Barriers to Entrepreneurship and SMEs Development between UK and Croatia

Notwithstanding the little attention given to the Entrepreneurs and the small and medium-sized enterprises (SMEs). The two remain the backbone of most economies globally; including the United Kingdom (UK) and Croatia economies. Nevertheless, governments (Croatia included) have continually failed to create favourable environments for the advancement of entrepreneurial activities and SMEs undertakings. Most governments continue to have stiff tax systems, frustrating labour laws, inefficient administrations, and low levels of education among other things. These conditions have continued to impact negatively on the growth/advancement of SMEs and entrepreneurship activities within these economies. In some instances, they have been the barriers to entry for SMEs and entrepreneurial advancements. This study investigates these barriers with a focus in Croatia and the UK.

Findings reveal that there are fewer entrepreneurial activities in Croatia than in the UK. Several reasons are put forward to explain this condition. For instance, the UK has a healthier business environment than Croatia. Secondly, the UK has a better education system, and business owners have solid economic knowledge as opposed to Croatia. Thirdly, regulation and laws are less complicated and more business oriented in the UK. In Croatia, there is too much bureaucracy. Fourthly, inefficient law enforcement on entrepreneurs that breach the law. Also, laws are changed too often and are much more complicated and inapplicable in most cases. In contrast, the UK has relatively clear laws with proper enforcement mechanisms. Fifthly, several entrepreneurs in Croatia have an unrealistic expectation about cash-flow, profit, and overall business success. Moreover, there is low capital base, which can often not support the required time for new businesses establishment. Improper business planning in Croatia is also another cause for the failure of TEA.

Sixthly, in Croatia, many entrepreneurs rely on connections to local government bodies and direct investments from state-owned companies, which are prone to failure. Last but not least, entrepreneurs in Croatia start a business without a sustainable business model and plan the development of their business in the process (García-Ramos et al., 2017, 730). On the other hand, the UK entrepreneurs have better knowledge but most important more experience from the developed market environment. Accordingly, fewer TEA failures in the UK than Croatia. The study finally makes recommendations including serious structural changes and overall political orientation towards liberal, less regulated market system. Lastly, through its recommendations, the study encourages Croatia to learn from best practices around it including the UK.

1.0 CHAPTER ONE: INTRODUCTION

This section introduces the discourse: it contextualizes the study, spells out the statement of the problem, objectives of the study, research questions, and justification to this study, the scope or limitation of the study, the definition of terms and finally the chapter breakdown.

1.1 Background of the Study

Despite the little or no attention given to the Entrepreneurs and the small and medium-sized enterprises (SMEs), the two remain the pillar of most economies globally; including the United Kingdom (UK) and Croatia economies. Notwithstanding, governments (Croatia included) have continually failed to create favourable environments for the advancement of entrepreneurial activities and SMEs undertakings (OECD Report, 1999). Most governments continue to have stiff tax systems, frustrating labour laws, inefficient administrations, and low levels of education among other things. These conditions have continued to impact negatively on the growth/advancement of SMEs and entrepreneurship activities within these economies. In some instances, they have been the barriers to entry for SMEs and entrepreneurial advancements.

Moreover, SMEs and entrepreneurship activities are fundamental to any functioning market economy. They are the drivers of political, social and economic re-engineering in these states. Accordingly, having a flexible tax system, efficient administrations, good labor laws, good education among other dynamics creates a conducive environment for the realization of benefits that can be derived thereof (Ateljevic et al., 2004, 245). While globalization has seen many economic reforms in most governments, such changes have not extensively included the formulation of new SMEs along appreciating new entrepreneurial skills, hence the difficulty that persists in most economies (scholars, policymakers, and economic specialists have a consensus on this). The economic barriers that existed before globalization still exist in most countries, hence hindering entrepreneurship development in those countries. The situation above occurs despite the relatively stable political and social conditions in those countries currently. Studies have shown that entrepreneurial activities directly relate to the economic growth of a given state, that is; states with higher entrepreneurial businesses have a higher Gross Domestic Product (GDP) per capita (Reynolds et al., 2004, 157). Figure 1 below illustrates the entry barriers to SMEs and entrepreneurial activities.

