Barriers to Entry and Growth of Private Companies in Poland, the Czech Republic, Hungary, Albania and Lithuania

Free 'Entry' and free 'Exit' are fundamental mechanisms of the competitive market economy operation. Free entry ensures that potential entrepreneurs will take advantage of profitable opportunities and enter profitable segments of the market, increasing competitive pressure on the incumbent firms, lowering output prices and improving the overall allocation of resources. Both free entry and free exit guarantee that more efficient firms and those producing in accordance with the market demand, survive and prosper while inefficient units and those whose production is not geared to the market will contract and eventually embark on exit. Barriers to entry and exit influence the development of competitive conditions in established market economies, however, for economies in transition the freedom of entry and exit has an even more significant dimension. The reason for that are particular 'initial conditions' which the economies inherited from their communist past: massive distortions of the economic structure, highly monopolistic and oligopolistic markets, and a large average firm size. With a collapse of the old regime, transformation of the old economic structure had to take place through the entry of new, market-oriented firms particularly in the undeveloped sectors of the economy and the exit of inefficient and uncompetitive enterprises especially from the over-grown industrial sector. This report presents some outputs of the research project 'The Impact of Barriers to Entry on the Speed of Transition: A Comparative Study of Countries in Different Stages of Transition' (PHARE ACE project No. P95-2047-R), coordinated by Leszek Balcerowicz and done by an international team which included: Ewa Balcerowicz (Poland), Andrzej Bratkowski, (Poland); Irena Grosfeld (France); Iraj Hashi (U.K); Jan Mladek (the Czech Republic); Gediminas Rainys (Lithuania); Jacek Rostowski (Hungary); Miklos Szanyi (Hungary); and Lindita Xhillari (Albania). The main aim of the project was to investigate nature and impact of barriers to entry in five countries at different stages of transition with various development backgrounds and traditions. The study has been based on the experience of new firms in Poland, Hungary, the Czech Republic, Lithuania and Albania - the first three having reached an advanced stage of transition and the latter two having embarked on the transition process later, thus lagging behind the front-runners. The study has focussed on the legal, fiscal and institutional factors which impede new entries and slow down the expansion of new firms in each country. The report consists of two parts. In Part I, Chapter 2 we discuss the interaction between the government's regulatory activity and the entry of new firms into the formal or informal sectors of the economy. Here we highlight the necessity of this important function of the government as well as its undesirable implications such as rent seeking and corruption. In Chapter 3 we consider a framework for the analysis of barriers to entry and growth of new firms, highlighting the main constraints to entry and growth considered by this report. Chapter 4 is devoted to the review of an actual pattern of new firms' entry in the early transition period in the five countries under consideration. Part II reports on the results of our enterprise survey; it is a detailed study of 400 firms in five transition economies. Here we first discuss (Chapter 5) the composition of the sample on which the study is based and then (Chapters 6,7,8,9 and 10) summarize main findings of the study in terms of the relative importance of different barriers facing new firms in each country. Chapter 11 discusses the main policy recommendations of this study.