SME Support in Post-Communist Countries: Moving from Individual to Cooperative Approaches (Reflections on the Polish Case)

SME Support in Post-Communist Countries:Moving from Individual to Cooperative Approaches(Reflections on the Polish Case)

RICHARD WOODWARD*

Abstract. In the most advanced post-Communist countries of Europe, including Poland, the dynamic growth ofthe small business sector has been the chief factor driving economic growth since 1992, and has beenaccompanied by a number of public programs supporting Small and Medium-sized Enterprise (SME)development. However, I argue that something crucial is generally missing from these programs; namely, anattempt to go beyond the problems of individual businesses to approaches based on forms of association andcooperation which preserve, and even enhance, the overall competitiveness of the economy. As a result, while theVisegrad countries are doing well on numbers of SMEs, they are lagging behind in the development of thosefirms. While proponents of such cooperative arrangements in Poland usually meet the argument that Polishculture does not provide fruitful soil for them, one can point to a handful of experiments in the area of smallbusiness finance which prove that this is not necessarily so. This paper presents reflections on the problems andpotential of public SME support programs based on case studies of two mutual loan guarantee funds, an enterpriseincubator, and various types of business support centers in one region.

Key Words: business support institutions, Poland, post-Communist economies, small business.

1. Introduction

Since the 1970s, the domination of the worlds most developed economies by oligopolies ofgiant industrial concerns has been increasingly challenged by smaller enterprises, whichhave gained market share in a number of countries due to their ability to utilize theircomparative advantages of flexibility and lack of bureaucracy in order to react moredynamically than their larger counterparts to the more and more rapidly changingconditions of contemporary global markets.1 With this development has come an increasein the amount of attention policy makers devote to the problems of small and medium-sizedenterprises (SMEs). In the most advanced post-Communist countries of Europe, includingPoland, the importance of SMEs has been augmented by the fact that, whereas jobs havebeen lost massively in the large enterprise sector throughout the 1990s, the dynamic growthof the small business sector has not only been the chief factor driving economic growthsince 1992, but has also served to absorb much of the unemployment created by theshrinking of the state sector.

The first nine years of post-Communist transformation in Poland have seen a number of

MOCT-MOST 11: 275-294, 2001. 2001 Kluwer Academic Publishers. Printed in the Netherlands.

* Center for Social and Economic Research (CASE), Warsaw, Poland.

1. See statistics presented in Dallago (1996).

programs for SME development. Approaches to the stimulation of small-scale enterpriseused to date in Poland have generally focused on overcoming the barriers to start-upfrequently faced by SMEs and include creation of enterprise incubators and specialinstitutions (such as loan guarantee funds and micro-lending funds) designed to ease theaccess of small businesses to external finance. These approaches have been based primarilyon the provision of support to individual firms and have met with mixed success.International experience indicates, moreover, that it is not enough to provide SMEs withstart-up support; that institutions which facilitate development are also needed. I will arguebelow that what has been largely missing in Polands SME development programs is thepromotion of efforts by Polish entrepreneurs to overcome well-known tendencies tomistrust and excessive individualism and learn to cooperate with each other. Theconceptual divide between the three sectors public, private, and non-profit hasprevented a recognition of the links between these sectors, and here I will be particularlyconcerned with the links between private business sector development and civil societydevelopment.

In the following, I briefly consider the theoretical reasons for the importance of varioustypes of non-government organizations (NGOs) for SME development and the experienceof developed market economies in this area. I then turn to a brief examination of what hashappened to date in Poland with respect to SME development programs, first providing ageneral picture of the Polish experience and then discussing case studies of mutual loanguarantee funds in two Polish towns, an enterprise incubator in a large city, and varioustypes of business support centers in one region. Finally, I reflect on the problems andpotential of public SME support programs in the area of stimulating the development ofNGOs which, in turn, facilitate SME cooperation in Poland.

2. Why do SMEs need cooperation, and how does that cooperation work?

According to a large number of analysts of the SME sector, small businesses differ fromtheir larger counterparts in that their development often requires a network of non-profit(or, sometimes, public) institutions which serve as forums or facilitators for cooperationand pooling of resources by those firms (Piore and Sabel, 1984; Pyke and Sengenberger,1992). Why is this so?

The problems of SMEs are many and varied but are well summed up in the statement ofPyke and Sengenberger (1992, p. 11), that [t]he main problem for small firms is not beingsmall but being lonely. Thus, for example, in contrast to large firms, small firms acting inisolation cannot achieve economies of scale due to large fixed capital costs. Similarly,unlike large firms, they cannot, on their own, afford the costs of gathering informationabout technology and markets. And they face much greater problems than large firms inobtaining commercial credit, even when they are able to offer the same rate of return. Bycooperating and pooling their resources in ways that do not inhibit healthy competition,however, they can overcome these barriers and achieve scale economies in certain activities

276 Richard Woodward

without giving up the beauty of smallness (flexibility, innovativeness, lack of bureaucracy,etc.).

How such arrangements for supporting small business development based on cooperationcan work is shown by the experience of the Italian region Emilia-Romagna.

Emilia-Romagna was a backward agricultural region at the beginning of the century.After the Second World War, small-scale industrialisation turned the region into Italysrichest. Various analyses of this miracle commonly point to the development of industrialdistricts or networks as the most important factor in the regions development.2 Inaddition to more standard aid measures, regional and local authorities helped privatebusinesses to make arrangements for cooperation which allowed them to obtain scaleeconomies usually available only to large companies while retaining the advantages ofsmallness, by creating various kinds of organizations which simultaneously serve a numberof SMEs. The crucial common denominator of such organizations is that public support isalways treated as a complement to, rather than a substitute for, mutual assistance. Thus, forexample, while the regional authorities of Emilia-Romagna provide seed money forsectoral small business development centers, these are expected to obtain financial self-sufficiency after a period of five years (Oughton, 1997).

