Entrepreneurs in Bulgaria

By Denitsa Gancheva

Student № 6274242

Social Policy and Social Work in Urban Areas

29/08/2011

MASTER THESIS

Supervisors:

Rineke van Daalen

Patrick Brown

UNIVERSITEIT VAN AMSTERDAM

OPINIONS OF ENTREPRENEURS ON THE

CURRENT SETTING FOR DEVELOPMENT

OF SMALL- AND MEDIUM-SIZED

ENTERPRISES IN BULGARIA

A STUDY OF GOVERNMENTAL

MEASURES AND TRUST

Denitsa Gancheva Entrepreneurs in Bulgaria

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~ Table of Contents ~

INTRODUCTION ...………………………………………………………………………… 2

CHAPTER 1: BULGARIAN INSTITUTIONAL SETTING …...…………….……. 4 - 17

I. Country Overview ……………………………………………………...……….. 4

II. Entrepreneurship Pre- and Post-1989 …………………………………………. 5

III. Current Institutional Setting for Operation of SMEs in Bulgaria …….…….. 8

3.1.The Investment Compact …………………………….………………………. 9

3.2.National Strategy for Encouragement of SME Development ………………. 11

3.2.1. European Employment Strategy and

Entrepreneurship at European Level …………...…...………… 11

3.2.2. Employment in Bulgaria and the National Strategy

for Encouragement of SME Development ………………….…. 13

CHAPTER 2: TRUST ……………………………………………………….……… 17 - 32

I. Explaining Trust …………………………………………………….………… 17

II. Trust and SMEs in Post-Communism ……………………..…….…………... 21

III. Trust and SMEs in Bulgaria ………………………………………………….. 27

CHAPTER 3: TRUST OF BULGARIAN ENTREPRENEURS ………………… 33 – 52

I. Interviews’ Background ……...………….……………………………………. 33

II. Opinions of Entrepreneurs on the Institutional Setting in Bulgaria ……….. 34

III. Institutional and Interpersonal Trust of Bulgarian Entrepreneurs ……..…. 43

CONCLUSION ………………………...…………………………………………...……… 51

Bibliography ………………………………………………..…………..…………………… 54

Appendix ……………………………………………...……………….………………….… 59


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[ABSTRACT]

The aim of this study is to provide an overview of the Bulgarian institutional environment for small-

and medium-sized enterprises. A description of the institutional setting in the country is presented. It

reveals that there are numerous factors remaining as a legacy from the communist regime that

negatively affect the SME performance of the country and its societal reformation as a whole.

However, the core of this study lies in the opinions of small- and medium-sized enterprises owners.

Their viewpoints have only rarely been presented, like in the current study, as an assessment of the

performance of Bulgarian institutions. The interviewed entrepreneurs reveal that despite the numerous

successful reforms that have been introduced, there are still serious issues that curb any further

development and demand attention. Among the most important is the rebuilding of trust in the society.

According to this study, it has to be done through a well-targeted to the needs of SMEs institutional

framework of rules and regulations. It is furthermore essential for these rules and regulations to be

properly implemented, without constant change in direction or application, which is currently the

case. It is argued that these actions will be able to reshape the deeply-rooted distrusting attitudes of

the population and to diminish the negative effects of the communist legacy.

INTRODUCTION

This study is dedicated to the evaluation of the business environment for small- and medium-

sized enterprises (SMEs) in Bulgaria. On the one hand, this assessment will be conducted

through the use of official indicators pointing at the condition of the institutional setting in

which Bulgarian SMEs thrive. On the other hand, the assessment will rely on the opinions of

the entrepreneurs themselves as an indicator of the factors that significantly affect the way

their enterprises function. Throughout the study, two aspects assert the most influence on the

way the institutional framework is perceived by the entrepreneurs. The first one is the way

rules and regulations are implemented and functioning and the second is the role of trust.

The first chapter will formulate the main institutional framework around which the topic will

unfold. The institutional environment in the country is an important factor that determines the

growth rate of SMEs. In this chapter the history of Bulgarian SMEs will be presented in terms

of the most significant political, economic and social events. Before turning to

entrepreneurship development, the initial process of “intrapreneurship” (Punchev, 1989) will


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be introduced. It is characterized with the creation of small, barely autonomous units within

the already existing big governmental establishments during the communist regime. The

reasons for the current relative underperformance of SMEs when compared to the Western

societies will also be discussed. In order to deliver a better description of the current efforts

for improving the business environment, two programmes will be introduced – the Investment

Compact and the National Strategy for the Encouragement of SME Development. The latter

has established the main framework around which changes in the Bulgarian SME sector are

pursued. For this reason the National Strategy will represent an important aspect of the

research. The reports on the Bulgarian progress point to a certain degree of improvement,

especially in the financial and regulatory frameworks. However they also stress the

immediacy of further advancements the lack of which could stultify the achieved progress.

The second chapter will take up the matter of trust. The concept is highly complex but

specific definitions, relevant to the research topic, will be discussed. This chapter will

furthermore present some of the most important schools of thought dealing with the origins

and types of trust. Following that, the attention will first move to the specific forms of trust in

post-communist societies and later on it will focus on the levels of trust in Bulgaria. It will be

examined to what extent the deeply-rooted attitudes from the communist era and the

destroyed civil society affect the degrees of trusting.

The last chapter of the study will examine the opinions of 17 interviewed entrepreneurs from

Bulgaria. Their answers will help draw conclusions on the two important aspects of the

research. First, to what extent the Bulgarian institutional setting is properly arranged to meet

the needs of small enterprises. And second, what levels of trust are exhibited towards the

institutions, but also towards other entities and how those levels of trust affect the

development of the business. This chapter will also investigate the question of how trust can

be restored – whether it is a matter of values and norms based on Bulgarian history and

culture or whether trust has to be earned through well-targeted and successful institutional

performance.


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CHAPTER 1

BULGARIAN INSTITUTIONAL SETTING

I. COUNTRY OVERVIEW

Bulgaria is located in South-eastern Europe and its population is slightly over 7.5 million

people (European Commission, 2011(B)). A former communist country that entered the

European Union in January 2007, it averaged more than 6% annual growth from 2004 to

2008. However the global downturn sharply reduced domestic demand, exports, production

and capital inflow and as a result the GDP of the country contracted by approximately 5% in

2009 and stagnated in 2010 (CIA: The World Factbook, 2011).

Due to the Bulgarian communist rule from 1944 until 1989, the country is still transitioning to

a market economy and is therefore most commonly defined by a significantly lower level of

economic development when compared to the mature market economies of the West. The

slow and difficult transition is due to the early years of transformation that brought economic

crises unlike anything experienced under socialism. Runaway inflation, sudden and

widespread losses of jobs, and expanding poverty among those of working age created an

urgent need for new forms of societal functioning (Fultz, 2002).

The former presence of communism explains the still existent high governmental influence

and intervention in certain areas. This, coupled with corruption in the public administration, a

weak judiciary, and the presence of organized crimes, remain significant challenges (CIA:

The World Factbook, 2011). Nonetheless, the accession into the European Union has

accelerated the reform process, which resulted in Bulgaria becoming one of the “leading

reformers” in South East Europe (Organisation for Economic Co-operation and Development,

2006, p. 15). The country is assessed as having completed the first phase of policy elaboration

and institutional (re-)building and being currently engaged in policy implementation. The

challenge is now in ensuring the stability and sustainability of the reform process

(Organisation for Economic Co-operation and Development, 2006).


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II. ENTREPRENEURSHIP PRE- AND POST-1989

In Bulgaria the process of entrepreneurship started off as the so-called “intrapreneurship”

(Punchev, 1989). “Intrapreneurship” was officially legitimized by Arrangement No.12, issued

by the government in 1982. Its purpose was “to more completely meet the need for additional

consumer goods and to provide for an increased spectrum of services from the state-owned

sector” (Punchev, 1989, p. 73). In other words, as Smallbone & Welter (2001) suggest, a

somewhat entrepreneurial behavior during the communist period was a necessary response to

the constant shortage of materials. The process is termed “intrapreneurship” since small and

medium-sized units were created almost entirely within already existing governmental

establishments on the country’s territory. Furthermore, there was virtually no independence

and freedom of action for these units. The full, direct control over them was assigned to the

Bulgarian Industrial Association (BIA) and legislative basis for preferential treatment was

also present, among other governmental interferences (Punchev, 1989).

Despite the number of restrictions the performance of these units proved quite strong –

“between 1984 and 1988, the mean labor productivity of small units was between 1.4 and 2.7

times greater than that of their larger counterparts […]” (Punchev, 1989, p. 74). Therefore

already in 1988 there were reasons to seriously consider whether the continued development

of SMEs was not one of the key factors in succeeding in the challenges posed by the Western

world.

Entrepreneurship can be therefore classified as one of the first positive trends that started with

the societal transformation in Bulgaria. Since citizens had to compensate for the withdrawn

state services, entrepreneurship was a natural alternative for self-support. The resulted

investment into private ownership was seen as a key factor leading to economic growth,

innovations and market competition. The emerging strong private sector and the creation of

numerous small- and medium-sized enterprises (SMEs) furthermore provided employment

opportunities for citizens which alleviated the worsened employment situation of the country.

Despite these positive effects “until 1997 the public policies in Bulgaria did not prioritize the

development of the SME sector […]. [U]ntil that period the Bulgarian government perceived

the development of the SMEs as rather “self-evident” (Kirov & Stoeva, 2005, p. 102). In 1997

the government initiated two National strategies for the encouragement of the SME sector.

However only in 1999 when issuing the Law on Small and Medium-Sized Enterprises the

three categories (micro, small and medium enterprises) and the three criteria (number of


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personnel, annual turnover/assets value and independence) were introduced for the first time

(Kirov & Stoeva, 2005). This accounted for a late legislative start of entrepreneurial

development and even though Bulgaria experienced a rapid growth of SMEs as the alternative

of governmentally supported employment, it is presently lagging behind when compared to

some of the other EU member states (Figure 1).

Figure 1. Number of SMEs per 1000 Inhabitants, 2003

In terms of economic growth however, the country continues to “register high GDP and

employment growth rates in spite of the international financial markets turmoil and the high

food and oil prices” (European Employment Strategy, 2008, p. 5). The real GDP growth in

2007 reached 6.2% (Figure 2).

Source: Eurostat


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Figure 2. Real GDP Growth

The high levels of GDP and employment growth should not be confused with already

achieved high GDP and employment among the working age population. Due to the ongoing

transitional process in Bulgaria these are logically still not up to the respective indicators in

other Western European countries but the exhibited positive growth is nonetheless an

important aspect. Despite the evidence that Bulgarian SMEs are underperforming when

compared to their Western counterparts, they still remain a key contributing factor to the

country’s growth. For the current state of country transformation, SMEs are a main unit of

innovation and job creation, contributing with around 74% to the total employment in

Bulgaria, which is a higher rate than the EU-27 average one (Figure 3) and representing

99.7% of all enterprises in the country (Figure 4) (European Commission: Enterprise and

Industry, 2009). These factors serve as an illustration of how SMEs actively participate in the

economic growth of the country.

Source: EES, 2008


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Figure 3. Share of SMEs (%) in Total Employment in Bulgaria and EU-27, 2008

ENTERPRISES

BULGARIA EU-27

Micro 27.9% 29.7%

Small 23.2% 20.7%

Medium-sized 23.0% 17.0%

TOTAL: SMEs 74.1% 67.4%

Figure 4. Number of SMEs and Their Share in All Enterprises in Bulgaria and EU-27,

20081

ENTERPRISES

BULGARIA EU-27

Number Share Share

Micro 255 697 89.3% 91.8%

Small 24 890 8.7% 6.9%

Medium-sized 4 897 1.7% 1.1%

TOTAL: SMEs 285 484 99.7% 99.8%

III. CURRENT INSTITUTIONAL SETTING FOR OPERATION OF

SMEs IN BULGARIA

“In all countries the government and its agencies have a fundamental lead role to play in

providing an environment favourable to business operations and conducive to private

investment. This is especially true for small business. Small and medium-sized enterprises are

the backbone of most economies today. In order to flourish and grow they need an

environment that facilitates and enables business start-up, does not hamper them with

1According to the EU: micro enterprises have up to 10 employees; small enterprises – up to 50 and medium-

sized – up to 250 (European Commission, 2011)

Source: European Commission, 2009



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excessive and costly regulations and facilitates access to finance and business services. In this

respect there is an urgent need in South East Europe (SEE) to design and implement an

effective enterprise policy, as the level of private investment still lags behind that of advanced

countries” (Organization for Economic Co-operation and Development, 2005, p. 3). This

summarizes the expectations set by the European-level organizations and the challenges faced

by the Bulgarian governmental structures. The EU accession has accelerated the reform

process in the country, which resulted in Bulgaria becoming one of the “leading reformers” in

South East Europe (Organisation for Economic Co-operation and Development, 2006, p. 15).

