Journal of Small Business Management 2001 39(1), pp.

103–109

䊏 GLOBAL PERSPECTIVE

An Analysis of Entrepreneurial
Environment and Enterprise
Development in Hungary
by Georgine Fogel

The term “entrepreneurial environ- grow. Individuals are more likely to be

ment” refers to a combination of factors that encouraged to start a business when the
play a role in the development of en- social environment values entrepreneur-
trepreneurship. Empirical studies on the en- ship, opportunities are available, and en-
trepreneurial environments of various trepreneurs have sufficient knowledge
countries show that countries that keep and skills to start and manage a business.
rules and regulations at a minimum, offer tax The encouragement of private business
and other incentives, and provide training activity has been an important element in
and counseling services to start-up entrepre- the economic transformation of Central
neurs increase the likelihood of new venture and Eastern Europe (CEE). Research
development (Dana 1987, 1990). Further- shows that small business development in
more, factors such as the availability of finan- CEE countries has been influenced to a
cial resources, being in large urban areas, great extent by macroeconomic factors
and the presence of universities for training such as inflation rates, price stability, inter-
and research are also found to be very im- est rates, credit conditions, capital inflows
portant in increasing the rate of new venture and outflows, and the availability of eco-
creations (Pennings 1982). Studies also nomic inputs (capital, labor, material, and
show that entrepreneurs face several obsta- technology). This study examines how
cles including lack of financial assistance, much progress has been made in enter-
lack of information on various aspects of prise development by one CEE country,
business, excessive taxation, and high rates of Hungary, and which elements of the busi-
inflation (Young and Welsch 1993; Fogel 1994). ness environment could be improved to
Scholars recommend a variety of policy foster entrepreneurial growth.
options for developing entrepreneurship.
These may include providing venture capi- Conceptual Framework
tal funds, tax-based incentives, and gov- The environmental conditions of en-
e r n m e n t p r o c u r e m e n t pr o gr am s ; trepreneurial activities in Hungary were ex-
protecting proprietary ideas and innova- amined using Gnyawali and Fogel’s (1994)
tion; investing in education and research; conceptual framework. This framework uses
rewarding entrepreneurship; and mini- five dimensions: (1) financial assistance;
mizing entry barriers (Goodman, Meany, (2) non-financial assistance; (3) entre-
and Pate 1992; Zapalska and Fogel 1998). preneurial and business skills; (4) socio-
There seems to be an agreement economic conditions; and (5) policies and
among researchers that the more condu- procedures for entrepreneurial activities.
cive the business environment, the more Financial Assistance to Small Busi-
likely new businesses will emerge and nesses. It is suggested that entrepreneurs

