Business Insolvencies in Latvia

Performance and growth of firms have been topics of increasing interest among entrepreneurship researchers for the past two decades (e.g. Davidsson, 2004). Only recently, however, have entrepreneurship scholars started to pay attention to factors determining the failure of firms, which comes as a surprise considering the fact that a high proportion of both new and already established companies choose or are forced to exit business activity every year (e.g. Shepherd, 2004; Schror, 2005). Moreover, the long term survival of new ventures has been acknowledged to be one of the biggest challenges for entrepreneurs (e.g. Simon, 1996). In this light, it is thus reasonable to believe that much can be learned from firms that exit businesses in order to increase the chance of survival and growth of other companies (Pasanen, 2005). Although the topic has recently gained interest in entrepreneurship research, still no comprehensive explanation of what constitutes business failure exists (e.g. Pasanen, 2005; Ciavarella et al. 2004). The complexity of the failure process, involving various internal and external factors which are often difficult to identify and understand by the entrepreneurs themselves as well as a lack of appropriate data because ex-entrepreneurs are often reluctant to discuss ‘their’ failure are among the main challenges in this regard.In the small business and management literature, business failure is defined in a number of ways, including closure, exit, insolvency, bankruptcy and discontinuance (e.g. Storey, 1994). Pointing to the overlap between these terms as well as different interpretations in various countries, the literature suggests distinguishing between companies which do not continue their business activities as a result of failure (for example, bankruptcy or insolvency) and firms which exit entrepreneurship deliberately (for example, in cases where the business is sold) (Pasanen, 2005). This explorative study focuses on firms that exit the market as a result of insolvency, that is they are unable to pay their debts3. The rest of the paper is structured as follows: Chapter 2 introduces the topic by reviewing reasons for business failure. In Chapter 3, the methodology and datasets are briefly introduced. Section 4 explores business insolvencies in Latvia drawing on existing official statistics. More specifically, by providing an overview of the legal framework for business insolvencies in Latvia, topics such as liabilities of smallness and newness and regional differences are covered there. The results from in-depth (2007) and phone interviews (2009) with insolvency administrators in Latvia are further presented and discussed in Section 5. The report concludes with conclusions and implications.