However Bulgaria has completed only the first level of policy reformation and institutional

building. The challenge now is to further improve the institutional context by alleviating the

regulatory framework from burdensome regulations and most importantly, by ensuring the

sustainability of the reform process.

In order to exemplify the country’s reform process in terms of SMEs, two programs for

encouraging their development are exemplary. First is the Investment Compact adopted in

1999 under the auspices of the OECD. Afterwards comes the National Strategy for

Encouragement of SME Development which started operating in 2007 and is closely

associated with the Small Business Act for Europe triggered by the European Union’s

Commission. In this study, the National Strategy is viewed as the more influential because it

started operating relatively simultaneously with the Bulgarian EU accession. Furthermore its

objectives and terms of achieving them are very much in line with the EU model and

requirements. For these reasons, the National Strategy will also be included in later parts,

where its effectiveness will be discussed and seen in the light of the opinions of the

interviewed entrepreneurs.

3.1. The Investment Compact

The South East Europe Compact for Reform, Investment, Integrity and Growth or The

Investment Compact is a key component of the Stability Pact under the Organization for

Economic Co-operation and Development (OECD). The Stability Pact for South Eastern

Europe was adopted in June 1999 with the aim to encourage co-operation among the countries

of South East Europe (SEE) and to facilitate the stability and economic growth in the region

(Organization for Economic Co-operation and Development, 2005).


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The main purpose of the Investment Compact is to encourage private investment since this is

an essential factor in the transition to a market economy structure and when strengthening the

country’s social and economic position. The objectives set by the program are to

(Organization for Economic Co-operation and Development, 2005, p. 2):

Improve the climate for business and investment

Attract and encourage private investment

Ensure private sector involvement in the reform process

Instigate and monitor the implementation of reform

The Investment Compact’s overall assessment of the Bulgarian institutional framework

suggests that progress is present but uneven across the different enterprise policy areas. Main

improvements have been noted in the financial and regulatory frameworks (Organization for

Economic Co-operation and Development, 2005, p. 12). The financial environment improved

with a significant growth in bank loans extended to the private sector, including to SMEs.

Furthermore the tax policy became more favorable with a reduction of the corporate tax rate

and introduction of serious incentives for investment. In addition, starting in 2003, the new

Law for Restricting the Administrative Regulation and Control over the Economic Activity

provided a general framework for improvement of the regulatory environment for enterprises.

Subsequently a detailed review of all administrative regimes was carried in order to identify

and eliminate those most burdensome for business (Organization for Economic Co-operation

and Development, 2005, p. 12).

Actions for improvement should now be directed to the process of information gathering and

dissemination; practical guidance for SMEs and co-ordination. As a result it is essential to

intensify the cooperation and dialogue with the civic society and entrepreneurs in particular,

in order to successfully formulate and implement the Bulgarian enterprise policy

(Organization for Economic Co-operation and Development, 2005, p. 16). To successfully

cooperate and reach a wider range of enterprises the more effective use of regional networks,

especially in the remote regions of the country, is desirable (Organization for Economic Co-

operation and Development, 2005, p. 16). Establishing such closer cooperation will

furthermore be beneficial for SMEs when policy measures are being formulated since there

will be a higher chance that the opinion of the entrepreneurs will be taken into serious

consideration.


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Another important point here is that the reforms that have already been introduced in the

financial and regulatory frameworks could not be considered as neither the only ones needed,

nor as completely finished successfully. Much more still remains to be done. For example,

many concerns have been raised (cf. Ministry of Economy, Energy and Tourism, 2010)

warning that increased amount of granted bank credits to SMEs has been only a short-term

phenomenon that could be accounted to Bulgaria’s EU accession. Furthermore, in the light of

the current economic downturn, credit granting has become immensely more difficult

(Organization for Economic Co-operation and Development, 2005). These factors point to the

importance of actively promoting alternative financial resources for SMEs. Later in this paper

the opinions of the interviewed entrepreneurs will provide further examples of reform

attempts that have not been perceived as carried out properly and effectively enough.

3.2. National Strategy for Encouragement of SME Development

3.2.1. European Employment Strategy and Entrepreneurship at the European Level

Unemployment is among the most serious problems in almost all countries in Europe.

Employment rate on the continent is 61%, which is nearly 10% below this in the US and

Japan. Population groups mostly endangered of unemployment are long-term unemployed,

young and older jobseekers, people with disabilities, ethnic minorities and women. As of

2000 the employment rate of women has been estimated at around 20% below the rate of men

(European Commission, 2000).

The European Union has recognized these issues and in order to overcome them, the

European Employment Strategy (EES) emerged after the Amsterdam Treaty of 1997. The first

set of employment guidelines of the 1997 Luxembourg summit aimed at the development of a

more active labor market policy by the use of four pillars (European Commission, 2000, p. 9):

Employability of jobseekers

Entrepreneurship

The adaptability of businesses and employees to economic and technological change

Equal opportunities for men and women and for people with disabilities

Since the EES was created as more than just a theoretical framework, an action plan was

developed where at the beginning of each year, certain priority areas for action are identified


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and in line with them the employment guidelines are formulated. From there on, each country

has to provide a national action plan which is supposed to implement the guidelines in

accordance with the country’s specifics. Subsequently a joint employment report is prepared

by the European Commission and a set of recommendations are formulated by the European

Council (European Commission, 2000).

The development of the EES continued with the 2000 Lisbon summit at which a new strategic

goal to be fulfilled by 2010 was agreed on, namely “[for the EU] to become the most

competitive and dynamic knowledge-based economy in the world, capable of sustaining

economic growth with more and better jobs and greater social cohesion” (European

Commission, 2000, p. 30). In 2010 the successor of Lisbon: Europe 2020 was held which

acknowledged that the aims of the Lisbon summit have not been met and thus established new

goals to be reached by 2020. These included a new strategy for jobs and smart, sustainable

and inclusive growth (European Commission, 2011(A)).

I will narrow down this overview to the subject of concern in the study – entrepreneurship,

which is also one of the four main pillars of the EES. According to the European Commission

(2010, p. 88) “[t]he typical European firm is a micro-enterprise (less than 10 people) and

accounts for more than 90% of all firms in the EU and 95% of newly created companies. [...]

Given that many of the entrepreneurs themselves employ people, these newly-created firms

contribute significantly to job creation and therefore to achieving the European Union’s goal

of more growth and jobs”. Immediately after the Luxembourg summit of 1997 concrete action

was taken in order to support the development of small and medium-sized enterprises

(SMEs), since they were found to be highly innovative and creating more jobs than other

businesses (European Commission, 2000, p. 12). The intention of the EU was to make it

easier to set up a new business by:

Indentifying existing obstacles to the creation of SMEs and making any necessary

changes

Reducing the tax and contributions burden on labor

Looking at how more jobs can be created in the social sphere

The efforts to improve the conditions for the existence of SMEs have been reflected in the

Small Business Act for Europe (SBA) established in 2008. The Bulgarian government’s

policy to SMEs is defined by the European Commission’s guidelines in this area and by the


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Small Business Act in particular. The Bulgarian National Strategy for Encouragement of SME

Development and more in-depth information on the employment and entrepreneurial situation

in the country will be discussed in the following subsection.

3.2.2 Employment in Bulgaria and the National Strategy for Encouragement of

SME Development

The global financial crisis that started in 2008 has resulted in one of the most severe

recessions since the Second World War. It has negatively affected the labor market in the EU

by nearly wiping out the steady increase in economic growth and decrease in unemployment

witnessed over the last decade (European Commission, 2010). As Figures 5 and 6 suggest, the

economic recession has significantly and negatively influenced the Bulgarian economic

situation, resulting in unemployment rate that has kept increasing even over the first half of

2010.

Figure 5. Change in Unemployment Rates for the EU, March 2008 – March 2009 and

March 2009 – March 2010



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Figure 6. Recent Developments in Unemployment Rates for the EU, 12.2009 – 07.2010

One of the direct measures of the Bulgarian government against the economic crisis and rising

unemployment has been the temporary increase of unemployment benefits for 2009 (Figure

7). Following the example of other EU members, the Bulgarian government has furthermore

adjusted to the economic crisis via reduced employment and productivity per hour rather than

reduced average working hours. The downturn has also served as a catalyst for improving the

flexibility of training services by providing more training opportunities and granting vouchers

to participate in such to all employees from end-2009 until end-2012 (European Commission,

2010).



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Figure 7. Stock of Recipients of Short-term Working Benefits in Bulgaria, 04.2009 –

02.2010

The National Strategy for SME Development was adopted in 2007. Its priorities, in line with

the Small Business Act, are aimed at “supporting the entrepreneurial spirit, improving access

to financing and providing financial support to SMEs (including support from EU programs),

simplifying the regulatory environment, achieving sustainable development, the

internationalization of SMEs, creating incentives for research and innovation, and protection

of intellectual property” (Ministry of Economy, Energy and Tourism, 2010, p. 11).

The main purpose of the scheme is for entrepreneurs “to have more time and financial

resources available for production and innovations, not for filling in forms, reports etc., as is

normally the practice in a bureaucratic environment” (Ministry of Economy, Energy and

Tourism, 2010, p. 60). One of the areas in which improvement has been noted has been the

financial setting. Over the past years there has been improved access to financial resources.

SMEs have benefitted from the situation with about 95% of them relying on external sources



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of funds. It should be noted nonetheless that the improved access to financing might be a one-

time effect attributable to the accession of Bulgaria to the European Union (Ministry of

Economy, Energy and Tourism, 2010).

In another area, reduced levels of employment have been observed in Bulgaria between 2008

and 2010 (Figure 8). This can be attributed to the transitional state of Bulgaria but the recent

economic recession has furthermore added to the lagging behind of the country. It has also

significantly destabilized the fragile positive development observed during the past decade.

Figure 8. Change in Employment in the EU, 2008 (quarter 2) – 2010 (quarter 2)

The aim of this chapter was to provide the necessary framework in which the study can be

subsequently placed. The institutional setting in Bulgaria is of significant importance to the

development of its SMEs. The relatively late start of active support for entrepreneurship and

the current state of transition are key factors explaining the still present underperformance of

SMEs when compared to the more advanced Western market economies. There was no

entrepreneurship, the way it is currently perceived, existing under the communist rule. Rather

a phenomenon termed “intrapreneurship” was present but strictly controlled and restricted in



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its freedom of action. With the change of regimes in 1989, entrepreneurship emerged as a

strong sector that helped the population overcome the difficulties of the seized social benefits.

Then it was experienced how entrepreneurship could result in innovation, competitiveness,

opening of working positions and in the end, lead to economic growth. Because the process

was more or less triggered naturally out of the needs of the population, until the late 1990s

entrepreneurship was perceived as self-present and self-developing, so no specific measures

to stimulate it were taken. This explains why despite its strong growth rates, the SME sector

in Bulgaria is still lagging behind when compared to the Western market economies.

Nonetheless two important strategies are currently operating in Bulgaria with the aim of

encouraging the development of SMEs – the Investment Compact and the National Strategy

for the Encouragement of SME Development. Their reports point to improvements mostly in

the financial and regulatory frameworks but nonetheless also stress the necessity of further

efforts to improve the institutional setting for SMEs within the country.

In the following chapter the attention will shift towards the concept of trust. First its definition

will be clarified and positioned in respect to the aims of the research. Following, the concept

will be put in the perspective of the post-socialist world and its small- and medium-sized

enterprises. The section will explore the ways in which communist regimes have affected and

transformed trust and the societal structures as a whole. Lastly, the focus will move to

Bulgaria, a specific example of a post-communist country, and the role of trust in the country

and in its SME sector.