GLOBAL PERSPECTIVE 103

require financial assistance for at least one (Davidsson 1991; Vesper 1983). Unless en-
of three purposes: to diversify or spread trepreneurs are well equipped with tech-
the start-up risk, to accumulate start-up nical and business skills, they may not be
capital, and to finance growth and expan- able to overcome problems at different
sion. While the availability of financial re- stages of their firm’s development. Re-
sources can be a major predictor of the search shows that the need for training
frequency of business start-ups, many programs is greater in countries where
lenders are unwilling to invest in high-risk external assistance and preferences for
projects or tend to withhold support until small business are limited. In Sweden,
the firm has been established successfully both business-related experience and
(Pennings 1982). In most developing business education were highly correlated
countries and emerging market econo- with the entrepreneur’s ability to start and
mies, venture capital companies and alter- manage a business (Davidsson 1991).
native sources of financing are almost Training and educational services are par-
non-existent. Thus, entrepreneurs in these ticularly important in emerging market
countries are stymied—they cannot start a economies because entrepreneurs lack ba-
business without financial assistance while sic business skills (Fogel 1994). Swanson
at the same time, they cannot secure finan- and Webster (1992) found that 30 percent
cial assistance because they lack collateral of the Czech entrepreneurs surveyed re-
or prior business experience (Gnyawali quested training in the areas of preparing
and Fogel 1994; Zapalska and Fogel 1998). business plans, decision-making, negotiat-
Non-Financial Assistance to Small ing, pricing, market penetration, handling
Businesses. It is also suggested that entre- of cash-flow, organization, and managing
preneurs need support services in addi- the business.
tion to financial assistance. In particular, Socioeconomic Conditions. Entre-
entrepreneurs need assistance in conduct- preneurship prospers if society views it
ing market studies, preparing business with a favorable attitude. Societies and cul-
plans, and getting loans. Business incuba- tures that value entrepreneurship tend to
tors can play a major role in providing develop societal systems to encourage it
services to start-up entrepreneurs (Hoy et (Vesper 1983). It has been noted that
al. 1991), especially in areas where infra- among the Chinese, entrepreneurial role
structure is not well developed or where models encourage people to go into busi-
modern physical facilities are costly. Net- ness, and entrepreneurs are often sup-
works are another important source of ported by close networks of family
non-financial assistance. According to members and relatives (Kao 1993; Siu and
Aldrich (1986), entrepreneurs spend Martin 1992). Programs that develop so-
nearly half their time during the start-up cietal awareness of entrepreneurship have
phase in developing contacts and net- a positive effect on small business develop-
works with other entrepreneurs and re- ment and growth. Research also shows
lated agencies. Networks provide four that tax and other start-up incentives have
essential kinds of assistance to entrepre- a positive impact on small business estab-
neurs: (1) support and motivation; (2) ex- lishments and growth (Davidsson 1991).
amples and role models; (3) expert Policies and Procedures for Entre-
opinion and counseling; and (4) access to preneurial Activities. Entrepreneurs may
opportunities, information, and resources be discouraged from starting a business if
(Manning, Birley, and Norburn 1989). they have to adhere to an excessive
Entrepreneurial and Business Skills. number of rules and procedures. The level
The level of technical and business skills is of procedural requirements for registra-
also a major factor in successfully starting tion and licensing, taxes, and financial re-
and developing a small business porting may either facilitate or hinder

104 JOURNAL OF SMALL BUSINESS MANAGEMENT

entrepreneurial activities. Research shows years. Thirty-two percent were involved in
that most small businesses consider paper- small-scale manufacturing or production
work very time-consuming and cumber- (plastics, electrical components, timber
some (Dana 1987, 1990; Young and Welsch processing, wood working, and food pro-
1993; Fogel 1994). Countries that keep duction), with about two-thirds (68 per-
procedural requirements to a minimum cent) in service activities (real estate,
generally have a viable and dynamic en- engineering designs, computer technolo-
trepreneurial sector. gies, restaurant operations, travel, tour-
ism, retailing, consulting, brokerage, and
Research Methods professional services). Regarding size of
The research method used in this study operations, 42 percent had fewer than 10
consisted of mail surveys and telephone employees, 27 percent reported 10 to 29,
interviews of small business owners and and 31 percent employed 30 or more.
operators in Hungary. Assistance in obtain- In terms of the owners’ personal back-
ing directories and contact lists was re- ground, one third (33 percent) indicated
ceived from the regional offices of the some college or university education, and
Hungarian Chamber of Commerce, the all survey participants noted several years
Hungarian National Association of Small of work experience in the field of the busi-
and Medium-Size Enterprises (SMEs), the ness. Although only a few (18 percent)
Ministry of Commerce and Industry in reported formal business training or prior
Hungary, and the Hungarian Trade Com- business experience, close to half (46 per-
mercial Office in New York. The sample cent) had technical training.
included 280 small businesses having op- Regarding sources of initial capital, 25
erated for at least one year and having an percent indicated reliance on loans or
initial capital investment of $1 million company-assisted funds. The majority (57
Hungarian Forint. Data were collected on- percent) relied on personal savings. In
site in 1999. The questionnaire elicited fact, many participants maintained full-
information about the size and nature of time employment to be able to support
operations, the owner’s educational back- their business. Friends and family mem-
ground and previous business experi- bers were mentioned by 18 percent as the
ence, the owner’s business objectives, major source of financial assistance. Their
financial assistance received and desired, primary reasons for starting the business
non-financial assistance received and de- included market opportunity (33 per-
sired, business training needs, percep- cent), need for additional family income
tions of socio-economic conditions of (30 percent), unemployment/company
entrepreneurship, public attitude, and so- layoff (20 percent), and independence (17
cietal promotion and recognition of en- percent).
trepreneurial success. The questionnaire Information about financial and non-
also explored the owner’s satisfaction with financial assistance and entrepreneurial
conditions in the entrepreneurial, includ- business skills is presented in Table 1. In
ing taxation, incentives, credit financing, all three categories, there was a consider-
laws, regulations, licensing, paperwork re- able difference between what Hungarian
quirements, and preferences given to small businesses received and what they
small business. desired. In the area of financial assistance,
the three most desirable forms of assis-
Findings tance were tax incentives, low-cost, long-
The majority (63 percent) of the small term loans, and venture capital/project
businesses surveyed had been in business financing. Close to half the businesses sur-
for at least three years. One in five (22 veyed (48 percent) reported a need for
percent) had been in business for five more tax incentives. Similarly, many (42