Under the human resources category, there is labor legislation, frustrating administrative procedures in hiring workers, qualification structure, and lack of specialization to improve entrepreneurial skills. Under the fiscal burdens, there is unadjusted state levies, penalty provisions, and unfavorable tax laws. Lastly, under the subjective circumstances, there is fear of failure, funding problems, education, tensed innovative environment and internal support.

Furthermore, poverty remains a significant setback in most states (especially in the developing economies). Providentially, entrepreneurship and SMEs have been seen to be the panacea to this problem. Gilder explains the potential benefits from entrepreneurial activities (Gilder, 2012, 489). Entrepreneurship and SMEs are considered the primary mechanisms through which states wallowing in poverty could adopt to improve their economic conditions. However, this might not be as easy as it might sound: there has to be a mechanism aimed at generating an empowering environment for entrepreneurship. The arrangements could include putting in place both tangible and intangible infrastructures (i.e., government policies and external support), elimination of the possible entry barriers among other things (Ateljevic et al., 2004, 253).

1.2 Statement of the problem

Entrepreneurship and SMEs are part of the significant pillars of most economies worldwide. However, some entry barriers have persistently stalled their growth and advancement in most countries; the UK and Croatia are not left out. Subsequently, it is highly essential to analyze the entry barriers to entrepreneurship and SMEs in these states. The analysis focuses on those barriers that can act as a setback or harm the entrepreneurial processes and emergence of new SMEs. The aim is to minimize or altogether avoid the barriers in question. The significance of eliminating such obstacles especially in Croatia include, however, they are not limited to the faster expansion of new entrepreneurial firms, the establishment of not only healthy enterprises but also big enterprises, the creation of new employment opportunities through establishing new SMEs, encouragement of innovation among others. This study consequently focuses on analyzing the entry barriers to entrepreneurship and SMEs between UK and Croatia. It focuses on the entrepreneurial activities in UK and Croatia with the aim of establishing the entry barriers between these two states.

1.3 Research objectives

This study has a broader aim of investigating the entrepreneurial activities in UK and Croatia with a focus on the barriers to entry for SME between UK and Croatia. This study has the following specific objectives.

1. To find out why the United Kingdom (UK) is more entrepreneurial than Croatia;

2. To investigate the barriers from Total early-stage Entrepreneurial Activity (TEA) to mature entrepreneurs;

3. To establish the significant differences in barriers to entry between the United Kingdom (UK) and Croatia;

4. To identify areas that require a change in Croatia for a better SMEs climate and success.

5. To suggest recommendations aimed at removing the entry barriers in UK and Croatia.

1.4 Research questions

The proceeding research questions are the primary guide to this study:

1. Why is the UK more entrepreneurial than Croatia? What could be the secret behind it?

2. What are the main barriers hindering the growth of TEA and SMEs in Croatia?

3. What are some of the significant differences in entry barriers between the United Kingdom and Croatia?

4. What are the areas that need to be changed to enable successful entrepreneurship and development of SMEs in Croatia?

5. What are some of the practical recommendations to address the identified problems?

1.5 Justification of the study

This discourse is essential on several grounds. Firstly, this study provides new literature that offers a deeper understanding of entrepreneurship and SMEs barriers, especially in the United Kingdom and Croatia. The literature is significant in bridging the knowledge gap that has existed for a long time in this field. Secondly, this study is crucial as it explores ‘best ways’ of dealing with current barriers to entrepreneurship and how to improve on them. Thirdly, this study will be resourceful to the stakeholders in this field while they will be reformulating their policies to adapt to current challenges in the field, hence enhancing a favorable environment for entrepreneurship. Lastly, from this study readers will be able to acquire insights on how to encourage entrepreneurial activities and SMEs development.

1.6 Scope of the study

This study restricts to the entry barriers to entrepreneurial activities and SMEs in the UK and Croatia. The research concentrates on the analysis of entrepreneurship in the United Kingdom, and conduct a comparison to the practice in Croatia. While appreciating entrepreneurial developments and SMEs in both UK and Croatia, the study will be limited to literature on events that occurred from 2004 to date.