CHAPTER 2

TRUST

I. Explaining Trust

Trust is one of the guiding forces behind societal interaction. However its importance goes

beyond the everyday experience. In recent decades, trust has been noted for its significant

influence in a number of fields. It has been the center of debates, research and investigation in

psychology, sociology and economics. As a result, trust is now seen in respect to every

society’s political system, societal structures, liberal, democratic and economic development,


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interpersonal, interorganizational and institutional relations; it has entered research fields in

all micro-, meso- and macro-levels of life. For example, it is used as a prominent predictor for

job performance and satisfaction (Robinson, 1996; Dirks & Ferrin, 2001); organizational

revenue and profit (Davis, Schoorman, Mayer, & Tan, 2000; Simons & McLean Parks, 2002)

and economic development in general (Arrow, 1973; Granovetter, 1985) to name a few.

In the current chapter, the following section will focus on clarifying the general definitions

and distinctions of trust by relating to the different schools of thought. The subsequent section

will deal with the context of post-communist societies and will aim at explaining why trust

has been low during communism and is still low nowadays. Different features of the

communist regime that still remain today form the so called “communist legacy” which

nowadays negatively affects the process of transformation of these societies into market

economies and democratic regimes. Finally this framework will be transferred to the specific

country of the research – Bulgaria – and the effect of distrust and skepticism will be viewed

not only in the light of impeding the rebuilding of the civil structure and society in the

country, but also as negatively affecting the business environment for SMEs.

The flourishing of trust as a research topic in a relatively short time span has been triggered

by a widely acknowledged concern on its alarmingly lowered levels (cf. Putnam, 2000). The

broad focus on trust however resulted in no universal agreement on its definition. Another

factor contributing to this is that trust has turned into a word of everyday use and thus

everyone knows what it is but no one seems to be able to term just one, most important,

essence of it. In the words of Niklas Luhmann (as quoted by Hoehmann & Malieva, 2002,

p.11): “It is worth serious consideration whether one wants to advise sociology to use words

of everyday usage and concepts of the traditional ethic world of ideas”. Despite its many

meanings, most concepts of trust share some common elements. First, there is the assumption

of a degree of interdependence between trustee and trustor since the concept of

trustworthiness only becomes relevant if one actor depends to a certain extent on another.

Second is the assumption that trust is a coping mechanism against existing risk and

uncertainty arising from the chance of opportunistic behavior of the other party. Third is the

assumption that such opportunistic behavior will not be employed by the other party in a way

as to take advantage of the trusting actor (Lane, 2001). Therefore, most broadly, trust can be

defined as the positive expectation that a partnering actor will not behave opportunistically


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and thus against the interest of the trustee (cf. Bradach & Eccles, 1989; Misztal, 1996; Nuissl,

2005).

The sources and types of trust are as numerous as its definitions. Distinguishing between them

is proven as a useful academic affair that helps to define different ideal types of trust but

nonetheless in reality trust is the outcome of a far more blurred process where the different

sources and types intermingle. Only the most relevant for the purpose of this study types will

be presented here. Even though they will be described as separate influences, their interplay

should not be neglected.

Among the first scholars to argue that trust cannot develop unless individuals share common

norms and values has been Talcott Parsons (1951), followed most prominently by Francis

Fukuyama (1995). In the words of the latter, all liberal and economic institutions depend on a

healthy civil society for their existence. The civil society, in its turn, depends on people’s

habits, customs, and ethics and it has been defined as the “[…] complex welter of

intermediate institutions, including businesses, voluntary associations, educational

institutions, clubs, unions, media, charities, and churches […]” (Fukuyama, 1995, p. 4). A key

element here is the fact that the civil society is formed through the constant and continuous

interactions between its elements, thus trust cannot form out of individual efforts alone but is

rather stemming from the overarching societal efforts and virtues. According to Fukuyama

(1995, p. 11) “[l]aw, contract, and economic rationality provide a necessary but not sufficient

basis for both the stability and prosperity of postindustrial societies; they must as well be

leavened with reciprocity, moral obligation, duty toward community, and trust, which are

based in habit rather than rational calculation”. This socially oriented type of trust creates

collective capital, which “contributes to the integration both of the local division of labour and

of contextual skills with new codified knowledge” (Dei Ottati, 2002, p. 29).

This type of trust can however be not effective enough when the concern is the creation of

new entities for further societal and economic innovation and development, like for example

small- and medium-sized enterprises. Collective trust does not automatically trigger personal

motivation since it mostly relies on established moral obligations to better the society. This

supports the existence of trust existence but does not result in further improvement. An

alternative is personal capital, which is the calculative or self-interested trust that enables the

actor to estimate the possible benefits of a trust relationship. The distinguishing feature here is

that behavior is motivated by the expectation that the future benefits of cooperating based on


20

trust will outweigh the immediate gain of an opportunistic behavior and distrust. This idea of

future gains is what is seen as detrimental for the further societal and economic improvement

since individuals will selfishly try to maximize these gains by trying their best to create a

better environment to enhance that (cf. Lyons & Mehta, 1997; Dei Ottati, 2002). The

mechanism that makes sure that society will not be torn apart by dominating but opposing

self-interests is not values and habits but rather control measures implemented by firms and

institutions to standardize the processes and determine the ways of ensuring that certain

obligations are followed (Brunetto & Farr-Wharton, 2007). Some authors (cf. Braun, 2002),

argue that as long as such controlling mechanisms are properly in place, alliances between

partners can well be established without the presence of trust. However, it is important to

balance trust and control since enforcing too many formal control mechanisms can dilute the

levels of trust and the clear expectations between actors, thus leaving all situations to be

handled by the certain formal entity imposing the control. It is essential for each actor to have

the possibility to act independently to a certain extent. Therefore, trust in this case is the

outcome of the combination of formal and social control mechanisms (Das & Teng, 1998).

And here, once again, the intertwining of individual self-interest that leads to formal ways of

controlling and social mechanisms that establish certain norms and obligations becomes

obvious.

Regarding the types of trust, the most broadly used ones are (inter)personal and institutional.

The former one is based on the perception that other agents will behave in a certain way that

can be predicted and is therefore dealing with calculation and risk assessment (Gambetta,

1988). It is also present when actors are unwilling to rely solely on institutional arrangements

(Granovetter, 1985; Smallbone & Lyon, 2002). Institutional trust, on the other hand is when

individuals have confidence in the economic, political and social institutions that they have to

deal with. It can be established only when there is “a critical mass of individuals trusting in

the system” (Smallbone & Lyon, 2002, p. 22). The two types of trust cannot be distinguished

in a clear-cut manner because institutional trust can also be viewed as a type of interpersonal

trust. The reason for that is that the former originates not only from the way of functioning of

institutions as a whole but also from the personal experience with the institutional

representatives on a day-to-day basis. Therefore we need to examine the individual and

institutional levels as interconnected and failure to properly establish the link between the

“micro and macro levels is inaccurate as it tends to anthropomorphize the organization”

(Zaheer, McEvily, & Perrone, 1998, p. 142). Norms and taken-for-granted routines from one


21

of the two types of trust can very well be translated into the second one. For example, if there

is a strong general trend for interpersonal trust, this can in turn positively affect the trust

orientation of the population towards its institutions. At the same time, if there is a long

history of successful institutional performance, the trust that this would have established

would be internalized by the people and transferred to their everyday interpersonal behavior.

However, interpersonal trust cannot be used as a proxy to institutional trust since many

additional factors also play a role during the formation of institutional trust. In line with the

aims of this study, a primary topic of interest will be institutional trust but it will not be

examined as occurring independently from interpersonal trust.

On another axis, according to Lane (2001) trust can be divided into calculative, value- or

norm-based and trust based on common cognitions. Calculative trusting involves expectations

about another actor, “based on calculations which weigh the cost and benefits of certain

courses of action to either the trustor or the trustee” (Lane, 2001, p. 5). This type goes in line

with the concept that examines trust as originating from the self-interested, rational actors that

try to maximize their gains by calculating the possible benefits of a trusting relationship.

Value-based trust goes in line with the theories of Parsons (1951) and Fukuyama (1995) and

is therefore based on the expectation that both parties will meet their social obligations and

will act responsibly, without violating the trusting relationship and taking advantage of

opportunistic behavior. Here, once again, the moral aspect of trust and its expected influence

are given prime emphasis. Lastly, there is the trust based on common cognitions. It sits as a

hybrid form between the main two concepts on the origins of trust. Common cognitions are

seen as the common expectations we hold “both about the social order in general and about

specific interactions with others” (Lane, 2001, p. 10). In this sense the basis of trust could be

found in the expectations in common societal structures but also in the certain predictable

ways of personal behavior. By looking into the empirical results of this study, the question of

which of these three types of trust is mostly present among the Bulgarian SME owners will be

investigated.

II. TRUST AND SMEs IN POST-COMMUNISM

According to Rose-Ackerman (2001), two conflicting stories are told about the impact of the

past on societies making a transition from socialism to a market economy. The first one


22

“recognizes the overall failures of the planned economies but points to cooperation between

family and friends as a means of coping with a dysfunctional system. This sense of

community has been broken up by the move to the market and to democracy leading to a loss

of trust and to an increase in opportunism” (Rose-Ackerman, 2001, p. 415). This story

recommends the establishment of policies that would reinforce interpersonal trust. The second

story “stresses the socialist governments’ lack of legitimacy – a fact that led citizens to

assume that official state actors were self-serving and that rules were irrational” (Rose-

Ackerman, 2001, p. 415). This story argues for policies that develop trust in the competence

of the state.

As was already pointed in the previous part, the best description of trust and its origins could

be provided after combining the different characteristics of opposing theories. In this section,

this is once again the case. It will be insisted that the topic of trust in post-socialist societies

sits exactly at the intersection of institutional and legal analysis, on the one hand, and the

study of interpersonal relations, on the other. Therefore, in order to best examine and

understand how trust occurs in such societies, both perspectives should be observed.

According to Mishler & Rose (1997, p. 418): “No government enjoys the absolute trust of its

citizens; arguably, none should”. Trust in leaders is integrally related to the capacity to predict

and affect their behavior. Leaders however have little motivation to be responsive or even

trustworthy toward those to whom they have no direct connection. Thus by reducing

drastically the number of paths from any leader to his potential followers, trust in such leaders

would be inhibited (Granovetter, 1973, p. 1374). Resulting from low trust, governments

cannot govern effectively, trust is further undermined and a vicious cycle is created (Mishler

& Rose, Trust, Distrust and Skepticism: Popular Evaluations of Civil and Political Institutions

in Post-Communist Societies, 1997, p. 419). This spiral of low trust, reinforcing the low-trust

attitude, has been termed as “low-trust dynamics” (Fox, 1973). Consequently, one of the

major problems of post-socialist societies is the mismatch between the trust potential of these

societies, on the one hand and the ever increasing need for trust, on the other (Nuissl, 2005).

Stemming from this, it becomes obvious that trust is not only in shortage in post-communist

societies but also that it is absolutely essential for their proper overall societal functioning.

This is especially so in democracies since only there is trust a rational gamble. In totalitarian

societies, it is irrational to trust anyone but your family and your closest friends. In

authoritarian societies, you might trust a somewhat larger circle. But only in democracies –


23

and not even all of them – will you give trust to strangers (Uslaner, 1994 as quoted by Letki &

Evans, 2005, p.517). Giving trust to strangers who are in the institutions intended to represent

the ordinary citizens, is supposed to ultimately result in enhancing both the legitimacy and the

effectiveness of democratic government.

But where does trust in institutions stem from? Like with general trust, there are two theories

on the matter. Cultural theories on the one hand hypothesize that trust in political institutions

is exogenous or originating outside of the political sphere in long-standing beliefs rooted in

the cultural norms of societies (Putnam, 1993; Inglehart, 1997; Mishler & Rose, 2001).

Connecting to that, communism is seen as having “created many habits – excessive

dependence on the state, leading to an absence of entrepreneurial energy, an inability to

compromise, and a disinclination to cooperate voluntarily in groups like companies or

political parties – that have greatly slowed the consolidation of either democracy or a market

economy” (Fukuyama, 1995, p. 40). According to Fukuyama (1995), people might have

successfully dedicated themselves to the replacement of communism with democracy and

capitalism but they will nonetheless lack the social habits necessary to make these work. The

lack of “firms, entrepreneurs, markets, and competition not only perpetuates poverty, it fails

to provide critical forms of social support for the proper functioning of democratic

institutions” (Fukuyama, 1995, p. 356). In this sense, the thorough destruction of civil society

that took place during communism could be seen as one of the most devastating consequences

of the regime.