GLOBAL PERSPECTIVE 105

 Table 1
Small Business Assistance and Entrepreneurial Business
Skill Development in Hungary (in percent)
Types of Assistance Received Desired

Financial assistance
Borrowing from friends and family 34
Short-term credit (bank loan) 18 10
Venture capital/project financing 16 18
Tax allowance and credits 6 48
Low-cost long-term loan 38
Non-financial assistance
Friends and family 35
Business networks (economic development agencies,
chambers of commerce, trade representatives, trade fairs,
industry shows 28 44
Small business management training, workshops,
and seminars 19 40
Technical assistance, management information systems 8 30
Incubator centers/industrial parks 10
Entrepreneurship and business training
Management training programs 25 52
Marketing studies and sample business plans 15 46
Customer data analysis and information system development 8 40
Advertising skill workshops 5 36
Consulting and case studies 3 24

percent) desired low-cost, long-term percent of the participants were interested

loans, and almost one fourth (22 percent) in utilizing the services of incubator cen-
expressed a need for venture capital and ters and industrial parks. Compared to the
project financing. In contrast to what these support needed, however, the majority
Hungarian entrepreneurs wanted, the pat- (35 percent) ended up relying on friends
tern of financial assistance they actually and family for support for the business.
received reflected an overwhelming reli- Personal networking and assistance by
ance on personal sources. A third (34 per- economic development agencies, includ-
c e n t ) o f t h e b u sin esse s b o rr o we d ing the Chamber of Commerce, local trade
primarily from friends and family, and organizations, fairs and industry shows,
more than one in four (28 percent) relied were noted as the second most important
on short-term credit financing. non-financial support received. Participa-
The most desirable kinds of non-finan- tion in management training seminars and
cial assistance were business network de- programs was reported by one fourth (19
velopment (44 percent), small business percent) of the businesses surveyed.
management training (40 percent), and In the area of “entrepreneurial and
technical assistance, mostly for manage- business skills,” the data indicated the
ment information system development same gap between the availability and
(30 percent). The study also found that 10 need for business skills training. About half

106 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Table 2
Perceptions of Socio-Economic Conditions for
Entrepreneurship in Hungary (percentages and means)
a
Socio-Economic Conditions Must be Improved Fair Average Good Mean
(1) (2) (3) (4)

Public attitude toward entrepreneurship 22 percent 22 46 10 2.44

Promotion of entrepreneurship success 35 32 28 5 2.03
Training of entrepreneurial skills 42 18 25 15 2.13
Recognition of entrepreneurial success 38 22 32 8 2.10
Economic growth and market opportunity 15 22 35 28 2.76
for entrepreneurs

a Rating Scale: 1 = Must be Improved; 2 = Fair; 3 = Average; and 4 = Good.

