Survival and Growth of Individual Farm Enterprises in Transition Economies: Empirical Evidence from Hungary

The new individual farmers face the necessity to decide on how much of their assets should be allocated to the individual farm, i.e. what should be the size and scale of operation. Starting from the Jovanovic's (1982) learning model we develop a theory an implication of which is that individual farms may begin at a small even suboptimal scale of production and then, if merited by subsequent performance, expand. Those farms that are successful will survive and grow, whereas those that are not successful will remain small and may ultimately be forced to exit from the industry. The samples of individual farmers analyzed throughout this paper are drawn from the 1997 Farm Household Survey in Hungary. Data on several aspects of household' s human capital, the history of farm enterprise such as age and initial (start-up) size of the individual farm, and the market and industry conditions are available. Our estimation results show that older and larger farms are more likely to survive, farm growth decreases with farm age when farm size is held constant and that the learning considerations are important. An increase of human capital can be expected to improve the effectiveness of a farm operator in allocating the farm's resources and adopting new technologies, which should translate into higher growth and survival rates. On the other hand, a farmer's opportunity for employment outside the sector also increases with his human capital, which raises the probability of switching to part-time farming or exiting the farm sector altogether.