Small enterprise development is crucial to reconstruction and development in war-affected regions of Croatia. Many support programmes are now coming on stream. Is it possible to rely on unaided free market mechanisms to regenerate economic development in such regions, or is a more interventionist industrial policy required? A recent survey by a joint UK-Croatia research team shows that a more comprehensive and interventionist policy approach is required if these regions are speedily to be merged anew into Croatia's economic and business life.

The business sector in war-affected regions of Croatia was much undermined by four years of conflict (1991-1995). Many entrepreneurs left the region. The operating capacity of the large enterprise sector was reduced to an all-time low, and still shows little sign of recovery. Even so, a significant number of new small businesses were established during the conflict and need to be encouraged. It is widely agreed that small and medium enterprises (SMEs) can help galvanise post-conflict recovery. Strong SME development boosts local supplies of consumer and construction goods, services for local large enterprises, job creation and reintegration of communities. The study analysed the business environment in war-affected regions over one year. In the process, 120 small firms were interviewed. Policy-relevant findings included the following:

• Over 50 percent of small enterprises surveyed suffered ill-effects in the conflict, while 25 percent lost all business.
• A significant 19 percent of small enterprises started up during the conflict, reacted dynamically to changing economic circumstances and are doing markedly well.
• Most entrepreneurs (52 percent) are former state enterprise employees who left to increase their earnings in the private sector. Unemployment seems not to have been a major 'push' factor in the founding of new businesses.
• The large enterprise sector has been severely undermined and many firms are unlikely to survive.
• War-affected regions are not receiving the attention of conventional business sector or banking support institutions: reconstruction will be delayed unless policy interventions plug this gap.
• The main impediments to SMEs functioning in the marketplace are high risk factors, lack of institutional endowment and a legacy of under-development.
• Lack of a significant small-enterprise population blocks the development of efficient local supply chains and this is discouraging larger enterprises from relocating to the regions.

The authors challenge the view that free market-led strategies for SME development will be sufficient to provide an environment in which entrepreneurship can flourish. Related policy lessons or conclusions are that:

• policy interventions should be clearly differentiated by region, according to their prior history of development
• there is a strong case for incentives for entrepreneurs to relocate or return to conflict-affected areas, and to enable would-be entrepreneurs who hesitate to 'take the plunge' because they lack finance to go ahead with their business idea
• re-training of populations remaining in or forcibly relocated to the regions must be a key item in any recovery strategy
• opportunities for creating small enterprise spin-offs from state enterprises should be explored. Out-placement support should be provided to enable prospective entrepreneurs to leave under the best possible circumstances
• networks of business support agencies are vital, and should be supported by local and regional authorities
• reconstruction contracts should be used to facilitate demand-led support to small enterprises
• risks involved in entrepreneurship should be reduced by government intervention: for instance, credit guarantee funds could be used to lever out investment finance
• creative use of abandoned, destroyed and under-utilised business space for entrepreneurial projects, and not for property speculation, should be a major aspect of local economic policy.

Source(s):
SME Development Policy in War Affected Regions in Croatia, Conference Paper, Malekovic, S., Polic, M et al. (1997)

id21 Research Highlight: 1998-Feb-13

Further Information:
Milford Bateman
Local Economic Development in Transition Economies Unit
University of Wolverhampton
Wolverhampton
WV1 1SB
UK

Tel: +44 (0) 1902 322324
Fax: +44 (0) 1902 322739
Contact the contributor: le1914@wlv.ac.uk

Local Economic Development in Transition Economies Unit, University of Wolverhampton