1.7 Definition of terms

Barriers to entry: the presence of high start-up costs and other hurdles that prevent easy entry of new competitors/ players into a business or an industry. The beneficiaries of barriers to entry are usually the already established and existing firms since these barriers act as a protector to these firms profits and revenues, which would otherwise have been whittled away by the new players/ competitors in the business/ industry (Armentano, 2017, 28). Prevalence forms of barriers to entry include but not limited to exceptional tax benefits to the prevailing firms, customer loyalty, high switching costs, established brands, and patents. Some of these barriers to entry result from government interventions, while others are a natural occurrence in the business world. The dominant industries usually encourage governments to set new restrictions to entry as a means to protect their business. Those barriers that naturally occur traditionally results from a long time stay of a particular industry in business, hence creating dominance (Weizsäcker, 2012, 227). Critics have asserted that regulations by the government resulting from the pressure of the dominant firms, for government to set new entry barriers, are needless and are aimed at accomplishing nothing but to stall entrepreneurial activities and limit competition (Geroski and Jacquemin, 2013, 22).

Entrepreneur: An entrepreneur is an individual who constructs new business ideas and converts them into practical activities, which he then runs through undertaking all the possible risks attached thereof, and benefits/rewards therein (Barreto, 2013, 220). An entrepreneur is typically an innovator, a spring of fresh ideas in the corporate world, a pacesetter and a visionary. Entrepreneurs’ roles in the economies are fundamental. They are the people with the skills and imaginations essential in anticipating both the current and future market needs. Through their creativity, they can bring fresh ideas into the market. The reward to entrepreneurs for successfully undertaking risks attached to innovations is usually the profits in their businesses; however, on some extreme cases, it is the fame they get.

 Entrepreneurship remains one of the factors of production alongside natural resources (land), capital and labor (specialization) as asserted by most economists (York and Venkataraman, 2010, 460). Entrepreneurship pool land, capital, and labor with the aim of either producing goods or delivering services. They are known to create business plans, source labor, seek funding, and provide control and supervision of the business. Schumpeter explains that entrepreneurs have been responsible for the creation of new ideas aimed at making a profit (Schumpeter, 2017, 80). Entrepreneurship usually faces some obstacles including bureaucratic challenges, specialization, and fiscal burdens among others (entry barriers).

Small Medium-sized Enterprises (SMEs): SMEs are independent, non-subsidiary firms that employ fewer numbers of personnel (Jenkins, 2009, 34). It is instructive to note that the numbers vary from country to country. In the European Union, the number is generally limited to 250 employees (Wymenga et al., 2012, 400). In the United States of America (USA), firms with less than 500 employees fall under the category of SMEs (Hillary, 2017, 100). In the UK, there is no single definition denouncing what SMEs are; the UK sometimes borrows the description used in the EU. In Croatia, the number ranges between 50 and 500 personnel. In some jurisdictions such as the EU, financial assets have been included in defining SMEs. Adoption of this type of definition creates an increment in the financial ceilings.

1.8 Chapter breakdown

Chapter one: Introduction

This section contextualizes the study, statement of the problem, objective, research questions, scope of the study, justification of the research and lastly the discourse outline.

Chapter two: A Literature review

This section presents an overview of the literature on the topic of the study. It provides for literature review on the research objectives and theoretical underpinning of the research.

Chapter three: Research Methodology

This section presents the research methodology.  The methodology will be a description of the procedures used in collecting the relevant information for this study.

Chapter four: Results and Result Analysis

This chapter provides for the result analysis of the study. The discussion will be an analysis based on the information gathered in section three.

Chapter five: Conclusion and Recommendation

This chapter concludes and makes recommendations based on the findings.

