The challenges of start-up entrepreneurship in post-transition period: evidence of the Republic of Serbia

According to Carland and Carland (2004), in many countries small and startup companies contributed to employment growth. Konings (1995), Hughes (1993), and Robson and Gallagher (1994) found that small firms became the key to employment growth in the Britain during the 1980s. Baldwin and Picot (1995) found the same pattern in Canada and, Bais, Bangma and Verhoeven (1997) reported on the importance of small firms in the Netherlands in the early 1990s

This was apparently not the case in Germany (Wagner, 1995), but aside from its experience, small firms have created most of the new jobs in Europe and North America (Audretsch & Thurik, 2000). 

Entrepreneurship has long been viewed as an engine that drives innovation and promotes economic development (Reynolds, 1997; Schumpeter, 1934) as also social development (Audretsch, 2016). 

The fact that SMEs would emerge as becoming more important in a knowledge based economy seems to be contrary to many of the conventional theories of innovation. Entrepreneurship can be defined from the outcomes that different types of entrepreneurship can have on the economy (Naude, 2008). 

These definitions are based on the realisation that not all forms of entrepreneurship are good for economic development. Entrepreneurship is a term that can generally be defined as a process of starting a new business or venture in order to generate revenue (Andersson and Wictor, 2003; Meyer et al. 2016). 

Acs (1992) and Aronson (1991) argue that entrepreneurship research has focused broadly on the development of smaller firms and more narrowly on the founding and success of firms that are introducing new products to the marketplace (Schumpeter, 1934). 

A basic premise of much international management research has been that firms are embedded in country-specific institutional arrangements (Busenitz et al. 2000). According to this statement and support by other research (Aronson, 1991; Rondinelli & Kasarda, 1992), certain types of start-ups may be more successful in one country than in another. In other words, some countries have an institutional environment that supports the development of entrepreneurship. In such cases, small companies effectively use the funds received from the government agencies. 

Even more, according to Busenitz et al. (2000) differences in national institutions may also bring about different levels of entrepreneurial activity across countries. The regulatory dimension of the institutional profile consists of laws, regulations, and government policies that provide support for new businesses, reduce the risks for individuals starting a new company, and facilitate entrepreneurs' efforts to acquire resources (Busenitz et al. 2000). 

What is the role of entrepreneurship in economic development and how they are connected? The theoretical framework linking entrepreneurship and economic growth is provided by the new theories of industry evolution (Jovanovic, 2001; Lambson, 1991; Hopenhayn, 1992; Audretsch 1995; Klepper, 1996; Ericson and Pakes, 1995). 

Entrepreneurship is a “catalyst” for economic development through job creation which helps alleviate poverty and generates income in developing countries (Adenutsi, 2009; Grubisic et al. 2011). While traditional theories suggest that entrepreneurship will retard economic growth, these new theories propose exactly the opposite - that entrepreneurship will stimulate and generate growth. According to Naude (2008), over the past fifty years or so the world has experienced a wide diversity of development experiences, from successful economic structural transformations, mixed-success transformations, and rapid innovation episodes—sometimes accompanied by high growth, but also growth stagnation, collapse and persistent conflict. Economic development theory can still be argued to lack a ‘general theory’ of entrepreneurship, one that could encompass a variety of development outcomes, progress has been made in extending the notion and understanding of entrepreneurship in economic development. In developing countries the concern is with (entrepreneurship) starting and accelerating growth, and in providing impetus to the structural transformation of economies; in the advanced economies the concern is largely with obtaining new sources of productivity growth (Naude, 2008). In the post-transition period, a large number of state owned companies, ceased to exist. This influenced on increasing in unemployment

Many workers which worked for decades in a variety of state-owned enterprises lost their jobs and faced the labour market, which is still in its developing. A significant number of these persons worked for many years of in one system and they are not able to cope in the new circumstances. The reasons are the inability to re-training, lack of knowledge and skills for current jobs. Another negative effect is reflected in the fact that in the same period of time, new, young generation did not have the opportunity to acquire any business experience. 