Table 3
Policies and Procedures for Entrepreneurial Activities
in Hungary (percentages and means)
a
Small Business Conditions Must be Improved Fair Average Good Mean
(Policies and Procedures) (1) (2) (3) (4)

Licensing and registration requirements 20 55 25 3.05

Small business networks 10 percent 17 35 38 3.01
Laws and regulations 12 16 72 2.60
Filing requirements (paperwork) 15 22 63 2.48
Preferential treatment 38 32 30 1.92
Taxation (incentives and exemptions) 42 28 30 1.88
Credit terms 46 32 22 1.76

a Rating Scale: 1 = Must be Improved; 2 = Fair; 3 = Average; and 4 = Good.

the respondents (52 percent) desired means of five factors with ratings on a scale
more management training programs in- of 1–4, where 1 = must be improved,
cluding marketing studies, sample busi- 2 = fair, 3 = average, and 4 = good. The
ness plans, customer data analysis, highest rating was reported on “economic
information system development, and ad- growth and market opportunities for en-
vertising. It was also found that one in five trepreneurs” (M = 2.76). “Public attitude”
of the businesses desired consulting serv- in Hungary was also rated fairly high
ices or case study opportunities. (M = 2.44). The lowest rating (M = 2.03)
Data on socio-economic conditions of was observed on “promotion of entre-
entrepreneurship are presented in Table 2. preneurial success,” with 35 percent reporting
The analysis consisted of calculations of it as “must be improved.” “Entrepreneurial

GLOBAL PERSPECTIVE 107

training” and “recognition of entrepre- CEE countries. Hungary has made much
neurial success” were rated mostly as “fair,” progress in entrepreneurial development.
with the majority (42 and 38 percent) rating It was found that the five environmental
them as “must be improved.” f a c t o r s a r e v e r y i m po r ta n t in e n-
Hungarian small businesses were also trepreneurial development. Capital en-
asked to rate their satisfaction with seven ables small enterprises to innovate and use
items identified as “policies and proce- advanced technology. It is also the primary
dures for entrepreneurial activities in Hun- means of growth. With the accession of
gary” on a 1–4 scale where 1 = must be Hungary to the European Union, Hungar-
improved, 2 = fair, 3 = average, and ian small businesses can benefit substan-
4 = good. Table 3 presents data on the tially from developing export capabilities.
perception of the small businesses sur- However, in order to develop competitive-
veyed on policies and procedures for en- ness in export categories, Hungarian en-
trepreneurial activities in Hungary. trepreneurs must innovate, invest in
Satisfaction levels were relatively low technology, and use market-based man-
on three items—credit terms (1.76), taxa- agement and marketing practices. Accord-
tion (1.88), and preferences given to small in g t o th i s s tu d y, e nt r e p r eneurial
businesses (1.92). Laws and regulations, development in Hungary has been hin-
licensing requirements, and the availabil- dered by lack of preferential treatment,
ity of small business networks were rated high taxation, and the unavailability of
as average (2.60, 3.05, and 3.01, respec- low-cost, long-term financing.
tively). The entrepreneurs complained To improve the entrepreneurial proc-
about the banking community’s attitude ess in Hungary, it is recommended that:
toward small businesses, especially the (1) small businesses be given opportuni-
lack of financial assistance given to small ties for low-cost borrowing and venture
business in Hungary. Others commented capital funds; (2) technical support and
on high interest rates and the lack of long- access to technology should be made a
term, low-cost loans. priority for small business development;
Overall, it was found that although en- (3) more entrepreneurial and business
trepreneurial growth has increased sub- training programs should be made avail-
stantially in Hungary, entrepreneurs are able; (4) the government should offer tax
faced with many difficulties. The results incentives and other special programs
indicate that small business development for small business and should reduce
in Hungary is hindered mostly by three reporting requirements; and (5) finan-
primary factors: (1) lack of preferences cial and regulatory institutions in the
given to small business; (2) high taxation; country should create a more enterprise-
and (3) the unavailability of low-cost, long- friendly culture that supports entrepre-
term financing. Continued growth in en- neurs not only financially but also
trepreneurial activities in the country will through networks, training, and busi-
depend largely on whether the small busi- ness information systems.
ness sector obtains preferential treatment Although this study is limited to one
in financing, business skill development, country, the framework used in this analy-
and government taxation. Entrepreneurial sis may be used for examining the en-
growth in Hungary could be further accel- trepreneurial environment in other
erated by addressing these three major countries.
concerns of the small business community.
Georgine Fogel
Conclusion Salem International
Entrepreneurial development and University
growth will continue to be a priority in Salem, West Virginia

