping model", which is a time-series, non-linear, multivariate regression prediction model with logarithmic transformation. The dependent variables or "what I want to predict" is as follows: Berrios, C. 7 A. Selected initial conditions in Cuba during transition. (By year) GDP per capita Share of industry in GDP, (%) Exports of goods and services, (% of GDP) Imports of goods and services, (% of GDP) Secondary school enrollment, (% of school-aged population) B. Implemented stabilization measures in Cuba during transition. (By year) Price liberalization, (% of prices freed) Trade liberalization, (Amount of import restrictions abolished) Exchange rates, (Fixed or floating) Fiscal and monetary policy, (degree of tightness or looseness) C. Selected economic indicators in Cuba during transition.

(By year) Real GDP (% annual change) Consumer prices (% annual change) Average real wages (% annual change) Labor costs per hour Private consumption per capita The independent variables, or the predictors, will be the very same aforementioned dependent variables, by year, however, for the countries of CEE that have achieved the most progress, i.e. Hungary, The Czech Republic, Slovenia, Slovakia, Poland, and The Baltic countries. These countries will provide positive correlation, or "what we should do" to emulate their success. Additionally, countries that have been laggard in implementing liberalization programs and mounting steady stabilization programs will also be used, i.e. Belarus, Ukraine, Russia, Moldova, and Romania. These countries will provide negative correlation, or "what we should not do" to avoid their laggardness.

Many have queried, "why use the CEE and FSU countries as the main benchmark in my research methodology, why not China or Vietnam? " My response has always been that I prefer the CEE / FSU countries as the main frame of reference and benchmark as Cuba has remained a country with an economic system closely patterned after that of the FSU and satellites, pre-Gorbachev. Most economic and all political decisions are made at the top. With few exceptions affecting a minute portion of output, all domestic prices are administered. Berrios, C. 8 In addition to the national currency, the U.S. dollar (recently made illegal by the Cuban Communist Regime) circulates illegally in the black market. The official peso / U.S. dollar exchange rate has no relation to the shadow price of the national currency.

A large variety of important basic need goods can only be purchased in dollars and are only available in the black market. This dual currency system has created an acute gap between the level of living of those who have dollars and those who do not. The State owns the large majority of productive enterprises and most of the agricultural land. Private SMEs are prohibited and politically rejected. With the exception of individual work performed by a small group of licensed self employed, the state is the only legal employer.

Structure, level, price, and distribution patterns of output are decided administratively. Budget policy is directed at maintaining current institutional structure underwriting with subsidies most state enterprises, including agricultural ones. The tax system is rudimentary and it is used, explicitly, not to produce revenue but to control and repress those authorized to work on their own. In practice, only the self-employed pay income taxes. There are neither standard accounting procedures nor transparency in governance. The political system is also closed.

Political parties, other than the Communist Party, are not permitted. Elections, which do take place, are not competitive. The Party selects all candidates to parliament. The parliament seldom debates bills and meets only several days per year to ratify government decisions. There is no civil society to speak of.

Dissidents and opponents are persecuted and frequently jailed. The preceding elements suggest the challenges and difficulties Cuba will face as it decides on transition. Cuba must reckon with both its assets and its liabilities. Cuba's important assets are: A highly educated population, with technical skills that, though frequently not up to date, will likely allow rapid learning. Infusion of new productive technology could quickly lead to large increases in productivity and production. A good stock of natural resources that can be used to advantage.

A large near-by exiled population with substantial know-how and capital, eager to assist. Geographical closeness to largest market on earth. In medium term, good prospect of joining the North American Free Trade Agreement (NAFTA) Berrios, C. 9 Cuba's liabilities are: A mindset bred after 46 years of experience that leads to a high degree of avoidance of risk and individual decision making... FEAR.

No experience in participatory democracy and citizens independent action for the last two generations. Known but unmeasured environmental damage from past government programs and human survivalist behavior. Prevalence of obsolete and fuel intensive technology. Outstanding claims of former property owner on a large number of confiscated properties.

Total inadequacy of current financial system to serve the needs of citizens, entrepreneurs, and SMEs. The diverse experience in transition cases in Europe suggests that Cuba will have to move rapidly on a number of fronts to ensure success of transition reforms. Short-term liberalization and a massive stabilization program should be quickly put in place with help from the international financial institutions (IFIs). Their financial support will also be required to organize and implement programs to minimize welfare impact of dislocations brought about by restructuring. Acute inequalities must be avoided. This assistance from the IFIs is also needed to make available the technical expertise required to develop and support structural reform programs.