During the 1990s, Republic of Serbia and other former constituent republics successive start the process of ownership transformation and transition of the economy. Bearing in mind this process in the last fifteen years, one of the main goals of strategy of economic development is to promotion and encouraging entrepreneurship. Entrepreneurship is recognized as the best way to increase employment as also to increase the social welfare. During this period of time, a number of entrepreneurial start-up companies are established. Some of them survived, but also significant number of experienced business failure. 

The subject of this paper is primarily focused on the success of all 44 credited start-up companies, for a period of two business years (2014 and 2015). The essence of the analysis are key business parameters and trends during the first two full business year that follows the year in which the loan was granted (in our case 2013). 

The purpose of our analysis is to determine the success rate of business firms from sample and conclude what is the real effect of start-up lending through state development funds into the post period in the Republic of Serbia. Specific conditions for entrepreneurial decision-making In this part we will discuss about specific conditions necessary for entrepreneurs to makes the decision to initiate and develop business. To understand this, it is necessary to analyze the following parameters. 

The motive of every entrepreneur to start their own business comes to the desire for higher earnings. In addition to earnings, there are other motives, such as personal and professional affirmation. In many cases in Serbia (and similar transition countries) entrepreneurs decide to start business in the emergency due to the fact that they have no other possibility of profit. If an entrepreneur "willingly" decide to start a certain activity, his approach to planning and organization of work will be significantly more comprehensive than those entrepreneurs who start a business from other motives (unwillingly or out of necessity). 

A comprehensive approach is rational consideration of resources, capacities and capabilities of the entrepreneur himself to the entrepreneurial idea. A significant number of entrepreneurs in the Republic of Serbia started business out of necessity. Moreover, increased unemployment in the post-transition period influence on increasing of start-ups. The main motive of majority of entrepreneurs from this group, is connected with the solely existential nature. A feasible strategy is necessary for growth and development when entrepreneurs start their own business. This strategy implies that the entrepreneurs have a concrete and achievable plan on of developing business, organizing a business process and available resources. 

The most important segment of every entrepreneurial strategy is the realization of the rate growth of the business. In Serbia, the largest number of entrepreneurs experiencing the collapse of their work in the first two years of existence (for example: the desire for a rapid increase in market share and profits, which is not accompanied by adequate resources). Sources of funding for entrepreneurial activities are the most important parameter of successful business. 

It is well known that there are two sources of financing of the business: own and borrowed funds. The practice has shown that entrepreneurs beginners mostly make mistakes in the budgeting of initial funds to start the business. Unforeseen costs and additional investments are the most common reasons for lack of funds in the early stages of the transaction. Initial financial resources of entrepreneurs in Serbia could be provided on several ways: sale of assets, savings, retirement, etc

For the borrowed funds are available three types of financing: Development Funds (Fund for Development, credit lines through state institutions), commercial bank loans, and equipment financing by leasing companies. From these credit sources of financing start-up the most accessible resources are development funds. Commercial banks rarely support this type of lending. In the Republic of Serbia, commercial banks do not directly support start-up, except for additional security. It is usually contracted guarantee in combination with additional collateral (mortgages, special purpose deposit and so on.). The explanation for this attitude of banks towards the start-up is in the reason that commercial banks lending of start-up considered highly risky

Leasing companies have a slightly "softer" approach to support start-up entrepreneurship. Most often they financed equipment, which also use as security for the leasing of the loan. This collateral is more liquid. If entrepreneurs have an adequate business plan, they can apply for long term loans that are granted through the Development Fund of the Republic of Serbia. These loans have low interest rates, imply a grace period of one yea and the mortgage is collateral. The grace period given to the entrepreneur is actually a period of stabilization of start up businesses. 

To the maturity of first credit annuity an entrepreneur can stabilize their cash flow. Government incentives are recognized as the necessary to develop entrepreneurship and their sustainable growth. One of the incentives conducted by the Government of the Republic of Serbia was subsidizing loans to commercial banks for current assets and investments. Under this program in the period 2010-2015, commercial banks granted loans to entrepreneurs at lower interest rates (3.5-5%), with no indexation of loans in foreign currency. The difference between the market interest rate and offer interest rate is paid by the Ministry of Finance. Companies (lenders) received less expensive loans and banks invested assets with the basis of market conditions. Unfortunately, this type of lending was not available to start up companies. 