Institutional theories, by contrast, see political trust as politically endogenous. Therefore

institutional trust is the expected consequence of the satisfactory performance of institutions

(Coleman, 1990; Mishler & Rose, 2001). As a result it can be argued that institutional

performance holds the key to developing trust and that “[g]overnments can generate public

trust the old-fashioned way: they can earn it […]” (Mishler & Rose, 2001, p.56). This

suggests that institutional trust should stem mainly from the visible control and performances,

rather than from the internal workings of the institution as such (Moellering, 2006). Therefore

the behavior of leaders could also be considered as a determinant of trust. After the fall of

communism, citizens became especially sensitive to institutions, which were then highly

pressured by expectations to provide all that people were deprived of during communism

(Mishler & Rose, 2001 as quoted by Kostadinova, 2007, p.823). In order to (re)build trust

leaders were expected to engage in different forms of fairness, support and participative


24

decision-making. In post-communist countries however the absence of such steps together

with the lack of reliable information and publicity over the deeds of public officials

contributed to the image of the institutions as corrupt, catering to selfish needs and not

deserving trust. And since earning trust is a relatively long and difficult process, distrust

continued to be inherited generation after generation with the expectation of a change towards

a more trusting state. These statements will later on be further reiterated through the opinions

of the interviewed entrepreneurs.

This is the reason why this research suggests that since communist rule in Bulgaria was

operating until the end of 1989, there is still the communist rule legacy present which leads to

skepticism and lack of trust. These phenomena are attributed to the communist period and are

not seen as being already present before its start. This is justified by the ample examples of

voluntarily organizations and the lively civil society that was present in Bulgaria prior to the

communist rule (Valkov, 2009). So despite some views that the Eastern European region is

generally more prone to low levels of trust, irrespective of the communist regime (Colton,

1995; Rose, Mishler, & Haerpfer, 1997), there is evidence that Bulgaria does not fall into this

category. Therefore with a degree of certainty the destruction of trust and civil society can

indeed be attributed to the regime. The communist legacy could be found in a number of

areas but it is most prominently visible in the weak civil society that remained after the

regime and in the ineffective institutions currently present that in their turn, result in a weekly

organized society. When focusing on entrepreneurship and SMEs, the consequences of the

abovementioned factors are also expressed by the negative feedback to the governmental

initiatives in the sphere, even if these are seen as successful by the Bulgarian ruling

institutions and the international organizations. The legacy of the past is nonetheless subject

to periodic revisions based on more recent experiences. Therefore the Bulgarian government

should strive for providing individual and collective good, in general and improving its

entrepreneurship policies, in particular if it is to successfully finish the transition process and

establish a stable democracy with high trust levels. Such efforts, if replicated in other Eastern

countries, could potentially close the gap between Western and Eastern European societies in

economic development and institutional quality. This still remains to be investigated but what

should be agreed upon is that the relationship between successfully operating official

institutions and trust is not a straightforward one, where one triggers the other but rather they

should be seen as complementing each other and each as being vital for the existence of the

other. In the words of Moellering (2006, p. 365) “institutions can be seen as bases, carriers


25

and objects of trust: trust between actors can be based on institutions, trust can be

institutionalized, and institutions themselves can only be effective if they are trusted”.

What should also be clear at this point is the argument that trust enhances the economic

performance of a society. Small- and medium-sized enterprises have also proven to be an

important factor to economic growth. Stemming from causality then, trust within SMEs is

also essential. Niklas Luhmann concentrated on its role in terms of the importance it plays in

modern societies for reducing the complexity of everyday life. He argues that trust acts as the

substitute for risks inherent in decisions and situations. For an entrepreneur, this would then

suggest that not all business relationships have to be regulated via contracts (Luhmann, 2000

as quoted by Welter & Smallbone, 2006). Consequently, a reduction of the transaction costs

of the relationship follows since the process of gathering information about the other party

can be minimized and the signing of contracts can be avoided where possible. Lowering

transaction costs through the ability to trust results in many other positive by-products. One of

the most important among them is the fact that SME owners and managers will be more likely

to seize opportunities which will help stepping up to their full potential and innovative

capabilities. The reason for that is that they would have maximized their efficiency by not

spending too much time on unnecessary safeguarding. Furthermore, the ability to trust will

highly affect the networking of the given small or medium enterprise and networking is an

essential skill for the survival of SMEs in general. According to Saxenian (1994), those SME

owners that have difficulties trusting new parties may turn into a liability for their enterprises.

This is because establishing the correct networks with others might present new opportunities

to add value to the enterprise and what is even more important – clustering for SMEs has so

far proven to be the most successful way for them to cope with competition from bigger

companies. It could therefore be claimed that “low levels of trust constrain market entry,

enterprise growth and competition whilst encouraging unproductive forms of

entrepreneurship. High levels of trust, on the other hand, encourage open and dynamic

competition structures and foster enterprise growth” (Hoehmann, Kautonen, Lageman, &

Welter, 2002, p. 4).

In terms of entrepreneurship and SMEs, in order to reach the trusting position, trust first needs

to be won and sustained through mutual effort. The literature agrees that “interpersonal trust

in business relations is rarely offered spontaneously but requires an extended period of

experience. During this time, knowledge about the exchange partner is accumulated through


26

direct contact or is acquired indirectly through reliable third parties. The search for

trustworthy partners is eased by the fact that it is in the interest of such potential partners to

make their trustworthiness known by sending out signals of trustworthiness” (Lane, 2001, p.

21). A basic prerequisite before trust can be established through mutual interaction is for both

actors to exhibit reciprocal interest; for both to be aware of the opportunities and benefits that

an existing trusting relationship could bring (Nuissl, 2005). These statements point to an

endogenous character of interpersonal trust as well, where the performance and

trustworthiness of the partner are what eventually results in trust.

As strong a motivator as self-interest could be, enterprise behavior results from a dynamic

inter-relationship between not only internal or endogenous but also external or exogenous

conditions. External ones “gain importance in transformation contexts where the institutional

reforms have not yet been thoroughly implemented and where the socialist legacy influences

the attitudes and behavior of individuals” (Hoehmann, Kautonen, Lageman, & Welter, 2002).

This emphasizes the importance of seeing entrepreneurship in the perspective of its social

context, despite the “tendency to underestimate the influence of external factors and

overestimate the influence of internal or personal factors when making judgments about the

behavior of other individuals” (Gartner, 1996). In linking the social context to

entrepreneurship, trust plays a complementing sanctioning role to the overall institutional

framework.

One of the main problems of post-socialist states is that there is an increased need for

entrepreneurial trust in order to restore the societal and economic order but the conditions are

such as to often discourage the creation of trust. Although barriers as such no longer exist and

entrepreneurs are free to run SMEs, connect with each other and engage in different forms of

cooperation, the process of trust development might prove to be more difficult than elsewhere.

The reasons for that can be attributed to the “legacies of socialism” (Nuissl, 2005) which still

affect people’s attitudes and behavior. The communist state “set about deliberately to destroy

all possible competitors to its power, from the “commanding heights” of the economy down

through the innumerable farms, small businesses, unions, churches, newspapers, voluntary

associations, and the like, to the family itself” (Fukuyama, 1995, p. 55). It can be argued that

“the state-managed neglect of elements of civil society on the one hand, and the necessity to

organize informal supply networks prompted by an economy of scarcity on the other hand

(both typical characteristics of “socialism as it existed in reality”), has a lasting influence on


27

attitudes and behavior patterns. Consequently, a pushy or opportunistic mentality is said to

have been released as soon as the ideology of equality and social welfare had vanished

together with the legally enforced norms which backed up this ideology, such as guaranteed

full employment” (Nuissl, 2005, p. 71). Therefore, the post-socialist societies have been

caught in the developmental trap of widespread distrust stemming from their communist

legacy. Increasing the effect of this legacy is the perception among entrepreneurs themselves

of the existence of such difficulties. Once it has been established, it discourages people from

engaging in trusting relationships with other actors. The low levels of trust do not however

only stem from past experiences. As it was suggested already, the past and the mind set

associated with it are subjects to reformulation based on the present situation. If people are

witnessing their official institutions working in their benefit, the citizens’ behavior will

change towards a more trusting state. Unfortunately, nowadays in the economies that are in

transition from centrally planned to market-based systems, the formal institutions which

should cater to the needs of entrepreneurs and stimulate their progress are either non-existent

or only minimally focused on that goal. This results in distrust, which is further amplified by

the still existent communist legacy and the slow pace of reformations that have followed the

fall of communism (cf. Raiser, 1999; Rose-Ackerman, 2001; Smallbone & Lyon, 2002).

III. TRUST AND SMEs IN BULGARIA

Post-communist Bulgaria has experienced decreasing trust levels following the fall of the

communist regime. This development could be explained by the dictatorship theory of Paldam

& Svendsen (2001) which has a lot in common with the suggested by Nuissl (2005) “legacies

of socialism” and which suggests that trust levels have deteriorated due to the oppressive

behavior of the communist dictatorship. During the communist rule, intelligence agencies

with internalized informers existed and thus it has been entirely rational to trust only one’s

family and closest circle of friends. It therefore seems safe to conclude that communism

destroyed generalized trust as conjectured in Paldam and Svendson’s theory (Bjornskov,

2007, p. 17) . As a result the most immediate problem in the Bulgarian post-communist

system was to overcome the distrust, remaining as a legacy of the communist rule. The

changes in the levels of trust of Bulgarians are indicated below (Table 1), using data from the

World Values Survey providing the most widely accepted measure of generalized trust by

asking the question: “In general, do you think that most people can be trusted, or can’t you be


28

too careful in dealing with people?”. The data available clearly indicates a drop in the levels

of trust despite the overruling of the communist regime and entering a period of transition

with a new democratic government.

Table 1. Levels of Trust among Bulgarians, WVS 1990 - 2006

WVS 1990 WVS 1997 WVS 1999 WVS 2006

Trust in

Bulgaria (%)

30.4% 28.6% 26.9% 22.2%

According to the New Democracies Barometer V (Mishler & Rose, 2001) the greatest lack of

trust among Bulgarians is almost exclusively found towards the political institutions in the

country and especially towards the parties (2.7%) and the parliament (3.1%).

These trends of development may present an additional perspective on why, in the opinion of

entrepreneurs, “over the past year there was no major improvement in the business

environment, and with respect to some of its elements there has been deterioration” (Ministry

of Economy, Energy and Tourism, 2010, p. 61). The majority of concerns are related to the

Bulgarian institutional framework, as exemplified by the figure below.

Source: WVS 1990-2006


29

Under the current transition economy, merit is supposed to be the determinant of success

(Koford, 2003). As a result the institutions responsible for allowing the start-up of private

enterprises are expected to act objectively. Nonetheless, “most Bulgarians expect decisions to

be made on the basis of “connections” (vruski)” (Koford, 2003). This perception is further

strengthened by the fact that even though 52% of Bulgarian entrepreneurs, according to the

OECD (2005, p. 22), are aware of the existence of a clearly identified organization,

responsible for the SME policy development, they are not familiar with its goals, functions, as

well as the results of its activities. This continues the culture of low trust towards official

institutions.

On the local level the situation is similar with a rather discouraging attitude towards SMEs

and favoritism towards bigger enterprises. This creates an important gap between the central

level, where the policy is developed and the local level – the closest to SMEs – where it

should be implemented. Entrepreneurs tend to believe that the government policies are only

pursued at the central level and negatively assess the involvement of regional governmental

representatives. This lack of proper communication with business, especially at the local

level, could be treated as one of the highly unsuccessful consequences of the governmental

efforts to transform its institutional setting and to lower its barriers to SMEs (Organization for

Economic Co-operation and Development, 2005, p. 24).