Some of the institutions often referred to as business support organizations (BSOs) which form SME cooperative infrastructures in developed market economies like that ofNorthern Italy include:

Mutual loan guarantee funds. The fact that small firms have less collateral with which tosecure loans than do larger enterprises is one important reason why small firms face creditbarriers even in the most developed countries. Mutual loan guarantee funds help toovercome the collateral problem faced by SMEs by pooling small enterprises resourcesand providing a guarantee that the lender can rely on even if a given enterprise goesbankrupt; in addition, they often provide a number of services, such as helping clientsprepare credit applications, and offering courses in accounting and sometimes other areasof business management. Finally, they also assume some of the loan monitoring costs thatlenders are unwilling to bear in the case of SMEs (Levitas, 1995). Such funds have beenoperating on a large scale in Italy and the Federal Republic of Germany since the 1950s andhave greatly contributed to SME development in those countries (Levitas and Gsicka,1995). It should be stressed that the point of such funds is not to deliver subsidized credit atbelow-market interest rates but to increase access to loans at market rates. The potential forcommercial success of lending to small businesses backed by borrowers mutualguarantees is illustrated by the record of the Grameen Bank of Bangladesh, which lends tothe very poor without collateral requirements and has a repayment rate of about 98 percent.The achievements of the Grameen Bank have led to its promotion by the World Bank as amodel for combating poverty by means of entrepreneurial development.

Incubators without walls. Conventional business incubators, such as the ones that have

SME Support in Post-Communist Countries 277

2. For a classic statement of this case, see Piore and Sabel (1984).

sprung up in Poland quite abundantly in the last several years, provide young businesseswith the physical space and equipment necessary to start their operations, but do notnecessarily encourage these businesses to lower their collective costs by pooling theirresources. This can be done by the creation of organizations which simultaneously serve anumber of SMEs e.g., marketing associations and agencies that do bookkeeping andincome tax accounting, legal advice and consulting, or purchasing of raw materials andequipment and by common use of certain physical capital which is associated with largefixed costs, such as warehouses, trucks, or expensive manufacturing equipment.

Technology transfer. Research centers located in universities, polytechnic institutes, andcommercial research and development centers develop and transfer technology to smallfirms which individually cannot afford their own R&D departments, in contrast to largefirms.

Training institutes help to provide local communities with a skilled work force, thusreducing unemployment and providing small businesses with the human capital necessaryfor high value added production and service provision.

Real services. This is a term first used in the empirical literature on Italian industrialdistricts to describe certain non-financial services provided by an infrastructuresurrounding SMEs in those districts. Real services include such items as: provision ofinformation about technical standards on foreign markets, customizing of productionsoftware for firms introducing computer-aided manufacturing (CAM) techniques,laboratories that run quality tests on raw materials, organization of trade fairs, andtranslations of tenders advertised in other countries.3

But cooperation and resource pooling of the kind we see in the institutions describedabove depends on trust, and trust is extraordinarily difficult to achieve in a milieu of smallactors which often appear and disappear overnight, where unhealthy types of competitionare often rampant. (In the case of Poland, additional difficulties arise as a result of thenegative experience of cooperatives and enterprise associations under Communism.4) Tobuild that trust, public action and institution-building are needed. In the next section, welook briefly at the development of the SME sector in Poland, with a particular focus onfactors affecting the development of institutions facilitating inter-firm cooperation as wellas the development of the trust that underlies such institutions.

3. The SME sector in Poland:A brief overview

The rapid proliferation of small private enterprises in Poland since 1989 has undoubtedlybeen one of the keystones of the Polish transformation. By the end of 1996 there were 2.4million SMEs (i.e., firms employing up to 250 persons) in Poland, which employed almost


3. On real services, see Brusco (1992), pp. 186-187.4. On this subject, see, for example, Maliszewski and Stolinska-Janic (1995), and Kondratowicz et al. (1995).

60 percent of the national work force (excluding agriculture, fishing and forestry),produced about 40 percent of the GDP and created 1.5 million jobs in 1990-1994(Ministerstwo, 1995, Polska Fundacja, 1998, Flint, 1997).

However, while Poland has seen an explosion of market entry of small firms, the recordwith respect to their development is poorer (partially reflected, for example, in thediscrepancy between SMEs share in employment and their share in GDP). This mirrors theexperience of a number of other Central European countries. As Slovenian economistsPetrin and Vahcic (1995) argue, these countries have witnessed a vast wave of start-ups ofnew small enterprises (often micro-enterprises, employing less than 10 persons) since1989, which gave them small business sectors comparable (in terms of the share in theeconomy as a whole) to those of developed market economies.5 Hungarian researcherIstvn Gbor concluded on the basis of his analysis of the small firm sector in post-Communist Hungary that the sector has too many firms and the firms are generally toosmall; small firms are not developing into medium-sized ones, but rather remaining smalland often in the gray sector, avoiding large investments and manufacturing.6 MaciejGrabowski concludes that the growth of the SME sector in Poland in 1990-1995 wasunbalanced, with the number of micro-businesses (employing 1-4 persons) growingrapidly, whereas the number of medium-sized businesses actually declined. He also reportsthat the average number of employees per firm in the SME sector in the European Union is6.3 persons, whereas in Poland it is 4.4 (Grabowski, 1996).