2.0 CHAPTER TWO: OVERVIEW OF LITERATURE

2.1 Introduction

As illustrated in chapter one of this study entrepreneurship and SMEs are the backbones of most economies around the globe. However, despite their significance and their input to the growth of most economies across the world, especially in Croatia, the GEM report (2016) indicates that the growth rate for entrepreneurial activities is relatively slower. That is, the percentage of entrepreneurial activities in Croatia lies behind the average percentage for entrepreneurial activities of the European Union nations, which Croatia is part of (Singer et al., 2017, 140). The Global Entrepreneurship Monitor (GEM) report (2010) observed that a significant number of business failures results from entrepreneurial barriers such as low education levels among other things, which translates into inadequate training aimed at addressing the current market challenges. Moreover, globalization has fashioned a knowledge-intensive economy (Teagarden and Schotter, 2013, 452), forcing most firms to seek international marketplace prospects essential for their survival (Alain et al., 2017, 132). The move brings the role of the entrepreneurs into sharper focus (Simpson et al., 2012, 283).

This segment evaluates the literature on entrepreneurship and SMEs with a focus on the entrepreneurial activities in UK and Croatia. The literature focuses explicitly on the entry barriers to entrepreneurship and SMEs between these two states. The review moves a step ahead to explore the possible areas of change in Croatia to facilitate entrepreneurial activities. The discussion has five subsections. The first subsection examines the theoretical understanding of entrepreneurship and SMEs. The second subdivision focuses on the entrepreneurial operations in the UK and Croatia. The third subdivision reviews the literature on the entry barriers to SMEs and entrepreneurial activities between the UK and Croatia. The fourth subdivision focuses on the literature on the possible changes that need to be undertaken, especially in Croatia to promote entrepreneurial activities. The last subsection in this chapter identifies the gaps and concludes on the same.

2.2 Entrepreneurship and Small Medium-sized Enterprises (SMEs).

2.2.1 Small medium-sized enterprises (SMEs)

This subsection reviews the literature available on the definition of SMEs across the economies in the globe with the aim of providing an understanding on SMEs. This understanding is essential in contextualizing SMEs and entrepreneurship in both UK and Croatia. While the importance of SMEs have received global recognition in the recent past, defining it has remained a puzzling task due to the varying definitions that it has attracted across various states. To date; no single universally accepted description of SMEs is agreed on (Širec and Rebernik, 2013, 293). Accordingly, it remains relatively difficult to conduct a comparison of SMEs between different states, especially when those states belong to a different scale of the economy (developed and developing economies). Alternatively, more importantly, when the measure used by the said states to define SMEs is not based on the number of employees, but the business annual turnover and profitability. The level of capitalization, sales, and employment differ from firm to firm (state to state); consequently, a delineation that employs a measure of size can result in ambiguous results. In curing this mischief, transnational studies have in the past preferred the use of the number of employees as a reasonable contrast and delimitation for SMEs (Carter and Jones-Evans, 2006, 594).

Acknowledging the various definitions that have been linked to SMEs by different states in the past: the said definitions can be broadly classified into two, that is, ‘economic’ and ‘statistical’ definitions. Under the first classification (economic description), a firm qualify as an SME if it is run by owners in a more personalized way, as opposed to the formalized structure of management. Secondly, a firm fall under this description when it has relatively small stakes in the marketplace. Lastly, a firm is in this category when it is both non-subsidiary and independent. These three criteria are the most critical underpinnings considered when giving an economic definition. The three criteria remain central and have to be met (Sobel, 2006, 44).

On the other hand, when giving a statistical definition, these are the three critical aspects that are advisable to look. First, the contribution of the enterprise to GDP and employment graph in a given country. Secondly, the changing trend in economic contribution of the enterprise in question. Lastly, the financial contribution of the enterprise in general. It is directive to note that these classifications of definitions have weaknesses. For instance, ‘economic definition’ state that the management is more personalized and does not take the formal management; is irreconcilable with the mathematical definition of an enterprise doing industrial and has approximately 200 workforces, as this would require some form of official control. For long these factors have remained central to this description (Madrid‐Guijarro et al., 2009, 488).

Understanding the definition of SMEs and distinguishing them from the vast enterprises is a policy development issue. States tend to have a blend of economic and statistical description to have a clear understanding and implementation of such policies. The table (Fig 2) below illustrates how SMEs are different from the large enterprises for deeper understanding.