108 JOURNAL OF SMALL BUSINESS MANAGEMENT

References Hoy, F., J. Wisnieski, E. Gatewood, L. Bry-
Aldrich, H. (1986). “Social Behavior and ant, and V. Patel (1991). “An Incubator
Entrepreneurial Networks,” in Fron- within an Incubator: A Case Study of
tiers of Entrepreneurship Research. Ed. Biotechnology Venturing,” in Frontiers
R. Ronstadt, J.A. Hornaday, R. Peterson, of Entrepreneurship Research. Ed. N.C.
and K.H. Vesper. Wellesley, Mass.: Bab- Churchill, W.D. Bygrave, J.G. Covin, L.L.
son College, 239–240. Sexton, D.P. Slevin, K.H. Vesper, and
Dana, L.P. (1987). “Entrepreneurship and W.E. Wetzel. Wellesley, Mass.: Babson
Venture Creation: An International College, 391–405.
Comparison of Five Commonwealth Kao, J. (1993). “The Worldwide Web of
Nations,” in Frontiers of Entrepreneur- Chinese Business,” Harvard Business
ship Research. Ed. N.C. Churchill, J.A. Review (March- April), 24–36.
Hornaday, B.A. Kirchhoff, O.J. Krasner, Manning, K., S. Birley, and D. Norburn
and K.H. Vesper. Wellesley, Mass.: Bab- (1989). “Developing New Ventures
son College, 573–583. Strategy,” Entrepreneurship Theory
——— (1990). “Saint Martin/Sint Maarten: and Practice 14(1), 69–76.
A Case Study of the Effects of Culture on Pennings, J.M. (1982). “Organizational
Economic Development,” Journal of Birth Frequencies: An Empirical Investi-
Small Business Management 28(4), gation,” Administrative Science Quar-
91–98. terly 27, 120–144.
Davidsson, P. (1991). “Continued En- Siu, W., and R.G. Martin (1992). “Success-
trepreneurship: Ability, Need, and Op- ful Entrepreneurship in Hong Kong,”
portunity as Determinants of Small Long Range Planning 25(6), 87–93.
Firm Growth,” Journal of Business Ven- Swanson, D., and L. Webster (1992). Pri-
turing 6, 405–429. vate Sector Manufacturing in the Czech
Fogel, G. (1994). “Perceptions of Small and Slovak Public: A Survey of Firms.
Business Owners: A Study of the Devel- Washington, D.C.: The World Bank.
opment of Entrepreneurship in Hun- Vesper, K.H. (1983). Entrepreneurship
gary,” Midwest Review of International and National Policy. Chicago, Ill.: Wal-
Business Research. Chicago, Ill.: Acad- ter E. Heller International Corporation
emy of International Business, 89–99. Institute for Small Business.
Gnyawali, D.R., and D.S. Fogel (1994). Young, E.C., and H.P. Welsch (1993). “Ma-
“Environments for Entrepreneurship jor Elements in Entrepreneurial Devel-
Development: Key Dimensions and Re- opment in Central Mexico,” Journal of
search Implications,” Entrepreneurship Small Business Management October,
Theory and Practice (Summer), 43–62. 80–85.
Goodman, J.P., J.W. Meany, and L.E. Pate Zapalska, A.M., and G. Fogel (1998).
(1992). “The Government as Entrepre- “Characteristics of Polish and Hungar-
neur: Industrial Development and the ian Entrepreneurship,” The Journal of
Creation of New Ventures,” in The State Private Enterprise 8(2), 132–144.
of the Art on Entrepreneurship. Ed. D.
L. Sexton and J. D. Kasarda. Boston,
Mass.: PWS-Kent.

GLOBAL PERSPECTIVE 109