Figure 9. Average Ratings by SME Owners and Managers of the Seven Dimensions of

Good Practice, 2002 - 2004

Source: OECD, 2005


30

The absence of effective institutional setting that is adapted to the needs of entrepreneurs,

leads to a general skepticism and distrust and form doubts whether the institutions are in truth

working for the benefit of the private sector. However the way institutions function is not the

most important factor affecting the trust levels of entrepreneurs. Rather it is the factor that is

preventing the currently existing low levels of trust to transform into a more trusting state. As

was already mentioned, in order for entrepreneurs to put their trust into another entity, they

first need to be convinced in the capabilities and honesty of the party. Following they can shift

their trust levels accordingly. However in the current relationship between the government

and the entrepreneurs, the existing environment does not foster trust generation, which results

in stable or increased levels of distrust.

The factors that create the underlying low levels of trust remain in the broader societal

perceptions and norms. Following the communist fall, Bulgaria was left with a destroyed civil

society in which distrust could easily strive. This process was enhanced during communism

when the state created an excessive reliance of its control and the population had difficulties

trusting anyone outside of a small circle of family and relatives. After the collapse of the

regime not much effort was put into restoring the active civil society and voluntary activities

and thus increasing trust again.

This brings up again the endogenous and exogenous types of institutional trust and which of

the two is more important when building up trust in institutions. In the case of Bulgaria it

seems that the exogenous type of institutional trust, as suggested by Putnam (1993) and

Inglehart (1997) is the underlying reason for the current institutional distrust in the country.

The norms and attitudes that have been artificially imposed during the communist regime

have destroyed the previous lively civil society and have made it difficult to rebuild trust since

the process of values re-adjustment is slow and very much dependent on the endogenous type

of institutional trust. In order for people to start trusting their institutions again, the latter need

to perform accordingly and in the best interest of their people. Trust then can be earned, as

suggested by Mishler & Rose (2001) and values slowly can shape around the new

environment in the country. In conclusion it can be observed that while the exogenous

character of institutional performance provides the basic source of distrust, the endogenous

one holds the key to earning trust through successful performance and as a result to re-shaping

the previously existing norms and attitudes.


31

The first section of this chapter was dedicated to the description of trust and its main

characteristics. Trust is a highly complicated to define but essential component not only of

everyday life but also of almost every other realm and scientific area. Based on some common

features of the existing definitions, the phenomenon was defined as the positive expectation

one party holds that another party would not act opportunistically but according to some

accepted line of behavior that will eventually benefit both actors.

Numerous theories also exist on the origins and types of trust. In terms of the origins, Parsons

(1951) and Fukuyama (1995) put forward the theory of collective norms and values through

which trust is nurtured and spread with the help of a lively civil society. Opposite of that is the

suggestion that trust is created by the self-interested efforts of individuals. Because people try

to maximize their benefits they will establish trusting relationships in order to achieve that

more effectively. In this case additional controls should be introduced in order to prevent the

society from falling apart due to strong but opposing interests. Existing norms and values in

this case cannot act as mitigating forces.

In terms of the types of trust, most commonly we have a distinction between interpersonal and

institutional. However, it has been argued that the latter could be examined as a form of

interpersonal trust since most often people develop their levels of trust towards their

institutions, based on the experiences they share with the official representatives on a day-to-

day basis. On another axis, trust can be calculative, value-based or based on common

cognitions. The first type goes in line with the theory suggesting that trust stems from self-

interest; the second is in line with the cultural theory on trust origin, while the third lies in

between.

Following the basic introduction of the trust concept, the attention was shifted towards trust in

post-communist societies. It was examined how the regime has destructed and even after its

collapse, its legacy has prevented the existence of high levels of trust. More broadly, the

extensive periods of communist regime have negatively affected and greatly slowed down the

consolidation of the society, the reconstruction of civil life and the move towards market

economy and democracy. It was presented that an essential feature for the rebuilding of post-

communist societies is the presence of trust.

Institutional trust has been presented as possessing exogenous and endogenous characteristics.

The former concerns the role of common values and attitudes and suggests that institutional


32

trust stems from them, while the latter insists that trust has to be earned through the successful

performance of the institutions. In the case of Bulgaria, it was argued that both play a role and

that exogenous trust or the persisting norms from communism form the framework for the

currently low levels of trust within the country. However the endogenous trust or the

institutional performance, which in the Bulgarian case can be considered poor over the past 20

years, is what is preventing the trust levels from going up again. Following from that it was

concluded that poor institutional performance is a minor factor contributing to the low levels

of trust. What matters in this case and for the example of Bulgaria are the deeply-rooted

attitudes and beliefs, remaining as the communist regime’s legacy. The institutional

performance however is essential if the levels of trust are to be increased since it has been

shown that trust has to be earned. This is a requirement that will later on be confirmed by the

interviewed entrepreneurs’ opinions.

For Bulgaria, the lack of trust has been attributed to the communist rule since there has been

evidence presented that prior to the regime, the country enjoyed ample voluntary life and civil

society. The regime destroyed these through establishing full state control with high levels of

citizens’ observation, which greatly lowered both interpersonal and institutional trust.

The lack of trust is not only negatively affecting the societal rebuilding but also preventing the

small businesses in Bulgaria from thriving. The presence of trust in this sector is highly

essential since it reduces the transaction costs for the actors involved. Trust substitutes the

risks involved in business relationships and also relieves actors from contracting on every

issue. If SMEs are assisted into a successful development, this would result into overall

economic growth, increased competitiveness of the country and greater innovative potential,

to name a few.

The following chapter will present the research’s case studies. First the participants’

background will be introduced, followed by their opinions on mainly two aspects – the

business environment in Bulgaria and their trust attitude towards the institutions and other

entities when running their enterprises. Conclusions will be drawn based on these opinions

and the effectiveness of the previously presented National Strategy will be assessed.


33

CHAPTER 3

TRUST OF BULGARIAN ENTREPRENEURS

I. INTERVIEWS’ BACKGROUND

In order to investigate the essence of the research, 17 interviews were conducted. These were

made possible with the help of owners and managers of different small- and medium-sized

enterprises, all on the territory of Bulgaria. Part of the interviews was conducted face-to-face,

part took place over Skype conversations and the last part of the data was received through

questionnaires filled in and sent back by e-mail by the participants. All interviews were

conducted in Bulgarian and correspondingly, all answers were in Bulgarian. The quotations

provided in this chapter are a translation of the original answers, which could be found in the

Appendix of the study.

The interviews were based on a questionnaire constructed so as to retrieve information in

three main categories: first, basic information about the participants and their enterprises;

second, information about the entrepreneurs’ opinions on the political and economic

environment for SMEs’ existence in the country; third, information on the importance of trust

in business relationships.

The choice of participants was randomized, initially counting on personal contacts in the

sphere and subsequently contacting SMEs representatives through the list of firms, approved

for gratuitous financial support under the Competitiveness Operational Programme (OP)2. 10

male and 7 female participants partook in the research. The age range of participants was

between 25 and 64 years and all of them had some type of university degree achieved, with

the exception of one participant with high school attainment and one participant that didn’t

specify his educational level out of confidentiality reasons. The number of employees divided

the represented SMEs into three categories: micro enterprises, which according to the

European Union (European Commission, 2011) are enterprises with up to 10 people

employed (in the study, the number (n) of these enterprises was 4); small enterprises with up

to 50 employees (n=5) and medium-sized ventures with a maximum of 250 employees (n=7).

One of the participants did not comment on the number of employees in his enterprise.

2 The list of approved SMEs can be seen here (in Bulgarian): http://www.eufunds.bg/bg/page/100


34

II. OPINIONS OF ENTREPRENEURS ON THE INSTITUTIONAL

SETTING IN BULGARIA

In the onset of this section the following main recommendations for governmental action in

respect to SMEs can be outlined (Министерство на Икономиката и Енергетиката: Ministry

of Economy and Energetics, 2007):

Simplification of the administrative and normative environment for SMEs through the

optimization of the regulatory conditions and encouraging market competitiveness

Increasing the administration’s qualifications for achieving more effective SME

assistance

Improving the quality of information services through the creation of unified database

about the conditions and needs of the SME sector; executing information campaigns

on the opportunities of the structural funds and the requirements of the European

market; trainings on project development and EU resources’ assimilation

Improving the financial environment for SMEs, including the possible creation of a

Development Bank and funds for stimulating SMEs at the local level

The significance of the abovementioned recommendations is that they point out practical

ways of improving the business environment for SMEs in Bulgaria and further stress the idea

that “in order to flourish and grow they [the small- and medium-sized enterprises] need an

environment that facilitates and enables business start-up, does not hamper them with

excessive and costly regulations and facilitates access to finance and business services”

(Organization for Economic Co-operation and Development, 2005, p. 3).

It will be the aim of this subsection to determine to what extent this environment currently

exists based on the opinions of the interviewed entrepreneurs. In order to fully assess the

situation, the general effectiveness of the National Strategy will also be presented and put in

the light of the personal standpoints.

The main problems coined by the participants can be divided into two main categories - the

first one is centered around the issue of administrative burden and constant change in

regulations, while the second one deals with, as one of the participants put it bluntly, the


35

complete indifference of the country in terms of improving the current business environment

and fixing whatever is malfunctioning. The following paragraphs will present these two issues

accordingly.

The reform in the Bulgarian regulatory framework is among the key EU recommendations for

the country. In order to improve it, the National Strategy has set the following main goals

(Ministry of Economy, Energy and Tourism, 2010; Republic of Bulgaria, 2010):

Increasing the functioning of the state administration (including through the

introduction of e-government and other electronic services)

Increasing the administrative efficiency

Reducing the existing administrative burden

Better, simpler and more transparent regulations

Indeed certain laws have been adopted with the aim of simplifying the regulatory burden.

Among the most significant of these is the Better Regulation Programme, which aims at

improving the functioning of the state administration, lowering the administrative barriers and

increasing the overall confidence in governmental institutions. Some of the more concrete

actions taken refer to the cost of starting a business and the number of procedures for that,

which have been significantly lowered as a result of the Strategy’s efforts. For 2010, the

number of procedures for starting a business was 4, the time was 18 days and the cost was

1.7% of per capita income (Ministry of Economy, Energy and Tourism, 2010; Republic of

Bulgaria, 2010). For a comparison, in 2004-2006 11 procedures were needed in order to start

a new business. In 2007 and 2008, the number was reduced to 9 before it became 4 in 2009

(European Commission: Enterprise and Industry, 2009).

These successful corrections of the small business’ environment are also reflected in the

opinions of the interviewed entrepreneurs. Nonetheless they also recognize that the removed

barriers are now replaced by new ones which is an occurrence that to a certain extent stultifies

the whole progress and reduces the positive effects from the improvements:

“Generally speaking, the administrative procedures are not complex or rather they have been

significantly simplified. For starting a limited liability company one now needs 2 leva instead

of 50003, which was a huge step ahead. The time consumed for registration is also typically

3 1 lev = 0,5 euro


36

very brief. As part of the registration, one doesn’t need to go to BULSTAT4 anymore because

there is now a unified registration agency. All documents are submitted there, which means

that one doesn’t have to hurry to and fro the court, BULSTAT and the tax administration

anymore. However, these few reliefs have been completely stultified by many other burdens

that are appearing, mostly due to the very dynamical changes in legislation. It is a fact that

many changes are still needed but I am against the lack of stability in their direction” [quote

15]

The remaining and newly emerging problems contribute to the effectiveness of the regulatory

framework being rated as modest at best. There are still a number of concerns, mostly

pertaining to the low functionality of the local and national administration or the insufficient

available information about the new services in the area. Furthermore the implementation of

some of the adopted measures has been postponed in time, which makes the National Strategy

in particular, less effective. The constant changes in the laws and regulations in the country as

a whole are a major source of concern with about 75% of all Bulgarian firms finding the issue

problematic (Figure 10).