The analysis of support of development fund of the republic of Serbia to start-up companies The Development Fund of the Republic of Serbia is a state-owned institution established as a legal person engaged in financial activities which business is regulated by the Law on the Development Fund of the Republic of Serbia of 2010 (Official Gazette of RS, No 36/2009 and 88/2010). 

The Activity of the Fund is supervised directly by the Government, which adopts the Fund’s work, program and annual report. The goals of The Fund are mainly achieved by providing subsidized financing on most favourable terms for programmes related to economic, regional and SME development, increasing competitiveness and related activities. The credits disbursed may be provided by another institution to the Fund on a commission basis or from the Fund’s own resources (Jovanovic et al, 2012). For the purposes of our analysis, we used data from The Development Fund of the Republic of Serbia ( in the period 08.05.2013-22.07.2013. Data on the legal status of borrowers we retrieved from The Serbian Business Registers Agency (SBRA), data on balance sheet indicators from also The Serbian Business Registers Agency and informations about blockades of company accounts from the National Bank of Serbia. 

The Fund was approved in four sessions start-up loans for a total of 44 start-up companies. The total amount of approved loans is RSD 95,341,000.00. From 44 approved requests, the 26 used companies and 18 used entrepreneurial stores. Regarding the intentions of approved start up loans, 34 companies raised a loan for the purchase of equipment and 10 used loans for the purchase, construction, renovation or reconstruction of fixed assets (Table 1). According to the approved loan amount, in the structure of the sample we have: four loans amounts to 1,000,000.00 RSD, twenty-nine loans amount from 1 to 5,000,000.00 RSD and eleventh amount from 5 to 10,000,000.00 RSD. As regards collateral for the loan, from 44 loans 38 is provided as "solid" collateraled, i.e. mortgage, while 6 loans are secured with guaranty. Under the terms of the approval of the Development Fund, the companies that granted a start-up loan were obliged to employ 154 new workers. All loans were approved in 2013 (the seventh month), so its assessment that the loans have been realised at the end of 2013 (after the establishment of mortgages and other guaranties). 

From total approved loans of 95,341,000.00 RSD, the entrepreneurial shops relating 21.605,700,00 RSD while companies 73,735,340.00 RSD. Our analysis observed that a large number of companies account got into blockade in a relatively short period of time. From forty-four companies, only eight companies have never been blocked, while thirty-six have been in larger or smaller interruptions. On 11.14.2016. the total amount of the blocked companies amounted to 14,737,000.00 RSD (according to NBS, Also, thirty-one companies either been blocked or the account is inactive due to liquidation or deletion from the register. Only thirteen companies from sample were not blocked. According to SBRA (2016), only 18% of firms in sample were not blocked. Three years after taking loans in 2013, the credit ratings of companies is relatively weak. According to same data and our analysis, 70.45% of firms are with blocked account or their account exists only formally. These companies in the sample does not perform payment transactions or a business activity, only three years from the approval and implementation of start-up loans. 


We can conclude by the preliminary analysis that in the 44 approved start-up loans in 2013. more than half of companies got into liquidity problems, which manifest with the poor balance indicators, blockades of their accounts. All of these lead to termination of the status of these companies. 

Furthermore, the companies will not meet the objective set up by granting credit, which are: development of certain economic areas, increasing employment, contribution to GDP, increasing fiscal revenue, etc. Analyzed start-up companies have become the cause of a significant percentage of illiquidity in the broader system of payment. According to the current amount of blockages and balance indicators point that more than half of the approved start-up loans will not be returned. 

These companies will become permanently irrecoverable debtors for their suppliers as also to the tax authorities, employees, etc. Financing start up a business should be transferred from development funds to development banks, which would significantly stricter criteria and more detailed analyzes, granted start up credit requirements

Also, in our research we found that the instruments and measures of regional development by the Development fund were mostly (65.31%) allocated to the beneficiaries in the most developed units of local self-government in which the level of development was more than 80% of national average, while only 23.35% were allocated to the users in local self-government units in which the level of development was below it. According to Vukovic (2013) and Jovanovic et al (2012), institutional incentives of regional development in Serbia have not been allocated in compliance with the set priorities of even regional development in Serbia and that thus they cannot contribute to the harmonization of regional development in Serbia.