This situation is similar to that of Italian small firms in regions of Northern Central Italysuch as Tuscany and Emilia Romagna before they began to shift, in the 1960s and 1970s,from traditional activities in the underground economy to internationally competitivemanufacturing whose success was based largely on technological innovation rather than taxevasion and low wages; as Dallago (1996) notes, this transition occurred when these firmsbegan to cooperate to form the industrial districts which have been identified in the relevantliterature as the key to the success of SME sectors in those regions. While it is true that thelow rate at which SMEs develop and emerge from the grey sector in post-Communisteconomies such as Polands is due in large measure to tax and social security paymentburdens, more attention needs to be devoted to overcoming the barriers to the transition toinnovation and cooperation noted in the Italian SME sector. A similar transition in thePolish SME sector is needed if it is to continue to be an engine for growth.

While proponents of such cooperative arrangements in Poland usually meet theargument that Polish culture does not provide fruitful soil for them, one can point to ahandful of experiments in the area of small business finance which prove that this is notnecessarily so. Among these are mutual loan guarantee funds and a micro-lending fundestablished with the help of the Polish-American Enterprise Fund, in which borrowers


5. According to The Economist (1995), in the early 1990s the USA witnessed a wave of small businessconsolidation, its population of small businesses appeared to decline, and venture capitalists channeled somefunds previously used for financing start-ups into consolidations or financing of the growth of existing firms.

6. Cited in Grabher and Stark (1997).

mutually guarantee repayment.7 Interestingly, during a presentation at a conference in April1998, representatives of the Micro Fund talked about how difficult it had been to convinceboth the funds staff and the borrowers themselves that such a system would be viable inPoland. The funds success demonstrated that these fears were unjustified.

Of course, SMEs and their owners do not exist in an institutional vacuum in Poland.There are membership-based organizations and various types of institutions supportingbusiness activity in Poland. What can we say about the nature of the barriers currentlyfacing SMEs in Poland and the ways in which these institutions and associations helpentrepreneurs deal with those barriers (and, perhaps, more importantly, help each other todeal with them)?

As of December 1997, 264 chambers of commerce and industry associations wereoperating in Poland. Most were members of the National Chamber of Commerce (KrajowaIzba Gospodarcza). In addition, there were 842 handicraft organizations, including guilds,cooperatives, and other associations (Polska Fundacja, 1998).

While these organizations are numerous, membership in entrepreneurs associations inPoland is rather low. According to surveys of a group of 850 Polish entrepreneurs carried outin late 1995 and early 1996, only 20% of them belonged to business associations (includinglocal and regional chambers of commerce, handicraft guilds, employers associations, etc.).This was often attributed to lack of knowledge about such organizationsexistence.8

By 1999 the Polish SME Promotion and Development Foundation (hereinafter: PolishSME Foundation9) had compiled a database consisting of 1508 business supportorganizations (BSOs). Of these, 349 were non-profit, non-membership-based BSOs ofvarious types, and 566 were membership-based BSOs. Membership dues do not suffice tocover the costs of membership-based organizations, which probably results from the above-mentioned weakness of their membership base. A comparison of non-membership-basedorganizations with entrepreneurs associations shows that the former receive much morefinancial assistance from public sources (of these, more frequently from the centralgovernment than from municipal budgets, but most frequently from foreign assistance).Training is the service most frequently provided by both types of organizations.Information and consulting services are in second place (Polska Fundacja, 2000).

What can we say about the development barriers facing Polish SMEs, which theseorganizations are supposed to help them overcome? To what extent, and in what ways, dothese barriers affect Polish firms?

First, credit barriers. This was the barrier named most frequently by both researchers andentrepreneurs themselves during the past decade. It is commonly held that Polish banks


7. The Micro Fund, which specializes in very small loans for very small businesses (the vast majority of loanshave been for businesses with no more than five employees and sums of no more than 5,000 USD), currently hasover 30 branches throughout Poland (Polish Press Agency, 10 April, 1997). The fund loaned almost 70 millionzotys (approximately 20 million USD) to small businesses in 1998, an 83% increase over 1997. By the end of1998 it was servicing 10,000 clients (at the end of 1998 there were 2.5 million micro-enterprises in Poland). Thedefault ratio for the loans was close to 3.5% at that time (Parkiet, 30 March, 1999, p. 5).

8. Cited in Polska Fundacja (1997).9. The name of the foundation was recently changed to the Polish Enterprise Development Agency.

make it difficult for small businesses to access credit, for example by making excessivedemands in the area of collateral.10

A good picture of the typical situation for a Polish small business applying for a loan inthe first half of the 1990s was presented in a report on research carried out by the Polish-American Small Business Advisory Foundation and the Gdask Banking Academy in 1994in 55 small businesses in the Gdask, Elblg, Bydgoszcz and Supsk regions (Kulawczukand Knyba, 1997). All of these firms had applied for loans, and 67% of them either wererejected in the research period or received the loans only after making numerousapplications. The reasons given by the banks for rejection of the loan applications wereinteresting. 21% of the firms were given no reason at all. Lack of collateral was the reasonfor rejection in 38% of the firms, and a negative evaluation of the investment project wasnamed in only 12% of the cases. On this basis, the researchers concluded that the banksoften evaluated loan applications in a formalistic manner, failing to carry out a thoroughanalysis of the business plan. When respondents were asked how in their opinion the supplyof credit could best be increased in Poland, 76% said that banks should look more at theproject, and less at collateral (this was the second most frequent response to the question,after the lowering of interest rates). Survey research carried out in 1997 among bankersalso showed that banks seldom assist clients in preparing credit applications. Only inexceptional cases do loan applicants receive examples of business plans or completedcredit applications (Kulawczuk et al., 1998).