Stemming by this brief overview it can be concluded that the current problems are not

resulting from the lack of correct rules and regulations. As it has been demonstrated,

entrepreneurs admit the applicability and usefulness of some laws. The problem rather stems

4 BULSTAT is officially the registration number under which every Bulgarian firm is registered. In this quote,

with BULSTAT the participant refers to the registration agency where this number was issued. 5 The original quotes, in Bulgarian, can be found in the Appendix of the study under the corresponding number

Source: The World Bank, 2009

Figure 10. Percentage of Firms Concerned with the Predictability and the Consistent

Interpretation of Laws and Regulations, 2009


37

from the poor execution and the lack of effectiveness of the administration which together

with the constant change in laws form a rather negative experience for most entrepreneurs:

“The problem is that the administration itself is uncertain of the way the changes are to be

interpreted. Even at the highest level of administration, it cannot be decided how to solve

different cases” [quote 2]

“The country encourages [the development of SMEs] but there should be people to carry all

those things out. At the moment the government aims at assimilating as much resources as

possible but somewhere along the way the ties break and problems begin” [quote 3]

This unstable interpretation of rules and laws results in an overall atmosphere of uncertainty,

lack of trust and a feeling that things are done randomly, without a direction of development:

“Lately I have been feeling completely uncertain, as if I am constantly making mistakes. All of

this is due to the constant changes in regulations which are impossible to follow” [quote 4]

It should however not be concluded that the administration is the only weak unit slowing

down the reform. The positive and negative effects alike are the outcome of a complex

interplay of factors. What is surprising nonetheless is what the entrepreneurs perceive as

complete lack of motivation from the administrative employees to be more responsive,

efficient and knowledgeable:

“There is a colossal unfamiliarity with the substance of things and undesirability for this to

change. I’m not claiming that there is only the administration to blame for the problems but

in reality it could alleviate itself to a maximum degree when dealing with the small businesses

and thus focus its’ efforts on another issue. The small business anyways always tries to be as

immaculate as possible since it doesn’t have the capacity and can’t afford to pay fines and to

waste its’ time in inspections, administrative procedures and so on” [quote 5]

In terms of certificates, licenses, and permits issuing the situation is again not lacking flaws.

Generally speaking, registering a firm is not a difficult task but once undertaken the process is

slow and often badly coordinated between the different institutions that provide the different

licenses. As already mentioned a unified registration agency is currently functioning but still

the problem of delayed and uncoordinated actions remains. The still present high levels of

bureaucracy and the lack of transparency of important, cornerstone institutions further add to

the problem:


38

“In our business certificates and work-related documents are international and not dependent

on the national way of operating but the ones that have to be issued by the official institutions

are received with difficulty due to the low levels of employees’ effectiveness. This is the main

reason for 90% of the problems in the governmental institutions and not the lack of correct

laws and regulations” [quote 6]

“In terms of licenses and permits one has to be very well aware of the procedures and if he

isn’t persistent enough it will be hard to get anything done. Very often one has to use

consulting firms which in exchange for a commission save the trip to the institutions. Not to

mention that usually the cart is set in front of the horse. Recently they started checking the

products’ certificates without Bulgaria in reality having an authorized laboratory to issue

such certificates. That is not an isolated case” [quote 7]

The presented brief overview of the regulatory framework, asserts that the overall reform in

the area is only moderate in its effectiveness and results. The reasons for that are multiple but

are mostly due to the constant changes in rules and regulations, which in their essence might

be necessary but the pace of change creates an overall atmosphere of uncertainty and lack of

transparency and direction. These, coupled with the poor execution and ineffective and

unhelpful administration, shift the attention away from all positive consequences and create

skepticism and distrust towards the institutions. An additional influential factor is that

Bulgaria is still a country in transition to a market economy, so the process of restructuring

after a long period of authoritarian rule, is bound to be challenging and slow. This should be

seen as a contributing component to the full description of the current societal state of

Bulgaria.

In terms of the second aspect of concern which according to one of the participating

entrepreneurs can be summarized by the overall indifference of the country, different factors

play a role. Among them is the financial environment in the country. In the latest National

Reform Programme (2011), the Bulgarian government acknowledged the progress achieved in

the overall financial stability of the country through the continuity in fiscal policy, limiting the

redistribution role of the state and maintaining low taxes. The financial system in Bulgaria is

dominated by a strong banking sector. The stable fundamentals, together with the

accumulated buffers in the form of capital and provisions, allowed the banking system to

retain its good financial position and to remain stable during the crisis. As a result, the

Bulgarian government does not consider its financial sector to be a bottleneck to economic


39

growth and thus does not recognize any immediate need for reforms (Republic of Bulgaria

2010; 2011). Furthermore, since the beginning of the National Strategy in 2007, an improved

access to financial resources for SMEs has been observed. However in terms of the other

objectives concerning the financial framework, only few visible improvements have been

achieved. The original plans for improving the access to finances were outlined as follows

(Ministry of Economy, Energy and Tourism, 2010, p. 72):

Establishment of a Bulgarian Development Bank, National Guarantee Fund and

support the development of existing guarantee funds

Support for the development of venture capital funds

Providing better conditions for foreign investment and encouraging domestic

investments

Encouraging the development of capital market and listing SMEs on the stock

exchange

Establishing a database of the credit history and credit rating of enterprises

Decreasing the tax and social security burden

Information campaign about funding opportunities for SMEs

A positive development in line of the objectives has been the launching of a programme that

granted financial assistance in the amount of BGN 20 million in order to support unemployed

people who want to put their business ideas into practice. There has also been a wider access

to institutional and project-based financing as an alternative to bank loans but their popularity

remains low, possibly due to insufficient information for likely users. As a result from the

95% of SMEs relying on external sources of funds, bank loans still play a leading role

(Ministry of Economy, Energy and Tourism, 2010). According to the opinions of the

interviewed entrepreneurs however, such external bank loans almost exclusively take place

once the business venture is already running and developing with a stable pace, i.e. in the later

stages of enterprise existence. When in need of financing for the start-up of a new SME,

entrepreneurs count largely on own savings and funds or financial help from family and

friends (Figure 11).


40

Furthermore the popularity of the banking sector is declining with the spreading of the

financial crisis which in turn leads to increased interest rates and requirements for potential

users (Ministry of Economy, Energy and Tourism, 2010). This has to a certain extent reversed

the positive effects witnessed prior to the crisis by making it ever more difficult for SMEs to

obtain access to financial support. As one of the interviewed participants commented:

“I don’t think that the government has to be strongly involved in the financial support of the

small business. Rather, I think that it has to involve itself into the formulation of a clear

framework for financial assimilation through the banks, through the financial instruments of

the EU and to a maximum degree to alleviate the burden from the procedures within this

framework. If the banks introduce a bit more flexible procedure regarding the requirements

for SMEs receiving financial support, which doesn’t mean lowering the standards, things

would look differently” [quote 8]

The reduced financial support for SMEs has made necessary the introduction, in cooperation

with the European partners, of new, innovative instruments for enterprise financing (Republic

of Bulgaria, 2011). The access to financial resources is planned to be enhanced through

various European programmes, like JEREMIE, EURECA and EUROSTARS, which will

operate under the established Operation Programme “Increasing the Competitiveness of the

Bulgarian Economy” (Republic of Bulgaria, 2010). Thanks to the implementation of this

initiative “guarantee funds, risk and joint venture capital funds, funds for capital increases

0 1 2 3 4 5 6 7

Other (e.g. help from partners; affiliation with a bigger company)

Bank loan

Help from family/friends

Foreign investment

Own resources

Figure 11. How did you finance the initial start of your enterprise?

How did you finance the initial start of your enterprise?

Number of participants (n=16)


41

targeted at developing and mixed instruments between share investments and loan finance,

will be established and capitalized” (Republic of Bulgaria, 2010, p. 19). The extent to which

these actions will have a positive outcome still remains to be seen.

Based on the entrepreneurs’ opinions and experience and the effectiveness assessment of the

National Strategy, a recommendation for the government and the policy makers is not only to

take advantage of the EU development instruments, but also to ensure the functionality of the

administrative system which will pass these to the SMEs. This is the only option if the EU

resources are to fully fit their purpose. In case this unit from the societal apparatus is

ineffective the overall impression among entrepreneurs will remain negative despite any effort

the government may invest itself into. SME owners will be bound to believe, even if not

completely true, that there is “political and economic instability and unpredictability” within a

country of “no business development strategy”, “no professionalism or competence”.

Another important factor building up to the overall opinion of entrepreneurs about the current

business environment for SMEs is connected to the unfair competition present in various

forms within the country. On the one hand, there is unfair competition coming from other

regions. In certain cases imported goods enter the market at a lower quality but also at a lower

price, which for obvious reasons does not function as a stimulus for local producers.

Unfortunately the government does little to protect local enterprises from such competition:

“In our field of production [production of shoes and shoe-lasts] in particular, the problems

stem from the competition coming from China. The state lacks the will to impose stricter

measures on Chinese imports. Bulgaria allegedly prioritizes the development of light industry

– the production of shoes, confections, etc. but at the same time does nothing to restrict

Chinese import and the import of a lot of fake products” [quote 9]

On the other hand, unfair competition is sometimes observed between the Bulgarian

enterprises themselves. Unfair competition and distrust are two factors that form a vicious

cycle where the presence of distrust nurtures unfair competition which subsequently justifies

and strengthens distrust. The matter of trust and the lack of it will be discussed more closely

in the following subsection but one of the interviewed entrepreneurs’ opinion exemplified

clearly how the two intertwine:

“I can very rarely trust. In Turkey for example, one door production is divided into 10

different cells – one makes one type of details, the next – another and so on until in the end


42

the finished product comes out. In Bulgaria there is no such enterprise which makes just one

type of detail because it won’t be loyal somewhere or it will start taking advantage of its

position and in the end you won’t be able to do your business. That is why everyone does a

finished cycle of production alone. Bulgarians are very distrustful, they always think that the

other is lying, deceiving or that he won’t be honest and in truth there are such [people] that

are not honest. That is why everyone does a finished cycle alone – so that there is control

from beginning to end and everything depends on you and the people in your team” [quote

10]

From another perspective, unfair competition to SMEs often comes from big enterprises. The

latter possess far more resources and are seen as “suppressive of the small enterprises”:

“The small enterprises are more honest, more precise in everything. At the same time a big

enterprise tries to lower your price; then tries to avoid paying you, etc. At the moment we

have many firms that still haven’t paid us. This is the so-called between-firm indebtedness”

[quote 11]

It is difficult for small enterprises to counter this status quo because, as previously presented,

big companies in Bulgaria are often perceived as being greatly supported by the national

government and the local officials. Allowing for such preferential support to bigger

companies when more than 90% of the Bulgarian working positions are created by SMEs,

(European Commission: Enterprise and Industry, 2009) strengthens the overall perception that

small enterprises are not prioritized and thus increases their skepticism and distrust towards

the official representatives of the country. This creates a negative atmosphere and working

environment for many of the interviewed entrepreneurs, which inhibit the belief that rules and

regulations are unsuitable for the current situation in the country. The result is a feeling

among entrepreneurs that Bulgaria is ruled by people who are highly non-acquaint with or

careless about the current institutional framework:

“As if we are ruled by people who don’t live in Bulgaria” [quote 12]

The following subsection will discuss the levels of trust entrepreneurs exhibit towards other

partners, colleagues, entrepreneurs and the government and country in general. It will

investigate into the cultural heritage of the country and the matter of how trust can be

cultivated after the long period of communism and the just as difficult period of transition.


43

III. INSTITUTIONAL AND INTERPERSONAL TRUST OF

BULGARIAN ENTREPRENEURS

As previously discussed trust is a complex phenomenon with different characteristics

predominating over the other depending on the context. However clearly distinguishing

between the different origins and types of trust is only possible in purely academic sphere and

not in a more realistic environment. Coining a specific type of trust has its positive effects

once one wants to put trust is a certain light of observation but the interplay between the

different factors should not be underestimated.

Two main types of trust have been outlined in a previous chapter of this research, namely

(inter)personal and institutional. The latter would be the focus in this subsection even though

it has sometimes been viewed as a type of (inter)personal trust because most people form their

levels of trust towards the institutions based on their encounters with the official

representatives. For the purpose of this study, institutional trust will be viewed as the levels of

trust that entrepreneurs exhibit towards the governing entities in Bulgaria. It will also be a

point of interest to see where such levels of trust or the lack of them find their grounding and

in this sense between-personal trust and experiences also play a determining role.

On another axis, there are three other forms of trust. Calculative trust which connects to the

already presented theory of trust originating in personal self-interest and value- or norm-based

trust which is in line with the theory suggested by Parsons (1951) and Fukuyama (1995) that

sees trust as rooted in the common culture and norms of every society. In between these two

stands the trust based on cognitions. In this subsection it will be determined which of these

three is most prominent among the opinions of the interviewed entrepreneurs.