Particularly in view of the past 50 years of repressive regimes, Cuba must move decisively to restore representative democracy. The population must share responsibility and agree with the overall direction of re-form. A modern and fair tax system will be necessary so that the government can raise revenues to develop physical, financial, and human infrastructure to support the market and the private sector. Government should move rapidly to privatize small state firms.

Such a move would make economic sense and help generate popular support for reforms. There are probably few claims from former owners on these groups of firms. Special, non-subsidized, programs must be developed in order to stimulate investment in new SMEs. These firms would have a large short-term impact on employment, output and the diversity of supply. They would provide employment for those workers terminated from inefficient state owned large firms, thus facilitating, in turn their privatization. It will also be of the utmost urgency to attempt to solve the issue of claims on property confiscated by the Revolution.

The issue has been handled in different ways in the CEE. Some countries have effected some restitution to former owners. Others have approved compensation in diverse ways. Still a third group has not recognized any claims. The important thing in Cuba is not to let it linger Berrios, C. 10 without a legal, and hopefully fair decision. Undue delays will affect the political stability of a new transition regime and effectively impede the reform process and act as a drag on domestic and foreign investment.

6. Data Sources: The following research libraries will be used: The University of Chicago, on-line research library The University of Puerto Rico, Main Campus Interamerican University of Puerto Rico Pontifical Catholic University of Puerto Rico Sacred Heart University of Puerto Rico The University of the West Indies, Barbados & Trinidad Campuses. The University of Florida, on-line research library Florida State University, on-line research library The following subject matter research institutions will be used: Hemispheric Trade Development Institute, The University of Puerto Rico Cuban Heritage Institute, The University of Miami Latin American Studies Institute, The University of Texas at Austin Cuban Research Institute, Florida International University Caribbean Studies Institute, City University of New York Hispanic Caribbean Studies Institute, Rutgers University Cuban & Caribbean Studies Institute, Tulane University "Proyecto Habana", Universidad de Alicante in Spain Forum for the study of Cuba, University of Wolverhampton in the U.K. Institute for Economics in Transition, Bank of Finland Center for Advanced Small Business Economics, Erasmus University, Rotterdam Center for Regional Economic Competitiveness, Arlington, VA, U.S.A. Commission of the European Communities European Commission, DG Enterprise European Commission for Enterprise Policy National Commission on Entrepreneurship, Washington, DC, U.S.A. Routledge, Taylor & Frances Consultancy Group Swedish Foundation for Small Business Research United Nations Department of Economic and Social Affairs, Division for Public Economics and Public Administration Entrepreneurship Center, West Virginia University Berrios, C. 117. Time Plan of the Work: DedicationAbstract Introduction Definition of Transition Definition of SMESME and entrepreneurship comparison TOTAL TIME: 2 months (July 2005 - August 2005) Central & Eastern Europe (CEE) Government authorities responsible for formulation of SME policies Characteristics of the SME sector in countries in transition Post communist transition and importance of the private sector Paths of recession, recovery and expansion Performance explanations of the SME sector The macro environment and privatization Barriers to SME development Policies for the development and promotion of SMEs TOTAL TIME: 6 months (September 2005 - February 2006) Cuba: Present History and geography Business and economics Politics and government policy Demographics and social trends Environmental regulations TOTAL TIME: 4 months (March 2006 - June 2006) Cuba: Future The role and importance of the SMEs in the economy Policies for the development and promotion of SMEs SME financing SME vision, by business sector Features of foreign investment code Foreign investment in Cuba Trade policy Technology innovation policy Human resource formation and development policy Institutional framework of support to the SMEs Environmental legislation Consumer prices, money supply, and liberalization Competition policy Taxation laws Business ethics and government corruption Berrios, C. 12 Business education Implications to SME development in Cuba: Lessons from Central & Eastern EuropeConclusionTOTAL TIME: 12 months (July 2006 - June 2007) TOTAL TIME OF DISSERTATION COMPLETION: 2 years (July 2005 - June 2007) TURN-IN DATE OF DISSERTATION: July 20078. List of References: A. Research Tools: (1) High Beam Research, web - Extensive electronic archive of more than 34 million reference documents from over 3,000 sources -- a vast collection of articles from leading publications, updated daily and going back as far as 20 years. Library, web, and reference research tools provided are as follow: Magazines, Journals & Transcripts, Newspapers, Books, Encyclopedias, Almanacs, Dictionaries, Newswires, Maps, Pictures (2) Dog Pile Internet Search Engine, web - Web-based integrated search engine featuring optimized results from the Internet's top search engines, including Google, Yahoo, Ask Jeeves, About, Find What, Look Smart, Altavista, Internet Finds, and Microsoft. B. Dissertation Proposal

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