Essentials

SMEs

Large enterprises

Administration

v Vender entrepreneurship

v Functions-linked personality

Ø Executive- entrepreneurship

Ø Specialization

Employees

v inadequate graduates

v All-pervading understanding

Ø The dominance of university graduates

Ø Specialization

Finance

v Self-financing

v Family funding

Ø Differentiated proprietorship structure

Ø Right to use  unspecified capital market

Organizations

Transactions

Buyers relationship

Manufacture

Enquiry development

v Extremely private contracts

v Unreliable positions

v Unsteady

v Labour demanding

v Follows the instinctive market tactic

Ø Extremely formal communication

Ø Reliable posts

Ø Stable

Ø Capital exhaustive, economies of scale

Ø Established

There is unanimity amongst economists, policy architects and business professionals that SMEs are movers of economic growth. A functioning SME sector conspicuously contributes to the growth of the economy through creating new employment opportunities, which conventionally come as one package with the innovation and entrepreneurial advancements. Fida asserts that SMEs are significant in the realization of full development by developing economies (Fida, 2008, 300). “The active role of SMEs in emerging economies positions SMEs as engines through which the development objectives of these economies are attainable. A position that is already recognized by most countries, both developed and developing.”

Studies reveal that one of the distinctive features of a prosperous and thriving economy is a happy and flourishing SME sector (“Importance of SMEs to Development,” 2015). SMEs ordinarily are known to play a central part in the economic expansion of any given state. They contribute to socioeconomic growth in different ways; for instance, they create employment opportunities, provide desirable sustainability in the field, and provide innovation avenues in the economy as a whole among others. It is noteworthy to state that some of the known large enterprises originated from SMEs (Fida, 2008, 340). Global Entrepreneurship Monitor report (2009) stresses that “… there is a very tight connection between the level of entrepreneurship in a country and its economic growth rate.”

Source: GEM Report 2009.

2.2.2 Entrepreneurship

Entrepreneurship has played an eminent role in creating avenues for employment across nations: it has involved the process of formulating fresh business ideas, procuring and escalating existing businesses. Entrepreneurs are known for taking risks and uncertainties in making business choices (Knight, 2012, 450), which aims at bringing new means of production, novel markets, new goods, and fresh ideas on industrial regrouping (Schumpeter, 2003, 356). Some scholars have a consensus that entrepreneurs shoulder perils with the intent of expanding their businesses (Krueger, 2002). On the other hand, Brockhaus (1980) acknowledged an entrepreneur as “an administrator or proprietor of a business who is not employed somewhere else” (Brockhaus, 1980, 511). Cooper and Dundleberg (1987) distinct entrepreneur as “an individual who either own or manage a business.” McClelland on the other hand defined entrepreneur as someone who manages an industry or business, and who has the primary responsibility of making decisions and taking responsibility for those decisions made (McClelland, 1961, 333). Entrepreneurship has evolved in its definition since the middle age period; this is traceable through history.

The Historical Developments of Entrepreneurship.

Entrepreneurs in the Middle Ages (before the 1700s)

History records that during the middle age period, the term entrepreneur referred to an actor or an individual managing large production projects (Baumol, 1996, 20). During this period, entrepreneurs did not assume risks in the said projects but only used the availed resources to manage the projects. The government of the day usually provided these resources. Example of entrepreneurs that existed in this period included the cleric, individuals in charge of architectural projects among others (Baumol, 1996, 22).

Entrepreneurs in the 17th century (during the 1700s)

The 1700s is the period when the link between risks and entrepreneurship was established. Here the term entrepreneur referred to an individual who would enter into a contract with the government to provide specific services or goods as agreed on contract terms. It is instructive to note that the contracts were inflexible; which meant that any profit or loss (risk) resulting from the deal was to be assumed by the entrepreneur. John Lawl (supposed that money was the only appropriate medium of exchange) is identified as one of the entrepreneurs of this time. He established the royal bank (Durant et al., 1965, 44) that later evolved into a limited contract to form a trading company, the Mississippi Company. Richard Cantillon (economist and author in the 1700s) is said to have originated the term entrepreneur and linked it with risk-taking. He observed that entrepreneurs were risk takers, citing examples of farmers and merchants who bought items at specific prices and sold them at indeterminate prices hence working at a scale of risk (Cantillon, 2015, 530).