Examining the received answers, suggests that Bulgarian entrepreneurs explain their levels of

trust with the presence of self-interests. According to the theory of calculative trust, self-

interest is breeds trust because each actor would assume that the others will act in reciprocity

in order to maximize their benefits in the long run, which will be more beneficial than

opportunistic behavior in the short run. Furthermore, the theory suggests that where trust

cannot be established because of opposing self-interests, existing rules and regulations will act

as to keep the relationship intact. Unexpectedly however, from all interviewed participants,

only one fit the framework of calculative trust, as theoretically presented. This entrepreneur


44

expected reciprocity from his partners based on the idea that they all share common goals,

which are only to be materialized if trust is established:

“I try to approach with maximum level of good intentions. I stem from the rule that they [the

other actors] should also be well-intentioned towards me and that every problem could be

solved when there is enough desire for communication. I would rather say I approach with

trust but I try to be alert enough and when there are problems, to detect them fast. Generally

speaking, what I can say is that Bulgarians possess far less of the culture needed to make

joined business with their partners” [quote 13]

More than 90% of all other participants that commented on the matter comment in a different

manner, thus revealing a previously unpredicted side of self-interest. In the theoretical

description of calculative trust, self-interest is supposed to influence a relationship as

described in the quote above – nurture trust due to the presence of common goals among the

calculative actors. Nonetheless in the specific case of Bulgaria self-interest is perceived as

exactly the reason why one should not trust. In the entrepreneurs’ opinion, self-interest breeds

distrust:

“For 20 years I’ve come to the conclusion that you should trust nobody, not even yourself.

Everyone is after their own self-interest. There are no loyalties. You can’t expect loyalty from

the people you’ve helped. The situation between firms is the same” [quote 14]

Similar to the quote about the door production cycle which in Bulgaria every entrepreneur

finishes alone, instead of dividing into production cells that maximize competitiveness and

reduce costs, in this case the certain oddity of the Bulgarian business environment again

becomes clear. Why is it that profit-oriented people, who strive for good reputation and

enterprise development, fail to cooperate? Why is it that even when the line of production is

the same, entrepreneurs actively distrust each other instead of joining forces for mutual

benefit? The answers to these paradoxes remain for future research but this study suggests

two possible explanations. First is the cultural heritage and destroyed civil society left after

communism, which lead to widely-spread opportunistic behavior. Second is the lack of

properly implemented laws and regulations in the current events. These two assumptions will

be subsequently discussed.

As already pointed out, communism in Bulgaria left immense marks in almost every societal

aspect in the country. Its fall destructed factories and lead to a loss of jobs, torn down the


45

social support system and made any type of move towards a more democratic and

economically-mature society difficult to reach due to the excessive and long-supported

authoritarianism and governmental control. Many jobless people of working age started their

own businesses because there were no other options available to them. However in reality the

transition process was still in such an early stage that at that time, not much in the country was

structured to meet their needs. This lead to, as one of the participants has pointed out, the

horse standing in front of the cart. More serious efforts for restructuring the private business

environment began only in 1999 with the introduction of the Law on SMEs and the

introduction of the National Strategies together with the EU accession preparations. Therefore

for more than 10 years Bulgarian entrepreneurs were struggling to stay above the surface and

keep their enterprises alive, while some Western European countries were actively developing

their SME sector and thus enabling their states’ economic development, innovation and

competitiveness and societal stability in general. The lagging development of the

entrepreneurial sector in Bulgaria together with the still deeply-rooted distrust attitudes that

have remained as part of the communist legacy, help to explain to a certain degree why

Bulgarian entrepreneurs currently behave with abundant distrust and negativism. Since there

were and still are other priorities set by the country’s officials, not much gets invested into

rebuilding something as abstract as trust. The social activities and capital that can successfully

restore trust are similarly not prioritized.

There is a widely spread suggestion that associational life in Eastern Europe in general has

been lacking, both during communism and before it. Nonetheless recent evidence shows that

Bulgaria possessed an active civil society pre-communism (Valkov, 2009). In his study

Valkov (2009) examines the formal presence of more than 100 organizations and also draws

his conclusions from narratives of the most popular organizations since the 19th

century.

Therefore the distrust and destroyed civil society that were left after communism could be

attributed to its presence and not examined as phenomena already existing prior to the regime.

Communism destroyed both the trust between people and their government and between

people themselves (Lovell, 2001). As a result the only way to trust someone was for that

entity to prove its trustworthiness over an extended period of time. And here once again the

intertwining between the exogenous and endogenous character of institutional trust becomes

visible. The Bulgarian entrepreneurs are distrustful due to historical events that have changed

their cultural heritage and reshaped their attitudes and values. Nowadays however it is in the

hands of the institutions to shift these opinions towards more trusting levels by earning


46

people’s trust through successful and well-targeted performance. Until then the initial state of

mind will remain distrustful and cautious:

“When they [the governing institutions] don’t trust me, I distrust them too. It is a closed

cycle. If the government supports the SMEs then I will trust it. […] Trust is the product of the

actions of the government. It now reduced the tax by 10% but actually this just benefits

specific actors. It doesn’t concern the small business; it helps the big companies with the big

money. But in truth, it is the small firms that create working places, since the big companies

are just a few” [quote 15]

The expressed opinions of entrepreneurs that trust needs to be earned, both at the personal and

at the institutional levels point to two conclusions. First is the more general assumption that in

the Bulgarian case it is not people’s institutional trust that initially leads to well-functioning

social arrangements but rather that such need to be at least to a certain degree established by

the institutions before trust is rebuilt. A well-intended government will earn its subjects’ trust

which once granted will help reinforce the social and economic development of the country as

a whole. Second is the further reaffirmation that trust stems from self-interest. Entrepreneurs

would grant their trust in institutions once their self-interests are properly safeguarded by a

successfully working business environment. Here it should also be noted that both of the

abovementioned conclusions have formed following the specific cultural and societal historic

development of Bulgaria. This once again stresses that even if trust originates in

calculativeness it is still inseparable from the historic path of a society and the cultural norms

and values it produces.

So how can trust in a self-interested society be earned? As previously explained, in the case of

personal calculativeness what keeps the society from falling apart due to numerous conflicting

but strong interests, are pre-established regulations. Stemming from that it could be assumed

that precisely these rules are what entrepreneurs will fall back on when in doubt of

opportunism and free-riding. Metaphorically speaking, the rules will fit the wholes once trust

is incapable of securing every aspect of a given relationship. Furthermore if entrepreneurs can

rely on the rules being maximally objective and rightly implemented, then this will result in

higher levels of trust as well. Such reciprocal interaction however seems to be almost

completely missing from the Bulgarian business environment. Even though the interviewed

entrepreneurs did not opt for governmental intervention in all aspects of the SMEs’

development, they nonetheless considered it essential for the institutions to regulate


47

successfully by creating the proper framework for their SMEs’ existence and development.

This could, not exclusively, but nonetheless primarily, be achieved through different forms of

well-targeted regulations. These do not necessarily have to be only officially recognized but

could also be expressed in navigating the overall structural formation as to cater to the needs

of small enterprises as much as it does the same for the bigger companies. The government is

thus responsible for creating fairness in the working conditions but its failure to do so until the

present moment has led to the overall perception that all institutions are corrupt and

disinterested:

“There haven’t been real politicians for these 20 years. In order for them to become

politicians they have estimated that all that they’ve invested will return to them in double,

triple or quintuple quantities. There [in the official institutions] it is massively stolen from

what is common” [quote 16]

“I am disgusted by the behavior of the officials who act as our mentors and not as a serving

unit, whose salaries come from our taxes” [quote 17]

All of these factors contribute greatly to the overall distrust that has by now firmly settled

within the minds of the Bulgarian entrepreneurs. The distrust attitudes are furthermore

strengthened by the overall late onset of the entrepreneurial sector in the country. As

previously pointed, notable active measures to improve the situation for SMEs have only

started around a decade ago. Thus even the existing improvements are not yet stable and well-

established enough to shake the deeply-rooted opinions formed through experience during the

hardest period of reform and before that, during communism. The following answers to two

of the questionnaire items could in this light be perceived as a natural consequence of these

developmental trends (Figure 12; Figure 13).


48

These graphs show the alarming rates of institutional distrust. The data clearly indicates that

entrepreneurs believe that Bulgarian politicians are only after their own self-interests and

barely if ever are concerned with something different than getting into office. The interests of

the politicians are paradoxically seen as essentially different from these of the entrepreneurs.

Not only that – both are clashing and since the political representatives possess more power,

their interests predominate at the expense of the entrepreneurs. This logically hinders the

0

2

4

6

8

10

12

14

Fully agree Agree Disagree Fully disagree

DN/NA

Figure 12. To what extent do you agree: Political representatives are more interested in getting

into power than representingtheir electorates

To what extent do you agree: Political representatives are more interested in getting into power than representingtheir electorates

0

2

4

6

8

10

12

Fully agree Agree Disagree Fully disagree

DN/NA

Figure 13. To what extent do you agree: It could be trusted that most of the elected political

representatives try to raise the standard of living of the population

To what extent do you agree: It could be trusted that most of the elected political representatives try to raise the standard of living of the population




49

successful completion of the transition process and consequently also creates and adverse

business environment where trust cannot thrive. These are some of the reasons behind the

opinions of the entrepreneurs, who perceive trust in institutions as absolutely essential for the

proper development of their enterprises:

“I need trust in the government so that I can predict the environment in which I do business”

[quote 18]

“Trust in the government gives greater freedom of action and safety when making important

decisions” [quote 19]

“The distrust I have towards the government stays on the way of my business. I can’t count on

it [the government]” [quote 20]

Naturally entrepreneurs would simply like to be able to count on their government for

support. They expect nothing more than a well-targeted and properly executed framework for

business development. In fact trust towards other entities has often been pointed as more

important than institutional trust during the day-to-day business encounters. Most often

trusting one’s clients and employees is what is considered enough to run a successful

business:

“Trust in clients, employees, suppliers is an integral part of the success of a firm. We have

survived because even after 16 years we have permanent clients, hold high level of quality

and the brand is well known and accepted in the country” [quote 21]

However the current analysis makes the preliminary statement that institutional distrust has

translated into distrust towards the other actors participating in the entrepreneurial business

cycle. For example, previously distrust and doubt in fellow entrepreneurs with the same line

of development has been presented. Furthermore lack of trust in clients has been an issue of

concern for some of the participants:

“I work in their [the clients’] interest but I doubt them. On a daily basis small decisions are

made verbally but then it is always possible for their opinions to change. I’m not 100%

certain of their intentions” [quote 22]

The justification for the assumption that institutional distrust has affected trust in other entities

lies in the more than 20 years of unstable institutional performance. This unreliable

framework has initially resulted in distrust towards the institutions. This has made people


50

generally more prone to distrust and has settled a more or less distrustful atmosphere.

Therefore the opportunistic behavior of some individuals, triggered after the collapse of the

communist state, has easily extended distrust into the interpersonal relations as well. Certainly

there could not be such a strong causal relationship drawn before more research on the topic is

present. However it is not without certain reason to suggest that when there is no proper

legislative framework in practice and no strong government to stay behind the interests of the

small sector and increase its competitive advantage, SMEs are almost completely left to fight

for survival alone. It its turn this creates an environment in which trust cannot be adopted

despite it being the most successful way to a stable, fully-grown enterprise. All of these layers

of different types of distrust add up to high generalized distrust which altogether is one of the

most significant factors hindering the transition progress in Bulgaria and not allowing for a

stable economic and societal development.

In this chapter the main purpose has been to examine the opinions of the interviewed

Bulgarian entrepreneurs. 17 participants took part in this research and their answers helped

draw conclusions on two important aspects. The first concerns the overall institutional setting

in Bulgaria in terms of SME framework and operation enhancement. The second focuses on

the levels of trust that entrepreneurs exhibit towards the institutions and other actors.

In terms of the institutional setting, two important remarks have been made by the

entrepreneurs. The first one concerns the regulatory framework of the country, which is seen

as only moderately effective at best. Despite the evidence for some positive improvements in

the legislation framework, as shown through the institutional evaluation of the country and

confirmed by the opinions of the interviewed entrepreneurs, new barriers are currently

emerging and these stultify the progress already achieved. The current main problems,

according to the entrepreneurs, are the constant changes in rules and regulations and the

indifferent and ineffective official administration. The ineffective financial framework and the

unfair competition have been noted as contributing factors. The access to financial resources

for SMEs is now hindered by the increased number of requirements due to the economic

downturn. Furthermore, a strong dominance of the banking sector and not many sources of

alternative finances are seen as significant challenges.