However, the situation improved during the second half of the 1990s. Research carriedout in 1997 shows that the years 1995-1996 brought enormous growth in the amount ofmoney loaned to the SME sector. This was probably caused to a large extent by legislationrequiring that transactions above a certain value be carried out electronically rather than incash. This requirement meant that small businesses money began moving through the banksystem to a much greater degree, allowing the banks to monitor those firms financialsituation. In 1995-1996, loans to SMEs (including loans for micro-businesses) amounted to40% of all loans to businesses. The researchers concluded from this that the share of SMEsin total loans had become proportional to their share in GDP11; they added, however, thatmicro-businesses were still taking out a small and decreasing number of loans.Nevertheless, one must note that the avoidance of commercial credit by micro-businesses isa world-wide phenomenon, and that statistics on lending to micro-businesses in Polandmay be misleading due to the fact that in recent years more and more business owners havebeen applying for consumer loans which are in fact used for business purposes (takingadvantage of the easier access to such loans than to business micro-loans) seeStrawhacker and Gajewski (1997).

Another development barrier which business owners complain about less frequently butwhich may be highly significant is the lack of managerial skills among entrepreneurs


10. See, for example, Business Central Europe (1995), Flint (1997), Gazeta Bankowa (23 March, 1997), TheWarsaw Voice (18 May, 1997).

11. See Kulawczuk et al. (1998). This strong growth in loans to the SME sector continued in 1997 and 1998;see Polska Fundacja (2000).

themselves. Sociological research conducted in 1995 showed that 44% of business ownersin Poland came from working class backgrounds and 20% from farming families; i.e., over64% do not belong to the intelligentsia. Only 17% had worked in managerial positionsprior to founding their businesses (Polska Fundacja, 1997). These facts suggest that thelevel of managerial skills of Polish entrepreneurs very often hinders or even rendersimpossible development of these firms beyond a certain point. (Interestingly, studies ofbusiness owners in manufacturing show that their level of education is on the averagehigher than that of their counterparts in Great Britain.12 This fact seems, however, to reflectrather the process in which small private manufacturing enterprises were spun off of stateenterprises in Poland in the first half of the 1990s and, perhaps, the situation in GreatBritain than the characteristics of the general population of Polish entrepreneurs.)

When Polish entrepreneurs are asked about the barriers facing the development of theirfirms, they complain fairly frequently about the shortage of skilled labor which exists inspite of the high rate of unemployment (Polska Fundacja, 2000). This is often ascribed tothe incentives created by the system of social benefits (including unemployment benefits).These benefits are said to leave recipients unmotivated to seek work or encourage them towork in the informal sector, which tends to absorb a large number of the unemployed(Polska Fundacja, 1997, Development Alternatives Inc., 1997).

Other research casts doubt on this theory. For example, studies carried out in the dregion in the first half of the 1990s showed that gray sector employment is more oftenassociated with young persons (aged 25-34) with only elementary or secondary vocationaleducation. These are persons with low skill levels. This research also showed that employersin the gray sector are most likely to employ low-skill workers, and that people working in thegray economy generally expressed eagerness to improve their skills and find work in theformal sector (Rogut, 1995). As Krystyna Poznaska (1997) notes, shortages of skilled laborare cited most frequently by employers in relatively weakly developed regions which aredistant from urban and highly industrialized areas and where access to the kind of educationwhich would satisfy employers requirements is very limited or even non-existent.

Finally, I would like to note the implications for SMEs of an important problem facingall of Polish industry: enormous under-investment in research and development. Table 1illustrates the scale of Polands problem with research and development investment incomparison with a number of other OECD countries.

As the table shows, the largest portion of the distance between Poland and the other OECDcountries is not due primarily to the low level of government R&D expenditures but rather tothe low level of private R&D spending by industry. Polish industrys spending on R&Damounts to a mere 0.3% of GDP, as opposed to the OECD average of 1.51% (Pietraszewski,1997). This is the case in spite of the existence of 260 state-owned R&D institutes whichPolish firms lacking their own R&D facilities could potentially take advantage of. Such


12. See Development Alternatives, Inc. (1997). Survey research from 1999 showed that 45% of the managersof firms employing 6-250 persons had higher education, while only 20% of the managers of the much morenumerous group of firms employing five persons or fewer had higher education. See Polska Fundacja (2000).

institutes (as well as research facilities at universities and polytechnic institutes) shouldconstitute ideal partners for SMEs, which often cannot afford their own laboratories.Nothing could, however, be further from the case in Poland. Cooperation between theseinstitutes and SMEs is practically unheard. Industrial R&D institutes prefer to concentrateon cooperation with their traditional clients, large industrial producers in the state-owned orformerly state-owned sector, and are, moreover, highly dependent on government grants.Polish universities suffer from many of the problems often observed in the West, resulting,for example, from the fact that universities are seldom well prepared for cooperation withbusiness and lack the necessary administrative flexibility, professionalism in drawing upcontracts, and general awareness concerning business practices (Quevit, 1997). Moreover,SMEs themselves usually lack both an awareness of what the institutes could possibly offerthem as well as financial resources to pay for R&D services. Possibilities for sectoral SMEsto pool their financial resources in developing cooperation with the institutes remainunexplored, and the R&D institutes generally fail to engage in marketing or promotionalactivity on any significant scale.