Entrepreneurs in the 18th century (during the 1800s)

While in the 17th century the government provided resources/ capital to entrepreneurs for them to provide services or goods, in the 18th-century entrepreneurs were differentiated from capital providers (the modern venture capitalist). This move began for several reasons including rapid global industrialization that was taking place at the time. This era had rapid inventions and most governments feared for the kind of threats that could come out of these inventions if they continued to provide capital to the entrepreneurs (Albion, 2008, 274). Consequently, the person giving money was differentiated from the person calling for funds.

Entrepreneurs in the 19th and 20th Century (during the 1900s)

In this period, entrepreneurs were viewed through an economic lens and were perceived as managers; there was no clear distinction between the two. The perception occurred in the late 19th century and early 20th century. Richard and Ralph explain, “…an entrepreneur systematizes and controls an enterprise for private gains. He/she recompenses current prices for the resources spent in the business. Moreover, he/she backs his/her inventiveness, skills, and creativity in preparing, consolidating, and directing the enterprise (Giudice et al., 2014, 156). An entrepreneur also accepts the chance of loss and gain consequential to unanticipated and irrepressible circumstances” (Murphy, 1986, 357). It is during the 1800s that Jean Baptiste Say developed his definition of an entrepreneur. He explained that an “entrepreneur shifts economic resources out of an area of lower productivity and into an area of higher productivity and greater yield” (Say, 1997, 101). Since Jean`s definition, there has been massive confusion and disagreement on the concept of an entrepreneur (Say, 1971, 103).

By the 20th century, the concept of entrepreneurs as innovators came into focus. Schumpeter explained, “…the work of an entrepreneur is to restructure or transform the design of production through the use of an invention; that is, putting into test the untested industrial methods of production. The production could include producing new commodities through deploying the old methods of production, or providing new sources of supply of materials and creation of a new outlet for merchandises, by reorganizing the industry or creating a new one altogether” (Schumpeter, 2003, 356).

The definition offered by Schumpeter places the idea of newness and innovation as a very central and integral part of entrepreneurship. Undeniably, innovation and introduction of new ideas/ things in the business is the most challenging task for the entrepreneurs (Hisrich et al., 2005, 501). This aptitude to innovate can be traced back to the Egyptians who premeditated and erected the magnificent pyramids from massive stones. Another trace is on the Great Big Temple in India, which was established from an extraordinary design. Despite the changes that have occurred in tools of innovation through the advancements in science and technology, the aptitude to innovate is said to have been in existence from one civilization to another (Ostendorf et al., 2004, 808). The recent interest shown towards entrepreneurship is founded on the realization by most economies that it is an activity essential for economic growth as Fayolle explains (Liñán and Fayolle, 2015, 922).

Moreover, entrepreneurship does not restrit to any precise industry, state or group of laborers; it is something that is within anyone/anybody, but its revelation is hinged on an individual`s desires. Presence of entrepreneurship is there in almost all societies and economies.

Entrepreneurship in the contemporary world

While the term entrepreneur has been used in reference to an individual,  there are possibilities of organizations being classified as entrepreneur depending on the approach it takes to secure the growth of its business (Weber and Schaper, 2004, 164). Vosle explains that an entrepreneur is a person or an individual who propels and facilitates the course of economic progress in a given state (Nandy and Kumar, 2014, 976). In a broad scope, an entrepreneur can be pronounced as an individual with the ability to explore the surroundings, detect prospects for upgrading, pool resources together and set workable plans aimed at capitalizing on the identified opportunities. Entrepreneurs are known to capitalize on every slight opportunity that has presented itself. Once they have identified opportunities, they then inventively amass the needed resources to make the most of them.