Academic journal article Entrepreneurship: Theory and Practice

Venture Capital in Transition Economies: The Case of Hungary

Academic journal article Entrepreneurship: Theory and Practice

Venture Capital in Transition Economies: The Case of Hungary

Article excerpt

The countries of Central and Eastern Europe (CEE) are now deep into a long-term process of transition to a market economy. The creation of market-oriented enterprises is a crucial element of this transition and has been taking place both through the establishment of new businesses (Lane, 1995; Roman, 1991; Gibb, 1993) and the privatization of state-owned firms either through sales to other companies or to incumbent management and employees (Karsai & Wright, 1994). While these developments have already led to a significant private sector throughout much of CEE,(1) a number of major problems need to be addressed before transition to a fully functioning market economy is achieved (Grosfeld & Hare, 1991). The development of entrepreneurship was severely constrained under the regimes in existence prior to 1989 and although there has been extensive creation of new businesses since then, considerable progress still needs to be made in the development of entrepreneurial skills (Filatotchev, Hoskisson, Buck, & Wright, 1996). Similarly, although much of the state-owned enterprise sector has been transferred to the private sector, major problems remain in converting them into commercially viable enterprises, not least because of problems with the age and vintage of productive capacity and the level of managers' commercial skills.

Developing a successful private sector also faces two further major problems. The first concerns access to finance. Roman (1991), in a survey of entrepreneurs in 214 Hungarian SMEs, found that access to finance was one of the major problems they faced, with this being a particular constraint on their ability to increase the level of technology in their enterprises. State-owned enterprises that have been acquired by incumbent management and employees, which account for a significant proportion of privatizations throughout the region, also face financial problems. These problems arise whether the enterprises have been privatised through voucher schemes (Boycko, Shleifer, & Vishny, 1993), as in Russia, or through the purchase in a manner similar to Western European and US experience, as in Hungary (Filatotchev, Grosfeld, Karsai, Wright, & Buck, 1996). Enterprises privatized through vouchers are effectively given away and do not directly involve the introduction of new finance. Enterprises sold as buy-outs, as in Hungary, typically involve the taking on of debt, but problems in the banking system severely constrain access to equity finance for innovation and growth (Estrin, Hare, & Suranyi, 1992). Hence, here also, privatization by itself may not involve new finance.

The second problem concerns corporate governance. Newly created enterprises with entrepreneurs inexperienced in a commercial environment and with little if any commitments to servicing outside finance may possess shortcomings in their corporate governance mechanisms. Similarly, the simple transfer of state-owned enterprises to the private sector does not necessarily enhance governance, especially if transfer is to incumbent management and employees, there is no commitment to service outside finance, and there are few if any outsiders represented on enterprise boards (Boycko, Shleifer, & Vishny, 1993; Frydman et al., 1993; Filatotchev, Hoskisson, Buck, & Wright, 1996; Filatotchev, Grosfeld, Karsai, Wright, & Buck, 1996).

These two problems are closely inter-linked since access to finance may be necessary for effective governance and effective governance may be a condition for access to finance. These problems may be addressed in CEE with the introduction of closely involved investors such as venture capitalists who can help to solve the dual problem of an inadequate system of corporate governance and a lack of long-term finance for restructuring and investment. They offer a form and style of financing that has not been provided elsewhere in the spectrum of financial services available in CEE so far, with respect to its combination of a certain length of commitment with greater involvement and a degree of influence over the companies in which equity stakes are taken (Beecroft, 1994). …

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