Many observers of the Polish business environment have pointed to the links betweencontinued financial weakness of Polish firms (and, in particular, SMEs) and their inabilityto provide sufficiently advanced products and to respond flexibly to sudden changes inmarket demand. Two examples are comments made by participants in the Sixth SMEBusiness Forum held in November 1999. According to Prof. Andrzej Herman of theWarsaw School of Economics, in 1999 the financial condition of SMEs deteriorated notonly because of the general economic slowdown, but also because the process of theirmodernization is too slow. Herman added that the most serious threat to the development ofPolish small companies comes from themselves rather than from European Unioncompetition, because they are too slow to introduce new cutting-edge technology. However,this is often caused by insufficient financing, said Andrzej Lech, head of the WarsawBanking Institute, adding that the introduction of new products for small businesses bybanks, is, for the time being, just promises.13


13. Rzeczpospolita, 5 November, 1999, page B2.

Table 1 - Research and development expenditures (% of GDP)

1965 1970 1975 1980 1984 1994 or 1995 Central government expenditures

Japan 1.27 1.59 1.73 1.91 2.37 2.69 0.63 (1994)USA 2.91 2.65 2.27 2.38 2.62 2.45 0.99 (1994)France 2.03 1.93 1.80 1.84 - 2.38 (1995) 1.05 (1993)United Kingdom 2.35 2.10 2.02 2.19 - 2.19 0.71 (1994)Germany (Federal Republic) 1.73 2.18 2.38 2.63 - 2.27 (1995) 0.84 (1995)Poland - - - - - ca. 0.8 (1995) 0.5

Sources: Pietraszewski (1997), pp. 42-44, Parteka (1997), p. 252.

I have listed the various types of organizations that have been created in Poland to helpSMEs deal with the sorts of problems discussed above. I will now turn to a discussion ofresearch conducted in 1998 and 1999, attempting to answer the following questions: How effective are these organizations in accomplishing their goals i.e., in responding

to the needs of the SMEs they are supposed to serve? How effective are these organizations in helping Polish small businesses to pool their

resources and achieve cooperative solutions to their problems? To what extent have these institutions attained financial independence and a member-

and client-oriented approach?

4. Polish Business Support Organizations: Case studies

In this section I will discuss case studies of three types of BSOs in Poland: businessincubators, mutual loan guarantee funds, and business support centers. The case studieswere prepared in a component (coordinated by the author) of a research project funded by theU.S. Agency for International Development and carried out by CASE the Center for Socialand Economic Research entitled Supporting Growth Through Reform Consolidation.These institutions were chosen because they represent some of the most far-reaching effortsby policy-makers and the emerging business community itself to create the forms ofcooperation discussed above which enhance the competitive advantages of SMEs.14

Business incubators in Poland have tended to simply provide walls, being engagedprimarily in providing support for business start-ups in the form of physical facilities, witha more limited role for advisory services and technology transfer (typical services forincubators without walls).15 The incubator in the large central Polish city of d,examined in detail by Dziurdzik and Klimczak (1999), is an example of one where anattempt has been made to reach out to the local research community to utilize its resourcesin building the strengths of local industry. It therefore constitutes an important example,providing evidence about the possibilities and limitations of this type of cooperativebusiness support activity in Poland.

While a number of loan guarantee funds of varying sizes already exist, capitalized fromthe state budget or foreign aid monies, the three currently existing mutual guarantee fundsin Poland represent the only attempt in this area to involve entrepreneurs themselves in boththe decision-making process surrounding the extension of guarantees and the capitalizationof the funds. Since the guarantees are mutual, with local entrepreneurs vouching for eachother, these funds can be seen as an experiment similar in many ways to that of the MicroFund mentioned above in developing relations of cooperation and trust between


14. For the studies themselves, see Kiliaski (1999), Dziurdzik and Klimczak (1999), Klich and Poznaska(1999).

15. A (rare?) example of a Polish incubator without walls is the initiative of the Bigoraj RegionalDevelopment Agency to provide transportation and marketing services in a putting-out system for womenformerly employed in a liquidated clothing factory. See Zasiady (1996).

entrepreneurs. Kiliaski (1999) presents a detailed examination of the activity of two ofthose three funds.

Klich and Poznaska (1999) look at business support centers in the Krakw region. Twocategories of institutions were investigated membership-based and non-membership-based. By examining a wide range of institutions in a single urban area, this case studyprovides insight into the nature and problems of membership-based business organizationsin Poland, and in particular concerning the manner in which business support organizationsinteract with the surrounding community on behalf of their clients (as well as how well theyperceive and serve those clients interests).

Except where explicitly indicated, the evaluations of the BSOs examined in the casestudies reflect my own views, based on the case studies, and not necessarily those of theauthors of the case studies.

4.1. Mutual loan guarantee funds in Bigoraj and Dzierzgo

In 1996, the Bigoraj Regional Development Agency (BARR), located in the southeasternPolish town of Bigoraj, converted its small business loan guarantee fund into a mutualfund. In the following year, the Regional Investment Society (RTI) in the northeastern townof Dzierzgo created a mutual fund from scratch. The costs of these operations were, to alarge degree, covered from European Union Phare program funds administered by thePolish SME Foundation. In these mutual funds, borrowers who employ fewer than 50persons and are interested in applying for guarantees are required to become participants inthe funds. Fund participants are involved in the funds decision-making process viarepresentation on the qualifying committees of the funds, which review guaranteeapplications and recommend their approval or rejection (the final decision is always madeby the president of BARR or RTI, respectively). Applicants for guarantees pay a smallapplication fee of up to 500 zotys (currently about 125 USD), and if they received aguarantee, they pay the fund a commission of up to 2% of the value of the guarantee, andmust additionally sign in blanco promissory notes as a form of security.