Subsequently it was shown that trust among Bulgarian entrepreneurs originates from self-

interests. However, the unexpected conclusion here has been that self-interest in the Bulgarian

case rather breeds distrust. Out of all interviewed participants only one presented self-interest


51

as a positive force that generates trust due to the common goals of the calculative actors. The

other participants however perceived self-interests as diminishing all loyalties and honesty

both between the entrepreneurs themselves and between the entrepreneurs and the official

institutions. The suggested explanations have been found in the cultural heritage left after the

communist regime and in the lack of stable direction of legislative reform. Entrepreneurs

perceive their interests to be generally different from those of the political powers and since

the latter are quite ineffective but in possession of more power, there is the widespread

perception that the interests of the entrepreneurs are not prioritized. The distrust in the

country’s institutions has been observed to have also entered the interpersonal relationships of

the entrepreneurs – distrust has been exhibited towards clients, partners and fellow

entrepreneurs.

The entrepreneurs’ have suggested that the successful institutional performance is the only

way through which trust can be nurtured again in the Bulgarian society. Entrepreneurs do not

opt for daily government intervention but for a well-targeted framework for SME growth.

With the successful execution of this, trust can slowly begin restoring and thus the communist

legacy and the norms associated with it can begin to vanish. In this chapter, it has once again

been visible that the exogenous character of institutional trust presents the roots to distrust but

the endogenous one holds the key to transforming these.

CONCLUSION

The main focus of this study has been the description of the Bulgarian institutional framework

for SME development and the factors that affect the sector’s performance. To achieve that

assessment the current level of institutional reformation in the country has been presented but

the main assessment source has been a number of interviews conducted with Bulgarian

entrepreneurs. The latter revealed interesting and unexpected discoveries concerning the

entrepreneurs’ opinions on the reform process and the role of trust.

Bulgaria is a former communist country in which the reformation from centrally-planned to a

market economy has been an ongoing process since 1989. The virtually full control of the

communist party over every aspect of social and economic life in the country accounts for the

followed difficult transition after the fall of the regime. This currently results in Bulgaria


52

lagging behind in its economic development and presence of civil society when compared to

the market economies of the West. The same lagging development is found in the

entrepreneurial sector, which is mostly the result of its late legislative start. In Bulgaria, the

importance of entrepreneurship has already been realized during the communist period but

then there was no existing autonomous entrepreneurial sector. Rather, there were small units

created within the already existing big governmental companies with the main purpose of

alleviating the constant shortage of resources, food and clothes. This was termed

“intrapreneurship” (Punchev, 1989) and even though entrepreneurship, as perceived today,

emerged right after the fall of the regime, only in 1997 the Bulgarian officials started

supporting the sector more actively.

This initial indifference of the country’s representatives together with the slow progress in

terms of unemployment alleviation, social benefits restoration and civil society rebuilding, all

account to a great extent to the high levels of distrust among the population. Lack of

interpersonal and institutional trust was a major characteristic of the communist regime but

the subsequent governments did not strive for rebuilding the levels of trust, which were

present before the communist rule and this resulted in current thriving distrust.

This culturally-embedded attitude nowadays has negative consequences on the way Bulgarian

entrepreneurs conduct their businesses. The levels of distrust towards the institutions are to a

certain extent justified by the administrative burden and constant change of rules and

regulations in the business environment of the country. This, coupled with the perceived by

the interviewed entrepreneurs, indifference of the officials to improve the situation, result to

general expression of skepticism and distrust, which could be observed in the entrepreneurs’

opinions.

Bulgarian entrepreneurs explain their levels of trust with their self-interest. In the theoretical

description of calculative trust, self-interests of different actors with common goals are

supposed to breed trust between them. When the interests are opposing, previously

established rules and regulations are supposed to keep the relationships intact. However, in

the Bulgarian case study, the interviewed entrepreneurs, point to self-interest as the root cause

of distrust. The explanation why this is the case remains for further research but in this study,

two possible reasons are suggested. First is the communist legacy, which nowadays exhibits

itself in the destroyed civil society and the unintended stimulation of opportunistic behavior.

Second, is the lack of proper rules and regulations to protect against free-riding. Many of the


53

interviewed entrepreneurs have negative experience from opportunistic behavior of partners,

clients, other SMEs and the country’s officials. These result in active distrust not only in the

institutions but in other individuals as well.

These assumptions point to two main conclusions. First is the suggestion that in the Bulgarian

society trust nowadays has to be earned through successful institutional performance before

the culturally-embedded norms and distrust attitudes can be reshaped. Therefore, it is not the

population’s institutional trust that will lead to a successful social arrangement but rather such

successful institutional performance should take place before trust in institutions can appear.

Similarly, interpersonal trust should also be earned through a period of information gathering

about the trustworthiness and accountability of the other actors, based on their actions and

behavior. Second is the further reaffirmation that Bulgarian entrepreneurs invest trust when

their self-interests are properly safeguarded and when they can be sure that the other actors

and the institutions will not act opportunistically.


54

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59

~Appendix~

Original Statements of Entrepreneurs in Bulgarian

[quote 1]:

„Реално административните процедури не са сложни, или по-скоро доста се

облекчиха. Прагът за създаване на дружество с ограничена отговорност падна от

5000 на 2лв, което беше огромна крачка напред. Времето за регистрация също трябва

да е много кратка. Вече като стъпка в регистацията, отпадна ходенето в агенция

БУЛСТАТ, защото вече има единна агенция по вписванията. Всички документи и

справки се подават на място там, т.е. не се снове между съда, БУЛСТАТ и

данъчната администрация. Но в крайна сметка, няколкото облекчения бяха

абсолютно обезсмислени от доста други тежести, които се появяват, основно

свързани с много динамичната промяна на законодателството. Факт е, че трябва да

се извършат много промени, но аз съм против това да няма устойчивост в посоката

на тези промени, защото дори в големи компании трудно се ориентират”

[quote 2]:

„Проблемът е, че самата администрация изпитва неувереност в тълкуването на

новостите. Дори на най-високо ниво в администрацията, тя не може да вземе

решение как да разреши различните казуси”

[quote 3]:

„Тя държавата насърчава, ама трябва да има хора, които да свършат всички неща. В

момента правителството се стреми да усвои колкото се може повече средства,

обаче някъде става късане на връзката и започват проблемите”

[quote 4]

„Напоследък се чувствам несигурна, все едно допускам постоянни грешки. Това се

дължи на постоянните промени в законите, които е невъзможно да се следят”


60

[quote 5]

„Огромно непознаване на материята и нежелание това да се промени. Аз не казвам,

че само администрацията е виновна за проблемите, но реално тя самата може да

облечки в максимална степен себе си в отношението си с малките бизнеси, насочвайки

усилията си в друга насока. Малкият бизнес винаги гледа да е максимално изряден,

зашото той няма капацитет и не може да си позволи да плаща глоби и да губи време в

ревизии, административни процедури и т.н.”

[quote 6]

„В нашия бизнес сертификатите и важни за работата документи са международни

и не зависят от държавната машина, но тези, които трябва да се издават от

държавни институции се получават трудно поради ниското ниво на ефективност на

служителите. Това е главната причина за 90% от проблемите в държавните

предприятия, а не липсата на правилни закони и нормативи”

[quote 7]

„По отношение на лицензи и разрешителни, трябва човек да е много добре запознат с

процедурите и ако сам не си движи нещата и не е настоятелен, трудно ще се оправи.

Доста често се налага ползването на консултантски фирми, които срещу комисионна

спестяват ходенето по инстанции. Да не говорим, че обикновено каруцата е пред

коня. Наскоро започнаха проверки за сертификат на продукти, без реално България да

има оторизирана лаборатория, която да издава такива сертификати. Това не е

единичен случай”

[quote 8]

„Не смятам, че правителството трябва да е силно ангажирано с финансова подкрепа

за малкия бизнес. По-скоро смятам, че трябва да се ангажира с ясна рамка за

ползване на преференции при финансирането, през банките, през финансовите

инструменти на ЕС и максимално облекчаване на процедурите в тази рамка. Ако

банките въведат една малко по-гъвкава и облекчена процедура, относно правилата за

отпускане на финансиране за малките предприятея, което не означава занижени

критерии, нещата биха изглеждали по друг начин”

[quote 9]


61

„Специално в нашия бранш е конкуренцията, идваща от Китай. Държавата няма воля

да наложи по-строги мерки за вноса от Китай, тъй като Бългавия уж дава

приоритет за развитие на леката промишленост - производство на обувки и

конфекция и др. - но в същото време не прави нищо за ограничаване на вноса от

Китай, както и на вноса на доста фалшиви стоки”

[quote 10]

„Много малко мога да се доверявам. В Турция, едно производство на врати е

направено в 10 клетки - един произвежда едни детайли, следващия други и т.н. и

накрая излиза готово изделие. В България няма такава фирма, която да прави само

едното, защото няма да е лоялна някъде или ще почне да рекетира и ти не можеш да

си въртиш бизнеса. Затова всеки си прави завършен цикъл на бизнеса. Българинът е

много мнителен, той си мисли, че другият нещо го лъже, мами или няма да е коректен,

а и наистина има и такива, които не са коректни. Затова всеки затваря цикъла до

край - за да има контрол от началото до края и да зависи всичко от него и хората от

екипа мy”

[quote 11]

„Малките предприятия са по-коректни, по-точни във всичко.Един голям предприемач,

веднъж гледа да те събори с цена, гледа и търси начин как да не ти плати и т.н. В

момента имаме много фирми, които не са платили. Така наречената междуфирмена

задлъжнялост”

[quote 12]

„Все едно че ни управляват хора, които не живеят в България”

[quote 13]

„Опитвам се да подхождам максимално добронамерено. Изхождам от правилото, че

те също би трябвало да се добронамерени в отношенията си с мен и че всеки един

проблем би могъл да се реши при наличието на достатъчно желание за комуникация.

По-скоро подхождам с доверие, но се опитвам да бъда достатъчно нащрек и когато

имам проблеми да ги откривам достатъчно бързо. Генерално, това което мога да

кажа, е че българите много по-малко имат културата да правят съвместен бизнес

със своите партьори”


62

[quote 14]

„За тия 20 години, стигнах до извода, че на никого не трябва да му имаш вяра, дори и

на себе си. Всеки гони своя интерес. Няма лоялности, на който се помогнал, да

очакваш лоялно отношение. Между фирмите отношението е същото”

[quote 15]

„Те като не ми вярват и аз започвам също да не им вярвам. То е затворен цикъл. Ако

държавата стои зад МСП, то и аз ще им вярвам. […] Доверието е продукт от

действията на държавата. Държавата свали данъка с 10%, но той облагодетелства

конкретно някого. Малкия бизнес не го засяга. Това облагодетелства големите фирми

с големите пари. А всъщност малките фирми създават работните места, големите

фирми са само няколко”

[quote 16]

„Няма политик за тия 20 години. За да стане политик, той е преценил, че това, което

е инвестирал, ще си го върне в двоен, троен или петорен размер. Там се краде

поголовно от това, което е общо”

[quote 17]

„Отвратена съм от работата на държавните чиновници, които се държат по-скоро

като наши наставници, отколкото като обслужващо звено, чиито заплати се плащат

от данъците ни”

[quote 18]

„Доверие към правителството ми е необходимо, за да прогнозирам средата, в която

правя бизнес”

[quote 19]

„Доверието към правителството дава по-голяма свобода на действие и сигурност при

вземане на важни управленски решения”

[quote 20]


63

„Недоверието, което изпитвам към правителството ми пречи малко или много на

бизнеса. Не мога да разчитам на правителството”

[quote 21]

„Доверието в клиентите, служителите, доставчици е неизменна част от успеха на

една фирма. Оцеляли сме, защото и след 16 години имаме постоянни клиенти, държим

високо ниво на качеството на стоката и марката е добре позната и приета в

страната”

[quote 22]

„Работя в техен интерес, но се съмнявам в тях. Ежедневно решения се вземат устно

и после е възможно да се измени мнението. Не съм 100% сигурна в техните

намерения”

Documents

Entrepreneurs in Bulgaria