The funds were created in cooperation with the banks that serve as lenders for the fundsparticipants. Three banks worked with the two funds a national bank and two local ones.The banks cooperate with the funds by bringing loan applicants with collateral problems tothe funds for help. In addition, they have negotiated multipliers with the funds whichallow the funds to accumulate a total value of guarantees exceeding their capitalization.The Bigoraj fund has a multiplier of 3, and the Dzierzgo fund has a multiplier of 2 withthe state bank and 4 with the local cooperative bank.

As of the end of November 1998, the statistics on the performance of the two funds wereas follows:


Table 2 Performance of the mutual loan guarantee funds (end of November 1998)

BARR RTI

Number of participants 71 57Number of applications 66 38Number of guarantees 61 34Value of guarantees (PLN) 1,131,000 773,400Value of the fund (PLN) 1,570,000 558,940Ceiling for value of guarantees* (PLN) 4,710,000 840,000Actual value of guarantees as percentage of value of fund 71% 138%Number of start-up firms in locality 35 16Number of guarantees to start-up firms 21 10 (of which,

6 for firms insurroundinglocalities)

Value of promissory notes (PLN) 192,000 111,000

Source: Kiliaski (1999).Note: As of the end of November 1998, 1 PLN = 0.29 USD.* This equals the value of the fund times its multiplier.

One of the undoubted achievements of these two funds is the fact that there had been noproblems with loan repayments at the time of writing of Kiliaskis paper (in 1995 and1996, BARR was forced to pay a total of 26,800 zotys less than 10,000 USD inguarantees when two borrowers failed to make payments on their loans). This seems toconfirm the thesis of advocates of this type of guarantee fund, who argue that the mutualcharacter of the guarantees gives the participants strong incentives to monitor each other(as in the case of the Micro Fund, which, as mentioned above, also functions on the basis ofmutual loan guarantees). Another accomplishment of the funds was the attainment of theassent of local banks for capital multipliers for the funds as well as lower interest rates onloans guaranteed by the funds. These accomplishments have been won at the cost ofdifficult negotiations. Such cooperation with banks is crucial for the success of these typesof funds, and one might hope that the cooperation between banks and small businessesengendered by the funds activities will lead to the banks becoming better acquainted withthe small business sector and to increasing their credit activity among such firms.

We can, however, point to certain weaknesses in the activity of the funds. One of these isthe high degree of dependency on foreign aid funds for capitalization. The second is thefact that the funds are still far from exhausting the financial potential which the capitalmultipliers afford them. As Kiliaski writes, weak demand for guarantees results fromweak demand for bank loans themselves, given the currently very high interest rates. Therecent very dynamic development of the Dzierzgo fund is noteworthy, however. It is oneof the few guarantee funds in Poland which have made guarantees of a total valueexceeding the value of the fund itself, thereby beginning to utilize their capital multipliers.

Finally, it seems that the funds could increase their effectiveness by more activelypromoting their services. Currently it is not the funds that seek entrepreneurs who could


develop their firms with loans guaranteed by the funds, but rather banks which directentrepreneurs to the funds.

4.2. d Business Incubator

The Incubator Foundation is located in Polands second largest city, d a city whichexperienced particularly grave problems with structural employment due to the collapse ofits textile industry in the early 1990s. The incubator was opened in 1992 by the City ofd and the d Regional Development Agency. The president of the incubator is auniversity professor and one of the leading national authorities on technology transfer andscience parks. Due largely to this focus of his interests, a separate department of theincubator devoted to projects related to technology transfer was created in 1996.

In all, by the end of 1997, 55 firms were being incubated. The incubated firms, inadditional to office space at below-market rental rates and telephones, received access tofax and photocopying machines and other office equipment. The incubator also organizedtraining for them in areas such as law, management, marketing, and technical issues relatedto technology transfer.

A particularly interesting achievement of the d incubator is the maintenance ofcontacts with numerous institutions which play an important role for local development ind. Among the institutions cooperating with the incubator are the d RegionalDevelopment Agency, d University, foreign entities, and, in the past, the d Chamberof Industry and Commerce. Another success of the incubator lies in its efforts to choosefirms for incubation in such a way as to assure maximum potential for achieving networkeffects, i.e. mutual aid of the incubated firms for each other. Thus, among the incubatedfirms are a law practice, an insurance firm, and an internet service provider, all of whichprovide their services to other incubated firms. Moreover, the incubator undertakes variousefforts to facilitate incubated firms in their contacts with each other, helping them toexchange views and search for common interests and development opportunities. This isnot easy: Dziurdzik and Klimczak (1999) write about the problems the incubator faces ininducing entrepreneurs to cooperate amongst themselves and with the incubator itself.Overcoming the barrier of mistrust demands a great deal of patience from the incubatorsstaff.

One of the important success indicators of an incubator is the percentage of firms thatleave it after a certain period. About 25% of the firms incubated to date by the dincubator have left it. It therefore seems too early to judge whether the incubator iseffectively carrying out its fundamental task of generating viable enterprises. The incubatoritself has not yet attained the scale of activity necessary for financial independence.

One thing that sets the d incubator apart form the vast majority of other Polishincubators is its activity in the area of technology transfer. In this context it is worth notingthe high degree of dependence on funds from the Polish State Scientific ResearchCommittee (KBN) and the INCOME Program run by the Polish Science Foundation(Fundacja na Rzecz Nauki Polskiej). It is limited access to funding which prevents the


incubator from engaging in a wider promotion of its services in order to attract projects. Onthe contrary, the incubators staff tries to restrict such searches to a narrow milieu ofresearchers. The presidents personal links with the University of d and the local andnational research community play a large, if not decisive, role here. As the authors write,the incubator owes its ability to identify technology projects with market potential topersonal contacts in the research community.

A serious barrier to the development and operation of the incubator, namely its lack oforganizational coherence, results from the high degree of dependency on aid programs ofvarious profiles. This gives rise to the question whether concentration on one task (such astechnology transfer), maximizing efficiency in carrying out that task, is possible withoutthe attainment of financial independence from various donors and international aidprograms. It seems that dependency constitutes not only a financial limitation, but also due to the variety of goals of various institutions as well as of their funding criteria seriously limits the development of organization coherence, by diffusing the goals of theorganizations and thereby weakening their effectiveness. This is probably reflected to alarge degree in the situation in which, according to the authors, innovation and technologytransfer remain a challenge for the future rather than a reality today.

Finally, it is worth noting a factor hampering technology transfer which, as mentionedabove, can be observed in the West as well: difficulties in cooperation with institutions ofhigher education. Before a project is implemented, it is typically necessary to hold longnegotiations concerning the intellectual property rights to an invention with authorities ofthe university where the inventor is employed.

4.3. Business support institutions in the Krakow region

Klich and Poznaska (1999) studied a group of seven organizations in the regionsurrounding the southern city of Krakw, Polands third largest. These organizationsincluded three membership-based organizations and four non-membership-based NGOs.The membership-based organizations included one relatively small one, with over 200members, and two large ones (including a handicrafts association) with several thousandmembers. All organizations except the handicrafts association had been established (or, insome cases, re-established after a 50-year pause in their activity) with the assistance oflocal and/or regional officials. The organizations offer a number of different kinds ofservices, the most common being training and various kinds of courses, as well asconsulting, advisory and information services. Some disseminate information about tradefairs and various national and international business opportunities; some also participate inthe organization of such fairs. A number of them offer assistance in preparation ofdocuments, such as contracts, business plans, and credit applications. One operates atechnology transfer center.

At first blush it might seem that the organizations studied by Klich and Poznaska offera palette of services largely similar to that offered by similar organizations in NorthernItaly. They offer, for example, information on trade fairs, opportunities for cooperation


(including contacts with foreign partners), and the preparation of documents (e.g. creditapplications, business plans, contracts). As in the case of the Northern Italian organizationsoffering business support services, we can also point to successes in the achievement ofimportant social goals (as in the case of the activity of the Foundation for EconomicPromotion of the Krakw Region FPGRK geared toward finding jobs for theunemployed, especially outside the city of Krakw in neighboring villages). Moreover,there are cases of inter-organizational cooperation (e.g. between the Progress and BusinessFoundations Technology Transfer Center on one hand and the FPGRK business incubatorand the Krakw Regional Development Agency ARRK on the other) and capital tiesbetween the centers (four of the institutions studied are shareholders in a fifth ARRK).Finally, the study shows that the role of regional and municipal institutions in founding andsupporting business support organizations in the Krakw Region is very significant. Oneof the most interesting cases in this regard is the special relationship between the FPGRKincubator and the Krakw suburb Nowa Huta (in particular the Sendzimir Steel Mill, thecenter of the economy of Nowa Huta, around which the city was built 50 years ago in one ofthe largest projects of socialist industrialization in Poland).

So is this a case of a Galician Emilia Romagna16? The picture painted in the paper leavesno doubt that there is a long way to go to reach such a goal. Although a local network ofinstitutions with a profile similar to that of their Italian counterparts is already existent, thisnetwork is rather thin; the links between local actors are fewer and looser than in Italy. Asthe authors write, they sometimes noticed in their interviews a certain reserve with respectto other centers realizing similar functions. This applies as well to relationships betweenBSOs and their clients/members.

In the case of membership-based organizations, membership fees constitute about 30%of the organizations budgets. The other funds necessary for operation are obtainedprimarily from commercial activity (and, in the case of one of the organizations, from aidprograms). This reflects the situation in the country as a whole (as discussed above) inwhich membership-based BSOs are forced to rely on commercial activity to supplementrevenues from membership fees, which do not suffice to cover costs. These organizationsdo not make exhaustive efforts to acquaint themselves with the needs of their clients andmembers, and, for their part, the members exhibit a rather passive attitude toward theorganizations to which they belong, making demands on them without showing a desire toget involved and contribute something. Moreover, the authors did not observe anydifference in this respect between membership-based and non-membership-basedorganizations.

We see that the lag in civil society development in Poland, as a result of which Polesoften prefer to passively wait for assistance from various institutions including the state than to take active part in improving the existing situation, is mirrored in the situation ofbusiness support organizations.


16. Referring to the southern Polish province of Galicia in the Austro-Hungarian empire, which includedsuch cities as Krakw and Lviv (in present-day Ukraine).

Finally, it is worth noting that here as in the other institutions studied organizationaleffectiveness is hampered as a result of dependency on outside funding. However, theauthors write optimistically about this, arguing that the diminishing availability of thisfunding is motivating BSOs to more actively research the needs of clients in the market forservices.

5. Conclusions

We have seen that one common denominator of various types of business supportorganizations in Poland is the lack of financial independence. The actors in theseorganizations often believe themselves to be trapped in a vicious circle. Lack of financialindependence forces them to search for various sources of funding including foreign aid which in turn distracts their attention from what should be their primary goal: assuring thegreatest degree of satisfaction of their clients and customers. This makes it impossible todevelop their client and member bases more rapidly, which is the conditio sine qua non forachieving financial independence. It is, however, worth asking whether it would not bepossible and indeed indispensable for them to concentrate on improving the quality ofservices to clients and members (instead of tailoring these services to the requirements ofvarious international donors and Polish state agencies), in order to achieve the financialindependence that would allow them to feasibly develop a customer- and member-basedfocus. In this context we would do well to be wary of the consequences of pouring more aidmoney into the Polish system of business support organizations.

Another weakness in the existing structure of Polish business support organizations withrespect to enhancing the competitiveness of SMEs is the fact that in membership-basedorganizations, large firms tend to be strongly over-represented.17 This is a greatdisincentive for small firms to join them, as they are apprehensive that such organizationswill not be interested in their concerns and problems. Experience shows, moreover, thattheir apprehensions are well-founded.

Finally, while positive models of supportive local government activity do exist inPoland,18 the attention of most local authorities is more often concentrated on dealing withthe effects of restructuring the large industrial enterprises that constitute the burdensomelegacy of socialism than on the creation of a favorable climate for the development of newfirms. Typically, if local authorities notice small businesses at all, it is only regarding theextent to which they can milk them, obtaining tax and fee revenue from them to pay forschools and social entitlements as well as to help bear the investment costs of making up forthe long years of Communist neglect of local infrastructure, building roads, sewagetreatment plants, etc.

In addition to these inherent weaknesses in the Polish institutional infrastructure


17. See, for example, Dornisch et al. (2000).18. For some interesting case studies, see Gorzelak et al. (1999).

surrounding small business, there are weaknesses in public administration which are of theutmost relevance for small business development prospects. Jonathan Zeitlin (1992,p. 289), referring to the literature on small business networks and industrial districts, findsthat the evidence indicates that the financial and policy independence of local authoritiesand the enhancement of the autonomy and powers of local government are crucial tosuccess of public policy in this area. On the other hand, Carlo Trigilia (1992, pp. 46-47),writing on the Italian case with special reference to the northern successes and southernfailures of the industrial network model, warns that trying to implement such a model in acontext of underdeveloped civil society and inefficient, corrupt local government is liableto prove inefficient and to stimulate the growth of political entrepreneurship rather thaneconomic development.Are small firm support networks developed by local and regionalauthorities in Poland apt to resemble Sicilian structures rather than those of EmiliaRomagna? My hypothesis in this regard is that the effectiveness of local and especiallyregional authorities involvement in BSOs will grow as the decentralization of publicadministration (including, crucially, an accompanying decentralization of public finances)progresses.19

Of particular significance here is the development of the 16 new regions created on 1January, 1999, which have the opportunity to take the initiative in the area of developingbusiness support infrastructure which has, to date, rested mainly with the centralgovernment and its agencies. By assuming this initiative, the regions could free themselvesfrom the clientelism and dependencies which one could (admittedly with some, perhapssmall, degree of exaggeration) see as having characterized Polish programs in this area,turning developments in the direction of real civil society development.20 For this reason,the prospect of the European Unions Structural Funds represents both an opportunity and athreat.

Ireland which has had the highest economic growth in the European Union for a


19. Of course, decentralization of public administration obviously doesn't necessarily yield positive resultsalways and everywhere, but I would argue that it is necessary if there are to be good results anywhere. Acomparison with the economy is useful: in a market economy, some enterprises go bankrupt and some persons areunemployed, but this is the price we pay for the ability of the economy to develop (an ability not shared by plannedeconomies, in which bankruptcy and unemployment do not exist). Analogously, the problems of Sicily may be theprice paid for the fact that regions such as Emilia-Romagna, Veneto and Tuscany have been able to adopt theinnovative policies that they are famous for. Moreover, it is doubtful whether Sicily would be better off if all thedecisions now made there were made in Rome instead. I am reminded of a Southern Italian mayor interviewed byRobert Putnam, who complained about the quality of public administration in his region following thedecentralizing reforms of the 1970s. When asked if he would prefer to return to centralized administration inRome, however, his answer was an unequivocal no (Putnam, 1993).

20. Unfortunately, recent developments in Poland give little cause for optimism. In June 2001 the governmentsigned the first regional development contracts with the regional governments. The contracts have been criticizedas providing too little money and constituting a poor substitute for genuine regional financial autonomy. Instead ofproviding the regional governments with adequate sums, the central government is forcing them to compete witheach other in bidding for subsidies allocated on the basis of the contracts, while continuing to finance most publicexpenditures in the regions from the central budget. As a result, the critics expect waste, corruption, and rent-seeking behavior instead of genuine support for regional economic development. See Warszawa trzyma kas(interview with Jerzy Hausner, Zyta Gilowska and Jacek Szlachta), in Gazeta wyborcza, 19 June, 2001.

number of years is reputed to have been the most effective user of European StructuralFund monies in restructuring its economy. Charles Sabel (1996) presents a number ofsuccessful cases of local development initiatives, almost all of which were financed fromEU coffers. He notes, however, that those successes are fragile and fraught with manydangers, many of which seem to derive from the very nature of the programming of EUfunds. Among these problems are, for example, lack of transparency and responsibility inpublic administration due to the creation of EU-funded institutions which often existparallel, as it were, to various institutions and agencies of the Irish state, sharing theobjectives of the latter without the latters democratic legitimation.

On the basis of Irish experience, it is clear that EU funding, coupled with access toknow-how from European regions which have achieved success with the model of smallbusiness development presented at the beginning of this paper, represents a greatopportunity to pursue promising models of local and regional development. It is, however,equally clear that even if Poland manages to steer clear of the problems of Greece andMezzogiorno and avoids pouring European money into the subsidization of a public sectorrife with corruption and clientelism, it still must deal with the problems that continueddependency on outside funding creates, including the threat to civil society and theprogressive delegitimation of public administration.

Acknowledgements

I would like to thank Alberto Chilosi and an anonymous reviewer for their very helpfulremarks on this paper.

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